2.313 Paper 2B Cost and Management Accounting Syllabus ................................................ 2.314 Bird's-Eye View .......................................... 2.315 Line Chart Showing Relative Importance Chapters .............. 2.317 Table Showing Importance of Chapter on the Basis of Marks ...... 2.318 Table Showing Importance of Chapter on the Basis of Marks of Compulsory Questions .................................. 2.319 Legends for the Graphs .................................... 2.320 Study Material Based Contents 1 (Study VIII) Introduction to Cost and Management Accounting .. 2.321 2 (Study IX) Material Cost ............................... 2.336 3 (Study X) Labour Cost ................................ 2.355 4 (Study XI) Direct Expenses and Overheads ................ 2.367 5 (Study XII) Method of Costing ........................... 2.380 6 (Study XIII) Budgetary Control ........................... 2.392 7 (Study XIV) Marginal Costing ............................ 2.415 8 (Study XV) Analysis & Interpretation of Financial Statements . . . 2.442 9 (Study XVI) Cash Flow Statement ........................ 2.477 10 Objective Questions .......................... 2.518 Question Paper of June, 2012 .................. 2.540 Question Paper of December, 2012 ............. 2.543 Question Paper of June, 2013 .................. 2.546 Question Paper of December, 2013 ............. 2.550
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2008 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true of false :
(i) Cost accounting is a branch of financial accounting. (2 marks)
Answer :
(i) False;
2008 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(iii) The type of process loss that should not affect the cost of inventories is —
(a) Abnormal loss
(b) Normal loss
(c) Seasonal loss
(d) Standard loss. (1 mark)
Answer :
(iii) (a) Abnormal loss
2008 - Dec [5] {C} (c) Re ! write the following sentences after filling !up the blank
spaces with appropriate word (s)/ figure (s) :
(i) Cost is a fact whereas price is a __________ .
(ii) Imputed costs are relevant for __________ .
(iii) A _______ is the cost that has already been incurred and cannot be avoided by
decisions taken in the future.
(v) A profit centre is a division or organisational unit concerned with controlling both
______ and costs. (1 mark each)
Answer :
(i) policy;
(ii) decision making;
(iii) sunk cost;
(v) sales / (revenue);
2009 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(ii) Fixed cost per unit remains fixed.
(iv) Rent on owned building is included in cost accounts. (2 marks each)
[Chapter #### 1] Introduction to Cost and Management... OOOO 2.323
Answer :(a)(ii) False : It is the total fixed cost which remains fixed inspective of the level of
output. But, the fixed cost per unit will be different at different level of output. Aslevel of output increases the fixed cost per unit will decrease and the level ofoutput decreases the fixed cost per unit will increases.
(iv) True: Rent on owned building is included in cost accounts, it is done to calculatethe real cost after taking into account the national rent which would have beenpaid, had the building been taken on rent.
2009 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaceswith appropriate word(s)/figures(s) :
(ii) Abnormal wastage_________ part of cost of production.(iv) Direct material + direct labour + factory overheads = _____. (1 mark each)
Answer :(ii) is not(iv) Factory cost/Works cost.
2009 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements arecorrect or incorrect :
(i) All long-term costs are controllable.(ii) Rent on own building is not included in cost accounts. (2 marks each)
Answer :(i) Correct : Normally, in short run all variable cost are controllable and all fixed
cost are not controllable whereas in long run/terms all cost whether variable orfixed cost are controllable.
(ii) Incorrect : For decision making, point of view rent on own building is veryimportant. Whether it is not recorded in the book and also important in comparingalternatives. This cost is treated as imputed or national costs and do not enterinto traditional accounting systems.
2009 - Dec [5] {C} (b) Choose the most appropriate answer from the given options inrespect of the following :(iii) Non-controllable cost is the cost which –
(a) Is not subject to control at any level of managerial supervision(b) Cannot be controllable during a particular financial year(c) Cannot be controllable at any cost(d) None of the above. (1 mark)
Answer :(iii) (a)
2009 - Dec [5] {C}(c) Re-write the following sentences after filling-in the blank spaceswith appropriate word(s)/figure(s) :
(v) ______is the allotment of proportion of items of cost to cost centre/cost units. (1 mark)
2008 - Dec [7] (Or) “Although including interest in the normal cost is practically difficult
but excluding interest altogether may lead to wrong managerial decisions.” Comment.
(6 marks)
Answer :
Arguments in favour of and against the inclusion of interest on capital in cost:
There is controversy amongst the cost expert about the inclusion of interest of capital
in cost. In some businesses the introduction of capital is from own Private Sources while
in other it is taken on loan.
Cost experts agree that interest on both types of capitals should be included in cost
records.
Any how following points are in favour and against the inclusion of interest on
capital in cost.
(a) Points in favour of inclusion of interest on capital in cost:
(i) Interest is reward of capital, as wages are the reward of labour hence, like
wage interest should be included in costs.
(ii) Real profit cannot be ascertained without taking account of interest.
(iii) It is necessary to include notional interest if intelligent comparisons are to be
made between operations, processes, etc.
(b) Points against the inclusion of interest on capital in cost:
(i) The argument of interest as reward of capital holds goods in economics and
not in costing.
(ii) Interest being an anticipation of profit cannot be a part of cost.
Hence, it is true that there are practical difficulties in including interest as part of the
normal cost. However, excluding it altogether may lead to wrong managerial decisions
which are not desirable.
Therefore, it is suggested that while interest may be excluded from the regular cost
sheet, cost calculations for other purposes for decision making should include a proper
amount of notional interest where the interest will be material.
2009 - Dec [6] (c) What are the limitations of ‘management accounting’? (3 marks)
[Chapter #### 1] Introduction to Cost and Management... OOOO 2.329
Answer :Limitations of Management Accounting:The management accountant has the responsibility of producing and providingdependable accounting and other relevant data for the use of management. Thefollowing are the limitations of management accounting:1. Different meaning of the same term: In accounting different terms carry different
meanings under different set of circumstances and conditions. The most commonsource of confusion is the word ‘cost’. There are historical costs, full costs, directcosts, variable costs, standard costs, original costs, residual costs, net costs,differential costs, opportunity costs, estimated cost and incremental costs. etc.
2. Approximations: Management accounting data cannot be completely accurate inall respects. A good deal of approximation is involved in the compilation andpreparation of such data.
3. Incompleteness of the data: Data will not disclose the extent to which the qualityand utility of a product is affected by the changes in materials or methods ofproduction. The management should guard itself against the belief that problemscould be completely solved by numerical analysis.
4. Importance of proper management action: A management accountant may provideinformation and figures in most appropriate form to the management. But figuresthemselves are nothing more than marks on pieces of paper, and by themselvesthey accomplish nothing. Anything that the business accomplishes is the result ofaction of the people.
2010 - Dec [7] (a) Explain briefly the role of a management accountant in a businessenterprise. (5 marks)Answer :For efficient and effective management of an enterprise management needs financialinformation in understandable form. The management accountant being principal officerin charge of accounts of the company plays a significant role in providing relevantfinancial information needed for day to day as well as strategic decisions. The role ofmanagement accountant in this direction includes :
(i) Management accountant establishes, coordinates and administers plans tofacilitate the forecasting of sales, preparation of budgets and development ofcost standards that facilitates profit planning, capital budgeting and financing.
(ii) He formulates accounting policy and procedures to facilitate analysis andinterpretation of financial data for the use of management.
(iii) He also assists in tax planning and implementing control schemes for enhancingprofit for owners of the business.
(iv) He keeps up to date information on economic and social matters which mayaffect the interest of his employer.
(v) He prepares reports for the use of managers at different layers of managementfor their rational decision making.
(i) This statement is correct. These are the hypothetical cost which are specially
computed for the purpose of decision making, Interest on capital is a common
type of imputed cost.
(ii) This statement is incorrect. This term is used to denote the sum of direct
labour and overhead costs in the production of a product. It is the total cost of
‘converting’ a raw material into finished product.
2004 - Dec [5] {C} (d) Explain briefly the nature of 'management accounting'.
(4 marks)
Answer :
(i) Management accounting is a decision-making system.
(ii) Management accounting is futuristic.
(iii) Management accounting is a technique of selective nature.
(iv) Management accounting analyses different variables.
(v) Management accounting does not set particular formats for information.
2005 - June [7] (a) "Management accounting is a decision making system." Comment.(2 marks)
Answer :Decision-making is an important and prime function of top management. ManagementAccounting may make the decision-making process more modern and scientific byproviding significant information relating to various alternatives in terms of cost andrevenue. With the help of techniques provided by Management Accounting, datarelating to cost, price profit or saving for each of the available alternatives may becollected and analysed and these provide a base for taking sound decision.Management Accounting deals with a number of techniques which could be usedinjudging the profitability and feasibility of the alternative selected on the basis of costand revenue data.
2005 - June [8] (a) "Opportunity cost is the measure of the benefit of opportunity
foregone."Comment. (3 marks)
Answer :
The terminology of ICMA defines opportunity cost as “the value of benefit sacrificed in
favour of an alternative course of action. ”
It is the value of benefit sacrificed in favour of an alternative course of action. “It is
an important cost for decision making & in comparing various alternatives to choose the
best one.”
For example, if an owned building is proposed to be used for a project, the likely
rent of the building is the opportunity cost which should be taken into account while
evaluating the profitability of the project.
[Chapter #### 1] Introduction to Cost and Management... OOOO 2.333
2005 - Dec [5] {C} Attempt the following :
(i) Explain the complementary role of financial accounting and cost accounting.
(5 marks)
Answer :
Both financial accounting and cost accounting are concerned with systematic recording
and presentation of financial data. The complementary roles of financial accounting and
cost accounting may be summarized as under:
Financial Accounting Cost Accounting
1. It provides information in general way
disclosing the profit or loss to the
owners & outsiders.
2. Financial accounts disclose profit for
the entire business as a whole.
3. It fails to guide the formulation of
pricing policy.
4. All the expenses or costs are reported
in aggregate.
5. Monetary information is used only.
It provides detailed information about cost
and profit and gives information to the
management for planning decision-making
and controlling.
It discloses profit or loss of each job,
product or service.
It provides adequete data for formulating
pricing policy.
Costs are presented on unit basis and in
analytical way.
Non-monetary information like units is also
used.
6. Stock is valued at cost or market
price whichever is lower.
Stock or inventory is valued at cost only.
2006 - June [5] {C} Attempt the following :
(i) Mention the various tools and techniques of ‘management accounting’.
(5 marks)
Answer :
The following are the tools and techniques of management accounting:
(i) Financial planning
(ii) Financial Statement Analysis
(iii) Decision-making
(iv) Control Techniques
(v) Statistical and operational techniques
(vi) Reporting.
2006 - Dec [5] {C} Attempt the following :
(i) “Management accounting is not concerned with legal and/or conventional
constraints and the ‘generally accepted principles’ unlike financial accounting.”
Answer :Financial accounting has to be governed by “generally accepted principles”. It providesinformation about the business in a general way. It tells about the profit and loss andfinancial position of business to outsiders and other outside parties. It classifies, recordsand analysis the transactions in a subjective manner that is according to the nature ofexpense.
Management accounting is concerned with presentation of accounting informationin the most useful way for managerial decision making. It does not specify any legal andor conventional constraints and the “generally accepted principles”. Managementaccounting collects and communicates significant and required information for variouslevel of management, known as internal parties. In management accounting fixedassets may be stated at appraisal values, overhead cost may be omitted frominventories or revenues may be recorded before realization. The form and content ofmanagement accounting information differs according to the needs and purpose.
2007 - Dec [8] (a) Attempt the following :
(i) What are the essential steps required for installation of an efficient and effective
management accounting system? (4 marks)
Answer :
Management accounting is the collection, analysis, diagnosis and interpretation of
accounting information in such a way as to help the management.
Management accounting is an integral part of management concerned with:
(a) Presenting and interpreting information used for formulating strategy;
(b) Planning and controlling activities;
(c) Decision taking;
(d) Optimizing the use of resources;
(e) Disclosure to shareholders;
(f) Disclosure to employee and
(g) Safeguarding the assets;
Following are the essential steps required for installation of an efficient and effective
management accounting system.
1. An appropriate organizational manual should be prepared and adopted.
2. The requisite staff will have to be recruited, trained and developed.
3. Appropriate forms, return etc. should be designed, prepared and made available.
4. Classification and codification of accounts.
5. Setting up suitable system of budgetary control.
6. Setting up cost budget and profit centers and introduction of operational research
technique.
2008 - June [6] (Or) (a) "Costing is a reality and pricing is a policy." Comment.
(5 marks)
[Chapter #### 1] Introduction to Cost and Management... OOOO 2.335
Answer :
Costing is technique and process of ascertaining costs. These techniques consist of
principles and rules which govern the procedure of ascertaining cost of products or
services. The process includes the day to day routine of determining costs by historical
or conventional costing, standard costing or marginal costing. The techniques to be
followed for analysis of expenses and the process by which such an analysis should be
related to the different products or services differ from industry to industry. The main
object of costing is the analysis of financial records, so as to sub-divide expenditure and
to allocate it to selected cost centers, and hence to arrive the total cost for the
departments, process or jobs of the organization.
Pricing of a product is used as a policy parameter by the organization to optimize the
interest in terms of profit and revenue subject to cost structure, competition, customer
expectations, legal concerns and perceived value to customers. Price of a product is
based on total cost i.e. production, administration and selling overheads, fixed as well
as variable plus normal profit. In the normal course, price fixed should cover all the
costs plus a desired level of profit. But in some situations the selling price may vary
depending on the desired profit even below total cost to tide over the situations.
Hence the management may fix the price of a product based on the situations
prevailing in the market and considering the objectives of the business.
Hence costing is considered as a reality and pricing is a policy.
Repeatedly Asked Questions
No. Question Frequency
1 “Management accounting is a decision making system.”
Comment. 05 - June [7] (a), 12 - Dec [8] (c) 2 Times
2.336
Star Rating
On the basis of Maximum marks from a chapter jj
On the basis of Questions included every year from a chapter jj
On the basis of Compulsory questions from a chapter jjj
2 Material Cost
This Chapter Includes : Introduction; Methods of Purchasing; Purchase Procedure;
Store Keeping; Classification and Codification of Materials; Inventory Control,
Techniques of Inventory Control; Bill of Materials; Pricing; Material Losses; Control
of Losses.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
[Chapter #### 2] Material Cost OOOO 2.337
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false :
(ii) Bin card shows the value of a material at any moment of time. (2 marks)
Answer :
(ii) False;
2008 - Dec [5] {C} (c) Re!write the following sentences after filling !up the blank
spaces with appropriate word (s)/ figure (s) :
(iv) Economic lot size is the order size that ________ the total cost of ordering and
storing. (1 mark)
Answer :
(iv) minimizes;
2009 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figures(s) :
(i) Inflated price method of valuing material issue is suited when_____. (1 mark)
Answer :
(i) is unavoidable wastage of material.
2009 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(iv) Re-ordering level is equal to –
(a) Maximum consumption x minimum re-order period
(b) Maximum consumption x maximum re-order period
(c) Minimum consumption x minimum re-order period
(d) Normal usage x normal delivery period. (1 mark)
Answer :
(iv) (b)
2009 - Dec [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) Material losses due to abnormal reasons should be transferred to ______.
(v) Average Stock Level = Minimum Level + of Re-order Quantity
= 1,950 Kgs. + × 1,196 Kgs.
= 1,950 Kgs. + 598 Kgs.
= 2,548 Kgs.
OR
= 4,396 Kgs. + 1950 Kgs. = 3173 Kgs.
2010 - Dec [7] (b) Pooja Pipes Ltd. uses about 75,000 valves per year and the usageis fairly constant at 6,250 valves per month. The valve costs ` 1.50 per unit whenbought in large quantities; and the carrying cost is estimated to be 20% of averageinventory investment on an annual basis. The cost to place an order and process thedelivery is ` 18. It takes 45 days to receive delivery from the date of an order and asafety stock of 3,250 valves is desired.
You are required to determine (i) The most economical order quantity andfrequency of orders; (ii) the re-order point; and (iii) the most economical order quantityif the valves cost ` 4.50 each instead of `1.50 each. (5 marks)Answer :
(i) Economic Order Quantity (EOQ)
Where!
