PREMIER ACADEMY
Suggested Answer
for IPCC Nov.11 model Exam
COST ACCOUNTING AND FINANCIAL MANAGEMENT
Question no.1 is compulsory.
Answer any five from the remaining six questions.
Working notes should form part of the answer.
(Time allowed = 3 hours) (Maxi. Marks= 100)
Question 1 (c)
(i) Production Budget for January to March 2009
(Quantitative)
| | Jan | Feb | Mar | April |
| Budgeted Sales | 10,000 | 12,000 | 14,000 | 15,000 |
| Add: Budgeted Closing Stock | 2,400 | 2,800 | 3,000 | 3,000 |
| (20% of sales of next month) | 12,400 | 14,800 | 17,000 | 18,000 |
| Less: Opening Stock | 2,700 | 2,400 | 2,800 | 3,000 |
| Budgeted Output | 9,700 | 12,400 | 14,200 | 15,000 |
Total Budgeted Output for the Quarter ended March 31, 2009
= (9,700 + 12,400 + 14,200)
= 36,300 units.
(ii) Raw Material Consumption Budget (in quantity)
| Month | Budgeted Output (Units) | Material 'X' @ 4 kg per unit (Kg) | Material 'Y' @ 6 kg per unit (Kg) |
| Jan | 9,700 | 38,800 | 58,200 |
| Feb | 12,400 | 49,600 | 74,400 |
| Mar | 14,200 | 56,800 | 85,200 |
| Apr | 15,000 | 60,000 | 90,000 |
| Total | | 2,05,200 | 3,07,800 |
(iii) Raw Materials Purchase Budget (in quantity)
for the Quarter ended (March 31,2009)
| Month | Material X (kg) | Material Y (kg) |
| Raw material required for production | 1,45,200 | 2,17,800 |
| Add: Closing Stock of raw material | 30,000 | 45,000 |
| | 1,75,200 | 2,62,800 |
| Less: Opening Stock of raw material | 19,000 | 29,000 |
| Material to be purchased | 1,56,200 | 2,33,800 |
(b) Calculation of Material Cost Variance
| (a) | | (b) | |
| Std Price × Std Mix × Std Qty for actual output | | Std. Price × Std. Mix × Actual Qty. | |
| X – 10 × 4 × 40,000 = | 16,00,000 | X – 10 × 4 × 4, 03,000 = 10 | 16,12,000 |
| Y – 15 × 6 × 40,000 = | 36,00,000 | Y – 15 × 6 × 4, 03,000 = 10 | 36,27,000 |
| | 52,00,000 | | 52,39,000 |
| (c) | | (d) | |
| Std Price × Actual Mix × Actual Qty | | Actual Price × Actual Mix × Actual Qty. | |
| X – 10 × 1,65,000 = | 16,50,000 | X – 10.20 × 1,65,000 = | 16,83,000 |
| Y – 15 × 2,38,000 = | 35,70,000 | Y – 15.10 × 2,38,000 = | 35,93,800 |
| | 52,20,000 | | 52,76,800 |
Direct Material Usage Variance = (a – c)
X – 16,00,000 – 16,50,000 = 50,000 (A)
Y – 36,00,000 – 35,70,000 = 30,000 (F)
52,00,000 – 52,20,000 = 20,000 (A)
Direct Material Price Variance = (c – d)
X – 16,50,000 – 16,83,000 = 33,000 (A)
Y – 35,70,000 – 35,93,800 = 23,800 (A)
52,20,000 – 52,76,800 = 56,800 (A)
Direct Material Cost Variance = (a – d)
X – 16,00,000 – 16,83,000 = 83,000 (A)
Y – 36,00,000 – 35,93,800 = 6,200 (F)
52,00,000 – 52,76,800 = 76,800 (A)
Calculation of Labour Cost Variances:
Budgeted output for the quarter = 36,300 units
Budgeted direct labour hours = 36,300 × ¾ hrs.
