REVISIONARY TEST PAPER

DECEMBER 2011

FOUNDATION

THE INSTITUTE OF
COST AND WORKS ACCOUNTANTS OF INDIA
12, SUDDER STREET, KOLKATA-700 016
 FOUNDATON EXAMINATION
(REVISED SYLLABUS - 2008)

Paper - 1 : ORGANIZATION & MANAGEMENT

FUNDAMENTALS

Q. 1. Define the following, in just one or two sentence.

(a) Organization
(b) Pure Line Organization
(c) Departmental Line Organization

Answer 1. (a)
An Organization is a consciously coordinated social unit, composed of two or more people what functions
of a relatively continuous basis to achieve a common goal or set of goals.

Answer 1. (b)
All individuals at a given level perform the same type of work and departments are created only to
facilitate supervision and control.

Answer 1. (c)
In department line organization work performed in each department is of a different nature.

Q. 2. Define Line Organizations. State its advantages and disadvantages.

Answer 2.
Line Organization is the oldest type of organization structure. It is also known as military or ‘Scalar’
organization because it originated in the army. In line organization there is an unbroken vertical line
through which authority flows from the top to the bottom of organization. Every managers exercises direct
authority over his subordinates who are in turn directly responsible to their superior. There is thus a
hierarchical arrangement of authority .There are no separate supportive or service units for
accounting,labour etc. Every manager is required to incorporate these activities in his department.
There are two types of Line Organization viz. Pure Line Organization and Departmental line organization.

Characteristics :
Line organization has the following characteristics :
(i) Lines of authority are vertical flowing from top to the bottom.
(ii) The command is through a straight and unbroken line. Each subordinate receives orders from one
superior and is responsible to him.
(iii) All person at the same level are independent of each other.
(iv) The authority and responsibility of each position is clearly specified.
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Advantages :
Line organization has the following advantages :
(A) Simplicity – Line organization is the most simple to establish and operate. Lines of authority and
responsibility are direct, simple and clear. Every individual understands to whom he is responsible.
The authority and responsibility of every person is clearly defined.
(B) Prompt decision-Every manager can take decisions independently without consulting others. He
has not to depend upon others for advice, assistance and service. Therefore decision making
process is easier and less time- consuming.
(C) Effective discipline – each position is under the direct control of its immediate superior position.
Therefore, it is to maintain discipline among the people in the organization.
(D) Orderly Communication-Communication between superiors and subordinates flows in a direct
vertical line. Such communication is easy to maintain and it is orderly in nature. It supports the
authority of the superior.
(E) Unified control- Unity of command results in close personal contacts between superiors and
subordinates. Direct and close contacts facilitate effective supervision and control.
(F) Economical-Line organization is quite economical because staff specialists are not required.
(G) Fixed responsibility-Every manager can be held responsible for the results of his unit.
(H) Coordination-As all activities relating to one department are managed by one person, co-ordination
can be effective.

Disadvantages :
Line organization suffers from the following disadvantages :
(A) Lack of specialization - There is no scope for specialization. A manager has to perform a variety of
functions which might not be interrelated. Every manager cannot be equally good in all the functions
and, therefore, the quality of management tends to be poor.
(B) Overloading - As managers are overloaded with day-to-day work, they do not find time for innovations
and creativity and independent thinking.
(C) Autocratic approach - The line of authority is direct and requires high level of obedience on the part
of subordinates. There is concentration of authority at the top and one way communicaition.
Managers at the top may be devoid of the realities of the situation. As a result decisions may be
arbitrary. There is scope for favoritism.
(D) Low morale - Subordinates are expected to carry out the decisions taken by superior. There may be
lack of initiative at the part of subordinates. Their opinions and grievances are not properly
communicated upward.
(E) Instability - The success and the continuity of the organization depend upon a few competent
managers. Succession problem is acute and there may be lack of continuity when key executives
retire.
(F) Rigidity - Discipline is emphasized so much that it may be difficult to change.

Q. 3. What do understand by Matrix Organization?

Answer 3.
The matrix structure sometimes referred to as a “multiple command system” is a hybrid that attempts to
combine the benefits of both types of designs while avoiding their drawbacks. An organization with a
matrix structure has two types of structure existing simultaneously. Employees have in effect two bosses-
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that is they work in two chains of command. One chain of command is functional or divisional, the type
diagrammed vertically in the following charts. The second is a horizontal overlay that combines people
from various divisions or functional departments into a project or business team led by a project or
group manager who is an expert in the team’s assigned area of specialization.
As organizations have become more global, many use a type of matrix form in their international operations.
There may be product or division managers, as in a divisionalised firm, as well as national managers for
each country in which the company does business. Thus a division employee would report to the divisional
manager on product related issues and to the national manager on political issues or those involving
international relations.
Although matrix organizational structures are necessarily complex, they have advantages.
(i) Often the matrix structure is an efficient means for bringing together the diverse specialized skills
required to solve a problem.
(ii) Problems of coordination-which plague most functional designs are minimized here because the
most important personnel for a project work together as a group. This is itself produces a side
benefits: By working together, people come to understand the demands faced by those who have
different areas of responsibility. A report from AT&T Bell Labs for example indicated that systems
engineers and systems developers overcame their preconceptions about each other jobs and
acquired more realistic attitude about each other after working together as project team. (This was
not, however, in a pure matrix structure). Indeed the interaction was so effective in stimulating
interest in each others work that some system developers decided to move into full time systems
engineering.
(iii) Another advantage of the matrix structure is that it gives the organization a great deal off cost
saving flexibility. Because each project is assigned only the number of people it needs , unnecessary
duplication is avoided.
A disadvantage is that not everyone adapts well to a matrix system.
(i) To be effective, team members must have interpersonal skills and be flexible and co-operative.
(ii) In addition, morale can be adversely affected when personnel are rearranged once projects are
completed and new ones are begun.
(iii) Finally if hierarchies are not firmly established and effectively communicated, there is the danger,
according to some analysts, that conflicting directives and ill-defined responsibilities will tie
managers hands.
To overcome these obstacles, special training in new job skills or interpersonal relationships may be
necessary when a matrix overlay is first introduced or when a temporary overlay becomes permanent. To
protect individuals who function well in traditional structures but are likely to have difficulty adjusting
to a matrix structure, many companies either make special efforts to retain personnel before assigning
them to project teams or select only volunteers for the teams.

Q. 4. Explain in brief the three levels of conflicts in any organization?

Answer 4.
There is frequent conflict and friction between the line executives and staff personnel. The causes of such
conflict may be divided into three categories :
(A) Line managers make the following complaints against staff personnel :
(i) Staff oversteps its authority . Staff officers encroach upon line authority. They interfere in the work
of line managers and attempt to tell them how to do their work. They do not confine themselves to
their advisory role.
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(ii) Staff does not give sound advice. Staff personnel fail to give fully considered, well balanced and
sound advice. They are academicians and give new ideas that have little practical application.
They are not well acquainted with the real problems of the enterprise. They often push untried and
untested ideas.
(iii) Staff steals credit. Staff personnel are not directly accountable for results and are generally
overjealous.They tend to assume credit for success but lay the blame for failure on line managers.
(iv) Staff experts fail to see the whole picture objectively. They tend to emphasize their speciality rather
than the interest of the total organization.
(v) Staff has a complex. Staff officers tend to impose their superiority on line managers. Staff personnel
are generally more qualified and specialist in their areas. Therefore, they consider themselves
superior to the line executives.
(B) Staff personnel usually make the following compliants against the managers :
(i) Line managers often resist new ideas and are not prepared to listen to the arguments to the staff
experts.
(ii) Line executive do not provide sufficient authority. Staff specialists lack authority to get their useful
ideas implemented. As a result they get frustrated.
(iii) Line managers do not make a proper use of their service of staff specialists . Line managers consult
them only as a last resort. They consider that asking for advice is admitting defeat. Therefore, staff
cannot anticipate problems and recommend precautionary measures.
(C) The following weaknesses in the organization structure also lead to line –stiff conflict :
(i) Lack of well defined authority. Very often authority relationship between line and staff are not
clearly defined. This results in overlapping and gaps in authority leading to conflicts.
(ii) Temperamental differences. These are fundamental differences in the orientation, viewpoints and
perceptions of line and staff. Generally, staff people are relatively young, better educated and more
sophisticated in their outlook. On the other hand, line personnel tend to be old, less educated and
more conservative. Staff feels their advice will produce miracles while line feels it impracticable.
Staff seeks change and experimentation whereas line often desires status quo and caution.

Q. 5. Discuss Delegation of Authority.

Answer 5.
The act of assigning formal authority and responsibility for completion of specific activities to a
subordinate.
Tasks of Effective Delegation. The prerequisites just discusses are all important to carrying out the following
tasks of effective delegation :
(i) Decide which tasks can be delegated. Many items can and should be delegated. Some of these are
minor decisions and recurring chores.However, unusually demanding and challenging assignments
may often be delegated to employees and will do much to develop them.
(ii) Decide who should get the assignment. Who has available time? Does the job require special
competence? For whom would it be an appropriate and useful developmental experience? Managers
ask these questions when deciding which of their people should get the assignment.
(iii) Provide sufficient resources for carrying out the delegated task. All the delegated authority in the
world will not help the recipient, if he or she cannot have the financial, staff or resources necessary
to do the job.
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(iv) Delegate the assignment. In delegating the assignment, effective managers provide all relevant
information on the task. As far as possible they specify the results expected , not the methods to be
used. Further, they cultivate a climate of free and open communication between themselves and the
person to whom they delegated the task.
(v) Establish a feedback system. Delegating managers establish a system of checkpoints and feedback
so they will remain advised of progress and can offer advice or ‘mid-course adjustments’ if
necessary. They select the feedback system carefully, bearing in mind that the tighter their controls,
the less actual delegation is taking place.

Q. 6. Discuss the Importance or benefits of delegation of authority.

Answer 6.
The importance of delegation of authority may be highlighted on the following lines :
(a) Vehicle for coordination . Delegation acts as a vehicles for coordination. By establishing structural
relationships through out the organization, delegation results in securing coordination and
company unity.
(b) Reduction of manager’s burden. Delegation reduces the burden of executives by relieving them of
the botheration of taking routine decisions which others can take efficiently. This will help them in
concentrating on vital aspect of management.
(c) Expansion of business. Delegation facilitates the expansion of business through extending and
multiplying the limited personal capacity of the superiors.
(d) Motivation. Delegation improves the morale of subordinates by way of raising their status and
importance in the organization. Subordinates are encouraged to take more initiative and turn out
better work. Delegation of authority is a type of motivation.
(e) Specialization. Delegation helps the organization in getting the benefits of specialized services of
its personnel.

Q. 7. State the difficulties or weakness of delegation of authority.

Answer 7.
(A) On the part of the Superior : Managerial failure in delegation arises because of he following :-
(i) There is a superiority complex among the supervisors (Superior).They feel that hey can do the job
in a better way.
(ii) Superior sometimes do not have any faith in the subordinates. Lack of confidence in the capacity,
ability and dependability of the subordinate obstructs the superior to delegate authority. Due to
this, superior are unwilling to delegate their authority.
(iii) Sometimes the superiors do not have enough ability to direct the subordinates. They fail to guide
the subordinates and this poses problems before the process of delegation of authority.
(iv) The desire of dominance over the work of subordinate at each step hampers the delegation. Hence
superior would like to do everything by themselves. They will not like their subordinates to enjoy
any power.
(v) If a superior is not competent, the procedures and methods deigned by him are likely to be faulty.
For fear of exposure, he keeps all the authority to themselves.
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(B) On the part of the subordinate :

Sometimes the subordinates may pose problems in the process of delegation, because of the following
reasons :-
(i) Subordinates are often unwilling to accept or utilize the delegated authority because they lack self
confidence in their abilities.
(ii) Some superior are in the habit of criticizing actions taken by the subordinate. This discourages
initiative.They want to play safe by depending on their boss for all decision.
(iii) Some subordinate have low need for autonomy and feel comfortable in the relationship of
dependence with their superiors. They feel confused and a sense of loss of direction if they are
entrusted with authority to make decisions.
(iv) Subordinates may hesitate accept the delegated assignment, if they believe they lack necessary
information and other infra-structure to perform it.
(v) Subordinates may be shy of taking a delegated authority.

(C ) On the part of Organization :

The fault contributing to be weakness of delegation may also lie with the organization. They may include
the following :
(i) Defective organization structure and non clarity of authority.
(ii) Inadequate planning.
(iii) Non implementation of principle of unity of command.
(iv) Lack of effective control mechanism.

Q. 8. Write Short Note on :

(i) Centralization.
(ii) Decentralization.

Answer 8.
(i) Centralization :
The amount of authority and autonomy given to a multinational divisional manager is a reflection of the
relative centralization or decentralization.
Al Winick, President of Norwest financial Information services Group, and Robert Major, President and
CEO of Chrysler First have studied the advantages of both centralization and decentralization in the
customer finance market.
Centralization offers a variety of strengths well studied to day’s customer finance market. He lists the
following as reasons for centralization :
(i) Specialized skills, talent, and technology are sometimes neither affordable nor practical in multiple
locations.
(ii) Decentralized locations usually mean an increase in overhead and staff.
(iii) Recent improvements in communication technology facilitate the movement of money, credit
information, transportation, and data processing from a central location.
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(ii) Decentralization :
Winick reports that decentralization is, in the opinion of many, “the best way to develop and retain a close
relationship with the customer”. He lists the following benefits of decentralization, inj relation to a
finance market :
(i) Proximity to the market. Having the same person procure accounts, receives payments, and handle
collections and renewals provides the customer with a more personalize level of service.
(ii) Local Knowledge. An employee’s knowledge of the community can prove critical in the decision to
grant a loan.
(iii) Customer acceptance and Knowledge. Local employees are also possed of a better understanding
of a customers needs due to local economic trends.
(iv) Dealer’s Comfort. Dealer’s also feel more comfortable doing business with the person who will be
servicing the dealer’s customers.
Factors influencing Decentralization.
Decentralization has value only to the extent it helps organization members achieve their objectives. In
determining the amount of decentralization appropriate for an organization, the following factors are
usually considered :
(i) Environmental influences, such as market characteristics, competitive pressures, and availability
of materials.
(ii) The organization’s size and growth rate.
(iii) Other characteristics of organization such as costliness of given decisions, top management
preferences, the organization’s culture, and abilities of lower-level managers.

Q. 9. Define Formal Organization. State its characteristics.

Answer 9.
Formal Organization – Formal organization refers to the organization structure deliberately created by
management for achieving the objectives of the enterprise. It is a pattern of activities, processes, human
relationships and roles planned and structured in order to accomplish organizational goals. It is a
network of official authority responsibility relationships and communications flows. According to Chester
Barnard, “Formal organization is a system of consciously coordinated activities of two or more persons
towards a common objective”.
Nature or Characteristics of Formal Organization :
(i) Common Purpose. Every organization exists to accomplish some common goals. The structure
must reflect these objectives as enterprise activities are derived from them. It is bound by common
purpose.
(ii) Division of Labour. The total work of an organization is divided into functions and subfunctions.This
is necessary to avoid the waste of time, energy and resources which arises when people have to
constantly change from one work to another. It also provides benefits of specialization.
(iii) Authority Structure. There is an arrangement of positions into a graded series. The authority of
every position is defined. It is subordinate to the position above it and superior to the one below it.
This chain of superior-subordinate relationship is known as chain of command.
(iv) People. An organization is basically group of persons. Therefore activity groupings and authority
provisions must take into account the limitations and customs of people. People constitute the
dynamic human element of an organization.
(v) Communication. Every organization has its own channels of communication. Such channels are
necessary for mutual understanding and cooperation among the members of an organization.
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(vi) Coordination. There is a mechanism for coordinating different activities and parts of an organization
so that it functions as an integrated whole. Cooperative effort is a basic feature of organization.
(vii) Environment. An organization functions in an environment comprising economic, social, political
and legal factors. Therefore, the structure must be designed to work efficiently in a changing
environment. It cannot be static or mechanistic.

Q. 10. (a) Discuss the Principles of Formal Organization.

(b) Write short note on Informal Organization.

Answer 10. (a)

The basic principles of formal organization are as follows :
(i) Unity of objective. An organization structure is sound when it facilitates the accomplishment of
objectives. Therefore the organization as a whole and every part of must be geared to the basic
objectives of the enterprise.
(ii) Specialization or Division of work. The activities of every member of the organization should be
confined, as far as possible, to the performance of a single function.
(iii) Span of Control. Every manager should have a limited number of subordinates reporting to him
directly. Generally the span should be narrow for complex work and wide for routine work. Span
should be neither too wide nor too narrow.
(iv) Scalar principle. There should be a clear chain of command extending from top to the bottom of the
organization. Every subordinates should know who his superior is and who his subordinates are.
(v) Exception principle. Only exceptional matters which are beyond the authority of lower level persons
should be referred to higher levels. Routine matters should be dealt with by executives at lower
levels. This is also known as authority level principle.
(vi) Unity of command. Each subordinated should have only one superior whose command he has to
obey. This is necessary to ensure discipline and to fix responsibility for results.
(vii) Flexibility. The organization structure should be adaptable enough to accommodate technical and
other changes in environment. Therefore complicated procedures, red tape and complexity of
control should be avoided. At the same time, the organization structure should be reasonably
stable so as to withstand changes.
(viii) Continuity. Paper arrangements should be made for the training and development of executives.

Answer 10. (b)

Informal Organization refers to the pattern of activities, interactions and human relationships which
emerge spontaneously due to social and psychological forces operating at the work place. It arises
naturally on the basis of friendship or some common interest which may or may not be related with work.
It is an unintended and non-planned network of unofficial and social patterns of human relationships.
Informal organization represents the pattern of interpersonal and intergroup relations that develop
within the formal organization,e.g friendship group and cliques.

Q. 11. Match with the following :

(a) extroversion (i) Relaxed, Scure, Unworried
(b) Openness to experience (ii) Trusting, Good natured, Cooperative, Soft-hearted.
(c) Agreeableness (iii) Intellectual, Imaginative, Curious, Broad-Minded
(d) Emotional Stability (iv) Outgoing, Talkative, Sociable, Assertive
(e) Conscientiousness (v) Dependable, Responsible, Achievement-oriented and persistent.
Foundation : Paper-1 : Organization and Management Fundamentals [ December  2011 ] 9

Answer 11.
(a) (iv)
(b) (iii)
(c) (ii)
(d) (i)
(e) (v)

Q. 12. Distinguish between Formal and Informal Organization

Answer 12.
The differences may be highlighted as follows :
Basis Formal Organization Informal Organization
Origin Formal organization is created deliberately Informal Organizational emerges
and consciously created by management. spontaneously on account of socio-
psychological forces operating at the
workplace. People working together develop
certain liking and disliking for each other.
Purpose Formal organization is created for achieving Informal organization is created by the
the legitimate objectives of the organization. members of the organization for their social
and psychological satisfaction
Size It may be quite large in size particularly Informal groups tend to be small in size so
when these groups are constituted to give as to maintain groups cohesiveness.
representation to various interest groups.
Nature of Formal groups are stable and may continue Members may form alternative groups.
groups for a very long period. They tend to
disappear or cease to be attractive for
members when changes take place in
personal liking and disliking.
Number of Number of formal groups is not larger than Generally the number of informal groups
groups the number of informal groups. is larger than the number of formal groups.
Authority Formal organization is bound together by a In informal organization all members are
hierarchical structure in which authority equal though some may command more
flows from higher to lower levels. Members authority by virtue of their personal
of a formal group derive their authority from qualities.
the process of delegation.
Leadership In formal organization leadership is vested In informal organization leadership is not
in managers. associated with manager ship.

Q. 13. Fill in the blanks :

(a) A person differs from an authoritarian person as his respect
for is not blind but is based upon organizational rules and regulations.
(Bureaucratic/Authoritarianism/Authority/Innovativeness)
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(b) People with high manipulate others for personal gains and that
ends can justify means.(Mechiavellianism/Extrovertness/believe/restrict)
(c) persons depend more on feelings and judgments.(Introvert/Impulsive).
(d) People with personality are impatient, aggressive, and highly .
(A/B/D/Competitive/Jealous)
(e) People with type personality are easy going, laid back and non competitive.
(A/B/C/D).
Answer 13.
(a) Bureaucratic, authority
(b) Machiavellianism, believe
(c) Impulsive
(d) Type A
(e) Type B

Q. 14. What are the determinants of personality?

Answer 14.
The factors which shape the personality of an individual are given below:

(A) Biological Factor :

(i) Heredity — It implies the transmission from ancestors to descendant through a mechanism
lying primarily in the chromosomes of the germ cells. An individual inherits physical stature,
facial attractiveness, tempereament, etc. from his or her parents. However, the role of heredity
differs from one personality trait to another. For example heredity is generally more important
in determining a person’s temperament than his ideals and values.
(ii) Brain — Brain is supposed to play an important role in the development of one’s personality.
However no conclusive proof is available so far about the role of brain in personality formation.
(iii) Physical features — Height, weight, colour, facial features etc. may have a great effect on one’s
personality. He influences others through his physical personality which in turn affects his
self-concept. Rate of maturation may also affect personality because persons of varying, maturity
are exposed to different physical and social situations.
(B) Family and Social Factor :
Generally, in infant acquires those personality traits and behaviour patterns which are customery
and which are acceptable to his family and the community. Parents and other family members
exercise a strong influence on the personality development of children. In addition to family members
and home environment, social groups such as co-students, friends and co-workers affect a person’s
personality. Family and social groups shape a person’s personality through the processes of
socialization and identification.
(i) Socialization — It is a process by which an infant acquires from the enormously wide range of
behaviour potentialities pattern that are open to him/her at birth, those behaviour patterns
that are customary and acceptable to the family and social groups. This process begins with
initial contact between mother and her infant. Later on, other members of the family and social
groups influence the socialization process.
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(ii) Identification — This process occurs when a person tries to identify himself with some person
whom he feels ideal in the family. Generally a child tries to behave like his mother or father. The
identification process can be examined from three different perspective. First, it can be viewed
as the similarity of behaviour (including feelings and attitudes) between the child and the
model. Thirdly it can be considered as the process through which the child actually acquires
the attributes of the model.
(C) Cultural factor :
The culture within which a person has been brought up shapes his personality. For example, American
culture fosters a spirit of independence and competition whereas Japanese culture reinforces attitudes
of cooperation and team spirit. However there is no linear relationship between culture and
personality so that individuals within the same culture can differ in their personality and behaviour.
(D) Situational factors :
Situations may exercise both restraints and push to personality formation. Events and experiences
shape the personality of a person. Some traumatic experience may transform the entire personality.

Q. 15. Write “Yes” or “No” giving proper reasoning in support of your answer.
(i) Bargaining is an important activities of the organization.
(ii) Competition offers expert advice.
(iii) Co-optation is the process of absorbing new elements into policy determining structure of an
organization.
(iv) Theory X — positive labeled
(v) Perception— Infatuation
Answer 15.
(i) No. — Bargaining is the process of arriving at an agreement between two or more organizations
through mutual give and take for exchange of goods or services. It is often witnessed between
management and labour, the dealer and customer etc.
(ii) No. — Competition is one process whereby the organizations choice of goals is partially controlled
by the environment.
(iii) Yes. — Cooptation as the process of absorbing new elements into the policy-determining structure
of an organization as a means of averting threats to its stability or existence. It is a process by
which power, or the burdens of power are shared.
(iv) No. — It is negative labeled. One of the assumptions is employees inherently dislike work, and
whenever possible try to avoid it.
(v) No. — It is a process by which individuals organize and interpret their sensory impressions in
order to give meaning to their environment.

Q. 16. Give full forms :

(i) MBO
(ii) FDI
(iii) BOD
(iv) PSU
(v) WTO
(vi) AIC
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Answer 16.
(i) MBO — Management by Objectives.
(ii) EDI — Foreign Direct Investment.
(iii) BOD — Board of Directors.
(iv) PSU — Public Sector Unit.
(v) WTO — World Trade Organization.
(vi) AIC — Auditor in Chief

Q. 17. Discuss Hawthorne Experiments.

Answer 17.
The human relations movement grew out of a famous series of studies conducted at the Western Electric
Company from 1924 to 1933.These eventually became known as the Hawthorne Experiments, because
many of them performed at Western Electric’s Hawthorne plant near Chicago. The experiment was conducted
by a team of researchers lead by Elton Mayo of Harvard Business School during 1924 to 1933.

(a) Illumination Experiment :

It is generally believed that the changes in the physical working conditions have effect on production
of goods and services and the productivity of the workers. The experiment was done by changing
the intensity of light chosen as one of the important physical working conditions at the workplace.
For the purpose of experiment two groups of workers were taken, one as the control group and the
other as test or experimental group. The groups were housed in different work places. In the room
where control group was kept the intensity of light was kept constant. In the room of test group the
intensity light was changed by reducing the intensity slowly and gradually over a period of time.
The production of the control group registered a marginal increase although there was no change
in the intensity of light. Surprisingly the production of the test group kept on increasing even
though the intensity of light was slowly and gradually reduced without the knowledge of the test
group. The production came down when the intensity of light was brought down almost at the
moonlight level. It was difficult to explain this phenomenon why the production increased even
though the intensity of light was reduced. It was thus evident that the physical condition of work
had no relationship with the production and this led the researchers to investigate for other
factors. Subsequently it was realized that the workers of both the control group and test group
started feeling important for getting special attention from the management during the period the
experiment was conducted. This attention from the management was satisfying for the workers and
workers as a motivator for them. It is often interpreted that possibly the social and esteem need of
the workers were satisfied and worked as and motivational factor.
(b) Relay Assembly Test Room :
This test was conducted in a room used to be known in the plant as Relay assembly room, where
mainly the female workers worked and the work involved assembling telephone relays by putting
together several parts. The work itself was boring and monotonous. A six women worker from the
relay assembly room was selected who were friendly amongst themselves and were placed in a
separate room. They were generally told about the experiment and a supervisor-researcher was
kept in a separate room. The workers were friendly with the supervisor who used to take personal
interest about the needs and even the personal conveniences of the workers. Layout and physical
working conditions were created like the Relay assembly room of the plant. The test was conducted
for two years. During this period, a series of controlled and planned changes were made in their
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working conditions. Rest time was extended for some period but reduced after some time. For some
period the company provided food and refreshments which was also either withdrawn or was
limited to only one time free coffee. Working hours were changed in a planned manner, work tools
were deliberately kept scattered. The researchers found that the production kept on increasing and
stabilized at a higher level when the improvements made in the working conditions were withdrawn.
During the test period the workers were neither closely supervised nor were given any financial
incentives. The researchers concluded that the working condition or certain fringe benefits did not
have direct relations with the production. The increase in production was explained as the result
of the feeling of importance the particular employees had in the eyes of other employees for being
chosed by the management for the experiment. The other contributing factors were informal and
friendly relationship with supervisor and for being at times on the matters of their direct interest.

(c) Interviewing Programme :

From both the test the researchers generally concluded that the form of interpersonal relations,
recognition by the management and the form of supervision are critical factors for the satisfaction
and motivation of workers and consequently for the increased production. To get the feedback from
the workers they were given a set of prepared questions through a structured questionaire asking
for their opinion as to how they feel about their job the form of supervision and working conditions.
The reply received were mostly guarded and it was felt that the workers considered many questions
as irrelevant. The workers then were interviewed personally and were allowed to speak on any
matter or issue relating to their work which they considered necessary to convey to the researchers.
After interviewing workers the researchers realized the importance of workers social relationship
within the organization the inevitability of the informal groups and the cultural assumptions the
workers bring with them in the workplace.These findings gave an insight about the importance of
developing proper communication systems in the organization and the importance of the workers
being listened to by the management.
The conclusions and learning from Hawthorne study.
(i) This study revealed and emphasized the importance of Human Relations approach in an
organization.
(ii) Through this experiment the importance of social needs of the workers were realized.
(iii) The importance of informal group, group norms and values were realized and this finding
differed with the “Rabble Hypothesis” of Frederick Taylor.
(iv) Workers value recognition by the management.

Q. 18. Fill in the blanks.

(i) The level—the goal constraints imposed on the organization by
.
(ii) The level –the of the as a system; and
(iii) The individual level-the of organizational participants.

Answer 18.
(i) environmental, society
(ii) Organizational, goals, organization
(iv) Goals
14 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 19. Define the following in one or two sentences.

Answer 19.
(i) Promotion : This means appointing an employee to a position of greater responsibility. It refers to
shifting of persons to positions carrying higher responsibility.
(ii) Transfer : This involves the shifting of an employee from one job to another with or without changing
his responsibility. It is used as a source of internal recruitment to meet personnel demand at the
place to which the employee is transferred.
(iii) Layoff : Layoff implies temporary removal of art employee from the payroll of the organization due
to circumstances beyond the control of the employer. It may last for an indefinite period.
(iv) Forecasting : Forecasting is the process of using past and current information to predict future
events and making provision to face such challenges of future contingencies.
(v) Coordination : Individuals and groups in an organization carry out their specialized functions and
this necessitates coordination. While performing the organizing function the manager should see
that all the activities are properly coordinated and there exists no conflicts.

Q. 20. Match the statement in column 1 with appropriate statement under column 2.
(i) Non –Monetary Incentives (a) Abraham Maslow
(ii) Payment by result (b) Welfare Measure
(iii) Self actualization needs (c) Halsey and Rowan
(iv) Non financial incentives (d) Continuous Process
(v) Development (e) Subsidized Canteen
(vi) Industrial Relation (f) Industrial peace and democracy
(vii) Training (g) Internal source of recruitment
(viii) Manpower Planning (h) Growth of the individual
Answer 20.
(i) (b)
(ii) (c)
(iii) (a)
(iv) (e)
(v) (d)
(vi) (f)
(vii) (h)
(viii) (g)

Q. 21. Discuss the different sources of recruitment.

Answer 21.
In order to recruit, both internal as well as external sources may be utilized as follows.
Internal sources of recruitment :
Internal sources refer to the present working force of an organization. Internal sources of recruitment
Foundation : Paper-1 : Organization and Management Fundamentals [ December  2011 ] 15

include personnel already on the payroll of the organization. The major internal sources of making
recruitment are as follows:
(i) Promotion : This means appointing an employee to a position of greater responsibility. It refers to
shifting of persons to positions carrying better prestige, higher responsibility and more salary.
Whenever a clear vacancy exists in a department it is filled in by promoting a suitable employee
from the lower cadre in the same department. Employee’s seniority, merit, job knowledge and
career record are considered at the of promotion.
(ii) Transfer : This involves the shifting of an employee from one job to another without changing his
responsibility. It is used as a source of internal recruitment to meet personnel demand at the place
to which the employee is transferred.
(iii) Present employees : The present employees of an organization may be informed about likely
vacant positions. The existing employees of an organization may be informed about likely vacant
positions. The existing employees can recommend their relatives or friends for the jobs suitable
for them.
(iv) Re-employment of ex-employees : This refers to employees who served the organization in the
past but quit voluntary or due to quit voluntarily or due to retrenchment and want to return, if the
organization wishes to re-employ them.
(v) Dependents : Dependents and relatives of the deceased and disabled employees can be employed
on compassionate grounds.
(v) Apprentices: Persons working as apprentices in the organization may also be hired whenever a
clear vacancy exists.

External Sources of recruitment :

External sources of recruitment include selection of personnel from outside the organisation.It is not
desirable for the organization to rely totally on internal sources for recruitment. It is necessary to inject
fresh talent into the organization from outside also. An organization may choose from the following
external sources of recruitment.
(i) Advertisements: This is the best method of recruiting personnel for skilled workers, clerical and
higher staff. The organization can advertise its vacancies through news papers, trade journals,
professional journals, radio, television, magazines, Internet etc.It can be used on a nationwide
basis and the management gets a wider range of candidates for selection.
(ii) Employment exchange : These organizations provide information about job vacancies to the job
seekers and help employers finding suitable candidates.The employment exchanges provide the
list of candidates to the organization when they get requisitions from various employers.
(iii) Educational Institutions : Sometimes educational institutions provide placements services. They
offer opportunities for recruiting recent graduates and other diploma holders. Junior level executives
or managerial trainees may be recruited from professional and technical institutions (IIM, IIT etc.)
(iv) Professional bodies : The professional institutions like (ICSI, ICWAI, ICAI, IIM, IIT and other
management institutions etc.) maintain a register of qualified persons from which they recommend
the names to the employers when asked for.
(v) Labour contractors : Contractors are the best sources of getting workers when they are required for
short periods. Manual workers may be recruited or hired through contractors, who maintain close
links with the workers.
16 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 22. Define the following in just one sentence.

(a) Job analysis
(b) On the job training
(c) Charge sheet
(d) Give two benefits of training
(e) Give two benefits of Orientation programme
Answer 22.
(a) Job analysis is undertaken to find out the one best way of doing the thing. The best way of doing a
job is one, which requires the least movement, consequently less time and cost.
(b) In this method the trainee is placed on a regular job and taught the skills necessary to perform it.
(c) The first step in the procedure for dismissal is to frame and issue a written charge sheet.It should
be based upon a written complaint against the employee.
(d) (i) Increased productivity – Training increases the knowledge and skills of employees. Therefore
well trained employees give their better performance on the job.
(ii) Job satisfaction – Training builds self confidence in the employees and enables them to achieve
the required level of performance. Their enthusiasm pride and interest in the job and their
morale goes up.
(e) (i) The history of the organization
(ii) Products and services of the organization.
(iii) Organization structure of the enterprise.
(iv) Rules and regulations.

Q. 23. Distinguish between Education and Training.

Answer 23.

Sl. No Basis of Difference Education Training

1 Meaning Education is a process of learning Training is a process of
which increases knowledge and increasing knowledge, skills and
understanding of a person. attitude of an employee to do a
particular job.
2 Objective Main aim of education is to increase Main aim of training is to
the knowledge of a person. increase the knowledge of a
person to do a particular job.
3. Nature Education is theoretical. Training is practical.
4. Scope Education is a wide term and covers Training is a narrow term and is
several aspects limited to a particular aspect.
5. Importance Education increases the knowledge Training increases ability and
and understanding. skill.
6. Liability It is not a liability of an enterprise to Training is a liability of the
educate its employees. employer itself.
7. Burden of expenses Education expenses are generally Expenses of training are
borne by employees generally borne by the
enterprise.
Foundation : Paper-1 : Organization and Management Fundamentals [ December  2011 ] 17

Q. 24. Distinguishment between Training and Development :

Answer 24.
Sl No. Basis of Training Development
difference
1. Meaning Training is a process of increasing the Development is a process of learning
knowledge, skills and attitude of an and growth which is helpful in overall
employee to do a particular job. growth of employees.
2. Objective Main aim of training is to enable the Main aim of development is the overall
employees to do a particular job. growth of employees.
3. Time Training is related with present Development is related with present
Relationship period. and future period.
4. Nature Training is a job oriented process. Development is a career centered
process.
5. Suitability Training is more suitable for workers and Development is more suitable for
employees. managers and executive.
6. Means & There are various methods of training Development can be attained with
Methods effective leadership and managerial
courses.
7. Scope Scope of training is limited and it is a part Development is a wide term and
of development process. includes training.

