C.S. Executive Acc. & Cost Dec.09 Solved Ans. 1
QN. 1 (a) State, with reasons in brief, whether the following statements are correct or incorrect:
(i) Interest on debentures is payable only when there is profit.
(ii) An underwriter while entering into a contract for issue of shares should be a company.
(iii) Partly paid-up preference shares can be redeemed.
(iv) Dividend can be paid on calls-in-advance.
(v) Interest cannot be paid out of capital during construction period. (2 marks each)
(b) Choose the most appropriate answer from the given options in respect of the following :
(i) As per the provisions laid down in Table-A of Schedule-I of the Companies Act, 1956, the amount of call as
the percentage of the face value of shares should not exceed —
(a) 10%
(b) 25%
(c) 20%
(d) None of the above.
(ii) The minimum percentage of the face value of shares that should be called for as application money is —
(a) 5
(b) 10
(c) 15
(d) 20.
(iii) Debentures issued as collateral security will be debited to —
(a) Bank account
(b) Debentures suspense account
(c) Debentures account 4
(d) Collateral security account.
(iv) Preliminary expenses are —
(a) Current liability
(b) Current assets ,
(c) Fictitious assets
(d) Contingent liability.
(v) As per section 77A of the Companies Act, 1956, every buy-back should In-completed within a period of —
(a) 3 months from the elate of passing special resolution
(b) 12 months from the date of passing special resolution
(c) 6 months from the date of passing special resolution
(d) 1 month from the date of passing special resolution. (1 mark each)
(c) Re-write the following sentences after filling-ill the blank spaces with appropriate word(s)/figure(s) :
(i) Issue of debentures to vendors is known as issue of debentures ______.
(ii) Profit prior to incorporation should be credited to _.._____ account.
(iii) If forfeited shades are re-issued at a discount, the amount of discount should in no case exceed the
amount credited to _______,
(iv) Accounting standards are formulated under the authority of the __.______.
(v) Yield basis valuation of shares may take the form of valuation based on rate of return and _______.
(1 mark each)
Ans. 1 (a) (i) Incorrect, Interest on debentures is a liabilities of a Company and has to be paid each if a Company
incurs losses.
(ii) Incorrect, an underwriter is a person who agrees to take a specified number of shares or debentures, or a
specified amount of debenture stock in the event of public not subscribing for them in consideration for a commission
and it can be any person a institutions need not necessarily be a Company.
(iii) Incorrect, as per section of Companies Act; only fully paid preference shares can be redeemed. If partly paid
shares are to be redeemed, call must be made first; and then redemption must be carried out.
(iv) Incorrect, Dividend is to be paid only on called up value of shares and not on calls paid up in advance.
(v) Correct, Interest paid out of capital during construction period needs to be capitalized to the respective asset
during the construction period.
Ans. 1 (b) (i) (d) None of the above
(ii) (a) 5%
(iii) (c) Debentures Account
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 2
(iv) (c) Fictitious Assets.
(v) (b) 12 months from the date of passing Special Resolution.
Ans. 1 (c) (i) Other than Cash
(ii) Capital Reserve A/c
(iii) Share forfeited A/c
(iv) Accounting Standard Board
(v) Rate of Dividend.
QN .2. (a) What is amortisation period of intangible assets ? Can useful life of the intangible assets exceed the
period of legal rights ? (6 marks)
(b) Suraj Ltd. issued to public 1.50,000 equity shares of Rs.100 each at par. Rs.60 per share? were payable along
with the application and the balance on allotment, This issue was underwritten equally by A, B. and C for a
commission of 3%. Applications for 1,40,000 shares were received as per details given below :
Underwriter Firm
Underwriting
Applications
Marked
Applications
Total
Applications
A
B
C
Unmarked Applications
5,000
5,000
3,000
--
40,000
46,000
34,000
--
45,000
51,000
37,000
7,000
1,40,000
It was agreed to credit the unmarked applications to A and C. Suraj Ltd. accordingly made the allotment and received
the amounts due from the public. The underwriters settled their accounts.
You are required to — (i) prepare a statement of liability of the underwriters 1 assuming that the benefit of firm
underwriting is given to individual underwriters; ! and (ii) journalise the above transactions (including cash) in the
books of Suraj Ltd. (6 marks)
(c) Give the necessary journal entries both at the time of issue and redemption of debentures in the following case :
Eagle Ltd. issued Us.1.00,000, 15% debentures of R.s.lOO each at a discount of 5%, but redeemable at a
premium of 591 at the end of 4 years. (3 marks)
Ans. 2 (a) Amortization period of intangible assets depends upon its useful life; it can be upto a maximum period of
10 years unless it is clearly evident useful life is long than covers. If economic benefits from intangible assets are
achieved through legal rights granted for finite period the useful life of intangible should not exceed legal rights period
unless the legal rights is renewable and renewal is almost certain.
Ans. 2 (b) Statement showing liability of each underwriters
Under writers
Particulars A B C
Gross liabilities
(-) Firm underwriting
(-) Marked application
Excess of 1000 share of B’s will be credited
to A & C in their Gross liability ratio.
Less : Unmarked Application distributed to
A & C in their Gross liability ratio
Add : firm underwriting
50,000
5,000
45,000
40,000
5,000
(500)
4,500
(3500)
1000
5000
50,000
5,000
45,000
46,000
(1000)
+ 1000
NIL
--
NIL
5000
50,000
3,000
47,000
34,000
13,000
(500)
12,500
(3500)
9000
3000
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 3
Net liability
6000
5000
12000
(ii) Journal Entries in the Books of Suraj Ltd.
Bank A/c --- Dr. 8400000
To Share Application A/c 8400000
(Being application money received on 140000
shares at Rs.60 per share from public)
Share Application a/c - Dr. 8400000
To Share Capital A/c 8400000
(Being money received on share application
on 140000 shares transferred to share capital A/c)
A’s A/c -- Dr. (6000 x 60) 360000
B’s A/c -- Dr. (5000 x 60) 300000
C’s A/c -- Dr. (12000 x 60) 720000
To Share Capital A/c 1380000
(Being application money due from underwriters
Including firm underwriting)
Underwriting Commission A/c – Dr. 450000
To A’s A/c 150000
To B’s A/c 150000
To C’s A/c 150000
(Being underwriting commission due to underwriters)
Bank A/c -- Dr. 930000
To A/s A/c 210000
To B’s A/c 150000
To C’s A/c 570000
(Being amount received from underwriters on
account of share application less underwriting
commission due to them)
Ans. 2 (c)
Bank A/c --- Dr. 9500000
Loss on issue of debentures A/c -- Dr. 1000000
To 15% debentures A/c 10000000
To Premium on redemption of debentures A/c 500000
At the time of Issue
Bank A/c -- Dr. 9500000
Discount on issue of debentures A/c – Dr. 500000
To 15% debentures A/c 10000000
(Being 15% debentures issued at a
Discount of 5%)
At the time of Redemption
15% debentures A/c -- Dr. 1000000
Premium on Redemption of debentures A/c 500000
To Bank A/c 10500000
(Being 15% debentures redeemed at a
premium of 5%)
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 4
QN. 3. (a) On the basis of following information, compute the value of an equity share and a preference share of
both Chelsi Ltd. and Nonsi Ltd. — (i) when only a few shares are sold; and (ii) when controlling shares are to he sold :
Chelsi Ltd.
(Rs.)
Nensi Ltd.
(Rs.)
Profit after tax
12% Preference share capital (shares of Rs.100 each)
Equity share capital (shares of Rs.10 each)
10,00,000
10,00,000
50,00,000
10,00,000
20,00,000
40,00,000
Assume that market expectation for both companies is 15%; and 80% of the profits are distributed. (6 marks)
(b) What do you understand by 'provision for taxation’ ? What factors are to be considered while estimating the
provision for taxation ? (6 marks)
(c) Ronny Ltd. forfeited 200 shares of Rs.10 each, Rs.8 per share being called-up on which a shareholder paid
application and allotment money of Ks.5 per share but did not pay the first call money of Rs.3 per share. Of these
forfeited shares, 150 shares were subsequently re-issued by the company as fully paid-up for Rs.8 per share. Give
journal entries for the forfeiture and re-issue of shares.
