The Institute of Cost Accountants of India (Statutory Body Under An Act of Parliament)

Paper 10: Cost & Management Accounting and Financial Management
[December_2021_Term]
INTERMEDIATE EXAMINATION
Syllabus 2016
Paper 10: COST & MANAGEMENT ACCOUNTING AND FINANCIAL MANAGEMENT (CMFM)
Time Allowed: 3 Hours Full Marks: 100
There are Sections A, B, C and D to be answered subject to instructions given against each.
Section A [20 Marks]
You are required to answer all the questions. Each question carries 1 mark. [20×1=20]
Instructions: Each question is followed by 4 Answer choices and only one is correct. You are
required to select the choice which according to you represents the correct answer.
1. Despite the development of Management Accounting as an effective discipline to improve

the managerial performance, it has some limitations.
Which of the following is a limitation of management accounting?
(i) Psychological Resistance
(ii) Physiological Resistance
(iii) Both of the above
(iv) None of the above
2. Which of the following costs incurred by a commercial airline can be classified as variable?
(i) Interest costs on leasing of aircraft
(ii) Pilots' salaries
(iii) Depreciation of aircraft
(iv) None of these three costs can be classified as variable
The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
3. When standard yield is higher than actual yield, material yield variance is________.
Which one of the choices from below according to you most appropriately completes the
above sentence?
(i) Controllable
(ii) Favourable
(iii) Improve future performance.
(iv) Unfavourable
4. For which of the following would zero based budgeting be most suitable?
(i) Building construction
(ii) Mining company operations
(iii) Transport company operations
(iv) Government department activities
5. When a company produces more than it sales in a period, which of the following is correct?
(i) Absorption costing profit is greater than marginal costing profit
(ii) Absorption costing profit is less than marginal costing profit
(iii) Absorption costing profit is equal to marginal costing profit
6. In comparing a fixed budget with a flexible budget, what is the reason for the difference
between the profit figures in the two budgets?
(i) Different levels of activity
(ii) Different levels of spending
(iii) Different levels of efficiency
(iv) The difference between actual and budgeted performance
7. The standard wage rate is Rs.40 per hour; Actual wage rate is Rs.45 per hour, standard time is
500 hours and actual hours worked is 480 hours. If wages paid for 505 hours then what will
be the labour idle time variance?
(i) Rs.1,000 (F)
(ii) Rs. 1,000 (A)
(iii) Rs.1,125 (F)
(iv) Rs. 1,125 (A)
8. The profit volume ratio of X Ltd. is 50% and the margin of safety is 40%. What will be the
net profit of X ltd. if the sales volume is Rs.1,00,000?
(i) Rs.15,000
(ii) Rs.16,000
(iii) Rs.20,000
(iv) Rs.22,000
9. Learning curve theory is not applicable to ________.

above sentence?
(i) Direct labour
(ii) Material
(iii) Spoilage and defective works
(iv) Overhead
10. Which of the following is not a reason to use the concept of Learning Curve?
(i) Labour efficiency
(ii) Introducing new technology
(iii) Value chain effect
(iv) Standardization, specialization, and methods improvements
11. Collateralized borrowing and lending obligation (CBLO) is a discounted instrument available
in electronic book entry for the maturity period ranging from ______________.
above sentence?
(i) 1 day to 19 days
(ii) 1 day to 15 days
(iii) 1 day to 30 days
(iv) None
12. Sales during the following months :

