ca ipcc assignment
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CA-IPCC FM ASSIGNMENT
LEVERAGES, COST OF CAPITAL, CAPITAL STRUCTURE AND CASH FLOW STATEMENT
MM: 75 Marks
Question No. 1: ABC Ltd. has the following capital structure which is considered to be optimum as on 31st March 2006.
`
14% debentures 30,000
11% Preference shares 10,000
Equity (10,000 shares) 1,60,000
2,00,000
The company share has a market price of `23.60. Next year dividend per share is 50% of year 2006 EPS. The following is the
trend of EPS for the preceding 10 years which is expected to continue in future.
Year EPS (Rs.) Year EPS (Rs.)
1997 1.00 2002 1.61
1998 1.10 2003 1.77
1999 1.21 2004 1.95
2000 1.33 2005 2.15
2001 1.46 2006 2.36
The company issued new debentures carrying 16% rate of interest and the current market price of debenture is `96.
Preference share `9.20 (with annual dividend of `1.1 per share) were also issued. The company is 50% tax bracket.
(A) Calculate after tax:
(i) Cost of new debt
(ii) Cost of new preference shares
(iii) New equity funds (consuming new equity from retained earnings)
(B) Calculate marginal cost of capital when no new shares are issued.
(C) How much needs to be spent for capital investment before issuing new shares? 50% of the 2006 earnings are available as
retained earnings for the purpose of capital investment.
(D) What will the marginal cost of capital when the funds exceed the amount calculated in (C), assuming new equity is issued at
Rs. 20 per share?
(10 Marks) Answer 1:(A) (i) Cost of new debt
Kd = I (1 – t)
NP
16 (1 - 0.50) = 8.33%
96
(ii) Cost of new preference shares
Kp = D = 1.1 = 11.96%
NP 9.2
(iii) Cost of new equity funds (Retained Earnings)
Kre = D1 + g = 1.18 + 0.10 = 15%
P0 23.60
D1 = 50% of 2006 EPS = 50% of 2.36 = ` 1.18
(B)
Type of Capital Optimum Weights Specific Cost WMCC
Debt 0.15 8.33% 1.25%
Preference 0.05 11.96% 0.60%
Equity 0.80 15.00% 12.00%
Marginal cost of capital 13.85%
(C) The company can spend the following amount of available Retained earnings (Breaking Point on exhaustion of RE) = (0.50)
(2.36 x 10,000) = ` 11,800
The ordinary equity is 80% of total capital.
Capital investment = `11,800 = `14,750
0.80
(D) If the company require fund in excess of `14,750 it will have to issue new shares. The cost of new issue will be
Ke = `1.18 + 0.10 = 15.90%
20
The marginal cost of capital will be
Type of Capital Optimum Weights Specific Cost WMCC
Debt 0.15 8.33% 1.25%
Preference 0.05 11.96% 0.60%
Equity (New) 0.80 15.90% 12.72%
Marginal cost of capital 14.57%
Question No. 2: The XYZ & Co, wishes to find out its weighted marginal cost of capital, WMCC, based on target capital
structure proportions. Using the data given below, find out the Schedule of WMCC and also show the WMCC curve.
Source Proportion Range Cost
Equity Share Capital 50% Up to Rs.3,00,000 13.00%
3,00,000 – 7,50,000 13.30%
Above 7,50,000 15.50%
Preference Shares 10% Up to Rs.1,00,000 9,33%
Above 1,00,000 10.60%
Long Term Debt 40% Up to Rs.4,00,000 5.68%
4,00,000 – 8,00,000 6.50%
Above 8,00,000 7.10%
(8 Marks) Answer 2: Determination of breaking points of difference sources:
Source Weight Cost Range Breaking Points
Equity Capital 0.50 13.00% Up to `3,00,000 3,00,000/0.50 = 6,00,000
13.30% 3,00,000 – 7,50,000 7,50,000/0.50 = 15,00,000
15.50% Above 7,50,000 --
Preference Shares 0.10 9.33% Up to `1,00,000 1,00,000/0.10 = 10,00,000
10.60% Above 1,00,000 --
Long Term Debt 0.40 5.68% Up to `4,00,000 4,00,000/0.40 = 10,00,000
6.50% 4,00,000 – 8,00,000 8,00,000/0.40 = 20,00,000
7.10% Above 8,00,000 --
Now, the WMCC for different ranges of new financing may be calculated as follows:
Range (`) Source Weight COC% WACC%
Up to `6,00,000 Equity Share Capital 0.50 13.00 6.50
Preference Shares 0.10 9.33 0.93
Long Term Debt 0.40 5.68 2.27
WMCC 9.70
`6,00,000 – 10,00,000 Equity Share Capital 0.50 13.30 6.65
Preference Shares 0.10 9.33 0.93
Long Term Debt 0.40 5.68 2.27
WMCC 9.85
`10,00,000 – 15,00,000 Equity Share Capital 0.50 13.30 6.65
Preference Shares 0.10 10.60 1.06
Long Term Debt 0.40 6.50 2.60
WMCC 10.31
`15,00,000 – 20,00,000 Equity Share Capital 0.50 15.50 7.75
Preference Shares 0.10 10.60 1.06
Long Term Debt 0.40 6.50 2.60
WMCC 11.41
`20,00,000 and above Equity Share Capital 0.50 15.50 7.75
Preference Shares 0.10 10.60 1.06
Long Term Debt 0.40 7.10 2.84
WMCC 11.65
10.31%
The WMCC curve for the firm has been presented in the following Figure:
6 10 15 20 Total New financing (` Lacs)
Weighted Marginal Cost of Capital
Question No. 3: The following information is available for Rahul Limited.
Net operating income ` 60 lakh
Interest on debt ` 15 lakh
Cost of equity 17%
Cost of debt 13%
Calculate the average cost of capital for the firm. (4 Marks) Answer 3:
Total amount of Debt = ` 15 lakh
13%
= ` 115.38 lakh
Total amount of Equity = ` 60 lakh – ` 15 lakh
17%
= ` 264.71 lakh
Total Debt & Equity = ` 115.38 lakh + ` 264.71 lakh = ` 380.09 lakh
Statement showing Computation of Average Cost of Capital
Source Amount
(` in lakhs)
Weight Cost WACC
Debt 115.38 0.304 13% 3.952%
Equity 264.71 0.696 17% 11.832%
380.09 1.00 15.784%
Therefore Average Cost of Capital for the firm = 15.78%.
