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    Default Solved Answer COST & F.M. CA IPCC Nov. 2009


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    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com )

    2

    Advantages of Contractee

    (i)

    Contractee pays only the reasonable price based on actual cost incurred,

    (ii)

    No bargaining hassles,

    (iii)

    Contractee gets the benefit of fall in price of materials and wage rates, etc.

    Ans. 1. (v) Break up point in case of multi product firm

    Fixed Cost

    616000

    BEP = -----------------------------------

    = ------------------------------

    Overall Contribution per unit

    31.428571/- (W.N.1)

    = 19600 Units per month

    W.N. (1)

    Overall contribution per unit

    Product

    J

    K

    Contribution per

    unit

    40/-

    20/-

    Sales

    Mix

    4 units

    3 units

    7

    Contribution

    X Sales Mix

    160

    60

    220

    Contribution x Sales Mix

    Overall Contribution per unit = --------------------------------

    Sales Mix

    220

    =

    ----- = 31.428571 /-

    7

    Ans.1 (vi) If the enterprises is maintaining integrated system of accounting, then reconciliation statement of cost and

    financial accounts are not required. In case of integrated system of accounting, cost and financial accounts are kept in

    the same set of books; therefore there is no need to reconcile them.

    QN 2. Mega Company has just completed its first year of operations. The unit costs on a normal costing basis are as

    under :

    Rs.

    Direct material 4 kg @ Rs. 4

    =

    16.00

    Direct labour 3 hrs @ Rs. 18

    =

    54.00

    Variable overhead 3 hrs @ Rs. 4

    =

    12.00

    Fixed overhead 3 hrs @ Rs. 6

    =

    18.00

    100.00

    Selling and administrative costs :

    Variable

    Rs. 20 per unit

    Fixed

    Rs.

    7,60,000

    During the year the company has the following activity :

    Units produced

    =

    24,000

    Units sold

    =

    21,500

    Unit selling price

    = Rs. 168

    Direct labour hours worked

    =

    72,000

    Actual fixed overhead was Rs. 48,000 less than the budgeted fixed overhead. Budgeted variable overhead was Rs.

    20,000 less than the actual variable overhead. The company used an expected actual activity level of 72,000 direct

    labour hours to compute the predetermine overhead rates.

    Required :

    (i) Compute the unit cost and total income under :

    (a) Absorption costing

    (b) Marginal costing.

    (ii) Under or over absorption of overhead.

    (iii) Reconcile the difference between the total income under absorption and marginal costing.

    [15 marks]




    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com )

    3

    Ans 2. (i)

    Profit & Loss A/c under absorption costing

    384000

    1296000

    288000

    432000

    430000

    760000

    20000

    300000

    3910000

    By Sales

    (215000 units @ 168/- p.u.)

    ” Over recovery of fixed overhead

    ” Closing Stock

    (100/- x 2500 units)

    3612000

    48000

    To D. Material

    (24000 units @ 16/- per unit)

    ” D. Labour

    (24000 units @ 54/- per unit)

    ” Variable overhead absorbed

    ” Fixed overhead absorbed

    ” Selling & Admn. Overhead

    Variable

    (21500 units @ 20/- p.u.)

    Fixed

    ” Under recovery of

    variable overhead

    ” Net Income

    250000

    3910000

    Profit & Loss A/c under marginal costing

    To D. Material

    ” D. Labour

    ” Variable overhead (Actual)

    ” Fixed overhead (Actual)

    ” Selling & Admn. OH

    Variable

    Fixed

    ” Net Income

    384000

    1296000

    308000

    384000

    By Sales

    ” Closing Stock

    (82.8333/- x 2500 units)

    3612000

    207083

    430000

    760000

    257083

    3819083

    3819083

    Budgeted Fixed overhead = 72000 labours hours x 6/- per hour = 432000/-

    Actual Fixed overhead = 432000/- - 48000 /- = 384000/-

    Fixed overhead absorbed

    = units produced x fixed oh per unit

    = 24000 x 18/- = 432000 /-

    Budgeted variable overhead

    = 72000 labour hours @ 4/- per hour = 288000 /-

    Actual variable overhead

    = 288000/- + 20000 /- = 308000 /-

    Cost per unit under absorption costing

    D. Material

    D. Labour

    Variable Overhead

    Fixed

    Overhead

    Total Cost

    Rs.

    16.00

    54.00

    12.00

    18.00

    100.00

    Cost per unit under Marginal costing

    D. Material

    D. Labour

    Variable overhead

    308000/-

    --------------

    2400 units

    Total Cost

    (ii) Under or over absorption of overhead

    Rs.

