EP CACMA December 2008

20

COMPANY ACCOUNTS
COST AND MANAGEMENT ACCOUNTING
Time allowed : 3 hours

Maximum marks :
100

NOTE : All working notes should be shown distinctly.

PART A

Question 1

(Answer Question No. 1 which is

compulsory and any two of the rest from
this part)

(a) State, with reasons in brief, whether the following statements are correct
or incorrect:
(i) The bonus share issue cannot be made unless the existing partly-paid
shares are fully paid-up.
(ii) In India, corporate financial statements in general do not include a
cash flow statement to explain movement of cash during the accounting
period.
(iii) A company is not under any legal obligation to make good its past
losses before distributing its current profits as dividends.
(iv) The Accounting Standard-21 mandates an Indian company to present
consolidated financial statements.
(v) In India, corporate financial statements are prepared recognising legal
forms of the transaction and ignoring the substance.
(2
marks each)
(b) Choose the most appropriate answer from the given options in respect of the
following :
(i) Securities premium money can be used for
(a) Payment of dividend
(b) Writing off goodwill
(c) Issuance of fully paid bonus shares
(d) None of the above.
(ii) Loss suffered from the date of acquisition of business to the date of
incorporation should be debited to
(a) Goodwill account
(b) Profit and loss account
(c) Capital reserve account
(d) Capital reduction account.
(iii) Pre-paid expenses are shown in balance sheet as
(a) Current assets
(b) Intangible assets
(c) Wasting assets
(d) Fixed assets.

20

EP CACMA December 2008 21

21

EP CACMA December 2008

(iv) The balance of forfeited shares after reissue of the same is transferred to
(a) Capital reserve account
(b) Share capital account
(c) Profit and loss account
(d) Debenture redemption fund
account. (v) Divisible profits include
(a) General reserves
(b) Profit on revaluation of assets
(c) Profit prior to incorporation period
(d) Capital reserve.
(1 mark
each) (c) Re-write the following sentences after filling-up the blank spaces with
appropriate
word(s)/figure(s) :
(i)

Accounting as a language of business communicates the financial

results of corporate enterprise to various
by means of financial
statements.

(ii) If a company offers to its equity shareholders the right to buy one equity
share of Rs.100 each at Rs.120 for every 4 equity share of Rs.100 each
and the market value of a share is Rs.180, then the value of the right is
Rs.
.
(iii)

The bonus share can be issued only if

permits such an issue.

of the company

(iv)

Accounting Standard-17: Segment reporting is mandatory for all

commercial, industrial and business reporting corporate enterprises,
whose turnover for the accounting period exceeds Rs.
.

(v) Consolidated financial statements are presented by a

company
to provide financial information about the economic activities of its
group.
(1 mark each)
Answer 1(a)
(i)

Correct - The bonus shares are always fully paid-up and issued to existing
shareholders on a pro-rata basis. Bonus issue is not made unless the partly
paid shares, if any, existing are made fully paid up.

(ii)

Correct The preparation and presentation of cash flow statement in India

is not mandatory for all types of corporate enterprises. However the
companies which are required to prepare and present such statements
should prepare and present cash flow statements as per revised Accounting
Standard (AS) - 3.

(iii)

Incorrect - In general a company is under no legal obligation to make good

a debit balance in its profit and loss account resulting from past losses
before distributing its current profits. But so much of the loss sustained by a
company in the past years as is attributable to the amount of provisions
made for depreciation must be set off against the current profit of the
company before a dividend is declared. But from the view point of sound
commercial policy, it is desirable to apply current profits in making good lost
capital before distribution of dividends.

(iv) Incorrect - The Companies Act, 1956 does not make it obligatory on the part
of the holding company to prepare group accounts or consolidated accounts.
In case, if a holding company prepares and present consolidated financial
statements, it has to follow the principles and procedures as laid down under
Accounting Standard (AS) - 21.
(v)

Incorrect - Transactions and other events are accounted for and presented
in accordance with their substance and financial reality and not merely with
their legal form. While the legal form of a lease agreement is that the lessee
may acquire no legal title to the leased asset, in the case of financial leases,
the substance and financial reality are that the lessee acquires the economic
benefits of the use of the leased assets for the major part of its economic life.
Therefore, a financial lease is recognized in the lessees balance sheet both
as an asset and as an obligation to pay future lease payments.

Answer 1(b)
(i) (c) Issuance of fully paid bonus shares
(ii) (a) Goodwill account
(iii) (a) Current assets
(iv) (a) Capital reserve account
(v) (a) General reserves
Answer 1(c)
(i) Accounting as a language of business communicates the financial results of
corporate enterprise to various interested parties / stakeholders by means
of financial statements.
(ii)

If a company offers to its equity shareholders the right to buy one equity
share of Rs.100 each at Rs.120 for every 4 equity share of Rs.100 each and
the market value of a share is Rs.180, then the value of the right is Rs. 12.

(iii)

The bonus share can be issued only if Articles of Association of the

company permits such an issue.

(iv) Accounting Standard-17: Segment reporting is mandatory for all commercial,

industrial and business reporting corporate enterprises, whose turnover for
the accounting period exceeds Rs. 50 crores .
(v)

Consolidated financial statements are presented by a holding company to

provide financial information about the economic activities of its group.

Question 2
(a) Write short notes on any two of the following :
(i) Objectives of international accounting standards
(ii) Loss on issue of debentures
(iii) Firm underwriting.

