Costing & FM J 2021

Group II
COSTING & FM
CHAPTER P. No.
1. MARGINAL COSTING 2
2. STANDARD COSTING 15
3. BUDGETARY CONTROL 26
4. LEARNING CURVE 36
5. TRANSFER PRICING 46
6. RATIO ANALYSIS 57
7. FUND FLOW STATEMENT 64
8. CASH FLOW STATEMENTS 72
9. COST OF CAPITAL 78
10. CAPITAL BUDGETING 83
11. WORKING CAPITAL 101
12. RECEIVABLES MANAGEMENT 109
13. CASH MANAGEMENT 113
14. CAPITAL STRUCTURE 114
15. LEVERAGES 117
16.DIVIDEND DECISIONS 122
SHRI RAMCHARAN 1 CELL: 9441042702

1. MARGINAL COSTING
1. From the following information, find out marginal cost if (i) profit is Rs 10,000; (ii) Loss
is Rs 5,000; and (iii) Loss is Rs 22,000; sales Rs 80,000; Fixed overhead Rs 20,000.
2. Ascertain the units to be sold to earn a profit of Rs 1,00,000 from the following data.
Fixed Cost Per unit Rs 3,00,000; Variable cost Per Unit Rs 30; Selling Price Per Unit Rs 50.
3. From the following particulars find out (i) P/V Ratio; (ii) BEP Sales; (iii) Net Profit for
Rs 1,50,000, (iv) sales required for a profit of Rs 1,50,000. Sales amounted to Rs 1,00,000
and Net Profit and fixed overheads amounted to Rs 10,000 and Rs 15,000 respectively.
4. The sales turnover and profit during the two periods are as follows:
Period – I Sales Rs 2,00,000 Profit Rs 2,00,000
Period – II Sales Rs 3,00,000 Profit Rs 4,00,000
Calculate (i) P/V Ratio ; and (ii) the sales required to earn a profit of Rs 5,00,000.
5. From the following information, find out :
(i) P/V Ratio
(ii) Profit when sales are Rs 40,000; and
(iii) New BEP if selling price is reduced by 20% .
Fixed Expenses Rs 8,000
BEP point Rs 20,000
6. (On Margin of Safety)
Calculate margin of Safety from the following:
Fixed cost Rs 2,00,000
Variable Cost Rs 3,00,000
Total Sales Rs 6,00,000
7. A company produces and sales a single product and has the following details:
Selling price per unit Rs 20
Variable Cost per unit Rs 12
Fixed expenses per annum Rs 8,00,000
Find out PV ratio & BEP sales both in units and in value.
What will be the sales level to earn a profit of Rs 1,00,000?
What is the profit at the sales value of Rs 60 lacs?
What is the margin of safety at the sales level of Rs 60 lacs?
Find out the new break even sales value if selling price is dropped by 10%.
8. Find out the Break Even Point and profit if the sales are Rs 50 Lacs and PV ratio &
Margin of Safety are 50% and 40% respectively.
9. The per unit cost structure of the company who sale a product at Rs 100 per unit are as
follows:
Direct material Rs 60
Direct wages Rs 10
Variable overheads Rs 10
Number of units sold during the current year was 5035 units. As per the wage agreement with
the union, direct wages are going to increase by 10% in the next year. Work out the number
of units to be sold next year to earn the same quantum of profits. By what amount should the
selling price be increased to maintain the same PV ratio?

10. A company manufactures “Product A” and sells them at Rs 20 each with a profit of Rs 5
each. It operates at 50% of the machine capacity at 50,000 units. The cost of each unit is as
under:
Direct Material Rs 6
Direct Labour Rs 2
Works Overheads Rs 5 (50% fixed)
Sales Expenses Rs 2 (25% variable)
It is anticipated that next year material cost will go up by 5%, labour by 20% and fixed
expenses by 10%. There will be no change, however, in the selling price per unit. The
company has received an additional order for 20,000 unit in the next year.
What will be the lowest price it can quote so as to earn the same profit as current year?
11. If the Margin of Safety is Rs 2,40,000 which is 40% of sales and the P/V ratio is 30%,
calculate the BEP level and the profit at the sales volume of Rs 9,00,000.
12. A company manufactures a single product, is operating at 80% of its capacity with at
Turnover of Rs 800000 at Rs 25 per unit.
The cost data is as under:
Material Cost Rs 7.50 per unit,
Labour Cost Rs 6.25 per unit
Semi-variable Cost (including Rs 3.75 as variable portion) Rs 1,80,000
Fixed Cost is Rs 90,000 up to 80% capacity and additional Rs 20,000 will be needed beyond
this level.
Calculate:
- Activity level at Break Even Point
- No. of units to be produced to earn Net Profit of 8% on sales
- Activity level needed to earn profit of Rs 95,000 and
- Selling price per unit, if BEP is to be brought down to 40% of activity level
13. From the particulars given below, determine what will be a selling price –
Average P/V Ratio is 50%.
Estimated Marginal Cost is Rs 60.
14. Determine whether is it wise to continue products from the particulars given below:
Fixed Cost Rs 1,00,000
Marginal Cost Rs 12 per unit
Selling Price Rs 13 per unit
Units sold 50,000
15. Present the following information to show to the management:
i) The marginal product cost and the contribution per unit.
ii) The total contribution and profits resulting from each of the following sales mixtures.
iii) The proposed sales mixes to earn a profit of Rs. 250 and Rs. 300 with total sales of A
and B being 300 units.

Sales mixtures:
(a) 100 units of Product A and 200 of B
(b) 150 units of product A and 150 of B
(c) 200 units of product A and 100 of B
Recommend which of the sales mixtures should be adopted.
P-16: The sports material manufacturing company budgeted the following data for the
coming year.
Sales(1,00,000 units) Rs.1,00,000
Variable cost Rs. 40,000
Fixed cost Rs. 50,000
Find out (a) P/V Ratio, B.E.P and Margin of Safety
(b) Evaluate the effect of
(i) 20% increase in physical sales volume
(ii) 20% decrease in physical sales volume
(iii) 5% increase in variable costs
(iv) 5% decrease in variable costs
(v) 10% increase in fixed costs
(vi) 10% decrease in fixed costs
(vii) 10%decreases in selling price and 10%increase in sales volume
(viii) 10% increase in selling price and 10% decrease in sales volume
(ix) Rs.5,000 variable cost decrease accompanied by Rs.15,000 increase in fixed costs.
P- 17: Two businesses AB Ltd and CD Ltd sell the same type of product in the same
market. Their budgeted profits and loss accounts for the year ending 30th June, 1986 are as
follows:
AB Ltd. CD Ltd.
Sales 1,50,000 1,50,000
Less: Variable Costs 1,20,000 1,00,000
Fixed 15,000 35,000
1,35,000 1,35,000
Profit 15,000 15,000
You are required to calculate the B.E.P of each business and state which business is likely to
earn greater profits in conditions. (a) Heavy demand for the product(b) Low demand for the
product.
P – 18: A factory is currently working to 40% capacity and produces 10,000 units. At 50%
the selling price falls by 3%. At 90% capacity the selling price falls by 5% accompanied by
similar fall in prices of raw material. Estimate the profit of the company at 50% and 90%
capacity production.
The cost at present per unit is:
Material Rs.10
Labour Rs. 3
Overheads Rs. 5 (60% fixed)
The selling price per unit is Rs.20/- per unit.
P- 19: The following figures of for profit and sales obtained from the accounts of X Co. Ltd.
Year Sales Profit
1985 20,000 2,000
1986 30,000 4,000
Calculate (a) P/V Ratio (b) Fixed cost (c)B.E. Sales (d) Profit at sales Rs.40,000 and (e) Sales
to earn a profit of Rs.5,000

P -20: The Reliable Battery Co. furnishes you the following income information:
YEAR 1986
FIRST HALF SECOND HALF
Sales Rs. 8,10,000 10,26,000
Profit earned 21,600 64,800
From the above you are required to compute the following assuming that the fixed cost
remains the same in both periods.
1. P/V Ratio 2. Fixed cost 3. The amount of profit or loss where sales are Rs. 6,48,000
4. The amount of sales required to earn a profit of Rs. 1,08,000
P – 21: The following figures relate to a company manufacturing a varied range of products:
TOTAL SALES TOTAL COST
Year ended 31-12-1988 22,23,000 19,83,600
Year ended 31-12-1989 24,51,000 21,43,200
Assuming stability in prices, with variable cost carefully controlled to reflect pre-determined
relation (a) The profit volume Ratio to reflect the rates of growth for profit and sales and
(b) any other cost figures to be deduced from the data.
P – 22: SV Ltd a multi product company furnishes you the following data relating to the
year 1989:
FIRST HALF OF THE YEAR SECOND HALF OF THE YEAR
Sales Rs. 45,000 50,000
Total Cost 40,000 43,000
Assuming that there is no change in prices and variable cost and that the fixed expenses are
incurred equally in the two half year period, calculate for the year, 1989 (i) The P/V Ratio,
(ii) Fixed Expenses (iii) Break-even sales (iv) Percentage of Margin of safety.
P – 23: S Ltd. furnishes you the following information relating to the half year ended 30th
June, 1990.
Fixed expenses Rs. 45,000
Sales value Rs. 1,50,000
Profit Rs. 30,000
During the second half the year the company has projected a loss of Rs. 10,000.
Calculate: (1) The B.E.P and M/S for six months ending 30th June, 1990. (2) Expected sales
volume for the second half of the year assuming that the P/V Ratio and Fixed expenses
remain constant in the second half year also. (3) The B.E.P and M/S for the whole year for
1990.
P – 24: The following is the statement of a Radical Co. for the month of June.
PRODUCTS
L M TOTAL
Sales 60,000 60,000 1,20,000
Variable Costs 42,000 30,000 72,000
Contribution 18,000 30,000 48,000
Fixed Cost 36,000
NET INCOME 12,000
You are required to compute the P/V ratio for each product and then compute the P/V Ratio,
Break-even Point and net profit for the following assumption.
(i) Sales revenue divided 60% to Product L & 40% to product M.

(ii) Sales revenue divided 40% to Product L & 60% to product M.
Also calculate the profit estimated on sales upto Rs. 1,80,000/-P.M. for each of the sales mix
provided above.
P -25: Accelerate Co. Ltd., manufactures and sells four types of products under the brand
names of A, B, C & D The sales Mix in value comprises 33-1/3%, 41-2/3%, 16-2/3%
& 8 1/3% of products A,B,C & D respectively. The total budgeted sales (100% are
Rs. 60,000 p.m.). Operating Costs are :
Variable Costs : Product A 60% of selling Price
Product B 68% of selling Price
Product C 80% of selling Price
Product D 40% of selling Price
Fixed Costs: Rs.14,700 p.m.
(a) Calculate the break-even-point for the products on overall basis and
(b) Also calculate break-even-point, if the sales mix is changed as follows the total sales per
month remaining the same. (Mix :- A - 25% : B - 40% : C - 30% : D - 5%)
P -26: The following particulars are extracted from the records of a company:
PER UNIT
PRODUCT A PRODUCT B
Sales Rs. 100 120
Consumption of material Kg 2 3
Material Cost Rs. 10 15
Direct wages cost Rs. 15 10
Direct expenses Rs. 5 6
Machine hours used Overhead expenses: Hrs. 3 2
Fixed Rs. 5 10
Variable Rs. 15 20
Direct wages per hour is Rs.5
(a) Comment on profitability of each product (both use the same raw material) when :
1) Total sales potential in units is limited;
2) Total sales potential in value is limited;
3) Raw material is in short supply;
4) Production capacity (in terms of machine hours) is the limiting factor.
(b) Assuming raw material as the key factor, availability of which is 10,000 Kgs. and each
product cannot be sold more than 3,500 units find out the product mix which will yield
the maximum profit.
P – 27: A company has a capacity of producing 1 lakh units of a certain product in a month.
the sales department reports that the following schedule of sales prices is possible.
VOLUME OF PRODUCTION % SELLING PRICE PER UNIT Rs.
60 0.90
70 0.80
80 0.75
90 0.67
100 0.61

The variable cost of manufacture between these levels is 15 paise per unit and fixed cost
Rs. 40,000. Prepare a statement showing incremental revenue and differential cost at each
stage. At which volume of production will the profit be maximum?
P -28: A company is at present working at 90 per cent of its capacity and producing 13,500
units per annum. It operates a flexible budgetary control system. The following figures are
obtained from its budget.
90% Rs. 100% Rs.
Sales 15,00,000 16,00,000
Fixed expenses 3,00,500 3,00,500
Semi-fixed expenses 97,500 1,00,500
Variable expenses 1,45,000 1,49,500
Units made 13,500 15,000
Labour and material costs per unit are constant under present conditions. Profit margin is 10 %:
a) You are required to determine the differential cost of producing 1,500 units by
increasing capacity to 100%
b) What would you recommend for an export price for these 1,500 units taking into account
that overseas prices are much lower than indigenous prices?
P – 29: A company manufactures scooters and sells it at Rs. 3,000 each. An increase of 17%
in cost of materials and of 20% of labour cost is anticipated. The increased cost in relation to
the present sales price would cause at 25% decrease in the amount of the present gross profit
per unit.
At present, material cost is 50%, wages 20% and overhead is 30% of cost of sales.
You are required to :
(a) Prepare a statement of profit and loss per unit at present and;
(b) Compute the new selling price to produce the same percentage of profit to cost of sales
as before.
P – 30: An umbrella manufacturer marks an average net profit of Rs. 2.50 per piece on a
selling price of Rs. 14.30 by producing and selling 6,000 pieces or 60% of the capacity. His
cost of sales is
Rs.
Direct material 3.50
Direct wages 1.25
Works overheads (50% fixed) 6.25
Sales overheads (25% variable) 0.80
During the current year, he intends to produce the same number but anticipates that fixed
charges will go up by 10% which direct labour rate and material will increase by 8% and 6%
respectively but he has no option of increasing the selling price. Under this situation, he
obtains an offer for furthur 20% of the capacity. What minimum price you will recommend
for acceptance to ensure the manufacturer an overall profit of Rs. 16,730.
P – 31: Mr. Young has Rs. 1,50,000 investment in a business. He wants a 15% profit on his
money. From an analysis of recent cost figures he finds that his variable cost of operating is
60% of sales; his fixed costs are Rs.75,000 per year. Show supporting computations for each
answer.

a) What sales volume must be obtained to break-even?
b) What sales volume must be obtained to his 15% return on investment?
c) Mr. Young estimates that even if he closed the doors of his business he would incur
Rs.25,000 expenses per year. At what sales would he better off by locking his sales up?
P – 32: The manager of a Co. provides you with the following information:
Rs.
Sales : 4,00,000
Costs: Variable 60% of sales, Fixed cost : 80,000
Profit before tax 80,000
Income-tax 60%
Net profit 32,000
The company is thinking of expanding the plant. The increased fixed cost with plant
expansion will be Rs.40,000. It is estimated that the maximum production in new plant will
be worth Rs.2,40,000. The company also wants to earn additional income Rs. 3,200 on
investment. On the basis of computations give your opinion on plant expansion.
P – 33: A manufacturer with overall (interchangeable among the products) capacity of

1,00,000 machine hours has been so far producing a standard mix of 15,000 units of product
A, 10,000 units of product B and C each. On experience, the total expenditure exclusive of
his fixed charges is found to be Rs. 2.09 lakhs and the cost ratio among the product
approximately 1, 1.5, 1.75 respectively per unit.
The fixed charges comes to Rs.2 per unit. When the unit selling prices are Rs. 6.25 for A,
Rs.7.5 for B and 10.5 for C. He incurs a loss.
Mix-I Mix-II Mix-III
A 18,000 15,000 22,000
B 12,000 6,000 8,000
C 7,000 13,000 8,000
As a management accountant what mix will you recommend?
P – 34: A Co. has annual fixed costs of Rs. 1,40,000. In 1988 sales amounted to
Rs.6,00,000, as compared with Rs. 4,50,000 in 1987, and profit in 1988 was Rs. 42,000
higher than that in 1987.
1) At what level of sales does the company break-even?
2) Determine profit or loss on a forecast sales volume of Rs.8,00,000
3) If there is a reduction in selling price by 10% in 1989 and the company desires to earn the
same amount of profit as in 1988, what would be the required sales volume?
P – 35: There are two plants manufacturing the same products under one corporate
management which decides to merge them.
PLANT - I PLANT - II
Capacity operation 100% 60%
Sales 6,00,00,000 2,40,00,000
Variable costs 4,40,00,000 1,80,00,000
Fixed Costs 80,00,000 40,00,000
You are required to calculated for the consideration of the Board of Directors.
a) What would be the capacity of the merged plant to be operated for the purpose of break-
even ?
b) What would be the profitability on working at 75% of the merged capacity.
P – 36: A company engaged in plantation activities has 200 hectors of virgin land which can
be used for growing jointly or individually tea, coffee and cardamom, the yield per hector of
the different crops and their selling prices per Kg. are as under :
Yield in Kgs Selling price per Kg.
Tea 2,000 20
Coffee 500 40
Cardamom 100 250
The relevant data are given below :
TEA COFFEE CARDAMOM
Labour charges Rs 8 10 120
Packing materials Rs 2 2 10
Other costs Rs 4 1 20
14 13 150
b) Fixed costs per annum : Rs.
Cultivation and growing cost 10,00,000
Administrative cost 2,00,000
Land Revenue 50,000
Repairs and maintenance 2,50,000
Other costs 3,00,000
Total Cost 18,00,000
The policy of the company is to produce and sell all three kinds of products and the
maximum and minimum area to be cultivated per product is as follows :
Hectors
Maximum Minimum
Tea 160 120
Coffee 50 30
Cardamom 30 10
Calculate the most profitable product mix and the maximum profit which can be achieved.
P – 37: Small Tools Factory has a plant capacity adequate to provide 19,800 hours of
machine use. The plant can produce all A type tools or all B type tools or a mixture of these
two type. The following information is relevant.
A B
Selling price Rs. 10 15
Variable cost Rs. 8 12
Hours required to produce 3 4
Market conditions are such that not more than 4,000 A type tools and 3,000 B type tools can
be sold in a year. Annual fixed costs are Rs. 9,900.
Compute the product mix that will maximise the net income to the company and find that
maximum net income..
P – 38: Taurus Ltd. produces three products A, B and C from the same manufacturing
facilities. The cost and other details of the three products are as follows:
A B C
Selling price per unit (Rs.) 200 160 100
Variable cost per unit (Rs.) 120 120 40
Fixed expenses/month (Rs.) 2,76,000

Maximum production per month (units) 5,000 8,000 6,000
Total hours available for the month 200
Maximum demand per month (units) 2,000 4,000 2,400
The processing hour cannot be increased beyond 200 hrs per month.
You are required to :
(a) Compute the most profitable product-mix.
(b) Compute the overall break-even sales of the co., for the month based in the mix
calculated in (a) above.
P – 39: A factory budget for a production of 1,50,000 units. The variable cost per unit is
Rs.14 and fixed cost is Rs.2 per unit. The company fixes its selling price to fetch a profit of
15% on cost.
(a) What is the break-even point ?
(b) What is the profit volume ratio ?
(c) If it reduces its selling price by 5% how does the revised selling price affect the BEP and
the profit volume ratio ?
(d) If a profit increase of 10% is desired more than the budget what should be the sale at the
reduced prices ?
P – 40: VINAYAK LTD. which produces three products furnishes you the following
information for 1991-92 :-
PRODUCTS
A B C
Selling price per unit 100 75 50
Profit volume ratio % 10 20 40
Maximum sales potential units 40,000 25,000 10,000
Raw Material content as % of variable costs 50 50 50
The expenses - fixed are estimated at Rs. 6,80,000. The company uses a single raw material
in all the three products. Raw material is in short supply and the company has a quota for the
supply of raw materials of the value of Rs. 18,00,000 for the year 1991-92 for the
manufacture of its products to meet its sales demand.
You are required to:-
a) Set a product mix which will give a maximum overall profit keeping the short supply of
raw material in view.
b) Compute that maximum profit.
P – 41: A review, made by the top management of Sweet and Struggle Ltd. which makes
only one product, of the result of two first quarters of the year revealed the following:-
Sales in units 10,000
Loss Rs. 10,000
Fixed Cost (for the year Rs. 1,20,000) 30,000 Quarter
Variable cost per unit Rs. 8
The finance Manager who feels perturbed suggests that the company should at least break-
even in the second quarter with a drive for increased sales. Towards this the company should
introduce a better packing which will increase the cost by Rs. 0.50 per unit.
The Sales Manager has an alternate proposal. For the second quarter additional sales
promotion expenses can be increased to the extent of Rs. 5,000 and a profit; of Rs. 5,000 can
be aimed at the for the period with increased sales.

The production Manager feels otherwise. To improve the demand the selling price per unit
has to be reduced by 3%. As a result the sales volume can be increased to attain a profit level
of Rs. 4,000 for the quarter.
The Managing Director asks for as a cost Accountant to evaluate these three proposals and
calculate the additional units required to reach their respective targets help him to make a
decision.
P – 42: A limited company manufactures three different products and the following
information has been collected from the books of accounts.
PRODUCTS
S’ T’ Y’
Sales Mix 35% 35% 30%
Selling price Rs. 30 40 20
Variable Cost Rs. 15 20 12
Total fixed cost Rs. 1,80,000
Total Sales Rs. 6,00,000
The company has currently under discussion, a proposal to discontinue the manufacture of
product Y and replace it with product M, when the following results are anticipated.
PRODUCTS
S’ T’ Y’
Sales Mix 50% 29% 25%
Selling price Rs. 30 40 30
Variable Cost Rs. 15 20 15
Total fixed cost Rs. 1,80,000
Total Sales Rs. 6,40,000
Will you advise the company to changeover to production of M? Give reasons for your
answer.
P – 43: The following figures have been extracted from the accounts of manufacturing
undertaking, which produces a single product for the previous (base) year.
Units produced and sold 10,000
Fixed overhead 20,000
Variable overhead cost per unit:
Labour 4
Material 2
Overheads 0.8
Selling Price Rs. 10 per unit
In preparing the budget for the current (budget) year the undernoted changes have been
envisaged:
Units to be produced and sold 15,000
Fixed overheads increased by Rs. 5,000
Fall in labour efficiency 20%
Special additional discount for
Bulk purchased of material 2 1/2 %
Variable overheads percentage reduced by 1 ¼ %
Fall in selling price per unit 10%
Calculate:
(i) the no. of units which must be sold to break even in each of the two years (ii) the no. of
units which would have to be sold to double the profit of the base year under base year
conditions (iii) the no. of units which will have to be sold in the budget year to maintain the
profit level of preceding year.

P – 44: From the following data calculate :
(1) B.E.P expressed in amount of sales in rupees.
(2) Number of units that must be sold to earn a profit of Rs. 60,000 per year
(3) How many units must be sold to earn a net income of 10% of sales.
Sales price Rs. 20 per unit; variable manufacturing costs Rs. 11 p.u; fixed factory overheads
Rs. 5,40,000 p.a; variable selling costs Rs. 3 p.u. Fixed selling costs Rs. 2,52,000 per year.
P –45: An engineering company receives in enquiry for the manufacture of certain products,
where costs estimated as follows per product. Direct materials Rs.3.10; Direct labour
(5 hours) Rs.2.05; Direct expenses Rs.0.05 Variable overheads 20 p. per hour.
The manufacture of these products will necessitate the provision of special tooling costing
approximately Rs.4,500. The price per unit is Rs.8.00. For an order to be considered
profitable it is necessary for it to yield a target contribution at the rate of Rs.0.30 per Labour
Hour (after tooling cost).
Find out :
a. The sales level at which contribution to profit commences
b. The sales at which the contribution exceeds the target.
P – 46: The present output details of a manufacturing department are as follows:

Average output per week - 48,000 units from 160 employees.
Rs.
Saleable value of the output 1,50,000
Contribution made by output towards fixed expenses and profit 60,000
The board of directors plan to introduce more mechanisation into the department at a
capital cost of Rs.40,000. The effect of this will be to reduce the number of employees to
120, but to increase the output per individual employees by 40%. To provide the necessary
incentive to achieve the increased output, the board intends to offer a 1% increase on the
piece of work price of 25 paise per article for every 2% increase in average individual output
achieved. To sell the increased output, it will be necessary to decrease the selling price by
4%. Calculate the extra weekly contribution resulting from the proposed change and evaluate
for the board’s consideration, the worth of the project .
P – 47: A Co. currently operating at 80% capacity has the following; profitability particulars:
Rs. Rs.
Sales 12,80,000
Costs:
Direct Materials 4,00,000
Direct labour 1,60,000
Variable Overheads 80,000
Fixed Overheads 5,20,000 11,60,000
Profit 1,20,000
An export order has been received that would utilise half the capacity of the factory. The
order has either to be taken in full and executed at 10% below the normal domestic prices, or
rejected totally. The alternatives available to the management are given below:
a) Reject order and Continue with the domestic sales only, as at present;
b) Accept order, split capacity equally between overseas and domestic sales and turn away
excess domestic demand;

c) Increase capacity so as to accept the export order and maintain the present domestic sales
by:
i) buying an equipment that will increase capacity by 10% and fixed cost by Rs. 40,000
ii) Work overtime a time and a half to meet balance of required capacity.
Prepare comparative statements of profitability and suggest the best alternative.
P – 48. During a period Vivek Ltd recorded a sales of Rs. 10 Lakhs. The PVR was 37% and
MOS was 25% of total sales.
A decrease in selling price and decrease in fixed cost could change PVR to 30% and MOS to
40% of the revised sales. There is no other change witnessed.
Calculate:
a) % of sales decrease b) Revised profit
c) New BEP and d) Decrease in Fixed cost.
P – 49.
(a) If BES is 40% and NP Ratio is 12% on total sales, what is the PVR?
(b) For an increase in VC of a product by Rs.2, the company increased the SP by Rs.2.5 to
maintain the same PVR, What is PVR the company protected?
(c) Profit reported by a company at a level of sales is Rs.12 Lacs and the contribution for
the same level of sales is Rs.48 Lacs. What is MOS in %?
P – 50. A, B and C are three similar plants under the same management who want them to be
merged for better operation. The details are as under:-
Plant A B C
Capacity Operated % 100 70 50
Rs. (in lakhs) Rs. (in lakhs) Rs. (in lakhs)
Turnover 300 280 150
Variable cost 200 210 75
Fixed costs 70 50 62
Find out
a) The capacity of the merged plant for break-even.
b) The profit at 75% capacity of the merged plant.
c) The turnover from the merged plant to give a profit of Rs.28 lakhs.
d) Supposing if all the works are experiencing same PVR, say 25%, is it necessary to find
operating results @ 100% of the factories to find break even point of the merged plant?
Prove.
P – 51. (a) Shut down/Continue point

A firm incurs a fixed cost of Rs.1, 20,000 at 60% capacity. At 0% capacity, fixed cost is only
Rs.40, 000. If its VC Ratio is 80%, find out the Shutdown point.
(b) Shut down/Continue point

A paint manufacturing company manufacture 2,00,000 per annum medium – sized tins of
“Spray Lac Paints” when working at normal capacity. It incurs the following costs of
manufacturing per unit:

(Rs.)
Direct Material 7.80
Direct Labour 2.10
Variable overheads 2.50
Fixed overheads 4.00
Product Cost per unit 16.40
The selling price is Rs.21 per and variable selling and administrative expenses is 60 paise
per tin.
During the next quarter only 10,000 units can be produced and sold. Management plans to
shut down the plant estimating that the fixed manufacturing cost can be reduced to Rs.74, 000
for the quarter. When the plant is operating, the fixed overheads are incurred at a uniform rate
throughout the year. Additional costs of plant shutdown for the quarter are estimated at
Rs.14, 000.
a) Express your opinion, as to whether the plant should be shut down during the quarter,
and
b) Calculate the shut down point for the quarter in terms of number of tins.

