Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

Paper 10- COST & MANAGEMENT ACCOUNTING AND

FINANCIAL MANAGEMENT

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

Paper 10 - Cost & Management Accounting and Financial

Management

Full Marks: 100 Time allowed:3hours

This paper is divided into two Sections A & B, each carrying 50 marks.
Further each Section has been divided into two parts.

SECTION – A (Cost and Management Accounting)

PART- I

1. Answer the following questions:

(A) Choose the correct answer from the given four alternatives. [1x6=6]

(i) Despite the development of Management Accounting as an effective discipline

to improve the managerial performance, it has some limitations. Which of the
following is a limitation of management accounting?
(a) Psychological Resistance
(b) Physiological Resistance
(c) Both of the above
(d) None of the above.

(ii) The following is the limitation of management accounting –

(a) Costly Affair
(b) Evolutionary Stage
(c) Psychological Resistance
(d) All of the above

(iii) Which of the following costs incurred by a commercial airline can be classified
as variable?
(a) Interest costs on leasing of aircraft
(b) Pilots' salaries
(c) Depreciation of aircraft
(d) None of these three costs can be classified as variable

(iv) Factors to be considered in Production Budget:

(a) Production plan
(b) The capacity of the business concern
(c) Inventory Policy
(d) All of the above

(v) Which of the following factors does not affect Learning Curve
(a) Method of production
(b) Labour strike
(c) Shut down
(d) Efficiency rate

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

(vi) Standard Price per kg of Material ₹ 2, Actual Material used 2,000 kg, Actual
cost of Material ₹ 3,000. Actual output 2,100 kg. Compute Material Price
Variance.
(a) ₹1050 (Favourable)
(b) ₹1142 (Favourable)
(c) ₹1000 (Favourable)
(d) None of the above

Answer:
i. (a)
ii. (d)
iii. (d)
iv. (d)
v. (d)
vi. (c)

(B) Match the following: [4×1=4]

Column ‘A’ Column ‘B’
1. Absorption costing A. Rigid /inflexible budget.
2. Differential cost is adopted B. Decision making
3. Fixed budget C. Cost per unit reduces, as the
production increases.
4. Zero based budgeting D. Marginal Costing

Answer:
1. C
2. D
3. A
4. B

(C) Say True or False for the following question: [4×1=4]

(i) Management Accounting is a traditional approach to accounting.

(ii) In marginal costing, managerial decisions are guided by profit.
(iii) Responsibility Accounting is also called Profitability Accounting & Acitivity
Accounting.
(iv) Standard costing system established yardstick against which the efficiency of
actual performance is measured.

Answer :
(i) False
(ii) False
(iii) True
(iv) True

PART - II
Answer any three questions out of four questions [12x3=36]

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 Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

2.(a) A Co. has annual fixed costs of ₹ 1,40,000. In 2015 sales amounted to ₹6,00,000, as
compared with ₹ 4,50,000 in 2014, and profit in 2015 was ₹ 42,000 higher than that in 2014.
(i) At what level of sales does the company break-even?
(ii) Determine profit or loss on a forecast sales volume of ₹ 8,00,000
(iii) If there is a reduction in selling price by 10% in 2016 and the company desires to earn
the same amount of profit as in 2015, what would be the required sales volume? [4]

(b) Seagreen Company Ltd., a retail dealer in garments is currently selling 24,000 T-shirts
annually. It supplies the following details for the year ended 31st march:
Variable cost per T-shirt ₹500
Selling cost per T-shirt ₹800
Fixed cost :
Advertising cost for the year ₹16,00,000
General office costs for the year ₹8,00,000
Staff salaries for the year ₹24,00,000
As a Cost Accountant of the firm you are required to answer the following each part
independently :

i. Calculate the break-even point and margin of safety in sales revenue and
number of T-shirt sold.
ii. Assume that 20,000 T-shirts were sold in a year. Find out the net profit of the firm
iii. If it is decided to introduce selling commission of ₹ 60 per T-shirt, how many T- shirt
would require to be sold in a year to earn a net income of ₹3,00,000.
iv. Assuming that for the year 2019 an additional staff salary of ₹6,60,000 is
anticipated and price of a T-shirt is likely to be increased by 15%, what should be
the break-even point in number of T-shirts and sales revenue? [8]