(3 marks each)

(b) Following is the balance sheet of Anupam Ltd. as on 31st March, 2008
: Liabilities
2,00,000, 14% Preference shares
of Rs.100 each, fully called
Less : Calls in arrears @ Rs. 20 per share
10,00,000 Equity shares of Rs.10
each, Rs.8 per share called
Less : Calls-in-arrears

Rs.
2,00,00,000
4,00,000

1,96,00,000

80,00,000
20,000
79,80,000

Add : Calls-in-advance

10,000

Securities premium
General reserve
10,000, 15% Debentures @ Rs.1,000 each, fully paid
Current liabilities and provisions

79,90,000
5,10,000
1,50,00,000
1,00,00,000
10,00,000
5,41,00,000

Assets
Fixed assets

1,30,00,000

Investments

28,00,000

Other current assets

2,15,00,000

Cash and bank balances

1,68,00,000
5,41,00,000

On 1st April, 2008, the Board of directors decided that

(i)

The fully paid preference shares are to be redeemed at a premium of 4% on

1st May, 2008 and for that purpose 6 lakh equity shares of Rs.10 each are to
be issued at a premium of 5%.
(ii) 3,000 Equity shares owned by Mohan, an existing shareholder, who has
failed to pay the allotment money and the first call money @ Rs.3 and
Rs.2.50 per share respectively, equity shares are to be forfeited on 31st
May, 2008.
(iii) The final call of Rs.2 per share is to be made on 7th July, 2008 on equity
shares.
All the above are duly complied with according to schedule. The amount due on
the issue of fresh issue and on final call are also duly received except from
Sohan who had failed to pay the first call for his 1,400 equity shares, has again
failed to pay the final call also. These shares of Sohan are to be forfeited on
31st August 2008.
Show the necessary journal entries.
(9
marks)
Answer 2(a)(i)
Objectives of International Accounting Standards
The International Accounting Standards are formulated by International
Accounting
Standards Board (IASB). The IASB has issued International Accounting Standards on

various matters relating to accounting policies, preparation and disclosure of

financial statements. The main objectives of these standards is to bring uniformity
and enhance inter-firm comparability pertaining to
(i) Recognition of transaction in financial
statements. (ii) Measurement of these transactions
and events.
(iii) Presentation of these transactions and events in the financial statements in a
manner that is meaningful and understandable to the users in making
economic decisions across the frontiers.
The IASB has issued 41 International Accounting Standards (some of them were
withdrawn) in addition to 8 International Financial Reporting Standards. The last
decade has witnessed a sea change in the global economic scenario. It is now
recognized by all that differences among countries in financial accounting and reporting
practices are a primary impediment to the free flow of capital. In view of this, the
Institute of Chartered Accountants of India has decided in principle to enforce the
convergence of Indian Accounting Standards with International Financial Reporting
Standards from 1st April, 2011.
Answer 2(a)(ii)
Loss
on
debentures

issue

of

If a company issues debentures at par or at a discount which are redeemable at

a premium, the premium payable on redemption of the debentures should be treated
as capital loss. Redemption of debentures at a premium is a known loss at the time
of issue of debentures as the terms of issue generally contain such provisions for
redemptions. As such, it would be prudent on the part of the company to write off
such loss during the life of the debentures. The loss to be incurred by a company for
a particular issue of debentures is ascertained in the following manner :
1.

If the debentures are issued at par and redeemable at a premium, the loss
will be equal to the amount of premium payable on redemption.

2.

If the debentures are issued at a discount and redeemable at a premium, the

loss will be equal to the total amount of discount on issue and the amount of
premium on redemption. In such a case, there is no need to debit discount
on Issue of Debenture Account. Instead, Loss on Issue of Debenture
Account should be debited with total loss.

Loss on issue of debentures account is written off gradually every year during
the life of the debentures. The unwritten off amount is shown in the balance sheet
under
Miscellaneous Expenditure Account.
Answer 2(a)(iii)
Firm underwriting
Firm underwriting refers to a definite commitment by the underwriter or
underwriters to take up an agreed number of shares or debentures of a company
irrespective of the number of shares or debentures subscribed by the public. In such
an instance, the underwriters are committed to take up the agreed number of shares
or debentures in addition to unsubscribed shares or debentures, if any. Even if the
issue is oversubscribed, the underwriters are liable to take up the agreed number of
shares or debentures.

While computing the individual liability of the underwriters, the firm

underwriting can be dealt with in any of the following manner in the absence of
any specific instructions:
(a) The firm underwriting may be adjusted against the individual liability of each
underwriter separately or may be treated at par with marked applications.
In such a case, the statement of liability of underwriters will be as
under: Gross Liability (agreed ratio-total shares underwritten)
xxxx Less : Marked applications including firm underwriting
xxxx
Balance left
Less : Unmarked application (ratio of gross liability)

xxxx

Net liability
Add :

Firm underwriting

xxxx

Total Liability

xxxx

(b) The benefit of firm underwriting may be shared by all underwriters or firm
underwriting may be treated at par with unmarked applications. In such
case, the shares/debentures underwritten firm will be included in the
unmarked forms. In such case, the state of liability of underwriters will appear
as shown above except that shares/debentures underwritten firm by each
underwriter will not be specifically adjusted against his individual liability but
will be included in the total unmarked forms to be distributed amongst all
underwriters in the ratio of their gross liability.
Answer 2(b)
Journal Entries
Date

Particulars

2008 Bank A/c

May 1 To Equity Share Capital A/c
To Securities Premium A/c
(Being Equity Shares issued at premium

Dr. (Rs.)

