Model Test Paper - 2

IPCC Group- I
Paper - 3
Cost Accounting and Financial Management
May - 2017
1. (a) Following details are related to a manufacturing concern:
Re-order Level - 160000 units
Economic Order Quantity - 90000 units
Minimum Stock Level - 100000 units
Maximum Stock level - 190000 units
Average Lead time - 6 days
Difference between Minimum lead time and
Maximum lead time - 4 days
Calculate:
(i) Maximum consumption per day
(ii) Minimum consumption per day (5 marks)
Answer:
Difference between Minimum lead time and Maximum lead time
= 4 days
Max. lead time - Min. lead time = 4 days
Or, Max. lead time = Min. lead time + 4 days ................................(i)
Average lead time is given as 6 days i.e.
= 6 days ............................................ (ii)

Putting the value of (i) in (ii),

= 6 days

Or, Min. lead time + 4 days + Min. lead time = 12 days

Or, 2 Min. lead time = 8 days
Or, Minimum lead time = = 4 days

Putting this Minimum lead time value in (i), we get

3.1
3.2 O Solved Scanner IPCC Group- I Paper - 3
Maximum lead time = 4 days + 4 days = 8 days
(i) Maximum consumption per day:
Re-order level = Max. Re-order period × Maximum Consumption
per day
1,60,000 units = 8 days x Maximum Consumption per day
Or, Maximum Consumption per day = =20,000 units

(ii) Minimum Consumption per day:

Maximum Stock level = Re-order level + Re-order Quantity-(Min.
lead time × Min. Consumption per day)
Or, 1,90,000 units = 1,60,000 units + 90,000 units - (4 days ×
Min. Consumption per day)
Or, 4 days × Min. Consumption per day = 2,50,000 units -
1,90,000 units
Or, Minimum Consumption per day = = 15,000 units

(b) Supreme Limited is a manufacturer of energy saving bulbs. To

manufacture the finished product one unit of component ‘LED’ is
required. Annual requirement of component ‘LED’ is 72,000 units,
the cost being ` 300 per unit. Other relevant details for the year
2015 - 2016 are:
Cost of placing an order ` 2,250
Carrying cost of inventory 12% per annum
Lead time –
Maximum : 20 days
Minimum : 8 days
Average : 14 days
Emergency purchase : 5 days
Consumption –
Maximum : 400 units per day
Minimum : 200 units per day
Average : 300 units per day
 Model Test Paper O 3.3

You are required to calculate:

(i) Re-order quantity
(ii) Re-ordering level
(iii) Minimum stock level
(iv) Maximum stock level
(v) Danger level (5 marks)
Answer:
(i) Calculation of Re-order quantity:
EOQ =

=
= 3,000 units.
(ii) Calculation of Re-ordering level:
ROL = Maximum Re-order period × Maximum usage
= 20 days × 400 units per day
= 8,000 units.
(iii) Calculation of Minimum stock level:

Minimum stock level = ROL –

= 8,000 – (300 × 14)

= 8,000 – 4,200
= 3,800 units.
(iv) Calculation of Maximum stock level:

Maximum stock level = ROL –

= 8,000 - (200 × 8) + 3,000

= 8,000 – 1,600 + 3,000
= 9,400 units.
3.4 O Solved Scanner IPCC Group- I Paper - 3
(v) Calculation of Danger level:
Danger level = Minimum consumption × Emergency delivery time
= 200 units × 5 days
= 1,000 units.
(c) MFN Limited started its operation in 2011 with the total production
capacity of 2,00,000 units. The following data for two years is made
available to you:
2011 2012
Sales units 80,000 1,20,000
Total cost (`) 34,40,000 45,60,000
There has been no change in the cost structure and selling price
and it is expected to continue in 2013 as well. Selling price is ` 40
per unit.
You are required to calculate:
(i) Break-Even Point (in units)
(ii) Profit at 75% of the total capacity in 2013. (5 marks)
Answer:
2011 2012 Difference
Sales Units 80,000 1,20,000 40,000
Sale Value @ ` 40 32,00,000 48,00,000 16,00,000
Total Cost ` 34,40,000 45,60,000 11,20,000
Variable Cost per unit (change in total 11,20,000/40,000 = ` 28
cost/ change in sales volume)
Total Fixed Cost (`) 45,60,000 - 1,20,000 × 28 = ` 12,00,000
Or
34,40,000 - 80,000 × 28 = ` 12,00,000
Break-even point in units Fixed Cost/Contribution per unit
= ` 12,00,000/` (40-28)
= 12,00,000 /12 = 1,00,000 units
Capacity at 75% 1,50,000 units (2,00,000 × 75%)
Contribution per unit ` 12
Contribution (`) 1,50,000 × ` 12 = ` 18,00,000
Fixed Cost ` 12,00,000
Profit at 75% capacity Contribution - Fixed Cost
= ` 18,00,000 - 12,00,000 = ` 6,00,000
 Model Test Paper O 3.5