Answer:
(a) P/V ratio = (Change in profit / Change in sales) x 100
= (42,000 / 1,50,000) x 100
= 28%
(i) Break even sales = Fixed cost / PV ratio
= 1,40,000 / 28%
= ₹ 5,00,000
(ii) Profit = (8,00,000 x 0.28) – 1,40,000
= 2,24,000 – 1,40,000
= ₹ 84,000
(iii) Profit in 2015 being desired profit = (6,00,000 x 0.28) – 1,40,000
= 1,68,000 – 1,40,000
= ₹ 28,000
Assuming same quantity of sales as in 2015 is also made in 2016, then sales would be ₹
6,00,000 x 90/100 = ₹ 5,40,000
Consequently contribution is ₹ 1,08,000 (1,68,000 – 60,000)
New P/V ratio = (1,08,000 / 5,40,000) x 100 = 20%
Required sales to get the same profit as in 2012 = (1,40,000 + 28,000) / 20% = 8,40,000

(b) (i) Breakeven point (in units) = fixed cost  contribution per unit

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

= ₹ 48,00,000  ₹ 300
= 16,000 T- shirts
Breakeven sales = 16,000 ×₹800
= ₹ 1,28,00,000
Total sales = 24,000 × ₹800 = ₹ 1,92,00,000
Margin of safety = Sales –BEP sales = ₹ 1,92,00,000 - ₹ 1,28,00,000 = ₹ 64,00,000
Margin of Safety(in units ) = ₹ 64,00,000  ₹800 = 8,000 T- shirts.
(ii) Contribution per unit = ₹ 800 - ₹ 500 = ₹ 300
No. of T-shirts sold = 20,000 T-shirts

Total contribution = 20,000 × ₹300 = ₹ 60,00,000

Less: Fixed Cost = ₹ 48,00,000
Net profit = ₹ 12,00,000
(iii) Sales commission of ₹ 60 per T-shirt is available cost and , therefore , revised variable
cost will be ₹ 560 per T- shirt .
Contribution per unit = ₹ ( 800-560) = ₹ 240
Fixed cost = ₹ 48,00,000
Desired profit = ₹ 3,00,000
Total contribution = ₹ 51,00,000
Required sales in units = Total contribution  contribution per unit
= ₹ 51,00,000  ₹ 240
= 21,250 T-shirts.
(iv) Revised Fixed Costs = 48,00,000 + 6,60,000 = ₹ 54,60,000
Revised selling price = ( ₹ 800 + 15% of ₹ 800 )= ₹920
Revised contribution = (920- 500 ) = ₹ 420 per T- shirt.
B.E. point = ₹54,60,000  ₹ 420 = ₹ 13,000 t- shirts
B.E. sales value = 13,000 × ₹920 = ₹ 1,19,60,000

3.(a) The standard set for material consumption was 200 kg@ ₹4.50 per kg.
In a cost period: Opening stock was 200 kg @ ₹5.00 per kg.
Purchase made 500 kg @ ₹ 4.30 per kg. Consumption 220 kg.

Calculate: (i) Usage (ii) price variance

1.) When variance is calculated at a point of purchase.
2.) When variance is calculated at a point of issue on FIFO basis
3.) When variance is calculated at a point of issue on LIFO basis. [6]

(b) A company manufacturing a special type of fencing tile 12”X 8” X 1\2” used a
system of standard costing. The standard mix of the compound used for making the
tiles is:
2,400 kg of Material A @ ₹ 0.30 per kg.
1,000 kg of Material B @ ₹ 0.60 per kg.
1,600 kg of Material C @ ₹ 0.70 per kg.
The compound should produce 12,000 square feet of tiles of 1/2” thickness. During
a period in which 1, 00,000 tiles of the standard size were produced, the material
usage was:
Kg ₹
14,000 Material A @ 0.32 per kg 4,480
6,000 Material B @ 0.65 per kg 3,900
10,000 Material C @ 0.75 per kg 7,500
30,000 15,880
Present the cost figures for the period showing Material Price, Mixture, Sub-usage
Variance. [6]

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

Answer:
(a) (i) Computation of Material Usage Variance
Material Usage Variance= SQSP-AQSP =SP(SQ-AQ) =4.50(200-220) =90(A).

(ii) Computation of Material Price Variance

1.) When variance is calculated at point of purchase
Price Variance
= AQSP-AQAP
=(220×4.5)-(220×4.30)
=990-946
=44(F)
2.) When variance is calculated at a point of issue on FIFO basis Price Variance
= AQSP-AQAP
=(220×4.50)-[(200×5.00)+(20×4.30)]
=990-(1000+86)
=990-1086
=96(A)
3.) When variance is calculated at a point of issue on LIFO basis Price Variance
= AQSP-AQAP
=(220×4.50)-(220×4.30)
=990-946
=44 (F)

(b) Area of tile =12 x 8/12 x 12=2/3 sq. ft.