U = Annual Requirement = 75,000 units
P = Ordering Cost = ` 18 per order
S = Carrying Cost per unit per annum = 20% of average inventory
= 3,000 units
Working note :
Total carrying cost = ` 22,500
Carrying cost per unit = ` 22,500/75,000 = ` 0.30
Frequency of orders :
Number of order per year = 75,000/3000 = 25 orders
Or Orders may be placed in every 14.6 days, i.e. 365/25 = 14.6 days
[Chapter #### 2] Material Cost OOOO 2.345
(i) Re order point = (Lead time × Normal usage) + 3,250 units = 12,625 units
= (1.5 months × 6,250 units per month) + 3,250 units = 12,625 units
(ii) EOQ when the cost per value is ` 4.50
Total carrying cost = ` 67,500
Carrying cost per unit = ` 67,500/75,000 = ` 0.90
2011 - June [8] (c) Following information is given :
Cost of placing a purchase order ` 20
No. of units to be purchased during the year 5,000 Nos.
Purchase price per unit inclusive of transport cost ` 50
Annual storage cost per unit ` 5
Details of lead time :
- Average 10 days
- Maximum 15 days
- Minimum 6 days
- For emergency purchase 4 days
Rate of consumption per day :
- Average 15 units
- Maximum 20 units
Calculate - (i) re-ordering level; (ii) re-order quantity; (iii) maximum level; (iv) minimum
level; and (v) danger level. ( 5 marks)
Answer :
(i) Re-ordering level (ROL)= Maximum usage × Maximum Reorder Period
= 20 units per day × 15 days
= 300 units
(ii) Reorder Quantity (ROQ)= =
= 200 units
A = Annual Demand
O = Ordering Cost
C = Carrying Cost
(iii) Maximum Level = ROL + ROQ - (Minimum rate of Consumption X Minimum
Reorder Period)
= 300 units + 200 units - (10 units per day × 6 days)
(iv) Minimum Level = ROL - (Average Rate of consumption × Average Reorder
Period)
= 300 units - (15 units per day × 10 days)
= 300 - 150 units
= 150 units
(v) Danger Level = Average consumption × Lead time for emergency purchases
= 15 units per day × 4 days
= 60 units
2011 - Dec [6] (b) From the following information, calculate economic order quantity
(EOQ) and the number of orders to be placed in one quarter of the year:
(i) Quarterly consumption of material : 2,000 kg.
(ii) Cost of placing one order : ` 50
(iii) Cost per unit : ` 40
(iv) Storage and carrying cost : 8% on average inventory. (3 marks)
Answer :
Economic Order Quantity (EOQ) = =
= 500 kgs
Number of orders per Quarter =
=
= 4 orders
Working Notes:A = Annual Demand = 2,000 × 4 = 8,000 kgsO = Ordering Cost = ` 50 per orderC = Carrying Cost = Cost per unit × Cost of Storage = 40 × 8% = ` 3.2
2012 - June [6] (a) A company manufacturers 5,000 units of a product per month. Thecost of placing an order is ` 100. The purchase price of the raw material is ` 10 per kg.The re-order period is 4 to 8 weeks. The consumption of raw materials varies from 100kg. to 450 kg. per week. The average weekly consumption being 275 kg. The carryingcost of inventory is 20% per annum. Assuming 52 weeks in a year, you are required tocalculate —
(i) Re-order quantity;(ii) Maximum level;(iii) Minimum level; and (iv) Average level. (6 marks)
Carrying Costs : These are the costs for holding the inventories. These costs will not
be incurred if inventories are not carried. These costs include :
(i) The cost of capital invested in inventories. “An interest will be paid on the
amount of capital locked up in inventories.
(ii) Costs of storage, which could have been used for other purposes.
(iii) Insurance Costs
(iv) Cost of spoilage in handling of materials.
Ordering costs increases as the number of orders increases carrying cost decreases
as the number of orders increases EOQ is that quantity where the total cost is minimum.
2007 - Dec [8] (a) Attempt the following :
(ii) Discuss the treatment of spoilage and defectives in cost accounting. (4 marks)
Answer :
Accounting treatment of spoilage :
Normal spoilage : It is spoilage which is in the interest in nature and result of the
process and therefore uncontrollable in short run. The cost of such spoilage will be
borne by good units.
Abnormal spoilage : This spoilage is avoidable and controllable even in the short run.
Its cost shall, therefore, be charged to costing profit and loss account.
Accounting Treatment of Defectives :
(a) Charging to Overheads
(b) Charging to specific job
(c) Charging to good units
(d) Charging reconditioned work.
[Chapter #### 2] Material Cost OOOO 2.351
PRACTICAL QUESTIONS
2005 - June [5] {C} Attempt the following :(ii) In a company, the weekly minimum and maximum consumption of Material-A are
25 and 75 units respectively. The re-order quantity as fixed by the company is300 units. Material-A is received within 4 to 6 weeks from the date of issue ofsupply order. Calculate minimum level and maximum level of Material-A.
(5 marks)Answer :Minimum Level
= Re-order Level!(Average rate of consumption×Average re-order period)= 450 units ! (50 units × 5 weeks) = 200 units
Maximum Level= Re-order level % Re-order quantity !(Minimum rate of consumption ×
Minimum reorder period)= 450 units % 300 units !(25 Units × 4 weeks) = 650 units
Working Note :Re-order level = Maximum usage per period × Maximum re-order period= 75 Units × 6 Weeks = 450 units
2006 - June [5] {C} Attempt the following :
(ii) The following details are available from the books of Ruby Engineering Works
(iv) By job rotation, labour turnover can be controlled/reduced upto some extent.
(2 marks each)
Answer :(iii) Incorrect : Efficient and inefficient workers are distinguished under the
differential piece-rate of incentive scheme. Efficient workers are those who attainor perform better than the standard are given a higher piece rate and inefficientworkers are given a lower rate. Hence, there is encouragement to improve theperformance of worker.
(iv) Correct : Workers can be satisfied through the job rotation within organizationand they do not try to leave the organization.
2010 - June [5] {C} (a) State, with reasons in brief, whether the following statementsare correct or incorrect:
(i) Under Flux Method, labour turnover is calculated by number of workers leftdivided by average number of workers.
(iii) There is no need to record attendance of piece rate workers since attendanceis not relevant for ascertaining the amount of wages to be paid.(2 marks each)
Answer :(i) This statement is Incorrect :
Reason :- Labour turnover under flux method has been calculated as givenbelow labour turnover is equal to number of workers left plus number of workersjoined, divided by average number of workers.
(iii) This statement is Correct : Reason :- The payment made to the worker under payment by result system is directly associated with output given by a worker
2010 - June [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following:
(i) The rate of change of labour force in an orgainsation during a specified period
is called—
(a) Labour efficiency
(b) Labour turnover
(c) Labour productivity
(d) None of the above. (1 mark)
Answer :
(i) (b)
2010 - June [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(iv) The time for which the employer pays remuneration to workers but obtains no
direct benefit is called . (1 mark)
Answer :
(iv) Idle time
[Chapter #### 3] Labour Cost OOOO 2.357
2010 - Dec [5] {C} (a) State, with reasons in brief, whether the follower statements aretrue or false :
(i) If a worker saves half of time of the standard time, the incentive under HalseyPlan and Rowan Plan will be the same. (2 marks)
Answer :(i) True : The incentives under Halsey and Rowan plan would be same because
half of standard time is saved due to operational efficiency of labour. Since, timesaved and the time taken being the same, the incentives calculated as per theformula resulted to the same amount.
2010 - Dec [5] {C} (b) Choose the most appropriate answer from the given options inrespect of the following :
(iii) Holiday pay is treated as !(a) Fringe benefits cost (b) Direct labour cost(c) Overheads(d) Abnormal loss charged to profit and loss account.
(iv) Incentive schemes include !(a) Piece rate wage plan(b) Time rate wage plan(c) Differential piece rate wage plan(d) None of the above. (1 mark each)
Answer :(iii) (c) Overheads or (b) Direct labour cost(iv) (c) Differential piece rate wage plan
2010 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaceswith appropriate word(s)/figure(s) :
(ii) The time lost by workers who are paid on time basis, is known as __________.(1 mark)
Answer :(ii) The time lost by workers who are paid on time basis, is known as idle time.
2011 - June [5] {C} (c) State, with reasons in brief, whether the following statementsare true or false :
(ii) Idle facility and idle time are the same. (iii) Overtime premium paid to all factory workers is usually considered direct labour.
(2 marks each)Answer :
(ii) False : Idle facility is that part of total facility like that part of a plant, machine orequipment etc. Which cannot be effectively utilized in the business whereas idletime is that time which is paid for, but not utilized for production. Hence, we maysay idle time is part of idle facility.
2009 - June [7] (c) Differentiate between 'Halsey wage plan' and 'Rowan wage plan.'
(3 marks)
Answer :
Comparison of Halsey and Rowan Plan
Basis Halsey Plan Rowan Plan
(1) Scientific
Method
It is not Scientific method or
technique
This method is completely
scientific
(2) Fixed rate
Premium
Under this plan, the rate of
premium is fixed (30% to 50%)
that is generally 50% of value of
time saved.
The rate of premium is not fixed
under this plan.
(3) Calculation
of Premium
Premium is calculated on a part
of normal wages of the time
saved.
Premium is calculated on the
basis of normal wages and rate
of efficiency.
(4) Relationship
with efficiency
Under this plan. Premium
increases with increase in
efficiency.
Under this plan, the premium
first increases with increase the
efficiency but after a limit it
starts decreasing.
(5) Practice It has gained currency and used
more in practice.
It is not much popular, in
practice.
(6) Easy Computation of Premium is
easier.
Computation of Premium is
relatively not easier.
2011 - June [6] (a) Distinguish between the following :
(iii) 'Time keeping' and 'time booking'. (3 marks)
Answer :
Is concerned with the recording of time of each worker engaged in the factory.
The time - keeping will serve the following purposes : -
1. Preparation of pay rolls in case of time - paid workers
2. Meeting the statutory requirements.
3. Ensuring discipline in attendance.
4. Recording of each worker's time 'in' and 'out' of the factory making distinction
between normal time, over time, late attendance & early leaving.
5. For overhead distribution when overheads are absorbed on the basis of labour
hours.
Time - Booking : is the recording of time spent by the worker on the different jobs or
work orders carried out by him during his period of attendance in the factory.
[Chapter #### 3] Labour Cost OOOO 2.361
The objects of time - booking are :- 1. To ensure that time paid for according to time - keeping is properly utilised on
different jobs or work orders. 2. To ascertain the labour cost of each individual job or work order. 3. To ascertain unproductive time or idle time so as to make efforts to keep it in limit.4. Bonus payable under incentive schemes of wage payment is dependent upon the
time taken for completing a job, so it is necessary to know the time taken tocomplete a particular job.
5. To know the efficiency of workers, it is necessary to make the comparison of actualtime taken with time allowed for completing a particular task.
DESCRIPTIVE QUESTIONS
2012 - June [6] (c) “Normal labour turnover is advantageous and excessive labourturnover is not desirable.” Comment. (3 marks)Answer :
Normal labour turnover is advantageous because it allows injection of Fresh Bloodinto the firm. But excessive labour turnover is not desirable because it shows that labourforce is not contended.The following steps may be taken to reduce the labour turnover:-
(i) A suitable personnel policy should be framed for employing the right person forthe right job.
(ii) Good working condition should be provided to the workers.(iii) No discrimination between the workers.(iv) Efficient workers are motivated to do more work.(v) Maximum not-monetary benefits should be introduced.(vi) Introducing incentive wage system.(vii) An employee suggestion box scheme should be introduced.(viii) It provides very strong incentive to efficient workers.(ix) Fair rates of pay and allowances should be introduced to the workers.(x) Man-management relationship should be improved.
PRACTICAL QUESTIONS
2009 - Dec [7] (a) A worker under the Halsey Plan of remuneration has a wage rate of
` 1,200 per week of 48 hours, plus a cost of living bonus of `10 per hour worked. He is
given an 8-hour task to perform, which he accomplishes in 6 hours. He is allowed 30%
of the time saved as premium bonus. What would be his total hourly rate of earnings,
and what difference would it make if he were paid under the Rowan Plan ? (6 marks)
Answer :Standard Time : 8 hoursTime taken : 6 hoursStandard Wages :Day rate = `1200 for 48 hours = ` 25per hourCost of living bonus = `10 per hourPremium bonus = 30% of time savedUnder Halsey Method:Wages for 6 hours @`25 per hour ` 150Cost of living bonus for 6 hours @`10 per hour ` 60Bonus:(Time saved × Rate × 30%) = 2 × ` 25 × 30% ` 15Earnings for 6 hours ` 225Hourly rate = `225/6 = `37.5Under Rowan Method:Wages for 6 hours @ ` 25 per hour `150.00Cost of living bonus for 6 hours @`10per hour ` 60.00Bonus: (Time saved/Standard Time) × Time taken ` 37.50x Hourly Rate = (2/8) × 6 × 25 = Earnings for 6 hours `247.50Hourly rate = ` 247.5/6=`41.25Under Rowan plan the worker would get ` 3.75 more per hour.
2011 - June [8] (a) From the following data provided to you, find out the labour turnoverrate by applying (i) replacement method; and (ii) separation method : Number of workers on the payroll : - At the beginning of the month : 500 - At the end of the month : 600. During the month, 5 workers left, 20 workers were discharged and 75 workers wererecruited. Of these, 10 workers were recruited in the vacancies of those leaving andwhile the rest were engaged for an expansion scheme. (4 marks)Answer :
(i) Replacement Method
= = 1.82%
(ii) Separation Method
= = 4.55%
Average no. of workers is calculated as under :
=
=
[Chapter #### 3] Labour Cost OOOO 2.363
2011 - Dec [7] (a) The cost accountant of Raman Ltd. has computed labour turnover
rates for the quarter ended 31st March, 2011 as 10%, 5% and 3% under flux method,
replacement method and separation method respectively.
If the number of workers replaced during the quarter is 30, find out the number of —
(i) Workers recruited and joined; and
(ii) Workers left and discharged. (6 marks)
Answer :
(i) Replacement Method
Labour Turnover Rate =
Or, 5 =
Or, average no. of workers on roll = 3,000/5
= 600
(ii) Separation Method
Labour Turnover Rate =
Or, 3 =
Or, no. of workers left and discharged = 18
(iii) Flux Method
Labour Turnover Rate
=
Or, 10 =
Or, no. of workers recruited and joined = 60 - 18 = 42
2013 - Dec [7] (c) The management of Sunshine Ltd. wants to have an idea of the
profit lost/foregone as a result of labour turnover last year. Last year sales accounted
to ` 66,00,000 and the P/V ratio was 20%. The total number of actual hours worked by
the direct labour force was 3.45 lakh. As a result of the delays by the personnel
department in filling up vacancies due to labour turnover, 75,000 potentially productive
hours were lost. The actual direct labour hours included 30,000 hours attributable to
training new recruits, cut of which half of the hours were unproductive. The cost incurred
consequent upon labour turnover revealed the following analysis :
Settlement cost due to leaving 27,420Recruitment cost 18,725Selection cost 12,750Training cost 16,105
Assuming that the potential production loss due to labour turnover could have been soldat prevailing prices, ascertain the profit forgone/lost last year on account of labourturnover. (6 marks)
CS Inter Gr. I
PRACTICAL QUESTIONS
2005 - June [5] {C} Attempt the following :(iii) A worker produced 200 units in a week's time. The guaranteed weekly wage
payment for 45 hours is ` 1,350. The expected time to produce one unit is 15minutes which is raised further by 20% under the incentive scheme. What will bethe earnings per hour of that worker under Halsey (50% sharing) and Rowanbonus schemes? (5 marks)
Answer :Earnings per hour under Halsey (50% sharing) Bonus Scheme
Earnings = (Hours worked × Rate per hour) + ½ (Time saved) × Rate per hour45 hours × ` 30 + (½ × 15 hours × ` 30)= ` 1,350 + `225= ` 1,575Earning per hour = ` 1,575 ÷ 45 = ` 35Earning per hour under rowan Bonus SchemeEarnings = Hours worked × Rate per Hour %
The total number of workers replaced during the quarter is 80.You are required to find the number of —(i) workers left and discharged; and(ii) workers recruited and joined including replacements. (5 marks)
Answer :Average number of workers on roll:Labour Turnover Rate
(Replacement method) =
Or =
Or Average number of workers on roll = 800 Workers left and discharged:
Labour Turnover Rate
(Separation method) = × or S = 48
Workers left and discharged = 48Labour Turnover Rate (Flux method)
=
=
N = = 112
No. of workers recruited and joined(including replacement) = 112
2006 - Dec [5] {C} Attempt the following :
(v) The labour turnover rates of a manufacturing organisation for the quarter ended
31st March, 2006 are 10%, 5% and 3% under ‘flux method’, ‘replacement
method’ and ‘separation method’ respectively. The number of workers replaced
during the quarter is 120. Work out the number of workers (i) left and discharged;
and (ii) recruited and joined including replacements. (5 marks)
(a) Use of supplementary rate(b) Transfer to costing profit and loss account(c) Carry forward to next year(d) Transfer to production account. (1 mark)
(c) Re-write the following sentences after filling-in the blank spaces with appropriateword(s)/figure(s):(i) All indirect costs are collectively called__________. (1 mark)
Answer:(b) (i) (b) Transfer to costing profit and loss account,(c) (i) Overheads,
2013 - June [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(iii) In case the amount of overheads recovered from production is more than the
actual overheads, there is said to be _______ of overheads. (1 mark)
Answer :
(iii) Over absorption.