Q. 25. Name some non monetary Incentives, (or Psychological Incentives)

Answer 25.
These incentives, usually given in the form of amenities or facilities, do not offer cash reward to the
employee for any specific or measured work done. Such non-monetary benefits create a psychological
effect by making the working conditions and terms of employment lucrative enough to induce the employee
to increase his efforts. The benefit goes to all the employees in the undertaking and is not limited to any
individual,class,or group. As a result of this and also because there is no immediate return which can be
linked with individual effort, the employees take the benefits for granted and the incentive element, is lost.
Non-financial benefits may be offered in several ways.A few examples are mentioned below :
(a) Favourable working conditions.
(b) Medical facilities for the individual and his family.
(c) Education facilities.
(d) Welfare measures
(e) Cheap grains
(f) Subsidized canteen
(g) Recreation amenities.
(h) Housing facilities.
(i) Pension schemes
(j) Fund contribution
(k) Protective clothing, liveries uniforms etc.
(l) Tea, milk etc.
18 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

It will be noted from the above list that some of the benefits offered are obligatory under law or are given
as a matter of convention. Such benefits cannot, strictly speaking, be termed as incentives. They are non
financial only so far as the employee is concerned. The employer has to incur expenditure to provide for
the incentive.
Non-financial incentives offer the following advantages —
(i) Reduce labour turn over
(ii) Impart satisfaction to the employees and create a sense of loyalty and cooperation in them.
(iii) Reduce absenteeism
(iv) Create a reputation for the undertaking so that the best labour is attracted.

Q. 26. Discuss the Contingency approach of Management

Answer 26.
The contingency approach is a relatively new approach to the organization and management. It is related
to the systems approach. The belief that organizations are open systems widened the perspective further
leading to the development of the contingency approach. It is also known as the situational approach. It
was developed by managers, consultants,and researchers who tried to apply the concepts of earlier
approaches to real life situations. They found that the concepts and techniques highly effective in one
situation failed to work in other situations.
The basic theme of the contingency approach is that there is no single best way of managing applicable in
all situations. The best solution is the one that is responsive to the peculiarities of the given situation.
Significant differences exist between one situation and others.Therefore,management should deal with
different situations in different ways. In other words, the effectiveness of any technique is contingent on
the given situation. The conditions and complexities of the situation determine which approach is
applicable and effective. The approach or technique should be a match or fit between the situational
variables and management variables. It is the responsibility of management to analyze the contingencies
or conditions peculiar to each situation and then choose the right approach to deal with it.
The main factor of this approach are as follows :
(i) Management is entirely situational. The application and effectiveness of any technique is contingent
on the situation.
(ii) Management should, therefore fit its approach to the requirement of the particular situation. To be
effective management policies and practices must respond to environmental changes.
(iii) Since management’s success depends on its ability to cope with its environment it should sharpen
its diagnostic skill so as to anticipate and comprehend the environmental changes.
(iv) Managers should understand that there is no one best way to manage. They must not consider
management principles and techniques universal.

Q. 27. Discuss the Principles of effective planning

Answer 27.
Planning does not substitute facts for judgment. It does not substitute science for the manager. However,
some general principles can be followed to make planning effective.
• Make plans simple and easy to understand .When the plan itself is complicated, it invites
misunderstandings among the members of organization.
• Be selective in the plan. Successful managers never try to cover too much territory.
Foundation : Paper-1 : Organization and Management Fundamentals [ December  2011 ] 19

• Plan should be geared to meet ,the needs of those who implement it.
• A plan should be through, it should not omit any function or sub-function and should not overlook
any necessary details. At the same time, controversial statements should be avoided.

According to Gary Dessler, to plan effectively the managers should consider the following points :
(i) Develop accurate forecasts : Many a time ,managers fail to understand the forecasting techniques
properly. At the same time, the people who prepare forecast may not understand the nature of
people who are supposed to use these forecasts. Thus, failure to fit forecasting methods to changing
needs, and circumstances is the inevitable result.
This situation can be considerably improved by educating the forecasting users in the art of
relating the forecasting techniques to practical problems and also encouraging the people who are
entrusted with the forecasting job to look into the informational need of managers.
(ii) Gain acceptance for the plan : Every plan, though made by managers at higher levels,is implemented
by people throughout the enterprise. Therefore,it is necessary to secure the acceptance and
commitment from them. This can be done by soliciting the subordinate’s participation in the
planning process itself. Participative approach to the planning is recommended here. Directive
planning, i.e. technical impersonal motion developing and information using activity, is appropriate
when the environment is reasonably predictable.
(iii) Plan must be sound one : In order to see that the plan is a sound one, an approach known as devil’s
advocate approach can be followed. In this approach, one advocate defends the plan, while the
second (devil’s advocate) prepare a counter argument listing what is wrong with the plan and why
the plan should not be adopted. Such an approach would prevent managers from the dangers of
hasty decisions. Further, to increase the efficiency of plans managers are advised to follow an
open-system approach where they recognize and pay concentration to the complex environment in
which their organization is functioning.
(iv) Develop an effective planning organization : Planning involves answers to several questions such
as: How to plan? What to plan? Who develops the plan? etc.The solution for these questions
requires a blueprint for planning and a planning organization as such. In small firms, the individual
performs all the functions the individual being the owner. In case of medium- sized and big
companies, separate planning department is created to have a long-term strategic orientation and
to develop effective plans.
(v) Be objective : Many a times, managers commit a mistake of visualizing what they want to see and
overestimate their chances of success. When the managers are blinded by such optimistic notions,
planning can never be successful. There is no doubt that the dark side of the moon always represents
a gloomy picture. The managers should not hesitate to verify the truth behind the pessimistic
notions or beliefs. To see that planning is successful managers must be objective.
(vi) Set up a monitoring system- Plans should preferably be subjective to regular appraisal and review.
Every plan should be refined and restructured on the basis of accurate and timely information.
While designing the plan the manager should see that there is room for in –built flexibility. Plans
should be sufficiently flexible because circumstances warrant change in plans. For the success of
a plan, good monitoring system is essential.
(vii) Revise the long-term plans every year : Planning is fascinating and challenging especially in a
dynamic environment. Changes in economic technical and political environment pose a threating
challenge to the plans and continuation of the existing plans. Many a time plans become inaccurate
by virtue of time factor and hence revision of long-term plans is a necessity every year.
20 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

(viii) Fit the plan to the situation : These days planning has become situational. The current problems of
change in technology,structure,people and organization-require a situational approach to planning.

Q. 28. The Rational Model of Decision Making

Or
Explain the sequential set of steps in the process of decision making.
Answer 28.
Managers who weigh their options and calculate optimal levels of risk are using the Rational Model of
Decision Making. This model is especially useful in making non programmed decisions. It helps managers
go beyond a priori reasoning, the assumption that there is an obvious solution already existing and simply
waiting to be found.
The basic process of rational decision making involves the four stages are discussed in below:

Stage 1 Investigate the Situation :

(A) Define the problem : Confusion in problem definition arises in part because the events or issues that
the manager’s attention may be symptoms of another more fundamental and pervasive difficulty. A manager
may be concern about the upsurge in employee resignation, but this is not a problem unless it interferes
with the achievement of organizational objectives. If the individuals resigning are low performers, and
more qualified replacements can be readily found, the resignation may represent an opportunity rather
than a problem. Curing the turnover problem then may be the last thing the manager should do. Defining
the problem in terms of the organizational objectives that are being blocked helps to avoid confusing
symptoms with problems.

(B) Diagnose the Causes : All this underscores the importance of diagnosing the causes of the problem.
Managers can ask a number of diagnostic questions. Each involves in some way human relationships
.What changes inside or outside the organization may have contributed to the problem? What people are
most involved with the problem situation? Causes unlike symptoms are seldom and managers sometimes
have to rely on intuition to identify them. Different individuals, whose views of the situation are inevitably
shaped by their own experiences and responsibilities, may perceive very different causes for the problem.
It is up to the manager to put all the pieces together and come up with as clear picture as possible.

(C) Identify the Decision Objectives : Once the problem has been defined and the causes diagnosed the
next step is to decide what would constitute an effective solution. Most problems consists of several
elements and a manager is unlikely to find one solution that will work for all of them.
If a solution enables managers to achieve organizational objectives , it is a successful one. However more
ambitious objectives may be appropriate. The immediate problem may be an indicator of future difficulties
a manager can prevent by taking early action. Else, the problem may offer the opportunity to improve
rather than merely restore, organizational performance.
What should be noted about all three aspects of problem investigation is the importance of a manager’s
education about the world and his or her imagination.

Stage 2 Develop Alternatives :

The stage may be reasonably simple for most programmed decision but not so simple for complex non
programmed decisions, especially if there are time constraints. Too often the temptation to accept the
first feasible alternative prevents managers from finding the best solutions for their problems. To prevent
this major decision should be made until several alternatives have been developed. To increase their
Foundation : Paper-1 : Organization and Management Fundamentals [ December  2011 ] 21

creativity at this task some managers turn to or group brainstorming in which participants spontaneously
propose alternatives even if they seem unrealistic or fantastic.

Stage 3 Evaluate Alternatives and Select the Best Available :

Once managers have developed a set of alternatives they must evaluate each one on the basis of the three
key questions.
(a) Is this alternative feasible. Does the organization have the required money and other resources to
carry out the alternative? Replacing all obsolete equipment might be an ideal solution but it is not
feasible if the company is already near bankruptcy. Does this alternative meet all the organization’s
legal and ethical obligation ? Any solution is only as effective as the support it wins within the
organization. Therefore in evaluating the alternative , managers must try to anticipate what would
happen if employees fail to support and implement it wholeheartedly.
(b) Is the alternative a satisfactory solution? To answer a manager need to consider two additional
questions. First does the alternative meet the decision objectives? Second does the alternative
have an acceptable chance of succeeding? (This assumes the chance can be calculated; in conditions
of uncertainty, of course this may be extremely difficult or impossible.) Managers should realize
too, that the definition of acceptable may differ from organization to organization and from person,
depending on the organization’s culture and the risk tolerance of those involved in the decision.
(c) What are the possible consequences for the best of the organization? As an organization is a
system of interrelated parts and exists among other systems, managers must try to anticipate how
a change in one area will affect other areas – both now and in the future. Cutting back research and
development for example might save money in the short term but could cripple the organization in
the long run. If the decision might affect people in other departments, they too should be consulted.
Competitors may also be affected by the decision; their reactions will have to be taken into account.
Alternative negative consequence will usually be favored over those with merely neutral
consequences.

Stage 4 Implement and monitor the decision :

Once the best available alternative has been selected managers are ready to make plans to cope with the
requirements and problems that may be encountered in putting it into effect. Implementing a decision
involves more than giving appropriate orders. Resources must be acquired and allocated as necessary.
Managers set up budgets and schedules for the actions they have decided upon, allowing them to measure
progress in specific terms. Next they assign responsibility for the specific tasks involved. They also set up
a procedure for progress reports and prepare to make corrections if new problems should arise. Budgets,
schedules and progress reports are all essential to performing the management functions of control.
Potential risks and uncertainties that have been identified during the earlier evaluation of alternative
stages must also be kept in mind. There is a natural human tendency to forget possible risks and
uncertainties once a decision is made.. Managers can counteract this failing by consciously taking extra
time to reexamine their decisions at this point and to develop detailed plans for dealing with these risks
and uncertainties.
After managers have taken whatever steps are possible to deal with potential adverse consequences
actual implementation can begin. Ultimately a decision is no better than the actions taken to make it a
reality. A frequent error of managers is to assume that once they make a decision, action on it will
automatically follow. Even if a decision is a good one, if others are unwilling or unable to carry it out then
the decision will not be effective.
22 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 29. Write short notes on :

(a) Management by Objectives.
(b) PERT and CPM.

Answer 29. (a) Management by Objectives :

Management by objectives is a popular management techniques which is applied as a technique of
planning, motivation and control. The famed management author Peter Drucker introduced the concept in
1954 as a way of successful organization. It provides an integrated approach to planning and control.
An effective MBO programmed begins with clearly set goals and strategies at the top management level.
These are communicated to the middle and lower managerial levels as guideline for planning. Managers
at every level formulate their goals based on the corporate goals, but in consultation with their supervisors.
It is a joint and participating activity. The goals so set and the means of achieving them becomes guide
posts for managers in directing their efforts and evaluating their performance.
In MBO the individual managers are given some autonomy to set their goals and to determine the means
of achieving them. It is likely that the technique promotes realistic goal setting and full involvement of
managers of all level in achievement of goals.

Answer 29. (b) PERT and CPM :

PERT and CPM are network techniques or models especially useful for planning scheduling and executing
large time bound projects which involve careful coordination of a variety of complex and interrelated
activities and resources. PERT stands for Programme Evaluation and Review Techniques and CPM for
Critical Path Method. Both the techniques were developed in USA during the 1950s PERT was developed by
US Navy Engineers to plan and control the huge Polaris Submarine programme . CPM was developed by Du
Pont and Remington Rand companies to help the process of scheduling maintenance of chemical plants.
Both the techniques have been applied successfully to improve of efficiency of execution of large projects
within pre-determined time and cost limits. Any new venture may be regarded as project such as
construction of a new plant, handling an earthquake relief work and so on.
PERT and CPM converge on several aspects and are almost treated as twins there are however some
differences between them which shall be indicated later on. The techniques recognize the systems or inter
related nature of activities in large work projects. The application of PERT and CPM are intended to
answer the following questions :-
(a) How soon will the project be completed?
(b) When is each individual phase of the project scheduled to start and finish?

This techniques is very useful in the case of projects which involve a large number of activities.It makes
the project manager list out all the possible activities and their relationships find out which activities
can be performed first, which next and which can be simultaneously and thereby find out the best possible
manner of completing the project.

Q. 30. Discuss Forecasting and its advantages and disadvantages.

Answer 30.
Forecasting is the process of using past and current information to predict future events and making
provision to face such challenges of future contingencies. In the words of Henry Fayol “The plan is the
synthesis of various forecasts; annual long-term, special etc.It is a sort of picture of the future where
immediate events are shown clearly, the prospects or the future with less certainty”.
Foundation : Paper-1 : Organization and Management Fundamentals [ December  2011 ] 23

Advantages of Forecasting :
The following are the payoffs of forecasting:
(i) Forecasting plays an important role in planning .In fact, plans are based on forecasts.
(ii) Forecasting helps the organization to derive the benefits from the environmental changes and
protect from the adverse effects.( when the changes are unfavourable).
(iii) Forecasting helps the manager to unify and coordinate the activities in the enterprise.Accurte
sales forecast is almost impossible in the absence of general business forecasting.
(iv) Forecasting facilitates control by identifying the weak spots in the organization .When once these
weak spots are identified. It becomes easy for the managers to establish sign posts for effective
control and sound planning thereafter.
(v) Forecasting helps the enterprise in the achievement of objectives effectively and smoothly.

Limitations of Forecasting :
Forecasts are just estimates of future conditions but not indicators of actual position. Future is almost
always shrouded by the shadows of uncertainty and it may be possible that the best laid plan may not
yield fruitful results and bad plan may derive supernormal profits to the firm. It is a near – impossible
task for the manager to map out all the future possibilities and make the organization ready for encountering
them. Uncertainty places a serious limitation to forecasting. Successful forecasts are as many managers
contend, a matter of chance.
Another long standing limitation of forecasting is that it is based on certain assumption about the future
and such it involves guess work on the part of managers. In this process, some errors may creep in
rendering the forecasts unreliable. Further forecasting is expected to create wonders. That is to say, too
much is expected from forecasting on the part of managers. The success of forecasting depends largely on
the skillful application of forecasts into practice and the meticulous care that is taken by the managers in
preparing forecasts. A forecast should to be successful, consider arriving at a magic figure not by the
fanciful guess work but by a careful analysis of the past events and project them into future more
rationally.

Q. 31. Organizing Process –

Answer 31.
As a function of management, i.e as a process organizing includes the following :
(i) Identifying the work
(ii) Grouping the work
(iii) Establishing formal reporting relationship
(iv) Providing for measurement evaluation and control.
(v) Delegation of authority and responsibility.
(vi) Co-ordination
Then may be explained as :-
(i) Identifying the work :
The first step in the organization process is to identifying the work to be performed in the organizational
unit i.e enterprise.Every organization is created deliberately to achieve some objectives- to produce and
distribute goods and services with the objective of making maximum profits. Similarly a hospital is
established to provide medical care to sick patients, a cooperative organization is established to provide
24 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

to service to the members of the society etc.It is absolutely essential to identify the work to be performed
to achieve these goals. Work must be divided and distributed because no one individual can perform the
total work in an organization single handed. Identification and classification of work enables managers
to concentrate on important activities, avoiding the unnecessary duplications, overlapping and wastage
of effort.
(ii) Grouping the work :
Dividing work is the root cause of coordination. After making the vision, similar activities shall be
grouped together in order to provide for a smooth flow of work. Departments and divisions are created in
an organization based on the principle of similarity and relatedness of the activities performed. For
instance, purchasing and storing activities can be grouped, sales and advertising activities can be grouped
together, budgeting and accounting activities can be grouped together etc.Depending on the size of a
organization there could be several departments for every separate function. In small organization various
departments may be grouped together and headed by only one or a few individuals.
(iii) Establishing formal reporting relationships :
One of the steps in organizing function is to establish formal reporting relationships among individual
members in the enterprise. After establishing these formal relationships it would be possible to know
what must be done, how it must be done, who is to do it etc.Establishment of formal reporting system
should pave way for assigning the duties and responsibilities to individual in an unambiguous fashion.
(iv) Providing for measurement evaluation and control :
Organization function involves providing the basis for measurement, evaluation and control of the activities.
It should establish signposts and control points in the organization so that the performance of individuals
(and groups) can be measured , evaluated and controlled at periodical intervals. The purpose of such
evaluation is to take necessary rectificational measures if there are serious deviations in the actual
performance.
(v) Delegating authority :
Authority is the right to act, and extract obedience from others. A manager may not be able to perform
tasks without granting authority to him by the organization. While assigning duties the manager should
clearly specify authority and responsibility limits. For example, the purchase manager may be delegated
authority to purchase goods and pay for them. In the absence of such delegation the manager may not be
able to purchase the goods.He may also be specified about the limit up to which he can purchase the
goods.
(vi) Coordination :
Individuals and groups in an organization carry out their specialized functions and this necessitates
coordination. while performing the organizing function the manager should see that all the activities are
properly coordinated and there exists no conflicts. Both individuals and groups may come in conflict
while performing their respective duties or functions in the organization.

Q. 32. Define the following in just one sentence.

Answer 32.
T- group training / Sensitivity Training – It is another popular technique employed by several organization
with the basic objectives of improving the interpersonal relationships in the organization.
Give four functions of Supervisors.
(i) Communicating the orders
(ii) Introductions of new methods of work
Foundation : Paper-1 : Organization and Management Fundamentals [ December  2011 ] 25

(iii) Making the work more interesting

(iv) Selecting the workers.
(i) Communicating the orders – The first duty of the supervisor is to communicate the order to
subordinates. The orders should be simple, complete and in a language easily understandable
to the subordinates.
(ii) Introduction of new methods of work - Every supervisor should examine the existing methods of
work and try his level best to improve the methods of performing work in order to increase the
productivity per worker.
(iii) Making the work more interesting - A supervisor should make the work interesting, instead of
dull and boring .A subordinate would feel like working only when he/she is comfortable at work.
(iv) Selecting the workers – In small and medium sized organizations, supervisors play a crucial
role in selecting the workers. A supervisor should outline the job specification and job description
so that right people are selected for right places and at right time.

Q. 33. State the difference between Theory X and Theory Y

Answer 33.
Theory X Theory Y
1. Inherent dislike for work 1. Work is natural like rest or play.

2. Unambitious and prefer to be directed by 2. Ambitious and capable of directing their

others. others own behaviour.
3. Avoid responsibility. 3. Accept and seek responsibility under proper
conditions.
4. Lack creativity and resist change 4. Creativity widely spread
5. Focus on lower level (physiological and 5. Both lower level and higher order needs like
safety) needs to motivate workers. social, esteem and self actualization are
sources of motivation.
6. External control and close supervision 6. Self direction and self Control.
required to achieve organizational
objectives.
7. Centralization of authority and autocrat 7. Decentralisation and participation in
leadership. leadership decision –making .Democratic
leadership.
8. People lack self - motivation 8. People are self – motivated.

Q. 34. Discuss Self – actualization needs as stated by Abraham Maslow in Need Hierarchy Theory.
Answer 34.
There are the needs for realizing one’s full potential, for continued self development, for being creative. It
is the desire of becoming what one is capable of becoming. It is an infinite and growth need. It is
psychological in nature and very few persons satisfy it. The conditions of modern industrial life provide
limited opportunity for the satisfaction of self – actualization.
26 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Need hierarchy represents a typical pattern that operates most of the time. It must not be viewed as a rigid
structure to be applied in all situations.
Maslow’s need priority model of motivation has gained extensive popularity because it is simple and
logical. It is compatible with the economic theory of demand. The theory helps to explain why a person
behaves differently in two similar situations. It provides an insight into what is common to all. It extends
to all areas of human life and is not limited to work situation alone.
But this theory is widely criticised for the following reasons.
(i) Needs are not the only determinant of behaviour.People seek objective and engage in behaviour
that are in no way connected with the gratification of needs. There are other motivating factors like
perceptions, expectations experiences etc.
(ii) Theory gives an over simplification of human needs and motivation. Need recognition and fulfillment
donot always follow the specific sequence of hierarchy suggested by Maslow, need classification
is somewhat artificial and arbitrary as human needs cannot by classified into neat watertight
compartments.Therefor the theory may not have universal validity.
(iii) Maslow’s theory is based on a relatively small sample. It is a clinically derived theory and its unit
of analysis is the individual. That is why Maslow presented his model with apologies to those who
insisted on conventional reliability,validity, sampling etc.
Despite these limitations this theory has a common sense appeal for managers. It is still relevant because
needs are important for understanding behaviour.It helps to explain inter-personal and intra-personal
differences in human behaviour.

Q. 35. Write short notes on :

(a) Break even analysis
(b) Free-rein or Laissez-fair leadership
Answer 35. (a) Break even analysis :
Also called Cost- Volume Profit analysis, break even analysis is a tool of contra size up the behaviour of
costs, revenues and profit various levels of activity. It enables management to understand the amount of
profit that can be expected at various volumes of operations, the appropriate volume of operations
needed to obtain a target level of profit, and the impact of changes in product prices and costs on the
volume of operations and profitability.
Break even analysis is adopted as a tool of profit planning. it is a technique of both planning and control.

Answer 35. (b) Free –rein or Laissez – fair leadership.

Free-rein leadership involves complete delegation of authority so that subordinates themselves take
decisions. The free rein leader avoids power and relinquishes the leadership position. He serves as a
contact to bring the information and resources needed by the subordinates.
Advantages :
(i) Positive effect on job satisfaction and morale of subordinates;
(ii) Maximum possible scope for development of subordinates;
(iii) Full utilization of the potential of the subordinates.

Q. 36. Write short notes on :

(a) Distinguish between Delegation and Decentralization
(b) Group
Foundation : Paper-1 : Organization and Management Fundamentals [ December  2011 ] 27

Answer 36. (a)

Distinction between Delegation and Decentralization.
Delegation Decentralization
1. It is a process or an art. 1. It is the end result of delegation.
2. It denotes relationship between a superior 2. It denotes relationship between the top
and a subordinate. management and various department oer
divisions.
3. It is essential for management process. 3. It is optional as top management may or may
not disperse authority.
4. The delegator exercises control over the 4. The control may delegate to departmental
subordinates. heads.
5. It is a technique of management 5. It is a philosophy of management.

Answer 36. (b)

Group : A group is an assemblage, cluster,or aggregation of persons considered to be related in some way
or united by some common interests. According to Edgar Schien a psychological group consists of any
number of people who :-
Interact with one another
Are psychologically aware of one another; and
Perceive themselves to be a group.

Why people join groups?

(i) According to C.Gratton Kemp the desire for need satisfaction is a strong motivating force for the
formation of groups. More specifically the security, social esteem and self-actualization needs of
some employees can be satisfied only when they join groups.
(ii) Groups provide some degree of warmth and support for individuals and security to the members.
(iii) Another reason for the people to group themselves is the proximity and attraction. Proximity
means the physical distance between employees performing job. Attraction means attraction of
people by virtue of their perception of similarity .People who have close proximity have a tendency
to form groups.
(iv) Individuals may be attracted to join groups by virtue of the group goals.
(v) The formal groups can be extremely useful in solving specific work problems in organization.

Q. 37. (a) Discuss Inter group Conflict.

(b) Resistance to change

Answer 37. (a) Inter group conflict :

Group exit in every organization both at formal as well as informal level. There may be conflict within one
group or conflict among groups The first kind of conflict is mostly interpersonal. Therefore intergroup
conflict becomes more important form of group conflict. There are various factors which determine
intergroup relationships. These factors are as follows.

1. Incompatible goals. The goals of two groups may have powerful impact on their relationship. Each
group tries to accomplish its own goals. Intergroup conflict arises when goals of two or more
28 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

groups are incompatible i.e goal attainment by one may prevent or reduce the level of goal attainment
of one or more groups.
2. Resource Sharing – The relationship between two groups can be affected by degree to which two
groups draw resources from a common pool, and the degree to which this common pool is not
adequate to meet the demands of both the groups. Conflicts arises because of discrepancy between
aggregated demand and available resources. Each party to the conflict has an interest in making
total resources as large as possible but also in securing as large a share of them as possible.
3. ask interdepence- Task interdepence refers to the dependence of one unit on another for resources.
It may result in one group having the ability to dictate the outcome of interaction between two
groups. This happens when one group exceeds its authority and conflict arises.
4. joint decision –making process- Because of interdepence groups involve in joint decision making
process. This process may not progress smoothly in the following circumstances.;-

(i) If people have different sources of information.

If there are leakage and blockages in the channeling of information to different lavels and departments.

Answer 37. (b) Resistance to change :

Individuals may respond to change in three wayside acceptance, indifference and resistance, depending
upon how they perceive the change. the main individual and organizational reasons for resistance to
change are given below :

1. Fear of economic loss.

People resist change when they will lose some economic benefits. Following are some examples.
(i) Fear of technological unemployment
(ii) Fear of reduced work hours and consequently reduced monetary benefits.
(iii) Fear of demotion and consequently less pay.

2. Obsolescence of Skills.
Change may render the existing knowledge and skills obsolete. Old skills and techniques may become
useless. For example an experienced accountant may resist the introduction of a computer due to the fear
that his experience will become useless and it might affect his pay and position in the organization. this
phenomenon is commonly found in people who possess no marketable skills and whose knowledge is
outdated.

3. Fear of Unknown
Change causes uncertainty and risk during the transition period. The unknown poses a constant threat to
people because the impact of change is unknown. For instance an employee may resist transfer to a
remote branch because of the anxiety of an unfamiliar place.

4. Ego Defensiveness
Sometimes people resist change because it hurts their ego. For instance an ego defensive branch manager
may resist even a good suggestion from the salesman because the branch manager feels that his ego may
be deflated if he accepts the suggestion.
Foundation : Paper-2 : Accounting [ December  2011 ] 29

FOUNDATON EXAMINATION
(REVISED SYLLABUS - 2008)

Paper - 2 : ACCOUNTING
Section I : Financial Accounting
Q. 1. (a) In each of the following, indicate the correct answer :
(i) The basic concepts related to Balance Sheet are :
(A) Business entity concept
(B) Accounting period concept
(C) Matching concept
(D) Realisation concept
(ii) As per double entry concept,
(A) Capital – Liabilities = Assets
(B) Capital + Assets = Liabilities
(C) Capital = Assets – Liabilities
(D) ssets + Liabilities = Capital
(iii) According to AS 2, inventories should be valued at
(A) Replacement cost
(B) Lower of Historical cost and replacement cost
C) Realisation value
(D) Lower of Historical cost or Net realizable value
(iv) Closing stock in the Trial Balance implies that
(A) It is already adjusted in Sales A/c
(B) It is already adjusted in Purchase A/c
(C) It is already adjusted in Opening Stock
(D) It is already adjusted in Profit & Loss A/c
(v) Bank overdraft is shown as a
(A) Current Asset
(B) Current Liability
(C) Contingent Liability
(D) Provision
(vi) DEF Club paid subscription fees of Rs. 10000, out of which Rs. 1500 is prepaid. In such case
(A) P&L A/c is debited with Rs. 10000
(B) P&L A/c is debited with Rs. 8500
(C) Rs. 1500 is shown as current asset.
(D) Both B and C.
30 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

(vii) The following data is extracted from the books of A Ltd. for the year 2010-11.
Bad debts for the year Rs. 4000
Closing balance of Sundry Debtors Rs. 100000
Provision for B/D as on 1.1.2010 Rs. 20000
If the company wishes to maintain provision for bad debts at 10% of debtors, the amount
debited/credited to profit and loss A/c for the year ended 31.3.11 is —
(A) Rs. 10000 debit
(B) Rs. 6000 credit
(C) Rs. 6000 debit
(D) Rs. 8000 credit
Workings :
Provision for B/D A/c
Particulars Rs. Particulars Rs.
To B/D 4000 By Opening balance 20000
To Closing Bal (10% × 100000) 10000
To P/L (bal. fig.) 6000
20000 20000
(viii) S enterprise maintains imprest system of petty cash book, the amount of imprest being Rs. 1000.
The petty cash transactions during the month of August 2010 are as under :
Particulars Amount (Rs)
Conveyance 186
Repairs 228
Stationary 154
Stamps 145
Other expenses 93
The amount of cash reimbursed to make up imprest balance is :
(A) Rs. 578
(B) Rs. 806
(C) Rs.422
(D) Rs. 1000
Workings :
Particulars Amount (Rs) Amount (Rs.)
Petty cash 1000
Less: Conveyance 186
Repairs 228
Stationary 154
Stamps 145
Other expenses 93 806
194 194
Amount reimbursed 806
Petty cash 1000
Foundation : Paper-2 : Accounting [ December  2011 ] 31

(ix) M/s GHI sent goods on approval basis to Mr. Y at invoice price of Rs.80000. The cost of such goods
is Rs. 60000. The enterprise accounted the above transaction as credit sales. The rectification of
the above will be to :
(A) Decrease sales as well as debtors by Rs. 80000
(B) Increase closing stock by Rs. 60000
(C) Decrease closing stock by Rs. 60000
(D) Both A and B.

(x) From the books of Mr. N , it was observed that cheques amounting to Rs. 240000 were deposited
in the bank, out of which cheques worth Rs. 20000 were dishonoured and cheques worth Rs. 40000
are still in the process of collection. The treatment of this while preparing Bank Reconciliation
Statement is

(A) Deduct Rs. 60000 from bank balance as per pass book.
(B) Add Rs. 20000 and deduct Rs. 40000 from overdraft balance as per cash book.
(C) Deduct Rs. 60000 from overdraft balance as per pass book.
(D) Add Rs. 60000 from overdraft balance as per pass book.

(xi) X draws a trade bill of Rs. 25000 for 6 months on Y. After holding the bill for 1.5 months, X discounts
the bill with bank @ 10% p.a. The amount of discount on bill is :

(A) Rs. 937.50

(B) Rs. 625
(C) Rs. 1350
(D) Rs. 612.50

Working :
Discount = Face value of bill × Rate of interest × unexpired months of bill/12
= 25000 × 10/100 × 4.5/12
= Rs. 937.50
(xii) X acquired an equipment for Rs. 80000 with an expected useful life of five years and Rs. 4000
expected residual value. Straight line method of depreciation was used. The equipment was sold
at the end of 4th year for Rs. 30000. The gain /loss on sale is :

(A) Rs. 12000 (gain)

(B) Rs. 10800(loss)
(C) Rs. 10800(gain)
(D) Rs. 12000(loss)

Working :
Depreciation = (80000-4000)/5 = Rs. 15200
Gain = Rs. 30000 – (80000 – 4 × 15200) = Rs. 10800.
32 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

(xii) In the year 2010-11, H purchased a new machine and following payments were made in relation
to it :
Cost as per supplier’s list = Rs. 520000
Less: Discount agreed = Rs. 50000 Rs. 470000
Delivery charges = Rs. 10000
Annual maintenance charges = Rs. 30000
Erection charges = Rs. 20000
Additional components to increase
the capacity of machine = Rs. 40000
Annual insurance premium = Rs. 5000
The cost of the machine is :
(A) Rs.550000
(B) Rs. 470000
(C) Rs. 540000
(D) Rs. 570000.
Working : Annual maintenance charges and insurance premium are revenue expenses. Rest
charges are to be capitalized with cost of the machine. So cost of machine is :
Cost as per supplier’s list = Rs 520000
Less: Discount agreed = Rs. 50000 Rs. 470000
Add: Delivery charges = Rs. 10000
Add: Erection charges = Rs. 20000
Add: Additional components to increase
the capacity of machine = Rs. 40000
Total cost = Rs. 540000
(xiv) For Sales Return at Branch, in case of dependent branches, entry to be passed in HO books,
(A) Debit Branch Debtors A/c, Credit Branch Stock A/c.
(B) Debit Branch Stock A/c, Credit Branch Debtors A/c.
(C) Debit Sales A/c, Credit Branch Debtors A/c.
(D) Debit Sales A/c, Credit Branch Stock A/c.
(xv) For difference between invoice price and the cost price of the entire consignment, the entry in
books of consigner will be :
(A) Debit Goods sent on Consignment A/c, credit Consignment A/c
(B) Credit Goods sent on Consignment A/c, debit Consignment A/c
(C) Credit Consignment Stock Reserve A/c, debit Consignment A/c
(D) Debit Consignment Stock Reserve A/c, credit Consignment A/c

Answer 1.
(i) (A) Business entity concept
(ii) (C) Capital = Assets – Liabilities
(iii) (D) Lower of Historical cost or Net realizable value
Foundation : Paper-2 : Accounting [ December  2011 ] 33

(iv) (B) It is already adjusted in Purchase A/c

(v) (B) Current Liability
(vi) (D) Both B and C.
(vii) (B) Rs. 6000 credit
(viii) (B) Rs. 806
(ix) (D) Both A and B.
(x) (C) Deduct Rs. 60,000 from overdraft balance as per pass book.
(xi) (A) Rs. 937.50
(xii) (C) Rs. 10,800 (gain)
(xiii) (C) Rs. 5.,40,000
(xiv) (B) Debit Branch Stock A/c, Credit Branch Debtors A/c.
(xv) (D) Debit Goods sent on Consignment A/c, credit Consignment A/c

Q. 2. Fill in the blanks with appropriate word/words :

(i) Gross Profit is the difference between and cost of goods sold.
(ii) Fixed assets and current assets are categorized as per concept of .
(iii) AS 3 deals with statements.
(iv) Provision for bad debts appear a on the Balance Sheet.
(v) Insurance prepaid is shown as .
(vi) Legal charges of Rs. 5000 for acquisition of building wrongly entered in the legal expenses A/c is
an example of .
(vii) The doctrine of implied authority is in case of co-venturers.
(viii) From accounting point of view, loss means in owner’s equity.
(ix) In case of manufacturing concerns, the balance in ‘Goods Sent to Branch A/c’ will be transferred
to Account.
(x) Depreciation is a profit.
(xi) When a fixed asset is obtained as a gift, the account to be credited is A/c.
(xii) A bill of exchange is drawn on 1st April 2011, payable after 3 months ; due date of the bill
is .
(xiii) Credit balance in Pass Book indicates balance.
(xiv) Salaries Outstanding A/c is a A/c.
(xv) The difference of the capital at the end and the capital at the beginning will show
provided there are no drawings.
Answer 2.
(i) Net Sales
(ii) Going concern
(iii) Cash flow
(iv) liability
(v) Current Asset
(vi) error of principle
34 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

(vii) not applicable

(viii) decrease
(ix) Trading
(x) charge against.
(xi) Capital Reserve.
(xii) 4th July, 2011
(xiii) favourable
(xiv) Personal
(xv) profits earned

Q. 3. State with reasons, whether the following statements are True or False :
(i) Goodwill is a fictitious asset.
(ii) Debit balance in the Profit and Loss A/c is treated as surplus.
(iii) Bank Reconciliation Statement is prepared to arrive at balance as per bank statement.
(iv) Capital is shown on the liability side because of Business Entity Concept .
(v) Depreciation is a process of apportionment.
(vi) Sales Journal is used for recording credit sales.
(vii) Noting charges are paid by the holder of the bill on the date of default.
(viii) Branch which sells goods for cash only is not required to maintain account books.
(ix) There is no difference between the normal commission and the del credere commission paid to
the consignee.
(x) “Joint Venture with — [name of co-venture(s) A/c]” does not disclose profit/loss on Joint Venture.
(xi) If Trial Balance tallies, it always means that none of the transactions has been completely omitted.
(xii) Expenses incurred in connection with obtaining license for starting a factory is capital expenditure.
(xiii) The adjustment to be made for income received in advance is to add income received in advance
to respective income and show it as a liability.
(xiv) Tax Deducted at Source appears in the Balance Sheet on liabilities side under provisions.
(xv) Drawings does not appear in Profit and Loss A/c.
Answer 3.
(i) False — Goodwill is an intangible asset.
(ii) False — Debit balance in the Profit and Loss A/c is treated as deficit or loss as expenses are more
than income.
(iii) False — Bank Reconciliation Statement is prepared to find the reasons of differences in balance
as per Cash Book and Bank Statement.
(iv) True — Business is treated as an entity apart from the owners.
(v) False — Depreciation is a process of allocation.
(vi) True — Cash Sales are recorded in Cash Book.
(vii) True — Noting charges are paid by the holder of the bill to get the bill noted for dishonor on the
date of its dishonor.
(viii) True.
(ix) False — Commission is reward to consignee to sell goods on behalf of the consignor. Del credere
commission is allowed to consignee in order to cover the risk of loss due to bad debts.
Foundation : Paper-2 : Accounting [ December  2011 ] 35

(x)True — It is nature of personal A/c. Memorandum JV A/c is opened to find out P/L on Joint Venture.
(xi)False — Error of omission does not affect a Trial Balance.
(xii)True — It is incurred for acquiring a right to carry on business for a long period.
(xiii)False — Income received in advance given as an adjustment requires deduction of the same from
the income amount and disclosure of the same as a liability in the balance sheet.
(xiv) False — Tax Deducted at Source appears in the Balance Sheet on liabilities side under current
liabilities.
(xv) True — Drawings are neither an income nor an expense to be recorded in Profit and Loss A/c.

