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. ` 30,000 10,000 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? 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) (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 14% debentures 11% Preference shares Equity (10,000 shares)

(10 Marks)

= (0.50)

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% 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

(8 Marks)

The WMCC curve for the firm has been presented in the following Figure: WMCC% 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 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 Weight Cost WACC (` in lakhs) 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 33% from present level as a result of expansion. 6 9.7% 9.85% 10.31% 11.41% 11.65%

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. Answer 4: Statement showing Calculation of Degree for various Leverages Particulars Present Debt Plan Equity Situation (`) (`) 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 6.429 3.828 1.854 EBT Pref. Dividend 1t 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 6,667 6,667 6,667 (1 t) C. Financial Break Even Point [A + B] 50,667 81,267 50,667

(20 Marks)

(g)

(h)

(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 6,667 6,667 6,667 (1 t) D. P/V Ratio 25% 25% 25% E. Operating BEP (A+B+C/D) (in `) 5,62,668 6,85,068 5,62,668 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 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. 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.

(i)

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

(j)

Less: Operating Expenses: Administrative Expenses Depreciation

(2,40,000) (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. 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

(12 Marks)

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. Answer 6: a. DOL = 1.50 DOL = Contribution = C . Contribution Fixed Cost CF 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

(9 Marks)

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

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. Drivers 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. 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 Per taxi Cost per taxis per month effective km Monthly Variable charges: Depreciation 2,00,000 50,000 x 14,000; or ` 1.50 per km x 100 21,000 4,500 1.825 1,00,000 80 Petrol ` 15 per 15 kms = ` 1 x 14,000; or ` 1 x 100 14,000 3,000 1.250 80 Mobil oil 20 per 100 km for 14,000; kms or 20 x 100 2,800 600 0.25 80 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 accountants salary 1,500 300 Interest 2,00,000 x 15 x 1 x 5 12,500 2,500 100 12 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

MM: 75 Marks

(10 Marks)

Challans & other sundry (900 12) x 5 375 75 ____ Total month fixed charges distributed over normal running of 45,500 9,100 3.792 15,000 kms (b) 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. Answer 2: Supplier I II III Variable Cost 8 7.5 6.9 Fixed Cost 3,000 6,000

(4 Marks)

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 nd rd Cut off the order quantity between 2 and 3 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: Drivers salary ` 3,000 per month Conductors 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 officers salary (3,000 x 12 10) 3,600 Establishment expenses (8,000 x 12 10) 9,600 Drivers salary (3,000 x 12) 36,000 Conductors 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 2x x 10 = 20 x 3x 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 Sept.14 Sept.18 Sept.21 Sept.23 Sept.25 Sept.28 Sept.28 Sept.30

Received 300 units @ `8.50 via GRN 37 Issued 120 units for production order 502 MRN 77 Return from Job no.301, 10 units MRT 105 Received 200 units @ `8.80 via GRN 41 Issued 150 units for Job no. 309 via MRN 83 Returned to vendor 20 units received via GRN 37 (DN 14) Received 160 units @ `8.85 via GRN 54 Freight on above purchase `24 Ordered 250 units @ `9.10 via purchase order 29

Answer 5: (i)