2. STANDARD COSTING
P – 1: From the following you are required to calculate

(a) Material Usage Variance
(b) Material Price Variance
(c) Material Cost Variance
Quantity of material purchased 3,000 units
Value of material purchased Rs 9,000
Standard quantity of material required for one tonne of finished product 25 units
Standard rate of material Rs 2 per unit
Opening stock of material NIL
Closing stock of material 500 units
Finished production during the period 80 tonnes
P – 2: The standard costs of certain chemical mixture is:

40% Material - A at Rs.200 per ton.
60% Material - B at Rs.300 per ton.
A standard loss of 10% is expected in production.
During a period they used:
90 tons of Material - A at the cost of Rs.180 per ton.
110 tons of Material - B at the cost of Rs. 340 per ton.
The Weight produced is 182 tons of good production.
Calculate and present Material Price, Usage, Mix and Yield Variances.
P – 3: A brass foundry making castings which are transferred to the machine shop of the
company at standards in regard to material stocks which are kept at standard price are as
follows:-
Standard Mixture 70% Copper : 30% Zinc
Standard Price Copper Rs.2,400 per ton
Zinc Rs. 650 per ton
Standard loss in melting 5% of input
Figures in respect of a costing period are as follows:
Commencing stocks Copper 100 tons
Zinc 60 tons
Finishing stocks Copper 110 tons
Zinc 50 tons
Purchases Copper 300 tons Cost Rs.7,32,500
Zinc 100 tons Cost Rs.62,500
Metal melted 400 tons
Casting produced 375 tons
Present figures showing: Material Price, Mixture and yield Variance.

P – 4: The standard mix of product M5 is as follows: -
LBs MATERIAL PRICE PER LB
50% A 5.00
20% B 4.00
30% C 10.00
The standard loss in production is 10% of input. There is no scrap value. Actual Production
for a month was 7,240 1bs. of M5 from 80 mixes. Actual purchases and consumption of
material during the month were:-
LBs MATERIAL PRICE PER LB
4,160 A 5.50
1,680 B 3.75
2,560 C 9.50
Calculate variances
P -5: S.V.Ltd. Manufacturers by mixing three raw materials. For every batch of 100Kg. of
BXE, 125 Kg. of raw Materials are used. In April, 1988, 60 batches were prepared to produce
an output of 5,600 Kg. of BXE. The standard and actual particulars for April, 1988 are as
under:-
RAW MIX PRICE MIX PRICE QUANTITY OF RAW
MATERIAL % PER kg % PER kg MATERIALS PURCHASED Kg
A 50 20 60 21 5,000
B 30 10 20 8 2,000
C 20 5 20 6 1,200
Calculate all variances.
P – 6: A company produces a finished product by using three basic raw materials. The
following standards have been set-up for raw materials:
Material Standard – Mix in percentages Standard Price per Kg. in Rs.
A 25 4
B 35 3
C 40 2
The standard loss in process is 20% of input. During a particular month, the company
produced 2,400 kgs of finished product. The details of stock and purchases for the month are
as under:
Material Opening Stock Closing Stock Purchases during the month
(kgs) (kgs) Quantity in Kgs Cost in Rs.
A 200 350 800 3,600
B 150 200 1,000 3,500
C 300 200 1,100 1,980
The opening stock is valued at standard cost. Compute:
(i) Material price and Material cost variance, when:
(a) Variance is calculated at the point of issue on First-in-First-out basis.
(b) Variance is calculated at the point of issue on Last-in-First-Out basis.
(ii) Material Usage Variance,
(iii) Material Mix Variance, and
(iv) Material Yield Variance.
P – 7: X Ltd. is producing floor covers in roll of standard size measuring 3 metres wide and
30 metres long by feeding raw materials to a continuous process machine. Standard mixture
fixed for a batch of 900 sq. metres of floor cover is as follows:
2,000 kg of material A at Re.1.00/kg.
800 kg of material B at Re.1.50/kg.
20 gallons of material C at Rs.30/gallon
During the period, 1505 standard size rolls were produced from material issued for 150
batches. The actual usage and the cost of materials were:
3,00,500 kg. of material A at Rs.1.10/kg.
1,19,600 kg. of material B at Rs.1.65/kg.
3,100 gallon of material C at Rs.29.50/gallon.
Present the figures to management showing the break-up of material cost variances arising
during the period.
P -8: A company manufacturing a special type of fencing tile 12"X 8" X 1\2" used a system
of standard costing. The standard mix of the compound used for making the tiles is: -
1,200 Kg. of material A @ Rs.0.30 per kg.
500 Kg. of Material B @ Rs.0.60 per kg.
800 Kg. of Material C @ Rs.0.70 per kg.
The compound should produce 12,000 square feet of tiles of 1\2" thickness. During a period
in which 1,00,000 tiles of the standard size were produced, the material usage was: -
Kg Rs.
7,000 Material A @ Rs.0.32 per kg. 2,240
3,000 Material B @ Rs.0.65 per kg. 1,950
5,000 Material C @ Rs.0.75 per kg. 3,750
15,000 7,940
Present the cost figures for the period showing Material-price, Mixture, Sub-usage Variance.
sn
P – 9: Standard labour hours and rate for production of article A given below:
Articles produced 1,000 units

Calculate: Labour Cost, Rate, Efficiency and Mix Variances.

P – 10: The Standard labour complement and the actual labour complement engaged in a
week for a job are as under:
Skilled Semi-Skilled Unskilled

Workers Workers Workers
a) Standard No. of workers in the gang 32 12 6
b) Standard wage rate per hour Rs. 3 2 1
c) Actual No. of workers employed in 28 18 4
the gang during the week
d) Actual wage rate per hour Rs.4 3 2
During the 40 hour working week the gang produced 1,800 standard labour hours of work.
CALCULATE: 1) Labour efficiency variance 2) Mix variance 3) Rate of wages
variance 4) Labour cost variance
P – 11:
Normal number of hours paid for in a week 40
Standard rate per hour (Rs) 8
standard output of department per hour, taking into account the normal idle time (units) 20
Actual rate per hour (Rs) 9
In a particular week, it was ascertained that 1000 units were produced despite 20% of the
time paid for was lost owing to power failure. Compute labour variances.
P – 12: Calculate variances from the following:
P -13: XYZ Co. has established the following standards for variable factory overhead:
Standard hours per unit: 6 Variable overhead per hour: Rs. 2
The actual data for the month are as follows:
Actual variable overheads incurred Rs. 2,00,000
Actual output 20,000
Actual hours worked 1,12,000
Calculate
(a) Variable overhead cost variance
(b) Variable overhead expenditure variance
(c) Variable overhead efficiency variance

P-14: SV Ltd has furnished you the following data:
Budgeted fixed OH rate is Rs.1 per hour. In July, 2012 the actual hours worked were
31,500/hrs
Calculate the following variances:
1) Efficiency 2) Capacity 3) Calendar 4) Volume 5) expenditure 6) Total OH
P- 15: A manufacturing company operating a standard costing system has the following data
in respect of July, 2010:-
Actual number of working days 22
Actual man-hours worked during the 8,600
month
Units produced 850
Actual fixed overhead incurred Rs.3,600
The following information is obtained from the company’s budget and standard cost data: -
Budgeted number of working days per month 20
Budgeted man-hours per month 8,000
Standard man-hours per unit produced 10
Standard fixed overhead rate per man-hour Re.0.50
Calculate fixed overhead variances.
P-16:
P-17: The Cost Accountant of a Co. was given the following information regarding the OHs
for Feb, 2013:
a. Overhead Cost Variance Rs.1,400 (A)
b. Overheads Volume Variance Rs. 1,000 (A)
c. Budgeted Hours for Feb, 2013: 1,200 Hours
d. Budgeted OH for Feb, 2013: Rs. 6,000
e. Actual Rate of Recovery of OH Rs. 8 per hour
You are required to assist him in computing the following for Feb, 2013
1. OHs expenditure Variance
2. Actual OH‘s incurred
3. Actual Hours for Actual Production
4. OHs Capacity Variance
5. OHs efficiency Variance
6. Standard Hours for Actual Production

P-18: A Co. manufacturing two products operates a standard costing system. The standard
OH content of each product in cost center 101 is
a) you are required to calculate total OH for the month of October

b) Show division into: 1) expenditure 2) Volume 3) efficiency Variances.
P-19:
From the above data calculate various sales variances
P- 20: Budgeted and actual sales for the month of December, 2012 of two products A and B
of M/s. XY Ltd. were as follows:
Budgeted
costs for Products A and B were Rs.4.00 and Rs.1.50 unit respectively. Work out from the
above data the following variances.
Sales Volume Variance, Sales Value Variance, Sales Price Variance, Sales Sub Volume
Variance, Sales Mix Variance
P- 21: From the following particulars for a period reconcile the actual profit with the
budgeted profit.
Actual material price and wage rates were higher by 10%. Actual sales prices are also higher
by 10%.

P-22:
During 2012-13, average prices increased over these of the previous years
(1) 20% in case of Sales (2) 15% in case of Prime Cost (3) 10% in case of overheads.
Prepare a profit variance statement from the above data.
P-23. The standard cost sheet per unit for the product produced by Modern Manufactures is
worked out on this basis.
Direct materials 1.3 tons @ Rs.4 per ton
Direct labour 2.9 hours @ 2.3 per hour
Factory overhead 2.9 hours @ Rs.2 per hour
Normal capacity is 2,00,000 direct labour hours per month.
The factory overhead rate is arrived at on the basis of a fixed overhead of Rs.1,00,000 per
month and a variable overhead of Rs.1.50 per direct labour hour.
In the month May, 50,000 units of the product was started and completed. An investigation
of the raw material inventory account reveals that 78,000 tons of raw material were
transferred into and used by the factory during May. These goods cost Rs.4.20 per ton.
1,50,000 hours of direct labour were spent during May at cost of Rs.2.50 per hour. Factory
overhead for the month amounted to Rs.3,40,000 of which 1,02,000 was fixed.
Compute and identify all variances under Material, Labour and Overhead as favourable or
adverse. Also identify one or more departments in the Co. who might be held responsible for
each variance.
IDENTIFICATION DEPARTMENTS
Nature of the Variance Name of the Department responsible
1. Material price Purchase
2. Material Usage Production
3. Labour Rate Personnel
4. Labour Efficiency Production
5. Overheads: Rate Increase Administration
Other Variances Production

P-24: ABC Ltd; adopts a Standard Costing System. The standard output for a period is
20,000 units and the standard cost and profit per unit is as under:
The actual production and sales for a period was 14,400 units. There has been no price
revision by the government during the period.
The following are the variances worked out at the end of the period:
You are required to: Ascertain the details of actual costs and prepare a Profit and Loss
Statement for the period showing the actual Profit/Loss. Show working clearly.
Reconcile the Actual Profit with Standard Profit.
P-25: A manufacturing concern which has adopted standard costing furnishes the following
information.
Standard
Material for 70 Kg of finished product of 100 Kg
Price of materials Re.1 per kg
Calculate:
a. Material Usage Variance
b. Material Price Variance
c. Material cost Variance

P -26: The standard cost of certain chemical mixture is
35% Material A at Rs.25 per Kg
65% Material B at Rs.36 per kg
A standard los of 5% is expected in production.
During a period they used :
125 kg. of Material A at Rs.27 per kg
275 kg. of Material B at Rs.34 per kg
The actual output was 365 kg.
Compute Material cost, price, mix, yield variances
P -27: A chemical company gives you the following standard and actual data of its
ChemicalNo.1456. You are required to calculate material variances:
Standard data
450 kg. of Material A @ Rs.20 per kg. 9,000
360 kg. of Material B @ Rs.10 per kg. 3,600
810 12,600
2,400 Skilled hours @ Rs.2 4,800
1,200 Unskilled hours @ Re.1 1,200
6,000
90 Normal loss
720 18,600
Actual data
450 kg. of Material A @ Rs.19 per kg. 8,550
360 kg. of Material B @ Rs.11 per kg. 3,960
810 12,500
2,400 Skilled hours @ Rs.2.25 5,400
1,200 Unskilled hours @ Re.1.25 1,500
6,900
50 Normal loss
760 19,400
P - 28: The standard material cost for 100 kg of chemical D is made up :

Chemical A 30 kg. @ Rs. 4 per kg
Chemical B 40 kg. @ Rs. 5 per kg
Chemical C 80 kg. @ Rs. 6 per kg
In a batch 500 kg. of chemical D were produced from a mix of
Chemical A 140 kg. @ Rs. 588
Chemical B 220 kg. @ Rs. 1,056
Chemical C 440 kg. @ Rs. 2,860
How do you yield mix and price of factors contribute to the variance in the actual cost per
100 kg. of chemical D over the standard cost ?
sn
P – 29: The standard set for material consumption was 100kg. @ Rs 2.25 per kg.
In a cost period:
Opening stock was 100 kg. @ Rs 2.25 per kg.
Purchases made 500 kg. @ Rs 2.15 per kg.

Consumption 110 kg.
Calculate: a) Usage b) Price variance
1) When variance is calculated at point of purchase
2) When variance is calculated at point of issue on FIFO basis
3) When variance is calculated at point of issue on LIFO basis
P – 30: The following information is related to labour of Aditya Ltd. engaged in a week of
November 2014 for Job –SH.
In a 40 hours week, the gang produced 1080 standard hours. The actual number of semi-
skilled workers is two
times of the actual number of unskilled workers. Total number of actual workers is same as
standard gang. The
rate variance of semi skilled workers is Rs. 6,400 (F).
You are required to find the following:
a. The actual number of workers/labours in each category.
b. Labour gang (mix) variance.
c. Labour sub-efficiency variance.
d. Labour rate variance.
e. Labour cost variance.
P -31: Using the following information calculate each of three labour variance for each
department
Dept X Dept Y
Gross wages direct Rs. 28,080 19,370
Standard hours produced 8,640 6,015
Standard rate per hour Rs. 3 3.40
Actual hours worked 8,200 6,395
P-32: In Dept. A, the following data is submitted for the week ended 31st October:
Prepare a statement of variances
P – 33: M P Ltd. operates a system of Standard Costing. The company has a normal monthly
machine hour capacity of 100 machines working 8 hours per day for 25 working days in the
month of April 2014.
a. The standard time required to manufacture one unit of product is 4 hours. The budgeted
fixed overhead was Rs. 1,50,000.
b. In the month of April 2014, the company actually worked for 24 days for average 750
machine hours per day.
c. The actual production was 4500 units, and the actual fixed overhead was Rs. 1,60,000.
You are required to compute:
i. Fixed overhead efficiency variance
ii. Fixed overhead capacity variance
iii. Fixed overhead calendar variance
iv. Fixed overhead expenditure variance
v. Fixed overhead volume variance
vi. Fixed overhead cost variance
P-34: The following information was obtained from the records of a manufacturing unit
using standard costing system.
You are required to calculate the following overhead variances

1) Variable OH 2) Fixed OH a) expenditure b) Volume c) Efficiency d) Calendar.
Also prepare a reconciliation statement for the standard fixed expenses worked out at
standard fixed OH rate and actual OH.

3. BUDGETARY CONTROL
P – 1: Prepare a production Budget for three months ending March 31, 1989 for a factory
producing four products, on the basis of the following information.
TYPE OF ESTIMATED STOCK ESTIMATED SALES DESIRED CLOSING
PRODUCT On- JAN.1,1989 DURING JAN. to STOCK ON 31.3.1989
MAR. 1989
A 2,000 10,000 3,000
B 3,000 15,000 5,000
C 4,000 13,000 3,000
D 3,000 12,000 2,000
P – 2: A company is manufacturing two products X and Y. A forecast about the number of

units to be sold in the first seven months is given below:
MONTH JAN FEB MAR APRIL MAY JUNE JULY
Product - X 10,000 12,000 16,000 20,000 24,000 24,000 20,000
-Y 28,000 28,000 24,000 20,000 16,000 16,000 18,000
It is anticipated that : 1) There will be no work-in-progress at the end of any month.
2) Finished units equal to half the sales for the next month will be in stock at the end of each
month (including December, of previous year).
Budgeted production and production costs for the year ending 31st December are as follows:
PRODUCT- X PRODUCT -Y
Production (units) 2,20,000 2,40,000
Direct material/unit Rs. 12.5 19.0
Direct wages/unit Rs. 4.5 7.0
Total factory overheads for each type of product (variable) 6,60,000 9,60,00
Rs.
Prepare for 6 months ending 30th June a production budget and a summarised cost of
production budget.
P – 3: Draw a material procurement Budget (Quantitative) from the following information.

Estimated sales of a product 40,000 units. Each unit of the product requires 3 units of
material A and 5 units of material B. Estimated opening balances at the commencement of
the next year.
Finished product = 5,000 units
Material A = 12,000 units
B = 20,000 units
Material on order
Material B = 11,000 units
The desirable closing balance at the end of the next year:
Finished product = 7,000units
B = 25,000 units
Material on order:
B = 10,000 units

P – 4: From the following figures prepare the raw material purchase budget for January,
2013:
P – 5: A company manufactures product - A and product -B during the year ending 31st
December, 1986, it is expected to sell 15,000 kg. of product A and 75,000 kg. of product B at
Rs. 30 and Rs. 16 per kg. respectively. The direct materials P, Q and R are mixed in the
proportion of 3: 5: 2 in the manufacture of product A, Materials Q and R are mixed in the
proportion of 1:2 in the manufacture of Product B. The actual and budget inventories for the
year are given below:
OPENING STOCK EXPECTED CLOSING ANTICIPATED
Kg. STOCK Kg. COST PER Kg. Rs.
Material - P 4,000 3,000 12
Q 3,000 6,000 10
R 30,000 9,000 8
Product – A 3,000 1,500 -----
B 4,000 4,500 -----
Prepare the production Budget and Materials Budget showing the expenditure on purchase of
materials for the year ending 31-12-1986.
P - 6: The following details apply to an annual budget for a manufacturing company.
QUARTER 1st 2nd 3rd 4th

Working Days 65 60 55 60
Production (Units per working day) 100 110 120 105
Raw material purchases (% by weight of annual total) 30% 50% 20% ----
Budgeted purchase price/Kg. Rs. 1 1.05 1.125 ----
Quantity of raw material per unit of production 2 kg. Budgeted closing stock of raw material
2,000 kg. Budgeted opening stock of raw material 4,000 kg. (Cost Rs. 4,000)
Issues are priced on FIFO Basis. Calculate the following budgeted figures.
a) Quarterly and annual purchase of raw material by weight and value.
b) Closing quarterly stocks by weight and value.
P - 7: You are required to prepare a selling Overhead Budget from the estimates given
below:
Advertisement Rs. 1,000
Salaries of the Sales Dept. 1,000
Expenses of the Sales Dept.(Fixed) 750
Salesmen's remuneration 3,000
Salesmen's and Dearness Allowance
Commission @ 1% on sales affected
Carriage Outwards: Estimated @ 5% on sales

Agents Commission : 7 1/2% on sales.
The sales during the period were estimated as follows:
Rs. 80,000 including Agent's sales Rs. 8,000
Rs. 90,000 including Agent's Sales Rs. 10,000
Rs. 1,00,000 including Agent's Sales Rs. 10,500.
P - 8: ABC Ltd. a newly started company wishes to prepare Cash Budget from January.
Prepare a cash budget for the first six months from the following estimated revenue and
expenses.
MONTH TOTAL MATERIALS WAGES OVERHEADS
SALES Rs. Rs.
Rs.
PRODUCTION SELLING &
Rs. DISTRIBUTION
Rs.
January 20,000 20,000 4,000 3,200 800
February 22,000 14,000 4,400 3,300 900
March 28,000 14,000 4,600 3,400 900
April 36,000 22,000 4,600 3,500 1,000
May 30,000 20,000 4,000 3,200 900
June 40,000 25,000 5,000 3,600 1,200
Cash balance on 1st January was Rs. 10,000. A new machinery is to be installed at
Rs. 20,000 on credit, to be repaid by two equal installments in March and April, sales
commission @5% on total sales is to be paid within a month following actual sales.
Rs. 10,000 being the amount of 2nd call may be received in March. Share premium
amounting to Rs. 2,000 is also obtained with the 2nd call. Period of credit allowed by
suppliers -- 2months; period of credit allowed to customers -- 1month, delay in payment of
overheads 1 month. Delay in payment of wages 1/2 month. Assume cash sales to be 50% of
total sales.
P – 9: Prepare a Cash Budget for the three months ending 30th June, 1986 from the
information given below:
a)
MONTH SALES MATERIALS WAGES OVERHEADS
February 14,000 9,600 3,000 1,700
March 15,000 9,000 3,000 1,900
April 16,000 9,200 3,200 2,000
May 17,000 10,000 3,600 2,200
June 18,000 10,400 4,000 2,300
b) Credit terms are:
Sales Debtors -- 10% sales are on cash, 50% of the credit sales are collected next month and
the balance in the following month.
Creditors : Materials 2 months
Wages 1/4 month
Overheads 1/2 month.
c) Cash and bank balance on 1st April, 1986 is expected to be Rs. 6,000.
d) Other relevant information are:
1. Plant and machinery will be installed in February 1986 at a cost of Rs. 96,000. The
monthly installment of Rs.2,000 is payable from April onwards.

2. Dividend @ 5% on preference share capital of Rs. 2,00,000 will be paid on 1st June.
3. Advance to be received for sale of vehicles Rs. 9,000 in June.
4. Dividends from investments amounting to Rs. 1,000 are expected to be received in
June.
P - 10: For production of 10,000 units the following are budgeted expenses:
Prepare a budget for production of 7,000 units and 9,000 units.
P - 11: Draw up a flexible budget for overhead expenses on the basis of the following data
and determine the overhead rates at 70%, 80% and 90%
Plant Capacity At 80% capacity
VARIABLE OVERHEADS: Rs.
Indirect labour 12,000
Stores including spares 4,000
SEMI VARIABLE:
Power (30% - Fixed : 70% -Variable) 20,000
Repairs(60%- Fixed : 40% -Variable) 2,000
Fixed Overheads
Depreciation 11,000
Insurance 3,000
Salaries 10,000
Total overheads 62,000
Estimated Direct Labour Hours 1,24,000
P - 12: The profit for the year of Push On Ltd. works out to 12.5% of the capital employed
and the relevant figures are as under:-
Sales Rs. 5,00,000
Direct materials 2,50,000
Direct labour 1,00,000
Variable Overheads 40,000
Capital employed 4,00,000
The new sales manager who has joined the company recently estimates for the next year †a
profit of about 23% on capital employed, provided the volume of sales is increased by 10%
and simultaneously there is an increase in selling price of 4% and an overall cost reduction in
all the elements of cost by 2%.
Find out by computing in detail the cost and profit for next year, whether the proposal of
sales manager can be adopted.

P - 13: A Glass Manufacturing company requires you to calculate and present the budget
for the next year from the following information.
Sales: Toughened glass Rs. 3,00,000
Bent toughened glass 5,00,000
Direct material cost 60% of sales
Direct wages 20 workers @ Rs. 150 p.m.
FACTORY OVERHEADS:
Indirect Labour:
Works Manager Rs. 500 per month
Foreman Rs. 400 per month
Stores and spares 2 1/2% on sales
Depreciation on machinery Rs. 12,000
Light and power 5,600
Repairs and maintenance 8,000
Other sundries 10% on direct wages
Administration, selling and distribution expenses Rs. 14,000 per year.
P - 14: From the following information relating to 1988 and conditions expected çto prevail
in 1989, prepare a budget for 1989.
1988 Actual:
Sales 1,00,000 (40,000 units)
Raw materials 53,000
Wages 11,000
Variable overheads 16,000
Fixed overheads 10,000
1989 Prospects
Sales 1,50,000 (60,000 units)
Raw materials 5% increase in prices
Wages 10% increase in wage rate
5% increase in productivity
Additional plant One lathe Rs. 25,000
One drill Rs. 12,000
P - 15: Production costs of a factory for a year are as follows:

Direct Wages Rs. 80,000
Direct materials 1,20,000
Product Overheads: Fixed 40,000
Variable 60,000
During the forthcoming year it is anticipated that:
a) The average rate for direct labour remuneration will fall from Rs. 0.80 per hour to
Rs. 0.75 per hour.
b) Production efficiency will be reduced by 5%
c) Price per unit of direct material and of other materials and services which comprise
overheads will remain unchanged, and
d) Production in the coming year will increase by 33 1/3%. Draw up a production cost
budget.

P- 16: A company manufactures two products, A and B and the budgeted data for the year
are as follows:
The
he sales manager forecasts the sales in units as follows:
It is assumed that (i) there will be no work in progress at the end of any month, and
(ii) finished units equal to half the sales for the following month will be kept in stock.
Preparee (a) A Production Budget for each month and (b) A Summarized Profit and Loss
Statement for the year.
P – 17: Three Articles X, Y and Z are produced in a factory. They pass through two cost
centers A and B. From the data furnished compile a statement for budgeted machine
utilization in both the centers.
(a) Sales budget for the year
(b) Machine hours per unit of product
(c) Total number of machines
(d) Total working hours during the year: Estimated 2500 hours per machine.

P - 18: The monthly budgets for manufacturing overhead of a concern for two levels of
activity were as follows:
You are required to:

(i) Indicate which of the items are fixed, variable and semi-variable;
(ii) Prepare a budget for 80% capacity and
(iii) Find the total cost, both fixed and variable per unit of output at 60%, 80% and
100%capacity.
P – 19: X Chemical Ltd. manufacture two products AB and CD by making the raw material
in the proportion shown:
The finished weight of products AB and CD are equal in the weight of in gradients. During
the month of June, it is expected that 60 tons of AB and 200 tons of CD will be sold.
Actual and budgeted inventories for the month of June as follows:
The purchase price of materials for June is expected to be as follows:
All materials will be purchased on 3rd of June, Prepare:

a) The Production Budget for the month of June,
b) The Material Requirement budget for June,
c) The Material Purchase Budget indicating the expenditure for material for the month of
June.

P - 20: The budget controller of a manufacturing organisation producing three products has
compiled the following data for the annual budget for the year 2013.
Fixed factory overhead rate per direct labour hour
The following policies have been laid down for the budgeted year 2013:
i. Fixed factory overheads will be absorbed on direct labour hour basis.
ii. Administration overheads are absorbed at the rate at 20% of factory cost.
iii. Selling and distribution overheads (one-third variable) are recovered at the rate of
25% of the cost of production including administration overheads.
iv. The mark up on the cost of sales for profit is:
Product ‘A’ 10%, Product ‘B’ 20%, Product ‘C’ 30%.
v. Inventories of finished goods will be reduced by 25% on 31-12-2013.
vi. The finished goods inventories are valued on marginal cost basis. The marginal cost
of the opening stocks on 1.1.2013 were:
vii. Product ‘A’ Rs. 80, Product ‘B’ Rs. 120 and Product ‘C’ Rs. 140
You are required to compute:
(a) The number of units of each product estimated to be sold in the budget year.
(b) The number of unit of each product proposed to be produced in the budget year.
(c) The contribution to sales ratio envisaged for each of the products
(d) Valuation of opening and closing stock of finished goods on marginal cost basis.
P - 21: From the information given below, prepare a cash budget of M/s Ram Limited for the
first half of 2013, assuming that cost would remain unchanged:
a) Sales are both on credit and for cash, the later being one-third of the former.
b) Realization from debtors are 25% in the month of sale, 60% in the month of following
that and the balance in the month after that.
c) The company adopts a uniform pricing policy of the selling price being 25% over cost.
d) Budgeted sales of each month are purchased and paid for in the preceding month.
e) The company has outstanding debentures of Rs. 2 lakhs on 1st January which carry
interest at 15% per annum payable on the last date of each quarter on calendar year
basis. 20% of the debentures are due for redemption on 30 June 2013.
f) The company has to pay the last installment of advanced tax, for assessment year 2013-
14, amounting to Rs. 54,000.
g) Anticipated office costs for the six months period are: January Rs. 25,000; February
Rs. 20,000; March Rs. 40,000; April Rs. 35,000; May Rs. 30,000 and June Rs.
45,000.
h) The opening cash balance of Rs. 10,000 is the minimum cash balance to be maintained.
Deficits have to be met by borrowers in multiples of Rs. 10,000 on which interest, on
monthly basis, has to be paid on the first date of the sub-sequent month, at 12% p.a.
Interest is payable for a minimum period of a month.
i) Rent payable is Rs. 2,000 per month.
j) Sales forecast for the different months are:
October 2012 Rs. 1,60,000; November Rs. 1,80,000; December Rs. 2,00,000;
January 2013 Rs. 2,20,000; February Rs. 1,40,000; March Rs. 1,60,000; April
Rs. 1,50,000; May Rs. 2,00,000; June Rs. 1,80,000; and July Rs. 1,20,000.
P - 22: Manufacturers Ltd. produce three products from three basic raw materials in three
departments. The company operates a budgetary control system and values its stock of
finished goods on a total cost basis. From the following data, you are required to produce for
the month of July 2013 the following budgets.
(a) Production
(b) Material usage
(c) Purchases
(d) P & L A/c for each product and in total.
The company is introduced a new system of inventory control which should reduce stocks.
The forecast is that stocks as at 31st July 2013 will be reduced as follows:
Raw materials by 10% and finished products by 20%.
Fixed production overhead is absorbed on a direct labour hour basis. It is expected that there
will be no work-in-progress as the beginning or end of the month.
Administration costs are absorbed by the products at a rate of 20% of production cost and
selling and distribution cost is absorbed by products at a rate of 40% of production cost.
Profit is budgeted as a percentage of total cost as follows:
Product A 25%, Product B 12½% and product C 16 2∕3 %
Standard data per unit of Product
P – 23: The budgeted level of activity of a production department of a manufacturing

company is 5,000 hours in a period. But a technical study assumes overhead behaviour
mentioned below:
a) Prepare fixed budget and a flexible budget at 70%, 85% and 110% of budget level of
activity in one statement.
b) Calculate a departmental hourly rate of overhead absorption.

