SUGGESTED ANSWERS - Group 1 Costing (Code FUN) Disclaimer (Read carefully) The answers given below are prepared by the faculty of Samvit Academy as per their views and experience. The working notes, notes and assumptions, if any stated, are purely the views of the respective faculty of Samvit Academy and students are encouraged to go through them and apply the same in the examination as a good practice. No assurance is given that the answer keys of the Institute of Chartered Accountants of India used for valuation are the same. However, utmost care has been taken while designing the below suggested answers. Feedback is welcome. For the questions, please refer to the question paper. Question 1 (a) i. Material Cost Variance = Standard Cost Actual Cost Or = SP SQ AP AQ A = ( 12,000 18 tonne 0.74) 1,62,000 = 2,160 (A) B = ( 23,500 18 tonne 0.40) 1,65,200 = 4,000 (F) C = ( 18,000 18 tonne 0.64) 2,07,000 = 360 (F) = 2,200 (F) ii. Material Price Variance = Actual Quantity (Std. Price Actual Price) Or = AQ SP AQ AP A = (13.12 tonne 12,000) 1,62,000 = 1,57,440-1,62,000 = 4,560 (A) B = (7.1 tonne 23,500) 1,65,200 = 1,66,850-1,65,200 = 1,650 (F) C = (11.5 tonne 18,000) 2,07,000 = 2,07,000-2,07,000 = Nil = 2,910 (A) iii. Material Usage Variance = Std. Price (Std. Quantity Actual Quantity) Or = SP SQ SP AQ A = ( 12,000 18 tonne 0.74) ( 12,000 13.12 tonne) = 1,59,840 1,57,440 = 2,400 (F) B = ( 23,500 18 tonne 0.40) ( 23,500 7.10 tonne) = 1,69,200 1,66,850 = 2,350 (F) C = ( 18,000 18 tonne 0.64) ( 18,000 11.5 tonne) = 2,07,360 2,07,000 = 360 (F)
= 5,110 (F) iv. Material Mix Variance = Std. Price (Revised Std. Quantity Actual Quantity) Or = SP RSQ SP AQ A = ( 12,000 * 31.72 tonne * 0.74/1.78) ( 12,000 * 13.12 tonne) = 1,58,243.6-1,57,440 = 803.60 (F) B= ( 23,500 * 31.72 tonne * 0.4/1.78) ( 23,500 * 7.1 tonne) = 1,67,510.11-1,66,850 = 660.11 (F) C= ( 18,000 * 31.72 tonne * 0.64/1.78) ( 18,000 * 11.5 tonne) = 2,05,288.99-2,07,000 = 1,711.01 (A) = 247.30 (A) v. Material Yield Variance = Std. Price (Std. Quantity - Revised Std. Quantity) Or = SP SQ SP RSQ A= ( 12,000 * 18 tonne * 0.74) ( 12,000 * 31.72 tonne * 0.74/1.78) = 1,59,840-1,58,243.6 = 1,596.4 (F) B= ( 23,500 * 18 tonne * 0.40) ( 23,500 * 31.72 tonne * 0.40/1.78) = 1,69,200-1,67,510.11 = 1,689.89 (F) C= ( 18,000 * 18 tonne * 0.64 ) ( 18,000 * 31.72 tonne * 0.64/1.78) = 2,07,360-2,05,288.89 = 2,071.01 (F) = 5,357.30 (F) (b) Contract Account for the year ending 31 st March, 2001 Particulars Amount Particulars Amount To Wages 6,00,000 By Work in progress To Special Plant 2,00,000 Work Certified 16,00,000 To Materials 3,00,000 Work Uncertified (WN-1) 58,200 16,58,200 To Overheads 1,20,000 By Materials at site 40,000 By Plant at site 2,00,000 Less: depreciation (10%)- 20,000 1,80,000 To Notional Profit 6,58,200 18,78,200 18,78,200 To Profit and Loss A/c (WN-2) 3,51,040 By Notional Profit b/d 6,58,200 To Reserve Profit 30,760 6,58,200 6,58,200
WN-1: Calculation of Work Uncertified Materials (5% * 3,00,000) = 15,000 Wages (6% * 36,000) = 36,000 Overheads (20% * 36,000) = 7,200 Total 58,200 WN-2 : Calculation of profit to be transferred to Costing P&L A/c % of completion = (Work Certified / Contract Price)* 100 = 16,00,000 / 24,00,000 = 66.67% Profit to be transferred to P&L A/c = 2/3 * Notional Profit * (Cash Recd / Work certified) Profit to be transferred = 2/3 * 6,58,200 * 80% = 3,51,040 (C) Computation of Effective Cost of Factoring Average level of Receivables = 12,00,000 * 