CA - IPCC · PDF file5/4/2011 · CA - IPCC Quality Education ... Material Requisition Note b. Purchase Requisition Note ... Distinguish between bill of materials and material requisition

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IPCC |Guess Questions– May 2016 – Costing (Theory) 2

98851 25025 / 26 www.mastermindsindia.com MASTER MINDS

COSTING

THEORY

1. BASIC CONCEPTS OF COSTING

1) Methods of costing

2) Techniques of costing.

3) What are the objectives of cost accounting?

4) Cost control vs. Cost reduction.

5) Enumerate the factors which are to be considered before installing a system of cost accounting in a manufacturing organisation.

6) Discuss essential features of a good cost accounting system (or) what are the characteristics of good cost accounting system.

7) State the method of costing and the suggestive unit of cost for the following industries.

a) Transport

b) Power

c) Hotel

d) Hospital

e) Steel

f) Coal

g) Bicycles

h) Bridge Construction

i) Interior Decoration

j) Advertising

k) Furniture

l) Brick Works

m) Oil refining mill

n) Sugar company having its own sugarcane field

o) Toy Making

p) Cement

q) Radio assembling

r) Ship Building

s) Automobile

t) Education

u) ice cream

v) dry cleaning

w) Pharmaceuticals

x) Carpet

y) Aircraft

z) Beer

8) State the types of cost in the following cases:

a) Interest paid on own capital not involving any cash outflow

b) Withdrawing money from bank deposit for the purpose of purchasing new machine for expansion purpose

c) Rent paid for the factory building which is temporarily closed

d) Cost associated with the acquisition and conversion of material into finished product

9) DEFINITIONS / MEANINGS.

a) Cost

b) Costing

c) Cost accounting

d) Cost accountancy

e) Cost unit

f) Cost centres

g) Cost objects

h) Profit centre

i) Investment centre

j) Explicit costs




No.1 for CA/CMA & MEC/CEC MASTER MINDS

k) Discretionary costs

l) Training costs

m) Period cost

n) Product cost

10) Classification of Costs.

2. MATERIALS

11) DEFINITIONS / MEANINGS

a. Material Requisition Note

b. Purchase Requisition Note

c. Goods Received Note

d. Material Received Note

e. Bin card

f. Stock Control Card

g. Stores Ledger

h. Economic Order Quantity

i. Re-order quantity

j. Re-order level

k. Maximum stock level

l. Minimum stock level

m. Average Inventory Level

n. Danger level

o. Safety Stock

p. Two Bin System

q. Establishment of Systems of Budgets

r. Control Ratios

12) Distinguish between bill of materials and material requisition note.

13) Explain the concept of "ABC ANALYSIS" as a technique of inventory controls.

14) Write short note on perpetual inventory control. (Or) what are the factors on which success of perpetual inventory system depends? (Or) what are the advantages of perpetual inventory system?

15) How normal and abnormal loss of material arising during storage treated in cost accounts?

16) Discuss the accounting treatment of defectives in cost accounts.

17) What is material handling cost? How will you deal it in cost account?

18) Discuss the accounting treatment of spoilage and defectives in cost accounting?

3. OPERATING COSTING

19) Define absolute tonnes–kms and commercial tonnes – kms.

20) Distinguish between operation cost and operating cost.

4. LABOUR


a) Labour cost

b) Direct labour cost

c) Indirect labour cost

d) Idle time

e) Normal idle time

f) Abnormal idle time

g) Time keeping

h) Time booking

i) Overtime

j) Overtime premium

22) Discuss the objectives of time keeping and time booking.

23) Explain the reasons for normal idle time and discuss its treatment in cost accounting.

24) Discuss the treatment of overtime premium in cost accounting.

25) Enumerate the causes of labour turnover

26) Enumerate the various methods of time booking.





27) Explain the reasons for abnormal idle time and discuss its treatment in cost accounting

28) Discuss the effect of overtime payment on productivity

29) Explain the methods for calculating labour turnover.

30) Discuss The Two Types Of Cost Associated With Labour Turnover.

31) Describe briefly, how wages may be calculated under the following systems

32) What do you mean by time and motion study? Why it is so important to management?

5. OVERHEADS


a) overhead

b) cost allocation

c) cost absorption

d) blanket overhead rate

e) departmental overhead rate

f) multiple overhead rate

34) Indicate the base or bases that you recommended to apportioning overhead costs to production department?

a. Supplies

b. Repair

c. Maintenance of building

d. Executive salaries

e. Rent

f. Electric Power

g. Fire insurance

h. Indirect labour

i. Lighting expenses

j. Material Handling/stores overhead

k. General Overheads

35) Discuss briefly three main methods of allocating support departments costs to operating departments. Out of these, which method is conceptually preferable?

36) Explain the treatment of over and under absorption of overheads in cost accounting?

37) How would you treat the idle capacity costs in cost accounts

38) Define selling and distribution expenses. Discuss the accounting for selling & distribution expenses

39) Explain the methods of accounting of administrative overheads.

6. RECONCILIATION AND BOOK KEEPING

40) What is an integrated accounting system? State its advantages?

41) What are the reasons for disagreement of profits as per cost and financial accounts? Discuss.

42) Why is it necessary to reconcile the profits between the cost accounts and financial accounts?

i) List the financial expenses which are not included in cost

ii) When is the reconciliation statement of cost and financial accounts not required?

7. JOB & BATCH COSTING

43) In batch costing, how economic batch quantity is determined.

8. JOINT PRODUCTS AND BY- PRODUCTS

44) Describe briefly, how joint costs up to the point of separation may be Apportioned amongst the joint products under the following methods: a) Average unit cost method: b) Contribution margin method:

c) Market value at the time of separation: d) Market value after further processing:





e) Net realisable value method: 45) Distinguish between joint products and by-products. 46) What are the methods of apportioning joint costs over by-products?

9. PROCESS AND OPERATION COSTING

47) Operation costing is defined as refinement of process costing –explain it. 48) Explain briefly the treatment of losses in process costing. 49) Explain equivalent units.

10. CONTRACT COSTING

50) State the advantages of cost plus contracts. 51) Describe the main features of cost plus contract. 52) Discuss briefly the principles to be followed while taking credit for Profits on incomplete contracts. 53) Write short notes on escalation clause?

11. MARGINAL COSTING

54) DEFINITIONS/MEANINGS. a) Marginal Cost b) Marginal Costing c) Absorption Costing d) Direct Costing e) Differential Costing f) Marginal contribution g) Break-even chart

h) Breakeven Point i) Cash Break-Even Point j) Cost Break-Even Point k) Margin of Safety l) P/V Ratio m) Angle of Incidence

55) Distinction between marginal costing and absorption costing. 56) Discuss the basic assumptions of cost volume profit analysis. 57) Elaborate the practical application of marginal costing. 58) What is meaning of MARGIN OF SAFETY (MOS)? State the relationship between operating leverage and

margin of safety ratio. 59) What is meant by direct costing? 60) Explain and illustrate cash break- even chart. 61) Elaborate the practical application of marginal costing.

12. STANDARD COSTING

62) Describe the three distinct groups of variances that arise in standard Costing. 63) Explain the types of standards? 64) Define the term standard costing and outline the steps involved therein.

NOTE: All the above Questions are from MM Material 34th edition.

THE END



IPCC |Guess Questions– May 2016 – Costing (Problems) 6


COSTING

PROBLEMS

1. MATERIALS

1) A company manufactures a product from a raw material, which is purchased at Rs.60 per kg. The company incurs a handling cost of Rs.360 plus freight of Rs.390 per order. The carrying cost of inventory of raw material is Re.0.50 per kg. per month. In addition, the cost of working capital finance on the investment in inventory of raw material is Rs.9 per kg. per annum. The annual production of the product is 1,00,000 units and 2.5 units are obtained from one kg of raw material.

a) Calculate the economic order quantity of raw materials. b) Advice, how frequently should orders for procurement be placed. c) If the company proposes to rationalize placement of orders on quarterly basis, what percentage of

discount in the price of raw materials should be negotiated. 2) ZED Company supplies plastic crockery to fast food restaurants in metropolitan city. One of its products is a

special bowl, disposable after initial use, for serving soups to its customers. Bowls are sold in pack 10 pieces at a price of 50 per pack.

The demand for plastic bowl has been forecasted at a fairly steady rate of 40,000 packs every year. The company purchases the bowl direct from manufacturer at 40 per pack within a three days lead time. The ordering and related cost is 8 per order. The storage cost is 10% per cent per annum of average inventory investment.

Required:

a) Calculate Economic Order Quantity. b) Calculate number of orders needed every year. c) Calculate the total cost of ordering and storage bowls for the year. d) Determine when the next order should be placed. (Assuming that the company does maintain a safety

stock and that the present inventory level is 333 packs with a year of 360 working days. 3) M/s Tubes Ltd. are the manufactures of picture tubes for T.V. The following are the details of their operation

during 2011

Average monthly market demand 2,000 Tubes

Ordering cost Rs.100 per order

Inventory carrying cost 20% per annum

Cost of tubes Rs.500 per tube

Normal usage 100 tubes per week

Minimum usage 50 tubes per week

Maximum usage 200 tubes per week

Lead time to supply 6-8 weeks

Compute from the above:

1. Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of 5%, is it worth accepting?

2. Maximum level of stock. 3. Minimum level of stock 4. Re-order level





4) A Manufacturer of Surat purchased the Chemicals A, B and C from Mumbai.

Chemical A: 3,000 kg. @ Rs 4.20 per kg. Chemical B: 5,000 kg. @ Rs 3.80 per kg. Chemical C: 2,000 kg. @ Rs 4.75 per kg. Sales Tax Railway Freight

12,600 19,000

9,500 2,055 1,000

Total cost 44,155

A shortage of 200 kgs in chemical A, of 280 kgs in chemical B and of 100 kgs in Chemical C was noticed due to breakages (Assume as normal loss). At Surat, the manufacturer paid Octroi duty @ Rs.0.10 per kg. He also paid cartage Rs.22 for chemical A, Rs.63.12 for Chemical B and Rs.31.80 for Chemical C. Calculate the stock rate that you would suggest for pricing issue for chemicals assuming a provision of 5% towards further deterioration.

5) Raw materials ‘AXE’ costing Rs. 150 per kg. and ‘BXE’ costing Rs. 90 per kg. are mixed in equal proportions for making product ‘A’. The loss of material in processing works out to 25% of the product. The production expenses are allocated at 40% of direct material cost. The end product is priced with a margin of 20% over the total cost. Material ‘BXE’ is not easily available and substitute raw material ‘CXE’ has been found for ‘BXE’ costing Rs. 75 per kg. It is required to keep the proportion of this substitute material in the mixture as low as possible and at the same time maintain the selling price of the end product at existing level and ensure the same quantum of profit as at present. You are required to compute the ratio of the mix of the raw materials ‘AXE’ and ‘CXE.

6) P Ltd. has a capacity of 4,800 tonnes per annum to manufacture a product which passes through two Production Departments A and B. The sales forecast for the next financial year envisages full utilisation of production capacity in the following customer mix.

Customer P Customer Q

3,000 tonnes @ Rs.1.50 lakhs/ tonne 1,800 tonnes @ Rs.2.00 lakhs/ tonne

Over the years the Company has established three possible sources of raw material supplies:

Supplier X Prepared to supply 3,600 tonnes of input materials @ Rs.0.60 lakh/tonne

Supplier Y Offers to supply 4,000 tonnes of input materials @ Rs.0.55 lakh/tonne

Supplier Z Agrees to supply @ Rs.0.65 lakhs tonne only if the entire input requirement is taken from him but offers a discount of 5%.

The cost of transport for bringing the input materials from supplier’s point is as under:

Supplier X Rs.0.02 lakh / tonne to be spent by P Ltd.

Supplier Y Rs.0.03 lakh/tonne to be spent by P Ltd.

Supplier Z The transport cost is to be paid by the supplier.

The average level of scrap arising from the two production departments A and B are 5% and 10% on the final output. The realisable value of scrap sold out is Rs.0.15 lakh / tonne for Department A and Rs.0.20 lakh / tonne for Department B. You are required to work out the following: a) Gross quantity of input material required to be procured. b) Selection of the source of procurement and the price at which inputs are to be procured.





7) PQR limited produces a product which has a monthly demand of 52,000 units. The product requires a component X which is purchased at Rs.15 per unit. For every finished product, 2 units of component X are required. The ordering cost is ‘350 per order and the carrying cost is 12% p.a. Required: a) Calculate the economic order quantity for component X. b) If the minimum lot size to be supplied is 52,000 units, what is the extra cost, the company has to incur? c) What is the minimum carrying cost, the company has to incur?

8) Assume that the following quantity discount schedule for a particular bearing is available to a Retail store: Order size (unit) Discount 0 - 49 0% 50 - 99 5% 100 - 199 10% 200 and above 12% The cost of a single bearing with no discount is Rs. 30. The annual demand is 250 units. Ordering cost is Rs. 20 per order and annual inventory carrying cost is Rs. 4 per unit. Determine the optimal order quantity and the associated minimal total cost of inventory and purchasing costs, if shortages are not allowed.

9) A company uses three raw materials A, B and C for a particular product for which the following data apply:

Weekly production varies from 175 to 225 units, averaging 200 units of the said product. What would be the following quantities:– (i) Minimum Stock of A? (ii) Maximum Stock of B? (iii) Re-order level of C? (iv) Average stock level of A?

2. OPERATING COSTING

10) SRMT Automobiles distributes its goods to a regional dealer using a single Lorry. The dealer’s premises are 40 kilometers away by road. The lorry has a capacity of 10 tonnes and makes the journey twice a day fully loaded on the outward journeys and empty on return journeys. The following information is available for a four weekly period during the year 1990:

Petrol consumption 8 kilometers per litre Petrol cost Rs.13 per litre Oil Rs.100 per week Driver’s wages Rs.400 per week Repairs Rs.100 per week Garage rent Rs.150 per week Cost of Lorry (excluding tyres) Rs.4,50,000 Life of Lorry 80,000 kilometers Insurance Rs.6,500 per annum Cost of Tyres Rs.6,250 Life of Tyres Rs.25,000 kilometers





Estimated sale value of Lorry at the end of its life Vehicle License Cost Other overhead cost The Lorry operates on a five-day week.

Rs.50,000 Rs.1,300 per annum

Rs.41,600 per annum

Required: a) A statement to show the total cost of operating the vehicle for the four weekly period analyzed into

variable costs and fixed costs. b) Calculate the vehicle cost per kilometer and per absolute tonne kilometer.

11) Voyager Cabs Pvt. Ltd. is a New Delhi based cab renting company, provides cab facility on rent for cities Delhi, Agra and Jaipur to the tourists. To attract more tourists it has launched a new three days tour package for Delhi-Jaipur-Agra-Delhi. Following are the relevant information regarding the package:

Distance between Delhi to Jaipur (Km.) 274 Distance between Delhi to Agra (Km.) 242 Distance between Agra to Jaipur (Km.) 238 Price of diesel in Delhi Rs. 54 per litre Price of diesel in Jaipur Rs. 56 per litre Price of diesel in Agra Rs. 58 per litre Mileage of cab per litre of diesel (Km.) 16 Chauffeur’s salary Rs. 12,000 per month Cost of the cab Rs. 12,00,000 Expected life of the cab 24,00,000 kms. Servicing cost Rs. 30,000 after every 50,000 kilometres run. Chauffeur’s meal allowance

Rs. 50 for every 200 kilometres of completed Journey

Other set up and office cost Rs. 2,400 per month. Voyager Cabs has made tie-up with fuel service centres at Agra, Jaipur and Delhi to fill diesel to its cabs on production of fuel passbook to the fuel centre. Company has a policy to get fuel filled up sufficient to reach next destination only. You are required to calculate the price inclusive of service tax @ 12.36% to be quoted for the package if company wants to earn profit of 25% on its net takings i.e. excluding service tax.