4. LEARNING CURVE
Meaning & Learning Curve Effect:
1. Learning is the process during which a person acquires the skill to do a job.
2. When a worker takes up a job for the first time, he is new to the job his performance
is not to his best. Hence he takes considerable time to complete it.
3. When the same job is repeated, he is able to improve his performance because of the
skill acquired by doing the same job or a similar job earlier.
4. The phenomenon is called Learning Effect. It applies only to labour oriented
operations.
Meaning of Learning Curve:

1. Learning Curve is a geometrical progression, which reveals the steadily decreasing
costs for the accomplishment of a given repetitive operation, as the identical operation
is increasingly repeated.
2. The amount of decrease will be less and becomes lesser with the production of each
successive unit.
3. The Slope of the Decision Curve is expressed as a percentage.
4. Learning curve is also known as Experience Curve, Improvement Curve and Progress
Curve.
Features of Learning Curve:

1. In manufacturing a product, when the quantity produced doubles, the absolute amount
of cost increase will be successively smaller. However the rate of decrease will
remain fixed. This is the essence of the Learning Curve theory.
2. The reduction in cost when output increases is due to the following special features of
the manufacturing environment:--
a) Better tooling methods are developed and used;
b) More productive equipments are designed and used to make the product;
c) Designed bugs are detected and corrected;
d) Engineering changes decrease over time;
e) Earlier teething problems are overcome. Management strives for better planning and
control;
f) Rejections and rework tend to diminish over time.
The reasons for such a reduction is that each unit will entail: (a) Less labour (b) Less
material (c) More units produced from same equipment and (d) Costs of fewer delays and
less loss of time.
Important applications of Learning Curve:

1. CVP analysis: Learning Curve helps to analyse CVP relationship during
familiarisation phase of product or process and thus it is very useful for cost
estimates. Learning Curve also assists in forecasting.
2. Budgeting and Profit Planning: Learning Curve provides scientific ideas and
sophistication for budgeting and profit planning. The Budget Team selects the costs
that reflect learning effect and incorporates it while developing budgets or when
planning projects.

3. Pricing decisions: Cost data adjusted for Learning Effect helps in proper pricing
decisions.
4. Product Design: It helps Design Engineers in decision making based upon expected
(predictable from past experience) rates of improvement.
5. Contract negotiations: It helps the Government to negotiate Contracts. The
Government receives full advantage of the decreasing unit cost in establishing the
contract price.
6. Setting Standards: The Learning Curve provides the base to set standards for the
learning phase.
Limitations of Learning Curve:

1. Non Pervasive: All activities of a Firm are not subject to learning effect. Following
types of activities are subject to learning effect---
 Activities that have not been performed in this present operational mode.
 Activities which are being performed by new workmen, new employees or others
not familiar with the particular activity. However, activities being performed by
experienced workmen, thoroughly familiar with all activities will NOT be subject
to learning effect.
 Activities involving utilisation of material not used by Firm so far.
2. Differential Rates of decrease: In any manufacturing activity, it is true that learning
effect takes place and the average time taken is likely to reduce. But in actual practice
it is very unlikely that there will be a regular consistent rate of decrease. Therefore,
any cost predictions based on conventional learning curves should be viewed with
caution.
3. Non-Availability of data: Valid data for computation of learning effect cannot be
obtained easily.
4. Differential circumstances: A slight change in circumstances quickly renders the
learning curve obsolete.
PROBLEMS
P - 1: Direct labour hours to assemble the first unit of new equipment were 400. Assuming
that this type of assemble will experience a learning effect of 90%. Compute the average
direct labour for the 3rd & the 4th units as also for the 5th to 8th units.
Find also the average labour for the 6th & 7th units. B = -0.1520
P - 2: A first batch of 25 transistor radios took a total of 250 direct labour hours. It is
proposed to assemble another 40 units. What will be the average labour per unit in this lot?
Assume that there is 85% learning rate. B = -0.23455
P - 3: A company has found that the average direct labour just after completion of X units
was 26.4 hours. The average at the end of the first unit was 52 hours. If there is learning
curve effect of 85%. What would have been the total output to date? B = -0.23455

P – 4: The usual learning curve model is Y = axb where
Y is the average time per unit for x units.
a is the time for first unit
x is the cumulative number of units
b is the learning coefficient and is equal to log 0.8/log 2 = -0.322 of a learning rate of 80%
Given that a = 10 hours and learning rare 80%, you are required to Calculate:
(i) The average time for 20 units.
(ii) The total time for 30 units.
(iii) The time for units 31 to 40.
Given that log 2 = 0.301, Antilog of 0.5811 = 3.812
log 3 = 0.4771,Antilog of 0.5244 = 3.345.
log 4 = 0.6021,Antilog of 0.4841 = 3.049.
P – 5: Illustrate the use of learning curves for calculating the expected average units cost of
making.
(a) 4 machines (b) 8 machines
Direct Labour need to make first machine = 1000 hrs.
Learning curve = 90%
Direct Labour cost = Rs 15/- per hour.
Direct materials cost = Rs 1,50,000
Fixed cost for either size orders = Rs 60,000.
P – 6: Z.P.L.C experience difficulty in its budgeting process because it finds it necessary to

qualify the learning effect as new products are introduced.
Substantial product changes occur and result in the need for retraining.
An order for 30 units of a new product has been received by Z.P.L.C So far, 14 have been
completed; the first unit required 40 direct labour hours and a total of 240 direct labour has
been recorded for the 14 units. The production manager expects an 80% learning effect for
this type of work.
The company use standard absorption costing. The direct costs attributed to the centre in
which the unit is manufactured and its direct materials costs are as follows:
Rs.
Direct material 30.00 per unit.
Direct Labour 6.00 per hour.
Variable overhead 0.50 per direct labour hour.
Fixed overhead 6,000 per four-week operating period.
There are ten direct employees working a five-day week, eight hours per day. Personal and
other downtime allowances account for 25% of total available time.
The company usually quotes a four-week delivery period for orders.
(i) Determine whether the assumption of an 80% learning effect is a reasonable one in this
case, by using the standard formula y = axb
Where Y = the cumulative average direct labour time per unit (productivity)
a = the average labour time per unit for the first batch.
x = the cumulative number of batches produced.
b = the index of learning.
(ii) Calculate the number of direct labour hours likely to be required for an expected second
order of 20 units.

(iii) Use the cost data given to produce an estimated product cost for the initial order,
examine the problems which may be created for budgeting by the presence of the learning
effect.
Note: log 2 = 0.3010; log3 = 0.4771; log 14 = 1.1461; log 0.8 = -0.09692; antilog 1.234
= 17.14;
P – 7: Suraksha, an electronics firm, has designed a new model of fire alarm system and
assembled a first unit as a prototype for demonstration. The direct labour expended on this
unit was 260 hours and the direct material cost was Rs.37,000. The direct labour rate is Rs.30
per hour. Following successful demonstrations to potential customers, confirmed orders have
been received for supply of 50 units during the first six months and a supply of 75 units
during the following six months.
The company wishes to set competitive prices for the supplies in each of the periods by
passing on the benefits of learning curve effect of 80% that is normally applicable to this type
of product assembly. Further, the variable overhead in regular production runs is estimated to
be 125% of the direct labour cost and the fixed overhead is charged at 75% of direct labour
cost. In view of the large production volumes it is expected that a 5% discount can be got on
the materials used for the first six months and a 10% discount for the second six months.
The company sets the selling price with a 40% mark-up on the cost. Determine the selling
price per unit that should be set for the orders in each of the six months. B=-0.3220.
P – 8: XYZ & Co. has given the following data :

80% Average – Time Curve
Required : Fill in the blanks

Note: log 2 = 0.3010; log 3 = 0.4771; antilog 1.8463 = 70.2
P – 9: The Gifts Company makes mementos for offering chief guests and other dignitaries at
functions. A customer wants 4 identical pieces of hand-crafted gifts for 4 dignitaries invited
to its function.
For this product, the Gifts Company estimates the following costs for the 1st unit of the
product
90 % learning curve ratio is applicable and one labourer works for one customer’s order.
(i) What is the price per piece to be quoted for this customer if the targeted contribution is
Rs.1,500 per unit?
(ii) If 4 different labourers made the 4 products simultaneously to ensure faster delivery to the
customer, can the price at (i) above be quoted? Why?

d14
P – 10: A Company has just completed the manufacture of 40 units of a new product. The
manufacturing costs are :-
The Company policy is to add a profit of 12% on selling price. The Company received
another order for 120 units of this product for which the company quoted, based on its policy
on absorption cost basis, a price of Rs15,625 per unit. The customer struck the order to
Rs11,000 per unit. The Company is short of work and so is keen to take up more orders but it
is reluctant to accept this order price because it is against the policy to accept any price below
its cost. The Company experiences a learning curve of 90%. (i) Compute the gain or loss
arising from acceptance of the order of Rs11,000 per unit. (ii) Advice whether the company
should accept this order for 120 units or not.
P – 11: A firm received an order to make and supply eight units of standard product which
involves intricate labour operations. The first unit was made in 10 hours. It is understood that
this type of operations is subject to 80% learning rate. The workers are getting a wages rate of
Rs. 12 per hour.
(i) What is the total time and labour cost required to execute the above order?
(ii) If a repeat order of 24 units is also received from the same customer, what is the labour
cost necessary for the second order?
12.

13.

5. TRANSFER PRICING
1. The following information relates to budgeted operations of Division X of a
manufacturing company.
Particulars Amount in rupees
Sales – 50,000 units @ Rest. 8 4,00,000
Less: Variable Costs @ Rest. 6 per unit 3,00,000
Contribution margin 1,00,000
Less: Fixed Costs 75,000
Divisional Profits 25,000
The amount of divisional investment is Rs 1,50,000 and the minimum desired rate of return
on the investment is the cost of capital of 20%
Calculate: i) Divisional expected ROI and
ii) Divisional expected RI
2. A company has two divisions, A and B. Division A manufactures a component which is

used by Division B to produce a finished product. For the next period, output and costs have
been budgeted as follows.
Particulars Division A Division B
Component units 50,000 -
Finished units - 50,000
Total variable costs – Rupees 2,50,000 6,00,000
Fixed Costs Rupees 1,50,000 2,00,000
The fixed costs are separable for each division. You are required to advise on the transfer
price to be fixed for Division A’s component under the following circumstances.
A. Division A can sell the component in a competitive market for Rs 10 per unit. Division
B can also purchase the component from the open market at that price.
B. As per the situation mentioned in (A) above, and further assume that Division B currently
buys the component from an external supplier at the market price of Rs 10 and there is
reciprocal agreement between the external supplier and another Division C, within the same
group. Under this agreement, the external supplier agrees to buy one product unit from
Division C at a profit of Rs 4 per unit to that division, for every component which Division B
buys from the sup.
3. A company has two divisions, Division A and Division B. Division A has a budget of
selling 20,000 number of a particular component X to fetch a return of 20% on the average
assets employed. The following particulars of Division A are also known.
Particulars Amount in Rupees
Fixed Overheads 5,00,000
Variable Cost Rs 1 per unit
Average Assets – Debtors 2,00,000
Inventories 5,00,000
Plant 5,00,000
However there is a constraint in marketing and only 1,50,000 units of the component X can
be directly sold to the market at the proposed price.
It has been gathered that Division B can take up the balance 50,000 units of component X. A
wants a price of Rs 4 per unit but B is prepared to pay Rs 2 per unit of X.

Division A has another option on hand, which is to produce only 1,50,000 units of component
X. This will reduce the holding of assets by Rs 2,00,000 and fixed overheads by Rs 25,000.
You are required to advise the most profitable course of action for Division A.
4. XYZ Ltd which has a system of assessment of Divisional Performance on the basis of
residual income has two Divisions, Alfa and Beta. Alfa has annual capacity to manufacture
15,00,000 numbers of a special component that it sells to outside customers, but has idle
capacity. The budgeted residual income of Beta is Rs 1,20,00,000 while that of Alfa is
Rs 1,00,00,000. Other relevant details extracted from the budget of Alfa for the current years
were as follows.
Particulars Details
Sale (outside customers) 12,00,000 units @ Rs 180 per unit
Variable cost per unit Rs 160
Divisional fixed cost Rs 80,00,000
Capital employed Rs 7,50,00,000
Cost of Capital 12%
Beta has just received a special order for which it requires components similar to the ones
made by Alfa. Fully aware of the idle capacity of Alfa, beta has asked Alfa to quote for
manufacture and supply of 3,00,000 numbers of the components with a slight modification
during final processing. Alfa and Beta agree that this will involve an extra variable cost of Rs
5 per unit.
You are required to calculate,
I. Calculate the transfer price which Alfa should quote to Beta to achieve its budgeted
residual income.
II. Also indicate the circumstances in which the proposed transfer price may result in a
sub optimal decision for the Company as a whole.
5. A company is organized into two divisions namely A and B. A produces three products,
K, L and M. The relevant data per unit is given below.
Particulars K L M
Market Price Rs 120 Rs 115 Rs 100
Variable Costs 84 60 70
Direct Labour hours 4 5 3
Maximum Sales potential - units 1600 1000 600
Division B has a demand for 600 units of product L for its use. If division A cannot supply
the requirements, division B can buy a similar product from market at Rs 112 per unit. What
should be the transfer price of 600 units of L for division B, if the total direct labor hours
available in division A are restricted to 15,000.
6. Transferor Ltd. has two processes Preparing and Finishing. The normal output per week is
7,500 units (Completed) at a capacity of 75%
Transferee Ltd. had production problems in preparing and requires 2,000 units per week of
prepared material for their finishing processes.
The existing cost structure of one prepared unit of Transferor Ltd. at existing capacity

Material Rs.2.00 (variable 100%)
Labour Rs.2.00 (Variable 50%)
Overhead Rs.4.00 (variable 25%)
The sale price of a completed unit of Transferor Ltd is Rs.16 with a profit of Rs.4 per unit.
Construct the effect on the profits Transferor Ltd., for six months (25 weeks) of supplying
units to Transferee Ltd. with the following alternative transfer prices per unit:
(i) Marginal Cost
(ii) Marginal Cost + 25%
(iii)Marginal Cost + 15% Return on capital(assume capital employed Rs. 20 lakhs)
(iv) Existing Cost
(v) Existing Cost + a portion profit on the basis of (preparing cost / Total Cost) x Unit
Profit
(vi) At an agreed market price of Rs.8.50 Assume no increase in fixed cost.
7. Division A is a profit centre which produces three products X, Y and Z. Each product has
an external market.
X Y Z
External market price per unit Rs. 48 Rs. 46 Rs. 40
Variable cost of production in division A Rs. 33 Rs. 24 Rs. 28
Labour hours required per unit in division A 3 4 2
Product Y can be transferred to Division B, but the maximum quantity that might be required
for transfer is 300 units of Y.
X Y Z
The maximum external sales are: 800 units 500 units 300 units
Instead of receiving transfers of Product Y from Division A, Division B could buy similar
product in the open market at a slightly cheaper price of Rs.45 per unit.
What should the transfer price be for each unit for 300 units of Y, if the total labour hours
available in Division A are?
(a) 3800 hours b) 5600 hours.
8. A Company with two manufacturing divisions is organised on profit centre basis.
Division ‘A’ is the only source for the supply of a component that is used in Division B in the
manufacture of a product KLIM. One such part is used each unit of the product KLIM. As
the demand for the product is not steady. Division B can obtain orders for increased
quantities only by spending more on sales promotion and by reducing the selling prices. The
Manager of Division B has accordingly prepared the following forecast of sales quantities
and selling prices.
Sales units per day Average Selling price per unit of KLIM
1,000 Rs.5.25
2,000 3.98
3,000 3.30
4,000 2.78
5,000 2.40
6,000 2.01
The manufacturing cost of KLIM in Division B is Rs. 3,750 first 1,000 units and Rs. 750 per
1,000 units in excess of 1,000 units.

Division A incurs a total cost of Rs. 1,500 per day for an output to 1,000 components and the
total costs will increase by Rs.900 per day for every additional 1,000 components
manufactured. The Manager of Division A states that the operating results of his Division
will be optimised if the transfer price of the component is set at Rs. 1.20 per unit and he has
accordingly set the aforesaid transfer price for his supplies of the component to Division A
You are required:
(a) Prepare a schedule showing the profitability at each level of output for Division A and
Division B.
(b) Find the profitability of the company as a whole at the output level which
(i) Division A’s net profit is maximum.
(ii) Division B’s net profit is maximum.
(c) If the Company is not organised on profit centre basis, what level of output will be
chosen to yield the maximum profit.
9. M/s. N.C.Ltd. has received an enquiry from a reputed cigarette factory for the supply of 20
million shells per month. Capacity exists for the same but a balancing equipment costing Rs.
50,000 has to be installed.
The cost details are as follows:
a) Duplex board - 50 tonnes @ Rs. 5.50 per kg.

b) Printing ink and gum - Rs.2 per 1000 shells
c) Packing cost - Rs.7.50 per one lakh shells
d) Labour hours - 1,600 hours of which 500 hours will be overtime.
e) Labour rate - Rs. 4 per hour with double the rate for overtime.
f) Overheads - Rs. 16,300 per month
g) Selling and distribution expenses - Rs. 16,300 per month.
Since duplex board is in short supply, procurement is made on cash basis. Working capital to
the extent of 50% of the sales value will be required.
The company expects a net return of 20% on the additional capital required for undertaking this
order.
Prepare a cost estimate and indicate the price to be quoted to the customer.
10. Transfer pricing conflicts
A Company has two divisions. South division manufactures an intermediate product for
which there is no immediate external market. North division incorporates this intermediate
product into a final product, which it sells. One unit of the intermediate product is used in the
production of the final product. The expected units of the final product, which North division
estimates it can sell at various selling prices, are as follows:
Net selling price Quantity sold
(Rs.) (Units)
100 1,000
90 2,000
80 3,000
70 4,000
60 5,000
50 6,000

The costs of each division are as follows:
South Division (Rs.) North Division (Rs.)
Variable cost per unit 11 7
Fixed costs per annum 60,000 90,000
The transfer price is Rs. 35 for the intermediate products, and is determined on a full cost-
plus basis.
(a) Prepare profit statements for each division and the company as a whole for the various
selling prices.
(b) State which selling price maximizes the profit of North division and the company as a
whole, and comment on why the latter selling price is not selected by North division.
(c) State which transfer pricing policy will maximize the company’s profit under a
divisional organization. Assume that there is no capacity constraint.
(d) State the implications of transfer pricing policy in (c) above on south division’s
profitability.
11. PH Ltd. manufactures and sells two products, namely BXE and DXE. The company’s
investment in fixed assets is Rs.2 lakh. The working capital investment is equivalent to three
months’ cost of sales of both the products. The fixed capital has been financed by term loan
lending institutions at an interest of 11% p.a. Half of the working capital is financed through
bank borrowing carrying interest at the rate of 19.4%, the other half of the working capital
being generated through internal resources.
The operating data anticipated for 1982-83 is as under:
Product BXE Product DXE
Production per annum (in units) 5,000 10,000
Direct Material/unit:
Material A (Price Rs.4 per kg) 1 Kg 0.75 Kg
Material B (Price Rs.2 per kg) 1 Kg 1 Kg
Direct labour hours 5 3
Direct wage rate Rs.2 per hour. Factory overheads are recovered at 50% of direct wages.
Administrative overheads are recovered at 40% of factory cost. Selling and distribution
expenses are Rs.2 and Rs.3 per unit respectively of BXE and DXE. The company expects to
earn an after tax profit of 12% on capital employed. The income tax rate is 50%.
Required:
(i) Prepare a cost sheet showing the element wise cost, total cost profit and selling price
per unit of both the products.
(ii) Prepare a statement showing the net profit of the company after taxes for the 1982-83.
12. A Company has two divisions – D1, and D2. D1, manufactures10,000 units of a
component per month operating at 80% of its capacity incurring variable cost of Rs. 50 per
unit and fixed cost of Rs. 1.00,000per month. It can sell 8,000 units of the component per
month in the external market @ Rs. 90 per unit. So far D1, has been transferring 10,000 units
of the component per month to D2 @ Rs. 70 per unit, the components are used by D1, which
is operating at its full capacity, for 10,000 units of its final product Q. D2 incurs variable

costs of Rs. 40 per unit and fixed costs of Rs. 50,000 per month, and sells Q in the external
market at Rs. 150 per unit.
In view of the higher market price of the component, D1, wants to increase its transfer price
to Rs. 80 per unit.
Suggest the minimum transfer price per unit of the component that D1, should charge and
also show the resultant monthly profit of the divisions at their 100% capacity utilization.
13. Your company fixes the inter-divisional transfer prices for its products on the basis of
cost, plus a return on investment in the division. The Budget for Division A for 1981-82
appears as under:
Fixed Assets 5,00,000
Current assets 3,00,000
Debtors 2,00,000
Annual Fixed Cost of the Division 8,00,000
Variable Cost per unit of Product 10
Budgeted Volume 4,00,000 units per year
Desired ROI 28%
Determine the transfer Price for Division A.
14. S.V.Ltd budgets to make 1,00,000 units of product P. The variable cost per unit is Rs. 10.
Fixed costs are Rs. 6,00,000.
The finance Director suggested that the cost-plus approach should be used with a profit mark-
up of 25%.
However, the Marketing Director disagreed and has supplied the following information:
Price per unit Demand
(Rs.) (Unit)
18 84,000
20 76,000
22 70,000
24 64,000
26 54,000
As Management Accountant of the Company analyse the above proposals and comment.
15. Look Ahead Ltd. wants to fix proper selling prices for their products ‘A’ and ‘B’ which
they are newly introducing in the market. Both these products will be manufactured in
Department D, which is considered as a Profit Centre.
The estimated data are as under: -
A B
Annual Production (unit) 1,00,000 2,00,000
Rs. Rs.
Direct Materials per unit 15.00 14.00
Direct Labour per unit 9.00 6.00
(Direct Labour Hour Rate = Rs.3)
The proportion of overheads other than interest, chargeable to the two products are as under :

Factory overheads (50% fixed) 100% of Direct Wages. Administration overheads (100%
fixed) 10% of factory costs. Selling and Distribution overheads (50% variable) Rs. 3 and
Rs. 4 respectively per unit of products A and B.
The fixed capital investment in the Department is Rs.50 lakhs. The working capital
requirement is equivalent to 6 months stock of cost of sales of both the product. For this
project a term loan amounting to Rs.40 lakhs has been obtained from Financial Institutions on
a interest rate of 14% per annum. 50% of the working capital needs are met by bank
borrowing carrying interest at 18% per annum. The Department is expected to give a return
of 20% on capital employed.
(a) Fix the selling price of products A and B such that the contribution per direct labour
hour is the same for both the products.
(b) Prepare a statement showing in details the overall profit that would be made by the
Department.
16. SV Ltd. manufactures a product which is obtained basically from a series of mixing
operations. The finished product is packaged in the company made glass bottles and packed
in attractive cartons.
The company is organised into two independent divisions viz. one for the manufacture of the
end product and the other for the manufacture of glass bottles. The Product manufacturing
division can buy all the bottle requirements from the bottle manufacturing division.
The General Manager of the bottle manufacturing division has obtained the following
quotations from the outside manufacturers for the empty bottles.
Volume empty bottles Total cost (Rs.)
8,00,000 14,00,000
12,00,000 20,00,000
A cost analysis of the bottle manufacturing division for the manufacture of empty bottles
reveals the following production costs:
Volume empty bottles Total purchase value (Rs.)
8,00,000 Rs. 10,40,000
12,00,000 14,40,000
The production cost and sales value of the end product marketed by the product
manufacturing division are as under.
Volume Total cost of end product* Sales Value

(Bottle of end product) (Packed in bottles)
8,00,000 Rs.64,80,000 Rs. 91,20,000
12,00,000 Rs.96,80,000 Rs.1,27,80,000
There has been considerable discussion at the corporate level as to the use of proper price for
transfer of empty bottles from the bottle manufacturing division to product manufacturing
division. This interest is heightened because a significant portion of the Divisional General
Manager’s salary is in incentive bonus based on profit centre results.

As the corporate management accountant responsible for defining the proper transfer prices
for the supply of empty bottles by the bottle manufacturing division to the product
manufacturing division, you are required to show for the two levels of volume of 8,00,000
and 12,00,000 bottles, the profitability by using (i) market price and (ii) shared profit relative
to the cost involved basis for the determination of transfer prices. The profitability position
should be furnished separately for the two divisions and the company as a whole under each
method. Discuss also the effect of these methods on the profitability of the two divisions.
*
(Excluding cost of empty bottles)
17. ABC Ltd has two divisions A and B. A division is currently operating at full capacity. It
has been asked to supply its product to division B. Division A sells its product to its regular
customers for Rs 30 each. Division B (currently operating at 50 per cent capacity) is willing
to pay Rs 20 each for the component produced by division A (this represents the full
absorption cost per component at division A). The components will be used by division B in
supplementing its main product to conform to the need of special order. As per the contract
terms of sale, the buyer calls for reimbursement of full cost to division B, plus 10 per cent.
Division A has a variable cost of Rs 17 per component. The cost per unit of division B
subsequent to the buying part from division A is estimated as follows:
The company uses return on investment in the measurement of divisional and division
manager’s performance.
Required:
i. As manager of division A would you recommend sales of your output to division B at
the stipulated price of Rs 20?
ii. Would it be in the overall interest of the company for division A to sell its output to
division B?
iii. Suggest an alternative transfer price and show how could it lead to goal congruence?
18. The Best Industries Ltd has two divisions, A and B. Division A manufactures product X
which it sells in outside market as well as to division B which processes it to manufacture Z.
The manager of division B has expressed the opinion that the transfer price is too high.
The two divisional managers are about to enter into discussions to resolve the conflict, and
the manager of division to supply him with some information prior to the discussions.
Division A has been selling 40000 units to outsiders and 10000 units to division B, all at
Rs 20 per unit. It is not anticipated that these demand will change. The variable cost is Rs 12
per unit and the fixed costs are Rs 2 lakh.
The manager of division A anticipates that division B will want a transfer price of Rs 18. If
he does not sell to division B Rs 30000 of fixed costs and Rs 175000 of assets can be
avoided. The manager of division A would have no control over the proceeds from the sale of
the assets and is judged primarily on his rate of return.
(a) Should the manager of division A transfer its products at Rs 18 to division B?
(b) What is the lowest price that the division A should accept? Support your decision.

19. A company AB Ltd. has two divisions, Division X manufactures a special type of
electrical component and Division Y sells a finished product for which it requires one
component per unit from X division.
Division X sells the component in the external market @ Rs 180 per unit and division X is
also working at almost full capacity. The variable cost of manufacturing per component is
Rs 102.
Division Y is now operating at 50 % capacity. It has received a special order for its product.
As Y is keen to get this order. Division Y will meet the special order at a price of Rs 1200 per
unit and it offers a price of Rs 120 per component to division X. The cost per unit of Division
Y is as:
i. As a manager of division X what decisions would you like to take on B’s request for
the supplies @ Rs 120?
ii. Would it be any short-term economic advantage for AB Ltd. to make Division X
transfer to Division Y at the price of Rs 120?
iii. What would be the behavioural difficulties of the managers?
20. A company has two divisions one producing an intermediate for which there is external
market and another using this intermediate in finished product and it sells in the market. Each
unit of finished product uses one unit of intermediate. The sales quantity is sensitive to the
price charged and the selling division has developed the following sales schedule:
Cost details are as:
The transfer price is Rs 175 based on the a full cost basis.