2013 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(ii) Simultaneous equation method is not an algebraic method. (2 marks)
SHORT NOTES
2008 - Dec [6] (a) Write short notes on the following :(i) Bases of apportionment. (3 marks)
Answer :Bases of Apportionment : It is also known as primary distribution of overheads. Thereare several bases, which are adopted in practice to apportion the items of overheadcosts to production and service department. However, the basis of apportionmentadopted should be proper and just which can be suitably explained some of thecommon bases of apportionment of different items of overhead are illustrated in thefollowing table.
Bases of apportionment Overhead
1.
2.
3.
4.
Floor area occupied
No. of light points
No. of employee
Direct wages
Rent and other building expenses, lighting
and heating, fire precaution services.
Lighting
Canteen expenses, welfare exp, time
keeping, personal office.
Compensation to workers, ESI and P.F
Contribution, holiday par etc.
[Chapter #### 4] Direct Expenses and Overheads OOOO 2.371
5.
6.
7.
Cubic content
Sales or total cost
Weight, volume, tonmiles
Building maintenance
Audit fees
Delivery charges
2010 - Dec [8] (a) Write a short note on ‘pre-determined overheads rate’. (3 marks)
Answer :
Pre-determined overhead rate
Pre-determined overhead rate is determined in advance of the actual production and
is computed by dividing the budgeted overhead expenses for the accounting period by
the budgeted base for the period i.e.
Pre-determined overhead rate =
The computation of a pre-determined overhead rate has the following advantages :
Blanket overhead rate Should not be used except when output is uniform. Other wise
it will result in over-costing and under-costing of certain cost units. Moreover, when a
blanket rate is used, performance of individual departments or cost centres can not be
properly assessed and exercise of control becomes difficult.
Multiple Overhead Rate : Multiple rates means a number of separate rates for each
cost centre or department. For instance, separate rates are calculated for each
production department, product line and for fixed and variable overheads. The following
formula is used to calculate multiple rates :
Overheads Rate =
Multiple rates are of more practical utility and should always be preferred over blanket
rates for accuracy and control.
DESCRIPTIVE QUESTIONS
2004 - Dec [5] {C} (c) Are the high overhead costs an indication of inefficiency?Explain. (4 marks)Answer :Overheads constitute an Important element of costs and without appropriate charge ofoverheads Product or service cost is not complete. In modern times dominated byincreasing automation necessitated by the demands of high productivity and speed inexecution, heavy investments are being made on sophisticated machineries andequipments with light technological inputs.The test of efficiency lies in increasing the utility of overhead costs and the resultantincrease in productivity. The benefits of productivity are reflected in the overallimprovement in production and consequent reduction in unit cost.
On the contrary, high amount of overheads may be sign of efficiency in a givensituation. With the progressive automation, direct labour cost often inversely moves withthe overhead costs and when compared with different manufacturing units, the oneusing more sophisticated technology than the other shows satisfactory results withlower cost of production through improved productivity.
2007 - Dec [6] (a) Comment on the following :
(i) Controlling of selling and distribution overheads is a difficult task. (4 marks)
Answer :
Control of selling and Distribution overhead : The control of selling and distribution
overhead is comparatively difficult because of certain special feature of such costs
which require a more detailed and exacting analysis. It is not easy to identify or link
selling and distribution costs with the units of production because these costs are
normally incurred after production has been completed.
[Chapter #### 4] Direct Expenses and Overheads OOOO 2.377
The incidence of such overhead is dependent upon various factors such as :
(a) distance of market;
(b) terms of sale;
(c) extent and nature of competition etc.
Which are beyond the control of management.
The main problem which are in the control of selling and distribution overhead costs are
as under:
(a) No Control over customers or competitors is possible.
(b) Capacity of sales organisation cannot be properly defined.
(c) It is difficult to obtain the market operation data.
(d) Price fluctuations are determined by many factors besides cost factors.
(e) The difference of making or not making is not clear.
In spite of the above difficulties the following methods may be used for controlling.
(i) Comparison with post results;
(ii) Budgetary control;
(iii) Standard costing.
PRACTICAL QUESTIONS
2004 - June [5] {C} (b) A factory is currently working at 50% of its working capacity and
produces 10,000 units. At 60% working capacity, the raw materials cost increases by
2% and selling price falls by 2%.
At 80% working capacity, raw material cost increases by 5% and selling price falls
by 5%.
At 50% working capacity, the product costs ` 180 per unit and sold at ` 200 per
unit. The cost of ` 180 is made up as follows : `
Materials 100
Labour 30
Factory overhead (40% fixed) 30
Administration overhead (50% fixed) 20
180
You are required to estimate the profits of the factory when it works at 60% and
(b) Is considered for inclusion in the profit for the year
(c) Is considered for the inclusion of a part of the year
(d) None of the above. (1 mark)
Answer :
(ii) (c)
2010 - June [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(ii) An account giving details of cost of production, cost of sales and profit made
during a particular period is called . (1 mark)
Answer :
(ii) Production account.
2010 - Dec [5] {C} (a) State, with reasons in brief, whether the follower statements are
true or false :
(ii) The method of costing used in a refinery is operating costing. (2 marks)
Answer :
(ii) False : The suitable method of costing to be used for a refinery is process
costing because refining is done in different consecutive processes.
2010 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) The three categories of inventory for a manufacturer are raw material, work-in-
process and_________. (1 mark)
Answer :
(i) The three categories of inventory for a manufacturer are raw material, work-in-
process and finished goods.
2011 - June [5] {C} (a) Write the most appropriate answer from the given options in
respect of the following :
(iii) Cost is determined before hand under -
(a) Standard costing
(b) Historical costing
(c) Marginal costing
(d) None of the above. (1 mark)
Answer :
(iii) (a) Standard costing
[Chapter #### 5] Method of Costing OOOO 2.383
2011 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaceswith appropriate word(s)/figure(s) :
(iv) Contract in which reimbursement is based on actual allowable cost plus a fixedfee is called__________. (1 mark)
Answer :(iv) Contract in which reimbursement is based on actual allowable cost plus a fixed
fee is called Cost plus contract
2012 - June [5] {C} (a) State, with reasons in brief, whether the following statementsare true or false :
(ii) In cost plus contracts, the contractor runs a risk of incurring loss. (2 marks)Answer :The statement is False :- Since the contractor is assured of a fixed percentage of profitthere is no risk of incurring any loss on the Contract.
2013 - June [5] {C} (a) State, with reasons in brief, whether the following statement istrue or false:
(i) Cost sheet is the same as statement of cost and profit. (2 marks)(c) Re-write the following sentences after filling-in the blank spaces with appropriateword(s)/figure(s):
(i) A document which provides for assembly of different costs in respect of a costcentre or a cost unit is called _______. (1 mark)
Answer :(a) (i) This statement is false : Cost sheet is a document which provide the detailed
cost of the cost centre. The selling and distribution expenses are not included inthe cost sheet when in statement of cost and profit.(a) the first part gives the cost of production.(b) the second part gives the cost of goods sold.(c) the third part gives the cost of sale and profits for the period.
(c)(i) Cost sheet.2013 - Dec [5] {C} (b) Write the most appropriate answer from the given options inrespect of the following:
(i) Batch costing method is applicable where !(a) Similar articles are produced in batches (b) Articles are produced in mass scale(c) Mass production is undertaken in batches (d) None of the above.
(iv) Which of the following is variable cost or variable expense —(a) Depreciation on machinery(b) Interest on capital(c) Direct materials(d) Rent, rates and taxes. (1 mark each)
1. It reveals the total cost and cost per unit of production.
2. It discloses the break-up of the total cost is different elements of cost.
3. It facilitates comparison with previous years
4. It helps in the fixation of selling price.
PRACTICAL QUESTIONS
2009 - June [7] (b) On 1st July, 2007, Delux Ltd. undertook a contract for ` 5,00,000.
On 30th June, 2008 when the accounts were closed, the following details about the
contract were gathered :
`
Material purchased 1,00,000
Wages paid 45,000
General expenses 10,000
Plant purchased 50,000
Materials on hand (30.6.2007) 25,000
Wages accrued (30.6.2008) 5,000
Work certified 2,00,000
Cash received 1,50,000
Work uncertified 15,000
Depreciation of plant 5,000
The above contract has an escalation clause which reads as follows :
"In the event of prices of materials and rates of wages increase by more than 5%,
the contract price would be increased accordingly by 25% of the rise in the cost of
materials and wages beyond 5% in each case."
It was found that since the date of signing the agreements, the prices of materials
and wage rates increased by 25%. The value of the work certified does not take into
account the effect of the above clause.
Prepare the contract account. (6 marks)
Answer :
Contract Account
For the year ending 30th June, 2009
Dr. Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Materials
To Wages (` 45,000 + `5,000)
To General Expenses
1,00,000
50,000
10,000
By Work-in-Progress:
Work certified
Work uncertified
2,00,000
15,000
[Chapter #### 5] Method of Costing OOOO 2.387
To Depreciation of Plant
To National Profit c/d
To Profit and Loss A/c
To Work-in-Progress A/c (Reserve)
5,000
80,000
2,45,000
20,000
60,000
By Materials on hand
By Contract Escalation(1)
By Notional Profit b/d
25,000
5,000
2,45,000
80,000
80,000 80,000
Working Note (1)
Particulars Total
Increase `̀̀̀
Upto
5% `̀̀̀
Beyond
5% `̀̀̀
Materials
(` 1,00,000-` 25,000) x
[ in the ratio of 5:20]
Wages ` 50,000 x
15,000
10,000
3,000
2,000
12,000
8,000
Total Increase 25,000 5,000 20,000
Increase in contract price = 25% of increase in material and wages beyond 5%.
= × ` 20,000 = ` 5,000
2010 - Dec [8] (b) The cost of sale of Product-A is made up as follows :`
Materials used in manufacturing 5,500Materials used in packing 1,000Materials used in selling the product 150Materials used in the factory 75Materials used in the office 125Labour required in production 1,000Labour required for supervision of the management for factory 200Direct expenses ! factory 500Indirect expenses ! factory 100Office expenses 125Depreciation ! office building and equipment 75
Depreciation ! factory 175Selling expenses 350Freight on materials 500Advertising 125Assuming that all products manufactured are sold. what should be the selling priceto obtain a profit of 25% on selling price ? (6 marks)
Answer :Cost Sheet
Particulars ` `
Direct Material : Materials used in manufacturing
Materials used in packing materials
Freight on materials
Direct Labour : Labour required on production
Direct Expenses : Direct Factory Expenses
Prime Cost
Add : Factory Overheads :
Indirect Material : Material used in factory
Indirect Labour : Labour required for supervision of
the management for factory
Indirect Expenses : Indirect factory expenses 100
Depreciation!factory 175
Factory Cost or Work Cost
Add : Office and administrative overheads :
Indirect Material : Material used in office
Indirect Expenses : Office expenses 125
Depreciation 75
Total Cost of Production
5,500
1,000
500
75
200
275
125
200
7,000
1,000
500
8,500
550
9,050
325
9,375
Particulars ` `
Add : Selling and distribution overheads :
Indirect Material : Material used in selling the product
Indirect Expenses : Selling 350
Advertising 125
Cost of Sales
Profit [33 1/2% on cost (25% on sale)
Sales
150
475 625
10,000
3,333
13,333
Treated as primary packing material. Otherwise may be treated as selling expenses.
[Chapter #### 5] Method of Costing OOOO 2.389
2012 - June [6] (b) The following are the particulars relating to a contract which hasbegun on 1st April, 2010 :
Uncertified work 9,000Overheads 8,240Material returned 1,600Machinery as on 31st March, 2011 22,000Material in hand on 31st March, 2011 3,700Value of work certified 3,90,000Cash received 3,51,000
Prepare the contract account for the financial year 2010-11 showing the amountof profit that may be taken to the credit of profit and loss account for the year.
As work complete is 78%, so 2/3 profit will be transferred to P&L Account
Profit to be transferred to P&L A/c =
=
= 34,200
2012 - Dec [7] (a) SV Constructions Ltd. have obtained a contract for construction of
a bridge. The value of the contract is ̀ 12 lakh and the work commenced on 1st October,
2011. The following details are shown in their books for the year ended 30th September,
2012:
`
Plant purchased 60,000
Wages paid 3,40,000
Wages accrued as on 30.9.2012 2,800
Material issued to site 3,36,000
Material at site as on 30.9.2012 4,000
Direct expenses 8,000
Direct expenses accrued as on 30.9.2012 1,200
General overheads apportioned 32,000
Work not yet certified at cost 14,000
Cash received being 80% of work certified 6,00,000
Life of plant purchased is 5 years and scrap value is nil.
You are required to—
(i) Prepare the contract account for the year ended 30th September, 2012.
(ii) Show the amount of profit which you consider might be fairly taken on the
contract and how you have calculated it. (9 marks)
Answer:
(i) S V Construction Ltd.
Contract Account
For the year ended 30th September, 2012
Particulars ` Particulars `
To Material 3,36,000 By work in Progress
To Wages paid: 3,40,000 Work Certified 7,50,000
Add: Accrued 2,800 3,42,800 Work Uncertified 14,000 7,64,000
To Direct Expenses paid 8,000 By Plant at site 48,000
Add: Accrued 1,200 9,200 By Materials at site 4,000
To Plant Purchased 60,000
To General Materials 32,000
[Chapter #### 5] Method of Costing OOOO 2.391
To P&L Account 19,200
To Work in Progress (Reserve) 16,800
8,16,000 8,16,000
Working Notes:Calculation of work certified
Cash received is ` 6,00,000 representing 80% of the work certified, hence the
value of the work certified would be ` 7,50,000 (6,00,000 × )
Calculation of Plant at site as on 30-09-2012Value of Plant Purchased ` 60,000Annual Depreciation ` 12,000 (Scrap value is given nil and working life
5 yrs)Value as on 30-09-2012 ` 48,000
(ii) Total profit made as on 30-09-2012 is ` 36,000. Since the contract value is ` 12lakh and value of work certified is ` 7.5 lakhs which is more than ½ of the contractprice. So 2/3rd of profit made to date as reduced on cash basis shall been takento the P&L Account.Profit to be taken to Profit and Loss Account
= × Profit made upto date ×
= ` 19,2002013 - Dec [6] (a) What is the profit to be recognised as per AS-7 in the current periodhaving regards to the following data :Contract price ` 99,00,000Cumulative figures :
To end of previous period-profit recognised `2,25,000To end of current period-total costs `49,50,000Cost of work certified `36,00,000
Estimated future costs to completion `27,00,000Estimated rectification cost 10% of contract price. (7 marks)
Repeatedly Asked Questions
No. Question Frequency
1 Write short notes on Cost-plus contracts.
08 - Dec [6] (a) (ii), 11 - June [7] (a) (iii) 2 Times
2 Distinguish between ‘production account’ and ‘cost sheet’.
08 Dec [8] (a) (iii), 13 June [7] (b)
2 Times
2.392
Star Rating
On the basis of Maximum marks from a chapter j
On the basis of Questions included every year from a chapter jjj
On the basis of Compulsory questions from a chapter j
6 Budgetary Control
This Chapter Includes : Budget; budgetary Control; Forecast and Budget;
Objectives; Advantages; Limitations; preliminaries for the Adoption of a System of
Budgetary Control; Installation of Budgetary Control System; Classification of
Budgets; Control Ratios; Zero Base Budgeting; Performance Budgeting.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true of false :
(iv) A budget manual is a summary of all the financial budgets. (2 marks)
Answer :
(iv) False;
[Chapter #### 6] Budgetary Control OOOO 2.393
2009 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(v) A budget designed to remain unchanged irrespective of the level of activity
actually attained is called –
(a) Master budget
(b) Fixed budget
(c) Current budget
(d) Flexible budget. (1 mark)
Answer :
(v) (b)
2009 - Dec [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(ii) ______determines the priorities of functional budgets. (1 mark)
Answer :
(ii) Budget key factor/ Principal budget factor
2010 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect:
(ii) In cost plus contracts, the contractor runs a risk of incurring a loss. (2 marks)
Answer :
(ii) This statement is Incorrect : Reason :- Under cost plus contract the contractor
is assured of a fixed percentage of profit over the total cost and there is no risk
incurring any loss on the contract.
