` 17,280 ` 17,550 ` 16,250. [5 Marks] [5 Marks] ` 30 Lakhs ` 35 Lakhs. [5 Marks] 2. Inventory T/O = = ½ M. Averagee 1 M 1 M 1 M. Sales.

Size: px

Start display at page:

Download "` 17,280 ` 17,550 ` 16,250. [5 Marks] [5 Marks] ` 30 Lakhs ` 35 Lakhs. [5 Marks] 2. Inventory T/O = = ½ M. Averagee 1 M 1 M 1 M. Sales."

Neal Harper
6 years ago
Views:

1 Guideline nswers for ost ccounting and Financial Management Exam Date: Solution to Question (a): [5 Marks]. GP = 5% on Sales. OGSS = Sales less 5% GP thereon = 6,40,000 less 5% = 5,44,000 ost of Goods Sold 5,44, Inventory T/O = = verage Inventory verage Inventory = 5 times s. On solving, verage Inventory =,08, urrent ssets = 2.5 times of urrent Liabiities (since urrent Ratio is 2.5 times) = ,0000 = 2,40, losing alance of Debtors = urrent ssets less (Stock + ash) = 2,40,000 () 48,000 () 6,000 =,76, verage Debtors = (Open ning Debtors + losing Debtors) 80,000 +,76,000 = =,28, So, veragee ollection Period = veragee Debtors,28, = 360 = 72 days. redit Sales 6,40,000 Solution to Question (b):. Revised Selling Price 2. Variable ost 3. ontributionn 4. Revised Fixed osts 5. Desired ontribution 6.No. of units required to earn above ontribution [5 Marks] ( 50 less 0% %) 45 per unit Materials 20 + Variable Manufacturing ost 5 35 per unit ( 2) Givenn 27 Lakhs + dditional Promotion 3 Lakhs Fixed osts 30 Lakhs + Profit 5 Lakhs 35,00, per unit 30 Lakhs 35 Lakhs 3,50,,000 units M M Solution to Question (c): [5 Marks] ctual Sale Price = ctual Sale Value ctual Sale Quantity. omputation of ctual Sale Prices Product 2,350 = units Product 50,700 = 3 3,900 units Product 29,250 = 5,950 units 2. omputation of Revised ctual Quantity (RQ) 3. omputation of udgeted and ctual Margin Q Sold = ,900 +,950 = 6,500 units. Product udgeted Mix RQ,280,300 units 3,200 3,250 unitss,920,950 units udgeted Margin (M) = udg. Price Std ost ctual Margin (M) = ctual Price Std ost 20 6 = = = = = = 2 M 3. Margin pproach or Profit pproach (Impact on Profit) ol.(): Q M,280 units 4 = 5,20 3,200 units 2 = 6,400,920 units 3 = 5,760 ol.(2): RQ M,300 units 4 = 5,200 3,250 units 2 =6,500,950 units 3 =5,850 ol.(3) ): Q M 650 units 4 = 2,600 3,900 units 2 = 7,800,950 units 3 = 5,850 ol.(4): Q M 650 units 3 =,950 3,900 units 3 =,700,950 units 2 =3,900 7,280 7,550 6,250 7,550 3 M