(i) Prepare a statement of profit for each division and the company as a whole.
(ii) Determine the selling price that will maximize the selling division profit and the price that
will maximize the company’s profit.
(iii) Determine the which transfer price policy will maximize the overall company’s profit.
21. Better and Better Ltd. manufacturers a component in two identifiable and separate stets
which are departmentalized. One is department A and the other is department B. Each
department is treated as a Profit Centre.
Department A manufactures 30,000 components during the year out of which it is able to sell
5,000 components only in the market at a price of Rs. 6 per unit. The balance is transferred at
the same price to Department B. The material and conversion cost worked out to Rs. 4 per
unit. This department has a fixed cost of Rs. 25,000 to bear.

Department B makes and sells all the 25,000 units in the open market at a price of Rs. 19 per
unit.The material und other conversion costs including transfer cost come to Rs. 16.25 per
unit and the burden of fixed cost works out toRs. 18,000 in case of department B.
(a) Work out the profit for each department and the overall profit for the company,
(b) Department B is not happy with the transfer price as it is able to get any number of
components from the market at Rs. 5 per unit. It wants to buy all its requirement of 25,000
components from the market or in the alternatives, accept the transfer of units from
Department A at Rs. 5 per unit only. Which course would you advisable from the overall
interest of the company?
(c) Placed in this predicament, department A wants to go all out for increasing the
sales in the open market. How much more should it sell to break even in the operation?
22. Show the optimum level of output, minimum transfer price per unit, divisional profits
and total profit of the company at the optimum level considering the information given
below:
N.B. Total Net Revenue means the total revenue less all costs except transfer costs.
23. X Ltd. has two divisions — D1 and D2. D1, manufactures three products - P, Q and R,
which are sold in the external market. The following information are available in respect of
the products of D1:
Total Fixed Costs: Rs. 50,000

Total Machine Hours available: 29,000
D2 requires a component, similar to product R manufactured by D1 for its product Z. So far,
it has been purchasing the component from external supplier at Rs. 60 per unit and selling its
final product to Z at Rs. 100 per unit incurring conversion cost (inclusive of fixed cost) of
Rs. 20 per unit. Now, the manager of D2, wants to procure 3000 units of R from D1 at Rs. 55
per unit for manufacture of the same number of units of Z. Show the minimum transfer price
per unit of R that may be fixed by D1 and suggest whether the manager of D1 should transfer
3000 units of R as proposed by the manager of D2, at Rs. 55 per unit. Also show the impact
of your suggestions on profit of the divisions and the company as a whole.

UNIFORM COSTING & INTERFIRM COMPARISON
P – 1: The share of production and the cost based fair price computed separately for a
common product for each of the four companies separately for a common product for each of
the four companies in the same industry are as follows:
Required:
What should be the uniform price that should be fixed for the common product?
P – 2: The share of total production and the cost based fair price computed separately for
each of the four units in industry are as follows:
Required:
What should be the uniform price fixed for the product of the industry?

6. RATIO ANALYSIS
Problem No. 1. A company has a profit margin of 20% and asset turnover of 3 times. What
is the company‘s return on investment? How will this return on investment vary if?
(i) Profit margin is increased by 5%?
(ii) Asset turnover is decreased to 2 times?
(iii) Profit margin is decreased by 5% and asset turnover is increase to 4 times?
Problem No. 2.Calculate the earning per share from the following data:
Net profit before Tax Rs.1,00,000 Taxation at 50% of net profit. 10%Preference share
capital(Rs.10) each Rs.1,00,000. Equity share capital (Rs.10 share) Rs.1,00,000
Problem No. 3.The operating profit of A Ltd. after charging interest on debentures and tax is
a sum of Rs.10,000. The amount of interest charged is Rs.2,000 and the provision for tax has
been made Rs.4000.
Calculate the interest charges cover ratio.
Problem No. 4. Net profit before interest and tax Rs.50,000. 10% debentures (payable in10
years in equal installments) Rs.1,00,000. Tax rate 50%
Calculate the debt service coverage ratio.
Problem No. 5.Compute the pay-out ratio and the retained earnings ratio from the following data:
Rs. Rs.
Net profit 10,000 No.of equity shares 3,000
Provision for tax 5,000 Dividend per equity share 0.40
Preference Dividend 2,000
Problem No. 6.The following details have been given to you for Masers Reckless Ltd. for
two years. You are required to find out the Fixed Assets turnover ratio and comment on it.
1997 (Rs.) 1998 (Rs.)
Fixed assets at written down value 1,50,000 3,00,000
Sales less returns 6,00,000 8,00,000
Problem No. 7.Calculate the debtors turn over ratio from the following figures:
Rs.
Total sales for the year 1997 1,00,000
Cash sales for the year 1997 20,000
Debtors as on 1-1-1997 10,000
Debtors as on 31-12-1997 15,000
Bills receivable as on 1-1-1997 7,500
Bills receivables as on 31-12-1997 12,500
Problem No. 8. From the information given below calculate the amount of Fixed assets and
Proprietor‘s fund.
Ratio of fixed assets to proprietors fund = 0.75
Net working capital = Rs.6,00,000

Problem No. 9. From the following figures calculate the creditors, turnover ratio and the
average age of accounts payable:
Rs.
Credit purchases during 1997 1,00,000
Bills payable on 1-1-1997 4,000
Bills payable on 31-12-1997 6,000
Creditors on 1-1-1997 20,000
Creditors on 31-12-1997 10,000
Problem No. 10. From the following trading account of Akylarks Ltd. Calculate the stock
turn over ratio:
Trading Account
To opening stock 40,000 By sales 2,00,000
To purchases 1,00,000 By closing stock 20,000
To carriage 10,000
To Gross profit 70,000
2,20,000 2,20,000
Problem No. 11. From the following compute the Fixed Assets Ratio:
Share Capital Rs. 1,00,000 Furniture Rs. 25,000
Reserves 50,000 Trade Debtors 50,000
6% Debentures 1,00,000 Cash Balance 30,000
Trade Creditors 50,000 Bills Payable 10,000
Plant and Machinery 1,00,000 Stock 40,000
Land and Buildings 1,00,000
Problem No. 12. From the following compute the Current Ratio
Sundry Debtors Rs. 40,000 Sundry Creditors 20,000
Prepaid Expenses 20,000 Debentures 1,00,000
Short-term Investment 10,000 Inventories 20,000
Loose Tools 5,000 Outstanding Exp. 20,000
Bills Payable 10,000
Problem No. 13. From the following figures calculate the debt-Equity Ratio:
Preference Share capital Rs. 1,00,000 Unsecured loans Rs. 50,000
Equity Share Capital 2,00,000 Creditors 40,000
Capital Reserves 50,000 Bills Payable 20,000
Profit and Loss A/C 50,000 Provision for Taxes 10,000
12%Mortgage Debentures 1,00,000 Provision for dividends 20,000
Problem No. 14. From the following calculate the proprietary ratio:
Preference Share Capital Rs. 1,00,000 Fixed Assets Rs. 2,00,000
Equity Share Capital 2,00,000 Current Asset 1,00,000
Reserves and Surplus 50,000 Goodwill 50,000
Debentures 1,00,000 Investments 1,50,000
Creditors 50,000
5,00,000 5,00,000

Problem No. 15. Following is the Profit and Loss Account and Balance Sheet of Jai Hind
Ltd. Redraft them for the purpose of analysis and calculate the following ratios:
i) Gross Profit Ratio ii) Overall Profitability Ratio iii) Current Ratio
iv) Debt-Equity Ratio v) Stock-Turnover Ratio vi) Liquidity ratio
Profit And Loss A/C
Dr. Rs. Cr. Rs.
Opening stock of finished goods 1,00,000 Sales 10,00,000
Opening stock of raw material 50,000 Closing stock of raw material 1,50,000
Purchase of raw material 3,00,000 Closing stock of finished goods 1,00,000
Direct wages 2,00,000 Profit on sale of shares 50,000
Manufacturing Exp. 1,00,000
Administration Exp. 50,000
Selling & distribution Exp. 50,000
0Loss on sale of Plant 55,000
Interest on debentures 10,000
Net Profit 3,85,000
13,00,000 13,00,000
Balance Sheet
Liabilities Assets
share capital:
Equity share capital 1,00,000 Fixed assets 2,50,000
Preference share capital 1,00,000 Stock of raw material 1,50,000
Reserves 1,00,000 Stock of finished goods 1,00,000
Debentures 2,00,000 Bank balance 50,000
Sundry Creditors 1,00,000 Debtors 1,00,000
Bills Payable 50,000
6,50,000 6,50,000
Problem No. 16. Following are the ratios to the trading activities of National Traders Ltd:
Debtors velocity 3 months
Stock velocity 8 months
Creditors velocity 2 months
Gross profit ratio 25%
Gross profit for a year ended 31st December ,1997 amounts to Rs. 4,00,000 closing stock of
the year is Rs. 10,000 above the opening stock. Bills receivable amount to Rs. 25,000 and
Bills payable to Rs. 10,000.
Find out : (a) Sales (b) Sundry Debtors (c) Closing stock & (d) Sundry creditors
Problem No. 17. From the following details, prepare statement of proprietary Funds with as
many details as possible :
a. Stock velocity 6
b. Capital Turn over ratio (on cost of sales) 2
c. Fixed Assets Turn over ratio (on cost of sales) 4
d. Debtors velocity 2months
e. Gross profit turn over ratio 20%
f. Creditors velocity 73days
The gross profit was Rs. 60,000. Reserves and surplus amounts to Rs. 20,000. Closing stock
was Rs. 5,000 in excess of opening stock.

Problem No. 18. With the help of the following ratios regarding Indu Films draw the
Balance sheet of the company for the year 1989:
Current Ratio 2.5
Liquidity ratio 1.5
Net working capital Rs.3,00,000
Stock turn over ratio (cost of sales /closing stock) 6 times
Gross profit ratio 20%
Fixed Assets turn over ratio (on cost of sales) 2 times
Debt collection period 2 months
Fixed Assets to share holders net worth 0.80
Reserve and surplus to capital 0.5
Problem No. 19. From the following information, prepare a Balance Sheet Show the
workings:
1. Working Capital 75,000
2. Reserves & surplus 1,00,000
3. Bank Over draft 60,000
4. Current ratio 1.75
5. Liquid ratio 1.15
6. Fixed Assets to proprietors funds 0.75
7. Long -term liabilities Nil
Problem No. 20. With the following ratios and furthur information given below prepare a
trading Account ,profit and Loss Account and a Balance sheet of Shri Narain:
a. Gross profit ratio 25%
b. Net profit /sales 20%
c. Stock -turn over ratio 10 times
d. Net profit/capital 1/5
e. Capital to total liabilities ½
f. Fixed Assets /capital 5/4
g. Fixed Assets /Totals current Assets 5/7
h. Fixed Assets Rs.10,00,000
i. Closing stock 1,00,000
Problem No.21. From the Following information prepare a Balance sheet with as many
details as possible :
Gross profit Rs. 80,000
Current assets Rs.1,50,000
Gross profit to cost of goods sold ratio 1/3
Account payable velocity 90 days
Stock velocity 6 times
Bills receivables Rs. 20,000
Bills payable Rs. 5,000
Opening stock Rs. 36,000
Fixed assets turnover ratio 8 times
Accounts receivable velocity 72 days (year 360 days)

Problem No.22. Following is the Balance Sheet of Sun Ltd., as on December 31, 2015.
Sales amounted to Rs.1,20,000. Calculate ratio for (a) testing liquidity, and (b) testing
solvency.
Problem No. 23: PKJ Limited has the following Balance Sheets as on March 31, 2016 and
March 31, 2015:
The Income Statement of the JKL Ltd. for the year ended is as follows:

Required:
1. Calculate for the year 2015-16:
a) Inventory Turnover Ratio
b) Financial Leverage
c) Return on Investment (ROI)
d) Return on Equity (ROE)
e) Average Collection period.
2. Give a brief comment on the Financial Position of PKJ Limited.
Problem No. 24. Using the information and the form given below, compute the balance sheet
items for a firm having a sale of Rs. 36lacks
Sales/Total assets 3 Sales/Debtors 15
Sales/Fixed assets 5 Current ratio 2
Sales/Current assets 7.5 Total assets/Net worth 2.5
Sales/Inventories 20 Debt/Equity 1
Balance Sheet
Net worth .... Fixed assets ....
Long-term Debt .... Inventories ....
Current Liabilities .... Debtors ....
Liquid assets ....
Total current assets ....
Problem No. 25. You are given the following information pertaining to the financial
statements of XYZ Ltd., as on 31-12-1997. On the basis of the information supplied, you are
required to prepare the Trading and Profit & Loss Account for the year ended and a Balance
Sheet as on that date.
Rs.
Net current assets 2,00,000
Issued share capital 6,00,000
Current Ratio 1.8
Quick ratio(Ratio of debtors and bank balance to current liabilities) 1.35
Fixed assets to shareholder’s equity 80%
Ratio of gross profit in turnover 25%
Net profit to issued share capital 20%
Stock turnover ratio(cost of goods sold/ closing stock 5 times
Average age of outstanding for the year 36½ days.
On 31st Dec, 1997, the current assets consisted only of stock, Debtors and bank balance;
liabilities consisted of share capital and current liabilities and assets consisted of fixed
assets and current assets.
P- 26: With the help of the following information complete the Balance Sheet of MNOP Ltd.

P- 27: The following is the Balance Sheet of M/S Yamuna Enterprise for the year ended
31-12-2012:
During the year provision for taxation was Rs. 20,000. Dividend was proposed at Rs. 10,000.
Profit carried forward from the last year was Rs. 15,000. You are required to calculate:
a) Short term solvency ratios, and b) Long term solvency ratios.
P- 28: Using the following data, prepare the Balance Sheet:
P- 29: The following figures and ratios are related to a company:
You are required to prepare Balance Sheet of the company on the basis of above details.
P - 30: MNP Limited has made plans for the next year 2011-12. It is estimated that the
company will employ total assets of Rs. 25,00,000; 30% of assets being financed by debt at
an interest cost of 9% p.a. The direct costs for the year are estimated at Rs. 15,00,000 and all
other operating expenses are estimated at Rs. 2,40,000. The sales revenue are estimated at
Rs. 22,50,000. Tax rate is assumed to be 40%. Required to calculate: (a) Net profit margin
(b) Return on Assets (c) Asset turnover (d) Return on equity

7. FUND FLOW STATEMENT
1. From the following Balance Sheet of KEROX Ltd., Prepare Funds Flow Statement for
2013.
Additional information:
1. A part of land was sold out in 2013, and the profit was credited to Capital Reserve.
2. A machine has been sold for Rs 5,000 (written down value of the machinery was
Rs 6,000). Depreciation of Rs 5,000 was charged on plant in 2013.
3. An interim dividend of Rs 10,000 has been paid in 2013.
4. An Amount of Rs 1,000 has been received as dividend on investment in 2013.
2. The Balance Sheets of A, B, & C Co. Ltd. as at the end of 2011 and 2012 are given below:
A plant purchased for Rs 4,000 (Depreciation Rs 2,000) was sold for Cash for Rs 800 on
September 30, 2012. On June 30, 2012 an item of furniture was purchased for Rs 2,000.
These were the only transactions concerning fixed assets during 2012. A dividend of 22½ %
on original shares was paid. You are required to prepare funds Flow Statement and verify the
results by preparing a schedule of changes in Working Capital.

3. From the Balance Sheet of A Ltd., Make out:
A Statement of changes in the Working Capital.
B. Funds Flow Statement.
Following is the additional information available.

(i) Depreciation of Rs 10,000 and Rs 20,000 have been charged on Plant and Land and
Buildings respectively in 2013.
(ii) Interim dividend of Rs 20,000 has been paid in 2013.
(iii) Income tax of Rs 35,000 has been paid in 2013.
4. From the following figures, prepare a statement showing the changes in the Working
Capital and Funds Flow Statement during the year 2012.
You are informed that during the year:

a. A machine costing Rs 70,000 book value Rs 40,000 was disposed of for Rs 25,000.
b. Preference share redemption was carried out at a premium of 5% and
c. Dividend at 15% was paid on equity shares for the year 2011.
Further:
1. The provision for depreciation stood at Rs 1,50,000 on 31.12.11 and at Rs 1,90,000 on
31.12.12; and
2. Stock which was valued at Rs 90,000 as on 31.12.11; was written up to its cost,
Rs 1,00,000 for preparing Profit and Loss account for the year 2012.

5. The directors of Chintamani Ltd. present you with the Balance Sheets as on 30th June,
2011 and 2012 and ask you to prepare statements which will show them what has happened
to the money which came into the business during the year 2012.
You are given the following additional information:

a. Depreciation has been charged (i) on Freehold Buildings @ 2½% p.a. on cost
Rs 10,00,000. (ii) on Machinery and Plant Rs 32,000 (iii) on Fixtures and Fittings @5%
on cost, Rs 10,000. No depreciation has been written off on newly acquired Building and
Plant and Machinery.
b. A piece of land costing Rs 1,00,000 was sold in 2012 for Rs 2,50,000. The sale proceeds
was credited to Land and Buildings.
c. Shares in other companies were purchased and dividends amounting to Rs 6,000 declared
out of profits made prior to purchase has received and used to write down the investment
(shares).
d. Goodwill has been written down against General Reserve.
e. The proposed dividend for the year ended 30th June 2011 was paid and, in additions, an
interim dividend, Rs 52,000 was paid.

6. The following is the Balance Sheets of the Andhra Industrial Corporation Ltd. as on 31st
December 2011 and 2012.
BALANCE SHEET
During the year ended 31st December, 2012, a divided of Rs 26,000 was paid and assets of
another company were purchased for Rs 50,000 payable in fully paid-up shares. Such assets
purchased were:
Stock Rs 21,640; Machinery Rs 18,360; and Goodwill Rs 10,000. In addition Plant at a cost
of Rs 5,650 was purchased during the year; depreciation on Property Rs 4,250; on Machinery
Rs 10,760. Income tax during the year amounting to Rs 28,770 was charged to provision for
taxation. Net profit for the year before tax was Rs 76,300.
Prepare Funds Flow Statement for the year 2012.
7. The following is the Balance Sheet of Gama Limited for the year ending March 31, 2011
and March 31, 2011;

Additional Information:
1. During the year 2011-12, fixed assets with a net book value of Rs 11,250 (accumulated
depreciation, Rs 33,750) was sold for Rs 9,000.
2. During the year 2011-12, Investments costing Rs 90,000 were sold, and also Investments
costing Rs 90,000 were purchased.
3. Debentures were retired at a Premium of 10%.
4. Tax of Rs 61,875 was paid for 2010-11.
5. During the year 2011-12, bad debts of Rs 15,750 were written off against the provision for
Doubtful Debt account.
6. The proposed dividend for 2003-04 was paid in 2011-12.
Required:
Prepare a Funds Flow Statement (Statement of changes in Financial Position on working
capital basis) for the year ended March 31, 2012.
8. The following schedule shows the Balance Sheets in condensed form of Bradstreet
Manufacturing Co. Ltd., at the beginning and end of the year 2012.
The following information concerning the transactions is available:

i) 10% Dividend was paid in cash
ii) New Machinery for Rs 20,000 was purchased but old machinery costing Rs 12,000 was
sold for Rs 4,000 accumulated depreciation was Rs 6,000.

iii) Rs 20,000 5% Debentures were redeemed by purchased from open market @ Rs 96/-
iv) Rs 10,000 was debited to contingency Reserve for settlement of previous tax liability.
You are required to prepare a Schedule of changes in Working Capital and a statement
showing the Sources and Application of Funds.
9. Condensed financial data of the Gamma Company for the years ended Dec. 31, 2010 and
Dec.31, 2011 are presented below:
New plant assets costing Rs 80,000 were purchased during the year.
Required: From the foregoing information prepare:-
1. A statement of sources and uses of funds for the 2012.
2. A schedule of changes in net Working Capital.
10. Prepare Funds Flow Statement from the following Balance Sheet of XL Engineering
Limited:

i) Depreciation charged on Buildings @ 3% on cost Rs 9,00,000, on plant and Machinery
@ 8% of cost Rs 4,00,000, on Fixtures and Fittings @ 5% on cost Rs 8,000.
ii) Investments were purchased and interest received was Rs 3,000 was used in writing
down the book value of investments. The declared dividend for 2011 was paid and
interim dividend of Rs 20,000 paid out of Profit and Loss Appropriation Account.
11. Balance Sheets of a company as on 31st March, 2011 and 2012 were as follows:
1. Investments were sold during the year at a profit of Rs 15,000.
2. During the year an old machine costing Rs 80,000 was sold for Rs 36,000. Its written down
value was Rs 45,000.
3. Depreciation charged on Plant and Machinery @ 20% on the opening balance.
4. There was no purchase or sale of Land and Building.
5. Provision for tax made during the year was Rs 96,000.
6. Preference shares were issued for consideration of cash during the year.
You are required to prepare:
a. Cash Flow Statement as per AS-3.
b. Schedule of changes in Working Capital.
12. The summarised Balance Sheets of XYZ Ltd., as at 31st Dec.,1979 and 31st Dec., 1980
are given below:
Liabilities Rs. Rs. Assets Rs. Rs.
Share capital 4,50,000 4,50,000 Fixed Assets 4,00,000 3,20,000
General Reserve 3,00,000 3,10,000 Investments 50,000 60,000
P & L A/c 56,000 68,000 Stock 2,40,000 2,10,000
Creditors 1,68,000 1,34,000 Debtors 2,10,000 4,55,000
Provision for taxation 75,000 10,000 Bank 1,49,000 1,97,000
Mortgage Loan ----- 2,70,000
10,49,000 12,42,000 10,49,000 12,42,000
i) Investment costing Rs.8,000 were sold during the year 1980 for Rs.8,500
ii) Provision for tax made during the year was Rs.9,000

iii) During the year part of the fixed assets book value Rs. 10,000 were sold for Rs.12,000
and the profit was included in profit and loss account and
iv) Dividend paid during the year amounted to Rs. 40,000.
You are required to prepare a statement of sources and used of Funds.
13. Following are the summarised Balance Sheets of AMCO as on December 31st 1969 & 1970.
Liabilities 1969 Rs. 1970 Rs.
Share Capital 2,00,000 2,50,000
General Reserve 50,000 60,000
Profit and Loss A/c 30,500 30,600
Bank Loan (Long term) 70,000 ----
Sundry Creditors 1,50,000 1,35,200
Provision for taxation 30,000 35,000
5,30,500 5,10,800
Assets:
Land and Buildings 2,00,000 1,90,000
Machinery 1,50,000 1,69,000
Stock 1,00,000 74,000
Sundry Debtors 80,000 64,200
Cash 500 600
Bank ---- 10,000
Goodwill ---- 3,000
5,30,500 5,10,800
Additional information supplied: - During the year ended December 31, 1970:
1. Dividend of Rs.23,000 was paid.
2. Assets of another company were purchased for a consideration purchased payable in
shares. The following assets were purchased: Stock Rs.20,000; Machinery Rs.25,000.
3. Machinery further purchased for Rs.8,000.
4. Depreciation written off on machinery Rs.12,000.
5. Income tax provided during the year Rs.33,000.
6. Loss on sale of machine Rs.200 was written off to general reserve.
You are required to prepare Statement of Funds Flow.

8.. CASH FLOW STATEMENTS
1. The Balance Sheet of X Ltd. as on 31
31-3-2011 and 31-3-2012
2012 are as under:
i) Depreciation charged on fixed assets during the year was Rs. 2,05,000. An old machine
costing Rs. 2,00,000 (WDV
(WDVRs. 80,000) was sold for Rs. 65,000 during the year.
ii) Provisions for tax made during the year for Rs. 1,78,000.
iii) On 1-4-2011
2011 company redeemed debentures of Rs. 1,00,000 at a premium of 5%.
iv) Company has issued fully paid bonus shares of Rs. 2,00,000 by capitalization of profit.
Prepare Cash Flow Statement.
2. The Balance Sheet of JK Limited as on 31st March, 2015 & 2016 are given below:
1. During the year 2015-2016,
2016, Fixed Assets with a book value of Rs.2,40,000 (accumulated
depreciation Rs.84,000) was sold for Rs.1,20,000.
2. Provided Rs.4,20,000 as depreciation.
3. Some investments are sold at a profit of Rs.48,000 and profit was credited to Capital
Reserve.
4. It decided that stocks bee valued at cost, whereas previously the practice was to value stock
at cost less 10 per cent. The stock was Rs.2,59,200 as on 31.03.15. The stock as on 31.03.16
was correctly valued at Rs.3,60,000.
5. It decided to write off Fixed Assets costing Rs.60,000 on which depreciation amounting to
Rs.48,000 has been provided.
6. Debentures are redeemed at Rs.105.
Required:
Prepare a Cash Flow Statement.
3. The following is the income statement XYZ Company for the year 2004:
Additional information’s are:

(i) 70% of gross revenue from sales were on credit.
(ii) Merchandise purchases amounting to Rs. 92,000 were on credit.
(iii) Salaries payable totaled Rs. 1,600 at the end of the year.
(iv) Amortisation of premium on bonds payable was Rs. 1,350.
(v) Noo dividends were received from the other company.
(vi) XYZ Company declared cash dividend of Rs. 4,000.
(vii) Changes in Current Assets and Current Liabilities were as follows:
Prepare a statement showing the amount of cash flow from operations. )

4. From the information contained in Income Statement and Balance Sheet of ‘A’ Ltd.,
prepare Cash Flow Statement:
Income Statement for the year ended March 31, 2006
Balance Sheet as on
Balance Sheet as on
The original cost of equipment sold during the year 2005

2005-06 was Rs. 7,20,000.