= 27,225 hours
| Budgeted direct labour cost |
| Budgeted direct labour hours |
| Rs.10,89,000 | = Rs.40 | | 27,225 hours | |
Standard or Budgeted labour rate per our
=
=
Standard labour hours for actual output:
= 40,000 units × ¾ hour
= 30,000 hours
| Actual labour hour rate = | Budgeted direct labour cost | = Rs.41 |
| Budgeted direct labour hours |
Direct Labour Efficiency Variance = Standard Rate × (Std. hrs – Actual hrs.)
= Rs.40 × (30,000 – 32,000)
= Rs.80,000 (A)
Direct Labour Rate Variance = Actual hrs. × (Std. Rate – Actual Rate)
= 32,000 × (40 – 41)
= Rs.32,000 (A)
Direct Labour Cost Variance = (Std. rate × Std. hrs.) – (Actual rate × Actual hrs.)
= (40 × 30,000) – (41 × 32,000)
= 12,00,000 – 13,12,000
= 1,12,000 (A)
Question 2
a. Answer:
| Particular | Material A (Rs) | Material B (Rs) |
| Opening stock | 10,000 | 9,000 |
| Add: Purchase | 52,000 | 27,000 |
| Less: Closing Stock | (6,000) | (11,000) |
| Materials consumed | 56,000 | 25,000 |
| Average inventory: (Opening Stock + Closing Stock) / 2 | 8,000 | 10,000 |
| Inventory Turnover ratio: (Consumption ÷ Average inventory) | 7 times | 2.5 times |
| Inventory Turnover (Number of Days in a year/IT ratio) | 52 days | 146 days |
Comments: Material A is more fast moving than Material B.
Ans (b)
(c) Let x = Time taken to complete the Job
Time saved = Time allowed – Time taken
= (50 – x) hours
Bonus under rowan premium plant
= Time saved × Actual hours × rate
Time Allowed
= 50-x × (x × Rs.9)
50
The effective hourly wages rate is Rs.10.80
Hence total earning = x × 10.80
Total earning of X under Rowan Premium Plan
x × 9.0 + 50-x × (x × Rs.9) = x × 10.80
50
450 + 450 - 9x = 10.80
50
900 – 9x = 540
x = 360 = 40 hrs. Time taken by x
9
Time saved = 50 – 40 = 10 hrs.
Under Halsey Premium Plan 50% bonus to y
Bonus will be 50% × 10 × 9 = Rs.45
Total earning of y: Wages + Bonus
= 40 × Rs.9 + 45 = Rs.360 + 45 = Rs.405
Effective hourly rate of wages
= Total Earning = 405 = Rs.10.125
Actual Hours 40
Answer (d)
i).
Let EOQ = Q
Annual Requirement of RM = A
| Order size (Units) | No. of order | Ordering cost (Rs.) | Carrying cost (Rs.) | Associated Cost (Rs.) |
| Q | A / Q | (A/Q) × 100 | ½ × Q × 20 | 40,000 |
In EOQ, Ordering cost = Carrying cost
Ordering cost + Carrying cost = Associated Cost
Ordering cost + Carrying cost = 40,000
Hence Carrying cost = 20,000
½ × Q × 20 = 20,000
Q = 200
EOQ = 200 Units
Ordering cost = 20,000
Ordering cost = (A/Q) × 100
Ordering cost = (100A / 200) = 20,000
ii) When the discount offered is 2 % when there is a lot size of 2000 units
Annual Requirement of RM =
| Order size (Units) | No. of order | Ordering cost (Rs.) | Carrying cost (Rs.) | Associated Cost (Rs.) |
| Q | A / Q | (A/Q) × 100 | ½ × Q × 20 | 40,000 |
Note : In question it is advised to assume that the inventory carrying cost does not vary according to discount policy the original carrying cost of Rs.200×0.1= Rs.20 per unit is considered even when there is a discount of 2 %
Cost of ordering and cost of carrying = 200+20,000 = Rs.20,200/-
