FM11
FINANCIAL AND MANAGEMENT ACCOUNTING
Assignment I
Assignment Code: 2012 FM11 B1 Last Date of Submission: 15th October 2012
Maximum Marks: 100
Attempt all the questions. All questions carry equal marks.
Section A
1. (I) What is the purpose of the statement of changes in financial position?
(II) What is the relationship of the assets turnover rate to the rate of return on total assets?
2. (I) What portion of profit on uncompleted contracts is transferred to the profit and loss account. Explain for different situations.
(II) Why is reconciliation of cost and financial accounts necessary? State the possible reasons for difference in profits shown by both accounts.
3. A chemical process yields the following products out of materials introduced in the process:
% of Material
Main Product—A 60
By-product—B 15
By-product—C 20
Wastage 5
Following additional information has been given to you:
(i) Total cost incurred:
Input 1,000 units Rs. 4,600
Direct labour Rs. 4,100
Overheads Rs. 6,000
(ii) One unit of Product-C requires half the raw material required for one unit of Product-B; one unit of Product-A requires one and half times the raw material required for Product-B.
(iii) Product-A requires double the time needed for the production of one unit of Product-B and one unit of Product-C.
(iv) Product-C requires half the time required for production of one unit of Product-B.
(v) Overheads are to be absorbed in the ratio of 6:1:1.
You are required to calculate the total and per unit cost of each of the products.
4. You are given the following figures worked out from the profit and loss account and balance sheet of
Steadfast Ltd. relating to the year 2007-08. Prepare a balance sheet:
Fixed assets (net, after writing off 30%) Rs. 10,50,000/-
Fixed assets turnover ratio (cost of sales basis) 2
Finished goods turnover ratio 6
Rate of gross profit to sales 25%
Net profit (before interest) to sales 16%
Fixed charges cover (debenture interest 14%) 8
Debt collection period 1-1/2 months
Materials consumed to sales 30%
Stock of raw materials (in terms of number of months'
Consumption) 3
Current ratio 2.4
Quick ratio 1.0
Reserves to capital 0.21
Section B
5 Case Study
X Ltd has been offered a contract to manufacture six special machines for the Government. Manufacture would take a total of three years at the rate of two machines per year. Payment would be in two installments, Rs.3,50,000 at the start f manufacture and another Rs.3,50,000 upon completion.
The company is now evaluating the contract to see if it is worthwhile undertaking and its management accounting department has produced the following estimates about the resources required to produce the special machines:
(a) Materials:
Type of material Quantity per Amount in Original cost of. Current purchase Current realizable
M/c ton stock now stock per ton price per ton value per ton
Rs. Rs. Rs.
Copper 20 60 700 1000 800
Radium 10 20 500 750 See below
Copper is used regularly by the company on many contracts. Radium is used rarely and if the existing stock is not applied to this contract it will have to be disposed immediately at a net cost of Rs.100 per ton. Materials required for the contract must be purchased and paid for annually in advance. Replacement cost of copper and radium and the realizable value of copper are expected to increase at an annual compound rate of 20%.
(b) Labour:
Each of the six machines will require 3,000 hours of skilled electronic engineering and 5,000 hours of unskilled labour. Current wage rate are Rs.4 per hour for skilled electronic staff and Rs.3 per hour for unskilled labour.
X Ltd expects to suffer a shortage of skilled staff during the firs year so that acceptance of the contract would make it necessary for the firm to give up ‘other work’ on which a contribution of Rs. 7 per hour would be earned (the other work would require no unskilled labour.)
In the contract’s first year only, the company expects to have 20,000 surplus unskilled labour hours. the company has an agreement with the in-house trade union whereby it lays off employees for whom there is work and pays them two-thirds of their normal wages during the lay-off period. All wage rates are expected to increase at an annual compound rate of 15%.
