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 (16 5 80 Marks). [Answer any 4 out of 5 in Q.7] Question 1(a): Quarterly Production Budget & BEP M 12 (5 Marks) AK Limited produces and sells a single product. Sales Budget for calendar year 2012 by quarters is as under Quarters I II III IV No. of units to be sold 18,000 22,000 25,000 27,000 The year is expected to open with an Inventory of 6,000 units of Finished Products, and close with Inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the current quarter s sales demand plus 30% of the following quarter demand. The Budgeted Selling Price per unit is ` 40. The Standard Cost details for one unit of the product are Variable Cost ` 34.50 per unit. Fixed Overheads 2 hours 30 minutes at ` 2 per hour based on a budgeted production volume of 1,10,000 Direct Labour Hours for the year. Fixed Overheads are evenly distributed throughout the year. You are required to (i) Prepare Quarterly Production Budget for the year. (ii) In which Quarter of the year, Company is expected to achieve Break Even Point. Solution: Production Budget Quarter I II III IV Total Budgeted Sales 18,000 22,000 25,000 27,000 92,000 Add: Closing Stock (bal. fig.) 7,200 (bal. fig.) 8,100 (bal. fig.) 8,700 (given) 8,000 8,000 25,200 30,100 33,700 35,000 1,00,000 Less: Opening Stock (given) 6,000 7,200 8,100 8,700 6,000 Budgeted Production 19,200 22,900 25,600 26,300 94,000 (70% of 18,000 + 30% of 22,000) (70% of 22,000 + 30% of 25,000) (70% of 25,000 + 30% of 27,000) Cumulative Production 19,200 42,100 67,700 94,000 1. Contribution p.u. Selling Price ` 40 Variable Cost ` 34.50 ` 5.50 p.u. Fixed Cost 1,10,000 hrs 2 p.h 2. Break even Quantity 40,000 units. Contribution p.u. 5.50 3. Since, Cumulative Production exceeds Break even Quantity in Quarter II, it is expected to achieve Break even Point in Quarter II. Question 1(b): Simple Machine Hour Rate M 12 (5 Marks) A Machine costing ` 10 Lakhs was purchased on 01.04.2011. The expected life of the Machine is 10 years. At the end of this period, its scrap value is likely to be ` 10,000. The Total Cost of all Machines including new one was ` 90 Lakhs. The other information is given as follows (i) Working Hours of the Machine for the year was 4,200 including 200 non productive hours. (ii) Repairs and Maintenance for the new Machine during the year was ` 5,000. (iii) Insurance Premium was paid for all the Machine ` 9,000. (iv) New Machine consumes 8 units of electricity per hour, the rate per unit being ` 3.75. (v) The new Machine occupies 1/10 th of the area of the department. Rent of the department is ` 2,400 per month. (vi) Depreciation is charged on Straight Line Basis. Compute the Machine Hour Rate for the new Machine. May 2012.1

Solution: Similar to Page 4.34 Illustration 23 1. Statement of OH Costs relating to the New Machine Particulars Computation ` Depreciation 10,00,000 10,000 10 years 99,000 Repairs and Maintenance Given 5,000 Insurance 10,00,000 9,000 90,00,000 1,000 Electricity 4,000 hrs 8 units ` 3.75 p.u. (assumed no Electricity during non productive time) Rent 1 ` 2,400 p.m. 12 months 10 1,20,000 2,880 Total OH 2,27,880 2. Machine Hour Rate Total OH Effective Machine Hours ` 2,27,880 (4,200 200) hrs ` 56.97 p.h. Question 1(c): M&M (with taxes) Levered vs Unlevered Firm M 12 (5 Marks) RES Ltd is an all