12) EPS is a Public School having 25 buses each plying in different directions for the transport of its school students. In view of large number of students availing of the bus service, the buses work two shifts daily both in the morning and in the afternoon. The buses are garaged in the school. The workload of the students has been so arranged that in the morning, the first trip picks up senior students and the second trip plying an hour later picks up junior students. Similarly, in the afternoon, the first trip takes the junior students and an hour later the second trip takes the senior students home. The distance travelled by each bus, one way is 16 kms. The school works 24 days in a month and remains closed for vacation in May and June. The bus fee, however, is payable by the students for all the 12 months in a year. The details of expenses for the year 2003-2004 are as under: Driver's salary – payable for all the 12 in month. Rs. 5,000 per month per drive. Cleaner's salary payable for all the 12 months Rs.3,000 per month per cleaner. (one cleaner has been employed for every five buses). Licence Fees, Taxes etc. Rs. 2,300 per bus per annum Insurance Premium Rs. 15,600 per bus per annum. Repairs and Maintenance Rs. 16,400 per bus per annum.





Purchase price of the bus Rs. 16,50,000 each. Life of the bus 16 years Scrap value Rs. 1,50,000 Diesel Cost Rs. 18.50 per litre Each bus gives an average of 10 kms per litre of diesel. The seating capacity of each bus is 60 students. The seating capacity is fully occupied during the whole year. The school follows differential bus fees based on distance traveled as under:

Students picked up and dropped within the range of distance from the school

Bus fee

Percentage of students availing this facility

4 kms 8 kms 16 kms

25% of Full 50% of Full

Full

15% 30% 55%

Ignore interest. Since the bus fees has to be based on average cost, you are required to a) Prepare a statement showing the expenses of operating a single bus and the fleet of 25 buses for a year. b) Work out average cost per student per month in respect of:

i) Students coming from a distance of upto 4 kms from the school. ii) Students coming from a distance of upto 8 kms from the school; and iii) Students coming from a distance of upto 16 kms from the school

13) Venkata Ramana travels owns a bus and operates a tourist service on daily basis. The bus starts from Guntur to Tirupathi and returns to Guntur the same day for 10 days. Distance between Guntur and Tirupathi is 250 Kms. This trip operates for 10 days between Guntur and Kalahasthi and returns to Guntur the same day. Distance between these two places is 200 Kms. The bus makes local sight seeing trips for 5 days in a month, covering a total distance of 60 Kms. per day. Normal capacity 50 persons.

Cost of Bus - Rs.3,50,000 Depreciation - 25% P.A. Driver’s Salary - Rs.1,200 p. m. Conductor’s Salary - Rs.1,000 p .m Part-time clerk’s salary - Rs.400 p. m Insurance - Rs.1,800 p.a

Diesel consumption 4 kms per litre @ - Rs.8 per litre. Token tax - Rs.2,400 p. a., Permit fee - Rs.1,000p. m. Lubricant oil Rs.100 for every 200 kms. Repairs and maintenance-Rs.1,500 p.m

While traveling between Guntur and Tirupathi (Both ways) the bus occupies 90% of the capacity and 80% when it travels between Guntur to Kalahasthi (Both ways). In the city the bus runs to full capacity. Passenger Tax is 20% of total takings of the firm. Calculate the rate to be charged to Tirupathi & Kalahasthi from Guntur per passenger if the profit required is 33.33% of total takings.

14) Mr. X owns a bus which runs according to the following schedule: (PM,SM)





3. LABOUR-I

15) You are given the following information of a worker: a) Name of worker : ‘X’ b) Ticket No. : 002 c) Work started : 1-4-11 at 8 a.m. d) Work finished : 5-4-11 at 12 noon e) Work allotted : Production of 2,160 units

f) Work done and approved : 2000 units g) Time and units allowed : 40 units per hour h) Wage rate : Rs. 25 per hour i) Worker X worked 9 hours a day.

You are required to calculate the remuneration of the worker on the following basis: i) Halsey plan and ii) Rowan plan

16) ‘A’ an employee of XYZ co. gets the following cash and benefits. a) Salary : Rs.250 per month b) Dearness allowance: On 1st Rs.100 of Salary - Rs.400, On next Rs.100 of Salary - Rs.100 & On balance

of every Rs.100 - Rs. 50 or part thereof c) Employer’s Contribution to Provident Fund 8% salary and D.A. d) E.S.I. : 4% of Salary and D.A. e) Bonus : 20% of Salary and D.A. f) Other Allowances : Rs. 2,725 per annum. A works for 2,400 hours p.a., out of which 400 hours are non-productive but treated as normal idle time. Find out: 1. Effective hourly cost of A. 2. A worked for 18 effective hours on Job ‘13’, where the cost of direct material equal A’s earnings and the

overhead applied is 100% of prime cost. The sale value of the job is quoted to earn a profit of 10% on such value. What is the sale value?

17) Calculate the earnings of A and B from the following particulars for a month and allocate the labour cost to each job X, Y and Z:

Particulars A B i. Basic Wages 100 160 ii. Dearness Allowance 50% 50% iii. Contribution to provident Fund (on basic wages) 8% 8% iv. Contribution to Employee’s State Insurance (on basic wages) 2% 2% v. Overtime 10 hours





The normal working hours for the month are 200. Overtime is paid at double the total of normal wages and dearness allowance. Employer’s contribution to state Insurance and Provident Fund are at equal rates with employees contributions. The two workers were employed on jobs X, Y and Z in the following proportions:

Jobs

Particulars X Y Z

Worker A 40% 30% 30%

Worker B 50% 20% 30%

Overtime was done on job Y. 18) The finishing shop of a company employs 60 direct workers. Each worker is paid 400 as wages per week of 40

hours. When necessary, overtime is worked up to a maximum of 15 hours per week per worker at time rate plus one-half as premium. The current output on an average is 6 units per man hour which may be regarded as standard output. If bonus scheme is introduced, it is expected that the output will increase to 8 units per man hour. The workers will, if necessary, continue to work Overtime up to the specified limit although no premium on incentives will be paid. The company is considering introduction of either Halsey Scheme or Rowan Scheme of WageIncentive system. The budgeted weekly output is 19,200 units. The selling price is 11 per unit and the direct Material Cost is 8 per unit. The variable overheads amount to 0.50 per direct labour hour and the fixed overhead is 9,000 per week. Prepare a Statement to show the effect on the Company’s weekly Profit of the proposal to introduce (a) Halsey Scheme, and (b) Rowan Scheme.

19) A, B and C are three industrial workers working in Sports industry and are experts in making cricket pads. A, B and C are working in Mahi Sports, Virat Sports and Sikhar Sports companies respectively. Workers are paid under different incentive schemes. Company wise incentive schemes are as follows:

Company Incentive scheme

Mahi Sports Emerson’s efficiency system

Virat Sports Merrick differential piece rate system

Sikhar Sports Taylor’s differential piece work system

The relevant information for the industry is as under:

Standard working hours 8 hours a day

Standard output per hour (in units) 2

Daily wages rate Rs. 360

No. of working days in a week 6 days

Actual outputs for the week are as follows:

A B C

132 units 108 units 96 units

You are required to calculate effective wages rate and weekly earnings of all the three workers.

4. LABOUR-II

20) An article passes through five hand operations as follows:

Operation no.

Time per article (in minutes)

Grade of Worker Wage rate per hour

1 2

15 25

A B

0.65 0.50





3 4 5

10 30 20

C D E

0.40 0.35 0.30

The factory works 40 hours a week and the production target is 600 dozens per week. Prepare a statement showing for each operation and in total the no. of operators required, the labour cost per dozen and the total cost per week to produce the total targeted output.

21) From the following information, calculate Labour turnover rate No. of workers as on 01.01.2000 = 7,600 No. of workers as on 31.12.2000 = 8,400 During the year, 80 workers left while 320 workers were discharged 1,500 workers were recruited during the year of these, 300 workers were recruited because of exits and the rest were recruited in accordance with expansion plans.

22) X Ltd. has an average of 42 workers employed in one of its factories in a period during which seven workers left and were replaced. The company pays a basic rate of Rs.4.60 per hour to all its direct personnel. This is used as the standard rate. In addition a factory wide bonus scheme is in operation. A bonus of half of the efficiency ratio in excess of 100% is added as a percentage to the basic hourly rate like if the efficiency ratio is 110% then the hourly rate is Rs.4.83 [i.e. 4.60+ (4.60 *5%)]. During the period 114,268 units of the company’s single product were manufactured in 4900 hours. The standard production is 22 units per hour. Calculate the labour turnover percentage for the period & Bonus.

5. OVERHEADS-I

23) Master Minds Ltd., has three production departments X, Y and Z and two service departments A and B. The following estimated figures for a certain period have been made available:

Rent and Rates Lighting and Electricity Indirect wages Power Depreciation of Machinery Other expenses and Sundries

10,000 1,200 3,000 3,000

20,000 20,000

Following further details are available:

Particulars Total X Y Z A B

Space (Sq. mts.) Light points (No’s) Direct wages (Rs.) H.P. of the machine Cost of Machinery Working hours

10,000 120

20,000 310

1,00,000

2,000 20

6,000 120

24,000 4,760

2,500 30

4,000 60

32,000 3,020

3,000 40

6,000 100

40,000 3,050

2,000 20

3,000 20

2,000 1,000

500 10

1,000 10

2,000 500

The expenses of the service departments A and B are to be apportioned as follows:

Particulars X Y Z A B

A (%) B (%)

20 40

30 20

40 30

- 10

10 -

a) Calculate the overhead absorption rate per hour in respect of the three production departments using Simultaneous Equation method, Repeated Distribution method, Trial & error method.

b) What will be the total cost of an article with material cost of Rs.80 and direct labour cost of Rs.40 which passes through X,Y and Z for 2, 3 and 4 hours respectively?





24) Deccan Manufacturing Ltd., have three departments which are regarded as production departments. ‘Service departments’ costs are distributed to these production departments using the “Step Ladder Method” of distribution. Estimates of factory overhead costs to be incurred by each department in the forthcoming year are as follows. Data required for distribution is also shown against each department:

Department Factory overhead Rs.

Direct labour hours

No. of employees Area in sq.m.

Production: X Y Z Service: P Q R S

1,93,000 64,000 83,000

45,000 75,000

1,05,000 30,000

4,000 3,000 4,000

1,000 5,000 6,000 3,000

100 125 85

10 50 40 50

3,000 1,500 1,500

500

1,500 1,000 1,000

The overhead costs of the 4 service departments are distributed in the same order, viz., P, Q, R & S respectively on the following basis.

Department Basis P Q R S

Number of employees Direct labour hours Area in square meter’s Direct labour hours

You are required to: a) Prepare a schedule showing the distribution of overhead costs of the four service departments to the three

production departments; and b) Calculate overhead recovery rate per direct labour hour for each of 3 production departments.

25) In an engineering company, the factory overheads are recovered on a fixed percentage basis on direct wages and the administrative overheads are absorbed on a fixed percentage basis on factory cost. The company has furnished the following data relating to two jobs undertaken by it in a period.

Particulars Job 101 Job 102 Direct materials Direct wages Selling price Profit percentage on total cost

54,000 42,000

1,66,650 10%

37,500 30,000

1,28,250 20%

Required: a) Computation of percentage recovery rates of factory overheads and administrative overheads. b) Calculation of the amount of factory overheads, administrative overheads and profit for ach job. c) Using the above recovery rates fix the selling price of job 103. The additional data being:

Direct materials Rs. 24,000, Direct wages Rs. 20,000 Profit percentage on selling price 12-½%

26) A company which sells four products, some of them unprofitable, proposes discontinuing the sale of one of them. The following information is available regarding income, costs and activity for the year ended 31st March, 2012.

Products A B C D Sales (Rs.) 3,00,000 5,00,000 2,50,000 4,50,000 Cost of sales (Rs.) 2,00,000 4,50,000 2,10,000 2,25,000 Area of storage (Sq.ft.) 50,000 40,000 80,000 30,000





Number of parcels sent 1,00,000 1,50,000 75,000 1,75,000 Number of invoices sent 80,000 1,40,000 60,000 1,20,000

Selling and Distribution overheads and the basis of allocation are: Basis of allocation to products

Fixed Costs (Rs.) Rent & Insurance 30,000 Sq.Ft. Depreciation 10,000 Parcel Salesmen’s salaries & expenses 60,000 Sales Volume Administrative wages and salaries 50,000 No. of invoices

Packing wages & materials RS. 0.20 per parcel Commission 4% of sales Stationery Rs. 0.10 per invoice

You are required to prepare Profit & Loss Statement, showing the percentage of profit or loss to sales for each product.

27) Arnav Ltd. has three production departments M, N and O and two service departments P and Q. The following particulars are available for the month of September, 2013:

5. OVERHEADS-II

28) ABC ltd has calculated a predetermined overhead rate of Rs 22 per machine hour for its Testing department. This rate has been calculated for the budgeted level of activity and is considered as appropriate for absorbing overheads. The following overhead expenditures at various activity levels had been estimated.

Total overheads Number of machine hours 3,38,875 3,47,625 3,56,375

14,500 15,500 16,500





You are required to: a) Calculate the variable overhead absorption rate per machine hour. b) Calculate the estimated total fixed overheads. c) Calculate the budgeted level of activity in machine hours. Calculate the amount of under/over-recovery of overheads if the actual machine hours were 15,850 and actual overheads were Rs 3,55,050.

29) PQR manufacturers – a small scale enterprise produces a single product and has adopted a policy to recover the production overheads of the factory by adopting a single blanket rate based on machine hours. The budgeted production overheads of the factory are Rs.10,08,000 and budgeted machine hours are 96,000. For a period of first six months of the financial year 2007, 2008 following information were extracted from the books:

Actual production overheads Rs.6,79,000 Amount included in the production overheads: Paid as per court’s order Rs.45,000 Expenses of previous year booked in current year Rs.10,000 Paid to workers for strike period under an award Rs.42,000 Obsolete stores written off Rs.18,000

Production and sales data of the concern for the first six months are as under: Production:

Finished goods 22,000 units Works-in-progress (50% complete in every respect) 16,000 units Sale: Finished goods 18,000 units

The actual machine hours worked during the period were 48,000 hours. It is revealed from the analysis of information that ¼ of the under-absorption was due to defective production policies and the balance was attributable to increase in costs. You are required: i) To determine the amount of under absorption of production overheads for the period, ii) To show the accounting treatment of under-absorption of production overheads, and iii) To apportion the unabsorbed overheads over the items.

30) A light engineering factory fabricates machine parts to customers. The factory commenced fabrication of 12 Nos. machine parts to customers’ specifications and the expenditure incurred on the job for the week ending 21st August, 2002 is given below:

Direct Materials (all items) Direct Labour (Manual) 20 hours @ Rs. 1.50 per hour Machine facilities: Machine No.I: 4 hours @ Rs. 4.50 Machine No.II: 6 hours @ Rs. 6.50 Total Overheads @ Rs. 0.80 per hour on 20 manual hours Total

18.00 39.00

78.00 30.00

57.00 165.00 16.00

181.00 The overhead rate of Re. 0.80 per hour is based on 3,000 man hours per week; similarly, the machine hour rates are based on the normal working of Machine No’s.I and II for 40 hours out of 45 hours per week. After the close of each week, the factory levies a supplementary rate for the recovery of full overhead expenses on the basis of actual hours worked during the week. During the week ending 21st August, 2002, the total labour hours worked was 2,400 and Machine Nos. I and II had worked for 30 hours and 32 ½ hours respectively. Prepare a Cost Sheet for the job for the fabrication of 12 Nos. machine parts duly levying the supplementary rates.