Ans. 3 (a) Assumption : - In the given question no separate market explanation is given for equity & preference
shares so it is presumed that a slightly minor dividend rate (15% - 2%) = 13% may be applied for valuation of
preference shares.
Preference dividend coverage Ratios : -
Profit after tax
Chelsi Ltd. = ------------------------ x 100
Preference dividend
1000000
= ------------ x 100 = 8.33 %
120000
1000000
Nensi Ltd. = ------------ x 100 = 4.16%
240000
The market explanation rate may be adjusted for the factors like ability to pay preference dividend. In this question
chelsi ltd. better preferences dividend coverage ratio as compared to Nensi Ltd. coverage ratio.
∴ Market expectations rate for Nensi Ltd should be mere by 0.5%
∴ Market expectation rate for Nensi Ltd should be 13.5%
Valuation of Preference Share : -
12%
Chelsi Ltd => ------ x 100 = Rs. 92.31/-
13%
12%
Nensi Ltd. => -------- x 100 = Rs. 88.88/-
13.5%
Calculation of Equity Shares : - (i) when only after Shares are sold.
Dividend Capitalization Method is more appropriate
Earnings x Distribution ratio
Dividend per Share = ----------------------------------
No. of Equity Shares
(1000000 – 120000) x 80%
Chelsi Ltd. => ---------------------------------
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 5
500000
= 1.408
(1000000 – 240000) x 80%
Nensi Ltd. => -----------------------------------
4000000
= 1.52
Valuation of Shares : -
1.408
Chelsi Ltd. = -------- x 10 = Rs. 9.39
1.5
(10 x 15%)
1.52
Nensi Ltd. = ------ x 10 = Rs.10.13
1.5
(ii) When Controlling Shares are to be sold : -
(EPS capitalization method is more appropriate)
EPS
Value of Equity Share = ------------------------------- x 100
Market Capitalization Rate
Particulars Chelsi Ltd. Nensi Ltd.
Profit after tax
Less : Preference dividend
Profit available for equity shareholders
No. of equity shares
EPS
Value of equity shares =
1000000
120000
880000
500000
= 1.76
1.76
------ x 10
1.5
= Rs. 11.73
1000000
240000
760000
400000
1.9
1.9
= ----- x 10
1.5
= Rs.12.67
Ans. 3 (b) Since it would take quite some time for the Company to get its income assessed; it is usual to provide
some amount for income tax on profits at current roles of taxation. Such provision is debited to Profit and Loss A/c
above the live and credited to ‘Provision for Taxation A/c’ which appears in the Balance Sheet under the head “Current
liabilities and Provisions.”
Just as provision is made this year, provision would of have been made the previous year and such provisions called
‘old provision’ would appear in the Trial Balance on the credit side. When such a provision exists income the paid must
be debited to provision account and not to Profit and Loss Account. If the old provision is in excess of income tax paid,
such surplus provision should be shown the credit side of Profit and Loss Account below the line. Likewise if old
provision is not sufficient, further debit is made to Profit and Loss Account below the line. These adjustments are
shown below the line that the current profits ma not be affected due to these items.
Ans. 3 (c) Journal entries in the books of Ronny Ltd.
(For forfeiture of shares)
Share Capital A/c - Dr. (200 x 8) 1600
To Forfeited shares A/c (200 x 5) 1000
To Share first call A/c (200 x 3) 600
(Being forfeiture of shares of a shareholder)
(At the time of Reissue)
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 6
Bank A/c --- Dr. (150 x 8) 1200
Forfeited Shares A/c --- Dr. 300
To Share Capital A/c (150 x 10) 1500
(Being reissue of 150 shares of Rs.10 each
credited as fully paid for Rs.8 per share)
Forfeited Shares A/c -- Dr. 450
To Capital Reserve A/c 450
(150 x 5 – 300 = 450)
(Being profit on reissue of 150 forfeited
shared is transferred to capital reserve)
QN 4. (a) Anuj Ltd. had an accumulated amount, of general n-serve of Rs. 5,00,000. The directors of Anuj Ltd.
decided to declare bonus shares out of the general reserve and to utilise the dividend in the following manner.
(i) To make: 10,000 partly paid sharers of Rs.10 each paid-up at Rs.ij each, as fully paid-up.
(ii) To distribute 4 fully paid bonus shares ol'K.s.10 each at Rs.12 each, for 5 fully paid existing 20,000 shares of
Rs.10 each.
Show journal entries in the books of Anuj Ltd. to give effect to the above adjustments. (6 marks)
(b) "Issue of bonus shares by the subsidiary company does not affect the cost of control." Comment. (6 marks)
(c) "Accounting Standards are mandatory for all companies." Comment. (3 marks)
Ans. 4 (a) Journal Entries in the books Anuj ltd.
General Reserve A/c -- Dr. (10000 x 4) 40000
To Equity Share Capital A/c 40000
(Being partly paid shares commuted into
fully paid up shares the amount being
transferred from general reserve)
General Reserve A/c -- Dr. 192000
To Bonus to shareholders A/c 192000
(Being general reserve used to issue
bonus shares)
Bonus to Shareholders A/c -- Dr. 192000
To Equity Share Capital A/c 192000
(Being bonus shares issued for
consideration other than cash 4 shares
for every 5 shares hold for existing 20000
shares of Rs.10 each at Rs.12 each)
4
( 20000 x ---- x 12 = 192000 )
5
Ans. 4 (b) “Issue of bonus shares by the Subsidiary Company does not affect the cost of control”. This statement is
correct. Since if Subsidiary Company issues shares then Holding Company will also get a part of bonus shares of
Subsidiary Company in the proportion of Share Capital held by hire in Subsidiary and the Holding Company will remain
the ultimate Holding Company even after issue of bonus shares by the subsidiary.
For eg :- If A ltd is the Holding Company and B ltd is the Subsidiary Company; A ltd holds 60% of the Share Capital of
the Subsidiary Company. Now if B Ltd (Subsidiary Company) issues bonus shares in the ratio of 1 share for every 5
shares hold and existing Share Capital of B ltd is Rs.100000 (10000 shares of Rs.10 each hence B ltd will issue 10000
x 1/5 = 2000 shares and A ltd’s share = 2000 shares x 60% = 1200 shares
Hence A ltd’s total investment in B Ltd.
= 100000 x 60% = Rs. 60000 + Bonus shares Rs.12000
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 7
Rs. 12000
1200 shares of Rs.10 each = ------------
Rs. 72000
Minorities Interest = Rs.100000 x 40% = 40000
+ Bonus shares = 800 shares x 10 = 8000 = 48000
Hence Holding Company remains Holding Company even after the issue of bonus shares by Subsidiary Company.
Ans. 4 (c) The notified Accounting Standards are mandatory for all Companies and their auditors except as exempted
/ related to SMCs.
Exemptions/relations to SMCs – The SMCs are given the following relaxation in complying the notified Accounting
Standards -
• SMCs need not prepare Cash Flow Statement as per AS-3 and need not to disclose the segment reporting as per
AS-17.
• The SMCs have been given following relaxation as regards AS-15 "Employee Benefits"
- SMCs need not comply paras 11 to 16 of AS-15 to extent that deal with recognition and measurement of
short-term accumulated compensating absences.
- Discounting the amount payable after 12 months of Balance Sheet as regards defined contribution plans
and termination benefits.
- Recognition, measurement and disclosure principles in respect of defined benefit plans and other long-term
employee benefits plan. However such enterprises should provide and disclose the accrued liability in
respect of defined benefit plan and other long-term employee benefit plan as per actuarial valuation based
on projected unit credit method and discount rate based on yield on Government bonds.
• SMCs need not disclose diluted EPS as per AS-20 "Earning Per Share".
• SMCs need not comply with disclosure requirements regarding operating leases of sub-paras (b) & (d) of para 46
and sub-paras (a), (b) & (e) of para 25 of AS-19 "Leases" and sub-paras (a) & (f) of para 37 and sub-paras (c),
(e) & (f) of para 22 of AS-19 regarding disclosure for finance lease by the lessor and lessee respectively.
• Value in use has been differently defined for SMCs which provides and alternate to calculate value in use based
on a reasonable estimate of future cash flows.