Cr.(Rs.)

Dr.
63,00,000
60,00,000
3,00,000

Securities Premium A/c

To Premium on Redemption of
Redeemable
Preference Shares A/c
(Being Premium on Redemption of
Preference shares provided)

Dr.

7,20,000

General Reserve A/c

To Capital Redemption Reserve A/c
(Being capital redemption reserve account
created)

Dr. 1,20,00,000

14% Preference Share Capital A/c

Premium on Redemption A/c
To Preference Shareholders A/c
(Being amount due to preference
shareholders)

Dr. 1,80,00,000
Dr.
7,20,000

7,20,000

1,20,00,000

1,87,20,000

Date

Particulars
Preference Shareholders A/c
To Bank A/c
(Being paid to preference shareholders)

Dr. (Rs.)

Cr.(Rs.)

Dr. 1,87,20,000
1,87,20,000

May 31 Equity Share Capital A/c

To Equity Share Allotment A/c
To Equity Share 1st Call A/c
To Forfeited Shares A/c
(Being 3,000 shares forfeited due to nonpayment of calls)

Dr.

July 7 Equity Share Final Call A/c

To Equity Share Capital A/c
(Being final call due on equity shares)

Dr.

24,000
9,000
7,500
7,500

19,94,000
19,94,000

Bank A/c
Calls in Advance A/c
To Equity Share Final Call A/c
(Being Final Call received on Equity
Shares)

Dr.
Dr.

Aug.31 Equity Share Capital A/c

To Equity Share 1st Call A/c
To Equity Share 2nd Call A/c
To Forfeited Shares A/c
(Being 1,400 shares forfeited due to
non-payment of calls)

Dr.

19,81,200
10,000
19,91,200

14,000

3,500
2,800
7,700

Question 3
(a) Comment on any two of the following statements :
(i) As a matter of prudence, whole of free reserves should not be utilised in
the case of buy-back of shares.
(ii) As a matter of sound commercial policy, current profits are to be applied
while paying dividend out of current profits without making good past
losses.
(iii) In case of under-subscription of shares, question of returning the money
does not arise at all.
(3 marks
each)
(b) Following are the balance sheets of Asha Ltd. and Bipasha Ltd. as on
31st March, 2008 :
Liabilities
Asha Ltd.
Bipasha
Assets
(Rs.)
Ltd.
Machinery
3,00,000
2,80,000
(Rs.)
Capital (Rs.10 per share)
10,00,000
8,00,000
Furniture
50,000
20,000
Profit and loss account
4,00,000
2,00,000
Debtors
2,50,000
8,00,000
Loan from Asha Ltd.
80,000
payable Ltd.
80,000
LoanBills
to Bipasha
80,000
60,000
14,80,000
11,40,000
Shares in Bipasha Ltd.
7,00,000

Bills receivable

1,00,000

40,000

14,80,000

11,40,000

Asha Ltd. purchased 75% shares of Bipasha Ltd. for Rs.7,00,000 on

31st March, 2008. Bills payable of Bipasha Ltd. include bills of Rs.20,000
accepted in favour of Asha Ltd.
Prepare a consolidated balance sheet.

(9 marks)

Answer 3(a)(i)
Section 77A of the Company (Amendment) Act, 1999 states that a company may
purchase its own shares or other specified securities (e.g. employees stock option or
other securities as may be notified by the Central Government from time to time) out
of:
(i) its free reserves (i.e. reserves which are free for distribution as dividend) and
includes balance of securities premium account or/ and
(ii) the proceeds of any shares or other specified securities.
However, as a matter of prudence, the entire free reserve should not be utilized
for the purpose of buy-back and the following items should be adjusted against free
reserves to arrive at the net amount of free reserves that can be utilized for the
purpose of buy- back:
(1) Unamortised miscellaneous expenditure.
(2) Unamortised deferred revenue expenditure.
(3) Contingent liabilities likely to mature and not provided
for. (4) Purchased goodwill.
(5) Any diminution of long-term investments not provided for.
(6) Any impairment in the value of tangible assets not provided for.
Answer 3(a)(ii)
A company is under no legal obligation to make good a debit balance in its Profit
and Loss Account resulting from past losses before distributing current profits. But so
much of the loss sustained by a company in the past financial year and years falling
after 28th December, 1960 as is attributable to the amount of provision made for
depreciation, must be set off against the current profits of the company before a
dividend is declared. The position in respect of set off of past losses for determining
divisible profits may be summarized as under:
(1) In respect of previous years ending before 28th December, 1960, arrears of
depreciation need not be taken into account.

(2) In respect of previous years, ending after 28th December, 1960 :

(a) All arrears of depreciation not provided for must be set off against the
profits of the current year;
(b) The losses of such years must be set off to the extent to which they
consist of depreciation provided in the books.
But from the view point of sound commercial policy, however, it is desirable
to apply current profits in making good lost capital.
Answer 3(a)(iii)
In practical situations, it rarely happens that the number of shares applied for is
exactly equal to the number of shares offered to public for subscription. In case of
under-subscription of shares, number of shares applied for, is less than the number
of shared offered by the company. All applications are accepted in full. If the
minimum subscription has not been subscribed, all application money may be
required to be returned. However, in case of over-subscription of shares, the
company returns the money to the applicants whose applications have either been
rejected or have been accepted partially. Hence, in case of under-subscription, the
question of returning the money does not arise at all.
Answer 3(b)
Consolidated Balance Sheet of Asha Ltd. And Bipasha
Ltd.
As on 31st March, 2008
Liabilities

Rs.