(d) Discuss the estimation of working capital need based on operating

cycle process. (5 marks)
Answer :
Estimation of Working Capital Need based on Operating Cycle
 Working capital is that part of the firm’s capital which is required
for financing short term asset or current assets such as cash,
marketable securities inventories etc.
 Forecasting working capital requirement is based on the
concept of operating cycle.
 The determination of operating capital cycle helps in the
forecast, control and management of working capital.
 The length of operating cycle is the indicator of performance of
management.
 The net operating cycle represents the time interval for which
the firm has to negotiate for Working Capital from its Banker. It
enables to determine accurately the amount of working capital
needed for the continuous operation of business activities.
 The duration of working capital cycle may vary depending on the
nature of the business.
 In the form of an equation, the operating cycle process can be
expressed as follows:
Operating Cycle = RWFDC
Where,
R = Raw material storage period.
W = Work-in-progress holding period.
F = Finished goods storage period.
D = Debtors collection period.
C = Credit period availed.
2. (a) The following information relates to a bus operator:
Cost of the bus ` 18,00,000
Insurance charges 3% p.a.
Manager-cum accountant’s salary ` 8,000 p.m.
Annual Tax ` 50,000
Garage Rent ` 2,500 p.m.
3.6 O Solved Scanner IPCC Group- I Paper - 3
Annual repair & maintenance ` 1,50,000
Expected life of the bus 15 years
Scrap value at the end of 15 years ` 1,20,000
Driver’s salary ` 15,000 p.m.
Conductor’s salary ` 12,000 p.m.
Stationery ` 500 p.m.
Engine oil, lubricants (for 1200 kms.) ` 2,500
Diesel and oil (for 10 kms.) ` 52
Commission to driver and conductor (shared equally) 10% of
collections
Route distance 20 km long
The bus will make 3 round trips for carrying on the average 40
passengers in each trip. Assume 15% profit on collections. The bus
will work on the average 25 days in a month.
Calculate fare for passenger-km. (8 marks)
Answer:
Statement of Operating Costs & Revenues per month
Particulars Computation ` `
Standing Charge
9333.33
Depreciation
Insurance
18,00,000 × 3% × 4,500

Manager cum
Accountants Salary given 8,000
Road tax
50,000 × 4166.67

Garage rent given 2,500

Total standing Charge 28,500
Maintenance Charge
Repairs & Maintenance
12,500 12,500
 Model Test Paper O 3.7

Running Cost
Drivers salary given 15,000
Conductors salary given 12,000
Stationery given 500
Engine oil, lubricants
= ` 2,500 6,250

Diesel oil
= ` 52 15,600 49,350

Total operating cost (excluding commission)

(85% - 10% - 75%) 90,350
Add: commission (10% on collection) 12,047
Total cost 1,02,397
Add: Profit .15% 18,070

Total takings 100% 1,20,467

Working Note:
No. of passengers = 40 (given)
No. of km. per month = 1 Bus × 3 Trips × 2 ways × 20 km. ×
25 days
= 3,000 km. p.m.
Passenger km. p.m. = 40 × 3,000 = 1,20,000.
It is given that profit= 15% of takings &
Commission = 10% of takings.
Hence,
Total Operating Costs = 100% - 15% - 10% = 75% of total
taking.
Total Takings = = 1,20,467.