Cost of ordering and cost of carrying at EOQ = Rs.4,000
Extra cost = Rs.20,200-Rs.4,000 = Rs.16,200
Quantity Discount received =2 % × 200 × 4000 units = Rs.16,000/-
iii) When the discount offered is 5 % when there is a single lot size of 4000 units
Number of orders = Annual demand/ quantity per order
= 4000/4000 = 1 order
Cost of placing orders = 1 × 100 = Rs.100/-
Inventory carrying cost = Avg.inventory × carrying cost per unit
=1/2 × 4000 ×Rs. 20 = 40,000
Note : In question it is advised to assume that the inventory carrying cost does not vary according to discount policy the original carrying cost of Rs.200×0.1= Rs.20 per unit is considered even when there is a discount of 5 %
Cost of ordering and cost of carrying = 100+40,000 = Rs.40,100/-
Cost of ordering and cost of carrying at EOQ = Rs.4,000
Extra cost = Rs.40,100-Rs.4,000 = Rs.36,100
Quantity Discount received = 5 % × 200 × 4000 units = Rs.40,000/-
Question 3
Answer (a)
Particulars J K
1. Sales mix 4 3
2. Contribution p.u Rs.40 Rs.20
3. Ratio of (1X2) 160 60
4. To achieve BEP , Required contribution = Fixed cost, Rs.6,16,000, to be apportioned in the above ratio . Hence, the amount is Rs.4,48,000 for J and Rs.1,68,000 for K.
5. BEQ = (4/2) 11,200 units 8,400 units
Ans (b)
8 x 60
Standard output per day = 40 units
12
Actual output = 37 units
37
Efficiency percentage x 100 = 92.5%
40
Under this method lower rate is 83% of the normal piece rate and is applicable if efficiency of worker is below 100%.
20
Earning rate per unit = 83% of or or 3.32 per unit
5 *
Earning = 37 x 3.32 = Rs. 122.84
60 minutes
* In one hour, production will be = = 5 units
standard time per peice,i.e.12 minutes
Answer (c)
Variable overheads per square metre:
Extra m2 cleaned = 7550 – 6375 = 1175
Extra overhead cost = Rs. 41792.5 – Rs. 36,975 = Rs. 4817.5
Variable overhead per m2 = Rs. 4817.5/1175 = Rs. 4.10
Fixed overhead:
Rs.
Total overheads of cleaning 6375 m2 = 36975
Variable overheads = 6375 x Rs. 4.10 = 26137.5
Fixed overhead (Rs. 36,975- Rs. 26, 137.5) = 10837.5
Total overheads for 8100 m2:
Rs.
Variable overhead = 8100 x Rs. 4.10 = 33210
Fixed overhead = 10837.5
44047.5
Answer (d)
| Production Units | = Opening stock + units introduced – Closing stock |
| | = 1,800 + 47,700 – 4,500 = 45,000 units |
| Normal loss | = 5 % of production = 5 % of 45,000 = 2,250 units |
| Actual loss | = Opening stock+units introduced – Units transferred – Closing stock |
| | = 1,800 + 47,700 – 43,200 – 4,500 = 1,800 units |
| Abnormal Gain | = Actual loss – Normal loss = 2,250 – 1,800 |
| | = 450 units |
| | |
| Statement of Equivalent units |
|
| | | | Material A Material B Labour & overheads |
| | Input Output | | Output units | | | | | | |
| Op.WIP | 1,800 | Work on | | Units % | | Units % | | Units % | |
| Process II | 47,700 | opening WIP | 1,800 | | | 360 | 20 | 720 | 40 |
| | | Completed | 41,400 | 41,400 | 100 | 41,400 | 100 | 41,400 | 100 |
| | | Closing WIP | 4,500 | 4,500 | 100 | 3,150 | 70 | 2,250 | 50 |
| | | Scrap | 2,250 | - | | - | | - | |
| | | Abnormal gain | (450) | (450) | 100 | (450) | 100 | (450) | 100 |