2 Sales Margin Quantity Variance + Sales Margin Mix Variance = 7,280 7,550 = 7,550 6,250 = 270 F =,300 + Sales Margin Price Variance = 6,250 7,550 =,300 F Sales Margin Volume Variance = 7,280 6,250 =,030 + Sales Margin Price Variance b/fd as above =,300 F Sales Margin Variance = 7,280 7,,550 = 270 F randwise reakup of Variances (Margin pproach): (a) Sales Margin Quantity Variance = ol. () ol. (2) (b) Sales Margin Mix Variance = ol. (2) ol. (3) 80 F R 00 F R 90 F 2600,300 F RNil (c) Sales Margin Volume Variance (a+b)=ol. () ol. (3) 2,520,400 F R 90 F (d) Sales Margin Price Variance = ol. (3) ol. (4) 650 3,900 F R,950 (e) Sales Margin Variance (c+d)= ol.() ol. (4) 3,70 5,300 F R, F,300,030,300 F 270 F Solution to Question (d(i)): [5 Marks]. No. of Passengers =50 75% = No. of Kms per month = 5 buses trip 2 ways 50 kms 30 days =5,000. So, Number of PassengerKms = ,0000 = 5,62, Operating ost Sheet. Standing harges: Wages of Drivers, onductors and leaners 2,40, 000 Salaries of Office Staff,00, 000 Taxation, Insurance 30, 000 Interest & Other Expenses 2,00, 000 Depreciation. Running & Maintenance harges: Repairs and Maintenance 2,60, , 000 8,30,000 Diesel Oil and Other Oil ommission to Staff based on Takings 3,50, 000,30, 000 5,60,000. ost: ( + ) 3. ost per PassengerKm. = 3, 90, 000 5, 62, 500 = ,90,000 Solution to Question 2(a): Note: Power ost may be apportioned in the ratio of HP rating only, if Working Hours or Labour Hours are given in the question. ut if Machine Hours are given, it is better to apportion the Power ost in the combined ratio of HP rating Machine Hours, derived as under. HP Machine Hours 50, ,,000 80,000 5,000 25,0000 2

3 and asis Factory Rent ( on rea) (50 : 25 : 50 : 25 : 50) Power (on HP M/c hours) (50 : 80: 80: 5 : 25) Depreciation (on M/c Value) (20 : 40 : 20 : 0: 0) Sundries (on Direct Wages) (5 : 2 : 8 : : 2) Direct Materials of Service Departments (ctuals) Direct Wages of Service Departments (ctuals) OH before reapportionment Reapportionment of Serv.Dept. Exps (WN 2 below) X Y. Statement of OH 0,000 5,000 0,000 X 5,000 Y 0,000 40,000 5,000 8,000 8,000,500 2,500 25,000 2,000 4,000 2,000,000,000 0,000 25,000 0,000 40,000 5,000 0,000 90,000 2,000,000,000 2,000 3,000 3,000 42,000 27,,000 60,000 5,500 26,500,7,000 7,609 2,537 5,073 (6,90),69 Nil 6,95 9,866 Nil,40 (28,9) Nil OH (after re apportionment) Machine Hours OH Rate (in per Machine Hour) 66,524, ,,403 2, ,073 4, ,7,000 Note: Initially, the above statement is prepared upto OH (before reapportionment) stage. Thereafter, Simultaneous Equations are formulated and solved as indicated in WN 2 below. Thereafter, the above OH Statement is continued from reapportionment onwards. 2. Simultaneous Equations are framed and solved as under X = 5, %Y. So, X = 5, Y. Equation Y = 26, % X. So, Y = 26, X.. Equation 2 Substituting the value of X in Equation 2, we have, Y = 26,500 + ( 5,500 + Y) Y = 26,500 +,550 + Y Y Y = 28,050, i.e. Y = 28 8,050. So, Y = 28,050 = 28, Substituting the value of Y in Equation, we have X = 5,500 + ( 28,9) = 6,,90 20 Note: The values of X and Y obtained after solving the above Simultaneous Equations should be higher than the OH osts of these Service Departments obtained earlier. These bigger values are then used for OH re apportionment. Solution to Question 2(b):. Initial Investment = ost of New M/c Sale Value of existing M/c = 5,00,000 6,00,000 = 9,00, omputation of Incremental Depreciation Opening WDV Year 9,,00,000 Year 2 6,75,000 Year 3 5,06,250 Year 4 3,79,687 Year 5 2,84,765 Depreciation at 25% losing WDV 2,,25,000 6,,75,000,68,750 5,06,250,26,563 3,79,687 94,922 2,84,765 7,9 2,3,574 Note: lock ssets oncept is applied for depreciation purposes, since the ompany has several machines having 25% depreciation. Hence, dditional ost included in sset lock = Initial Investment of 9,00,000. Increase in Revenuee Savings in Operating ost (Note) 3. omputation of NPV Year,50,000,00,000 Year 2,50,,000,00,,000 Year 3,50,000,50,000 Year 4,50,000,50,000 Year 5,50,000,50,000 3

