Paper10 Set1 Answer

Answer to MTP_Intermediate_Syl2016_June2017_Set 1
Paper 10- Cost & Management Accounting and Financial Management
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
Paper-10: Cost & Management Accounting and Financial Management
Full Marks: 100 Time allowed: 3 hours
PART – A (Cost and Management Accounting)

Section I
1. Answer the following questions:
(a) Choose the correct answer from the given four alternatives. [1x6=6]
(i) The breakeven point is the point at which,

(a) There is no profit, no loss
(b) Contribution margin is equal to total fixed cost
(c) Total fixed cost is equal to total revenue
(d) All of the above.
(ii) The P/V ratio of a product is 0.4 and the selling price is `40 per unit. The marginal cost of
the product would be,
(a) ` 8
(b) ` 24
(c) ` 20
(d) ` 25
(iii) If standard hours are 400 @ ` 1 per hour and actual hours are 380 @ `1.25 per hour, the
labour rate variance is:
(a) ` 20 (Favourable)
(b) ` 25 (Favourable)
(c) ` 100 (Adverse)
(d) ` 95 (Adverse)
(iv) The time taken for initial unit of a product is 100 hours. At 80% learning rate what is the
total time for 4 units.
(a) 100 hours
(b) 80 hours
(c) 160 hours
(d) 256 hours
(v) Sales `4,00,000; Variable Cost ` 3,00,000; Fixed Cost ` 75,000; Investments ` 1,50,000 and
desired 20% on investments. What is residual income?
(a) ` 25,000
(b) ` 30,000
(c) ` 20,000
(d) ` (5,000)
(vi) Sales in January month ` 3,00,000; Credit Sales are 80%; Credit period is 2 months.
Amount collected in the month of March is
(a) ` 50,000
(b) ` 2,40,000
(c) ` 40,000
(d) None of the above
(b) Match the statement in Column I with the most appropriate statement in Column II :
[1×4 =4]
Column I Column II
i. Inter-firm comparison A Decision Making
ii. Margin of Safety B Difference between Standard and Actual
Cost.
iii. Variance Analysis C Profit / PV Ratio
iv. Differential Costing D Technique for evaluating performance.
(c) State whether the following statements are True or False [1x4=4]
(i) Uniform costing is a method of costing.

(ii) A variance may be either favourable or adverse.
(iii) Marginal cost equals to prime cost plus variable overheads.
(iv) Variable Cost is also known as Indirect Cost.
Answer:
(a) Chose the correct answer:
(i) (a) There is no profit, no loss

(ii) (b) `24
(iii) (d) `95 (Adverse)
(iv) (d) 256 hours
(v) (d) `(5,000)
(vi) (b) `2,40,000
(b) Matching:
Column I Column II
i. Inter-firm comparison D Technique for evaluating performance.
ii. Margin of Safety C Profit / PV Ratio
iii. Variance Analysis B Difference between standard and actual
cost
iv. Differential Costing A Decision Making
(c) True and False
(i) False
(ii) True
(iii) False
(iv) False
Section II
Answer any three Question from Q. No. 2, 3, 4 and 5. Each Question carries 12 Marks
2. (a) The following data relate to a manufacturing company:
Plant capacity : 4,00,000 units per annum. Present utilisation : 40%
Actuals for the year 2016 were :
Selling price `50 per unit Variable Manufacturing Costs `15 per unit
Material Cost 20 per unit Fixed Costs 27 lakhs
In order to improve capacity utilisation the following proposals are considered:
Reduce selling price by 10%
Spend additionally ` 3 lakhs on sales promotion.
How many units should be sold to earn a profit of ` 5 lakhs per year. [6]
Answer:
PROPOSAL 1: REDUCTION OF SELLING PRICE BY 10%
New Selling Price (` 50 - ` 5) `45

Less: Variable Costs:
Materials Cost `20
Variable Manufacturing Cost 15 35
Contribution per unit 10
No. of units to be sold to earn a profit of ` 5
lakhs:
Fixed Costs + Desired Profit
=
contribution per unit
27,00,000 + 5,00,000
10
32,00,000
= = 3,20,000 units
10
PROPOSAL 2: Additional Expenditure of `3 lakhs on Sales Promotion
New Selling Price `50