7. BOOK KEEPING IN COSTING

31) Acme Manufacturing Co. Ltd. has the balances as on 1st July, 2012 as follows:

Stores Control A/c Work-in-Progress A/c Finished Goods A/c Production Overhead A/c Administration Overhead A/c Selling and Distribution Overhead A/c General Ledger Control A/c

1,24,000 62,500

1,24,000 8,400

6,250

12,000

3,13,150

The following are the transactions for the quarter ended 30th September, 2012:

Materials purchased Materials issued to jobs Materials to works maintenance Materials to administration office Materials to selling department Wages-direct Wages-indirect Transportation for incoming materials Production overheads Production overheads – Absorbed

4,80,100 4,77,400

41,200 3,400 7,200

1,49,300 65,000

8,400

2,42,250 3,59,100

Administration overheads Administration allocated to production Administration allocated to sales Sales overheads Sales overheads absorbed Finished goods produced Finished goods sold Sales Realisation

74,000

52,900

14,800 64,200 82,000

9,58,400 9,77,300

14,43,000

Make the various accounts & prepare a Trial Balance as at 30th September, 2012. 32) A company operates on historic job cost accounting system, which is not integrated with the financial accounts. At

the beginning of a month, the opening balances (in lakhs) were:

Stores Ledger Control Account Work-in-Progress Control Account Finishing Goods Control Account Building construction Account Cost Ledger Control Account Transactions during the month: Materials: Purchase Issued to production Issued to general maintenance Issued to building construction Wages: Gross wages paid Indirect wages For building construction Works Overheads: Actual amount incurred (Excluding items shown above) Absorbed in building construction Under absorbed Royalty paid Selling & distribution and administration overheads Sales

80 20

430 10

540

40 50 6 4

150 40 10

160 20 8 5

25 450





At the end of the month, the stock of raw materials and work-in progress was Rs.55 lakhs & 25 Lakhs respectively. The loss arising in the raw material account is treated as factory overheads. The building under construction was completed during the month. Company’s gross profit margin is 20% on sales. Prepare the relevant control accounts to record the above transactions.

33) The following incomplete accounts for the month ended 31st October, 2002. Stores Control Account

1.10.02 To Balance 54,000

Work in Progress Control Account

1.10.02 To Balance 6,000

Finished Goods Control Account

1.10.02 To Balance 75,000

Factory Overheads Control Account

Total debits for October, 2002 45,000

Factory Overheads Applied Account

Cost of Goods Sold Account

Creditors for Purchases Account

1.10.02 By Balance 30,000

Additional information: a) The factory overheads are applied by using a budgeted rate based on Direct Labour Hours. The budget

for overheads for 2002 is Rs. 6,75,000 and the budget of direct labour hours is 4,50,000. b) The balance in the account of creditors for purchases on 31.10.02 is Rs. 15,000 and the payment made to

creditors in October, 2002 amount to Rs. 1,05,000. c) The finished goods inventory as on 31st October, 2002 is Rs. 66,000. d) The cost of goods sold during the month was Rs. 1,95,000. e) On 31st October, 2002, there was only one unfinished job in the factory. The cost records show that Rs.

3,000 (1,200 direct labour hours) of Direct Labour Cost and Rs. 6,000 of Direct Material Cost had been charged.

f) A total of 28,200 direct labour hours were worked in October, 2002. All factory workers earn same rate of pay.

g) All actual factory overheads incurred in October, 2002 have been posted. You are required to find:

a) Materials purchased during October. b) Cost of goods completed in October. c) Overheads applied to production in Oct. d) Balance of WIP on 31st Oct. e) D.M. consumed during October, 2002. f) Balance of Stores A/c on 31st October. g) Over or under-absorbed overheads for October, 2002.

34) In the course of physical verification of stores as on 31st March 2004, following differences are revealed in case of AB Ltd. Prepare journal entries in the Cost Ledger to give effect to the following:





Materials Unit Rate Physical Ledger Remarks A Nos. 7 600 680 Wrong counting.

B Liters 12 1100 1155 Normal evaporation loss.

C Nos.

6 350 400 Material issued not accounted for.

D Kgs.

22 390 900 Shortage due to pilferage and theft

E Nos.

15 1475 1325 150 nos. received but not entered in ledger.

F Mts. 10 291 291 Obsolete materials. Realised sale value Rs. 1,650, awaiting dispatch.

35) A fire destroyed some accounting records of a company. You have been able to collect the following from the spoilt papers/records and as a result of consultation with accounting staff in respect of January, 2013: i) Incomplete Ledger Entries:

Raw Materials A/c

Particulars (Rs.) Particulars (Rs.)

Beginning Inventory 32,000

Work-in-Progress A/c


Beginning Inventory 9,200 Finished Stock 1,51,000

Creditors A/c


Opening Balance 16,400

Closing Balance 19,200

Manufacturing Overheads A/c


Amount Spent 29,600

Finished Goods A/c


Opening Inventory 24,000

Closing Inventory 30,000

ii) Additional Information: a) The cash-book showed that Rs. 89,200 have been paid to creditors for raw-material. b) Ending inventory of work-in-progress included material Rs. 5,000 on which 300 direct labour hours

have been booked against wages and overheads. c) The job card showed that workers have worked for 7,000 hours. The wage rate is Rs. 10 per labour

hour. d) Overhead recovery rate was Rs. 4 per direct labour hour. You are required to complete the above

accounts in the cost ledger of the company





8. RECONCILIATION

36) The following figures have been extracted from the cost records of a manufacturing company: Rs. Stores : Opening Balance 63,000 Purchases 3,36,000 Transfer from Work-in-progress 1,68,000 Issues to Work-in-progress 3,36,000 Issues to Repairs and Maintenance 42,000 Deficiencies found in Stock taking 12,600 Work-in-progress: Opening Balance 1,26,000 Direct Wages applied 1,26,000 Overhead Applied 5,04,000 Closing Balance 84,000

Finished Products: Entire output is sold at a Profit of 10% on actual cost from work-in-progress. Others: Wages incurred Rs.1,47,000; Overhead incurred Rs. 5,25,000. Income from investment Rs. 21,000; Loss on sale of Fixed Assets Rs. 42,000. Draw the stores control account, work-in-progress control account, costing profit and loss account, profit and loss account and reconciliation statement.

37) The financial books of a company reveal the following data for the year ended 31st March, 2013:

Rs.

Opening Stock: Finished goods 625 units Work-in-process 01.04.2012 to 31.03.2013 Raw materials consumed Direct Labour Factory overheads Administration overheads Dividend paid Bad Debts Selling and Distribution Overheads Interest received Rent received Sales 12,615 units Closing Stock: Finished goods 415 units Work-in-process

53,125 46,000

8,40,000 6,10,000 4,22,000 1,98,000 1,22,000 18,000 72,000 38,000 46,000

22,80,000 45,650 41,200

The cost records provide as under: a) Factory overheads are absorbed at 70% of direct wages. b) Administration overheads are recovered at 15% of factory cost. c) Selling and distribution overheads are charged at Rs. 3 per unit sold. d) Opening Stock of finished goods is valued at Rs. 120 per unit. The company values work-in-process at factory cost for both Financial and Cost Profit Reporting.





Required: i) Prepare statements for the year ended 31st March, 2013 show

1. The profit as per financial records 2. The profit as per costing records.

ii) Present a statement reconciling the profit as per costing records with the profit as per Financial Records. 38) The following figures have been extracted from the cost records of a manufacturing unit:

Particulars (Rs.) Stores: Opening balance 32,000 Purchases of material 1,58,000 Transfer from work-in-progress 80,000 Issues to work-in-progress 1,60,000 Issues to repair and maintenance 20,000 Deficiencies found in stock taking 6,000 Work-in-progress: Opening balance 60,000 Direct wages applied 65,000 Overheads applied 2,40,000 Closing balance of W.I.P. 45,000

Finish products: Entire output is sold at a profit of 10% on actual cost from work-in-progress. Wages incurred Rs. 70,000, overhead incurred Rs. 2,50,000. Items not included in cost records: Income from investment Rs. 10,000, Loss on sale of capital assets Rs. 20,000. Draw up Store Control account, Work-in-progress Control account, Costing Profit and Loss account, Profit and Loss account and Reconciliation statement.

9. JOB COSTING & BATCH COSTING

39) From the records of a manufacturing Company, the following budgeted details are available. Particulars Rs.

Direct Materials 1,99,000 Direct Wages Machine Shop 12,000 hours 63,000 Assembly Shop 10,000 hours 48,000 1,11,000 Works Overheads Machine Shop 12,000 hours 88,200 Assembly Shop 10,000 hours 51,800 1,40,000 Administrative Overheads 90,000 Selling Overheads 81,000 Distribution Overheads 62,100

The Company follows Absorption Costing method. You are required to prepare – a) Schedule of OH Rates from the data available stating the basis of OH Recovery Rates used under the

given circumstances. b) A Cost estimate for the following job based on the overhead rates so computed.

i) Direct Materials 25 kg at Rs. 16.80 per kg, and 15 kg at Rs. 20.00 per kg ii) Direct Labour - Machine Shop 30 hours, Assembly Shop 42 hours

40) A customer has been ordering 5,000 special design metal columns at the rate of 1,000 per order during the past year. The production cost is Rs 12 a unit - Rs 8 for materials and labour and Rs 4 for overheads (fixed) cost. It costs Rs 1,500 to set up for one run of 1,000 columns, and inventory carrying cost is 20 per cent. Since this customer may buy at least 5,000 columns this year, the company would like to avoid making five different production runs. Find the most economic production run.





41) What to do Ltd has just received an enquiry for the supply of a part. Annual supply would be 3,60,000 pieces. The Company ascertains the following information for decision making: a) Cost of material for each component: Rs.6 b) Direct Labour: 6 minutes per unit. Labourers are paid at Rs.50 per hour. c) However, for machinery set-up time, labourers are paid only Rs.40 per hour. d) Machine set-up time: 2 1/2 hours, Machine Hour Rate (OH rate): Rs.100 per machine hour. e) Average Cost of stock holding = Rs.700 per annum for every 100 units.

The company has approached you for the following consultations. a) What should be the economic batch size? b) What is the S.P. if OH is accounted for at Rs.4 per unit and one third margin on cost is desired? c) What would be the annual profit after estimated share of Head Office Expenses is Rs.12 lakhs?

10. JOINT & BY PRODUCTS

42) ABC Ltd. operates a simple chemical process to convert a single material into three separate items, referred to here as X, Y and Z. All three end products are separated simultaneously at a single split-off point. Product X and Y are ready for sale immediately upon split off without further processing or any other additional costs. Product Z, however, is processed further before being sold. There is no available market price for Z at the split-off point. The selling prices quoted here are expected to remain the same in the coming year. During 2013-14, the selling prices of the items and the total amounts sold were: X – 186 tons sold for Rs. 1,500 per ton Y – 527 tons sold for Rs. 1,125 per ton Z – 736 tons sold for Rs. 750 per ton The total joint manufacturing costs for the year were Rs. 6,25,000. An additional Rs. 3,10,000 was spent to finish product Z. There were no opening inventories of X, Y or Z at the end of the year. The following inventories of complete units were on hand:

X 180 tons Y 60 Tons Z 25 tons

There was no opening or closing work-in-progress. Required: a) Compute the cost of inventories of X, Y and Z for Balance Sheet purposes and cost of goods sold for

income statement purpose as of March 31, 2014, using: (i) Net realizable value (NRV) method of joint cost allocation (ii) Constant gross-margin percentage NRV method of joint-cost allocation.

b) Compare the gross-margin percentages for X, Y and Z using two methods given in requirement (a) 43) The Sunshine Oil Company purchases crude vegetables oil. It does refining of the same. The refining process

results in four products at the split off point: M, N, O and P. Product O is fully processed at the split off point. Product M, N and P can be individually further refined into ‘Super M’, ‘Super N’ and ‘Super P’. In the most recent month (March, 2014), the output at split off point was:

Product M 3,00,000 gallons

Product N 1,00,000 gallons

Product O 50,000 gallons

Product P 50,000 gallons





The joint cost of purchasing the crude vegetables oil and processing it were Rs. 40,00,000. Sunshine had no beginning or ending inventories. Sales of Product O in March, 2014 were Rs. 20,00,000. Total output of products M, N and P was further refined and then sold. Data related to March, 2014 are as follows:

Further Processing Costs to Make Super Products

Sales

Super M’ Rs. 80,00,000 Rs. 1,20,00,000 Super N’ Rs. 32,00,000 Rs. 40,00,000 Super P’ Rs. 36,00,000 Rs. 48,00,000

Sunshine had the option of selling products M, N and P at the split off point. This alternative would have yielded the following sales for the March, 2014 production:

Product M Rs. 20,00,000 Product N Rs. 12,00,000 Product P Rs. 28,00,000

You are required to answer: a) How the joint cost of Rs. 40,00,000 would be allocated between each product under each of the following

methods (i) sales value at split off; (ii) physical output (gallons); and (iii) estimated net realizable value? b) Could Sunshine have increased its March, 2014 operating profits by making different decisions about the

further refining of product M, N or P? Show the effect of any change you recommend on operating profits. 44) P ltd. Chocolates manufactures and distributes chocolate products. It purchases Cocoa beans and processes

them into two intermediate products: Chocolate powder liquor base Milk-chocolate liquor base These two intermediate products become separately identifiable at a single split off point. Every 500 pounds of cocoa beans yields 20 gallons of chocolate – powder liquor base and 30 gallons of milk-chocolate liquor base. The chocolate powder liquor base is further processed into chocolate powder. Every 20 gallons of chocolate-powder liquor base yields 200 pounds of chocolate powder. The milk chocolate liquor base is further processed into milk-chocolate. Every 30 gallons of milk chocolate liquor base yields 340 pounds of milk chocolate. Production and sales data for October, 2013 are:

Cocoa beans processed 7,500 pounds

Costs of processing Cocoa beans to split off point (including purchase of beans)

Rs. 7,12,500

Production Sales Selling price

Chocolate powder 3,000 pounds 3,000 pounds Rs. 190 per pound

Milk chocolate 5,100 Pounds 5,100 Pounds Rs. 237.50 per pound

The October, 2013 separable costs of processing chocolate-powder liquor into chocolate powder are Rs. 3,02,812.50. The October 2013 separable costs of processing milk-chocolate liquor base into milk-chocolate are Rs. 6,23,437.50. P ltd. full processes both of its intermediate products into chocolate powder or milk chocolate. There is an active market for these intermediate products. In October, 2013, P ltd.could have sold the chocolate powder liquor base for Rs. 997.50 a gallon and the milk-chocolate liquor base for Rs. 1,235 a gallon. Required: a) Calculate how the joint cost of Rs. 7,12,500 would be allocated between the chocolate powder and milk-

chocolate liquor bases under the following methods:





i) Sales value at split off point ii) Physical measure (gallons) iii) Estimated net realizable value, (NRV) and iv) Constant gross-margin percentage NRV.

b) What is the gross-margin percentage of the chocolate powder and milk-chocolate liquor bases under each of the methods in requirements (a) above?

c) Could P ltd. have increased its operating income by a change in its decision to fully process both of its intermediate products? Show your computations.

45) CPPL plant processes 1,50,000 kgs of raw material in a month to produce 2 products viz, P & Q. The cost of raw material is Rs.12 per kg. The process costs for the month are:

Direct Materials Direct Wages Variable OH Fixed OH

90,000 1,20,000 1,00,000 1,00,000

The loss in process is 5% of input. The output ratio of P&Q which emerge simultaneously is 1:2. The selling prices of the two products at the point of split off are: P Rs.12 per kg and Q Rs.20 per kg. A proposal is available to process p further by mixing it with other purchased materials. The entire current output of the plant can be so processed further to obtain a new product S. The price per Kg of S is Rs.15 and each Kg of output of S will require one kg of input P. The cost of processing of P into S (including other materials) is Rs.1,85,000 p.m. Prepare a statement showing the monthly profitability based on both the existing manufacturing operations and on further processing.

