PRACTICE TEST PAPER - 2 INTERMEDIATE (IPC): GROUP I PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT

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1 PRACTICE TEST PAPER - 2 INTERMEDIATE (IPC): GROUP I PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. Working notes should form part of the answer. Time Allowed 3 Hours Maximum Marks 100 Solution 1 (a): (i) Break Even Point = Fixed Cost P/V ratio P/V ratio = Contribution x 100 Sales Contribution = Selling Price per unit Variable Cost per unit = `6 (` ) = `4.4 P/V ratio = `4.4 x 100 = 73.33% `6 Fixed Cost = Fixed Producing Cost + Fixed Selling Cost = (`4 + `0.8) x 10,000 units = `48,000 Break Even Point = `48,000 = ` % In units = ` = units `6 (ii) Desired Contribution to earn a profit of `11,000 = Total Fixed Cost + Profit required = `48,000 + `11,000 = `59,000 Desired Sales = Desired Contribution P/V ratio = `59,000 = `80, % (Units) = `80, = 13, units `6 Solution 1 (b): Difference between Minimum lead time Maximum lead time = 4 days Min. lead time = 4 days Or, Max. lead time = Min. lead time + 4 days (i) Average lead time is given as 6 days i.e. Max. lead time + Min. lead time = 6 days (ii) 2 Putting the value of (i) in (ii), Min. lead time + 4 days + Min. lead time = 6 days 2 Or, Min. lead time + 4 days + Min. lead time = 12 days Or, 2 Min. lead time = 8 days Or, Minimum lead time = 8 days = 4 days 2 Putting this Minimum lead time value in (i), we get Maximum lead time = 4 days + 4 days = 8 days (i) Maximum consumption per day: Re-order level = Max. Re-order period Maximum Consumption per day 1,60,000 units = 8 days Maximum Consumption per day Or, Maximum Consumption per day = 1,60,000 units = 20,000 units 8 days (ii) Minimum Consumption per day: Maximum Stock Level = Re-order level + Re-order Quantity (Min. lead time Min. Consumption per day) Or, 1,90,000 units = 1,60,000 units + 90,000 units (4 days Min. Consumption per day) Or, 4 days Min. Consumption per day = 2,50,000 units 1,90,000 units Or, Minimum Consumption per day = 60,000 units = 15,000 units 4 days

2 Solution 1 (c): Degree of Operating Leverage (DOL) Firm = % Change in Operating Income % Change in Revenue 25% = P 27% 32% = Q 25% R S 36% = % 40% = % Degree of Combined Leverage (DCL) = % Change in EPS. % Change in Revenue 30% = % 24% = % 21% = % 23% = % Solution 1 (d): Trading and Profit & Loss A/c for the year ending 31 st March, 2015 To Opening Stock 4,50,000 By Sales (WN 5) 90,00,000 To Purchase (bal.) 65,70,000 By Closing Stock (WN 7) 7,20,000 To Gross Profit c/d (WN 6) 27,00, ,20,000 97,20,000 To Interest on 14% Long term Debts (WN 8) 7,00,000 By Gross Profit b/d 27,00,000 To Income Tax (WN 3) 6,73,077 To Sundry expenses (bal.) 76,923 To Net Profit c/d (WN 2) 12,50,000 27,00,000 27,00,000 Working Notes: (1) Debt Equity Ratio = Long term Debt = 2 Equity 1 2 = `50,00,000 1 Equity Equity = `25,00,000 (2) Return of Equity = EAT x 100 Equity 50 = EAT x 100 `25,00,000 EAT = `25,00,000 x 50 = `12,50, (3) EBT = EAT = `12,50,000 = `19,23,077 (1 - t) (1 0.35) Income Tax = `19,23,077 x 35% = `6,73,077 (4) Capital Employed = 14% Long term Debt + Equity = `50,00,000 + `25,00,000 = `75,00,000 (5) Capital Turnover ratio = Sales Capital Employed 1.2 = Sales `75,00,000 Sales = `90,00,000 (6) Gross Profit = Sales x GP ratio = `90,00,000 x 30% = `27,00,000 (7) Closing Stock = 8% x Sales = 8% x `90,00,000 = `7,20,000 (8) Interest on 14% Long term Debts = 14% x `50,00,000 = `7,00,000 Solution 2 (a): (a) Calculation of Total wages and average wages per worker per month (i) When Current system of wages and incentive payment system is followed? Particulars Worst Case Optimal Case Best Case I. Standard Production (in units) 84,960 84,960 84,960 (45 hours x 4 units x 4 weeks x 118 workers) II. No. of units to be produced 42,400 84,960 1,27,400 III. Efficiency {(II I) x 100} 49.91% 100% % IV. Differential piece rate* `10 (`12.5 x 0.8) `15 (`12.5 x 1.2) `15 (`12.5 x 1.2) V. Total Wages (II x IV) `4,24,000 `12,74,400 `19,11,000 VI. Average wages per worker (V 118) `3, `10,800 `16,194.92

3 *For efficiency less than 100%, 83% of piece rate and for efficiency more than or equals to 100%, 125% of piece rate may also be taken. (ii) When workers demand for time rate wages and Halsey premium plan is accepted: Particulars Worst Case Optimal Case Best Case I. No. of units expected to be produced (units) 42,400 87,400 1,27,400 II. Standard no. units in an hour (units) III. Standard Hours (I II) 10,600 21,240 31,850 IV. Expected working hours (45 hours x 4 weeks x 118 workers) 21,240 21,240 21,240 V. Hours to be saved (III - IV) ,610 VI. Time wages (IV x `50) `10,62,000 `10,62,000 `10,62,000 VII. Incentive under Halsey Premium Plan (1/2 x Time saved x `50) - - `2,65,250 VIII. Total Wages (VI + VII) `10,62,000 `10,62,000 `13,27,250 IX. Average wages per worker (VIII 118) `9,000 `9,000 `11, (b) Calculation of gain or loss in the current monthly income of Mr. K: Wages earned in October 2015: Standard production unit (45 hours x 4 weeks x 4 units) 720 units No. of units produced 1,050 units Efficiency % Differential piece rate (refer the above part) `15 I. Total wages (1,050 units x `15) `15,750 Expected wages under the new scheme Standard hours (1,050 units 4 units) hours Expected hours to be taken (45 hours x 4 weeks) 180 hours Time Saved hours Time wages (180 hours x `50) `9,000 Incentive (1/2 x Time saved x `50) `2, II. Total expected wages `11, Loss from the proposed scheme (II - I) `4, Supporting the demand of colleague workers will cost `4, in the next month to Mr. K. Solution 2 (b): (a) Projects Cumulative Cash Inflows (Amount in `) Years A B C 1 1, , ,000 1,000 2, ,000 3,000 5, ,000 6,000 10,000 Initial Cash Outflows (Amount in `) Years A B C 0 5,000 1,000 5,000 Computation of Payback Period Years A B C Payback Period 3 Years 2 Years 3 Years (b) If standard payback period is 2 years, Project B is the only acceptable project. (c) Computation of NPV (Amount in `) Year PVF A B C Cash Flows PV Cash Flows PV Cash Flows PV 0 1 (5,000) (5,000) (1,000) (1,000) (5,000) (5,000) , , , , , ,000 2,254 2,000 1,503 3,000 2, ,000 2,049 5,000 3,415 NPV (1,011) 3,378 2,403 Advise: Accept Project B & C as they have Positive NPVs. (d) False (e) True

