Gurukripa s Guideline Answers to Nov 2010 IPCC Exam Questions

Gurukripa s Guideline Answers to Nov 2010 IPCC Exam Questions Question No.1 is compulsory (4 X 5 20 Marks). Answer any five questions from the remaining six questions (16 X 5 80 Marks). Question 1(a): Standard Costing Computation of Sales Variances N 10 (5 Marks) Compute the Sales Variances (Total, Price and Volume) from the following figures Product Budgeted Quantity Budgeted Price per unit Actual Quantity Actual Price per unit P 4,000 Rs.25 4,800 Rs.30 Q 3,000 Rs.50 2,800 Rs.45 R 2,000 Rs.75 2,400 Rs.70 S 1,000 Rs.100 800 Rs.105 Solution: Similar to Page 10.24, Q.16 Particulars BQ BP AQ AP AQ BP (1) (2) (3) P 4,000 25 Rs.1,00,000 4,800 30 Rs.1,44,000 4,800 25 Rs.1,20,000 Q 3,000 50 Rs.1,50,000 2,800 45 Rs.1,26,000 2,800 50 Rs.1,40,000 R 2,000 75 Rs.1,50,000 2,400 70 Rs.1,68,000 2,400 75 Rs.1,80,000 S 1,000 100Rs.1,00,000 800 105 Rs. 84,000 800 100 Rs. 80,000 Total Rs.5,00,000 Rs.5,22,000 Rs.5,20,000 Sales Variances: Total Sales Variance (1) (2) 22,000 F Breakup: P 44,000 F, Q 24,000 A, R 18,000 F, S 16,000 A Sales Price Variance (3) (2) 2,000 F Breakup: P 24,000 F, Q 14,000 A, R 12,000 A, S 4,000 F Sales Volume Variance (1) (3) 20,000 F Breakup: P 20,000 F, Q 10,000 A, R 30,000 F, S 20,000 A Question 1(b): Materials Computation of EOQ N 10 (5 Marks) ABC Ltd has received an offer of quantity discount on its order of materials as under Price per tonne Rs.4,800 Rs.4,680 Rs.4,560 Rs.4,440 Rs.4,320 Tonnes Number Less than 50 50 and less than 100 100 and less than 200 200 and less than 300 300 & above The annual requirement for the material is 500 tonnes. The Ordering Cost per order is Rs.6,250 and the Stockholding Cost is estimated at 25% of the Material Cost per annum. (1) Compute the most economical purchase level. (2)Compute EOQ if there are no purchase discounts and the price per tonne is Rs.5,250. Solution: Similar to Illustration 16, Page 2.54 N 04 Question. Purchase Price Approach is given here. Student may adopt either Purchase Price Approach or Discount Approach in the exams. Lot Size 1. Computation of EOQ under Trial and Error Method (Purchase Price Approach) Buying Cost p.a. No. of Carrying Cost per annum Associated Purchase Cost per annum Orders Cost per order Avg Inv. CC p.u. p.a. Cost p.a. for 500 tons (1) (2) [500 tons (1)] Rs.6,250 (3) [(1) 2] Purc Price 25% (4) (2)+(3) (5) 500 tons (Purchase Price) Total Cost per annum (6) (4) + (5) 10 50 6,250 3,12,500 5 1,200 6,000 3,18,500 500 4,800 24,00,000 27,18,500 50 10 6,250 62,500 25 1,170 29,250 91,750 500 4,680 23,40,000 24,31,750 100 5 6,250 31,250 50 1,140 57,000 88,250 500 4,560 22,80,000 23,78,250 200 5/2 6,250 15,625 100 1,110 1,11,000 1,26,625 500 4,440 22,20,000 23,46,625 300 5/3 6,250 10,417 150 1,080 1,62,000 1,72,417 500 4,320 21,60,000 23,32,417 Conclusion: From the table, the most economical purchase quantity (i.e. EOQ) is 300 tonnes, relating to Least Total Costs. EOQ 2AB, where C 2. Computation of EOQ under Wilson s Model A Annual Requirement of Raw Materials 500 tonnes. B Buying Cost per order Rs.6,250 per order (given) C Carrying Cost p.u. p.a. Rs.5,250 (Purc. Price) 25% Rs.1,312.50 per tonne p.a. On substitution, EOQ 69.01 tonnes. Nov 2010.1