90/360 3,00,000 Factoring Commission = 3,00,000 * 2/100 6,000 Factoring Reserve = 3,00,000 * 10/100 30,000 Amount Available for Advance = Rs. 3,00,000-(6,000+30,000) 2,64,000 Factor will deduct his interest @ 16% :- Interest = 264000*90/360*16% = 10560 Advance to be paid = Rs. 2,64,000 Rs. 10,560 = Rs. 2,53,440 Annual Cost of Factoring to the Firm: Rs. Factoring Commission (Rs. 6,000 * 360/90) 24,000 Interest Charges (Rs. 10,560 *360/90) 42,240 Total 66,240 Firm s Savings on taking Factoring Service: Rs. Cost of Administration Saved 50,000 Cost of Bad Debts (Rs. 12,00,000 x 1.5/100) avoided 18,000 Total 68,000
Net Benefit to the Firm (Rs. 68,000 Rs. 66,240) 1760 Effective Cost of Factoring =66240*100/253440 26.136% Effective Cost of Factoring = 26.136% (D) Purchase price = 25,000 Loan amount = 25000-5000 = 20000 Rate of interest = 14%/12 = 1.1667% p.m Loan = Installment*Annuity factor 20,000 = Installment*AF(1.1667,24) 20,000 = Installment*20.8277 (i) Installment =20000/20.8277 = 960.26 (ii) Total interest paid = Installments paid - loan = 960.26*24 20000 = 3046.24 Question 2 (a) Statement of Profit as per financial records (for the year ended March 31, 2015) Particulars Amount Particulars Amount To Opening stock By Sales 20,80,000 Finished Goods 76,525 By Closing stock: Work-in-process 33,000 Finished Goods 43,250 To Raw materials consumed 7,84,000 Work-in-Process 48,200 To Direct labour 4,65,000 By Rent received 72,000 To Factory overheads 2,65,000 By Interest received 18,500 To Goodwill written off 95,000 To Administration overheads 3,15,000 To Selling & distribution 65,000 overheads To Interest paid 72,000
To Bad debts 21,000 To Profit 70,425 Total 22,61,000 22,61,000 Statement of Profit as per costing records (for the year ended March 31,2015) Sales Revenue (14,500 units) (A) 20,08,000 Cost of Sales Opening stock ( 875 units * 105) 91,875 Add: Cost of Production of 14,000 units (Wn-1 and 2) 18,15,360 Less: Closing Stock ( 18,15,360 * [375 units /14,000 units]) (48,626) Production cost of goods sold (14,500 units) 18,58,609 Selling and distribution overheads (14,500 units * 5) 72,500 Cost of Sales (B) 19,31,109 19,31,109 Profit (A) (B) 1,48,891 Working Notes: 1. Number of units produced Units Sales 14,500 Add: Closing stock 375 Total 14,875 Less: Opening stock 875 Number of units produced 14,000 WN 2: COST SHEET Raw materials consumed 7,84,000 Direct labour 4,65,000 Prime cost 12,49,000 Factory overheads (60% of direct wages) 2,79,000 Factory cost 15,28,000 Add: Opening work-in-process 33,000
Less: Closing work-in-process (48,200) Factory cost of goods produced 15,12,800 Administration overheads (20% of factory cost) 3,02,560 Cost of production of 14,000 units 18,15,360 Cost of Production per unit = Total cost of production / No. of units produced = 18,15,360/ 14,000 units = 129.67 Statement of Reconciliation (Reconciling the profit as per costing records with the profit as per financial records) Particulars Amount ( ) Amount ( ) Profit as per Cost Records 1,48,891 Add: Factory overheads over absorbed ( 2,79,000-14,000 2,65,000) S&D Overheads over absorbed ( 72,500-65,000) 7,500 Opening stock overvalued ( 91,875-76,525) 15,350 Interest Received 18,500 Rent Received 72,000 1,27,350 Less: Administration overheads under-absorbed ( 3,15,000 12,440-3,02,560) Closing stock overvalued ( 48,626-43,250) 5,376 Goodwill written off 95,000 Interest Paid 72,000 Bad debts 21,000 2,05,816 Profit as per Financial accounts 70,425 (b) Computation of initial cash outlay (Rs in lakhs) Equipment Cost 150 Working Capital 25
