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 – (`1.2 + 0.46) = `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 = `65454.54
73.33%
In units = `65454.54 = 10909.09 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 = `80,454.54
73.33%
(Units) = `80,454.54 = 13,409.09 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
Solution 1 (c):
Degree of Operating Leverage (DOL)
Degree of Combined Leverage (DCL)
Firm
= % Change in Operating Income
=
% Change in EPS
% Change in Revenue
% Change in Revenue
25% = 0.926
30% = 1.111
P
27%
27%
32% = 1.280
24% = 0.960
Q
25%
25%
36% = 1.565
21% = 0.913
R
23%
23%
40% = 1.905
23% = 1.095
S
21%
21%
Solution 1 (d):
Trading and Profit & Loss A/c for the year ending 31st March, 2015
Particulars
Amount in (`) Particulars
Amount in (`)
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)
27,00,000
97,20,000
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 = `12,50,000
100
(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%
149.95%
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)
`3,593.22
`10,800
`16,194.92
.
.
.
*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)
4
4
4
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)
10,610
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
`11,247.88
(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
145.83%
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)
262.50 hours
Expected hours to be taken (45 hours x 4 weeks)
180 hours
Time Saved
82.50 hours
Time wages (180 hours x `50)
`9,000
Incentive (1/2 x Time saved x `50)
`2,062.50
II. Total expected wages
`11,062.50
Loss from the proposed scheme (II - I)
`4,687.50
Supporting the demand of colleague workers will cost `4,687.50 in the next month to Mr. K.
Solution 2 (b): (a) Projects Cumulative Cash Inflows
(Amount in `)
Years
A
B
C
1
1,000
0
1,000
2
2,000
1,000
2,000
3
5,000
3,000
5,000
4
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 `)
A
B
C
Year
PVF
Cash Flows
PV
Cash Flows
PV
Cash Flows
PV
0
1
(5,000)
(5,000)
(1,000)
(1,000)
(5,000)
(5,000)
1
0.909
1,000
909
0
0
1,000
909
2
0.826
1,000
826
1,000
826
1,000
826
3
0.751
3,000
2,254
2,000
1,503
3,000
2,254
4
0.683
0
0
3,000
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
Solution 3 (a): (a) Overhead Distribution Statement
Production Departments
Particulars
Machine Shops
Packing
Allocated Overheads:
Indirect labour
Maintenance Material
Misc. supplies
Supervisor’s salary
Cost & payroll salary
Total allocated overheads
Add: Apportioned Overheads
(As per Schedule below)
Service Departments
General Plant
Stores
(`)
8,000
3,400
1,500
--12,900
1,84,350
(`)
6,000
1,600
2,900
--10,500
70,125
(`)
4,000
2,100
900
16,000
80,000
1,03,000
22,775
(`)
11,000
2,800
600
--14,400
73,150
1,97,250
80,625
1,25,775
87,550
Schedule of Apportionment of Overheads
Item of Cost
Basis
Power
Rent
Fuel & Heat
Insurance
Taxes
Depreciation
HP hours (7 : 1 : - : 2)
Floor space (5 : 2 : 1 : 4)
Radiator sec. (3 : 6 : 2 : 4)
Investment (10 : 3 : 1 : 2)
Investment (10 : 3 : 1 : 2)
Investment (10 : 3 : 1 : 2)
Production Departments
Machine Shops (`)
Packing (`)
Service Departments
General Plant (`)
Stores (`)
54,600
7,800
-15,600
30,000
12,000
6,000
24,000
12,000
24,000
8,000
16,000
7,500
2,250
750
1,500
5,250
1,575
525
1,050
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 = 1,25,775 + 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 0.94 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 = 87,550 + 0.2 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
1,97,250.00
80,625.00
General Plant
1,61,745
80,872.50
48,523.50
(1,61,745 x 5/10) (1,61,745 x 3/10)
Stores
1,19,899
59,949.50
23,979.80
(1,19,899 x 50%) (1,19,899 x 20%)
3,38,072.00
1,53,128.30
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
Less: Tax @ 40%
Profit After Tax
Less: Preferred Stock Dividend (`4,000 x 11%)
Earnings Available to Equity Holders
660
(264)
396
396
1,140
(456)
684
(440)
244
1,140
(456)
684
684
No. of Equity Shares
Earnings per Share (EPS)
800
0.495
800
0.305
1,050
0.651
Additional No. Equity shares to be issued in Common Stock Plan = `40,00,000 = 2,50,000 shares
`16 per share
(b) Indifference Point:
(EBIT - I) (1 - t) - PD = (EBIT - I) (1 - t) - PD
N1
N2
Earnings Per Share (`)
2.50
12% Debt Plan
2.00
1.76
1.50
1.15
1.00
Common Stock Plan
0.50
0
360
840 1,093 1,500
11% Preferred Stock
Plan
2,376
3,440
EBIT (` in ‘000)
Debt Plan and Preferred Stock Plan (` in ‘000): (EBIT - 840) (1 – 0.4) = (EBIT – 360) (1 – 0.4) - 440
800
800
There is no indifference point between the above financial plans.