• SMCs are exempt from disclosure requirements of paras 66 and 67 of AS-29 regarding provisions and its
descriptions.
QN. 5. (a) State, with reasons in brief, whether the following statements are correct, or incorrect :
(i) All long-term costs are controllable.
(ii) Rent on own building is not included in cost accounts.
(iii) Under differential piece rate of incentive scheme, there is no encouragement to improve the performance
of the workers.
(iv) By job rotation, labour turnover can be controlled/reduced upto some extent.
(v) Administration overheads are incurred due to management policy and they are easily controllable.
(2 marks each)
(b) Choose the most appropriate answer from the given options in respect of the following :
(i) The most suitable cost system where the products differ in type of materials and work performed is —
(a) Job costing
(b) Process costing
(c) Operating costing
(d) None of the above.
(ii) Current liabilities are equal to —
(a) Working capital + current assets
(b) Working capita! - current assets
(c) Current assets - working capital
(d) Current assets + working capital,
(iii) Non-controllable cost is the cost which —
(a) IS not subject to control at any level of managerial supervision
(b) Cannot Lie controllable (luring a particular financial year
(c) Cannot be controllable at any cost
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 8
(d) None of the above,
(iv) Re-ordering level is equal to —
a. Maximum consumption x minimum re-order period
b. Maximum consumption x maximum re-order period
c. Minimum consumption x minimum re-order period
d. Normal usage x normal delivery period.
(v) A budget designed to remain unchanged irrespective of the level of activity actually attained is called.-- .
(a) Master budget
(b) Fixed budget
(c) Current budget
(d) Flexible budget. ( 1 mark each )
(c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figures) :
(i) Material losses due to abnormal reasons should be transferred to .........
(ii) ………… determines the priorities of functional budgets,
(iii) The ratio of total liquid assets to current liabilities is known as ………….
(iv) Break-even chart is the graphical relationship between
(v) ………………… is the allotment of proportion of items of cost to cost centre/cost units. (1 mark each)
Ans. 5 (a)
(i) Correct; in long run all costs are controllable, since no cost is fixed all are variable in long run and moreover no
cost are uncontrollable it is only in relation to a specified individual that me may specify a particular cost either
controllable or uncontrollable.
(ii) Incorrect; Rent of own building is a notional or imputed cost; and it is also included in Cost Account.
(iii) Incorrect, since in differential piece rate of incentive system higher reward is paid to efficient maker hence it
acts as an encouragement to improve the performance of markers.
(iv) True; Job rotation leads to change in monotonous job of markers which controls labour turnover to a certain
extend since workers requirements of better jobs are fulfilled.
(v) True; Administration overheads are indirect and covers all expenditure incurred in formulating the policy,
directing the organization and controlling the operations of a concern; and they can be controlled by the
management.
Ans. 5 (b) (i) (a) Job Costing
(ii) (b) Working Capital – Current Assets
(iii) (d) None of the above
(iv) (b) Maximum Consumption x Maximum Reorder Period
(v) (a) Master Budget
Ans. 5 (c) (i) Costing Profit and Loss Account
(ii) Functions
(iii) Acid Test Ratio
(iv) Cost and sale
(v) Allocations
QN. 6 (a) The sales turnover and profit during two periods were as follows :
Period- 1 ---- Sales : Rs.20 lakh; and Profit : Rs.2 lakh
Period- 2 ---- Sales : Rs.30 lakh; and Profit : Rs. 4 lakh
Calculate :
(i) P/V ratio;
(ii) Sales required to earn a profit of Its, 5 lakh; and
(iii) Profit when sales are Rs.10 lakh, (6 marks)
(b) The total overhead expenses of a factory are Its. 4,46,380. Taking into account the normal working of the factory,
overheads were recovered from production at Ks.1,25 per hour. The actual hours worked were 2,93,104. Slow would
you proceed to close the books of account, assuming that besides 7,800 units produced of which 7,000 were sold ?
There' were 200 equivalent units in work-in-progress.
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 9
On investigation, it was found that 50% of the unahsorbed overheads were on account of increase in the cost of
indirect material and indirect labour and the other 50% was due to factory's inefficiency. (6 marks)
(c) What are the limitations of 'management accounting ? (3 marks)
Ans. 6 (a)
Change in Profit
i) P/v ratio = --------------------
Change in Sale
4 – 2
= ---------- = 20%
30 – 20
Working Notes Period I Period II
Sales
(-) V. Cost (80%)
Contribution
(-) Fixed Cost (B/F)
Profit
20
16
4
2
2
30
24
6
2
4
Profit + Fixed Cost
ii) Required Sale = -----------------------
P/v ratio
5 + 2
= -------------
20%
= 35 Lakh.
iii) Sales = 10 lakh.
(-) v. cost 80% 8 lakh
-----------
2 lakh
(-) Fixed cost 2 lakh
---------
Profit Nil
Ans. 6 (b) Calculation of under/over absorption of overheads.
Total overhead incurred. 446380
(-) Overheads absorbed (293104 x 1.25) 366380
Under absorption 80000
Treatment of under absorption overheads
50% of 80,000 = 40,000 due to increase in cost therefore we should applied supplementary rate
1. Finished goods Stock 800 unit
2. Cost of goods Sold 7000 unit
3. Work in progress 200 unit
40,000
We absorbed in finished good Stock = -------- x 800 = 4000 /-
8000
40,000
We absorbed in Cost of goods Sold = --------- x 7000 = 35000 /-
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 10
8000
40,000
We absorbed in work in progress = --------- x 200 = 1000/-
8000
Balance 50% of 80,000 = 40,000 arise due to factories inefficiency therefore we transfer Rs.40,000 to Costing P/L A/c.
Ans. 6 (c) The Management Accountant has the responsibility of producing and providing dependable Accounting and
other relevant data for the use of management. However, the information and reports presented by Management
Accountant still suffers from the following limitations:
(1) Different meaning of the same term: In Accounting different terms carry different meanings under different set of
circumstances and conditions. Such meanings and figures may superficially resemble one another and a person
who is not, familiar with them may easily become confused or frustrated. The most common source of confusion
is the word 'cost'. There are historical costs, full costs, direct costs, variable costs, standard costs, original costs,
residual costs, net costs, differential costs, opportunity costs, estimated cost and incremental costs.
(2) Management Accounting data cannot be completely accurate in all respects. A good deal of approximation is
involved in the compilation and preparation of such data. The smaller the time gap between the happening and
reporting of an event, the greater will be the approximation. In addition, in the working out of the estimates and
future costs, approximation
(3) Incompleteness of the data: Management Accountant can provide only the quantitative data as far as available, to
the management. Business problems and their decisions often require additional quantitative as well as qualitative
data which may be outside the purview of the management accountant. For example, the management
Accounting data will not disclose the extent to which the quality and utility of a product is affected by the changes
in materials or methods of production.
(4) Importance of proper Management action: A management accountant may provide information and figures in
most appropriate form to the management. But figures themselves are nothing more than marks on pieces of
paper, and by themselves they accomplish nothing. Anything that the business accomplishes is the result of action
of the people.
Qn. 7 (a) A worker under the- Halsey Plan of remuneration has a day rate of Rs. 1,200 per week of 48 hours, plus a.
cost of living bonus of Its. 10 per hour worked. He is given an 8-hour task to perform, winch he accomplishes in 6
hours. He is allowed 30% of the time saved as premium bonus. What would he his total hourly rate of earnings, and
what difference would it make if he wore paid under the Rowan Plan ? (6 marks)
(b) A chemical manufacturing unit, uses Material-A as the basic material. The cost of .Material-A is Rs.20 per kg. and
the input-output ratio is 12%. Due to a sudden shortage in the market, Material-A becomes non-available and the
manufacturing unit is considering the use of one of the following substitutes available :
Material Material Input-Output Ratio Rs. Per Kg.
B1
B2
135%
115%
26
30
You are required to recommend which of the above substitutes is to be used. Also indicate additional cost required to
be incurred, (6 marks)
(c) Write a note on ‘zero base budgeting’ (ZBB). (3 marks)
Ans. 7 (a) Under Halsey Plan :
Day rate 1200 per week of 48 hours
1200
∴ Rate per hours = ------- = 25/- per hour
48
Time allowed = 8 hours.