    16.00

    54.00

    12.83

    82.83




    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com )

    4

    (a) Variable Overhead (Actual)

    ”

    ”

    (Absorbed)

    Under recovery

    (b) Fixed overhead (Actual)

    ”

    ”

    (Absorbed)

    Over recovery

    =

    =

    =

    =

    308000/-

    288000/-

    20000/-

    384000/-

    432000/-

    48000/-

    Ans. 2 (iii) Reconciliation statement between profit under absorption costing & marginal costing

    Profit as per marginal costing

    257083 /-

    Add : under valuation of Clo. Stock in marginal costing

    42917/-

    Profit as per absorption costing

    ----------

    300000 /-

    -----------

    3. (a) XP Ltd. furnishes you the following information relating to process II.

    (i) Opening work-in-progress—NIL

    (ii) Units introduced 42,000 units @ Rs. 12

    (iii) Expenses debited to the process :

    Rs.

    Direct material

    61,530

    Labour

    88,820

    Overheads

    1,76,400

    (iv) Normal loss in the process = 2% of input.

    (v) Closing work-in-progress—1200 units



    Degree of completion —

    Materials

    100%

    Labour

    50%

    Overhead

    40%

    (vi) Finished output—39500 units

    (vii) Degree of completion of abnormal loss :

    Material

    100%

    Labour

    80%

    Overhead

    60%

    (viii) Units scraped as normal loss were sold at Rs. 4.50 per unit,

    (ix) All the units of abnormal loss were sold at Rs. 9 per unit.

    Prepare :

    (a) Statement of equivalent production.

    (b) Statement showing the cost of finished goods, abnormal loss and closing work-in-progress.

    (c) Process II account and abnormal loss account.

    [8 marks]

    (b) The following information is available from the cost records of Vatika & Co. For the month of August, 2009 :

    Material purchased 24,000 kg Rs. 1,05,600

    Material consumed 22,800 kg

    Actual wages paid for 5,940 hours Rs. 29,700

    Unit produced 2160 units.

    Standard rates and prices are :

    Direct material rate is Rs. 4.00 per unit

    Direct labour rate is Rs. 4.00 per hour

    Standard input is 10 kg. for one unit.

    Standard requirement is 2.5 hours per unit.

    Calculate all material and labour variances for the month of August-2009.

    [8 marks]

    Ans. (3) (a) Statement showing equivalent production

    Particulars

    Total

    Material

    Labour

    Overhead




    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com )

    (i) Opening WIP

    (ii) Units in produced, completed

    & transferred process III

    (iii) Normal Loss

    (iv) Abnormal Loss

    (v) Closing WIP

    Equivalent Production

    NIL

    39500

    840

    460

    1200

    42000

    %

    --

    100%

    --

    100%

    100%

    Qty

    --

    39500

    --

    460

    1200

    41160

    %

    --

    100%

    --

    80%

    50%

    Qty

    --

    39500

    --

    368

    600

    40468

    %

    --

    100%

    --

    60%

    40%

    5

    Qty

    --

    39500

    --

    276

    480

    40256

    Statement showing cost per unit of each element of material, labour & overhead

    Material

    Labour

    Total Material Cost including additional material (Rs.)

    565530

    88820

    Less : Scrap value of Normal Loss

    [840 units @ 4.5/- per unit]

    3780

    --

    561750

    88820

    Equivalent Production

    41160

    40468

    Cost per unit

    13.647959/-

    2.1948205/-

    Statement showing cost of finished goods, abnormal loss closing WIP

    Particulars

    Finished Goods

    Abnormal Loss

    D. Material

    539094/-

    6278/-

    (39500 x 13.647959)

    (460 x 13.6479)

    D. Labour

    86695/-

    807/-

    (39500 x 2.1948)

    (368 x 2.1948/-)

    Overhead

    173087/-

    1210/-

    (39500 x 4.3819/-)

    (276 x 4.3819/-)

    798876/-

    8295/-

    Overhead

    176400

    --

    176400

    40256

    4.3819554/-

    Closing WIP

    16378/-

    (1200 x 13.6479/-)

    1318/-

    (600 x 2.1948/-)

    2103/-

    (480 x 4.3819/-

    19799/-

    Particulars

    To D. Material

    ” Other Material

    ” D. Labour

    ” Overhead

    Qty

    42000

    --

    --

    --

    42000

    Process II account

    Amount Particulars

    504000 By Normal Loss

    61530 ” Abnormal Loss

    88820 ” Finished Goods a/c

    176400 ” Closing WIP

    830750

    Qty

    840

    460

    39500

    1200

    42000

    Amount

    3780

    8295

    798876

    19799

    830750

    Abnormal Loss account

    To Process II a/c

    8295

    By Cash a/c (460 units @ 9/- p.u.)