Rs.

Assets

Share Capital:

Rs.

Machinery :
10,00,000

Shares of Rs. 10 each

Minority Interest
Reserve and Surplus:
Profit and Loss A/c
Capital Reserve

Asha Ltd.

3,00,000

2,50,000

Bipasha Ltd.

2,80,000

4,00,000

Furniture :
Asha Ltd.

80,000

Less : Inter Co.debts

80,000

20,000

Debtors :
Asha Ltd.

8,00,000 10,50,000

Asha Ltd.

80,000

Loan to
Bipasha Ltd.
Less : Inter Co.

Bipasha Ltd.

60,000

debts
Bills Receivables :

1,40,000

20,000

80,000

Asha Ltd.

80,000

Nil

1,00,000

1,20,000 Bipasha Ltd.

40,000

Less: Inter Co.debts

18,20,000

1,40,000
20,000 1,20,000
18,20,000

Working Notes :
1. Allocation of capital profit of Bipasha
Ltd.

70,000

2,50,000

Nil Bipasha Ltd.

Bills payable

5,80,000

50,000

50,000 Bipasha Ltd.

Current Liabilities :
Loan from Asha Ltd.

Less : Inter Co.debts.

Rs.

Rs.

Profit & Loss Account balance as on 31.3.2008

2,00,000

Share of Asha Ltd. 75%

1,50,000

Share of Minority Shareholders

50,000

2. Calculation of Capital Reserve :

Paid-up value of shares
Share of capital profit

6,00,000
1,50,000

Less : Cost of shares

7,50,000
7,00,000

Capital reserve

50,000

3. Calculation of Minority Interest :

Paid up Values of shares
Share of Capital Profit

2,00,000
50,000
2,50,000

Question 4
(a) Distinguish between any two of the following
: (i) Underwriters and brokers.
(ii) Marked applications and unmarked applications.
(iii) Calls-in-arrears and calls-in-advance.

(3 marks

each) (b) Following is the balance sheet of Ramesh Ltd. as on 31st March,
2008 : Liabilities

Rs.

Equity shares of Rs.10 each

10,00,000

12% Preference shares of Rs.100 each

10,00,000

General reserve

6,00,000

Profit and loss account

4,00,000

15% Debentures
Creditors

10,00,000
8,00,000
48,00,000

Assets
Goodwill

5,00,000

Building

15,00,000

Plant

10,00,000

Investment in 10% stock (market value of

Rs.5,20,000, nominal value Rs. 5,00,000)

4,80,000

Stock

6,00,000

Debtors

4,00,000

Cash

1,00,000

Preliminary expenses

2,20,000
48,00,000

Additional

Assets
follows:

information
are

revalued

as

Building : Rs.32,00,000; Plant : Rs.18,00,000; Stock : Rs.4,50,000; and

Debtors : Rs.3,60,000.
Average profit before tax of the company is Rs.12,00,000 and 12.5% of the profit
is transferred to general reserve, rate of taxation being 50%. Normal dividend
expected on equity shares is 8% while fair return on capital employed is 10%.
Goodwill may be valued at 3 years purchase of super profits.
Ascertain the value of each equity share under fair value method.
marks)

(9

Answer 4(a)(i)
Underwriters and brokers
The persons or institutions underwriting a public issue of shares or debentures
are called underwriters. The underwriters may be individuals, partnership firms or
joint stock companies. But, an issue of shares or debentures is hardly underwritten
by a single individual as it involves more risk and attaches greater responsibility.
Generally, an issue of shares or debentures of a company is underwritten by two or
more firms jointly. The consideration payable to the underwriters for underwriting the
issue is known as underwriting commission. Some specialized financial institutions
set-up by the Government in the public sector are also playing an active role these
days in underwriting shares or debentures of a company.
Brokers merely promise or try to procure subscriptions to the shares or
debentures issued; they do not take any responsibility of subscribing to the shares or
debentures of the company. They simply procure subscriptions for shares or
debentures from the public on behalf of the company and in exchange of their service
rendered to the company, they get remuneration called brokerage.
Answer 4(a)(ii)
Marked applications and unmarked applications
When the issue of shares or debentures of a company is underwritten by two or
more persons, it is usual that the applications for shares or debentures sent through
the underwriters should bear a stamp of the respective underwriters. The applications
bearing the stamp of the respective underwriters are called marked applications
while the applications received directly by the company which do not bear any stamp
of the underwriters are called unmarked applications.