Preferred Stock and Common Stock Plan (` in ‘000): (EBIT - 360) (1 – 0.4) - 440 = (EBIT – 360) (1 – 0.4)
800
1,050
EBIT = 3,440
Corresponding EPS = (3,440- 360) (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 = (2,376 - 360) (1 – 0.4) = `1.152
1,050
(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 2014-2015
Particulars
Amount in (`) Particulars
Amount in (`)
To Materials issued
15,30,000 By Material Sold
2,40,000
To Direct Wages
10,12,500
By Costing P&L Account
15,000
(Loss on sale of material)
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
By Material at site
73,000
Less: Prepaid
68,000
2,57,000 By Work-in-Progress:
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 2014-2015
- Materials Issued in 2014-2015
- Less: Closing Materials at Site
15,30,000
- 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 2014-2015
- 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 2014-2015:
- 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 2014-2015:
- 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 2014-2015
3,00,000
- 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* = `5,14,958.33
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 2014-2015, will be on the basis of estimated profit calculated as above.
Profit to be transferred in Costing Profit & Loss account for the year 2014-2015 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.
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 0.35
8
Incremental CFAT
6,950
PVF (10% for 8 years)
5.335
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.
Particulars
Amount in (`) Particulars
Amount in (`)
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
2,70,840
73,090
Work in Progress
Amount in (`) Particulars
89,100 By Finished goods control
1,97,750 By Balance c/d
85,480
2,13,700
5,86,030
To balance b/d
73,980
Dr.
Finished Goods Control
Particulars
Amount in (`) Particulars
To Balance b/d
42,075 By Cost of goods sold
To Work-in-progress
5,12,050 By Balance c/d
5,54,125
To balance c/d
60,665
Dr.
Production Overhead Control
Particulars
Amount in (`) Particulars
To Cost ledger control
2,08,220 By Work-in-progress
To Additional depreciation
12,500 By Under-absorbed
2,20,720
Solution 6 (b): Cash Flow Statement (for the year ended 31st March, 2015)
(A) Cash Flows from Operating Activities
Retained Earnings for the year (`18,75,000 – `15,00,000)
Add: Transfer to General Reserve during the year (WN 6)
Add: Dividends Proposed during the year (WN 7)
Net Profits After Tax
Add: Provision for Tax made during the year
Net Profit Before Tax
Add: Premium on Redemption of Debentures written (`14,50,000 x 10%)
Add: Loss on Sale of machine written off (WN 3)
Add: Depreciation written off on Plant & Machinery (WN 3)
Add: Depreciation written off Building (WN 4)
Add: Goodwill written off (WN 8)
Operating Profits Before Working Capital changes
Add: Decrease in Stock
Less: Increase in Debtors
Add: Increase in Current Liabilities
Cash Flow from Operating Activities before Tax
Less: Income Tax paid (WN 5)
Cash Flows from Operating Activities (A)
(B) Cash Flows from Investing Activities
Sale Proceeds of Investments (WN 2)
Add: Sale Proceeds of Plant & Machinery (WN 3)
Less: Purchase of Plant & Machinery (WN 3)
Cash Flows from Investing Activities (B)
(C) Cash Flows from Financing Activities
Issue of Equity Share Capital (WN 1)
Less: Redemption of Debentures at a Premium [(`58,00,000 – `43,50,000) x 110%]
Less: Payment of Dividends (WN 7)
Cash Flows from Financing Activities (C)
Changes in Cash & Cash Equivalents (A) + (B) + (C)
Add: Opening Cash & Cash Equivalents
Closing Cash & Cash Equivalents
To Balance c/d
Dr.
Particulars
To Balance b/d
To Stores control
To Direct wages
To Production overhead control
2,70,840
Cr.
Amount in (`)
5,12,050
73,980
5,86,030
Cr.
Amount in (`)
4,93,460
60,665
5,54,125
Cr.
Amount in (`)
2,13,700
7,020
2,20,720
(Amount in `)
3,75,000
6,75,000
9,10,000
19,60,000
4,50,000
24,10,000
1,45,000
1,75,000
15,02,400
6,80,000
2,25,000
51,37,400
5,50,000
(11,75,000)
2,50,000
47,62,400
(2,25,000)
45,37,400
4,50,000
6,25,000
(55,85,400)
(45,10,400)
27,50,000
(15,95,000)
(7,50,000)
(4,05,000)
4,32,000
14,93,000
19,25,000
Working Notes: (1)
Particulars
Equity Share Capital A/c
Particulars
Amount in (`)
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
Particulars
Amount in (`) Particulars
Amount in (`)
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
Particulars
Amount in (`) Particulars
Amount in (`)
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
Particulars
Amount in (`) Particulars
Amount in (`)
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
Particulars
Amount in (`) Particulars
Amount in (`)
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
Particulars
Amount in (`) Particulars
Amount in (`)
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
Particulars
Amount in (`) Particulars
Amount in (`)
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
Particulars
Amount in (`) Particulars
Amount in (`)
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.
Amount in (`)
(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
2. Defectives also are not intended but can be eliminated
of material or process itself.
through proper control.
3. Generally scraps are not used or rectified.
3. Defectives can be used after rectification.
4. Scraps have insignificant recoverable value.
4. Defectives are sold at lower value from that of good
one.
(ii) Difference between Preference Shares and Debentures
Basis of difference
Preference shares
Debentures
Debenture is a type of loan which
can be raised from the public
Ownership
Preference Share Capital is a special kind of share
Payment of
Dividend/Interest
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
It carries fixed percentage of
interest.
Nature
Preference shares are a hybrid form of financing with some
characteristic of equity shares and some attributes of Debt
Capital.
Debentures are instrument for
raising long term capital with a
period of maturity.