Question 1(c): Ratio Analysis Computation of Ratios N 10 (5 Marks) MNP Ltd has made plans for the next year 2010 11. It is estimated that the Company will employ Total Assets Rs.25,00,000, 30% of the assets being financed by Debt at an interest cost of 9% p.a. The Direct Costs for the year are estimated at Rs.15,00,000 and all other Operating Expenses are estimated at Rs.2,40,000. The Sales Revenue are estimated at Rs.22,50,000. Tax Rate is assumed to be 40%. You are required to calculate (i) Net Profit Margin, (ii) Return on Assets, (iii) Asset Turnover, (iv) Return on Equity. Solution: 1. Total Assets 25,00,000 2. Debt at 30% of Total Assets 7,50,000 3. Equity at 70% of Total Assets (1 2) 17,50,000 4. Sales (given) 22,50,000 5. Direct Costs (given) 15,00,000 6. Operating Costs (given) 2,40,000 7. EBIT (4 5 6) 5,10,000 8. Less: Interest at 9% on Debt 67,500 9. EBT (7 8) 4,42,500 10. Less: Tax at 40% 1,77,000 11. EAT (9 10) 2,65,500 12. Net Profit Margin EAT Sales (11) (4) 11.80% 13. Return on Assets EBIT Total Assets (7) (1) 20.40% 14. Asset Turnover Sales Total Assets (4) (1) 0.90 times 15. Return on Equity EAT Equity (11) (3) 15.17% Question 1(d): Cost of Capital Computation of WACC N 10 (5 Marks) PQR Ltd has the following capital structure on 31 st October Equity Share Capital (2,00,000 Shares of Rs.10 each) Rs.20,00,000 Reserves and Surplus Rs.20,00,000 12% Preference Shares Rs.10,00,000 9% Debentures Rs.30,00,000 Total Rs.80,00,000 The Market Price of Equity Share is Rs.30. It is expected that the Company will pay next year, a dividend of Rs.3 per Share, which will grow at 7% forever. Assume 40% Income Tax Rate. You are required to compute the Weighted Average Cost of Capital of the Company using Market Value Weights. Solution: Similar to Illustration 15, Page 18.19 M 09 Question Computation of WACC is as under Component Market Value Rs. % Individual Cost WACC Equity (2,00,000 30) Rs.60,00,000 60% K e (See Note below) 17.00% 10.20% Preference Capital Rs.10,00,000 10% K p Given 12.00% 1.20% Debt Rs.30,00,000 30% K d 9% (100% 40%) 5.40% 1.62% Total Rs.1,00,00,000 100% WACC K o 13.02% DPS Rs.3 Note: Revised K e + g + 7% 10% + 7% 17.00% MPS Rs. 30 Question 2(a): Contract Costing Estimation of Total Profit and Profit Recognition PQR Construction Ltd commenced a contract on 1 st April 2009. The Total Contract was for Rs.27,12,500. It was decided to estimate the Total Profit on the contract and to take to the credit of P & L Account that proportion of estimated profit on cash basis, which the work completed bore to the total contract. Actual expenditure in 2009 2010 and estimated expenditure in 2010 2011 are given below Particulars 2009 10 (Actuals) (Rs.) 2010 11 (Estimated) (Rs.) Materials Issued 4,56,000 8,14,000 Labour: Paid 3,05,000 3,80,000 Outstanding at end 24,000 37,500 Plant Purchased 2,25,000 Expenses: Paid 1,00,000 1,75,000 Outstanding at the end 25,000 Prepaid at the end 22,500 Nov 2010.2