5. Ms. Jyothi of Star Oils Limited has collected the following information for the preparation
of cash flow statement for the year 2000:
Rs. in lakhs
Net Profit 25,000
Dividend (including dividend tax) paid 8,535
Provision for Income tax 5,000
Income tax paid during the year 4,248
Loss on sale of assets (net) 40
Book value of the assets sold 185
Depreciation charged to Profit & Loss Account 20,000
Amortisation of Capital grant 6
Profit on sale of Investments 100
Carrying amount of Investment sold 27,765
Interest income on investments 2,506
Interest expenses 10,000
Interest paid during the year 10,520
Increase in Working Capital (excluding Cash & Bank balance) 56,075
Purchase of fixed assets 14,560
Investment in joint venture 3,850
Expenditure on construction work in progress 34,740
Proceeds from calls in arrear 2
Receipt of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceeds from short-term borrowings 20,575
Opening cash and Bank balance 5,003
Closing cash and Bank balance 6,988
Required:
Prepare the Cash Flow Statement for the year 2000 in accordance with AS-3, Cash Flow
Statement issued by the Institute of Chartered Accountants of India (Make necessary
assumptions).
6. Astor Limited had the following condensed Trial Balance as at 31-03-2014:
During 2014-2015, the following transactions took place :

a) A tract of land was purchased for Rs 7,750 cash.
b) Bonds payable in the amount of Rs 6,000 were retired for cash at face value.
c) An additional Rs 20,000 equity shares were issued at par for cash.
d) Dividends totalling Rs 9,375 were paid.
e) Net income for 2014-2015 was Rs 28,450 after allowing for depreciation of Rs 9,500.

f) Land was purchased through the issuance of Rs 22,500 in bonds.
g) Usha Ltd. sold a part of its investments portfolio for Rs 12,875 cash. The transaction
resulted in a gain of Rs 1,375 for the firm.
h) Current liabilities increased to Rs 18,000 at 31-3-2015.
i) Accounts receivable at 31-3-2015 total Rs 38,000.
Prepare a statement of cash flows for 2014-2015 with the indirect method as per AS-3
7.
The Company made the following estimates for financial year 2014-15:
a) The company will pay a free of tax dividend of 10% the rate of tax being 25%.
b) The company will acquire fixed assets costing Rs. 1,90,000 after selling one machine for
Rs. 38,000 costing
c) Rs. 95,000 and on which depreciation provided amounted to Rs. 66,500.
d) Stocks and Debtors, Creditors and Bills payables at the end of financial year are
expected to be Rs 5,60,500, Rs. 1,48,200 and Rs. 98,800 respectively.
e) The profit would be Rs. 1,04,500 after depreciation of Rs. 1,14,000.
Prepare the projected cash flow statement and ascertain the bank balance of X Ltd. at the end
of Financial year 2014-15.
8. Arrange and redraft the following Cash Flow Statement in proper order keeping in mind
the requirements of AS-3.
Rs. (in lacs) Rs. (in lacs)
Net Profit 60,000
Add: Sale of Investments 70,000
Depreciation of Assets 11,000
Issue of Preference Shares 9,000
Loan raised 4,500
Decrease in Stock 12,000
1,66,500
Less: Purchase of Fixed Assets 65,000
Decrease in Creditors 6,000
Increase in Debtors 8,000
Exchange gain 8,000
Profit on sale of investments 12,000
Redemption of Debenture 5,700
Dividend paid 1,400
Interest paid 945 1,07,045
59,455
Add: Opening cash and cash equivalent 12,341
Closing cash and cash equivalent 71,796

9. The Balance Sheets of a Company as on 31st March, 2008 and 2009 are given below:
During the year ended 31st March, 2009 the company:
i) Sold a machine for Rs. 1,20,000; the cost of machine was Rs. 2,40,000 and
depreciation provided on it was Rs. 84,000.
ii) Provided Rs. 4,20,000 as depreciation on fixed assets.
iii) Sold some investmentnt and profit credited to capital reserve.
iv) Redeemed 30% of the debentures @ 105.
v) Decided to write off fixed assets costing Rs. 60,000 on which depreciation amounting
to Rs. 48,000 has been provided.
You are required to prepare Cash Flow Statement as per AS 3.
10. The summarized Balance Sheet of XYZ Limited as at 31st March, 2011 and 2012 are
given below:
During the year 2012 the company:
1. Preference share capital was redeemed at a premium of 10% partly out of proceeds issue of
10,000 equity shares of Rs 10 each issued at 10% premium and partly out of profits
otherwise available for dividends.
2. The company purchased plant and machinery for Rs 95,000. It also acquired another
company stock Rs 25,000 and plant and machinery Rs 1,05,000 and paid Rs 1,60,000 in
Equity share capital for the acquisition.
3. Foreign exchange loss of Rs 1,600 represents loss in value of short term investment.
4. The company paid tax of Rs 1,40,000.
You are required to prepare Cash Flow Statement.

9. COST OF CAPITAL
P- 1: Assuming the corporate tax rate of 35%, compute the after tax cost of capital in the
following situations:
i) Perpetual 15% Debentures of Rs.1,000, sold at a premium of 10% with no flotation costs.
ii) 10-year 14% Debentures of Rs.2,000, redeemable at par, with 5% flotation costs.
P- 2: Calculate the Cost of Capital from the following cases:
i) 10-year 14% Preference shares of Rs.100, redeemable at premium of 5% and flotation
costs 5%. Dividend tax is 10%.
ii) An equity share selling at Rs.50 and paying a dividend of Rs.6 per share, which is
expected to continue indefinitely.
iii) The above equity share if dividends are expected to grow at the rate of 5%.
iv) An equity share of a company is selling at Rs.120 per share. The earnings per share is
Rs.20 of which 50% is paid in dividends. The shareholders expect the company to earn a
constant after tax rate of 10% on its investment of retained earnings.
P- 3: From the following information, determine the appropriate weighted average cost of
capital, relevant for evaluating long-term investment projects of the company.
Cost of equity 0.18
After tax cost of long-term debt 0.08
After tax cost of short-term debt 0.09
Cost of Reserve 0.15
Sources of capital Book Value (BV) Market Value (MV)
Equity:
Capital Rs.3,00,000 Rs. 7,50,000
Reserve 2,00,000 -
Long-term debt 4,00,000 3,75,000
Short-term debt 1,00,000 1,00,000
10,00,000 12,25,000
P- 4: In considering the most desirable capital structure of a company, the following

estimates of the cost of debt and equity capital (after tax) have been made at various levels of
debt-equity mix:
Debt as percentage of total capital employed Cost of debt % Cost of equity %
0 5.0 12.0
10 5.0 12.0
20 5.0 12.5
30 5.5 13.0
40 6.0 14.0
50 6.5 16.0
60 7.0 20.0
You are required to determine the optimal debt-equity mix for the company by calculating
composite cost of capital.

P-5: (a) Asif J. Ltd. has 12% perpetual debt of Rs. 4,00,000. The tax rate is 40%. Ascertain
the cost of debt assumingthat the debt is issued (i) at par, (ii) at a discount of 10%, and
(iii) at a premium of 10%.
(b) SonaAwal Ltd. issued 12% debentures @ Rs. 100 each in order to raise Rs. 15,00,000 to
finance a project. Theflotation cost was 10%. The debentures were redeemable at par at the
end of 5 years. The income taxrate applicable to the company was 40%. Ascertain the cost of
debt.
P-6: The present capital structure of a company is as follows:

Rs. (million)
Equity share (Face value = Rs. 10) 240
Reserves 360
11% Preference Shares (Face value = Rs.10) 120
12% Debentures 120
14% Term Loans 360
1,200
Additionally the following information are available:
Company’s equity beta 1.06
Yield on long-term treasury bonds 10%
Stock market risk premium 6%
Current ex-dividend equity share price Rs. 15
Current ex-dividend preference share price Rs. 12
Current ex-interest debenture market value Rs. 102.50 per Rs. 100
Corporate tax rate 40%
The debentures are redeemable after 3 years and interest I paid annually. Ignoring flotation
costs, calculate the company’ weighted average cost of capital (WACC)
P- 7: Bombay Cotton Mills Limited Ltd. makes a rights issue at Rs. 5 a share of one new
share for Every four shares held. Before the issue, there were 10 million shares outstanding
and the share price was Rs. 6. Based on the above information you are required to compute-
a. The total amount of new money raised

b. How many value of one rights are required to buy one new share?
c. What is the value of one right?
d. What is the prospective ex-rights price?
P- 8: Aries Limited wishes to raise additional finance of Rs. 10 lacs for meeting its
investment plans. It has Rs. 2,10,000 in the form of retained earnings available for investment
purposes. The following are the further details:
1. Debt/equity mix 30% / 70%
2. Cost of debt upto Rs.1,80,000 10% (before tax) beyond Rs. 1,80,000 16% (before tax)
3. Earnings per share Rs. 4
4. Dividend pay out 50% of earnings
5. Expected growth rate in dividend 10%

6. Current market price per share Rs. 44
7. Tax rate 50%
a) To determine the pattern for raising the additional finance.
b) To determine the post-tax average cost of additional debt.
c) To determine the cost of retained earnings and cost of equity, and
d) Compute the overall weighted average after tax cost of additional finance.
P -9: 7. (a) Raja Ltd. issued 10% debentures of Rs. 100 each repayable at par after 5 years
from the date of issue for raising fund of Rs. 12,00,000 to finance a project. The flotation cost
was 15% which was written off equally over its life. The tax rate applicable to the company
was 40%. Ascertain the cost of debt.
(b) Ratul India Ltd. issues 15% irredeemable preference shares. Its face value is Rs. 100 and
the expense relating to the issue of shares is 10%. Ascertain the cost of such preference share
if it is issued –
i) at par, ii) at a discount of 10% and iii) at a premium of 10%.
P -10: The Modern Chemicals Ltd. requires Rs. 25,00,000 for a new plant. This plant is
expected to yield earnings before interest and taxes of Rs. 5,00,000. While deciding about
the financial plan, the company considers the objective of maximising earnings per share. It
has three alternatives to finance the project—by raising debt of Rs. 2,50,000 or Rs. 10,00,000
or Rs. 15,00,000 and the balance, in each case, by issuing equity shares. The company’s
share is currently selling at Rs. 150, but is expected to decline to Rs. 125 in case the funds
borrowed in excess of Rs. 10,00,000. The funds can be borrowed at the rate of 10% upto
Rs. 2,50,000, at 15% over Rs. 2,50,000 and upto 10,00,000 and at 20% over Rs. 10,00,000.
The tax rate applicable to the company is 50%. Which form of financing should the company
choose?
P -11: A company earns a profit of Rs. 3,00,000 per annum after meeting its interest liability
of Rs. 1,20,000 on 12% debentures. The Tax rate is 50%. The number of Equity Shares of
Rs. 10 each are 80,000 and the retained earnings amount to Rs. 12,00,000. The company
proposes to take up an expansion scheme for which a sum of Rs. 4,00,000 is required. It is
anticipated that after expansion, the company will be able to achieve the same return on
investment as at present. The funds required for expansion can be raised either through debt
at the rate of 12% or by issuing Equity Shares at par.
Required:
(i) Compute the Earnings Per Share (EPS), if:
---the additional funds were raised as debt.
---the additional funds were raised by issue of equity shares.
(ii) Advise the company as to which source of finance is preferable.

P -12: JKL Ltd. has the following book-value capital structure as on March 31, 2003.
Equity share capital (2,00,000 shares) Rs. 40,00,000
11.5% preference shares 10,00,000
10% debentures 30,00,000
80,00,000
The equity share of the company sells for Rs. 20. It is expected that the company will pay
next year a dividend of Rs. 2 per equity share, which is expected to grow at 5% p.a. forever.
Assume a 35% corporate tax rate.
Required:
(i) Compute weighted average cost of capital (WACC) of the company based on the existing
capital structure.
(ii) Compute the new WACC, if the company raises an additional Rs. 20 lakhs debt by
issuing 12% debentures. This would result in increasing the expected equity dividend to
Rs. 2.40 and leave the growth rate unchanged, but the price of equity share will fall to Rs.
16 per share.
(iii)Comment on the use of weights in the computation of weighted average cost of capital.
P -13: ABC Limited has the following book value capital structure:
Equity Share Capital (150 million shares, Rs. 10 par) Rs. 1,500 million
Reserves and Surplus Rs. 2,250 million
10.5% Preference Share Capital (1 million shares, Rs. 100 par) Rs. 100 million
9.5% Debentures (1.5 million debentures, Rs. 1000 par) Rs. 1,500 million
8.5% Term Loans from Financial Institutions Rs. 500 million
The debentures of ABC Limited are redeemable after three years and are quoting at
Rs. 981.05 per debenture. The applicable income tax rate for the company is 35%.
The current market price per equity share is Rs. 60. The prevailing default risk free interest
rate on 10-year GOI Treasury Bonds is 5.5%. The average market risk premium is 8%. The
beta of the company is 1.1875.
The preferred stock of the company is redeemable after 5 years is currently selling at
Rs. 98.15 per preference share.
Required:
(i) Calculate weighted average cost of capital of the company using market value weights.
(ii) Define the marginal cost of capital schedule for the firm if it raises Rs. 750 million for a
new project. The firm plans to have a target debt to value ratio of 20%. The beta of
new project is 1.4375. The debt capital will be raised through term loans. It will carry
interest rate of 9.5% for the first 100 million and 10% for the next Rs. 50 million.
P -14: A company issues Rs. 10,00,000 12% debentures of Rs. 100 each. The debentures
are redeemable after the expiry of fixed period of 7 years. The company is in 35% tax
bracket.
Required:
(i) Calculate the cost of debt after tax, if debentures are issued at
(a) Par (b) 10% Discount (c) 10% Premium
(ii) If brokerage is paid at 2%, what will be the cost of debentures, if issue is at par?

P -15: The capital structure of MNP Ltd. is as under:
9% Debentures Rs. 2,75,000
11% Preference shares Rs. 2,25,000
Equity shares (face value: Rs. 10 per share) Rs. 5,00,000
Rs. 10,00,000
(i) Rs. 100 per debenture redeemable at par has 2% floatation cost and 10 years of
maturity. The market price per debenture is Rs. 105.
(ii) Rs. 100 per preference share redeemable at par has 3% floatation cost and 10 years of
maturity. The market price per preference share is Rs. 106.
(iii)Equity share has Rs. 4 floatation cost and market price per share of Rs. 24. The next
year expected dividend is Rs. 2 per share with annual growth of 5%. The firm has a
practice of paying all earnings in the form of dividends.
(iv) Corporate Income-tax rate is 35%
Required:
Calculate Weighted Average Cost of Capital (WACC) using market value weights.
P -16: PQR Ltd. has the following capital structure on October 31, 2010:
Rs.
Equity Share Capital (2,00,000 Shares of Rs. 10 each) 20,00,000
Reserves and Surplus 20,00,000
12% Preference Shares 10,00,000
9% Debentures 30,00,000
80,00,000
The market price of equity share is Rs. 30. It is expected that the company will pay next year
a dividend of Rs. 3 per share, which will grow at 7% forever. Assume 40% income tax rate.
You are required to compute weighted average cost of capital using market value weights.
P- 17: (a) Derive the Dividend Growth Model for measurement of cost of equity.
(b) The current market price of an equity share of Rs. 100 is Rs. 150 and underwriting
commission inclusive of allcosts of issue is 5% on issue price. The dividend per share paid
for the last five years were as follows –
The company has a fixed dividend payout ratio and current growth in earnings and dividend
is likely tobe maintained in future. Estimate the cost of equity.

10. CAPITAL BUDGETING
P - 1: The directors of Alpha Limited are contemplating the purchase of a new machine to
replace a machine which has been in operation in the factory for the last 5 years.
Ignoring interest but considering tax at 50% of net earnings, suggest which of the two
alternatives should be preferred. The following are the details:
OLD MACHINE NEW MACHINE
Purchase price Rs. 40,000 Rs. 60,000
Estimated life of machine 10 years 10 years
Machine running hours per annum 2,000 2,000
Units per hour 24 36
Wages per running hour 3 5.25
Power per annum 2,000 4,500
Consumables stores per annum 6,000 7,500
All other charges per annum 8,000 9,000
Materials cost per unit 0.50 0.50
Selling price per unit 1.25 1.25
You may assume that the above information regarding sales and cost of sales will hold good
throughout the economic life of each of the machines. Depreciation has to be charged
according to straight-line method.
P – 2: A limited Company is considering investing a project requiring a capital outlay of

Rs. 2,00,000. Forecast for annual income after depreciation but before tax is as follows:
Year Rs.
1 1,00,000
2 1,00,000
3 80,000
4 80,000
5 40,000
Depreciation may be taken as 20% on original cost and taxation at 50% of net income.
You are required to evaluate the project according to each of the following methods:
a) Pay-back method
b) Rate of return on original investment method
c) Rate of return on average investment method
d) Discounted cash flow method taking cost of capital as 10%
e) Net present value index method
f) Internal rate of return method.
g) Modified internal rate of return
P – 3: A company has just installed a machine model A for the manufacture of a new
product at capital cost of Rs. 1,00,000. The annual operating costs are estimated at
Rs. 50,000 (excluding depreciation) and these costs are estimated on the basis of an annual
volume of 1,00,000 units of production. The fixed costs at this volume of 1,00,000 units of

output will amount to Rs. 4,00,000 p.a. The selling price is Rs.5 per unit of output. The
machine has a five year life with no residual value.
The company has now come across another machine called Super Model which is capable of
giving, the same volume of production at an estimated annual operating costs of Rs. 30,000
exclusive of depreciation. The fixed costs will however, remain the same in value. This
machine also will have a five year life with no residual value. The capital cost of this
machine is Rs. 1,50,000.
The company has an offer for the sale of the machine Model A (which has just been installed)
at Rs. 50,000 and the cost of removal there of will amount to Rs. 10,000. Ignore tax.
In view of the lower operating cost, the company is desirous of dismantling of the machine
Model A and installing the Super Model Machine. Assume that Model A has not yet started
commercial production and that the time lag in the removal thereof and the installation of the
super model machine is not material.
The cost of capital is 14% and the P.V. Factors for each of the five years respectively are
0.877, 0.769, 0.675, 0.592 and 0.519.
State whether the company should replace Model A machine by installing the super model
machine. Will there be any change in your decision if the Model A machine has not been
installed and the company is in the process of consideration of selection of either of the two
models of the machine? Present suitable statement to illustrate your answer.
P – 4: Techtronics Ltd., an existing company, is considering a new project for manufacture

of pocket video games involving a capital expenditure of Rs. 600 lakhs and working capital
of Rs. 150 lakhs. The capacity of the plant is for an annual production of 12 lakh units and
capacity utilisation during the 6-year working life of the project is expected to be as indicated
below.
Year Capacity utilisation (%)
1 33 1/3 %
2 66 2/3 %
3 90 %
4-6 100 %
The average price per unit of the product is expected to be Rs. 200 netting a contribution of
40%. Annual fixed costs, excluding depreciation, are estimated to be Rs. 480 lakhs per
annum from the third year onwards; for the first and second year it would be Rs. 240 lakhs
and Rs. 360 lakhs respectively. The average rate of depreciation for tax purposes is 33 1/3%
on the capital assets. No other tax reliefs are anticipated. The rate of income-tax may be
taken at 50%.
At the end of the third year, an additional investment of Rs. 100 lakhs would be required for
working capital.
The company, without taking into account the effects of financial leverage, has targeted for a
rate of return of 15%.
You are required to indicate whether the proposal is viable, giving your working notes and
analysis.

Terminal value for the fixed assets may be taken at 10% and for the current assets at 100%.
Calculation may be rounded off to lakhs of rupees. For the purpose of your calculations, the
recent amendments to tax laws with regard to balancing charge may be ignored.
P – 5: A chemical company is considering replacing an existing machine with one costing

Rs.65,000. The existing machine was originally purchased two years ago for Rs. 28,000 and
is being depreciated by the straight line method over its seven-year life period. It can
currently be sold for Rs. 30,000 with no removal costs. The new machine would cost
Rs. 10,000 to install and would be depreciate over five years. The management believes that
the new machine would have a salvage value of Rs. 5,000 at the end of year 5. The
management also estimates an increase in net working capital requirement of Rs. 10,000 as a
result of expanded operations with the new machine. The firm is taxed at a rate of 55% on
normal income and 30% on capital gains. The company’s expected after-tax profits for next
5 years with existing machine and with new machine are given as follows:
Expected after-tax profits
Year With existing machine With new machine
1 2,00,000 2,16,000
2 1,50,000 1,50,000
3 1,80,000 2,00,000
4 2,10,000 2,40,000
5 2,20,000 2,30,000
a) Calculate the net investment required by the new machine.
b) If the company’s cost of capital is 15%, determine whether the new machine should
be purchased.
P - 6: Electromatic Excellers Ltd. specialise in the manufacture of novel transistors. They
have recently developed technology to design a new radio transistor capable of being used as
an emergency lamp also. They are quite confident of selling all the 8,000 units that they
would be making in a year. The capital equipment that would be required will cost Rs. 25
lakhs. It will have an economic life of 4 years and no significant terminal salvage value.
During each of the first four years promotional expenses are planned as under:
Year 1 2 3 4
Advertisement 1,00,000 75,000 60,000 30,000
Others 50,000 75,000 90,000 1,20,000
Variable cost of production and selling expenses: 250 per unit
Additional fixed operating costs incurred because of this new product are budgeted at
Rs. 75,000 per year.
The company’s profit goals call for a discounted rate of return of 15% after taxes on
investments on new products. The income tax rate on an average works out to 40%. You can
assume that the straight line method of depreciation will be used for tax and reporting.
Work out an initial selling price per unit of the product that may be fixed for obtaining the
desired rate of return on investment.
Present value of annuity of Re. 1 received or paid in a steady stream throughout 4 years in the
future at 15% is 3.0079.

P – 7: A product is currently manufactured on a machine that is not fully depreciated for tax
purposes and has a book value of Rs. 70,000. It was purchased for Rs. 2,10,000 twenty years
ago. The cost of the product are as follows:
Unit Cost
Direct Labour Rs. 28.00
Indirect labour 14.00
Other variable overhead 10.50
Fixed overhead 17.50
70.00
In the past year 10,000 units were produced. It is expected that with suitable repairs the old
machine can be used indefinitely in future. The repairs are expected to average Rs.75,000 per
year.
An equipment manufacturer has offered to accept the old machine as a trade in for a new
equipment. The new machine would cost Rs.4,20,000 before allowing for Rs.1 Rs.1,05,000 for
the old equipment. The Project costs associat
associated
ed with the new machine are as follows:
Unit Cost
Direct Labour Rs.14.00
Indirect labour 21.00
Other variable overhead 7.00
Fixed overhead 22.75
64.75
The fixed overhead costs are allocations for other departments plus the depreciation of the
equipment. The old machine can be sold now for Rs. 50,000 in the open market. The new
machine has an expected life of 10 years and salvage value of Rs, 20,000 at that time. The
current corporate
rate income tax rate is assumed to be 50%. For tax purposes cost of the new
machine and the book value of the old machine may be depreciated in 10 years. The
minimum required rate is 10%. It is expected that the future demand of the product will stay
at 10,000 units per year. The present value of an annuity of Re. 1 for 9 years @ 10%
discount factor=5.759. The present value of Re.1 received at the end of 10th year @10%
discount factor is = 0.386. Should the new equipment is purchased?
P- 8. PR Engineering Ltd. is considering the purchase of a new machine which will carry out
some operations which are at present performed by manual labour. The following
information related to the two alternative models – ‘MX’ and ‘MY’ are available:
Estimated net income before depreciation and tax:

Corporate tax rate for this company is 30 percent and company’s required rate of return on
investment proposals is 10 percent. Depreciation will be charged on straight line basis.
i) Calculate the pay-back period of each proposal.
ii) Calculate the net present value of each proposal, if the P.V. factor at 10% is – 0.909,
0.826, 0.751, 0.683, 0.621 and 0.564.
iii) Which proposal you would recommend and why?
P – 9: Bisk-Farm Biscuits Ltd is considering the purchase of a delivery van, and is

evaluating the following two choices:
a) The company can buy a used van for Rs. 20,000 and after 4 years sell the same for
Rs. 2,500 (net of taxes) and replace it with another used van which is expected to cost
Rs. 30,000 and has 6 years life with no terminating value,
b) The company can buy a new van for Rs. 40,000. The projected life of the van is 10 years
and has an expected salvage value (net of taxes) of Rs. 5,000 at the end of 10 years.
The services provided by the vans under both the choices are the same. Assuming the cost of
capital at 10 percent, which choice is preferable?
P – 10: A company manufacturing electronic equipments to currently buying component A

from a local supplier at a cost of Rs. 30 each. The company has a proposal to install a
machine for the manufacture of the component. Two alternatives are available as under: -
i) Installation of semi-automatic machine involving an annual fixed expenses of Rs. 18
lakhs and a variable cost of Rs. 12 per component manufactured.
ii) Installation of automatic machine involving an annual fixed cost of Rs. 30 lakhs and a
variable cost of Rs. 10 per component manufactured.
Required: 1) Find the annual requirement of components to justify a switch over from
purchase of components to i) manufacture of the same by installing semi-automatic machine
and ii) manufacture of the same by installing automatic machine.
2) If the annual requirements of the component is 5,00,000 units, which machine would you
advise the company to install? At what annual volume would you advise the company to
select automatic machine instead of semi-automatic machine?
P – 11: Following are the data on a capital project being evaluated by the management of X
Ltd.:
Project M
Annual cost saving Rs. 40,000
Useful life 4 years
I.R.R 15%
Profitability Index (PI) 1.064
NPV ?
Cost of capital ?
Cost of project ?
Pay back ?
Salvage value 0

Find the missing values considering the following table of discount factor only:
Discount Factor 15% 14% 13% 12%
1 year 0.869 0.877 0.885 0.893
2 years 0.756 0.759 0.783 0.797
3 years 0.658 0.675 0.693 0.712
4 years 0.572 0.592 0.613 0.636
2.855 2.913 2.974 3.038
P – 12: Projects X and Y are analysed and you have determined the following parameters.
Advise the investor on the choice of a project:
Particulars Project X Project Y
Investment Rs.7 Cr. Rs.5 Cr.
Project life 8 years 10 years
Construction period 3 years 3 years
Cost of capital 15% 18%
N.P.V. @ 12% Rs.3,700 Rs.4,565
N.P.V. @ 18% Rs. 325 Rs.325
I.R.R. 45% 32%
Rate of return 18% 25%
Payback 4 years 6 years
B.E.P. 45% 30%
Profitability index 1.76 1.35
P – 13: A company is considering a proposal of installing a drying equipment. The

equipment would involve a cash outlay of Rs. 6,00,000 and Net Working Capital of
Rs. 80,000. The expected life of the project is 5 years without any salvage value. Assume
that the company is allowed to charge depreciation on straight-line basis for income-tax
purpose. The estimated before-tax cash in flows are given below:
Before-tax Cash in flows (Rs. ‘000)
Year 1 2 3 4 5
240 275 210 180 160
The applicable Income-tax rate to the company is 35%. If the company’s opportunity cost of
capital is 12%, calculate the equipment’s discounted payback period, payback period, net
present value and internal rate of return. The PV factors at 12%, 14% and 15% are:
Year 1 2 3 4 5
PV factor at 12% 0.8929 0.7972 0.7118 0.6355 0.5674
PV factor at 14% 0.8772 0.7695 0.6750 0.5921 0.5194
PV factor at 15% 0.8696 0.7561 0.6575 0.5718 0.4972
P – 14: C Ltd. is considering investing in a project. The expected original investment in the
project will be Rs. 2,00,000, the life of project will be 5 year with no salvage value. The
expected net cash inflows after depreciation but before tax during the life of the project will
be as follows:
Year 1 2 3 4 5
Rs. 85,000 1,00,000 80,000 80,000 40,000
The project will be depreciated at the rate of 20% on original cost. The company is subjected
to 30% tax rate.

Required:
1. Calculate pay back period and average rate of return (ARR).
2. Calculate net present value and net present value index, if cost of capital is 10%.
3. Calculate internal rate of return.
Note: The P.V. factors are:
Year P.V at 10% P.V at 37% P.V at 38% P.V at 40%
1 .909 .730 .725 .714
2 .826 .533 .525 .510
3 .751 .389 .381 .364
4 .683 .284 .276 .260
5 .621 .207 .200 .186
P – 15: A company is required to choose between two machines A and B. The two machines
are designed differently, but have identical capacity and do exactly the same job. Machine A
costs Rs. 6,00,000 and will last for 3 years. It costs Rs. 1,20,000 per year to run.
Machine B is an ‘economy’ model costing Rs. 4,00,000 but will last only for two years, and
cost Rs. 1,80,000 per year to run. These are real cash flows. The costs are forecasted in
Rupees of constant purchasing power. Opportunity cost of capital is 10%. Which machine
company should buy? Ignore tax.
PVIF0.10,1 = 0.9091, PVIF0.10,2 = 0.8264, PVIF0.10,3 = 0.7513.
P – 16: A company is considering two mutually exclusive project with the following details:
Cost of capital of the company is 10%.

Calculate NPV of the projects and recommend the projects that can be accepted.
P – 17: The management of P Limited is considering to select a machine out of the two
mutually exclusive machines. The company’s cost of capital is 12 percent and corporate tax
rate for the company is 30 percent. Details of the machines are as follows:
Machine – I Machine – II
Cost of machine 10,00,000 15,00,000
Expected life 5 years 6 years
Annual Income before tax and depreciation 3,45,000 4,55,000
Depreciation is to be charged on straight line basis.
a. Calculate the discounted pay-back period, net present value and internal rate of return for
each machine.
b. Advise the management of P Limited as to which machine they should take up.
The present value factors of Re. 1 are as follows:

Year 1 2 3 4 5 6
At 12% .893 .797 .712 .636 .567 .507
At 13% .885 .783 .693 .613 .543 .480
At 14% .877 .769 .675 .592 .519 .456
At 15% .870 .756 .658 .572 .497 .432
At 16% .862 .743 .641 .552 .476 .410
P – 18: X and Co. intends to invest Rs. 10 lakh in a project having a life of 4 years. The cash
inflows from the project at the end of year one to the fourth year are expected as
Rs. 3,00,000, Rs. 4,20,000, Rs. 4,00,000 and Rs. 3,30,000before charging depreciation and
tax. You are required to calculate the Accounting Rate of Return of the project and comment
on the use of the rate of return. Tax rate is 50%.
P – 19: Compute the pay-back

back period for the project
P – 20: PKJ Ltd. is considering two mutually

mutually- exclusive projects. Both require an initial cash
outlay Rs. 10,000 each for machinery and have a life of 5 Years. The Company's required
rate of return is 10% and it pays tax at 50%. The projects will be depreciated on a straight
straight-
line basis. The net cash flows (before taxes) expected to be generated by the projects and the
present value (PV) factor (at 10%) are as follows:
You are required to calculate

I. The Pay Back Period of each project;
II. The NPV and the profitability index of each project.
P - 21: ANP Ltd. is providing the following information:
Annual cost of saving Rs 96,000
Useful life 5 years Salvage value zero
Internal rate of return 15%
Profitability index 1.05
Table of discount factor:
You are required to calculate:

(i) Cost of the project (ii) Payback period
(iii) Net present value of cash inflow (iv) Cost of capital.

