PAGE - 1 Resonance Eduventures Ltd. Disclaimer Clause : These solutions are prepared by expert faculty team of RESONANCE. Views and answers provided may differ from that would be given by ICAI due to difference in assumptions taken in support of the answers. In such case answers as provided by ICAI will be deemed as final. CA-INTERMEDIATE (IPC) NOVEMBER - 2015 Total number of questions : 7 | Time allowed : 3 hours | Maximum Marks : 100 | Date : 06-11-2015 PAPER-3 EXAMINATION PAPER WITH SOLUTION SUBJECT : COST & FINANCIAL MANAGEMENT NOTE : 1. Question No. 1 is compulsory. Answer any five questions from the remaining six questions. 2. Working notes should form part of the answers.
Transcript
R ES O N AN CE PAGE - 1Resonance Eduventures Ltd.
Disclaimer Clause : These solutions are prepared by expert faculty team of RESONANCE. Views andanswers provided may differ from that would be given by ICAI due to difference in assumptions taken insupport of the answers. In such case answers as provided by ICAI will be deemed as final.
CA-INTERMEDIATE (IPC)NOVEMBER - 2015
Total number of questions : 7 | Time allowed : 3 hours | Maximum Marks : 100 | Date : 06-11-2015
PAPER-3
EXAMINATIONPAPER WITH SOLUTION
SUBJECT : COST & FINANCIAL MANAGEMENT
NOTE : 1. Question No. 1 is compulsory. Answer any five questions from the remaining six questions. 2. Working notes should form part of the answers.
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Q.1 Answer the following : [4 × 5 = 20 Marks](a) Human Resources Department of A Ltd. computed Labour Turnover by Replacement Method at 3% for the
quarter ended June 2015. During the quarter, fresh recruitment of 40 workers was made. The number ofworkers at the beginning and end of the quarter was 990 and 1010 respectively.You are required to calculate the Labour Turnover Rate by Separation Method and Flux Method.
Sol. Labour Turnover Rates :
(i) Separation Method: = 100wokrerAvg
separatedkerworof.No
= 1001000
20
= 2% (For One Quarter)= 8% (For full year)
(ii) Flux Method: = 100kerWor.Avg
s AccessionSeparation
= 000,1403020
× 100
= 9% (For One Quarter)= 36% (For Full year)
Working Note : -
(a) Average worker =2
010,1990
= 1,000(b) No. of worker Replaced during the year = 1000 × 3%
= 30 workers(c) Accessions = Replacements + New Recruitments
= 30 + 40= 70 Workers
(d) No. of separation :Workers at the Beginning of the Quarter 990Add :- New worker appointed 40
(Other than replacement)Less :- Worker Separated (X)
Worker at the end of Quarter 1010Worker separated = 20 Workers
(b) A company gives the following informationMargin of safety = ` 3,75,000Total cost = ` 3,87,500Margin of safety (Qty.) = 15000 unitsBreak Even Sales in units = 5000 unitsYou are required to calculate :(i) Selling price per unit (ii) Profit (iii) Profit/volume ratio(iv) Break Even Sales (in Rupees) (v) Fixed cost
Sol. 1. Sale Price p.u. = )Units(safetyofinargM)(safetyofinargM `
3. Profit/volume ratioContribution per unit = Profit / MOS Quantity
= 1,12,500 / 15,000Contribution per unit.= ` 7.50
Hence PV Ratio = u.ppriceSale,u.ponContributi
= 255.7
= 30%4. Break Even Sales (in Rupees) = BEP (units) × Sale Price p.u.
= 5,000 units × ` 25= ` 1,25,000
5. Fixed cost = BEP (units) × contribution per unit= 5,000 × 7.5= ` 37,500
(c) From the following details of X Ltd., prepare the Income Statement for the year ended 31st December2014:Financial Leverage 2Interest ` 2,000Operating Leverage 3Variable cost as a percentage of sales 75%Income tax rate 30%
(d) A company issues 25,000, 14% debentures of ` 1,000 each, The debentures are redeemable after theexpiry period of 5 years. Tax rate applicable to the company is 35% (including surcharge and educationcess.) Calculate the cost of debt tax if debentures are issued at 5% discount with 2% flotation cost.