Particulars 2009 10 (Actuals) (Rs.) 2010 11 (Estimated) (Rs.) Plant returned to Stores (Historical Cost) 75,000 (On 31 st Dec 2010) 1,50,000 Materials at site 30,000 75,000 Work in Progress Certified 12,75,000 Full Work in Progress Uncertified 40,000 Cash Received 10,00,000 The Plant is subject to annual depreciation at 20% on WDV Cost. The Contract is likely to be completed on 31 st Dec 2010. Required: Prepare the Contract Account for the year 2009 10. Estimate the profit on the contract for the year 2009 2010 on prudent basis, which has to be credited to P & L Account. Solution: Similar to Illustration 12, Page 6.31 M 06 Question 1. Statement of Current & Total Profits Particulars Till date Additional Total A. Income: Work Certified Given 12,75,000 Given 27,12,500 Work Uncertified Given 40,000 Total 13,15,000 27,12,500 B. Expenditure: Materials (WN a) 4,26,000 7,69,000 11,95,000 Labour (WN b) 3,29,000 3,93,500 7,22,500 Expenses (WN c) 77,500 2,22,500 3,00,000 Depreciation (WN d) 45,000 18,000 63,000 Total 8,77,500 14,03,000 22,80,500 C. Profit (A B) 4,37,500 Notional Profit 4,32,000 Estimated Total Profit D. Profit transfer to P&L A/c (based on formula specified in the question) Estimated Total Profit Work Certified Contract Pr ice Cash Re ceived Rs.12,75,000 Rs.4,32,000 Work Certified Rs.27,12,500 Rs.10,00,000 Rs.1,59,263 Rs.12,75,000 Notes: Particulars 2009 10 1 st Apr 2009 to 31 st Mar 2010 2010 11 1 st Apr 2010 to 31 st Dec 2010 (a) Materials Consumed (b) Labour Cost incurred Opening Stock+Issues Closing Stock Nil + 4,56,000 30,000 4,26,000 Paid during the year + O/S at end 3,05,000 + 24,000 3,29,000 (c) Expenses Paid + O/S at end Prepaid at end 1,00,000 + Nil 22,500 77,500 Opening Stock + Issues Closing Stock 30,000 + 8,14,000 75,000 7,69,000 Paid during the year + O/S at end O/s at Opg 3,80,000 + 37,500 24,000 3,93,500 Prepaid of previous period + Paid during the year + O/S at end O/s at beginning 22,500 + 1,75,000 + 25,000 Nil 2,22,500 (d) Depreciation 2,25,000 20% 12 months 45,000 (2,25,000 60,000 45,000) 20% 9 months 18,000 Note: It is assumed that Plant costing Rs.75,000 is returned to Store on last day of the financial year, i.e. 31 st Mar 2010. 2. Contract Account for the year ending 31 st March 2010 To Material Issued 4,56,000 By Work in Progress To Labour (as per WN above) 3,29,000 Work Certified 12,75,000 To Expenses (as per WN above) 77,500 Work Uncertified 40,000 To Depreciation on Plant 45,000 By Materials at Site 30,000 To Notional Profit 4,37,500 Total 13,45,000 Total 13,45,000 To P&L A/c Profit transfer as per WN 1 above 1,59,263 By Notional Profit b/d 4,37,500 To Reserve Profit c/d 2,78,237 Total 4,37,500 Total 4,37,500 To WIP b/d 13,15,000 By Reserve Profit b/d 2,78,237 To Materials at site b/d 30,000 Nov 2010.3

Question 2(b): Working Capital Management Debtors Credit Period Analysis RST Limited is considering relaxing its present credit policy and is in the process of evaluating two proposed policies. Currently, the Firm has annual credit sales of Rs.225 Lakhs, and Accounts Receivable Turnover Ratio is 5 times a year. The current level of loss due to Bad Debts is Rs.7,50,000. The Firm is required to give a return of 20% on the investments in new Accounts Receivables. The Company s Variable Costs are 60% of the Selling