4 Solution 3 (a): (a) Overhead Distribution Statement Production Departments Service Departments Particulars Machine Shops Packing General Plant Stores Allocated Overheads: (`) (`) (`) (`) Indirect labour 8,000 6,000 4,000 11,000 Maintenance Material 3,400 1,600 2,100 2,800 Misc. supplies 1,500 2, Supervisor s salary , Cost & payroll salary , Total allocated overheads 12,900 10,500 1,03,000 14,400 Add: Apportioned Overheads 1,84,350 70,125 22,775 73,150 (As per Schedule below) Schedule of Apportionment of Overheads Item of Cost Basis 1,97,250 80,625 1,25,775 87,550 Production Departments Service Departments Machine Shops (`) Packing (`) General Plant (`) Stores (`) Power HP hours (7 : 1 : - : 2) 54,600 7, ,600 Rent Floor space (5 : 2 : 1 : 4) 30,000 12,000 6,000 24,000 Fuel & Heat Radiator sec. (3 : 6 : 2 : 4) 12,000 24,000 8,000 16,000 Insurance Investment (10 : 3 : 1 : 2) 7,500 2, ,500 Taxes Investment (10 : 3 : 1 : 2) 5,250 1, ,050 Depreciation Investment (10 : 3 : 1 : 2) 75,000 22,500 7,500 15,000 1,84,350 70,125 22,775 73,150 (b) Re-distribution of Overheads of Service Departments to Production Departments: Let, the total overheads of General Plant = a and the total overheads of Stores = b a = 1,25, b (i) b = 87, a (ii) Putting the value of b in equation no. (i) a = 1,25, (87, a) Or a = 1,25, , a Or 0.94 a = 1,52,040 Or a = 1,61,745 (approx.) Putting the value of a = 1,61,745 in equation no. (ii) to get the value of b b = 87, x 1,61,745 = 1,19,899 Secondary Distribution Summary Particulars Total (`) Machine Shops (`) Packing (`) Allocated and Apportioned overheads as per Primary distribution 2,77,875 1,97, , General Plant 1,61,745 80, , (1,61,745 x 5/10) (1,61,745 x 3/10) Stores 1,19,899 59, , (1,19,899 x 50%) (1,19,899 x 20%) 3,38, ,53, Solution 3 (b): (a) Computation of EPS (` in 000) Particulars Debt Preferred Stock Common Stock EBIT 1,500 1,500 1,500 Less: Interest on Existing Debt (3,600 x 10%) (360) (360) (360) Less: Interest on New Debt (4,000 x 12%) (480) - - Profit Before Tax 660 1,140 1,140 Less: 40% (264) (456) (456) Profit After Tax Less: Preferred Stock Dividend (`4,000 x 11%) - (440) - Earnings Available to Equity Holders No. of Equity Shares ,050 Earnings per Share (EPS) Additional No. Equity shares to be issued in Common Stock Plan = `40,00,000 = 2,50,000 shares `16 per share

5 Earnings Per Share (`) (b) Indifference Point: (EBIT - I) (1 - t) - PD = (EBIT - I) (1 - t) - PD N1 N % Debt Plan Common Stock Plan % Preferred Stock Plan 360 EBIT (` in 000) Debt Plan and Preferred Stock Plan (` in 000): (EBIT - 840) (1 0.4) = (EBIT 360) (1 0.4) There is no indifference point between the above financial plans. Preferred Stock and Common Stock Plan (` in 000): (EBIT - 360) (1 0.4) = (EBIT 360) (1 0.4) 800 1,050 EBIT = 3,440 Corresponding EPS = (3, ) (1 0.4) = `1.76 1,050 Debt Plan and Common Stock Plan (` in 000): (EBIT - 840) (1 0.4) = (EBIT 360) (1 0.4) 800 1,050 EBIT = 2,376 Corresponding EPS = (2, ) (1 0.4) = ` ,050 (c) For the current level of EBIT, Common Stock plan is preferable clearly. EBIT would need to increase from `15,00,000 to beyond `23,76,000, in order to make 12% Debt plan better than Common Stock plan. Solution 4 (a): Contract Account for the year To Materials issued 15,30,000 By Material Sold 2,40,000 To Direct Wages 10,12,500 By Costing P&L Account (Loss on sale of material) 15,000 Add: Outstanding 80,000 10,92,500 By Plant sold 80,000 To Plant purchased 7,50,000 By Plant at site 2,50,000 To Expenses 3,25,000 Less: Prepaid 68,000 2,57, ,093 1,500 2,376 3,440 By Material at site By Work-in-Progress: 73,000 To Site office expenses 3,00,000 -Work certified 45,00,000 To Notional profit c/d 17,68,500 -Work uncertified 5,40,000 50,40,000 56,98,000 56,98,000 To Costing P&L A/c (transfer) (WN) 4,11,967* By Notional Profit b/d 17,68,500 To Work-in-Progress (reserve) 13,56,533 # 17,68,500 17,68,500 Calculation of Estimated Profit (April 2014 to December 2016) Particulars Amount in (`) Total value of the Contract (A) 1,00,00,000 (i) Materials Costs: Materials Consumed in Materials Issued in Less: Closing Materials at Site 15,30,000