Sol. Kd = 100
2NPRV
nNP–RVt)–(1I
= 100
29311000
5931–1000(0.65)140
= 100965.50
13.8091
= 10.85%
NoteI = 1000 × 14% = 140RV = 1000NP = Face value 1000
– Discount 50Issue price 950
– floatation cost 19*NP 931
* Floation cost @ 2% is considered on issue price. Alternatively it may also be considered onFace value.
Q.2(a) ML Auto Ltd. is a Manufacturer of auto components and the details of its expenses for the year 2014 are
given below:`
(i) Opening Stock of Material ` 1,50,000(ii) Closing Stock of Material ` 2,00,000(iii) Purchase of Material ` 18,50,000(iv) Direct Labour ` 9,50,000(v) Factory Overhead ` 3,80,000(vi) Administrative Overhead ` 2,50,400During 2015, the Company has received an order from a Car Manufacturer where it estimates that the Cost ofMaterial and Labour will be ` 8,00,000 and ` 4,50,000 respectively. ML Auto Ltd. charges Factory Overhead asa Percentage of Direct Labour and Administrative Overhead as a Percentage of Factory Cost based on previousyear's cost. Cost of Delivery of the components at Customer's Premises is estimated at ` 45,000.You are required to -(i) Calculate the Overhead Recovery Rates based on Actual Costs for 2014.(ii) Prepare a detailed Cost Statement for the order received in 2015 and the price to be quoted if the
Company wants to earn a Profit of 10% on Sales. [ 8 Marks]Sol. (i) Particulars `
Direct Materials(1,50,000 + 18,50,000 – 2,00,000)Direct Labour
18,00,000
9,50,000
Prime Cost
Add: Factory overhead
27,50,000
3,80,000
Factory Cost
Add: Administrative overhead
31,30,000
2,50,400
Cost of Production 33,80,400
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Overhead recovery Rates
(a) Factory overhead = 100labour
overheadFactory
= 100000,50,9000,80,3
= 40% of labour
(b) Administrative overhead = 100tcosFactory
overheadistrativeminAd
= 100000,30,31400,50,2
= 8% of factory cost(ii) Cost statement for the order received in 2015
Particulars `Direct Materials (Given)Direct Labour (Given)
8,00,0004,50,000
Prime CostAdd: Factory overhead
12,50,0001,80,000
Factory CostAdd: Administrative overhead
14,30,0001,14,400
Cost of ProductionDelivery Cost
15,44,40045,000
Total costProfit (10% on sales or 1/9 of cost)
15,89,4001,76,600
Sale price 17,66,000
(b) VRA Limited has provided the following information for the year ending 31st March, 2015.Debt Equity Ratio 2 : 114% long term debt ` 50,00,000Gross Profit Ratio 30%Return on equity 50%Income tax Rate 35%Capital Turnover Ratio 1.2 timesOpening Stock ` 4,50,000Closing Stock 8% of salesYou are required to prepare Trading and Profit and Loss Account for the year ending 31st March,2015.
[8 Marks]
Sol. D/E Ratio =ED
2 =E
50,00,000`
Equity = ` 25,00,000
* Return Equity = EquityNPAT
NPAT = Equity × ROE= ` 25,00,000 × 50%= 12,50,000
Tax Rte= 35%
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PBT = )t–1(PAT
= 65.000,50,12
= 19,23,077
* Capital Turnover Ratio = EmployedCapitalSales
# Cap. Emp. = D + E
1.2 = L75Sales`
Sales = ` 90,00,000* Closing stock is 8% of Sales
Closing stock = ` 7,20,000* Gross Profit Ratio is 30%
Gross Profit = ` 2700000
Trading and Profit & Loss Account for the year ending 31st March 2015
97,20,000 Total 97,20,000To Interest on debt.To Other ExpensesTo Income taxTo Net Profit
7,00,00076,923
6,73,07712,50,000
By Gross Profit b/d 27,00,000
Q.3(a) XY Co. Ltd. manufactures two products, viz. X and Y and sells them through two divisions, East and West.