Q. 4. Give one word or phrase to describe the following :

(i) Book of original entries.
(ii) What type of asset is a Coal Mine?
(iii) Advance Tax A/c appearing in the Trial Balance is shown on which side of Balance Sheet?
(iv) Cash purchase of trading goods is initially recorded in which book?
(v) The account through which rectification of errors detected in the next financial year is carried out.
(vi) Subscriptions received in advance by a club appear in which side of Balance Sheet?
(vii) The Account that does not form part of double entry system.
(viii) Agent selling goods on behalf on consignor.
(ix) Account showing Profit /Loss on Joint Venture.
(x) Refusal by acceptor to make payment of the bill on the maturity date is called .
(xi) Owners’ equity + Outsiders liability.
(xii) Bad debts recovered is credited to this A/c.
(xiii) As per AS 10 , fixed assets that have been retired from active use and held for disposal should be
stated in balance sheet at this value.
(xiv) Opening stock + Purchases+ Gross profit+ Direct expenses - Closing stock.
(xv) Omission of paise and showing the round figures in financial statements is based on this concept.
Answer 4.
(i) Journal
(ii) Wasting Asset
(iii) Assets side
(iv) Cash Book
(v) Profit and Loss Adjustment A/c
(vi) Liabilities
(vii) Memorandum A/c
(viii) Consignee
(ix) Joint Venture A/c
(x) dishonour of bill
(xi) Assets
(xii) P/L A/c
(xiii) Lower of net book value or realizable value
(xiv) Sales
(xv) Materiality concept
36 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 5. Journalise the following transactions :

(i) Assets as on 1/4/2011: Cash in hand Rs. 2000, Cash at Bank Rs. 68000, Stock Rs. 40000, Machinery
Rs. 1,00,000, Furniture Rs. 10,000, M/s X owe Rs. 15000, M/s Y owe Rs. 25000.
Liabilities as on 1/4/2011 : Loan Rs. 50000, Sum owing to M/s Z Rs. 20000.
(ii) While carrying forward the total of one page of the Purchases Book to the next, the amount of
Rs. 21235 was written as Rs. 21325.
(iii) Stock taken for private use Rs. 25,000.
(iv) Purchased goods worth Rs. 16,000 less 20% trade discount and 5% cash discount from M/s M for
cash and supplied them to M/s R at list price less 10% trade discount.
(v) A dishonoured Bill of Exchange receivable for Rs. 15,000 returned by the Bank had been credited
to the Bank and debited to Bill Receivable A/c.
(vi) The Balance in Revaluation Reserve A/c is Rs. 60,000 pertaining to Machinery that has been
disposed off is to be transferred.

Answer 5.
(i)
Date Particulars L.F Debit (Rs) Credit (Rs)
1/4/2011 Cash A/c Dr. 2,000
Bank A/c Dr. 68,000
Stock A/c Dr. 40,000
Machinery A/c Dr. 1,00,000
Furniture A/c Dr. 10,000
M/s X A/c Dr. 15,000
M/s Y A/c Dr. 25,000
To Loan A/c 50,000
To M/s Z A/c 20,000
To Capital A/c 1,90,000
(Being balances brought forward)
(ii)
Date Particulars L.F Debit (Rs) Credit (Rs)
Suspense A/c Dr. 90
To P/L Adjustment A/c 90
(Being correction of error whereby
Purchases A/c was debited in excess
through carry forward of the total on
page ....... of Rs. 21235 as Rs. 21325.)
(iii)
Date Particulars L.F Debit (Rs) Credit (Rs)
Drawings A/c Dr. 25,000
To Purchase A/c 25,000
(Being stock taken for private use)
Foundation : Paper-2 : Accounting [ December  2011 ] 37

(iv)
Date Particulars L.F Debit (Rs) Credit (Rs)
Purchases A/c Dr. 12,000
To Cash A/c 12,000
(Being purchased goods worth Rs. 16,000
less 20% trade and 5% cash discount)
M/s R Dr. 14,400
To Sales 14,400
(Being sold goods for 16,000 less 10%
trade discount)
(v)
Date Particulars L.F Debit (Rs) Credit (Rs)
Drawee’s A/c 15,000
To Bill Receivable A/c 15,000
(Being amount of dishonoured bill wrongly
debited to Bills Receivable A/c instead of
Drawee’s A/c; error now rectified)
(vi)
Date Particulars L.F Debit (Rs) Credit (Rs)
Goodwill A/c Dr. 60,000
To Revaluation Reserve A/c 60,000
(Being balance in Revaluation Reserve
A/c transferred to Goodwill A/c)

Q. 6. Pass necessary rectifying entry for the following errors :

(i) Machinery purchased for Rs. 15,600, has been entered in the Purchase Day Book.
(ii) Legal Expenses of Rs. 9,500 paid to Mr. Y were debited to his Personal A/c.
(iii) Rs. 5,740 paid for Repairs to Motor Car, was debited to Motor Car A/c Rs. 1,740.
(iv) Goods bought on credit from M/s N for Rs. 15,000 were entered in the Sales Books as Rs. 10,500;
M/s N was credited with Rs. 10,500 in the ledger.
(v) Rs. 5,400 received from X was posted to debit of his account.
Answer 6.
(i)
Date Particulars L.F Debit (Rs) Credit (Rs)
Plant & Machinery A/c Dr. 15,600
To Purchases A/c 15,600
(Being machine purchased for Rs. 15,600
previously charged to Purchased A/c;
error now corrected)
38 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

(ii)
Date Particulars L.F Debit (Rs) Credit (Rs)
P & L Adjustment A/c Dr. 9,500
To Mr. Y 9,500
(Being the amount of legal expenses
charged to Mr. Y; error now rectified)
(iii)
Date Particulars L.F Debit (Rs) Credit (Rs)
P & L Adjustment A/c Dr. 5,740
To Motor Car A/c 1,740
To Suspense A/c 4,000
(Being the amount of repairs to motor car,
Rs. 5,740, wrongly debited to Motor Car A/c
as Rs. 1,740, this credit now removed and
full debit given to P & L A/c)

(iv)
Date Particulars L.F Debit (Rs) Credit (Rs)
P & L Adjustment A/c Dr. 25,500
To M/s N A/c 4,500
To Suspense A/c 21,000
(Being effect of credit of Rs. 10,500 to Sales
Account instead of debit to Purchases A/c
of Rs. 15,000 removed credit to M/s N raisd
by Rs. 4,500 to make it Rs. 15,000)

(v)
Date Particulars L.F Debit (Rs) Credit (Rs)
Suspense A/c Dr. 10,800
To Mr. X A/c 10,800
(Being the amount received from Mr. X
wrongly posted to his debit, now rectified)

Q. 7. (a) Following information is available from the books of M/s H.

(i) Balance as per passbook on 30-11-2010 overdrawn Rs. 20,000
(ii) On 5-10-2011 M/s H deposited for collection of Rs. 1,000 and made entry in cash which
appears in the passbook on 6-12-2010 at Rs. 990.
(iii) Cheques issued to parties but not presented for payment till 30-11-2010 are Rs. 525, Rs. 835
and Rs.900.
(iv) Cheques deposited for collection but not collected by bankers till 30-11-2010 are Rs. 8,760
and Rs. 410. What is the balance as per Cash Book? What is the balance as per Cash Book?
Foundation : Paper-2 : Accounting [ December  2011 ] 39

(b) M maintains a provision for bad debts at 5% and provision for discount on debtors at 2.5%. It
consistently adopts the methods of crediting the bad debts recovered directly to profit and loss
account.
Particulars Amount (Rs.)
Balances on 1.04.2010 :
Provision for bad debts 5,000
Provision for discount on debtors 2,375
During 2010-2011 :
Bad debts incurred 1,600
Discount allowed 800
Bad debts recovered 600
The debtos after writing off bad debts and discount allowed as on 31-03-2011 amounted to
Rs. 1,00,000. Prepare ledgers — Provisions for Discount on Debtors and Provisions for Bad and
Doubtful Debts.

Answer 7. (a)
Particulars Rs. Rs.
Balance as per Passbook (OD) 20,000
Add : Cheques issued but not presented for payment till 30.11.2010 525
835
900
Less : Cheque deposited but collected by bankers after 30.11.2010 and
appears in the passbook at Rs. 990 1,000
Cheques deposited but not collected by bankers till 30.11.2010 8,760
Overdraft Bank Balance as per Cash Book (Cr. Bal.) 410 10,170
Balance as per Cash Book (Credit Balance) 12,090

Answer 7. (b)
Provision for Discount on Debtors
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Discount allowed 800 By Balance b/d 2,375
To Balance c/d 2,375 By P & L A/c 800
(2.5% on Rs. 95,000) 3,175 3,175

Provision for Bad and Doubtful Debts

Particulars Amount (Rs.) Particulars Amount (Rs.)
To Bad Debts 1,600 By Balance b/d 5,000
To Balance c/d 5,000 By P & L A/c (balance) 1,600
(5% on Rs. 1,00,000) 6,600 6,600
40 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 8. X purchased goods from Y for Rs. 10,000 on 1st June 2010 and accepted a bill of exchange for 2
months drawn on him by Y on the same date for the amount. B got the bill discounted at his bank at
18%. At maturity the bill was dishonored, the noting charges amounting to Rs. 10. Y agreed to
receive from X the sum of Rs. 2,370 and a promissory note of Rs. 8,000 (in full settlement) at 3
months. On due date, X met the not. Give ledger accounts in books of X.

Answer 8.
X’s Ledger
Purchases Account

Date Particulars Amount Date Particulars Amount

2010 Rs. Rs.
June 1 To Y 10,000

Y’s Account

Date Particulars Amount Date Particulars Amount

2010 Rs. Rs.
June 1 To Bill’s Payable A/c 10,000 June 1 By Purchases A/c 10,000
Aug. 4 By Bill’s Payable A/c 10,000
Aug. 4 To Cash 2,370 Aug. 4 Noting Charges A/c 10
Aug. 4 To Bills Payable A/c 8,000 Aug. 4 Interest A/c 360
20,370 20,370

Bills Payable Account

Date Particulars Amount Date Particulars Amount

2010 Rs. 2010 Rs.
Aug. 4 To Y (dishonor) 10,000 June 1 By Y 10,000
Nov. 7 To Bank (payment) 8,000 Aug. 4 By Y 8,000
18,000 18,000

Noting Charges Account

Date Particulars Amount Date Particulars Amount

2010 Rs. Rs.
June 1 To Y 10

Interest Account

Date Particulars Amount Date Particulars Amount

2010 Rs. Rs.
Aug. 4 To Y 360
Foundation : Paper-2 : Accounting [ December  2011 ] 41

Q. 9. (a) NT of Kolkata has a branch at Darjeeling. The branch does not maintain separate books of accounts.
The branch has the following assets and liabilities on 31st August, 2010 and 30th September,
2010 :
31st August, 2010 30th September, 2010
Rs. Rs.
Stock of tea 4,50,000 3,75,000
Advance to suppliers 12,50,000 11,25,000
Bank Balance 1,87,500 2,50,000
Prepaid expenses 25,000 30,000
Outstanding expenses 32,500 27,500
Creditors for purchases 7,50,000 to be ascertained
During the month, Darjeeling branch :

(i) received by electronic mail transfer Rs. 25,00,000 from Kolkata head office;
(ii) purchased tea worth Rs. 30,00,000;
(iii) sent tea costing Rs. 30,75,000 to Kolkata, freight of Rs. 2,00,000 being payable at the destination
by the receiver;
(iv) spent Rs. 62,500 on office expenses;
(v) paid Rs. 7,50,000 as advance to suppliers;
(vi) paid Rs. 16,25,000 to suppliers in settlement of outstanding dues.

In addition, NT informs you that the Kolkata office had directly paid Rs. 875,000 to Darjeeling
suppliers by cheques drawn on bank accounts in Kolkata during the month.
NT informs you that for the purpose of accounting, Darjeeling branch is not treated as an outsider.
He wants you to write the detailed accounts relating to the transactions of the Darjeeling branch
as would appear in the books of Kolkata Head Office.

(b) Head Office passes adjustment entry at the end of each month to adjust the position arising out
of inter-branch transactions during the month. From the following inter-branch transactions in
November, 2010, make the entry in the books of Head Office :
(i) Mumbai Branch
(1) Received Goods: Rs. 9,000 from Kolkata Branch, Rs. 6,000 from Patna Branch.
(2) Sent Goods to Rs. 15,000 to Patna, Rs. 12,000 to Kolkata.
(3) Received B/R : Rs. 9,000 from Patna.
(4) Sent Acceptance: Rs. 6,000 to Kolkata, Rs. 3,000 to Patna.
(ii) Chennai Branch (Apart from the above)
(5) Received Goods: Rs. 15,000 from Kolkata, Rs. 6,000 from Mumbai.
(6) Cash Sent : Rs. 3,000 to Kolkata, Rs. 9,000 to Mumbai.
(iii) Kolkata Branch (Apart from the above)
(7) Sent Goods to Patna : Rs. 9,000.
(8) Paid B/P : Rs. 6,000 to Patna, Rs. 6,000 cash to Patna.
42 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 9. (a)
Dr. Darjeeling Tea Stock Account Cr.
Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Sept. 1 To Opening balance 4,50,000 Sept. 30 By Tea in transit to Kolkata 30,75,000
30 To Purchases 30,00,000 30 By Closing stock 3,75,000
34,50,000 34,50,000

Dr. Advance to Darjeeling Supplier’s Account Cr.

Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Sept. 1 To Opening balance 12,50,000 Sept. 30 By Suppliers—
adjustment 8,75,000
30 To Darjeeling bank 7,50,000 30 By Closing balance 11,25,000
20,00,000 20,00,000

Dr. Darjeeling Supplier’s Account Cr.

Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Sept.30 To Advance to Suppliers Sept. 1 By Opening balance 7,50,000
— Darjeeling 8,75,000 30 By Tea stock 30,00,000
30 To Darjeeling bank 16,25,000 (Purchases)
30 To Kolkata Bank 8,75,000
30 To Balance c/d 3,75,000
37,50,000 37,50,000
Dr. Darjeeling Bank Account Cr.
Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Sept. 1 To Balance b/d 1,87,500 Sept. 30 By Advance to Suppliers 7,50,000
30 To Kolkata Bank A/c 25,00,000 30 By Suppliers 16,25,000
30 By Expenses 62,500
30 By Balance c/d 2,50,000
26,87,500 26,87,500
Dr. Darjeeling Bank Account Cr.
Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Sept. 1 To Prepaid expenses 25,000 Sept. 1 By Outstanding expenses 32,500
30 To Darjeeling Bank 62,500 30 By Prepaid expenses 30,000
30 To Outstanding expenses 27,500 30 By Branch Profit and Loss 52,500
1,15,000 1,15,000
Foundation : Paper-2 : Accounting [ December  2011 ] 43

Answer 9. (b)

Date Particulars Dr. Cr.

Rs. Rs.
2010
Nov 30 Chennai Branch A/c Dr. 9,000
Patna Branch A/c Dr. 24,000
To Mumbai Branch A/c 9,000
To Kolkata Branch A/c 24,000
(Being adjustment entry passed by head office in respect
of inter-branch transactions during the month.)

Working Note :

Inter - branch transactions

Mumbai Chennai Kolkata Patna

Rs. Rs. Rs. Rs.
(a) Mumbai Branch
(1) Received Goods 15,000 (Dr.) 9,000 (Cr.) 6,000 (Cr.)
(2) Sent Goods 27,000 (Cr.) 12,000 (Dr.) 15,000 (Dr.)
(3) Received B/R 9,000 (Dr.) 9,000 (Cr.)
(4) Sent Acceptance 9,000 (Cr.) 6,000 (Dr.) 3,000 (Dr.)
(b) Chennai Branch
(5) Received Goods 6,000 (Cr.) 21,000 (Dr.) 15,000 (Cr.)
(6) Cash Sent 9,000 (Dr.) 12,000 (Cr.) 3,000 (Dr.)
(c) Kolkata Branch
(7) Sent Goods 9,000 (Cr.) 9,000 (Dr.)
(8) Paid B/P and Cash 12,000 (Cr.) 12,000 (Dr.)
9,000 (Cr.) 9,000 (Dr.) 24,000 (Cr.) 24,000 (Dr.)
44 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 10. (a) On 1st January, 2010 D Ltd., Mumbai, sent on consignment to N Ltd. of Kanpur 100 cases of tea
costing Rs. 500 each, invoiced “proforma” at Rs. 600 each. The freight and other charges on the
consignment amounted to Rs. 3,100. At the same time, D Ltd. passed the documents through
the Bank and drew upon N Ltd. for Rs. 30,000 at 15 days sight and discounted the draft with the
Bank for Rs. 29,775. The draft was duly honoured by N Ltd.
On 1st March, 2010, N Ltd. sent Account Sales (together with he necessary remittance) showing
that 40 cases had realised Rs. 600 each, and 30 cases Rs. 700 each and that 30 cases remained in
stock unsold. The expenses in Kanpur amounted to Rs. 2,500 in respect of the entire consignment.
N Ltd. are entitled to a selling commission of 5 per cent.
On 15th March, 2010 N Ltd. informed the consignors that 20 cases were damaged due to bad
packing and that they estimated that the selling price of the damaged goods would be about Rs.
200 per case.
Both the firms close their books of account on 31st March. Prepare ledger accounts in the books
of (i) D Ltd. and (ii) N Ltd.

Answer 10. (a)

D Ltd. Ledger
Dr. Consignment Account Cr.

Date Particulars Amount Date Particulars Amount

2010 Rs. 2010 Rs.
Jan. 1 To Goods Sent on Mar. 1 By N Ltd. — Sales 45,000
Consignment Account 60,000 ” 15 By Abnormal Loss 6,620
” To Bank — Expenses 3,100 31 By Goods Sent on
Mar. 1 To N Ltd. — Expenses 2,500 Consignment Account
” To N Ltd. — Commission 2,250 — Loading 10,000
15 To Consignment Stock ” By Consignment Stock
Reserve Account 1,000 Account 10,310
31 To Profit & Loss Account
— Profit 3,080
71,930 71,930

Dr. N Ltd. of Kanpur Cr.

Date Particulars Amount Date Particulars Amount

2010 Rs. 2010 Rs.
Mar. 1 To Consignment Account— Jan. 1 By Bills Receivable Account 30,000
Sales 45,000 Mar. 1 By Consignment Account–
” 31 To Balance c/d 3,000 Expenses 2,500
” ” By Consignment Account—
Commission 2,250
” ” By Bank 13,250
48,000 48,000
Foundation : Paper-2 : Accounting [ December  2011 ] 45

Dr. Bills Receivable Account Cr.

Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Jan. 1 To N Ltd. 30,000 Jan. 1 By Bank 29,775
” ” By Discount Account 225
30,000 30,000

Dr. Goods Sent on Consignment Account Cr.

Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Mar. 1 To Consignment Account— Jan. 1 By Consignment Account 60,000
Loading 10,000
” ” To Trading Account— Transfer 50,000
60,000 60,000

Dr. Consignment Stock Account Cr.

Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Mar. 31 To Consignment Account 10,310 Mar. 31 By Balance c/d 10,310
Apr. 1 To Balance b/d 10,310

Dr. Consignment Stock Reserve Account Cr.

Date Particulars Amount Date Particulars Amount

2010 Rs. 2010 Rs.
Mar. 31 To Balance c/d 1,000 Mar. 31 By Consignment Account 1,000
Apr. 1 By Balance b/d 1,000

Dr. Discount Account Cr.

Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Mar. 31 To Bills Receivable Account 225 Mar. 31 By Profit & Loss Account
—Transfer 225
46 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Working Notes :
(i) Calculation of abnormal loss : Rs.
Cost of 20 cases @ Rs. 500 per case 10,000
20
Add : Proportionate expense = Rs. 3,100 × 620
100
10,620
Less : Value of 20 cases @ Rs. 200 per case 4,000
6,620
(ii) Calculation of closing stock :
Invoice price of 10 cases @ Rs. 600 per case 6,000
10
Proportionate expense = Rs. 3,100 × 310
100
6,310
Add : Value of 20 cses @ Rs. 200 per case 4,000
10,310

(iii) Since 10 cases have not yet been sold 1/10th of advance has not been adjusted.

N Ltd. Ledger
Dr. D Ltd. of Mumbai Cr.
Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Jan. 1 To Bills Payable Account 30,000 ? By Bank — Sales Proceeds 45,000
? To Bank—Expenses 2,500 Mar. 31 By Balance c/d 3,000
Mar. 1 To Commission Account 2,250
” ” To Bank 13,250
48,000 48,000
Apr. 1 To Balance b/d 3,000

Dr. Bills Payable Account Cr.

Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Jan.31 To Bank 30,000 Jan. 1 By D Ltd. 30,000

Dr. Commission Account Cr.

Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Mar. 31 To Profit & Loss Account 2,250 Mar. 1 By D Ltd. 2,250
Foundation : Paper-2 : Accounting [ December  2011 ] 47

Q. 10. (b) A and B were partners in a joint venture sharing profits and losses in the proportion of four-fifths
and one-fifth respectively. A supplies goods to the value of Rs. 50,000 and incurs expenses
amounting to Rs. 5,400. B supplies goods to the value of Rs. 14,000 and his expenses amount to
Rs. 800. B sells goods on behalf of the joint venture and realises Rs. 92,000. B is entitled to a
commission of 5% on sales. B settles his account by bank draft. Give journal entries and necessary
accounts in the books of A.

Answer 10. (b)

In the Books of A
Journal
Dr. Cr.
Rs. Rs.
Joint Venture Account Dr. 55,400
To Trading Account 50,000
To Bank Account 5,400
(Goods sent to B to be sold by him on joint account and
expenses incurred in respect goods sent)

Joint Venture Account Dr. 14,800

To B Account 14,800
(The value of goods supplied and expenses incurred by B
on joint account)

B’s Account Dr. 92,000

To Joint Venture Account 92,000
(Sale proceeds received by B on account of joint venture)

Joint Venture Account Dr. 4,600

To B Account 4,600
(Commission due to B on joint ventures sales at the rate of 5%)

Joint Venture Account Dr. 17,200

To B Account 3,440
To Profit & Loss Account 13,760
(Profit of Rs. 17,200 divided as to 1/5th to B and 4/5the to self—
transferred to Profit and Loss Account)

Bank Account Dr. 69,160

To B Account 69,160
(Bank draft received from B in settlement of account)
48 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Ledger
Dr. Joint Venture Account Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Trading Account (goods) 50,000 To B (Sales) 92,000
To Bank (expenses 5,400
To B :
Goods 14,000
Expenses 800
To B (commission) 4,600
To B (1/5th profit) 3,440
To Profit & Loss A/c (4/5th profit) 13,760
92,000 92,000

Dr. B Account Cr.

Particulars Amount Particulars Amount
Rs. Rs.
To Joint Venture Account (Sales) 92,000 By Joint Venture Account :
Goods 14,000
Expenses 800
By Joint Venture Account Commission 4,600
Profit 3,440
By Bank — bank draft in settlement 69,160
92,000 92,000

Q. 11. (a) The following trial balance is extracted from the books of a E on 31st December 2010 :
Particulars Dr. Cr.
Rs. Rs.
Furniture and Fittings 640
Motor Vehicles 6,250
Buildings 7,500
Capital Account 12,500
Bad Debts 125
Provisions for Bad Debts 200
Sundry Debtors and Creditors 3,800 2,500
Stock on January 1, 2010 3,460
Purchases and Sales 5,475 15,450
Bank Overdraft 2,850
Sales and Purchases Returns 200 125
Advertising 450
Interest (on Bank Overdraft) 118
Commission 375
Cash 650
Taxes and Insurance 1,250
General Expenses 782
Salaries 3,300
34,000 34,000
Foundation : Paper-2 : Accounting [ December  2011 ] 49

The following adjustments are to be made :

(a) Stock in hand on 31st December 2010 was Rs. 3,250.
(b) Depreciate Buildings at the rate of 5%, Furniture & Fittings @ 10% and Motor Vehicles @ 20%
(c) Rs. 85 is due for interest on bank overdraft.
(d) Salaries Rs. 300 and Taxes Rs. 120 are outstanding.
(e) Insurance amounting to Rs. 100 is prepaid.
(f) One-third of the commission received is in respect of work to be done next year.
(g) Write off a further sum of Rs. 100 as bad debt and provision for bad debts to be made equal to 10
per cent on sundry debtors.
Prepare a Trading and Profit & Loss Account for the year ending 31st December, 2010 and Balance Sheet
as on the date.
Answer 11. (a)
Trading and Profit & Loss Account
(for the year ending 31st December, 2010)
Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock 3,460 By Sales 15,450
To Purchases 5,475 Less : Sales
Less : Returns 125 5,350 Returns 200 15,250
To Gross Profit c/d 9,690 By Closing Stock 3,250
18,500 18,500
To Salaries 3,300 By Gross Pofit b/d 9,690
Add : Outstanding 300 3,600 By Commission 375
To General Expenses 782 Less : Received in advance 125 250
To Taxes & Insurance 1,250
Add : Outstanding 120
1,370
Less : Prepaid Ins. 100 1,270
To Depreciation :
Building (5%) 375
Furniture & Fitting (10%) 64
Motor Vehicles (20%) 1,250 1,689
To Advertising 450
To Bad Debts 225
Add : New Provision 370
595
Less : Old Provision 200 395
To Interest on Bank Overdraft 118
Add : Outstanding 85 203
To Net Profit 1,551
9,940 9,940
50 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Balance Sheet
(as on the 31st December, 2010)
Liabilities Amount Assets Amount
Rs. Rs.
Capital 12,500 Buildings 7,500
Add : Net Profit 1,551 14,051 Less : Depreciation 375 7,125
Sundry Creditors 2,500 Furniture 640
Bank Overdraft 2,850 Less : Depreciation 64 576
Add : Interest Due 85 2,935 Motor Vehicles 6,250
Outstanding Expenses : Less : Depreciation 1,250 5,000
Salaries 300 Stock in trade 3,250
Taxes 120 420 Sundry Debtors 3,700
Commission Received in Less : Provision for bad debts 270 3,330
Advance 125 Prepaid Insurance 100
Cash in Hand 650
20,031 20,031

Q. 11. (b) From the following figures extracted from the books of C, you are required to prepare a Trading
and Profit & Loss Account for the year ended 31st March, 2010 and a Balance Sheet as on that
date after making the necessary adjustments :

Particulars Rs. Particulars Rs.

C’s Capital 2,28,800 Stock 1.4.2009 38,500
C’s Drawings 13,200 Wages 35,200
Plant and Machinery 99,000 Sundry Creditors 59,400
Freehold Property 66,000 Postage and Telegrams 1,540
Purchases 1,10,000 Insurance 1,760
Returns Outwards 1,100 Gas and Fuel 2,970
Salaries 13,200 Bad Debts 660
Office Expenses 2,750 Office Rent 2,860
Office Furniture 5,500 Freight 9,900
Discount A/c (Dr.) 1,320 Loose Tools 2,200
Sundry Debtors 29,260 Factory Lighting 1,100
Loan to Shri Krishna Provision for D/D 880
@ 10% p.a. — balance on 1.4.94 44,000 Interest on loan to Sh. Krishna 1,100
Cash at Bank 29,260 Cash on Hand 2,640
Bills Payable 5,500 Sales 2,31,440

Adjustments :

1. Stock on 31st March 2010 was valued at Rs. 72,600.

2. A new machine was installed during the year costing Rs. 15,400 but was not recorded in the books as
no payment was made for it. Wages Rs. 1,100 paid for its erection have been debited to wages
account.
Foundation : Paper-2 : Accounting [ December  2011 ] 51

1
3. Depreciate Plant and Machinery by 33 %
3
Furniture by 10%
Freehold Property by 5%
4. Loose tools were valued at Rs. 1,760 on 31.3.2010.
5. Of the Sundry Debtors Rs. 660 are bad and should be written off.
6. Maintain a provision of 5% on Sundry Debtors for doubtful debts.
7. The manager is entitled to a commission of 10% of the net profits after charging such commission.

Answer 11. (b)

C
Trading and Profit & Loss Account
(for the year ended 31.3. 2010)
Particulars Amount Particulars Amount
Rs. Rs.
To Stock (1.4.2009) 38,500 By Sales 2,31,440
To Purchase 1,10,000 By Closing Stock 72,600
Less : Returns 1,100 1,08,900
To Wages 35,200
Less : Erection of
Machinery 1,100 34,100
To Gas and Fuel 2,970
To Freight 9,900
To Factory Lighting 1,100
To Gross Profit c/d 1,08,570
3,04,040 3,04,040
To Salaries 13,200 By Gross Profit b/d 1,08,570
To Office Expenses 2,750 By Interest 1,100
To Postage & Telegrams 1,540 Add : O/S 3,300 4,400
To Insurance 1,760
To Office Rent 2,860
To Discount 1,320
To Bad Debt 660
Add : Addl. Bad Debts 660
Add : New Provision 1,430
2,750
Less : Old Provision 880 1,870
To Depreciation :
Machinery 38,500
Funriture 550
Freehold Property 3,300
Loose Tools 440 42,790
To Commission to Manager 4,080
To Net Profit taken to
Balance Sheet 40,800
1,12,970 1,12,970
52 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

C
Balance Sheet as at 31.3.2011
Liabilities Amount Assets Amount
Rs. Rs.
Capital 2,28,800 Plant & Machinery 99,000
Add : Net Profit 40,800 Add : New Machinery
2,69,600 (15,400+1,100) 16,500
Less : Drawings 13,200 2,56,400 1,15,500
Less : Depreciation 38,500 77,000
Freehold Property 66,000
Bills Payable 5,500 Less : Depreciation 3,300 62,700
Sundry Creditors 59,400 Office Furniture 5,500
Manager’s Commission 4,080 Less : Depreciation 550 4,950
Outstanding Loose Tools 2,200
Less : Depreciation 440 1,760
Closing Stock 72,600
Sundry Debtors 29,260
Less : Bad Debts 660
28,600
Less : Provision for
doubtful debts 1,430 27,170
Loan to Sh. Krishna 44,000
Add : Interest accured
and outstanding 3,300 47,300
Cash at Bank 29,260
Cash in Hand 2,640
3,25,380 3,25,380

Q. 12. (a) A trader keeps his books by single entry. During the year 2010 he kept a cash book of which the
following is an analysis :
Rs.
Received from Sundry Debtors 64,000
Additional Capital introduced on 1st October, 2010 8,000
Loan from Z at 16% p.a. on 1st July 2010 10,500
Paid to Sundry Creditors 57,700
General Expenses paid 3,900
Salaries paid 3,000
Drawings 4,000
Deposits in the bank during the year 50,000
Withdrawals from the bank during the year 36,000
The following balances existed on 1st January 2010 :
Sundry Debtors Rs. 15,300; Sundry Creditors Rs. 11,500; Bank Overdraft Rs. 8,000; Building
Rs. 42,500; Stock Rs. 21,800; and Cash Balance Rs. 600. The following Balances existed on 31st
December 2010:
Foundation : Paper-2 : Accounting [ December  2011 ] 53

Sundry Debtors Rs. 16,000; Sundry Creditors Rs. 11,900; and Stock Rs. 26,000.
Depreciate Building by 5% and provide interest on Z’s loan.
Prepare Trading and Profit and Loss Account for the year ended 31st December, 2010 and
Balance Sheet as on that date. Also prepare Sundry Debtors Account, Sundry Creditors, Cash
Account, Bank Account and working notes in full, as part of your answer.

Answer 12. (a)

Trading and Profit & Loss Account
(for the year ended 31.3. 2011)
Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock 21,800 By Sales 64,700
To Purchases 58,100 By Closing Stock 26,000
To Gross Profit c/d 10,800
90,700 90,700
To Salaries 3,000 By Gross Profit b/d 10,800
To General Expenses 3,900
To Depreciation 2,125
To Interest on Loan 840
To Net Profit transferred to
Capital Account 935
10,800 10,800

Balance Sheet
as on 31st December, 2011
Liabilities Amount Assets Amount
Rs. Rs.
Capital 60,700 Building 42,500
Add : Addn. during the year 8,000 Less : Depreciation 2,125 40,375
Add : Net Profit 935 8,935 Stock-in-trade 26,000
69,635 Sundry Debtors 16,000
Less : Drawings 4,000 Cash at Bank 6,000
65,635 Cash in Hand 500
Z’s Loan 10,500
Add : Interest 840 11,340
Sundry Creditors 11,900
88,875 88,875
54 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Working Notes :
Sundry Debtors Account
Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Jan. 1 To Balance b/d 15,300 Jan. 1 By Cash 64,000
Dec. 31 To Sales (bal. figure) 64,700 Dec. 31 By Balance c/d 16,000
80,000 80,000

Sundry Creditors Account

Date Particulars Amount Date Particulars Amount
2010 Rs. 2010 Rs.
Dec. 31 To Cash 57,700 Jan. 1 By Balance b/d 11,500
” 31 To Balance c/d 11,900 Dec. 31 By Purchases 58,100
(bal. fig.)
69,600 69,600

Cash and Bank Account

Date Particulars Cash Bank Date Particulars Cash Bank
Rs. Rs. Rs. Rs.
2010 2010
Jan. 1 To Balance b/d 600 Jan. 1 By Balance b/d 8,000
To Sundry Debtors 64,000 By Creditors 57,700
To Z’s Loan 10,500 By Bank 50,000
To Capital A/c 8,000 By General Exp. 3,900
To Cash 50,000 By Salaries 3,000
To Bank 36,000 By Drawings 4,000
By Cash 36,000
By Balance c/d 500 6,000
1,19,100 50,000 1,19,100 50,000

Working Notes :
Balance Sheet
(as on the 31st December, 2011)
Liabilities Amount Assets Amount
Rs. Rs.
Capital 60,700 Building 42,500
(balancing figure) Stock-in-trade 21,800
Bank Overdraft 8,000 Sundry Debtors 15,300
Sundry Creditors 11,500 Cash in Hand 600
80,200 80,200
Foundation : Paper-2 : Accounting [ December  2011 ] 55

Q. 12. (b) T does not maintain his books and accounts according to Double Entry System. From the following
ifnormation, prepare Profit and Loss Account and Balance Sheet as at June 30, 2010.