Time taken = 6 hours.
Time saved = 2 hours.
Total wages = Guaranteed wages + Bonus + Cost of living Bonus
= (6 x 25) + (2 x 30% x 25) + (10 x 6)
= 150 + 15 + 60
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 11
= 225 /-
225
Total hourly rate of earning = ----- = 37.50 /-
6
Under Rowan Plan
Total wages = Guaranteed wages + Bonus + Cost of living Bonus
2
= (25 x 6) + ( ---- x 6 x 25 ) + (10 x 6)
8
= 150 + 37.5 + 60
= 247.50
247.5
Total hourly rate of Earning = --------
6
= 41.25 /-
Q7(b) Material Cost input output ratio
A 20/- 120%
Substitutes
B1 26/- 135%
B2 30/- 115%
As given in question if
Mat A => Input = 1 kg output = 1.2 kg
Cost = Rs.20 for 1.2 kg output;
Since, due to shortage of material A either of the substitutes B1 or B2 is to be used in place of material A.
Material B1 If input = 1 kg output 1.35 kg cost = 26 Rs. for 1.35 kg output.
Material B2
If input = 1 kg output = 1.15 kg cost = Rs.30 for 1.15 kg output
As can be seen from above material B1 is cheaper as compared to material B2 and also output produced per kg of
input is also favourable of material B1 compared to material B2. Hence material A should be substituted with material
B1.
Ans. 7(c) Zero base budgeting is a revolutionary concept of planning the future activities and there is a sharp
contradiction from conventional budgeting. Zero base budgeting, may be better termed as "De nova budgeting" or
budgeting from the beginning without any reference to any base-past budgets and actual happening. Zero base
budgeting may be defined as "a planning and budgeting process which requires each manager to justify his entire
budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why
he should spend any money at all.
Zero-base budgeting is based on the premise that every rupee of expenditure requires justification. The traditional
budgeting approach includes expenditures of previous year which are automatically incorporated in new budget
proposals and only increments are subjected to debate. Zero base budgeting assumes that a responsibility centre
manager has had no previous expenditure. Important features of zero-base budgeting are:
(i) Concentration of efforts is not simply on "how much" a unit will spend but "why" it needs to spend.
(ii) Choices are made on the basis of what each unit can offer for a specific cost, (iii) Individual unit's objects are
linked to corporate targets.
(iii) Quick budget adjustments can be made if, during the operating year costs are required to maintain expenditure
level.
(iv) Alternative ways are considered.
(v) Participation of all levels in decision-making.
QN 8. (a) From the following information provided by Jolly Ltd., you are required to prepare the balance sheet :
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 12
Current ratio 2.5
Liquidity ratio 1.5
Proprietary ratio 0.75
Working capital Rs. 6, 00,000
He-serves and surplus Rs. 4,00,000
Hank overdraft Rs. 1,00, 000
There is no long-term loan or fictitious assets. You are also required to show the necessary working notes. (6 marks)
(b) What are the benefits of cash flow statement ?
Mention the parties who are benefited from preparing cash flow statement. (6 marks)
(c) What is 'margin of safety' ? How may it be improved ? (3 marks)
Ans. 8 (a) Balance Sheet of Jolly Ltd.
Liabilities Amount Assets Amount
Equity share Capital
Reserve & Surplus
Bank Overdraft
Other Current Liabilities
800000
400000
100000
300000
1600000
Fixed Assets (B/F)
Current Assets
Stock
Debtors
600000
400000
600000
1600000
Working Notes –
(i) Working Capital = Rs. 6,00,000/-
Current Assets
Current ratio = 2.5 = ---------------------
Current Liabilities
Working Capital = Current Assets – Current liabilities
=> 6,00,000 = 2.5 Current liabilities – Current liabilities.
6,00,000
=> Current liabilities = -----------
1.5
=> Current liabilities = 4,00,000 /-
∴ Current Assets = 2.5 x 4,00,000 = 10,00,000 /-
Current Assets – Stock
Liquidity ratio = ----------------------------
Current Liabilities
10,00,000 – Stock
=> 1.5 = -----------------------
4,00,000
=> Stock = 10,00,000 – 6,00,000 = 4,00,000
Current Liabilities = 4,00,000
= Bank Overdraft + other Current Liabilities
= 1,00,000 + 3,00,000
Proprietary Ratio = 0.75
= Equity share Capital + Reserve & Surplus – Fictitious Assets
0.75 = Equity share Capital + 4,00,000 - NIL
Total of liabilities side = Equity Share capital + Reserve & Surplus + Current liabilities.
If Equity share Capital + Reserve & Surplus is equal to 0.75
Therefore Current liabilities is equal to .25
4,00,000
” Total of Liabilities side = -----------
.25
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 13
= 16,00,000
∴ Equity share Capital = 16,00,000 – (4,00,000 + 1,00,000 + 3,00,000)
= 8,00,000 /-
Ans. 8 (b) This information is important to Shareholders, part of whose investment return (dividends) is dependent
on cash flows and to lenders, whose interest payment and principal repayment require the use of cash. The welfare of
other constituents of a company including its employees, its suppliers, and the local bodies that may levy taxes on it,
depends to varying degrees on the company's activity to generate adequate cash flows to fulfill its financial
obligations, The usefulness of Cash Flow Statement can be summarized as follows:
(i) Predict future cash flows: The Cash Flow Statement makes it possible to predict the amounts, timing and
uncertainty of future cash flows on the basis of what has happened in the past. This approach is better than
accrual basis data presented by profit and loss account and the balance sheet.
(ii) Determine the ability to pay dividends and other commitments: A Cash Flow Statement indicates the sources
and uses of cash under suitable headings such as operating, investing and financing activities. Shareholders are
interested in receiving dividends on their investments in the shares. Creditors want to receive their interest and
principal amount on time. The statement of cash flows helps investors and creditors to predict whether the
business can make these payments.
(iii) Show the relationship of net income to changes in the business cash: Usually cash and net income move
together. High levels of income tend to lead to increase in cash and vice-versa. However, a company's cash
balance can decrease when its net income is high, and cash can increase when incorrect is low. The users want
to know the difference between the net profit and net cash provided by operations. The net profit shows the
progress of the business during the year while cash flow relates more to the liquidity of the business. The
users can assess the reliability of net profit with the help of cash flow statement.
(iv) Efficiency in cash management: Cash flow analysis helps in evaluating financial policies and cash position. It
facilitates the management to plan and co-ordinate the financial operations properly. The management can
estimate how much funds are needed, from which source they will be derived, how much can be generated
internally and how much should be arranged from outside.
(v) Discloses the movement cash: A comparison of cash flow statement for the previous year with the budget for
that year would indicate to what extent the resources of the enterprise were raised and applied. A comparison
of the original forecast with actual result may highlight trend of movement that might otherwise undetected.
(vi) Discloses success or failure of cash planning: A success or failure of cash planning can be known by comparing
the projected cash flow statement with the actual cash flow statement and necessary remedial measures can
be taken. Moreover it provides a better measure for inter-period and inter-firm comparison.
(vii) Evaluate management decisions: The statement of cash flows reports the companies' investing and financing
activities and thus gives the investors and creditors about cash flow information for evaluating managers'
decisions.
Ans. 8 (c) Margin of safety is the difference between the actual sales and sales at break-even int. Sales beyond
break-even volume brings in profits. Such Sales represent a Margin of Safety. Margin of Safety is calculated as follows:
Margin of Safety = Total sales - Break even Sales
Margin of Safety can also be calculated with the help of P/V ratio i.e.
Profit
Margin of Safety = -------------
P/V ratio
Margin of Safety can also be expressed as percentage of Sales
Margin of Safety x 100
i.e. ---------------------------
Total Sales
It is important that there should be reasonable Margin of Safety, otherwise, a reduced level of activity may
prove disastrous. The soundness of a business is gauged by the size of the margin of safety. A low margin of safety
usually indicates high fixed overheads so that profits are not made until there is a high level of activity to absorb fixed
costs.
A high Margin of Safety shows that break-even point is much below the actual sales, so that even if there is a
fall in sales, there will still be a point. A low margin of safety is accompanied by high fixed costs, so action is called for
reducing the fixed costs or increasing sales volume.