If the entire issue of shares or debentures is underwritten by only one

underwriter, the marking of applications is immaterial. But, the issue of shares or
debentures is generally underwritten by more than one underwriter as the risk is
distributed among the underwriters in an agreed ratio. In such a case it is essential
that the applications sent through the underwriters should be marked properly so as
to determine their respective liability correctly.
The purpose of distinguishing
between marked and unmarked applications is to determine the liability of individual
underwriters.
Answer 4(a)(iii)
Calls-in-arrears and Calls-in-advance
Calls-in-arrears refers to the amount called up by-the company which has not yet
been paid by the shareholders till the last day fixed for payment thereof. The amount
of calls-in-arrears is shown by way of deduction from the called-up capital in the
Balance Sheet. Generally interest is charged on calls-in-arrears. The maximum rate
of interest as per Table A is 5% p.a. The interest on calls-in-arrears account is
transferred to the Profit and Loss Account at the end of the year.
Calls-in-advance refers to the amount paid by the shareholders in excess of the
amount due from them. A company may accept calls-in-advance only if Articles
authorize to do so. Interest is allowed on calls-in-advance. The amount of calls-inadvance is shown under separate heading on the Liabilities Side of the Balance Sheet.
The maximum rate of interest as per Table A is 6% p.a. It is a debt of a company
until, the calls are made and the amount already paid is adjusted. It is to be noted
that the money received on calls-in-advance does not become part of share capital.
No dividend is paid on calls- in-advance.
Answer 4(b)
Assets :
Less : Income Tax 50%
Building
Actual Profit
Plant
Less : Transfer to Reserve 12.50%
Stock

Rs.

Debtors
Less : Preference Dividend
Cash
Profit for Equity Shareholders

Rs.
Rs.
5,75,000
32,00,000
5,75,000
18,00,000
71,875
4,50,000
5,03,125
3,60,000
1,20,000
1,00,000
3,83,125
59,10,000

Super Profit = Actual Profit Normal Profit

Less : Liabilities :
Normal Profit (Return) = 10% on Capital Employed
8,00,000
Creditors
= Rs.41,10,000 x 10% = Rs. 4,11,000
Debentures
10,00,000
18,00,000
Super Profit = Rs. 5,75,000 Rs. 4,11,000 = Rs. 1,64,000
41,10,000
Capital Employed
Goodwill = Rs.1,64,000 x 3 = Rs.4,92,000
Calculation of Actual Profit :
Net assets for equity shareholders = Capital Employed + Goodwill + Investment
12,00,000
Average Profit
Preference Capital
Less : Income from Investment
50,000
= Rs.41,10,000 + Rs.4,92,000 + Rs. 4,80,000 Rs. 10,00,000 = Rs. 40,82,000
Value per share (intrinsic value) = Rs. 40,82,000 / 1,00,00011,50,000
= Rs. 40.82
Value per share yield method =
Expected rate of dividend =

Expected rate of dividend x Paid up Value

Normal rate of dividend

Rs. 3,83,125 x 100 = 38.31%

Rs. 10,00,000

= Rs.47.89
Value per Share = 38.31 x 10
8

Value per share as per fair value method =

=
=

Intrinsic value + Yield value

2

Rs. 40.82 + Rs. 47.89

2
Rs.44.36 approx.

Note :
(i) Debentures are excluded from capital employed for calculating super
profit.
(ii) Normal profit is calculated on capital employed. It may also be calculated on
average capital employed, then answers will change accordingly.
PART B
(Answer Question No. 5 which is
compulsory and any two of the rest from
this part.)
Question 5
(a) State, with reasons in brief, whether the following statements are true or
false : (i) Cost accounting is a branch of financial accounting.

(ii) Bin card shows the value of a material at any moment of time.
(iii) In absorption costing, the valuation of inventories is higher than in
marginal costing technique.
(iv) A budget manual is a summary of all the financial budgets.
(v) Cost reduction is cost control.
(2 marks
each) (b) Choose the most appropriate answer from the given options in respect
of the
following :
(i) Administration overheads are recovered as a percentage of
(a) Direct materials
(b) Direct
wages (c)
Prime cost (d)
Works cost.
(ii) For contracts which are very near to completion, the profit is ascertained
by the formula
(a) Estimated profit x Work certified / contract price
(b) Estimated profit x Work certified / contract price x cash received /
Work certified
(c) Estimated profit x Work certified / contract price x cost of work / Total
cost to date
(d) Any of the above in the absence of specific instruction.
(iii) The type of process loss that should not affect the cost of inventories is
(a) Abnormal loss
(b) Normal loss
(c) Seasonal loss
(d) Standard loss.
(iv) Cost-Volume-Profit analysis is most important for the determination of the
(a) Volume of operations necessary to break-even
(b) Variable revenues necessary to equal fixed costs
(c) Relationship between revenues and costs at various levels of operation
(d) Sales volume necessary to equal fixed costs.
(v) For shoe manufacturers, the most suitable cost system is
(a) Job costing
(b) Batch costing
(c) Contract costing
(d) None of the above.
(1 mark
each) (c) Re-write the following sentences after filling-up the blank spaces with
appropriate
word(s)/figure(s) :
(i) Cost is a fact whereas price is a

(ii) Imputed costs are relevant for

(iii) A
is the cost that has already been incurred and cannot be
avoided by decisions taken in the future.
(iv) Economic lot size is the order size that
ordering and storing.

the total cost of

(v) A profit centre is a division or organisational unit concerned with

controlling both
and costs.
mark each)

(1

Answer 5(a)
(i)

False : Cost accounting is a specialized branch of accounting and not of

financial accounting.
Its main purpose is recording, ascertainment,
analysis and presentation of cost information pertaining to a product or a
service unit.

(ii) False : Bin card shows only the quantity of material and not its value. This
card is prepared by stores department. It details out only quantity of material
available at a moment of time.
(iii)

True : This is so because stock in absorption costing is valued at total cost

basis. The stock is valued at variable cost in case of marginal costing.