Now, Commission & Profits are taken at 10% & 15% respectively on
total takings.
Fare per Passenger Km. = = ` 1.00
 3.8 O Solved Scanner IPCC Group- I Paper - 3
(b) Discuss factors that a venture capitalist should consider before
financing any risky project. (8 marks)
Answer:
Factors to be considered before Financing any Risky Project by
Venture Capitalist :
1. Technical feasibility of the new product/service should be
considered.
2. A research must be carried out to ensure that there is a market
for the new product.
3. Since the risk involved in investing in the company is quite high,
venture capitalists should ensure that the prospects for future
profits compensate for the risk.
4. Quality of the management team is a very important factor to be
considered. They are required to show a high level of
commitment to the project.
5. The technical ability of the team is also vital. They should be
able to develop and produce a new product/service.
3. (a) ABX Company Ltd. provides the following information relating to
Process-B:
(i) Opening Work-in-progress - NIL
(ii) Units Introduced - 45,000 units @ ` 10 per
unit
(iii) Expenses debited to the process:
Direct material ` 65,500
Labour ` 90,800
Overhead ` 1,80,700
(iv) Normal loss in the process - 2% of Input
(v) Work-in-progress - 1,800 units
Degree of completion
Materials - 100%
Labour - 50%
Overhead - 40%
(vi) Finished output - 42,000 units
 Model Test Paper O 3.9

(vii) Degree of completion of abnormal loss:

Materials - 100%
Labour - 80%
Overhead - 60%
(viii) Units scrapped as normal loss were sold at ` 5 per unit.
(ix) All the units of abnormal loss were sold at ` 2 per unit.
You are required to prepare:
(a) Statement of equivalent production.
(b) Statement showing the cost of finished goods, abnormal
loss and closing balance of work-in-progress.
(c) Process-B account and abnormal loss account. (8 marks)
Answer :
(a) Statement of Equivalent Production
Equivalent Production
Input Units Output Units
Material Labour Overhead
Details Particulars
% Units % Units % Units
Unit 45,000 Finished output 42,000 100 42,000 100 42,000 100 42,000
Introduced Normal loss 900 - - - - - -
(2% of 45,000)
Abnormal loss 300 100 300 80 240 60 180
Closing W-I-P 1,800 100 1,800 50 900 40 720
45,000 45,000 44,100 43,140 42,900

(b) Statement of Cost

Particulars Units Rate (`) Amount (`) Amount (`)
(i) Finished goods 42,000 17.9042 7,51,976.40
(ii) Abnormal Loss
Material 300 11.5873 3,476.19
Labour 240 2.1048 505.15
Overhead 180 4.2121 758.18 4,739.52
(iii) Closing W-I-P:
Material 1,800 11.5873 20,857.14
Labour 900 2.1048 1,894.32
Overhead 720 4.2121 3,032.71 25,784.17
3.10 O Solved Scanner IPCC Group- I Paper - 3
Cost Per Unit
Particulars Amount Units Per Unit
(`) (`)
(i) Direct Material:
Unit Introduced 4,50,000
Add: Material 65,500
5,15,500
Less: Value of normal loss (4,500)
(900 units x ` 5) 5,11,000 44,100 11.5873
(ii) labour 90,800 43,140 2.1048
(iii) Overhead 1,80,700 42,900 4.2121
17.9042
(c) Process- B A/c
Particulars Units Amount Particulars Units Amount
(`) (`)
To Input 45,000 4,50,000 By Normal loss 900 4,500
To Direct Material - 65,500 By Abnormal loss 300 4,740
To Labour - 90,800 By Finished goods 42,000 7,51,976
To Overhead 1,80,700 By Closing W-I-P 1,800 25,784
45,000 7,87,000 45,000 7,87,000

Abnormal Loss A/c

Particulars Units Amount Particulars Units Amount
(`) (`)
To Process-BA/c 300 4,740 By Cost ledger control A/c 300 600
or Bank A/c
By Costing Profit & loss A/c - 4,140
300 4,740 300 4,740
 Model Test Paper O 3.11