2010 - Dec [5] {C} (a) State, with reasons in brief, whether the follower statements are
true or false :
(iii) Fixed budgets are budgets of fixed assets. (2 marks)
Answer :
(iii) False : Fixed budgets are used for estimating costs of a product or a service
over a period of time in which the budget is designed to remain unchanged
irrespective of the level of activity attained. Hence it is not the budget of fixed
assets.
2011 - June [5] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) _________budget is a summary budget incorporating the component functional
budgets and which is finally approved, adopted and employed.
(v) Excess of budgeted revenues over the break-even revenue is called_________.
(c) Budgetary Control helps the management, as an important tool of control, in proper
execution of the plan. This is done by comparing the actual results with the pre-
determined budgets and finding out deviations.
(1) It is an important tool of management control.
(2) It requires formulation of proper budgets which provides data for future
comparison.
(3) It may result in elimination of waste and assist in cost reduction.
(4) It helps in establishing divisional and departmental responsibility.
(5) Effective control in achieving the target easily.
(6) It helps in co-ordinating the various divisions of a business such as-
(a) Production
(b) Marketing
(c) Financial and
(d) Administrative divisions.
(7) It promotes proper co-operation and co-ordination among the various
executive of the concern.
(8) The budgetary control helps the management in proper and continuous
evaluation of the performance of the employee and remind them about the
target and goals to be achieved.
Thus, it can easily said that the budget does not take the place of management
rather it is a tool of management. The budget should be regarded not as a master
but as a servant, it is an aid to management is not a substitute for management.
2012 - Dec [6] (b) Briefly point out the process of budgetary control. (5 marks)
Answer:
Please refer 2011 - Dec.[7] (c) on page no. 398
2013 - Dec [6] (b) Flexible budget is more useful, elastic and practical. Explain.
(4 marks)
[Chapter #### 6] Budgetary Control OOOO 2.401
PRACTICAL QUESTIONS
2008 - Dec [6] (b) A factory is currently working at 50% capacity and produces 1,000units. From the following information, you are required to estimate profits of the factorywhen it works at 60% and 80% working capacity respectively and offer your criticalcomments :
At 60% working capacity, raw material cost increases by 2% and selling price fallsby 2%. At 80% working capacity, raw materials cost increases by 5% and selling price
falls by 5%. At 50% capacity working, the product costs ` 180 per unit and is sold at
` 200 per unit. The unit cost of ` 180 is made up as follows :
` Raw material 100Labour 30Factory overheads 30 (40% fixed)Administration overheads 20 (50% fixed) (9 marks)
Answer :
Costclas-sific-ation
50% capacity1,000 units
60% capacity1,200 units
80% capacity1,600 units
Per unit
`
Total `(000's)
Per unit
`
Total `(000's)
Per unit
`
Total `(000's)
Raw MaterialsLabourFactoryOverheads (60%)Adm.Overheads (50%)Total VariableCost (V)Sales (S ! V)ContributionFactory OverheadsAdmn. OverheadsTotal Fixed CostsTotal Cost (V + F)Profit (Sales-TotalCost)
VV
V
V
FFF
10030
18
10
158200 4212
10 22180
20
100.030.0
18.0
10.0
158.0200.0 42.012.0 10.0 22.0
180.020.0
10230
18
10
160196 3610
8.3318.33
178.3317.67
122.436.0
21.6
12.0
192.0235.2 43.212.010.022.0
214.021.2
10530
18
10
163190 27
7.50 6.2513.75
176.75 13.25
168.048.0
28.8
16.0
260.8304.0 43.212.010.022.0
282.821.2
The profit at 60% and 80% capacities is the same and as such it is not advisable toincrease the production to 80%. However increase to 60% capacity is advisable.
Normal capacity of production of company is 1,25,000 units.
Prepare a budget of total cost at 1,40,000 units of output. (6 marks)
Answer :
Jay Electricals Ltd.
Budget for the year commencing from 1st April, 2011
Output 1,40,000 units
Particulars Rate per unit (`) (`)
Variable Costs :
Direct Material
Direct Labour
Salesman Commission
Indirect Material
Indirect Labour
Inspection
Total Variable Costs (1)
Semi-Variable Cost
Maintenances (WN:1)
! Fixed
! Variable
Supervision (WN : 2)
! Fixed
! Variable
7.00
4.00
1.00
2.20
1.25
0.75
0.60
1.20
9,80,000
5,60,000
1,40,000
3,08,000
1,75,000
1,05,000
22,68,000
12,000
84,000
54,000
1,68,000
Total Semi-Variable Costs (2)
Fixed Costs
Selling and Administration
Expenses
Depreciation : Plant and Equipment
Engineering Services
Total Fixed Costs (3)
Total Costs=(1)+(2)+(3)
3,18,000
85,000
90,000
94,000
2,69,000
28,55,000
[Chapter #### 6] Budgetary Control OOOO 2.405
Working Notes :
1. Maintenance Cost - Variable cost per unit = Change in Cost/Change in
Output
= 18,000/30,000
= ` 0.60 per unit
Total Variable Cost for 1,20,000 units = 1,20,000 × 0.60 = ` 72,000
Total Fixed Costs = 84,000!72,000 = ` 12,000
2. Supervision Cost
Variable Cost per unit = Change in Cost/Change in
Output
= 36,000/30,000 = ` 1.20 per unit
Total Variable Cost for 1,20,000 units = 1,20,000 × 1.20 = ` 1,44,000
Total Fixed Costs = 1,98,000 - 1,44,000 = ` 54,000
2011 - Dec [7] (b) The monthly budgets for the manufacturing overheads of a concernfor two levels of activity were as follows:Capacity 60% 100%Budgeted production (Units) 600 1,000
Differences between Budgetary Control and Standard Costing
Budgetary Control Standard Costing
1. It is more extensive as it covers all the
operations of the business.
2. It is a projection of financial accounts.
3. It can be operated without standards.
4. It is more management oriented.
It is more intensive technique of controlling
cost.
It is a projection of cost accounts.
It cannot exist without budget.
It is more engineering oriented.
2005 - Dec [7] (a) Define 'budget key factor'. List four principal budget factors whichmay influence the targets. (5 marks)Answer :Budgeting key factor or Principal Budget or limiting or Governing factor is defined by theCIMA London terminology as “a factor which will limit the activities of an under takingand which is taking into account in preparing budgets.Key factors influencing the targets:(a) Customer Demand(b) Plant Capacity(c) Availability of raw material, skilled labour & Capital. (d) Availability of accommodation for plant, raw materials & finished goods.(e) Government restrictions.
2006 - Dec [5] {C} Attempt the following :
(iii) Explain the meaning and importance of ‘flexible budgeting’ as a tool of control.
(5 marks)
Answer :
Importance of Flexible Budgeting:
1. It presents details regarding output, costs, sales and profit for varying levels of
business operations which makes the marginal analysis more practicable and
feasible.
2. It makes possible the comparison of actual performance and budgeted one for
actual level of operation in a very easy and understanding way.
3. Fixed Budget fails to achieve the objective of cost control and hence flexible budget
becomes an indispensable tool for achieving the objective of cost reduction and
cost control.
4. Keeping into account the uncertainty and external influences, no exact and precise
forecasts for varying levels of operation. This is possible only by adopting the
flexible budgetary system.
2007 - Dec [6] (a) Comment on the following :
(ii) Standard costing and budgetary systems vary in scope despite the similarity in
the basic principles. (4 marks)
[Chapter #### 6] Budgetary Control OOOO 2.411
Answer :
Please refer 2004 - Dec [7] (a) on page no. 409
2008 - June [6] (a) What do you mean by ‘zero base budgeting’ (ZBB). Explain in brief.
(5 marks)
Answer :
Zero Base Budgeting : Zero based budgeting is a new technique of budgeting
introduced first in USA in the year 1969. This is system of budgeting was developed by
Peter Pyhrr of Taxes Instrument of USA. This technique of budgeting is more useful in
government budgeting but can also be used in factories for non-manufacturing activities.
Such as administration and selling activities.
According to Peter Pyhrr, it is a “Planning and budgeting Process which requires each
manager to justify his entire budget request in detail from Scratch (hence Zero base)
and shifts the burden of proof to each manner to justify why he should spend money at
all. The approach requires that all activities be analysed in Decision Packages which
are evaluated by systematic analysis and ranked in order of importance.
I CMA London, has defined it “as a method of budgeting whereby all activities are re-
evaluated each time a budget is set. Discrete levels of each activity are valued and
combination chosen to match funds available”.
Advantages of ZBB:
Following are the main advantages of ZBB:
1. Under ZBB, all the budget proposals compete equally.
2. Zero-base budgeting is most appropriate for the Staff and support areas (that is
non manufacturing overheads) of an organisation because the inputs of these
areas are not directly related to the final output of the organisation.
3. There is a lesser Paper work in case of ZBB as compared to traditional budgeting.
4. It focuses management process on analysis and decision making because it
requires managers to review their activity when a budget is developed.
5. Increased Participation in ZBB creates a motivational impact.
6. It help in finding out the impact of any expenditure on a project duly identified.
7. ZBB is particularly useful for Service departments and Governments.
Criticism against Zero base budgeting:
(a) The paper work will increase periodically due to large number of decision
Packages.
(b) Zero base budgeting requires a lot of training for managers.
(c) Ranging of Packages is very often subjective and may give risk to conflicts.
(d) It may lay more emphasis on short-term benefits to the determinant of long term
objectives of the organisation.
(e) Where objectives are very difficult to qualify as in research and Development, Zero
base budgeting does not offer any significant control advantage.
2004 - Dec [5] {C} (b) The following information is obtained from the records of amanufacturing company for a budgeted production of 10,000 units per annum :
for all levels of production) 10.00Distribution expenses (20% fixed) 10.00Total cost of sales (per unit) 320.00
You are required to prepare a budget for production levels of 6,000, 7,000 and8,000 units respectively, showing distinctly marginal cost and total cost. (4 marks)Answer :
Statement showing the cost at budgeted leval production
2011 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(i) Semi-variable costs are ignored in marginal costing.
(ii) ‘Cost volume profit relationship’ is a more comprehensive term than ‘break-even
analysis’. (2 marks each)
Answer :
(i) The statement is false:
Semi - Variable cost should not be ignored in the marginal costing.
Semi – Variable cost are classified into fixed cost and variable cost keeping in
view the variable proportion by the appropriation method.
(ii) The statement is true:- Cost volume profit relationship is more comprehensive
term because its determination includes marginal cost approach, break even
analysis, profit volume ratio etc.
2011 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(i) At break-even point, the contribution will be equal to __________. (1 mark)
Answer :
(i) Fixed cost
2012 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(v) When a factory operates at full capacity, fixed cost also becomes relevant for
make or buy decisions. (2 marks)
(c) Write the most appropriate answer from the given options in respect of the following:
(v) Product cost under marginal costing include —
(a) Prime cost only
(b) Prime cost and fixed overheads
(c) Prime cost and variable overheads
(d) Material cost and variable overheads. (1 mark)
Answer :
(a) (v) The statement is True:- A factory operates at full capacity, the decision to make
further is very likely to call expansion in installed capacity at such fixed cost
become relevant cost for arriving at make or buy-decisions.
(c) (v) Prime Cost and Variable Overheads.
2012 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(ii) Cost-volume-profit relationship is a more comprehensive term than break-
even analysis. (2 marks)
[Chapter #### 7] Marginal Costing OOOO 2.419
(b) Write the most appropriate answer from the given options in respect of thefollowing:(iii) The costing method in which fixed factory overheads are added to the
inventory is—(a) Direct costing(b) Marginal costing(c) Absorption costing(d) Standard costing.
(iv) When margin of safety is 20% and P/V ratio is 60%, the profit will be—(a) 30%
(b)
(c) 12%(d) None of the above. (1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriateword(s)/figure(s):(ii) Marginal costing is a__________of costing.(iv) The break-even point__________when selling price is increased.
(1 mark each)Answer:(a)(ii) This Statement is True.
For the determination of cost volume-profit relationship, marginal cost, breakeven point analysis, profit volume ratio and key factor are considered. Hencecost volume profit relationship is more comprehensive term.
(b)(iii) Absorption Costing (iv) 12%(c) (ii) Technique (iv) Decreases
2013 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false:
(iii) When a factory operates at full capacity, fixed cost also becomes relevant for
make or buy decisions.
(iv) Marginal costing is different from direct costing. (2 marks each)
(b) Write the most appropriate answer from the given options in respect of the following:
(iii) Marginal costing is a very useful technique to management for —
In the case of absorption costing, both fixed and variable overheads are charged to
production on the other hand, in marginal costing only variable overheads are charges
to production while fixed overheads, are fully charged against contribution in profit
determination. Absorption costing lays emphasis on production or output, while marginal
costing stresses on sales and takes significance of production only to the extent of
quantity sold and its variable cost.
(i) When output is equal to sales that it is with no opening or closing stock of
profit. Under absorption and marginal costing is equal.
(ii) When output is less than sales that is closing stock is less than opening stock,
the profit under marginal costing is greater than the profit under absorption
costing.
(iii) When output is greater than sales that is closing stock is more than opening
stock, the profit under marginal costing is less than the profit under absorption
costing.
2013 - Dec [6] (c) Explain the relevance of ‘key factor’ in decision making. (4 marks)
PRACTICAL QUESTIONS
2008 - Dec [7] (b) A company has annual fixed cost of ` 1,40,00,000. In the year2007!08, sales amounted to ` 6,00,00,000 as compared with `4,50,00,000 in thepreceding year 2006!07. Profit in 2007!08 is ` 42,00,000 more than that in 2006!07.
[Chapter #### 7] Marginal Costing OOOO 2.423
On the basis of the above information, answer the following :(i) At what level of sales, the company would have break!even?(ii) Determine profit/loss on a forecasted sales volume of ` 8,00,00,000.(iii) If there is a reduction in selling price by 10% in the financial year 2008 !09 and
company desires to earn the same amount of profit as in 2007 !08, what wouldbe the required sales volume ? (9 marks)
Answer : (i) P/V = (Change in Profit / Change in Sales) × 100 or
(iii) Contribution in 2007-08 = 28% × ` 6,00,00,000 = ` 1,68,00,000Sales in 2008-09 after reduction in price by 10%= (` 6,00,00,000 ! 10% of ` 6,00,00,000) = ` 5,40,00,000New PV Ratio = [Changed Contribution / Changed Sale] × 100= (` 1,68,00,000 ! ` 60,00,000) / ` 5,40,00,000 × 100 = 20%The required sales volume for earning contribution of ` 1,68,00,000= (Required Contribution / New PV Ratio)= (` 1,68,00,000 / 20%) = ` 8,40,00,000
2009 - Dec [6] (a) The sales turnover and profit during two periods were as follows.Period-1 — Sales : ` 20 lakh; and Profit : ` 2 lakhPeriod-2 — Sales : ` 30 lakhs; and Profit : ` 4 lakhCalculate :
(i) P/V ratio;(ii) Sales required to earn a profit of ` 5 lakh; and (iii) Profit when sales are ` 10 lakh. (6 marks)
Since fixed costs are constant, the increase in costs is due to increase in variablecost in tune with increase in sales volume. As such variable costs are 80% of sales.