Question No. 4: AK Ltd. provides you the following information
Income Statement
Particulars `
Sales (operating at 60% level of installed capacity) 6,00,000
Total costs (excluding interest but including fixed cost which is 1/6 of total cost) (5,40,000)
EBIT 60,000
Interest on Debentures @ 11% (44,000)
EBT 16,000
Income tax paid @ 40% (6,400)
Earnings after tax 9,600
Pref. Dividend paid @ 8% (4,000)
Earnings available for Equity Shareholders 5,600
Earnings per share of 100 each ` 11.20
MPS ` 112
Dividend paid per share ` 11.20
Cost of proposed expansion programme 50% of Total Assets at Present Flotation Cost associated with raising of finance `
5,000.
Sales expected to be increased by 33⅓% from present level as a result of expansion.
11.41% 11.65%
9.85% 9.7%
9.0
9.5
10.0
10.5
11.0
11.5
12.0
12.5
WMCC%
If AK Ltd. finances the expansion with debt, the rate of the incremental debt will be 1% more than that at present and the
price earnings ratio shall be 4 times. If expansion is financed through equity shares, the new share can be sold at 70% premium
and the price-earnings ratio shall be at present level. Required:
(a) Calculate the degree of all leverages at present and proposed sales level.
(b) Calculate EPS and percentage change in EPS if financing is through (i) Debt and (ii) Equity shares
(c) Calculate the market value per equity share under both the alternatives.
(d) Which form of financing should be employed?
(e) Determine the indifference point.
(f) Determine the financial break-even point, operating break-even point & Overall Break Even Point at present and proposed
sales levels.
(g) Determine that level of Indifference point between Debt Plan & Equity Plan & level of EBIT at which uncommitted earnings
per share (UEPS) would be same if sinking fund obligations amount to ` 50,000 per year.
(h) Shall the market price of share be same at the indifference point under all forms of financing?
(i) Which plan has more financial risk?
(j) Compute post tax cost of new debt & cost of new equity assuming that entire earnings will be distributed amongst equity
shareholders.
(20 Marks) Answer 4: Statement showing Calculation of Degree for various Leverages
Particulars Present
Situation (`)
Debt Plan
(`)
Equity
Plan (`)
Sales 6,00,000 8,00,000 8,00,000
Less: Variable Costs (75% of sales) (4,50,000) (6,00,000) (6,00,000)
Contribution 1,50,000 2,00,000 2,00,000
Less: Fixed Costs (1/6 x 5,40,000) (90,000) (90,000 (90,000)
Earnings before Interest & Tax 60,000 1,10,000 1,10,000
Less: Interest (44,000) (74,600) (44,000)
Earnings before Tax (EBT) 16,000 35,400 66,000
Less: Tax @ 40% (6400) (14,160 (26,400)
Earnings after Tax (EAT ) 9,600 21,240 39,600
Less: Pref. Dividend (4,000) (4,000) (4,000)
Earnings Available for Equity Shareholders (EAE) 5,600 17,240 35,600
No. of Equity Shares 500 500 2.000
(a) Operating Leverage (Contribution/EBIT) 2.50 1.82 1.82
Financial Leverage EBIT
EBT – Pref. Dividend
1 – t
6.429 3.828 1.854
Combined leverage (Operating Leverage x Financial Leverage) 16.07 6.97 3.37
(b) Earnings per share (EPS) [EAE/No. of Equity Shares] 11.20 34.48 17.80
Percentage Change in EPS 207.86% 58.93%
Price Earnings Ratio (P/E Ratio) 10 4 10
(c) Market Price [EPS x P/E Ratio] 112 137.92 178
(d) Recommendation: The equity financing should be employed since the market price of an equity share is higher than that
under debt financing.
(e) Calculation of indifference point between the proposed plans
(x – 74,600) (1 – 0.4) – 4,000 = (x – 44,000) (1 – 0.4) – 4,000
500 2,000
0.6 X – 48,760 = 0.6 X – 30,400
500 2000
X = ` 91,467
(f) (i) Calculation of Financial Break Even Point (`)
Particulars Present Plan Debt Plan Equity Plan
A. Interest on Debt 44,000 74,600 44,000
B. Preference Dividend after Grossing up for Tax
Preference Dividend
(1 – t)
6,667
6,667
6,667
C. Financial Break Even Point [A + B] 50,667 81,267 50,667
(ii) Calculation of Operating Break Even Point (`)
Particulars Present Plan Debt Plan Equity Plan
A. Fixed Cost 90,000 90,000 90,000
B. P/V Ratio 25% 25% 25%
C. Operating BEP (A/B) (in `) 3,60,000 3,60,000 3,60,000
(iii) Calculation of Overall Break Even Point (`)
Particulars Present Plan Debt Plan Equity Plan
A. Fixed Cost 90,000 90,000 90,000
B. Interest on Debt 44,000 74,600 44,000
C. Preference Dividend after Grossing up for Tax
Preference Dividend
(1 – t)
6,667
6,667
6,667
D. P/V Ratio 25% 25% 25%
E. Operating BEP (A+B+C/D) (in `) 5,62,668 6,85,068 5,62,668
(g) Calculation of Indifference Point at which UEPS will be same
(x – 74,600) (1 – 0.4) - 4,000 - 50,000 = (x – 44,000) (1 – 0.4) – 4,000 – 50,000
500 2,000
0.6X – 98,760 = 0.6X – 80,400
500 2000
X = `1,74,800
(h) At the Indifference Points though the EPS under both Plans will be same, but the P/E Ratio under both Plans is not same.
P/E Ratio for Debt Plan is 4 and P/E Ratio for Equity Plan is 10. Therefore, market price of Shares under both Plans will be
different at the Indifferent Point.