(a) Assets and Liabilities 30.6.2009 30.6.2010

Stock 19,800 1,13,200
Creditors 16,000 14,500
Debtors 1,18,000 1,25,000
Premises 90,000 90,000
Furniture 11,000 11,500
Air Conditioner 15,000 15,000

(b) Creditors as at 30.6.2009 includes Rs. 15,000 for purchase of Air Conditioner :

(c) Cash Transactions : Rs.

Cash as at July 1, 2009 15,000
Collections from Customers 1,60,800
Payments to Creditos (Trade) 1,44,000
Rent, Rates and Taxes 11,500
Salaries 1,12,000
Sundry Expenses 18,000
Sundry Income 16,500
Drawings by Thomas 30,000
Loan from Mrs F 23,000
Capital introduced 12,000
Cash Sales 11,500
Cash Purchases 15,000
Paid to Creditor for Air Conditioner 15,000

(d) Bad Debts written off 1,200

Answer 12. (b)

Trading and Profit & Loss Account
for the year ended June 30, 2010
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock 19,800 By Sales : Cash 11,500
To Purchases: Cash 15,000 Credit 1,69,000
Credit 1,42,500 By Closing Stock 1,13,200
To Gross Profit 1,16,400
2,93,700 2,93,700
56 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Particulars Amount Particulars Amount

Rs. Rs.
To Salaries 1,12,000 By Gross Profit 1,16,400
To Rent, Rates & Taxes 11,500 By Sundry Income 16,500
To Sundry Expenses 18,000 By Loss for the year transf.
To Bad Debts 1,200 to Capital A/c 9,800
1,42,700 1,42,700

Balance Sheet
as at June 30, 2010
Liabilities Amount Assets Amount
Rs. Rs.
T Capital Account 2,37,800 Fixed Assets :
as at 1.6.2009 Premises 90,000
Add : Capital Introduced 12,000 Furniture 11,500
2,49,800 Air Conditioner 15,000
Less : Drawings 30,000
2,19,800 Current Assets :
Less : Loss for the year 9,800 2,10,000 Stock 1,13,200
Loan from Mrs. F 23,000 Debtors 1,25,000
Bank Balance (Overdraft) 1,07,200
Sundry Creditors 14,500
3,54,700 3,54,700

Working Notes :
(i) Total Debtors Account

Particulars Amount Particulars Amount

Rs. Rs.
To Balance b/d 1,18,000 By Bank 1,60,800
To Credit (balancing fig.) 1,69,000 By Bad debts 1,200
By Balance c/d 1,25,000
2,87,000 2,87,000

(ii) Total Creditors Account

Particulars Amount Particulars Amount
Rs. Rs.
To Bank 1,44,000 By Balance b/d 16,000
To Balance c/d 14,500 By Purchases 1,42,500
1,58,500 1,58,500
Foundation : Paper-2 : Accounting [ December  2011 ] 57

(iii) Bank Account

Particulars Amount Particulars Amount
Rs. Rs.
To Balance (Opening) 15,000 By Payments to Creditors 15,000
To Collections from Customers 1,60,800 (Airconditioners)
To Sundry Income 16,500 By Payments to Creditors (Trade) 1,44,000
To Loan from Mrs. Fernandes 23,000 By Rent, Rates & Taxes 11,500
To Thomas Capital A/c 12,000 By Salaries 1,12,000
To Cash Sales 11,500 By Sundry Expenses 18,000
To Balance (Overdraft) 1,07,200 By Drawings 30,000
(balancing figure) By Cash Purchases 15,000
By Furniture 500
3,46,000 3,46,000

(iv) Opening Balance Sheet

as at July 1, 2009
Liabilities Amount Assets Amount
Rs. Rs.
Capital Account 2,37,800 Fixed Assets :
(balancing figure) Premises 90,000
Creditors Furniture 11,000
(including creditors for Air 31,000 Air Conditioner 15,000
Conditioner Rs. 15,000) Current Assets :
Stock 19,800
Debtors 1,18,000
Cash 15,000
2,68,800 2,68,800

Q. 12. (c) Sumit and Amit entered into a Joint Venture to purchase , recondition and sell second hand cars.
Sumit purchased 100 cars during the period 1.1.2010 to 30.6.2010 at the following prices and
paid for the same :
20 cars @ Rs. 15,000 each; 40 cars @ Rs.25,000 each ; 40 cars @ Rs. 55,000 each. Amit during the
same period reconditioned the cars by spending the following amounts :
Spare parts used Rs. 1,80,000; Painting Rs. 2,00,000; Air-conditioning 10 cars Rs. 3,00,000; Testing
charges Rs. 20,000; insurance Rs.60,000;Labour charges Rs. 10,40,000. Sumit and Amit sold the
cars, the details of which are :
Sold by
Sumit Amit
A.C. Cars 5 4
Non-A.C. Cars 35 46
58 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

A.C. cars were sold at Rs.1,75,000 each. Non-A.C. cars were sold:
Sumit 35 cars @ Rs. 1.25 lakhs each
Amit 35 cars @ Rs. 1.10 lakhs each
11 cars @ Rs. 0.60 lakhs each
During testing one non-A.C. car met with an accident and the Insurance Company paid the actual
cost as claim. Prepare the Joint Venture Account and Account of Amit in the books of Sumit.

Answer 12. (c)

In the books of Sumit

Dr. Joint Venture Account Cr.

Date Particulars Amount Amount Date Particulars Amount Amount
? To Bank A/c By Bank A/c
(Cost of cars 35,00,000 Sales Proceeds 52,50,000
Purchased ” Amit A/c
” Amit - Sales Proceeds 52,10,000
(Reconditioning ” Insurance claim 50,000
charges): ” Closing stock:
” Spare parts 1,80,000 ” A. C. car 80,000
” Painting 2,00,000 ” Non-A.C. car
” Air-conditioning 3,00,000 (8 × Rs. 50,000) 4,00,000 4,80,000
” Testing charges 20,000
” Insurance 60,000
” Labour charges 10,40,000 18,00,000
” Profit on Venture:
” P & L A/c (1/2) 28,45,000
” Amit (1/2) 28,45,000 56,90,000
1,09,90,000 1,09,90,000

Dr. Amit Account Cr.

Data Particulars Amount Date Particulars Amount
Rs. Rs.
? To Joint Venture A/c ? By Joint Venture
-Sales Proceeds 52,10,000 (Reconditioning Charges) 18,00,000
Joint Venture A/c
(Share of Profit) 28,45,000
Balance c/d 5,65,000
52,10,000 52,10,000
Foundation : Paper-2 : Accounting [ December  2011 ] 59

Workings :
Rs.
1. Cost of Cars Purchased
(20 cars × Rs. 15,000)+(40 cars × Rs. 25,000) + (40cars × Rs. 55,000) 35,00,000

2. Sales Proceeds
Sumit- (5 × Rs. 1,75,000) + (35 × Rs. 1,25,0000) 52,50,000
Amit- (4 × Rs. 1,75,000) + (35 × Rs. 1,10,000) + (11 × Rs. 60,000) 52,10,000

3. Closing Stock (A.C. Cars + Non-A.C. Cars) 35,00,000

Purchase Price
Add : Reconditioning Charges 15,00,000
50,00,000
Cost per Non-A.C. Car = Rs. 50,00,000/100 and, 50,000
cost of 10 A.C. Cars Rs. 30,00,000/100 30,000
Total Cost for A.C. cars (50,000 + 30,000) 80,000

4. Actual cost per Non-A.C. car (calculated above) Rs. 50,000, which has been paid by the insurance
company.

Q. 13. (a) A firm purchased on 1st January, 2007 certain Machinery for Rs. 58,200 and spent Rs. 1,800 on its
erection. On 1st July, 2007 additional machinery costing Rs. 20,000 was purchased. On 1st July,
2009 the machinery purchased on 1st January, 2007 having become obsolete was auctioned for
Rs. 28,600 and on the same date fresh machinery was purchased at a cost of Rs. 40,000.
Depreciation was provided for annually on 31st December at the rate of 10 per cent on written
down value. In 2010, however the firm changed this method of providing depreciation and
adopted the method of providing 5 per cent per annum depreciation on the original cost of the
machinery.
Give the Machinery Account as it would stand at the end of each year from 2008 to 2010.
60 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 13. (a)

Dr. Machinery Account Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2007 2007
Jan. 1 To Bank 58,200 Dec. 31 By Depreciation A/c 7,000
To Bank 1,800 By Balance c/d 73,000
(erection chargs.)
July To Bank 20,000
80,000 80,000
2008 2008
Jan. 1 To Balance b/d 73,000 Dec. 31 By Depreciation A/c 7,300
By Balance c/d 65,700
73,000 73,000
2009 2009
Jan. 1 To Balance b/d 65,700 July 1 By Depreciation 2,430
July 1 To Bank 40,000 Dec. 31 By Bank 28,600
By Profit & Loss A/c 17,570
By Depreciation 3,710
By Balance c/d 53,390
1,05,700 1,05,700
2010 2010
Jan. 1 To Balance b/d 53,390 Dec. 31 By Depreciation 3,000
To Profit & Loss A/c Dec. 31 By Balance c/d 53,500
(excess dep. written back) 3,110
56,500 56,500

Working Notes :
(i) Book Value of Machines : Machine I Machine II Machine III
Rs. Rs. Rs.
Cost 60,000 20,000 40,000
Depreciation for 2007 6,000 1,000
Written down value 54,000 19,000
Depreciation for 2008 5,400 1,900
Written down value 48,600 17,100
Depreciation for 2009 2,430 1,710 2,000
Written down value 46,170 15,390 38,000
Sale proceeds 28,600
Loss on Sale 17,570
Foundation : Paper-2 : Accounting [ December  2011 ] 61

(ii) Written down value on the basis of 5% depreciation according to Straight Line Method on 31st Dec.
2009 has been calculated as follows :
Machine I Machine III
Rs. Rs.
Cost 20,000 40,000
Depreciation : for 2½ years 2,500
for ½ year 1,000
17,500 39,000

Total : Rs. 56,500

(iii) The book value appearing in the Books is Rs. 53,390; Rs 3,110 has to be written back to make this
figure Rs. 56,500.
(iv) The depreciation rate of 10% has been assumed to be per annum.

Q. 13. (b) M/s MW and Wright commenced business on 1st January, 2006 when they purchased plant and
equipment for Rs. 7,00,000. They adopted a policy of (i) charging depreciation at 15% per annum
on diminishing balance basis and (ii) charging full year’s depreciation on additions.
Over the years, their purchases of plant have been :
Date Rs.
1.8.2007 1,50,000
30.9.2010 2,00,000
On 1.1.2010 it was decided to change the method and rate of depreciation to 10% on straight
line basis with retrospective effect from 1.1.2006, the adjustment being made in the accounts
for the year ending 31st December, 2010.
Calculate the difference in depreciation to be adjusted in the Plant and Equipment A/c 1.1.2010
and show the ledger account for the year 2010.

Answer 13. (b)

Depreciation on Written Down Value Basis
Purchased on Purchased on
January 1, 2006 August 2007
2006 Cost 7,00,000
Depreciation 1,05,000
Written Down value (WDV) / Cost 5,95,000 1,50,000
2007 Depreciation 89,250 22,500
2008 WDV 5,05,750 1,27,500
Depreciation 75,863 19,125
2009 WDV 4,29,887 1,08,375
Depreciation 64,483 16,256
3,65,404 92,119
62 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Rs. Rs.
Depreciation charged 3,34,596 (i) 57,881(ii)
Total depreciation charged (i) + (ii) – (A) 3,92,477
Depreciation on straight line basis :
Annual depreciation
(10% of original cost) 70,000 15,000
No. of years for which depreciation is to be charged 4 3
Total Depreciation 2,80,000(i) 45,000(ii)
Total Depreciation to be charged (i) + (ii) – (B) 3,25,000
Difference : Excess depreciation charged to be 67,477
adjusted in 1995 : (A) – (B)

Dr. Plant and Equipment Account Cr.

Date Particulars Amount Date Particulars Amount
Rs. Rs.
2010 2010
Jan. 1 To Balance b/d 4,57,523 Dec. 31 By Depreciation (10%)
(Rs. 8,50,000–Rs. 3,92,477) (on original cost) 1,05,000
Jan. 1 To Profit and Loss A/c By Balance c/d 6,20,000
(adjustment for
depreciation) 67,477
Sept.30 To Bank 2,00,000
7,25,000 7,25,000

Q. 13. (c) Perfect Pvt. Ltd. has two accounts with Ever Bank ltd. The accounts were known as Account I and
Account II.As at Dec 31,2010,the balance as per A/c books reflected the following :
Account I Rs. 1,25,000 Regular balance
Account II Rs. 1,11,250 Overdraft balance.
The accountant failed to tally the balances with Pass Book and the following information was
available :
(a) The Bank has charged Interest on Account II Rs. 11,375 and credited Interest on Account I
Rs. 1,250. These were not recorded by the accountant.
(b) Rs. 12,500 drawn on Dec 10,2011 from Account I was recorded in the books of Account II.
(c) Bank charges of Rs. 150 and Rs. 1,125 for Account I and Account II were not recorded in the
books.
(d) A deposit of Rs. 17,500 in Account I was wrongly entered in Account II in the books.
(e) Two cheques of Rs. 12,500 and Rs. 13,750 deposited in Account I, but entered in Account II
in the books, were dishonoured. The entries for dishonoured cheques were entered
correctly in account II.
Foundation : Paper-2 : Accounting [ December  2011 ] 63

(f) Cheques issued for Rs. 1,50,000 and Rs. 15,000 from Account I and II, respectively, were,
not presented until January 5, 2011.
(g) Cheques deposited Rs. 1,25,000 and Rs. 1,17,500 in Accounts I and II, respectively, were
credited by bank on February 2, 2011.

Answer 13. (c)

Bank Reconciliation Statement-(Account-I)
as at 31st December 2010
Particulars Amount Amount
Rs. Rs.
Bank balance as per Cash Book 1,25,000
Add : Interest earned but not recorded in Cash Book 1,250
A deposit made into Account I wrongly entered in Account II 17,500
Cheques deposited but not entered (Rs.12,500+Rs.13,750) 26,250
Cheques issued but not presented for payment 1,50,000 1,95,000
3,20,000
Less : A withdrawal from Account I wrongly recorded in Account II 12,500
Bank charges debited in Pass Book but not entered in Cash 150
Book
Cheques dishonoured but not recorded in Cash Book 26,250
Rs. (12,500+13,750)
Cheques deposited but not credited by Bank 1,25,000 1,63,900
Bank Balance as per Pass Book 1,56,100

Bank Reconciliation Statement (Account-II)

as at 31st December 2010
Particulars Amount Amount
Rs. Rs.
Overdraft balance as per Cash Book 1,11,250
Add : Interest charged on overdraft but not entered in Cash Book 11,375
Bank charges debited by bank but not entered in Cash Book 1,125
A deposit made with Account I wrongly entered in Account II 17,500
Cheques deposited bun not credited by the bank 1,17,500 1,47,500
Less : Withdrawal wrongly recorded 12,500
Cheque issued but not presented 15,000 27,500
Overdraft balance as per Pass Book 2,31,250

Q. 13. (d) The Trial Balance of M/s Sen & Co., as on 31.3.2011, contained the following items: Reserve for
Bad Debts Rs. 12,000; Bad Debts Rs. 8,000 and Sundry Debtors Rs. 1,00,000.
You are required to show the Provision for bad debts Account assuming that provision for Bad
Debts to be created @ 2% on Debtors and further Bad Debt amounted to Rs. 5,000. M/s Sen &
Co. closing its account on 31st March, every year.
64 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 13. (d)

Provision for Bad Debts Account
Date Particulars Amount Date Particulars Amount
2011 2010
March 31 To Bad Debt A/c April 1 By Balance b/d 12,000
(Rs. 12,000+Rs. 5,000) 17,000 2011 ” Profit and Loss A/c
” Balance c/d 2,000 March 31 (bal fig.) 7,000
(2% on Rs. 1,00,000) -Further Provision to
be created
19,000 19,000

Working Notes :
1. The Bad Debt which are given in the Trail Balance has already been adjusted against Sundry Debtors.
2. The further Bad Debt amounting to Rs. 5,000 which are given in the adjustment should be adjusted
against Sundry Debtor by passing the following entry
Rs. Rs.
Bad Dabt A/c Dr. 5,000
To, Sundry Debtors A/c 5,000
Total Bad Debt will be Rs. 17,000 (Rs. 12,000 + Rs. 5,000)
3. The Reserve for Bad Debt which is given in the Trial Balance is the old provision or old reserve. New
provision will be calculated, on Closing Debtors = Rs. 2,000 (Rs. 1,00,000 × 2%)

Q. 14. (a) The MM Club’s accounts on 31st March. 2009 showed that annual subscriptions outstanding
were Rs. 5,000 from 50 members and that subscriptions had been received for 2009-2010 from
20 members. The total number of members on 31st March. 2009 was 1,500. During the year
ended 31st March, 2010, 25 members left or died (5 of which were those who owed subscriptions
on 31st March, 2009) and 40 others were admitted; they paid Rs. 150 as admission fee; 15 of
these paid subscriptions for 2009-2010 as well. The total amount received during 2009-2010 as
subscriptions were Rs. 1,47,000.
Prepare the Subscriptions Account and show the amount to be credited or debited to the
Income and Expenditure Account for the year ended 31st March, 2010 in respect of the above.
Answer 14. (a)
Dr. Subscriptions Account Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2009 2009
Apr. 1 To Subscription Outstanding Apr. 1 By Subscriptions Received
Account-transfer 5,000 in Advance A/c-transfer 2,000
2010 2009-10 By Bank 1,47,000
Mar. 31 To Subscription Received Mar. 31 By Income & Expenditure A/c
in Advance A/c (15 members) 1.500 -subscriptions irrecover-
Mar. 31 To Income & Expenditure able for 5 members 500
A/c-transfer of subscriptions By Subscriptions Outstanding
pertaining to the year 1,51,500 Mar. 31 A/c-working note 8,500
1,58,000 1,58,000
Foundation : Paper-2 : Accounting [ December  2011 ] 65

Working Note :
Subscriptions Outstanding on March, 31, 2010- No. Rs. Rs.
No. of members on March, 31, 2009 1,500
New admission 40
1,540
Less : Withdrawals and deaths 25

No. of members on 31st March, 2010 1,515

Total amount receivable @ Rs. 100 for 1,515 members 1,51,500
Add : Receivd in Advance on 31st March, 2010 1,500
Outstanding on 31st March, 2009 (good) 4,500
1,57,500
Less : Received in cash during the year 1,47,000
Received in Advance on March 31, 2009 2,000 1,49,000
8,500

Q. 14. (b) TC Cricket Club gives you the following Receipts and Payments Account for the year ended 31st
March, 2010.
Receipts Rs. Rs. Payments Rs. Rs.
To Balance of cash on By Salaries and wages 12,000
1st April 2009: By Sports Equipments 46,785
At Office 150 By Stationery and Printings 1,220
At Bank 14,200 14,350 By Maintenance of Ground 6,000
To Subscriptions 61,100 By Prizes 1,060
To Admission Fees 350 By Balance of cash on
To Interest on Investment 31st March, 2010
@ 9% per annum for 9,000 At Office 380
full year At Bank 17,355 17,735
84,800 84,800

The following additional information is provided to you :

On 1st April, 2009 On 1st April, 2010
(i) Subscription 480 560
(ii) Subscriptions Received in Advance 80 40
(iii) Sports Equipment 21,800 29,700
(iv) Land and Buildings (Cost less depreciation) 80,000 76,000

Prepare Income and Expenditure Account for the year ended 31st March, 2010 and Balance
Sheet as at that date.
66 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 14. (b)

Dr. Income and Expenditure Account of TC Cricket Club for the year ended 31st March, 2010. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Salaries and Wages 12,000 By Subscriptions
To Sports Equipment Used (Working Note No. 3) 61,220
(Working Note No. 2) 38,885 By Admission Fees 350
To Stationery and Printing 1,220 By Interest on Investments—
To Maintenance of Ground 6,000 @ 9% poer annum on Rs. 1,00,000 9,000
To Prizes 1,060
To Depreciation on Land & Buildings
(Rs. 80,000 – Rs. 76,000) 4,000
To Surplus i.e. Excess of Income over
Expenditure 7,405
70,570 70,570

Balance Sheet of Gavaskar Cricket Club as at 31st March, 2010

Liabilities Amount Assets Amount

Rs. Rs.
Capital Fund : Land and Buildings 80,000
Balance as on 1st April, 2009 Less : Depreciation for
(Working Note No. 1) 2,16,550 the year 4,000 76,000
Sports Equipments 29,700
Add : Surplus for the year 7,405 2,23,955 Investments 1,00,000
Subscriptions Received in 40 Subscription Due 560
Advance Cash at Bank 17,355
Cash at Office 380
2,23,995 2,23,995

Working Notes :
(i) Balance Sheet of TC Cricket Club as on 1st April, 2009
Liabilities Amount Assets Amount
Rs. Rs.
Subscriptions Received in Advance 80 Land and Buildings 80,000
Capital Fund (balancing figure) 2,16,550 Investments 1,00,00
Stock of Sports Equipment 21,800
Subscriptions Due 480
Cash at Bank 14,200
Cash at Office 150
2,16,630 2,16,630
Foundation : Paper-2 : Accounting [ December  2011 ] 67

(ii) Calculation of Sports Equipment Used : Rs.

Stock of Sports Equipment on 1st April, 2009 21,800
Add : Sports Equipment purchased during the year 2009-2010 46,785
68,585
Less : Stock of Sports Equipment on 31st March, 2010 29,700
38,885
(iii) Calculation of Income on account of Subscriptions :
Amount received during the year 61,100
Add : Subscriptions Received in Advance as on 1st April, 2009 80
Subscriptions Due as on 31st March, 2010 560
Rs. 61,740
Less : Subscription Received in Advance as on 31st March, 2010 40
Subscriptions Due as on 1st April, 2009 480 520
61,220

Q. 14. (c) Dhakeshwari Traders of Kolkata purchased 10,000 sarees @ Rs. 100 per saree. Out of these 6,000
sarees were sent on consignment to Lakshmi Traders of Jodh pur at the selling price of Rs. 120
per saree. The consignors paid Rs. 3,000 packing and freight.
Lakshmi Traders sold 5,000 sarees @ Rs. 125 each and incurred Rs. 1,000 for selling expenses and
remitted Rs.5,00,000 to Kolkata on account. They are entitled to a commission of 5% on total sale
plus a further of 25% commission on any surplus price realised over Rs. 120 per saree.
3,000 sarees were sold at Kolkata@ Rs. 110 per saree.
Owing to fall in market price, the value of stock of saree in hand is to be reduced by 8%.
Prepare : (i) Consignment Account, (ii) Lakshmi Traders Account, (iii) Trading and Profit & Loss
Account.
Answer 14. (c)
In the books of Dhakeshwari Traders
Dr. Consignment to Jodhpur Account Cr.
Date Particulars Amount Date Particulars Amount
? To Goods sent on By National Traders A/c
consignment A/c 6,00,000 - Sales proceeds 6,25,000
(6,000 × Rs.100) (5,000 × Rs. 125)
” Bank A/c 3,000 ” Stock on Consignment A/c 87,500**
- Packing and Freight
” Lakshmi Traders A/c
- Selling Expenses 1,000
- Commission 37,500*
” Profit and Loss A/c - Profit
on consignment transferred 71,000
7,12,400 7,12,400
* 3,000 sarees, which were sold at Kolkata @ Rs.110 per saree, are not to be taken into consideration
since it is not consignment transaction and, hence, the same is excluded from Consignment Account.
** Although the consignor purchased 10,000 sarees, only 6,000 sarees are related to consignment
transaction, balance is not to be taken into Consignment account at all.
68 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Dr. Lakshmi Traders Account Cr.

Date Particulars Amount Date Particulars Amount
? To Consignment to ? By Bank A/c 5,00,000
Jodhpur A/c - Advance
- Sales proceeds 6,25,000 ” Consignment to
Jodhpur A/c
- Exp. & Com. 38,500
” Balance c/d 86,500
6,25,000 6,25,000

Dr. Trading Account and Profit and Loss Account for the year dended ...... Cr.
Date Particulars Amount Date Particulars Amount
? To Purchase A/c ? By Sales A/c
(10,000 × Rs. 100) 10,00,000 (3,000 × Rs. 110) 3,30,000
” Gross Profit c/d 17,400 ” Goods sent on
consignment A/c 6,00,000
(6,000 × Rs. 100)
” Unsold Stock A/c 87,400
10,17,400 10,17,400
To Capital A/c By Gross Profit b/d 17,400
- Net Profit transferred 88,300 ” Consig. to Jodhpur A/c
- Profit 70,900
88,300 88,300

Workings :
1. Calculation of commission Payable to Lakshmi Traders Rs.
Total Sales @ Rs. 125 6,25,000
Less : Sales over Rs. 120 6,00,000
Surplus Price Realised 25,000
@ 5% on total Sales
Rs. 6,25,000 × 5% 31,250
Add : 25% on Rs. 25,000 6,250
37,500
2. Valuation of Unsold Stock
Since market price has fallen by 8% valuation of unsold
stock on consignment will be calculated as :
Rs.
Total Cost (1,000 × Rs. 100) 1,00,000
(without consideration expenses)
Less : 8 % Reduction 8,000
92,000
Less : Consignee’s Commission @ 5% 4,600
Estimated selling price 87,400
Foundation : Paper-2 : Accounting [ December  2011 ] 69

Q. 15. (a) Mr. S operates two Bank Accounts both of which are maintained in the Columnar Cash Book itself.
You are required to draw up a proforma of the Cash Book and show how the following transactions
relating to 28th February, 2010 will appear therein and close the Cash Book for the day :
(1) Opening Balances :
Cash Rs. 150
N Bank Rs. 11,240 (O/D)
O Bank Rs. 35,460
(2) Received cheque for Rs. 1,250 in respect of sales for realising which the N Bank charged
Rs. 1.50 and credited the balance.
(3) Purchased goods for Rs. 13,210 and a cheque issued on the O Bank.
(4) Paid office expenses: Rs. 45 and 15.50 for stationery.
(5) Out of cash sales of Rs. 13,265 a sum of Rs. 10,000 was deposited in the N Bank.
(6) Credit purchases of Rs. 15,000 were made from Mr M who sent the documents relating to
the goods though the O Bank for 90 percent of their value. The bank charged Rs. 115 for
releasing the documents.
(7) Deposited Rs. 5,000 in N Bank.
(8) A “Bills Receivable” for Rs. 10,000 was discounted with the O Bank, which charges 1 per
cent towards discounting.
(9) Withdrew Rs. 5,000 from the O Bank.
(10) A demand draft was purchased for Rs. 3,000 from a bank after paying Rs. 2 towards their
charges and paid to the Electricity Department as a deposit.
(11) Interest of Rs. 122 and Rs. 50 were credited and debited respectively by the O Bank and
N Bank.
(12) An amount of Rs. 1,500 was withdrawn from the O Bank and salaries paid to that extent.
Answer 15. (a)
Dr. Cash Book Cr.
Date Particulars L.F. N Bank O Bank Cash Discount Date Particulars L.F. N Bank O Bank Cash
Rs. Rs. Rs. Rs. Rs. Rs.
2010 2010
Feb. 28 To Balance b/d 35,460 150 Feb. 28 By Balance b/d 11,240
To Sales A/c 1,250 By Bank Charges A/c 1.50
To Sales A/c 13,265 By Purchases A/c 13,210
To Cash ‘C’ 10,000 By Office Expenses 45.00
To Cash ‘C’ 5,000 By Stationery A/c 15.50
To Bills By N Bank ‘C’ 10,000
Receivable A/c 9,900 100 By Mr. M 13,500
To O Bank ‘C’ 5,000 By Bank Charges A/c 115
To Interest A/c 122 By N Bank ‘C’ 5,000
To O Bank ‘C’ 1,500 By Cash ‘C’ 5,000
To Dividend A/c 1,250 By Electricity
To O Bank ‘C’ 1,500 Deposit A/c 3,000
By Bank Charges A/c 2.00
By Interest A/c 50
By Cash ‘C’ 1,500
By Salaries A/c 1,500
By N Bank ‘C’ 1,500
By Balance c/d 5,458.50 11,807 352.50
Total 17,750 46,732 19,915 100 Total 17,750 46,732 19,915
Mar. 1 To Balance b/d 5,458.50 11,907.00 352.50
70 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 15. (b) Write the analytical Petty Cash Book from the following transactions (on imprest system)

Rs.
Jan. 1 Received from the Bank as imprest cash balance 100
” 7 Bought Postage Stamps 20
” 10 Paid for Stationery 29
” 15 Paid for Charge 4
” 20 Paid Taxi hire 5
” 22 Paid tips to office peons 9
” 23 Paid to S against his account 13
” 27 Paid for Stationery purchased 10
” 30 Paid for tea to travel agent 3

Answer 15. (b)

Dr. Petty Cash Book Cr.
Receipts Date Particulars Voucher Total Conveyance Cartage Postage Stationery Misc.
(Rs.) Rs. Rs. Rs. Rs. Rs.
100 Jan. 1 To Bank
” 7 By Postage Stamps 20 20
” 10 By Stationery 29 29
” 15 By Cartige 4 4
” 20 By Taxi Fare 5 5
” 22 By Tips to Peons 9 9
” 23 By S (or his A/c)* 13 13
” 27 By Stationery 10 10
” 31 By Tea to Travel Agent 3 3
93 5 4 20 39 25
By Balance c/d 7
100 100
7 Feb. 1 To Balance b/d
93 To Bank

* Note : Paid to ‘S’ agianst his acount Rs. 13 has been entered in the miscellaneous column. The Petty
Cashier should not have made this payment. It may further be noted that any payment to a
creditor, however, small the amount may be, should not be entered in the Petty Cash Book.

Q. 15. (c) Mr. David draws two bills of exchange on 1.1.2011 for Rs.6,000 and Rs. 10,000. The bill of exchange
for Rs. 6,000 is for 2 months while the bill of exchange of Rs. 10,000 is for 3 months. These bills
are accepted by Mr. Thomas. On 4.3.2011 Mr. Thomas Requests Mr. David to renew the first bill
with interest @ 18% p.a. for period of 2 months . Mr. David agrees to this proposal. On 20.3.2011
Mr. Thomas retires the acceptance for Rs. 10,000, the interest rebate, i.e, discount, being
Rs. 100. Before the due date of the renewed bill, Mr. Thomas become insolvent and only 50 paise
in a Rupee could be recovered from his estate. You are to give the journal entries in the books of
Mr. David.
Foundation : Paper-2 : Accounting [ December  2011 ] 71

Answer 15. (c)

In the books of Mr. Thomas
journal
Date Particulars L.F Debit Credit
2010 Rs. Rs.
Jan 1 Bills Receivable A/c Dr. 6,000
To, Mr. Thomas A/c 6,000
(Bill drawn for 2 months)
? Bills Receivable A/c Dr. 10,000
To, Mr. Thomas A/c 10,000
(Bill drawn for 3 months)
Mar. 4 Mr. Thomas A/c Dr. 6,000
To, Bills Receivables A/c 6,000
(Bills dishonoured at maturity)
Mr. Thomas A/c Dr. 180
To, Interest A/c 180
(Interest receivable on fresh bill)
Bills Receivable A/c Dr. 6,180
To, Mr. Thomas A/c 6,180
(Bill drawn for 2 months)
” 20 Bank A/c Dr. 9,900
Rebate Allowed A/c Dr. 100
To, Bills Receivable A/c 10,000
(Bill retired at a rebate of Rs. 100)
May 7 Mr. Thomas A/c Dr. 6,180
To, Bills ReceivableA/c 6,180
(First bill dishonoured at maturity)
? Bank A/c Dr. 3,090
Bad Debt A/c Dr. 3,090
To, Mr. Thomas A/c 6,180
(50% of the amount realised from Thomas as
he became insolvent)

Q. 15. (d) Rectify the following errors , assuming that these were detected after preparing Trial Balance :
(a) Interest received Rs. 300 was credited to Commission Account.
(b) Purchased plant for Rs. 4,000, wrongly debited to Purchase Account.
(c) Sold old Furniture for Rs. 800,wrongly credited to Sales Account.
(d) Rs. 2,000 salary paid to Mr. B. Bose ,stands debited to his personal Account.
(e) Rs. 1,000 paid to B Bros. against our acceptance , were debited to B. Bros. Account.
(f) Purchase of goods for the consumption of the proprietor was debited to Purchase Account
for Rs. 800.
72 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 15. (d)

In the books of…………..
Journal
Date Particulars L.F Debit Credit
Rs. Rs.
? (a) Commission A/c Dr. 300
To Interest A/c 300
(Interest received but wrongly credited to
Commission Account, now rectified)
(b) Plant A/c Dr. 4,000
To Purchase A/c 4,000
(Plant purchased but wrongly debited to
Purchases Account, now rectified)
(c) Sales A/c Dr. 800
To Furniture (Old) A/c 800
(Old furniture sold but wrongly credited to
Sales Account, now rectified)
(d) Salary A/c Dr. 2,000
To B. Bose A/c 2,000
(Salary paid to B. Bose, wrongly debited to his
account, now rectified)
(e) Bills Payable A/c Dr. 1,000
To B. Bros. A/c 1,000
(Accepted paid but wrongly debited
to B. Bros Account, now rectified)
(f) Drawings A/c Dr. 800
To Purchases A/c 800
(Goods purchase for private consumption, wrongly
debited to Purchases Account, now rectified)
Foundation : Paper-2 : Accounting [ December  2011 ] 73

Section II : Cost Accounting

Q. 16. Select the correct answer :
(i) One of the important tools in cost planning is :
(a) Direct cost
(b) Cost sheet
(c) Budget
(d) Marginal costing.
(ii) Fixed cost per unit increases when :
(a) Variable cost per unit increases.
(b) Variable cost per unit decreases
(c) Production volume increases.
(d) Production volume decreases.
(iii) The three major elements of product cost are all but :
(a) Direct materials
(b) Direct labour
(c) Factory overhead
(d) lndirect labour
(iv) Conversion cost is equal to the total of :
(a) Material cost and direct wages.
(b) Material cost and indirect wages.
(c) Direct wages and factory overhead
(d) Material cost and factory overhead
(v) Cost of goods sold includes :
(a) Cost of production and work in progress
(b) Cost of production and finished goods inventory
(c) Cost of production, WIP, and finished goods inventory
(d) WIP and finished goods inventory

(vi) Which of the following is an accounting record?