2020-Oct Rs. 12,00,000
2020-Nov Rs. 14,00,000
2020-Dec Rs. 16,00,000
60% of sales are collected in the month after sales, 30% in the second month and 10% in the
third month. What is the Budgeted collection from Debtors for the month of Jan ‘2021?
(i) Rs.14,60,000
(ii) Rs.15,00,000
(iii) Rs.16,60,000
(iv) Rs.27,20,000
13. A firm has a capital of Rs. 10 lakhs, sales of Rs. 5 lakhs, gross profit of Rs. 2 lakhs and
expenses of Rs.1 lakh. The Net Profit Ratio is________.
above sentence?
(i) 50%
(ii) 40%
(iii) 20%
(iv) 10%
14. Which of the following is the danger of too high amount of working capital?
(i) It results in unnecessary accumulation of inventories and gives chance to

inventory mishandling, wastage, pilferage, theft, etc., and losses increase
(ii) Excess working capital means idle funds which earns no profits for the business.
(iii) It results in overall inefficiency
(iv) All of the above.
15. Interest received on long term investments is shown under _________.

above sentence?
(i) Investing activities
(ii) Operating activities
(iii) Financing activities
16. The 'Dividend-Payout Ratio' is equal to _________.

above sentence?
(i) The Dividend yield plus the capital gains yield
(ii) Dividends per share divided by Earning per Equity Share
(iii) Dividends per share divided by par value per share
(iv) Dividends per share divided by current price per share
17. A company has a Debt Equity ratio of 1.75 as compared to 1.5 Industry average. It means
that the company has _______________.
above sentence?
(i) Higher capital employed
(ii) Higher financial risk
(iii) Higher capital employed
(iv) Higher profitability
18. Find the present value of Rs. 1,000 receivable 6 years hence if the rate of discount is 10
percent.
(i) Rs.554.5
(ii) Rs.564.5
(iii) Rs.574.5
(iv) Rs.600
19. Stock holder‘s wealth = _________________

above sentence?
(i) No. of shares owned x Current stock price per share
(ii) No. of shares owned x Current stock price per share
(iii) No. of shares owned x Current stock price per share
(iv) None
20. Minimum rate of return that a firm must earn in order to satisfy its investors is known
as___________.
above sentence?
(i) Average return on investment
(ii) Net profit ratio
(iii) Average cost of borrowing
(iv) Weighted average cost of capital
Section B [20 Marks]
You are required to answer all the questions. Each question carries 1 mark. [20×1=20]
Instructions: Each question is followed by a space where you are required to type your answer.
1. Other variables remaining constant, a hike in variable cost per unit will_____ the Break
Even Point.
Fill up the blank above with an appropriate word.
Type your answer here:

Higher
2. Selling price per unit Rs. 12.50, Fixed production cost= Rs. 77,000 per annum, Fixed non-
production cost = Rs. 46,000 per annum, and Break even sales per annum = 24,600units.
What is the contribution per unit?
Type your answer here :

Rs.5.00
3. Fill up the blank below with appropriate word(s).
Under this method the cost of product is determined after considering the total cost i.e.,
both fixed and variable costs. This technique is known as ___________.

Absorption Costing
In a system whereby all activities are revaluated each time a budget is formulated and
starts with the assumption that requirement of funds does not exist is called ______.

Zero- based Budgeting
5. MSE Manufacturing gives you the following details.

Standard Price per kg of Material Rs. 2,
Actual Material used 2,000 kg,
Actual cost of Material Rs. 3,000.
Actual output 2,100 kg.
Compute Material Price Variance.

Rs. 1000 (Favourable)
6. Management Accounting is concerned with accounting information, which is useful to the

management — This definition is given by ______________.

Robert N. Anthony
7. The time taken for initial unit of a product is 100 hours. At 80% learning rate what is the
total time for 4 units?

256 hours
8. Idle time variance is always_______.


Adverse
9. The 'Learning Curve' is also known as _________.

Experience Curve
10. Which item in Column II is an appropriate match for the item in Column I?
Column I Column II
(i) different purposes
A fixed budget is prepared for (ii) mainly for control

purpose

(i) Different purpose
A process through which loans and other receivables are underwritten and sold in a form
of asset is known as _______.

Securitisation
A ratio of ______________ is considered satisfactory by the financial institutions the greater

debt service coverage ratio indicates the better debt servicing capacity of the organization.