(i) Financial risk under Debt Plan is more on account of the following reasons:
(i) Debt Plan has higher Financial Leverage.
(ii) Financial BEP is higher under Debt Plan as compared to Equity Plan.
(j) Post tax Cost of new debt Kd = I(1-t) = ` 30,600 (1 – 0.4) = 7.34%
NP ` 2,50,000
Post tax Cost of new equity Ke = DPS = ` 26,700 = 10.68%
NP ` 2,50,000
Working Notes:
(i) Calculation of Total Funds Required
= (50% of Total Assets) + Flotation Cost
= [50% of (Debt + Equity + Pref. Share Capital)] + Flotation Cost
= [50% of ` 44,000 + 5,600 x 100 + 4,000 + ` 5,000
11% 11.20 8%
= [50% of (` 4,00,000 + ` 50,000 + ` 50,000)] + ` 5,000 = ` 2,55,000
(ii) No. of New Equity Shares to be issued = ` 2,55,000/(` 100 + ` 70) = 1,500.
(iii) Amount of new interest expense = ` 2,55,000 x 12%
= ` 30,600
(iv) Amount of equity dividends on new equity shares = ` 17.80 x 1,500 shares
= ` 26,700
Question No. 5: You are provided with the following information for Excellent Ltd.:
Balance Sheet Amount in (`)
Liabilities As at 31.3.2011 As at 31.3.2010 Assets As at 31.3.2011 As at 31.3.2010
Share Capital 5,00,000 5,00,000 Fixed Assets 10,50,000 8,50,000
P&L A/c 5,00,000 4,25,000 Stock 3,00,000 3,40,000
Long-term Loan 5,50,000 5,00,000 Debtors 3,45,000 3,80,000
Creditors 1,80,000 1,75,000 Cash 35,000 30,000
17,30,000 16,00,000 17,30,000 16,00,000
Income Statement for the year ended 31.3.2011 (Amount in `)
Sales 21,50,000
Less: Cost of sales (14,70,000)
6,80,000
Less: Operating Expenses:
Administrative Expenses (2,40,000)
Depreciation (1,00,000)
3,40,000
Add: Dividend Received 25,000
3,65,000
Less: Interest Paid (70,000)
2,95,000
Less: Income Tax (1,30,000)
Profit after tax 1,65,000
Excellent Ltd. paid Dividend of `90,000 during the year ended 31.3.2011
Prepare Cashflow Statement of Excellent Ltd. for the year ended 31.3.2011 using Direct and Indirect Method both and
disclosing cashflows from Operating, Investing and Financing activities and the opening and closing cash balances.
(12 Marks) Answer 5: Cashflow Statement of Excellent Ltd. for the year ended 31.3.2011 (Indirect Method)
Particulars Amount in (`) Amount in (`)
A. Cashflows from Operating Activities
Net Profits before tax 2,95,000
Add: Depreciation 1,00,000
Add: Interest paid 70,000
Less: Dividend received (25,000)
Operating Profit before Working Capital changes 4,40,000
Add: Decrease in Stock 40,000
Add: Decrease in Debtors 35,000
Add: Increase in Creditors 5,000
Cashflows from Operating Activities before tax 5,20,000
Less: Tax paid (1,30,000)
Cashflows from Operating Activities (A) 3,90,000
B. Cashflows from Investing Activities
Dividend received on Investments 25,000
Less: Purchase of Fixed assets (WN 1) (3,00,000)
Cash Outflows from Investing Activities (B) (2,75,000)
C. Cashflows from Financing Activities
Long term loan taken 50,000
Less: Interest paid (70,000)
Less: Dividend paid (90,000)
Cash Outflows from Financing Activities (c) (1,10,000)
Changes in Cash and Cash Equivalents (A + B + C) 5,000
Add: Opening Cash and Cash Equivalents 30,000
Closing Cash and Cash Equivalents 35,000
Alternatively, Cashflows from Operating Activities (Direct Method)
Particulars Amount in (`) Amount in (`)
Cashflows from Operations:
Cash received from Debtors 21,85,000
Uses of Cash from Operations:
Less: Payment to Creditors (WN 2) (14,25,000)
Less: Administrative Expenses (2,40,000) (16,65,000)
Cashflows from Operating Activities before tax 5,20,000
Less: Tax Paid (1,30,000)
Cashflows from Operating Activities 3,90,000
Working Notes: WN 1: Fixed Assets A/c
Particulars Amount in (`) Particulars Amount in (`)
To Balance b/d 8,50,000 By Depreciation 1,00,000
To Bank A/c (BF) 3,00,000 By Balance c/d 10,50,000
11,50,000 11,50,000
WN2: Payment to Suppliers
Cost of Goods sold 14,70,000
Add: Closing Stock 3,00,000
Less: Opening Stock (3,40,000)
Purchases 14,30,000
Add: Opening Creditors 1,75,000
Less: Closing Creditors (1,80,000)
Payment to suppliers 14,25,000
WN 3: Debtors A/c
Particulars Amount in (`) Particulars Amount in (`)
To Balance b/d 3,80,000 By Cash A/c (B.F.) 21,85,000
To Sales 21,50,000 By Balance c/d 3,45,000
25,30,000 25,30,000
Question No. 6: The following are the estimates made by Raman & Co., for the year 2004-2005:
(i) The expected Degree of Operating Leverage (DOL) is 1.50.
(ii) The amount of debt outstanding will be `50 lakh and interest rate on the same will be 12%.
(iii) It is estimated that fixed costs will be `10 lakh.
(iv) The earnings per share of the company is expected to be `2.50.
You are required to calculate:
a. The expected degree of financial leverage of the company.
b. The expected degree of total leverage of the company.
c. The percentage decline in sales which will wipe out the entire profit before tax. (9 Marks)
Answer 6: a. DOL = 1.50
DOL = Contribution = C .