22. From the particulars given below calculate the IRR of the project.
(i) Net cash flow after tax over the four years of the project life.
(ii) Initial outlay is Rs. 20,000, Salvage value at the end of the project life is Nil
(iii) Present value of Rs. 1 receivable at the end of year 1, 2, 3 and 4
23. A Company can make either of two investments at the beginning of 2003. Assuming a
required rate of return of 10% p.a., evaluate the investment proposals under (i) Pay Back
Profitability, (ii) Discounted Pay Back Period and (iii) Profitability Index. The particulars
relating to the projects are given below:
It is estimated that each of the alternative proposals will require an additional working capital
of Rs. 2,000which will be received back in full after the expiry of each project life. The
present value of Re. 1, to be received at the end of each year, at 10% p.a. is given below:
24. BGR Limited is considering a number of plant improvement projects with an allocable
fund of Rs. 10,00,000.
The following projects are under consideration.

25. A firm proposes to market a cheaper variety of its existing brand to be sold for Rs. 20 per
unit, estimated product-life being five years. The sales volume for the five years has been
estimated to be 30,000 units for the first year, 40,000 units for each of the next two years and
20,000 units for each of the last two years. The variable cost p.u. is Rs. 10. Production of the
cheapest brand will entail an initial expenditure of Rs. 4,50,000 in purchasing and installing a
new plant with estimated economic life of five years and scrap value of Rs. 50,000.
The fixed cost of Rs.2,00,000 per annum including depreciation on the plant on straight-line
basis will be needed for producing and marketing the cheaper brand. Introduction of this
cheaper variety is also likely to have an adverse impact on the demand of the existing dearer
brand resulting in loss of contribution estimated at Rs. 20,000 per annum.
Assuming cost of Capital to be 10% and marginal tax rate to be 40%, you are required to
evaluate proposal and give your reasoned recommendation as to its acceptance or rejection.
The PV factors at 10% for five years are 0.909, 0.826, 0.751, 0.683 and 0.62.

11. WORKING CAPITAL
1. A company has prepared its annual budget, relevant details of which are reproduced
below.
(a) Sales Rs 46.80 lakhs : 78,000 units (25% cash sales and balance on credit)
(b) Raw material cost : 60% of sales value
(c) Labour cost : Rs 6 per unit
(d) Variable overheads : Rs 1 per unit
(e) Fixed overheads : Rs 5 lakhs (including Rs 1,10,000 as depreciation)
(f) Budgeted stock levels:
Raw materials : 3 weeks
Work-in-progress : 1 week (Material 100%, Labour & overheads 50%)
Finished goods : 2 weeks
(g) Debtors are allowed credit for 4 weeks.
(h) Creditors allow 4 weeks credit.
(i) Wages are paid bi-weekly, i.e. by the 3rd week and by the 5th week for the 1st & 2nd
weeks and the 3rd & 4th weeks respectively.
(j) Lag in payment of overheads : 2 weeks
(k) Cash-in-hand required : Rs 50,000
Prepare the Working Capital budget for a year for the company, making whatever
assumptions that you may find necessary.
2. A company plans to manufacture and sell 400 units of a domestic appliance per month at a
price of Rs 600 each. The ratio of costs to selling price are as follows:
Fixed overheads are estimated at Rs 4,32,000 per annum.

The following norms are maintained for inventory management:
Raw materials 30 days
Packing materials 15 days
Finished goods 200 units
Work-in-progress 7 days
Other particulars are given below:
(a) Credit sales represent 80% of total sales and the dealers enjoy 30 working days credit.
Balance 20% are cash sales.
(b) Creditors allow 21 working days credit for payment.
(c) Lag in payment of overheads and expenses is 15 working days.
(d) Cash requirements to be 12% of net working capital.
(e) Working days in a year are taken as 300 for budgeting purpose.
Prepare a Working Capital requirement forecast for the budget year.

3. A Company provided the following data:
The following additional information is available:

(a) Average raw materials in stock: one month.
(b) Average materials in process: half-a-month
(c) Average finished goods in stock: one month
(d) Credit allowed by suppliers: one month
(e) Credit allowed to debtors: two months.
(f) Time lag in payment of wages: one and a half weeks.
(g) Overheads: one month
(h) One-fourth of sales are on cash basis.
(i) Cash balance is expected to be Rs 1,20,000.
You are required to prepare a statement showing the Working Capital needed to finance a
level of activity of 70,000 units of annual output. The production is carried throughout the
year on even basis and wages and overheads accrue similarly. (Calculation be made on the
basis of 30 days a month and 52 weeks a year).
4. (a) From the following details, prepare an estimate of the requirement of Working Capital:
Wages and overheads are paid at the beginning of the month following/ In production all the
required materials are charged in the initial stage and wages and overheads accrue evenly.
(b) What is the effect of Double Shift Working on the requirement of Working capital?
5. Camellia Industries Ltd. is desirous of assessing its working capital requirements for the
next year. The finance manager has collected the following information for the purpose.
Estimated cost per unit of finished product
Raw materials...............................................................90
Direct labour ................................................................50
Manufacturing and admn. ovd.
(Excluding depreciation) ..............................................40
Depreciation .................................................................20
Selling overheads ......................................................._30
Total Cost ...................................................................230

The product is subject to excise duty of 10 percent (levied on cost of production) and is sold
at Rs. 300 per unit.
i. Budgeted level of activity is 1,20,000 units of output for the next year.
ii. Raw material cost consists of the following:
Pig iron Rs. 65 per unit
Ferro alloys 15 per unit
Cast iron borings 10 per unit
iii. Raw materials are purchased from different suppliers, extending different credit
period.
Pig iron, 2 months
Ferro alloys, ½ months
Cast iron borings, 1 month.
i. Product is in process for a period of 1/2 month. Production process -requires full
unit (100 percent) of pig iron and ferroalloys in beginning of production: cost iron
boring is required only to the extent of 50 percent in the beginning and the
remaining is needed at a uniform rate during the process. Direct labour and other
overheads accrue similarly at a uniform rate throughout production process.
ii. Past trends indicate that the pig iron is required to be stored for 2 months and
other materials for 1 month.
iii. Finished goods are in stock for a period of 1 month.
iv. It is estimated that one-fourth of total sales are on cash basis and the remaining
sales are on credit. The past experience of the firm has been to collect the credit
sales in 2 months.
v. Average time-lag in payment of all overheads is l month and ½ month in the case
of direct labour.
vi. Desired cash balance is to be maintained at Rs, 10 lakh.
You are required to determine the amount of net working capital of the firm. State your
assumptions, if any.
6. The board of Directors of Nanak Engineering Company Private Ltd. request you to
prepare a statement showing the working capital requirements forecast for a level of activity
of 1,56,000 units of production.
The following information is available for your calculation:
a.
Per unit
Raw materials Rs. 90
Direct labour 40
Overheads 75
205
Profits 60
Selling price per unit 265
b.
(i) Raw materials are in stock on average one month.
(ii) Materials are in process, on average 2 weeks.
(iii) Finished goods are in stock, on average 1 month.

(iv) Credit allowed by supplier one month.
(v) Time lag in payment from debtors two months.
(vi) Lag in payment of wages 1½ week.
(vii) Lag in payment of overheads is one month.
20% of the output is sold against cash. Cash in hand and at bank is expected to be Rs. 60,000.
It is to be assumed that production is carried on evenly throughout the year, wages and
overheads accrue similarly and a time period of 4 weeks is equivalent to a month.
7. On 1st April, 2010 the Board of Directors of Calci Limited wishes to know the amount of
working capital that will required to meet the programme of activity they have planned for
the year. The following information is available.
i) Issued and paid-up capital Rs 2,00,000
ii) 5% Debentures (Secured on Assets) Rs 50,000
iii) Fixed assets valued at Rs 1,25,000 on 31-12-2009
iv) Production during the previous year was 60,000 units; it is planned that this level
of activity should be maintained during the present year.
v) The expected ratios of cost to selling price are – raw materials 60%, direct wages
10%, and overheads 20%.
vi) Raw materials are expected to remain in stores for an average of two months
before these are issued for production.
vii) Each unit of production is expected to be in process for one month.
viii) Finished goods will stay in warehouse for approximately three months.
ix) Creditors allow credit for 2 months from the date of delivery of raw materials.
x) Credit allowed to debtors is 3 months from the date of dispatch.
xi) Selling price per unit is Rs 5.
xii) There is a regular production and sales cycle.
You are required to prepare:
a) Working capital requirement forecast; and
b) An estimated profit and loss account and balance sheet at the end of the year.
8. From the following data, compute the duration of the operating cycle for each of years and
comment on the increase/decrease:
Year1 Year 2
Stock:
Raw materials 20,000 27,000
Work-in-progress 14,000 18,000
Finished goods 21,000 24,000
Purchases 96,000 1,35,000
Cost of goods sold 1,40,000 1,80,000
Sales 1,60,000 2,00,000
Debtors 32,000 50,000
Creditors 16,000 18,000
Assume 360 days per year for computational purposes.

9. Q Ltd sells goods at a uniform rate of gross profit of 20% on sales including depreciation
as part of cost of production. Its annual figures are as under:
Rs
Sales (at 2 months credit) 24,00,000
Materials consumed (suppliers credit 2 months) 6,00,000
Wages paid (Monthly at the beginning of the subsequent month) 4,80,000
Manufacturing expenses(cash expenses are paid –one month in arrear) 6,00,000
Administration expenses (cash expenses are paid –one month in arrear) 1,50,000
Sales promotion expenses (paid quarterly in advance) 75,000
The company keeps one month stock each of raw materials and finished goods. A minimum
cash balance of Rs.80,000 is always kept. The company wants to adopt a 10% safety margin
in the maintenance of working capital
The company has no work-in-progress
Find out the requirements of working capital of the company on cash cost basis.
10. The following information is provided by the DPS Limited for the year ending 31st
March, 2013.
Raw material storage period 55 days
Work-in-progress conversion period 18 days
Finished Goods storage period 22 days
Debt collection period 45 days
Creditors’ payment period 60 days
Annual Operating cost Rs. 21,00,000
(Including depreciation of Rs. 2,10,000)
[1 year = 360 days]
i) Operating Cycle period.
ii) Number of Operating Cycle in a year.
iii) Amount of working capital required for the company on a cash cost basis.
iv) The company is a market leader in its product, there is virtually no competitor in the
market. Based on a market research it is planning to discontinue sales on credit and
deliver products based on pre-payments. Thereby, it can reduce its working capital
requirement substantially.
What would be the reduction in working capital requirement due to such decision?
11. X Ltd. sells goods at a gross profit of 20%. It includes depreciation as part of cost of
production. The following figures for the 12 months ending 31st Dec, 1999 are given to
enable you to ascertain the requirement of working capital of the company on a cash cost
basis.
In your working, you are required to assume that:
i) a safety margin of 15% will be maintained;
ii) Cash is to be held to the extent of 50% of current liabilities;
iii) There will be no work-in-progress;
iv) Tax is to be ignored.

Stocks of raw materials and finished goods are kept at one month’s requirements. All
working notes are to form part of your answer.
Sales at 2 months credit Rs. 27,00,000
Materials consumed (suppliers credit is for 2 months) 6,75,000
Total wages (paid at the beginning of the next month) 5,40,000
Manufacturing expenses outstanding at the end of the year 60,000
(These expenses are paid one month in arrears)
Total administrative expenses (paid as above) 1,80,000
Sales promotion expenses paid quarterly and in advance 90,000
12. Compute “Maximum Bank Borrowings” permissible under Method I, II & III of Tandon
Committee norms from the following figures and comment on each method.
Current Liabilities Rs. in lakhs Current assets Rs. in lakhs
Creditors for purchases 200 Raw materials 400
Other current liabilities 100 Work in progress 40
300 Finished goods 180
Bank borrowings including bills 400 Receivable including bills 100
discounted with bankers discounted with bankers
Other current assets 20
700 740
Assume core current assets are Rs.190 lakhs.
13. Solaris Ltd. sells goods in domestic market a gross profit of 25 percent, not counting on
depreciation as a part of the 'cost of goods sold'. Its estimates for next year are as follows:
The company keeps 1 month's stock of each of raw materials and finished goods and
believes in keeping Rs. 20 lakh as cash. Assuming a 15 percent safety margin, ascertain
the estimated working capital requirement of the company (ignore work -in-process).
14. Estimate the requirement of total capital of the following project with an estimated
production of 250 m/t per annum of chemical X, presently imported and which can be
entirely sold at the rate of it’s landed cost of Rs. 8,500 per m/t. You are also required to find
out.
(i) Percentage of yield on investment;
(ii) Percentage of profit on sales;
(iii) Rate of cash generation per annum before tax.

Details of the proposed project for expected production of 250 m/t are as under:
D13
15. From the following information, work out the average amount of working capital
requirement:
Average amount of holding of stocks and WIP is Rs4,00,000 and there should be cash
balance of Rs50,000. Assume that all expenses and income are made evenly throughout the
year.
M1j17
16. A company plans to sell 48000 units next year. The following information is given:
The duration at various stages is expected to be as follows:

Assume uniform sales of 4000 units per month. Estimate the gross working capital
requirement taking (i) Debtors at Cost; (ii) Debtors at Sales Value.
17. Following information is forecasted by the CS Limited for the year ending 31st March,
2010:
You may take one year as equal to 365 days.

(i) Net operating cycle period.
(ii) Number of operating cycles in the year.
(iii) Amount of working capital requirement.

12. RECEIVABLES MANAGEMENT
1. A firm is considering pushing up its sales by extending credit facilities to the following
categories of customers:
a) Customers with a 10% risk of non-payment, &
b) Customers with a 30% risk of non-payment.
The incremental sales expected in case of category (a) are Rs. 40,000 while in case of
category (b) they are Rs. 50,000.
The cost of production and selling costs are 60% of sales while the collection costs amount to
5% of sales in case of category (a) and 10% of sales in case of category (b).
You are required to advise the firm about extending credit facilities to each of the above
categories of customers.
2. The following are the details regarding the operations of a firm during a period of
12 months.
Sales Rs. 12,00,000
Selling price per unit Rs. 10
Variable cost price per unit Rs. 7
Total cost per unit Rs. 9
Credit period allowed to customers one month. The firm is considering a proposal for a more
liberal extension of credit which will result in increasing the average collection period from
one month to two months. This relaxation is expected to increase the sales by 25% from its
existing level.
You are required to advise the firm regarding adoption of the new credit policy, presuming
that the firm’s required return on investment is 25%.
3. XYZ Corporation is considering relaxing its present credit policy and is in the process of
evaluating two proposed policies. Currently, the firm has annual credit sales of Rs. 50 lakhs
and accounts receivable turnover ratio of 4 times a year. The current level of loss due to bad
debts is Rs. 1,50,000. The firm is required to give a return of 25% on the investment in new
accounts receivable. The company’s variable costs are 70% of the selling price. Given the
following information, which is the better option?
Present Policy Policy Option I II
Annual credit sales Accounts receivable Rs. 50,00,000 60,00,000 67,50,000
Turnover ratio 4 times 3 times 2.4 times
Bad debts losses 1,50,000 3,00,000 4,50,000
4. A trader whose current sales are in the region of Rs. 8,00,000 per annum and an average
collection period of 30 days wants to pursue a more liberal policy to improve sales. A study
made by a management consultant reveals the following information
Credit Increase in collection Increase in Present default
policy period Sales anticipated
A 10 days Rs.30,000 1.5%
B 20 days Rs.48,000 2%
C 30 days Rs. 75,000 3%
D 40 days Rs. 90,000 4%

The selling price per unit is Rs. 3. Average cost per unit is Rs. 2.25 and variable costs per unit
are Rs. 2.
The current bad debt loss is 1%. Required return on additional investment is 20%. Assume a
360 days year.
Which of the above policies would you recommend for adoption?
5. The ABC company currently sells on terms ‘net 45’. The company has sales of Rs. 3.75
million a year, with 80% being the credit sales. At present, the average collection period is 60
days. The company is now considering offering terms ‘2/10, net 45’. It is expected that the
new credit terms will increase current credit sales by 1/3rd. The company also expects that
60% of the credit sales will be on discount and average collection period will be reduced to
30 days. The average selling price of the company is Rs. 100 per unit and variable cost is
85% of selling price. The Company is subject to a tax rate of 40%, and its before-tax rate of
borrowing for working capital is 18%. Should the company change its credit terms to ‘2/10,
net 45’? Support your answers by calculating the expected change in net profit. (Assume
360 days in a year)
6. Slow Players are regular customers of Goods Dealers Ltd., Calcutta and have approached
the sellers for extension of credit facility for enabling them to purchase goods from Goods
Dealers Ltd. On the analysis of past performance and on the basis of information supplied,
the following pattern of payment schedule emerges in regard to Slow Players:
Schedule Pattern
At the end of 30 days 15% of the bill
60 days 34% of the bill
Non recovery 1% of the bill
Slow Players wants to enter into a firm commitment for purchase of goods of Rs. 15,00,000
in 1982, deliveries to be made in equal quantities on the first day of each quarter in the
calendar year. The price per unit of the commodity is Rs. 150 on which a profit of Rs. 5 per
unit is expected to be made. It is anticipated by the Good Dealers Ltd., that taking up of this
contract would mean an extra recurring expenditure of Rs. 5,000 per annum. If the
opportunity cost of funds in the hands of Goods Dealers is 24% per annum, would you as the
finance manager of the seller recommend the grant of credit to Slow Players? Working
should form part of your answer.
7. At present, the customers of the X Department take, on average, 90 days credit before
paying. New credit terms are being considered which would allow a 5% cash discount for
payment within 30 days with the alternative of full payment due after 60 days.
It is expected that 60% of all customers will take advantage of the discount terms. Customers
not taking the discount would be equally split between those paying after 60 days and those
taking 90 days credit. The new policy would increase sales by 20% from the current level of
Rs. 1,00,000 p.a., but bad debts would rise from 1% to 2% of total sales. X Department
products have variables costs amounting to 80% of sales value. Evaluate the proposal of X
Department, assuming the year to be consisting of 360 days and rate of interest is 12%.

8. XYZ Ltd. has annual credit sales amounting to Rs. 10,00,000 for which it grants a credit of
60 days. However, at present no discount facility is offered by the firm to its customers. The
company is considering a plan to offer a discount of “3 / 15 net 60”. The offer of discount is
expected to bring the total credit periods from 60 days to 45 days and 50% of the customers
(in value) are likely to avail the discount facility. The selling price of the produces is Rs. 15
while the average cost per unit comes to Rs.12.
Please advise the company whether to resort to discount facility if the rate of return is 20%
and a month is equal to 30 days.
9. Trinadh Traders Ltd. currently sells on terms of net 30 days. All the sales are on credit
basis and average collection period is 35 days. Currently, it sells 5,00,000 units at an average
price of Rs. 50 per unit. The variable cost to sales ratio is 75% and a bad debt to sales ratio is
3%. In order to expand sales, the management of the company is considering changing the
credit terms from net 30 to ‘2/10, net 30’. Due to the change in policy, sales are expected to
go up by 10%, bad debt loss on additional sales will be 5% and bad debt loss on existing sales
will remain unchanged at 3%. 40% of the customers are expected to avail the discount and
pay on the tenth day. The average collection period for the new policy is expected to be 34
days. The company required a return of 20% on its investment in receivables.
You are required to find out the impact of the change in credit policy of the profit of the
company. Ignore taxes.
pm
10. A new customer with 10% risk of non-payment desires to establish business connections
with you. He would require 1.5 month of credit and is likely to increase your sales by
Rs. 1,20,000 p.a. Cost of sales amounted to 85% of sales. The tax rate is 30%. Should you
accept the offer if the required rate of return is 40% (after tax)?
11. A company is presently having credit sales of Rs. 12 lakh. The existing credit terms are
1/10, net 45 days andaverage collection period is 30 days. The current bad debts loss is 1.5%.
In order to accelerate the collectionprocess further as also to increase sales, the company is
contemplating liberalisation of its existing credit termsto 2/10, net 45 days. It is expected that
sales are likely to increase 1/3 of existing sales, bad debts increase to2% of sales and average
collection period to decline to20 days. The contribution to sales ratio of the companyis 22%
and opportunity cost of investment in receivables is 15% per cent (pre tax). 50 per cent and
80 Per cent of customers in term of sales revenue are expected to avail cash discount under
existing and liberalization scheme respectively. The tax rate is 30%.
Should the company change its credit terms? (Assume 360 days in a year).
12. Narang Ltd. currently has sales of Rs. 30,00,000 with an average period of two months.
At present no discounts are offered to the customers. The management of the company is
thinking to allow a discount of 2% on cash sales which result in:
a. The Average collection period would reduce to one month
b. 50% of customers would take advantage of 2% discount
c. The company normally requires a 25% return on its investment
Advise the management whether to extend discount on cash sales or not.
13. A company manufactures a small computer component. The component is sold for Rs.
1,000 and its variable cost is Rs. 700. The company sold on an average, 300 units every
month in 2014-15. At present the company grants one month credit to its customers. The
company plans to extend the credit to 2 months on account of which the following is
expected:

Increase in sales is 25%
Increase in stock is Rs. 1,50,000
Increase in creditors Rs. 60,000
Should the company extend the credit terms if:
a) All customers avail of the extended period of 2 months.
b) Only new customers avail of 2 months credit, assuming that the increase in sales is due
to new customers.
The company expects a minimum rate of return of 30% on its investment. (Consider debtors
at sales value).
14. Gemini Products Ltd. is considering the revision of its credit policy with a view to
increasing its sales and profits. Currently all its sales are on credit and the customers are
given one month‘s time to settle the dues. It has a contribution of 40% on sales and it can
raise additional funds at a cost of 20% per annum. The marketing director of the company has
given the following options with draft estimates for consideration.
Advise the company to take the right decision. (Workings should form part of the answer).
15. Surya Industries Ltd. is marketing all its products through a network of dealers. All sales
are on credit and the dealers are given one month time to settle bills. The company is thinking
of changing the credit period with a view to increase its overall profits. The marketing
department has prepared the following estimates for different periods of credit:
The company has a contribution/sales ratio of 40% further it requires a pre-tax return on
investment at 20%. Evaluate each of the above proposals and recommend the best credit
period for the company.

13. CASH MANAGEMENT
1. United Industries Ltd. projects that cash outlays of Rs. 37,50,000 will occur uniformly
throughout the coming year. United plans to meet its cash, requirements by periodically selling
marketable securities from its portfolio. The firm's marketable securities are invested to earn
12% and the cost. per transaction of converting securities to cash is Rs. 40.
a) Use the Baumol Model to determine the optimal transaction size of marketable
securities to cash.
b) What will be the company's average cash balance?
c) How many transfers per year will be required?
d) What will be the total annual cost of maintaining cash balances?
2. The Cyberglobe Company has experienced a stochastic demand for its product. With the
result that cash balances fluctuate randomly. The standard deviation of daily net cash flows is
Rs. 1,000, The Company wants to impose upper and lower bound control limits for conversion
of cash into marketable securities and vice-versa. The current interest rate on marketable
securities is 6%. The fixed cost associated with each transfer is Rs. 1,000 and minimum cash
balance to be maintained is Rs. 10,000. Compute the upper lower limits.
3. Illustrate the model by using the following information about A Ltd.
The annual cash requirement of A Ltd .is 10 lakh. The company has marketed securities in lot
sizes of 1,00,000 , 200,000, 250,000. Cost of conversion of marketable securities per lot is
1,000. The company can earn 5% annual yield on its securities. The optimal lot size to be
sold will be?
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4. Beta Limited faces an interest rate of 0.5 per cent per day and its broker charges Rs. 75 for
each transaction in short-term securities. The managing director has stated that the minimum
cash balance that is acceptable is Rs 2,000 and that the variance of cash flows on a daily basis
is Rs. 16,000. You are required to determine the maximum level of cash Beta Limited should
hold and at what point should it start to purchase or sell securities?
5. ABC Ltd. has an estimated cash payments of Rs. 8,00,000 for a one month period and the
payments are expectedto steady over the period. The fixed cost per transaction is Rs. 250 and
the interest rate on marketable securities is12% p.a. Calculate the optimum transaction size.
6. Lower control limit set Rs. 1,000
Interest rate per day 0.025%
Standard deviation of daily cash flows (variance of Rs. 2,50,000) Rs. 500
Switching costs per transaction Rs. 20
7. The information given below is available for a given firm which wants to adopt a lockbox
system. Suggest the feasibility of adopting the lockbox system by the firm.

14. CAPITAL STRUCTURE
1. A company’s expected annual net operating income (EBIT) is Rs.50,000. The company
has Rs. 2,00,000, 10% debentures. The equity capitalisation rate (K) of the company is
12.5%. Find the value of the firm and overall cost of capital under Net Income approach.
2. Assuming no taxes and given the earnings before interest and taxes (EBIT), interest (I) at
10% and equity capitalisation rate (Ke) below, calculate the total market value of each firm
under Net Income approach:
Firms EBIT I Ke
Rs. Rs.
X 2,00,000 20,000 12.0%
Y 3,00,000 60,000 16.0%
Z 5,00,000 2,00,000 15.0%
W 6,00,000 2,40,000 18.0%
Also determine the weight average cost of capital for each firm.
3. The existing capital structure of XYZ Ltd. is as under:
Equity Shares of Rs. 100 each Rs. 40,00,000
Retained Earnings Rs. 10,00,000
9% Preference Shares Rs. 25,00,000
7% Debentures Rs. 25,00,000
The existing rate of return on the company’s capital is 12% and the income-tax rate is 50%.
The company requires a sum of 25,00,000 to finance an expansion programme for which it
is considering the following alternatives:
i) Issue of 20,000 equity shares at a premium of Rs.25 per share.
ii) Issue of 10% preference shares.
iii) Issue of 8% debentures
It is estimated that the PE ratios in the cases of equity preference and debenture financing
would be 20,17 and 16 respectively.
Which of the above alternatives would you consider to be the best?
4. XL Limited provides you with following figures:
Rs.
Profit 2,60,000
Less: Interest on Debentures @ 12% 60,000
2,00,000
Income tax @ 50% 1,00,000
Profit after tax 1,00,000
Number of Equity shares (of Rs.10 each) 40,000
EPS (Earning per share) 2.50
Ruling price in market 25
PE Ratio (i.e. Price/EPS) 10

The Company has undistributed reserves of Rs. 6,00,000. The company needs Rs. 2,00,000
for expansion. This amount will earn at the same rate as funds already employed. You are
informed that a debt equity ratio Debt/ (Debt+ Equity) more than 35% will push the P/E Ratio
down to 8 and raise the interest rate on additional amount borrowed to 14%. You are required
to ascertain the probable price of the share.
i) If the additional funds are raised as debt; and
ii) If the amount is raised by issuing equity shares.
5. From the following data find out the value of each firm and value of each equity share as
per the Modigliani-Miller approach:
X Y Z
EBIT Rs. 13,00,000 13,00,000 13,00,000
No. of shares 3,00,000 2,50,000 2,00,000
12% debentures 9,00,000 10,00,000
Every firm expect 12% return on investment.
6. Z Co. has a capital structure of 30% debt and 70% equity. The company is considering
various investment proposals costing less than Rs. 30 Lakhs. The company does not want to
disturb its present capital structure. The cost raising the debt and equity are as follows:
Project Cost Cost of Debt Cost of Equity
Upto Rs. 5 Lakhs 9% 13%
Above Rs. 5 Lakhs and upto Rs. 20 Lakhs 10% 14%
Above Rs. 20 Lakhs and upto Rs. 40 Lakhs 11% 15%
Above Rs. 40 Lakhs and upto Rs. 1 Crore 12% 15.55%
Assuming the tax rate is 50%, compute the cost of two projects A and B, whose fund
requirements are Rs. 8 Lakhs and Rs. 22 Lakhs respectively. If the project are expected to
yield after tax return of 11%, determine under what conditions if would be acceptable.
7. Company X and company Y are in the same risk class, and are identical in every fashion
except that company X uses debt while company Y does not. The levered firm has
Rs. 9,00,000 debentures, carrying 10% rate of interest. Both the firms earn 20% before
interest and taxes on their total assets of Rs.15 lakhs. Assume perfect capital markets,
rational investors and so on; a tax rate of 50% and capitalisation rate of 15% for an all equity
company.
(i) Compute the value of firms X and Y using the net income (NI) approach.
(ii) Compute the value of each firm using the net operating income (NOI) approach.
(iii) Using the NOI approach, calculate the overall cost of capital (ko) for firms X & Y.
(iv) Which of these two firms has an optimal capital structure according to the NOI
approach? Why?
8. A Company’s current operating income is Rs. 4 lakhs. The firm has Rs.10lakhs of 10%
debt outstanding. Its cost of equity capital is estimated to be 15%.
(i) Determine the current value of the firm using traditional valuation approach.
(ii) Calculate the firm’s overall capitalisation ratio as well as both types of leverage
ratios (a) B/s (b) B/V.