Price. Given the following information, which is better option? Particulars Present Policy Policy Option I Policy Option II Annual Credit Sales Rs.225 Lakhs Rs.275 Lakhs Rs.350 Lakhs Accounts Receivable Turnover Ratio 5 times 4 times 3 times Bad Debt Losses Rs.7.50 Lakhs Rs.22.50 Lakhs Rs.47.50 Lakhs Solution: Similar to Illustrations in Page 16.44, 16.45 (Figures in Rs. Lakhs) Particulars Present Policy Policy Option I Policy Option II 1. Annual Credit Sales 225.00 275.00 350.00 2. Variable Costs at 60% of Sales 135.00 165.00 210.00 3. Contribution (1 2) 90.00 110.00 140.00 4. Debtors Turnover Ratio (in times) 5 times 4 times 3 times 5. Average Debtors (1 4) 45.00 68.75 116.67 6. Interest on Average Debtors at 20% 9.00 13.75 23.33 7. Bad Debts (given) 7.50 22.50 47.50 8. Total Costs (6+7) 16.50 36.25 70.83 9. Net Benefit (3 8) 73.50 73.75 69.17 Conclusion: Policy Option I is preferable due to higher Net Benefit when compared to the present situation. Question 3(a): Process Costing Equivalent Production FIFO First Process Following information is available regarding Process A for the month of October. Production Records Cost Records (i) Opening WIP (Materials 100% complete, 40,000 units Opening Work in Progress: Materials Rs.1,00,000 and 25% complete for Labour and OH) Labour Rs.25,000 (ii) Units Introduced 1,80,000 units Overheads Rs.45,000 (iii) Units Completed 1,50,000 units Cost incurred during the month: (iv) Units in Process on 31 st October 70,000 units Materials Rs.6,60,000 (Materials 100% complete, 50% complete Labour Rs.5,55,000 for Labour and OH) Overheads Rs.9,25,000 Assume that FIFO Method is used for WIP Inventory Valuation. Required (i) Statement of Equivalent Production, (ii) Statement showing Cost for each element, (iii) Statement of apportionment of Cost, (iv) Process A Account. Solution: Similar to Illustration 13, Page 8.22 1. Statement of Equivalent Production Particulars Input Particulars Output Materials Labour Overheads Transfer from: % E.U % E.U % E.U Opg. WIP 40,000 Opg WIP 40,000 75% 30,000 75% 30,000 Fresh units 1,80,000 fresh units(b/f) 1,10,000 100% 1,10,000 100% 1,10,000 100% 1,10,000 Total transfer 1,50,000 1,10,000 1,40,000 1,40,000 Closing WIP 70,000 100% 70,000 50% 35,000 50% 35,000 Total 2,20,000 Total 2,20,000 1,80,000 1,75,000 1,75,000 Note: Transfer out of Fresh Units Total Transfer less Transfer out of Opening WIP 1,50,000 40,000 1,10,000 units. 2. Statement of Cost per Equivalent Unit Cost Element Total Costs Equivalent Units Cost per Equivalent Unit Material Rs.6,60,000 1,80,000 units Rs.3.67 Labour Rs.5,55,000 1,75,000 units Rs.3.17 Overhead Rs.9,25,000 1,75,000 units Rs.5.29 Total Rs.21,40,000 Nov 2010.4

