BATCH : LI 10, LI-13, LI-16. DATE: MAXIMUM MARKS: 60 TIMING: 2 Hours ANSWER SHEET

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1 BATCH : LI 10, LI-13, LI-16 DATE: MAXIMUM MARKS: 60 TIMING: 2 Hours COST ACCOUNTING & FINANCIAL MANAGEMENT ANSWER SHEET Question 1 (4 Marks) A newspaper presently sells 1,00,000 copies of its morning daily. It wants to publish evening daily. Particulars are: Actual for Morning Estimates for Evening Sales price Variable cost Fixed cost Rs. 2 per paper Rs per paper Rs. 2.4 lakh per week Rs per paper Rs per paper Rs. 10,000 per week Sale of morning daily will 1 copy for every 10 copies sold of evening daily. Calculate Break-even sales for evening daily per week. Question 2: ( 4 Marks ) What is inter-process profit? State its advantages and disadvantages. Solution: In some process industries the output of one process is transferred to the next process not at cost but at market value or cost plus a percentage of profit. The difference between cost and the transfer price is known as inter-process profits. The advantages and disadvantages of using inter-process profit, in the case of process type industries are as follows: Advantages: ( 1 Marks ) 1. Comparison between the cost of output and its market price at the stage of completion 1 P a g e

2 is facilitated. 2. Each process is made to stand by itself as to the profitability. Disadvantages: ( 1 Marks ) (iv) The use of inter-process profits involves complication. (v) The system shows profits which are not realised because of stock not sold out Question-3 ( 4 Marks ) Elaborate the practical application of Marginal Costing. Solution: ( 1 marks for each point) Practical applications of Marginal costing: (i) Pricing Policy: Since marginal cost per unit is constant from period to period, firm decisions on pricing policy can be taken particularly in short term. (ii) Decision Making: Marginal costing helps the management in taking a number of business decisions like make or buy, discontinuance of a particular product, replacement of machines, etc. (iii) Ascertaining Realistic Profit: Under the marginal costing technique, the stock of finished goods and work-in-progress are carried on marginal cost basis and the fixed expenses are written off to profit and loss account as period cost. This shows the true profit of the period. (vi) Determination of production level: Marginal costing helps in the preparation of breakeven analysis which shows the effect of increasing or decreasing production activity on the profitability of the company. Question 4: ( 8 Marks ) From the following Information for the month ending October, 2013, prepare Process Cost accounts for Process III. Use First-in-fist-out (FIFO) method to value equivalent production. Direct materials added in Process III (Opening WIP) 2,000 units at Rs. 25,750 Transfer from Process II 53,000 units at Rs. 4,11,500 Transferred to Process IV Closing stock of Process III Units scrapped 48,000 units 5,000 units 2,000 units Direct material added in Process III Rs. 1,97,600 Direct wages Rs. 97,600 Production Overheads Rs. 48,800 Degree of completion: Opening Stock Closing Stock Scrap Materials 80% 70% 100% Labour 60% 50% 70% Overheads 60% 50% 70% The normal loss in the process was 5% of production and scrap was sold at Rs. 3 per unit. Solution: (a) Process III Process Cost Sheet (FIFO Method) Opening Stock: 2,000 units; Introduced: 53,000 units 2 P a g e

3 Statement of Equivalent Production Input Output Equivalent production Item Units Item Units Mat- A (%) Mat- B (%) Labour (%) & OHs. Opening stock 2,000 Work on opening WIP 2, Process II transfer Element of cost Material A: 53,000 Introduced & completed during the period (48, ) Normal Loss (2,000+53,000 5,000) x 5% 46,000 46, , , ,000 2, Closing WIP 5,000 5, , , ,500 51,000 49,900 49,300 Abnormal Gain ,000 55,000 50,500 49,400 48,800 Statement of Cost for each Element Cost (Rs.) Transfer from Process-II 4,11,500 Less: Scrap value of Normal Loss (2,500 Rs. 3) 7,500 Equivalent Production Cost per unit (Rs.) 4,04,000 50,500 8 Material B 1,97,600 49,400 4 Wages 97,600 48,800 2 Overheads 48,800 48,800 1 Opening WIP (for completion): Process Cost Sheet 7,48, ( Rs.) Material- B (400 units Rs. 4) 1,600 Wages (800 units Rs. 2) 1,600 Overheads (800 units Rs. 1) 800 Introduced and completely processed during the period 4,000 (46,000 units Rs. 15) 6,90,000 Closing WIP: 3 P a g e