(b) A company wants to invest in a machinery that would cost ` 50,000

at the beginning of year 1. It is estimated that the net cash inflows
from operations will be ` 18,000 per annum for 3 years, if the
company opts to service a part of the machine at the end of year 1
at ` 10,000 and the scrap value at the end of year 3 will be ` 12,500.
However, if the company decides not to services the part, it will have
to be replaced at the end of year 2 at ` 15,400. But in this case, the
machine will work for the 4th year also and get operational cash
inflow of ` 18,000 for the 4th year. It will have to be scrapped at the
end of year 4 at ` 9,000. Assuming cost of capital at 10% and
ignoring taxes, will you recommend the purchase of this machine
based on the net present value of its cash flows?
If the supplier gives a discount of ` 5,000 for purchase, what
would be your decision? (The present value factors at the end of
years 0, 1, 2, 3, 4, 5 and 6 are respectively 1, 0.9091, 0.8264,
0.7513, 0.6830, 0.6209 and 0.5644). (8 marks)
Answer :
Option I : Purchase Machinery and Service Part at the end of
Year 1
Net Present value of cash flow @ 10% per annum discount rate.
NPV =  50,000 + + +  +
= 50,000 + 18,000 (0.9091 + 0.8264 + 0.7513)(10,000 ×
0.9091) + 12,500× 0.7513)
= 50,000 + (18,000 × 2.4868)  9,091 + 9,391
=  50,000 + 44,762  9,091 + 9,391
NPV = 4,938
Since, Net Present Value is negative therefore, this option is
not to be considered.
If Supplier gives a discount of ` 5,000 then,
NPV = + 5,0004,938 = + 62
In this case, Net Present Value is positive but very small,
therefore, this option may not be advisable.
 3.12 O Solved Scanner IPCC Group- I Paper - 3
Option II : Purchase Machinery and Replace Part at the end of
Year 2.
NPV = 50,000 + + +  +
=  50,000 + 18,000 (0.9091+ 0.8264 +0.7513)(15,400 ×
0.8264) + (27,000 × 0.6830)
=  50,000 + 18,000 (2.4868)(15,400 × 0.8264) + (27,000 ×
0.6830) =  50,000 + 44,762 (15,400 × 0.8264) + (27,000 ×
0.6830)
=  50,000 + 44,76212,727 + 18,441
=  62,727 + 63,203
= + 476
Net Present Value is positive, but very low as compared to the
investment.
If the Supplier gives a discount of ` 5,000 then
NPV = 5,000 + 476 = 5,476
Decision : Option II is worth investing as the net present value
is positive and higher as compared to Option I.
4. (a) What do you understand by Key factor ? Give two examples of it.
(8 marks)
Answer :
Key factor is a factor which at a particular time or over a period limits
the activities of an undertaking. It may be the level of demand for the
products or service or it may be the shortage of one or more of the
productive resources.
Examples of key factors are :
1. Shortage of raw material.
2. Shortage of Labour.
3. Plant capacity available.
4. Sales capacity available.
5. Cash availability.
 Model Test Paper O 3.13

(b) Following information relates to ABC company for the year 2016:
(i) Projected sales: (` in lakhs)
Month August September October November December
Sale 35 40 40 45 46
(ii) Gross profit margin will be 20% on sale.
(iii) 10% of projected sale will be cash sale. Out of credit sale of
each month, 50% will be collected in the next month and the
balance will be collected during the second month following the
month of sale.
(iv) Creditors will be paid in the first month following credit purchase.
There will be credit purchase only.
(v) Wages and salaries will be paid on the first day of the next
month. The amount will be ` 3 lakhs each month.
(vi) Interim dividend of ` 2 lakhs will be paid in December 2016.
(vii) Machinery costing ` 10 lakhs will be purchased in September
2016. Repayment by instalment of ` 50,000 p.m, will start from
October 2016.
(viii) Administrative expenses of ` 1,00,000 per month will be paid in
the month of their incurrence.
(ix) Assume no minimum cash balance is required. Opening cash
balance as on 01-10-2016 is estimated at ` 10 lakhs.
You are required to prepare the monthly cash budget for the 3
month period (October 2016 to December 2016). (8 marks)
Answer:
Cash Budget
(from October, 2016 to December, 2016)
Particulars October November December
Opening Cash balance 10,00,000 14,25,000 21,25,000
Receipts:
Cash Sales 4,00,000 4,50,000 4,60,000
Collection from Debtors (W.N.1) 33,75,000 36,00,000 38,25,000
(A) 47,75,000 54,75,000 64,10,000
3.14 O Solved Scanner IPCC Group- I Paper - 3