| | 49,500 | | 49500 | 45,450 | | 44,460 | | 43,920 | |
| Statement of Cost per unit: |
| Particulars | Equivalent units | Cost | Cost per unit |
| | | Rs. | Rs. |
| Material A | 45,450 | 5,36,625 | |
| | Scrap | (15,188) | 11.4728 |
| 5,21,437 |
| Scrap 2,250 @ Rs.6.75/unit |
| Material B | 44,460 | 1,77,840 | 4.0000 |
| Labour | 43,920 | 87,840 | 2.0000 |
| Overheads | 43,920 | 43,920 | 1.0000 |
| | | | 18.472 |
| Statement of apportionment of cost |
|
| Rs. |
| Opening WIP 1,800 Material A | 27,000 |
| Opening WIP-Material B 360 units @ Rs.4/unit | 1,440 |
| Labour 720 units @ Rs.2/unit | 1,440 |
| Overheads 720 units @ Rs.1/unit | 720 |
| | 30,600 |
| Completed units 41,400 Cost @ Rs.18.4728/unit | 7,64,773 |
| Cost of units warehoused | 7,95,373 |
| | |
| Abnormal Gain 450 Cost @ Rs.18.4728/unit | 8,313 |
| | |
| Closing WIP – Material-A 4,500 units @ Rs.11.4728/unit | 51,628 |
| Material B 3,150 units @ Rs.4/unit | = 12,600 |
| Labour 2,250 units @ Rs.2/unit | = 4,500 |
| Overheads 2,250 units @ Rs.1/unit = | = 2,250 |
| Cost of closing WIP | 70,978 |
| | | | | | | | | | | | | |
| Process Account III |
| | Units | Rs. | | Units | Rs. |
| To Balance b/d | 1,800 | 27,000 | By Normal Loss | 2,250 | 15,187 |
| To Process II A/c | 47,700 | 5,36,625 | By finished goods | 43,200 | 7,95,373 |
| To Direct materials | | 1,77,840 | | | |
| To Direct wages | | 87,840 | | | |
| To Production | | | By Closing WIP | 4,500 | 70,978 |
| overheads | 450 | 43,920 | | | |
| To Abnormal Gain | 49,950 | 8,81,538 | | 49,950 | 8,81,538 |
Question 4
Ans: (b)
(i) Work in process Ledger control A/c Dr. 5,50,000
Factory overheads control A/c Dr. 1,50,000
To Stores Ledger Control A/c 7,00,000
(Being the entry for issue of materials from stores)
(ii) Work in process Ledger control A/c Dr. 2,00,000
Factory overheads control A/c Dr. 40,000
To Wages Control A/c 2,40,000
(Being the entry for allocation of wages and salaries)
(iii) Factory overheads control A/c Dr. 20,000
To Costing Profit & Loss A/c 20,000
(Being the entry for transfer of over absorbed factory overheads)
(iv) Costing Profit & Loss A/c Dr. 10,000
To Admn.Overhead Control A/c 10,000
(Being the entry for transfer of under absorbed Admn.overheads)
Answer (c)
| | Computation of EPS |
| | Plan A | Plan B | Plan C |
| EBIT | 80,000 | 80,000 | 80,000 |
| Less : Interest | | 8,000 | |
| Earning before Tax | 80,000 | 72,000 | 80,000 |
| Less: Taxation 50% | 40,000 | 36,000 | 40,000 |
| Profit after (PAT) | 40,000 | 36,000 | 40,000 |
| Less: Preference dividend | | | 8,000 |
| Equity Earnings | 40,000 | 36,000 | 32,000 |
| No.of shares | 10,000 | 5,000 | 5,000 |
| Earning per share | Rs.4 | Rs.7.20 | Rs.6.40 |
b)The financial break even point for each plan
The financial BEP For plan A = 0
For plan B = Rs.8,000
For plan C = Rs.16,000
Plan A does not involve any fixed financial costs. Hence its financial BEP = 0. But, plan B must have EBIT of Rs.8,000 to cover interest charge and plan C must have an EBIT of Rs.16,000 to cover the preference dividend of Rs.8,000.