Less: Variable Costs:
Materials Cost `20
Variable Manufacturing Cost 15 35
Contribution per unit 15
No. of units to be sold to earn a profit of ` 5 lakhs:
Fixed Costs + Additional Sales Promotion Cost + Desired Profit
=
Contribution per unit
27,00,000 + 3,00,000  5,00,000
15
35,00,000
= = 2,33,334 units
15
(b) A company produces and markets industrial containers and packing cases. Due to
competition, the company proposes to reduce the selling price. If the present level of
profit is to be maintained, indicate the number of units to be sold if the proposed
reduction in selling price is:
(a) 5%; (b) 10%;
The following additional information is available:
` `
Present Sales Turnover (30,000 units) 3,00,000
Variable Cost (30,000 units) 1,80,000
Fixed Cost 70,000 2,50,000
Net Profit 50,000

[6]
Answer:
Calculation of Contribution
Present Anticipated Condition (Reduction in
Conditions Selling Price)
5% Reduction 10% Reduction
` ` `
Selling price per unit 10.00 9.50 9.00
Less: Variable cost per unit 6.00 6.00 6.00
(`1,80,000/ 30,000 units)
4.00 3.50 3.00
Total FixedCost + Desired Profits

Number of units to be sold to earn desired profits =
Contribution Per Unit
`70,000 + ` 50,000
(i) Under present conditions = = 30,000 units
`4
`70,000 + ` 50,000
(ii) At a price reduction of 5% =
` 3.50
`70,000 + ` 50,000
(iii) At a price reduction of 10% =
`3
3. (a) The budgeted sales for one month and the actual results achieved are as under:
Product Budget Actual

Quantity Rate
Amount Quantity Rate Amount
Nos. ` ` Nos. ` `
A 1,000 100
1,00,000 1,200 125 1,50,000
B 700 200
1,40,000 800 150 1,20,000
C 500 300
1,50,000 600 300 1,80,000
D 300 500
1,50,000 400 600 2,40,000
2,500 5,40,000 3,000 6,90,000
Calculate in respect of each product,
(i) Sales Value Variance
(ii) Sales Price Variance
(iii) Sales Volume Variance
(iv) Sales Mix Variance [2x4 =8]
Answer:
Sales Value Variance = Budgeted sales – Actual Sales
= `5,40,000 – 6,90,000 = 1,50,000 (Favourable)
Sales Price Variance = Standard sales – Actual Sales
Or = Actual Qty. × (Std. rate – Actual rate)
A = 1,200 × (100 – 125) = `30,000 (F)
B = 800 × (200 – 150) = `40,000 (A)
C = 600 × (300 – 300) = Nil
D = 400 × (500 – 600) = `40,000 (F)
30,000 (F)
Sales Volume Variance = Budgeted sales – Standard Sales
Or, Std. rate × (Budgeted Qty. – Actual Qty.)
A = 100 × (1,000 – 1,200) = `20,000 (F)

B = 200 × (700 – 800) = 20,000 (F)
C = 300 × (500 – 600) = 30,000 (F)
D = 500 × (300 – 400) = 50,000 (F)
`1,20,000 (F)
Verification:
Sales Value Variance = Sales price Variance + Sales volume variance
= `30,000 (F) + `1,20,000 (F)
= `1,50,000 (Favorable)
Sales Mix Variance = Revised Standard Sales – Standard Sales
Or = Std. Rate × (Revised Std. Qty. – Actual Qty.)
Total Actual Mix of Sales
Revised Std. Qty. = × Std. Qty.
Total Standard Mix of Sales
Sales mix variance: A = 100 × (1,200 – 1,200) = Nil
B = 200 × (840 – 800) = 8,000 (A)
C = 300 × (600 – 600) = Nil
D = 500 × (360 – 400) = 20,000 (F)
12,000 (Favorable)
(b) The following details relating to the Product 'X' during the month March, 2016 are available.
You are required to compute:
(i) Material Price Variance.
(ii) Labour Rate Variance.
Standard Cost per unit:
Materials 50 kg. @ ` 40 per kg.
Labour 400 hrs. @ ` 1.00 per hour
Actual Cost for the month:
Material 4,900 kgs. @ 42 per kg.
Labour 39,600 hours @ ` 1.10 per hour
Actual production—100 units [2+2=4]
Answer:
Standard Cost (SC): `
Material 100 x 50 kgs. = 5,000 kgs. @ ` 40 = 2,00,000
Labour 100 x 400 = 40,000 hrs. @ ` 1.00 = 40,000
2,40,000
Actual Cost (AC) `