QN. 1 (a) State, with reasons in brief, whether the following statements are correct or incorrect:
(i) Interest on debentures is payable only when there is profit.
(ii) An underwriter while entering into a contract for issue of shares should be a company.
(iii) Partly paid-up preference shares can be redeemed.
(iv) Dividend can be paid on calls-in-advance.
(v) Interest cannot be paid out of capital during construction period. (2 marks each)
(b) Choose the most appropriate answer from the given options in respect of the following :
(i) As per the provisions laid down in Table-A of Schedule-I of the Companies Act, 1956, the amount of call as
the percentage of the face value of shares should not exceed —
(a) 10%
(b) 25%
(c) 20%
(d) None of the above.
(ii) The minimum percentage of the face value of shares that should be called for as application money is —
(a) 5
(b) 10
(c) 15
(d) 20.
(iii) Debentures issued as collateral security will be debited to —
(a) Bank account
(b) Debentures suspense account
(c) Debentures account 4
(d) Collateral security account.
(iv) Preliminary expenses are —
(a) Current liability
(b) Current assets ,
(c) Fictitious assets
(d) Contingent liability.
(v) As per section 77A of the Companies Act, 1956, every buy-back should In-completed within a period of —
(a) 3 months from the elate of passing special resolution
(b) 12 months from the date of passing special resolution
(c) 6 months from the date of passing special resolution
(d) 1 month from the date of passing special resolution. (1 mark each)
(c) Re-write the following sentences after filling-ill the blank spaces with appropriate word(s)/figure(s) :
(i) Issue of debentures to vendors is known as issue of debentures ______.
(ii) Profit prior to incorporation should be credited to _.._____ account.
(iii) If forfeited shades are re-issued at a discount, the amount of discount should in no case exceed the
amount credited to _______,
(iv) Accounting standards are formulated under the authority of the __.______.
(v) Yield basis valuation of shares may take the form of valuation based on rate of return and _______.
(1 mark each)
Ans. 1 (a) (i) Incorrect, Interest on debentures is a liabilities of a Company and has to be paid each if a Company
incurs losses.
(ii) Incorrect, an underwriter is a person who agrees to take a specified number of shares or debentures, or a
specified amount of debenture stock in the event of public not subscribing for them in consideration for a commission
and it can be any person a institutions need not necessarily be a Company.
(iii) Incorrect, as per section of Companies Act; only fully paid preference shares can be redeemed. If partly paid
shares are to be redeemed, call must be made first; and then redemption must be carried out.
(iv) Incorrect, Dividend is to be paid only on called up value of shares and not on calls paid up in advance.
(v) Correct, Interest paid out of capital during construction period needs to be capitalized to the respective asset
during the construction period.
Ans. 1 (b) (i) (d) None of the above
(ii) (a) 5%
(iii) (c) Debentures Account
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 2
(iv) (c) Fictitious Assets.
(v) (b) 12 months from the date of passing Special Resolution.
Ans. 1 (c) (i) Other than Cash
(ii) Capital Reserve A/c
(iii) Share forfeited A/c
(iv) Accounting Standard Board
(v) Rate of Dividend.
QN .2. (a) What is amortisation period of intangible assets ? Can useful life of the intangible assets exceed the
period of legal rights ? (6 marks)
(b) Suraj Ltd. issued to public 1.50,000 equity shares of Rs.100 each at par. Rs.60 per share? were payable along
with the application and the balance on allotment, This issue was underwritten equally by A, B. and C for a
commission of 3%. Applications for 1,40,000 shares were received as per details given below :
Underwriter Firm
Underwriting
Applications
Marked
Applications
Total
Applications
A
B
C
Unmarked Applications
5,000
5,000
3,000
--
40,000
46,000
34,000
--
45,000
51,000
37,000
7,000
1,40,000
It was agreed to credit the unmarked applications to A and C. Suraj Ltd. accordingly made the allotment and received
the amounts due from the public. The underwriters settled their accounts.
You are required to — (i) prepare a statement of liability of the underwriters 1 assuming that the benefit of firm
underwriting is given to individual underwriters; ! and (ii) journalise the above transactions (including cash) in the
books of Suraj Ltd. (6 marks)
(c) Give the necessary journal entries both at the time of issue and redemption of debentures in the following case :
Eagle Ltd. issued Us.1.00,000, 15% debentures of R.s.lOO each at a discount of 5%, but redeemable at a
premium of 591 at the end of 4 years. (3 marks)
Ans. 2 (a) Amortization period of intangible assets depends upon its useful life; it can be upto a maximum period of
10 years unless it is clearly evident useful life is long than covers. If economic benefits from intangible assets are
achieved through legal rights granted for finite period the useful life of intangible should not exceed legal rights period
unless the legal rights is renewable and renewal is almost certain.
Ans. 2 (b) Statement showing liability of each underwriters
Under writers
Particulars A B C
Gross liabilities
(-) Firm underwriting
(-) Marked application
Excess of 1000 share of B’s will be credited
to A & C in their Gross liability ratio.
Less : Unmarked Application distributed to
A & C in their Gross liability ratio
Add : firm underwriting
50,000
5,000
45,000
40,000
5,000
(500)
4,500
(3500)
1000
5000
50,000
5,000
45,000
46,000
(1000)
+ 1000
NIL
--
NIL
5000
50,000
3,000
47,000
34,000
13,000
(500)
12,500
(3500)
9000
3000
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 3
Net liability
6000
5000
12000
(ii) Journal Entries in the Books of Suraj Ltd.
Bank A/c --- Dr. 8400000
To Share Application A/c 8400000
(Being application money received on 140000
shares at Rs.60 per share from public)
Share Application a/c - Dr. 8400000
To Share Capital A/c 8400000
(Being money received on share application
on 140000 shares transferred to share capital A/c)
A’s A/c -- Dr. (6000 x 60) 360000
B’s A/c -- Dr. (5000 x 60) 300000
C’s A/c -- Dr. (12000 x 60) 720000
To Share Capital A/c 1380000
(Being application money due from underwriters
Including firm underwriting)
Underwriting Commission A/c – Dr. 450000
To A’s A/c 150000
To B’s A/c 150000
To C’s A/c 150000
(Being underwriting commission due to underwriters)
Bank A/c -- Dr. 930000
To A/s A/c 210000
To B’s A/c 150000
To C’s A/c 570000
(Being amount received from underwriters on
account of share application less underwriting
commission due to them)
Ans. 2 (c)
Bank A/c --- Dr. 9500000
Loss on issue of debentures A/c -- Dr. 1000000
To 15% debentures A/c 10000000
To Premium on redemption of debentures A/c 500000
At the time of Issue
Bank A/c -- Dr. 9500000
Discount on issue of debentures A/c – Dr. 500000
To 15% debentures A/c 10000000
(Being 15% debentures issued at a
Discount of 5%)
At the time of Redemption
15% debentures A/c -- Dr. 1000000
Premium on Redemption of debentures A/c 500000
To Bank A/c 10500000
(Being 15% debentures redeemed at a
premium of 5%)
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 4
QN. 3. (a) On the basis of following information, compute the value of an equity share and a preference share of
both Chelsi Ltd. and Nonsi Ltd. — (i) when only a few shares are sold; and (ii) when controlling shares are to he sold :
Chelsi Ltd.
(Rs.)
Nensi Ltd.
(Rs.)
Profit after tax
12% Preference share capital (shares of Rs.100 each)
Equity share capital (shares of Rs.10 each)
10,00,000
10,00,000
50,00,000
10,00,000
20,00,000
40,00,000
Assume that market expectation for both companies is 15%; and 80% of the profits are distributed. (6 marks)
(b) What do you understand by 'provision for taxation’ ? What factors are to be considered while estimating the
provision for taxation ? (6 marks)
(c) Ronny Ltd. forfeited 200 shares of Rs.10 each, Rs.8 per share being called-up on which a shareholder paid
application and allotment money of Ks.5 per share but did not pay the first call money of Rs.3 per share. Of these
forfeited shares, 150 shares were subsequently re-issued by the company as fully paid-up for Rs.8 per share. Give
journal entries for the forfeiture and re-issue of shares.