Calculation of Cash Inflows: 175 Years 1 2 3 to 5 6 to 8 Sales in units 80,000 1,20,000 3,00,000 2,00,000 Contribution @ Rs 60 p.u. 48,00,000 72,00,000 1,80,00,000 1,20,00,000 Fixed cost 16,00,000 16,00,000 16,00,000 16,00,000 Advertisement 30,00,000 15,00,000 10,00,000 4,00,000 Depreciation 15,00,000 15,00,000 16,50,000 16,50,000 Profit /(loss) 13,00,000) 26,00,000 1,37,50,000 83,50,000 Tax @ 50% NIL 13,00,000 68,75,000 41,75,000 Profit/(Loss) after tax 13,00,000) 13,00,000 68,75,000 41,75,000 Add: Depreciation 15,00,000 15,00,000 16,50,000 16,50,000 Cash inflow 2,00,000 28,00,000 85,25,000 58,25,000 Computation of PV of Cash Inflow Year Cash Inflow (Rs) PV Factor @ 12% (Rs) 1 2,00,000 0.893 1,78,600 2 28,00,000 0.797 22,31,600 3 85,25,000 0.712 60,69,800 4 85,25,000 0.636 54,21,900 5 85,25,000 0.567 48,33,675 6 58,25,000 0.507 29,53,275 7 58,25,000 0.452 26,32,900 8 58,25,000 0.404 23,53,300 Working Capital 15,00,000 0.404 6,06,000 Scrap Value 1,00,000 0.404 40,400 (A) 2,73,21,450 Cash Outflow: Initial Cash Outlay 1,75,00,000 1 1,75,00,000 Additional Investment 10,00,000 0.797 7,97,000 (B) 1,82,97,000 Net Present Value (NPV) (A)-(B) 90,24,450 Recommendation: Accept the project in view of positive NPV. Question 3: (a)
i. Calculation of Raw material inputs during the month Quantities entering the Litres Quantities Leaving the Litres process process Opening WIP 800 Transfer to finished goods 4,200 Raw Material input (Balancing figure) 5360 Process Loss Closing WIP 1,800 160 6160 6160 ii. Calculation of Normal Loss and Abnormal Loss/Gain Particulars Litres Total process losses for month 1,800 Normal Loss (10% of input) 536 Abnormal Loss (Balancing figure) 1,264 iii. Calculation of values of raw material, labour and overheads added to the process Particulars Material Labour Overheads Cost per equivalent unit Rs. 23 Rs. 7 Rs. 9 Equivalent units (Litre) WN-1 4,824 4,952 5,016 Cost of Equivalent units Rs. 1,10, 952 Rs. 34, 664 Rs. 45, 144 Add: Scrap value of normal Rs. 8,040 - - loss (536 units * Rs. 15) Total Value added Rs. 1,18,992 Rs. 34,664 Rs. 45, 144 WN-1: Statement of Equivalent units (Litres) Equivalent Production Input Units Output Units Material Labour Overheads Units % Units % Units % Opening WIP 800 Units completed Units 5,360 - opening 800 - - 240 30 320 40 Introduced WIP -Fresh units 3400 3,400 100 3,400 100 3,400 100
Normal 536 - - - - - - Loss Abnormal 1,264 1,264 100 1,264 100 1,264 100 Loss Closing WIP 160 160 100 48 30 32 20 6160 6,160 4,824 4,952 5,016 iv. Process Account for month Particulars Litres Amount Particulars Litres Amount To opening WIP 800 26,640 By Finished goods 4,200 1,63,800 To Raw Materials 5,360 1,18,992 By normal loss 536 8,040 To wages - 34, 664 By Abnormal Loss 1,264 49, 296 To Overheads - 45,144 By Closing WIP 160 4,304 6,160 2,25,440 6,160 2,25,440 (b) Funds Flow Statement of Zeta Limited for the year 2 Rs Sources of funds: Funds from business operations(refer to working note (i)) 11,000 Sale of Plant 3,000 Issuance of shares 7,000 Total : 21,000 Application of funds: Purchase of Land 4,000 Purchase of Plant & Equipment (Refer to working note (ii)) 24,000 Dividend paid 6,000 Decrease in working capital (Refer to working note (iii)) 13,000 Total : 21,000 Working Notes:
(i) Funds from business operations: Particulars Rs Net income after taxes 7,000 Add: Depreciation 5,000 Less: Gain on sale of plant 1,000 Funds from business operations: 11,000 (ii) Plant and Equipment Account Particulars Rs Particulars Rs To Balance b/d 20,000 By Cash (sale of plant) 3,000 To P & L A/c 1,000 By Depreciation 5,000 (Profit on the sale of plant) By Balance c/d 37,000 To Cash 24,000 (Purchases, balancing figure) Total 45,000 Total 45,000 (iii) Statement of changes in working capital Particulars Year1 Current Assets : Cash 5,000 6,000 Accounts receivable 14,000 14,000 Inventory 22,000 8,000 Prepaid Insurance 200 250 Rs Year2 Prepaid Rent 150 100 Prepaid Property taxes 300 41,650 400 28,750 Less: Current Liabilities: Accounts payable 20,000 18,000 Accrued expenses 2,000 4,000 Income tax payable 1,000 23,000 1,100 23,100 Rs Working capital 18,650 5,650 Change in working capital 13,000 (Decrease) Question 4 (a)
Flexible budget for different levels in Particulars 30 students 60 students 90 students 120 students 150 students A) Variable Costs Breakfast Lunch Tea Entrance Fee 150 300 90 60 300 600 180 120 450 900 270 180 600 1,200 360 240 750 1,500 450 300 TOTAL (A) 600 1,200 1,800 2,400 3,000 Variable cost per student 20 20 20 20 20 B) Semi-Variable Costs Buses Required Bus Rent Special Permit Fee Allowance for teachers 1 650 50 100 2 1,300 100 200 2 1,300 100 200 3 1,950 150 300 3 1,950 150 300 TOTAL (B) 800 1,600 1,600 2,400 2,400 C) Fixed Costs Entrance fee to Planetarium Prizes for games 250 250 250 250 250 250 250 250 250 250 TOTAL (C) 500 500 500 500 500 TOTAL COST (A)+(B)+(C) 1,900 3,300 3,900 5,300 5,900 Average Cost per student 63.33 55 43.33 44.17 39.33 Computation of break-even point of students Contribution per student = Collection per student ( 45) Variable cost per student ( 20) = 25 Since, the breakup of semi-variable costs is not provided, semi variable costs in entirety are considered in calculating the break-even point. The blocks can be considered as follows: Particulars Upto 50 students 51-100 students 101-150 students Fixed cost + semivariable cost (A) 1,300 2,100 2,900
Contribution per unit 25 25 25 (B) BEP (A) / (B) 52 84 116 (b) Particulars 1,00,000 units 1,20,000 units Sales at Rs 10 per unit 10,00,000 12,00,000 Less: Variable costs at Rs 6 per unit 6,00,000 7,20,000 Contribution (C) at Rs 4 per unit 4,00,000 4,80,000 Less: Fixed expenses 2,00,000 2,00,000 Operating Profit or EBIT 2,00,000 2,80,000 Less Interest on Debentures (10% on Rs 10 Lakhs) 1,00,000 1,00,000 Profit before tax (PBT) 1,00,000 1,80,000 Less Tax at 50% 50,000 90,000 Profit after tax (PAT) or net profit 50,000 90,000 (i) Earnings per Share (EPS) [10,000 equity shares] 5 9 % increase in EPS 9-5/5 *100 = 80% (ii) Financial leverage EBIT/PBT 2 1.56 (iii) Operating leverage Contribution/EBIT 2 1.714 (iv) In relation to increase in Production & Sales of 1,00,000 units to 1,20,000 units (20% increase), EPS has gone from Rs 5 to Rs 9 i.e. increased by 80%. But both the Financial Leverage and Operating Leverage have decreased with increase in sales. Due to this reduction, both the risks i.e. business risk & financial risks of the business are reduced. Question 5 (a) (i) Nursing Home (ii) Coal (iii) Bicycles (iv) Bridge construction (v) Interior Decoration (vi) Advertising (vii) Furniture (viii) Sugar company having Operating Single Multiple Contract Job Job Multiple/ Job costing Process