Thus P/V Ratio = 20%
Alternatively P/V Ratio = = × 100 = 20%
(ii) Calculation of sales required to earn a profit of `̀̀̀ 5 lakhs Fixed Expenses = Contribution & Net Profit
= 20% of 30,00,000&4,00,000 =` 2,00,000
Required Sales =
= = ` 35,00,000
(iii) Profit at Sales of `̀̀̀ 10 lakhs= Sales × P/V Ratio & Fixed Expenses= ` 10 lakhs × 20% & ` 2,00,000= ` 2,00,000 & ` 2,00,000 = Nil
2010 - June [7] (b) Two manufacturing companies which have the following operatingdetails decided to merge:
Company!I Company!IICapacity utilisation (%) 90 60Sales (` in lakhs) 540 300Variable costs (` in lakhs) 396 225Fixed costs (` in lakhs) 80 50Assuming that the proposal in implemented, calculate—
(i) Break-even sales of the merged plant and the capacity utilisation at that stage.(ii) Profitability of the merged plant at 80% capacity utilisation.(iii) Sales turnover of the merged plant to earn a profit of ` 75 lakh.(iv) When the merged plant is working at a capacity to earn a profit of ̀ 75 lakh, what
percentage increase in selling price is required to sustain an increase of 5% infixed overheads? (9 marks)
Answer :(i) Position of the Merged Plant at 100% capacity
(` in lakhs)
Company I Company II Total
Sales
Less: Variable
Costs
Contribution
Less: Fixed Costs
Profit
600
440
160
80
80
500
375
125
50
75
1,100
815
285
130
155
[Chapter #### 7] Marginal Costing OOOO 2.425
P/V Ratio of the merged plant = [(Contribution ÷ Sales) × (100)]
= × 100 = 25.909% (` in lakh)
Break even sales of the merged plant = = = ` 501.75 lakhs
Per cent of capacity utilization = x 100 = 45.61%
(ii) Profitability of the merged plant at 80% capacity ` (in lakh)
Since in the given question, machine hour’s availability is a limiting factor so the priority
of machine will depend on contribution per hour.
Calculation of contribution per machine hour
Particular Machine A (`) Machine B (`)
Selling price per unit 9 9
Less: Marginal cost 5 6
Contribution per unit 4 3
Output per hour 100 units 150 units
Contribution per hour 400 450
Since per hour contribution is higher in case of machine B so machine B is to be used
for the production of Product-X
2013 - June [8] (b) A company has fixed expenses of ̀ 90,000 with sales of ̀ 3,00,000and a profit of ` 60,000 during the first half year. If in the next half year, the companysuffered a loss of ` 30,000.Calculate !
(i) P/V ratio, break-even point and margin of safety for the first half year.(ii) Expected sales volume for next half year assuming that selling price and fixed
expenses remain unchanged.(iii) The break-even point and margin of safety for the whole year. (6 marks)
Answer :
(i) P/V Ratio =
= `
= 50%
Break Even Point =
= `
= ` 1,80,000Margin of safety = Actual Sales ! Break even sales
= ` 3,00,000 ! ` 1,80,000= ` 1,20,000
[Chapter #### 7] Marginal Costing OOOO 2.431
(ii) Expected Sales Volume =
= `
= ` 1,20,000
(iii) Break even point for the whole year =
=
= ` 3,60,000
Margin of safely = Actual sales ! Break even sales
= ` 4,20,000 ! ` 3,60,000
= ` 60,000
2013 - Dec [8] (b) A company makes 1,500 units of a product for which the profitability
statement is given below :
` `
Sales 1,20,000
Direct material 30,000
Direct labour 36,000
Variable overheads 15,000
Total variable overheads 81,000
Fixed Cost 16,800
Total Cost 97,800
Profit 22,200
After the first 500 units of production, the company has to pay a premium of ̀ 6 per unit
towards overtime labour. The premium so paid has been included in the direct labour
cost of `36,000 given above. You are required to compute the break-even point.
( 5 marks)
CS Inter Gr. I
DESCRIPTIVE QUESTIONS
2005 - Dec [5] {C} Attempt the following :
(iii) Explain the significance of 'break-even analysis'. (5 marks)
Less : Fixed Costs : Factory Overheads 1,89,900 Distribution Overheads 58,400 General Administration Overheads 66,700 3,15,000 Net Profit 73,500Alternatively :Profit at the budgeted sales of ` 18,50,000 :Profit = (Sales × P/V Ratio) !Fixed Costs
(b) Increase of 5% from budgeted sales :Revised sales value 19,42,500Less : Variable costs @ 79% 15,34,575Contribution 4,07,925Less: Fixed Costs 3,15,000Net Profit 92,925
2004 - June [8] (c) Design Pens Ltd., manufactures only pens where the marginalcost of each pen is ` 3. It has fixed costs of ` 25,000 per annum. Present productionand sales of pens is 50,000 units and selling price per pen is ` 5. Any sale beyond50,000 pens is possible only if the company reduces20% of its current selling price.
However, the reduced price applies only to the additional units. The companywants a target profit of ̀ 1,00,000. How many pens the company must produce and sellif the target profit is to be achieved? (7 marks)Answer :
(i) Present Sales (in units) = 50,000Per Unit (`) Value (`)
Since Profit on existing 50,000 units is ` 75,000 the profit to be earned from
additional sales is ` 25,000.
(ii) Selling Price obtainable beyond 50,000 unit shall be equivalent to = (` 5 !(` 5× 0.20) = ` 4.
(iii) Revised contribution shall be ` 4 !` 3 = Re. 1(iv) Sales in order to earn additional profits of ̀ 25,000 on revised selling price of ̀ 4
= 25,000/1 = 25,000 units.(v) The Company must produce and sell 75,000 pens in order to make a target profit
of ` 1,00,000.
2004 - Dec [7] (b) The profit volume ratio of Ulysis Manufacturers Ltd, is 40% and themargin of safety is also 40%. Work out the following if the sales volume is ̀ 1.50 crore:
(i) break-even point;(ii) net profit;(iii) fixed cost; and(iv) sales required to earn a profit of ` 30 lakh. (4 marks)
Answer :(i) Margin of safety in the difference between break -even volume of sales and
actual volume of sales.Therefore, Break-even point = Actual Sales !Margin of Safety = ` 150 lakhs !40% of Actual Sales = ` 90 lakhs
(ii) For margin of safety, contribution is equal to profit since all fixed costs arerecovered at break-even point. Net profit is computed below:
(` in lakhs)Actual Sales 150 100%Break-even point 90 60%Margin of Safety 60 40%Profit = Margin of Safety ×P/V ratio 60 lakhs × 40% 24
(iii) Selling Price !Variable Cost = ContributionOr Selling Price ! Contribution = Variable CostTherefore. Variable Cost = 100% !40% = 60%Total Cost = Variable Cost % Fixed CostBEP is the point, at which no profit is made, nor loss is incurred, i.e., variablecost and fixed cost are recovered. Therefore, fixed cost is worked out as under:
(` in lakhs)Break Even Sales 90Variable Cost : 60% of `90 lakhs 54Fixed Cost 36
(i) The number of units by selling which the company will neither lose nor gain
anything.
(ii) The sales needed to earn a profit of 20% on sales.
(iii) The extra units which should be sold to obtain the present profit if it is proposed
to reduce the selling price by 20%.
(iv) The selling price to be fixed to bring down its break-even point to 500 units under
present conditions. (7 marks)
Answer :
(i) Number of units where there is no-profit no-loss, i.e., break-even point
Break-even point =
= = 2,400 units
'Selling price `25 !Variable Cost `17.50
(ii) Sales to earn a net profit of 20% on sales
Let the units sold be X
Sales = 25X
Profit = 5X
Total Sales = Variable Cost %Fixed Cost %Profit
25X =17.5X % 18,000 % 5X
2.5X = ` 18,000
X = ` 18,000/2.5 = 7,200
Sales = 7,200 X `25 = ` 1,80,000
(iii) Extra units to be sold to maintain present profit if selling price is reduced by 20%Present selling price ` 25.00Less: Reduction 20% ` 5.00New Selling Price `20.00Less: Variable cost `17.50Contribution per unit ` 2.50
Units to be sold =
=
= = 12,000 units.
Extra units to be sold = 12,000 !4,000 units = 8,000 units.
[Chapter #### 7] Marginal Costing OOOO 2.441
(iv) Selling Price for Break-even Point at 500 units
Break-even point =
Let the contribution per unit be 'X'
500 =
500X = `18,000X = 36
Selling price per unit = Variable cost per unit%Contribution per unit= ` 17,50 % ` 36= ` 53,50 per unit
Table Showing Marks of Compulsory Questions
Year 09
J
09
D
10
J
10
D
11
J
11
D
12
J
12
D
13
J
13
D
Dt. Between 3
Total 3
2.442
Star Rating
On the basis of Maximum marks from a chapter jjjjj
On the basis of Questions included every year from a chapter jjjjj
On the basis of Compulsory questions from a chapter jjjjj
8 Analysis & Interpretation
of Financial Statements
This Chapter Includes : Financial Statements; Nature; Attributes of Financial
Statements; Importance; Limitations; Recent Trends in Presenting Financial
Statements; Analysis of Financial Statements; Methods, Objectives and Limitations
of Financial Statements Analysis; Ratio Analysis; Uses, Advantages and Limitations
of Ratio Analysis; Inter-firm Comparison.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.443
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2009 - June [5] {C} (a) State, with reasons in brief, whether the following statements
are true or false :
(iii) Liquidity ratios measure long-term solvency of a concern. (2 marks)
Answer :
(iii) False : Liquidity ratio measure the Short term solvency of the concern. These
ratios indicate the relationship between liquid assets/quick assets and the current
liabilities of the concern. Traditionally, a quick ratio of 1:1 is considered to be
satisfactory ratio.
2009 - Dec [5] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(ii) Current liabilities are equal to –
(a) Working capital + current assets
(b) Working capital – current assets
(c) Current assets – working capital
(d) Current assets + working capital. (1 mark)
Answer :
(ii) (c)
2009 - Dec [5] {C}(c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iii) The ratio of total liquid assets to current liabilities is known as ____. (1 mark)
Answer :
(iii) Liquid ratio/Acid test ratio/ Quick ratio
2010 - Dec [5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iii) Quick ratio is the indicator of position of an enterprise. (1 mark)
Answer :
(iii) Quick ratio is the indicator of liquidity position of an enterprise.
2011 - June [5] {C} (c) State, with reasons in brief, whether the following statements
are true or false :
(v) Collection of sundry debtors has no impact on current ratio. (2 marks)
(iii) Material used = 40% of Cost of sales= 40/100 ` 18,00,000 = ` 7,20,000×
(iv) Wages and overheads = ` 18,00,000 - ` 7,20,000 = ` 10,80,000(v) Stock = Cost of sales/ Stock turnover ratio = ` 18,00,000/5= ` 3,60,000(vi) Debtors = Sales for 2 months = ` 24,00,000 2/12 = ` 4,00,000×
(vii) As current ratio is 2, Current liabilities are half of current assets Hence, current liabilities = 1/2 (`3,60,000+` 4,00,000)= ` 3,80,000×
(viii) Trade Creditors = 3 months of material consumed= ` 7,20,000 3/12 = ` 1,80,000×
(ix) Bank overdraft = ` 3,80,000 - 1,80,000 = ` 2,00,000(x) Fixed assets to capital employed = 80%
Hence, working capital to capital employed = 20%Working Capital = Current assets - Current liabilities= (` 3,60,000 + `4,00,000) - ` 3,80,000=` 3,80,000Fixed assets = ` 3,80,000 80/20 = ` 15,20,000×
(xi) Total long term fund = Fixed Assets + Capital= ` 15,20,000 + ` 3,80,000 = ` 19,00,000
(xii) Capital gearing ratio being 30% (Preference share capital plus debentures toTotal Long Term Funds)= 3% of ` 19,00,000 = ` 5,70,000Preference share capital = ` 5,70,000 2/3 = ` 3,80,000×
(xiii) Debentures = ` 5,70,000 1/3 = ` 1,90,000×
(xiv) Equity Shareholders’ Fund = `19,00,000 - ` 5,70,000 = ` 13,30,000General reserved and Profit & Loss Account = 20% of equity shareholders’ fund= 20% of ` 13,30,000 = ` 2,66,000 Equity share capital = ` 13,30,000 ! ` 2,66,000 = ` 10,64,000.
(xv) Net profit = 10% of Equity share capital = ` 1,06,400(xvi) General Reserve = ` 2,66,000 - ` 1,06,400 = ` 1,59,600
(viii) Reserves = 2.5% of Turnover i.e. 2.5% of ` 24,00,000 = ` 60,000(ix) Profit = 10% Turnover i.e. 10% of 24,00,000 = ` 2,40,000(x) Capital Block = ` 12,00,000
2012 - Dec [6] (a) Prepare the balance sheet of Moon Ltd. from the followingparticulars:
Current ratio 2Working capital ` 4,00,000Capital block to current assets 3 : 2Fixed assets to turnover (based on sales) 1 : 3Cash sales / Credit sales 1 : 2Stock velocity 2 monthsCreditors velocity 2 monthsDebtors velocity 3 monthsNet profit 10% of turnoverReserves 2.5% of turnoverDebentures/share capital 1 : 2Gross profit ratio 25% (on sales)
Assume that capital block includes share capital, debentures, profit and reserves.(10 marks)
Answer:1. Working Note No. 1
Current Ratio = 2Working Capital = ` 4,00,000
Since Current Ratio =
2 =
2 Current Liabilities = Current AssetsAs Working Capital = Current Assets - Current Liabilities` 4,00,000 = 2 Current Liabilities - Current Liabilities` 4,00,000 = Current LiabilityCurrent Assets = 2 × Current Liabilities
= 2 × ` 4,00,000= ` 8,00,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.459
2. Working Note No. 2Capital Block to Current Assets = 3.2Capital Block = Share Capital + Debentures + Net Profit +
Reserves
Capital Block = Current Assets ×
= ` 8,00,000 ×
= ` 12,00,000Total Liabilities = Capital Block + Current Liabilities
5. Working Note No. 5Ratio of cash sales to credit sales = 1:2Total Sales = ` 24,00,000 (refer working note number 3)
So Credit Sales = ` 24,00,000 ×
= ` 16,00,000Debtors Velocity = 3 months
Debtors Velocity in months = Debtors ×
3 = Debtors ×
Debtor = ` 16,00,000 ×
= ` 4,00,0006. Working Note No. 6
Net profit is 10% of TurnoverSince sales are ` 24,00,000 net profit is ` 24,00,000 × 10% = ` 2,40,000Reserve is 2 ½ % of TurnoverReserve = ` 24,00,000 × 2.5% = ` 60,000
7. Working Note No. 7Capital Block = Share Capital + Debentures + Net Profit + ReservesOr ` 12,00,000 = Share Capital + Debentures + ` 24,0000 + ` 60,000Or Share Capital + Debentures = ` (12,00,000 - 2,40,000 - 60,000)
= ` 9,00,0008. Working Note No. 8
Debentures/Share Capital Ratio = 1:2Hence, Debentures = 9,00,000 × 1/3 = ` 3,00,000Share Capital = 9,00,000 × 2/3 = ` 6,00,000
Balance Sheet of Moon Ltd.I. EQUITIES AND LIABILITIES `̀̀̀
1. Shareholders’ Funds(a) Share Capital 6,00,000(b) Reserves and Surplus:
I. Reserves 60,000II. Profit & Loss Account 2,40,000
2. Non-Current LiabilitiesDebentures 3,00,000
3. Current LiabilitiesCreditors 3,00,000Others Liabilities 1,00,000TOTAL 16,00,000
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.461
II. ASSETS `̀̀̀
1. Fixed Assets 8,00,0002. Current Assets
Stock 3,00,000Debtors 4,00,000Cash & Bank Balance 1,00,000(Balancing Figure) TOTAL 16,00,000
2013 - June [6] (a) From the following particulars relating to Genius Ltd., preparebalance sheet as on 31st March, 2013:
Fixed assets/turnover ratio (based on sale) 1 : 2Debt collection period 2 monthsGross profit 25%Consumption of raw materials 40% of cost of goods soldStock of raw materials 4 months consumptionFinished goods 20% of turnover at costFixed assets to current assets 1 : 1Current ratio 2Long-term loan to current liability 1 : 3Capital to reserve 5 : 2Cost of fixed assets ` 10,50,000 (12 marks)
Answer :Balance Sheet of Genius Ltd.
as on 31st March 2013
Particulars Amount (`̀̀̀)
I. EQUITIES AND LIBILITIES(a) Share capital(b) Reserves and Surplus(c) Non Current liabilities
Long Term Loan(d) Current Liabilities
TotalII. Assets
1. Non Current AssetsFixed Assets
2. Current AssetsStock of raw materialsStock of finished goodsDebtorsCash (balancing figure)
2005 - Dec [8] (a) You are given the following figures worked out from the profit and
loss account and balance sheet of Steadfast Ltd. relating to the year 2004-05. Prepare
a balance sheet :
Fixed assets (net, after writing off 30%) (`) 10,50,000
Fixed assets turnover ratio
(cost of sales basis) 2
Finished goods turnover ratio 6
Rate of gross profit to sales 25%
Net profit (before interest) to sales 16%
Fixed charges cover (debenture interest 14%) 8
Debt collection period 1½ months
Materials consumed to sales 30%
Stock of raw materials (in terms of number of months'
consumption) 3
Current ratio 2.4
Quick ratio 1.0
Reserves to capital 0.21 (9 marks)
Answer :
Balance Sheet of Steadfast Ltd. as on 31st March, 2005
Liabilities ` Assets ` `
Share Capital
General Reserve
14% Debentures
Current Liabilities
10,00,000
2,10,000
4,00,000
4,00,000
20,10,000
Fixed Assets at cost
Less: Depreciation
Current Assets:
Stock of Raw
Materials
Stock of Finished
Goods
Book Debts
Cash
15,00,000
4,50,000
2,10,000
3,50,000
10,50,000
5,60,000
3,50,000
50,000
20,10,000
Working Notes :(i) Cost of Sales = Fixed Assets (net)×2 = `21,00,000(ii) Finished Goods Stock = (Cost of sales/6) = `3,50,000.(iii) Total Sales = ` 21,00,000×100/75 = `28,00,000(iv) Book Debts = 28,00,000/12 × 1.5 = `3,50,000.(v) Material Consumed = 30% of ` 28,00,000 or `8,40,000.(vi) Stock of raw materials = 3 months' consumption = 8,40,000/ 12×3 or
` 2,10,000.