Equity financed Company with a Market Value of ` 25,00,000 and Cost of Equity, Ke 21%. The Company wants to buyback Equity Shares worth ` 5,00,000 by issuing and raising 15% Perpetual Debt of the same amount. Rate of Tax may be taken as 30%. After the capital restructuring and applying MM Model (with taxes), you are required to calculate (i) Market Value of RES Ltd. (ii) Cost of Equity Ke. (iii) Weighted Average Cost of Capital and comment on it. Solution: Given, Value of Unlevered Firm (given) ` 25,00,000, and Cost of Equity (K e ) 21% So, EAT of Unlevered Firm ` 25,00,000 21% ` 5,25,000 EBT of Unlevered Firm ` 5,25,000 100% 70% ` 7,50,000 EBIT also. Particulars ` EBIT of Levered Firm 7,50,000 Less: Interest (` 5,00,000 15%) 75,000 EBT 6,75,000 Less: Tax at 30% 2,02,500 EAT of Levered Firm 4,72,500 After Restructuring: 1. Market Value of Levered Firm Market Value of Unlevered Firm + (Debt Rate Tax Rate) ` 25,00,000 + (5,00,000 30%) ` 26,50,000 2. EAT 4,72,500 Cost of Equity (K e ) 23.63% Value of Equity 25,00,000 5,00,000 3. Cost of Capital (K o ) is as under Component ` % Individual Cost WACC Debt 5,00,000 20% K d 15% (100% 30%) 10.5% 2.1% Equity 20,00,000 80% K e (as above) 23.63% 18.9% Total 25,00,000 21% Comment: K o is constant under M & M Approach at 21%. May 2012.2

Question 1(d): Debtors Management Credit / Discount Decision M 12 (5 Marks) A Company is presently having a Credit Sales of ` 12 Lakh. The existing credit terms are 1/10 net 45 days, and average collection period is 30 days. The current Bad Debts Loss is 1.5%. In order to accelerate the collection process further as also to increase Sales, the Company is contemplating liberalization of its existing credit terms to 2/10 net 45 days. It is expected that Sales are likely to increase 1/3 rd of existing Sales, Bad Debts increase to 2% of Sales and average collection period to decline to 20 days. The Contribution to Sales Ratio of the Company is 22% and Opportunity Cost of Investment in Receivables is 15% (pre tax). 50% and 80% of Customers in term of Sales Revenue are expected to avail Cash Discount under existing and liberalization scheme respectively. Tax Rate is 30%. Should the Company change its credit terms? (Assume 360 days in a year). Solution: Similar to Page 16.61 Illustration 51 (N 03) Particulars Present Proposed 1. Sales ` 12,00,000 ` 12,00,000 + 1/3 rd ` 16,00,000 2. Variable cost at 78% (Sales Contribution) ` 9,36,000 ` 12,48,000 3. Contribution at 22% ` 2,64,000 ` 3,52,000 4. Cost of Sales Variable Cost only (as per 2) ` 9,36,000 ` 12,48,000 5. Collection Period (days) 30 20 5 6. Average Debtors (4 ) ` 78,000 ` 69,333 360 7. Interest on Average Debtors at 15% ` 11,700 ` 10,400 8. Bad Debts ` 12,00,000 1.5% ` 18,000 ` 16,00,000 2% ` 32,000 9. Discount Allowed ` 12,00,000 50% 1% ` 6,000 ` 16,00,000 80% 2% ` 25,600 10. Net Benefit (3 7 8 9) ` 2,28,300 ` 2,84,000 Conclusion: The Company may change its credit terms, due to additional Net Benefit of ` 55,700 (2,84,000 2,28,300) Note: Working Capital Management decisions are generally pre tax decisions and hence tax rate need not be considered in above calculations. Question 2(a): Contract Costing A Contractor commenced a Contract on 01.07.2011. The Costing Records concerning the said contract reveal the following information as on 31.03.2012 Particulars ` Material sent to Site 7,74,300 Labour Paid 10,79,000 Labour Outstanding as on 31.03.2012 1,02,500 Salary to Engineer 20,500 per month Cost of Plant sent to Site (01.07.2011) 7,71,000 Salary to Supervisor (3/4 th time devoted to Contract) 9,000 per month Administration and Other Expenses 4,60,600 Prepaid Administration Expenses 10,000 Material in Hand at Site as on 31.03.2012 75,800 Plant used for the contract has an estimated life of 7 years with residual value at the end of life ` 50,000. Some of material costing ` 13,500 was found unsuitable and sold for ` 10,000. Contract Price was ` 45,00,000. On 31.03.2012, two third of the contract was completed. The Architect issued certificate covering 50% of the Contract Price and Contractor has been paid ` 20,00,000 on account. Depreciation on Plant is charged on Straight Line basis. Prepare Contract Account. Solution: Similar to Page 6.28 Illustration 9 (N 91) Note: In this Question, Cost of Work Uncertified is not given. However, total work done is 2/3 rd or 66.67%, while extent of certification is 50%. Hence, balance 16.67% constitutes work done but not certified. This should be computed on proportionate cost basis in the following manner. May 2012.3

1. Contract Account for the year ended 31 st March 2012 Particulars ` Particulars ` To Materials 7,74,300 By Cost of Contract c/d (bal. fig.) 26,39,600 To Labour Charges (Paid + P ble) 11,81,500 By Materials A/c Cost of Materials sold 13,500 (10,79,000 + 1,02,500) To Engineer s Salary (20,500 9) 1,84,500 By Materials c/d 75,800 To Supervisor s Salary (9,000 ¾ 9) 60,750 To Administration & Other Expenses (4,60,600 Prepaid 10,000) 4,50,600 To Deprn (7,71,000 50,000) 7 1 12 9 ) 77,250 Total 27,28,900 Total 27,28,900 To Cost of Contract b/d 26,39,600 By Work in Progress Account Work Certified [WN (a)] 22,50,000 To Notional Profit c/d (balancing figure) 2,70,300 Work Uncertified [WN (b)] 6,59,900 Total 29,09,900 Total 29,09,900 To P & L Account Profit transfer [WN (c)] 80,089 By Notional Profit b/d 2,70,300 To Reserve Profit (balancing figure) 1,90,211 Total 2,70,300 Total 2,70,300 To Work in Progress b/d (22,50,000 + 6,59,900) 29,09,900 By Reserve Profit 1,90,211 To Materials b/d 75,800 Note: (a) Value of Work Certified ` 45 Lakhs 50% ` 22.50 Lakhs. (b) Cost of 66.67% work done ` 26,39,600 (as per Contract A/c above) So, Proportionate Cost of 16.67% work done (i.e. Uncertified Work) ` 26,39,600 Work Certified (c) Percentage of Completion 50% (given) Contract Pr ice 1 Cash Re ceived So, Profit tfrd to P & L A/c Notional Profit 3 Work Certified 16.67% ` 6,59,900 66.67% 1 20,00,000 2,70,300 3 22,50, 000 ` 80,089 (d) Loss on sale of unsuitable material (` 13,500 ` 10,000 ` 3,500) may be directly considered in General P & L A/c. Alternatively, Sale Value may be credited to Contract Account. Question 2(b): Cash Flow Statement The Balance Sheet of X Ltd as on 31.03.2011 and 31.03.2012 are as under Liabilities 2011 2012 Assets 2011 2012 Eq. Sh. Capital (` 10 each) 18,00,000 22,00,000 Fixed Assets (incl. Machine) 20,50,000 18,75,000 General Reserve 7,50,000 6,00,000 Stock 7,10,000 8,95,000 Security Premium 50,000 45,000 Debtors 7,25,000 9,80,000 Profit and Loss A/c 4,50,000 5,30,000 Cash Balance 1,25,000 1,80,000 7% Debentures 3,00,000 2,00,000 Preliminary Expenses 35,000 25,000 Creditors 1,50,000 