For the purpose of Sales Budget to the Budget Committee, following information has been made availablefor the year 2014-2015:
Product BudgetedSales
ActualSalesEast Division West Division East Division West Division
X 400 units at ` 9 600 units at ` 9 500 units at ` 9 700 units at ` 9Y 300 units at ` 21 500 units at ` 21 200 units at ` 21 400 units at ` 21
Adequate market studies reveal that Product X is popular but under priced. It is expected that if the Price ofX is increased by ` 1, it will find a ready market. On the other hand, Y is overpriced and if the Price of Y isreduced by ` 1, it will have more demand in the market. The Company Management has agreed for theaforesaid price changes. On the basis of these price changes and the reports of salesmen, followingestimates have been prepared by the Divisional Managers:
Percentage Increase in Sales over Budgeted Sales
Product East Division West DivisionX + 10% +5%Y + 20% + 10%
With the help of intensive Advertisement Campaign, following additional sales (over and above the abovementioned estimated sales by Divisional Managers) are possible:
Product East Division West DivisionX 60 units 70 unitsY 40 units 50 units
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You are required to prepare Sales Budget for 2015–2016 after incorporating above estimates and alsoshow the Budgeted Sales and Actual Sales of 2014–2015. [ 8 Marks]
Sol. 1. Sales Budget for Year 2015-2016
Particulars East Division West Division TotalProduct X
Budgeted Quantity of 2015–2016 (Note -1) 500 700 1,200Price for 2015–2016 (9+1) ` 10 ` 10Budgeted Sales Value for 2015–2016 ` 5,000 ` 7,000 ` 12,000
Product YBudgeted Quantity of 2015–2016 (Note - 2) 400 600 1,000Price for 2015–2016 (21–1) ` 20 ` 20Budgeted Sales Value for 2015–2016 ` 8,000 ` 12,000 ` 20,000
2. Budgeted and Actual Sales for FY 2014-2015Particulars East Division West Division Total
Budgeted Quantity of 2014-2015 400 600Add : Increase due to price change (10% & 5%) 40 30Add : Increase due to Advertisement. 60 70
500 700Note : 2 Budgeted sales quantity (Y)
East WestBudgeted Quantity of 2014-2015 300 500Add : Increase due to price change (20% & 10%) 60 50Add : Increase due to Advertisement. 40 50
400 600
(b) Balance Sheet of KAS Limited as on 31st March, 2014 and 31st March, 2015 are furnished below:
(Amount in Rupees)
L i a b i l i t i e s A s a t 3 1
st As at 31st
March, 2014 March, 2015
Eqity Share Capital 75,00,000 1,02,50,000
General Reserve 42,50,000 50,00,000
Profit & Loss Account 15,00,000 18,75,000
13% Debentures of face value ` 100 each 58,00,000 43,50,000
Current Liabilities 30,00,000 32,50,000
Proposed Dividend 7,50,000 9,10,000
Provision for Income tax 22,50,000 24,75,000
Total 2,50,50,000 2,81,10,000
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Assets As at 31st As at 31st
March, 2014 March, 2015
Goodwill 10,00,000 7,75,000Land & Building 68,00,000 61,20,000Plant & Machinery 75,12,000 1,07,95,000Investment 25,00,000 21,25,000Stock 33,00,000 27,50,000Debtors 24,45,000 36,20,000Cash and Bank 14,93,000 19,25,000
Total 2,50,50,000 2,81,10,000
Following additional information is available:(i) During the financial year 2014-15 the company issued equity shares at par.(ii) Debentures were redeemed on 1st April, 2014 at a premium of 10%.(iii) Some investments were sold at a profit of ` 75,000 and the profit was credited to General
Reserve Account.(iv) During the year an old machine costing ` 23,50,000 was sold for ` 6,25,000. Its written down
value was ` 8,00,000.(v) Depreciation is to be provided on plant and machinery at 20% on the opening balance.(vi) There was no purchase or sale of land and building.(vii) Provision for tax made during the year was ` 4,50,000. [8 Marks]
Sol. KAS Ltd.Cash Flow Statement for the year ended 31.03.2015
Particulars Rs.