4 dd: dditional enefit dditional Depreciation (WN 2) dditional PT dditional Tax at 35% dditional PT dditional Depreciation dditional FT PVF at 0% dditional DFT Year 2,50,000 2,25,000 25,000 8,750 6,250 2,25,000 2,4, ,9,320 Year 2 2,50,,000,68,,750 8,,250 28,,438 52,,82,68,,750 2,2, ,83,,099 Year 3 3,00,000,26,563,73,437 60,703,2,734,26,563 2,39, ,79,72 Year 4 3,00,000 94,922 2,05,078 7,777,33,30 94,922 2,,28, ,55,876 Year 5 3,00,000 7,9 2,28,809 80,083,48,726 7,9 2,9, ,36,546 dditional DFT 8,74,553 Initial Investment NPV 9,00,000 (25, 447) Note: Maintenance Expenses of Existing Machine are expected to increase by 50,000 from the 6 year of installation, of which 3 years life already over at the time of Year 0 itself. onclusion: Since NPV is negative, the proposal is not financially viable. Solution to Question 3(a): [ arks]. Plant and Equipment ccount To balance b/d To Purchases ccount (bal. figure) rores 309 y Machinery Disposal /c 33 y balance c/d 442 rores ½ To Machinery disposal /c To balance c/d 2. ccumulated Depreciation ccount rores 5 y balance b/d y Profit and Loss /c Depreciation for 28 the year (bal. figure) 223 rores ½ ash Flow Statementt for the year ended 3 st March, 205 (Indirect Method) rores rores. SH FLOWS FROM OPERTING TIVITIES: Net Income as per P & L ccount 66 djustment for: Depreciation & amortization charges (WN 2) Loss on sale of equipment (given) 29 4 Operating ash Flow before Working apital hanges djustment for: Decrease in ccounts Receivables (270 80) Increase in Inventories ( ) Decrease in PrePaid Expenses ( 20 7) Decrease in ccounts Payable ( ) Increase in ccrued Liabilities ( 70 60) Increase in Deferred Income Tax ( 5 8) Net ash flow from / (used in) Operating ctivities (45) 3 (80)

5 rores rores. SH FLOWS FROM NVESTING TIVITIES: dditions to Fixed ssets Plant and Equipment (WN ) Decrease in Long Term Investments ( 75 60) (33) 5 Proceeds from sale of equipment 3 Net ash flow from / (used in) Investing ctivities. SH FLOWS FROM FINNING TIVITIES: (5) Increase in onds Payable ( 40 35) 95 ash Dividends paid (given) (48) Net ash flow from / (used in) Financing ctivities 47 D. Net Increase in ash and ash Equivalents (++) E. ash and ash Equivalents on F. ash and ash Equivalents on (D + E) 26 Solution to Question 3(b): (a) The Initial Investment earned interest for pril June and July September quarter, i.e. for 2 quarters. In this case, 6 R = = %, NK = 2 and ompounded mount = 80,000 ( + %) 2 = 80,, = 82, So, the additional amount invested on st Oct =,00,000 82,48 = 7,582 (b) The Time Deposit has earned interest compounded monthly for 2 quarters. 6 Here, R = = %, NK = 6, P =, 00, Required Maturity Value = P ( + R) NK 6 =,00,000 ( + %) =,00, = 2,03,038. (c) Interest Earned = st Deposit (82,48 80,000) + 2 nd Deposit (,03,038,00,000) = (2,48+3,038) = 5,456 Solution to Question 4(a):. reditors ccount Mar To ank (Payments made, given),05,000 ar 3ar To balance c/d (losing al, given) 5,000 Mar y balance b/d (Opg. al, given) y Purchases (bal. figure) 30,000 90,000,20,000,20, Finished Goods ontrol ccount ar To balance b/d (Opg FG, given) 75,000 Mar y OS /c (OGS, given) Mar To WIP trl (goods completed) ( b/f),86,000 3ar y balance c/d (lg.al, given) 2,6,000,95,000 66,000 2,6,000 Mar Note: 3. Factory OH ontrol ccount Various Expenses ( Debits, given) 45,000 Mar y WIP ontrol (absorbed, Note) 42,300 3ar y bal.c/d (underabsorbed)(b/f) 2,700 45,000 45,000 udgeted Factory Overheads 6,75,000 Factory OH Recovery Rate = = =.50 per Direct Labour Hour budg geted Direct Labour Hours 4,50,000 5