(c) Overheads:
Overhead costs are currently allocated to contracts at a rate of Rs.14 per skilled labour hour calculated as follows:
Fixed overhead (including equipment depreciation of Rs.5) 11
Variable overhead 3
Special equipment will be required to undertake this contract and will be purchases at Rs.2,00,000/- payable immediately. It will be sold once the contract is completed for Rs.50,000/- both fixed and variable overheads are expected to increase in line with the Retail Price Index.
The special equipment will be financed with the first contract installment paid by Government.
The company believes that a return of 20% would be acceptable for the project. The Retail Price Index is expected to increase by 15% per year over the life of the contract.
All current prices will hold for the next 1 month, before increasing in line with inflation.
Therefore material cost for the second year’s production will be 20% higher than the current market prices.
Analyze and comment whether the project can be acceptable. Ignore Tax.
FM11
FINANCIAL AND MANAGEMENT ACCOUNTING
Assignment II
Assignment Code: 2012 FM11 B2 Last Date of Submission: 15th November 2012
Maximum Marks: 100
Attempt all the questions. All questions carry equal marks.
Section A
1. What is capital budgeting? Explain IRR and Discounted NPV methods for appraisal if investments.
2 (I) Explain the factors to be considered in pricing-decision and describe the stages involved in decision
Process.
(II) Explain relevance of time value of money in investment decision. What are the disadvantages of the same?
3. ABC earns an average net profit of Rs.3 per unit at a selling price of Rs. 15 by producing and selling 60,000 units at 60% potential capacity.
The composition of cost of sales is as follows:
Direct materials Rs.4.00
Direct labour Rs.1.00
Production overhead Rs.6.00 (50 fixed)
Sales overhead Re.1.00 (75% fixed)
During the current year the firm intends to produce the same number but anticipates that:
(i) its fixed expenses will increase by 10%;
(ii) rates of direct material will increase by 5%;
(iii) rates of direct labour will increase by 20%; and
(iv) Selling price can not be increased.
Under these circumstances, the firm obtains an order for an additional 20% of its capacity.
What minimum price, would you recommend for accepting the order to ensure ABC an overall profit of Rs.1,80,500 ?
4. The following information is available from the records of Always First Ltd. for a particular week with regard to the composition and rates of a gang of workmen:
Standard Standard
Composition Hourly Rate
(Rs.)
20 Skilled workmen 12.00
15 Semi-skilled workmen 10.00
5 Unskilled workmen 8.00
The standard output for a week is 3,600 units and a week consists of 48 hours.
During a particular week, a gang consisted of 25 skilled workmen, 12 semi-skilled workmen and 3 unskilled workmen and the actual wages paid were as follows:
Skilled workmen @ Rs. 11.60 per hour; semi-skilled workmen @ Rs. 10.20 per hour; and unskilled workmen @ Rs. 8.00 per hour.
Actual output during the week was 3,750 units despite the fact that 6 hours were lost in that week due to abnormal idle time.
Based on the above information, you are required to work out —
(i) Labour rate variance;
(ii) Labour mix variance;
(iii) Labour idle time variance;
(iv) Labour yield variance;
(v) Labour efficiency variance; and
(vi) Labour cost variance.
Section B
5. Case Study
A multi product company has been producing an electronic component in its department P. The budget of department P for the next year is as under:
Budgeted Production and Sales 72,000 units.
Rs. Per unit
Selling price 200
Direct materials
X 1kg per unit 40
Y I kg per unit 30
Direct wages 40
Variable overheads 20
Fixed overheads 60
Total 190
Subsequent to the preparation of the budget, the company offered that the setting up of an electronic park in the region where the company is situated has resulted in migration of the majority of the departments workforce and consequently the company is forced to take a decision on the closer of the department and abandonment of the budget. The company was however, advised to produce either 24000 or 48,000 components in the next year by employing contract labour. A few remaining workers will be absorbed by the company with in the organization against vacancies. The relevant data are as under:
(a) The cost of contract labour is Rs.6 per hour and the standard contract labour time per units 10 hours.