46) Oleum Refinery Ltd. refines crude oil and produces two joint product Gasoline and HSD in the ratio of 4:6. The refining is done in three processes. Crude oil is first fed in Process-A, from where the two products Gasoline and HSD are get separated. After separation from Process-A, Gasoline and HSD are further processed in Process- B and Process- C respectively. During the month of July, 2014, 4,50,000 Ltr. of crude oil were processed in Process-A at a total cost of Rs. 1,71,99,775. In Process-B, Gasoline is further processed at a cost of Rs. 10,80,000. In Process- C, HSD is further processed at a cost of Rs. 1,35,000. The Input output ratio for the each process is as follows:

Process- A 1 : 0.80

Process- B 1 : 0.95

Process- C 1 : 0.90

The details of sales during the month are:

Gasoline HSD

Quantity sold (Ltr.) 1,32,000 1,88,000

Sales price per Ltr.(Rs.) 68 46

There were no opening stocks. If these products were sold at split-off point, the selling price of Gasoline and HSD would be Rs. 64 and Rs. 41 per Ltr. respectively. Required: a) Prepare a statement showing the apportionment of joint cost to Gasoline and HSD in proportion of sales

value at split off point. b) Prepare a statement showing the cost per Ltr. of each product indicating joint cost, processing cost and

total cost separately. c) Prepare a statement showing the product wise profit or loss for the month.





11. PROCESS COSTING

47) Following information is available regarding process A for the month of Feb., 02:

Production Records: Units in process as on 1.2.02. [All materials used, 25% complete for labour & OH] New units introduced Units completed Units in process as on 28.2.02. [All materials used, 33-1/3% complete for Labour & OH] Work-in-process as on 1.2.02. Materials Labour Overhead Cost during the month: Materials Labour Overhead

4,000

16,000 14,000 6,000

Rs.

6,000 1,000 1,000

8,000

25,600 15,000 15,000

55,600

Prepare Statement of equivalent production, Statement showing cost for each element, Statement of apportionment of cost & Process cost a/c for process ‘A’ using FIFO.

48) The following details are available of Process X for August 2013:

1) Opening work-in-progress 8,000 units

Degree of completion and cost: Material (100%) Labour (60%) Overheads (60%)

Rs. 63,900 Rs. 10,800 Rs. 5,400

2) Input 1,82,000 units at Rs. 7,56,900

3) Labour paid Rs. 3,28,000

4) Over heads incurred Rs. 1,64,000

5) Units scrapped 14,000

Degree of completion: Material Labour and overhead

100% 80%

6) Closing work-in-process 18000 units

Degree of completion: Material Labour and overhead

100% 70%

7) 1,58,000 units were completed and transferred to next process.

8) Normal loss is 8% of total input including opening work-in-process

9) Scrap value is Rs. 8 per unit to be adjusted in direct material cost

You are required to compute, assuming that average method of inventory is used: a) Equivalent production, and





b) Cost per unit 49) From the following information for the month of January, 2013, prepare Process-III cost accounts under FIFO

method. Opening WIP in Process-III 1,600 units at Rs. 24,000 Transfer from Process-II 55,400 units at Rs. 6,23,250 Transferred to warehouse 52,200 units Closing WIP of Process-III 4,200 units Units Scrapped 600 units Direct material added in Process-III Rs. 2,12,400 Direct wages Rs. 96,420 Production overheads Rs. 56,400

Degree of completion:

Opening Stock Closing Stock Scrap Material 80% 70% 100% Labour 60% 50% 70% Overheads 60% 50% 70%

The normal loss in the process was 5% of the production and scrap was sold @ Rs. 5 per unit. (Students may treat material transferred from Process – II as Material – A and fresh material used in Process – III as Material B)

50) A Company produces a component, which passes through two processes. During the month of April, 2006, materials for 40,000 components were put into Process I of which 30,000 were completed and transferred to Process II. Those not transferred to Process II were 100% complete as to materials cost and 50% complete as to labour and overheads cost. The Process I costs incurred were as follows:

Direct Materials Rs. 15,000

Direct Wages Rs. 18,000

Factory Overheads Rs. 12,000

Of those transferred to Process II, 28,000 units were completed and transferred to finished goods stores. There was a normal loss with no salvage value of 200 units in Process II. There were 1,800 units, remained unfinished in the process with 100% complete as to materials and 25% complete as regard to wages and overheads. No further process material costs occur after introduction at the first process until the end of the second process, when protective packing is applied to the completed components. The process and packing costs incurred at the end of the Process II were:

Packing Materials Rs. 4,000 Direct Wages Rs. 3,500 Factory Overheads Rs. 4,500

Required: i) Prepare Statement of Equivalent Production, Cost per unit and Process I A/c. ii) Prepare statement of Equivalent Production, Cost per unit and Process II A/c.

51) Pharma Limited produces product ‘Gluco-G’ which passes through two processes before it is completed and transferred to finished stock. The following data relates to March, 2014:

Process-I (Rs.)

Process-II (Rs.)

Finished Stock (Rs.)

Opening Stock 1,50,000 1,80,000 4,50,000 Direct materials 3,00,000 3,15,000 - Direct Wages 2,24,000 2,25,000 -





Factory Overheads 2,10,000 90,000 - Closing Stock 74,000 90,000 2,25,000 Inter process profit included in Opening stock

NIL 30,000 1,65,000

Output of process I is transferred to process II at 25 percent profit on the transfer price, whereas output of process II is transferred to finished stock at 20 percent on transfer price. Stock in processes are valued at prime cost. Finished stock is valued at the price at which it is received from process II. Sales for the month is Rs. 28,00,000. You are required to prepare Process-I A/c, Process-II A/c, and Finished Stock A/c showing the profit element at each stage.

52) Star Ltd. manufactures chemical solutions for the food processing industry. The manufacturing takes place in a number of processes and the company uses a FIFO process costing system to value work-in-process and finished goods. At the end of the last month, a fire occurred in the factory and destroyed some of the paper files containing records of the process operations for the month. Star Ltd. needs your help to prepare the process accounts for the month during which the fire occurred. You have been able to gather some information about the month’s operating activities but some of the information could not be retrieved due to the damage. The following information was salvaged: (RTP NOV-15) a) Opening work-in-process at the beginning of the month was 800 litres, 70% complete for labour and 60%

complete for overheads. Opening work-in-process was valued at Rs. 26,640.

b) Closing work-in-process at the end of the month was 160 litres, 30% complete for labour and 20% complete for overheads.

c) Normal loss is 10% of input and total losses during the month were 1,800 litres partly due to the fire damage.

d) Output sent to finished goods warehouse was 4,200 litres. e) Losses have a scrap value of Rs.15 per litre. f) All raw materials are added at the commencement of the process. g) The cost per equivalent unit (litre) is Rs.39 for the month made up as follows:

Rs. Raw Material 23 Labour 7 Overheads 9 39

Required: i) Calculate the quantity (in litres) of raw material inputs during the month. ii) Calculate the quantity (in litres) of normal loss expected from the process and the quantity (in litres) of

abnormal loss / gain experienced in the month. iii) Calculate the values of raw material, labour and overheads added to the process during the month. iv) Prepare the process account for the month.

12. CONTRACT COSTING 53) A contractor commenced a contract on 1-7-2013. The costing records concerning the said contract reveal the

following information as on 31-3-2014.

Particulars Amount (Rs.) Material sent to site 7,74,300 Labour paid 10,79,000 Labour outstanding as on 31-3-2014 1,02,500





Salary to Engineer 20,500 per month Cost of plant sent to site (1-7-2013) 7,71,000 Salary to Supervisor (3/4 time devoted to contract) 9,000 per month Administration & other expenses 4,60,600 Prepaid Administration expenses 10,000 Material in hand at site as on 31-3-2014 75,800

Plant used for the contract has an estimated life of 7 years with residual value at the end of life Rs. 50,000. Some of material costing Rs.13,500 was found unsuitable and sold for Rs.10,000. Contract price was Rs.45,00,000. On 31-3-2014 two third of the contract was completed. The architect issued certificate covering 50% of the contract price and contractor has been paid Rs.20,00,000 on account. Depreciation on plant is charged on straight line basis. Prepare Contract Account.

54) A loan Construction Company Ltd. commenced its business of construction on 1-1-2006. The trial balance as on 31-12-2006 showed the following balances:

Particulars Dr. Cr.

Paid-up Share capital Cash received on a/c of contract (80% of work certified) Land and Building Machinery at cost (75% at site) Bank Materials issued to site Direct Labour Expenses at site Lorries and Vehicles Furniture Office Equipment Postage and Telegrams Office Expenses Rate and Taxes Fuel and Power

30,000 40,000

4,000 40,000 55,000

2,000 30,000

1,000 10,000

500 2,000 3,000 2,500

1,00,000

1,20,000

2,20,000 2,20,000

The contract Price is Rs. 3,00,000 and work certified is Rs.1,50,000. the work completed since certification is estimated at Rs. 1,000(at cost). Machinery costing Rs. 2,000 was returned to stores at the end of the year. Stock of material at site on 31-12-2006 was of the value of Rs.5,000. Wages outstanding were Rs. 200. Depreciation on Machinery at 10%. You are required to calculate the profit from the contract and show how the work-in-progress will appear in the balance sheet as on 31-12-2006.

55) Modern Constructions Ltd obtained a contract No.B-37 for Rs.40 Lakhs. The following balances and information relates to the contract for the year just ended-

Particulars At the beginning of the year Rs.

At the end of the year Rs.

Work-in-Progress: Work Certificate 9,40,000 30,00,000 Work Uncertified 11,200 32,000 Materials at site 8,000 20,000 Accrued Wages 5,000 3,000





Particulars Rs. Particulars Rs.

Materials issued from Stores Rs.4,00,000 Indirect Expenses Rs.10,000

Materials directly purchased Rs.1,50,000 Share of General Overheads for B-37 Rs.18,000

Wages paid Rs,6,00,000 Materials returned to Supplier Rs,15,000

Architect’s Fees Rs.51,000 Fines and Penalties paid Rs.12,000

Plant Hire Charges Rs.50,000 Materials returned to Stores Rs.25,000

The Contractee pays 80% of Work Certified in cash. You are required to prepare- • Contract Account showing clearly the amount of profits transferred to Profit and Loss Account, • Contractee’s Account, and • Balance Sheet

56) A contractor commenced a building contract on October 1, 2010. The contract price is Rs. 4,40,000. The following data pertaining to the contract for the year 2011-2012 has been compiled from his books and is as under :

The cash received represents 80% of work certified. It has been estimated that further costs to complete the contract will be Rs. 23,000 including the materials at site as on March 31, 2012. Required : Determine the profit on the contract for the year 2011-12 on prudent basis, which has to be credited to Costing P/L A/c. (PM,SM)

14. MARGINAL COSTING 57) Following information’s are available for the year 2013 and 2014 of PIX Limited:

Year 2013 2014

Sales Rs.32, 00,000 Rs.57, 00,000

Profit/ (Loss) (Rs.3,00,000) Rs.7, 00,000

Calculate – (a) P/V ratio, (b) Total fixed cost, and (c) Sales required to earn a Profit of Rs. 12,00,000 58) PQR Ltd. has furnished the following data for the two years:

2011 2012 Sales Rs.8,00,000 ? Profit/Volume Ratio (P/V ratio) 50% 37.5% Margin of Safety sales as a % of total sales 40% 21.875%





There has been substantial savings in the fixed cost in the year 2012 due to the restructuring process. The company could maintain its sales quantity level of 2011 in 2012 by reducing selling price. You are required to calculate the following: i) Sales for 2012 in Rs. ii) Fixed cost for 2012 iii) Break-even sales for 2012 in Rupees.

59) MNP Ltd sold 2,75,000 units of its product at Rs. 37.50 per unit. Variable costs are Rs. 17.50 per unit (manufacturing costs of Rs. 14 and selling cost Rs. 3.50 per unit). Fixed costs are incurred uniformly throughout the year and amount to Rs. 35,00,000 (including depreciation of Rs.15,00,000). there are no beginning or ending inventories. Required: i) Estimate breakeven sales level quantity and cash breakeven sales level quantity. ii) Estimate the P/V ratio. iii) Estimate the number of units that must be sold to earn an income (EBIT) of Rs. 2,50,000. Estimate the sales level achieve an after-tax income (PAT) of Rs. 2,50,000. Assume 40% corporate Income Tax rate.

60) A Company sells two products, J and K. The sales mix is 4 units of J and 3 units of K. The contribution margins per unit are Rs. 40 for J and Rs.20 for K. Fixed costs are Rs. 6,16,000 per month. Compute the break-even point.

61) T Ltd produces a single product ‘T-10’ and sells it at a fixed price of Rs. 2,050 per unit. The production and sales data for first quarter of the year 2014-15 are as follows:

Actual/budget information for each month was as follows: Direct materials 4 kilograms at Rs.120 per kilogram Direct labour 6 hours at Rs.60 per hour Variable production overheads 150% of direct labour Sales commission 15% of sales value Fixed production overheads Rs. 5,00,000 Fixed selling overheads Rs. 95,000 There was no opening inventory at the start of the quarter. Fixed production overheads are budgeted at Rs. 60,00,000 per annum and are absorbed into products based on a budgeted normal output of 60,000 units per annum. Required: a) Prepare a profit statement for each of the three months using absorption costing principles. b) Prepare a profit statement for each of the three months using marginal costing principles. c) Present a reconciliation of the profit or loss figures given in your answer to (a) and (b).

(PM, SM, RTP- Nov 15) 15. STANDARD COSTING

62) The standard cost of a chemical mixture is as follows: 40% material A at Rs. 20 per kg. 60% material B at Rs. 30 per kg. A standard loss of 10% of input is expected in production. The cost records for a period showed the following usage : 90 kg material A at a cost of Rs. 18 per kg.





110 kg material B at a cost of Rs. 34 per kg. The quantity produced was 182 kg. of good product. Calculate all material variances.

63) SV Ltd. manufactures product BXE by mixing three raw materials. For every batch of 100 kgs. of BXE 125 Kgs of the raw materials are used. During April 60 batches were prepared to produce 5,600 Kgs of BXE. The standard and actual particulars for the month are:

Standard Actual Raw materials Mix % Price / Kg Rs. Mix % Price / Kg Rs.

Quantity of Raw materials purchase

A 50 20 60 21 5,000

B 30 10 20 8 2,000

C 20 5 20 6 1,250

Calculate relevant material variances. 64) Following are the details of the product Phomex for the month of April 2013:

Standard quantity of material required per unit 5 Kg

Actual output 1000 units

Actual cost of materials used Rs.7,14,000

Material price variance Rs.51,000 (Fav)

Actual price per kg of material is found to be less than standard price per kg of material by Rs. 10. You are required to calculate: i) Actual quantity and Actual price of materials used. ii) Material Usage Variance iii) Material Cost Variance

65) The budgeted labour force for producing 1000 articles of X is: a) 30 Men @ Rs.4 per hour for 50 hours b) 20 Women @ Rs.3 per hour for 30 hours c) 10 Boys @ Rs.2 per hour for 20 hours The actual data for producing 2000 articles are: a) 50 Men @ Rs.4.5 per hour for 50 hours b) 60 Women @ Rs.3 per hour for 30 hours c) 20 Boys @ Rs.2 per hour for 15 hours Calculate labour variances.

66) The standard labour employment and the actual labour engaged in a 40 hours week for a job are as under:

Standard Actual Category of Workers No. of

workers Wage Rate

per hour (Rs.) No. of

workers Wage Rate

per hour (Rs.)

Skilled 65 45 50 50

Semi-skilled 20 30 30 35

Unskilled 15 15 20 10

Standard output: 2000 units; Actual output: 1800 units Abnormal Idle time 2 hours in the week Calculate: (i) Labour Cost Variance





(ii) Labour Efficiency Variance (iii) Labour Idle Time Variance.

67) KPR Limited operates a system of standard costing in respect of one of its products which is manufactured within a single cost centre. The Standard Cost Card of a product is as under:

Standard Unit cost (Rs.)

Direct material 5 kgs @Rs.4.20 21.00

Direct labour 3 hours @Rs.3.00 9.00

Factory overhead Rs.1.20 per labour hour 3.60

Total manufacturing cost 33.60

The production schedule for the month of June, 2007 required completion of 40,000 units. However, 40,960 units were completed during the month without opening and closing work-in process inventories. Purchases during the month of June, 2007, 2,25,000 kgs of material at the rate of Rs.4.50 per kg. Production and Sales records for the month showed the following actual results.