Material 4,900 kgs. @ ` 42 = 2,05,800
Labour 39,600 kgs. @ ` 1.10 = 43,560
2,49,360
Material Variances `
(i) Material Price Variance(MPV)= AQ(SR-AR) = 4,900(40-42)= 9,800 A
Labour Variances `
(i) Labour Rate Variance(LRV)=AHP(SR-AR)= 39,600(1.00-1.10) = 3,960 A
4. (a) A company manufactures product - A and product - B during the year ending 31st
December, 2016, it is expected to sell 15,000 kg. of product A and 75,000 kg. of product B at
` 30 and ` 16 per kg. respectively. The direct materials P, Q and R are mixed in the
proportion of 3: 5: 2 in the manufacture of product A, Materials Q and R are mixed in the
proportion of 1:2 in the manufacture of Product B.
The actual and budget inventories for the year are given below:
OPENING STOCK EXPECTED ANTICIPATED
CLOSING STOCK COST PER KG.
Kg. Kg. `
Material - P 4,000 3,000 12
Q 3,000 6,000 10
R 30,000 9,000 8
Product - A 3,000 1,500 --
B 4,000 4,500 --
Prepare the production Budget and Materials Budget showing the expenditure on purchase
of materials for the year ending 31-12-2016. [6]
Answer:
Production Budget for the product A & B
Particulars Product A Product B
Sales 15,000 75,000
Add: Closing Stock 1,500 4,500
16,500 79,500
Less: Opening Stock 3,000 4,000
Production 13,500 75,500
Material purchase budget for the year ending Dec31st 2016

Particulars P Q R Total
Material required for product A 4,050 6,750 2,700 13,500
in the ratio of 3:5:2
Material required for product B ------- 25,167 50,333 75,500
in the ratio of 1:2
Total requirement 4,050 31,917 53,033
Add: Closing stock 3,000 6,000 9,000
7,050 37,917 62,033
Less: Opening stock 4,000 3,000 30,000
Purchases (in units) 3,050 34,917 32,033
Cost per kg. 12 10 8
Total purchase cost (`) 36,600 3,49,170 2,56,264 6,42,034
(b) A firm received an order to make and supply eight units of standard product which
involves intricate labour operations. The first unit was made in 10 hours. It is understood
that this type of operations is subject to 80% learning rate. The workers are getting a
wages rate of ` 12 per hour.
(i) What is the total time and labour cost required to execute the above order?
(ii) If a repeat order of 24 units is also received from the same customer, what is the
labour cost necessary for the second order? [6]
Answer:
80% Learning Curve results are given below:
Production (Units) Cumulative Average Time Total Time (hours)
(hours)
1 10 10
2 8 16
4 6.4 25.6
8 5.12 40.96
16 4.096 65.54
32 3.2768 104.86
Labour time required for first eight units = 40.96 hours

Labour cost required for 8 units = 40.96 hours × ` 12/hr = ` 491.52
Labour time for 32 units = 104.86 hours
Labour time for first eight units = 40.96 hours
Labour time required for 2nd order for 24 units = 63.90 hours
Labour cost for 24 units = 63.90 hours × ` 12/hr = ` 766.80
5. Write short note on any three. [3 x 4=12]
(a) Significance of Management Accounting
(b) Objectives Of Intercompany Transfer Pricing
(c) Responsibility Accounting:
(d) Limitations of Inter-firm Comparison
Answer:
(a) Significance of Management Accounting:
The various advantages that accrue out of management accounting are enumerated
below:
 Delegation of Authority: Now a day the function of management is no longer
personal, management accounting helps the organisation in proper delegation of
authority for the attainment of the vision and mission of the business.
 Need of the Management: Management Accounting plays the role in meeting the
need of the management.
 Qualitative Information: Management Accounting accumulates the qualitative
information so that management would concentrate on the actual issue to
deliberate and attain the specific conclusion even for the complex problem.
 Objective of the Business: Management Accounting provides measure and reports to
the management thereby facilitating in attainment of the objective of the business.
(b) Objectives Of Intercompany Transfer Pricing:

The following are the main objectives of intercompany transfer pricing scheme:
 To evaluate the current performance and profitability of each individual unit: This is
necessary in order to determine whether a particular unit is competitive and can
stand on its working. When the goods are transferred from one department to
another, the revenue of one department becomes the cost of another and such inter
transfer price affects the reported profits.
 To improve the profit position: Intercompany transfer price will make the unit
competitive so that it may maximize its profits and contribute to the overall profits of
the organisation.
 To assist in decision making: Correct intercompany transfer price will make the costs
of both the units realistic in order to take decisions relating to such problems as make
or buy, sell or process further, choice between alternative methods of production.
 For accurate estimation of earnings on proposed investment decisions: When finance
is scarce and it is required to determine the allocation of scarce resources between
various divisions of the concern taking into consideration their competing claims, then
this technique is useful.
(c) Responsibility Accounting: One of the recent developments in the field of management
accounting is the responsibility accounting, which is helpful in exercising cost control.
Responsibility Accounting is a system of accounting that recognizes various responsibility
centers throughout the organization and reflects the plans and actions of each of these
centers by assigning particular revenues and costs to the one having the pertinent
responsibility. It is also called profitability accounting and activity accounting.
It is a system in which the person holding the supervisory posts as president, function
head, foreman, etc are given a report showing the performance of the company or
department or section as the case may be. The report will show the data relating to
operational results of the area and the items of which he is responsible for control.
Responsibility accounting follows the basic principles of any system of cost control like
budgetary control and standard costing. It differs only in the sense that it lays emphasis
on human beings and fixes responsibilities for individuals. It is based on the belief that
control can be exercised by human beings, so responsibilities should be fixed for
individuals.
Principles of responsibility accounting are as follows:
 A target is fixed for each department or responsibility center.
 Actual performance is compared with the target.
 The variances from plan are analysed so as to fix the responsibility.
 Corrective action is taken by higher management and is communicated.
(b) Limitations of Inter-firm Comparison:
The practical difficulties that are likely to arise in the implementation of a scheme of inter-
firm comparison are:
 The top management may not be convinced of the utility of inter-firm comparison.
 Reluctance to disclose data which a concern considers to be confidential.
 A sense of complacence on the part of the management who may be satisfied with
the present level of profits.
 Absence of a proper system of Cost Accounting so that the costing figures supplied
may not be relied upon for comparison purposes.
 Non-availability of a suitable base for comparison.
PART – B (Financial Management)

Section III
6. Answer the following questions:
(a) Choose the correct answer from the given four alternatives. [1x6=6]
(i) Current Assets ` 20,00,000; Current Liabilities ` 10,00,000 and Stock ` 2,00,000, then what is
liquid ratio?
(a) 2 times
(b) 1.8 times
(c) 1.4 times
(d) None of these
(ii) Annual credit sales ` 4,00,000; Average collection period 45 days (assume 360 days in a
year). What is Average debtors?
(a) ` 60,000
(b) ` 74,000
(c) ` 50,000
(d) ` 4,00,000
(iii) Investment in a project is ` 200 lakhs and Net Present Value is ` 50 lakhs. Then the
amount of inflows is :
(a) ` 150 lakhs
(b) ` 200 lakhs
(c) ` 100 lakhs
(d) ` 250 lakhs
(iv) PAT of a company ` 100 lakhs and number of equity shares of ` 10 each is ` 50 lakhs, then
EPS is:
(a) ` 2
(b) ` 1
(c) ` 10
(d) None of these
(v) Degree of operating leverage is :

(a) EBIT / EBT
(b) Contribution / EBT
(c) Contribution / EBIT
(d) None of these
(vi) Cost of goods sold is `8000 and gross margin is `5000 then revenue will be
(a) `3,000
(b) `5,000
(c) `8,000
(d) `13,000
(b) Match the statement in Column I with the most appropriate statement in Column II :
[1×4 =4]
Column I Column II
i. Cash Flow Statement A Capital Budgeting
ii. Net working capital B Net Sales / Fixed Assets
iii. Pay Back Period C AS – 3
iv. Fixed Assets Turnover Ratio D Current Assets – Current Liabilities
(c) State whether the following statements are True or False [1x4=4]
(i) Ratio Analysis is the only technique of analysis of financial statement.