No of tiles that can be laid in 12,000 sq. ft. is 12,000 / (2/3) = 18,000 tiles.
Standard Data Actual Data
Q(₹) P(₹) V(₹) Q(₹) P(₹) V(₹)
A 13,333.33 0.3 4,000 14,000 0.32 4,480
B 5,555.55 0.6 3,333.33 6,000 0.65 3,900
C 8,888.88 0.7 6,222.22 10,000 0.75 7,500
27,777.76 30,000 15,880

(1) (2) (3) (4)

SQSP(₹) RSQSP(₹) AQSP(₹) AQAP(₹)
A 4,000 14,400 × 0.3 14,000 × 0.3 4,480
B 3,333.33 6,000 × 0.6 6,000 × 0.6 3,900
C 6,222.22 9,600 × 0.7 10,000 × 0.7 7,500
A 4,320 4,200
B 3,600 3,600
C 6,720 7,000
(₹)13,555.55 (₹)14,640 (₹)14,800 (₹)15,880

30,000
RSQ for A = ×13,333.333 = 14400
27,777.76
30,000
RSQ for B = ×5,555.55 = 6,000
27,777.77

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30,000
RSQ for C = ×8,888.88 = 9,600
27,777.77

1. SQSP = ₹ 13,555.55
2. RSQSP = ₹ 14,640
3. AQSP = ₹ 14,800
4. AQAP = ₹ 15,880
a) Material Sub – usage Variance = (1-2) = ₹ 1084(A).
b) Material Mix Variance = (2-3) = ₹ 160 (A).
c) Material Usage Variance =( 1-3) = ₹ 1244 (A).
d) Material Price Variance = (3-4) = ₹ 1080 (A).
e) Material Cost Variance = (1-4) = ₹ 2324 (A).

4.(a) The following data are available in manufacturing company an yearly period :
Variable expenses (at 50% of capacity) ₹ (in lakhs)

Materials 21.7
Labour 20.4
Other expenses 7.9
Semi- variable expenses (at 50% of capacity)

Indirect labour 7.9

Repairs and maintenance 3.5
Sundry administrative expenses 2.8
Sales department salaries etc. 3.8
Fixed expenses

Wages & salaries 6.6

Rents , rates & taxes 6.5
Depreciation 9.5
Sundry administrative expenses 7.4
Assume that the fixed expenses remains constant for all levels of production , semi –
variable expenses remains constant between 45% and 65 % of capacity , increasing
by 10% between 65 % and 80 % capacity and by 20% between 80% and 100 %
capacity.

Sales at various levels are : ₹ (in lakhs)

50% capacity 100
60% capacity 120
75% capacity 150
90% capacity 180
100% capacity 200
Prepare a flexible budget for the year and forecast the profit at 60%, 75%, 90%, 100%
of capacity. [8]

(b) A company fixes the inter-divisional transfer prices for its products on the basis of
cost plus an estimated return on investment in its divisions. The relevant portion of the
budget for the Division JOJO for the year 2018 -19 is given below:

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

Particulars Amount (₹)

Fixed Assets 10,00,000
Current Assets (other than debtors) 6,00,000
Debtors 4,00,000
Annual fixed cost for the division 16,00,000
Variable cost per unit of product 10
Budgeted volume of production per year (units) 8,00,000
Desired Return on investment 28%
You are required to determine the transfer price for Division JOJO. [4]

Answer:
(a) Flexible Budget
₹ (in lakhs)
Activity level 50% 60% 75% 90% 100%
Fixed expenses :
Wages and salaries 6.6 6.6 6.6 6.6 6.6
Rent , rate and taxes 6.5 6.5 6.5 6.5 6.5
Depreciation 9.5 9.5 9.5 9.5 9.5
Sundry administrative 7.4 7.4 7.4 7.4 7.4
expenses
Semi – variable expenses
Repairs and maintenance 3.5 3.5 3.85 4.2 4.2
Indirect wages 7.9 7.9 8.69 9.48 9.48
Sales department salaries 3.8 3.8 4.18 4.56 4.56
etc.
Sundry administrative 2.8 2.8 3.08 3.36 3.36
expenses
Variable expenses
Material 21.70 26.04 32.55 39.60 43.40
Labour 20.40 24.48 30.60 36.72 40.80
Other expenses 7.9 9.48 11.85 14.22 15.80
Total cost of production 98.00 108.00 124.8 142.14 151.60
Profit 2.00 12.00 25.20 37.86 48.40
Sales 100.00 120.00 150.00 180.00 200.00

(b) Computation of Transfer Price per unit for Division JOJO

Particulars Amount (₹)
Variable cost 10
Fixed cost (16,00,000/8,00,000) 2
Total cost 12
Add : Desired return (20,00,000 × 28%)/ 8,00,000 0.7
Transfer Price 12.70