    ” Profit & Loss a/c (B/F)

    -------

    8295

    -------

    Ans. 3 (b) Material Variances (Assuming Partial plan)

    SP x SQ

    SP x SM

    SP x AQ used

    4 x (10 x 2160)

    4 x 22800

    4 x 22800

    = 86400/-

    = 91200/-

    = 91200/-

    SP = Standard Price of material per kg = 4/-

    SQ = Standard Quantity for actual output = 10 kg x 2160 units = 21600 k.g.

    AQ used = Actual Quantity used = 22800 k.g.

    Rs. 105600

    ---------------

    24000 k.g.

    4140

    4155

    --------

    8295

    -------

    AP x AQ used

    4.4 x 22800

    = 100320

    AP = Actual Price of Material per K.g. =




    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com ) 6

    = 4.4/- per k.g.

    SM=Total Actual quantity used in standard mix ratio= 22800 k.g. (because there is only one material given in the question)

    Material Cost variance = (SP x SQ) – (AP x AX used) = 86400/- - 100320/- = 13920 /- (A)

    Material Price variance = (SP x AX used) – (AP x AQ used) = 91200/- - 100320/- = 9120/- (A)

    Material usage variance = (SP x SQ) – (SP x AQ used) = 86400 – 91200 = 4800/-

    Material Mix Variance = (SP x SM) - (SP X AQ used) = 91200 – 91200 = NIL

    Material yield variance = (SP X SQ) – (SP X SM) = 86400 – 91200 = 4800 /- (A)

    Labour variance

    SR X ST

    4 x (2.5 x 2160)

    = 21600/-

    (A)

    SR X SM

    4 x 5940

    = 23760/-

    SR X ATW

    4 x 5940

    = 23760/-

    SR X ATP

    4 x 5940

    = 23760/-

    AR X ATP

    29700/-

    Here,

    SR = Standard rate of labour per hour

    AT = Actual rate of labour per hour

    ST = Standard time for actual output

    ATw = Actual time worked.

    ATp = Actual time paid for

    SM = Total Actual time worked in standard mix ratio.

    Note : - (1) It is assumed that ATp = ATw

    (2) In this question only one type of labour is there therefore SM = ATw.

    SR = 4/- per hour

    ST = 2.5 hours per unit x 2160 units = 5400 hours

    ATp = ATw = SM = 5940 hours

    Labour cost variance = (SR x ST) – (AR x ATp) = 21600 – 29700 = 8100/- (A)

    Labour rate variance = (SR x ATp) – (AR x ATp) = 23760 – 29700 = 5940/- (A)

    Labour Idle time variance = (SR x ATw) – (SR x ATp) = NIL

    Labour Mix Variance

    = (SR x SM) – (SR x ATw) = NIL

    Labour Efficiency Variance = (SR x ST) – (SR x SM) = 21600 – 23760 = 2160 (A)

    QN 4. Answer any three of the following :

    [3 x 3 = 9 marks]

    (i) Standard Time for a job is 90 hours. The hourly rate of Guaranteed wages is Rs. 50. Because of the saving in time

    a worker a gets an effective hourly rate of wages of Rs. 60 under Rowan premium bonus system. For the same saving

    in time, calculate the hourly rate of wages a worker B will get under Halsey premium bonus system assuring 40% to

    worker.

    (ii) Explain briefly, what do you understand by Operating Costing. How are composite units computed ?

    (iii) The following information relating to a type of Raw material is available :

    Annual demand

    2000 units

    Unit price

    Rs. 20.00

    Ordering cost per order

    Rs. 20.00

    Storage cost

    2% p.a.

    Interest rate

    8% p.a.

    Lead time

    Half-month

    Calculate economic order quantity and total annual inventory cost of the raw material.

    (iv) List the eight functional budgets prepared by a business.