2
In proper capital budgeting analysis we evaluate incremental ________.

Cash flow
The term _______means manipulation of accounts in a way so as to conceal vital facts and
present the financial statements in a way to show a better position than what it actually is.

Window dressing
15. Concept of maximum permissible bank finance was introduced by _______ Committee.
Fill up the blank below with appropriate word(s).

Tandon

Net Income Approach to capital structure decision was proposed by _______.

D. Durand
17. A point where profile of net present value crosses horizontal axis at plotted graph
indicates project’s _______.
Fill up the blank below with appropriate word(s).

Internal Rate of Return
18. Gross profit ratio for a firm remains the same but the net profit ratio is decreasing. The
reason for such behavior could be due to ____________.

Increase in expense
19. If Sales= Rs. 50,000, Variable cost= 60% Fixed cost=Rs. 12,000.
The Operating Leverage will be ______ .

2.50
20. Identify the correctly matched pair of statements:
Column A Column
B
1. Leverage (i) Raise Short Term Finance through

Receivables
2. Stochastic Model (ii) Control Limits

Correctly matched pair:
Column A, Item: 2. Stochastic Model
Column B, Item: ii. Control Limits
Section C [48 Marks]
You are required to answer any 4 out of 6 questions in this section [4 × 12= 48]
Candidates shall provide adequate reasons/workings in brief, in support of their answers.
1. Product B is one of a number of products produced and sold by FL Ltd.

The following information relates to Product B:
(a) Production / Sales per period is 2,000 units
(b). Selling Price / Unit is Rs. 10.00
(c). Variable Costs / Unit is Rs. 6.30
(d) Fixed Costs of Rs. 5,400 per period which is avoidable if production of Product B should
not cease.
(e). Rs.12,000 share of general company costs which will remain if the product is
discontinued.
(i) Discuss on the claim made by one of the management member that the production and sale 4
of Product B should be discontinued.

Net margin= Rs. 2,000
Net loss= Rs.(10,000)
Product B is making a net loss, hence, the reason for management’s decision to
discontinue the product. It is however, making a contribution of Rs. 2,000 to company net
cash inflows represented by its net margin. In the absence of any more profitable use of
the capacity, its production should be continued.
Workings:
Particulars Product B
Rs.
Sales revenue 20,000
Less-Variable costs 12,600
Contribution 7,400
Less- Avoidable fixed cost 5,400
Net margin 2,000
Less- General fixed cost 12,000
Net loss (10,000)
(ii) At what production / sales level will Product B breakeven? 3

Break even sales level=Rs.47,027
Workings:
Contribution / Sales ratio-Rs. 3.70 / Rs. 10 =0.37
Total fixed cost = Rs.17,400
Sales at break-even point = Fixed cost/CS ratio
= Rs. 17,400/0.37
=Rs.47,027
(iii) Product B can be replaced by Product Y on the basis of one unit of Y for two units of B. 5
Product Y has a selling price of Rs.16 and a Contribution / Sales ratio of 0.3. Should the
substation be implemented?
(a) If 500 units of B are to be replaced?
(b) If all units of B are to be replaced?

(a) If 500 units of B are to be replaced: Net loss to the company =Rs.650
It is better therefore, not to substitute.
(b) If all units of B are to be replaced: Net gain to the company =Rs. 2,800
It is better in this situation to carry out the substitution.
Workings:
(a) If 500 units of B are to be replaced, fixed cost of Rs. 5,400 will remain.
Contribution lost from B= =Rs. 3.70 x 500 =Rs.Rs.1,850
Contribution gained from Y =Rs.16 x 0.3 x 250 =Rs.1,200
Net loss to the company =Rs.650
(b) If all units of B are to be replaced, Rs.5,400 of fixed cost is avoided.