5. Short notes (any three questions out of four questions) [3×4=12]

(a) Break-even Analysis
(b) Performance Budgeting
(c) Advantages of Uniform Costing
(d) Difference between Standard Costing and Budgetary Control

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

Answer:

(a) Break-even Analysis:

Break Even means the volume of production or sales where there is no profit or
loss. In other words, Break Even Point is the volume of production or sales where
total costs are equal to revenue. It helps in finding out the relationship of costs and
revenues to output. In understanding the breakeven point, cost, volume and profit
are always used.
When no. of units are expressed on X-axis and costs and revenues are expressed
on Y-axis, three lines are drawn i.e., fixed cost line, total cost line and total sales
line. In the above graph we find there is an intersection point of the total sales line
and total cost line and from that intersection point if a perpendicular is drawn to X-
axis, we find break even units. Similarly, from the same intersection point a parallel
line is drawn to X-axis so that it cuts Y-axis, where we find Break Even point in terms
of value.

(b) Performance Budgeting:

Performance Budgeting is synonymous with Responsibility Accounting, which means
that the responsibility of various levels of management is predetermined in terms of
output or result keeping in view the authority is vested with them.

Performance budget is a budget that reflects the input of resources and the output
of services for each unit of an organization. This type of budget is commonly used by
the government to show the link between the funds provided to the public and the
outcome of these services.
Performance budgeting is a method of budgeting that provides the purpose and
objectives for which funds are needed, costs of programs and related activities
proposed to accomplish those objectives and outputs to be produced or services to
be rendered under each program.

Performance budgeting follows the validation that a relaxation of input controls and
an increased flexibility enhances managers' performance as long as results are
measured and managers are held responsible for their results . The major aim of
performance budgeting is to improve the efficiency of public expenditure, by linking
the funding of public sector organizations to the results they deliver. It adopts
organized performance information (indicators, evaluations, program costings) to
make this link. There is a good impact of performance budgeting on organizations in
terms of improved prioritization of expenditure, and in improved service effectiveness.

Performance budgeting is based on a classification of managerial level for the

purpose of establishing a budget for each level. The individual in charge of that level
should be made responsible and held accountable for its performance over a given
period of time .

(c) Advantages of Uniform Costing:

Main advantages of a uniform Costing System are summarised below:
(i) It provides comparative information to the members of the
organisation/association which may by them to reduce or eliminate the evil
effects of competition and unnecessary expenses arising from competition.
(ii) It enables the industry to submit the statutory bodies reliable and accurate data
which might be required to regulate pricing policy or for other purposes.
(iii) It enables the member concerns to compare their own cost data with that of
the others detect the weakness and to take corrective steps for improvement in
efficiency.
(iv) The benefits of research and development can be passed on the smaller

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

members of the association lead to economy of the industry as a whole.

(v) It provides all valuable features of sound cost accounting such as valued and
efficiency of the workers, machines, methods, etc., current reports of
comparing major cost items with the predetermined standards, etc.
(vi) It serves as a prerequisite to Cost Audit and inter firm comparison

(d) Difference between Standard Costing and Budgetary Control:

Standard Costing Budgetary Control

(i) Standards are based on technical Budgets are based on past actuals
assessments adjusted to future trends
(ii) Standards are mainly for Budgets are compiled for sales,
production expenses i.e., elements production, expenses, Profit, capital
of cost expenditure
(iii) Standard cost is projection of cost Budgets are projects of financial
accounts. accounts
(iv) Standards are minimum targets Budgets are the maximum limits of
which are to be attained expenses above which expenditure
should not be incurred.
(v) Standards are pointers to further Budgets are indices, adherence to
improvements. which keeps a business out of
problems.
(vi) Variances are accounted for in the Variance analysis is only a statistical
books. data
(vii) Standards are expressed per unit of Budgets are expressed in totals of
production amounts
(viii) Detailed analysis is needed in case No further analysis is required if costs
of variances, whether they are are within the budget
favourable or unfavourable.

SECTION- B (Financial Management)

PART- I

6. Answer the following questions: [1x6=6]

(A) Choose the correct answer from the given four alternatives.
(i) When cost of capital of a project is equal to its Internal Rate of Return(IRR)
(a)NPV will be zero.
(b) NPV will be +ve.
(c) NPV will be -ve.
(d)Benefit cost ratio will be zero.