    Ans (4) (i) Time Allowed = 90 hours




    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com )

    7

    Time taken = x hours (Assumed)

    Time saved = 90 – x

    Total Earning of the worker under Rowan System

    Total = Time wages + Bonus Earning

    TT

    60x = (X x 50) + ---- x TS x Guaranteed wages per hour

    TA

    X

    60 x = 50 x + ----- x (90 – x) x 50

    90

    50 x2

    10x = 50x - -------

    90

    50x2

    ------ = 50x – 10x

    90

    50x2 = 40x X 90

    40x X 90

    2

    x = ------------

    50

    2

    x = 72 x

    x = 72 hours

    TT = Time Taken (Hours)

    TA = Time Allowed ( ” )

    TS = Time Saved ( ” )

    Total earning of the worker under halsey scheme (40%) For the same savings in time

    Total Earning

    =

    =

    =

    =

    Time wages + Bonus

    Time wages + 50% of time saved x Guaranted wages

    (50% x 72 hours) + 50% [18 hours x 50/-]

    3600/- + 450/- = 4050 /-

    Total Earning

    -----------------

    TT

    4050 /-

    --------- = 56.25/-

    72 hrs

    Hourly Earning of worker B =

    =

    Qn. 4(ii) MEANING OF OPERATING COSTING : It is a method of ascertaining costs of providing or operating a

    service. This method of costing is applied by those undertakings which provide services rather than production of

    commodities. The emphasis under operating costing is on the ascertainment of cost of services rather than on the

    cost of manufacturing a product. This costing method is usually made use of by transport companies; gas and

    water works departments, electricity supply companies, canteens, hospitals, theatres, schools, etc.

    Composite units i.e, tonnes Kms, quintal Kms. etc may be computed in two ways -

    i)

    Absolute (Weighted average) tonnes-kms., quintal kms., etc. : Absolute (weighted) tonnes kms, are

    the sum total of tonnes kms., arrived at by multiplying various distances by respective load quantities carried.




    ii)

    8

    Commercial (simple average) tonnes Kms., quintal Kms etc. : Commercial (simple average) tonnes

    Kms., are arrived at by multiplying total distance kms., average load quantity.

    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com )

    2AB

    Economic order quantity =

    ------



    C

    A = Annual Consumption = 2000 units assuming consumption ratio of finished goods & Raw material is 1:1

    B= Ordering Cost per order = 20/-

    C = Carrying cost per unit per annum = (2% + 8%) of Purchase price

    = 10% of Rs. 20/- = 2/- per unit p.a.

    2AB

    ------

    C

    2 X 2000 x 20

    ---------------- = 200 units

    2

    Ans 4 (iii)

    EOQ =



    =



    Total Annual Inventory cost of Raw Material

    = Inventory Purchase cost + Inventory Holding Cost + Inventory Carrying Cost

    = 40000/- + 200/- +200/- = 40400/-

    Inventory Purchase Cost = 2000 units @ 20/- p.u. = 40000/-

    AB

    ---------

    EOQ

    2000 X 20

    ---------------

    200

    200/-

    ”

    ”

    Holding Cost =

    =

    =

    ”

    ”

    Carrying Cost

    EOQ x C

    200 units x 2/-

    = ---------- = ------------------

    2

    2

    = 200/-

    QN 4 (iv) List of eight functional budgets prepared by a business are –

    1. Sales Budget

    2. Production Budget

    3. Production Cost Budget

    4. Raw Material Consumption Budget

    5. Raw Material Purchase Budget

    6. Direct Labour Budget

    7. Factory/Manufacturing Overheads Budget

    8. Administration Overheads Budget etc.

    5. Answer any five of the following : .

    [5 x 2 = 10 marks]

    (i) Explain briefly the limitations of Financial ratios.

    (ii) What do you understand by Business Risk and Financial Risk ?

    (iii) Differentiate between Factoring and Bills discounting.

    (iv) Differentiate between Financial Management and Financial Accounting.

    (v) Y Ltd. retains Rs. 7,50,000 out of its current earning. The expected rate of return to the shareholders. If they

    had invested the funds elsewhere is 10%. The brokerage is 3% and the shareholders came in 30% tax bracket.

    Calculate the cost of retained earning.

    (vi) From the informations given below calculate the amount of Fixed assets and

    Proprietor's fund.

    Ratio of fixed assets to proprietors fund =

    0.75

    Net working capital

    =

    Rs. 6,00,000

    Ans. 5 (i) Limitations of Financial ratios




    9

    (a) Financial statements do not represent a complete picture of the business, but merely a collection of facts which

    can be expressed in monetary terms. These may not refer to other factors which affect performance.

    (b) Over use of ratios as controls on managers could be dangerous, in that management might concentrate more on

    simply improving the ratios than on dealing with the significant issues. For example, the return on capital

    employed can be improved by reducing assets rather than increasing profits.