A. CASH FLOW FROM OPERATING ACTIVITIESNet Profit of current year
Closing Balance of P & L 18,75,000Less : Opening Balance of P & L 15,00,000 3,75,000Add : Transfer to Reserve 6,75,000 Proposed Dividend 9,10,000 Provision for tax 4,50,000
.Net Profit Before tax and extraordinary items 24,10,000Adjustment for non cash and Non operating itemsAdd : Depreciation on
Plants & machintery 15,02,400Land & Building 6,80,000
Goodwill w/o 2,25,000Interest on 13% debenture 5,65,500Premium on Red. of Debentures 1,45,000Loss on sale of plant & machinary 1,75,000Oper. Profit before working capital changes 57,02,900Decrease in stock 5,50,000Increase in debtors (11,75,000)Increase in current liabilities 2,50,000Cash Generated from operations 53,27,900Less: tax paid 2,25,000Net Cash Flow from Operating Activites 51,02,900
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(B) CASH FLOW FROM INVESTING ACTIVITIESPurchase of Plant & Machinery (55,85,400)Investment sold 4,50,000Machinery sold 6,25,000
Net Cash Flow from Investing Activites (45,10,400)
(C) CASH FLOW FROM FINANCING ACTIVITIESIssue of Equity Share 27,50,000Redemption of Debentures(14,50,000 + 1,45,000) (15,95,000)Interest on Debentures (5,65,500)Dividend Paid (7,50,000)Net Cash Flow from Financing Activites (1,60,500)(A + B + C) Changes in Cash & Cash Equivalent 4,32,000Add : Cash and Cash Equivalent in the beginning of the year 14,93,000Cash and Cash Equivalent at the end of the year 19,25,000
Working Notes:General Reserve A/c Cr.
By Balance b/d 42,50,000By Profit on sale of Investment 75,000
To Balance c/d 50,00,000 By P & L a/c 6,75,00050,00,000 50,00,000
Land and Building A/cDr. Cr.To Balance b/d 68,00,000 By P & L (Dep.) 6,80,000
By Balance c/d 61,20,000 68,00,000 68,00,000
Provision for tax A/cDr. Cr.To Bank 2,25,000 By Balance b/d 22,50,000To Balance c/d 24,75,000 By P & L 4,50,000
27,00,000 27,00,000
Plant & Machinery A/cTo Balance b/d 75,12,000 By Bank 6,25,000
By P & L 1,75,000To Bank 55,85,400 By Dep 15,02,400
. By Balance c/d 1,07,95,000 1,30,97,400 1,30,97,400
Investment A/cTo Balance b/d 25,00,000 By Bank 4,50,000To Gen. Res. 75,000 By Balance c/d 21,25,000
25,75,000 25,75,000Q.4(a) The following information is furnished by ABC Company for process - II of its manufacturing activity for the
month of April 2015 :(i) Opening Work-in-progress – Nil(ii) Units Transferred from process I – 55,000 units at ` 3,27,800(iii) Expenditure debited to process - II :
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(iv) Units transferred to process III – 51,000 units(v) Closing WIP – 2000 units (Degree of completion) :
Consumable – 80%Labour – 60%Overhead – 60%
(vi) Units scrapped – 2000 units, scrapped unitswere sold at ` 5per unit.