(ii) A process through which loans and other receivables are underwritten and sold
in a form of asset is known as:
(a) Factoring
(b) Forfeiting
(c) Securitisation
(d) Bill Discounting

(iii) Which of the following does not help to increase Current Ratio?
(a) Issue of Debentures to buy Stock.
(b) Issue of Debentures to pay Creditors.
(c) Sale of Investment to pay Creditors.
(d) Avail Bank Overdraft to buy Machine.

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(iv) A firm has capital of Rs 10 lakhs,sales of Rs 5 lakhs,gross profit of Rs 2 lakhs and

expenses of Rs 1 lakh.The Net Profit Ratio is:
(a) 50%
(b) 40%
(c) 20%
(d) 10%
(v) The excess of Current Assets over Current Liabilities is called:
(a) Net Current Assets.
(b) Net Working Capital.
(c) Working Capital.
(d) All of the above.

(vi) Type of accounting which measures, reports and analyse non-financial and
financial information to help in decision making is called:
(a) Financial Accounting.
(b) Management Accounting.
(c) Cost Accounting.
(d) Green Accounting.

Answer:

i. (a)
ii. (c)
iii. (d)
iv. (c)
v. (d)
vi. (b)

(B) Match the statement in Column I with the most appropriate statement in column II:
[1x4=4]
Column I Column II
1 Zero Base Budgeting A Negotiated Pricing
2 Value of share is worth the present B Myron Gordon
value of its future dividend rather
than its earnings
3 Dividend policy has an impact on C John Burr Williams
share valuations
4 Transfer Price D Discretionary Cost

Answer:

1. D
2. C
3. B
4. A

(C) State whether the following statements are True or False [1x4=4]

i. CVP analysis assumes a linear revenue function and a linear cost function.
ii. The key issue of the theory of capital structure is to examine whether a business
can change its value and cost of capital by changing its capital structure.
iii. Treasury Bills are short term instruments issued by the Reserve Bank of India to
address short term liquidity shortfalls.
iv. While calculating cost of redeemable debt, it is necessary to consider the
repayment of the principal, but the interest can be ignored.

Answer:

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

(i) True
(ii) True
(iii) True
(iv) False

PART – II
Answer any three Question from Q. No. 7,8,9,10.Each question carries 12 marks.

7.(a) From the following information prepare a statement of Proprietors’ Funds:

(i) Current Ratio = 2.5:1
(ii) Fixed Assets/Proprietors Funds = 0.75
(iii) Liquid Ratio = 1.5 : 1
(iv) Bank Overdraft = ₹ 20,000
(v) Reserves and Surplus = ₹ 1,60,000
(vi) Working Capital = ₹ 2,40,000 [4]

(b) Dunlop Ltd. provides the following data :

Comparative trial balance
31/3/2019 31/3/2018 Increase
(decrease)
Debit balance ₹ ₹ ₹
Working capital 4,00,000 2,00,000 2,00,000
Investment 2,00,000 3,00,000 (1,00,000)
Building & Equipment 10,00,000 8,00,000 2,00,000
Land 80,000 1,00,000 (20,000)
16,80,000 14,00,000 2,80,000
Credit Balance
Accumulated 4,00,000 3,20,000 80,000
depreciation
Bonds 2,00,000 1,00,000 1,00,000
Reserves 6,80,000 6,80,000 ------
Equity shares 4,00,000 3,00,000 1,00,000
16,80,000 14,00,000 2,80,000

Income Statement for the period ending March 31,2019

Particulars ₹ ₹
Sales 20,00,000
Cost of goods sold (10,00,000)
10,00,000
Selling expenses 1,00,000
Administrative expenses 1,00,000 2,00,000
Operating income 8,00,000
Other charges and credits:
Gains on sale of building and equipment 10,000
Loss on sale of investments (20,000)
Interest (12,000)
Taxes (3,78,000) (4,00,000)
Net income after taxes 4,00,000
Notes : (i) The depreciation charged for the year ended March’s 2019 was
₹1,20,000 .
(ii) The book value of the building and equipment disposed of was ₹
20,000.

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(iii) Land was sold at no profit no loss basis. [8]

Required:
Prepare a Fund Flow Statement for the period ending March 31, 2019
Answer :

(a) If Working Capital = CA – CL = ₹ 2,40,000 and CA = 2.5 CL,

Then 2.5 CL – CL = ₹ 2,40,000
Therefore CL =₹ 1,60,000 and CA = ₹4,00,000
Liquid Ratio = Quick Assets/CL = 1.5
Therefore Quick Assets = CL × 1.5 = ₹ 2,40,000
Since Quick Assets = CA – Stock, then Stock = CA – QA = ₹1,60,000