Payments
Payment to creditors (W.N. 2) 29,00,000 29,00,000 33,00,000
Wages & salaries 3,00,000 3,00,000 3,00,000
Interim dividend – – 2,00,000
Installment of Asset 50,000 50,000 50,000
Administration expenses 1,00,000 1,00,000 1,00,000
(B) 33,50,000 33,50,000 39,50,000
Closing Cash Bal. (A - B) 14,25,000 21,25,000 24,60,000
Working Notes:
1. Calculation of collection from Debtors:
Particulars August September October November December
Credit sale @
90% of sales 31,50,000 36,00,000 36,00,000 40,50,000 41,40,000
50% collection in
next month – 15,75,000 18,00,000 18,00,000 20,25,000
Remaining in
second month – – 15,75,000 18,00,000 18,00,000
Total collection 33,75,000 36,00,000 38,25,000

2. Calculation of purchase:
Payments to October November December
creditors
For September 29,00,000 – –
purchase {(80% of ` 40)-3}
For October 29,00,000
purchase {(80% of ` 40)-3}
For November – – 33,00,000
purchase {(80% of ` 45)-3}
Total of payment 29,00,000 29,00,000 33,00,000
made to creditors
 Model Test Paper O 3.15

5. (a) A company has fixed cost of ` 90,000, Sales ` 3,00,000 and Profit
of ` 60,000.
Required :
(i) Sales volume if in the next period, the company suffered a loss
of ` 30,000.
(ii) What is the margin of safety for a profit of ` 90,000? (4 marks)
Answer :
Fixed Cost (Given) = ` 90,000
Sales = ` 3,00,000
Profit = ` 60,000
Contribution = Fixed Cost + Profit = ` 1,50,000
P/V Ratio = = = 50 %

(i) Calculation of sales volume if there is loss of ` 30,000:

Sales =

= = = 1,20,000

(ii) Calculation of margin of safety for profit of ` 90,000:

Margin of Safety = = ` 1,80,000

(b) (i) Explicit costs

(ii) Engineered costs (4 marks)
Answer:
(i) Explicit costs: These are also known as out of pocket costs.
They refer to costs involving immediate payment of cash.
Salaries, postage and telegram, printing and stationery, interest
on loan etc. are some of the examples of explicit costs involving
immediate cash payment.
(ii) Engineered Costs: These are cost that result specifically from
a clear cause and effect relationship between inputs and
outputs. The relationship is usually personally observable
examples of input are direct material costs, direct labour costs,
etc.
Examples of output are cars, computers, etc.
3.16 O Solved Scanner IPCC Group- I Paper - 3
(c) Explain the limitations of profit maximization objective of Financial
Management. (4 marks)
Answer:
Arguments 1. It leads to exploitation of workers and
against Profit consumers
Maximisation 2. It ignores the risk factor associated with
profit.
3. Profit in itself is a vague concept and means
differently to different people.
4. It is a narrow concept at the cost of social
and moral obligations.
Limitation of 1. It ignores the risk factor as well as timing of
Profit returns.
Maximization 2. The concept of profit maximisation is vague
objectives and narrow.
3. It emphasizes the short-run profitability and
short-term projects.
4. It may cause decrease in share price.
5. It fails to consider the social responsibility of
business.
6. It may allow decisions to be taken at the cost
of long run stability and profitability of the
concern.
7. The profit is only one of the many objectives
of a modern firm.
8. It ignores the time and risk factors
 Model Test Paper O 3.17