(iv) False : A budget manual lays down the details of the organizational set up,
duties and responsibilities of executives at different layers.
(v) False : Cost reduction and cost control, are two different approaches for
enhancing efficiency. Their concepts and procedures are quite different.
Answer 5(b)
(i) (d) Works cost.
(ii) (a) Estimated Profit x Work Certified / Contract Price
Or (d) Any of the above in the absence of specific instruction.
(iii) (a) Abnormal loss
(iv) (c) Relationship between revenues and costs at various levels of
operation. (v) (b) Batch costing.
Answer 5(c)
(i) Cost is a fact whereas price is a policy.
(ii) Imputed costs are relevant for decision making.
(iii)

A sunk cost is the cost that has already been incurred and cannot be
avoided by decisions taken in the future.

(iv)

Economic lot size is the order size that minimizes the total cost of ordering
and storing.

(v) A profit centre is a division or organizational unit concerned with controlling both
sales / (revenue) and costs.

Question 6
(a) Write short notes on any two of the following
: (i) Bases of apportionment
(ii)
Cost plus
contracts
(iii) Labour turnover.
(3 marks
each) (b) A factory is currently working at 50% capacity and produces 1,000
units. From the following information, you are required to estimate profits of
the factory
when it works at 60% and 80% working capacity respectively and offer your
critical comments:
At 60% working capacity, raw material cost increases by 2% and selling
price falls by 2%. At 80% working capacity, raw materials cost increases by
5% and selling price falls by 5%. At 50% capacity working, the product costs
Rs.180 per unit and is sold at Rs.200 per unit. The unit cost of Rs.180 is made
up as follows :
Rs.
Raw material
100
Labour
30
Factory overheads
30 (40% fixed)
Administration overheads
20 (50% fixed)
(9 marks)
Answer 6(a)(i)
Bases for apportionment
The following are the various bases for the apportionment of the overhead
expenses among the various cost centres :
(a)

Direct Wages - Under this method overheads are distributed among the
centre in proportion to the direct wages of the respective centres,

(b) Number of Workers - Under this method the total number of workers working
in each centre forms the basis.
(c) Direct Labour Hours - The overhead cost is distributed in the proportion to
the centres in the proportion of the total number of hours worked in each
centre.
(d) Floor Area - The relative area of the cost centre is used as a basis for
apportionment of certain expenses-like rent, rates, taxes, heating, lighting,
air conditioning, etc.
(e)

Machine Hours - Machine hour rate indicates the cost per hour of the
machine used.

Answer 6(a)(ii)
Cost Plus contracts
Cost Plus contract is a contract in which the value of the contract is ascertained
by adding a certain percentage of profit over the total cost of the work. In other
words, it is a pricing method, under which contractee agrees to reimburse the actual
cost plus the agreed percentage of profit. This is used in case of those contracts
whose exact cost cannot be correctly estimated at the time of undertaking a work.
This method is usually adopted in the works of construction during war time, urgent
works, defence, public

utility works, ship building, etc. Government and Semi Government organizations
usually adopt the cost plus contracts to assign works. Generally, in such contract,
contractor and contractee have clear agreement, about the items of cost to be
included, type of material to be used, labour rates for different grades, etc.
Following are the benefits of cost plus contracts :
1. It is possible to know the cost of contract, cost per each element and the
amount of profit to the contractor.
2. The contractor carries on the work promptly and expeditiously.
3. When the works are to be carried out urgently and the value of the contract
is high, the cost-plus contract method is usually adopted.
4. The contractee can exercise an effective control over the work at different
stages as well as over the various elements of cost.
5. It assumes a fixed percentage margin profit to the contractor.
6. The contractor is protected from wide fluctuations in the prices of the
elements of costs. He will also get benefits of escalation clause.
7. The benefit of social justice is also obtained by the method.
Answer 6(a)(iii)
Labour turnover
The rate of change in the labour force is known as labour turnover. It is the ratio
at which the employees leave the concern during a given period in relation to the
average number of workers employed during a period. It can be measured by
relating the engagements and losses in the labour force to the total number employed
at the beginning of the period. All the losses must be taken into account regardless of
the cause for leaving. Labour turnover reduces the labour productivity and increases
costs. The rate of labour turnover depends on a number of factors, like, the nature of
the industry, its size, location, nature of labour, etc.
The commonly used techniques for measuring labour turnover is expressed
by the under noted formula :
1. Separation Rate Method

Separation during a given period

x 100
Labour turnover = Average number of workers during the period

2. Net Labour Turnover Rate Method or Replacement

Method
Number of replacements during a given period
x 100
Average working force during the period
3. Labour
Flux Rate Method

x
Number of separation

Number of new employees
during a period

during a given period x 100

(Average number of workforce during the given period)

EP CACMA December 2008 37

EP CACMA December 2008

37

Answer 6(b)
Flexible Budget
Present Capacity 50% - 1000 units
Cost
classi
fication

50% capacity
1,000 units

60% capacity
1,200 units

Per
unit
Rs.

Total Rs.
(000s)

Per
unit
Rs.