9. The following is the data regarding two companies X and Y belonging to the same risk
class:
Company Company
Number of ordinary shares X 90,000 Y
1,50,000
Market price per share 1.20 1.00
(Rs.)
6% Debentures (Rs.) 60,000 -
Profit before interest (Rs.) 18,000 18,000
All profits after debenture interest are distributed as dividends.
Explain how under Modigliani & Miller approach, an investor holding 10% of shares in
company X will be better off in switching his holding to Company, Y.
10. From the following selected data, determine the value of the firms, P and Q belonging to
the homogeneous risk class under (a) the (NI) approach, and (b) the Net operating Income
(NOI) approach.
Firm P Firm Q
EBIT 2,25,000 2,25,000
Interest at 15% 75,000 ——
Equity capitalization rate, 20%
K .
Corporate tax rate 50%
Which of the two firms has an optimal capital structure under the (i) NI approach, and
(ii) NOI approach?
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11. There are two firms P and Q which are identical except P does not use any debt in its
capital structure while Q has Rs. 8,00,000, 9% debentures in its capital structure. Both the
firms have earnings before interest and tax of Rs. 2,60,000 p.a. and the capitalization rate is
10%. Assuming the corporate tax of 30%, calculate the value of these firms according to MM
Hypothesis.

15. LEVERAGES
1. Consider the following information for Strong Ltd:
Calculate the percentage of change in earnings per share, if sales increased by 5 per cent.
2. XYZ and Co. has three financial plans before it, Plan I, Plan II and Plan III. Calculate
operating and financial leverage for the firm on the basis of the following information and
also find out the highest and lowest value of combined leverage:
3. The data relating to two Companies are as given below:
You are required to calculate the Operating leverage, Financial leverage and Combined
leverage of two Companies.
4. The following summarises the percentage changes in operating income, percentage

changes in revenues, and betas for four pharmaceutical firms.
Required:
(i) Calculate the degree of operating leverage for each of these firms. Comment also.
(ii) Use the operating leverage to explain why these firms have different beta.

5. A Company had the following Balance Sheet as on March 31, 2006:
The additional information given is as under:

Fixed Costs per annum (excluding interest) Rs. 8 crores
Variable operating costs ratio 65%
Total Assets turnover ratio 2.5
Income-tax rate 40%
Required:
Calculate the following and comment:
(i) Earnings per share
(ii) Operating Leverage
(iii) Financial Leverage
(iv) Combined Leverage.
6. Consider the following information for Omega Ltd.:
Required: Calculate percentage change in earnings per share, if sales increase by 5%.
7. Delta Ltd. currently has an equity share capital of Rs 10,00,000 consisting of 1,00,000
Equity share of Rs 10 each. The company is going through a major expansion plan requiring
to raise funds to the tune of Rs 6,00,000. To finance the expansion the management has
following plans:
Plan-I : Issue 60,000 Equity shares of Rs 10 each.
Plan-II : Issue 40,000 Equity shares of Rs 10 each and the balance through long term
borrowing at 12% interest p.a.
Plan-III : Issue 30,000 Equity shares of Rs10 each and 3,000 Rs100, 9% Debentures.
Plan-IV : Issue 30,000 Equity shares of Rs 10 each and the balance through 6% preference
shares. The EBIT of the company is expected to be Rs 4,00,000 p.a. assume corporate tax
rate of 40%. Required:
(i) Calculate EPS in each of the above plans.
(ii) Ascertain the degree of financial leverage in each plan.
8. A company operates at a production level of 5,000 units. The contribution is Rs 60 per
unit, operating leverage is 6, combined leverage is 24. If tax rate is 30%, what would be its
earnings after tax?
9. Z Limited is considering the installation of a new project costing Rs 80,00,000. Expected
annual sales revenue from the project is Rs 90,00,000 and its variable costs are 60 percent of
sales. Expected annual fixed cost other than interest is Rs 10,00,000. Corporate tax rate is 30
percent. The company wants to arrange the funds through issuing 4,00,000 equity shares of
Rs 10 each and 12 percent debentures of Rs 40,00,000.

(i) Calculate the operating, financial and combined leverages and Earnings per Share (EPS).
(ii) Determine the likely level of EBIT, if EPS is (1) Rs 4, (2) Rs 2, (3) Rs 0.
10. The following details of RST Limited for the year ended 31st March, 2006 are given
below:
Required:
(i) Calculate Financial leverage
(ii) Calculate P/V ratio and Earning per Share (EPS)
(iii) If the company belongs to an industry, whose assets turnover is 1.5, does it have a high
or low assets leverage?
(iv) At what level of sales the Earnin
Earningg before Tax (EBT) of the company will be equal to
zero?
11. Alpha Ltd. has furnished the following Balance Sheet as on March 31, 2011:
(1) Annual Fixed Cost other than Interest 28,00,000
(2) Variable Cost Ratio 60%
(3) Total Assets
ets Turnover Ratio 2.5
(4) Tax Rate 30%
(i) Earnings per Share (EPS), and
(ii) Combined Leverage.
12. The following information related to XL Company Ltd. for the year ended 31st March,
2013 are available to you:
Equity share capital of Rs 10 each Rs 25 lakh
11% Bonds of Rs 1000 each Rs 18.5 lakh
Sales Rs 42 lakh
Fixed cost (Excluding Interest) Rs 3.48 lakh
Financial leverage 1.39
Profit-Volume Ratio 25.55%
Income Tax Rate Applicable 35%
(i) Operating Leverage; (ii) Combined Leverage; and (iii) Earning per Share.

13. A firm’s sales, variable costs and fixed cost amount to Rs. 75,00,000, Rs. 42,00,000 and
Rs. 6,00,000 respectively. It has borrowed Rs. 45,00,000 at 9% and its equity capital totals
Rs. 55,00,000.
a) What is the firm’s ROI?
b) Does it have favourable financial leverage?
c) If the firm belongs to an industry whose asset turnover is 3, does it have a high or low
asset leverage?
d) What are the operating, financial and combined leverages of the firm?
e) If the sales drop to Rs.50,00,000, what will the new EBIT be?
f) At what level will the EBIT of the equal to zero?
14. The following data is available for XYZ Ltd. :
Find out:
(a) Using the concept of financial leverage, by what percentage will the taxable income
increase if EBIT increase by 6%?
(b) Using the concept of operating leverage, by what percentage will EBIT increase if there is
10% increase in sales, and
(c) Using the concept of leverage, by what percentage will the taxable income increase if the
sales increase by 6%. Also verify results in view of the above figures.
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15.(i) Find out operating leverage from the following data:
(ii) Find out of financial leverage from the following data :
16. From the following, prepare Income Statements of A, B and C firms.
17. (a) The following data are available for ABC& Co.:
Rs.
Operating Profit 200,000
Excess of sales revenue over variable cost 400,000
Interest on long-term debt 100,000
If the company‘s sales revenue declines by 5%, then what will be the percentage change in
EPT?

(b) Rahul Technologies Ltd. has a capital structure consisting of:
(i) Rs. 800,000 in the form of equity shares of Rs. 10 each,
(ii)Rs. 400,000 in the form of 12% preference shares,
(iii) Rs. 1200,000 in the form of 10% debentures and
(iv) Rs. 400,000 as retained earnings.
The company‘s EBIT is Rs. 480,000. Assuming a corporate income tax rate of 60%,
60
ascertain:
(A) financial break-even-point,
point,
(B) financial margin of safety,
(C) financial margin of safety ratio and
(D) degree of financial leverage.
INDIFFERENCE POINT
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18. Calculate the level of earnings before interest and tax (EBIT) at which the EPS
indifference point between the following financing alternatives will occur.
(i) Equity share capital of Rs6,00,000
6,00,000 and 12% debentures of Rs4,00,000
Or
(ii) Equity share capital of Rs44,00,000, 14% preference share capital of Rs2,00,000
2,00,000 and 12%
debentures of Rs4,00,000.
Assume the corporate tax rate is 35% and par value of equity share is Rs 10 in each case.
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19. X Ltd. is considering the following two alternative financing plans:
The indifference point between the plans is Rs 2,40,000. Corporate tax rate is 30%.
Calculate the rate of dividend on preference shares.
20. ABC Ltd. wants to raise Rs. 5,00,000 as additional capital. It has two mutually exclusive
alternative financial plans. The current EBIT is Rs. 17,00,000 which is likely to remain
unchanged.
The relevant Information is –
Present Capital Structure: 3,00,000 Equity shares of Rs. 10 each and 10% Bonds of
Rs. 20,00,000.
What is the indifference level of EBIT? Identify the financial break
break-even
even levels.

16. DIVIDEND DECISIONS
1. ABC Ltd. has a capital of Rs. 10 lakhs in equity shares of Rs. 100 each. The shares
currently quoted at par. The company proposes declaration of a dividend of Rs. 10 per share
at the end of the current financial year. The capitalisation rate for the risk class to which the
company belongs is 12%.
What will be the market price of the share at the end of the year, if
i) A dividend is not declared?
ii) A dividend is declared?
iii) Assuming that the company pays the dividend and has net profits of Rs. 5,00,000
and makes new investments of Rs. 10 lakhs during the period, how many new
shares must be issued? Use the M.M. model.
2. A company belongs to a risk-class for which the appropriate capitalization rate is 10%. It
currently has outstanding 25,000 shares selling at the Rs. 100 each. The firm is contemplating
the declaration of dividend of Rs. 5 per share at the end of the current financial year. The
company expects to have a net income Rs. 2.5 lakhs and a proposal for making new
investments of Rs. 5 lakhs.
Show that under the MM assumptions, the payment of dividend does not affect the value of
the firm and also calculate valuation of firm at the end of current financial year under both
alternatives.
3. M Ltd. belongs to a risk class for which the capitalization rate is 10%. It has
25,000outstanding shares and the current market price is Rs 100. It expects a net profit of
Rs. 2,50,000 for the year and the Board is considering dividend of Rs 5 per share.
M Ltd. requires to raise Rs. 5,00,000 for an approved investment expenditure. Show, how
does the MM approach affect the value of M Ltd., if dividends are paid or not paid.
4. A textile company belongs to a risk-class for which the appropriate PE ratio is 10. It
currently has 50,000 outstanding shares selling at Rs.100 each. The firm is contemplating the
declaration of Rs.8 dividend at the end of the current fiscal year which has just started. Given
the assumption of MM, answer the following questions.
i) What will be the price of the share at the end of the year: (a) if a dividend is not
declared, (b) if its is declared?
ii) Assuming that the firm pays the dividend and has a net income of Rs.5,00,000 and
makes new investments of Rs.10,00,000 during the period, how many new shares
must be issued?
iii) What would be the current value of the firm: (a) if a dividend is declared, (b) if a
dividend is not declared?
5. The earnings per share of a share of the face value of Rs. 100 of PQR Ltd. is Rs. 20. it has
a rate of return of 25%.capitalization rate class is 12.5%. If Walter’s model is used:
a) what should be the optimum payout ratio?
b) what should be the market price per share if the payout ratio is zero?
c) suppose, the company has a payout of 25% of EPS, what would be the price per
share?

6. Sahu & Co. earns Rs 6 per share having capitalisation rate of 10 per cent and has a return
on investment at the rate of 20 per cent. According to Walter’s model, what should be the
price per share at 30 per cent dividend payout ratio? Is this the optimum payout ratio as per
Walter?
7. X Ltd., has 8 lakhs equity shares outstanding at the beginning of the year 2003. The
current market price per share is Rs 120. The Board of Directors of the company is
contemplating Rs 6.4 per share as dividend. The rate of capitalisation, appropriate to the risk-
class to which the company belongs, is 9.6%:
(i) Based on M-M Approach, calculate the market price of the share of the company, when
the dividend is – (a) declared; and (b) not declared.
(ii) How many new shares are to be issued by the company, if the company desires to fund an
investment budget of Rs 3.20 crores by the end of the year assuming net income for the year
will be Rs 1.60 crores?
8. The following figures are collected from the annual report of XYZ Ltd.:
What should be the approximate dividend pay-out ratio so as to keep the share price at Rs 42
by using Walter model?
9. The following information pertains to M/s XY Ltd.
(i) What would be the market value per share as per Walter’s model?
(ii) What is the optimum dividend payout ratio according to Walter’s model and the market
value of Company’s share at that payout ratio?
10. The following information are supplied to
(i) Ascertain whether the company is the following an optimal dividend policy.
(ii) Find out what should be the P/E ratio at which the dividend policy will have no
effect on the value of the share.
(iii) Will your decision change, if the P/E ratio is 8 instead of 12.5?

11. Based on the following information, you are required to determine the market value of
equity shares of SC India Ltd. as per Gordon‘s model:
Earnings of the company Rs.25,00,000
Dividend paid Rs. 15,00,000
Number of shares outstanding 5,00,000
Price earning ratio 8
Rate of return on investment 0.15
Are you satisfied with the current dividend policy of the company? If not, what should be the
optimal dividend payout ratio in this case?
12. The Beta Co-efficient of Target Ltd. is 1.4. The company has been maintaining 8% rate
of growth in dividends and earnings. The last dividend paid was Rs 4 per share. Return on
Government securities is 10%. Return on market portfolio is 15%. The current market price
of one share of Target Ltd. is Rs 36.
(i) What will be the equilibrium price per share of Target Ltd.?
(ii) Would you advise purchasing the share?
13. Z Ltd. is foreseeing a growth rate of 12% per annum in the next 2 year The growth rate is
likely to fall to 10% for the third year and fourth year. After that the growth rate is expected
to stabilize at 8% per annum. If the last dividend paid was Rs 1.50 per share and the
investors’ required rate of return is 16%, find out the intrinsic value per share of Z Ltd. as of
date. You may use the following table:
14. Piyush Loonker and Associates presently pay a dividend of Re. 1.00 per share and has a
share price of Rs 20.00. If this dividend were expected to grow at a rate of 12% per annum
forever, what is the firm’s expected or required return on equity using a dividend-discount
model approach?
15. A Company pays a dividend of Rs 2.00 per share with a growth rate of 7%. The risk free
rate is 9% and the market rate of return is 13%. The Company has a beta factor of 1.50.
However, due to a decision of the Finance Manager, beta is likely to increase to 1.75. Find
out the present as well as the likely value of the share after the decision.

COSTING BITS
(a) Choose the correct answer from the given four alternatives.
(1) Management Accounting is an integral part of management concerned with_______
information.
(a) identifying, presenting and interpreting (b) identifying and presenting
(c) identifying (d) None of the above
(2) Management Accounting is related with _____________.

(a) formulating strategy (b) planning and controlling activities
(c) optimizing the use of resources (d) All of the above
(3) Despite the development of Management Accounting as an effective discipline to

improve the managerial performance, it has some limitations. Which of the following is
a limitation of management accounting?
(a) Psychological Resistance (b) Physiological Resistance
(c) Both of the above (d) None of the above
(4) The primary objective of Management Accounting is to _______________.

(a) maximize profits (b) minimize losses
(c) maximize profits or minimize losses (d) All of the above
(5) Management accounting is concerned with data collection from _____________.

(a) internal sources (b) external sources
(c) internal and external sources (d) internal or external sources
(6) “Management Accounting is concerned with accounting information, which is useful

to the management.” — This definition is given by ______________.
(a) Robert N. Anthony (b) Brown and Howard
(c) CIMA (d) The Institute of Chartered Accountants of England and Wales
Ans: 1-a; 2-d; 3-a; 4-d; 5-c; 6-a
(b) Match the statement in column I with the most appropriate statement in column II:
Ans: 1-c; 2-d; 3-a; 4-b
(c) State whether the following statements are true or false:

1. Management Accounting is a traditional approach to accounting
2. The information in the management accounting system is used for three different
purposes.
3. Management accounting helps in decision making only, not in strategic decision
making.
4. The scope of Management Accounting is broader than the scope of Cost Accounting.

5. As the reports generated by management accounting are not used by any external
party, thebusiness enterprises don‘t need to take care of GAAP.
6. Management accounting records are kept for public.
Answers: 1-F;2-T;3-F;4-T;5-T;6-F
DECISION MAKING TOOLS

1. Choose the correct alternative:
(i) Marginal costs is taken as equal to
a) Prime Cost plus all variable overheads b) Prime Cost minus all variable overheads
c) Variable overheads d) None of the above
(ii) Marginal costing is also known as

a) Direct costing b) Variable costing c) Both a and b d) None of the above
(iii) Which of the following costs is relevant in decision-making?

a) committed costs b) accounting costs c) historical costs d) cash costs
(iv) An opportunity cost is the cost of

a) lost business b) unplanned new business
c) obtaining new business opportunities d) the next best alternative course of action
(v) In a product mix decision, which is the most important factor to consider in order to
try to maximize profit?
a) contribution per unit of a scarce resource used to make the product b) contribution per unit
of the product c) variable cost per unit of the product d) product unit selling price
(vi) Which of the following costs incurred by a commercial airline can be classified as
variable?
a) Interest costs on leasing of aircraft b) Pilots' salaries
c) Depreciation of aircraft d) None of these three costs can be classified as variable
(vii)The basic decision rule on acceptance of special contracts is:

a) Accept the special contract if additional fixed costs can be covered by contribution from
other products
b) Accept the special contract if the additional revenue from the contract exceeds the fixed
costs of manufacture
c) Accept the special contract if it produces a positive contribution to fixed costs
d) Accept the special contract if it produces a positive contribution to variable costs
Solution: i. (a); ii.(c); iii. (a); iv. (a); v. (a); vi. (d); vii. (c)
MULTIPLE CHOICE QUESTIONS:

1. If sales are Rs. 90,000 and variable cost to sales is 75%, contribution is
A. Rs. 21,500 B. Rs. 22,500 C. Rs. 23,500 D. Rs. 67,500
2. Variable cost
A. Remains fixed in total B. Remains fixed per unit
C. Varies per unit D. Nor increase or decrease

3. If sales are Rs. 150,000 and variable cost are Rs. 50,000. Compute P/V ratio.
A. 66.66% B. 100% C. 133.33% D. 65.66%
4. Marginal Costing technique follows the following basic of classification
A. Element wise B. Function Wise C. Behaviour wise D. Identifiability wise
5. P/V ratio will increase if the
A. There is an decrease in fixed cost B. There is an increase in fixed cost C. There is a
decrease in selling price per unit. D. There is a decrease in variable cost per unit.
6. The technique of differential cost is adopted when
A. To ascertain P/V ratio B. To ascertain marginal cost C. To ascertain cost per unit
D. To make choice between two or more alternative courses of action
7. Difference between the costs of two alternative is known as the
A. Variable cost B. Opportunity cost C. Marginal cost D. Differential cost
8. Contribution is Rs. 300,000 and sales is Rs. 1,500,000. Compute P/V ratio.
A. 15% B. 20% C. 22% D. 17.5%
9. Variable cost to sales ratio is 40%. Compute P/V ratio.
A. 60% B. 40% C. 100% D. None of the these
10. Fixed cost is 30,000 and P/V ratio is 20%. Compute breakeven point.
A. Rs. 160,000 B. Rs. 150,000 C. Rs. 155,000 D. Rs. 145,000
11. The breakeven point is the point at which,

A. There is no profit, no loss B. Contribution margin is equal to total fixed cost
C. Total fixed cost is equal to total revenue D. All of the above.
12. A large margin of safety indicates

A. Over capitalization B. The soundness of business
C. Overproduction D. None of the above
13. The selling price is Rs.20 per unit, variable cost Rs.12 per unit, and fixed cost
Rs.16,000, the breakeven-point in units will be
A. 800 units B. 2000 units C. 3000 units D. None of these
14. The P/V ratio of a product is 0.4 and the selling price is Rs.40 per unit. The marginal
cost of the product would be,
A. Rs. 8 B. Rs.24 C. Rs.20 D. Rs.25
15. Fixed cost per unit decreases when,

A. Production volume increases B. Production volume decreases
C. Variable cost per unit decreases D. Variable cost per unit increases.
16. Each of the following would affect the breakeven point except a change in the,
A. Number of units sold. B. Variable cost per unit
C. Total fixed cost D. Sales price per unit.

17. A decrease in sales price,
A. Does not affect the break-even-sales. B. Lowers the net profit
C. Increases the break-even-point. D. Lowers the break-even-point
18. Under the marginal costing system, the contribution margin discloses the excess of,
A. Revenue over fixed cost B. Projected revenue over the break-even-point
C. Revenues over variable costs D. Variable costs over fixed costs.
19. Cost volume-profit analysis allows management to determine the relative
profitability of product by,
A. Highlighting potential bottlenecks in the production process
B. Keeping fixed costs to an obsolete minimum
C. Determine contribution margin per unit and projected profits at various levels production
D. Assigning costs to a product in a manner that maximizes the contribution margin.
20. Contribution margin is known as,

A. Marginal income B. Gross profit C. Net income D. Net profit.
Match the following:

1.
2.

Fill in the Blanks:
1. Variable cost per unit is ______________.
2. Marginal cost is the ___________ of sales over contribution.
3. P/V ratio is the ratio of __________________ to sales.
4. If variable cost to sales ratio is 60%, P/V ratio is _____________.
5. ___________ + Variable overhead = Marginal Cost.
6. When sales are Rs. 300,000 and variable cost is Rs. 180,000, P/V ratio will be ________.
7. Variable cost remains __________________.
8. Margin of safety is _____________.
9. Breakeven point is ____________.
10. Contribution margin equals to _____________________.
11. In cost accounting, marginal cost does not include .
12. In absorption costing, ____________ cost is added to inventory.
13. Sales minus variable cost = fixed costs plus ____________ .
14. Profit volume ratio is contribution / ______________ X 100
15. At breakeven point total revenue is equal to costs.
16. In marginal costing, fixed costs are charged to ____ __________.
17. Margin of safety is the difference between ____ and ________________ .
18. In marginal costing, stock is valued at ___________.
19. When the production volume is nil, the loss will be equal to_________.
20. Constraint on various resources is also known as _____________ .
True or False:
1. Contribution= Sales * P/V ratio.
2. Margin of Safety = Profit / P/V ratio
3. P/ V ratio remains constant at all levels of activity.
4. Marginal Costing follows the behaviours wise classification of costs.
5. At breakeven point, contribution available is equal to total fixed cost.
6. Breakeven point = Profit / P/V ratio.
7. Marginal cost is aggregate of Prime Cost and Variable cost.
8. Variable cost remains fixed per unit.
9. Contribution margin is equal to Sales – Fixed cost.
10. Variable cost per unit is variable.

11. Marginal cost includes prime cost plus fixed overheads.
12. Contribution is the difference between the selling price and the total costs.
13. An increase in the volume of the production will result in reduction in unit variable cost.
14. The amount of profit under absorption costing and marginal costing is one and the same.
15. All variable costs are included in the marginal cost.
16. Margin of safety is the difference between actual sales and the sales and the break even
point.
17. The difference between the budgeted output and the actual output is known as margin of
safety.
18. The breakeven point will be lower if the selling price is increased but the amount of cost
does not change.
19. At breakeven point margin of safety is nil.
20. When fixed cost is deducted from total cost, we get marginal cost.
State true or False.

i. In marginal costing, managerial decisions are guided by profit.
ii. In Absorption Costing, closing stock is valued at full cost.
iii. In marginal costing, fixed costs are treated as period cost.
iv. Marginal costing is a technique of cost control.
v. When quantity (kg) of material is the limiting factor, products are ranked based
on contribution per unit.
vi. When sales value (Rs.) is the limiting factor, products are ranked based on Profit
Volume ratio.
vii. Fixed costs are always unavoidable.
Solution: i. False; ii. True; iii. True; iv. False; v. False; vi. True; vii. False.
Match the following.
Solution: I. D; II. A; III.B; IV. C
BUDGETING AND BUDGETARY CONTROL
1. Answer the following questions:

(1) If budgets are prepared of a business concern for a certain period taking each and
every function separately such budgets are called ______________.
(a) Separate Budgets(b) Functional Budgets(c) Both of them(d) None of the above

(2) Which of the following is not an example of functional budget?
(a) Production budget (b) Cost of production budget
(c) Materials budget (d) None of the above
(3) Which of the following is an essential of a budget?

(a) It is prepared for a definite future period.
(b) It is a statement prepared prior to a defined period of time.
(c) The Budget is monetary and I or quantitative statement of policy.
(d) All of the above
(4) When preparing a production budget, the quantity to be produced equals

(a) sales quantity + opening inventory of finished goods + closing inventory of finished
goods
(b) sales quantity – opening inventory of finished goods + closing inventory of finished
goods
(c) sales quantity – opening inventory of finished goods – closing inventory of finished goods
(d) sales quantity + opening inventory of finished goods – closing inventory of finished
goods
(5) In comparing a fixed budget with a flexible budget, what is the reason for the
difference between the profit figures in the two budgets?
(a) Different levels of activity (b) Different levels of spending
(c) Different levels of efficiency (d) The difference between actual and budgeted performance
(6) When budget allowances are set without the involvement of the budget owner, the
budgeting process can be described as:
(a) top down budgeting (b) negotiated budgeting
(c) zero based budgeting (d) participative budgeting
(7) For which of the following would zero based budgeting be most suitable?
(a) Building construction (b) Mining company operations
(c) Transport company operations (d) Government department activities
Ans: 1-b; 2-d; 3-d; 4-b; 5-a; 6-a; 7-d.
(b) Match the statement in column I with the most appropriate statement in column II:
Ans: 1-c; 2-d; 3-a; 4-b

1. A budget is not a quantitative statement.
2. The principal budget factor is the factor which limits the activities of an organisation.
3. The flexible budget also called as Sliding Scale Budget.
4. The budget is imposed by lower management.
5. The sales budget is an example of functional budget.
6. Responsibility accounting is also called profitability accounting and activity accounting.
Ans: 1-F; 2-T; 3-T; 4-F; 5-T; 6-T

1. Budgets are shown in ……. Terms
A. Qualitative B. Quantitative C. Materialistic D. both (b) and (c)
2. Which of the following is not an element of master budget?
A. Capital Expenditure Budget B. Production Schedule
C. Operating Expenses Budget D. All above
3. Which of the following is not a potential benefit of using a budget?
A. Enhanced coordination of firm activities B. More motivated managers C. Improved
interdepartmental communication D. More accurate external financial statements
4. Which of the following is a long-term budget?
A. Master Budget B. Flexible C. Cash Budget D. Capital Budget
5. Materials become key factor, if
A. quota restrictions exist B. insufficient advertisement prevails
C. there is low demand D. there is no problem with supplies of materials
6. The difference between fixed cost and variable cost assumes significance in the
preparation of the following budget.
A. Master Budget B. Flexible Budget C. Cash Budget D. Capital Budget
7. The budget that is prepared first of all is …
A. Master budget B. Budget, with key factor
C. Cash Budget D. Capital expenditure budget
8. Sales budget is a …
A. expenditure budget B. functional budget C. Master budget D. None of these
9. A flexible budget requires a careful study of
A. Fixed, semi-fixed and variable expenses B. Past and current expenses
C. Overheads, selling and administrative expenses. D. None of these.
10. The basic difference between a fixed budget and flexible budget is that a fixed
budget…….
A. is concerned with a single level of activity, while flexible budget is prepared for
different levels of activity
B. Is concerned with fixed costs, while flexible budget is concerned with variable costs.
C. is fixed while flexible budget changes
D. None of these.