6 - Less: Unsuitable Materials Sold (73,000) Add; Materials to be Consumed (2,55,000) 12,02,000 - Materials to be issued 21,00,000 - Add: Opening materials at site 73,000 21,73,000 33,75,000 (ii) Direct Wages Cost: Direct Wages for Wages paid 10,12,500 - Outstanding at Closing 80,000 10,92,500 Direct Wages to be incurred: - Wages to paid 12,25,000 - Less: Outstanding at opening (80,000) - Add: Outstanding at closing 1,15,000 12,60,000 23,52,500 (iii) Plant Cost Plant used during : - Plant purchased 7,50,000 - Less: Plant disposed off (80,000) - Less: Closing plant at site (2,50,000) 4,20,000 Plant to be used - Additional amount to be spent 4,62,500 - Add: Opening plant at site 2,50,000 - Less: Residual value of plant (67,500) 6,45,000 10,65,000 (iv) Expenses Expenses incurred during : - Expenses paid 3,25,000 - Less: Prepaid at closing (68,000) 2,57,000 Expenses to be incurred - Expenses to be paid 5,40,000 - Add: Prepaid at opening 68,000 6,08,000 8,65,000 (v) Site office expenses paid in ,00,000 - Add: To be paid {(3,00,000 12) x 21 months} 5,25,000 8,25,000 (vi) Consultancy charges to be paid 1,57,500 Total Estimated Cost of the Contract (B) 86,40,000 Estimated Profit (A-B) 13,60,000 * The Profit to be transferred can be calculated using various formulae given in the working note, however, in this solution following the conservative approach, the lowest amount has been taken. # Profit transferred to the reserve will vary depending upon the formula of profit calculation adopted. Working Note: Profit to be transferred to Costing Profit and Loss Account = Estimated Profit x Work Certified x Cash received = `13,60,000 x `45,00,000 x `36,00,000 = `4,89,600 Contract price Work certified `1,00,00,000 `45,00,000 Or = Estimated Profit x Cost of work to date x Cash received = `13,60,000 x `32,71,1500* x `36,00,000 = `4,11,967 Estimated total cost Work certified `86,40,000 `45,00,000 Or = Estimated Profit x Cost of work to date = `13,60,000 x `32,71,500* = `5,14, Estimated total cost `1,00,00,000 Or = Estimated Profit x Value of Work Certified = `13,60,000 x `45,00,000 = `6,12,000 Value of Contract `1,00,00,000 *[Material consumed + Direct Wages + Plant used + Expenses + Site office expenses] [`12,02,000 + `10,92,500 + `4,20,000 + `2,57,000 + `3,00,000 = `32,71,500] Since, in the question estimated cost information is given, hence, the profit to be transferred in the Costing Profit & Loss account for the year , will be on the basis of estimated profit calculated as above. Profit to be transferred in Costing Profit & Loss account for the year on percentage of completion method as below: Notional Profit x 1 x Cash Received = `17,68,500 x 1 x `36,00,000 = `4,71,600 3 Value of Work Certified 3 `45,00,000 The detailed calculations have been shown for better understanding of the students.