| Computation of EBIT range among plans of indifference |
| Plans A and B | (EBIT – 0) x (1-0.5) | = | (EBIT – 8,000) x (1-0.5) |
| 10,000 | 5,000 |
| | EBIT = Rs.16,000 | | |
| Plans A and C | (EBIT – 0) x (1-0.5) | = | (EBIT – 0) x (1-0.5) -8,000 |
| 10,000 | 5,000 |
| | EBIT = Rs.32,000 | | |
| Plans A and C | (EBIT – 8,000) x (1-0.5) | = | (EBIT – 0) x (1-0.5) -8,000 |
| 5,000 | 5,000 |
| | EBIT = Rs.32,000 | | |
| 0.5 EBIT – 4,000 = 0.5 EBIT – Rs.8,000 |
| Hence ,there is no indifference point between financial plans B and C |
Question 5
Ans: (a) Saving /(additional cost) of using plant A (per annum)
Direct labour 1st shift (Rs.7,50,000)
2nd shift saving 9,50,000
Over head (40,000)
Saving per year 1,60,000
Present value of recurring annual savings of Rs.1,60,000 per year at 10% p.a
= Rs.1,60,000 x 6.1446 = Rs.9,83,136
Additional outlay for plant A = Rs.30,00,000 – Rs.22,00,000 = Rs.8,00,000
The present value of savings for using Plant A is higher than the extra capital outlay.
Therefore it is advisable to go for plant A
Answer (b)
Let the interest rate on secured loans be X %
Operating profit - Rs.25,00,000
Less: Int on unsecured loan 1,25,000
On secured loans X x 25,00,000/100 = 25,000 X
Profit before tax Rs.23,75,000 – 25000X
Income tax Rs.11,87,500 – 12500 X
Profit after tax Rs.11,87,500 – 12500 X
No.of equity shares - 50,00,000/20 = Rs.2,50,000
Earning per share = 11,87500 – 12500 X
2,50,000
PE ratio = Market price per share / EPS
12.5 = 50
(11,87,500 – 12500 X)
2,50,000
12.5 = 50x 2,50,000
(11,87,500 – 12500 X)
1,48,43,750 – 1,56,250X = 1,25,00,000
1,56,250X = 23,43,750
X = 15
The rate of interest on secured loans is 15%
Answer (c)
ii) Cash receipts = Sales – increase in debtors = 4,00,000 – 30,000 = Rs.3,70,000
Cash payment = Cost of goods sold (70% of sales) + Inventory increase + Variable
Selling and admn.expenses + Fixed selling (excl.depren)& admn expenses
= Rs.2,80,000 + .20,000 + 10,000+ 50,000 – 20,000 = Rs.3,40,000
Cash surplus = Rs. 3,70,000 – Rs.3,40,000 = Rs.30,000
Question 6
a. Answer
1÷ (1.05)5 = 0.784. Therefore, you need to set aside 10,000 × 0.784 = Rs. 7,840.