3. Statement of Cost Apportionment (Note: Rounding off amounts are adjusted against Closing WIP) Item Material at Rs.3.67/eu Labour at Re.3.17/eu OH at Rs.5.29/eu Total Tfr to Process B 1,10,000 3.67 4,03,700 1,40,000 3.17 4,43,800 1,40,000 5.29 7,40,600 15,88,100 Closing WIP 70,000 3.67 2,56,300 35,000 3.17 1,11,200 35,000 5.29 1,84,400 5,51,900 Total 6,60,000 5,55,000 9,25,000 21,40,000 Note: Total Cost of Opening WIP Rs.1,00,000 + Rs.25,000 + Rs.45,000 Rs.1,70,000 Note: Total Cost of Transfer Opening WIP Cost Rs.1,70,000 + Current Value Addition Rs.15,88,100 Total Rs.17,58,100 4. Process I Account Particulars Qtty Rs. Particulars Qtty Rs. To Opening WIP b/d 40,000 1,70,000 By Process II transfer (Note 3) 1,50,000 17,58,100 To Materials 1,80,000 6,60,000 To Labour 5,55,000 To Production Overheads 9,25,000 By Closing WIP c/d (Note 3) 70,000 5,51,900 Total 2,20,000 23,10,000 Total 2,20,000 23,10,000 Question 3(b)(i): Leverage Computation of DOL, DFL and DCL N 10 (4 Marks) Calculate the degree of Operating Leverage, Degree of Financial Leverage and the Degree of Combined Leverage for the following Firms and interpret the results. Firm P Q R 1. Output (in units) 2,50,000 1,25,000 7,50,000 2. Fixed Costs (Rs.) 5,00,000 2,50,000 10,00,000 3. Unit Variable Costs (Rs.) 5.00 2.00 7.50 4. Unit Selling Price (Rs.) 7.50 7.00 10.00 5. Interest Expenses (Rs.) 75,000 25,000 Solution: Similar to Illustration 11, Page 17.12 Firm P Q R Sale Quantity 2,50,000 units 1,25,000 units 7,50,000 units Sale Price per unit Rs.7.50 Rs.7.00 Rs.10.00 Less: Variable Costs per unit Rs.5.00 Rs.2.00 Rs.7.50 Contribution per unit Rs.2.50 Rs.5.00 Rs.2.50 Total Contribution (Qtty X Cn pu) Rs.6,25,000 Rs.6,25,000 Rs.18,75,000 Less: Fixed Costs Rs.5,00,000 Rs.2,50,000 Rs.10,00,000 EBIT Rs.1,25,000 Rs.3,75,000 Rs.8,75,000 Less: Interest Rs. 75,000 Rs. 25,000 EBT Rs. 50,000 Rs.3,50,000 Rs.8,75,000 Contribution Degree of Operating Leverage EBIT 5.00 1.67 2.14 EBIT Degree of Financial Leverage EBT 2.50 1.07 1.00 Degree of Combined Leverage DOL DFL 12.50 1.79 2.14 Inference: Overall Risk of Firm P is the highest while that of Firm Q is the least. Question 3(b)(ii): Working Capital Management Theory N 10 (4 Marks) Discuss the Liquidity vs Profitability issue in management of Working Capital. Answer: See Page 16.5, Q.12 Question 4(a): Funds Flow Statement Balance Sheets of ABC Limited as on 31 st March 2009 and 2010 and additional information are as under Additional Information: 1. New Machinery for Rs.6,00,000 was purchased but an Old Machinery costing Rs.2,90,000 was sold for Rs.1,00,000 and Accumulated Depreciation thereon was Rs.1,50,000. 2. 10% Debentures were redeemed at 20% premium. 3. Investments (Long Term) were sold for Rs.90,000 and its profit was transferred to General Reserve. 4. Income Tax paid during the year 2009 10 was Rs.1,60,000 Nov 2010.5

5. An Interim Dividend of Rs.2,40,000 has been paid during the year 2009 10. 6. Assume Provision for Taxation as a Current Liability and Proposed Dividend as a Non Current Liability. 7. Investments (Long Term) are non trade investments. Balance Sheets Liabilities 31.03.2009 31.03.2010 Assets 31.03.2009 31.03.2010 Share Capital 40,00,000 40,00,000 Land and Building 30,00,000 28,00,000 General Reserve 8,00,000 9,00,000 Plant and Machinery 36,00,000 35,00,000 Profit & Loss A/c 5,00,000 7,20,000 Investments (Long Term) 8,00,000 7,44,000 10% Debentures 20,00,000 16,00,000 Stock 9,60,000 17,00,000 Bank Loan (Long Term) 10,00,000 12,00,000 Debtors 12,00,000 15,96,000 Creditors 8,00,000 11,60,000 Prepaid Expenses 1,00,000 80,000 Outstanding Expenses 40,000 50,000 Cash and