Ans. 3 (a) Assumption : - In the given question no separate market explanation is given for equity & preference
shares so it is presumed that a slightly minor dividend rate (15% - 2%) = 13% may be applied for valuation of
preference shares.
Preference dividend coverage Ratios : -
Profit after tax
Chelsi Ltd. = ------------------------ x 100
Preference dividend
1000000
= ------------ x 100 = 8.33 %
120000
1000000
Nensi Ltd. = ------------ x 100 = 4.16%
240000
The market explanation rate may be adjusted for the factors like ability to pay preference dividend. In this question
chelsi ltd. better preferences dividend coverage ratio as compared to Nensi Ltd. coverage ratio.
∴ Market expectations rate for Nensi Ltd should be mere by 0.5%
∴ Market expectation rate for Nensi Ltd should be 13.5%
Valuation of Preference Share : -
12%
Chelsi Ltd => ------ x 100 = Rs. 92.31/-
13%
12%
Nensi Ltd. => -------- x 100 = Rs. 88.88/-
13.5%
Calculation of Equity Shares : - (i) when only after Shares are sold.
Dividend Capitalization Method is more appropriate
Earnings x Distribution ratio
Dividend per Share = ----------------------------------
No. of Equity Shares
(1000000 – 120000) x 80%
Chelsi Ltd. => ---------------------------------
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 5
500000
= 1.408
(1000000 – 240000) x 80%
Nensi Ltd. => -----------------------------------
4000000
= 1.52
Valuation of Shares : -
1.408
Chelsi Ltd. = -------- x 10 = Rs. 9.39
1.5
(10 x 15%)
1.52
Nensi Ltd. = ------ x 10 = Rs.10.13
1.5
(ii) When Controlling Shares are to be sold : -
(EPS capitalization method is more appropriate)
EPS
Value of Equity Share = ------------------------------- x 100
Market Capitalization Rate
Particulars Chelsi Ltd. Nensi Ltd.
Profit after tax
Less : Preference dividend
Profit available for equity shareholders
No. of equity shares
EPS
Value of equity shares =
1000000
120000
880000
500000
= 1.76
1.76
------ x 10
1.5
= Rs. 11.73
1000000
240000
760000
400000
1.9
1.9
= ----- x 10
1.5
= Rs.12.67
Ans. 3 (b) Since it would take quite some time for the Company to get its income assessed; it is usual to provide
some amount for income tax on profits at current roles of taxation. Such provision is debited to Profit and Loss A/c
above the live and credited to ‘Provision for Taxation A/c’ which appears in the Balance Sheet under the head “Current
liabilities and Provisions.”
Just as provision is made this year, provision would of have been made the previous year and such provisions called
‘old provision’ would appear in the Trial Balance on the credit side. When such a provision exists income the paid must
be debited to provision account and not to Profit and Loss Account. If the old provision is in excess of income tax paid,
such surplus provision should be shown the credit side of Profit and Loss Account below the line. Likewise if old
provision is not sufficient, further debit is made to Profit and Loss Account below the line. These adjustments are
shown below the line that the current profits ma not be affected due to these items.
Ans. 3 (c) Journal entries in the books of Ronny Ltd.
(For forfeiture of shares)
Share Capital A/c - Dr. (200 x 8) 1600
To Forfeited shares A/c (200 x 5) 1000
To Share first call A/c (200 x 3) 600
(Being forfeiture of shares of a shareholder)
(At the time of Reissue)
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 6
Bank A/c --- Dr. (150 x 8) 1200
Forfeited Shares A/c --- Dr. 300
To Share Capital A/c (150 x 10) 1500
(Being reissue of 150 shares of Rs.10 each
credited as fully paid for Rs.8 per share)
Forfeited Shares A/c -- Dr. 450
To Capital Reserve A/c 450
(150 x 5 – 300 = 450)
(Being profit on reissue of 150 forfeited
shared is transferred to capital reserve)
QN 4. (a) Anuj Ltd. had an accumulated amount, of general n-serve of Rs. 5,00,000. The directors of Anuj Ltd.
decided to declare bonus shares out of the general reserve and to utilise the dividend in the following manner.
(i) To make: 10,000 partly paid sharers of Rs.10 each paid-up at Rs.ij each, as fully paid-up.
(ii) To distribute 4 fully paid bonus shares ol'K.s.10 each at Rs.12 each, for 5 fully paid existing 20,000 shares of
Rs.10 each.
Show journal entries in the books of Anuj Ltd. to give effect to the above adjustments. (6 marks)
(b) "Issue of bonus shares by the subsidiary company does not affect the cost of control." Comment. (6 marks)
(c) "Accounting Standards are mandatory for all companies." Comment. (3 marks)
Ans. 4 (a) Journal Entries in the books Anuj ltd.
General Reserve A/c -- Dr. (10000 x 4) 40000
To Equity Share Capital A/c 40000
(Being partly paid shares commuted into
fully paid up shares the amount being
transferred from general reserve)
General Reserve A/c -- Dr. 192000
To Bonus to shareholders A/c 192000
(Being general reserve used to issue
bonus shares)
Bonus to Shareholders A/c -- Dr. 192000
To Equity Share Capital A/c 192000
(Being bonus shares issued for
consideration other than cash 4 shares
for every 5 shares hold for existing 20000
shares of Rs.10 each at Rs.12 each)
4
( 20000 x ---- x 12 = 192000 )
5
Ans. 4 (b) “Issue of bonus shares by the Subsidiary Company does not affect the cost of control”. This statement is
correct. Since if Subsidiary Company issues shares then Holding Company will also get a part of bonus shares of
Subsidiary Company in the proportion of Share Capital held by hire in Subsidiary and the Holding Company will remain
the ultimate Holding Company even after issue of bonus shares by the subsidiary.
For eg :- If A ltd is the Holding Company and B ltd is the Subsidiary Company; A ltd holds 60% of the Share Capital of
the Subsidiary Company. Now if B Ltd (Subsidiary Company) issues bonus shares in the ratio of 1 share for every 5
shares hold and existing Share Capital of B ltd is Rs.100000 (10000 shares of Rs.10 each hence B ltd will issue 10000
x 1/5 = 2000 shares and A ltd’s share = 2000 shares x 60% = 1200 shares
Hence A ltd’s total investment in B Ltd.
= 100000 x 60% = Rs. 60000 + Bonus shares Rs.12000
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 7
Rs. 12000
1200 shares of Rs.10 each = ------------
Rs. 72000
Minorities Interest = Rs.100000 x 40% = 40000
+ Bonus shares = 800 shares x 10 = 8000 = 48000
Hence Holding Company remains Holding Company even after the issue of bonus shares by Subsidiary Company.
Ans. 4 (c) The notified Accounting Standards are mandatory for all Companies and their auditors except as exempted
/ related to SMCs.
Exemptions/relations to SMCs – The SMCs are given the following relaxation in complying the notified Accounting
Standards -
• SMCs need not prepare Cash Flow Statement as per AS-3 and need not to disclose the segment reporting as per
AS-17.
• The SMCs have been given following relaxation as regards AS-15 "Employee Benefits"
- SMCs need not comply paras 11 to 16 of AS-15 to extent that deal with recognition and measurement of
short-term accumulated compensating absences.
- Discounting the amount payable after 12 months of Balance Sheet as regards defined contribution plans
and termination benefits.
- Recognition, measurement and disclosure principles in respect of defined benefit plans and other long-term
employee benefits plan. However such enterprises should provide and disclose the accrued liability in
respect of defined benefit plan and other long-term employee benefit plan as per actuarial valuation based
on projected unit credit method and discount rate based on yield on Government bonds.
• SMCs need not disclose diluted EPS as per AS-20 "Earning Per Share".
• SMCs need not comply with disclosure requirements regarding operating leases of sub-paras (b) & (d) of para 46
and sub-paras (a), (b) & (e) of para 25 of AS-19 "Leases" and sub-paras (a) & (f) of para 37 and sub-paras (c),
(e) & (f) of para 22 of AS-19 regarding disclosure for finance lease by the lessor and lessee respectively.
• Value in use has been differently defined for SMCs which provides and alternate to calculate value in use based
on a reasonable estimate of future cash flows.
• SMCs are exempt from disclosure requirements of paras 66 and 67 of AS-29 regarding provisions and its
descriptions.