(ii) The difference between the cash receipts and cash payments is the net cash flow
provided by (or used in) operating activities.
(iii) Commercial Paper (CP) is a secured promissory note.
(iv) Investment decisions and capital budgeting are same.
Answer:
(a) Choose the correct alternative:
(i) (B) 1.8 times

(ii) (c) `50,000
(iii) (d) `250 lakhs
(iv) (d) None of these
(v) (c) Contribution / EBIT
(vi) (d) `13,000
(b) Matching
Column I Column II
i. Cash Flow Statement C AS – 3
ii. Net working capital D Current Assets – Current Liabilities
iii. Pay Back Period A Capital Budgeting
iv. Fixed Assets Turnover Ratio B Net Sales / Fixed Assets
(c) True & False
(i) False
(ii) True
(iii) False
(iv) False
Section IV
Answer any three Question from Q. No 7, 8, 9 and 10. Each Question carries 12 Marks
7. (a) The following information is given to you as on 31-03-2016 for a company:

Current Ratio 2.5
Liquid Ratio 1.5
Fixed Assets (net) 1,80,000
Working Capital 60,000
Reserves and Surplus 40,000
Bank Overdraft (Short term) 10,000
Assume that there is no long term loan or fictitious assets.
Make a statement of proprietary fund and match it with fixed assets and as many details
of current assets net of current liabilities. [8]
Answer:
CA/CL = 2.5; CA - CL = 60,000
1.5 CL = 60,000
CL = 60,000/1.5 = 40,000
CA = 60,000 + CL = 1,00,000
Bank OD is not excluded from CL since it is stated to be short term
Quick Ratio = CA - Stock/CL = 1.5
1,00,000 - stock = 1.5 × 40,000 = 60,000
Stock = 40,000
Debtors/ Cash = 60,000
Share Capital = 2,00,000
Liabilities Amount (`) Assets Amount (`)

Share Capital 2,00,000 Fixed Assets 1,80,000
Reserves 40,000 Current Assets:
Stock 40,000
Current Liabilities 40,000 Cash and Debtors 60,000
Total 2,80,000 Total 2,80,000
(b) The Balance Sheet of Magnavision Ltd. as on 31.03.2015 and 31.03.2016 are given below:
Assets 31.03.2015 31.03.2016
Land & Building 8,00,000 6,40,000
Investments 1,00,000 1,20,000
Inventory 4,80,000 4,20,000
Accounts Receivables 4,20,000 9,10,000
Cash & Bank Balance 2,98,000 3,94,000
Total Assets: 20,98,000 24,84,000
Liabilities
Share Capital 9,00,000 9,00,000
Reserves 6,00,000 6,20,000
Profit and Loss Account 1,12,000 1,36,000
Term Loan Nil 5,40,000
Current Liabilities 4,86,000 2,88,000
Total Liabilities: 20,98,000 24,84,000
From the fallowing information, you are required to prepare the Statement of Changes in
Working Capital. [4]
Answer:
Magna Vision Ltd.
Statement of changes in Working Capital:
Particulars 31.03.2015 31.06.2016 Increase in Decrease
Wc in WC
Current Assets (A) 60,000
Inventory 4,80,000 4,20,000
Accounts Receivable 4,20,000 9,10,000 4,90,000
Cash & Bank Balances 2,98,000 3,94,000 96,000
11,98,000 17,24,000 5,26,000
Current Liabilities (B) 4,86,000 2,88,000 1,98,000
(A – B) 7,12,000 14,36,000 7,84,000 60,000
Net Increase in WC 7,24,000
8. (a) A company plans to sell 48000 units next year. The following information is given:
Raw Materials = `100(per unit)
Manufacturing expense = `30(per unit)
Selling cost = `20(per unit)
Selling Price = `180 (per unit)
Average Cash balance = `1,20,000
The duration at various stages is expected to be as follows:

Raw materials stage 2 months
Work in progress 1 month (Row Materials 100% complete; Manufacturing 25% complete)
Finished goods 1 month
Debtors 1 month
Assume uniform sales of 4000 units per month.
Estimate the gross working capital requirement taking
(i) Debtors at Cost;
(ii) Debtors at Sales Value. [8]
Answer:
(a) Statement of Gross Working Capital
Item Workings Amount (`)
Current Assets
Raw Materials 4000 × 2 × 100 8,00,000
WIP:
Materials 4000 × 100 × 100% × 1 month 4,00,000
Manufacturing Expenses 4000 × 30 × 25% × 1 month 30,000
Finished Goods 4000 × 130 × 1 month 5,20,000
Debtors (at cost) 4000 × 150 × 1 month 6,00,000
Cash 1,20,000
Total Gross WC Requirement 24,70,000
If Debtors are at Sales, add profit of `30 per unit. Debtors will be 30 × 4,000 = 1,20,000
More than the above figure. i.e. 7,20,000
Then, Gross WC= 25,90,000
Alternative Presentation:
RM WIP FG Debtors Total Working Amount
RM 2m 1m 1m 1m 5m 5 × 100 × 20,00,000
4000
Mfg. expenses .25 1 1 2.25 2.25 × 2,70,000
m 4000 × 30
Selling exp 1 1 4000 × 20 80,000
Profit 1 1 4000 × 30 1,20,000
Cash 1,20,000
Total Gross WC(Drs at 25,90,000
sales)
Less : Profit 1,20,000
Gross WC (Drs at Cost) 24,70,000
(b) Calculate the degree of Operating Leverage and degree of Financial Leverage following
firms:
Firm X
(i) Output (units) 80000
(ii) Variable Cost per unit (`) 1.50
(iii) Fixed Cost (`) 10,000
(iv) Interest on Loan Fund (`) 6,000
(v) Selling price per unit (`) 2.50
[4]
Answer:
FIRM X
Output (Units) 80,000
Selling price period (`) 2.50
Less : V Cost per unit (`) 1.50
Cost per unit (`) 1.00
Total contribution (`) 80,000
Less : Fixed Cost (`) 10,000
EBIT 70,000
Less : Interest 6,000
PBT 64,000
80,000
Cont 70,000
Degree of I.O.L =
EBIT =1.14
EBIT 70,000
Degree FL =
PBT 64,000
Degree of Comb =1.09
Cont
Leverage = 80,000
PBT
64,000
=1.25
9. (a) PQR Ltd. operating income (before interest and tax) is `11,25,000. The firm’s cost of debts is
10% and currently firm employs `37,50,000 of debts. The overall cost of capital of firm is 12%.
Calculate cost of equity. [4]
Answer:
Value of the firm (V) = EBIT/ Overall cost of capital (Ko)
= `11,25,000/ 12% = `93,75,000
Market value of debts (D) = 37,50,000
Market value of equity (S) = V – Debts
= 93,75,000 – 37,50,000 = `56,25,000
Cost of Equity (Ke) = (Ko.V – Kd.D) /S
= (0.12 x 93,75,000 – 0.10 x 37,50,000)/ 56,25,000
= 13.33%
(b) A limited Company is considering investing a project requiring a capital outlay of `

2,00,000. Forecast for annual income after depreciation but before tax is as follows:
Year `
1 1,00,000
2 1,00,000
3 80,000
4 80,000
5 40,000
Depreciation may be taken as 20% on original cost and taxation at 50% of net income.
Calculate NPV. [8]
Answer:
Calculation of NPV
Year EBT Tax @50% Cash inflow after PV factor Present
tax [PAT + Depn.] @ 10% Value `
1 1,00,000 50,000 90,000 0.909 81,810
2 1,00,000 50,000 90,000 0.826 74,340
3 80,000 40,000 80,000 0.751 60,081
4 80,000 40,000 80,000 0.683 54,640
5 40,000 20,000 60,000 0.621 37,260
Total Inflow 3,08,131
Less: Initial investment 2,00,000
NPV (1,08,131)
10. Write short note on any three [3 x 4=12]
(a) Assumptions of the MM Approach:

(b) Differences between Funds Flow Statement and Cash Flow Statement
(c) Commercial Bill
(d) Significance of Cash Management
Answer:
(a) Assumptions of the MM Approach:
 There is a perfect capital market. Capital markets are perfect when
 Investors are free to buy and sell securities,
 They can borrow funds without restriction at the same terms as the firms do,
 They behave rationally,
 They are well informed, and
 There are no transaction costs.
 Firms can be classified into homogeneous risk classes. All the firms in the same risk
class will have the same degree of financial risk.
 All investors have the same expectation of a firm‘s net operating income (EBIT).
 The dividend payout ratio is 100%, which means there are no retained earnings.
 There are no corporate taxes. This assumption has been removed later.
(b) Differences between Funds Flow Statement and Cash Flow Statement:
The following are the main differences between a Funds Flow Statement and a Cash
Flow Statement:-
Funds Flow Statement Cash Flow Statement
1. Funds Flow Statement reveals the Cash Flow Statement reveals the changes
change in working capital between in cash position between two balance
two Balance Sheet dates sheet dates
2. Funds Flow Statement is based on Cash Flow Statement is based on cash
accounting basis of accounting
3. In the case of Funds Flow Statement a No such schedule of changes in working
schedule of changes in working capital is prepared for a Cash Flow
capital is prepared. Statement.
4. Funds Flow Statement is useful in Cash Flow Statement as a tool of financial
planning, intermediate and long term analysis is more useful for short-term analysis
financing. and cash planning.
(c) Commercial Bill:
Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk. It
enhances the liability to make payment in a fixed date when goods are bought on
credit. The bill of exchange is a written unconditional order signed by the drawer
requiring the party to whom it is addressed to pay on demand or at a future time, a
definite sum of money to the payee. It is negotiable and self-liquidating money market
instrument which evidences the liquidity to make a payment on a fixed date when goods
are bought on credit. It is an asset with a high degree of liquidity and a low degree of risk.
Such bills of exchange are discounted by the commercial banks to lend credit to the bill
holder or to borrow from the Central bank. The bank pays an amount equal to face
value of the bill minus collection charges and interest on the amount for the remaining
maturity period. The writer of the bill (debtor) is drawer, who accept the bill is drawee
and who gets the amount of bill is payee. Commercial bills can be inland bills or foreign
bills.
(d) Significance of Cash Management

 Cash planning: Cash is the most important as well as the least unproductive of all
current assets. Though, it is necessary to meet the firm‘s obligations, yet idle cash
earns nothing. Therefore, it is essential to have sound cash planning neither excess nor
inadequate.
 Management of cash flows: This is another important aspect of cash management.
Synchronisation between cash inflows and cash outflows rarely happens. Sometimes,
the cash inflows will be more than outflows because of receipts from debtors, and
cash sales in huge amounts. At other times, cash outflows exceed inflows due to
payment of taxes, interest and dividends etc. Hence, the cash flows should be
managed for better cash management.
 Maintaining optimum cash balance: Every firm should maintain optimum cash
balance. The management should also consider the factors determining and
influencing the cash balances at various point of time. The cost of excess cash and
danger of inadequate cash should be matched to determine the optimum level of
cash balances.
 Investment of excess cash: The firm has to invest the excess or idle funds in short term
securities or investments to earn profits as idle funds earn nothing. This is one of the
important aspects of management of cash. Thus, the aim of cash management is to
maintain adequate cash balances at one hand and to use excess cash in some
profitable way on the other hand.

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Answer to MTP_Intermediate_Syl2016_June2017_Set 1

Paper 10- Cost & Management Accounting and Financial Management

Full Marks: 100 Time allowed: 3 hours

PART – A (Cost and Management Accounting)

1. Answer the following questions:

(i) The breakeven point is the point at which,

(i) Uniform costing is a method of costing.

(i) (a) There is no profit, no loss

(c) True and False

New Selling Price (` 50 - ` 5) `45

PROPOSAL 2: Additional Expenditure of `3 lakhs on Sales Promotion

New Selling Price `50

The following additional information is available:

Present Sales Turnover (30,000 units) 3,00,000

Variable Cost (30,000 units) 1,80,000

Fixed Cost 70,000 2,50,000

Net Profit 50,000

Total FixedCost + Desired Profits

Product Budget Actual

A = 100 × (1,000 – 1,200) = `20,000 (F)

Actual Cost (AC) `

Material purchase budget for the year ending Dec31st 2016

Labour time required for first eight units = 40.96 hours

5. Write short note on any three. [3 x 4=12]

(a) Significance of Management Accounting

(b) Objectives Of Intercompany Transfer Pricing

(c) Responsibility Accounting:

(d) Limitations of Inter-firm Comparison

(b) Objectives Of Intercompany Transfer Pricing:

PART – B (Financial Management)

6. Answer the following questions:

(v) Degree of operating leverage is :

(i) Ratio Analysis is the only technique of analysis of financial statement.

(i) (B) 1.8 times

(c) True & False

7. (a) The following information is given to you as on 31-03-2016 for a company:

Liabilities Amount (`) Assets Amount (`)

Total 2,80,000 Total 2,80,000

The duration at various stages is expected to be as follows:

(b) A limited Company is considering investing a project requiring a capital outlay of `

(a) Assumptions of the MM Approach:

(c) Commercial Bill:

(d) Significance of Cash Management

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