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.469
(vii) Ratio of stock to current liabilities is 1,4,i.e. 2,4 !1.0; Stock of finished goods andof raw materials total ` 5,60,000. Hence current liabilities are `5,60,000/1.4 =4,00,000. Quick assets ratio being 1, quick assets (book debts and cash) areequal to the current liabilities i.e., ` 4,00,000. Book Debts are ` 3,50,000;therefore cash in hand ` 50,000.
(viii) Net Profit on sales is 16%; total profit is ` 4,48,000; this covers the debentureinterest B times, hence debenture interest is ` 56,000 At 14%. the debenturesmust be ` 4,00,000.
(ix) Capital and Reserves are the balancing figures in total; capital and reserves arein the ratio of 100:21.
(x) Fixed assets are after writing of 30% depreciation; the total cost is `10,50,000×100/70 = ` 15,00,000.
2006 - June [7] (b) A firm having owner’s equity of ` 1 lakh provides the following
ratios :
Short term debt to total debt = 0.40
Total debt to owner’s equity = 0.60
Fixed assets to owner’s equity = 0.60
Total assets turnover = 2 times
Inventory turnover = 8 times
From the above information, draw a balance sheet of the firm. (10 marks)
Answer :
Balance Sheet as at-------
Liabilities ` Assets `
Owner's equity
Long-term debts
Short-term debts
1,00,000
36,000
24,000
1,60,000
Fixed assets
Inventory
Cash
60,000
40,000
60,000
1,60,000
Working Notes:
(i) Owner's equity = ` 1,00,000
Total debts = ` 1,00,000 × 0.60 = `60,000
Fixed assets = ` 1,00,000 × 0.60 = `60,000
(ii) Total capital and liabilities = Total debts%Owner's equity
= `60,000%`1,00,000
= ` 1,60,000
(iii) Total assets = Total capital and liabilities
[Chapter #### 8] Analysis & Interpretation of Financial... OOOO 2.475
2008 - June [8] (b) Anjali Ltd. has provided the following abridged balance sheet as at31st March, 2008 :
Liabilites `
Share capital 5,00,000Fixed liabilities 2,50,000Current liabilites 2,50,000
10,00,000AssetsFixed assets 6,00,000Liquid assets 3,00,000Stock in trade 1,00,000
10,00,000From the above, you are required to comment upon the following by calculating testratios on :
(i) Long term solvency of the company; and (6 marks)(ii) Short term solvency of the company. (4 marks)
Answer :
(i) Long-term Solvency Ratio
(a) Debt Equity Ratio =
=
= = 0.33 or 1 : 3
The proportion of the long-term debt in total long-term funds is only 33%. Itmeans shareholder's funds are 67% of the total long-term funds. Even ifborowed funds would have been 50%, the financial position of the companywould have been considered as quite good. The company, therefore, has asound financial position from this angle.
(b) Fixed Assets Ratio = =
= 0.80 : 1 or 0.80
Long-term requirements of funds should be met out of long-term funds. Judgedfrom this angle, the company has not only met the long-term financialrequirements (i.e., fixed assets) out of long-term funds but it has also met a partof working capital requirement from long-term funds. The ideal ratio is 0.67.The present ratio is 0.80 and hence it is quite satisfactory.
1,03,100 1,03,200Additional information !— Dividend paid ` 3,500; and — Land was purchased for ` 10,000.Prepare a cash flow statement as per Accounting Standard- 3 (Revised). (6 marks)Answer : Cash Flow Statement of ..............
for the year ended 31st December, 2008
Particulars `̀̀̀ `̀̀̀
(A) Cash Flow from Operating Activities :Increase in balance of Profit & Loss A/cAdjustments for non-cash and non-operating items:
Reserve for doubtful debtsDividendGoodwill written off
Operating profits before working capital changesAdjustment for changes in current assets and liabilities :
Increase in trade creditorsIncrease in debtorsDecrease in stock
Cash generated from operationsIncome-tax paidNet cash from operating activities
(B) Cash Flow from Investing Activities :Purchase of LandNet cash used in investing activities
(C) Cash Flow from Financing Activities :Proceeds from issue of share capitalRedemption of DebenturesDividend paidNet cash used in financing activitiesNet decrease in cash and cash equivalents{(A) + (B) + (C)}Cash and cash equivalents at the beginning of theperiodCash and cash equivalents at the end of the period
V. Add: Cash and cash equivalents at the beginning of
the period 20,000
VI. Cash and cash equivalents at the end of the period
(IV + V) 20,000
Working Notes:
Dr. Plant & Machinery A/c Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Balance b/fd
To Profit & Loss A/c (Profit
on sale)
To Bank (Purchases)
(Balancing figure)
5,00,000
3,000
3,55,000
8,58,000
By Depreciation A/c
By Bank
By Balance c/fd
50,000
8,000
8,00,000
8,58,000
Book Value of machinery sold = Original Cost - depreciation
= ` 12,000 - ` 7,000
= ` 5,000
Profit on sale of machinery = 60% of ` 5,000 = ` 3,000
Sale proceeds of machinery = Book Value + Profits
= ` 5,000 + 3,000
= ` 8,000
2012 - June [7] (a) Surya Ltd. provides you the following information for the year ended
31st March, 2011 :
(i) Sales for the year amounted to ̀ 1,20,00,000, the company sells goods for cash
only.
(ii) Cost of goods sold was 60% of sales. Closing inventory was higher than opening
inventory by ̀ 53,750. Trade creditors on 31st March, 2011 exceeds those on 31st
March, 2010 by ` 28,750.
(iii) Net profit before tax was ` 17,25,000. Tax paid amounted to ` 8,75,000.
Depreciation on fixed assets for the year was ` 3,93,750. Whereas other
expenses totalled ` 26,81,250. Outstanding expenses on 31st March, 2010 and
on 31st March, 2011 totalled to ` 1,02,500 and ` 1,13,750 respectively.
(iv) New machinery and furniture costing ` 12,84,375 in all were purchased.
(v) A rights issue was made of 2,500 equity shares of ` 250 each at a premium of
` 75. The entire money was received with applications.
[Chapter #### 9] Cash Flow Statement OOOO 2.493
(vi) Dividends and dividend distribution tax totaling ` 5,08,750 were paid.(vii) Cash in hand and at bank as on 31st March, 2010 totalled ` 2,67,250.
Prepare cash flow statement as per Accounting Standard - 3 (Revised). (9 marks)Answer :
Cash Flow StatementFor the year ending 31.3.2011
(A) Cash flow from Operating ActivitiesNet Profit before tax 17,25,000Add: Depreciation 3,93,750Operating Profit before working Capital changes 21,18,750Less: Increase in inventory 53,750Add: Increase in Trade Creditors 28,750Add: Increase in outstanding expenses 11,250Cash generated from operations 21,05,000Tax paid 8,75,000Net Cash from operating activities 12,30,000
(B) Cash Flow from Investing ActivitiesPurchase of Fixed Assets (12,84,375)Net cash flow from Investing Activities (12,84,375)
(C) Cash Flow from Financing ActivitiesProceeds from issue of share capital 8,12,500Dividend Corporate Dividend Tax Paid (5,08,750)Net Cash flow from Financing Activities 3,03,750Net Increases in Cash & Cash equivalent(A + B + C) 2,49,375Add: Cash & Cash equivalents as on31.3.2010 (opening balance) 2,67,250Cash & Cash equivalents as on 31.3.2011(Closing balance) 5,16,625
2012 - Dec [8] (a) Following are the balances of accounts of Great Ltd.:Equity and Liabilities As on As on
31.03.2012 31.03.2011(`) (`)
Share capital 10,00,000 8,00,000Reserves 2,00,000 1,50,000Profit and loss (Surplus) 1,00,000 60,000Proposed dividend 2,00,000 1,00,000Debentures 2,00,000 —Provisions for taxation 1,00,000 70,000Trade payables 7,00,000 8,20,000
(c) Short-term provisionsProvision of taxation 1,00,000 80,000Proposed dividend 72,000 50,000
TOTAL 20,00,000 14,20,000II. ASSETS
(1) Non-current assets(a) Fixed assets
Tangible assets before depreciation 8,10,000 7,00,000Less: Depreciation (2,50,000) (1,80,000)Tangible assets after depreciation 5,60,000 5,20,000Investments 20,000 70,000
(2) Current assets(a) Inventories 8,20,000 5,10,000(b) Trade receivables 5,70,000 2,80,000
Bills receivables 30,000 24,000(c) Bank — 16,000
TOTAL 20,00,000 14,20,000The profit for the year ended 31st March, 2012 as per profit and loss account afterproviding depreciation amounted to ` 2,42,000 which was further adjusted as follows:
`
Surplus (P&L as per last balance sheet) 70,000Add : Profit after depreciation 2,42,000
3,12,000Less :
Loss on investment 5,000Provision for taxation 95,000Transfer to reserve 80,000Proposed dividend 72,000 2,52,000Balance of profit 60,000
You are informed that :(i) The sales and purchases for the year ended 31st March, 2012 amounted to
` 60,00,000 and `45,00,000 respectively.(ii) In arriving at the profit, the cost of sales and administrative and selling
expenses were deducted.Prepare a cash flow statement as per AS-3 (revised). (10 marks)
[Chapter #### 9] Cash Flow Statement OOOO 2.501
CS Inter Gr. I
PRACTICAL QUESTIONS
2004 - June [7] (c) Swastik Oils Ltd. has furnished the following information for the year
Net Increase in cash equivalents (A%B%C) (13,602.50)
Cash and cash equivalents at the beginning of the year 11,032.50
Cash and cash equivalents at the end of the year 2,569.50
2004 - Dec [6] (c) From the following balance sheets of Winners Ltd. as on 31st March,
2003 and 31st March, 2004, prepare a cash flow statement:
Liabilities 31.3.2003 31.3.2004
(`) (`)
Equity shares of ` 100 each 9,00,000 12,00,000
Securities premium — 90,000
Profit and loss appropriation account 3,00,000 3,00,000
Profit for the year 50,000 6,00,000
9% Debentures 4,00,000 3,00,000
Sundry creditors 4,05,000 2,30,000
Provision for taxation 1,50,000 3,00,000
Proposed dividend 45,000 1,00,000
22,50,000 31,20,000
[Chapter #### 9] Cash Flow Statement OOOO 2.503
Assets 31.3.2003 31.3.2004(`) (`)
Land 6,00,000 7,50,000Plant and machinery 12,00,000 13,50,000Less: depreciation 4,20,000 7,80,000 4,50,000 9,00,000Loans to subsidiary company 50,000 —Share in subsidiary company 60,000 60,000Stock in trade 3,70,000 4,50,000Debtors 3,00,000 4,00,000Bank 90,000 5,60,000
22,50,000 31,20,000
The following additional information are available:(i) A plant costing ` 1,50,000 was sold during the year for ` 60,000. Accumulated
depreciation on this plant was ̀ 1,00,000 and profit/loss, if any, arising out of thissale was transferred to profit and loss account.
(ii) During the year, the company paid income-tax amounting to ` 1,80,000. (9 marks)
Answer : Winners LimitedCash Flow Statement for the year ended 31.3.2004
(a) Cash Flows from Operating Activities `
Net Profit before tax and extraordinary items 5,50,000Adjustments for:Depreciation 1,30,000Provision for taxation 3,30,000Proposed dividend 1,00,000Profit on sale of plant (10,000)Operating profit before working capital changes 11,00,000Adjustments for :Increase in debtors (1,00,000)Increase in stock-in-trade (80,000)Decrease in creditors (1,75,000)Cash generated from operations 7,45,000Tax paid (1,80,000)Net Cash from Operating Activities 5,65,000
(b) Cash Flows from Investing ActivitiesPurchase of land (1,50,000)Sale of plant 60,000Purchase of plant and machinery (3,00,000)Refund of loans from subsidiary 50,000
Provision for depreciation (-) 8,00,000 (-) 9,80,000
Investments 2,50,000 1,00,000
Inventories 4,13,300 5,07,100
Trade debtors 1,60,000 1,80,000
Provision for bad debts (-) 8,000 (-) 9,000
Cash in hand and at bank 1,39,000 1,97,000
25,54,300 25,95,100
Profit and loss account for the year ended 31st March, 2004 :
`
Sales 36,40,200
Cost of goods sold (-) 27,10,700
Compensation received in law suit 55,000
Interest received on investments 21,000
Profit on sale of investments 7,500
Provision for bad debts (-) 1,000
Provision for depreciation (-) 1,80,000
Net profit before tax 8,32,000
Tax paid for the year 4,16,000
Net profit after tax 4,16,000
Astha Ltd. informs you that the debentures were redeemed at par. Prepare the
cash flow statement in accordance with AS-3 for the year ended 31st March, 2004.
(10 marks)
Answer :
Cash Flow Statement for the Year ended 31st March, 2004
(indirect Method)
` `
Cash Flow from Operating Activities
Net Profit before income tax and extra-ordinary items: 7,77,000
Adjustments for
Depreciation 1,80,000
Provision for Bad debts 1,000
Profit on sale of investments (7,500)
Income from investments (21,000)
Operating profit before working capital changes 9,29,500
[Chapter #### 9] Cash Flow Statement OOOO 2.507
Adjustments for :Increase in Inventory (93,800)Increase in Trade Debtors (20,000)Increase in Trade Creditors 24,800Cash inflow from operations 8,40,500Income Tax Paid (4,16,000)Cash flow before extra ordinary item 4,24,500Cash flow from extra ordinary items:Compensation received in law suit 55,000Net Cash from operating activities 4,79,500Cash flow from Investing ActivitiesPurchase of Fixed Assets (2,00,000)Sale Proceeds of Investments 1,57,500Interest received on Investments 21,000Net cash used in investing activities (21,500)Cash flow from financing activitiesRedemption of Debentures at par (1,00,000)Dividends paid (3,00,000)Net cash used in financing activities (4,00,000)Net increase in Cash and Cash Equivalents 58,000Cash and Cash Equivalents as on 31st March, 2003(closing balance) 1,39,000Cash and Cash Equivalents as on 31st March, 2004(closing balance) 1,97,000Working Notes :
`
(i) Net profit before income tax and extra ordinary item Net profit before income tax 8,32,000Less: Compensation received in law suit 55,000
7,77,000(ii) Sale proceeds of Investments
Cost of Investments sold 1,50,000Add: Profit on sale of investments 7,500
1,57,500(iii) Dividend and corporate dividend tax thereon paid
Retained earnings as on 31.3.2003 8,30,000Net Profit for the year ended 4,16,000
12,46,000Less: Retained earning as on 31.3.2004 9,46,000
3,00,000Note: Alternatively the cash flow statement may also be prepared by using directmethod.
2005 - Dec [8] (b) The following information is available from the books of ExclusiveLtd. for the year ended 31st March, 2005:
(i) Cash sales for the year were ` 10,00,000 and sales on account ` 12,00,000.(ii) Payments on accounts payable for inventory totalled ` 7,80,000.(iii) Collection against accounts receivable were ` 7,60,000.(iv) Rent paid in cash ` 2,20,000, outstanding rent being ` 20,000.(v) 4,00,000 Equity shares of ` 10 par value were issued for ` 48,00,000.(vi) Equipment was purchased for cash ` 16,80,000.(vii) Dividend amounting to ` 10,00,000 was declared, but yet to be paid.(viii) ` 4,00,000 of dividends declared in the previous year were paid.(ix) An equipment having a book value of ` 1,60,000 was sold for ` 2,40,000.(x) The cash account was increased by ` 37,20,000.