Material used 2,05,600 kgs.

Direct labour cost (1,21,200 hours) Rs. 3,87,840

Total factory overhead cost incurred Rs. 1,00,000

Sales 40,000 units

Selling price to be so fixed as to allow a mark-up of 20 per cent on selling price. Required: a) Calculate material variances based on consumption of material. b) Calculate labour variances and the total variance for factory overhead. c) Prepare Income statement for June, 2007 showing actual gross margin.

An incentive scheme is in operation in the company whereby employees are paid a bonus of 50% of direct labour hour saved at standard direct labour hour rate. Calculate the Bonus amount.

68) The following standards have been set to manufacture a product:

The company manufactured and sold 6,000 units of the product during the year. Direct material costs were as follows: 12,500 units of P at Rs. 4.40 per unit 18,000 units of Q at Rs. 2.80 per unit 88,500 units of R at Rs. 1.20 per unit The company worked 17,500 direct labour hours during the year. For 2,500 of these hours the company paid at Rs. 12 per hour while for the remaining the wages were paid at the standard rate. Calculate material price, usage variances, labour rate, and efficiency variances.

BUDGETARY CONTROL

69) S Ltd., manufactures and sells 2 products, S1 and S2. The following data is relevant for drawing budget 1997. a) Projected Sales:





Product Units Price (Rs.)

S1 S2

60,000 40,000

140 200

b) To produce one unit of S1 and S2 the following raw materials are used :

Raw Material Unit Amount used per unit

S1 S2 A B C

Kgs Kgs kgs

4 2 2

5 3 1

c) Inventories in Units:

Product Expected January 1, 1997 Target December 31, 1997

S1 S2

20,000 8,000

25,000 9,000

Raw Material

A B C

32,000 Kgs 29,000 Kgs 6,000 Kgs

36,000 Kgs 32,000 Kgs 7,000 Kgs

d) The anticipated purchase price of raw material A, B and C are Rs.12, Rs.5 and Rs.3 per Kg. respectively. e) Projected direct labour requirements for 1997, and rates of pay are:

Product Hours per Unit Rate per hour

S1 S2

2 3

12 16

f) Overhead is applied at the rate of Rs.20 per direct labour hour. Based on the above projections & budget requirements for 1997, prepare the following budgets: i) Sales budget in Rupees; ii) Production budget in units; iii) Raw material purchase budget in quantities; iv) Raw material purchase budget in Rupees; v) Direct labour budget in Rupees; vi) Budgeted finished goods at 31/12 in Rupees; vii) Profit and Loss Budget.

70) P Ltd., manufactures two products using one type of material and one grade of labour. Shown below is an extract from the company’s working papers for the next period’s budget:

Particulars Product A Product B

Budgeted Sales (units) Budgeted material consumption Per-product (kg.) Standard hours allowed per product

3,600

5 5

4,800

3 4

Budgeted material cost Rs.12 per Kg. And Budgeted wage rate Rs.8/- per hour.





Overtime premium is 50% and is payable, if a worker works for more than 40 hours a week. There are 90 direct workers. The target productivity ratio for the productive hours worked by the direct workers in actually manufacturing the products is 80%, in addition the non-productive downtime is budgeted at 20 % of the productive hours worked. There are twelve 5 day weeks in the budget period and it is anticipated that sales and production will occur evenly throughout the whole period. The stock at the beginning of the period will be:

Product A B Raw material

Units 1020 2400 4300 Kg.

The target closing stocks, expressed in terms of anticipated activity during the budget period are: Product A – 15 days sales, Product B – 20 days sales, Raw material – 10 days consumption. Calculate the material purchases budget and the wages budget for the direct workers, showing the quantities and values, for the next period.

71) Jigyasa Ltd. is drawing a production plan for its two products Minimax (MM) and Heavyhigh (HH) for the year 2013-14. The company’s policy is to hold closing stock of finished goods at 25% of the anticipated volume of sales of the succeeding month. The following are the estimated data for two products:

Minimax (MM) Heavyhigh (HH) Budgeted Production units 1,80,000 1,20,000

(Rs.) (Rs.) Direct material cost per unit 220 280 Direct labour cost per unit 130 120 Manufacturing overhead 4,00,000 5,00,000

The estimated units to be sold in the first four months of the year 2013-14 are as under April May June July

Minimax 8,000 10,000 12,000 16,000 Heavy high 6,000 8,000 9,000 14,000

Prepare production budget for the first quarter in month wise. 72) Pentax Limited has prepared its expense budget for 20,000 units in its factory for the year 2013 as detailed

below: (Rs. per unit) Direct Materials 50 Direct Labour 20 Variable Overhead 15 Direct Expenses 6 Selling Expenses (20% fixed) 15 Factory Expenses (100% fixed) 7 Administration expenses (100% fixed) 4 Distribution expenses (85% variable) 12 Total 129

Prepare an expense budget for the production of 15,000 units and 18,000 units 73) M/s NNSG Ltd, specialized in manufacturing of piston rings for motor vehicle. It has prepared budget for 8,000

units per annum at budgeted cost of Rs. 21,64,400 as detailed below: (Rs.) (Rs.) Fixed cost (Manufacturing) 2,28,000 Variable costs: Power 18,000 Repairs, etc. 16,000





Other variable cost 6,400 Direct material 6,16,000 Direct labour 12,80,000 19,36,400 21,64,400

Considering the possible impact on sales turnover by market trends, the company decides to prepare flexible budget with a production target of 4,000 and 6,000 units. On behalf of the company you are required to prepare a flexible budget for production levels at 50% and 75%. Assuming the selling price per unit is maintained at Rs. 400 as at present, indicate the effect on net profit. Administration, selling and distribution overheads continue at Rs. 72,000.

74) A fruit juice manufacturer is in the process of preparing budgets for the next few months, and the following draft figures are available:Rs. (PM,MTPOCT 15) Sales forecast

June 6,000 Litres July 7,500 Litres August 8,500 Litres September 7,000 Litres October 6,500 Litres

A litre of fruit juice has a standard cost of Rs. 75 and a standard selling price of Rs. 105. Each litre of juice uses 3.5 kg. of fruits and it is policy to have stocks of fruits at the end of each month to cover 50 per cent of next month’s production. There are 5,800 kg in stock on 1st June. There are 750 litres of finished fruit juice in stock on 1st June and it is policy to have stocks at the end of each month to cover 10% of the next month’s sales. Requirements: a) Prepare a production budget (in litres) for June, July, August and September. b) Prepare a fruits purchase budget (in kg.) for the months of June, July and August. c) Calculate the budgeted gross profit for the quarter June to August.

NOTE: All the above Questions are from MM Material 34th edition unless otherwise specified.

THE END




IPCC |Guess Questions– May 2016 – Financial Management(Theory) 36

FINANCIAL MANAGEMENT

THEORY

1. TIME VALUE OF MONEY

1) Explain the relevance of time value of money in financial decisions (or) reasons why money in the future is worth less than similar money today.

2. CAPITAL BUDGETING

2) Distinguish between NPV and IRR. 3) Define Modified IRR. 4) Explain the concept of discontinued Payback period. 5) Explain the concept of Multiple IRR. 6) Specify reasons for “capital budgeting decisions are important, crucial and critical business decisions”.

3. ADVANCED CONCEPTS IN CAPITAL BUDGETING

Nil

4. COST OF CAPITAL

7) Write short notes on significance of cost of capital. 8) What is meant by WACC? 9) Write short notes on CAPM approach.

5. CAPITAL STRUCTURE

10) What is optimum capital structure? Explain. 11) Explain in brief the assumptions of Modigliani-Miller theory. 12) Explain the principles of “Trading on equity”. 13) Discuss financial break-even and EBIT-EPS indifference analysis. 14) Discuss the major considerations in capital structure planning. 15) What is over capitalization? State its causes and consequences. 16) Explain in brief the assumptions of Net Operating income approach.

6. LEVERAGES

17) Differentiate between business risk and financial risk. 18) Explain the concept of leveraged lease. 19) “Operating risk is associated with cost structure whereas financial risk is associated with capital structure of a

business concern”. Critically examine this statement.

7. WORKING CAPITAL MANAGEMENT

20) Discuss the factors to be taken into consideration while determining the requirement of working capital. 21) Discuss the estimation of working capital need based on operating cycle process. 22) Explain the cash management models. 23) What is virtual banking? State its advantages. 24) Write short note on different kinds of float with reference to management of cash. 25) “Management of marketable securities is an integral part of investment of cash”. Comment. 26) Explain the Aging schedule in the context of monitoring of receivables. 27) Write short note on factoring. 28) Explain briefly the functions of treasury department.




IPCC |Guess Questions– May 2016 – Financial Management(Theory) 37

8. RATIO ANALYSIS

29) Diagrammatically present the DU PONT CHART to calculate return on equity. 30) Explain briefly the limitations of financial ratios.

9. FUNDS FLOW STATEMENT

31) Distinguish between cash flow and fund flow statement. 10. SOURCES OF FINANCE

32) Discuss the risk-return considerations in financing of current assets. 33) Write short notes on the following

a) ADR b) GDR c) Bridge Finance d) Venture capital Financing e) Seed capital assistance f) Packing Credit g) Advantages of Debt Securitisation h) Floating rate bonds

34) State the main features of Deep Discount bonds. 35) Explain the term ‘Ploughing back of Profits’. 36) Discuss the features of Secured Premium notes (SPN’s). 37) Explain the concept of Closed and Open-ended lease. 38) Distinguish between Operating and Finance lease. 39) Differentiate between Factoring and Bills discounting. 40) Write short notes on Pre shipment and post shipment of goods. 41) Discuss the meaning and features of ‘commercial paper’.

11. SCOPE AND OBJECTIVES OF FINANCIAL MANAGEMENT

42) Explain as to how the wealth maximisation objective is superior to the profit maximisation objective? 43) Discuss the functions of CFO. 44) Explain two basic functions of financial management. 45) Differentiate between financial management and Financial Accounting.

NOTE: All the above Questions are from MM Material 34th edition.

THE END



IPCC |Guess Questions– May 2016 – Financial Management (Problems) 38

98851 25025 / 26 No.1 for CA/CMA & MEC/CEC MASTER MINDS

FINANCIAL MANAGEMENT

PROBLEMS

1. TIME VALUE OF MONEY

1) Mr. Pinto borrowed Rs. 1,00,000 from a bank on a one-year 8% term loan, with interest compounded quarterly. Determine the effective annual interest on the loan?

2) A person opened an account on April, 2012 with a deposit of Rs. 800. The account paid 6% interest compounded quarterly. On October 1, 2012, he closed the account and added enough additional money to invest in a 6-month Time Deposit for Rs. 1,000 earning 6% compounded monthly. a) How much additional amount did the person invest on October 1? b) What was the maturity value of his Time Deposit on April 1, 2013? c) How much total interest was earned?

3) Z plans to receive an annuity of Rs. 5,000 semi-annually for 10 years after he retires in 18 years. Money is worth 9% compounded semi-annually. a) How much amount is required to finance the annuity? b) What amount of single deposit made now would provide the funds for the annuity? c) How much will Mr. Z receive from the annuity?

4) Mr. Sanyukta has bought a new car and has taken a 20 month car loan of 6, 00,000. The rate of interest is 12 per cent per annum. You are required to compute the amount of monthly loan amortization for Mr. Shankar?

5) You need a sum of Rs. 1,00,000 at the end of 10 years. You know that the best you can do is to deposit some lump sum amount today at 6% rate of interest or to make equal payments into a bank account, starting a year from now on which you can earn 6%interest. Find out (SM,RTP NOV 15) i) What amount to be deposited today or ii) What amount must be deposited annually?

2. CAPITAL BUDGETING

6) Cello Limited is considering buying a new machine which would have a useful economic life of five years, at a cost of Rs.1,25,000 and a scrap value of Rs.30,000, with 80 percent of the cost being payable at the start of the project and 20 percent at the end of the first year. The machine would produce 50,000 units per annum of a new project with an estimated selling price of Rs.3 per unit. Direct costs would be Rs.1.75 per unit and annual fixed costs, including depreciation calculated on a straight-line basis, would be Rs.40,000 per annum. In the first year and the second year, special sales promotion expenditure, not included in the above costs, would be incurred, amounting to Rs.10,000 and Rs.15,000 respectively. Evaluate the project using the NPV method of investment appraisal, assuming the company’s cost of capital to be 10 percent.

7) Elite Cooker Company is evaluating three investment situations: (1) Produce a new line of aluminum skillets, (2) Expand its existing cooker line to include several new sizes, and (3) develop a new, higher-quality line of cookers. If only the project in question is undertaken, the expected present values and the amounts of investment required are:

Project Investment required (Rs.) Present value of Future Cash-Flows (Rs.)

1 2,00,000 2,90,000

2 1,15,000 1,85,000

3 2,70,000 4,00,000





If projects 1 and 2 are jointly undertaken, there will be no economies; the investments required and present values will simply be the sum of the parts. With projects 1 and 3, economies are possible in investment because one of the machines acquired can be used in both the production processes. The total investment required for projects 1 and 3 combined is Rs.4,40,000. If projects 2 and 3 are undertaken, there are economies to be achieved in marketing and producing the products but not in investment. The expected present value of future cash flows for projects 2 and 3 is Rs.6,20,000. If all the three projects are undertaken simultaneously, the economies noted will still hold. However, a Rs.1,25,000 extension on the plant will be necessary, as space is not available for all the three projects. Which project or projects should be chosen?

8) A company wants to invest in a machinery that would cost Rs.50,000 at the beginning of year 1. It is estimated that the net cash inflows from operations will be Rs.18,000 per annum for 3 years, if the company opts to service a part of the machine at the end of year 1 at Rs.10,000. In such a case, the scrap value at the end of year 3 will be Rs.12,500. However, if the company decides not to service the part, then it will have to be replaced at the end of year 2 at Rs.15,400. But in this case, the machine will work for the 4th year also and get operational cash inflow of Rs.18,000 for the 4th year. It will have to be scrapped at the end of year 4 at Rs.9,000. Assuming cost of capital at 10% and ignoring taxes, will you recommend the purchase of this machine based on the Net Present Value of its cash flows? If the supplier gives a discount of Rs.5,000 for purchase, what would be your decision? (The present value factors at the end of years 0, 1, 2, 3, 4, 5 and 6 are respectively 1, 0.9091, 0.8264, 0.7513, 0.6830, 0.6209 and 0.5644).

9) APZ Limited is considering to select a machine between two machines 'A' and 'B'. The two machines have identical capacity, do exactly the same job, but designed differently. Machine 'A' costs Rs. 8,00,000, having useful life of three years. It costs Rs. 1,30,000 per year to run. Machine 'B' is an economy model costing Rs. 6,00,000, having useful life of two years. It costs Rs. 2,50,000 per year to run. The cash flows of machine 'A' and 'B' are real cash flows. The costs are forecasted in rupees of constant purchasing power. Ignore taxes. The opportunity cost of capital is 10%. Which machine would you recommend the company to buy?

10) Shiva Limited is planning its capital investment programme for next year. It has five projects all of which give a positive NPV at the company cut-off rate of 15 percent, the investment outflows and present values being as follows:

Project Investment NPV @ 15% Rs.‘000 Rs.‘000

A (50) 15.4 B (40) 18.7 C (25) 10.1 D (30) 11.2 E (35) 19.3

The company is limited to a capital spending of Rs.1,20,000. You are required to optimize the returns from a package of projects within the capital spending limit. The projects are independent of each other and are divisible (i.e. part-project is also possible).

11) PR Engineering Ltd. is considering the purchase of a new machine which will carry out some operations which are at present performed by manual labour. The following information related to the two alternative models - Rs.MX’ and Rs.MY’ are available:

Machine Rs.MX’ Machine Rs.MY’ Cost of Machine Rs. 8,00,000 Rs. 10,20,000

Expected Life 6 years 6 years Scrap Value Rs.20,000 Rs.30,000





Estimated net income before depreciation and tax: Year Rs. Rs.

