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You are required to calculate ROE (Return on Equity) of the company based on the
'DuPont Model'.
(d) A Company has Sales of ` 1,00,00,000; Variable Cost is 55% of Sales and fixed Cost is
` 6,00,000. The Capital Structure of the company is: Equity ` 1,20,00,000 and 8% Debt
` 80,00,000.
Required:
(i) Calculate Company's Operating, Financial and Combined Leverages.
(ii) If the Sales amount is increased by 12%, by what percentage EBIT will increase?
(4 x 5 = 20 Marks)
Answer
(a) Calculation of earnings
(i) Differential piece rate system
= Actual Output × Piece rate per unit × 120%
= 120 Pieces × ` 4.00 × ` 120%
= 120 × ` 4.80 = ` 576
120
*Efficiency = 100 = 120% i.e. above normal output, so 120% of piece rate is
100
applicable.
(ii) Halsey Premium Scheme
1
= Time taken × Rate + Time Allowed - Time Taken × Rate
2
= 45 hours X ` 8 + ½ {(45/100 X 120)- 45hours} X ` 8
1
= ` 360 + Rs. 54 - 45 × Rs. 8.00
2
= ` 360 + ` 36 = ` 396
(75 - 60)
(b) P/V Ratio = ×100 = 20%
75
OR
= 1- Variable cost ratio
= 1- 80%
= 20%
Wages 10,48,000
Indirect expenses 92,000
Administrative charges 1,18,000
Materials at site at the end of the year 38,000
A plant was purchased for the contract on 1st April, 2018 which, after charging
depreciation @ 15% p.a. on the cost, appeared at ` 6,12,000 at the end of the year.
A supervisor who is paid ` 10,000 per month has devoted two-third of his time to this
contract.
Two-third of the contract was completed. The architect issued certificate covering 50% of
the contract price and contractor has been paid 90% of the work certified on account.
The books of accounts are closed on 31st March every year.
Prepare contract account showing following:
(i) Works cost of the contract
(ii) Value of works uncertified
(iii) Notional profit and
(iv) Amount to be carried to profit and loss account. (8 Marks)
(b) A Doctor is considering purchasing a machine at a cost of ` 1,20,000. The projected life
of the machine is 5 years and has an expected salvage value of ` 10,000 at the end of 5
years. The annual operating cost of the machine is ` 2,000. It is expected to generate
revenues of ` 60,000 per year for five years. At present the Doctor is outsourcing his
work related to this machine and earns commission income of ` 15,000 per annum; net
of taxes. Tax Rate is 30%.
You are required to find as to whether it would be profitable for the Doctor to purchase
the machine? Give your advice based on:
(i) Net Present Value Method
(ii) Profitability Index Method
Take PV Factors at 9% as given below:
Year 1 2 3 4 5 Total
0.917 0.842 0.772 0.708 0.650 3.889
(8 Marks)
Answer
(a) Contract Account
Particulars (`) Particulars (`)
To Material purchased 8,52,000 By Material (at site) 38,000
” Wages 10,48,000
” Indirect expenses 92,000
” Administrative charges 1,18,000
” Depreciation on 1,08,000
machine (WN-1)
” Supervisor’s salary 80,000 ” Works cost c/f 22,60,000
(` 10,000 × 12 × 2/3) (balancing figure)
22,98,000 22,98,000
” Works cost b/f 22,60,000 ” Value of work 22,50,000
certified
(50% of 45,00,000)
” Notional profit c/f 5,55,000 ” Cost of work 5,65,000
uncertified
(Working Note 2)
28,15,000 28,15,000
” Costing P&L A/c 3,33,000 ” Notional profit b/f 5,55,000
(Working Note 3)
” Work-in-progress 2,22,000
(Reserve)
5,55,000 5,55,000
Working notes:
` 6,12,000
1. Depreciation = 15% = `1,08,000,
85%
Opening value of plant = ` 6,12,000+1,08,000 = ` 7,20,000
2. The cost of 2/3rd of the contract is ` 22,60,000
` 22,60,000
Cost of 100% of the contract is 3 = ` 33,90,000
2
Cost of 50% of the contract which has been certified by the architect is
` 16,95,000. Also, the cost of 1/3rd of the contract, which has been completed but
not certified by the architect is ` 5,65,000 (22,60,000-16,95,000 = 56,5000)
2 Cash received
3. ×Notional Profit ×
3 Work certified
2 90% 22,50,000
or, × 5,55,000 × = ` 3,33,000
3 22,50,000
OR
Year CFAT PV Factor @9% Present Value of
Cash inflows
1 to 4 32,200 3.239 1,04,295.8
5 42,200 0.650 27,430.0
1,31,725.8
Less: Cash Outflows 1,20,000
NPV 11,725.8
(iii) Calculate the values of Raw Materials, Labour and Overheads added to the process
during the month.