its own sugar-cane fields (b) (i) Service Provider Railways Electricity Board Canteen Boiler House Cost per unit Per Passenger Kilometer Per kilowatt- hours Per meal Per 1000 Kg of steam (ii) Cost Unit Passenger Kms (c) Passenger Kilometres = No. of buses * Distance travelled in one round trip * Seating capacity of each bus * No of days in a month = 5 buses* 50 kms * 2 times * 50 passengers * 75% capacity * 30 days = 5,62,500 Passenger Kilometers ROE = [ROI + {(ROI r) x D/E}] (1 t) = [0.20 + {(0.20 0.10) x 0.60}] (1 0.40) = [ 0.20 + 0.06] x 0.60 = 0.1560 ROE = 15.60% (d) Rs Crs Option 1 Option 2 Option 3 Equity shares Loan@15% Pref shares@12% EBIT 15 15 15 Int 30*15% 0 0 4.5 0 EBT 15 10.5 15 Tax@30% 4.5 3.15 4.5 EAT 10.5 7.35 10.5 Pref share divi 30*12% 0 0 3.6 Earning to ESH 10.5 7.35 6.9 No of shares Existing 0.6 0.6 0.6 New 0.3 Total 0.9 0.6 0.6 EPS 11.67 12.25 11.5
Question 6 (a) i. Overhead Distribution Statement (Highest) Particulars Production Departments Service Departments Machine Packing General Stores Shops Plant Allocated Overheads (Rs) (Rs) (Rs) (Rs) Indirect Labour 8,000 6,000 4,000 11,000 Maintenance Material 3,400 1,600 2,100 2,800 Misc. Supplies 1,500 2,900 900 600 Supervisor s salary - - 16,000 - Cost and Payroll salary - - 80,000 - Total overheads allocated 12,900 10,500 1,03,000 14,400 Add: Apportioned overheads (As 1,84,350 70,125 22,775 73,150 per schedule below) Total 1,97,000 80,625 1,25,775 87,550 Schedule of Apportionment of Overheads Production Departments Service Departments Item of Cost Basis Machine Packing General Stores (Rs) Shops (Rs) (Rs) Plant (Rs) Power HP Hours 54,600 7,800-15,600 (7:1:-:2) Rent Floor Space 30,000 12,000 6,000 24,000 (5:2:1:4) Fuel and Radiator 12,000 24,000 8,000 16,000 Heat Sec. (3:6:2:4) Insurance Investment 7,500 2,250 750 1,500
(10:3:1:2) Taxes Investment 5,250 1,575 525 1,050 (10:3:1:2) Depreciation Investment 75,000 22,500 7,500 15,000 (10:3:1:2) Total 1,84,350 70,125 22,775 73,150 (i) 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 = 1,25,775 + 0.3b...(i) b = 87,550 + 0.2a...(ii) Putting the value of b in equation no. (i) a = 1,25,775 + 0.3 (87,550 + 0.2a) Or a = 1,25,775 + 26,265 + 0.06a Or 0.94a = 1,52,040 Or a = 1,61,745 (appx.) Putting the value of a = 1,61,745 in equation no. (ii) to get the value of b b = 87,550 + 0.2 1,61,745 = 1,19,899 Secondary Distribution Summary Particulars Total (Rs) Machine Shops Packing (Rs) (Rs) Allocated and Apportioned overheads as per primary distribution 2,77,875 1,97,250 80,625 - General Plant 1,61,745 80,872.50 [1,61,745 * (5/10) ] 48,523.50 [1,61,745 * (3/10) ] - Stores 1,19,899 59,949.50 (1,19,899 * 50%) 23,979.80 (1,19,899 * 20%) Total Overheads 3,38,072 1,53,128.3 (b) Statement Showing Cost and Sales for the First Year
Annual Production Capacity Production Sales 60,000 units 40,000 units 35,000 units Particulars Rs. Sales Revenue (Rs. 80 * 35,000) 28,00,000 Cost of Production: Materials @ Rs. 20 per unit 8,00,000 Direct Labour @ Rs. 15 per unit 6,00,000 Manufacturing Overheads Variable @ Rs. 15 per unit 6,00,000 Fixed (based on production capacity 60,000 units* Rs. 10) 6,00,000 Cost of Production 26,00,000 Less: Closing Stock (40,000 35,000 = 5,000 units). 26,00,0000*5000/40,000 3,25,000 Cost of Goods Sold 22,75,000 Add: Selling & Distribution Overheads Variable @ Rs. 3 *35,000 units = 1,05,000 Fixed (Re. 1 * 60,000 units) = 60,000 1,65,000 Cost of Sales 24,40,000 Profit 3,60,000 Statement Showing Working Capital Requirement A. Current Assets Rs. Stock of Raw Materials (Rs. 8,00,000 * 3/12) 2,00,000 Stock of Finished Goods 3,25,000 Debtors at Cost (Rs. 24,40,000 * 3/24) 3,05,000 Cash and Bank 60,000 Total (A) 8,90,000