    (c) Ratios are interconnected. They should not be treated in isolation. The effective use of ratios, therefore, depends

    on being aware of all these limitations and ensuring that, following comparative analysis, they are used as a

    trigger point for investigation and corrective action rather than being treated as meaningful in themselves.

    Qn 5 (ii) Business Risk : It is concerned with the operation of any firm. The cost structure of the any firm gives

    rises to business risks because of the existence of fixed nature of costs.

    Financial Risk : It indicates the effects on earnings by rise of fixed cost funds. It refers to the use of debt in the

    capital structure. Financial risk arises when a firm deploys debt funds with fixed charge.

    Ans. 5 (iii)

    1.

    2.

    3.

    4.

    5.

    6.

    7.

    8.

    9.

    10.

    Factoring

    It is also called ‘Invoice factoring’.

    In this, the parties are viz., client, factor and

    debtor.

    It is broad in scope.

    It is management of book debts.

    Maximum time is 6 months.

    Grace time is not given.

    Bad debts protection is given for extra

    commission.

    There is no specific Act.

    Settlement : No such provision.

    Provision of advance payment on book debts is

    available.

    1.

    2.

    3.

    4.

    5.

    6.

    7.

    Bills discounting

    It is also called ‘Invoice discounting’.

    In this, the parties are : drawer, drawee and

    payee.

    It is narrow in its scope.

    It is a sort of borrowing from commercial banks.

    Maximum time is 3 months.

    Grace time is 3 days.

    Protection is allowed for del credre commission.

    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com)

    8. Negotiable Instruments Act applies.

    9. Settlement : Notary public.

    10. No such provision is available.

    Ans 5 (iv) Difference between Financial Management and Financial Accounting :

    Just as production and sales are major functions in an enterprise, finance too is an independent specialized function

    and it is well knit with other functions. Financial management is a separate management area. In many organizations

    accounting and finance functions are clubbed and the finance function is often considered as part of the functions of

    the Accountant. But the Financial management is something more than an art of accounting and book keeping in the

    sense that, accounting function discharges the function of systematic recording of transactions relating to the firm’s

    transactions in books of account and summarizing the same for presenting in financial statements viz, Profit and loss

    account and Balance sheet, Funds flow and Cash flow statements. The finance manager will make use of the

    accounting information in analysis and review of the firm's business position in decision making. In addition to the

    analysis of financial information available from the books of account and records of the firm, a Finance manager uses

    the other methods and techniques like capital budgeting techniques, statistical and mathematical models and

    computer applications in decision making to maximize the value of the firm's wealth and value of the owners' wealth.

    In view of the above, finance function is a distinct and separate function rather than simply an extension of accounting

    function. Financial management is the key function, many firms prefer to centralize the function to keep constant

    control on the finances of the firm. Any inefficiency in Financial management will be concluded with a disastrous

    situation. But, as far as, the routine matters are concerned, the finance function could be decentralized with adoption

    of responsibility accounting concept. It is advantageous to decentralize accounting function on to speedup the process

    of information. But since the accounting information is used in taking financial decisions, proper controls should be

    exercised on accounting function in processing of accurate and reliable information to the needs of the firm. The

    centralization or decentralization accounting and finance functions mainly depend on the attitude of the top level

    management.

    Ans. 5. (v) Cost of Retained Earnings : Kr x Retained Earnings

    Kr = (D – I) (1 – t)

    Where Kr = Cost of Retained Earnings

    D = Opportunity Cost of Capital = 10%

    I = Incidental cost = 3%




    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com)

    10

    t = tax rate = 30%

    Kr = (10% - 3%) x (1 - 0.30)

    = 4.9 %

    Cost of Retained Earnings : Kr x Retained Earnings = 4.9% x Rs. 7,50,000 = Rs. 36,750

    Ans. 5. (vi) Proprietor Fund = Fixed Assets + Working Capital

    Fixed Assets

    ---------------- = 0.75

    Proprietor Fund

    Fixed Assets

    -------------------------------- = 0.75

    Fixed Assets + Working Capital

    Fixed Assets

    -------------------------------- = 0.75

    Fixed Assets + Rs. 6,00,000

    0.75 Fixed Assets + Rs. 4,50,000 = Fixed Assets

    Therefore Fixed Assets = Rs. 4,50,000 = Rs. 18,00,000

    0.25

    Proprietor Fund = Fixed Assets + Working Capital

    = 18,00,000 + 6,00,000 = Rs. 24,00,000

    Qn. 6. The Balance Sheets of a Company as on 31st March, 2008 and 2009 are given below :

    Liabilities

    31.3.08

    31.3.09

    Assets

    31.3.08

    31.3.09

    Rs.