Contribution – Fixed Cost C – F
1.5 (C - 10) = C
Or 1.5C – 1.5 x 10 = C
Or (1.5 - 1) C = 15
Or 0.5 C = 15
Or C = `30 Lakh
EBIT = Contribution – Fixed Cost = `30 Lakhs – `10 Lakhs = `20 Lakhs
DFL = EBIT/(EBIT - I) = 20/(20 - 6) or DFL = 1.43
b. DTL = DOL x DFL = 1.5 x 1.43 = 2.145
c. If a decline in sales causes the profit before tax to be zero then profit after tax and EPS will also be zero.
DTL = Change in EPS ÷ Change in S or Change in S = Change in EPS ÷ DTL
EPS S S EPS
In such a situation, Change in EPS = 0 – 2.5 = - 2.5
Change in EPS = - 2.5 = - 1.00
EPS 2.5
Change in S = - 1.00 = - 0.4662 i.e., - 46.62%
S 2.145
A decline in sales by 46.62% will wipe out the entire profit before tax.
Question No. 7: Maxwell Ltd. is operating in electronic equipments development and its sales and earnings before interest and
taxes for the current year were `70,00,000 and `18,00,000 respectively. During the year, interest expense was `16,000 and
preference dividend was `20,000. These fixed charges are expected to continue for the next year. The company is thinking to
diversify its operations which will require `7,00,000 and is expected to increase EBIT by `4,00,000 to `22,00,000.
The company has the following three financing alternatives under its consideration:
Alternative 1: Issue 10,000 equity shares at `70 per share. The company has currently 80,000 shares of common stock
outstanding.
Alternative 2: Issue `7,00,000, 15 years 15% debentures, Sinking fund payments on these debentures will commence after 15
years.
Alternative 3: Issue `7,00,000, 14% preference shares.
You are required to calculate:
(i) The EPS at the expected earnings before interest and taxes level of `22,00,000 for each financing alternative.
(ii) The equivalency level of earnings before interest and taxes between the debt and common stock alternatives.
(iii) The equivalency level of earnings before interest and taxes between the preference shares and common stock alternatives.
Assume 30% income-tax rate. (12 marks) Answer 7:
(i) Determination of EPS at EBIT level of `22,00,000
Financing Plan
(a) (b) (c)
Equity Shares (`) Debentures (`) Pref. Shares (`)
EBIT 22,00,000 22,00,000 22,00,000
Less: Interest (16,000) (1,21,000) (16,000)
Taxable Income 21,84,000 20,79,000 21,84,000
Less: Tax @ 30% (6,55,200) (6,23,700) (6,55,200)
EAT 15,28,800 14,55,300 15,28,800
Less: Dividend on Pref. Shares (20,000) (20,000) (1,18,000)
Earnings available for equity shares 15,08,800 14,35,300 14,10,800
Number of Equity Shares 90,000 80,000 80,000
EPS (`) 16.76 17.94 17.64
(ii) Equivalency level of Earnings between Equity & Debt
[(X – `16,000) (1 - 0.30)] – `20,000 = (X – `16,000 – `1,05,000) (1 - 0.30) – `20,000
90,000 80,000
0.7X – `11,200 – `20,000 = 0.7X – `11,200 – `73,500 - `20,000
90,000 80,000
0.7X – `31,200 = 0.7X – `1,04,700
90,000 80,000
8(0.7X – `31,200) = 9(0.7X – `1,04,700)
5.6X – `2,49,600 = 6.3X – `9,42,300
5.6X – 6.3X = - `9,42,300 + `2,49,600
- 0.7X = - `6,92,700
X = `6,92,700 = `9,89,571
0.7
(iii) Equivalency level between Preferred Stock and Common Stock
(X – `16,000) (1 - 0.30) – `20,000 – `98,000 = (X – `16,000) (1 – 0.30) – `20,000
80,000 90,000
0.7X – `11,200 – `1,18,000 = 0.7X – `11,200 – `20,000
80,000 90,000
9(0.7X – `1,29,200) = 8(0.7X – `31,200)
6.3X – `11,62,800 = 5.6X – `2,49,600
6.3X – 5.6X = - `2,49,600 + `11,62,800
0.7X = `9,13,200
X = `9,13,200
0.7
= `13,04,571
CA-IPCC COST ASSIGNMENT
MATERIAL, LABOUR, OPERATING AND CONTRACT COSTING
MM: 75 Marks Question No. 1: Rajat owns 5 taxis which generally operate 100 km daily for 30 days in a month. Cost relating to the taxis are
as follows:
Cost of each taxi ` 2,00,000.
Expected life of each taxi 1,00,000 km.
Salvage value at the end of effective life ` 50,000.
Petrol consumption @ ` 15 per litre, each litre sufficing for 15 kms.
Mobil oil @ ` 20 per litre. One litre of mobil oil is required for 100 kms,
Monthly maintenance cost per taxi ` 300.
Repair cost for the entire life of a taxi is estimated at ` 40,000.
Driver’s salary is ` 3,000 per month.
Garage Rent is ` 5,000 per month for all the taxis.
Permit fee ` 3,000 per taxi per annum.
Insurance ` 1,500 per taxi per annum. Token tax ` 600 per taxi per annum.
Rajat knows by experience that generally ` 900 per taxi per annum is spent on challans and other sundry costs. He also
regards 15% interest on investment in taxis as costs and attributes a salary of ` 4,500 per month for his personal service,
towards this business. In addition he pays ` 1,500 per month to a part time accountant. Other office and administration
expenses amount to ` 3,000 per month.
Generally each taxi runs 20% without fare every day. During the month in question one of the taxis had met with an
accident which resulted in an extra repair cost of 20,000 of which only ` 16,000 were recovered from insurance company. This
also resulted in that taxi being non-operational for 10 days in a month.
Calculate total monthly cost for 5 taxis, cost per taxi and also charge per km if Rajat wants to earn a profit of 20% on total
cost.