(a) Bill of material
(b) Bin card
(c) Stores ledger
(d) AII of the above.

(vii) According to which of the following methods of pricing, issues are close to current economic
values?
(a) LIFO
(b) FIFO
(c)Highest in first out
(d) Weighted average price.
74 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

(viii) Which of the following items of cost is not a direct material?

(a) Sand paper used in production.
(b) Thread used in stitching garments.
(c) Electricity representing 85% of total cost.
(d) AII the above.
(ix) Which of the following is a service department?
(a) Refining department
(b) Receiving department
(c) Machining department
(d) Finishing department
(x) Factory overhead should be absorbed on the basis of :
(a) Relationship to cost incurred.
(b) Direct labour cost
(c) Direct labour hours
(d) Machine hours.
(xi) Labour turnover is measured by :
(a) Number of workers replaced / Average number of workers.
(b) Number of workers left/number in the beginning plus number at the end.
(c) Number of workers joining/ number in the beginning of the period.
(d) None of these.
(xii) lnput in a process is 5000 units and normal loss is 20%. Output of the process is 4040 units.
(a) There is abnormal loss of 40 units.
(b) There is abnormal gain of 40 units.
(c) There is neither abnormal loss nor gain.
(d) There is normal loss of 960 units.
(xiii) An under-statement of closing W-I-P inventory will :
(a) Understate cost of goods produced.
(b) Understate net profit.
(c) Overstate gross profit.
(d) Overstate current assets.
(xiv) Costing Profit and Loss Account does not record the :
(a) Sales value of goods.
(b) Balance of cost of sales account.
(c) Balance of overhead adjustment account.
(d) Balance of stores ledger control account.
(xv) Which of the following accounts make the cost ledger self-balancing?
(a) Overhead adjustment A/c
(b) Costing P & L A/c
(c) Cost Ledger Control A/c
(d) None of the above.
Foundation : Paper-2 : Accounting [ December  2011 ] 75

Answer 16.
(i) (c) Budget.
(ii) (d) Production volume decreases.
(iii) (d) Indirect labour.
(iv) (c) Direct wages and factory overhead.
(v) (b) Cost of production and finished goods inventory.
(vi) (c) Stores ledger.
(vii) (a) LIFO.
(viii) (d) All the above.
(ix) (c) Machining department.
(x) (a) Relationship to cost incurred.
(xi) (a) Number of workers replaced / Average number of workers.
(xii) (b) There is abnormal gain of 40 units.
(xiii) (b) Understate net profit.
(xiv) (d) Balance of stores ledger control account.
(xv) (c) Cost Ledger Control A/c.
Q. 17. State with reasons whether the following statements are True / False :
(a) Direct wages is a variable cost.
(b) Fixed cost per unit varies when output changes.
(c) Cost and expense are synonymous.
(d) Normal material losses are charged to Costing Profit and Loss A/c.
(e) When prices are rising LIFO method shows higher profit.
(f) Supervisor is a director worker.
(g) Under Rowan Plan, bonus is a fixed percentage.
(h) Bad debts do not form part of cost.
(i) Cost of after sales service is a distribution cost.
(j) ln a cost sheet, opening and closing work in progress is adjusted in the cost of production.
(k) Fixe cost = Contribution – Variable Cost.
(I) BEP point can be studied in a profit volume chart.
(m) Standard costing aims at achieving maximum efficiency, hence standards should be based on
ideal performance.
(n) Journal entry for over absorbed administrative overhead amount in control accounts is to
Credit Administration Overhead A/c and Debit Overhead Adjustment A/c.
(o) There is a clear cut division between joint products and by products.

Answer 17.
(a) True — Direct wages can be identified with a cost unit.
(b) True — Fixed cost is period cost and remains unchanged for particular level of output. So per unit
cost changes with output.
(c) False — Cost represents the resources that have been sacrificed to attain a particular objective.
Expense is expired cost that has matching economic benefit.
(d) False — Normal losses forms part of cost.
76 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

(e) False — Under this method, inventory is valued at the oldest price, and materials are issued at
current price. So this method, shows a lower profit at higher prices.
(f) False — Supervisor is not part of Direct Labour.
(g) False — Bonus = T × R × [(S-T)/S)], where T = Time taken, R = Time rate, S = Standard Time.
(h) True — Bad debts is a financial loss and is taken to Costing P/L A/C.
(i) False — lf the costs are incurred within guarantee period, it is treated as production overhead
absorbed into product cost. If incurred after guarantee period, such costs are booked against the
service rendered.
(j) False — They are adjusted in Factory or Works Cost.
(k) False — Fixed Cost = Contribution – Profit.
(I) True — The point at which total sales and total cost lines intersect in the BEP level.
(m) False — In order to achieve maximum efficiency, standards should be based on expected
performance.
(n) False — The entry is to Debit Administration Overhead A/c and Credit Overhead Adjustment A/c.
(o) False — The point of distinction of Joint product and By-products is a question of commercial
importance. A joint product today may become by-product tomorrow depending on changing market
condition.

Q. 18. Fill in the blanks :

(i) The aggregate of indirect materials, indirect labour and indirect expenses is known
as .
(ii) costs are hypothetical costs which are not actually incurred but used only for
decision making by management.
(iii) represents that quantity of material which is normally purchased when materials
reach ordering level.
(iv) The two perpetual inventory records are and .
(v) Materials turnover is a ratio of to .
(vi) In technique of material control, materials are classified according to their value.
(vii) Wage sheet is prepared by department.
(viii) In Halsey Bonus Plan, a worker gets a bonus equal of the time saved.
(ix) When overtime is worked due to seasonal pressure of work, the overtime premium should be
treated as .
(x) Allotement of overheads to cost units is known as .
(xi) When there is loss on incomplete contract, it is transferred to .
(xii) Finished Goods produced during a period are transferred from Account to
Finished Stock Ledger A/c.
(xiii) is the difference between sales and variable cost.
(xiv) Profit/ Volume ratio shows the relationship between and .
(xv) When fixed cost reduces, margin of safety .
Answer 18.
(i) overhead
(ii) Imputed
(iii) Reorder quantity
Foundation : Paper-2 : Accounting [ December  2011 ] 77

(iv) bin card, stores ledger

(v) materials consumed during the period, average stock
(vi) ABC
(vii) Payroll
(viii) 50%
(ix) overhead
(x) absorption
(xi) Profit & Loss A/c
(xii) W-I-P
(xiii) Contribution
(xiv) contribution, value of sales
(xv) improves

Q. 19. (a) Given below is a list of ten industries. Give the method of costing and the unit of cost against each
industry.
(i) Nursing Home
(ii) Road Transport
(iii) Steel
(iv) Brick - works
(v) Bicycles
(vi) Bridge Construction
(vii) Interior Decoration
(viii) Advertising
(ix) Furniture
(x) Sugar company having its own sugarcane fields.
(b) Distibguish between :
(i) Cost Centre and Profit Centre
(ii) BOM and MRN
(iii) Estimated cost and standard cost

Answer 19. (a)

Industry Method of costing Unit of cost
(i) Nurshing Home Operating Per Bed per week or per day
(ii) Road transport Operating Per Tonne Kilometer or per mile
(iii) Steel Process Per Tonne
(iv) Brick – works Single or output 1,000 bricks
(v) Bicycles Multiple Each unit
(vi) Bridge construction Contract Each contract
(vii) Interior Decoration Job Each Job
(viii) Advertising Job Each job
(ix) Furniture Multiple Each unit
(x) Sugar company having its Process Per Quintal/Tonne
own sugar-cane fields
78 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 19. (b)

(i)
Cost Centre Profit Centre
A Cost Centre is the smallest segment of activity or A Profit Centre is that segment of activity of a
the area of responsibility for which costs are business which is responsible for both revenue
accumulated. and expenses and discloses the profit of a
particular segment of activity.
Cost Centres are created for accounting A profit centre is created because of
convenience of costs and their control. decentralisation of operations.
A Cost Centre does not have target costs but efforts Each profit centre has a profit target and enjoys
are made to minimise costs. authority to adopt such policies as are necessary
to achieve its targets.

(ii)
BOM (Bill of Materials) MRN (Material Requisition Note)
It is a comprehensive list of materials with exact It is a formal written demand or request, usually
description and specifications, required for a job from the production department to store for the
or other production units. This also provides supply of specified materials, stores etc. It
information about required quantities so that if authorises the storekeeper to issue the
there is any deviation from the standards, it can requisitioned materials and record the same on
easily be detected. It is prepared by the Engineering bin card.
or Planning Department in a standard form.
The purpose of bill of material is to act as a single The purpose of material requisition note is to draw
aurhorisation for the issue of all materials and material from the store by concerned departments.
stores items mentioned in it. It provides an advance
intimation to store department about the
requirements of materials. It reduced paper work.
It surves as a work order to the production
department and a document for computing the cost
of material for a particular job or work order to
the cost department.

(iii)
Estimated cost Standard cost
Kohler defines estimated costs as ‘the expected Standard Cost means a pre-determined cost. It
cost of manufacture or acquisition, often in terms attempts to show what the cost should be for
of a unit of product computed on the basis of clearly defined conditions and circumstances.
information available in advance of actual Standard costs represent’ planned cost of a
production or purchase’ Estimated cost are product. They are expected to be achieved under a
prospective costs since they refer to prediction of particular production process under normal
costs. conditions.’
Foundation : Paper-2 : Accounting [ December  2011 ] 79

Q. 20. (a) A factory uses a job costing system. The following cost data are available from the books for the
year ended 31st March, 2011 :
Rs.
Direct Material 9,00,000
Direct Wages 7,50,000
Profit 6,09,000
Selling and Distribution Overhead 5,25,000
Administrative Overhead 4,20,000
Factory Overhead 4,50,000

Prepare a Cost Sheet indicating the prime cost, works cost, production cost, cost of sales and
sales value.

Answer 20. (a)

COST SHEET
For the jobs carried out by the concern for the year ending on 31st March, 2011.
Rs.
Direct Materials 9,00,000
Direct Wages 7,50,000
Prime Cost 16,50,000
Factory Overhead 4,50,000
Works Cost 21,00,000
Administrative Overhead 4,20,000
Production Cost 25,20,000
Selling and Distribution Overhead 5,25,000
Cost of Sales 30,45,000

Q. 20. (b) The books of ABC Company present the following data for the month of April, 2011.
Direct labour cost Rs. 17,500 being 175% of works overheads.
Cost of goods sold excluding administrative expenses Rs. 56,000.
Inventory accounts showed the following opening and closing balances :
April 1 April 30
Rs. Rs.
Raw materials 8,000 10,600
Works in progress 10,500 14,500
Finished goods 17,600 19,000

Other data are : Rs.

Selling expenses 3,500
General and administration expenses 2,500
Sales for the month 75,000
You are required to compute the value of materials purchased.
80 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 20. (b)

Computation of the value of materials purchased
Rs.
Cost of goods sold 56,000
Add : Closing stock of finished goods 19,000
75,000
Less : Opening stock of finished goods 17,600
Cost of goods manufactured 57,400
Add : Closing stock of works-in-progress 14,500
71,900
Less : Opening stock of work-in-progress 10,500
Works Cost 61,400

 100 
Less : Factory Overhead:  of Direct Labour Cost  10,000
 175 
Prime Cost 51,400
Less : Direct Labour 17,500
Raw materials consumed 33,900
Add : Closing stock of raw materials 10,600
Raw materials available 44,500
Less : Opening stock of raw materials 8,000
Value of materials purchased 36,500

Q. 21. (a) Discuss briefly how the following items are to be treated in Cost Accounts :
(i) Carriage inwards raw materials
(ii) Storage losses
(iii) Cash discount received
(iv) Insurance costs on stocks of raw materials.
(v) Scrap

Answer 21. (a)

(i) Carriage inwards on raw materials : It represents the expenditure incurred in bringing raw materials
to factory from outside. This expense is directly allocated to materials and thus forms a part of the
cost of such materials. When this is not practicable and allocation to specific items of materials
is difficult, the expense is treated as manufacturing overhead and is charged to cost of production
at a predetermined rate.
(ii) Storage losses : The losses arising out of storage of material can be classified into two categories.
The treatment of losses under each category in Cost Accounts is as under :-
(A) Losses due to reasons like evaporation, shrinkage, absorption and moisture, etc. are considered
as normal losses. Such losses are absorbed by good production units by inflating the cost of
material issued for production.
(B) Losses due to fire, flood, storm, theft etc. are treated as abnormal losses. If these losses are
heavy and are not recoverable from the insurance authorities, it is preferred to charge them to
Costing Profit and Loss Account.
Foundation : Paper-2 : Accounting [ December  2011 ] 81

(iii) Cash discount received : It is an allowance given by the vendor for prompt payment of material
price.
The opinion among accountants about its treatment differs. Two prevalent approaches for treating
the cash discount received are as follows :-
(A) The cash discount received in the course of materials buying should be deducted from the
invoice price of the materials. This way the discount received will reduce the purchase price of
the materials.
(B) It may be treated as an item of financial nature and therefore be kept outside the purview of
cost accounting. However, it can be dealt in the following manner.
The full invoice price should be charged to the material account crediting the suppliers with
the net invoice price, and the discount earned account with the amount of cash discount
received. If the prompt payment could not be made, the discount lost is debited to the discount
lost account. Any difference between the discount earned and discount lost may be treated as
an item of administrative overhead.
(iv) Insurance costs on stocks of raw materials : The amount paid as insurance costs (insurance premium)
on stocks of raw materials is meant for covering the risk which may arise due to fire, theft, riot etc.
The insurance cost is apportioned over different materials on the basis of their value. This cost
may be charged directly to the cost of material.
(v) Scrap : The incidental residue arising from the manufacturing operations, small in quantity and
Iow in value, recoverable without further processing. Scrap may be treated in Cost Accounts in the
following ways :
(A) Where the value of scrap is negotiable, it may be excluded from costs. In other words, the cost
of scrap is borne by good units and income from scrap is treated as other income.
(B) If the scrap value is considerable, the net sale proceeds of scrap (Gross sales proceeds of
scrap-the cost of selling scrap) is deducted from the material cost or factory overhead. Under
this method the material cost or factory overhead recovery rate are reduced on account of sale
proceeds of scrap. However, no distinction is made between various processes or jobs.
(C) Where the various jobs or processes give rise in varying amount of scrap, the scrap from each
job or process is recorded separately and the sale proceeds from the same credited to the
particular job or process. This method is useful where scrap is of considerable value and does
not arise uniformly.
However, this would necessitate the scrap being identified with various jobs or processes. For this purpose
details records for scrap will be required.

Q. 21. (b) S E Ltd. manufactures a special product “Y”. The following particulars were collected for the year
2011 :
(a) Monthly demand of “Y” - 1,000 units.
(b) Cost of placing an order Rs. 100.
(c) Annual carrying cost per unit Rs. 15.
(d) Normal usage 50 units per week.
(e) Minimum usage 25 units per week.
(f) Maximum range 75 units per week.
(g) Re-order period 4 to 6 weeks.
82 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Compute from the above :

(1) Re-order Quantity
(2) Re-order Level
(3) Minimum Level
(4) Maximum Level
(5) Average Stock Level

Answer 21. (b)

2AS
(1) Re-order Quantity of units used =
C
(Refer to note)
Where A = Annual demand of input units
S = Cost of placing an order
C = Annual carrying cost per unit

2  2600  Rs. 100

=
Rs. 15
= 186 units (approximately)

(2) Re-order Level = Maximum re-order period × maximum usage

= 6 weeks × 75 unts = 450 units
(3) Minimum Level = Re-order Level – (Normal usage × average re-order period)
= 450 units – (50 units × 5 weeks).
= 450 units – 250 units = 200 units
(4) Maximum Level = Re-order level + Re-order quantity – (Minimum
usage × Minimum re-order period)
= 450 unit + 186 units – 25 units × 4 weeks
= 536 units.

1
(5) Average Stock Level = (Minimum Stock Level + Maximum Stock Level)
2
1
= (200 units + 536 units)
2
= 368 units

Note : A = Annual demand of input units for 12,000 units of “Y”

= 52 weeks × Normal usage of input per week
= 52 weeks × 50 units of input per week
= 2,600 units.
Foundation : Paper-2 : Accounting [ December  2011 ] 83

Q. 22. (a) Z Ltd. is committed to supply 24,000 bearings per annum to X Ltd. on a steady basis. It is
estimated that it costs 10 paise as inventory holding cost per bearing per month and that the
set-up cost per run of bearing manufacturing is Rs. 324.
(i) What would be the optimum run size for bearing manufacture?
(ii) Assuming that the company has policy of manufacturing 6,000 bearing per run, how much
extra costs the company would be incurring as compared to the optimum run suggested in
(i) above?
(iii) What is the minimum inventory holding cost?

Answer 22. (a)

2UP
(i) Optimum production run (O) = where
I
U = No. of units to be produced within on year.
P = Set-up cost per production run.
I = Carrying cost per unit per annum.
2  24 ,000  Rs. 324
=
0.10  12
= 3,600 bearings.

(ii) Total Cost (of maintaining the inventories) when production run sizes (Q) are 3,600 and 6,000
bearing respectively.
Total Cost = Total set-up cost + Total carrying cost.
(Total set up cost) Q = 3,600 = (No. of production runs ordered) × Set up cost per production run)
24 ,000
=  Rs. 324 = Rs. 2,160 (1)
3,600
24 ,000
(Total set-up cost) Q=6,000 =  Rs. 324 = Rs. 1,296 (2)
6,000
1
(Total carrying cost) Q=3,600 = Q×1
2
1
= × 3,600 × 0.10P × Rs. 12 = Rs. 2,160 (3)
2
1
(Total carrying cost) Q=6,000 = × 6,000 × 0.10P × Rs. 12 = Rs. 3,600 (4)
2
(Total Cost) Q = 3,600 = (1) + (3) = Rs. 2,160 + Rs. 2,160 = Rs. 4,320 (5)
(Total Cost) Q = 6,000 = (2) + (4) = Rs. 1,296 + Rs. 3,600 = Rs. 4,896 (6)
Extra Cost incurred = (6) – (6) = Rs. 4,896 – Rs. 4,320 = Rs. 576
1
(iii) Minimum inventory holding cost = Q×I
2
(When Q = 3,600 bearing)
1
= × 3,600 × 0.10 P × Rs. 12
2
= Rs. 2,160.
84 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 22. (b) When and why would you recommend the LIFO method of pricing material issues?

Answer 22. (b)

LIFO method has an edge over FIFO or any other method of pricing material issues due to the following
advantages:
(i) The cost of the materials issued will be either nearer or will reflect the current market price. Thus,
the cost of goods produced will be related to the trend of the market price of materials. Such a trend
in price of materials enables the matching of cost of production with current sales revenues.
(ii) The use of the method during the period of rising prices does not reflect undue high profit in the
income statement, as it was under the first-in-first out or average method. In fact, the profit shown
here is relatively lower because the cost of production takes into account the rising trend of
material prices.
(iii) ln the case of falling prices, profit tends to rise due to lower material cost, yet the finished products
appear to be more competitive and are at market price.
(iv) During the period of inflation, LIFO will tend to show the correct profit and thus, avoid paying
undue taxes to some extent.

Q. 23. (a) Discuss the three methods of calculating labour turnover.

Answer 23. (a)

Methods of Calculating labour turnover
No. of employees replaced  100
(i) Replacement method =
Av. number of employee on roll

No. of employees separated during the year  100

(ii) Separation method =
Av. number of employees on roll

(No. of employees separated  No. of employees replaced

(iii) Flex method =  100
Av. number of employees on roll during the period

Q. 23. (b) Discuss two types of Costs, which are associated with labour turnover.

Answer 23. (b)

Two types of costs associated with labour turnover are :
(i) Preventive costs :
These costs are incurred to keep the labour turnover rate at a low level. They include costs of
accommodation, transport facilities, medical services, welfare schemes, pension schemes,
environment improvement, lighting, heating, air-conditioning etc. The rate of labour turnover is
usually low, if a company incurs higher preventive costs.
(ii) Replacement costs :
These costs arise due to high labour turnover, e.g. cost of advertising, recruitment, selection,
training & induction, abnormal breakage and scrap, extra wages & overheads etc., caused as a
result of inefficient and inexperienced newly recruited workers.
Foundation : Paper-2 : Accounting [ December  2011 ] 85

Q. 24. (a) Bonus paid under the Halsey Plan with Bonus at 50% for the time saved equals the bonus paid
under the Rowan System. When will this statement hold good?

Answer 24. (a)

Bonus under Halsey Plan
50
= Standard wage rate   Time saved ........... (i)
100

Bonus under Rowan Plan

Time saved
= Standard wage rate   Time taken ........... (ii)
Time allowed

Bonus under Halsey Plan will be equal to the

Bonus under Rowan Plan when the following condition holds good
50
Standard wage rate   Time saved
100

Time saved
= Standard wage rate   Time taken
Time allowed

1 Time taken
or 
2 Time allowed

1
or Time taken  of Time allowed
2

Hence, when the time taken is 50% of the time allowed the bonus under Halsey and Rowan Plans is
equal.

Q. 24. (b) The time allowed for a job is 8 hours. The hourly rate is Rs. 8. Prepare a statement showing :
(i) The bonus earned
(ii) The total earnings of labour and
(iii) Hourly earnings.
Under the Halsey System with 50% bonus for time saved and Rowan System for each hour saved
progressively.
86 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 24. (b)

Statement of Bonus, Total earnings of Labour and hourly earnings under Halsey and Rowan Systems.

T ime T ime T ime Basic Bonus under Bonus Total Total Hourly Hourly
allowed taken saved Wages Halsey system under earnings earnings earnings earnings
50
B × Rs. 8 C Rs. 8 Rowan under under under under
100
System Halsey Rowan Halsey Rowan
C
 B Rs. 8 System System System System
A
D+E D+F G/B H/B
A B C = (A-B) D E F G H I J
hours hours hours Rs. Rs. Rs. Rs. Rs. Rs. Rs.
8 8 – 64 – – 64 64 8.00 8.00
8 7 1 56 4 7 60 63 8.57 900
8 6 2 48 8 12 56 60 9.33 10.00
8 5 3 40 12 15 52 55 10.40 11.00
8 4 4 32 16 16 48 48 12.00 12.00
8 3 5 24 20 15 44 39 14.67 1300
8 2 6 16 24 12 40 28 20.00 14.00
8 1 7 8 28 7 36 15 36.00 15.00

Q. 25. (a) How do you deal with the following in cost accounts?
(i) Employee welfare costs
(ii) Bad debts
(iii) Research and development costs
(iv) Depreciation
(v) Fringe benefits

Answer 25. (a)

(i) Employee welfare costs : It includes those expenses, which are incurred by the employers on the
welfare activities of their employees. The welfare activities on which these expenses are usually
incurred may include canteen, hospital, play grounds, etc. These expenses should be separately
recorded as Welfare Department Costs. These Costs may be apportioned to production cost centres
on the basis of total wages or the number of men employed by them.
(ii) Bad debts : There is no unanimity among various authors about the treatment of bad debts. Some
authors believe that bad debts are financial losses and therefore should not be included in the cost
of a particular product or job. Another view is that, bad debts are a part of selling and distribution
overhead, especially where they arise in the normal course of trading. Therefore they should be
treated in cost accounts in the same way as any other selling and distribution expense.
(iii) Research and development costs : It is the cost/expense incurred for searching new or improved
products, production methods/techniques or plants/equipments. Re- search cost may be incurred-
for carrying basic or applied research. Both basic and applied research relates to original
investigations to gain from new scientific or technical knowledge and understanding, which is not
directed towards any specific practical aim (under basic research) and is directed towards a
specific practical aim or objective (under applied research).
Foundation : Paper-2 : Accounting [ December  2011 ] 87

Treatment in Cost Accounts: Cost of Basic Research (if it is a continuous activity) be charged to the
revenues of the concern. It may be spread over a number of years if research is not a continuous
activity and amount is large.
Cost of applied research, if relates-to all existing products and methods of production then it
should be treated as a manufacturing overhead of the period during which it has been incurred and
absorbed. Such costs are directly charged to the product, it is solely incurred for it.
If applied research is conducted for searching new products or methods of production etc. then the
research costs treatment depends upon the outcome of such research. For example, if research
findings are expected to produce future benefits or if it appears that such findings are going to
result in failure then the costs incurred may be amortized by charging to the Costing Profit and Loss
Account of one or more years depending upon the size of expenditure. If research proves successful,
then such costs will be charged to the concerned product.
Development Costs begins with the implementation of the decision to produce a new or improved
product or to employ a new or improved method. The treatment of development expenses is same
as that of applied research.
(iv) Depreciation : It represents the fall in the asset value due to its use, wear and tear and passage of
time. Depreciation is an indirect cost of production and operations. It is an important element of
cost and without this true cost of production cannot be obtained. In costing; depreciation on plant
and machinery is normally treated as part of the factory overheads.
(v) Fringe benefits : In every organization, workers are paid some benefits in addition to their normal
wage or salary. These additional benefits are popularly called fringe benefits. They include :
(a) Housing
(b) Children education allowance
(c) Holiday pay
(d) Leave pay
(e) Leave travel concession to home town or any place in india etc.
Expenses incurred on fringe benefits in respect of factory workers should be treated as factory
overheads and apportioned among the production and service departments on the basis of number
of workers in each department.
Fringe benefits to office and selling and distribution staff should be treated as administration
overheads and selling and distribution overheads respectively and recovered accordingly.

Q. 25. (b) A departmental store has several departments. What bases would you recommend for
apportioning the following items of expense to its departments :
(1) Fire insurance of Building.
(2) Rent
(3) Delivery Expenses.
(4) Purchase Department Expenses.
(5) Credit Department Expenses.
(6) General Administration Expenses.
(7) Advertisement.
(8) Sales Assistants Salaries.
(9) Personal Department expenses.
(10) Sales Commission.
88 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 25. (b)

Items of expenses Basis For apportioning
(1) Fire insurance of Building. Floor Area
(2) Rent. Floor Area
(3) Delivery Expenses. Volume or Distance or Weight
(4) Purchase Department Expenses. No. of Purchase order/Value of Purchases
(5) Credit Department Expenses. Credit Sales Value
(6) General Administration Expenses. Works cost
(7) Advertisement. Actual sales
(8) Sales Assistants Salaries. Actual/Time devoted
(9) Personal Department expenses. No. of Employees
(10) Sales Commission. Actual

Q. 26. (a) MM Ltd. have three production department P1, P2 and P3 and two Service Departments S1 and
S2 the details pertaining to which are as under :-
P1 P2 P3 S1 S2
Direct Wages (Rs.) 3,000 2,000 3,000 1,500 195
Working Hours 3,070 4,475 2,419
Value of Machines (Rs.) 60,000 80,000 1,00,000 5,000 5,000
HP of Machines 60 30 50 10
Light Points 10 15 20 10 5
Floor space (Sq. Ft.) 2,000 2,500 3,000 2,000 500

The following figures extracted from the Accounting records are relevant :
Rs.
Rent and Rates 5,000
General Lighting 600
Indirect Wages 1,939
Power 1,500
Depreciation on Machines 10,000
Sundries 9,695

The expenses of the service departments are allocated us under :

P1 P2 P3 S1 S2
D 20% 30% 40% – 10%
S2 40% 20% 30% 10% –

Find out the total cost of product “W” which is processed for manufacture in Departments P1, P2
and P3 for 4,5 and 3 hours respectively, given that its Direct Material cost in Rs. 50 Direct Labour
cost Rs. 30.
Foundation : Paper-2 : Accounting [ December  2011 ] 89

Answer 26. (a)

Statement Showing Distribution of Overheads of MM Ltd.
Particulars Production Depts. Service Depts.
Basis Total P1 P2 P3 S1 S2
Rs. Rs. Rs. Rs. Rs. Rs.
Rent and Rates Area 5,000 1,000 1,250 1,500 1,000 250
General Lighting Light points 600 100 150 200 100 50
Indirect Wages Direct Wages 1,939 600 400 600 300 39
Power H. P. 1,500 600 300 500 100 –
Depreciation of Value of 10,000 2,400 3,200 4,000 200 200
Machines machines
Sundries Direct Wages 9,695 3,000 2,000 3,000 1,500 195
28,734 7,700 7,300 9,800 3,200 734

Redistribution of Service Departments’ Expenses Over

Production Departments
Particulars Production Depts. Service Depts.
Total P1 P2 P3 S1 S2
Rs. Rs. Rs. Rs. Rs. Rs.
Total Overheads 28,734 7,700 7,300 9,800 3,200 734
Dept. S1 Overheads apportioned 3,200 640 960 1,280 –3,200 320
in the ratio (20:30:40: – :10)
Dept. S2 Overheds apportioned 1,054 421.60 210.80 316.02 105.40 –1.054
in the ratio (40:20:30:10 –)
Dept. S1 Overheds apportioned 105.40 21.08 31.62 42.16 – 105.40 10.54
in the ratio (20:30:40: – :10)
Dept. S2 Overheds apportioned 10.54 4.22 2.11 3.16 1.05 –10.54
in the ratio (40:20:30:10 –)
Dept. S1 Overheds apportioned 1.05 0.21 0.32 0.42 –1.05 0.10
in the ratio (20:30:40: – :10)
Dept. S2 Overheds apportioned 0.10 0.05 0.02 0.03 – – 0.10
in the ratio (40:20:30:10 – )
Total 8,787.16 8,504.87 11,441.79

Working hours 3,070 4,475 2,419

Overhead rate per hour 2.86 1.90 4.73
(See working product ‘W’) Rs.
Direct Material Cost 50
Direct Labour Cost 30
Overhead Cost 35.13
(Working Note-2)
115.13
90 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Working Note :
1. Overhead rate per hour for production department
Rs. 8,787.16
P1   Rs. 2.86
3,070
Similar overhead rate for production departments P2 and P3 are Rs. 1.90 and Rs. 4.73
2. Overhead cost
Rs. 2.86 × 4 + Rs. 1.90 × 5 + Rs. 4.73 × 3
= Rs. 11.44 + Rs. 9.50 + Rs. 14.19 = Rs. 35.13
Note : The service departments have only indirect costs which are to be absorbed by production
departments.

Q. 26. (b) In a manufacturing unit, factory overhead was recovered at a pre- determined rate of Rs. 25 per
man - day. The total factory overhead expenses incurred and the man-days actually worked were
Rs. 41.50 lakhs and 1.5 lakhs man-days respectively. Out of the 40,000 units produced during a
period, 30,000 were sold.
On analysing the reasons, it was found that 60% of the unabsorbed overheads were due to
defective planning and the rest were attributable to increase in overhead costs.
How would unabsorbed overheads be treated in Cost Accounts?

Answer 26. (b)

Computation of Unabsorbed Overheads
Man – days worked 1,50,000
Rs.
Overhead actually incurred 41,50,000
Less : Overhead absorbed @ Rs. 25%/- per man - day
(Rs. 25 × 1,50,000) 37,50,000
Unabsorbed Overheads 4,00,000
Unabsorbed Overheads due to defective planning 2,40,000
(i.e 60% of Rs. 4,00,000)
Balance of Unabsorbed Overheads 1,60,000
Treatment of Unabsorbed Overheads in Cost Accounts
(i) The unabsorbed overheads of Rs. 2,40,000 due to defective planning to be treated as abnormal and
therefore be charged to Costing Profit and Loss Accounts.
(ii) The balance unabsorbed overheads of Rs. 1,60,000 be charged to production i.e. 40,000 units at
the supplementary overhead absorption rate i.e. Rs. 4/- per unit.
(Refer to Working Note) Rs.
Charge to Costing Profit and Loss Account as part of the cost of units sold 12,00,000
(30,000 units @ Rs. 4/-p.u.)
Add : To Closing stock of finished goods (10,000 units @ Rs. 4/- p.u.) 40,000
Total 1,60,000
Working Note :
Rs. 1,60,000
Supplementary Overheads Absorption Rate =
Rs. 40,000
= Rs. 4/- p.u.
Foundation : Paper-2 : Accounting [ December  2011 ] 91

Q. 26. (c) T20 Ltd provides you the following information for the year 2011 :
Margin of Safety Rs. 64,000, Total Cost Rs. 41,600, Margin of Safety 6,400 Units , Break- Even Sales
1,600 units. During the next year 2012, the Selling Price is expected to be reduced by 10% and
Variable Costs and Fixed Costs are to be increased by 12.5% and 20% respectively.
Required :
Estimate the Profit if Sales Units are expected to increase by 20%.
Estimate the Sales in order to increase Profit by 20%.
Estimate the sales in so as to earn 20% on sales.
Estimate the Sales so as to earn a Profit of Rs. 2 Per Unit.
Estimate the BEP for the next year 2012.
Answer 26. (c)
(a) Rs.
A. Sales 86,400 (Rs. 80,000 × 120% × 90%)
B. Less : Variable Cost 43,200 (Rs. 32,000 × 120% × 112.5%)
C. Contribution (A-B) 43,200
D. Less : Fixed Cost 11,520 (Rs. 9,600 × 120%)
E. Profit (C-D) 31,680
(b) Desired Sales =(New Fixed cost +Expected Profit)/New P/V Ratio
= ((Rs. 9,600 × 120%) + (Rs. 38,400 × 120%))/50% = Rs. 1,15,200
(c) Desired Sales = (New Fixed Cost + Expected Profit)/ New P/V Ratio
Let Sales be x, x = ((Rs. 9,600 × 120%) + 0.20 ×)/50%
or, x = Rs. 11,520/0.03 = Rs. 38,400
(d) Desired Sales (Unit) = (New Fixed Costs + Expected Profit)/ Contribution Per Unit
Let Sales be x, x = ((Rs. 9,600 × 120%) + 0.02x)/(Rs. 9 – Rs. 4.5) = 4,608 Units
Desired Sales (Rs.) = 4,608 Units × Rs. 9= Rs. 41,472
(e) New BEP = New Fixed Cost/ (New P/V Ratio) = (Rs. 9,600*120%)/50% = Rs. 23,040

Working Notes :
(i) Margin of Safety(%) = Margin of Safety (Units) × 100/Actual Sales(Units)
= 6,400 × 100/ (6,400 + 1,600) = 80%
(ii) Total Sales = Margin of Safety (Rs.)/Margin of Safety (%) = Rs. 64,000/80% = Rs. 80,000
(iii) Profit = Total Sales – Total Cost = Rs. 80,000 – Rs. 41600 = Rs. 38400
(iv) P/V Ratio = Profit × 100/Margin of Safety = Rs. 38,400 × 100/Rs. 64,000 = 60%
(v) Break- Even Sales = Total Sales × (100-Margin of Safety %) = Rs. 80,000 × 20% = Rs. 16,000
(vi) Fixed Costs = BEP × P/V Ratio = Rs. 16,000 × 60% = Rs. 9,600
(vii) New P/V Ratio = (New Selling Price-New Variable Cost) × 100/Naw Selling Price
=((Rs. 10 – 105 of Rs. 10) – (Rs. 4 + 12.5% of Rs. 4)) × 100/(Rs. 10 – 10% of Rs. 10)
= (Rs. 9 – Rs. 4.5) × 100/Rs. 9 = 50%
92 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 27. (a) From the following information relating to QS Ltd., you are required to find out (i) Contribution,
(ii) Break-even point in units, (iii) Margin of Safety, (iv) Profit.
Total Fixed Costs Rs. 4,500
Total Variable Costs 7,500
Total Sales 15,000
Units Sold 5,000 (units)

Also calculate the volume of sales to earn profit of Rs. 6,000.