B. Current Liabilities Creditors for Materials (Rs. 10,00,000 * 4/12) 3,33,333 Creditors for Expenses (Rs. 13,65,000 * 1/24) 56,875 Outstanding Wages (Rs. 6,00,000 * 1/12) 50,000 Total (B) 4,40,208 Working Capital Requirement before Contingencies (A B) 4,49,792 Add: Provision for Contingencies (Rs. 4,49,792 * 1/9) 49,977 Estimated Working Capital Requirement 4,99,769 Workings Notes: Purchase of Raw Material during the first year Rs. Raw Material consumed during the year 8,00,000 Add: Closing Stock of Raw Materials (3 months consumption) 2,00,000 Less: Opening Stock of Raw Material Nil Purchases during the year 10,00,000 Question 7 (a) Labour turnover in an organisation is the rate of change in the composition of labour force during a specified period measured against a suitable index. The standard of usual labour turnover in the industry or labour turnover rate for a past period may be taken as the index or norm against which actual turnover rate should be compared. The methods for measuring labour turnover are: Replacement method: This method takes into consideration actual replacement of labour irrespective of no. of workers leaving. Replacement method = Average number of employees on roll during the year x 100 Number of employees replaced during the year
Separation method: In this method labour turnover is measured by dividing the total no. of separations during the period by average no. of workers on payroll during the same period. Separation method = Average number of employees on roll during the year 100 Number of employees separated during the year Flux method: This method takes into account both the replacements as well as no. of separations during the period. Flux Method= No of employees replaced + No of employees separated x 100 during the year during the year Average number of employees on roll during the year The suggestive remedial steps that will be helpful for Zuri Ltd. to minimize the labour turnover are as follows: Exit interview: An interview to be arranged with each outgoing employee to ascertain the reasons of his leaving the organization. Job analysis and evaluation: to ascertain the requirement of each job and allot appropriate job to appropriate persons. Organisation should make use of a scientific system of recruitment, placement and promotion for employees. Organisation should create healthy atmosphere, providing education, medical and housing facilities for workers. Committee for settling workers grievances. (b) The following point of distinction may be explained to Kohli to satisfy his query: Distinction between Perpetual Inventory System and Continuous Stock taking Perpetual Inventory System: It is a system of stock control followed by the stores department. Under this system, a continuous record of receipt and issue of material is maintained by the stores department. In other words, in this system, stock control cards or bin cards and the stores ledger show clearly the receipts, issues and balance of all items in stock at all times. This system facilitates planning of production and ensures that production is not interrupted for want of materials and stores. Continuous Stock taking: It means physical verification of stores items on a continuous basis to reveal the position of actual balances. Such verification is conducted round the