(d) (v) How is return on capital employed calculate d ? What is its

significance?
(vi) What is quick ratio? What does it signify? (4 marks)
Answer :
(v) Return on capital employed =
Return = Profit after tax
+ Tax
+ Interest
+ Non trading Expenses
 Non operating incomes
Capital employed = Equity share capital
+ Preference share capital
+ Reserves & surplus + P & L (Cr. Bal.) + Long term loans
+ Debentures
 Non trading investment - Fictitious Assets
 P & L (Dr. Bal)
Significance of Return on capital employed:
1. Overall profitability of the business is highlighted
2. Comparison of Return on capital employed with rate of
interest debt leads to financial leverage.
(vi) Quick ratio also termed as “acid test ratio” is one of the best
measures of liquidity.
It is worked out as follows :
Quick Ratio =
In the above formula:
Quick Assets = Current Assets  Inventories
Quick liabilities = Current liabilities  Bank Overdraft  Cash
credit
Quick ratio of 1:1 is an ideal ratio significance :
It indicates whether the firm is in a position to pay its
current liabilities within a month or immediately.
 3.18 O Solved Scanner IPCC Group- I Paper - 3
6. (a) The following information relate to Process A:
(i) Opening Work-in-Progress 8,000 units at ` 75,000
Degree of Completion:
Material 100%
Labour and Overhead 60%
(ii) Input 1,82,000 units at ` 7,37,500
(iii) Wages paid ` 3,40,600
(iv) Overheads paid ` 1,70,300
(v) Units scrapped 14,000
Degree of Completion:
Material 100%
Wages and Overheads 80%
(vi) Closing Work-in-Progress 18,000 units
Degree of Completion:
Material 100%
Wages and Overheads 70%
(vii) Units completed and transferred 1,58,000 to next process
(viii) Normal loss 5% of total input including opening WIP
(ix) Scrap value is ` 5 per unit to be adjusted out of direct material
cost
You are required to compute on the basis of FIFO basis:
(i) Equivalent Production
(ii) Cost Per Unit
(iii) Value of Units transferred to next process. (8 marks)
 Model Test Paper O 3.19

Answer:
(i) Statement of Equivalent Production
(Under FIFO Method)
Input Output Equivalent Production
Particulars Units Particulars Units Materials Labour &
Overheads
(%) Units (%) Units
Opening WIP 8,000 Transfer to next Process:
Introduced 1,82,000 Opening WIP completed 8,000 - - 40 3,200
Introduced & completed 1,50,000 100 1,50,000 100 1,50,000
Normal loss 5%
(8,000 +1,82,000) 9,500 - - - -
Abnormal loss 4,500 100 4,500 80 3,600
Closing WIP 18,000 100 18,000 70 12,600
1,90,000 1,90,000 1,72,500 1,69,400
(ii) Computation of Cost per unit
Particulars Materials Labour Overheads
(`) (`) (`)
Input of Materials 7,37,500 - -
Expenses - 3,40,600 1,70,300
Total 7,37,500 3,40,600 1,70,300
Less: Sale of Scrap (9,500 units × ` 5) (47,500) - -
Net cost 6,90,000 3,40,600 1,70,300
Equivalent Units 1,72,500 1,69,400 1,69,400
Cost Per Unit 4.0000 2.0106 1.0053
Total cost per unit = ` (4.0000 + 2.0106 + 1.0053) = ` 7.0159
(iii) Value of units transferred to next process:
Particulars Amount Amount
(`) (`)
Opening W-I-P 75,000
Add: Labour (3,200 units × ` 2.0106) 6,434
Overhead (3,200 units × ` 1.0053) 3,217 84,651
New introduced (1,50,000 units × ` 7.0159) 10,52,385
11,37,036
3.20 O Solved Scanner IPCC Group- I Paper - 3
(b) Balance Sheets of ABC Limited as on March 31,2009 and March
31,2010 are as under :