80% capacity
1,600 units

Total
. Per
unit
Rs .
Rs.
(000s)

Total Rs.
(000s)

Raw Materials

100

100.0

102

122.4

105

168.0

Labour

30

30.0

30

36.0

30

48.0

Factory
Overheads (60%)

18

18.0

18

21.6

18

28.8

Adm.
Overheads (50%)

10

10.0

10

12.0

10

16.0

Total Variable
Cost (V) Sales (S

158

158.0

160

192.0

163

260.8

V) Contribution

200

200.0

196

235.2

190

304.0

42

42.0

36

43.2

27

43.2

10

12.0

7.50

12.0

Factory Overheads
Admn. Overheads

12

12.0

Total Fixed Costs

10

10.0

8.33

10.0

6.25

10.0

22

22.0

18.33

22.0

13.75

22.0

180

180.0

178.33

214.0

176.75

282.8

20

20.0

17.67

21.2

13.25

21.2

Total Cost (V+F)

Profit (Sales
Total Cost)

The profit at 60% and 80% capacities is the same and as such, it is not advisable
to increase the production to 80%. However increase to 60% capacity is advisable.
Question 7
(a) What are the objectives of financial statement analysis ?

(6

marks) OR
Although including interest in the normal cost is practically difficult but
excluding interest altogether may lead to wrong managerial decisions.
Comment.
(6 marks)
(b) A company has annual fixed cost of Rs.1,40,00,000. In the year 2007-08,
sales amounted to Rs.6,00,00,000 as compared with Rs.4,50,00,000 in the
preceding year 2006-07. Profit in 2007-08 is Rs.42,00,000 more than that in
2006-07. On the basis of the above information, answer the following :
(i) At what level of sales, the company would have break-even ?

(ii) Determine profit/loss on a forecasted sales volume of Rs.8,00,00,000.

(iii)

If there is a reduction in selling price by 10% in the financial year 200809 and company desires to earn the same amount of profit as in 2007-08,
what would be the required sales volume ?
(9
marks)

Answer 7(a)
Financial statement analysis is very much helpful in assessing the financial
position and profitability of a concern. The main objectives of analyzing the financial
statement are as follows :
(i)

The analysis would enable the present and the future earning capacity and
the profitability of the concern.

(ii)

The operational efficiency of the concern as a whole as well as department

wise can be assessed. Hence, the management can easily locate the areas
of efficiency and inefficiency.

(iii)

The solvency of the firm, both short-term and long-term, can be determined
with the help of financial statement analysis which is beneficial to trade
creditors and debenture holders.

(iv)

The comparative study in regard to one firm with another firm or one
department with another department is possible by the analysis of financial
statements.

(v)

Analysis of past results in respect of earning and financial position of the

enterprise is of great help in forecasting the future results. Hence it helps in
preparing budgets.

(vi) It facilitates the assessment of financial stability of the concern.

(vii)

The long-term liquidity position of funds can be assessed by the analysis of

financial statements.

Answer to Alternate Question 7(a)

Interest is an element of cost and therefore, should be included in cost. Interest
is the cost to be paid for the use of capital; capital is also a factor of production just
as labour. If interest is not included in cost calculation, a number of managerial
decisions may be taken wrongly. Thus, where a decision involves replacement of
labour with expensive machinery, the question of interest assumes importance,
since, if interest is not included, the cost accountant may conclude that machinery is
cheaper. In inventory control, interest is an important item to be considered. Payment
of interest depends entirely on the financing policies and financing pattern. In reality,
whether a firm raises a certain sum of money from the proprietor or borrows from the
outside does not make any difference as far as production efficiencies are
concerned. Thus, an amount of notional interest may be charged on the total capital
whether it is borrowed or not.
Another practical difficulty arises in the calculation of the amount of capital on
which interest should be worked out. While the fixed capital is readily ascertainable,
working capital keeps on changing. If notional interest is to be charged, the problem
of determining a proper rate of interest arises. In the money and capital markets,
there is a large number of rates depending upon different factors like risk, period of
maturity, bank rate, etc. By including interest on the proprietors capital amount by
taking that

figure in the cost of production, we would obviously be including profit since the
closing stock will be valued at a higher figure.
Hence, it is true that there are practical difficulties in including interest as part of
the normal cost. However, excluding it altogether may lead to wrong managerial
decisions which are not desirable. Therefore, it is suggested that while interest may
be excluded from the regular cost sheet, cost calculations for other purposes for
decision making should include a proper amount of notional interest where the
interest will be material.
Answer 7(b)
(i) P/V ratio

(Change in Profit / Change in Sales) x 100 or

Rs. 42,00,000 / (Rs.6,00,00,000Rs. 4,50,00,000) x 100 =

28% Break Even Sales

=

Fixed Cost / (P/V Ratio)

Rs. 1,40,00,000 / 28% = Rs.

5,00,00,000 (ii) Contribution for sales volume of Rs.8,00,00,000

=

(PV Ratio x S) or 28% x Rs. 8,00,00,000 = Rs. 2,24,00,000

Therefore, Profit
=

(Contribution Fixed Cost) = Rs.(2,24,00,000 1,40,00,000) =

Rs.84,00,000 (iii) Contribution in 2007-08 = 28% x Rs. 6,00,00,000 = Rs.