4 Material- A (5,000 units Rs. 8) 40,000 Material - B (3500 units Rs. 4) 14,000 Wages (2,500 units Rs. 2) 5,000 Overheads (2,500 units Rs. 1) 2,500 61,500 Abnormal Gain (500 units Rs. 15) 7,500 Process III A/c Particulars Units Amount Particulars Units Amount To Balance b/d 2,000 25,750 By Normal Loss 2,500 7,500 To Process II A/c 53,000 4,11,500 By Process IV A/c To Direct Material 1,97,600 (Rs. 6,90,000 + Rs.4000 To Direct Wages 97,600 +Rs. 25,750) 48,000 7,19,750 To Production OH 48,800 By Balance c/d 5,000 61,500 To Abnormal Gain 500 7,500 55,500 7,88,750 55,500 7,88,750 Question 5 ( 6 Marks ) The following is the capital structure of a Company: Source of capital Book value Market value Equity Rs. 100 each 80,00,000 1,60,00,000 9 per cent cumulative preference Rs. 100 each 20,00,000 24,00, per cent debentures 60,00,000 66,00,000 Retained earnings 40,00,000 Rs. Rs. 2,00,00,000 2,50,00,000 The current market price of the company s equity share is Rs For the last year the company had paid equity dividend at 25 per cent and its dividend is likely to grow 5 per cent every year. The corporate tax rate is 30 per cent and shareholders. pers.onal income tax rate is 20 per cent. You are required to calculate: (i) Cost of capital for each source of capital. (ii) Weighted average cost of capital on the basis of book value weights. (iii) Weighted average cost of capital on the basis of market value weights. Answer (i) Calculation of Cost of Capital for each source of capital: 1. Cost of Equity Capital: 4 P a g e

5 K e = DPS(1 g) X100 MP g 25(1 0.05) 200 = X100 5 = X = = % 2. Cost of preference capital or Kp = 9%. 3. Cost of Debentures: Kd (after tax) = r (1 T) = 11 (1 0.3) = 7.7%. 4. Cost of Retained Earnings: Kr = Ke (1 Tp) (1 Marks for cost of each source) = (1 0.2) = 14.5%. (ii) Weighted Average Cost of Capital (On the basis of Book Value Weights) Source Amount (Book Value) Weights Cost of WACC (Rs.) Capital (%) (after tax) (%) (1) (2) (3) (4) (5) = (3) (4) Equity Capital 80,00, Preference Capital 20,00, Debentures 60,00, Retained earnings 40,00, ,00,00, Hence, WACC on the basis of Book Value Weights = 13.36%. (iii) Weighted Average Cost of Capital (On the basis of Market value weights) Source Amount Weights Cost of Capital WACC (Market Value) (after tax) (%) (Rs.) (%) (1) (2) (3) (4) (5) = (3) (4) Equity Capital 1,60,00, P a g e