6 So, Factory OH applied to Production = ctual DLH FOH Recovery Rate = 28,200 hours.50 = 42,300 The difference in the Factory OH ontrol /c represents underabsorption (as computed in the Ledger / /c above), whichh is carried forward pending identificationn of reasons for difference into Normal and bnormal Reasons. lternatively, such underabsorpti on may be fully transferred to osting P&L ccount. 4. WIP ontrol ccount ar To balance b/d (Opg WIP, given) 6,000 Mar Mar To Stores Ledger ontrol /c (b/ f) 78,000 being Direct Materials onsumed Mar To Wages ontrol (Direct Wages) 28,200 hours 2.50 (Note b) 70,500 Mar To POH ontrol (bsorbed) (WNN 3) 42,300 3ar,96,800 y WIP ontrol /c (from WN 2) (FG tfr to Warehouse) y bal.c/d (lg.al, Note (a)),86,000 0,800,96,800 Notes: (a) Value of losing WIP = Direct Material ost + = given 6,000 + Direct Labour ost + pplied POH given 3,000 + (,200 hrs..50 ph) = 0,800 (b) Wage Rate Direct Labour Hour (based on information given for losing WIP) Direct Labour ost of WIP (on 3 st March) = 3,000,, and Direct Labour Hours of WIP =,200 hours 3,000 So, Direct Wage Rate per hour = = 2.50 per DLH.,20 00 hours Solution to Question 4(b): Product Production / Sale Quantity Sales Values Profit at 25/25 of Sale Price ost = Sales Less Profit Further Processing osts Estimated NRV at splitoff Joints osts apportioned in NRV ratio So, Joint ost Per unit P 8,000 units 6, 000 units 8, =,0,000 6, = 52,500 22,000 0,500 88,000 42,000 8,000 5 = 40,000 6,000 4 = 24,000 48,000 8,000 64,000 24,000 64,000 8,000= ,000 6,000= 4.00 Q,62,500 32,500,30,000 64,000 66,000 88,000 Solution to Question 5(a): Statement of Working apital Requirements ( pproach) Quantity units. urrent ssets: Rate p.u. 4 Raw Material Stock (Note 2),08,000 = 8,308 units 52 RM ost = 80 6,64,640 WIP Stock Finished Goods Stock (Given) = 4,000 units (Given) = 8,000 units RM ost + 50% of Labour & OH = [ % of (30+60)] = 25 ost of Production = 70 5,00,000 3,60,000 Debtors (Note ) 8 96,000 =4,769 units 52 Sale Price = ,53,800 ash & ank balances Given 25,000 55,03,440 6