QN. 5. (a) State, with reasons in brief, whether the following statements are correct, or incorrect :
(i) All long-term costs are controllable.
(ii) Rent on own building is not included in cost accounts.
(iii) Under differential piece rate of incentive scheme, there is no encouragement to improve the performance
of the workers.
(iv) By job rotation, labour turnover can be controlled/reduced upto some extent.
(v) Administration overheads are incurred due to management policy and they are easily controllable.
(2 marks each)
(b) Choose the most appropriate answer from the given options in respect of the following :
(i) The most suitable cost system where the products differ in type of materials and work performed is —
(a) Job costing
(b) Process costing
(c) Operating costing
(d) None of the above.
(ii) Current liabilities are equal to —
(a) Working capital + current assets
(b) Working capita! - current assets
(c) Current assets - working capital
(d) Current assets + working capital,
(iii) Non-controllable cost is the cost which —
(a) IS not subject to control at any level of managerial supervision
(b) Cannot Lie controllable (luring a particular financial year
(c) Cannot be controllable at any cost
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 8
(d) None of the above,
(iv) Re-ordering level is equal to —
a. Maximum consumption x minimum re-order period
b. Maximum consumption x maximum re-order period
c. Minimum consumption x minimum re-order period
d. Normal usage x normal delivery period.
(v) A budget designed to remain unchanged irrespective of the level of activity actually attained is called.-- .
(a) Master budget
(b) Fixed budget
(c) Current budget
(d) Flexible budget. ( 1 mark each )
(c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figures) :
(i) Material losses due to abnormal reasons should be transferred to .........
(ii) ………… determines the priorities of functional budgets,
(iii) The ratio of total liquid assets to current liabilities is known as ………….
(iv) Break-even chart is the graphical relationship between
(v) ………………… is the allotment of proportion of items of cost to cost centre/cost units. (1 mark each)
Ans. 5 (a)
(i) Correct; in long run all costs are controllable, since no cost is fixed all are variable in long run and moreover no
cost are uncontrollable it is only in relation to a specified individual that me may specify a particular cost either
controllable or uncontrollable.
(ii) Incorrect; Rent of own building is a notional or imputed cost; and it is also included in Cost Account.
(iii) Incorrect, since in differential piece rate of incentive system higher reward is paid to efficient maker hence it
acts as an encouragement to improve the performance of markers.
(iv) True; Job rotation leads to change in monotonous job of markers which controls labour turnover to a certain
extend since workers requirements of better jobs are fulfilled.
(v) True; Administration overheads are indirect and covers all expenditure incurred in formulating the policy,
directing the organization and controlling the operations of a concern; and they can be controlled by the
management.
Ans. 5 (b) (i) (a) Job Costing
(ii) (b) Working Capital – Current Assets
(iii) (d) None of the above
(iv) (b) Maximum Consumption x Maximum Reorder Period
(v) (a) Master Budget
Ans. 5 (c) (i) Costing Profit and Loss Account
(ii) Functions
(iii) Acid Test Ratio
(iv) Cost and sale
(v) Allocations
QN. 6 (a) The sales turnover and profit during two periods were as follows :
Period- 1 ---- Sales : Rs.20 lakh; and Profit : Rs.2 lakh
Period- 2 ---- Sales : Rs.30 lakh; and Profit : Rs. 4 lakh
Calculate :
(i) P/V ratio;
(ii) Sales required to earn a profit of Its, 5 lakh; and
(iii) Profit when sales are Rs.10 lakh, (6 marks)
(b) The total overhead expenses of a factory are Its. 4,46,380. Taking into account the normal working of the factory,
overheads were recovered from production at Ks.1,25 per hour. The actual hours worked were 2,93,104. Slow would
you proceed to close the books of account, assuming that besides 7,800 units produced of which 7,000 were sold ?
There' were 200 equivalent units in work-in-progress.
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 9
On investigation, it was found that 50% of the unahsorbed overheads were on account of increase in the cost of
indirect material and indirect labour and the other 50% was due to factory's inefficiency. (6 marks)
(c) What are the limitations of 'management accounting ? (3 marks)
Ans. 6 (a)
Change in Profit
i) P/v ratio = --------------------
Change in Sale
4 – 2
= ---------- = 20%
30 – 20
Working Notes Period I Period II
Sales
(-) V. Cost (80%)
Contribution
(-) Fixed Cost (B/F)
Profit
20
16
4
2
2
30
24
6
2
4
Profit + Fixed Cost
ii) Required Sale = -----------------------
P/v ratio
5 + 2
= -------------
20%
= 35 Lakh.
iii) Sales = 10 lakh.
(-) v. cost 80% 8 lakh
-----------
2 lakh
(-) Fixed cost 2 lakh
---------
Profit Nil
Ans. 6 (b) Calculation of under/over absorption of overheads.
Total overhead incurred. 446380
(-) Overheads absorbed (293104 x 1.25) 366380
Under absorption 80000
Treatment of under absorption overheads
50% of 80,000 = 40,000 due to increase in cost therefore we should applied supplementary rate
1. Finished goods Stock 800 unit
2. Cost of goods Sold 7000 unit
3. Work in progress 200 unit
40,000
We absorbed in finished good Stock = -------- x 800 = 4000 /-
8000
40,000
We absorbed in Cost of goods Sold = --------- x 7000 = 35000 /-
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 10
8000
40,000
We absorbed in work in progress = --------- x 200 = 1000/-
8000
Balance 50% of 80,000 = 40,000 arise due to factories inefficiency therefore we transfer Rs.40,000 to Costing P/L A/c.
Ans. 6 (c) The Management Accountant has the responsibility of producing and providing dependable Accounting and
other relevant data for the use of management. However, the information and reports presented by Management
Accountant still suffers from the following limitations:
(1) Different meaning of the same term: In Accounting different terms carry different meanings under different set of
circumstances and conditions. Such meanings and figures may superficially resemble one another and a person
who is not, familiar with them may easily become confused or frustrated. The most common source of confusion
is the word 'cost'. There are historical costs, full costs, direct costs, variable costs, standard costs, original costs,
residual costs, net costs, differential costs, opportunity costs, estimated cost and incremental costs.
(2) Management Accounting data cannot be completely accurate in all respects. A good deal of approximation is
involved in the compilation and preparation of such data. The smaller the time gap between the happening and
reporting of an event, the greater will be the approximation. In addition, in the working out of the estimates and
future costs, approximation
(3) Incompleteness of the data: Management Accountant can provide only the quantitative data as far as available, to
the management. Business problems and their decisions often require additional quantitative as well as qualitative
data which may be outside the purview of the management accountant. For example, the management
Accounting data will not disclose the extent to which the quality and utility of a product is affected by the changes
in materials or methods of production.
(4) Importance of proper Management action: A management accountant may provide information and figures in
most appropriate form to the management. But figures themselves are nothing more than marks on pieces of
paper, and by themselves they accomplish nothing. Anything that the business accomplishes is the result of action
of the people.
Qn. 7 (a) A worker under the- Halsey Plan of remuneration has a day rate of Rs. 1,200 per week of 48 hours, plus a.
cost of living bonus of Its. 10 per hour worked. He is given an 8-hour task to perform, winch he accomplishes in 6
hours. He is allowed 30% of the time saved as premium bonus. What would he his total hourly rate of earnings, and
what difference would it make if he wore paid under the Rowan Plan ? (6 marks)
(b) A chemical manufacturing unit, uses Material-A as the basic material. The cost of .Material-A is Rs.20 per kg. and
the input-output ratio is 12%. Due to a sudden shortage in the market, Material-A becomes non-available and the
manufacturing unit is considering the use of one of the following substitutes available :
Material Material Input-Output Ratio Rs. Per Kg.
B1
B2
135%
115%
26
30
You are required to recommend which of the above substitutes is to be used. Also indicate additional cost required to
be incurred, (6 marks)
(c) Write a note on ‘zero base budgeting’ (ZBB). (3 marks)
Ans. 7 (a) Under Halsey Plan :
Day rate 1200 per week of 48 hours
1200
∴ Rate per hours = ------- = 25/- per hour
48
Time allowed = 8 hours.
Time taken = 6 hours.
Time saved = 2 hours.