7 Solution 4 (b): Statement showing computation of NPV Particulars Amount in (`) Reduction in Labour Cost (Net of tax) 5,200 `8,000 (1 0.35) Add: Tax Savings on A/c of Depreciation on new machine 1,750 `40,000 x Incremental CFAT 6,950 PVF (10% for 8 years) PVCI 37,078 Less: PVCO (40,000) NPV (2,922) Advice: Since NPV is negative, new machine should not be purchased. Solution 5: (a) Money in the future is worth less than the Similar Money Today due to several reasons: (i) Risk: There is uncertainty about the receipt of money in future. (ii) Preference For Present Consumption: Most of the persons and companies in general, prefer current consumption over future consumption. (iii) Inflation: IN an inflationary period a rupee today represents a greater real purchasing power than a rupee a year hence. (iv) Investment Opportunities: Most of the persons and companies have a preference for present money of availabilities of opportunities of investment for earning additional cash flow. (b) Business Risk and Financial Risk: Business risk refers to the risk associated with the firm s operations. It is an unavoidable risk because of the environment in which the firm has to operate and the business risk is represented by the variability of earnings before interest and tax (EBIT). The variability in turn is influenced by revenues and expenses. Revenues and expenses are effected by demand of firm s products, variations in prices and proportion of fixed cost in total cost. Whereas, Financial risk refers to the additional risk placed on firm s shareholders as a result of debt use in financing. Companies that issue more debt instruments would have higher financial risk than companies financed mostly by equity. Financial risk can be measured by ratios such as firm s financial leverage multiplier, total debt assets ratio etc. (c) Internal Rate of Return: It is that rate at which discounted cash inflows are equal to the discounted cash outflows. It can be stated in the form of a ratio as follows: Cash inflows = 1 Cash Outflows The rate is to be found by trial and error method. This rate is used in the evaluation of investment proposals. In this method, the discount rate is not known but the cash outflows and cash inflows are known. In evaluating investment proposals, internal rate of return is compared with a required rate of return, known as cut-off rate. If it is more than cut-off rate the project is treated as acceptable; otherwise project is rejected. (d) Different types of Packing Credit: Packing credit may be of the following types (i) Clean Packing credit: This is an advance made available to an exporter only on production of a firm export order or a letter of credit without exercising any charge or control over raw material or finished goods. It is a clean type of export advance. Each proposal is weighted according to particular requirements of the trade and credit worthiness of the exporter. A suitable margin has to be maintained. Also, Export Credit Guarantee Corporation (ECGC) cover should be obtained by the bank. (ii) Packing credit against hypothecation of goods: Export finance is made available on certain terms and conditions where the exporter has pledgeable interest and the goods are hypothecated to the bank as security with stipulated margin. At the time of utilising the advance, the exporter is required to submit along with the firm export order or letter of credit, relative stock statements and thereafter continue submitting them every fortnight and whenever there is any movement in stocks. (iii) Packing credit against pledge of goods: Export finance is made available on certain terms and conditions where the exportable finished goods are pledged to the banks with approved clearing agents who will ship the same from time to time as required by the exporter. The possession of the goods so pledged lies with the bank and is kept under its lock and key. (iv) E.C.G.C. guarantee: Any log given to an exporter for the manufacture, processing, purchasing, or packing of goods meant for export against a firm order qualifies for the packing credit guarantee issued by Export credit Guarantee Corporation. (v) Forward exchange contract: Another requirement of packing credit facility is that if the export bill is to be drawn in foreign currency, the exporter should enter into a forward exchange contact with the bank, thereby avoiding risk involved in a possible change in the rate of exchange. (Note: Students may answer any four of the above packing credits). Solution 6 (a): Dr. Stores Control Account Cr. To Balance b/d 54,250 By Work in progress 1,97,750 To Cost ledger control account 2,16,590 By Balance c/d 73,090