Stores Ledger Account Based on FIFO Material A Receipts Issue Balance Date Qty Rate Amount Qty Rate Qty Amount Amount 2000 Particulars Particulars ` ` ` ` ` Units Units Units Sept 1 Op. Stock 100 8 800 100 800 Sept 6 MRN 72 40 8 320 60 480 Job 301 Sept 11 P.O. 21 300 8.50 2,550 360 3,030 GRN 37 Sept 14 Pr. O. 502 60 8 480 240 2,040 MRN 77 60 8.50 510 990 Sept 18 Job 301 10 8 80 250 2,120 MRT 105 Sept 21 GRN 41 200 8.80 1,760 450 3,880 Sept 23 Job 309 150 8.50 1,275 300 2,605 MRN 83 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 Receipts Issue Balance Date Qty Rate Amount Qty Qty Rate Amount Amount 2000 Particulars Particulars ` ` ` ` ` Units Units Units Sept 1 Op. Stock 100 8 800 100 800 Sept 6 MRN 72 40 8 320 60 480 Job 301 Sept 11 P.O. 21 300 8.50 2,550 360 3,030 GRN 37 Sept 14 Pr. O. 502 120 8.50 1,020 240 2,010 MRN 77 Sept 18 Job 301 10 8 80 250 2,090 MRT 105 Sept 21 GRN 41 200 8.80 1,760 450 3,850 Sept 23 Job 309 150 8.80 1,320 300 2,530 MRN 83 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 Receipts Issue Balance Date Qty Rate Amount Qty Qty Rate Amount Amount 2000 Particulars Particulars ` ` ` ` ` Units Units Units Sept 1 Sept 6 Op. Stock 100 8 800 MRN 72 Job 301 40 8 320 100 60 800 480

(9 Marks)

Sept 11 Sept 14 Sept 18 Sept 21 Sept 23

P.O. 21 GRN 37 Job 301 MRT 105 GRN 41 -

300 10 200 -

8.50 8 8.80 -

2,550 80 1,760 -

Pr. O. 502 MRN 77 -

120 -

8.417* -

1,010 -

360 240 250

3,030 2,020 2,100

450 3,860 Job 309 150 8.578 1,287 300 2,573 MRN 83 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.

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 . `0.40 `0.40 `0.40 10 Units 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 `0.40 100 units x `0.40 120 units x `0.40 = `32 = `40 = `48 (b) Halsey Premium Bonus Plan (50% sharing) Wages = Time Taken x Time Rate + 50% of 8 hours x `4 + 50% x 0 8 hours x `4 + 50% x 2 8 hours x `4 + 50% x 4 Time Saved x Time Rate hours x `4 hours x `4 hours x `4 = `32 = `36 = `40 (c) Rowan Premium Bonus Plan Wages = Time Taken x Time Rate + 8 hours x `4 + 8 hours x `4 + 8 hours x `4 + Time Saved x Time Taken x Time Rate 0 hours x 8 hours x `4 2 hours x 8 hours x `4 4 hours x 8 hours x `4 Time Allowed 8 hours 10 hours 12 hours = `32 = `38.4 = `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 (`) Contractees 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

(8 Marks)

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 31 st 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 20,000 By Abnormal Loss of 6,000 `50,000 x 10% x 12 + `2,00,000 x 10% x 9 . Material 12 12 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 . 5,000 12 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 = 8=

36 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 31 st 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 31 st 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 31 st 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. Answer 9: Particulars To Materials To Wages To Plant To Sundry Expenses To Establishment charges To Profit on sale of Plant To Balance b/d Contract Account Particulars By Plant at site By Material at site By Loss on Materials By Sale of Materials By Sale of Plant By Balance c/d By Work in Progress certified `4,80,000 x 100 . 80

No. of Replacements x 100 Average no. of workers x 100

(12 Marks)

Amount in (`) 2,10,000 2,93,000 70,000 15,000 10,000 1,000 5,99,000 5,47,000

Amount in (`) 20,000 6,000 4,000 16,000 6,000 5,47,000 5,99,000 6,00,000

To Notional Profit c/d To Profit and Loss A/c* To Work in Progress Reserve A/c (Bal. Fig.)

1,03,000 6,50,000 52,368 50,632

By Work in Progress Uncertified By Notional Profit b/d

50,000 6,50,000 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 To Materials (2,10,000 4,000 16,000) 2,90,000 By Contractees A/c 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 ) 15,000 12 To Reserve for contingencies 18,000 To Estimated Profit (Bal. fig.) 1,09,100 10,00,000 Extract of Balance Sheet as on 31-12-2006 Liabilities Amount in (`) Assets Work in Progress: Work Certified Work Uncertified

1,03,000

Amount in (`) 10,00,000

10,00,000 Amount in (`)

6,00,000 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 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

(4 Marks)

(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