(10 Marks) Answer 1: Total normal kms in a month = (30 x 100) x 5 = 15,000 km
Actual running in the month = 4 x (30 x 100) + (20 x 100) = 14,000 kms
Total normal effective kms in a month due to 20% idle running = 15,000 x (80 ÷ 100) = 12,000 kms
Effective kms for actual running = 14,000 x (80 ÷ 100) = 11,200 kms
Operating Cost Sheet For The Taxis
Particulars For 5
taxis
Per taxi
per month
Cost per
effective km
Monthly Variable charges:
Depreciation 2,00,000 – 50,000 x 14,000; or ` 1.50 per km x 100
1,00,000 80
21,000 4,500 1.825
Petrol ` 15 per 15 kms = ` 1 x 14,000; or ` 1 x 100
80
14,000 3,000 1.250
Mobil oil 20 per 100 km for 14,000; kms or 20 x 100
80
2,800 600 0.25
Repair 40,000 = 0.40 x 14,000; or 0.40 x 100
1,00,000 80
5,600
1,200
0.50
Total variable cost for the month (A) 43,400 9,300 3.875
Charged on the basis of actual running of 14,000 kms
Fixed Monthly Charges
Office & Admn. Expenses 3,000 600
Notional salary for personal supervision 4,500 900
Part time accountant’s salary 1,500 300
Interest 2,00,000 x 15 x 1 x 5
100 12
12,500 2,500
Monthly maintenance 1,500 300
Drivers salary 15,000 3,000
Garage rent 5,000 1,000
Permit fee (3,000 ÷ 12) x 5 1,250 250
Insurance (1,500 ÷ 12) x 5 625 125
Token tax (600 ÷ 12) x 5 250 50
Challans & other sundry (900 ÷ 12) x 5 375 75 ____
Total month fixed charges distributed over normal running of
15,000 kms (b)
45,500 9,100 3.792
Total cost per effective Km (a) + (b) 7.667
Add: Profit per effective Km @ 20% on cost 1.533
Total charge/collection per effective Km 9.20
Note: Abnormal loss of ` 20,000 – ` 16,000 = ` 4,000 is debited to Costing Profit % Loss A/c
Unabsorbed fixed cost = 45,500 x 1,000 = ` 3,033.33 also debited to Costing P & L A/c
15,000
Note: Variable cost is calculated with reference to actual running whereas fixed cost is distributed over normal running.
Question No. 2: You have invited tenders. Three tenders have been received. First is from a local supplier at a price of `8 per
unit. The second is from an Indian supplier located far off which involves a fixed cost of `3,000 per order at a price of `7.50
per unit. The third quotation is from a foreign supplier involving a fixed cost of `6,000 per order at a price of `6.90 per unit.
Explain with whom order should be placed & upto what quantity.
(4 Marks) Answer 2:
Supplier Variable Cost Fixed Cost
I 8 -
II 7.5 3,000
III 6.9 6,000
Cut off the order quantity between 1st and 2nd supplier = Fixed Cost per order/Per unit price difference
= 3,000 / (8 – 7.50) = 6,000 units
Cut off the order quantity between 2nd and 3rd supplier = (6,000 – 3,000) / (7.50 – 6.90) = 5,000 units
Cut off the order quantity between 1st and 3rd supplier = 6,000 / (8 – 6.90) = 5,454.54 units
From above calculations the conclusions are:
(a) For order quantity below 5,454.54 units, the first supplier is economical.
(b) For order quantity of 5,454.54 units, both 1st and 3rd suppliers are equally good.
(c) For order quantity above 5,454.54 units 3rd supplier is better.
Question No. 3: A school has ten 50 seater buses. Cost of each bus is ` 8,50,000 with salvage value of ` 50,000 and an
estimated effective life of 10 years. The school has a separate transportation section in the school premises. The rent
apportioned to this section is ` 60,000 per annum. Salary of transport officer is ` 3,000 per month and establishment expenses
of this section amount to ` 8,000 per month in addition. The school is close for two months in summer, fifteen days in autumn
and for fifteen days during winter. But for this period the buses operate on the average for 20 days in a month. However,
students are charged bus fee per 11 months in a year, though the entire staff is paid salary for the full year. The bus covers a
distance upto 15 kms. from the school both in the morning and evening. About 30 student in each bus are from a distance upto 5
kms, 10 students from distance upto 5 to 10 kms, and 10 students from a distance between 10 to 15 kms. The monthly charge
from second category of students is double compared to that in the first and that from third category the charge is three
times that from the first category. Within each category all students, are charged equally.
Expenses relating to buses are as follows:
Driver’s salary ` 3,000 per month
Conductor’s salary ` 2,500 per month
Annual maintenance and repair ` 10,000 per bus
Diesel ` 8 per litre, each litre sufficing 2 kms. of running
Lubricants ` 20 per litre, each litre sufficient for 100 kms.
Prepare operating cost sheet giving monthly transport charge from each category of students so as to recover full annual
transportation cost incurred by the school. (10 Marks) Answer 3: Total number of months in a year 12 Months
Holidays in summer, autumn and winter - 3
Study months 9
No. of days buses operate each month x 20
Total operational days in a year = 180
Total trips two each day (to and fro) 180 x 2 360
Kms. Covered in each trip = 15 x 2 x 30
Actual Annual total kms travelled per bus 10,800
Operating Cost Sheet for a bus
Variable cost for the year per bus: ` `
Diesel 10,800 x 8/2 = 43,200
Lubricating oil 10,800 x 20/100 2,160 45,360
Fixed cost for the year per bus:
Depreciation: (8,50,000 – 50,000) ÷ 10 80,000
Rent (60,000 ÷ 10) 6,000
Transport officer’s salary (3,000 x 12 ÷ 10) 3,600
Establishment expenses (8,000 x 12 ÷ 10) 9,600
Driver’s salary (3,000 x 12) 36,000
Conductor’s salary (2,500 x 12) 30,000
Annual maintenance and repair 10,000
Total annual fixed cost per bus 1,75,200
Total annual cost per bus 2,20,560
The above cost is to be recovered from 11 months fee
Monthly collection = 2,20,560 = ` 20,051
11
Let charges per student from 1st category (i.e. 0 to 5 km) = x
Let charges per student from 2nd category (i.e. 5 to 10 km) = 2x
Let charges per student from 3rd category (i.e. 10 to 15 km) = 3x
Charge x No. of students = Charge x No. of student
x x 30 = 30 x
2 x x 10 = 20 x
3 x x 10 = 30 x
80 x
80 x = ` 20,051; x = 20,051 ÷ 80 = ` 250.64
Monthly charge per student upto 0 to 5 kms = 250.64
Monthly charge per student upto 5 to 10 kms = 250.64 x 2 = ` 501.48
Monthly charge per student upto 10 to 15 kms = 250.64 x 3 = ` 751.92
Approximating ` 250, ` 500 and ` 750 per month, respectively.