If Proprietors Funds are P then Fixed Assets = 0.75P

Proprietors Funds + CL = FA + CA
Or P + 1, 60,000 = 0.75P + 4,00,000
Or 0.25 P = 2, 40,000, or P = ₹ 9, 60,000,
FA = 9, 60,000+1,60,000-4,00,000 = ₹ 7,20,000
Since Proprietary Funds are = Sh. Capital + Reserves,
Therefore Sh. Capital = ₹8,00,000

Statement of Proprietors Fund

Proprietors Fund ₹ ₹
Share Capital 8,00,000
Reserve and Surplus 1,60,000 9,60,000

Investment Of Funds
Fixed Assets 7,20,000
Stocks 1,60,000
Other Current Assets 2,40,000
Less: Current Liabilities 1,60,000 9,60,000

(b) Fund Flow Statement of Dunlop Ltd. for the period ended march 31, 2019
Sources of Funds
Funds from business operations: ₹ ₹
Net Income after taxes 4,00,000
Add : Depreciation 1,20,000
Interest 12,000
Loss on sale of investments 20,000
Less : Gain on sale of building and equipment (10,000) 5,42,000
Issuance of long –term liabilities :
Equity shares 1,00,000
Bonds 1,00,000 2,00,000
Sales of Non- current assets :
Investments (₹ 1,00,000 - ₹ 20,000) 80,000
Land (₹ 1,00,000 - ₹ 80,000 ) 20,000
Building and equipment (₹20,000 + ₹ 10,000) 30,000 1,30,000
Total 8,72,000

Working Notes :
1. Accumulated Depreciation Account
Dr. Cr.
Particulars ₹ Particulars ₹
To Building and equipment 40,000 By balance b/d 3,20,000
(depreciation on sale of

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

building and equipment)

To balance c/d 4,00,000 By P/L A/c (depreciation of 1,20,000
the year 2019)
4,40,000 4,40,000

2. Building & Equipment A/c

Dr. Cr.
Particulars ₹ Particulars ₹
To balance b/d 8,00,000 By cash 30,000
To P&L A/c 10,000 By accumulated 40,000
depreciation
To cash (purchases) 2,60,000 By balance b/d 10,00,000
10,70,000 10,70,000

3. Reserves account
Dr. Cr.
Particulars ₹ Particulars ₹
To Dividend Paid (bal. 4,00,000 By balance c/d 6,80,000
fig.)
To balance c/d 6,80,000 By profit of the year 2019 4,00,000
10,80,000 10,80,000

8.(a) Ziva Ltd. sells goods at a gross profit of 20% . It includes depreciation as a part of
cost of production. The following figures for the 12 month-period ending March 31,
current year are given to enable you to ascertain the requirements of working
capital of the company on a cash cost basis .
In your working , you are required to assume that :
(i) A safety margin of 15% will be maintained;
(ii) Cash is to be held to the extent of 50% of current liabilities;
(iii) There will be no work –in –progress;
(iv) Tax is to be ignored;
(v) Finished goods are to be valued at manufacturing costs. Stocks of raw materials
and finished goods are kept at one month’s requirements.
Sales at 2 month’s credit ₹ 13,50,000.
Materials consumed (suppliers’ credit is for 2 months),₹ 3,37,500
Wages (paid on the last of the month), ₹ 2,70,000
Manufacturing expenses outstanding at the end of the year (cash expenses are
paid one month in arrear), ₹ 30,000
Total administrative expenses (paid as above), ₹ 90,000
Sales promotion expenses(paid quarterly in advance), ₹ 45,000 [6]

(b) Calculate the operating leverage for each of the four firms P,Q,R and S from the
following price and cost data. What conclusion can you draw with respect to levels of
fixed cost and the degree of operating leverage result ? Explain. Assume number of
units sold is 10,000.
Firms
P Q R S
Sales price per unit ₹20 ₹32 ₹50 ₹70
Variables cost per unit 6 16 20 50
Fixed operating cost 1,60,000 80,000 4,00,000 Nil
[6]

Answer :

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

(a) Statement showing determination of working capital

Particulars ₹ ₹
(A) Current assets :
(i) Raw material (3,37,500 /12) 28,125
(ii) Finished goods (9,67,500/12) 80,625
(iii) Debtors (11,02,500 ×2/12) 1,83,750
(iv) Sales promotion expenses (45,000 × 3/12) 11,250
(v) Cash in hand (1,05,000 × 0.5) 52,500
Total current assets 3,56,250
(B) Current liabilities :
(i) Creditors (3,37,500 ×2/12) 56,250
(ii) Manufacturing expenses 30,000
(iii) Administrative expenses 90,000 /12 7,500
(iv) Wages (2,70,000 ×1/24) 11,250
Total current liabilities 1,05,000
(C) Net working capital (A-B) 2,51,250
Add: Safety margin (0.15× ₹ 2,51,250) 37,688
Working capital required on cash 2,88,938
cost basis