Bank 2,80,000 1,70,000 Proposed Dividend 6,00,000 7,20,000 Provision for Taxation 2,00,000 2,40,000 Total 99,40,000 1,05,90,000 Total 99,40,000 1,05,90,000 Prepare: (a) Schedule of Changes in Working Capital, (b) Funds Flow from Operations for the year ended 31 st March 2010. Solution: Similar to Illustration 2, Page 15.6 N 08 Question (figures doubled) 1. Schedule of Changes in Working Capital Particulars 31.03.2009 31.03.2010 Increase Decrease A. Current Assets: Stock 9,60,000 17,00,000 7,40,000 Debtors 12,00,000 15,96,000 3,96,000 Prepaid Expenses 1,00,000 80,000 20,000 Cash and Bank balances 2,80,000 1,70,000 1,10,000 Sub Total Current Assets 25,40,000 35,46,000 11,36,000 1,30,000 B. Current Liabilities: Creditors 8,00,000 11,60,000 3,60,000 Outstanding Expenses 40,000 50,000 10,000 Provision for Taxation 2,00,000 2,40,000 40,000 Sub Total Current Liabilities 10,40,000 14,50,000 4,10,000 C. Net Working Capital 15,00,000 20,96,000 7,26,000 1,30,000 Adjustment: Increase in Working Capital 5,96,000 5,96,000 Total 20,96,000 20,96,000 7,26,000 7,26,000 2. Analysis of Non Current Asset & Non Current Liability Accounts and movements therein (a) Investments A/c To balance b/d Opening balance (given) 8,00,000 By Bank (Sale Proceeds) (given) 90,000 To General Reserve (Pft on Sale transfer) 34,000 By balance c/d Closing balance (given) 7,44,000 Total 8,34,000 Total 8,34,000 (b) Plant and Machinery A/c To balance b/d Opg balance (given) 36,00,000 By Bank (Sale Proceeds of M/c) given 1,00,000 To Bank New m/c purchased (given) 6,00,000 By P&L A/c (Loss on Sale of Machine) 40,000 (2,90,000 1,50,000 1,00,000) By P&L A/c (Deprn for the year) (bal.fig) 5,60,000 By balance c/d Closing balance (given) 35,00,000 Total 42,00,000 Total 42,00,000 (c) Depreciation on Buildings during the year Closing Bal. less Opening Bal. Rs.30,00,000 Rs.28,00,000 Rs.2,00,000. (d) Transfer to General Reserve out of current profits Rs.9,00,000 Rs.8,00,000 Invt transfer Rs.34,000 Rs.66,000. (e) Amount paid on redemption of Debentures (Rs.20,00,000 Rs.16,00,000) + 20% Premium Rs.4,80,000. Nov 2010.6

3. Computation of Funds from Operations by preparing the Adjusted P & L Account To Loss on Sale of Machinery (WN 2a) 40,000 By balance b/d Opening balance (given) 5,00,000 To Depreciation on Plant & Mach. (WN 2a) 5,60,000 By Funds from Operations (bal.fig) 21,26,000 To Depreciation on Buildings (WN 2c) 2,00,000 To Premium on Redemption of Deb. (WN 2e) 80,000 To Transfer to General Reserve (WN 2d) 66,000 To Proposed Dividend (given) 7,20,000 To Interim Dividend (given) 2,40,000 To balance c/d Closing balance (given) 7,20,000 Total 26,26,000 Total 26,26,000 4. Statement of Sources and Application of Funds (Funds Flow Statement) Sources of Funds Rs. Application of Funds Rs. Funds from Operations (WN 3) 21,26,000 Increase in Working Capital (WN 1) 5,96,000 Bank Loan (Long Term) (12 10) Lakhs 2,00,000 Purchase of New Machinery (given) 6,00,000 Sale of Old Machinery (given) 1,00,000 Redemption of Debentures at Premium 4,80,000 Sale of Investments (given) 90,000 Dividend Paid (relating to Fin Year 2008 09) 6,00,000 Interim Dividend Paid (Fin Year 2009 10) 2,40,000 