2,15,000 Provision for Tax 1,45,000 1,65,000 Total 36,45,000 39,55,000 Total 36,45,000 39,55,000 Additional Information (i) Depreciation charged on Fixed Assets during the year was ` 2,05,000. An Old Machine costing ` 2,00,000 (WDV ` 80,000) was sold for ` 65,000 during the year. (ii) Provision for Tax made during the year for ` 1,78,000. (iii) On 01.04.2011, Company redeemed Debentures of ` 1,00,000 at a Premium of 5%. (iv) The Company has issued fully paid Bonus Shares of ` 2,00,000 by capitalisation of profit. Prepare Cash Flow Statement. May 2012.4

Solution: 1. Provision for Tax Account Particulars ` Particulars ` To Bank A/c (bal. fig.) (Tax paid) 1,58,000 By balance b/d 1,45,000 To balance c/d (given) 1,65,000 By Profit & Loss A/c (Provn. for the year) 1,78,000 Total 3,23,000 Total 3,23,000 2. Fixed Assets Account Particulars ` Particulars ` To balance b/d 20,50,000 By Depreciation A/c (given) 2,05,000 To Bank A/c Purchase (bal. fig.) 1,10,000 By Bank A/c Sale Proceeds of Machinery 65,000 By Profit & Loss A/c (Loss on Sale) 15,000 By balance c/d (given) 18,75,000 Total 21,60,000 Total 21,60,000 3. Computation of Net Profit before Taxation Particulars ` Increase in P&L Account balance 5,30,000 4,50,000 80,000 Add: Transfer to General Reserve (Note) 50,000 Add: Provision for Taxation for the year 1,78,000 Net Profit before Taxation, taken to Cash Flow Statement 3,08,000 Note: Bonus Issue has been made by Capitalisation of Profits available in General Reserve. Since there is only a decrease of ` 1,50,000 in General Reserve during the year, it is assumed that the balance of ` 50,000 has been transferred from P&L A/c to General Reserve for Bonus Issue. 4. Cash Flow Statement of X Ltd for the year ended 31 st March 2012 (using Indirect Method) Particulars ` ` A. CASH FLOWS FROM OPERATING ACTIVITIES Net Profit before Taxation (WN 3) 3,08,000 Adjustments for: Depreciation 2,05,000 Loss on sale of Fixed Assets (WN 2) 15,000 Preliminary Expenses written off [35,000 25,000] 10,000 Operating Profit Before Working Capital Changes 5,38,000 Adjustments for Working Capital Changes Increase in Stock [8,95,000 7,10,000] (1,85,000) Increase in Debtors [9,80,000 7,25,000] (2,55,000) Increase in Creditors [2,15,000 1,50,000] 65,000 Cash Generated from Operations Before Income Tax 1,63,000 Less: Income Taxes Paid (1,58,000) Net Cash Flow from / (used in) Operating Activities (A) 5,000 B. CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Fixed Assets (WN 2) (1,10,000) Sale of Fixed Assets 65,000 Net Cash Flow from / (used in) Investing Activities (B) (45,000) C. CASH FLOWS FROM FINANCING ACTIVITIES Redemption of Debentures at Premium (1,00,000 + 5,000) (Note) (1,05,000) Issue of Eq. Sh. Capital (Opg. bal. 22 Lakhs Clg. bal. 18 Lakhs Bonus Issue 2 Lakhs) 2,00,000 Net Cash Flow from / (used in) Financing Activities (C) 95,000 D. Net Increase / (Decrease) in Cash & Cash Equivalents (A) + (B) + (C) 55,000 E. Cash & Cash Equivalents at the beginning of the period 1,25,000 F. Cash & Cash Equivalents at the end of the period (D + E) 1,80,000 Note: Reduction of ` 5,000 in Securities Premium A/c in Balance Sheet implies that Premium on Redemption of Debentures has been met out therefrom. May 2012.5