Working notes :
(i) Determination of manufacturing ₹
expenses
Sales 13,50,000
Less : Gross profit margin ₹ 13,50,000 × 0.20 2,70,000
Total manufacturing costs 10,80,000
Less : Cost of materials consumed 3,37,500
Less : Wages 2,70,000 (6,07,500)
Manufacturing expenses (bal. fig.) 4,72,500
(ii) Cash manufacturing expenses 30,000 × 12 3,60,000
(iii) Depreciation 4,72,500 -3,60,000 1,12,500
(iv) Cash manufacturing costs 10,80,000-112,500 9,67,500
(v) Cash cost of sales 9,67,500 + 90,000+45,000 11,02,500

(b)
Firms
P Q R S
Sales (units) 10,000 10,000 10,000 10,000
Sales revenue 2,00,000 3,20,000 5,00,000 7,00,000
(unit × price)
Less: Variable cost 60,000 1,60,000 2,00,000 5,00,000
(units × VC per unit)
Less : Fixed cost 1,60,000 80,000 4,00,000 NIL
EBIT (20,000) 80,000 (1,00,000) 2,00,000
Current sales - Variable cost
DOL =
Current EBIT

2,00,000 - 60,000
DOL(P) = = 7
20,000

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

3,20,000 -1,60,000
DOL(Q) = =2
80,000

5,00,000 - 2,00,000
DOL (R) = =3
1,00,000

7,00,000 - 5,00,000
DOL (S) = =1
2,00,000

The operating leverage exists only when there are fixed cost. In this case of firm S,
there is no magnified effect on the EBIT due to change in sales . Operating leverage
is maximum in firm P, followed by firm R and minimum in firm Q . The interpretation of
DOL of 7 is that 1% change in sales results in 7% change in EBIT level in the direction of
the change of sales level of firm P.

9. (a) Jamia Ltd. has on its book the following amounts and specific costs of each type of
capital :
Type of capital Book value Market value Specific
costs (%)
Debt 8,00,000 7,60,000 5
Preference 2,00,000 2,20,000 8
Equity 12,00,000 24,00,000 15
Retained earnings 4,00,000 13
26,00,000 33,80,000
[5]

(b) A plastic manufacturer has under consideration the proposal of production of high
quality plastic bowl .The necessary equipment to manufacture the bowl would cost ₹
2 lakhs and would last 5 years . The tax relevant rate of depreciation is 20% on written
down value . There is no other asset in the block. The expected salvage is ₹ 20,000 .
The bowl can be sold at ₹ 4 each . Regardless of the level of production , the
manufacturer will incur cash cost ₹ 50,000 each year if the project is undertaken. The
overhead costs allocated to this new line would be ₹ 10,000. The variable costs are
estimated at ₹ 2 per bowl . The manufacturer estimates it will sell about 1,50,000 bowl
per year ; the tax rate is 35% . Should the proposed equipment be purchased ?
Assume 20% cost of capital and additional working requirement, ₹1,00,000. [7]

Answer :

(a) Determination of weighted average cost of capital using book value weighs :

Type of capital Book value (₹) Specific costs (%) Total cost (₹)
(BV) (K) BV × K
Debt 8,00,000 5 40,000
Preference 2,00,000 8 16,000
Equity 12,00,000 15 1,80,000
Retained earnings 4,00,000 13 52,000
26,00,000 2,88,000
Total cost 2,88,000
K0 = = ×100 = 11.07692%
Total amount of capital 26,00,000

Determination of weighted average cost of capital using market value weights:

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

Type of capital Market value (₹) Specific costs (%) Total cost (₹)
(MV) (K) MV × K
Debt 7,60,000 5 38,000
Preference 2,20,000 8 17,600
Equity 18,00,000 15 2,70,000
Retained earnings 6,00,000 13 78,000
33,80,000 4,03,600
Total cost 4,03,600
K0 = = ×100 = 11.9408 %
Total amount of capital 33,80,000
The K0 based upon market value is greater than K 0 upon book value because
market value of equity fund is considerably larger than their book value and
since these sources of long term funds have higher specific costs , the overall
cost of capital increases.
The weighted average cost of capital would be the same with both the book
value weights and market value weights when there is no difference between
the book value and the market value of securities used in raising the capital.