6 Preference Capital 24,00, Debentures 66,00, Retained earnings 2,50,00, Hence, WACC on the basis of Market Value Weights = % Question 6 ( 5 Marks ) X Ltd. is considering the following two alternative financing plans: Plan - I Rs. Plan - II Rs. Equity shares of Rs. 10 each 4,00,000 4,00,000 12% Debentures 2,00,000 - Preference Shares of Rs. 100 each - 2,00,000 Rs. 6,00,000 6,00,000 The indifference point between the plans is Rs. 2,40,000. Corporate tax rate is 30%. Calculate the rate of dividend on preference shares. Answer (EBIT - Interest) (1 - Tax rate) = EBIT (1 - Tax rate) - Preference Dividend No. of Equity Shares (N 1 ) No. of Equity Shares (N 2 ) (2,40,000-24,000) (1-0.30) = 2,40,000 (1-0.30) - Preference Dividend 40,000 40,000 2,16,000 (1-0.30) = 1,68,000 - Preference Dividend 40,000 40,000 1,51,200 = 1,68,000 Preference Dividend Preference Dividend = 1,68,000 1,51,200 Preference Dividend = 16,800 Rate of Dividend = Preference Dividend x 100 Question 7 16,800 2,00,000 X % (5 Marks) Preference Share Capital A Company has an operation leverage of 1.2 as against 1.25 during the previous year. If the current fixed cost is 25% more than that of the previous year, to what extent has the contribution earned by the firm changed over the previous year? 6 P a g e

7 Solution 3 Operating Leverage = Contribution Contribution - Fixed cost Last year 1.25 = C C - F 1.25(C - F) = C 1.25C - l.25f = C 1.25C - C = 1.25F 0.25C = 1.25F C = 5F Increase in Contribution in current year over last year = Current year contribution - Last year contribution Last year contribution Current year 1.20 = C C -1.25F 1.20(C F) = C l.20c - l.5f = C 1.20C - C = l.5f 0.20C = 1.5F C = 7.5F = 7.5F - 5F x 100 = 5F 2.5F x 100 = 50% 5F 50% increase in Contribution over last year. Question 8: (4 Marks) What is Net Operating Income (NOI) theory of capital structure? Explain the assumptions of Net Operating Income approach theory of capital structure. Answer Net Operating Income (NOI) Theory of Capital Structure According to NOI approach, there is no relationship between the cost of capital and value of the firm i.e. the value of the firm is independent of the capital structure of the firm. Assumptions (a) The corporate income taxes do not exist. (b) The market capitalizes the value of the firm as whole. Thus the split between debt and equity is not important. (c) The increase in proportion of debt in capital structure leads to change in risk perception of the shareholders. The overall cost of capital (Ko) remains constant for all degrees of debt equity mix. LAW Question: 1 esllz xsv fjp D;qbd fy- ds dqn _.knkrkvksa us f'kdk;r dh gs fd deiuh ds izorzdksa us deiuh ds _.knkrkvksa dks èkks[kk nsus rfkk dkuwuh izkoèkkuksa dk ikyu u djus ds mís'; ls cukbz FkhA deiuh vf/kfu;e 2013 ds vurxzr dkuwuh izko/kku dks crkb,a bl lecuèk esa os vkidh lykg pkgrs gsa ;g tkuus ds fy, fd fuxfer vkoj.k dk D;k vfkz gs rfkk dc deiuh ds izorzdksa dks deiuh }kjk fy, x, _.kksa ds fy,] mugsa mùkjnk;h Bgjk;k tk ldrk gs\ (5 Marks) 7 P a g e

8 Answer 1: Question: 2 deiuh vf/kfu;e] 2013 ds izko/kkuksa ds vuq:i deiuh ds uke dks ifjofrzr djus dh fof/k dh O;k[;k dhft,a (5 Marks) Answer: 2 Question: 3,l tks fd,d deiuh dk va'k/kkjd gs] deiuh dh,d uksfvl ehfvax gksus ds frffk ls ik p fnu 8 P a g e

9 iwoz izkwdlhl dk fujh{k.k djus ds fy, nsrk gs vksj og deiuh dh ehfvax gksus ls nks fnu igys izkwdlhl dk fujh{k.k djus ds fy, laidz LFkkfir djrk gsa mlds ¼,l½ dk;kzykiksa dh os/kkfud flfkfr D;k gs\ (5 Marks) Answer 3: Question: 4 Dksje dk D;k vfkz gs \ deiuh vf/kfu;e;] 2013 ds izko/kkuksa ds vuqlkj dksje dc vko ;d ugha gs \ (5 Marks) Answer 4: *** 9 P a g e