(vii) Normal Loss – 4% of units introducedYou are required to :(a) Prepare a Statement of Equivalent Production.(b) Determine the Cost per unit(c) Determine the Value of Work-in-Process and Units transferred to Process - III. [ 8 Marks]
Sol. 1. Statement of Equivalent Production
Input Output Equivalent Units
Particulars Units Particulars Units Material A Material B Labour & OH% Units % Units % Units
Op. WIPTransferfrom P–I
NIL55,000
Transfer to P–IIINormal LossAbnormal Gain (b/f)Closing WIP
51,0002,200(200)2,000
100%–
100%100%
51,000–
(200)2,000
100%–
100%100%
51,000–
(200)16,00
100%–
100%100%
51,000–
(200)12,00
Total 55,000 Total 55,000 52,800 52,400 52,000
Note:1. Normal Loss = 4% of Units Introduced = 55,000 × 4% = 2,200 Units.
2. Statement of Cost per Equivalent Unit
Cost Element Total Costs Equivalent Units Cost per EquivalentUnitMaterial A (From P–I) 3,27,800
Less: Scrap Value of Normal Loss (11,000)Material B (Consumables)LabourOverhead
` 3,16,800` 1,57,200` 1,04,000
` 52,000
52,80052,40052,00052,000
` 6` 3` 2` 1
Total ` 6,30,0003. Statement of Cost Apportionment
Particular Units Cost per unit Amount
3,06,0001,53,0001,02,000
51,0006,12,000
1,200600400200
(2,400)
12,0004,8002,4001,200
Transfer to process - IIIMaterial AMaterial BLabourOverhead
Abnormal GainMaterial AMaterial BLabourOverhead
Closing WIPMaterial AMaterial BLabourOverhead
51,00051,00051,00051,000
200200200200
2,0001,6001,2001,200
6321
6321
6321
20,400
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(b) RST Ltd. is expecting an EBIT of ` 4 lakhs for F.Y. 2015-16. Presently the company is financedentirely by equity share capital of ` 20 lakhs with equity copitalization rate of 16%. The company iscontemplating to redeem part of the capital by introducing debt financing. The company has twooptions to raise debt to the extent of 30% or 50% of the total fund.It is expected that for debt financing upto 30%, the rate of interest will be 10% and equity capitalizationrate will increase to 17%. If the company opts for 50% debt, then the interest rate will be 12% andequity capitalization rate will be 20%You are required to compute value of the company; its overall cost of capital under different options andalso state which is the best option. [8 Marks]
Sol. RST LimitedEvaluation of financial alternatives
D NIL 600000 10,00,000V 25,00,000 26,00,000 24,00,000
Ko = 100v
EAS 16% 15.38% 16.67%
Option II is the best where company reuses debt. to the extent of 30% of total funds it has maximumMarket Value and least overall cost of capital.
Q.5(a) State the Method of Costing and also the Unit of Cost for the following industries: [ 4 × 4 = 16 Marks]
(i) Hotel (ii) Toy–Making(iii) Steel (iv) Ship Building
Sol. Point Method of Costing Unit of Cost(i) Operating Guest Days, Room Days(ii) Batch Per Batch(iii) Process Per Tonne(iv) Contract Per Ship
(b) How would you account for Idle Capacity Cost in Cost Accounting?Sol. Treatment of idle capacity cost in Cost Accounts:
It is that part of the capacity of a plant, machine or equipment which cannot be effectively utilised in produc-tion. The idle capacity may arise due to lack of product demand, no availability of raw-material, shortage ofskilled labour, shortage of power, etc. Costs associated with idle capacity are mostly fixed in nature. Thesecosts remain unabsorbed or unrecovered due to under-utilisation of plant and service capacity. Idle capacitycosts are treated in the following ways in Cost Accounts.(i) If the idle capacity cost is due to unavoidable reasons - a supplementary overhead rate may be
used to recover the idle capacity cost. In this case, the costs are charged to the production capacityutilised.