Net loss from B (its net margin) =Rs.2,000
Contribution gain from Y =Rs. 16x0.3x1,000 =Rs. 4,800
Net gain to the company Rs. 2,800
Note: Rs. 12,000 share of general company costs should be ignored since they are
unavoidable whatever decision is taken.
2. (i) The Standard Material cost to produce a tonne of prefabricated building material of AJANTA 6
LTD. is:
300 kgs. of material X @ Rs. 10 per kg.
400 kgs. of material Y @ Rs. 5 per kg.
500 kgs. of material Z @ Rs. 6 per kg.
During December 2017, 100 tonnes of mixture prefabricated building material were
produced from the usage of:
35 tonnes of material X at a cost of Rs. 9,000 per tonne
42 tonnes of material Y at a cost of Rs. 6,000 per tonne
53 tonnes of material Z at a cost of Rs. 7,000 per tone
Calculate the following variances:

a) Material cost variance
b) Material price variances
c) Material usage variance

(a) Material Cost Variance: = Rs. 1,38,000 (Adverse)
(b) Material Price Variances

X : Rs. 35,000 (Favourable)
Y : = Rs. 42,000 (Adverse)
Z : = Rs. 53,000 (Adverse)
(c) Material Usage Variances

X : = Rs. 50,000 (Adverse)
Y : = Rs. 10,000 (Adverse)
Z : = Rs. 18,000 (Adverse)
Workings:
Material Standard Actual
Quantity Rate Amount Quantity Rate Amount
kg Rs. Rs. kg Rs. Rs.
X 30,000 10.00 3,00,000 35,000 9.00 3,15,000
Y 40,000 5.00 2,00,000 42,000 6.00 2,52,000
Z 50,000 6.00 3,00,000 53,000 7.00 3,71,000
Total 1,20,000 8,00,000 1,30,000 9,38,000
(a) Material Cost Variance:

Formula: Standard Cost for Actual Quantity - Actual Cost
Computation: Rs. 8,00,000 - Rs. 9,38,000 = Rs. 1,38,000 (A)
(b) Material Price Variances

Formula: Actual Quantity (Actual Price- Standard Price)
Computation:
X : 35,000 (9-10) = Rs. 35,000 (Favourable)
Y : 42,000 (6-5) = Rs. 42,000 (Adverse)
Z : 53,000 (7-6) = Rs. 53,000 (Adverse)
(c) Material Usage Variances

Formula: Standard Price (Actual Quantity – Standard Quantity)
Computation:
X : 10 (35,000 - 30,000) = Rs. 50,000 (Adverse)
Y : 5 (42,000 - 40,000) = Rs. 10,000 (Adverse)
Z : 6 (53,000 - 50,000) = Rs. 18,000 (Adverse)
(ii) The following details are available for ABC LTD. A manufacturing company: 6
Budgeted Expenses, units & Actual Expenses, units &
hrs hrs.
Variable Overheads (Rs.) 5,00,000 5,20,000
Output in units 50,000 40,000
Working hours 2,50,000 2,20,000
You are Required to Calculate the following variances:

(a) Variable Overhead Expenditure Variance
(b) Variable Overhead Efficiency Variance
(c) Total Variable Overhead Variance
Type your Answer Here:

(a) Variable Overhead Expenditure Variance= Rs. 80,000 Adverse
(b) Variable Overhead Efficiency Variance= Rs.40,000 Adverse.
(c) Total Variable Overhead Variance= Rs.1,20,000 Adverse.
Workings:
Standard Variable Overhead per unit Rs. 5,00,000/50,000 = Rs. 10
Standard Variable Overhead per hour 5,00,000/2,50,000 = Rs. 2
Time allowed per unit of output = 2,50,000/50,000 = 5 hours
a) Variable Overhead Expenditure Variance :

Formula: Actual Hours × Standard Rate – Actual OverVH
Computation: (2,20,000 × 2) - 5,20,000 = Rs. 80,000 Adverse
(b) Variable Overhead Efficiency Variance:

Formula: Standard time for actual production × Standard Rate per hour- Actual hours ×
Standard Rate per hour
Computation: (2,00,000 hrs × 2) -(2,20,000 x 2)
= Rs. 40,000 Adverse
(c) Total Variable Overhead Variance :

Formula: Actual output × SR-per unit - Actual Overhead
Computation: (40,000 X 10)- (5,20,000)= = Rs.1,20,000 Adverse
3 (i) P LTD has prepared its Expense Budget for 10,000 units in its factory for a year as detailed 6
below:
Particulars Rs./unit
Direct Material 25
Direct Labour 10
Variable Overhead 8
Direct Expenses 3
Selling Expenses (20% Fixed) 10
Factory Expenses (100% Fixed) 5
Administrative Expenses (100% Fixed) 2
Distribution Expenses (85% Variable) 6
Total (Rs.) 69
Prepare an Expenditure Budget for the Production of 15,000 units and 20,000 units..

Expense Budget for 15,000 units=Rs.9,85,500
Expense Budget for 20,000 units=Rs.12,81,000
Workings:
Expenditure Budget of P LTD.
Particulars Rs./ Situation- Situation-III

unit II (Rs.)
(Rs.)
Production Level (units) 15,000 20,000
Direct Material 25 375000 5,00,000
Direct Labour 10 1,50,000 2,00,000
Variable Overhead 8 1,20,000 160,000
Direct Expenses 3 45,000 60,000
Selling Expenses:
Fixed 20000 20000
Variable 8 120000 160000
Factory Expenses 50,000 50,000
Administrative Expenses 20,000 20,000
Distribution Expenses:
Fixed 9000 9000
Variable 5.10 76,500 102,000
Total Expenses 985,500 12,81,000
(ii) Calculate the expected average units cost of making 6

(a) 4 machines and (b) 8 machines using the data below:
Direct Labour need to make first machine = 800 hrs.
Learning curve = 80% Direct Labour cost = Rs. 20/- per hour.
Direct materials cost = Rs. 200000
Fixed cost for either size orders = Rs. 80000.
Type your Answer here:

Average cost of making 4 units = Rs. 2,30,240
Average cost of making 8 units = Rs. 2,18,192
Workings:
Calculation of cost of making 4 and 8 units
No. of Average Labour cost Material Fixed cost Total Cost
machines Time Cost
1 800 16000 200000 80000 296000
2 640 12800 200000 40000 252800
4 512 10240 200000 20000 230240
8 409.6 8192 200000 10000 218192
4. (i) Consider the following information of K Ltd. Rs. 8

Rs. in Lakh
EBIT 1,120
EBT 320
Fixed Cost 700
You are required to find out the percentage change in earnings per share if sales increased
by 5%.

Percentage change in earnings per share= Rs. 28.4375
Workings:
Degree of Operating Leverage
Formula: Contribution/EBIT=[EBIT+ Fixed Cost]/EBIT
Computation: [1120+700]/1120= 1.625
Degree of Financial Leverage

Formula: EBIT/EBT
Computation: 1120/320=3.5
Degree of Combined Leverage

Formula: DOLxDFL
Computation:1.625 x 3.5 =5.6875
Formula: Degree of Combined Leverage= % Changes in EPS/% Changes in Sales

Computation:5.6875= % Changes in EPS/5 % Changes in EPS=5 x 5.6875= 28.4375
(ii) State the assumptions of M-M Dividend Model 4

M-M dividend model is based on the following assumptions:
(i) Capital markets are perfect. It implies that
(a) all information are freely available in the market;
(b) there is no transaction cost;
(c) no investor can influence market prices; and (d) there is no tax differential between
dividends and retained earnings or between dividends and capital gains.
(ii) All investors are rational.
(iii) The investment policy adopted by the company is fixed.
(iv) Investment opportunities and future profits of all companies are known to investors
with certainty. The perfect certainty assumption is later dropped by M-M.
5. (i) N Ltd. currently has sales of Rs. 30,00,000 with an average period of two months. At present 4
no discounts are offered to the customers. The management of the company is thinking to
allow a discount of 2% on cash sales which result in:
(a) The Average collection period would reduce to one month
(b) 50% of customers would take advantage of 2% discount
(c) The company normally requires a 25% return on its investment
Advise the management whether to extend discount on cash sales or not.