Total 25,16,000 Total 25,16,000 Question 4(b): Marginal Costing MNP Ltd sold 2,75,000 units of its product at Rs.37.50 per unit. Variable Costs are Rs.17.50 per unit (Manufacturing Costs of Rs.14 and Selling Costs of Rs.3.50 per unit). Fixed Costs are incurred uniformly throughout the year and amount to Rs.35,00,000 (including Depreciation of Rs.15,00,000). There are no beginning or ending inventories. Required 1. Estimated Break Even Sales Quantity and Cash Break Even Sales Level Quantity. 2. Estimate the PV Ratio. 3. Estimate the number of units that must be sold to earn an income (EBIT) of Rs.2,50,000. 4. Estimate the sales level to achieve an after tax income (PAT) of Rs.2,50,000. Assume 40% Corporate Income Tax Rate. Solution: 1. Contribution per unit Sale Price less Variable Costs Rs.37.50 Rs.17.50 Rs.20 per unit Total Fixed Costs Rs.35,00,000 2. Break Even Quantity 1,75,000 units Contribution per Unit Rs.20 Cash Fixed Costs 3. Cash Break Even Quantity Contribution per Unit 4. PV Ratio Contribution per unit Sales Pr ice per unit 100 Rs.20,00,000 1,00,000 units Rs.20 Rs.20.00 Rs.37.50 100 53.33% 5. If Required Profit (EBIT) Rs.2,50,000, Contribution required FC+EBIT 35,00,000 + 2,50,000 Rs.37,50,000 6. Quantity required to earn above profit of Rs.2,50,000 Rs.37,50,000 1,87,500 units Rs.20 7. Since Tax Rate is 40%, PAT constitutes 60% of EBIT. Hence, if required PBT is Rs.2,50,000, required EBIT Rs.2,50,000 Rs.4,16,667 60% 8. If Required Profit (EBIT) Rs.4,16,667, Contribution required FC+EBIT 35,00,000 + 4,16,667 Rs.39,16,667 9. Quantity required to earn above PAT of Rs.2,50,000 Rs.39,16,667 1,95,833 units Rs.20 Question 5(a): Cost Accounting Systems Memorandum Reconciliation Account with Losses A manufacturing Company has disclosed a Net Loss of Rs.8,75,000 as per their Cost Accounts for the year ended 31 st March. However, their Financial Accounting Records disclosed a Net Loss of Rs.7,91,250 for the same period. A scrutiny of the data of both the sets of books of accounts revealed the following information (information in Rs.) (i) Factory OH over absorbed 47,500 (vi) Income Tax provided in Fin. Accounts 7,250 (ii) Administration OH under absorbed 32,750 (vii) Transfer Fees (Credit in Financial Accounts) 12,500 (iii) Depreciation charged in Financial Accounts 2,25,000 (viii) Preliminary Expenses written off 27,500 Nov 2010.7

(iv) Depreciation charged in Cost Accounts 2,42,250 (ix) Undervaluation of Opening Stock in Cost A/cs 6,250 (v) Interest on Invts not included in Cost Accounts 62,750 (x) Undervaluation of Closing Stock in Cost A/cs 17,500 Prepare a Memorandum Reconciliation Account. Solution: Similar to Illustration 19, Page 5.58 M 03 Question Memorandum Reconciliation Account To Net Loss as per Financial Books (given) 7,91,250 By Expenses not considered in Cost Records To Factory OH overabsorbed in Cost Records 47,500 Preliminary Exps written off 27,500 To Incomes not considered in Cost A/cs Income Tax 7,250 Interest on Investments 62,750 By Admin OH underabsorbed in Cost Books 32,750 Transfer Fees 12,500 By Depreciation as per Financial Records 2,25,000 To Undervaluation of Clg Stock in Cost