(iv) Prepare the Process Account for the month. (8 Marks)
(b) The following information has been extracted from the books of ABS Limited:
1st April, 2017 31st March, 2018
(` ) (` )
Raw Material 1,00,000 70,000
Works-in-progress 1,40,000 2,00,000
Finished goods 2,30,000 2,70,000
Other information for the year:
`
Average receivables 2,10,000
Average payables 3,14,000
Purchases 15,70,000
Wages and overheads 17,50,000
Selling expenses 3,20,000
Sales 42,00,000
All purchases and sales are on credit basis. Company is willing to know:
(i) Net operating cycle period
(ii) Amount of working capital requirements (Assume 360 days in a year) (8 Marks)
Answer
(a) (i) Calculation of Raw Material inputs during the month:
Quantities Entering Litres Quantities Leaving Litres
Process Process
Opening WIP 1,100 Transfer to Finished Goods 5,900
Raw material input 7,220 Process Losses 2,200
(balancing figure)
Closing WIP 220
8,320 8,320
(ii) Calculation of Normal Loss and Abnormal Loss/Gain
Litres
Total process losses for month 2,200
` 1,00,000 + ` 70,000
= 360 = 19.125 days or 19 days
2
16,00,000
2. Work – in - Progress (WIP) Conversion Period (W)
Average Stock of WIP
WIP Conversion Period = × 360
Annual Cost of Production
`1, 40,000 + ` 2,00,000
= 360 = 18.60 or 19 days .
2
` 32,90,000
3. Finished Stock Storage Period (F)
Average Stock of Finished goods
× 360
Annual Cost of Goods Sold
` 2,30,000 + ` 2,70,000
= 360 = 27.69 days or 28 days
2
` 32,50,000
4. Receivables (Debtors) Collection Period (D)
Average Receivables
× 360
Annual Credit Sales
2,10,000
= ×360 = 18 days
42,00,000
5. Payables (Creditors) Payment Period (C)
Average Payables for materials
= × 360
Annual Credit purchases
3,14,000
× 360 = 72 days
15,70,000
(i) Net Operating Cycle Period
=R+W +F+D-C
= 19 + 19 + 28 + 18 – 72
= 12 days
Any change in the leverage will not lead to any change in the total value of the firm and
the market price of shares, as the overall cost of capital is independent of the degree of
leverage. As a result, the division between debt and equity is irrelevant.
As per this approach, an increase in the use of debt which is apparently cheaper is offset
by an increase in the equity capitalisation rate. This happens because equity investors
seek higher compensation as they are opposed to greater risk due to the existence of
fixed return securities in the capital structure.
(d) Seed Capital Assistance: The seed capital assistance has been designed by IDBI for
professionally or technically qualified entrepreneurs. All the projects eligible for financial
assistance from IDBI, directly or indirectly through refinance are eligible under th e
scheme. The project cost should not exceed ` 2 crores and the maximum assistance
under the project will be restricted to 50% of the required promoter’s contribution or ` 15
lacs whichever is lower.
The seed capital assistance is interest free but carries a security charge of one percent
per annum for the first five years and an increasing rate thereafter.
Question 6
(a) RSJ produces a single product and absorbs production overheads at a pre-determined
rate. Information relating to a period is as under:
Production overheads actually incurred ` 4,84,250
Overhead recovery rate at production ` 1.45 per hour
Actual hours worked 2,65,000 hours
Production :
Finished goods 17,500 units
Works-in-progress (50% complete in all respect) 5,000 units
Sales of finished goods 12,500 units
At the end of the period, it was discovered that the actual production overheads incurred
included ` 40,000 on account of 'written off obsolete stores' and wages paid for the strike
period under an award.