7 . urrent Liabilities: Quantity units Rate p.u. reditors (Note 3) 4, 6,308 = 8,947 units 52 RM ost = 80 7,5,760 Wages Payable (Note 4). 5,06,000 = 3,058 units ,740 8,07,500. Net Working apital 46,95,940 D. omputation of Maximum Permissible ank Finance under Tandon ommittee Norms: Method : 75% of (urrent ssets less urrent Liabilities) = 75% of ( 55,03,440 8,07,500) Method 2: 75% of urrent ssets less urrent Liabilities = (75% of 55,03,440) 8,07,500 35,2,955 33,20,080 Notes:. Units sold during the period = Units produced less losing Stock of FG =,04,0000 8,000 = 96,,000 units. 2. Raw Material onsumption is considered for Production, i.e. Units Sold + losing FG + losing WIP = 96,000 units + 8,000 units + 4,000 units =,08,0000 units. 3. reditors are consideredd for the Material Purchases, i.e. Issued for completed Production + Issued for WIP Stock + losing Stock of Raw Materials =,04,000 units + 4,000 units + 8,308 units =,6,308 units. 4. Wages Payable is considered for Labour ost, i.e. Incurred on Production + losing WIP (50% complete) =,04, % of 4,000 =,06,000 units. 5. It is assumed that there is no lag in payment of OH, and it is paid as and when it arises. Solution to Question 5(b):. Production udget Sales (for 2 5 = 60 days) dd: losing Stock (for 5 and 20 days) Product Product (Given) 3,600 units (Given) 4,800 units ,600 = 900 un nits 4,,800 =,600 units Sub Opening Stock udgeted Production Raw Materials required per unit udgeted Raw Materials usage Direct Labour Hours required per unit Std Hours for budgeted production 4,500 units (Given),020 units 3,480 units 5 kg 3,480 5 = 7,4000 kg 5 hrs 3,480 5 = 7,400 hrs 6,400 units (Given) 2,400 units 4,000 units 3 kg 4,000 3 = 2,000 kg 4 hrs 4,000 4 = 6,000 hrs dd: 2. Material Purchase udget omputation udgeted Raw Materials Usage (for 60 days) 7,400 kg + 2, 000 kg (WN ) losing Stock (for 0 days consumption) 0 29, Sub Opening Stock of Raw Materials Given udgeted Purchases ost of Materials to be purchased at 2 per kg 3. Labour Hours and ost udget omputation Standard Hours for udgeted Production 7,400 hrs + 6,000 hrs Result 29,400 kg 4,900 kg 34,300 kg 4,300 kg 30,000 kg 3,60,000 Result 33, 400 hours 7

8 dd: Revised Hours for Production at 80% efficiency Non Productive Downtime Hours Required to be worked / paid for Normal Working Hours alance Overtimee Hours required Wages Payable omputation Result 33, % 4, 750 hours 20% of 4,750 8, 350 hours 50, 00 hours (90 workers 60 days 8 hours) 43, 200 hours 6,900 hours (43,200 hours 8)+(6,900 hours 2) 4,28,400 Solution to Question 6(a): (i) Statement of Equivalent Production Process III Input Output Material Material Labour & OH Transfer from: % E.U % E.U % E.U Opg WIP Fresh Units,600 55,400 Opg WIP Fresh units,600 50, , , ,600 transfer 52,200 50,600 50,920 5,240 Normal Loss (5% of 52,800) 2,640 bnormal Gain (2,040) 00 (2,040) 00 (2, 040) 00 (2,040) losing WIP 4, , , ,00 Note: 57,000 52,760 5,,820 5,300. Production units = Opening units + Units transferred from Process II losing Units =,600 units + 55,400 units 4,200 units = 52,800 units 2. Normal Loss = 5% of Expected Production = 5% of [Opening WIP + Fresh Units losing WIP] = 5% (, ,6000 2,640) = 2, 400 units. Transfer out of Fresh Units = Transfer Less Transfer out of Opening WIP = 52,200,600 = 50,600 units. Labour and OH are complete to the same degreee of completion, hence considered as a single column here. bnormal Gain is taken as 00% complete in all respects, since it represents actual good production. (ii) Statement of ost per Equivalent Unit ost Element osts Equi. Units ost per E.U. Material 6,23,250 () Scrap Value of Normal Loss ( 3,200) Net ost Material Labour Overheads 6,0,050 2,2,400 96,420 56,400 52,760 5,820 5,300 5, ,75, 270 Note: alculations may be made upto two places after decimal. (iii) Statementt of ost pportionment (a) Opg WIP = = =,32, Item (b) Fresh Units (c) bnormal Gain (d) losing WIP Material at 50, (2,040) , = Material at 50, = (2,040) = 2, = Labour at 50, (2,040) ,, = OH at 50, (2,040) , /eu = 5,85,073 = 23,588 48, / eu 2,07,399 8,362 2, / eu = 95,03 = 3,834 3, / eu = 55,630 = 2,243 = 2,309 3,29 9,43,205 38,027 66,868 6,57,224 2,29,23,04,086 60,886 0,5,39 8