Question No. 4: Calculate Economic Order Quantity (EOQ), minimum stock or safety stock, re-order level and maximum stock
with the help of the following data supplied by a producer for a particular material:
Annual demand for material = 4,000 units Average daily consumption = 12 units
Cost of placing an order = ` 200 Maximum daily consumption = 16 units
Per unit cost of material = ` 60 Maximum lead time = 10 days
Annual rate of interest = 10% Minimum lead time = 6 days
Rent, insurance and other storage costs = ` 4 per unit (4 Marks) Answer 4: Minimum Daily Consumption = 2 x Average daily consumption – Maximum daily consumption
= 2 x 12 – 16 = 8 units.
Average Lead time = Maximum Lead time + Minimum Lead time = 10 + 6 = 8 days
2 2
EOQ = 2 x A x O = 2 x 4,000 x 200 = 400 units
C (60 x 0.10 ) + 4
Reorder Level = Maximum Daily Consumption x Maximum Lead time = 16 x 10 = 160 units
Safety Stock or Minimum Level = Reorder Level – (Average Daily Consumption x Average Lead time)
= 160 – (12 x 8) = 64 units
Maximum Level = Reorder Level + EOQ – (Minimum Daily Consumption x Minimum Lead time)
= 160 + 400 – (8 x 6) = 512 units
Question No. 5: Enter the following transactions in Stores Ledger Account of material A on the basis of:
(i) FIFO
(ii) LIFO
(iii) Weighted Average Method
2000
Sept. 1 Opening stock 100 units @ `8 per unit
Sept.4 Ordered 300 units @ `8.50 via purchase order 21
Sept.6 Issued 40 units via MRN 72 for job no. 301
Sept.9 Ordered 200 units @ `8.80 via purchase order 24
Sept.11 Received 300 units @ `8.50 via GRN 37
Sept.14 Issued 120 units for production order 502 MRN 77
Sept.18 Return from Job no.301, 10 units MRT 105
Sept.21 Received 200 units @ `8.80 via GRN 41
Sept.23 Issued 150 units for Job no. 309 via MRN 83
Sept.25 Returned to vendor 20 units received via GRN 37 (DN 14)
Sept.28 Received 160 units @ `8.85 via GRN 54
Sept.28 Freight on above purchase `24
Sept.30 Ordered 250 units @ `9.10 via purchase order 29
(9 Marks) Answer 5: (i) Stores Ledger Account Based on FIFO Material A
Date
2000
Receipts Issue Balance
Particulars Qty
Units Rate
` Amount
` Particulars
Qty
Units Rate
` Amount
` Qty
Units Amount
`
Sept 1 Op. Stock 100 8 800 - - - - 100 800
Sept 6 - - - - MRN 72
Job 301
40 8 320 60 480
Sept 11 P.O. 21
GRN 37
300 8.50 2,550 - - - - 360 3,030
Sept 14 - - - - Pr. O. 502
MRN 77
60
60
8
8.50
480
510
990
240 2,040
Sept 18 Job 301
MRT 105
10 8 80 - - - - 250 2,120
Sept 21 GRN 41 200 8.80 1,760 - - - - 450 3,880
Sept 23 - - - - Job 309
MRN 83
150 8.50 1,275 300 2,605
Sept 25 - - - - DN 14 20 8.50 170 280 2,435
Sept 28 GRN 54 160 9* 1,440 - - - - 440 3,875
Note * Freight paid has been distributed over units purchased. Thus, purchase price = 8.85 + (24/160) = `9
(ii) Stores Ledger Account Based on LIFO Material A
Date
2000
Receipts Issue Balance
Particulars Qty
Units Rate
` Amount
` Particulars
Qty
Units Rate
` Amount
` Qty
Units Amount
`
Sept 1 Op. Stock 100 8 800 - - - - 100 800
Sept 6 - - - - MRN 72
Job 301
40 8 320 60 480
Sept 11 P.O. 21
GRN 37
300 8.50 2,550 - - - - 360 3,030
Sept 14 - - - - Pr. O. 502
MRN 77
120 8.50 1,020 240 2,010
Sept 18 Job 301
MRT 105
10 8 80 - - - - 250 2,090
Sept 21 GRN 41 200 8.80 1,760 - - - - 450 3,850
Sept 23 - - - - Job 309
MRN 83
150 8.80 1,320 300 2,530
Sept 25 - - - - DN 14 20 8.50* 170 280 2,360
Sept 28 GRN 54 160 9 1,440 - - - - 440 3,800
Note: * Since the units of materials returned to vendor are unissued as per stores records, they have been valued at the same
rate at which they have been purchased, i.e., `8.50 per unit.
(iii) Stores Ledger Account Based on Weighted Average Material A
Date
2000
Receipts Issue Balance
Particulars Qty
Units Rate
` Amount
` Particulars
Qty
Units Rate
` Amount
` Qty
Units Amount
`
Sept 1 Op. Stock 100 8 800 - - - - 100 800
Sept 6 - - - - MRN 72
Job 301
40 8 320 60 480
Sept 11 P.O. 21
GRN 37
300 8.50 2,550 - - - - 360 3,030
Sept 14 - - - - Pr. O. 502
MRN 77
120 8.417* 1,010 240 2,020
Sept 18 Job 301
MRT 105
10 8 80 - - - - 250 2,100
Sept 21 GRN 41 200 8.80 1,760 - - - - 450 3,860
Sept 23 - - - - Job 309
MRN 83
150 8.578 1,287 300 2,573
Sept 25 - - - - DN 14 20 8.578* 172 280 2,401
Sept 28 GRN 54 160 9 1,440 - - - - 440 3,841
Note: Materials returned to vendor were purchased @ `8.50 but are entered in issue column @ 8.578 based on weighted
average. Therefore, inventory adjustment A/c is debited by 20 x (8.578 – 8.50) = `2 or 172 – 20 x 8.50 = `2.