1 2,50,000 2,70,000 2 2,30,000 3,60,000 3 1,80,000 3,80,000 4 2,00,000 2,80,000 5 1,80,000 2,60,000 6 1,60,000 1,85,000

Corporate tax rate for this company is 30 percent and company’s required rate of return on investment proposals is 10%. Depreciation will be charged on straight line basis. You are required to: a) Calculate the pay-back period of each proposal. b) Calculate the Net Present Value of each proposal, if the P.V.factors at 10% are – 0.909, 0.826, 0.751,

0.683, 0.621 and 0.564. c) Which proposal would you recommend and why?

12) Following are the data on a capital project of X Ltd. Particulars Project M

Annual cost saving Rs.40,000 Useful life 4 years Internal rate of return 15% Profitability index 1.064 Net present value ? Cost of capital ? Payback period ? Salvage value 0

Find the missing values. 13) A hospital is considering to purchase a diagnostic machine costing Rs.80,000. The projected life of the

machine is 8 years and has an expected salvage value of Rs.6,000 at the end of 8 years. The annual operating cost of the machine is Rs.7,500. It is expected to generate revenues of Rs.40,000 per year for eight years. Presently, the hospital is outsourcing the diagnostic work and is earning commission income of Rs.12,000 per annum (net of taxes).

Required: Whether it would be profitable for the hospital to purchase the machine? Give your recommendation under:

(i) Net Present Value method (ii) Profitability Index method.

PV factors at 10% are given below: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467

14) A Ltd. is considering the purchase of a machine which will perform some operations which are at present performed by workers. Machines X and Y are alternative models. The following details are available:

Machine X (Rs.) Machine Y (Rs.) Cost of machine 1,50,000 2,40,000 Estimated life of machine 5 years 6 years Estimated cost of maintenance p.a. 7,000 11,000 Estimated cost of indirect material, p.a. 6,000 8,000





Estimated savings in scrap p.a. 10,000 15,000 Estimated cost of supervision p.a. 12,000 16,000 Estimated savings in wages pa. 90,000 1,20,000

Depreciation will be charged on straight line basis. The tax rate is 30%. Evaluate the alternatives according to: a) Average Rate Of Return method, and b) Present Value Index method assuming cost of capital being 10%.

(The present value of Rs.1.00 @ 10% p.a. for 5 years is 3.79 and for 6 years is 4.354)

15) BT Pathology Lab Ltd. is using a X-ray machines which reached at the end of their useful lives. Following new X-ray machines of two different brands with same features are available for the purchase.

Residual Value of both of above machines shall be dropped by 1/3 of Purchase price in the first year and thereafter shall be depreciated at the rate mentioned above. Alternatively, the machine of Brand ABC can also be taken on rent to be returned back to the owner after use on the following terms and conditions: • Annual Rent shall be paid in the beginning of each year and for first year it shall be Rs. 1,02,000. • Annual Rent for the subsequent 4 years shall be Rs. 1,02,500. • Annual Rent for the final 5 years shall be Rs. 1,09,950. • The Rent Agreement can be terminated by BT Labs by making a payment of Rs. 1,00,000 as penalty. This penalty would be reduced by Rs. 10,000 each year of the period of rental agreement. You are required to: a) Advise which brand of X-ray machine should be acquired assuming that the use of machine shall be

continued for a period of 20 years. b) Which of the option is most economical if machine is likely to be used for a period of5 years?

The cost of capital of BT Labs is 12%. (RTP NOV 15)

3. ADVANCED CONCEPTS IN CAPITAL BUDGETING 16) The cash flows of projects C and D are reproduced below:

Cash Flow Project C0 C1 C2 C3

NPV at 10% IRR

C - Rs. 10,000 +2,000 +4,000 +12,000 + Rs. 4,139 26.5% D - Rs. 10,000 +10,000 +3,000 +3,000 +Rs. 3,823 37.6%

a) Why there is a conflict of rankings? b) Why should you recommend project C inspite of lower internal rate of return?

Period Time

1 2 3 PVIF0.10, t 0.9090 0.8264 0.7513 PVIF0.14, t 0.8772 0.7695 0.6750 PVIF0.15, t 0.8696 0.7561 0.6575 PVIF0.30, t 0.7692 0.5917 0.4552 PVIF0.40, t 0.7143 0.5102 0.3644





17) ABC Company Ltd. has been producing a chemical product by using machine Z for the last two years. Now the management of the company is thinking to replace this machine either by X or by Y machine. The following details are furnished to you:

Z X Y Book value (Rs.) 1,00,000 - - Resale value now (Rs.) 1,10,000 - - Purchase price (Rs.) - 1,80,000 2,00,000 Annual fixed costs (including depreciation) (Rs.) 92,000 1,08,000 1,32,000 Variable running cost per unit (Rs.) (including labour cost)

3 1.50 2.50

Production per hour (units) 8 8 12 You are also provided the following details

Selling price per unit (Rs.) 20 Cost of materials per unit (Rs.) 10 Annual operating hours 2,000

Working life of each of the three machines (as from now) - 5 years Salvage value of machines Z is Rs. 10,000, X is Rs. 15,000 and Y is Rs. 18,000

The company charges depreciation using straight line method. It is anticipated that an additional cost of Rs. 8,000 per annum would be incurred on special advertising to sell the extra output of machine Y. Assume tax rate of 50% and cost of capital 10%. The present value of Rs. 1 to be received at the end of the year at 10% is as under:

Year 1 2 3 4 5

Present value 0.909 0.826 0.751 0.683 0.621

Required: Using NPV method, you are required to analyse the feasibility of the proposal and make recommendations.

18) A machine purchased six years back for Rs.1,50,000 has been depreciated to a book value of Rs.90,000. It originally had a projected life of fifteen years and zero salvage value. A new machine will cost Rs.2,50,000 and result in a reduced operating cost of Rs.30,000 per year for the next nine years. The older machine could be sold for Rs.50,000. The new machine shall also be depreciated on a straight-line method on nine-year life with salvage value of Rs.25,000. The company's tax rate is 50% and cost of capital is 10%. Determine whether the old machine should be replaced. Given: Present Value of Re. 1 at 10% on 9th year = 0.424; and Present Value of an annuity of Re. 1 at 10% for 8 years = 5.335.

19) Nine Gems Ltd. has just installed Machine-R at a cost of Rs. 2,00,000. The machine has a five year life with no residual value. The annual volume of production is estimated at 1,50,000 units, which can be sold at Rs. 6 per unit. Annual operating costs are estimated at Rs. 2,00,000 (excluding depreciation) at this output level. Fixed costs are estimated at Rs. 3 per unit for the same level of production. Nine Gems Ltd. has just come across another model called Machine-S capable of giving the same output at an annual operating cost of Rs. 1,80,000 (exclusive of depreciation). There will be no change in fixed costs. Capital cost of this machine is Rs. 2,50,000 and the estimated life is for five years with nil residual value. The company has an offer for sale of Machine-R at Rs. 1,00,000. But the cost of dismantling and removal will amount to Rs. 30,000. As the company has not yet commenced operations, it wants to sell Machine-R and purchase Machine-S. Nine Gems Ltd. will be a zero-tax company for seven years in view of several incentives and allowances available. The cost of capital may be assumed at 14%. P.V. factors for five years are as follows:

Year 1 2 3 4 5 P.V. Factor @ 14% 0.877 0.769 0.675 0.592 0.519





a) Advise whether the company should opt for the replacement. Will there be any change in your view if Machine-R has not been installed but the company is in the process of selecting one or the other machine? Support your view with necessary workings.

20) MNP Limited is thinking of replacing its existing machine by a new machine which would cost Rs.60 lakhs. The company’s current production is 80,000 units, and is expected to increase to 1,00,000 units, if the new machine is bought. The selling price of the product would remain unchanged at Rs.200 per unit. The following is the cost of producing one unit of product using both the existing and new machine:

Unit Cost

Existing Machine

(80,000 units) New Machine

(1,00,000 units) Difference

Materials 75.00 63.75 -11.25 Wages and Salaries 51.25 37.50 -13.75 Supervision 20.00 25.00 5.00 Repairs and Maintenance 11.25 7.50 -3.75 Power and Fuel 15.50 14.25 -1.25 Depreciation 0.25 5.00 4.75 Allocated Corporate Overheads 10.00 12.50 2.50

Total 183.25 165.50 -17.75 The existing machine has an accounting book value of Rs.1,00,000, and it has been fully depreciated for tax purpose. It is estimated that machine will be useful for 5 years. The supplier of the new machine has offered to accept the old machine for Rs. 2,50,000. However, the market price of old machine today is Rs.1,50,000 and it is expected to be Rs. 35,000 after 5 years. The new machine has a life of 5 years and a salvage value of Rs. 2,50,000 at the end of its economic life. Assume corporate Income tax rate at 40%, and depreciation is charged on straight line basis for Income-tax purposes. Further assume that book profit is treated as ordinary income for tax purpose. The opportunity cost of capital of the Company is 15%. Required: i) Estimate net present value of the replacement decision. ii) Estimate the internal rate of return of the replacement decision. iii) Should Company go ahead with the replacement decision? Suggest.

4. COST OF CAPITAL

21) A company issued 10,000, 10% debentures of Rs.100 each on 1.4.2010 to be matured on 1.4.2015. The company wants to know the current cost of its existing debt and the market price of the debentures is Rs.80. Compute the cost of existing debentures assuming 35% tax rate.

22) Reserve Bank of India is proposing to sell a 5-year bond of Rs.5,000 at 8 percent rate of interest p.a. The bond amount will be amortized equally over its life. What is the bond’s present value for an investor if he expects minimum rate of return of 6 percent?

23) D Ltd. is foreseeing a growth rate of 12% per annum in the next two years. The growth rate is likely to be 10% for the third and fourth year. After that the growth rate is expected to stabilize at 8% per annum. If the last dividend was Rs.1.50 per share and the investor’s required rate of return is 16%, determine the current value of equity share of the company. The PV factors at 16%

Year 1 2 3 4

PV Factor 0.862 0.743 0.641 0.552





24) Y Ltd. retains Rs.7,50,000 out of its current earnings. The expected rate of return to the shareholders, if they had invested the funds elsewhere is 10%. The brokerage is 3% and the shareholders come in 30% tax bracket. Calculate the cost of retained earnings.

25) Aries Limited wishes to raise additional finance of Rs.10 lakhs for meeting its investment plans. It has Rs.2,10,000 in the form of retained earnings available for investment purposes. Following are further details:

Debt/equity mix 30% - 70% Cost of Debt: Up to Rs. 1,80,000 10% [before tax] Beyond Rs. 1,80,000 16% [before tax] Earnings per share Rs. 4 Dividend pay out 50% of earnings Expected growth rate in dividend 10% Current market price per share Rs. 44 Tax rate 50%

You are required: a) To determine the pattern for raising the additional finance. b) To determine the post-tax average cost of additional debt. c) To determine the cost of retained earnings and cost of equity, and d) Compute the overall weighted average after tax cost of additional Finance.

26) You are required to determine the weighted average cost of capital of a firm using (i) book value weights and (ii) market value weights. The following information is available for your perusal: Present book value of the firm’s capital structure is:

Rs. Debentures of Rs.100/- each 8,00,000 Preference Shares of Rs.100/- each 2,00,000 Equity Shares of Rs.10/- each 10,00,000 20,00,000

All these securities are traded in the capital markets. Recent prices are: Debentures @ Rs.110, Preference shares @ Rs.120 and Equity shares @ Rs.22. Anticipated external financing opportunities are as follows: i) Rs.100 per debenture redeemable at par : 20 years maturity 8% coupon rate, 4% floatation costs, sale

price Rs.100. ii) Rs.100 preference share redeemable at par: 15 years maturity, 10% dividend rate, 5% floatation costs,

sale price Rs.100. iii) Equity shares: Rs.2 per share floatation costs, sale price Rs.22. In addition, the dividend expected on the equity share at the end of the year is Rs.2 per share; the anticipated growth rate in dividends is 5% and the firm has the practice of paying all its earnings in the form of dividend. The corporate tax rate is 50%.

27) The Following is the capital structure of a company.

Sources Book Value (Rs.) Market Value (Rs.) Equity shares @ Rs.100/- each 80,00,000 1,60,00,000 9% Cumulative Preference Shares@ 100/- each 20,00,000 24,00,000 11% Debentures 60,00,000 66,00,000 Retained Earnings 40,00,000 - 2,00,00,000 2,50,00,000





The current Market price of the company’s equity share is Rs.200/-.For the last year the company had paid equity dividend at 25% and its dividend is likely to grow 5% every year. The corporate tax rate is 30% and shareholders personal income tax rate is 20%. You are required to calculate: a) Cost of capital for each source of capital. b) WACC on the basis of book value weights. c) WACC on the basis of Market value weights.

28) Three companies A, B & C are in the same type of business and hence have similar operating risks. However, the capital structure of each of them is different and the following are the details:

A B C Equity share capital [face value Rs.10/- per share ]

Rs.4,00,000 Rs.2,50,000 5,00,000

Market Value per share 15 20 12 Dividend per share 2.70 4 2.88 Debentures [face value per debenture]

Nil 1,00,000 2,50,000

Market value per debenture - 125 80 Interest rate - 10% 8%

Assume that the current levels if dividends are generally expected to continue indefinitely and the income tax rate at 50%. You are required to compute Weighted Average Cost of Capital.

5. CAPITAL STRUCTURE

29) A Company earns a profit of Rs. 3,00,000 per annum after meeting its interest liability of Rs. 1,20,000 on 12% debentures. The Tax rate is 50%. The number of Equity Shares of Rs. 10 each are 80,000 and the retained earnings amount to Rs. 12,00,000. The company proposes to take up an expansion scheme for which a sum of Rs. 4,00,000 is required. It is anticipated that after expansion, the company will be able to achieve the same return on investment as at present. The funds required for expansion can be raised either through debt at the rate of 12% or by issuing Equity Shares at par. Required:

a) Compute the Earnings Per Share (EPS), if:

i) The additional funds were raised as debt ii) The additional funds were raised by issue of equity shares.

b) Advise the company as to which source of finance is preferable.

30) Excel Limited is considering three financing plans. The key information is as follows:

a) Total funds to be raised, Rs.2,00,000. b) Financing plans

Plans Equity (%) Debt (%) Preference (%)

A B C

100 50 50

50

50

c) Cost of debt 8 per cent; cost of preference shares 8 per cent. d) Tax rate, 35 per cent. e) Equity shares of the face value of Rs.10 each will be issued at a premium of Rs.10 per share.





f) Expected EBIT Rs.80,000. Determine for each plan: i) Earnings per share (EPS) and financial break-even point. ii) Indicate if any of the plans dominate and compute the EBIT range among the plans for indifference.

31) X Ltd is considering the following two alternatives

Plan I Plan II

Amount (Rs) Amount (Rs)

Equity Shares of Rs.10 /- each 4,00,000 4,00,000

12 % Debentures 2,00,000 -

Preference Shares of Rs.100/- each - 2,00,000

6,00,000 6,00,000 The indifference point between the plans is Rs.2,40,000 .Corporate Tax rate is 30% .Calculate the rate of Dividend of Preference Shares.

32) There are two firms P and Q which are identical except P does not use any debt in its capital structure while Q has Rs.8,00,000, 9% debentures in its capital structure. Both the firms have Earnings Before Interest And Tax of Rs.2,60,000 p.a. and the capitalization rate is 10%. Assuming the corporate tax rate of 30%, calculate the value of these firms according to MM Hypothesis.

33) There are two firms N and M, having same earnings before interest and taxes i.e. EBIT of Rs. 20,000. Firm M is levered company having a debt of Rs. 1,00,000 @ 7% rate of interest. The cost of equity of N company is 10% and of M company is 11.50%. Find out how arbitrage process will be carried on?