b Working Notes:
1. Annual Depreciation of Machines
Depreciation of Machine 'MX' = Rs. 8,00,000 - Rs. 20,000 = Rs. 1,30,000
6
Depreciation of Machine 'MY '= Rs. 10,20,000 - Rs. 30,000 = Rs. 1,65,000
6
Calculation of Cash Inflows
Machine 'MX'
| YEAR | 1 | 2 | 3 | 4 | 5 | 6 |
| Income before Depreciation & Tax | 2,50,000 | 2,30,000 | 1,80,000 | 2,00,000 | 1,80,000 | 1,60,000 |
| Less: Depreciation | 1,30,000 | 1,30,000 | 1,30,000 | 1,30,000 | 1,30,000 | 1,30,000 |
| Profit before Tax | 1,20,000 | 1,00,000 | 50,000 | 70,000 | 50,000 | 30,000 |
| Less : Tax @ 30% | 36,000 | 30,000 | 15,000 | 21,000 | 15,000 | 9,000 |
| Profit after Tax (PAT) | 84,000 | 70,000 | 35,000 | 49,000 | 35,000 | 21,000 |
| Add: Depreciation | 1,30,000 | 1,30,000 | 1,30,000 | 1,30,000 | 1,30,000 | 1,30,000 |
| Cash Inflows | 2,14,000 | 2,00,000 | 1,65,000 | 1,79,000 | 1,65,000 | 1,51,000 |
| Cumulative Cash Inflows | 2,14,000 | 4,14,000 | 5,79,000 | 7,58,000 | 9,23,000 | 10,74,000 |
| Pay-back Period | 4 + (800,000-758000) 165000 = 4.25 years |
Machine 'MY'
| YEAR | 1 | 2 | 3 | 4 | 5 | 6 |
| Income before Depreciation & Tax | 2,70,000 | 3,60,000 | 3,80,000 | 2,80,000 | 2,60,000 | 1,85,000 |
| Less: Depreciation | 1,65,000 | 1,65,000 | 1,65,000 | 1,65,000 | 1,65,000 | 1,65,000 |
| Profit before Tax | 1,05,000 | 1,95,000 | 2,15,000 | 1,15,000 | 95,000 | 20,000 |
| Less : Tax @ 30% | 31,500 | 58,500 | 64,500 | 34,500 | 28,500 | 6,000 |
| Profit after Tax (PAT) | 73,500 | 1,36,500 | 1,50,500 | 80,500 | 66,500 | 14,000 |
| Add: Depreciation | 1,65,000 | 1,65,000 | 1,65,000 | 1,65,000 | 1,65,000 | 1,65,000 |
| Cash Inflows | 2,38,500 | 3,01,500 | 3,15,500 | 2,45,500 | 2,31,500 | 1,79,000 |
| Cumulative Cash Inflows | 2,38,500 | 5,40,000 | 8,55,500 | 11,01,000 | 13,32,500 | 15,11,500 |
| Pay-back Period | 4 + (1020,000-855500) 245500 = 3.67 years |
(ii) Calculation of Net Present Value (NPV)
| | | Machine 'MX' | Machine 'MY' |
| Year | PV factor | CFAT | DCFAT | CFAT | DCFAT |
| 1 | 0·909 | 2,14,000 | 2,38,500 | 1,94,526 | 2,16,797 |
| 2 | 0·826 | 2,00,000 | 1,65,200 | 3,01,500 | 2,49,039 |
| 3 | 0·751 | 1,65,000 | 1,23,915 | 3,15,500 | 2,36,941 |
| 4 | 0·683 | 1,79,000 | 1,22,257 | 2,45,500 | 1,67,677 |
| 5 | 0·621 | 1,65,000 | 1,02,465 | 2,31,500 | 1,43,762 |
| 6 | 0·564 | 1,51,000 | 85,164 | 1,79,000 | 1,00,956 |
| Scrap Value | 0·564 | 20,000 | 11,280 | 30,000 | 16,920 |
| Total DCFAT | | | |
| Less: Initial Investment | (800,000) | | (1020,000) |
| Net Present Value | 4,807 | | 1,12,092 |
(iii) Recommendation
Machine 'MX' Machine 'MY'
Ranking according to Pay-back Period II I
Ranking according to Net Present Value (NPV) II I
Advise: Since Machine 'MY' has higher ranking than Machine 'MX' according to both
parameters, i.e. Payback Period as well as Net Present Value, therefore, Machine 'MY' is
recommended.
d. Answer
Working Notes:
(i) Purchase of Plant Rs.
Net increase in Gross Value 93,000
Add: Gross Value of Plant Sold 29,000
1,22,000
(ii) Depreciation on Plant and Machinery
Plant and Machinery Account
Rs. Rs.
To Balance b/d 63,500 By Sale of Plant & Machinery A/c 19,000
To Purchases 1,22,000 By Depreciation (balancing figure) 24,000
By Balance c/d 1,42,500
1,85,500 1,85,500
(iii) Funds from Operations Rs.