The contract labour, however, will have to be trained at a fixed cost of Rs.40,000.
(b) The stock of material X is 72000kg. There is no other use for t his material. The quantity not used in
department P will have to be disposed of. The cost of disposal is Rs.4000 plus Re.1 per kg disposed off.
(c) The stock of material Y is 36000 kg. if this material is not used in department P, a quantity up to
24000 kg can be used in another department a substitute for an equivalent weight of a material which
currently costs Rs.36 per kg. Material Y originally cost Rs.30 per kg and its current market price is
Rs.40 per kg. if any surplus material Y is sold, it will fetch a realization of Rs.20 pre kg sold.
(d) The variance overheads will be 30% higher per unit produced than originally budgeted.
(e) If department P is to closed down immediately, the foreman who will otherwise retire at the end of next
year, will be asked to retire earlier and he will be paid Rs.80,000 s compensation. His salary is
Rs.6,000 per month.
(f) The only machine used in department P originally cost Rs.1,40,000 and it can be currently sold for
Rs.86,000. This sales values will go down to RS.80,000 at the end of the next year and if the machine is
used during the next year for any production activity in the year, the sale value will further decrease by
Rs.1000 per every 1000 units produced.
(g) The fixed overheads are apportionment of general overheads and will not be altered by any decision
concerning department P.
(h) The sales manager states that a sales volume of 24000 units can be achieved if the selling price is set at
Rs.180 per unit. He further stated that a sales volume of 48000 units will be achieved if the selling price
per unit is reduced to Rs.150 and an advertisement expenditure of RS.30,000 is spent.
Required:
( i ) Prepare a statement indicating the financial implications of the choice to be made between the following alternatives:
(A) Close down department P immediately.
(B) Operate department P for a further year to produce 24000 units of he component.
(C) Operate department P for a further year to produce 48000 units of the component.
(ii) Advise the management on the course of action to be taken.
FINANCIAL AND MANAGEMENT ACCOUNTING
Assignment I
Assignment Code: 2012 FM11 B1 Last Date of Submission: 15th October 2012
Maximum Marks: 100
Attempt all the questions. All questions carry equal marks.
Section A
1. (I) What is the purpose of the statement of changes in financial position?
(II) What is the relationship of the assets turnover rate to the rate of return on total assets?
2. (I) What portion of profit on uncompleted contracts is transferred to the profit and loss account. Explain for different situations.
(II) Why is reconciliation of cost and financial accounts necessary? State the possible reasons for difference in profits shown by both accounts.
3. A chemical process yields the following products out of materials introduced in the process:
% of Material
Main Product—A 60
By-product—B 15
By-product—C 20
Wastage 5
Following additional information has been given to you:
(i) Total cost incurred:
Input 1,000 units Rs. 4,600
Direct labour Rs. 4,100
Overheads Rs. 6,000
(ii) One unit of Product-C requires half the raw material required for one unit of Product-B; one unit of Product-A requires one and half times the raw material required for Product-B.
(iii) Product-A requires double the time needed for the production of one unit of Product-B and one unit of Product-C.
(iv) Product-C requires half the time required for production of one unit of Product-B.
(v) Overheads are to be absorbed in the ratio of 6:1:1.
You are required to calculate the total and per unit cost of each of the products.
4. You are given the following figures worked out from the profit and loss account and balance sheet of
Steadfast Ltd. relating to the year 2007-08. Prepare a balance sheet:
Fixed assets (net, after writing off 30%) Rs. 10,50,000/-
Fixed assets turnover ratio (cost of sales basis) 2
Finished goods turnover ratio 6
Rate of gross profit to sales 25%
Net profit (before interest) to sales 16%
Fixed charges cover (debenture interest 14%) 8
Debt collection period 1-1/2 months
Materials consumed to sales 30%
Stock of raw materials (in terms of number of months'
Consumption) 3
Current ratio 2.4
Quick ratio 1.0
Reserves to capital 0.21
Section B
5 Case Study
X Ltd has been offered a contract to manufacture six special machines for the Government. Manufacture would take a total of three years at the rate of two machines per year. Payment would be in two installments, Rs.3,50,000 at the start f manufacture and another Rs.3,50,000 upon completion.