34) Company P and Q are identical in all respects including risk factors except for debt/equity, company P having issued 10% debentures of Rs. 18 lakhs while company Q is unlevered. Both the companies earn 20% before interest and taxes on their total assets of Rs. 30 lakhs. (RTP NOV 15) Assuming a tax rate of 50% and capitalization rate of 15% from an all-equity company. Compute the value of companies P and Q using (i) Net Income Approach and (ii) Net Operating Income Approach.

6. LEVERAGES

35) X Corporation has estimated that for a new product its break-even point is 2,000 units if the item is sold for Rs.14 per unit; the cost accounting department has currently identified variable cost of Rs.9 per unit. Calculate the degree of operating leverage for sales volume of 2,500 units and 3,000 units. What do you infer from the degree of operating leverage at the sales volumes of 2,500 units and 3,000 units and their difference if any?

36) A company operates at a production level of 5,000 units. The contribution is Rs.60 per unit, operating leverage is 6, combined leverage is 24. If tax rate is 30%, what would be its earnings after tax?

37) From the following financial data of Company A and Company B: Prepare their Income Statements.

Company A Company B Rs. Rs. Variable Cost Fixed Cost Interest Expenses Financial Leverage Operating Leverage Income Tax Rate Sales

56,000 20,000 12,000

5 : 1 -

30% -

60% of sales -

9,000 -

4:1 30%

1,05,000

38) The following details of RST Limited for the year ended 31March, 2013 are given below:

Operating leverage 1.4 Combined leverage 2.8





Fixed Cost (Excluding interest) Rs. 2.04 lakhs Sales Rs. 30.00 lakhs 12% Debentures of Rs. 100 each Rs. 21.25 lakhs Equity Share Capital of Rs. 10 each Rs. 17.00 lakhs Income tax rate 30 per cent

Required: a) Calculate financial leverage b) Calculate p/v ratio and earning per share (EPS) c) If the company belongs to an industry, whose assets turnover is 1.5, does it have a high or low assets

leverage? d) At what level of sales the earning before tax (EBT) of the company will be equal to zero?

39) The capital structure of JCPL ltd is as follows.

Rs. Equity Share Capital of Rs.10/- each 8,00,000 8% Preference Share capital of Rs.10/- each 6,25,000 10% Debentures of Rs.100/- each 4,00,000 18,25,000

Additional Information: Profit after tax (tax rate 30%) Rs.1,82,000 Operating expenses (including depreciation Rs.90,000) being 1.50 times of EBIT Equity Share dividend paid 15% Market Price per equity share Rs.20/-

Required to calculate: i) Operating and Financial Leverage ii) Cover for the preference and Equity share of dividends. iii) The earning yield and price earnings ratio. iv) The net fund flow.

40) Alpha Ltd. has furnished the following Balance Sheet as on March 31, 2011:

Liabilities Rs. Assets Rs. 30,00,000 18,00,000

Equity Share Capital (1,00,000 equity shares of Rs. 10 each) General Reserve 15% Debentures Current Liabilities

10,00,000 2,00,000 28,00,000 8,00,000 48,00,000

Fixed Assets Current Assets

48,00,000

Additional Information: 1. Annual Fixed Cost other than Interest 28,00,000 2. Variable Cost Ratio 60% 3. Total Assets Turnover Ratio 2.5 4. Tax Rate 30% You are required to calculate:

i) Earnings per Share (EPS), and ii) Combined Leverage.





7. WORKING CAPITAL MANAGEMENT

41) Aneja Limited, a newly formed company, has applied to the commercial bank for the first time for financing its working capital requirements. The following information is available about the projections for the current year. Estimated level of activity: 1,04,000 completed units of production plus 4,000 units of work-in-progress Based on the above activity, estimated cost per unit is:

Raw material Rs.80 per unit

Direct wages Rs.30 per unit

Overheads (exclusive of depreciation) Rs.60 per unit

Total cost Rs.170 per unit

Selling price Rs.200 per unit

Raw materials in stock: Average 4 weeks consumption, work-in-progress (assume 50% completion stage in respect of conversion cost) (materials issued at the start of the processing)

Finished goods in stock 8,000 units

Credit allowed by suppliers Average 4 weeks

Credit allowed to debtors receivables Average 8 weeks

Lag in payment of wages Average 1 ½ weeks

Cash at banks (for smooth operations) is expected to be Rs.25,000 Assume that production is carried on evenly throughout the year (52 weeks) and wages and overheads accrue similarly. All sales-are on credit basis only. You are required to calculate the net working capital required.

42) PQ Ltd., a company newly commencing business in 2013 has the under mentioned projected Profit and Loss Account:

Rs. Rs.

Sales 2,10,000

Cost of goods sold 1,53,000

Gross Profit 57,000

Administrative Expenses 14,000

Selling Expenses 13,000 27,000

Profit before tax 30,000

Provision for taxation 10,000

Profit after tax 20,000

The cost of goods sold has been arrived at as under: Materials used Wages and manufacturing Expenses Depreciation Less: Stock of Finished goods (10% of goods produced not yet sold)

84,000 62,500 23,500

1,70,000 17,000

1,53,000

The figure given above relate only to finished goods and not to work-in-progress. Goods equal to 15% of the year’s production (in terms of physical units) will be in process on the average requiring full materials but only





40% of the other expenses. The company believes in keeping materials equal to two month’s consumption in stock. All expenses are paid one month in Advance. Suppliers of materials will extend 1- 1/2 months credit. Sales will be 20% for cash and the rest at two months’ credit. 70% of the Income tax will be paid in advance in quarterly installments. The company wishes to keep Rs.8,000 in cash. 10% has to be added to the estimated figure for unforeseen contingencies. Prepare an estimate of working capital. Note: All workings should form part of the answer.

43) Samreen Enterprises has been operating its manufacturing facilities till 31.3.2013 on a single shift working with the following cost structure

Per unit Rs. Cost of Materials 6.00 Wages (out of which 40% fixed) 5.00 Overheads (out of which 80% fixed) 5.00 Profit 2.00 Selling Price 18.00 Sales during 2012-13 is Rs.4,32,000/- As at 31.03.13 the Company held the following balances : Rs. Stock of raw materials (at cost) 36,000 Work-in-progress (valued at prime cost) 22,000 Finished goods (valued at total cost) 72,000 Sundry debtors 1,08,000

In view of increased market demand, it is proposed to double production by working an extra shift. It is expected that a 10% discount will be available from suppliers of raw materials in view of increased volume of business. Selling price will remain the same. The credit period allowed to customers will remain unaltered. Credit availed of from suppliers will continue to remain at the present level i.e., 2 months. Lag in payment of wages and expenses will continue to remain half a month. You are required to assess the additional working capital requirements, if the policy to increase output is implemented.

44) Alpha Limited has forecasted the following information for the year ending 31st March, 2012:

Particulars Balance as at

1st April, 2011 (Rs.)

Balance as at 31st March, 2012 (Rs.)

Raw Material Work-in-progress Finished goods Debtors Creditors Annual purchases of raw material (all credit) Annual cost of production Annual cost of goods sold Annual operating cost Annual sales (all credit)

45,000 35,000 60,181

1,12,123 50,079

65,356 51,300 70,175

1,35,000 70,469

4,00,000 7,50,000 9,15,000 9,50,000

11,00,000

You may take one year as equal to 365 days. You are required to calculate: i) Net operating cycle period. ii) Number of operating cycles in the year. iii) Amount of working capital requirement.





45) A Ltd. has a total sales of Rs.3.2 crores and its average collection period is 90 days. The past experience indicates that bad-debt losses are 1.5% on sales. The expenditure incurred by the firm in administering its receivable collection efforts are Rs.5,00,000. A factor is prepared to buy the firm’s receivables by charging 2% commission. The factor will pay advance on receivables to the firm at an interest rate of 18% p.a. after withholding 10% as reserve.

Calculate the effective cost of factoring to the Firm.

46) The Megatherm Corporation has just acquired a large account. As a result, it needs an additional Rs.75,000 in working capital immediately. It has been determined that there are three feasible sources of funds: a) Trade credit: The company buys about Rs.50,000 of materials per month on terms of 3/30, net 90.

Discounts are taken. b) Bank loan: The firm’s bank will lend Rs.1,00,000 at 13 per cent. A 10 per cent compensating

balance will be required, which otherwise would not be maintained by the company. c) A factor will buy the company’s receivables (Rs.1,00,000 per month), which have a collection period

of 60 days. The factor will advance up to 75 per cent of the face value of the receivables at 12 per cent on an annual basis. The factor will also charge a 2 per cent fee on all receivables purchased. It has been estimated that the factor’s services will save the company a credit department expense and bad-debts expenses of Rs.1,500 per month.

On the basis of annual percentage cost, which alternative should the company select? 47) XYZ Co. Ltd. is a pipe manufacturing company. Its production cycle indicates that materials are

introduced in the beginning of the production cycle; wages and overhead accrue evenly throughout the period of the cycle. Wages are paid in the next month following the month of accrual. Work in process includes full units of raw materials used in the beginning of the production process and 50% of wages and overheads are supposed to be conversion costs. Details of production process and the components of working capital are as follows:

Production of pipes 12,00,000 units Duration of the production cycle One month Raw materials inventory held One month consumption Finished goods inventory held for Two months Credit allowed by creditors One month Credit given to debtors Two months Cost price of raw materials Rs.60 per unit Direct wages Rs.10 per unit Overheads Rs.20 per unit Selling price of finished pipes Rs.100 per unit

Required to calculate the amount of working capital required for the company. 48) Satyam Sundaram Ltd.’s Profit and Loss A/c and Balance Sheet for the year ended 31.12.2000 are given

below. You are required to calculate working capital requirement & operating cycle period. Trading and profit & loss a/c for the year ended 31.12.2000

Particulars Rs. Particulars Rs.

To Opening Stock: Raw materials Work-in-progress Finished goods To Credit Purchase To Wages & Manufacturing exp.

10,000 30,000

5,000 35,000 15,000

By Credit Sales By Closing Stock: Raw materials Work-in-progress Finished goods

1,00,000

11,000 30,500

8,500





55,000

1,50,000 1,50,000

15,000 10,000 30,000

55,000

To Gross profit c/d To Administrative exp. To Selling and Dist. Exp. To Net Profit

55,000

By Gross profit b/d

55,000

Balance sheet as at 31.12.2000

Liabilities Rs. Assets Rs.

1,60,000

30,000 10,000

1,00,000

11,000 30,500

8,500 30,000 20,000

Share Capital (16,000 equity Shares of Rs.10 each) Profit and Loss Account Creditors

2,00,000

Fixed assets Closing Stock:

Raw materials Work in Progress Finished goods

Debtors Cash and Bank

2,00,000

Opening debtors and opening creditors were Rs.6,500 and Rs.5,000 respectively.

49) Misha Limited presently gives Terms of net 30 days. It has Rs.6 crores in sales, and its average collection period is 45 days. To stimulate demand ,the company may give terms of net 60 days .If it does instigate these terms ,sales are expected to be 75days ,with no difference in habits between old and new customers .Variable costs are 0.80 for every Rs.1. of sales ,and the company’s required rate of return on investment in receivables is 20 percent .Should the company extend its credit period?(Assume 360 days year)

50) Sonachandi Limited has present annual sales of 10,000 units at Rs. 300 per unit. The variable cost is Rs. 200 per unit and the fixed costs amount to Rs. 3,00,000 per annum. The present credit period allowed by the company is 1 month. The company is considering a proposal to increase the credit period to 2 months and 3 months and has made the following estimates:

Existing Proposed

Credit Policy 1 month 2 months 3 months

Increase in sales - 15% 30%

% of Bad Debts 1% 3% 5%

There will be increase in fixed cost by Rs. 50,000 on account of increase of sales beyond 25% of present level. The company plans on a pre-tax return of 20% on investment in receivables. You are required to calculate the most paying credit policy for the company.

51) A new customer with 10% risk of non-payment desires to establish business connections with you. He would require 1.5 month of credit and is likely to increase your sales by Rs.1,20,000 p.a. Cost of sales amounted to 85% of sales. The tax rate is 30%. Should you accept the offer if the required rate of return is 40% (after tax)?





8. RATIO ANALYSIS

52) Given below are the Profit and Loss Statement of Om Limited for the year ended 31st March, 2014 and Balance Sheet as on that date: (MM, SM)

Profit and Loss Statement Rs.

in lakhs Rs.

in lakhs Sales 7,850 Less: Cost of goods sold 5,232 Gross Profit 2,618 Less: Administrative Expenses 240 Selling & Distribution Expenses 545 Finance Charge 280 Depreciation 540 1,605 Profit Before Tax 1,013 Less: Tax Provision 500 Net Profit 513 Less: Proposed dividend 400 Retained Earnings 113

Balance Sheet

Liabilities Rs.

in lakhs Rs.

in lakhs Assets

Rs. in lakhs

Rs. in lakhs

Share Capital (Rs.10 each)

4,000 Gross Block 6,550

Reserve & Surplus

2,000 i) Less: Accumulated

depreciation. 1,540 5,010

Add: Retained Earnings

113 2,113

Secured loans 2,500 Unsecured loans 1,500 Investments 2,500

Current liabilities and provisions:

Stock 1,500

Sundry Creditors 550 Debtors 1,800 Tax Provision 500 Cash at bank 700

Proposed dividend

400 1,450 Cash in hand 53 4,053

Total 11563 11,563

Total 11563

You are required to show the following ratios: 1. Gross yield percentage 2. Market value to book value per share 3. Price-earnings ratio 4. Market price to cash flow Market price per share may be taken as Rs.30 which was arrived at by taking average share price for the month of March, 2014.





53) Given below is the Balance Sheet of Ahuja Company as on 31.12.2013 Rs.(’000) Rs.(’000)

Liabilities Rs. Assets Rs. Share Capital Net Block 180 Equity shares of Rs.10 each 100 Inventories 100 General Reserve 10 Sundry Debtors 40 Capital Reserve 15 Cash and Bank Balances 40 Capital Redemption Reserve 50 Profit & Loss A/c 20 12% Convertible Debentures (convertible into equity shares by 31.3.2013 at a 10% premium)

55

14% Debentures (25% Redeemable by 31.3.2013)

50

Current Liabilities 100

Total 380 Total 380 The company plans to issue 14% fresh debentures at the debt-equity ratio of 2:1 excluding capital redemption reserve and capital reserve for which it has no cash backing. Tanuja Co. Ltd. wants to subscribe fully the fresh debentures of Ahuja Co. Ltd. You are asked to calculate the amount needed to be set aside for this purpose. Also you are asked by Ahuja Co Ltd. to determine the proprietary ratio after conversion of debentures and fresh issue.

54) Using the following information, complete this balance sheet:

* Assume a 360-day year and all sales on credit.

Rs. Rs. Cash ? Notes and payables 1,00,000 Accounts receivable ? Long-term debt ? Inventory ? Common stock 1,00,000 Plant and equipment ? Retained earnings 1,00,000 Total assets ? Total liabilities and equity ?

55) The following figure and ratios are related to company: Sales for the year (all credit) Rs.30,00,000 Gross profit ratio 25% Fixed assets turnover (basis on cost of goods sold) 1.5 Stock turnover (basis on cost of goods sold) 6 Liquid ratio 1:1 Current ratio 1.5:1 Debtor’s collection period 2 months Reserves and surplus to share capital 0.6:1 Capital gearing ratio 0.5 Fixed assets to net worth 1.20:1

Long-term debt to net worth 0.5 to 1 Total asset turnover 2.5 times Average collection period* 18 days Inventory turnover 9 times Gross profit margin 10% Acid-test ratio 1 to 1





You required to prepare Balance sheet of the company on the basis of above details. The statement showing working capital requirement, if the company wants to make a provision for contingencies @ 10% of net working capital including such provision.

56) X Co. has made plans for the next year. It is estimated that the company will employ total assets of Rs.8,00,000; 50 per cent of the assets being financed by borrowed capital at an interest cost of 8 per cent per year. The direct costs for the year are estimated at Rs.4,80,000 and all other operating expenses are estimated at Rs.80,000. The goods will be sold to customers at 150 per cent of the direct costs. Tax rate is assumed to be 50 per cent. You are required to calculate; (i) net profit margin; (ii) return on assets; (iii) asset turnover and (iv) return on owner’ s equity.