Question 3(a): Wage Plans Halsey, Rowan, Taylor, Emerson The Management of a Company wants to formulate an incentive plan for the workers, with a view to increase productivity. The following particulars have been extracted from the books of the Company. Piece Wage Rate ` 10 Weekly Working hours 40 Hourly Wages Rate (guaranteed) ` 40 Standard / Normal Time taken per unit 15 minutes Actual Output for a week: Worker A Worker B 176 pieces 140 pieces Differential Piece Rate: 80% of Piece Rate when Output below Normal and 120% of Piece Rate when Output above Normal. Under Halsey Scheme, Workers get a Bonus equal to 50% of Wages of Time Saved. Calculate: (i) Earnings of Workers under Halsey s and Rowan s Premium Scheme. (ii) Earnings of Workers under Taylor s Differential Piece Rate System and Emerson s Efficiency Plan. Solution: 1. Computation of Time Saved Particulars Worker A Worker B 15 15 Standard/ Normal time 176 Units 44 hours 140 Units 35 hours 60 60 Less: Actual time taken (given) 40 hours (given) 40 hrs Time Saved 4 hours 2. Earnings of Workers under Halsey s and Rowan s Premium Schemes Particulars Worker A Worker B (a) Hours worked Rate p.h. (40 hrs ` 40) ` 1,600 (40hrs ` 40) ` 1,600 (b) Bonus under Halsey 50% Time Saved Rate p.h. (50% 4 hrs ` 40) ` 80 NA Actual Hrs (c) Bonus under Rowan Time Saved Rate p.h. (40 44 4)hrs ` 40 ` 145.45 NA Standard Hrs (d) Total Wages under Halsey s System (a) + (b) ` 1,680 ` 1,600 (e) Total Wages under Rowan s System (a) + (c) ` 1,745.45 ` 1,600 (a) Efficiency 3. Earnings of Workers under Taylor s and Emerson s Premium Scheme Particulars Worker A Worker B Actual Output S tandard Output (b) Total Wages under Taylor s System (c) Total Wages under Emerson s System Note: Proportionate percentage of Bonus Actual Units produced 120 % of Rate per Piece 176 units 120% of ` 10 ` 2,112 120% of Time Rate + 10% 120% (40 hours ` 40) + 10% ` 2,112 (87.5 (100 66.67) 20% 66.67) 176 140 110% 87.5% 160 160 20.83 20% 12.5% 33.33 Actual Units produced 80% of Rate per Piece 140 units 80% of ` 10 ` 1,120 Time Rate + Increasing Bonus based on actual efficiency (40 hrs. ` 40) + 12.5% ` 1,800 (Note) Question 3(b): Working Capital Forecast Cash Cost Approach STN Ltd is a ready made garment manufacturing Company. Its production cycle indicates that Materials are introduced in the beginning of the production phase, Wages and Overhead accrue evenly throughout the period of cycle. The following figures for the 12 months ending 31 st December 2011 are given May 2012.6

Production of Shirts 54,000 units Selling Price per unit ` 200 Duration of the production cycle 1 month Raw Material Inventory held 2 month s consumption Finished Goods Stock held for 1 month Credit allowed to Debtors is 1.5 months and credit allowed by Creditors is 1 month. Wages are paid in the next month following the month of accrual. In the Work in Progress, 50% of Wages and Overheads are supposed to be Conversion Costs. The ratio of Cost to Sales Price is Raw Materials 60%, Direct Wages 10% and Overheads 20%. Cash is to be held to the extent of 40% of Current Liabilities and Safety Margin of 15% will be maintained. Calculate the amount of Working Capital for the Company on a Cash Cost Basis. Solution: Similar to Page 16.33, Illustration 13, M 05 (Modified) Note: RM 60% of 200 ` 120, Labour 10% of ` 200 ` 20, OH 20% of ` 200 ` 40 Statement of Working Capital Requirements (Cash Cost Approach) Particulars Quantity Rate p.u ` A. Current Assets Raw Materials Stock 54,000 units 12 2 9,000 60% of 200 ` 120 10,80,000 WIP Stock 54,000 units 12 1 4,500 RM Cost + 50% (Lab+ OH) 120 + 50% (20 + 40) ` 150 6,75,000 Finished Goods Stock 54,000 units 12 1 4,500 At Cost ` 180 8,10,000 1. 