Prepare a cash flow statement using direct method. (6 marks)Answer : Exclusive Limited
Cash Flow Statement for the year ended 31st March, 2005(Direct Method)
` `
Cash Flows from Operating Activities
Cash receipts from customers
(`10,00,000 + `7,60,000)
Cash paid to suppliers and for rent
Net Cash Flows from Operating Activities
Cash Flows from Investing Activities
Sale of equipment
Purchase of equipment
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Issue of equity shares (including premium)
Dividends paid
Net Cash Flows from Financing Activities
Net Increase in Cash and Cash Equivalents
17,60,000
(10,00,000)
2,40,000
(16,80,000)
48,00,000
(4,00,000)
7,60,000
(14,40,000)
44,00,000
37,20,000
2006 - June [8] (b) The following are the balance sheets in condensed form of Modern
Ltd. :
Liabilities and Capital As on As on
31.3.2004 31.3.2005
(`) (`)
Sundry creditors 5,15,000 4,80,000
Outstanding expenses 65,000 60,000
[Chapter #### 9] Cash Flow Statement OOOO 2.509
8% Debentures 4,50,000 3,50,000
Depreciation fund 2,00,000 2,20,000
Reserve for contingencies 3,00,000 3,00,000
Profit and loss account 80,000 1,15,000
Equity share capital 11,50,000 11,50,000
27,60,000 26,75,000
Assets As on As on
31.3.2004 31.3.2005
(`) (`)
Cash and bank balances 4,50,000 4,50,000
Sundry debtors 3,35,000 2,15,000
Temporary investments 5,50,000 3,70,000
Prepaid expenses 5,000 10,000
Stock in trade 4,10,000 5,30,000
Machinery 2,60,000 3,50,000
Land and buildings 7,50,000 7,50,000
27,60,000 26,75,000
The following information are also available :
(i) 10% Dividend in cash.
(ii) New machinery for ` 1,50,000 was purchased, but old machinery costing
` 60,000 was sold for ̀ 20,000. Accumulated depreciation thereon was ̀ 30,000.
(iii) ` 1,00,000, 8% debentures were redeemed through open market purchase @` 96 for a debenture of ` 100.
(iv) ` 1,80,000 investments were sold at book value.You are required to prepare a cash flow statement for the year ended 31st March, 2005in accordance with Accounting Standard - 3 (Revised) by direct method. (10 marks)Answer :
Modern Ltd.Cash Flow Statement for the year ended 31.3.2005
Particulars ` ` `
A. Cash Flow from Operating ActivitiesNet profit earned during the year 35,000Add: Adjustment for :
Depreciation 50,000Dividend 1,15,000Loss on sale of machinery 10,000Profit on redemption of debentures (4,000)
Operating profit before working capital changes:Decrease in debtorsDecrease in sundry creditors
2,06,0001,20,000(35,000)
Increase in stock
Decrease in outstanding expenses
Increase in pre-paid expenses
Cash Flow from Operating Activities (net) (A)
B. Cash Flow from Investing Activities :
Purchase of new plant and machinery
Sale of old plant and machinery
Sale of temporary investments
Cash Flow from Investment Activities (net) (B)
C. Cash Flow from Financial Activities :
Redemption of debentures
Dividends paid in cash
Cash Flow from Financing Activities (C)
Net increase/decrease in cash and cash
equivalents (A) + (B) + (C)
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
(1,20,000)
(5,0000)
(5,000)
(1,50,000)
(20,000)
1,80,000
(96,000)
(1,15,000)
1,61,000
50,000
(2,11,000)
Nil
4,50,000
4,50,000
Note : Cash Flow Statement has been prepared by indirect method in accordance with
Accounting Standard -3 (Revised) with the given information.
2006 - Dec [8] (b) Madhuri Ltd. gives you the following information for the year ended31st March, 2006 :
(i) Sales for the year totalled ` 96,00,000. The company sells goods for cash only.(ii) Cost of goods sold was 60% of sales.(iii) Closing inventory was higher than opening inventory by ` 43,000.(iv) Trade creditors on 31st March, 2006 exceeded those on 31st March, 2005 by
` 23,000.(v) Tax paid amounted to ` 7,00,000.(vi) Depreciation on fixed assets for the year was ` 3,15,000 whereas other
expenses totalled ` 21,45,000. Outstanding expenses on 31st March, 2005 and31st March, 2006 totalled ` 82,000 and ` 91,000 respectively.
(vii) New machinery and furniture costing ` 10,27,500 in all were purchased.(viii) A rights issue was made of 50,000 equity shares of ` 10 each at a premium of
` 3 per share. The entire money was received with applications.(ix) Dividends totalling ` 4,00,000 were distributed among shareholder.(x) Cash in hand and at bank as at 31st March, 2005 totalled ` 2,13,800.
You are required to prepare a cash flow statement using direct method. (10 marks)
[Chapter #### 9] Cash Flow Statement OOOO 2.511
Answer :
Madhuri Ltd.
Cash Flow Statement of for the year ended 31st March, 2006
Particulars `̀̀̀ `̀̀̀
(a) Cash Flow from Operating Activities
Cash receipts from customers 96,00,000
Cash paid to supplies and employees
Cash inflow from operations
Tax paid
Net cash from Operating Activities
(b) Cash Flow from Investing Activities:
Purchase of Fixed Assets
Net cash used in Investing Activities
(c) Cash Flow from Financing Activities :
Proceeds (from issue of share capital
Dividends paid
Net cash from Financing Activities
Net increase in cash and cash equivalents
(A + B + C)
Cash and Cash equivalents as on 31st
March, 2005
(79,16,000)
16,84,000
(7,00,000)
(10,27,500)
6,50,000
(4,00,000)
9,84,000
(10,27,500)
2,50,000
2,06,500
(Opening balance)
Cash and Cash equivalents as on 31st
March 2006 (Closing Balance)
2,13,800
4,20,300
Working Notes :(i) Calculation of cash paid to supplies and employees: `
Cost of sales, 60% of ` 96,00,000 57,60,000Add: Expenses incurred 21,45,000
Outstanding expenses on 31st March, 2005 82,000Excess of closing inventory 43,000
80,30,000Less: Excess of closing creditors `
over opening creditors 23,000Outstanding expenses on31st March, 2006 91,000 1,14,000
79,16,000(ii) Proceeds from issue of share capital:
Issue price of one share = ` 10 + ` 3 = ` 13Proceeds from issue of 50,000 shares = ` 13 × 50,000 = ` 6,50,000.
2007 - June [6] (b) The following are the summary of cash transactions extracted fromthe books of Happy Ltd.
(` in ‘000)Balance as on 1st April, 2006 140Receipts from customers 11,132Issue of shares 1,200Sales of fixed assets 512
12,984Payments to suppliers 8,188Payments for fixed assets 920Payments for overheads 460Wages and salaries 276Taxation 972Dividends 320Repayment of bank loans 1,000
12,136Balance as on 31st March, 2007 848You are required to prepare a cash flow statement of the company for the period
ended 31st March, 2007 in accordance with the Accounting Standard-3 (Revised).(10 marks)
Answer :
In the books of Happy Limited
Cash Flow Statement for the period ending 31st March, 2007
(` in "000s)
(A)
(B)
(C)
Cash Flow from Operating Activities
Receipts from customers
Payment to supplies
Payment of Wages and Salaries
Payment of Overheads
Payment of Taxes
Net Cash from Operating Activities (A)
Cash Flow from Investing Activities
Proceeds on sale of fixed assets
Acquisition of (payment) fixed assets
Net Cash Used in Investing Activities (B)
Cash Flow from Financing Activities
Proceeds on issue of shares
Payments of dividends
Repayments of bank loans
Net Cash Used in Investing Activities (C)
11,132
(8, 188)
(276)
(460)
(972)
512
(920)
1200
(320)
(1,000)
1236
(408)
(120)
[Chapter #### 9] Cash Flow Statement OOOO 2.513
Net increase in cash and cash equivalents
(A) + (B) + (C)
Cash and cash equivalents at the beginning of the
period.
Cash and cash equivalents at the end of the period
Cash and cash equivalents at the end of the period.
708
140
848
2007 - Dec [7] (b) Amex Ltd. gives the following condensed balance sheets relating to
years 2006 and 2007 and the profit and loss appropriation account for the year 2007:
Balance Sheets of Amex Ltd. as on 31st March, 2006 and 2007
2006 2007
Liabilities (`) (`)
Share capital 5,00,000 6,00,000
Reserves 1,50,000 1,80,000
Profit and Loss account 40,000 65,000
Debentures 3,00,000 2,50,000
Creditors for goods 1,70,000 1,60,000
Provision for income-tax 60,000 80,000
12,20,000 13,35,000
Assets
Gross block 10,00,000 11,20,000
Less: Depreciation 3,70,000 4,60,000
Net block 6,30,000 6,60,000
Stock in trade 2,40,000 3,70,000
Book debts 2,50,000 2,30,000
Cash in hand and at bank 80,000 60,000
Misc. expenditure:
Discount on issue of shares 10,000 7,500
Preliminary expenses 10,000 7,500
12,20,000 13,35,000
Profit and Loss Appropriation Account for the
year ended 31st March, 2007
Debit Credit
Particulars ` Particulars `
To Transfer to reserves 30,000 By Balance b/d 40,000
(iii) Abnormal losses on account of idle time should be written off by being directly
debited to__________. (2)
(iv) Two important opposing factors in fixing the economic order quantity are
________ and carrying cost. (2)
(v) Zero base budgeting overcomes the weaknesses of ________. (6)
(1 mark each)
(c) Write the most appropriate answer from the given options in respect of the
following :
(i) The annual demand is 1,000 units. The unit price is ` 10 per unit. The carrying
cost of inventory is 10% and the ordering cost is ` 5 per order. The economic
order lot to be ordered is —
(a) 100 units
(b) 800 units
(c) 200 units
(d) 400 units. (2)
(ii) The nature of ratio analysis is —
(a) Quantitative analysis
(b) Qualitative analysis
(c) Both quantitative and qualitative analysis
(d) None of the above. (8)
(iii) When prices fluctuate widely, the method that will smooth out the effect of
fluctuations is —
(a) FIFO
(b) LIFO
(c) Simple average
(d) Weighted average. (2)
(iv) When the amount of overheads absorbed is less than the amount of overheads
incurred, it is called —
(a) Under-absorption of overheads
(b) Over-absorption of overheads
(c) Proper absorption of overheads
(d) Normal absorption of overheads. (4)
(v) Product cost under marginal costing include —
(a) Prime cost only
(b) Prime cost and fixed overheads
(c) Prime cost and variable overheads
(d) Material cost and variable overheads. (7)
(1 mark each)
[Chapter #### 10] Objective Questions OOOO 2.533
Answer :(a) (i) The statement is False:- Since cash flow statement ignores non cash
transactions as it does not take into consideration transactions which do notaffect the cash, issue of shares against the purchase of fixed assets is notconsidered in cash flow statement at all.
(ii) The statement is False:- Since the contractor is assured of a fixed percentageof profit there is no risk of incurring any loss on the contract.
(iii) The statement is True:- Since the management time is saved since attentionneed be paid only to some of the items rather than all the items as would be thecase if the ABC (always better control) system was not in operation because itis based on the principal of management by exception.
(iv) The statement is False:- A firm with a very high current ratio and very lowliquid ratio indicates a high level of investment in such inventories with aremostly un-salable.
(v) The statement is True:- A factory operates at full capacity, the decision tomake further is very likely to call expansion in installed capacity at such fixedcost become relevant cost for arriving at make or buy-decisions.
(b) (i) Variable.(ii) Bin-card.(iii) Costing Profit & Loss A/c.(iv) Ordering cost.(v) Conventional or Traditional budgeting.
(c) (i) (a) 100 units.(ii) (a) Quantitative analysis.(iii) (d) Weighted average.(iv) (a) Under-absorption of overheads.(v) (c) Prime Cost and Variable Overheads.
2012 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements aretrue or false:
(i) Cash flow statement ignores the accrual accounting concept. (9)(ii) Cost-volume-profit relationship is a more comprehensive term than break-
even analysis. (7)(iii) For control purposes, long-term budgets should be prepared. (6)(iv) Direct cost and variable cost are not the same. (2)(v) ABC analysis is used to manage the spare parts, etc. (2)
(2 marks each)(b) Write the most appropriate answer from the given options in respect of the
following:(i) Over-absorption of factory overheads due to inefficiency of management
(iv) Marginal costing is different from direct costing. (7)
(v) Management accounting is based on double entry system. (1)
(2 marks each)
(b) Write the most appropriate answer from the given options in respect of the
following:
(i) The rate of change of labour force in an organisation during a specified period
is called —
(a) Labour efficiency
(b) Labour turnover
(c) Labour productivity
(d) None of the above. (3)
(ii) Differential cost analysis is incorporated in the —
(a) Cost books
(b) Financial books
(c) Statutory books
(d) None of the above. (1)
(iii) Marginal costing is a very useful technique to management for —
(a) Cost control
(b) Profit planning
(c) Decision making
(d) All of the above. (7)
(iv) When prices of materials have a rising trend, then the suitable method for
issuing the materials will be —
(a) FIFO
(b) LIFO
(c) HIFO
(d) Standard cost price. (2)
(v) Cash flow statement is required for the financial planning of —
(a) Short range
(b) Long range
(c) Medium range
(d) Very long range. (9)
(1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(i) A document which provides for assembly of different costs in respect of a cost
centre or a cost unit is called _______. (5)
(ii) Economic order quantity depends on _______ and _______ costs. (2)
[Chapter #### 10] Objective Questions OOOO 2.537
(iii) In case the amount of overheads recovered from production is more than theactual overheads, there is said to be _______ of overheads. (4)
(iv) Abnormal idle time cost should be charged to _______. (3)(v) Bin card shows _______ at any moment of time. (2)
(1 mark each)Answer :(a) (i) This statement is false : Cost sheet is a document which provide the detailed
cost of the cost centre. The selling and distribution expenses are not includedin the cost sheet when in statement of cost and profit.(a) the first part gives the cost of production.(b) the second part gives the cost of goods sold.(c) the third part gives the cost of sale and profits for the period.
(ii) This statement is false : Zero based budgeting is not based on incrementalapproach, because it promote operational efficiency. Hence, it require managerto review and justify their activities or the fund. ZBB is particularly useful forservice department and government.
(iii) This statement is true : When factory works at full capacity, fixed cost alsobecome relevant for make or buy decision.
(iv) This statement is true : Marginal costing covers only those expenses whichare of variable nature whereas direct costing may also include costs whichbesides being fixed in the nature are identified with the cost objective.
(v) This statement is false : Management Account is not based on double entrysystem.
Answer :(b) (i) (b) Labour turnover.
(ii) (a) Cost books.(iii) (d) All of the above.(iv) (c) HIFO.(v) (a) Short range.
Answer :(c) (i) Cost sheet.
(ii) Ordering and storage.(iii) Over absorption.(iv) Costing profit and loss account.(v) The quantity of raw materials.
2013 - Dec [5] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(i) Job card is used for recording the ‘in’ and ‘out’ time of the workers on the job.(3)
(ii) Simultaneous equation method is not an algebraic method. (4)
(iii) Cash flow statement shows receipts and payments of cash. (9)
(iv) Unchanged fixed costs should not be considered in a make or buy decision.(7)
(v) Cost-volume-profit relationship is a more comprehensive term than break-even
analysis. (2 marks each) (7)
2013 - Dec [5] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(i) Batch costing method is applicable where !
(a) Similar articles are produced in batches
(b) Articles are produced in mass scale
(c) Mass production is undertaken in batches
(d) None of the above. (5)
(ii) When margin of safety is 20% and P/V ratio is 60%, the profit will be —
(a) 30%
(b)
(c) 12%
(d) None of the above. (7)
(iii) Traditional budgeting is accounting oriented whereas zero base budgeting is —
(a) Activity oriented
(b) Decision oriented
(c) Event oriented
(d) None of the above. (6)
(iv) Which of the following is variable cost or variable expense —
(a) Depreciation on machinery
(b) Interest on capital
(c) Direct materials
(d) Rent, rates and taxes. (5)
(v) Cost-volume-profit analysis is based on several assumptions. Which of the
following is not one of those assumptions —
(a) The sales mix of the product is constant
(b) Inventory quantities change during the year
(c) The behavior of both revenue and cost is linear throughout the relevant
range
(d) Factor prices, e.g. material prices and wage rates remain unchanged.(7)
(1 mark each)
2013 - Dec[5] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) If the work certified is 50% or more of contract price, the formula for ascertaining
the profit to be transferred to profit and loss account is _____________ . (5)
[Chapter #### 10] Objective Questions OOOO 2.539
(ii) Material losses due to abnormal reasons should be transferred to _________ .