The company is now evaluating the contract to see if it is worthwhile undertaking and its management accounting department has produced the following estimates about the resources required to produce the special machines:
(a) Materials:
Type of material Quantity per Amount in Original cost of. Current purchase Current realizable
M/c ton stock now stock per ton price per ton value per ton
Rs. Rs. Rs.
Copper 20 60 700 1000 800
Radium 10 20 500 750 See below
Copper is used regularly by the company on many contracts. Radium is used rarely and if the existing stock is not applied to this contract it will have to be disposed immediately at a net cost of Rs.100 per ton. Materials required for the contract must be purchased and paid for annually in advance. Replacement cost of copper and radium and the realizable value of copper are expected to increase at an annual compound rate of 20%.
(b) Labour:
Each of the six machines will require 3,000 hours of skilled electronic engineering and 5,000 hours of unskilled labour. Current wage rate are Rs.4 per hour for skilled electronic staff and Rs.3 per hour for unskilled labour.
X Ltd expects to suffer a shortage of skilled staff during the firs year so that acceptance of the contract would make it necessary for the firm to give up ‘other work’ on which a contribution of Rs. 7 per hour would be earned (the other work would require no unskilled labour.)
In the contract’s first year only, the company expects to have 20,000 surplus unskilled labour hours. the company has an agreement with the in-house trade union whereby it lays off employees for whom there is work and pays them two-thirds of their normal wages during the lay-off period. All wage rates are expected to increase at an annual compound rate of 15%.
(c) Overheads:
Overhead costs are currently allocated to contracts at a rate of Rs.14 per skilled labour hour calculated as follows:
Fixed overhead (including equipment depreciation of Rs.5) 11
Variable overhead 3
Special equipment will be required to undertake this contract and will be purchases at Rs.2,00,000/- payable immediately. It will be sold once the contract is completed for Rs.50,000/- both fixed and variable overheads are expected to increase in line with the Retail Price Index.
The special equipment will be financed with the first contract installment paid by Government.
The company believes that a return of 20% would be acceptable for the project. The Retail Price Index is expected to increase by 15% per year over the life of the contract.
All current prices will hold for the next 1 month, before increasing in line with inflation.
Therefore material cost for the second year’s production will be 20% higher than the current market prices.
Analyze and comment whether the project can be acceptable. Ignore Tax.
FM11
FINANCIAL AND MANAGEMENT ACCOUNTING
Assignment II
Assignment Code: 2012 FM11 B2 Last Date of Submission: 15th November 2012
Maximum Marks: 100
Attempt all the questions. All questions carry equal marks.
Section A
1. What is capital budgeting? Explain IRR and Discounted NPV methods for appraisal if investments.
2 (I) Explain the factors to be considered in pricing-decision and describe the stages involved in decision
Process.
(II) Explain relevance of time value of money in investment decision. What are the disadvantages of the same?
3. ABC earns an average net profit of Rs.3 per unit at a selling price of Rs. 15 by producing and selling 60,000 units at 60% potential capacity.
The composition of cost of sales is as follows:
Direct materials Rs.4.00
Direct labour Rs.1.00
Production overhead Rs.6.00 (50 fixed)
Sales overhead Re.1.00 (75% fixed)
During the current year the firm intends to produce the same number but anticipates that:
(i) its fixed expenses will increase by 10%;
(ii) rates of direct material will increase by 5%;
(iii) rates of direct labour will increase by 20%; and
(iv) Selling price can not be increased.
Under these circumstances, the firm obtains an order for an additional 20% of its capacity.