    Rs.

    Rs.

    Rs.

    Equity share capital

    14,40,000

    19,20,000 Fixed assets

    38,40,000 45,60,000

    Capital reserve

    -

    48,000 Less depreciation

    11,04,000 13,92,000

    General reserve

    8,16,000

    9,60,000

    27,36,000 31,68,000

    Profit & Loss A/c

    2,88,000

    3,60,000 Investment

    4,80,000

    3,84,000

    9% debentures

    9,60,000

    6,72,000 Sunder debtors

    12,00,000 14,00,000

    Sundry creditors

    5,50,000

    5,90,000 Stock

    1,40,000

    1,84,000

    Bills payables

    26,000

    34,000 Cash in hand

    4,000

    -

    Proposed dividend

    1,44,000

    1,72,800 Preliminary Expenses

    96,000

    48,000

    Provision for tax

    4,32,000

    4,08,000

    Unpaid dividend

    -

    19,200

    46,56,000

    51,84,000

    46,56,000 51,84,000

    Additional informations:

    During the year ended 31st March, 2009 the company :

    (i) Sold a machine for Rs. 1,20,000; the cost of machine was Rs. 2,40,000 and depreciation provided on it was Rs.

    84,000.

    (ii) Provided Rs. 4,20,000 as depreciation fixed assets.

    (iii) Sold some investment and profit credited to capital reserve.

    (iv) Redeemed 30% of the debenture @ 105

    (v) Decided to write off fixed assets costing Rs. 60,000 on which deprecation amounting to Rs. 48,000 has been

    provided.

    You are required to prepare Cash Flow Statement as per AS-3.

    [15 marks]

    Ans. 6

    Cash flow operating activities

    Increase in P/L

    Cash Flow Statement

    72000




    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com)

    11

    Transfer to G/ Reserve

    Transfer to Capital Reserve

    Proposed Dividend

    Depreciation

    Preliminary Exps. W. off

    Loss on sale of machinery (w.n.2)

    Profit on sale of investment (w.n.4)

    Loss on redemption of debenture

    Depreciation w. off on F.A. (w.n. 3)

    F. Assets W. off

    Opening Cash before w. capital changes

    Changes in working capital

    Increase in Debtor

    (200000)

    Increase in Stock

    (44000)

    Increase in Creditor

    40000

    Increase in B/P

    8000

    Cash generated from operations

    Less – I. Tax paid

    Cash flow from investing activities

    Sale of machinery

    Sale of investment

    Purchase of F. Assets

    Cash from Investing activities

    144000

    48000

    172800

    420000

    48000

    36000

    (48000)

    14400

    (48000)

    60000

    919200

    (196000)

    723200

    (24000)

    6,99,200 (A)

    120000

    144000

    (1020000)

    (75600) (B)

    Cash flow from financing activities

    Payment of Dividend (144000 – 19200) =

    Redemption of Debentures

    Issue of equity share capital

    Cash from financing activities

    Total Cash generated (A + B + C)

    Add – Cash at the beginning of the years

    Cash at the end of the years

    W.N. 1

    (124800)

    (302400)

    480000

    52800

    (4000)

    4000

    NIL

    (C)

    Fixed Asset A/c

    To Balance b/d

    ” Cash A/c (B/F)

    (Purchase of F.A.)

    3840000

    1020000

    4860000

    By Sales of machinery

    ” P/L A/c (W. off)

    ” Balance c/d

    240000

    60000

    4560000

    4860000

    W.N. 2

    Machinery A/c

    To Balance b/d

    240000

    By Depreciation

    ” Cash A/c

    ” P/L A/c (Loss on sale)

    84000

    120000

    36000

    240000

    240000

    W.N. 3

    Depreciation A/c

    To Machinery A/c

    ” P/L (W. off)

    84000

    48000

    By Balance b/d

    ” P/L A/c

    1104000

    420000




    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com)

    12

    1524000

    ” Balance c/d

    1392000

    1524000

    W.N. 4

    Investment A/c

    To Balance b/d

    ” P/L (Profit on sale)

    480000

    48000

    528000

    By Balance c/d

    ” Cash A/c (Sale of Investment)

    384000

    144000

    528000

    W.N. 5

    Debenture A/c

    105

    To Cash A/c (960000 x 30% x ---- )

    100

    ” Balance c/d

    302400

    672000

    974400

    By Balance b/d

    ” P/L (Loss on redemption)

    960000

    14400

    974400

    7. (a) From the following Financial data of Company A and Company B :

    Prepare their Income statements.