Vendor is debited by the original price, i.e., 20 x 8.50 = `170. The difference is due to approximation.
Question No 6: The three workers Govind, Ram and Shyam produced 80, 100 and 120 pieces of a product X on a particular day
in May 2009 in a factory. The time allowed for 10 units of Product X is 1 hour and their hourly rate is `4.
Calculate for each of these three workers the following:
(i) Earnings for the day
(ii) Effective rate of earnings per hour under:
(a) Straight piece-rate plan
(b) Halsey premium bonus plan (50% sharing)
(c) Rowan premium bonus plan of labour remuneration.
(8 Marks) Answer 6: Statement Showing Computation of Earnings of Workers
Particulars Govind Ram Shyam
Production (Units) 80 100 120
Time Allowed (Hours) (80/10) = 8 (100/10) = 10 (120/10) = 12
Piece Rate `4 .
10 Units
`0.40 `0.40 `0.40
Time Taken (Hours) 8 8 8
Time Saved (Hours) 0 2 4
(i) Earnings for the day:
(a) Straight Piece Rate Plan 80 units x `0.40
= `32
100 units x `0.40
= `40
120 units x `0.40
= `48
(b) Halsey Premium Bonus Plan (50% sharing)
Wages = Time Taken x Time Rate + 50% of
Time Saved x Time Rate
8 hours x `4 + 50% x 0
hours x `4
= `32
8 hours x `4 + 50% x 2
hours x `4
= `36
8 hours x `4 + 50% x 4
hours x `4
= `40
(c) Rowan Premium Bonus Plan
Wages = Time Taken x Time Rate +
Time Saved x Time Taken x Time Rate
Time Allowed
8 hours x `4 +
0 hours x 8 hours x `4
8 hours
= `32
8 hours x `4 +
2 hours x 8 hours x `4
10 hours
= `38.4
8 hours x `4 +
4 hours x 8 hours x `4
12 hours
= `42.67
Question No. 7: The following is the trial balance of Premier Construction Company engaged on the execution of Contract No.
1047 for the year 31st December, 2005:
Particulars Amount in (`) Amount in (`)
Contractee’s account (amount received) 3,00,000
Buildings 1,60,000
Creditors 72,000
Bank balance 35,000
Capital account 5,00,000
Materials 2,00,000
Wages 1,80,000
Expenses 47,000
Plant 2,50,000
8,72,000 8,72,000
The work on Contract No. 1047 commenced on 1st January 2005. Materials costing `1,70,000 were sent to the site of the
contract but those of `6,000 were destroyed in an accident. Wages of `1,80,000 were paid during the year. Plant costing
`50,000 was used on the contract all through the year. Plant with a cost of `2 lakh was used from 1st January to 30th
September and was then returned to stores. Materials of the cost of `4,000 were at site on 31st December, 2005. The contract
was for `6,00,000 and the contract pays 75% of the work certified. Work certified was 80% of the total contract work at the
end of 2005. Uncertified work was estimated at `15,000 on 31st December, 2005. Expenses are charged to contract at 25% of
wages. Plant is to be depreciated at 10% p.a.
Prepare Contract No. 1047 account for the year 2005 and make out the Balance Sheet as on 31st December, 2005 in the books
of Premier Construction Company. (10 Marks) Answer 7: In the books of Premier Construction company Contract No. 1047 A/c
Particulars Amount in (`) Particulars Amount in (`)
To Materials 1,70,000 By W.I.P
To Wages 1,80,000 Certified 4,80,000
To Expenses (25% of `1,80,000) 45,000 Uncertified 15,000
To Depreciation on Plant
`50,000 x 10% x 12 + `2,00,000 x 10% x 9 .
12 12
20,000 By Abnormal Loss of
Material
6,000
To Notional Profit c/d 90,000 By Material at site 4,000
5,05,000 5,05,000
To Profit & Loss A/c (WN1) 37,500 By Notional Profit b/d 90,000
To WIP A/c (Profit in Reserve B.F.) 52,500
90,000 90,000
Working Note:
WN1: Transfer to Profit and Loss A/c = Notional Profit x 2 x Cash Received [
3 Work Certified
= `90,000 x 2 x `3,00,000 = `37,500
3 `4,80,000
Particulars Amount in (`) Particulars Amount in (`)
Capital 5,00,000 Buildings 1,60,000
Profit & Loss A/c (WN2) 24,500 Plant at site 45,000
Creditors 72,000 Plant in store (2,00,000 – 20,000) 1,80,000
Material in site 4,000
Material in store (`2,00,000 - `1,70,000) 30,000
Work – in – progress:
Certified 4,80,000
Uncertified 15,000
4,95,000
Less: Cash (3,00,000)
1,95,000
Less: Reserve (52,500) 1,42,500
Bank 35,000
5,96,500 5,96,500
WN2:
Particulars Amount in (`)
Profit on Contract A/c 37,500
Less: Depreciation on Plant `2,00,000 x 10% x 3 .
12
5,000
Under-absorbed expenses (`47,000 – `45,000) 2,000
Loss of materials 6,000 (13,000)
Net Profit 24,500
Question No. 8: Accountant of your company had computed labour turnover rates for the quarter ended 30th September, 2012
as 14%, 8% and 6% under Flux method, Replacement method and Separation method respectively. If the number of workers
replaced during 2nd quarter of the financial year 2012-13 is 36, find the following:
(i) The number of workers recruited and jointed; and
(ii) The number of workers left and discharged.