Liabilities 31.3.2009 31.3.2010 Assets 31.3.2009 31.3.2010

` ` ` `

Share Capital 40,00,000 40,00,000 Land and Building 30,00,000 28,00,000

General Reserve 8,00,000 9,00,000 Plant and Machinery 36,00,000 35,00,000
Profit and Loss A/c 5,00,000 7,20,000 Investments
10% debentures 20,00,000 16,00,000 (long-term) 8,00,000 7,44,000
Bank Loan (long term) 10,00,000 12,00,000 Stock 9,60,000 17,00,000
Creditors 8,00,000 11,60,000 Debtors 12,00,000 15,96,000
Outstanding Expenses 40,000 50,000 Prepaid Expenses 1,00,000 80,000
Proposed dividend 6,00,000 7,20,000 Cash and Bank 2,80,000 1,70,000
Provision for taxation 2,00,000 2,40,000

99,40,000 1,05,90,000 99,40,000 1,05,90,000

Additional Information :
(i) New machinery for ` 6,00,000 was purchased but an old
machinery costing ` 2,90,000 was sold for ` 1,00,000 and
accumulated depreciation thereon was ` 1,50,000.
(ii) 10% debentures were redeemed at 20% premium.
(iii) Investments (long term) were sold for ` 90,000 and its profit was
transferred to general reserve.
(iv) Income-tax paid during the year 2009-10 was ` 1,60,000.
(v) An interim dividend of ` 2,40,000 has been paid during the year
2009-10.
(vi) Assume the provision for taxation as current liability and
proposed dividend as non-current liability.
(vii) Investments (long term) are non-trade investments.
Required :
(i) Schedule of changes in working capital.
(ii) Funds flow from operations for the year ended March 31,2010.
(8 marks)
 Model Test Paper O 3.21

Answer :
(i) Schedule of Changes in Working Capital:
Particulars Working Capital
31.3.2004 31.3.2010 Increase Decrease
(A) Current Assets
Stock 9,60,000 17,00,000 7,40,000
Debtors 12,00,000 15,96,000 3,96,000
Prepaid Expenses 1,00,000 80,000 20,000
Cash and Bank 2,80,000 1,70,000 1,10,000
Total (A) 25,40,000 35,46,000
(B) Current Liabilities
Creditors 8,00,000 11,60,000 3,60,000
Outstanding Expenses 40,000 50,000 10,000
Provision for Taxation 2,00,000 2,40,000 40,000
Total (B) 10,40,000 14,50,000
Working Capital 15,00,000 20,96,000 11,36,000 5,40,000
(A) – (B)
Increase in Working Capital 5,96,000
Total 15,00,000 20,96,000 11,36,000 11,36,000
(ii) Funds flow from Operations for the year ended
March 31, 2010
Adjusted Profit and Loss A/c
Particulars ` Particulars `
To General Reserve 66,000 By Balance b/d 5,00,000
To Depreciation: By Funds from 21,26,000
On Land & Building 2,00,000 Operations
On Plant & Machinery 5,60,000 7,60,000 (Balancing
To Loss on Sale of Machine 40,000 figure)
To Premium on Redemption of
Debentures 80,000
To Proposed Dividend 7,20,000
To Interim Dividend 2,40,000
To Balance c/d 7,20,000
26,26,000 26,26,000
Working Notes:
(i) Depreciation on Land and Building = ` 30,00,000 – 28,00,000
= ` 2,00,000
(ii) Loss on Sale of Old Machine = ` 2,90,000 (Cost) –1,50,000
(Cumulative Dep.) – 1,00,000 (Sale Value) = 40,000
 3.22 O Solved Scanner IPCC Group- I Paper - 3
(iii) Plant and Machinery A/c
Particulars (`) Particulars (`)
To Balance b/d 36,00,000 By Bank A/c (sold) 1,00,000
To Bank A/c 6,00,000 By Profit & Loss A/c 40,000
(Purchases) (Loss on Sales)
By Depreciation 5,60,000
(Balancing figure)
By Balance c/d 35,00,000
42,00,000 42,00,000