8 2,70,840 2,70,840 To Balance c/d 73,090 Dr. Work in Progress Cr. To Balance b/d 89,100 By Finished goods control 5,12,050 To Stores control 1,97,750 By Balance c/d 73,980 To Direct wages 85,480 To Production overhead control 2,13,700 5,86,030 5,86,030 To balance b/d 73,980 Dr. Finished Goods Control Cr. To Balance b/d 42,075 By Cost of goods sold 4,93,460 To Work-in-progress 5,12,050 By Balance c/d 60,665 5,54,125 5,54,125 To balance c/d 60,665 Dr. Production Overhead Control Cr. To Cost ledger control 2,08,220 By Work-in-progress 2,13,700 To Additional depreciation 12,500 By Under-absorbed 7,020 2,20,720 2,20,720 Solution 6 (b): Cash Flow Statement (for the year ended 31 st March, 2015) (Amount in `) (A) Cash Flows from Operating Activities Retained Earnings for the year (`18,75,000 `15,00,000) 3,75,000 Add: Transfer to General Reserve during the year (WN 6) 6,75,000 Add: Dividends Proposed during the year (WN 7) 9,10,000 Net Profits After Tax 19,60,000 Add: Provision for Tax made during the year 4,50,000 Net Profit Before Tax 24,10,000 Add: Premium on Redemption of Debentures written (`14,50,000 x 10%) 1,45,000 Add: Loss on Sale of machine written off (WN 3) 1,75,000 Add: Depreciation written off on Plant & Machinery (WN 3) 15,02,400 Add: Depreciation written off Building (WN 4) 6,80,000 Add: Goodwill written off (WN 8) 2,25,000 Operating Profits Before Working Capital changes 51,37,400 Add: Decrease in Stock 5,50,000 Less: Increase in Debtors (11,75,000) Add: Increase in Current Liabilities 2,50,000 Cash Flow from Operating Activities before Tax 47,62,400 Less: Income Tax paid (WN 5) (2,25,000) Cash Flows from Operating Activities (A) 45,37,400 (B) Cash Flows from Investing Activities Sale Proceeds of Investments (WN 2) 4,50,000 Add: Sale Proceeds of Plant & Machinery (WN 3) 6,25,000 Less: Purchase of Plant & Machinery (WN 3) (55,85,400) Cash Flows from Investing Activities (B) (45,10,400) (C) Cash Flows from Financing Activities Issue of Equity Share Capital (WN 1) 27,50,000 Less: Redemption of Debentures at a Premium [(`58,00,000 `43,50,000) x 110%] (15,95,000) Less: Payment of Dividends (WN 7) (7,50,000) Cash Flows from Financing Activities (C) (4,05,000) Changes in Cash & Cash Equivalents (A) + (B) + (C) 4,32,000 Add: Opening Cash & Cash Equivalents 14,93,000 Closing Cash & Cash Equivalents 19,25,000

9 Working Notes: (1) Equity Share Capital A/c By Bal. b/d 75,00,000 To Bal. c/d 1,02,50,000 By Bank A/c (CFF) 27,50,000 1,02,50,000 1,02,50,000 (2) Investment A/c To Bal. b/d 25,00,000 By Bank A/c (CFI) (Bal. fig.) (Sale) 4,50,000 To General Reserve A/c (Profit on Sale) 75,000 By Bal. c/d 21,25,000 25,75,000 25,75,000 (3) Plant & Machinery A/c To Bal. b/d 75,12,000 By Bank A/c (Sale) (CFI) 6,25,000 To Bank A/c (Purchase)(CFI) (Bal.) 55,85,400 By P&L A/c (Loss on Sale) 1,75,000 By P&L A/c (Dep.) (20% x `75,12,000) 15,02,400 By Bal. c/d 1,07,95,000 1,30,97,400 1,30,97,400 (4) Land & Building A/c To Bal. b/d 68,00,000 By P&L A/c (Depreciation) (Bal. fig.) 6,80,000 By Bal. c/d 61,20,000 68,00,000 68,00,000 (5) Provision for tax A/c To Bank A/c (CFO) 2,25,000 By Bal. b/d 22,50,000 To Bal. c/d 24,75,000 By P&L A/c 4,50,000 27,00,000 27,00,000 (6) General Reserve A/c To Bal. c/d 50,00,000 By Bal. b/d 42,50,000 By Investment A/c 75,000 By P&L Appropriation A/c (Bal. fig) (Transfer) 6,75,000 50,00,000 50,00,000 (7) Proposed Dividend A/c To Bank A/c (CFF) 7,50,000 By Bal. b/d 7,50,000 To Bal. c/d 9,10,000 By P&L Appropriation A/c 9,10,000 16,60,000 16,60,000 (8) Goodwill A/c To Bal. b/d 10,00,000 By P&L A/c (written off) 2,25,000 10,00,000 By Bal. c/d 7,75,000 10,00,000 10,00,000 Solution 7: (a) Treatment of over and under absorption of overheads are:- (i) Writing off to costing P&L A/c: Small difference between the actual and absorbed amount should simply be transferred to costing P&L A/c, if difference is large then investigate the causes and after that abnormal loss shall be transferred to costing P&L A/c. (ii) Use