year, thus covering each item of store twice or thrice. Any discrepancies, irregularities or shortages brought to the notice, as a result of continuous stock verification are reported to the appropriate authorities for initiating necessary rectification measures. This system works as a moral check as stores staff and acts as a deterrent to dishonesty. A perpetual inventory system is usually supported by a programme of continuous stock taking. That is continuous stock taking is complementary to the perpetual inventory system. Sometimes the two terms are considered synonymous but it is not so. The success of the perpetual inventory system depends upon the maintenance and upto date writing up of (i) the stores ledger and (ii) bin cards/ stock control cards. Continuous stock taking, ensures the veracity of figures shown by the above records. (c) Operating risk is associated with cost structure whereas financial risk is associated with capital structure of a business concern. Operating risk refers to the risk associated with the firm s operations. It is represented by the variability of earnings before interest and tax (EBIT). The variability in turn is influenced by revenues and expenses, which are affected by demand of firm s products, variations in prices and proportion of fixed cost in total cost. If there is no fixed cost, there would be no operating risk. Whereas financial risk refers to the additional risk placed on firm s shareholders as a result of debt and preference shares used in the capital structure of the concern. Companies that issue more debt instruments would have higher financial risk than companies financed mostly by equity (d) Venture Capital Financing and Factors to be considered in financing any Risky Project Under venture capital financing, venture capitalist makes investment to purchase debt or equity from inexperienced entrepreneurs who undertake highly risky ventures with potential of success. The factors to be considered in financing any risky project are: (i) Quality of the management team is a very important factor to be considered. They are required to show a high level of commitment to the project. (ii) The technical ability of the team is also vital. They should be able to develop and produce a new product / service. (iii) Technical feasibility of the new product / service should be considered. (iv) Since the risk involved in investing in the company is quite high, venture capitalists should ensure that the prospects for future profits compensate for the risk.
(v) A research must be carried out to ensure that there is a market for the new product. (vi) The venture capitalist himself should have the capacity to bear risk or loss, if the project fails. (vii) The venture capitalist should try to establish a number of exit routes. (viii) In case of companies, venture capitalist can seek for a place on the Board of Directors to have a say on all significant matters affecting the business. (Note: Students may answer any two of the above factors) (e) Advantages of Electronic Cash Management System (i) Significant saving in time. (ii) Decrease in interest costs. (iii) Less paper work. (iv) Greater accounting accuracy. (v) More control over time and funds. (vi) Supports electronic payments. (vii) Faster transfer of funds from one location to another, where required. (viii) Speedy conversion of various instruments into cash. (ix) Making available funds wherever required, whenever required. (x) Reduction in the amount of idle float to the maximum possible extent