9 Qtty (iv) Process III ccount Qtty To Opening WIP b/d,600 24, 000 y Finished Goods ontrol /c 52,500 9,07,422 To Process II /c 55,400 6,23, 250 y Normal Loss (at 5 p.u.) 2,640 3,200 To Direct Materials 2,2, 400 y losing WIP c/d 4,200 66,874 To Direct Labour 96, 420 To Overhead 56, 400 To bnormal Gain 2,040 38, ,040 0,50,496 59,040 0,50,496 Solution to Question 6(b):. ssets T/O= Sales Fixed ssets + urrent ssets = 2.5 times. So, Sales 30,00, ,00,000 = 2.5 Hence, Sales = ,00,000 =,20,00,000 Sales Variable osts ontribution Fixed osts EIT Interest ET Tax at 30% 2. Profitability Statement (to compute EPS and DL) omputation ET = Residual Earnings (since there is no PS) Re sidual Earnings EPS =,00,000 Equity Shares WN, 20,00,000 Given 60% (72,00,000) Sales less Variable osts 48,00,000 Given (28,00,000) ontribution less Fixed osts 5% on Debt 28,00,000 20,00,000 (4,20,000) EIT less Interest 5,80,000 30% on ET (4,74,000) ET less Tax,06,000,06,000.06,00,000 ombined Leveragee (DL) = ontribution ET 48,00,000 5,80, times Solution to Question 6(c):. Loan required = 25% of 20 Lakhs 2. Interest on Loan = ( 2,00,000 0%) + ( 3,00,000 3%) = 20, ,000 = Interest (00% Tax Rate) 3. K d = = 59, 000 (00% - 30%) = Net Pr oceeds of Issue Rs. 5, 00, K r = K e = DPS MPS0 + g = 2 50% 0% + 0% = % + 0% = K o = (K d W d ) + (K e W e ) = (8.26% 25%) + (2% 75%) = Result 5,00,000 59, % 2.00% 7.82% Note: DPS has been considered in computation of K e. lternatively, EarningsGrowth model may also be applied. Shareholders Personal Tax Rate is not considered since Dividends are exempt from Tax in their hands. 9