It is suggested to offer the 2% discount on cash sales, which will result increase in profit
by Rs. 32,500. Cost of Cash Discount =[ 2 100 - 2 × 365 60 - 0 ] × 100 = [ 2 98 × 365 60 ] ×
100 = 12.4% Since cost of discount 12.4% is less than the rate of return on investment
25%, it is suggested to extend the discount terms of cash sales.
Workings:
Current Debtors (Rs. 30,00,000x2/12)= 5,00,000
Revised Debtors (Rs. 30,00,000x1/12)= 2,50,000
Reduction of investment in Debtors balance= 2,50,000
Discount to be offered =3,00,00,00x50/100x2/100 = 30,000
Increase in profit due to decrease in debtors = 2,50,000x25/100 = 62,500
Net increase in profit =62,500-30,000 = 32,500
(ii) A company is considering two mutually exclusive projects with the following details: 8
Particulars Project A Project B

Life of the project (years) 4 5
Initial Investment (Rs.) 22000 27000
Net Cash Flow (Rs.)
Year 1 11000 18000
Year 2 14000 16000
Year 3 17000 16000
Year 4 19000 12000
Year 5 - 10000
Cost of capital of the company is 10%.

Calculate NPV of the projects and recommend the projects that can be accepted.

NPV of Project A: Rs.25,307
NPV of Project B: Rs.29,000
Since NPV is higher for Project B, it is acceptable.
Workings:
Year Project E Project F PVIF @ 10% Project A Project B
1 11,000 18,000 0.909 9999 16,362
2 14,000 16,000 0.826 1,15,64 1 13,216
3 17,000 16,000 0.751 12,767 12,016
4 19,000 12,000 0.683 12,977 8,196
5 10,000 0.621 0 6,210
Total PV of 47,307 56,000
Cash flow
(-)Initial 22,000 27,000
Investment
NPV 25,307 29,000
6. Write short notes on any 4 out of 5 questions. 3 x 4=12
i. Factors to be considered in Production Budget.
(a) Production plan: Production planning is an important part of the preparation of the
production budget. Optimum utilisation of plant capacity is taken by eliminating or
reducing the limiting factors and thereby effective production planning is made.
(b) The capacity of the business concern: It is to be ensured that the capacity of the
organisation will coincide the budgeted production or not. For this purpose, plant
utilisation budget will also be necessary. The production budget must be based on normal
capacity likely to be achieved and it should not be too high or too low.
(c) Inventory Policy: While preparing the production budget it is also necessary to see to
what extent materials are available for producing the budgeted production. For that
purpose, a purchase budget or a purchase plan must also be studied. Similarly, on the
other hand, it is also necessary to verify the extent to which the inventory of finished
goods is to be carried.
(d) Sales Policy: Sales budgets must also be considered before preparing production
budget because it may so happen that the entire production of the concern may not be
sold. In such a case the production budget must be in line with the sales budget.
(e) Sequence of Operations Policy: A plan of the sequence of operations of production for
effective preparation of a production budget should always be there.
(f) Management Policy : The policy of the management should also be considered before
preparing the production budget.
ii. Angle of Incidence

Angle of Incidence is the angle between sales and total cost line. This angle is an indicator
of profit earning capacity of the firm over the breakeven point sales. Angle of Incidence is
an angle formed at the intersection point of total sales line and total cost line in a formal
break even chart. If the angle is larger, the rate of growth of profit is higher and if the
angle is lower, the rate of growth of profit is lower. So, growth of profit or profitability
rate is depicted by Angle of Incidence.
iii. ‘Control’ as a function of management accounting.