5 Debtors 54,000 units 12 6,750 At Cost ` 180 12,15,000 Cash B. Current Liabilities 40% of Current Liabilities 40% of 6,30,000 2,52,000 Total 40,32,000 Creditors 54,000 units 12 1 4,500 60% of 200 ` 120 5,40,000 Wages Payable 1 54,000 units 12 4,500 10% of 200 ` 20 90,000 Total 6,30,000 C. Net Working Capital (A B) 34,02,000 D. Add: 15% Safety Margin 5,10,300 E. Required Net Working Capital 39,12,300 Note: In the absence of information, Depreciation is ignored in the above computation. Question 4(a): Standard Costing VOH & FOH Variances SJ Ltd has furnished the following information Standard Overhead Absorption Rate per unit ` 20 Standard Rate per hour ` 4 Budgeted Production 15,000 units Actual Production 15,560 units Actual Hours ` 74,000 Actual Overheads were ` 2,95,000 of which ` 62,500 were fixed. May 2012.7

Overheads are based on the following Flexible Budget. Production (units) 8,000 10,000 14,000 Total Overheads (`) 1,80,000 2,10,000 2,70,000 You are required to calculate the following Overhead Variances (on hours basis) with appropriate workings (i) Variable Overhead Efficiency and Expenditure Variance. (ii) Fixed Overhead Efficiency and Capacity Variance. Solution: Standard VOH p.u Δ OH 2,10,000 1,80,000 Δ Qtty (10,000 8,000) uts 30,000 ` 15 p.u 2,000 uts Standard FOH p.u Total Absorption Rate ` 20 p.u VOH ` 15 p.u ` 5 p.u ` 20 pu Standard Time p.u. ` 4 ph 5 hours p.u ` 15 pu Standard VOH p.h. ` 5 ph ` 3 p.h. ` 5 pu Standard FOH p.h. ` 5 ph ` 1 p.h. 1. VOH Variance Computation based on Time Col.(1): SH SR Col.(2):AH SR Col.(3):AVOH (15,560 units 5 hrs) ` 3 p.h. ` 2,33,400 74,000 hrs 3 p.h. ` 2,22,000 2,95,000 62,500 ` 2,32,500 VOH Efficiency Variance ` 2,33,400 ` 2,22,000 ` 11,400 F + VOH Expenditure Variance ` 2,22,000 ` 2,32,500 ` 10,500 A Total VOH Cost Variance ` 2,33,400 ` 2,32,500 ` 900 F 2. Computation of FOH Variances Col. (1): AO SR Col. (2): AH SR Col. (3): BFOH Col. (4): AFOH ` 62,500 (Given) 15,560 units ` 5 p.u ` 77,800 74,000 hrs 1 p.h. ` 74,000 15,000 units ` 5 ` 75,000 FOH Efficiency Variance ` 77,800 ` 74,000 ` 3,800 F + FOH Capacity Variance ` 74,000 ` 75,000 ` 1,000 A + FOH Expenditure Variance ` 75,000 ` 62,500 ` 12,500 F FOH Volume Variance ` 77,800 ` 75,000 ` 2,800 F + FOH Expenditure Variance b/fd as above ` 12,500 F Total FOH Cost Variance ` 77,800 ` 62,500 ` 15,300 F Question 4(b): Capital Budgeting Reverse Working ANP Ltd is providing the following information You are required to calculate Annual Cost of Saving ` 96,000 (i) Cost of the Project Useful Life 5 years (ii) Payback period Salvage Value Nil (iii) Net Present Value of Cash Inflow Internal Rate of Return 15% (iv) Cost of Capital Profitability Index 1.05 May 2012.8