Answer 27. (a)

(i) Contribution Statement

Output and sales 5,000 units
Total Per unit
Sales Rs. 15,000 15,000 3.00
Less : Variable cost 7,500 1.50
Contribution 7,500 1.50

(ii) Break-even point in units :

Fixed costs
B.E.P. (in units) = Contribution per unit

= Rs. 4,500/1.50 = 3,000 units.

Break-even point of sales value = 3,000 × 3 = Rs. 9,000.

(iii) Margin of Safety = Actual Sales – Sales at Break-even Point

= Rs. 15,000 – Rs. 9,000 = Rs. 6,000
6,000
As per percentage =  100 = 40%
15,000

(iv) Profit = Sales – (Fixed cost + Variable cost)

= Rs. 15,000 – (Rs. 4,500 + Rs. 7,500)
= Rs. 15,000 – Rs. 12,000 = Rs. 3,000.
Or, = Contribution – Fixed Costs
= Rs. 7,500 – 4,500 = Rs. 3,000.
Volume of sales to earn a profit of Rs. 6,000
Fixed Cost  Desired Pr ofit
Volume of sales = P / V Ratio *
Rs. 4 ,500  Rs. 6 ,000 Rs. 10,500  100
= 
50% 50
= Rs. 21,000
Foundation : Paper-2 : Accounting [ December  2011 ] 93

Contributi on
* P/V Ratio =  100
Sales
Rs. 7,500
=  100 = 50%
Rs. 15,000

Q. 27. (b) The projected output of a plant, when sold, would earn Rs. 70,000 in sales income to GM Ltd. The
variable costs for this production volume would be Rs. 30,000. The fixed costs are Rs. 20,000.
Determine the following :
(i) The break-even point of the company;
(ii) The profit or loss to the company on sales of Rs. 49,000 and Rs. 28,000;
(iii) The amount of sales that will enable the company to earn a net profit of Rs. 28,000.

Answer 27. (b)

Total Contributi on
PV Ratio =  1200
Total Sales
40,000 40
= 70,000  100  70 %

(i) Break-even Sales = Fixed Costs / PV Ratio

70
= 20,000 × = Rs. 35,000
40
(ii) (a) Profit (Loss) on sales of Rs. 49,000 :
 40 
Total Contribution =  49,000   = Rs. 28,000
 70 
Less : Fixed Costs Rs. 20,000
Profit Rs. 8,000
(b) Profit (Loss) on sales of Rs. 28,000 :
 40 
Total Contribution =  28,000   = Rs. 16,000
 70 
Less : Fixed Costs Rs. 20,000
(Loss) Rs. (4,000)

Q. 27. (c) The standard hours of job X is 100 hours. The job has been completed by Amar in 65 hours, Akbar
in 70 hours and in 90 hours.
The bonus system applicable to the job is as follows :
Percentage of time saved to time allowed Bonus
Savings up to 10% 10% of time saved
From 11% to 20 % 15% of time saved
From 21% to 40% 20% of time saved
From41% to 100 % 25% of time saved
The rate of pay is Re. 1 per hour. Calculate the earnings of each worker and also the rate of
earning per hour.
94 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 27. (c)

Statement showing total earnings and rate of earning of the three workers
Amar Akber Anthony
Standard hours 100 100 100
Time taken (hours) 65 70 90
Time saved (hours) 35 30 10
Percentage of time saved to std. time 35% 30% 10%
Bonus percentage 20% 20% 10%
Bonus hours 35 × 20%=7 30 × 20% = 6 10 × 10%=1
Total earning @ Re. 1 Rs. 72 Rs. 76 Rs. 91
Payment for bonus hours 7/65 = 0.10 6/70 = 0.086 1/90 = 0.011
Wage rate per normal hours 1.000 1.000 1.000
Rate of earning per hour Rs. 1.108 Rs. 1.086 Rs. 1.011

Q. 27. (d) Following information relates to the manufacturing of a component P-104 in a cost centre:
Cost of materials Rs. 4/unit
Labour charges Rs. 6/hour
Labour hr required 0.5 hr
Overhead (all fixed) Rs. 300
Prepare cost sheets showing production cost total and per unit, when a batch consists of :
(i) 10 components; (ii) 100 components; (iii)1,000 components.

Answer 27. (d)

(i) COST STATEMENT FOR A BATCH OF 10 COMPONENTS
Total Per Unit
Rs. Rs.
Cost of Material 40 4.00
Labour (10 × 0.5 × Rs. 6) 30 3.00
Prime Cost 70 7.00
Add : Overhead (Rs. 300/10 units) 300 30.00
Cost of Production 370 37.00

(ii) COST STATEMENT FOR A BATCH OF 100 COMPONENTS

Total Per Unit
Rs. Rs.
Cost of Material 4.00 4.00
Labour (100 × 0.5 × Rs. 6) 300 3.00
Prime Cost 700 7.00
Add : Overhead (Rs. 300/10 units) 300 3.00
Cost of Production 1,000 10.00
Foundation : Paper-2 : Accounting [ December  2011 ] 95

(iii) COST STATEMENT FOR A BATCH OF 1000 COMPONENTS

Total Per Unit
Rs. Rs.
Cost of Material 4000 4.00
Labour (1,000 × 0.5 × Rs. 6) 3000 3.00
Prime Cost 7000 7.00
Add : Overhead (Rs. 300/1,000 units) 300 0.30
Cost of Production 7,300 7.30

Q. 28. (a) The following are the maintenance cost incurred in a machine shop for – six months with
corresponding machine hours.
Months Machine Hours Maintenance Cost Months Machine Hour Maintenance Cost
Rs. Rs.
January 2000 300 April 2400 340
February 2200 320 May 1800 280
March 1700 270 Jun 1900 290
12000 1,800
Analyse the maintenance cost which is semi-variable into fixed and variable element.

Answer 28. (a)

By using Range Method :
Machine Hours Maintenance Cost
Rs.
Highest Point : April 2400 340
Lowest Point : March 1700 270
700 70

Change in cost 70
Variable cost per hour =  = Rs. 0.10
Change in hours 700
Fixed cost for 2400 hours = Rs. 340 – (2400 × .10)
= 340 – 240 = 100

Q. 28. (b) A company sold in two successive period 7,000 and 9,000 units respectively and incurred a loss of
Rs. 10,000 and earned a profit of Rs. 10,000 in the two periods respectively.

Calculate :
(i) the amount of fixed expenses,
(ii) the number of units to break even, and
(iii) the number of units to earn a profit of Rs. 40,000.
The selling price of the article is Rs. 100 per unit.
96 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 28. (b)

(i) Fixed expenses :
Sales Profit
units Rs.
I Period 7,000 – 10,000
II Period 9,000 10,000
Difference 2,000 20,000
Since 2,000 units yield a contribution of Rs. 20,000, the contribution per unit is Rs. 10. Therefore
the variable cost is Rs. 90, i.e., Rs. 100 less Rs. 10.
Rs.
Sale value of 7,000 units @ Rs. 100 7,00,000
Total variable cost @ Rs. 90 6,30,000
Total contribution 70,000
Loss during the period 10,000
Total fixed expenses 80,000

(ii) Break Even Point :

Rs.
Fixed Expenses 80,000
Contribution per unit 10
No. of units required to meet fixed expenses 80,000 ÷ 10
or 8,000 units.
(iii) Units required for a profit of Rs. 40,000
Total contribution required
(Fixed Expenses plus desired profit) 1,20,000
No. of units required to produce the contribution :
1,20,000 ÷ 10 or 12,000.

Q. 28. (c) The inventory records of Suneel Brothers, Delhi, for the year 2010 show the following figures :
Opening Stock Purchases Closing stock
Material A 1200 kg 11,500 kg 200 kg
Material B 200 Litres 11,000 Litres 1200 Litres
Material C 1000 kg 18000 kg 1200 kg

The inventory is valued @ Re 1 per Kg or Litre.

Calculate the material turnover ratios regarding each of these materials and express in number
of days the average inventory held. What inference do you draw?
(I.T.R= Inventory Turnover Ratio, M.T.R= Material Turnover Ratio).
Foundation : Paper-2 : Accounting [ December  2011 ] 97

Answer 28. (c)

Materials Consumed Opening stock+ Purchases – Closing stock
Material A 1200+11,500-200 = 12,500 kg of Rs.12,500
Material B 200+11,000-1,200 = 10,000 Litres of Rs.10,000
Material C 1,000+1,800-1,200 = 1,600 kg of Rs. 1,600
Average Inventory (Opening Stock+ Closing Stock)/2
Material A (1200+200)/2=700 kg. of Rs.700
Material B (200+1,200)/2=700 Litres of Rs. 700
Material C (1,000+1,200)/2=1,100kg. of Rs. 1,100.

Material Turnover Ratio Value of materials consumed during a period/Value of average

inventory held
Material A 12,500/700=17.86
Material B 10,000/700=14.29
Material C 1,600/1,100=1.46

Material Turnover Ratio expressed in number of days :

= (Value of average inventory × Days of the period)/Materials consumed
= Days of the period/ Inventory Turnover
Material A = (700 × 365)/12,500 = 20 days approx.
Material B = (700 × 365)/10,000 = 26 days approx.
Material C = (1,100 × 365)/1,600 = 250 days.

The above figures clearly show that material A has the highest inventory turnover ratio , while material c
has the lowest. The control has to be exercised over purchase of material C.
Since the I.T.R of A is more than B. So, A is more fast moving material than B.

Q. 29. (a) A manufacturer has shown an amount of Rs. 16,190 in his books as “Establishment” which really
includes the following expenses :
From this information, prepare a statement showing in separate totals (a) Selling Expenses,
(b) Distribution Expenses, (c) Administration Expenses, and (d) Expenses which you would disregard
in estimating costs.
Rs. Rs.
1. Agents’ Commission 5,750 9. Rent, Rates and Insurance of Office 230
2. Warehouse Wages 1,800 10. Lighting of Warehouse 270
3. Warehouse Repair 510 11. Printing Stationary 1,500
4. Lighting of Office 70 12. Trade Magazine 70
5. Office Salaries 1,130 13. Donation 150
6. Directors’ Remuneration 1,400 14. Bank Charges 100
7. Travelling Expenses 760 15. Discount Allowed 1,970
8. Rent, Rates and Insurance 16. Bad Debt 170
of Warehouses 310
98 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 29. (a)

The expenses given in the problem have been put under different categories as follows :
(a) Selling Expenses :
Rs.
(i) Agent’s Commission 5,750
(ii) Travelling Expenses 760
(iii) Bad Debt 170
6,680

(b) Distribution Expenses :

Rs.
(i) Warehouse Wages 1,800
(ii) Warehouse Repairs 510
(iii) Rent, Rates & Insurance of Warehouse 310
(iv) Lighting of Warehouse 270
2,890

(c) Administration Expenses :

Rs.
(i) Office Salaries 1,130
(ii) Lighting of Office 70
(iii) Directors Remuneration 1,400
(iv) Rent, Rates & Insurance of office 230
(v) Printing & Stationery 1,500
(vi) Trade Magazine 70
(vii) Bank Charges 100
4,500

(d) Expenses excluded from Cost Accounts :

Rs.
(i) Donations 150
(ii) Discount Allowed 1,970
2,120
Total Expenses :
6,860 + 2,890 + 4,500 + 2,120 = 16,190

Notes : 1. Travelling expenses have been assumed to have been related to salesmen.
2. Discount allowed is presumed to be as cash discount which is a financial item.
Foundation : Paper-2 : Accounting [ December  2011 ] 99

Q. 29. (b) The following is the Manufacturing and Profit and Loss Account of ST Ltd. for the year ended 30th
June 2010 :
Rs. Rs.
Opening Stock : Sales 5,00,000
Materials 2,000 Closing Stock :
Finished Goods 3,000 Materials 18,500
Purchase of Material 1,50,000 Finished Goods 3,000
Direct Wages 1,20,000
Power 15,500
Carriage on Material 2,000
Royalty 24,000
Cost of a Special Design 5,000
Gross Profit c/d 2,00,000
5,21,500 5,21,500
Rent and Rates : Gross Profit b/d 2,00,000
Office 5,000 Interest on Loan 4,500
Factory 7,000 12,000 Sale of Scrap (at works cost) 750
Telephone 3,000 Discount received 1,750
Advertisement 7,500
Electricity :
Office 3,000
Factory 4,500 7,500
Provision for Bad Debts 10,000
Depreciation :
Plant & Machinery 6,000
Delivery Vans 2,000 8,000
Income-tax 12,000
Salaries 25,000
Donations 7,000
Establishment 10,000
Depreciation on Furniture :
Office 2,500
Factory 2,000 4,500
Rent of Warehouse 6,500
Net Profit 94,000
2,07,000 2,07,000
You are required to prepare a statement showing classification of cost under different components from
the above information after giving due consideration to the following facts :
(1) 60% of telephone expenses relate to office and 40% to sales department :
(2) 25% of salaries relate to factory, 50% to office and 25% to sales department; and
(3) 50% of the establishment expenses relate to office and 50% to sales department.
100 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 29. (b)

Statement of Cost of ST Ltd.
for the year ended 30 June, 2010
Rs. Rs. Rs.
Add : Opening Stock of materials 2,000
Purchase 1,50,000
1,52,000
Less : Closing Stock of materials 18,500
1,33,500
Add : Carriage on materials 2,000
Value of raw materials consumed 1,35,500
Direct wages 1,20,000
Royalty 24,000
Cost of special design 5,000
Prime Cost 2,84,500
Add : Factory overheads :
Power 15,500
Factory rent and rates 7,000
Electricity 4,500
Depreciation on plant and machinery 6,000
Salaries 6,250
Description on factory furniture 2,000 41,250
3,25,750
Less : Sale of scrap 750
Works Cost 3,25,000
Add : Office and administration overheads :
Office rent and rates 5,000
Telephone expenses 1,800
Electricity 3,000
Salaries 12,500
Establishment 5,000
Depreciation on office furniture 2,500 29,800
Cost of Production 3,54,800
Add : Opening stock of finished goods 3,000
3,57,800
Less : Closing stock of finished goods 3,000
Cost of Goods Sold 3,54,800
Add : Selling & distribution overheads :
Telephone expenses 1,200
Advertisement 7,500
Depreciation on delivery vans 2,000
Salaries 6,250
Establishment 5,000
Rent of warehouse 6,500 28,450
Total Cost 3,83,250
Profit 1,16,750
Sales 5,00,000
Note : Item excluded from cost accounts are : Provision for bad debts; Income tax; Interest on Loans;
Discount received; and Donations.
Foundation : Paper-2 : Accounting [ December  2011 ] 101

Q. 29. (c) Utkal Construction Ltd. took a contract in 2010 for road construction . The contract price was
Rs. 10,00,000 and its estimated cost of completion would be Rs. 9,20,000. At the end of 2010,
the company has received Rs. 3,60,000 representing 90% of work certified. Work not yet
certified had cost Rs. 10,000.
Expenditure incurred on the contract during 2010 was as follows: Materials Rs. 50,000; Labour
Rs. 3,00,000; and Plant Rs. 20,000.
Materials costing Rs. 5.000 were damaged and had to be disposed of for Rs. 1,000. Plant is
considered as having depreciated by 25%. Prepare contract account for 2010 in the books of
Utkal Construction Ltd. Also show all possible figures that can reasonably credited to Profit and
Loss Account in respect of the contract.
Answer 29. (c)
Utkal Construction Ltd.
CONTRACT ACCOUNT FOR 2010
Particulars Amount Particulars Amount
Rs. Rs.
To Materials 50,000 By Materials damaged 5,000
To Labour 3,00,000 By Plant at site 15,000
To Plant 20,000 By Work -in- progress:
To Profit 60,000 Work certified 4,00,000
- Work uncertified 10,000
4,30,000 4,30,000

Amount of Profit that may be taken to Profit and Loss Account

(i) The contract price is Rs. 10,00,000, the work certified is Rs. 4,00,000;
(a) 1/3 of the profit earned to date may be transferred to Profit and Loss Account 60,000 × 1/3=
Rs. 20,000
(b) Alternatively, the amount calculated under (a) above may be reduced on cash basis: 20,000 × 90/
100 = Rs. 18,000
(ii) The estimated profit is Rs. 80,000,
(a) Profit to be transferred to Profit and Loss Account may be calcuted on the basis of work
certified: 80,000 × 4,00,000/10,00,000 = Rs. 32,000
(b) Profit calculated under (a) above may be further reduced on cash basis: 32,000 × 90/100=
Rs. 28,800.

Q. 30. (a) (i) What is a cost unit?

(ii) What is meant by conversion cost?
(iii) What are preproduction costs?
(iv) Define the terms — salvage and rectification.
(v) How are idle facilities treated in Cost Accounting?
(vi) What are piece-rate?
(vii) What do you understand by the term ‘pre-determined rate of recovery of overheads’?
(viii) What is blanket overhead rate?
102 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

(ix) What is margin of safety?

(x) What is angle of incidence?

Answer 30. (a)

(i) Cost unit may be defined as “a unit of product, service or time in relation to which costs may be
ascertained or expressed.”
(ii) Conversion cost is the cost incurred to convert raw materials into finished goods. It is the sum of
direct wages, direct expenses and manufacturing overheads.
(iii) These costs forms the part of development cost, incurred in making a trial production run,
preliminary to formal production. These costs are incurred when a new factory is in the process of
establishment or a new project is undertaken or a new product line or product is taken up, but there
is no established or formal production to which such costs may be charged. These costs are
normally treated as deferred revenue expenditure (except the portion which has been capitalised)
and charged to the costs of future production.
(iv) Salvage : Salvaged material refers to the material retrieved from the spoiled work. Salvage is the
process by which salvaged material is retrieved. The salvaged units of material are usable in the
production. The value of salvaged material may be credited to the account to which spoilage is
charged.
Rectification : It means bringing back the defective units either to standard units of production or
as seconds, by reworking. The work of rectification in small concern’s is usually entrusted to the
production shop, whereas in big concerns, a separate department carries out the task. Before the
start of rectification work an estimate of the cost of rectification is prepared and compared with
the excess value to be obtained after rectification. The concern only goes ahead with the task of
rectification if the aforesaid comparison is found favourable.
The task of rectification is usually carried out under a ‘Rectification Work Order’, and all costs of
re-work are collected against this work order for material, labour and overhead.
If the defective production is inherent in the process of manufacture, and arises as a normal
consequence of productive activities and if it can be identified with specific jobs, the rectification
cost is charged to the jobs as the cost of manufacturing good units of the product. This will have the
effect of adding to the cost of the jobs. If the expenditure on rectification is considered abnormal,
it is excluded from product costs and charged to Costing Profit and Loss Account.
(v) Normal idle facilities cost which arises due to unavoidable reasons, should be included in the
works overhead. On the other hand, abnormal idle facilities cost which arises due to plants or
machines/facilities remaining idle on account of trade depression or for want of work etc., should
be written off to costing profit and loss account.
(vi) Piece-rate is that rate, which is paid to a worker for producing a single unit of output. The wages of
a worker under piece rate method are calculated by multiplying the number of units of output
produced by a pre-determined piece rate. For example, if the pre-determined piece rate is RS.7 per
unit and a worker has produced 500 units, then the total wages to be paid will be Rs. 3500.
To be more exact, the above type of piece rate method is known as straight piece rate. It has another
variation also, which is known as differential piece rate. Under differential piece rate system,
different piece rates are given to workers for different levels of efficiency.
(vii) The term ‘pre-determined’ rate of recovery of overheads’ refers to a rate of overhead absorption. It
is calculated by dividing the budgeted overhead expenses for the accounting period by the budgeted
base for the period. This rate of overhead absorption is determined prior to the start of the activity;
that is why it is called a ‘pre-determined rate’.
Foundation : Paper-2 : Accounting [ December  2011 ] 103

(viii) Blanket overhead rate is one single overhead absorption rate for the whole factory. It may be
computed by using the following formulae :
Overhead costs for the whole factory
Blanket overhead rate 
* Total units of the selected base
* The selected base can be tht total output; total labour hours; machine hours etc.
(ix) Margin of safety is the difference between actual sales and break-even sales.
(x) Angle of incidence is formed by intersection of total sales line and cost line.

Q. 30. (b) Leo Ltd. undertakes to supply 1,000 units of a component per month for the month of January,
February and March. Every month a batch order is opened against which materials and labour
costs are booked at actual. Overheads are levied on the basis of labour hour. The selling price is
contracted at Rs. 15 per unit.
From the following data, present the cost and profit per unit of each batch order and the overall
position of the order for 3,000 units. Ignore set up costs.
Months Batch Output Material Cost Labour cost
(Numbers) Rs. Rs.
January 1,250 6,250 5,000
February 1,500 9,000 6,000
March 1,000 5,000 4,000
Labour is paid at the rate of Rs. 4 per hour. The other details are :
Months Overhead (Rs.) Total Labour Hours.
January 12,000 4,000
February 9,000 4,500
March 15,000 5,000

Answer 30. (b)

January February March
Labour Hours = Rs. 5,000/Rs.4=1,250 Rs. 6,000/4=1,500 Rs. 4,000/4=1,000
Labour Hour Rate = Rs. 12,000/4,000 hrs; Rs. 9,000/4,500hrs; Rs. 15,000/5,000hrs
= Rs. 3 =Rs. 2 = Rs. 3
Leo Ltd. Statement of Cost and Profit
January February March Total
Output in units 1,250 1,500 1,000 3,750
Materials 6,250 9,000 5,000 20,250
Wages 5,000 6,000 4,000 15,000
Overhead based on labour hr. rate 3,750 3,000 3,000 9,750
Total cost 15,000 18,000 12,000 45,000
Sales @ Rs.15 per unit 18,750 22,500 15,000 56,250
Profit 3,750 4,500 3,000 11,250
Cost per unit 12.00 12.00 12.00 12.00
Profit per unit (S.P.-Cost=Rs.15-Rs.12) 3.00 3.00 3.00 3.00
Overall Profit on the order = Rs. 3 × 3,000 units = Rs. 9,000
104 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 30. (c) Calculate the machine- hour rate to recover the overhead expenses indicated below :
Per hour Per annum
Electicity power 75P
Steam 10P
Water 2P
Repairs Rs. 530
Rent Rs. 270
Running hours 2,000
Original cost Rs. 12,500
Book value Rs. 2,870
Present replacement value Rs. 11,500
Depreciation (on original cost) 7.5% per annum

Answer 30. (c)

Computation of Machine Hour Rate
Fixed Charges : Rs.
- Repairs 530
- Rent 270
- Depreciation (Rs. 12,500 × 7.5%) 937.5
Total Fixed Charges 1737.5
Effective hrs. 2,000
Fixed Charges per hr. 0.87
(+) Variable Charges per hr.
- Steam 0.10
- Water 0.02
- Power 0.75
Machine Hour Rate 1.74

Q. 30. (d) A contract expected to be completed in year 4, exhibits the following information :

End of year Value of work Cost of work Cost of work not Cash received
certified (Rs.) to date (Rs.) yet certified (Rs.) (Rs.)
1. 0 50,000 50,000 0
2. 3,00,000 2,30,000 10,000 2,75,000
3. 8,00,000 6,60,000 20,000 7,50,000

The contract price is Rs. 10,00,000 and the estimated profit is 20%. You are required to calculate,
how much profit should have been credited to the Profit and Loss A/c by the end of years 1,2
and 3.
Foundation : Paper-2 : Accounting [ December  2011 ] 105

Answer 30. (d)

End of Year Value of work Cost of work Notional Profit** Amount that should have been
certified certified* credited to Profit and Loss A/c by the
end of the Year
(Rs.) (Rs.) (Rs.) (Rs.)
1 0 0 0 0
2 3,00,000 2,20,000 80,000 1/3 × 80,000 × (2,75,000/3,00,0000
= 24,444
3 8,00,000 6,40,000 1,60,000 2/3 × 1,60,000 × (7,50,000/8,00,000)
= 1,00,000

Working Notes :

End of Year Completion of contract Profit credited to P&L Account

Year 1 Less than 25% No profit credited
Year 2 255 or more than 25% Cumulative profit = 1/3 × notional profit*
But less than 50% (cash received/Value of work certified)
Year 3 50% or more than 50% Cumulative Profit = 2/3*notional profit*
But less than 90% (cash received/Value of work certified)

* Cost of work certified = Cost of work to date-Cost of work not yet certified
** Notional profit = Value of work certified - (Cost of work not yet certified)
106 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

FOUNDATON EXAMINATION
(REVISED SYLLABUS - 2008)

Paper - 3 : ECONOMICS AND BUSINESS FUNDAMENTALS

Section - I
[ Economics ]

Q. 1. Economic goods are goods which —

(a) Obey the laws of economics
(b) Are scarce and limited in supply
(c) Are tangible
(d) Are intangible

Answer 1. (b)
Economic good is a good that is scarce. The desire for economic goods exceeds the amount that is freely
available from nature.

Q. 2. A decrease in price could be because of a

(a) Fall in demand or a rise in supply
(b) Rise in demand or a rise in supply
(c) Fall in demand or a fall in supply
(d) Rise in demand or a fall in supply
Answer 2. (a)
Fall in demand or rise in supply decrease the price of the good, while rise in demand or fall in supply
increases the price of the good.

Q. 3. Which of the following has the lowest elasticity of supply?

(a) Luxury items.
(b) Necessities.
(c) Perishable goods.
(d) Items that have the least budgetary allocation.
Answer 3. (c)
Elasticity of supply is lowest when the supply curve is perfectly inelastic. That means the change in price
does not have effect on quantity supplied. Perishable goods like milk and vegetables have to be disposed
off before they decompose or their quality decreaes. So even if their price changes they do not have any
change in supply.
Foundation : Paper-3 : Economics and Business Fundamentals [ December  2011 ] 107

Q. 4. Internet cafes in the twin cities have faced a slump in revenues because of the charges fixed by the
Association of Internet Cafes for browsing the Net at Rs.60 per hour. Before this action by the
association the charges were as low as Rs.30 per hour. The demand for Net browsing is
(a) Perfectly price elastic
(b) Perfectly price inelastic
(c) Relatively price elastic
(d) Relatively price inelastic

Answer 4. (c)
If the demand is relatively price elastic, for a given change in the price, the quantity demanded will
change. As the charges were increased from 30 to 60 the demand for net browsing came down and the
revenues decreased very largely. If the demand is inelastic then price change would not have effected the
demand for net browsing and thereby revenue.

Q. 5. The average total cost will be minimum at a point where

(a) Marginal cost and average fixed cost curves intersect
(b) Marginal cost and average variable cost curves intersect
(c) Marginal cost and average cost curves intersect
(d) Marginal cost is minimum

Answer 5. (c)
The marginal cost curve intersects both the average variable cost and average cost at their respective
minimum points.

Q. 6. Which of the following are valid in a perfectly competitive market, when demand is inelastic and
supply is increased by a firm?
(a) The quantity decreases.
(b) The quantity remains unchanged.
(c) The price increases.
(d) The equilibrium quantity increases slightly.

Answer 6. (d)
In perfect competition no single supplier is able to influence the price or market supply and the demand
is constant. So even if the supply is increased the quantity will only increase slightly.

Q. 7. A perfectly competitive firm can increase its slaes revenue by

(a) Reducing the price
(b) Increasing the price
(c) Increasing the production
(d) Increasing the expenditure on advertising

Answer 7. (c)
An individual firm in perfect competition is a price taker. The level of market price is determined by the
market supply and demand. A perfectly competitive firm has control over only on quantity. So sales
revenue can be increased by increasing the production only.
108 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 8. The demand and supply functions of a good in Delhi are Qd = 100 – 3P and Qs = 2P – 20. If the price is
Rs. 20, there would be surplus (deficit) of
(a) 20 units
(b) 25 units
(c) 30 units
(d) 35 units
Answer 8. (a)
When P = 20,
Qd = 100 – 3(20) = 40 units
Qs = 2(20) – 20 = 20 units
Shortagae = 40 – 20 = 20 units.

Q.9. The supply function for a product is Qs = 500P – 1000. Calculate the price elasticity of supply at a price
of Rs. 10.
(a) 4000
(b) 1.25
(c) 500
(d) 1.33
Answer 9. (b)
When we need to compute price elasticity of demand at a particular point (price), we use point price
elasticity of supply.
Q P
The formula for point price elasticity of supply is ePS  
P Q
Supply function is Qs = 500P – 1000
When the price is Rs. 10 the quantity supplied, Qs = 500 × 10 – 1000 = 4000.
Q P 10
ePS    500   1.25.
P Q 4000

Q. 10. The Marginal Cost function for a firm is found to be MC = 100 + 0.004Q. The level of output when
MC = 200 is
(a) 10,000
(b) 12,500
(c) 13,500
(d) 25,000
Answer 10. (d)
200 = 100 + 0.004Q = 25,000.

Q. 11. GDP can be defined as sum of the market value of the ........
(a) Final manufactured goods and services
(b) Intermediate goods
(c) Goods and services exported
(d) Sub-standard goods and discarded services
Foundation : Paper-3 : Economics and Business Fundamentals [ December  2011 ] 109

Answer 11. (a)

Final manufactured goods and services.

Q. 12. If Nominal GDP is 11% and Real GDP is 6%, then the difference of 5% represent
(a) Depreciation
(b) Rate of inflation
(c) Rate of interest
(d) Tax burden
Answer 12. (b)
Rate of inflation.

Q. 13. As per IMF Balance of payment manual, import and export (Merchandise) of goods should be
presented on
(a) FOB basis
(b) CIF
(c) FOR
(d) Any of these
Answer 13. (a)
FOB basis.

Q. 14. Disguised unemployment is mainly due to

(a) Under employment
(b) Seasonal nature of work
(c) Strike and lock-out
(d) Structural changes in the economy

Answer 14. (a)

Under employment.

Q. 15. Unemployment due to mismatch between skill possessed and present available jobs
(a) Cyclical unemployment
(b) Structural unemployment
(c) Frictional unemployment
(d) Seasonal unemployment

Answer 15. (b)

Structural unemployment
Q. 16. Which of the following is the oldest system of money?
(a) Barter
(b) Plastic money
(c) Credit money
(d) Gold
110 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 16. (a)

Barter.
Q. 17. Vijaya Ltd., is operating in a perfectly competitive industry. The Total Cost function of the firm is
given by TC = 25000 + 150Q + 3Q2.
If the industry is in long run equilibrium what is the price of the Vijaya Stores product?
(a) 66.77
(b) 697.7
(c) 91.3
(d) 6.9
Answer 17. (b)
In long run equilibrium price equals the minimum value of average cost. Therefore the minimum value of
average cost is needed to be found.
The Average Cost (AC) is minimum when dAC/dQ = 0
TC = 25000 + 150Q + 3Q2
TC 25000
AC    150  3Q
Q Q
dAC 25000
 3 0
dQ Q2
0.5
 25000 
Thus Q     91.3
 3 
25000
AC = + 150 + 3(91.3) = 697.7.
91.3
Thus, the long run equilibrium price = Rs. 697.7.

Q. 18. Racing Cycles Ltd. operates under conditions of perfect competition. The Total Cost (TC) function of
the firm is estimated as follows :
TC = 200 + 150Q – 20Q2 + Q3
Where, Q is quantity. What is the price below which the firm will be forced to shutdown its
operations?
(a) Rs. 40
(b) Rs. 45
(c) Rs. 50
(d) Rs. 55

Answer 18. (c)

The firm will be forced to shutdown its operations if the price is less than the minimum average variable
cost.
From the total cost function
TC = 200 + 150Q – 20Q2 + Q3
Marginal cost is the first derivative of the total cost function
Foundation : Paper-3 : Economics and Business Fundamentals [ December  2011 ] 111

d(TC)
MC   150  40Q  3Q 2
dQ
From the total cost function, total variable cost function can be derived as
TVC = 150Q – 20Q2 + Q3
TVC
Average variable cost 
Q
150Q  20Q 2  Q 3

Q
= 150 – 20Q + Q2
Since the average variable cost will be minimum at its intersection with marginal cost, the minimum
average variable cost is where, AVC = MC
 150 – 20Q + Q2 = 150 – 40Q + 3Q2
150 – 20Q + Q2 – 150 + 40Q – 3Q2 = 0
20Q – 2Q2 = 0
2Q(10 – Q) = 0
Which has the roots Q = 0 and 10.
Disregarding the root associated with a zero output, the average variable cost is minimum at an input of
10 units.
AVC = 150 – 20(10) + 102
= 150 – 200 + 100
= Rs. 50
Thus, it is not viable for the firm to produce output at any price less than Rs. 50.

Q. 19. Average productivity of labor for a firm is 25 when labor employed is 50 units. When labor employed
is increased to 52 units, average productivity of labor declines to 24 units. At current input level the
marginal productivity of labour is
(a) – 1 unit
(b) – 2 units
(c) 1 unit
(d) 2 units

Answer 19. (a)

TP (when labor = 50 units) = 50 × 25 = 1250
TP (when labor = 52 units) = 52 × 24 = 1248
(1248  1250) 2
Thus, MP    1 unit.
(52  50) 2

Q. 20. Assuming all other things to be constant, the damand for inferior goods increases in the following
cases
(a) When the price of the good rises
(b) When the income of people falls
(c) Depends on the supply of the goods
(d) When the income of people rises
112 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 20. (b)

Demand for interior goods increases when the income of people falls.
Q. 21. In the BoP statement, current account includes
(i) Merchandize, invisible items
(ii) Government loans from abroad
(iii) Foreign direct investment
(a) (i) only
(b) Both (i) and (ii) above
(c) Both (i) and (iii) above
(d) Both (ii) and (iii) above

Answer 21. (a)

The current account records all transactions in merchandize and invisibles of the country with the rest of
the world.

Q. 22. The following are the data pertaining to National income of an economy.
Particulars Rs. in crores
GNP at factor prices 1,90,000
Indirect taxes 28,000
NDP at market prices 2,00,844
NNP at market prices 2,00,000
GNP at Market prices 2,14,000
Personal income taxes 20,000
Corporate Profit taxes 13,000
Retained Profits 60,000
Calculate National income.
(a) 1,74,000
(b) 1,54,000
(c) 1,76,000
(d) 1,58,000
Answer 22. (c)
National Income = NNP at Factor Cost
= NNP at Market Prices – Indirect Taxes + Subsidies
Subsidies = GNP at Factor Cost + Indirect Taxes – GNP at Market Prices
= Rs. 1,90,000 + 28,000 – 2,14,000 crore = Rs. 4,000 crore
National Income = 2,00,000 – 28,000 + 4,000 = 1,76,000 crore.

Q. 23. Which of the following statements is/are true about the impact of inflation in the economy?
(a) Higher than expected inflation hurts creditors but benefits debtors.
(b) Inflation creates inefficiency in the economy because it forces people to search for prices when
they could be doing something else.
Foundation : Paper-3 : Economics and Business Fundamentals [ December  2011 ] 113

(c) Inflation can lead to a misallocation of resources because people tend to make mistakes when
there is inflation in the economy.
(d) All of the above.
Answer 23. (d)
Inflation is a serious problem on the part of the government worldwide. The effect of inflation is ranging
from redistribution of income and wealth of the society to the worsening the balance of payments position
of the country.
(a) It is true statement that higher than expected inflation hurts creditors but benefits debtors. Debtors
repay the amount, which is fixed in nominal terms. The real values of repayments in the future will
decrease with an increase in inflation, leads to an increase in the wealth of the debtors. On the
other hand, the wealth of the creditors will decrease with an increase in the rate of inflation.
(b) It is a true statement that inflation creates inefficiency in the economy because people spent lot of
time to find a reasonable price.
(c) It is a ture statement that infalation can lead to a misallocation of resources because inflation
misleads people to invest logically.
(d) Is the answer because all the above statements are correct.