It is absolutely essential that there should be a system of monitoring the performance of
all divisions and departments so that deviations from the desired path are brought to
light, without delay and are corrected then and there. This process is termed as control.
The aim of this function control is to facilitate accomplishment of the goals in an efficient
manner. For the discharge of this important function, management accounting provides
meaningful information in a systematic and effective manner. However, the role of
accountant is misunderstood. Many consider the accountant as a controller of their
performance. Many accountants themselves misunderstand their own role as controllers.
The real role of control is effective communication and assists the managers in achieving
their goals, as efficiently as possible.
A typical process for management control includes the following steps:
(1) actual performance is compared with planned performance,
(2) the difference between the two is measured,
(3) causes contributing to the difference are identified, and
(4) corrective action is taken to eliminate or minimize the difference.
iv. Financial Ratios
They are also termed as ‗Solvency Ratios‘. These ratios indicate about the financial
position of the company. A company is considered to be financially sound if it is in a
position to carry on its business smoothly and meet all its obligations both short-term and
long-term without strain. The Financial or Solvency Ratios can therefore be classified into
following categories: (i) Long-term Solvency Ratios, which include fixed assets ratio, debt
equity ratio and proprietary ratio:
(ii) Short-term Solvency Ratios, which include current ratio, liquidity ratio, super-quick
ratio and defensive interval ratio & debt service coverage ratio.
v. Common size statement.

Common size statement expresses assets and liabilities as percentage of total assets and
expenses and profits as percentage of sales common size comparative statements
prepared for one firm over the years to highlight the relative changes in each group of
expenses assets and liabilities. This statements can be equally useful for inter firm
comparisons given the fact that absolute figures of the two firm of the same industry are
not comparable.
Section D [12 Marks]

CASE STUDY
You are required to answer all the questions in this section

Candidates shall provide adequate reasons/workings in brief, in support of their answers.
(a) XYZ Co. purchases 40,000 glass cases per annum from an outside supplier at Rs. 5 each.
The production manager feels that these should be manufactured and not purchased. A
machine costing Rs. 1,00,000 (no salvage value) will be required to manufacture the item
within the factory. The machine has an annual capacity of 60,000 units and life of 5 years.
The costs required for manufacture of each glass case is as follows:
Direct Materials Rs. 2.00
Direct Labour Rs. 1.00
Variable overheads 100% of Labour Cost
(i) Should the company continue to purchase the glass cases from outside supplier or should it 3
make them in the factory?

Net Savings = Rs. 20,000
It is advisable to manufacture the cases in the factory.
Workings:
Total variable cost of manufacturing one glass case = Rs. 4.00
Additional Fixed cost of manufacture p.a. Depreciation (1,00,000 x 1/5) = Rs. 20,000
Since the marginal cost of manufacturing the case is less than the supplier's price of Rs. 5,
there shall be a saving of Rs. (Rs. 5 - 4) or Rs. 1 per case if the Case is manufactured within
the factory. Manufacturing will however result in an additional fixed cost of Rs. 20,000 p.a.
Total saving = 40,000 cases @ Rs. 1 = Rs. 40,000
Less additional fixed cost (depreciation) = Rs. 20,000
Net Savings = Rs. 20,000
(ii) Should the company accept an order to supply 10,000 glass cases to the market at a selling 3
price of Rs. 4.50 per unit?