Table of Discount Factor: Discount Years Factor 1 2 3 4 5 Total 15% 0.870 0.756 0.658 0.572 0.497 3.353 14% 0.877 0.769 0.675 0.592 0.519 3.432 13% 0.886 0.783 0.693 0.614 0.544 3.520 Solution: Similar to Page 20.17, Illustration 10 (M 09) 1. Since IRR 15%, Discounted Cash Inflows at 15% Initial Investment in the Project. So, Cost of Project Initial Investment CFAT p.a. Cum. PVF at 15% for 5 years 96,000 3.353 ` 3,21,888 Initial Investment 2. Payback Period CFAT p.a. 3,21,888 3.353 years 96,000 3. NPV Total DCFAT (WN 3) Initial Investment (WN 1) 3,37,982.40 3,21,888 ` 16,094.40 Total DCFAT 4. Profitability Index 1.05 (given). So, Total DCFAT PI Initial Investment Initial Investment DCFAT CFAT p.a. PVF at K o.on substitution, ` 3,37,982.40 ` 96,000 PVF at K o. 1.05 3,21,888 ` 3,37,982.40 On Solving, PVF at K o 3,37,982.4 3.52. From the above table, Ko 13% 96,000 K o 13% Question 5: Various Chapters M 12 (4 4 16 Marks) Question Reference (a) What is an Integrated Accounting System? State its advantages. Page 5.3, Q.No.5 & 6 (b) State the types of cost in the following cases (i) Interest paid on Own Capital not involving any cash outflow. Notional/Imputed Cost (ii) Withdrawing money from Bank Deposit for the purpose of purchasing new Machine for expansion purpose. Opportunity Cost (iii) Rent paid for the Factory Building which is temporarily closed. Sunk/Committed Cost (iv) Cost associated with the acquisition and conversion of Material into Finished Product. Factory Cost (c) Discuss the factors that a Venture Capitalist should consider before financing any risky project. Page 21.6, Q.No.18 (d) What is Net Operating Income Theory of Capital Structure? Explain the assumptions on which the NOI theory is based. Page 18.9, Q.No.23 & Page 18.8 Q.No.21 Question 6(a): Process Costing Basics A product passes through two processes A and B. During the year 2011, the input to Process A of Basic Raw Material was 8,000 units at ` 9 per unit. Other information for the year is as follows: Process A Process B Output Units 7,500 4,800 Normal Loss (% to input) 5% 10% Scrap Value per unit (`) 2 10 Direct Wages (`) 12,000 24,000 Direct Expenses (`) 6,000 5,000 Selling Price per unit (`) 15 25 May 2012.9

Total Overheads ` 17,400 were recovered as percentage of Direct Wages. Selling Expenses were ` 5,000. There are not allocated to the processes. 2/3 rd of the Output of Process A was passed on to the next process, and the balance was sold. The entire output of Process B was sold. Prepare Process A & B Accounts. Solution: Similar to Page 8.9, Illustration 4 (N 07) Working Note Process A 1. Loss Analysis Process Loss Input Output 8,000 7,500 500 Process B 1. Loss Analysis Process Loss Input Output 5,000 4,800 200 Normal Loss Abnormal Loss Normal Loss Abnormal Gain 5% of 8,000 400 (bal. fig.) 100 10% of 5,000 500 (bal. fig.) 300 2. Cost Analysis 2. Cost Analysis Particulars Cost Quantity Particulars Cost Quantity Gross 95,800 8,000 Gross 1,03,100 5,000 ( ) Normal Loss 800 400 ( ) Normal Loss 5,000 500 Net 95,000 7,600 Net 98,100 4,500 ` ` Effective Cost 95,000 7,600 ` 12.5 p.u Effective Cost 98,100 4,500 ` 21.8 p.u Process A A/c Particulars Qtty ` Particulars Qtty ` To Basic Raw Material A/c 8,000 72,000 By Finished Goods Control at ` 12.5 (1/3 rd of 7,500) 2,500 31,250 To Direct Wages A/c 12,000 By Process B tfr. at ` 12.5 p.u. (2/3 rd of 7,500) 5,000 62,500 To Direct Expenses A/c 6,000 By Normal Loss A/c 400 800 To Overheads A/c (Note) 5,800 By Abnormal Loss A/c at ` 12.5 p.u. 100 1,250 Total 8,000 95,800 Total 8,000 95,800 Process B A/c Particulars Qtty ` Particulars Qtty ` To Process A A/c transfer 5,000 62,500 By Finished Goods Control at ` 21.8 4,800 