It was also found that 30% of the under absorption of production overheads was due to
factory inefficiency and the rest was attributable to normal increase in costs.
Required to calculate:
(i) The amount of under absorbed production overheads during the period.
(ii) Show the accounting treatment of under absorption of production overheads and
pass journal entry. (8 Marks)
(b) PQR Ltd. has the following capital structure at book value:
(` )
Equity Share Capital (` 10 each) 1,50,00,000
10% Preference share capital (` 100 each) 50,00,000
9% Debentures (` 1,000 each) 1,50,00,000
9.5% Term Loan 2,00,00,000
Debentures are redeemable after 3 years and are being currently quoted at ` 980 per
debenture in the market.
Preference shares are also redeemable after 5 years and currently selling at ` 98.50 per
share.
The current market price of one equity share is ` 75. The risk free interest rate is 6.25%.
The market portfolio return is 15.25%. The beta of the company is 1.93.
The applicable income tax rate for the company is 35%.
You are required to calculate the cost of the following using market value as weight:
(i) Equity share
(ii) Preference share
(iii) 9% Debenture
(iv) 9.5% Term loan
(v) Weighted average cost of capital (8 Marks)
Answer
(a) (i) Amount of under absorption of production overheads during the period :
Amount Amount
(`) (`)
Total production overheads actually incurred during the 4,84,250
period
Less: Expenses on account w/o obsolete store and 40,000
wages paid for the strike period
Net production overheads actually incurred 4,44,250
Less: Production overheads absorbed as per machine
hour rate (2,65,000 hours × `1.45) 3,84,250
Amount of under absorbed production overheads 60,000
(ii) Accounting treatment of under absorbed production overheads: As, 30% of the
under absorbed overheads were due to factory inefficiency, this being abnormal,
hence should be debited to Costing Profit and Loss Account.
Amount to be debited to Costing Profit and Loss Account = (60,000 × 30%)
= ` 18,000.
Balance of under absorbed production overheads should be distributed over Works
in progress, Finished goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = (60,000 × 70%) = ` 42,000.
` 42,000
Supplementary rate = = 2.10
20,000 units *
Apportionment of under absorbed production overheads over WIP, Finished goods
and Cost of sales:
Equivalent Amount
completed units (`)
Work-in-Progress (5,000 units × 50% × 2.10) 2,500 5,250
Finished goods (5,000 units × 2.10) 5,000 10,500
Cost of sales (12,500 units × 2.10) 12,500 26,250
Total 20,000 42,000
1
*(17,500 units + of 5000 units)
2
Journal Entry:
Particulars Dr. (` ) Cr. (`)
WIP control A/C Dr. 5,250
Finished goods control A/C Dr. 10,500
Cost of Sales A/C Dr. 26,250
Costing P/L A/C 18,000
To Overhead Control A/c 60,000
(iii) Rent paid for the factory building which is temporarily closed.
(iv) Cost associated with the acquisition and conversion of raw material into finished
product.
(b) List the Financial Expenses which are not included in Cost.
(c) (i) Explain angle of incidence.
(ii) Write any two limitations of profit maximisation objectives of financial management.
(d) What are common methods of venture capital financing?
(e) Explain ageing schedule in context of monitoring of receivables. (4 x 4 = 16 Marks)
Answer
(a)
Sl. Cases Type of Cost
No.
(i) Interest paid on own capital not involving any Cash Imputed Cost /Notional
Outflow. Cost
(ii) Withdrawing money from Bank Deposit for the Opportunity Cost
purpose of purchasing new machine.
(iii) Rent paid for the factory building which is Shut Down Cost
temporarily closed
(iv) Cost associated with the acquisition and conversion Product Cost
of raw material into finished product.
(b) Financial expenses which are not included in cost accounting are as follows:
• Interest on debentures and deposits
• Gratuity
• Pension
• Bonus of Employee,
• Income Tax,
• Preliminary Expenses
• Discount on issue of Share
• Underwriting commissions.
(c) (i) This angle is formed by the intersection of sales line and total cost line at the break-
even point. This angle shows the rate at which profits are being earned once the
break-even point has been reached. The wider the angle the greater is the rate of
earning profits. A large angle of incidence with a high margin of safety indicates
extremely favourable position.