Q. 24. Financial interrelation ratio is equal to

(a) Total issues/National income
(b) Primary issues/Net capital formation
(c) Total issues/Net capital formation
(d) Total stock of financial assets/Stock of fiscal assets
Answer 24. (c)
Financial Intermedian Ratio (FIR) is the ratio of financial claims issued to the net physical capital
formation. FIR shows the relation between financial development and the growth of physical investment.

Q. 25. Ceteris paribus, an income tax

(a) Increases the value of the expenditure and net tax revenue multiplier
(b) Increases the value of the expenditure multiplier and decreases the value of the net tax revenue
multiplier
(c) Decreases the value of the expenditure and net tax revenue multiplier
(d) Decreases the value of the expenditure multiplier and increases the value of the net tax revenue
multiplier
Answer 25. (c)
Ceteris paribus, introduction of taxes reduces the disposable income. This in turn decreases the value of
the expenditure and net tax revenue multiplier.

Q. 26. Fill in the blanks :

(i) Internal economies accrue to a firm when it .
(ii) Creation of saving and its productive investment in called .
(iii) Fisher’s Quantity Theory of Money is also called .
(iv) Law of variable proportions applies in the .
(v) Demand poll inflation is when aggregate demand aggregate supply.
114 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

(vi) Cheap money policy is followed by central bank during .

(vii) Formula for calculating optimum population is .
(viii) Labour cannot be separated from .
(ix) Propounded growth concept of economics.
(x) Price under the very long period is also called .

Answer 26.
(i) Expands
(ii) Capital formation
(iii) Cash transaction theory
(iv) Short-run
(v) Exceeds
(vi) Deflation
A O
(vii)
O
(viii) Labourer
(ix) A. Samulson
(x) Secular price

Q. 27. Write short notes on the following :

(i) Deficit Financing
(ii) Functions of money
(iii) Factors affecting supply
(iv) Special drawing rights (SDR)
(v) Explicit costs

Answer 27. (b)

(i) Deficit Financing :
When government spending exceeds its earnings, the budget is said to be deficit and to bridge the
gap, if government borrows money from the Central Bank or runs down its accumulated reserves,
it leads to a net addition to money supply. It is called deficit financing. It is used as an instrument
to remedy depression and unemployment. Deficit financing denotes more spending by the
government through created money.
Lord Keynes advocated deficit financing for lifting up of an economy from business depression and
unemployment. According to him demand deficiency was the root cause of these problems. Hence
the prescription to raise private expenditure comprising consumption and investment. The total
expenditure of private sector cannot increase on its own in a depressionary economy. It needs
external push. This is what the government should do through a policy of budgetary deficit financed
by new money. Creation of new money and its injection into the economy can raise C+I+G curve
upward to a level where unused and unemployed resources may be gainfully employed. Once the
resources are fully employed more spending by the government will lead to inflationary rise in
price.
Foundation : Paper-3 : Economics and Business Fundamentals [ December  2011 ] 115

(ii) Functions of money :

Money is a matter of four functions, viz.,
(a) Medium of exchange : Money everywhere acts as a common medium of exchange. In an
exchange economy, money has an intermediary role. The origin of money lies in the
inconveniences of the barter system. The invention of money has made the exchange· system
smooth and convenient.
(b) Measure of value : Money measures exchange value of goods and services. Things are said to
be cheap or expensive on the basis of amount of money for their possession. This makes
exchange mutually profitable.
(c) Standard of deferred payment : Money as a standard of deferred payment implies the role of
money in borrowing and lending. Money taken as loan is usually repaid after a time gap. This
delayed payment is done through money.
(d) Store of value : Money gives a man command over goods and services because of its purchasing
power. This purchasing power of money can be stored by keeping a part for future use. Not
being perishable, value of money can be preserved for a long time.
Money plays a dynamic role in a modern economy. It lubricates the wheels of trade and
commerce. Money is the lifeblood of industry. Money activates idle resources and puts them
into productive channels. It helps in increasing output, employment, income and converting
savings into investment.
(iii) Factors affecting supply :
Supply is defined as a quantity of a commodity offered by the producers to be supplied at a
particular price and at a certain time.
The factors affecting the supply of a commodity are:
(a) The price of the commodity in the market. When price rises, there will be more profit and
supply increases. The reverse will happen when price falls.
(b) Goals of the firm, such as profit maximization, sales maximization and employment
maximization.
(c) The supply of a commodity is influenced by the prices of raw materials, labour and other
inputs.
(d) State of technology used for production of a commodity. Improved and advanced technology
reduces the cost of production and increases the supply.
(e) The government policy with reference to production of commodities, imposition of taxes,
such as excise duty, sales tax, subsidy policy etc. influence the supply of a commodity.
(f) Expectation about future prices of the commodity.
(g) Prices of other commodities, e.g., the supply of one commodity falls as the prices of other
goods rise.
(h) Number of firms in the market. Decrease in the number of firms reduces the supply.
(i) In case of natural disorders like flood, drought, etc. reduce the supply of a commodity specially
agricultural produces.
(iv) Special Drawing Rights (SDR) :
About two decades ago a new international money was created by the IMF for two reasons. First to
overcome the shortage of gold in the world economy leading to fall in international reserves.
116 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Second, to avoid the movement of gold across national boundaries. This new international currency
is known as Special Drawing Rights (SDR) held with the IMF. The origin of SDR thus lies in the
shortage of international liquidity all over the world in the wake of acute shortage of American
Dollar in the 60s and early 70s which was then the main reserve currency.
The SDR was first introduced in 1969. Under this scheme the IMF grants its member government
special drawing rights from Special Drawing Account (SDA). They are like coupons which can be
exchanged for currencies required by its holder for making international payments. They are also,
besides gold and key currencies, a component of international reserve of an economy.
Each member of the fund was assigned an SDR quota that was granted in terms of a fixed value of
gold. Hence they have been aptly described as “Paper Gold”. The member countries are required to
provide their currency in exchange for SDR when called upon. The use of SDR would mean a
reduction in the country’s foreign reserve and a corresponding increase in the SDR holding of the
country receiving it.
The mechanism of the SDR system is an economy in need of foreign exchange has to apply to the
Fund for the use of SDR. The Fund would designate another country having a sound foreign exchange
resources to meet the need of the former. So the debtor country’s SDR decreases and that of the
creditor increases. The former have to pay interest at 1.5% per annum to the latter country. A
designated (creditor) country can not pay more than the amount equal to twice the amount of SDRs
allotted to the country. The scheme is flexible in that each country can use its quota to have an
equivalent amount of convertible foreign exchange to overcome balance of payment difficulties.

(v) Explicit costs :

Actual payments made by a firm for purchasing or hiring resources (or factor-services) from the
factor-owners or other firms are called explicit costs. In other words, explicit costs are actual
money expenses directly incurred for purchasing the resources. These are the costs which a cost
accountant includes under the head expenses of the firm. Hence explicit costs also. Accounting
costs include all costs incurred by the firm in acquiring various inputs from outside suppliers.
Thus the examples of explicit costs are: payments for raw materials and power; wages to the hired
workers; rent for the factory-building; interest on borrowed money; expenses on transport and
publicity, etc.

Q. 28. What is internal economies? What are its different types?

Answer 28.
Internal Economies :
Internal Economies that accrue to a particular firm with the expansion of its output and scale are termed
internal economies. Internal economies of a firm are independent of the action of other firms. They are
internal in the sense that they are limited to a firm when its output increase. They are not shared by other
firms in the industry. Following are the main types of internal economies :

(i) Labour Economies — These are also known as the economies of specialization and division of
labour. Division of labour and specialization are possible more in large-scale operations. Different
types of workers can specialize and do the job for which they are more suited. A worker acquires
greater skill by devoting his attention to a particular job. As a result of this quality and speed of
work both improve. This results in a sharp increase in output per man. Thus in short, with growing
scale comes, increasing specialization and increasing returns to scale.
Foundation : Paper-3 : Economics and Business Fundamentals [ December  2011 ] 117

(ii) Technical Economies — The main technical economies result from the indivisibilities.
Several capital goods, because of the strength and weight required, will work only if they are of a
certain minimum size. There is a general principle that as the size of a capital good is increased, its
total output capacity increases far more rapidly than the cost of making it. To double the size and
output capacity of a blast furnace, for instance, we do not have to double the materials required.
Besides this a large scale firm can easily take advantages of the use of superior technique or
specialized and sophisticated machines. A large firm can also enjoy the benefits from linked
processes and from the use of by-products.
(iii) Marketing Economies — Marketing economies arise from the large scale purchase of raw materials
and other inputs. A firm may receive large discounts on the purchase of bigger volume of raw
materials and intermediate goods. For instance, a large cloth mill may get more discounts on the
purchase of yarn than the small mill.
Marketing economies can also be reaped by the firm in its sales promotion activities. Advertising
space (in newspapers and magazines) and time (on television and radio), and the number of
salesmen do not have to rise proportionately with the sales. Thus per unit selling cost may also fall
with the increase in output.
(iv) Managerial Economies — Managerial economies arise from specialization of management and
mechanisation of managerial functions. Large firms make possible the division of managerial
tasks. This division of decision-making in large firms has been found very effective in the increase
of the efficiency of management. Besides, large firms apply techniques of management involving a
high degree of mechanization, such as telephones, telex machines, television screens and computers.
These techniques save time and speed up the processing of information.
(v) Financial Economies — Large firms can easily raise timely and cheap finance from banks and other
financial institutions and also from the general public by issue of shares and debentures.
(vi) Risk-bearing Economies — A large firm can more successfully withstand the risks of business.
With the product diversification and by operating in several markets a large firm can withstand
the risk of changing consumer’s tastes and preferences.
(vii) Economies Related to Transport and Storage Costs — Large firms are able to enjoy freight concessions
from railways and road transport. Because a large firm uses its own transport means and large
vehicles, the per unit transport costs would fall. Similarly, a large firm can also have its own storge
godowns and can save storage costs.
(viii) Other Economies — A large firm may also enjoy some other economies with the expansion of its
output. Prominent among them are economies on conducting research and development activities
and economies of employee welfare schemes.
As a result of all these internal economies firm’s long-run average and marginal cost decline with
the increase in output and scale of production.

Q. 29. What do you understand by the term ‘national income’? Discuss different methods of measuring it.
Answer 29.
National Income is nothing but the income of a nation or a country. In real terms a national income is the
flow of goods and services produced in an economy in aparticular period — a year. A National Sample
survey has, therefore, defined national income as — money measures of the net aggregates of all
commodities and services accruing to the inhabitants of a community during a specified period.
118 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

There are three alternative ways of estimating National Income of a country. Broadly it may be viewed
from income side, output side and expenditure side. Let us discuss these methods :

(a) Product method - In simple terms this method implies that by adding the values of output produced
and services rendered by different sectors one may find out the national income.
The output method is unscientific. In this method only those goods and services are counted which
are paid for, that is marketed. But there are many goods and services that do not have market price
and are not paid for. Services of a housewife or a teacher-father; food crop, fruits and vegetable
grown in family farm would not be counted as part of the GNP. Similar services or goods would
become a part of GNP if they are paid for. Thus GNP at market price invariably leads to an
underestimate of gross and services.
Moreover, there lies possibility of double or even triple counting in this method. Counting wheat,
flour and bread’s value separately is methodologically incorrect because bread’s value contains
flour’s value which, in turn, contains wheat’s value. However, this problem can be overcome if only
value of final goods are considered excluding primary and intermediate goods. The problem can be
overcome in another way known as the value added method whereby only the value added by each
firm in the production process is included in the output figure. Thus the value added output of all
sectors makes up GNP at factor cost.

(b) Income method - In this method all income from employment and ownership of assets before
taxation received from productive activities to be counted. It is the factor income method. The
summation of incomes earned by the factors of production for their contribution to production. To
these be added the undistributed profits of the private sector and trading surplus of the public
sector corporations. While all those groups of income generated in production, some other are to
be excluded. These are known as Transfer Earnings. Examples of such earnings are pensioner
benefits, un employment doles, sickness benefits, interest on national debt etc. These are excluded,
as they do not arise from productive activities.

(c) Expenditure Method - By measuring total domestic expenditure we can measure the income of a
nation. Broadly, total domestic expenditure comprises two elements. First, consumption expenditure
of the household sector on goods and services. It also includes the consumption outlays of business
sector and public authorities.
Another part of national expenditure is investment expenditure by private sector and public
authorities. Expenditure is said to be investment when it is used for making a fixed capital like
building, machinery etc. It also means an increase in the stock of inputs and finished products.
In measuring total domestic expenditure we have to take some precautions (a) only new goods be
considered. Any spending on old goods is a transfer of asset from one hand to another. There is no
new asset coming through production (b) Only the final stage of purchase be included because
measuring expenditure for intermediate stage may lead to duplication of spending amounts.
(c) Residents of country may spend for foreign goods (import) any may also earn by selling goods
abroad (exports). Hence it is necessary to exclude spending on imports and to include value of
exports.
Foundation : Paper-3 : Economics and Business Fundamentals [ December  2011 ] 119

Q. 30. Distinguish between Return to a Variable Factor and Return to Scale.

Answer 30.
The main differences between returns to a variable factor and returns to scale are as indicated below :

Returns to a Variable Factor Returns to Scale

1. Operates in the short run or it is related to short- 1. Operated in the long-run or it is related to long-
run production-function. run production-function.
2. Only the quantities of a variable factor are 2. All factor-inputs are varied in the same
varied. proportion.
3. There is change in the factor proportion. 3. There is no change in factor-ratio. For instance,
Suppose on 1 acre land 1 labour is employed, in a firm is employing 1 unit of labour and 2
then the land labour ratio is 1 : 1 . Now if we units of capital, then the labour-capital ratio
add one more unit of labour on the 1 acre land, is 1 : 2. Now if the firm increases is scale of
then land-labour ratio would become 1 : 2. operation and employed 2 units of labour and
4 units of capital, the labour-capital ratio still
remains the same as 1 : 2.
4. No change in the scale of production. Because 4. There is change in the scale of production
here all the factor-inputs are not changed. because here all the factor-inputs are varied in
the same proportion.
120 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Section - II
[ Business Fundamentals ]

Q. 31. (a) Answer the following :

(i) Salient features of a co-operative society are :
A. Voluntary association
B. Service motive
C. Equality
D. All the above

(ii) Advantages of limited partnership are :

A. Enables people to invest
B. Mobilizes large financial resources
C. More stable
D. All the above

(iii) Semantic barrier to communication is referred as the :

A. Receiver misinterpreting the symbols used by the sender
B. Sender misusing the symbols
C. Receiver clarifying the symbols with sender
D. Receiver not being able to decode the symbols used by the sender

(iv) In a stock exchange

A. Any security can be transacted
B. Only listed securities can be transacted
C. Only securities of private companies be traded
D. Any common person can conduct transaction directly.

(v) Which of the following is not a social obligation for a firm :

A. Avoiding anti-social practices
B. Maintaining a healthy environment
C. Ensuring job satisfaction of employees
D. Earning adequate profit

Answer 31. (a)

(i) D — All the above
(ii) A — Enables people to invest
(iii) A — Receiver misinterpreting the symbols used by the sender
(iv) A — Any security can be transacted
(v) A — Avoiding anti-social practices
Foundation : Paper-3 : Economics and Business Fundamentals [ December  2011 ] 121

Q. 31. (b) Fill in the blanks :

(i) The minimum no. of directors in case of public company is .
(ii) Preliminary expenses are of a nature.
(iii) In case of an company, the liability clause does not appear in the
memorandum of association.
(iv) A proxy is not allowed to vote except on a , unless the articles otherwise
provide.
(v) The first official general meeting of shareholders is called meeting.

Answer 31. (b)

(i) Three
(ii) Capital
(iii) Unlimited
(iv) Poll
(v) Statutory

Q. 31. (c) State which of the following statements is “True” and which is “False”. :
(i) W.T.O. is not a part of international environment.
(ii) The main motive of state enterprises is to render services.
(iii) For communication to be effective, it must be communicator-oriented.
(iv) A limited liability partnership is registered.
(v) The minimum subscription should be received within 100 days after the date of the issue of
the prospectus.

Answer 31. (c)

(i) False
(ii) True
(iii) False
(iv) True
(v) False

Q. 31. (d) Define the following terms in not more than two lines :
(i) Preliminary expenses
(ii) Statement in lieu of prospectus
(iii) Stock exchange clearing house
(iv) Ex-dividend
(v) Sweat equity shares

Answer 31. (d)

(i) Expenses incidental to the formation of a company are known as preliminary expenses. These
expenses are of a capital nature, but they do not represent any tangible assets. Thus, preliminary
expenses are treated as fictitious assets and these expenses are to be written off against Profit &
Loss Account over a certain period.
122 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

(ii) The statement in lieu of prospectus is drafted in accordance with the form set out in Part-I of
Schedule -III of the Companies Act. If a public company does not issue a prospectus, it can issue a
statement in lieu of prospectus.
(iii) Important stock exchanges maintain a clearing house. It serves as a useful link between buyers
and sellers of securities and pools together all the bargains of a member and ascertains his net
position.
(iv) Shares are said to be bought or sold ex-dividend when the buyer acquired the shares without any
right to receive the dividend declared (interest due in case of debentures and bonus). It is only the
seller who gets the dividend or interest there on.
(v) Sweat equity shares means equity shares issued at a discount or for consideration other than cash
for providing know-how or making available rights in the nature of intellectual property rights or
value additions, by whatever name called. A company may issue sweat equity shares of a class of
shares already issued.

Q. 32. What is the difference between partnership and sole prorietorship?

Answer 32.
1. Number of members. Sole proprietorship is owned and controlled by one person. The number of
partners in a firm can be upto ten in banking business and twenty in other cases. At least two
persons are required to form a partnership.
2. Agreement. No agreement is required in a sole proprietorship. On the other hand, there must be an
express or implied agreement among partners in order to constitute a partnership.
3. Registration. A sole proprietorship need not be registered except under the Shops and Establishment
Act. A partnership firm should be registered otherwise it will not be able to enforce its rights in the
court of law.
4. Capital. The entire capital of a sole proprietorship is contributed by one man, the owner of business.
In a proprietorship, several persons contribute capital. Therefore, a partnership firm can raise
larger financial resources than a proprietor.
5. Management. The management of sole proprietorship lies exclusively with its owner. He is the
supreme authority in the business. But in a partnership, every partner has a right to take part in the
management of the firm. There is pooling of knowledge and judgment. Work can be divided among
partners according to their skills and aptitudes.
6. Secrecy. Secrets of sole proprietorship are known only to its owner. In partnership, secrets are
shared among the partners. Therefore, a sole proprietor is in a better position to retain the secrets
of business.
7. Quick decisions. In sole proprietorship one man takes all the decisions. But in partnership decisions
are taken through mutual consultation between the partners. Therefore, sole proprietorship can
take decisions more quickly than a partnership. But decsionsm taken in a partnership are likely to
be less reckless and hasty than those of a proprietor.
8. Governing law. There is no specific law governs sole proprietorship. Partnership is governed under
the Partnership Act 1932.
9. Sharing of profits. There is no profit sharing in a sole proprietorship and all profits belong to the
owner. In a partnership profits are shared between all the partners.
10. Flexibility of operation. Proprietorship is a one man show whereas partnership is carried on by two
or more persons. Therefore, there is greater flexibility of operations in sole proprietorship.
Foundation : Paper-3 : Economics and Business Fundamentals [ December  2011 ] 123

11. Mutual agency. In proprietorship there is no mutual agency. But in a partnership every partner is an
implied agent of the firm and of other partners.
12. Scale of operations. Sole proprietorship is suitable for small scale business, while partnership is
suitable for medium sized business. Scope for expansion is greater under partnership.
13. Risk. The owner alone bears all the risks of sole proprietorship. In a partnership risks are shared by
all the partners.
14. Continuity. The life of a partnership is more uncertain than that of sole proprietorship. Lack of
mutual trust and unity among the partners can result in untimely dissolution of partnership.

Q. 33. What are the disadvantages of a joint stock company?

Answer 33.
The following are the disadvantages of a joint stock company :
(i) Adherence of too many legal formalities : The formation of a company requires adherence of too
many legal formalities. The establishment and running of a company would prove to be troublesome,
because of complicated legal regulations. Moreover, the formation and management of the company
is expensive too.
(ii) Concentration of power in few hands : Shareholders of the company have practically no say in the
affairs of the company. The directors of the company become self-centered and they do not care for
the shareholders. In most of the cases, directors try to formulate policies in order to promote their
own interests. Thus, the company form of organization has helped concentration of economic
power in few hands.
(iii) Excessive Government control : A company has to observe too many provisions of different laws
imposed by the Government. This affects the smooth functioning of the company.
(iv) Undue speculation in shares of the company : Undue speculation in shares of a company is injurious
to the interests of the shareholders. Sometimes, directors indulge in speculation by misusing inner
information of the company for speculative purposes and personal gain.
(v) Fraudulent management : The promoters and directors may indulge in fraudulent practices. The
unscrupulous directors may present a rosy picture of the company in its annual report. In this way,
the innocent and ignorant investors are duped.
(vi) Bureaucratic control : Quick decisions and prompt action are absent in the management of a
company. It makes a company an inflexible enterprise. As a result, officers and their assistants do
not enforce any decision promptly. Opportunities may be lost because of delay in decision-making.
(vii) High nepotism : In companies, employees are selected not on the basis of ability but on the basis
of personal interest of the management. There is scope for a high degree of favoritism and nepotism
and as a result worthless people join in the company.
(viii) Inflexibility in management : A company cannot quickly adjust with the changing conditions in the
market, because of its complex structure and legal obligations. It has, therefore, less flexibility in
management.
(ix) Monopolistic control and exploitation of consumers : Joint stock companies facilitate formation of
business combinations which ultimately lead to monopolistic control and exploitation of
consumers.
(x) Social abuses : Evils of factory system like insanitation, pollution, congestion of cities are attributed
to the company form of organization. Moreover, the close and cordial relationship between the
management and employees is difficult to maintain. It brings about strikes, lock outs, retrenchment,
closure, etc., in the business.
124 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 34. What are the various business objectives?

Answer 34.
The various objectives of business could be classified as follows :
1. Economic objectives
2. Social objectives
3. Human objectives
4. National objectives
5. Organic objectives

The Economic objectives are :

(a) Earning of adequate profit
(b) Production of tangible form of wealth
(c) Creation of market or creation of customers
(d) Innovation
(e) Best use of available scarce resources.

The Social objectives are :

(a) Providing quality goods and services
(b) Charging reasonable prices
(c) Generation of employment
(d) Avoiding antisocial practices and profiteering
(e) Creating and maintaining better environment.

The Human objectives are :

(a) Giving a fair deal to the employees
(b) Ensuring job satisfaction
(c) Treating employees as partners to prosperity
(d) Development of human resources

The National objectives are :

(a) Producing goods and providing services as per national priorities
(b) Development of small enterprises
(c) Guaranteeing social justice
(d) Export promotion

The Organic objectives are :

(a) Survival
(b) Growth, expansion and diversification
(c) Creating goodwill, prestige and recognition.
Foundation : Paper-3 : Economics and Business Fundamentals [ December  2011 ] 125

Q. 35. What is Listing of securities? What are its advantages?

Answer 35.
A stock exchange does not deal in the securities of all companies. Only securities which are included in
the official trade list of the stock exchange can be bought and sold on it. Therefore, listing of securities
means, the inclusion of securities in the official list of a stock exchange. The securities can be listed, only
if the company furnishes details of its organization and the working to stock exchange and fulfils the
conditions laid down in the ‘rules and regulations of the exchange’ by listing the securities of a company,
the stock exchange does not guarantee the financial soundness of the company or recommend it’s shares
to the public. It is not the function of the stock exchange to advise the investors in the selection of
securities.

Advantages of Listing :
1. Listing gives the company a higher status, contributes to expansion of activities and helps its growth
by making future finance easier. It enables a company to enjoy the confidence of the investing
public.
2. Listing helps in widening the market for the securities issued.
3. The listed company gets some tax advantages.
4. The investors are also benefited by the listing of securities. These securities may be used for obtaining
bank credit as they command higher collateral value. They stand to gain in respect of income tax.
Wealth tax, estate duty and other taxes payable by them. They can be sure that there is no fraud in
the issue of shares. Listing insists on due notice in advance of closure of the transfer books. Thus, it
offer facilities to them for transfer, registration of right, fair and equitable allotment.
5. Listing safeguards the interest of the general public too as it enforces timely disclosure of proper
information regarding dividends, bonus shares, new issues of capital etc.
126 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

FOUNDATON EXAMINATION
(REVISED SYLLABUS - 2008)

Paper - 4 : BUSINESS MATHEMATICS & STATISTICS

FUNDAMENTALS
Section - I
[ Arithmetic ]

4
a1 a2 a3 a4 a a 
Q. 1. (a) If    , show that 1   1  .
a2 a3 a4 a5 a5  a2 
(b) Three numbers are in continued proportion of which the middle one is 16 and the sum of the
other two is 130. Find the numbers.

Answer 1. (a)

a1 a2 a3 a4
We have     k (say).
a2 a3 a4 a5
Then a 1 = a2k = a3k.k = a3k2 = a4k3 = a5k4
a2 = a3k = a4k2 = a5k.k2 = a5k3
a3 = a4k = a5k.k = a5k2
a4 = a5k.
a1 a5k 4 a1 a5k 4  a1 
4
   k 4 and a   k.    k .
4
a5 a5 2 a5K 3 a
 2
4
a1  a1 
Hence a   a  .
5  2
4
a1 a2 a3 a4 a1 4  a1   a 

Other size. a a a a    k  k  k  k  k 4
, or, a  k     1 k .
2 3 4 5 5  a2   a2 

Answer 1. (b)
Let the first and the third number be x and y respectively. Then x, 16, y are in continued proportion.
x 16
 
16 y , or, xy = 256. ... (i)
Also x + y = 130.
 (x – y)2 = (x + y)2 – 4xy = (130)2 – 4 × 256,
or, (x – y)2 = 16900 – 1024 = 15876;  x – y = ± 126. ... (ii)
Solving (i) and (ii), we get x = 128, y = 2, or, x = 2, y = 128.
Hence the three numbers are 128, 16, 2 or 2, 16, 128.
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 127

Q. 2. (a) The average marks in “Elements of Mathematics” of Preliminary students of 3 centres in India is
50. The number of candidates in 3 centres are respectively 100, 120, 150. If the averages of the
first two centres are 70 and 40, find the average marks of the third centre.

(b) The following are the prices of certain important commodities required by a family. The importance
(weight in kgs.) attached to each commodity by the family is indicated. Compare the mean price
per kg. with the weighted mean price per kg.

Commodity Importance Price per kg.

(wt. in kgs.) Rs.
Rice 30 7.00
Wheat 12 4.00
Oils 4 40.00
Dals 4 12.00

(c) Mean monthly income of 10 workers in factory A is Rs. 4,000 and that of workers in factory B is
Rs. 3,700. If the mean income of all workers in A and B is 3,800 per month, find the number of
workers in B.

Answer 2. (a)

Let the average marks of the third centre be x3 .

n1 x  n2 x2  n3 x3
Then using the formula : x  , we get
n1  n2  n3

100  70  120  40  150  x3 11,800  150 x3

50 = , or, 50 = ,
100  120  150 370

or, 11,800 + 150 x3 = 18,500, or, 150 x3 = 18,500 – 11,800 = 6,700

6,700
 x3 = = 44.67
150

Hence the required average marks of the third centre = 44.67.

Answer 2. (b)
6  4  40  12 62
Mean price per kg.   = Rs. 15.50.
4 4
128 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

fx
Weighted Mean price per kg. = , where N = f.
N
Commodity Importance f Price per kg. x (Rs.) fx
Rice 30 6 180
Wheat 12 4 48
Oils 4 40 160
Dal 4 12 48
Total 50 = f = N — 436 = fx

fx 436
Hence the required Mean price per kg.    Rs. 8.72
N 50
Mean price per kg. is much higher than the weighted mean price per kg.

Answer 2. (c)
n1 x1  n2 x2
Let n2 be the no. of workers in B. Then x  .
n1  n2
Here n1 = 10, x1 = 4000, x2 = 3,700 and x = 3,800, n2 = ?
10  4000  n2  3700
 3800 = , or, 38000 + 3800n2 = 40000 + 3700n2,
10  n2
or 100n2 = 2000, or, n2 = 20.
Hence the required no. of workers in B = 20.

Q. 3. (a) A vessel contains a mixture of Wine and Water. Had there been a litre more of Wine and a litre less
of Water, the ratio of Wine to Water would have been 7 : 8; but had there been a litre more of
Water and a litre less of Wine, the ratio would have been 2 : 3. How many litres does the mixture
consist of?
(b) A dealer mixes two varieties of teas costing Rs. 100 per kg. and Rs. 160 per kg. in the proportion
5 : 1. He sold the 6 kg. mixture at the rate of Rs. 120 per kg. Find his profit.
Answer 3. (a)
Let the vessel contain x litres of milk and y litres of water. Then the vessel contains (x + y) litres of mixture.
By the given conditions,
x 1 7
 (i)
y 1 8
x 1 2
and 
y 1 3 . (ii)
 From (i),
8x + 8 = 7y – 7,
or, 8x – 7y = – 15. (iii)
From (ii),
3x – 3 = 2y + 2,
or, 3x – 2y = 5. (iv)
Solving (iii) and (iv), we get x = 13 and y = 17.
Hence the vessel contains 13 + 17, i.e., 30 litres of mixture.
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 129

Answer 3. (b)
Of 6 kg. mixture tea there are 5 kg of 1st type costing Rs. 500 and 1 kg of 2nd type costing Rs. 160. Thus cost
price of 6 kg of given mixture = 500 + 160 = 660. Their selling price = 6120 = 720. His profit = 720 – 660 =
60.

Q. 4. (a) At what rate per cent will Rs. 264.35 amount to Rs. 317.22 in 4 years?
(b) A sum deposited at a bank fetches Rs. 13,440 after 5 years at the rate of 12% simple interest. Find
the principal amount.
(c) If I ask you for a loan and agree to repay you Rs. 300 after nine months from today, how much
should you loan me if you are willing to make the loan at the rate of 6% p.a. ?
Answer 4. (a)
We have
 nr  Pnr
A =  1  100  = P + ,
  100
r
or, 317.22 = 264.35 + 264.35 × 4 × [  P = 264.35, A = 317.22, n = 4]
100
r r
or, 317.22 – 264.35 = 264.35 × 4 × , or, 52.87 = 264.35 × 4 × ,
100 100
52.87  100
or, r= = 5.
264.35  4
Hence the required rate = 5%
Answer 4. (b)
Let the principal amount be Rs. 100. Then
Simple interest on Rs. 100 for 5 years at 12% p.a. = 12 × 5 = Rs. 60.
Amount at the end of 5 years = 100 + 60 = Rs. 160.
Amount Principal
13,440
160 100  x = 100 × = Rs. 8,400
160
13,440 x

Answer 4. (c)
9 9 9 209
If Rs. 100 be the amount of loan, then interest  6   Rs. and amount with interest  100   Rs. .
12 2 2 2
209
If repayable amount be Rs. , then amount of loan is Rs. 100.
2
2
If repayable amount be Rs. 300, then amount of loan is Rs. 100   300  Rs. 287.08.
209
Q. 5. (a) A bill was drawn on 14 June 1989 at 8 months after date and was discounted on 24 September
1984 at 5% p.a. If the banker’s gain on the basis of simple interest is Rs. 3, for what sum the bill was
drawn?
(b) The difference between the tree discount and the banker’s discount on Rs. 12,750, paid 4 months
before it is due, is Rs. 5. Find the rate per cent.
130 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 5. (a)
Date of drawing 14.6.84
Period 8 months
Nominal due date 14.2.85
Days of grace 3 days
Legally due date 17.2.85

 Unexpired period = 24.9.84 to 17.2.85 = 6 + 31 + 30 + 31 + 31 + 17 = 146 days.

Given B. G. = Rs. 3, or, B.D. – T.D. = Rs. 3 ... (i)
146
If P. V. = Rs. 100, then T.D. = 5 × = Rs. 2, B. V. = P. V. + T. D. = 100 + 2 = Rs. 102.
365
5 146 204
 B. D. = Interest on B. V. =  102    Rs. 2.04.
100 365 100
1
 B. G. = B. D. – T. D. = Rs. 2.04 – Rs. 2 = Rs. .04 = Rs. .
25
1
If B. G. = Rs. , then B. V. = Rs. 102.
25
102
 If B. G. = Rs. 3, then B. V. =  3 = Rs. 7,650.
1 / 25

Hence the required Bill Value is Rs. 7,650.

Answer 5. (b)
B. V. (A) = 12750, B. D. = Interest on 12750 for 4 months at r%
r 4 255r
=   12750  ,
100 12 6
r being the rate per cent.
A 12750 12750 12750r
P. V. = 1  ni  1  r / 300 , T. D. = B. V. – P. V. = 12750  1  r / 300  300  r .
Now
255r 12750r 51r 2550r
B. D. – T. D. = B. G., or,   5 , or,  1,
6 300  r 6 300  r

1 50  r
or, 51r    1 , or, 51r   1 , or, 17r2 = 600 + 2r,
 6 300 r  6(300  r)

or, 17r2 – 2r – 600 = 0, or, 17r2 – 102r + 100r – 600 = 0

or, (r – 6) (17r + 100) = 0;  r = 6 [ r cannot be negative]
Hence the required rate of interest = 6%.
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 131

Section - II
[ Algebra ]
Q. 6. Choose the correct option showing necessary reasons/calculations.
1
(a) If x  2  3 then the value of x 4  is
x4
(i) 98, (ii) 196, (iii) 194, (iv) none of these.
(b) n Cr n Cr1 is equal to
n1 n1 n
(i) Cr , (ii) Cr , (iii) Cr 1 , (iv) none of these.

log x log y log z

(c) If   then the value of xyz is
y z zx xy
(i) 1, (ii) 0, (iii) – 1, (iv) none of these.
Answer 6. (a)
(iii)

1 1 2 3 2 3
   2 3
x 2 3 2 3 2 3 4 3  
x 
1
x

 2 3  2 3  4   
2
1  1
x2    x    2  4 2  2  14
x 2
 x
2
1  2 1 
x4    x  2   2  142  2  196  2  194 .
x4  x 

Answer 6. (b)
(ii)
|n |n
n
Cr n Cr1 = |r |n - r  |r - 1|n - r  1

|n n  r  1  r 
= |r |n - r   r(n  r  1) 
 
(n  1)|n |n  1 n1
= |r |n  r  1  |r |n  r  1  Cr .

Answer 6. (c)
(iv)
log x log y log z
   K (say)
y z zx x y
132 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Then log x = K(y – z)

log y = K(z – x)
log z = K(x – y)
Adding log x + log y + log z = K (y – z + z – x + x – y) = K × 0 = 0
or, log xyz = log 1
or, xyz = 1.

Q. 7. (a) If  be an imaginary cube root of unity then find the value of (1 –  + 2) (1 +  – 2)
(b) Simple interest and compound interest in 2 years for same principal are Rs. 200 and Rs. 210 at the
same rate of interest per annum. Find the principal amount.
(c) The volume of a gas varies directly as the absolute temperature and inversely as pressure. When
the pressure is 15 units and the temperature is 260 units the volume is 200 units. What will be
the volume when the pressure is 18 units and the temperature is 195 units?