A/cs 17,500 By Undervaluation of Opg Stock in Cost A/cs 6,250 To Depreciation as per Cost Records 2,42,250 By Net Loss as per Cost Records (bal. fig) 8,75,000 Total 11,73,750 Total 11,73,750 Question 5(b): FM Basics & Sources of Finance Theory Distinguish between the following N 10 (2 X 4 8 Marks) (i) Profit Maximisation and Wealth Maximisation Objective of a Firm [Similar to N 06, N 07, M 09] Page 13.4, Q.8 (ii) Global Depository Receipts and American Depository Receipts [Similar to M 03, M 04, M 07, M 09] Page 21.19, Q.44 Question 6(a): Capital Budgeting Project Life Disparity EAC Method A Company has to make a choice between two machines X and Y. The two machines are designed differently, but have identical capacity and do exactly the same job. Machine X costs Rs.5,50,000 and will last for 3 years. It costs Rs.1,25,000 per year to run. Machine Y is an Economy Model costing Rs.4,00,000 but will last only for two years, and cost Rs.1,50,000 per year to run. These are real cash flows. The costs are forecasted in rupees of constant purchasing power. Opportunity Cost of Capital is 12%. Which Machine should the Company buy? Ignore taxes. Given: PVIF 0.12,1 0.8929, PVIF 0.12,2 0.7972, PVIF 0.12,3 0.7118, PVIFA 0.12,2 1.6901, PVIFA 0.12,3 2.4019. Solution: Similar to Illustration 28, Page 20.37, M 09 Question. Since Project Lives are different, the Equivalent Annual Flows Method is adopted. Since Taxes are to be ignored, Tax Saved on Depreciation Expense is not relevant. Machine X Y 1. Cost of Machine (Initial Investment) Rs.5,50,000 Rs.4,00,000 2. Useful Life 3 years 2 years 3. Depreciation per annum (1) (2) Rs.1,83,333 Rs.2,00,000 4. Cash Operating Expenses p.a. Cash Outflow p.a. Rs.1,25,000 Rs.1,50,000 5. Annuity Factor at 10% for 3 years and 2 years Given 2.4019 Given 1.6901 6. Equivalent Annual Investment (1) (5) Rs.2,28,985 Rs.2,36,672 7. Equivalent Annual Outflow / Costs (4) + (6) Outflow Rs.3,53,985 Outflow Rs.3,86,672 Decision: Since Machine X has the least EAC (Equivalent Annual Costs), it may be selected. Question 6(b): Basics & Overheads Theory Write short notes on the following N 10 (2 X 4 8 Marks) (i) Essential Factors for installing a Cost Accounting System [Same as M 96, N 09] Page 1.16, Q.40 (ii) Treatment of Under and Over absorbed OH in Cost A/cing [Same as M 86, N 89, M 94, N 98, M 04, M 06] Page 4.11, Q.33 Question 7: Theory Various Topics Answer any four of the following N 10 (4 X 4 16 Marks) (a) What are the methods of re apportionment of Service Department Expenses over the Production Departments? Discuss. [Similar to N 99] Page 4.7, Q.21 (b) How apportionment of Joint Costs upto the point of separation amongst the Joint Products using Market Value at the point of separation and Net Realisable Value Method is done? Discuss. Page 7.3, Q.15 [Similar to M 09] (c) Discuss the method of estimation of Working Capital Needs, based on Operating Cycle Process. Page 16.3, Q.5 (d) Discuss Financial Break Even and EBIT EPS Indifference Analysis. [Similar to M 09] Pg18.5, Q.14,15 (e) Discuss three different methods of calculating Labour Turnover. [Same as N 85, M 03, N 04, N 07] Page 3.7, Q.20 Nov 2010.8