(ii) If the idle capacity cost is due to avoidable reasons - such as faulty planning, etc. the costshould be charged to Costing Profit and Loss Account.
(iii) If the idle capacity cost is due to trade depression, etc., - being abnormal in nature the costshould also be charged to the Costing Profit and Loss Account.
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(c) Distinguish NPV and IRR
Sol. NPV and IRR methods differ in the sense that the results regarding the choice of an assetunder certain circumstances are mutually contradictory under two methods. In case of mutuallyexclusive investment projects, in certain situations, they may give contradictory results suchthat if the NPV method finds one proposal acceptable, IRR favours another.
The different rankings given by the NPV and IRR methods could be due to size disparity problem,time disparity problem and unequal expected lives.
The net present value is expressed in financial values whereas internal rate of return (IRR) isexpressed in percentage terms.
In the net present value cash flows are assumed to be re-invested at cost of capital rate. In IRRreinvestment is assumed to be made at IRR rates.
(d) Venture Capital Financing
Sol. The term venture capital refers to capital investment made in a business or industrial enterprise,which carries elements of risks and insecurity and the probability of business hazards. Capitalinvestment may assume the form of either equity or debt or both as a derivative instrument. Therisk associated with the enterprise could be so high as to entail total loss or be so insignificantas to lead to high gains.
The European Venture Capital Association describes venture capital as risk finance forentrepreneurial growth oriented companies. It is an investment for the medium or long termseeking to maximise the return.
Venture Capital, thus, implies an investment in the form of equity for high-risk projects with theexpectation of higher profits.
Methods of Venture Capital Financing: The venture capital financing refers to financing andfunding of the small scale enterprises, high technology and risky ventures. Some commonmethods of venture capital financing are as follows:
(i) Equity financing: The venture capital undertakings generally requires funds for a longerperiod but may not be able to provide returns to the investors during the initial stages.Therefore, the venture capital finance is generally provided by way of equity sharecapital. The equity contribution of venture capital firm does not exceed 49% of the totalequity capital of venture capital undertakings so that the effective control and ownershipremains with the entrepreneur.
(ii) Conditional Loan: A conditional loan is repayable in the form of a royalty after theventure is able to generate sales. No interest is paid on such loans. In India VentureCapital Financers charge royalty ranging between 2 to 15 per cent; actual rate dependson other factors of the venture such as gestation period, cash flow patterns, riskinessand other factors of the enterprise. Some Venture Capital financers give a choice to theenterprise of paying a high rate of interest (which could be well above 20 per cent)instead of royalty on sales once it becomes commercially sound.
(iii) Income Note: It is a hybrid security which combines the features of both conventionalloan and conditional loan. The entrepreneur has to pay both interest and royalty onsales but at substantially low rates. IDBI’s Venture Capital Fund provides fundingequal to 80-87.5% of the project’s cost for commercial application of indigenoustechnology or adopting imported technology to domestic applications.
(iv) Participating Debenture: Such security carries charges in three phases- in thestart- up phase, no interest is charged, next stage a low rate of interest is chargedupto a particular level of operations, after that, a high rate of interest is required to bepaid.