Increase in Retained Earnings 1,72,500
[4,10,500 – 2,38,000]
Add: Dividend Paid 37,500
Add: Depreciation on Plant 24,000
2,34,000
Less: Gain on Sale of Equipment 13,000
2,21,000
STATEMENT OF SOURCES AND USES OF FUND
SOURCES Rs. USES Rs.
Funds from Operation 2,21,000 Purchase of plant 1,22,000
Sale of Equipment 32,000 Purchase of 1,58,000
Investments
(2,90,000 -1,32,000)
Decrease in Net Working
Capital (Balancing figure) 2,44,500 Payment of Bonds 1,80,000
Dividends 37,500
4,97,500 4,97,500
Ans 7 (a)
(i)Sales
Gross Profit =Rs.5,00,000
Rate of Gross Profit =20%
Sales = (Rs.5,00,000 x 100)/20 =Rs.25,00,000
(ii)Sundry debtors
Sales =Rs.25,00,000
Debtors velocity =3 months
| Year end sales outstanding = | Rs.25,00,000 | x 3 = | 6,25,000 |
| 12 |
Less Bills Receivable 60,000
Sundry Debtors 5,65,000
(iii)Sundry Creditors
Purchases =Sales-Gross Profit +Increase in Stocks
=Cost of Goods Sold + Increase in Stock
Cost of Goods sold =Rs.25,00,000-5,00,000 20,00,000
Increase in stocks 20,000
Purchases 20,20,000
Creditors velocity = 2months
Year end outstanding for purchases
= Rs.20,20,000 x 2 = 3,36,667
12
Less: Bills payable 36,667
Sundry creditors 3,00,000
iv) Closing stock
Cost of goods sold Rs.20,00,000
Stock velocity = 6 months
Average stock = Rs.20,00,000 x 6 = Rs.10,00,000
12
Suppose opening stock = x
Closing stock = x + 20,000
Twice average stock = ( x + ( x +20,000) ) * 2
2
= 2x + 20,000 = Rs.20,00,000
x = Rs.9,90,000
Hence closing stock = 9,90,000+20,000 = Rs.10,10,000
c. Answer
Let opening stock be Rs.x and the closing stock is Rs.x+20,000
Average inventory = Opening stock + closing stock
2
1,00,000 = x+x+20,000
2
2,00,000 = 2x +20,000
2x = 1,80,000 x = 90,000
| Opening stock is = 90,000 and closing stock is Rs.1,10,000 |
| Cost of material consumed | = Op.stock + purchases – Closing stock |
| | =90,000+2,70,000 – 1,10,000 = Rs.2,50,000 |
| | = Cost of raw material consumed |
| | Average inventory |
| | = 2,50,000/1,00,000 = 2.5 |
| Average number of days inventory is held = 365/2.5 = 146 days |
d. Ans:
Assuming the revenue generated from each category as 100 as the basis for assessing company's credit policy
Classs Gross profit Bad debts Interest Total cost Net effect Decision
@ 13% Rs. Rs. cost Rs. Rs. Rs.
1 13 - 1.79 1.79 11.21 Accept
2 13 3 1.72 4.72 8.28 Accept
3 13 8 1.61 9.61 3.39 Accept
4 13 18 2.68 20.68 (7.68) Reject
It appears that the company is allowing liberal credit days in spite selling it on terms of net 30 days. For all category it allows above 30 days as credit period on an average. Up to category 3 total cost is favourable and may be accepted. In the case of category 4 it is un favourable as its cost is more than gross profit. The company should try to reduce the bad debts in category 4 at least by 7.68 % so that it can accommodate credit period up to 75 days for increasing the sales.
Working for interest cost
Avg,rate of interest x cost of goods sold x Avg. collection period
Interest cost = 365 days
For category 1 = 15% x 87 x 50 = 1.79
365
= 15% x 87 x 48 = 1.72
365
15% x 87 x 45 = 1.61
= 365
15% x 87 x 75 = 2.68
= 365
= = = = **** = = = =