1,04,640 To Direct Wages A/c 24,000 By Normal Loss A/c at ` 10 pu 500 5,000 To Direct Expenses A/c 5,000 To Overheads A/c (Note) 11,600 To Abnormal Gain at ` 21.8 p.u. 300 6,540 Total 5,300 1,09,640 Total 5,300 1,09,640 Note: Total Overheads ` 17,400 apportioned in the ratio of Direct Wages i.e., 1:2. Question 6(b): Ratio Analysis The Capital Structure of JCPL Ltd is as follows: ` Equity Share Capital of ` 10 each 8,00,000 8% Preference Share Capital of ` 10 each 6,25,000 10% Debentures of ` 100 each 4,00,000 Total 18,25,000 Additional Information: Profit after Tax (tax rate 30%) ` 1,82,000 Operating Expenses (including Depreciation ` 90,000) being 1.50 times of EBIT Equity Share Dividend paid 15% Market Price per Equity Share ` 20 May 2012.10

You are required to calculate the following: (a) Operating and Financial Leverage (b) Cover the Preference & Equity Share Dividends (c) The Earning Yield and Price Earning Ratio (d) The Net Fund Flow Solution: Note: It is assumed that all Operating Costs other than Depreciation are variable in nature. Profit Statement Particulars Computation ` Sales EBITD + Operating Cost 7,50,000 Less: Variable Operating Costs excl. Depreciation (EBIT 1.50 times) Deprn. (3,00,000 1.50) 90,000 (3,60,000) Contribution EBIT + Depreciation 3,00,000 + 90,000 3,90,000 Less: Fixed Costs Depreciation (given) (90,000) EBIT EBT + Interest 2,60,000 + 40,000 3,00,000 Less: Interest 10% on 4,00,000 (40,000) EBT 100% 1,82,000 2,60,000 70% Less: Tax at 30% 30% (78,000) EAT 100% 30% 70% (given) 1,82,000 Less: Preference Dividend 8% on 6,25,000 (50,000) Residual Earnings 1,32,000 Less: Equity Dividend (1,20,000) Retained Earnings 12,000 No. of Shares 80,000 Nos. Earnings Per Share (EPS) Residual Earnings 1,32,000 No.of Equity Shares 80,000 1.65 Operating Leverage Financial Leverage PE Ratio Earning Yield Ratio (taken as Dividend Yield) Preference Dividend Cover Equity Dividend Cover Contribution EBIT 3,90,000 3,00,000 EBIT 3,00,000 EBT 2,60, 000 Market Pr ice per Share Earnings per Share EAT Pref. Dividend 20 1.65 DPS 1.50 MPS 20 1,82,000 50,000 Residual Earnings 1,32,000 Eq. Dividend 1,20,000 1.3 times 1.15 times 12.12 7.5% 3.64 times 1.1 times Net Fund Flow EBIT + Depreciation 3,90,000 Question 7: Various Chapters M 12 (4 4 16 Marks) Question Reference (a) The Profit Maximisation is not an operationally feasible criterion. Comment on it. Page 13.3, Q.No.7 (b) Explain the important ratios that would be used in each of the following situations (i) A Bank is approached by a Company for a Loan of ` 50 Lakhs for WC purposes. (ii) A Long Term Creditor interested in determining whether his Claim is adequately secured. (iii) A Shareholder who is examining his portfolio and who is to decide whether he should hold or sell his holding in the Company Page 14.28, Q.No.24 Hint: (iv) GP Ratio, NP Ratio, ROCE, ROI and all Activity Ratios (iv) A Finance Manager interested to know effectiveness with which a Firm uses its available resources. (c) Write Short notes on the following: (i) Deep Discount Bonds Page 21.17, Q.No.39 (ii) Angle of Incidence Page 11.6, Q.No.19, Pt 3 (d) Discuss basic assumptions of Cost Volume Profit Analysis. Page 11.5, Q.No.18, Pt 3 (e) Distinguish between Bill of Material and Material Requisition Note. Page 2.7, Q.No.17 May 2012.11

Students Notes May 2012.12