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Q.6(a) PVK Constructions commenced a Contract on 1st April 2014. Total Contract Value was ` 100 Lakhs. The
contract is expected to be completed by 31st December 2016. Actual Expenditure during the period 1st April2014 to 31st March 2015 and estimated expenditure for the period 1st April 2015 to 31st December 2016 are asfollows:
Particulars Actual (`) Estimated (`)Period 1st April 2014 to 31 March 2015 1st April 2015 to 31st December 2016
Material issued 15,30,000 21,00,000Direct Wages Paid 10,12,500 12,25,000Direct Wages Outstanding 80,000 1,15,000Plant Purchased 7,50,000 –Expenses Paid 3,25,000 5,40,000Prepaid Expenses 68,000 –Site Office Expenses 3,00,000 –Part of the Material procured for the contract was unsuitable and was sold for ` 2,40,000 (cost being `2,55,000) and a part of Plant was scrapped and disposed off for ` 80,000. The value of Plant at site on 31stMarch 2015 was ` 2,50,000 and the value of Materials at site was ` 73,000. Cash received on account to datewas ` 36,00,000, representing 80% of the Work Certified. The Cost of Work Uncertified was valued at `5,40,000.Estimated further expenditure for completion of contract is as follows:(i) An additional amount of ` 4,62,500 would have to be spent on the Plant, and the Residual Value of
the Plant on the completion of the contract would be ` 67,500.(ii) Site Office Expenses would be the same amount per month as charged in the previous year.(iii) An amount of ` 1,57,500 would have to be incurred towards Consultancy Charges.Required: Prepare Contract Account and calculate the Estimated Total Profit on this contract. [ 8 Marks]
Sol. 1. Contract Account for the year ending 31st March 2015Particulars ` Particulars `
To Material IssuedTo Labour (10,12,500 + 80,000)To Expenses (3,25,000 – 68,000)To Depreciation (7,50,000 – 80,000 – 2,50,000)To Site Office ExpensesTo Notional Profit c/d
15,30,00010,92,500
2,57,0004,20,0003,00,000
17,68,500
By Bank (Material sold)By P & L (Loss on sale of material)By Material at siteBy Work in Progress
C. Total cost (A + B) 86,40,000D. Contract revenue 1,00,00,000E. Estimated Profit (D – C) 13,60,000
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Note : - 1 Amount transfer to P & L = receivedCashvenueReContract
profitNotional
= 000,00,36000,00,00,1
500,68,17
= 6,36,660
Note: -2 It is assumed that Plant scrapped and disposed off for ` 80,000 is at cost. Hence, Loss / Gain thereon isignored.
(b) A firm has a total sales of ` 200 lakhs of which 80% is on credit. It is offering credit terms of 2/40, net120. Of the total, 50% of customers avail of discount and the balance pay in 120 days. Past experienceindicates that bad debt losses are around 1% of credit sales. The firm spends about ` 2,40,000 perannum to administer its credit sales. These are aviodable as a factor is prepared to buy the firm’sreceivables. He will charge 2% commission. He will pay advance against receivables to the firm at aninterest rate of 18% after witholding 10% as reserve.
(i) What is the effective cost of factoring ? Consider year as 360 days.
(ii) If bank finance for working capital is available at 14% interest, should the firm avail of factoringservice? [8 Marks]
Annual Total Cost of Factoring (1,99,111 × 360/80) = ` 8,96,000
Amount received from the factor (35,55,556 – 3,55,556 – 1,99,111) = ` 30,00,889
Effective Cost of Factoring = 100889,00,30
000,96,8 = 29.86% p.a.
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Comparison with Bank Finance for Working CapitalParticulars Computation `
(a) Bad Debts at 1% on Credit Sales ` 200 Lakhs × 80% × 1% 1,60,000
(b) Interest on Average Debtors at 14% ` 160 Lakhs × 14% ×36080
4,97,778
(c) Credit Administration Costs Given 2,40,000Total Costs per annum 8,97,778
Conclusion: Annual Cost of Factoring (` 8,96,000) is less than Annual Cost of Bank Working Capital(` 8,97,778), hence Factoring may be preferred.
Q.7 Answer any four of the following [ 4 × 4 = 16 Marks]
(a) Explain the treatment of over and under absorption of Overheads in Cost Accounting.
Sol. Treatment of over and under absorption of overheads are:-(i) Writing off to costing P&L A/c:– Small difference between the actual and absorbed amount
should simply be transferred to costing P&L A/c, if difference is large then investigate the causesand after that abnormal loss shall be transferred to costing P&L A/c.
(ii) Use of supplementary Rate: Under this method the balance of under and over absorbed overheadsmay be charged to cost of W.I.P., finished stock and cost of sales proportionately with the help ofsupplementary rate of overhead.