(2)
(iii) Contribution earned after reaching break-even point is ___________ of the firm.
(7)
(iv) Flexible budget recognises the difference between fixed, variable and _______
costs. (6)
(v) _________ are that portion of the process loss which can be converted into a
finished product by incurring more material and labour expenses. (2)
(1 mark each)
Table Showing Marks of Compulsory Questions
Year 09
J
09
D
10
J
10
D
11
J
11
D
12
J
12
D
13
J
13
D
Objective 14 20 20 20 20 20 20 20 20 20
Total 14 20 20 20 20 20 20 20 20 20
2.540
June - 2012Cost and Management Accounting
PART - B(Answer Question No. 5 which is compulsory and any two of the rest from this part.)
5. (a) State, with reasons in brief, whether the following statements are true or false:(i) Issue of shares against the purchase of fixed assets is considered under
financing activities in cash flow statement. (ii) In cost plus contracts, the contractor runs a risk of incurring loss.(iii) ABC analysis is based on the principle of management by exception.(iv) A firm with a very high current ratio and very low liquid ratio has very low
level of inventory.(v) When a factory operates at full capacity, fixed cost also becomes
relevant for make or buy decisions. (2 marks each)(b) Re-write the following sentences after filling-in the blank spaces with
appropriate word(s)/figure(s) :(i) Variable cost per unit does not remain _________.(ii) Quantitative records of receipts, issue and balance items of material in
stores are entered in _________.(iii) Abnormal losses on account of idle time should be written off by being
directly debited to__________.(iv) Two important opposing factors in fixing the economic order quantity
are ________ and carrying cost.(v) Zero base budgeting overcomes the weaknesses of ________.
(1 mark each)(c) Write the most appropriate answer from the given options in respect of the
following :(i) The annual demand is 1,000 units. The unit price is ` 10 per unit. The
carrying cost of inventory is 10% and the ordering cost is ` 5 per order.The economic order lot to be ordered is —(a) 100 units(b) 800 units(c) 200 units(d) 400 units.
(ii) The nature of ratio analysis is —(a) Quantitative analysis(b) Qualitative analysis(c) Both quantitative and qualitative analysis(d) None of the above.
(iii) When prices fluctuate widely, the method that will smooth out the effectof fluctuations is —(a) FIFO(b) LIFO(c) Simple average(d) Weighted average.
Question Papers OOOO 2.541
(iv) When the amount of overheads absorbed is less than the amount ofoverheads incurred, it is called —(a) Under-absorption of overheads(b) Over-absorption of overheads(c) Proper absorption of overheads(d) Normal absorption of overheads.
(v) Product cost under marginal costing include —(a) Prime cost only(b) Prime cost and fixed overheads (c) Prime cost and variable overheads(d) Material cost and variable overheads. (1 mark each)
6. (a) A company manufacturers 5,000 units of a product per month. The cost ofplacing an order is ` 100. The purchase price of the raw material is ` 10 perkg. The re-order period is 4 to 8 weeks. The consumption of raw materialsvaries from 100 kg. to 450 kg. per week. The average weekly consumptionbeing 275 kg. The carrying cost of inventory is 20% per annum. Assuming 52weeks in a year, you are required to calculate —
(i) Re-order quantity;(ii) Maximum level;(iii) Minimum level; and (iv) Average level. (6 marks)
(b) The following are the particulars relating to a contract which has begun on1st April, 2010 :
Uncertified work 9,000Overheads 8,240Material returned 1,600Machinery as on 31st March, 2011 22,000Material in hand on 31st March, 2011 3,700Value of work certified 3,90,000Cash received 3,51,000
Prepare the contract account for the financial year 2010-11 showing theamount of profit that may be taken to the credit of profit and loss account forthe year. (6 marks)
(c) “Normal labour turnover is advantageous and excessive labour turnover isnot desirable.” Comment. (3 marks)
7. (a) Surya Ltd. provides you the following information for the year ended 31st
March, 2011 :(i) Sales for the year amounted to ` 1,20,00,000, the company sells goods
for cash only.(ii) Cost of goods sold was 60% of sales. Closing inventory was higher than
opening inventory by ` 53,750. Trade creditors on 31st March, 2011exceeds those on 31st March, 2010 by ` 28,750.
(iii) Net profit before tax was ̀ 17,25,000. Tax paid amounted to ̀ 8,75,000.Depreciation on fixed assets for the year was ̀ 3,93,750. Whereas otherexpenses totalled ` 26,81,250. Outstanding expenses on 31st March,2010 and on 31st March, 2011 totalled to ` 1,02,500 and ` 1,13,750respectively.
(iv) New machinery and furniture costing ̀ 12,84,375 in all were purchased.(v) A rights issue was made of 2,500 equity shares of ` 250 each at a
premium of ` 75. The entire money was received with applications.(vi) Dividends and dividend distribution tax totaling ` 5,08,750 were paid.(vii) Cash in hand and at bank as on 31st March, 2010 totalled ` 2,67,250.
Prepare cash flow statement as per Accounting Standard - 3 (Revised).(9 marks)
(b) Metro Service Ltd. is operating at 70% capacity and presents the followinginformation :Break-even point : ` 200 croreP/V ratio : 40%Margin of safety : ` 50 crore.Metro management has decided to increase production to 95% capacitylevel with the following modifications —— Selling price will be reduced by 8%.— The variable cost will be reduced to 55% on sales.— The fixed cost will increase by ` 27 crore including depreciation on
additions, but excluding interest on additional capital.— Additional capital of ` 50 crore will be needed for capital expenditure
and working capital.You are required to calculate —
(i) Sales required to earn ̀ 7 crore over and above the present profit andalso to meet 20% interest on additional capital;
(ii) Revised break-even point;(iii) Revised P/V ratio; and(iv) Revised margin of safety. (6 marks)
8. (a) From the following particulars, prepare the balance sheet of Dhan DhanyaLtd.: Current ratio 2Working capital ` 4,00,000Capital block (employed) to current assets 3:2
Question Papers OOOO 2.543
Fixed assets to turnover 1:3Cash sales/credit sales 1:2Debentures/share capital 1:2Stock velocity 2 monthsCreditors velocity 2 monthsDebtors velocity 3 monthsGross profit ratio 25% (to sales)Net profit 10% of turnoverReserve 2.5% of turnover
(9 marks)(b) Flexible budgets are more realistic and useful than fixed budgets. Do you
agree ? Explain. (3 marks)(c) “Budget is an aid to management and not a substitute for management”.
Comment. (3 marks)
December - 2012Cost and Management Accounting
PART—BAnswer Question No. 5 which is compulsory
and any two of the rest from this part.
5. (a) State, with reasons in brief, whether the following statements are true orfalse:(i) Cash flow statement ignores the accrual accounting concept.(ii) Cost-volume-profit relationship is a more comprehensive term than
break-even analysis.(iii) For control purposes, long-term budgets should be prepared.(iv) Direct cost and variable cost are not the same.(v) ABC analysis is used to manage the spare parts, etc. (2 marks each)
(b) Write the most appropriate answer from the given options in respect of thefollowing:(i) Over-absorption of factory overheads due to inefficiency of management
should be disposed by—(a) Use of supplementary rate(b) Transfer to costing profit and loss account(c) Carry forward to next year(d) Transfer to production account.
(ii) A flexible budget is a budget which is designed to change in relation tothe level of activity—(a) Budgeted(b) Attained(c) Not budgeted(d) Forecasted.
(iii) The costing method in which fixed factory overheads are added to theinventory is—(a) Direct costing(b) Marginal costing(c) Absorption costing(d) Standard costing.
(iv) When margin of safety is 20% and P/V ratio is 60%, the profit will be—(a) 30%
(b) %
(c) 12%(d) None of the above.
(v) Rowan premium plan is an improvement over—(a) Taylor plan(b) Gantt bonus plan(c) Halsey premium plan(d) None of the above. (1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces withappropriate word(s)/figure(s):(i) All indirect costs are collectively called__________.(ii) Marginal costing is a__________of costing.(iii) Zero base budgeting overcomes the weaknesses of__________.(iv) The break-even point__________when selling price is increased.(v) __________method of valuation of inventory is useful when prices are
rising. (1 mark each)6. (a) Prepare the balance sheet of Moon Ltd. from the following particulars:
Current ratio 2Working capital ` 4,00,000Capital block to current assets 3 : 2Fixed assets to turnover (based on sales) 1 : 3Cash sales / Credit sales 1 : 2Stock velocity 2 monthsCreditors velocity 2 monthsDebtors velocity 3 monthsNet profit 10% of turnoverReserves 2.5% of turnoverDebentures/share capital 1 : 2Gross profit ratio 25% (on sales)Assume that capital block includes share capital, debentures, profit andreserves. (10 marks)
(b) Briefly point out the process of budgetary control. (5 marks)
Question Papers OOOO 2.545
7. (a) SV Constructions Ltd. have obtained a contract for construction of a bridge.The value of the contract is ` 12 lakh and the work commenced on 1st
October, 2011. The following details are shown in their books for the yearended 30th September, 2012:
`
Plant purchased 60,000Wages paid 3,40,000Wages accrued as on 30.9.2012 2,800Material issued to site 3,36,000Material at site as on 30.9.2012 4,000Direct expenses 8,000Direct expenses accrued as on 30.9.2012 1,200General overheads apportioned 32,000Work not yet certified at cost 14,000Cash received being 80% of work certified 6,00,000Life of plant purchased is 5 years and scrap value is nil.You are required to—(i) Prepare the contract account for the year ended 30th September, 2012.(ii) Show the amount of profit which you consider might be fairly taken on the
contract and how you have calculated it. (9 marks)(b) X Ltd. is committed to supply 24,000 bearings per annum to Y Ltd. on regular
basis. It is estimated that it costs 10 paise as inventory holding cost perbearing per month and that the set-up cost per run of bearing manufacture is` 324.Required—(i) What would be the optimum run size for manufacture of bearings?(ii) Assuming that company has a policy of manufacturing 6,000 bearings per
run, how much extra cost the company would be incurring as comparedto the optimum run suggested in (i) above.
(iii) What is the minimum inventory holding cost? (6 marks)8. (a) Following are the balances of accounts of Great Ltd.:
Equity and Liabilities As on As on31.03.2012 31.03.2011
(`) (`)Share capital 10,00,000 8,00,000Reserves 2,00,000 1,50,000Profit and loss (Surplus) 1,00,000 60,000Proposed dividend 2,00,000 1,00,000Debentures 2,00,000 —Provisions for taxation 1,00,000 70,000Trade payables 7,00,000 8,20,000
AssetsPlant and machinery 7,00,000 5,00,000Land and building 6,00,000 4,00,000Investment 1,00,000 —Trade receivables 5,00,000 7,00,000Stock 4,00,000 2,00,000Cash in hand/bank 2,00,000 2,00,000
25,00,000 20,00,000Additional information is as follows:(i) Depreciation @ 25% was charged on the opening value of plant and
machinery.(ii) During the year, one old machine costing ` 50,000 (written down value
` 20,000) was sold for ` 35,000.(iii) ` 50,000 was paid towards income-tax during the year.(iv) Building under construction was not subject to any depreciation.Prepare cash flow statement as per Accounting Standard-3. (9 marks)
(b) Product-X can be produced either by Machine-A or Machine-B. Machine-Acan produce 100 units of Product-X per hour and Machine-B can produce 150units per hour. Total machine hours available during the year are 2,500.Taking into account the following data, determine which machine is to be usedfor the manufacture of Product-X.Costs and price per unit of Product-X:
(c) “Management accounting is a decision making system.” Comment.(3 marks)
June - 2013Cost and Management Accounting
Part— B(Answer Question No. 5 which is compulsory and any two of the rest from this part.)
5. (a) State, with reasons in brief, whether the following statements are true or false:(i) Cost sheet is the same as statement of cost and profit.(ii) Zero base budgeting is based on incremental approach.(iii) When a factory operates at full capacity, fixed cost also becomes relevant
for make or buy decisions.(iv) Marginal costing is different from direct costing.(v) Management accounting is based on double entry system.
(2 marks each)
Question Papers OOOO 2.547
(b) Write the most appropriate answer from the given options in respect of thefollowing:(i) The rate of change of labour force in an organisation during a specified
period is called —(a) Labour efficiency(b) Labour turnover(c) Labour productivity(d) None of the above.
(ii) Differential cost analysis is incorporated in the —(a) Cost books(b) Financial books(c) Statutory books(d) None of the above.
(iii) Marginal costing is a very useful technique to management for —(a) Cost control(b) Profit planning(c) Decision making(d) All of the above.
(iv) When prices of materials have a rising trend, then the suitable method forissuing the materials will be —(a) FIFO(b) LIFO(c) HIFO(d) Standard cost price.
(v) Cash flow statement is required for the financial planning of —(a) Short range(b) Long range(c) Medium range(d) Very long range. (1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces withappropriate word(s)/figure(s):(i) A document which provides for assembly of different costs in respect of
a cost centre or a cost unit is called _______.(ii) Economic order quantity depends on _______ and _______ costs.(iii) In case the amount of overheads recovered from production is more than
the actual overheads, there is said to be _______ of overheads.(iv) Abnormal idle time cost should be charged to _______.(v) Bin card shows _______ at any moment of time. (1 mark each)
6. (a) From the following particulars relating to Genius Ltd., prepare balance sheetas on 31st March, 2013:Fixed assets/turnover ratio (based on sale) 1 : 2Debt collection period 2 months
Gross profit 25%Consumption of raw materials 40% of cost of goods soldStock of raw materials 4 months consumptionFinished goods 20% of turnover at costFixed assets to current assets 1 : 1Current ratio 2Long-term loan to current liability 1 : 3Capital to reserve 5 : 2Cost of fixed assets ` 10,50,000 (12 marks)
7. (a) From the information given below prepare cash flow statement for Smile Ltd.:Balance Sheets
As on As on31-03-2012 31-03-2013( ` in ‘000) (` in ‘000)
Equity and liabilitiesShareholders’ funds:
Share capital 1,800 2,000Reserves and surplus:
General reserve 50 30Profit and loss account 140 160
Non-current liabilities:Loan on mortgage @ 8%
(taken on 1st July, 2012) ! 50Current liabilities:
Bank overdraft 115 114Trade payables 22 40Short-term provisions:Provision for final dividend 90 80
2,217 2,474AssetsNon-current assets:
Freehold building 1,000 1,160Machinery and plant 340 490Furniture and fittings 7 6Goodwill 150 130Investment in shares 100 120Preliminary expenses 15 5
Question Papers OOOO 2.549
Current assets:Inventories 440 422Trade receivables 160 134Prepaid expenses 4 5Cash in hand 1 2
2,217 2,474Additional information:(i) Depreciation on freehold building @ 2 ½% on cost ̀ 12,00,000; on machinery
and plant @ 10% on cost ` 5,00,000; on furniture and fitting @ 5% on cost`10,000.
(ii) Dividend received ` 6,000 was used in writing down the book value ofinvestment in shares.
(iii) Goodwill was written off out of general reserve.(iv) The proposed dividend for the year ended 31st March, 2012 was paid off and
interim dividend of ` 60,000 was paid out of profit and loss account.(12 marks)
(b) Distinguish between ‘production account’ and ‘cost sheet’. (3 marks)8. (a) The following data are available in a manufacturing company for a year period:
(` in lakhs)Fixed expenses :
Wages and salaries 9.50Rent, rates and taxes 6.60Depreciation 7.40Sundry administrative expenses 6.50
Semi-variable expenses (at 50% capacity):Maintenance and repairs 3.50Indirect labour 7.90Sales department salaries, etc. 3.80Sundry administrative expenses 2.80
Variable expenses (at 50% of capacity):Materials 21.70Labour 20.40Other expenses 7.90
98.00Assume that fixed expenses remain constant for all levels of production, semi-variableexpenses remain constant between 45% and 65% of capacity and increasing by 10%between 65% and 80% capacity and by 20% between 80% and 100% capacity.Sales at various levels are ! at 50% capacity : ̀ 100 lakh; at 60% capacity : ̀ 120 Lakh;at 75% capacity : ̀ 150 lakh; at 90% capacity : ̀ 180 lakh; and at 100% capacity : ̀ 200lakh.Prepare a flexible budget for the year and forecast the profits at 60%, 75%, 90% and