1,68,00,000
Sales in 2008-09 after reduction in price by 10%
=

(Rs. 6,00,00,000 10% of Rs. 6,00,00,000) = Rs. 5,40,00,000

New PV Ratio = [Changed Contribution / Changed Sale] x 100

=

(Rs. 1,68,00,000 Rs. 60,00,000)/ Rs. 5,40,00,000 x 100 =

20% The required sales volume for earning contribution of

Rs.1,68,00,000
=

(Required Contribution / New PV Ratio)

(Rs. 1,68,00,000 / 20%) = Rs.8,40,00,000

Question 8
(a) Distinguish between any two of the following
: (i) Budget period and control period.
(ii) Cash and cash equivalents.
(iii) Cost sheet and production account.
(3 marks
each) (b) From the following information, prepare a cash flow statement showing
net cash
flows from operating activities, investing activities and financing activities as
per Accounting Standard-3 (revised) :
Rs. in Lakhs
Net profit
Dividend paid (including dividend tax)
Book value of assets sold
Amortisation of capital grant

25,000
8,535
185
6

EP CACMA December 2008 40

40

EP CACMA December 2008

Carrying amounts of investments sold

27,765
Interest expenses
10,000
Increase in working capital (excluding cash
and bank balances)
56,075
Expenditure on construction work-in-progress
34,740
Receipt of grant for capital projects
12
Proceeds from short term borrowings
20,575
Closing cash and bank balances
6,988
Provision for taxation
5,000
Income-tax paid
Loss on sale of assets

4,248
40

Depreciation charged
20,000
Profit on sale of investments
Interest on investments

100
2,506

(9 marks)

Interest paid during the year

10,520
Purchase of fixed assets
Investment in joint venture

14,560
3,850

Proceeds from calls-in-arrears

2
Proceeds from long-term borrowings
25,980
Opening cash and bank balances
5,003
Answer 8(a)(i)
Budget period and control period
A budget period should be distinguished from control period. Budget period is
the period for which a budget is prepared and used, which may then be sub-divided
into control periods. It refers to the period of time covered by a budget. In
determining the length of the budget period, the following factors should be
considered :
(i) The budget period should be long enough to complete production of the
various products.
(ii) For the business of a seasonal nature, the budget period should cover at
least one entire seasonal cycle.

EP CACMA December 2008

EP CACMA December 2008 41
41
(iii) The budget period should be long enough to allow for the financing of
production well in advance of actual needs.
(iv) Major operations and drastic changes in plant lay-out or manufacturing
methods must be planned far in advance to determine financial
requirements.
(v) The budget period should coincide with the financial accounting period to
compare actual results with budgeted estimates.
A budget period should be distinguished from control period. The latter indicates
the periodicity, with which reports are sent to the various levels of management. It
need not be the same as the budget period. Reports are sent usually at shorter
intervals so

that corrective action may be taken within the budget period. This would ensure that
the overall variation between budget and actual is minimized. The periodicity of the
reports is also dependent upon the urgency and significance of the matter under
report.
Answer 8(a)(ii)
Cash
and
equivalent

cash

Cash comprises cash in hand and demand deposits with banks. Cash
equivalents are short term, highly liquid investments that are readily convertible into
known amounts of cash and which are subject to an insignificant risk of changes in
value. An investment normally qualifies as a cash equivalent only when it has a short
maturity of, say, three months or less from the date of acquisition. Examples of cash
equivalents are : (a) treasury bills, (b) commercial paper, (c) money market funds, (d)
investment in preference shares and redeemable within three months can also be
taken as cash equivalents if there is no risk of failure of the company. Therefore, cash
flows are inflows and outflows of cash and cash equivalents.
Answer 8(a)(iii)
Cost
sheet
account

and

production

Following are the points of distinction between cost sheet and production account:
Cost Sheet

Production Account

(1) It is prepared as a statement.

It is prepared as an
account. (2) Expenses are classified to ascertain
Expenses are not
classified.
prime cost, factory cost, total cost, etc.
(3) To enable comparison, figures of
previous period are provided.
is

No figures of previous period are

provided. Hence no comparison
possible.

(4) It is based on actual and estimated

figures of expenses.

It is based on actual figures.

(5) It is prepared for each job and someIt is prepared for each production
times for the whole factory.
department.
Answer 8(b)
Cash Flow Statement
(Rs. In lakhs)
(A) Cash Flows from Operating Activities
:
Net Profit before Provision for Taxation
Rs. (25,000 + 5,000)
Add :

30,000

Adjustments
Depreciation
Loss on Sale of Assets
Interest Expenses

20,000
40
10,000

30,040
60,040

Less :
6
AmortisationProfit on Sale of Investments
of Capital
Grant
Interest income on Investments

100
2,506

Operating Profit before change in Working Capital

Less : Increase in Working Capital

2,612
57,428
56,075
1,353
4,248

Less : Income Tax Paid

Net Cash used in Operating Activities
It is prepared for each production

(2,895)

(B) Cash Flows from Investing Activities :

Sale on Investments (Book Value + Profit on Sale)

27,865

Sale of Asset (Book Value Loss on Sale)

145

Interest on Investments

2,506
30,516

Less : Fixed Assets Purchased

Investments in Joint Venture
Expenses on construction W.I.P

14,560
3,850
34,740

53,150

Net Cash Used in Investing Activities

(22,634)

(C) Cash Flow from Financing Activities :

Calls in Arrears received

Grant received for Capital Projects

12

Proceeds from Long Term Borrowings

25,980

Proceeds from Short Term Borrowings

20,575

Less : Interest Paid

10,520

Dividend Paid (Including Tax)

8,535

Net Cash Generated from Financing Activities

46,569

19,055
27,514

Net increase in Cash and Cash Equivalents (A+B+C)

1,985

Cash and Cash Equivalents at the beginning

5,003

Cash and Cash Equivalents at the end

6,988