Answer 7. (a)
1 +  + 2 = 0
1 –  + 2 = 1 + 2 – = – – = – 2
1 +  – 2 = – 2 – 2 = – 22
 (1 –  + 2) (1 +  – 2) = (– 2)(– 22) = 43 = 4 × 1 = 4
Answer 7. (b)
Let x = Principal amount and r % = rate of interest per annum
r rx
The simple interest = Rs. 200 = x  2   rx  10000
100 50
2
 r 
The compound interest = Rs. 210 = x  1   x
 100 

 2r r 2  rx r2x
= x    
100 10000  50 10000
 
r2x 10000r
 210  200   10   r  10
10000 10000
200  50 10000
So, x    1000 Rs.
r 10

Answer 7. (c)
Volume = V, Pressure = P, Absolute Temp = T
1 T T
 V  T & V   V   V K K = constant
P P P
Then P = 15, T = 260 then V = 200
260 150
200 = K K 
15 13
150 195
When P = 15, T = 260 then V    125 units
13 18
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 133

Q. 8. (a) If p = log10 20 and q = log10 25, find x and such that 2 log10 (x + 1) = 2p – q
(b) If x = log2a a, y = log3a 2a, z = log4a 3a, Show that : xyz + 1 = 2yz.

(c) Show that log 3 3 3 3 .....   1 .

Answer 8. (a)
2p – q = 2 log10 20 – log10 25 = log10 (20)2 – log10 25
400
= log10 400 – log10 25 = log10 = log10 16
25

Now, 2 log10 (x + 1) = log10 16 or, log10 (x + 1)2 = log10 16 or, (x + 1)2 = 16 = (± 4)2
or, x + 1 = ± 4
 x = 3, – 5.

Answer 8. (b)
L. H. S. = log2a a. log3a 2a. log4a 3a + 1
= (log10 a × log2a 10) · (log10 2a × log3a 10) · (log10 3a × log4a 10) + 1

log 10 a log 10 2a log 10 3a

=   1
log 10 2a log 10 3a log 10 4a

log10 a
= log 4a  1 = log4a a + log4a 4a = log4a (a·4a) = log4a 4a2.
10

R.H.S. = 2log3a 2a· log4a 3a = log4a (2a)2 = log4a· 4a2

Hence the result.

Answer 8. (c)

Let, x  3 3 3 ... or x 2  3 3 3... 

(squaring both sides)

or, x2 = 3x or, x2 – 3x = 0 or, x (x – 3) = 0 or, x – 3 = 0 (as x  0),
 x=3
 given expression = log33 = 1.

Q. 9. (a) In how many ways can be letters of the word TABLE be arranged so that the vowels are always
(i) together (ii) separated?

(b) A student is to answer 8 out of 10 questions on an examination :

(i) How many choice has he?
(ii) How many if he must answer the first three questions?
(iii) How many if he must answer at least four of the first five questions?
134 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 9. (a)
(i) In the word there are 2 vowels, 3 consonants all different. Taking the 2 vowels (A, E) as one letter we
are to arrange 4 letters (i.e. 3 consonants + 1) which can be done in 4 ! ways.
Again 2 vowels can be arranged among themselves in 2 ! ways.
Hence, required number of ways = 4! × 2! = 48.
(ii) Without any restriction (i.e. whether the vowels, consonants are together or not) all the different 5
letters can be arranged in 5! ways. Arrangement of vowels together is 48 (shown above)
Hence, Required number of ways = 5! – 48 = 120 – 48 = 72.

Answer 9. (b)
(i) The 8 questions out of 10 questions may be answered in 10C8
10! 10  9  (8)!
Now 10
C8    5  9  45 ways
8! 2! 8! 2!
(ii) The first 3 questions are to be answered. So there are remaining 5 (= 8 – 3) questions to be answered
out of remaining 7 (= 10 – 3) questions which may be selected in 7C5 ways.
Now, 7C5 = 7.6 = 42 ways.
(iii) Here we have the following possible cases :
(a) 4 questions from first 5 questions (say, group A), then remaining 4 questions from the balance
of 5 questions (say, group B).
(b) Again 5 questions from group A, and 3 questions from group B.
For (a), number of choice is 5C4 × 5C4 = 5 × 5 = 25
For (b), number of ways is 5C5 × 5C3 = 1 × 10 = 10.
Hence, Required no. of ways = 25 + 10 = 35.

Q. 10. (a) If x  y, prove that px + qy  ax + by, where p, q, a, b are fixed constants.

(b) If x + y  x – y, show that ax + by  px + qy, a, b, p, q being all constants.

(c) Find x, if x x x
 (x x )x .

Answer 10. (a)

Since x  y, we have x = ky, where k is a constant.
px  qy p  ky  qy y(pk  q) pk  q
Now     constant = k (say),
ax  by a  ky  by y(ak  b) ak  b
or, px + qy = k (ax + by), where k is a constant.
Hence px + qy  ax + by.

Answer 10. (b)

If x + y  x – y;  x + y = m(x – y), where m is a constant,
or, x + y = mx – my,
or, y + my = mx – x,
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 135

or, y (1 + m) = (m – 1)x,
m 1
or, y  x  kx , where k is a constant. Now see 10(a).
m1

Answer 10. (c)

xx x
 (x x )x ,
1/ 2 1
or, x x.x  ( x  x 2 )x ,
3/2
or, xx  (x 3 / 2 )x ,
3/2
or, xx  x 3x / 2 ;
3x
 x3/2  ,
2
9 2
or, x3  x ,
4
9
or, x [ x0]
4

Section - III
[ Mensuration ]
Q. 11. (a) The area of a rectangle is 180 sq metres and its perimeter is 54 metres. Find its dimensions.
(b) A rectangular lawn is surrounded by a path 1 metre wide. The area of the lawn is 20 sq metres
and the area of the path is 22 sq metres. Find the length and breadth of the lawn.

Answer 11. (a)

Let a metres be the length and b metres be the breadth of the rectangle. Then
ab = 180 (i)
and 2 (a + b) = 54, or, a + b = 27. (ii)
180
From (i), a  .
b

Substituting this value in (ii), we get

180
 b  27 , or, 180 + b2 = 27b, or, b2 – 27b + 180 = 0, or, (b – 12) (b – 15) = 0;
b
 b = 12 or 15.

180 180 180

If b = 12, then a    15 and in b = 15, then a   12 .
b 12 15
Hence the length is 15 metres and the breadth is 12 metres.
136 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 11. (b)

Let the length and the breadth of the lawn be x metres and y metres respectively. Then the length and
breadth of the combined rectangular plot of lawn and path are respectively (x + 2) m and (y+2) m.
By the given conditions,
lm
xy = 20 ... (i)
lm
or, (x + 2) (y + 2) = 20 + 22 = 42. ... (ii)
From (ii),
ym
xy + 2(x + y) + 4 = 42
or, 20 + 2(x + y) + 4 = 42,
lm xm or , 2 (x + y) = 42 – 24 = 18,
lm or, x + y = 9. ... (iii)
From (i),
20
y  .
x
Putting this value in (iii), we get
20
x 9
x
or, x2 + 20 = 9x,
or, x2 – 9x + 20 = 0,
or, (x – 4) (x – 5) = 0.
 x = 4, or, 5.
20
 y 5 or 4.
x
Hence the required length and breadth are 5 cms and 4 cms.

Q. 12. (a) Find the area of the road which is 7m. Wide and is around but outside a circular park, whose
circumference is 88 metre. What would be the total cost to develop the road of at the rate of Rs.
100 per sq. metre. and to develop the park at the rate of Rs. 150 per sq. metre?
(b) A number of circular pieces of 0.25 cm. radious is to be cut from a metal sheet of dimension 11
cm by 2 cm. Find the possible number of such pieces.

Answer 12. (a)

22
Circumference of circular park = 2r = 2   r = 88 or, r = 14 metre. Circular Road is 7 metre wide, so outer
7
radius (R) = 14 + 7 = 21 m.
Area of cicular road
 Total cost = 770 × 100 = Rs. 77,000
22
Again total cost of park    14 2  150   14  14  150  Rs. 92,400
7

Answer 12. (b)

2
22  1  22 1
Area of circular piece   r 2      sq. cm.
7 4 7 16
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 137

Area of metal sheet = 11 × 2 sq. cm.

11  2 7 16
 Required no of pieces   11  2    112 .
22  1 22 1
7 16

Q. 13. (a) The area of a rectangle is 96 sq. cm and its perimeter is 40 cm, what are its length and breadth?
(b) Find the quantity of water in litre flowing out of a pipe of cross-section area 5 cm2 in 1 minute if
the speed of the water in the pipe is 30 cm/sec.
(c) The volumes of two spheres are in the ratio 8:27 and the difference of their radii is 3 cm. Find the
radii of both the spheres.
Answer 13. (a)
Let l = length and b = breadth of rectangle in cm.
Then perimeter = 2(l + b) = 40 cm i.e. l + b = 20 .... (1)
And area = lb = 96 sq cm. i.e. lb = 96 .... (2)
So l(20 – l) = 96  20 l – l2 = 96  l2 – 20 l + 96 = 0
i.e. l = 12 or 8
Then b = 20 – l = 8 or 12
But b < l so l = 12 cm and b = 8 cm.

Answer 13. (b)

Volume of water flowing in 1 sec = 5 × 30 = 150 c.c.
Volume of water flowing in 1 min = 150 × 60 = 9000 c.c. = 9 litre

Answer 13. (c)

4 3
r
3 1  8  r1  2  r  2k , r  3k
1 2
4 3 27 r2 3
r2
3
Now 3k – 2k = 3  k = 3
So, the radii (r1) of 1st sphere = 6 cm and
the radii (r2) of 2nd sphere = 9 cm.

Q. 14. (a) The circumference of the base of a cylinder is 44 cms. and its height is 20 cms. Find the volume of
the cylinder.
(b) A solid cylindrical rod of length 80 cms. radius, 15 cms. is melted and made into a cube. Find the
side of the cube.

Answer 14. (a)

22
2r = 44 or, 2   r  44 or, r = 7 cm.
7
22
Volume = r2h   49  20 = 3080 cu. cm.
7
138 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 14. (b)

Volume of cube = a3 cu. cm. [Where a is the side of cube]
22
Volume of cylindrical rod  r 2h   152  80  a3, by question.
7
Or, a3 = 56571.428 or, a  3 56571.428 cm.

Q. 15. (a) The circumference of the base of a cylinder is 44 cm and its height is 20 cm. Find the volume of
the cylinder.
(b) The curved surface of a cylinder is 1000 sq cm and the diameter of the base is 20 cm. Find the
volume of the cylinder and its height to the nearest millimeter.

Answer 15. (a)

If r cm be the radius of the base of the cylinder, then
44 44 44 7
2r = 44, or, r     7.
2 2 2 22
22 2
Volume of the cylinder  r 2  h   7  20  3080 cu cms.
7

Answer 15. (b)

20
If r cm be the radius of the base of the cylinder, then r   10 ; curved surface = 2rh.
2
2rh = 1000, or, h = 50, where h = height.
 Volume of the cylinder = r2h =  · 102 · h = 100 × 50 = 5000 cu cm.

50 7 175
Height of the cylinder  h   50    15.909  15.9 cm.
 22 11

Q. 16. (a) The diameter of the base of a conical water tank is 28 m and its height is 18 m. How much water
does the tank hold?
(b) A conical tent is required to accommodate 5 people, each person must have 16 sq ft of space on
the ground and 100 cu ft of air to breathe. Give the vertical height, slant height and width of the
tent.

Answer 16. (a)

28
Radius of the circular base of the tank   14 m and its height = 18 m.
2
1 2 1 22
Volume of the water tank = r h    (14)2  18   196  60
3 3 7
= 3696 cu m. = 3696 × 1000 decimetres
= 3696000 litres = 3696 kilolitres.
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 139

Answer 16. (b)

Space required to accommodate 5 people = 16 × 5 = 80 sq ft;  r2 = 80, where r is the radius of the base.
1 2
Again volume of the conical tent  r h , where h = height of the tent
3
1
  80  h .
3
1 3  500
 × 80 × h = 100 × 5, or, h   1875 ft.
3 80
From r2 = 80, we have
22 2 560
r  80, or, r 2   25.45;  r = 5.04 ft.
7 22
 Width = 2r = 2 × 5.04 = 10.08 ft.

l = slant height  h2  r2  (18.75)2  25.45  377.01  19.42 ft.

Section - IV
[ Co-ordinate Geometry ]
Q. 17. (a) Obtain an equation of a line through (– 5, 3) and whose intercept on the x-axis is 4 times its
intercept on the y-axis.
(b) In what ratio is the joint of the points (4, – 1) and (5, 3) divided by the line x + 3y – 8 = 0?

Answer 17. (a)

Let the equation of the line in the intercept form be
x y
  1. (i)
a b
By the given condition, a = 4b.
 From (i), we get
x y
  1, or, x + 4y = 4b. (ii)
4b b
If this line passes through the point (– 5, 3), then – 5 + 4.3 = 4b, or, b = 7/4.
Hence, from (ii), the required equation of the line is x + 4y = 7.
Answer 17. (b)
Let the line x + 3y – 8 = 0 divide the join of A (4, – 1) and B (5, 3) at the point C in the ratio m : n. Then the
 5m  4n 3m  n 
co-ordinates of C are C  , .
 mn mn  B (5, 3)
n
Since C lies on the line x + 3y – 8 = 0;
5m  4n 3m  n 5m  4n  9m  3n  8m  8n C
  3  8  0 , or,  0,
mn mn mn
m 7 m
or, 6m – 7n = 0, or, 6m = 7n, or,  , i.e., m : n = 7 : 6.
n 6
A (4, -1)
Hence the required ratio is 7 : 6.
140 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Q. 18. (a) Find the lengths of the intercepts of the circle x2 + y2 – 8x – 7y + 12 = 0 on the axes of co-ordinates.
(b) Show that the point (3, 7) lies inside the circle x2 + y2 – 6x – 8y – 11 = 0.

Answer 18. (a)

x2 + y2 – 8x – 7y + 12 = 0.

Putting y = 0,
x2 – 8x + 12 = 0, or, x2 – 2x – 6x + 12 = 0, or, x(x – 2) – 6 (x – 2) = 0,
or, (x – 2) (x – 6) = 0.  x = 2, 6.
 x1 = 2 and x2 = 6.
Hence the intercept on the x-axis = x2 – x1 = 6 – 2 = 4.

Answer 18. (b)

Here 2g = – 6, 2f = – 8 and c = – 11.  g = – 3, f = – 4.
 The centre C of the circle is the pont ( – g, – f) = (3, 4), and the radius of the circle

 g2  f 2  c  9  16  11  6.
The distance of the point P (3, 7) from the centre

C (3, 4)  (3  3)2  (7  4)2  3,

which is less than 6.
Hence the point (3, 7) lies inside the circle.

Q. 19. (a) Find the co-ordinates of the vertex and the focus and the equation of the directrix of the
parabola 3y2 = 16x. Find also the length of the latus rectum.
(b) Find the co-ordinates of the points at which the straight line 2x – 3y + 16 = 0 intersects the
parabola y2 = 16x.

Answer 19. (a)

We have
16
3y2 = 16x, or, y2 = x
3
which is of the form y2 = 4ax.
Here
16 4
4a = , or, a  .
3 3
 The co-ordinates of the vertex are (0, 0) and the co-ordinates of the focus are (a, 0), i.e., (4/3, 0).
The equation of the directrix is
4
x  a  0 , or, x   0 , or, 3x + 4 = 0.
3
The length of the latus rectum 4a = 16/3 units.
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 141

Answer 19. (b)

We have
2x – 3y + 16 = 0 (i)
and y2 = 16x (ii)

For the co-ordinates of the points of intersection of (i) and (ii), we solve these two equations for x and y.

3y  16
From (i), 2x = 3y – 16, or, x  .
2

From (ii),
(3y  16)
y 2  16   24 y  128, or, y2 – 24y + 128 = 0,
2
or, (y – 8) (y – 16) = 0;  y = 8, 16.

3  8  16 3  16  16
If y = 8, x   4; if y = 16, x   16.
2 2
Hence the required co-ordinates of the points of intersection are (4, 8) and (16, 16).

Q. 20. (a) Find the co-ordinates of the foci, the eccentricity and the equations of the directrices of the
hyperbola 16x2 – 9y2 = 144.
x2 y2
(b) Show that the line x – 3y = 13 touches the ellipse   1. What are the co-ordinates of the
25 16
point of contact?

Answer 20. (a)

We have
16x 2 9y 2 x2 y2
16x2 – 9y2 =144, or,   1, or,   1.
144 144 9 16

Here a2 = 9 and b2 = 16.  a = 3, taking positive sign.

Now
a2  b2 9  16 25 5
e2    ;  e [  e > 1.]
a 2 9 9 3
 The co-ordinates of the foci are
5
(± ae, 0) = (± 3. , 0) = (± 5, 0).
3
5
The eccentricity is e = .
3
The equations of the directrices are
5
ex ± a = 0, or, x  3  0 or, 5x ± 9 = 0.
3
142 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 20. (b)

x – 3y = 13 (i)
2 2
x y
and   1.
25 16
From (1),
x = 13 + 3y.
 From (2),
(13  3y)2 y 2 169  9y 2  78y y 2 2704  144y 2  1248y  25y 2
  1, or   1, or,  1,
25 16 25 16 400
or, 169y2 + 1248y + 2304 = 0, or, (13y + 48)2 = 0
48 48
which gives two real and equal values of y, i.e., y   ,  .
18 18
Since the roots are equal, the line (i) intersects the ellipse (ii) in two coincident points. Hence the line (i)
touches the ellipse (ii).
48
Substituting y  in x = 13 + 3y, we get
13
48 169  144 25
x  13  3    .
13 13 13
 25  48 
 The point of contact is  13 , 13  .
 

Section - V
[ Calculus ]
dy y
Q. 21. (a) If xa yb = (x + y)a+b show that  where a and b are independent of x and y.
dx x
(b) If y = Aemx + Be–mx show that y2 – m2y = 0.
(c) Find the area of the region lying in the first quadrant bounded by the parabola y2 = 4x, the x-axis
and the ordinate x = 4.

Answer 21. (a)

a log x + b log y = (a + b) log (x + y)
Differentiating w.r.t. x
a b dy a  b  dy 
   1  
x y dx x  y  dx 

 b a  b  dy a  b a
or,     
 y x  y  dx x  y x
b(x  y)  (a  b)y dy x(a  b)  a(x  y)
or,  
y(x  y) dx x(x  y)
dy (bx  ay) y(x  y) y
or,   
dx x(x  y) (bx  ay) x
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 143

Answer 21. (b)

y = Aemx + Be–mx
y1 = Amemx – Bme–mx

= m (Aemx – Be–mx)
y2 = m (Amemx + Bme–mx)
= m2 (Aemx + Be–mx) = m2y

 y2 – m2y = 0

Answer 21. (c)

y2 = 4x

x=4

0 x
4

4
4 4  3
x2 
Required area =  y dx 
0 0
4x dx  2 
3
 2 
0

2 3 2  2  8 32
= 2   (22 ) 2   sq unit
3 3 3

x dy
Q. 22. (a) If y  show that x  y(y 2  1).
1x 2 dx

m
(b) If y   x  1  x 2  show that (1 + x2)y2 + xy1 = m2y.
 

2
(c) Evaluate  x log
1
e x dx.
144 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 22. (a)

 1
(2x)  
dy 1  2   x dy  x x3
 x 
dx
 dx
  
3 3
1  x2 1  x2 2 1  x2 1  x2 2

3
dy  x 
  x dy
x   x  y 3  y  (y 2  1)
dx  1  x 2 
1x 2 dx
 

Answer 22. (b)

m 1  
m
 1  2x
y   x  1  x 2   y 1m  x  1  x 2  1  
     2 1  x 2 

m1  
 x  1x
2
 y 1  m  x  1  x 2  
   
 1  x2 

my
 y1   y 12 (1  x 2 )  m2 y 2
1x 2

 2y 1 y 2 (1  x 2 )  2xy 12  2m2 yy 1

 y 2 (1  x 2 )  xy 1  m2 y

(1  x 2 ) y 2  xy 1  m2 y Proved.

Answer 22. (c)

2 2 2 2
 x2 x2 1   x2  1

1
 log e  dx   log e x 

2 
 dx 
2 x  2
1 
log e x    dx
1
2
1

2
4 1  x2  1 3
 log e 2  0     2 log e 2  (4  1)  2 log e 2 
2 2 2 4 4
 1

Q. 23. (a) If y  log  x  x 2  a2  y2 + xy1 = 0.

 
δf δf

(b) If f (u, v) = u3 – v3 + 3u2v – 3vu2, then verify that u  3f(u, v)
δu δu
(c) Find the area of the region bounded by curves y2 = x and y = x.
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 145

Answer 23. (a)

y = log  x  x 2  a2 
 
x
1 2 2  12 1
1  (x  a ) .2x x  a2 
2 1
y1  2 
x x a
2 2
x x a 2 2
x  a2
2

1  3 .2 x x
y 2   (x 2  a2 ) 2  
2 (x 2  a2 ) x 2  a2
 (x 2  a2 )y2  xy1  0

Answer 23. (b)

f (u, v) = u3 – v3 + 3u2v – 3uv2
f f
 3u2  6uv  3v 2 ,  3v 2  3u2  6uv
u v
f f
u v  3u2  6u2 v  3uv 2  3v 3  3u2 v  6uv 2
u v

 3(u3  v 3  3u2 v  3uv2 )  3 f(u, v)

Answer 23. (c)

y2 = x and y = x cut at (0, 0) and (1, 1)
1 1

Required area  
0

x dx  xdx
0

1 1
 x 3 / 2   x2  2 1 1
 3 / 2    2   3 (1  0)  2 (1  0)  6 sq. unit
 0  0

Q. 24. (a) The total cost (C) for output x is as follows :

3 15
C x .
5 4
Find (i) Cost when output is 5 units (ii) Average cost of output of 10 units (iii) Marginal cost (C)
(b) The cost function (C) for commodity (q) is given by C = q3 – 4q2 + 6q. Find the AVC and also find the
value of q for which AVC is minimum.

Answer 24. (a)

3 15
For 5 units  .5   3  3.75  6.75 units.
5 4
3 15
C 3 x  4 3 15
AC    
x x 5 4x
146 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

3 15 d(C) 3
 AC for 10 units    0.6  0.375  0.975; MC    0.6.
5 40 dx 5

Answer 24. (b)

C 2
AVC   q  4q  6, (in cost function (C), fixed cost is absent)
q
d 3
MC  (q  4q2  6q)  3q2  8q  6. For AVC minimum, slope of AC is zero i.e.,
dq
d 2
(q  4q  6)  0 or, 2q – 4 = 0 or, q = 2 units.
dq

Section - VI
[ Statistics ]
Q. 25. (a) Construct a pie diagram with the following data :
Consumers State Electricity Board TISCO CESC Railway Coal Others
Power Consumed : 7,50,000 3,60,000 6,00,000 1,80,000 4,50,000 6,60,000
(in KWt. hours)

(b) Draw a histogram and a frequency polygon for the following data :
Weight 102-113 113-124 124-135 135-146 146-157 157-168 168-179 Total
(nearest to the pound) :
No. of men : 1 1 4 14 12 5 3 40
Answer 25. (a)
Consumers Power Consumed in % degrees % × 3.6
(in (Kwt. hrs.)
SEB 7,50,000 25 90
TISCO 3,60,000 12 43.2
CESC 6,00,000 20 72
RAIL 1,80,000 6 21.6
COAL 4,50,000 15 54
OTHERS 6,60,000 22 79.2
30,00,000 100 360.0
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 147

Answer 25. (b)

Wt. (lb) 102-113 113-124 124-135 135-146 146-157 157-168 168-179
No. of men (f) 1 1 4 14 12 5 3

16
14
HISTOGRAM
12
10
8 FREOUENCY
6 POLYGON
4
2

0
102 113 124 135 146 157 168 179

Q. 26. (a) The mean annual salary of all employees of a company is Rs. 28,500. The mean salaries of male
and female employees are Rs. 30,000 and Rs. 25,000, respectively. Find the percentage of males
and females employed by the company.
(b) Median marks of 50 candidates in mathematics in a test are 26. Frequencies in the ranges 10 - 20
and 30 - 40 are missing the following table :
Marks obtained : 0-10 10-20 20-30 30-40 40-50
No. of candidates : 5 — 20 — 7
Determine the missing frequencies.

Answer 26. (a)

Let n1 be the number of males and n2 the number of females
n1 x1  n2 x2
Then x
n1  n2

n1  30,000  n2  25,000
 28,500 
n1  n2
 3,500n2  1500ni
n1 70
   n1 : n2  7 : 3
n2 30

7
 Percentage of males   100  70 and females = 30.
10

Answer 26. (b)

Let the missing frequencies be f1 and f2

 5 + f1 + 20 + f2 + 7 = 50  f1 + f2 = 18
148 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Class No. of Cumulative

(Marks) Candidates frequencies
0 - 10 5 5
10 - 20 f1 5 + f1
20 - 30 20 25 + f1 * median class
30 - 40 f2 25 + f1 + f2
40 - 50 7 32 + f1 + f2

25  (5  f1 )
Median  26  20   10 ,
20
 6  20  200  10f1  f1  8

f1 + f2 = 18  f2 = 18 – 8 = 10
 The missing frequencies are 8 and 10.

Q. 27. (a) Find the mean deviation about arithmetic mean of the first 10 natural numbers.
(b) From the following age distribution of 230 workers, calculate Karl Pearson’s coefficient of skewness
and quartile deviation :

Wages in Rs. p.m. 500 — 600 600 — 700 700 — 800 800 — 900 900 — 1000
No. of workers 30 53 82 40 25

Answer 27. (a)

n (n  1) 10  11
Sum of first 10 natural numbers    55
2 2
55
A.M. of first 10 natural numbers   5.5
10
First 10 natural x– x |x  5.5|
numbers (x) = x – 5.5
1 – 4.5 4.5
2 – 3.5 3.5 Mean deviation
3 – 2.5 2.5
25
4 – 1.5 1.5   2. 5
10
5 – 0.5 0.5
6 0.5 0.5
7 1.5 1.5
8 2.5 2.5
9 3.5 3.5
10 4.5 4.5
25
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 149

Answer 27. (b)

x
Wages f Mid. value of x = X – 750  x fx’2 fx’
100
Rs. p.m. Class (X)
500 — 600 30 550 – 200 –2 120 – 60
600 — 700 53 650 – 100 –1 53 – 53
700 — 800 82 750 0 0 0 0
800 — 900 40 850 100 1 40 40
900 — 1000 25 950 200 2 100 50
f  230 fx2 f x 
= 313 = – 23

 f x   23
Mean  A  i  750   100  740
  f  230

 2
fx  fx  
S.D.    i
 f  f  
 
2
313  23 
 100    116.2
230  230 

 82  53 
Mode  700     100
 2  82  53  40
29
 700   100  740.8
71
Karl Pearson’s Coefficient of Skewness
Mean  Mode

SD
740  740.8 0.8
   0.007
116.2 116.2

Q. 28. (a) Find the mean and standard deviation of the 2 values, (a + b) and (a – b).
(b) Calculate coefficient of variation for the following distribution of marks obtained by 60 students
in a test :
Marks : 0 — 10 10 — 20 20 — 30 30 — 40 40 — 50
Students : 11 19 15 9 6
Answer 28. (a)
ab  ab
Mean   a.
2

 (x  x)2 (a  b  a)2 (a  b  a)2 b2 b2

S.D      b .
n 2 2 2 2
150 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

Answer 28. (b)

d
Class Mid No. of x – 25 d  fd’ fd’2
10
Interval Value Students =d
x f
0 — 10 5 11 – 20 –2 – 22 44
10 — 20 15 19 – 10 –1 – 19 19
20 — 30 25 15 0 0 0 0
30 — 40 35 9 10 1 9 9
40 — 50 45 6 20 2 12 24
 f  60  fd fd2
= – 20 = 96

 fd  20 20 130
Mean  A   i  25   10  25    21.7 approx.
 f  60 6 6

 fd2  fd 2 
S.D.  10    
 f  f  

2
96   20 
    10 1.6  0.11  12.2
60  60 
S.D. 12.2
C.V.   100   100  56.25
Mean 21.7

Q. 29. (a) Explain the concept is negatively skewed.

For a frequency distribution, the quartiles are Rs. 20 and Rs. 50, and the median is 30. Calculate
bowley’s coefficient of skewness.
(b) Mean monthly income of 10 workers in factory A is Rs. 4,000 and that of workers in factory B is
Rs. 3,700. If the mean income of all workers in A and B is Rs. 3,800 per month, find the number
of workers in B.
(c) Find the missing frequecies in the following frequency distribution when it is known that the
mean = 11.1, total frequency = 60.

Class limits Frequencies Class limites Frequencies

9.3 — 9.7 2 11.3 — 11.7 14
9.8 — 10.2 5 11.8 — 12.2 6
10.3 — 10.7 — 12.3 — 12.7 3
10.3 — 11.2 — 12.8 — 13.2 2

Answer 29. (a)

Firs Quartile = 20 = Q1
Second Quartile = Meadian = 30 = Q2
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 151

Third Quartile = 50 = Q3
Bowley’s Coefficient of Skewness

Q 3  Q 1  2Q 2 50  20  60 10 1
    .
Q 3  Q1 50  20 30 3

Answer 29. (b)

Let the numbers of workers in factory B be x then
10  4 ,000  3,700x
 3,800
10  x
 40,000 + 3,700x = 38,000 + 3,800 x
 2,000 = 100x  x = 20.

Answer 29. (c)

Class limit Mid-value x – 11.5 = d Frequency fd
x f
9.3 — 9.7 9.5 –2 2 –4
9.8 — 10.2 10.00 – 1.5 5 – 7.5
10.3 — 10.7 10.5 –1 f1 – f1
10.8 — 11.2 11.00 – 0.5 f2 – 0.5 f2
11.3 — 11.7 11.5 0 14 0
11.8 — 12.2 12.00 0.5 6 3
12.3 — 12.7 12.5 1 3 3
12.8 — 13.2 13.00 1.5 1 1.5
d  2 f  fd 
31 + f1 + f2 – 4 – f1 – 0.5f2

4  f1  0.5 f2
Mean  11.5   11.1
31  f1  f2
 4 + f1 + 0.5 f2 = 0.4 × 60 = 24 [ 31 + f1 + f2 = 60]
 f1 + 0.5 f2 = 20
 f1 + 0.5 f2 + 0.5 f2 – 0.5 f2 = 20
 f1 + f2 – 0.5 f2 = 20
 29 – 0.5 f2 = 20 [ 31 + f1 + f2 = 60  f1 + f2 = 291
 f2 = 18, f1 + f2 = 29  f1 = 11
 The missing frequencies are 11 and 18.

Q. 30. (a) (i) Find mean and standard deviation of following frequency distribution of ages :
Class of age (yrs) : 0 – 10 10 – 20 20 – 30 30 – 40 40 – 50 Total
No. of persons : 2 4 9 3 2 20
152 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

(ii) Find median and mode of the following distribution :

Weekly wages (Rs.) : 50 – 59 60 – 69 70 – 79 80 – 89 90 – 99 Total
No. of persons : 6 14 16 13 3 52

(iii) If the fast of two samples has 100 items with mean 15 and variane 9 and the second has 150
items with mean 16 and variance 16, the the mean and variance of the combined sample.

(b) Short notes on :

(i) Central tendency of data;
(ii) Ogive less than type.

Answer 30. (a)

(i) Mid value (x) : 5 15 25 35 45 Total

u = (x – 25)/10 : –2 –1 0 1 2
freq (f) : 2 4 9 3 2 20
fu : –4 –4 0 3 4 –1

fu2 : 8 4 0 3 8 23

mean  25  10 
 fu  25  10  (1)  25  0.5  24.5 yrs.
f 20


 fu  fu    10 
2
2   23   1 2 
s.d         10  114.75  10.71 yrs.


f 
  f    20  20  

(ii)
Class of weekly wages 49.5 – 59.5 59.5 – 69.5 69.5 – 79.5 79.5 – 89.5 89.5 – 99.5
(in boundaries)
Frequency (f) 6 14 16 13 3
Cum. freq (< type) 6 20 36 49 52

N/2 = 26, 20 < 26 < 36; Median class is 69.5 – 79.5

26  20
Median  69.5   10  69.5  3.75  73.25 Rs.
16
Model class is 69.5 – 79.5 as maximum freq = 16 is in that class
Foundation : Paper-4 : Business Mathematics & Statistics Fundamentals [ December  2011 ] 153

16  14
Mode 69.5   10  69.5  4  73.5 Rs.
(16  14)  (16  13)

(iii) For the combined sample

100  15  150  16 3900

mean    15.6 and
100  150 250

100  9  150  16  100  (15.6  15)2  150  (15.6  16)2

variance 
100  150
900  2400  36  24
  13.44
250
Answer 30. (b)
(i) Central tendency of data :
The are statistcial constants which give an idea about the concentration of the values in the central part
of the distribution. It can be thought of as the value of the variable which is representative of the entire
distribution.
Properties : (a) It should be rigidly defined.
(b) It should be understood and calculated easily.
(c) It should be based on all observations.
(d) It should be amenable to algebraic tratment.
(e) It should be least affected by extreme values.
(f) It should be least affected by sampling fluctuations.
A frequency distribution can be taken in the form
x  x1 x2 ...... xn
f  f1 f2 ...... fn
where x1, x2, ...... xn are the values of the variable x with frequencies f1, f2 ..... fn Let f1 + f2 + ...... + fn = N. Then
N is total frequency

x 1 f1  x 2 f2  .........  x n fn
1. Arithmetic Mean 
N


2. Geometric Mean  x1 f1  x 2 f2 ......xnfn 1/N

N
3. Harmonic Mean = f1  f2  .....  fn 1
1 1
x x2 xn

4. Median : Median is defined to be the middle most variate value when the variate values are arranged
in increasing or decreasing order of magnitude.
For continuous variable arranged in a grouped frequency distribution, median is defined as
N
 F1
Median  L 1  2 h
fme
154 [ December  2011 ] Revisionary Test Paper (Revised Syllabus-2008)

L1 = lower class boundary of the median class

N = total frequency
F1 = cumulative frequency of the class preceeding the median class
fme = frequency of the median class
h = width of the median class
5. Mode : It is that value of the variate for which frequency is maximum. For grouped distribution it is
given by
fm  f1
Mode  L  h
2fm  f1  f2
L = lower limit of modal class
fm = frequency of modal class
f1 = frequency of the class preceding the modal class
f2 = frequency of the class following the modal class

(ii) Ogive less than type :

Cumulative frequency corresponding to a given variate value of a distribution is defined to be the sum
total of frequencies up to and including that variate value. This is known as cumulative frequency of less
than type. In case of a grouped frequency distribution, cumulative frequency (less than) of a class
corresponds to the upper class-boundary of that class and it is the sum total of frequencies of classes up
to and including that class.
For grouped frequency distribution of a continuous variable, cumulative, cumulative frequency distribution
of less than type can be represented graphically by means of a cumulative frequency polygon also known
as ogive less than type. To draw a cumulative frequency polygon, boundary values of each class are
located in the X axis. The cumulative frequency table provides the cumulative frequency (less than type)
corresponding to upper class boundary of a class along Y axis. For each pair of values (Ui, CFi), a point is
plotted in the graph paper. Joining all these points by straight lines, we get a cumulative frequency
polygon of ‘less than type’.
Cumulative frequency (less than)
(y)

Class Boundaries (x)