of supplementary Rate: Under this method the balance of under and over absorbed overheads may be charged to cost of W.I.P., finished stock and cost of sales proportionately with the help of supplementary rate of overhead. (iii) Carry Forward to Subsequent Year: Difference should be carried forward in the expectation that next year the position will be automatically corrected. This would really mean that costing data of two years would be wrong. (b) The Steps of standard costing is as below: (i) Setting of Standards: The first step is to set standards which are to be achieved. (ii) Ascertainment of actual costs: Actual cost for each component of cost is ascertained. Actual costs are ascertained from books of account, material invoices, wage sheet, charge slip etc.

10 (iii) Comparison of actual cost and standard cost: Actual costs are compared with the standards costs and variances are determined. (iv) Investigation of variances: Variances arises are investigated for further action. Based on this performance is evaluated and appropriate actions are taken. (v) Disposition of variances: Variances arise are disposed off by transferring it the relevant accounts (costing profit and loss account) as per the accounting method (plan) adopted. (c) Cash Budget is the most significant device to plan for and control cash receipts and payments. It plays a very significant role in effective Cash Management System. This represents cash requirements of business during the budget period. The various role of cash budgets in Cash Management System are:- (i) Coordinate the timings of cash needs. It identifies the period(s) when there might either be a shortage of cash or an abnormally large cash requirement; (ii) It also helps to pinpoint period(s) when there is likely to be excess cash; (iii) It enables firm which has sufficient cash to take advantage like cash discounts on its accounts payable; and (iv) Lastly it helps to plan/arrange adequately needed funds (avoiding excess/shortage of cash) on favorable terms. (d) The financing of current assets involves a trade off between risk and return. A firm can choose from short or long term sources of finance. Short term financing is less expensive than long term financing but at the same time, short term financing involves greater risk than long term financing. Depending on the mix of short term and long term financing, the approach followed by a company may be referred as matching approach, conservative approach and aggressive approach. In matching approach, long-term finance is used to finance fixed assets and permanent current assets and short term financing to finance temporary or variable current assets. Under the conservative plan, the firm finances its permanent assets and also a part of temporary current assets with long term financing and hence less risk of facing the problem of shortage of funds. An aggressive policy is said to be followed by the firm when it uses more short term financing than warranted by the matching plan and finances a part of its permanent current assets with short term financing. (e) (i) Difference between Scrap and Defectives Scrap Defectives 1. This type of loss connected with the output but it can 1. It is loss connected with output be in the input as well. 2. Scraps are not intended but cannot be eliminated due to nature of material or process itself. 2. Defectives also are not intended but can be eliminated through proper control. 3. Generally scraps are not used or rectified. 3. Defectives can be used after rectification. 4. Scraps have insignificant recoverable value. (ii) Difference between Preference Shares and Debentures 4. Defectives are sold at lower value from that of good one. Basis of difference Preference shares Debentures Ownership Preference Share Capital is a special kind of share Debenture is a type of loan which can be raised from the public Payment of Dividend/Interest Nature its holders enjoy priority both as regard to the payment of a fixed amount of dividend and also towards repayment of capital in case of winding up of a company Preference shares are a hybrid form of financing with some characteristic of equity shares and some attributes of Debt Capital. It carries fixed percentage of interest. Debentures are instrument for raising long term capital with a period of maturity.