    Company A

    Company B

    Rs.

    Rs.

    Variable cost

    56,000

    60% of sales

    Fixed cost

    20,000

    -

    Interest expenses

    12,000

    9,000

    Financial Leverage

    5:1

    -

    Operating Leverage

    -

    4:1

    Income tax rate

    30%

    30%

    Sales

    -

    1,05,000

    [8 marks]

    (b) A hospital is considering to purchase a diagnostic machine costing Rs. 80,000. The projected life of the machine

    is 8 years and has an expected salvage value of Rs. 6,000 at the end of 8 years. The annual operating cost of the

    machine is Rs. 7,500. It is expected to generate revenues of Rs. 40,000 per year for eight years. Presently, the

    hospital is outsourcing the diagnostic work and is earning commission income is Rs. 12,000 per annum; net of taxes.

    Required :

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

    (i) Net Present Value method

    (ii) Profitability Index method.

    PV factors at 10% are given below :

    Year 1

    Year 2

    Year 3

    Year 4

    Year 5

    Year 6

    Year 7

    Year 8

    0.909

    0.826

    0.751

    0.683

    0.621

    0.564

    0.513

    0.467

    [8 marks]

    Ans 7 (a)

    Particulars

    Sales

    - V. Cost

    Contribution

    Income statement of company A & B :

    A

    91000

    56000

    35000

    B

    105000

    63000

    42000




    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com)

    - F. Cost

    EBIT

    - Interest

    FBT

    - Tax @ 30%

    EAT

    Note

    (1) EBT means Earning Before Tax

    (2) EAT

    ”

    ”

    after tax.

    Company A

    EBIT

    Financial Leverage = ---------------------

    EBIT – Interest

    5

    EBIT

    ---

    =

    --------------

    1

    EBIT - 12000

    5 EBIT – 60000 = EBIT

    60000

    EBIT = -------- = 15000 /-

    4

    Contribution – Fixed Cost = EBIT

    Contribution – 20000 = 15000

    Contribution = 35000 /-

    Sales = Contribution + Variable Cost

    = 35000 + 56000 = 91000 /-

    20000

    15000

    12000

    3000

    900

    2100

    13

    31500

    10500

    9000

    1500

    450

    1050

    Company B

    Contribution = Sales x P.V. ratio

    = 10500 x (1 - .60) = 42000 /-

    Contribution

    --------------------------------

    Contribution – Fixed Cost

    Operating Leverage =

    4=

    42000

    -------------------------

    42000 – Fixed Cost

    168000 – 4 Fixed Cost = 42000

    168000 - 42000

    Fixed Cost = -------------------

    4

    = 31500 /-

    EBIT

    --------------------

    EBIT – Interest

    42000 – 31500

    ------------------ =

    10500 – 9000

    Financial Leverage =

    =

    7

    Ans. 7 (b) Calculation of Depreciation

    Acquisition Cost – Salvage values

    80000 - 6000




    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com)

    14

    =

    ----------------------------------------

    Life of asset

    =

    ----------------

    8

    =

    9250 /- p.a.

    Note : In this question tax rate is not given therefore we assumed that tax rate is 40%

    NPV method

    Calculation of Cash inflow

    Sales

    -

    Cost

    Operating Cost

    7500

    Opportunity Cost

    12000

    Depreciation

    9250

    EBT

    -

    Tax @ 40%

    EAT

    +

    Depreciation

    Cash flow

    Annuity factor @ 10% for 8 yr

    Present Value of cash in flow

    Add Present Value of salvage value

    (6000 x 0.467)

    Total Present Value of cash inflow

    Less – Present Value of cash outflow

    NPV

    =

    Profitability Index method

    P/V of cash inflow

    PI =

    ----------------------

    P/V of cash outflow

    40000

    28750

    11250

    4500

    6750

    9250

    16000

    5.334

    85344

    85344

    2802

    88146

    80000

    8146

    88146

    ------- =

    80000

    =

    1.1 times.

    Conclusion Under both methods it is profitable to purchase new machine.

    8. Answer any three of the following :

    [3 x 3 = 9 marks]

    (i) Explain the two basic functions of Financial Management.

    (ii) Explain the following terms :

    (a) Ploughing back of profits

    (b) Desirability factor.

    (iii) What do you understand by Weighted average cost of Capital ?

    (iv) There are two firms P and Q which are identical except P does not use any debt in its capital structure while Q has

    Rs. 8,00,000, 9% debentures in its capital structure. Both the firms have earning before interest and tax of Rs.