What minimum price, would you recommend for accepting the order to ensure ABC an overall profit of Rs.1,80,500 ?
4. The following information is available from the records of Always First Ltd. for a particular week with regard to the composition and rates of a gang of workmen:
Standard Standard
Composition Hourly Rate
(Rs.)
20 Skilled workmen 12.00
15 Semi-skilled workmen 10.00
5 Unskilled workmen 8.00
The standard output for a week is 3,600 units and a week consists of 48 hours.
During a particular week, a gang consisted of 25 skilled workmen, 12 semi-skilled workmen and 3 unskilled workmen and the actual wages paid were as follows:
Skilled workmen @ Rs. 11.60 per hour; semi-skilled workmen @ Rs. 10.20 per hour; and unskilled workmen @ Rs. 8.00 per hour.
Actual output during the week was 3,750 units despite the fact that 6 hours were lost in that week due to abnormal idle time.
Based on the above information, you are required to work out —
(i) Labour rate variance;
(ii) Labour mix variance;
(iii) Labour idle time variance;
(iv) Labour yield variance;
(v) Labour efficiency variance; and
(vi) Labour cost variance.
Section B
5. Case Study
A multi product company has been producing an electronic component in its department P. The budget of department P for the next year is as under:
Budgeted Production and Sales 72,000 units.
Rs. Per unit
Selling price 200
Direct materials
X 1kg per unit 40
Y I kg per unit 30
Direct wages 40
Variable overheads 20
Fixed overheads 60
Total 190
Subsequent to the preparation of the budget, the company offered that the setting up of an electronic park in the region where the company is situated has resulted in migration of the majority of the departments workforce and consequently the company is forced to take a decision on the closer of the department and abandonment of the budget. The company was however, advised to produce either 24000 or 48,000 components in the next year by employing contract labour. A few remaining workers will be absorbed by the company with in the organization against vacancies. The relevant data are as under:
(a) The cost of contract labour is Rs.6 per hour and the standard contract labour time per units 10 hours.
The contract labour, however, will have to be trained at a fixed cost of Rs.40,000.
(b) The stock of material X is 72000kg. There is no other use for t his material. The quantity not used in
department P will have to be disposed of. The cost of disposal is Rs.4000 plus Re.1 per kg disposed off.
(c) The stock of material Y is 36000 kg. if this material is not used in department P, a quantity up to
24000 kg can be used in another department a substitute for an equivalent weight of a material which
currently costs Rs.36 per kg. Material Y originally cost Rs.30 per kg and its current market price is
Rs.40 per kg. if any surplus material Y is sold, it will fetch a realization of Rs.20 pre kg sold.
(d) The variance overheads will be 30% higher per unit produced than originally budgeted.
(e) If department P is to closed down immediately, the foreman who will otherwise retire at the end of next
year, will be asked to retire earlier and he will be paid Rs.80,000 s compensation. His salary is
Rs.6,000 per month.
(f) The only machine used in department P originally cost Rs.1,40,000 and it can be currently sold for
Rs.86,000. This sales values will go down to RS.80,000 at the end of the next year and if the machine is
used during the next year for any production activity in the year, the sale value will further decrease by
Rs.1000 per every 1000 units produced.
(g) The fixed overheads are apportionment of general overheads and will not be altered by any decision
concerning department P.
(h) The sales manager states that a sales volume of 24000 units can be achieved if the selling price is set at
Rs.180 per unit. He further stated that a sales volume of 48000 units will be achieved if the selling price
per unit is reduced to Rs.150 and an advertisement expenditure of RS.30,000 is spent.
Required:
( i ) Prepare a statement indicating the financial implications of the choice to be made between the following alternatives:
(A) Close down department P immediately.
(B) Operate department P for a further year to produce 24000 units of he component.
(C) Operate department P for a further year to produce 48000 units of the component.
(ii) Advise the management on the course of action to be taken.