Total wages = Guaranteed wages + Bonus + Cost of living Bonus
= (6 x 25) + (2 x 30% x 25) + (10 x 6)
= 150 + 15 + 60
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 11
= 225 /-
225
Total hourly rate of earning = ----- = 37.50 /-
6
Under Rowan Plan
Total wages = Guaranteed wages + Bonus + Cost of living Bonus
2
= (25 x 6) + ( ---- x 6 x 25 ) + (10 x 6)
8
= 150 + 37.5 + 60
= 247.50
247.5
Total hourly rate of Earning = --------
6
= 41.25 /-
Q7(b) Material Cost input output ratio
A 20/- 120%
Substitutes
B1 26/- 135%
B2 30/- 115%
As given in question if
Mat A => Input = 1 kg output = 1.2 kg
Cost = Rs.20 for 1.2 kg output;
Since, due to shortage of material A either of the substitutes B1 or B2 is to be used in place of material A.
Material B1 If input = 1 kg output 1.35 kg cost = 26 Rs. for 1.35 kg output.
Material B2
If input = 1 kg output = 1.15 kg cost = Rs.30 for 1.15 kg output
As can be seen from above material B1 is cheaper as compared to material B2 and also output produced per kg of
input is also favourable of material B1 compared to material B2. Hence material A should be substituted with material
B1.
Ans. 7(c) Zero base budgeting is a revolutionary concept of planning the future activities and there is a sharp
contradiction from conventional budgeting. Zero base budgeting, may be better termed as "De nova budgeting" or
budgeting from the beginning without any reference to any base-past budgets and actual happening. Zero base
budgeting may be defined as "a planning and budgeting process which requires each manager to justify his entire
budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why
he should spend any money at all.
Zero-base budgeting is based on the premise that every rupee of expenditure requires justification. The traditional
budgeting approach includes expenditures of previous year which are automatically incorporated in new budget
proposals and only increments are subjected to debate. Zero base budgeting assumes that a responsibility centre
manager has had no previous expenditure. Important features of zero-base budgeting are:
(i) Concentration of efforts is not simply on "how much" a unit will spend but "why" it needs to spend.
(ii) Choices are made on the basis of what each unit can offer for a specific cost, (iii) Individual unit's objects are
linked to corporate targets.
(iii) Quick budget adjustments can be made if, during the operating year costs are required to maintain expenditure
level.
(iv) Alternative ways are considered.
(v) Participation of all levels in decision-making.
QN 8. (a) From the following information provided by Jolly Ltd., you are required to prepare the balance sheet :
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 12
Current ratio 2.5
Liquidity ratio 1.5
Proprietary ratio 0.75
Working capital Rs. 6, 00,000
He-serves and surplus Rs. 4,00,000
Hank overdraft Rs. 1,00, 000
There is no long-term loan or fictitious assets. You are also required to show the necessary working notes. (6 marks)
(b) What are the benefits of cash flow statement ?
Mention the parties who are benefited from preparing cash flow statement. (6 marks)
(c) What is 'margin of safety' ? How may it be improved ? (3 marks)
Ans. 8 (a) Balance Sheet of Jolly Ltd.
Liabilities Amount Assets Amount
Equity share Capital
Reserve & Surplus
Bank Overdraft
Other Current Liabilities
800000
400000
100000
300000
1600000
Fixed Assets (B/F)
Current Assets
Stock
Debtors
600000
400000
600000
1600000
Working Notes –
(i) Working Capital = Rs. 6,00,000/-
Current Assets
Current ratio = 2.5 = ---------------------
Current Liabilities
Working Capital = Current Assets – Current liabilities
=> 6,00,000 = 2.5 Current liabilities – Current liabilities.
6,00,000
=> Current liabilities = -----------
1.5
=> Current liabilities = 4,00,000 /-
∴ Current Assets = 2.5 x 4,00,000 = 10,00,000 /-
Current Assets – Stock
Liquidity ratio = ----------------------------
Current Liabilities
10,00,000 – Stock
=> 1.5 = -----------------------
4,00,000
=> Stock = 10,00,000 – 6,00,000 = 4,00,000
Current Liabilities = 4,00,000
= Bank Overdraft + other Current Liabilities
= 1,00,000 + 3,00,000
Proprietary Ratio = 0.75
= Equity share Capital + Reserve & Surplus – Fictitious Assets
0.75 = Equity share Capital + 4,00,000 - NIL
Total of liabilities side = Equity Share capital + Reserve & Surplus + Current liabilities.
If Equity share Capital + Reserve & Surplus is equal to 0.75
Therefore Current liabilities is equal to .25
4,00,000
” Total of Liabilities side = -----------
.25
C.S. Executive Acc. & Cost Dec.09 Solved Ans. 13
= 16,00,000
∴ Equity share Capital = 16,00,000 – (4,00,000 + 1,00,000 + 3,00,000)
= 8,00,000 /-
Ans. 8 (b) This information is important to Shareholders, part of whose investment return (dividends) is dependent
on cash flows and to lenders, whose interest payment and principal repayment require the use of cash. The welfare of
other constituents of a company including its employees, its suppliers, and the local bodies that may levy taxes on it,
depends to varying degrees on the company's activity to generate adequate cash flows to fulfill its financial
obligations, The usefulness of Cash Flow Statement can be summarized as follows:
(i) Predict future cash flows: The Cash Flow Statement makes it possible to predict the amounts, timing and
uncertainty of future cash flows on the basis of what has happened in the past. This approach is better than
accrual basis data presented by profit and loss account and the balance sheet.
(ii) Determine the ability to pay dividends and other commitments: A Cash Flow Statement indicates the sources
and uses of cash under suitable headings such as operating, investing and financing activities. Shareholders are
interested in receiving dividends on their investments in the shares. Creditors want to receive their interest and
principal amount on time. The statement of cash flows helps investors and creditors to predict whether the
business can make these payments.
(iii) Show the relationship of net income to changes in the business cash: Usually cash and net income move
together. High levels of income tend to lead to increase in cash and vice-versa. However, a company's cash
balance can decrease when its net income is high, and cash can increase when incorrect is low. The users want
to know the difference between the net profit and net cash provided by operations. The net profit shows the
progress of the business during the year while cash flow relates more to the liquidity of the business. The
users can assess the reliability of net profit with the help of cash flow statement.
(iv) Efficiency in cash management: Cash flow analysis helps in evaluating financial policies and cash position. It
facilitates the management to plan and co-ordinate the financial operations properly. The management can
estimate how much funds are needed, from which source they will be derived, how much can be generated
internally and how much should be arranged from outside.
(v) Discloses the movement cash: A comparison of cash flow statement for the previous year with the budget for
that year would indicate to what extent the resources of the enterprise were raised and applied. A comparison
of the original forecast with actual result may highlight trend of movement that might otherwise undetected.
(vi) Discloses success or failure of cash planning: A success or failure of cash planning can be known by comparing
the projected cash flow statement with the actual cash flow statement and necessary remedial measures can
be taken. Moreover it provides a better measure for inter-period and inter-firm comparison.
(vii) Evaluate management decisions: The statement of cash flows reports the companies' investing and financing
activities and thus gives the investors and creditors about cash flow information for evaluating managers'
decisions.
Ans. 8 (c) Margin of safety is the difference between the actual sales and sales at break-even int. Sales beyond
break-even volume brings in profits. Such Sales represent a Margin of Safety. Margin of Safety is calculated as follows:
Margin of Safety = Total sales - Break even Sales
Margin of Safety can also be calculated with the help of P/V ratio i.e.
Profit
Margin of Safety = -------------
P/V ratio
Margin of Safety can also be expressed as percentage of Sales
Margin of Safety x 100
i.e. ---------------------------
Total Sales
It is important that there should be reasonable Margin of Safety, otherwise, a reduced level of activity may
prove disastrous. The soundness of a business is gauged by the size of the margin of safety. A low margin of safety
usually indicates high fixed overheads so that profits are not made until there is a high level of activity to absorb fixed
costs.
A high Margin of Safety shows that break-even point is much below the actual sales, so that even if there is a
fall in sales, there will still be a point. A low margin of safety is accompanied by high fixed costs, so action is called for
reducing the fixed costs or increasing sales volume.
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