    2,60,000 p. a. and the capitalisation rate is 10%. Assuming the corporate tax of 30%, calculate the value of these

    firms according to MM Hypothesis.

    Qn 8. (i) TWO BASIC FUNCTIONS OF FINANCIAL MANAGEMENT :

    (1) Procurement of funds : - Procurement of fund includes followings:-

    1. Identification of finance sources.

    2. Cultivating sources of funds and raising funds.

    3. Determination of finance mix.

    4. Allocation of profit between dividends and retention of profits i.e. internal fund

    generation.

    (2) Utilisation of funds :- Effective utilisation of fund is one of most important work under financial management

    because in present developed financial system procurement of fund is more easy then its effective utilisation.

    Ans (8) (ii) (a) Ploughing back of profits : It is a management tool under which management does not distribute

    the whole of the profits earned during an year to the owners of capital but it retains a part of it to be utilized in future

    for financing the schemes of development & betterment of the company and/or meeting the special fixed or working

    capital requirements of the concern. It is the best device to finance the schemes of expansion, modernization and




    15

    betterment for an existing company. Ploughing back or re-investment of profits is an aspect of sound financial

    management. It raises no problem or complication as does borrowings either from the banks or the public. The

    reserves may be built up during a continuous spell of prosperous period by following the conservative dividend policy

    and without touching the capital structure of the company and may be used during emergency. It will help the

    company during depression however serious. According to this device, a part of the total earnings may be transferred

    to various reserves eg General Reserve, Repair and Renewal Reserve fund etc. Sometimes secret reserves are created

    by the directors without the knowledge of the shareholders to make the financial position of the company sound.

    Ans. (8) (ii) (b) Desirability factor : - It is also called Profitability Index. The desirability factor is the present value

    of an anticipated future cash inflows divided by the initial outlay. A project is acceptable if its desirability if equal to or

    more than one. When more than one project proposals are evaluated, for selection of one among them, the project

    with higher desirability factor will be selected. Mathematically, desirability factor can be expressed as follows :

    Present value of cash inflows

    -----------------------------------

    Present value of cash outflows

    Advantage

    1. This methods also uses time value of money concept

    2. It is a better project evaluation technique than NPV.

    Disadvantages

    1. If fails as a guide to resolve capital rationing when projects are indivisible

    2. Sometimes project with a lower desirability factor chosen generates cash flows in such a way that another new

    project can be started within one or two years and the total NPV exceeds the NPV of the project with maximum

    desirability factor.

    The desirability factor approach cannot be used indiscriminately without examining other type of alternatives of

    projects.

    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com )

    Qn. 8. (iii) Weighted average cost of capital: The composite or overall cost of capital of a firm is the weighted

    average of the costs of various sources of funds. Weights are taken to be the proportion of each source of funds in the

    capital structure. The weight to be used can be either book value weights or market value weights. While taking

    financial decisions this overall or weighted cost is used. For calculating WAC following steps should be followed:-

    Step. 1. Calculate individual cost of capital as above.

    Step. 2. Calculate Weights:

    Weights for

    How to calculate

    1. Equity Capital

    Equity capital / Total capital employed

    2. Retained earning

    Retained earning/Total capital employed

    3. Preference share

    Preference share / Total capital employed

    4. Loans, debenture, deposit

    Loan, debenture, deposit/Total Capital employed.

    Step. 3. WAC = Step 1 X Step 2 (Individual for each items)

    Note: One may consider market value of capital instead of books value of calculating weights but normally book value

    is taken. If we take market value then market value is taken for numerator and denominator both. But market value is

    taken only when question is required.

    Qn. 8. (iv)

    Value of unlevered firm = Value of equity

    = Earnings available for equity shareholders

    ------------------------------------------- =

    Equity Capitalisation rate

    1,82,000 (WN 1)

    ----------------- = 18,20,000

    10%

    Value of levered firm = Value of unlevered firm + Value of Debt (tax rate)

    = 18,20,000 + (8,00,000 X 30%)

    = 20,60,000

    WN 1 – Calculation of Earnings available for equity shareholders

    EBIT

    2,60,000

    Less : Interest

    ----




    Solved Answer COST & F.M. CA IPCC Nov. 2009 (Collected by www.onlinequestionpapers.com)

    16

    EBT

    Less : Tax @ 30%

    EAT

    -----------

    2,60,000

    78,000

    ------------

    1,82,000

    Attached Files Attached Files
    Last edited by Gyan Guru; 08-22-2011 at 05:48 PM.

 

 

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