10 Solution to Question 7(a):. Sunk ost: It is a cost which has already been incurred or sunk in the past. It is not relevant for decision making. Thus, if a Firm has obsolete stock of materials originally purchased for 50,0000 which can be sold as scrap now for 8,0000 or can be utilised in a special job, the value of stock already available 50,000 is a sunk cost and is not relevant for decision making. 2. ommitted ost: It is a cost in respect of which decision has already been taken, and such decision cannot be altered, e.g. entering into irrevocablee agreements for Rent, Technical ollaboration, etc. ommitted osts are not relevant for decisionmaking. This should be contrasted with Discretionary osts, which are avoidable costs. Solution to Question 7(b):. n ngel Investor (also known as a usiness ngel or ngel or Informal Investor) is an affluent / wealthy individual who provides capital for a business startup, usually in exchange for onvertible Debt or Ownership Equity. 2. The basic distinction between ngel Financing and Venture apital Financing is that ngels typically invest their own funds, whereas Venture apitalists manage the pooled money of others in a professionallymanaged fund. 3. The difference however is narrowing down, when a small but increasing number of ngel Investorss organize themselves into ngel Groups or ngel Networks to share research and pool their investment capital, as well as to provide advice to their Portfolio ompanies. Solution to Question 7(c): Solution:. EOQ = 2, where = nnual Requirement of Raw Materials = 2,000 units (given) = uying ost per orderr = 2 per order (given) = arrying ost per unit per annum = 24% = 0.24 p.u. p.a. On substitution, EOQ = ROQ =,095 units. (approximately) M 2. ReOrder Level 30 = Safety Stock + Lead Time onsumption=(2,000 ) (2, ) =,5 500 units 3. Since Lead Time = 5 days, atleast 5 days material consumption requirements should be held in Stores, beforee an order 5 is placed for the next consignment of materials. So, the ideal stock level at the time of receipt =2,000 = 5 00 units lternatively, Ideal Stock Level can be taken as Safety Stock, i.e. 30 days consumptionn = (2,000 ) =,000 0 units. 360 Solution to Question 7(d):. asic omputations (a) Standard Output per day = 8 hours 2 units 6 days =. 360 (b) Wage Rate per hour (Time Rate) = = 45 per hour. 8 hours (c) Wage Rate per unit (Piece Rate) = = per unit. hours 2 units Workers 2. Statementt of Workers Earnings Standard Output (WN ) ctual Output 32 units 08 units Efficiency (%) 32 units 00 = % 08 units 00 = 2.5% units units 000 = 00% 0

11 Workers Daily wages Rate Incentive System Emerson s System Merrick s System Taylor s System Payment Rate (20 % %) = 57.5% of Time Rate 20% above Normal Piece Rate of 22.5 = 27 pu 25% above Normal Piece Rate of 22.5 = pu Earnings (8 hours 6 days %) = 3,,402 (08 units 27 p.u.) = 2,96 ( pu) = 2,700 Solution to Question 7(e):. ost Plus ontract:. Meaning: ost plus ontract is one where the ontract Price is ascertained by adding a percentage of profit to the total cost of the work. Such type of contracts is entered into when contract costs cannot be estimated with reasonable accuracy due to unstable conditions, e.g. material prices, labour, etc. 2. dvantages and Disadvantage es: (ny point) dvantages (a) The ontractor is assured of a fixed percentage of profit. There is no risk of incurring any loss on the contract. (b) It is useful particularly when the work to be done is not definitely fixed at the time of making the estimate. (c) ontractee can ensure himself about the cost of the contract, as he is empowered to examine the books and documents of the ontractor, to ascertain the accuracy of the costs. Disadvantages (a) There is no incentive to the ontractor to avoid wastages and achieve economy in production. (b) The ontractee may not know the actual cost of contract till its completion, unlike a Fixed Price ontract, where his outflow / cost is predetermined.. Fixed Price ontract: 2M. Meaning: Fixed Price ontract is one where the ontract Price is fixed and determined in advance at the time of entering into the agreement. Such type of contracts is entered into when contract costs can be reasonably estimated with a degree of certainty. 2. dvantages and Disadvantage es: (ny point) dvantages Disadvantages (a) The ontractee s outflow on the contract is known and (a) ontractor may resort to the use of materials of lesser quality / price to increase his profit margin. determined in advance. (b) ontractor may incur losses if he had not estimated the contract (b) It is useful specially when the costs properly or if price levels increase due to abnormal reasons, costs of work to be done can be after entering into the agreement. determined with certainty. (c) ontractee cannot have any idea about the real costs since he cannot examine the books of the ontractor.

Gurukripa s Guideline Answers to May 2012 Exam Questions IPCC Cost Accounting and Financial Management

Gurukripa s Guideline Answers to May 2012 Exam Questions IPCC Cost Accounting and Financial Management Question No.1 is compulsory (4 5 20 Marks). Answer any five questions from the remaining six questions