(iii) Carry Forward to Subsequent Year: Difference should be carried forward in the expectation thatnext year the position will be automatically corrected. This would really mean that costing data oftwo years would be wrong.
(b) Describe the various steps involved in adopting Standard Costing System in an organization.
Sol. The process of standard cost is as below:(i) Setting of Standards: The first step is to set standards which are to achieved, The process of
standard setting is explained above.
(ii) Ascertainment of actual costs: Actual cost for each component of cost is ascertained. Actualcosts are ascertained from books of account, material invoices, wage sheet, charge slip etc.
(iii) Comparison of actual cost and standard cost: Actual costs are compared with the standardscosts and variances are determined.
(iv) Investigation of variances: Variances arises are investigated for further action. Based on thisperformance is evaluated and appropriate actions are taken.
(v) Disposition of variances: variances arise are disposed off by transferring it the relevant accounts(costing profit and loss account) as per the accounting method (plan) adopted.
(c) Evaluate the role of cash budget in effective cash management
Sol. Cash Budget is the most significant device to plan for and control cash receipts and payments. This representscash requirements of business during the budget period.The various purposes of cash budgets are :-
* Coordinate the timings of cash needs. It identifies the period(s) when thre might either be ashortage of cash or an abnormally large cash requirement;
* les firm which has sufficient cash to take advantage like cash discounts on its accountspayable;
* Lastly it helps to plan/arrange adequately needed funds (avoiding excess/shortage of cash)on favorable terms.On the basis of cash budget, the firm can decide to invest surplus cash inmarketable securities and earn profits.
R ES O N AN CE PAGE - 16Resonance Eduventures Ltd.
(d) Discuss the risk-return considerations in financing of current assets.
Sol. The financing of current assets involves a trade off between risk and return. A firm can choose fromshort or long term sources of finance. Short term financing is less expensive than long term financingbut at the same time, short term financing involves greater risk than long term financing.
Depending on the mix of short term and long term financing, the approach followed by a companymay be referred as matching approach, conservative approach and aggressive approach.
In matching approach, long-term finance is used to finance fixed assets and permanent currentassets and short term financing to finance temporary or variable current assets.
Under the conservative plan, the firm finances its permanent assets and also a part of temporarycurrent assets with long term financing and hence less risk of facing the problem of shortage offunds.
An aggressive policy is said to be followed by the firm when it uses more short term financing thanwarranted by the matching plan and finances a part of its permanent current assets with short termfinancing.
(e) Distinguish between the following:
(i) ‘Scraps’ and ‘Defectives’ in Costing
(ii) Preference Shares and Debenture
Sol. (i) Scrap: Scrap is incidental residence from certain type of manufacture, usually of small amountand low value, recoverable without further processing.
The cost of scrap is borne by good units and income scrap is treated as other income.
Defectives: Defectives are portion of production which can be rectified by incurring additionalcost. Normal defectives can be avoided by quality control. Normal defectives are charged to goodproducts.
Abnormal defectives are charged to Costing Profit and Loss Account.
(ii) There are many differences between preference shares and debentures, with the biggestdifference being that a preference share is an equity security that gives the owner preferen-tial rights in the event of a dividend payment or liquidation by the underlying company, while adebenture is a debt security issued by a corporation or government entity, and it is notbacked by an asset or lien.
Differences between preference shares and debentures* Preference Shareholders are effectively part of owners capital; debenture-holders are creditors.
* Preference Shareholders may vote at AGMs and be elected as directors; debenture-holdersmay not vote at AGMs or be elected as directors.
* Preference Shareholders receive profit in the form of dividends; debenture-holders receive afixed rate of interest.
* If there is no profit, the shareholder does not receive a dividend; interest is paid to debenture-holders regardless of whether or not a profit has been made.
* In case of dissolution of firms debenture holders are paid first as compared to shareholder.