If the company accepts to sell additional 10,000 units at 4.50, then additional contribution
is 10,000 × 0.50 = Rs. 5,000. This will add to total profit.
(b) The management of C LTD. has called for a statement showing the working capital needed 3+3 = 6
to finance a level of activity of 3,00,000 units of output for the year ended March 31, 2021.
The cost structure for the company's product, for the above mentioned activity level, is
detailed below:
Cost per unit (Rs.)
Raw materials 20
Direct labour 5
Overheads 15
Total cost 40
Profit 10
Selling price 50
Past trends indicate that the raw materials are held in stock, on an average, for two
months. Work-in-process (50 per cent complete) will approximate to ½ month's production.
Finished goods remain in warehouse, on an average, for 1 month. Suppliers of materials
extend 1 month's credit. Two months’ credit is normally allowed to debtors. A minimum
cash balance of Rs. 25,000 is expected to be maintained. The production pattern is assumed
to be even during the year (12 months).
Calculate the following:

(i) Current Assets
(ii) Working Capital

Current Assets =Rs. 42,75,000
Working Capital= Rs. 37,75,000
Workings:
Statement of determining Current Assets & Working Capital of C Ltd.
Particulars Amount Amount
Rs. Rs.
A) Current Assets:
(i) Raw materials (25,000 units × 2 × Rs. 20) 10,00,000
(ii) Work in process
Raw Materials (12,500 units × Rs. 10) 1,25,000
Direct Labour (12,500 units × Rs. 2.5) 31,250
Overhead (12,500 units × Rs. 7.5) 93,750 2,50,000
(iii) Finished Goods (25,000 units × Rs. 40) 10,00,000
(iv) Debtors (3,00,000 × Rs. 40 × 2)/12 20,00,000
(v) Minimum Cash Balance 25,000
Total Current Assets 42,75,000
(B) Current Liabilities:
(i) Creditors for 1 month (3,00,000 × Rs. 20 × 5,00,000
1)/12
(C) Working Capital (NWC) (A-B) 37,75,000
END

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The Institute of Cost Accountants of India (Statutory Body Under An Act of Parliament)

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Paper 10: Cost & Management Accounting and Financial Management

Time Allowed: 3 Hours Full Marks: 100

Section A [20 Marks]

1. Despite the development of Management Accounting as an effective discipline to improve

(i) Psychological Resistance

(ii) Physiological Resistance

(iii) Both of the above

(iv) None of the above

(i) Interest costs on leasing of aircraft

(ii) Pilots' salaries

(iii) Depreciation of aircraft

(iv) None of these three costs can be classified as variable

(iii) Improve future performance.

(i) Building construction

(ii) Mining company operations

(iii) Transport company operations

(iv) Government department activities

(i) Absorption costing profit is greater than marginal costing profit

(ii) Absorption costing profit is less than marginal costing profit

(iii) Absorption costing profit is equal to marginal costing profit

(iv) None of the above

(i) Different levels of activity

(ii) Different levels of spending

(iii) Different levels of efficiency

(iv) The difference between actual and budgeted performance

(i) Rs.1,000 (F)

(ii) Rs. 1,000 (A)

(iii) Rs.1,125 (F)

(iv) Rs. 1,125 (A)

9. Learning curve theory is not applicable to ________.

(i) Direct labour

(iii) Spoilage and defective works

(i) Labour efficiency

(ii) Introducing new technology

(iii) Value chain effect

(iv) Standardization, specialization, and methods improvements

(i) 1 day to 19 days

(ii) 1 day to 15 days

(iii) 1 day to 30 days

12. Sales during the following months :

(i) It results in unnecessary accumulation of inventories and gives chance to

(iii) It results in overall inefficiency

(iv) All of the above.

15. Interest received on long term investments is shown under _________.

(i) Investing activities

(ii) Operating activities

(iii) Financing activities

(iv) None of the above

16. The 'Dividend-Payout Ratio' is equal to _________.

(i) The Dividend yield plus the capital gains yield

(ii) Dividends per share divided by Earning per Equity Share

(iii) Dividends per share divided by par value per share

(iv) Dividends per share divided by current price per share

(i) Higher capital employed

(ii) Higher financial risk

(iii) Higher capital employed

(iv) Higher profitability

19. Stock holder‘s wealth = _________________

(i) No. of shares owned x Current stock price per share

(ii) No. of shares owned x Current stock price per share

(iii) No. of shares owned x Current stock price per share

(i) Average return on investment