57) The capital structure of beta limited is as follows:

Equity share capital of Rs.10/- each 8,00,000 9% Preference Share capital of Rs.10/- each 3,00,000

Additional information: Profit (after tax at 35 per cent), Rs.2,70,000; Depreciation, Rs.60,000; Equity dividend paid, 20 per cent; Market price of equity shares, Rs.40. You are required to compute the following, showing the necessary workings: a) Dividend yield on the equity shares b) Cover for the preference and equity dividends c) Earnings per shares d) Price – earnings ratio.

58) The following information and financial ratios of PQR Ltd. relate to the year ended 31st December, 2006:

S.NO Particulars 2006 I. Accounting Information:

Gross Profit Net profit Raw materials consumed Direct wages Stock of raw materials Stock of finished goods Debt collection period All sales are on credit

15% of Sales

8% of sales 20% of works cost 10% of works cost

3 months’ usage 6% of works cost

60 days

II. Financial Ratios: Fixed assets to sales Fixed assets to Current assets Current ratio Long-term loans to Current liabilities Capital to Reserves and Surplus

1:3

13:11 2:1 2:1 1:4

If value of fixed assets as on 31st December, 2005 amounted to Rs.26 lakhs, prepare a summarized profit and Loss Account of the company for the year ended 31st December, 2006 and also the Balance Sheet as on 31st December, 2006.

59) using following data complete balance sheet given below: Gross profit Rs.54,000 Shareholder funds Rs.6, 00,000 Gross profit margin 20% Credit sales to total sales 80% Total asset turn over 0.3 times





Inventory turnover 4 times Average collection period (360 days per a year) 20 days Current ratio 1.8 Long-term debt of equity 40%

Balance sheet

Liabilities Amount Assets Amount Creditors long term debts shareholders fund

? ? ?

Cash debtors inventory fixed assets

? ? ? ?

60) MN Limited gives you the following information related for the year ending 31st March, 2009:

1. Current Ratio 2.5 : 1 2. Debt-Equity Ratio 1 : 1.5 3. Return on Total Assets 15% 4. Total Assets Turnover Ratio 2 5. Gross Profit Ratio 20% 6. Stock Turnover Ratio 7 7. Current Market Price per Equity Share Rs.16 8. Net Working Capital Rs.4,50,000 9. Fixed Assets Rs.10,00,000 10. 60,000 Equity Shares of Rs.10 each 11. 20,000, 9% Preference Shares of Rs.10 each 12. Opening Stock Rs.3,80,000

You are required to calculate:

a) Quick Ratio

b) Fixed Assets Turnover Ratio

c) Proprietary Ratio

d) Earnings per Share e) Price-Earning Ratio.

61) The following accounting information and financial ratios of M Limited relate to the year ended 31st March, 2012:

Inventory Turnover Ratio 6 Times Creditors Turnover Ratio 10 Times Debtors Turnover Ratio 8 Times Current Ratio 2.4 Gross Profit Ratio 25%

Total sales Rs.30,00,000; cash sales 25% of credit sales; cash purchases Rs.2,30,000; working capital Rs.2,80,000; closing inventory is Rs.80,000 more than opening inventory. You are required to calculate: a) Average Inventory b) Purchases c) Average Debtors d) Average Creditors

e) Average Payment Period f) Average Collection Period g) Current Assets h) Current Liabilities.





62) From the following information, prepare a summarized balance sheet as at 31st march, 2002 Working capital 2,40,000 Bank overdraft 40,000 Fixed assets to proprietary ratio 0.75 Reserves and surplus 1,60,000 Current ratio 2.5

Liquid ratio 1.5

9. FUNDS FLOW STATEMENT

63) Following are the financial statements of Zed Ltd.: Balance Sheet as on

Particulars 31.3.2007 31.3.2006 Capital and liabilities Share capital Share premium Reserves & surplus Debentures Long-term loans Creditors Bank O.D Accursed expenses Income Tax payable Assets Land Building net of depreciation Machinery net of Dep. Investments in A ltd. Stock Prepaid expenses Debtors Trade investments Cash

1,67,500 3,35,000 1,74,300 2,40,000

40,000 28,800

7500 4,350

48,250

10,45,700

3600

6,01,800 1,10,850

75,000 58,800

1,900 76,350 40,000 77,400

10,45,700

1,50,000 2,37,500 1,23,250

- 50,000 27,100

6,250 4,600

16,850

6,15,550

3600

1,78,400 1,07,050

- 46,150

2,300 77,150

1,05,000 95,900

6,15,550

Income Statement For the year ended March 31, 2007

Particulars Amount Net Sales Less: Cost of goods sold and operating expenses (including depreciation on buildings of Rs.6,600 and depreciation on machinery of Rs.11,400) Net operating profit Gain on sale of trade investments Gain on sale of machinery Profits before tax

13,50,000

12,58,950 91,050

6,400 1,850

99,300





Income-tax Profits after tax

48,250 51,050

Additional information: i) Machinery with a net book value of Rs.9,150 was sold during the year. ii) The shares of ‘A’ Ltd. were acquired by issue of debentures Required: Prepare a Funds Flow Statement (Statement of changes in financial position on Working capital basis) for the year ended March 31, 2007.

64) Given below are the balance sheets of Spark Company for the years ending 31st July, 2013 and 31st July, 2014.

Balance Sheet for the year ending on 31st July Rs.

2013 Rs.

2014 Capital and Liabilities Share capital 3,00,000 3,50,000 General reserve 1,00,000 1,25,000 Capital reserve (profit on sale of investment) - 5,000 Profit and loss account 50,000 1,00,000 15% Debentures 1,50,000 1,00,000 Accrued expenses 5,000 6,000 Creditors 80,000 1,25,000 Provision for dividend 15,000 17,000 Provision for dividend 35,000 38,000

Total 7,35,000 8,66,000 Assets Fixed Assets 5,00,000 6,00,000 Less: Accumulated depreciation 1,00,000 1,25,000 Net fixed assets 4,00,000 4,75,000 Long-term investments (at cost) 90,000 90,000 Stock (at cost) 1,00,000 1,35,000 Debtors (net of provisions for doubtful debts of Rs. 20,000 and Rs. 25,000 respectively for 2013 and 2014)

1,12,500 1,22,500

Bills receivables 20,000 32,500 Prepaid expenses 5,000 6,000 Miscellaneous expenditure 7,500 5,000

Total 7,35,000 8,66,000 Additional Information: 1. During the year 2014, fixed asset with a net book value of Rs. 5,000 (accumulated depreciation Rs.

15,000) was sold for Rs. 4,000. 2. During the year 2014, investments costing Rs. 40,000 were sold, and also investments costing Rs. 40,000

were purchased. 3. Debentures were retired at a premium of 10 percent. 4. Tax of Rs. 27,500 was paid for 2013. 5. During 2014, bad debts of Rs. 7,000 were written off against the provision for doubtful debt account. 6. The proposed dividend for 2013 was paid in 2014. You are required to prepare a funds flow statement (i.e. statement of changes in financial position on working capital basis) for the year ended 31st July, 2014.





65) Balance sheets of KP Babu Ltd. as on 31st March 2011, &2012 and additional information are as under. Prepare (a) schedule of changes in working capital, (b) Funds flow from operations for the year ended 31st March 2012.

Balance sheets Liabilities 31.03.11 31.03.12 Assets 31.03.11 31.03.12

40,00,000 8,00,000 5,00,000

20,00,000 10,00,000

8,00,000

40,000

6,00,000

2,00,000

40,00,000 9,00,000 7,20,000

16,00,000 12,00,000

11,60,000

50,000

7,20,000

2,40,000

30,00,000 36,00,000

8,00,000 9,60,000

12,00,000 1,00,000 2,80,000

28,00,000 35,00,000

7,44,000

17,00,000 15,96,000

80,0000 1,70,000

Equity share Capital General reserve Profit & loss A/c 10% debentures Bank loan (long term) Creditors Outstanding expenses Proposed dividend Provision for taxation

99,40,000 1,05,90,000

Land & building Plant & machinery Investments ( long term) Stock Debtors Prepaid expenses Cash and bank

99,40,000 1,05,90,000

Additional information: a) New machinery for Rs. 6,00,000 was purchased but an old machinery costing Rs. 2,90,000 was sold for Rs.

1,00,000 and accumulated depreciation there on was Rs. 1,50,000. b) 10% debentures were redeemed at 20 % premium. c) Investments (long term) were sold for Rs. 90,000 and its profit was transferred to general reserve. d) Income tax paid during the year 2011-2012 was Rs. 1,60,000. e) An interim dividend of Rs. 2,40,000 has been paid during the year 2011-2012. f) Assume provision for taxation as a current liability and proposed dividend as a Non-current liability. g) Investments (long term) are Non- trade investments.

66) The following are the financial statements of Noah Limited. Noah Limited

Balance Sheets 31st March 2014 31st March 2013 Assets Cash Trade Investments Debtors Stock Prepaid Expenses Investment in A Ltd. Land Buildings, Net of Depreciation Machinery, Net of Depreciation

3,49,600 1,60,000 3,05,400 2,35,200

7,600 3,00,000

14,400 24,07,200 4,43,400

4,83,600 4,20,000 3,08,600 1,84,600

9,200 -

14,400 7,13,600 4,28,200

Total Assets 42,22,800 25,62,200 Liabilities Creditors Bank Overdraft Accrued Expenses

1,15,200

30,000 17,400

1,08,400

25,000 18,400





Income-Tax Payable Current Installment due on Long- Term Loans Long-Term Loans Debentures, Net of Discount Share Capital, Rs. 10 par value Share Premium Reserves and Surplus

1,93,000

40,000 1,60,000 9,60,000 6,70,000

13,40,000 6,97,200

67,400

- 2,00,000

- 6,00,000 9,50,000 4,93,000

Total Liabilities 42,22,800 25,62,200 Noah Limited

Income Statement for the year ended 31st March, 2014 (Rs.) Sales Cost of goods sold and operating expenses including depreciation on buildings of Rs. 26,400 and depreciation on machinery of Rs. 45,600 Operating Profit Gain on Sale of Trade Investments Gain on Sale of Machinery Profit before Taxes Income Taxes Net Profit

16,92,400

11,91,200 5,01,200

25,600 7,400

5,34,200 2,09,400 3,24,800

Additional Information: a) Machinery with a net book value of Rs. 36,600 was sold during the year. b) The shares of A Ltd. were acquired upon a payment of Rs. 1,20,000 in cash and the issuance of 3,000

shares of Noah limited. The share of Noah Limited was selling for Rs. 60 a share at that time. c) A new building was purchased at a cost of Rs. 17,20,000. d) Debentures having a face value of Rs. 100 each were issued in January 2014, at 96. e) The cost of trade investments sold was Rs. 2,60,000. f) The company issued 4,000 shares for Rs. 2,80,000. g) Cash dividends of Rs. 1.80 a share were paid on 67,000 outstanding shares. You are required to prepare a statement of changes in financial position on working capital basis of Noah limited for the year ended 31st March, 2014.

67) From the following summarized Balance Sheet of a Company, as at 31st March, you are required to prepare funds flow statement. All workings should form part of your answer.

Liabilities 1995 1996 Assets 1995 1996 Equity share Capital 10% Redeemable Preference Share Capital Reserve for Replacement of Machinery Long Term Loans Bank Overdraft Trade Creditors Proposed Dividends on: Equity Shares Profit and Loss Account

75,000

1,00,000

15,000 ---

22,000 84,450

12,000

1,00,350

1,20,000

80,000

10,000 40,000

--- 75,550

24,000

1,02,700

Fixed Assets at cost Less: Depreciation Investments Stocks Trade Debtors Bank

2,40,070

90,020 1,50,050

61,000 98,000 88,000 11,750

2,53,730

98,480 1,55,250

76,000

1,04,000 85,000 32,000





Additional Information: a) During the year, additional equity capital was issued to the extent of Rs.25,000 by way of bonus shares

fully paid up. b) Final dividend on preference shares and an interim dividend of Rs.4,000 on equity shares were paid on

31st March, 1996. c) Proposed dividends for the year ended 31st March, 1995 were paid in October, 1995. d) Movement in Reserve for replacement of machinery account represents transfer to Profits and Loss

Account. e) During the year, one item of plant was up valued by Rs.3,000 and credit of this was taken in the Profit and

Loss Account. f) Rs.1,700 being expenditure on fixed assets of the year ended 31st March, 1995 wrongly debited to Sundry

Debtors then, was corrected in the next year. g) Fixed assets costing Rs.6,000 ( accumulated depreciation Rs.4,800) were sold for Rs.250. Loss arising

there from was written off. h) Preference share redeemed in the year (June, 1995) were out of a fresh issue of equity shares. Premium

paid on redemption was 10%.

10. CASH FLOW STATEMENT 68) The following is the income statement XYZ Company for the year 2004: (PM)

(Rs.) Sales 1,62,700 Add.: Equity In ABC Company’s earning 6,000

1,68,700 Expenses (Rs.) Cost of goods sold 89,300 Salaries 34,400 Depreciation 7,450 Insurance 500 Research and development 1,250 Patent amortization 900 Interest 10,650 Bad debts 2,050 Income tax: Current 6,600 Deferred 1,550 8,150 Total expenses 1,54,650 Net income 14,050 Additional information’s are: i) 70% of gross revenue from sales were on credit. ii) Merchandise purchases amounting to Rs.92,000 were on credit. iii) Salaries payable totaled Rs.1,600 at the end of the year. iv) Amortisation of premium on bonds payable was Rs.1,350. v) No dividends were received from the other company. vi) XYZ Company declared cash dividend of Rs.4,000. vii) Changes in Current Assets and Current Liabilities were as follows:





Prepare a statement showing the amount of cash flow from operations.

69) The Balance Sheet of JK Limited as on 31st March, 2005 and 31st March, 2006 are given below:

Additional Information: (PM, MTP SEP 15) i) During the year 2005-2006, Fixed Assets with a book value of Rs. 2,40,000 (accumulated depreciation

Rs. 84,000) was sold for Rs.1,20,000. ii) Provided Rs.4,20,000 as depreciation. iii) Some investments are sold at a profit of Rs. 48,000 and Profit was credited to Capital Reserve. iv) It decided that stocks be valued at cost, whereas previously the practice was to value stock at cost less 10

per cent. The stock was Rs. 2,59,200 as on 31.03.05. The stock as on 31.03.06 was correctly valued at Rs. 3,60,000.

v) It decided to write off Fixed Assets costing Rs. 60,000 on which depreciation amounting to Rs. 48,000 has been provided.

vi) Debentures are redeemed at Rs. 105. Required: Prepare a Cash Flow Statement.

70) The Balance Sheet of X Ltd. as on 31st March, 2007 is as follows: (PM)

The following additional information is available: i) The stock turnover ratio based on cost of goods sold would be 6 times. ii) The cost of fixed assets to sales ratio would be 1.4. iii) Fixed assets costing Rs. 30,00,000 to be installed on 1st April, 2007, payment would be made on March

31, 2008. iv) In March, 2008, a dividend of 7 per cent on equity capital would be paid. v) Rs. 5,50,000, 11% Debentures would be issued on 1st April, 2007. vi) Rs. 30,00,000, Equity shares would be issued on 31st March, 2008. vii) Creditors would be 25% of materials consumed. viii) Debtors would be 10% of sales.





ix) The cost of goods sold would be 90 per cent of sales including material 40 per cent and depreciation 5 per cent of sales.

x) The profit is subject to debenture interest and taxation @ 30 per cent. Required: i) Prepare the projected Balance Sheet as on 31st March, 2008. ii) Prepare projected Cash Flow Statement in accordance with AS-3.

NOTE: All the Questions are from MM Material 34th edition unless otherwise specified.

THE END



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