(iv) Premium on Redemption of Debentures

Amount of Debentures Redeemed = ` 20,00,000 - 16,00,000
= ` 4,00,000
Premium = 20% of 4,00,000 = ` 80,000
7. Answer any four of the following:
(a) Following details relating to product X during the month of April,
2009 are available :
Standard cost per unit of X :
Materials : 50 kg @ ` 40/kg
Actual production : 100 units
Actual material cost : ` 42/kg
Material price variance : ` 9,800 (Adverse)
Material usage variance : ` 4,000 (Favourable)
Calculate the actual quantity of material used during the month April,
2009. (4 marks)
Answer :
Material price variance = AQ (Std. price per kg - Actual price per kg)
= () 9800 = AQ (40  42)
= () 9800 = AQ ( 2)
 AQ = = 4,900

Actual quantity of material used during the month of April = 4,900 kg.
 Model Test Paper O 3.23

(b) Explain the terms notional profit and retention money in contract
costing. (4 marks)
Answer :
Notional Notional Profit is the excess of income till date over
Profit expenditure till date on a contract. Since actual profit
can be computed only after the contract is complete,
notional profit is used to recognise profit during the
course of contract.
The notional profit is computed as follows:
Value of work certified xxx
Add: Cost of work uncertified x xxxx
Less: Costs incurred till date x
 Notional profit xxx
Retention The contractor gets money on the basis of work
Money completed as certified by the certificate of work
done. Sometimes the customer does not pay the
whole value of work done. As per the agreement, a
certain percentage of the value of work done is
retained by the customer. This is called Retention
Money.
The objective behind Retention Money is to place the
customer in a favourable position as against the
contractor. It safeguards the interest of the customer
as against failure of the contractor to fulfill any of the
clause of the agreement or against the defective
work found later on.
(c) Distinguish between Fixed overheads and Variable overheads.
(4 marks)
Answer :
Fixed Overheads Vs. Variable Overheads
Fixed overheads are not affected by any variation in the volume of
activity, e.g., managerial remuneration, rent etc. These remain the
same from one period to another except when they are deliberately
changed. Fixed overheads are generally variable per unit of output
or activity e.g Rent, Insurance, Depreciation, Audit fees etc.
3.24 O Solved Scanner IPCC Group- I Paper - 3
Whereas, the variable overheads that change in proportion to
the change in the volume of activity or output, e.g., power
consumed, consumable stores etc. The variable overheads are
generally constant per unit of output or activity. e.g. direct material,
direct labour, commission on sale.
(d) Z Ltd.'s operating income (before interest and tax) is ` 9,00,000. The
firm's cost of debts is 10 percent and currently firm employs
` 30,00,000 of debts. The overall cost of capital of firm is 12 percent.
Required :
Calculate cost of equity. (4 marks)
Answer :
Total Value of firm =
= 75,00,000
Debt capital :- 30,00,000
Equity capital 45,00,000

.12 = .10 + Ke

.12 = .10 (.4) + Ke (.6)

.12 = .04 + Ke .6
.08 = Ke .6
Ke =

= .1333
= 13.33%
(e) Write a short note on functions of Treasury department. (4 marks)
Answer:
Functions of Treasury Department
Treasury Department conducts efficient management of liquidity and
financial risk in business. Earlier it was viewed as a peripheral
activity conducted by back-office, but today it plays a very vital role
in corporate management.
 Model Test Paper O 3.25

The major functions of treasury department are as follows :

1. Setting up of corporate financial objective :
(i) Financial and treasury policies.
(ii) Financial and treasury systems.
(iii) Financial aims and strategies.
2. Corporate Finance :
(i) Equity capital management.
(ii) Project finance.
(iii) Joint ventures.
(iv) Business acquisition .
(v) Business sales.
(vi) Equity capital management.
3. Liquidity Management :
(i) Working capital management.
(ii) Money management.
(iii) Money transmission management.
(iv) Banking relationships and arrangements.
4. Funding Management :
(i) Sources of fund.
(ii) Funding policies.
(iii) Types of funds.
(iv) Funding procedures.
5. Currency Management :
(i) Exposure policies and procedures.
(ii) Exchange regulations.
(iii) Exchange dealings.
6. Other :
(i) Risk management.
(ii) Insurance management.
(iii) Corporate transaction.
(iv) Pension fund investment management.