Match the following:
Fill in the Blanks:

1. Budgets are ______ plans.
2. The key factor in a budget does not remain the _____ every year.
3. Cash budget is a part of _____________ budget.
4. ____________ budgets are subsidiary to master master budget.
5. _______________ leads to budgeting and budgeting leads to budgetary control.
6. _________ Control involves checking and evaluation of actual performance.
7. The document which describes the budgeting organisation, procedure etc is known as
________________.
8. A budget is a ________ to management.
9. The principle budget factor for consumer goods manufacture is normally ________.
10. A budget is a projected plan of action in __________________.
True or False:
1. Budget is a means and budgetary control is the end result.
2. To achieve the anticipated targets, Planning, Co-ordination and Control are the important
main tasks of management, achieved through budgeting and budgetary control.
3. A key factor or principal factor does not influence the preparation of all other budgets.
4. Budgetary control does not facilitate introduction of ‘Management by Exception’.
5. Generally, budgets are prepared to coincide with the financial year so that comparison of
the actual performance with budgeted estimates would facilitate better interpretation and
understanding.

6. A flexible budget is one, which changes from year to year.
7. A flexible budget recognises the difference between fixed, semi-fixed and variable cost
and is designed to change in relation to the change in level of activity
8. Sales budget, normally, is the most important budget among all budgets.
9. The principal factor is the starting point for the preparation of various budgets.
10. A budget manual is the summary of all functional budgets.
STANDARD COSTING & VARIANCE ANALYSIS

MCQ Type Questions:
1. Which among the below is the reason behind Material Price Variance:
a) Change in basis purchase price of material. b) Uneconomical size of purchase order.
c) Payment of excess or less freight. d) All of the above.
2. In a factory Standard rate per hour Rs. 4, Standard time per unit of output – 20
hours, Units produced -500,Actual hours worked-12,000. Compute Labour Efficiency
Variance.
a) Rs. 6000 (Favourable) b) Rs.8000 (Adverse)
c) Rs. 9,600 (Favourable) d) Rs.8000 (Favourable)
3. MSE Manufacturing gives you the following details.

Standard Price per kg of Material Rs.2, Actual Material used 2,000 kg, Actual cost of
Material Rs. 3,000. Actual output 2,100 kg. Compute Material Price Variance.
a) Rs. 1050 (Favourable) b) Rs.1142 (Favourable)
c) Rs. 1000 (Favourable) d) None of the above
Answer:1-d;
2-b; (Hints: Labour Efficiency Variance=SR(SH-AH)=4(500×20-12,000)=8,000 (Adverse)
3-c. (Hints: Material Price Variance = (SP-AP)×AQ = (2-3000/2000)2000 = (2 - .5)2000 =
1000 (Favourable)
1. Excess of actual cost over standard cost is known as
A. Abnormal effectiveness B. Unfavourable variance
C. Favourable variance D. None of these.
2. Difference between standard cost and actual cost is called as
A. Wastage B. Loss C. Variance D. Profit
3. Standards cost is used
A. To ascertain the breakeven point B. To establish cost-volume profit relationship
C. As a basis for price fixation and cost control through variance analysis.
4. Standard price of material per kg Rs. 20, standards consumption per unit of
production is 5 kg. Standard material cost for producing 100 units is
A. Rs. 20,000 B. Rs. 12,000 C. Rs. 8,000 D. Rs. 10,000

5. Standard cost of material for a given quantity of output is Rs. 15,000 while the actual
cost of material used is Rs. 16,200. The material cost variance is:
A. Rs. 1,200 (A) B. Rs. 16,200 (A) C. Rs. 15,000 (F) D. Rs. 31,200 (A)
6. For the purpose of Proof, Material Cost Variance is equal to:
A. Material Usage Variance + Material Mix variance
B. Material Price Variance + Material Usage Variance
C. Material Price Variance + Material yield variance
D. Material Mix Variance + Material Yield Variance
7. Cost variance is the difference between
A. The standard cost and marginal cost B. The standards cost and budgeted cost
C. The standards cost and the actual cost D. None of these
8. Standard price of material per kg is Rs. 20, standard usage per unit of production is 5
kg. Actual usage of production 100 units is 520 kgs, all of which was purchase at the
rate of Rs. 22 per kg. Material usage variance is
A. Rs. 400 (F) B. Rs. 400 (A) C. Rs. 1,040 (F) D. Rs. 1,040 (A)
9. Standard price of material per kg is Rs. 20, standard usage per unit of production is 5
kg. Actual usage of production 100 units is 520 kgs, all of which was purchase at the
rate of Rs. 22 per kg. Material cost variance is
A. 2,440 (A) B. 1,440 (A) C. 1,440 (F) D. 2,300 (F)
10. Standard quantity of material for one unit of output is 10 kgs. @ Rs. 8 per kg.
Actual output during a given period is 800 units. The standards quantity of raw
material
A. 8,000 kgs B. 6,400 Kgs C. 64,000 Kgs D. None of these.
11. Which of the following is true about standard costs?
A. They are the actual costs for delivering a product or service under normal conditions
B. They are predetermined costs for delivering a product or service under normal conditions.
C. They are the actual costs for producing a product under normal conditions
D. They are predetermined costs for delivering a product or service under normal and
abnormal conditions.
12. Which of the following is true?

A. Standard costs are predetermined rates for materials and labour only.
B. Standard costs are predetermined rates for materials only.
C. Standard costs are based on actual activity at the end of the period
D. Standard costs are predetermined rates for materials, labour, and overhead.
13. Which of the following is often the cause of differences between actual and standard
costs of materials and labour?
A. Price changes for materials B. Excessive labour hours
C. Excessive use of materials D. All of the above
14. Which of the following can be used to calculate the materials price variance?
A. (AQ – SQ) x SP B. (AP – SP) x AQ C. (AP – SP) x SQ D. (AQ – SQ) x AP

15. Which of the following is the difference between actual and standard cost of
material caused by the actual quantity of material used exceeding the standard quantity
of material allowed?
A. Price variance B. Mix variance C. Quantity variance D. Yield variance
16. Which of the following departments is most likely responsible for a price variance in
direct materials?
A. Warehousing B. Receiving C. Purchasing D. Production
17. The overhead variance is caused by the difference between which of the following?
A. Actual overhead and standard overhead applied
B. Actual overhead and overhead budgeted at the actual operating level
C. Standard overhead applied and budgeted overhead
D. Budgeted overhead and overhead applied
18. When are the overhead variances recorded in a standard costing system?
A. When the cost of goods sold is recorded
B. When the factory overhead is applied to work-in-process
C. When the goods are transferred out of work-in-process
D. When direct labour is recorded
19. Which of the following is true when recording variances in a standard costing
system?
A. All unfavourable variances are debited
B. Only unfavourable material variances are credited.
C. Only unfavourable material variances are debited.
D. Only unfavourable variances are credited.
20. Which of the following operating measures would a manager want to see decreasing
over time?
A. Merchandise inventory turnover B. Total quality cost
C. Percentage of on-time deliveries D. Finished goods inventory turnover
Match the following: 1.

2.
Fill in the Blanks:

1. Standard cost is a ___________ cost.
2. Standard cost when fixed is recorded on _____________ card.
3. Historical costing uses post period costs while standards costing uses ___________costs.
4. Three types of standards are ____________________.
5. The _____________ is usually the co-ordinator of the standards committee.
6. Standards cost when fixed recorded on ________ card.
7. Basically there are two types of standards viz, a) Basic standards, and ___________.
8. When actual cost is less than the standards cost, it is known as ______________variance.
9. Standard Costing is one of the __________________ techniques.
10. Standard means a criterion or a yardstick against which actual activity can be compared to
determine the ______________ between two.
11. Ideal time variance is always ________________.
12. Material usage variance is the sum of ______________.
13. ____________ is a must for meaningful inter firm comparison.
14. Standard cost is the ___________ cost.
15. Uniform costing is a _____________ of costing.
16. Inter firm comparison is the technique of evaluation of _____________.
17. Standard cost is a _____________cost.
18. Three types of standard ______________.
19. Standards costing are applied in ____________ industry.
20. When standard cost is less than the standard cost, it is known as ___________ variance.

True or False:
1. Excess of Actual cost over Standards Cost is treated as unfavourable variance.
2. Variances are calculated for both material and labour.
3. While fixing standards, normal losses and wastages are taken into account.
4. Under the system of standard costing, there is no need for variance analysis.
5. Standard costing is an ideal name given to the estimate making.
6. Standards cost, once fixed cannot be altered.
7. Predetermined standards provide a yardstick for the measurement of efficiency.
8. Material cost variance and labour cost variance are always equal.
9. Fixing standards is the work of industrial engineer or the production people and not of cost
accountant.
10. Standards costing are more profitability employed in job order industries than in process
type industries.
11. Standard costing works on the principle of exception.

12. An increase in production means an increase in overall productivity.
13. Difference between the standard cost and actual cost is called as variance.
14. Uniform costing helps in free exchange of ideas among the participating members.
15. A variance may be either favourable or adverse.
16. There is no difference between standard costing and budgeting.
17. The objective of uniform costing is wealth maximisation.
18. Uniform costing is a method of costing.
19. Uniform costing is a must for meaningful in a firm comparison.
20. Standards are arrived at on the basis of past performance.
LEARNING CURVE
1. Choose the correct alternative.
(i) Which of the following factors does not affect Learning Curve
a. Method of production b. Labour strike c. Shut down d. Efficiency rate
(ii) Which of the following is not a reason to use the concept of Learning Curve?
a. Labour efficiency b. Introducing new technology
c. Value chain effect d. Standardization, specialization, and methods improvements
(iii) Learning curve theory is not applicable to

a. Direct labourb. Material c. Spoilage and defective works d. Overhead
Solution: (i) c; (ii) b; (iii) d.

2. State true or false.
i) Learning curve passes through three stages.
ii) Learning curve suggests great opportunities for cost reduction.
iii) Application of learning curve concept pre-requisites uninterrupted flow of work.
iv) Learning curve effects make the value chain inefficient.
v) The more experience a firm has in producing a particular product, the higher is its costs.
Solution: i. True; ii. True; iii. True; iv. False; v. False.
1. Cost Price is not fixed in case of:

A. Cost plus contracts B. Escalation clause C. De escalation clause D. All of the above.
2. Continuous stock taking is a part of:
A. ABC analysis B. Annual stock taking C. Perpetual Inventory D. None of these.
3. In Reconciliation Statements expenses shown only in financial accounts are:
A. Added to financial profit B. Deducted from financial profit
C. Ignored D. Added to costing profit.
4. Operating costing is applicable to:
A. Hospitals B. Cinemas C. Transport undertaking D. All the above.
5. Flexible budget requires a careful study of:
A. Fixed, semi-fixed and variable expenses B. Past and current expenses
C. Overheads, selling and administrative expenses D. None of the above.
6. Which of the following items is not excluded while preparing a cost sheet?
A. Goodwill written off B. Provision for taxation
C. Property tax on factory building D. Interest paid.
7. The most important element of cost is:
A. Material B. Labour C. Overheads D. All the above.
8. Continuous stock taking is a part of:
A. ABC analysis B. Annual stock taking C. Perpetual inventory D. None of the above.
9. Depreciation is an example of:
A. Fixed cost B. Variable cost C. Semi variable cost D. None of the above.
10. Joint cost is suitable for:

A. Infrastructure industry B. Ornament industry C. Oil industry D. Fertilizer industry.
Answer:
1-A 2-C 3-A 4-D 5-A 6-C 7-A 8-C 9-A 10-C
II. True / False

1. Multiple costing is suitable for banking industry.
2. Cost ledger control account makes the cost ledger self balancing.
3. Production cost includes only direct costs related to the production.
4. CAS 9 is for direct expenses as issued by the Cost Accounting Standards Board (CASB) of
the Institute of Cost Accountants of India.
5. ABC analysis is based on the principle of management by exception.
6. Slow moving materials have a high turnover ratio.
7. Cost of indirect material is apportioned to various departments.
8. Departments that assist producing Department indirectly, are called service departments.
9. Waste and scrap of material have small realisation value.
10. Bin card are not the part of accounting records.
Answer:
1. False 2. True 3. False 4. False 5. True 6. False 7. False 8. True 9. False 10.True.

III. Matching:
Answer:
1-E 2-F 3-C 4-D 5-J 6-B 7-G 8-A 9-I 10-H
FM BITS
INTRODUCTION TO FINANCIAL MANAGEMENT

(a) Choose the correct answer from the given four alternatives. [1x6=6]
(1) Profit Maximization is the main objective of business because:

(a) Profit acts as a measure of efficiency and (b) It serves as a protection against risk.
(c) Both (d) none
(2) Stock holder’s wealth = _________________

(a) No. of shares owned x Current stock price per share (b) No. of shares owned x Current
stock price per share (c) No. of shares owned x Current stock price per share (d) none
(3) Working Capital Management refers to a Trade-off between _____________and

Profitability.
(a) Liquidity (b) Risk (c) Both of the above (d) None of the above
(4) Which one of the following is a medium term source?
(a) Public Deposits (b) Lease Financing (c) Euro Debt Issue (d) All of the above
(5) The lease period in such a contract is less than the useful life of asset. Here we are
talking about_______.
(a) Operating or Service Lease (b) Service Lease (c) Financial Lease (d) None of the above
(6) Which one is the Benefit(s) of Factoring?

(a) Better Cash Flows (b) Better Assets Management
(c) Better Working Capital Management (d) All of the above

(7) Find the present value of Rs. 1,000 receivable 6 years hence if the rate of discount is
10 percent.
(a) 564.5 (b) 554.5 (c) 574.5 (d) 600
(8) The term ________means manipulation of accounts in a way so as to conceal vital
facts and present the financial statements in a way to show a better position than what it
actually is.
(a) window dressing (b) creative accounting (c) window accounting(d) modified accounting
(9) Collateralized borrowing and lending obligation (CBLO) is a discounted instrument

available in electronic book entry for the maturity period ranging from ___________.
(a) 1 day to 19 days (b) 1 day to 15 days (c) 1 day to 30 days (d) None of the above
(10) IPO refers to ______; the first time a company comes to public to raise money.
(a) Immediate Public Offer (b) Immediate Public Offering
(c) Initial Public Offer (d) Initial Public Offering
(11) SPO refers to _________________, the second and subsequent time a company
raises money from the public directly.
(a) Second Public Offering (b) Subsequent Public Offering
(c) Subsequent Public Offer (d) Seasonal Public Offering
(12) Liquid Liability = Current Liability – Bank Overdraft – _______________

(a) Cash Credit (b) Trade Credit (c) Both of the above (d) None of the above
Ans: 1-c; 2-a; 3-c; 4-d; 5-a; 6-d; 7-a; 8-a; 9-a; 10-d; 11-d; 12-a.
(b) Match the statement in Column I with the most appropriate statement in column II:
Ans: 1-c; 2-d; 3-a; 4-b
(c) State whether the following statements are True or False [1x4=4]
1. There is a conflict between profitability and liquidity of a firm.
2. The Finance Manager has to bring a trade-off between risk and return by maintaining
a proper balance between debt capital and equity share capital.
3. The earlier objective of profit maximization is now replaced by wealth
maximization.
4. The modern approach to the Financial Management is concerned with only the
solution of a problem - financing of a business enterprise.
5. The investment decision is concerned with the selection of assets.
6. One of the most important functions of the Finance Manager is to ensure availability
of adequate financing.
Ans.: 1-T; 2-T; 3-T; 4-F; 5-T; 6-T

TOOLS FOR FINANCIAL ANALYSIS AND PLANNING
Answer the following questions:
(1) Ratio analysis is the process of determining and interpreting numerical relationships
based on _________.
(a) Financial values (b) Financial statements
(c) Financial numerical information (d) All of the above
(2) Ratio analysis is based on __________ measure.

(a) relative (b) absolute (c) Both of the above (d) None of the above
(3) The persons interested in the analysis of financial statements can be grouped as
____________.
(a) Owners or investors (b) Creditors (c) Financial executives (d) All of the above
(4) The term “Operating Profit” means profit before __________________.

(a) interest (b) tax (c) interest and tax (d) interest or tax
(5) Debt- equity Ratio is an example of ________________.

(a) Short term solvency Ratio (b) Long term solvency Ratio
(c) Profitability Ratio (d) None of the above
(6) In Cash Flow Statement, Cash includes______________________.

(a) cash on hand
(b) demand deposits with banks
(c) cash on hand and demand deposits with banks
(d) cash on hand or demand deposits with banks
(7) The treatment of interest and dividends received and paid depends upon the nature
of the enterprise. For this purpose, the enterprises are classified as _______________.
(a) (i) Financial enterprises, and (ii) Operating enterprises.
(b) (i) Financial enterprises, and (ii) Other enterprises.
(c) (i) Financial enterprises, and (ii) Non-Financial enterprises.
(d) (i) Trading enterprises, and (ii) Non - Trading enterprises.
(8) Cash Flow Statement is _________for Income Statement or Funds Flow Statement.
(a) not a substitute (b) a substitute (c) depends on situation (d) None of the above
(9) Funds Flow Statement reveals the change in ____ between two Balance Sheet dates.
(a) Working capita l(b) Internal capital (c) Share capital (d) Both (a) & (c)
Ans: 1-d; 2-a; 3-d; 4-c; 5-b; 6-c; 7-b; 8-a; 9-a.

(b) Match the statement in Column I with the most appropriate statement in column II:
Ans: 1-c; 2-d; 3-a; 4-b
(c) State whether the following statements are True or False

1. Funds Flow Statement is a substitute of Income Statement or a Balance Sheet.
2. Unrealised gains and losses arising from changes in foreign exchange rates are not
cash flows.
3. A high proprietary ratio will indicate a relatively little danger to the creditors or vise-
versa in the event of forced reorganization or winding up of the company.
4. Cash equivalents include purely short term and highly liquid investments which are
readily convertible into cash and which are subject to an insignificant risk of changes
in value.
5. An example of cash flows arising from investing activities is Cash proceeds from
issuing shares.
6. Debtors Turnover Ratio or Debt Collection Period Ratio measures the quantity of
debtors since it indicates the speed with which money is collected from the debtor.
7. Decrease in working capital is a source of fund.
8. According to Accounting Standard - 3 (Revised) an enterprise should prepare a Cash
Flow Statement and should present it for each period with financial statements
prepared.
Answer: 1-F; 2-T; 3-T; 4-T; 5-F; 6-F; 7-T; 8-T
WORKING CAPITAL MANAGEMENT

MCQ Type Questions:
1. A firm following an aggressive working capital strategy would:
a. Hold substantial amount of fixed assets.
b. Minimize the amount of short term borrowing.
c. Finance fluctuating assets with long term financing.
d. Minimize the amount of fund in very liquid assets.
2. Which of the following would be consistent with a conservative approach to financing

working capital?
a. Financing short-term needs with short-term funds.
b. Financing short-term needs with long-term debt.
c. Financing seasonal needs with short-term funds.
d. Financing some long-term needs with short-term fund

3. To financial analysts, "net working capital" means the same thing as __________.
a. total assets b. fixed assets c. current assets d. current assets minus current liabilities.
4. Baumol's Model of Cash Management attempts to:

a. Minimise the holding cost b. Minimization of transaction cost
c. Minimization of total cost d. Minimization of cash balance
5. Which of the following is not considered by Miller-Orr Model?

a. Variability in cash requirement b. Cost of transaction
c. Holding cost d. Total annual requirement of cash.
Answer: 1-d; 2-b; 3-d; 4-c; 5-d.
COST OF CAPITAL, CAPITAL STRUCTURE THEORIES,

DIVIDEND DECISIONS AND LEVERAGE ANALYSIS
(A) Choose the correct answer from the given four alternatives:
(i) A firm is said to be financially unlevered firm if the firm has ……….
(a) only external equity in its capital structure.
(b) only owner‘s equity in its capital structure.
(c) both external equity and owner‘s equity in its capital structure.
(d) only equity share capital in its capital structure.
(ii) The term “optimal capital structure” implies that combination of external equity
and internal equity at which ………………..
(a) the overall cost of capital is minimised.
(b) the overall cost of capital is maximised.
(c) the market value of the firm is minimised.
(d) the market value of firm is greater than the overall cost of capital.
(iii) Net Income Approach to capital structure decision was proposed by …….
(a) J. E. Walter (b) M.H. Miller and D.Orr (c) E. Solomon (d) D. Durand
(iv) There is a reciprocal relationship between ……………….

(a) DOL and DFL (b) DOL and margin of safety ratio.
(c) DFL and margin of safety ratio. (d) DOL and break-even-point.
(v) The genesis of financial risk lies in …………….

(a) capital budgeting decision. (b) capital structure decision.
(c) dividend decision. (d) liquidity decision.
(vi) Financial break-even point is that level of EBIT at which ………….

(a) EPS > 0(b) EPS < 0(c) EPS = 0(d) EPS > 1
Answer: (i) – b; (ii) – a; (iii) – d; (iv) – b; (v) – b; (vi) – c.

(B) Match the statement in column I with the most appropriate statement in column II:
Column I Column II
I) Optimal dividend payout a) Business risk
II) Optimal capital structure b) Financial margin of safety
III) DFL c) Gordon
IV) DOL d) Durand
Answer: (i) – c; (ii) – d; (iii) – b; (iv) – a;

(i) The business risk is independent of capital structure because the operating profitability
is not influenced by the sources from which the funds have been raised.
(ii) Under CAPM model, it is assumed that unsystematic risk can be avoided by the
investors by considering different kinds of securities in their portfolio.
(iii)According to Walter‘s model, the optimal dividend payout ratio of a growth firm is
100 per cent.
(iv) “The investment policy adopted by the company is fixed”. This assumption is made in
Gordon‘s Dividend Model.
Answer: (i) True, (ii) True, (iii) False, (iv) False
CAPITAL BUDGETING – INVESTMENT DECISIONS

1. Choose the correct alternative:
(i) In mutually exclusive projects, projects which are selected for comparison must have
a) positive net present value b) negative net present value
c) zero net present value d) none of the above
(ii) In a single projects situation, results of internal rate of return and net present value
lead to
a) cash flow decision b) cost decision c) same decisions d) different decisions
(iii) The discount rate which forces net present values to become zero is classified as
a) positive rate of return b) negative rate of return
c) external rate of return d) internal rate of return
(iv) A point where profile of net present value crosses horizontal axis at plotted graph
indicates project
a) costs b) cash flows c) internal rate of return d) external rate of return
(v) Payback period in which an expected cash flows are discounted with the help of
project cost of capital is classified as
a) discounted payback period b) discounted rate of return
c) discounted cash flows d) discounted project cost
(vi) Number of years forecasted to recover an original investment is classified as

a) payback period b) forecasted period c) original period d) investment period
(vii)In proper capital budgeting analysis, we evaluate incremental

a) Accounting income b) Cash flow c) Earnings d) Operating profit

(viii)The term mutually exclusive investments mean:
(a) Choose only the best investments.
(b) Selection of one investment precludes the selection of an alternative.
(c) The elite investment opportunities will get chosen.
(d) There are no investment options available.
Solution: (i) (a); (ii) (c); (iii) (d); (iv) (c); (v) (a); (vi) (a); (vii) (b);(viii) (b).
11. State true or false:

(i) When NPV is zero PI will be one.
(ii) In case the IRR of a project is higher than the cost of capital, NPV will be positive.
(iii) In calculating Discounted Payback Period, IRR is used as the discounting rate.
(iv) IRR is also known as the highest opportunity cost that the project can bear.
(v) Accounting Rate of Return (ARR) method does not consider time value of money.
Solution: (i) True; (ii) True; (iii) False; (iv) True; (v) True.
12. Match the following:
Solution: A. V; B. III; C. II; D. I; E. IV

(a) Multiple Choice Questions (MCQ)
(i) Which of the following is not a characteristic of GDR?
(A) Is a negotiable instrument (B) Carry voting rights
(C ) Freely tradable in International Market (D) Denominated in US Dollars.
(ii)Which of the following is a feature of Factoring?
(A) Tool of short term borrowing (B) Purchase of export bill only.
(C) Used in Export business only. (D) Done without recourse to the client.
(iii)Which of the following is a Profitability Ratio?
(A)Proprietary Ratio (B)Debt –equity Ratio (C )Price Earnings Ratio (D)Fixed Asset Ratio.
(iv) GP Margin=20%, GP=Rs. 54000, Sales=
(A) Rs. 300000 (B) Rs. 270000 (C) Rs. 280000 (D) Rs. 290000
(v) EBIT=Rs. 1120000, PBT=Rs. 320000, Fixed Costs=Rs. 700000, Operating Leverage=
(A) 1.625 (B) 2.625 (C) 6.625 (B) 3.625
(vi) Which of the following is not a Source of Fund?
(A) Issue of Capital (B) Issue of Debenture
(C)Decrease in working capital (D) Increase in working capital.
(vii)Determinants of credit policy relates to:
(A) Credit standards (B) Credit terms
(C) Collection Procedures (D)All of the above
(viii)The following is not a Discounted Cash Flow Technique:
(A) NPV (B) PI (C) Accounting of Average rate of return (D) IRR

(ix) β(Beta ) of a security measures its:
(A)Diversifiable risk (B) Financial risk (C) Market risk (D) None of above.
(x)Following method is also known as ‘Benefit Cost Ratio.’

(A) NPV (B)IRR (C)ARR (D) PI
(b)Match the following:
(c) State whether the following statement are True/False.

i) Cost of capital is highest in Equity share Financing.
ii) Bill Financing is least liquid from Banker’s point of view
iii) Payout Ratio=Earning per Equity share/Dividend per equity share
iv) Liquid Assets=Current Assets-Inventory
v) Under cash credit/overdraft arrangement, a predetermined limit for borrowing is
specified by the bank.
vi) As per TANDON Committee norms under method 1 the proprietor should contribute
75% of Working Capital Gap.
vii) Value of right=Cum right share price minus Ex right share price
viii) Combined leverage=Contribution/EBT
ix) DPP=Discounted Annual Cash Flow/Investment
x) Project can be accepted when NPV is positive or at least zero
Ans:
1(a) (i)-(B) (ii)-(A) (iii)-(C) (iv)-(B) (v)-(A) (vi)-(D) (vii)-(D) (viii)-(C) (ix)-(C) (x)-(D)
1(b) (A)-(vi) (B)-(i) (C)-(vii) (D)-(ii) (E)-(iv) (F)-(x) (G)-(v) (H)-(iii) (I)-(ix) (J)-(viii)
1(c) (i)True (ii)False (iii)False (iv)True (v)True (vi)False (vii)True (viii)True (ix)False
(x) True

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Group II

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P – 33: A manufacturer with overall (interchangeable among the products) capacity of

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P – 46: The present output details of a manufacturing department are as follows:

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P – 51. (a) Shut down/Continue point

(b) Shut down/Continue point

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P – 1: From the following you are required to calculate

P – 2: The standard costs of certain chemical mixture is:

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Articles produced 1,000 units

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Skilled Semi-Skilled Unskilled

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a) you are required to calculate total OH for the month of October

From the above data calculate various sales variances

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P - 28: The standard material cost for 100 kg of chemical D is made up :

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Prepare a statement of variances

You are required to calculate the following overhead variances

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P – 2: A company is manufacturing two products X and Y. A forecast about the number of

P – 3: Draw a material procurement Budget (Quantitative) from the following information.

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P - 6: The following details apply to an annual budget for a manufacturing company.

QUARTER 1st 2nd 3rd 4th

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Prepare a budget for production of 7,000 units and 9,000 units.

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P - 15: Production costs of a factory for a year are as follows:

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(b) Machine hours per unit of product

(c) Total number of machines

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You are required to:

The purchase price of materials for June is expected to be as follows:

All materials will be purchased on 3rd of June, Prepare:

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Fixed factory overhead rate per direct labour hour

P – 23: The budgeted level of activity of a production department of a manufacturing

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Meaning of Learning Curve:

Features of Learning Curve:

Important applications of Learning Curve:

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Limitations of Learning Curve:

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P – 6: Z.P.L.C experience difficulty in its budgeting process because it finds it necessary to

Costing & FM J 2021

Costing & FM J 2021