(4 Marks)
Answer 8: Replacement Rate = No. of Replacements x 100
Average no. of workers
8 = 36 x 100
Average no. of workers
Average no. of workers = 450 workers
Separation Rate = No. of Separations x 100
Average no. of workers
6 = No. of separations x 100
450
No. of separations = 27 Workers
Since Flux Rate = 14%, hence flux rate would be
Flux Rate = No. of Replacements + No. of Separations x 100
Average no. of workers
14 = 36 + 27 x 100
450
Hence,
No. of workers recruited & joined = 36 workers
No. of workers left & discharged = 27 workers
Question No. 9: The contract ledger of M/s XYZ showed the following expenditure on account of contract on 31st December,
2006:
Amount in (`)
Materials 2,10,000
Wages 2,93,000
Plant 70,000
Sundry Expenses 15,000
Establishment charges 10,000
The contract was started on 1st January, 2006 and the contract price was `10,00,000. Cash received on account to date was
`4,80,000 representing 80% of work certified, remaining 20% being retained until completion. Value of plant on 31st December,
2006 was `20,000 and the value of materials in hand was `6,000. The cost of work finished but not certified on said date was
`50,000. Some of the materials costing `20,000 were found unsuitable and were sold for `16,000 and a part of plant costing
`5,000 unsuited for the contract was sold at a profit of `1,000.
The contractor estimated a further expenditure that would be incurred in completing the contract and took to the credit of
P&L A/c for the year 2006. The preparation of estimated net profit on contract which the value of work certified bears to the
contract price. This is to be further reduced by proportion of cash received that bears to work certified. The estimates of
further expenditure were as follows:
(i) That the contract would be completed by 30th June, 2007.
(ii) That a further sum of `30,000 would have to be spent on the plant and its residual value on completion of the
contract would be `12,000.
(iii) That materials in addition to those in hand on 31st Dec., 2006 would cost `1,00,000 and that further sundry
expenses of `7,000 would be incurred.
(iv) That the wages for the completion of contract would amount to 1,69,900.
(v) That the establishment charges would cost the same amount per year as in the previous year.
(vi) That `18,000 would be sufficient to provide for contingencies.
Prepare Contract Account for the year ended 31st December, 2006 and show the amount to be credited to P&L A/c for the
year. Also show how the relevant figures would appear in the Balance Sheet as on that date.
(12 Marks) Answer 9: Contract Account
Particulars Amount in (`) Particulars Amount in (`)
To Materials 2,10,000 By Plant at site 20,000
To Wages 2,93,000 By Material at site 6,000
To Plant 70,000 By Loss on Materials 4,000
To Sundry Expenses 15,000 By Sale of Materials 16,000
To Establishment charges 10,000 By Sale of Plant 6,000
To Profit on sale of Plant 1,000 By Balance c/d 5,47,000
5,99,000 5,99,000
To Balance b/d 5,47,000 By Work in Progress certified `4,80,000 x 100 .
80
6,00,000
To Notional Profit c/d 1,03,000 By Work in Progress Uncertified 50,000
6,50,000 6,50,000
To Profit and Loss A/c* 52,368 By Notional Profit b/d 1,03,000
To Work in Progress Reserve A/c
(Bal. Fig.)
50,632
1,03,000 1,03,000
*Profit to be taken to P&L A/c
= Estimated Profit x Work Certified x Cash Received .
Contract Price Work Certified
= `1,09,100 x `6,00,000 x `4,80,000
`10,00,000 `6,00,000
= `52,368
Memorandum Contract Account (18 months)
Particulars Amount in (`) Particulars Amount in (`)
To Materials (2,10,000 – 4,000 – 16,000) 2,90,000 By Contractee‘s A/c 10,00,000
To Wages (2,93,000 + 1,69,900) 4,62,900
To Plant (70,000 + 1,000 – 6,000 + 30,000 – 12,000) 83,000
To Sundry Expenses (1,50,000 + 7,000) 22,000
To Establishment Charges (10,000 + 10,000 x 6 )
12
15,000
To Reserve for contingencies 18,000
To Estimated Profit (Bal. fig.) 1,09,100
10,00,000 10,00,000
Extract of Balance Sheet as on 31-12-2006
Liabilities Amount in (`) Assets Amount in (`)
Work in Progress:
Work Certified 6,00,000
Work Uncertified 50,000
6,50,000
Less: Reserve (50,632)
5,99,368
Less: Cash Received (4,80,000)
Work in Progress 1,19,368
Materials in Hand 6,000
Plant at Site 20,000
Question No. 10: From the following particulars compute a conservation estimate of profit by 4 methods on a contract which
has 80 percent complete: `
Total expenditure to date 8,50,000
Estimate further expenditure to complete the contract 1,70,000
Contract Price 15,30,000
Work Certified 10,00,000
Work not certified 85,000
Cash received 8,16,000
(4 Marks) Answer 10: Computation of Notional Profit & Profit to be taken to Contract P & L A/c
Value of Work Certified `10,00,000
Less: Cost of Work Certified
Cost of Contract to date `8,50,000
Less: Cost of Work uncertified (`85,000) (`7,65,000)
Notional Profit `2,35,000
Profit to be taken to Contract Profit & Loss A/c (When 80% of Contract is complete)
= 2 x Notional Profit x Cash Received
3 Work Certified
= 2 x `2,35,000 x `8,16,000 = `1,27,840
3 `10,00,000
(2) Four Methods of Computing the Conservative estimates of Profit
(a) Computation of Total estimated Profit on Contract
Contract Price `15,30,000
Less: Total estimated Cost of Contract Cost to date `8,50,000
Less: Estimated further Cost to Complete the Contract`1,70,000 (`10,20,000)
Estimated Profit `5,10,000
(b) Profit to be taken to Contract P/L A/c
1. Cost to Cost Basis
(i) Estimated Profit x Cost to date .
Total Estimated Cost
`5,10,000 x `8,50,000 = `4,25,000
`10,20,000
(ii) Total Estimated Profit x Cost of Contract to date x Cash Received
Total Estimated Cost Work Certified
`5,10,000 x `8,50,000 x `8,16,000 = `3,46,800
`10,20,000 `10,00,000
2. On Value to Value Basis
(a) Estimated Profit x Work Certified
Contract Price
`5,10,000 x `10,00,000 = `3,33,333
`15,30,000
(b) Estimated Profit x Work Certified x Cash Received
Contract Price Work Certified
`5,10,000 x `10,00,000 x `8,16,000 = `2,72,000
`15,30,000 `10,00,000
Most Conservative estimate = `1,27,840