(b) Cash outflows

Cost of production equipment ₹ 2,00,000
Additional working capital requirement ₹ 1,00,000
₹ 3,00,000

Determination of CFAT and NPV :

Particulars Years
1 2 3 4 5
Sales revenue 6,00,000 6,00,000 6,00,000 6,00,000 6,00,000
(1,50,000 × 4)
Less : Costs
Variable costs 3,00,000 3,00,000 3,00,000 3,00,000 3,00,000
(1,50,000×2)
Additional fixed 50,000 50,000 50,000 50,000 50,000
costs
Depreciation (D) 40,000 32,000 25,600 20,480 Nil
Earnings before 2,10,000 2,18,000 2,24,400 2,29,520 2,50,000
taxes
Less : Taxes 73,500 76,300 78,540 80,332 87,500
Earning after 1,36,500 1,41,700 1,45,860 1,49,188 1,62,500
taxes (EAT)
CFAT (EAT + D) 1,76,500 1,73,700 1,71,460 1,69,668 1,62,500
Add: Recovery of 1,00,000
WC
Add : Salvage 20,000
(SV)
Add : Tax benefit 21,672
on short term
capital loss
(Note 1)
3,04,172
Multiplied by PV 0.833 0.694 0.579 0.482 0.402
factor 0.20
PV (CFAT × PV 1,47,025 1,20,548 99,276 81,780 1,22,278
factor)
Total PV(t= 1-5) 5,70,907
Less : Cash 3,00,000
outflow

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

NPV 2,70,906
Note 1: ₹2,00,000-1,18,080(accumulated depreciation)-₹20,000(SV)×0.35
= ₹ 21,672.
Note 2: As the block consists of single asset , no depreciation is to be charged in
the terminating year as the asset has been sold in the year.
Recommendation : The company is advised to buy the proposed equipment .

10. Write short note on any three question out of four question: [3×4=12]
(a) Window Dressing
(b) Capital Asset Pricing Model
(c) Advantages of Ratio Analysis
(d) Limitations of Funds Flow Statement.

Answer :

(a) Window Dressing:

The term window dressing means manipulation of accounts in a way so as to
conceal vital facts and present the financial statements in a way to show a
better position than what it actually is. On account of such a situation, presence
of a particular ratio may not be a definite indicator of good or bad management
For example a high stock turnover ratio is generally considered to be an
indication of operational efficiency of the business. But this might have been
achieved by unwarranted price reductions or failure to maintain proper stock of
goods.

(b) Capital Asset Pricing Model:

Another technique that can be used to estimate the cost of equity is the
capital asset pricing model approach. The capital asset pricing model explains
the behaviour of security prices and provides a mechanism whereby investors
could assess the impact of a proposed security investment on their overall
portfolio risk and return.
In other words, CAPM formally describes the risk required return trade off for
securities. The assumptions for CAPM approach are:
i) The efficiency of the security
ii) Investor preferences. The capital asset pricing model describes the relationship
between the required rates of return, or the cost of equity capital and the non-
diversifiable or relevant risk of the firm as reflected in its index of non-
diversifiable risk.
Symbolically, Ke = Rf + β (Rm – Rf)
Where, Ke = Cost of equity capital
Rf = Risk free rate of return
Rm = Return on market portfolio
β = Beta of Security.

(c) Advantages of Ratio Analysis:

Ratio Analysis is useful and very relevant in assessing the performance of a firm
in respect of the following purposes:
➢ Ratio analysis is the process of determining and interpreting numerical
relationships based mainly on the financial statements.
➢ To measure the liquidity position, i.e., whether the firm will be able to meet
its current obligations when they become due or not.
➢ To know the solvency position for assessing the long-term financial liability
of the firm
➢ Operating efficiency or turnover of the firm.

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Answer to MTP_Intermediate_Syllabus 2016_June 2020_Set 1

➢ To assess the profitability position of the firm, in respect of sales and the
investments.
➢ For Inter-firm and Intra-firm comparison, to assess the relative position of
the firm vis-a-vis its competitors.
➢ For Trend Analysis, for ascertaining whether the financial position of a firm
is improving or deteriorating over the years.
➢ Commercial Bankers and Trade Creditors are most interested in ratios like
Current Ratio, Acid Test Ratio, Turnover of Receivables, Inventory Turnover,
Coverage of interest by level of earnings, etc.

(d) Determinants of Working Capital:

The size or magnitude and amount of working capital will not be uniform for
all organizations and will differ from one organization to another.
The following are some factors that would determine the size of Working
Capital:
➢ Nature and size of the Business.
➢ Production Policies of the concern.
➢ Process of manufacturing.
➢ Growth and expansion of business.
➢ Fluctuations in the trade cycle.
➢ Dividend Policy.
➢ Operating Efficiency.
➢ Other Factors like Market facilities, tax considerations, Locational
Factors, Labour availability.

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