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Treasury & Cash Management
Treasury & Cash Management
Question 1.
Enumerate the activities which are covered by Treasury Management. (Nov 2002, 3 marks)
OR
Answer the following:
Explain briefly the functions of Treasury Department. (May 2008, 3 marks)
OR
Answer the following:
Write a short note on functions of Treasury Department. (May 2009, 2 marks)
OR
Answer the following:
Explain briefly the functions of Treasury Department. (Nov 2016, 4 marks)
Answer:
Functions of Treasury Department can be as follows:
1. Cash
Planning or forecasting future cash Management requirements through Cash Budgets, Efficient collection of Receivables, and payment of liabilities/claims through Float Management. Monitoring of funds position at various divisions/branches and identifying surplus or idle funds to transfer them to other divisions. Investment Planning or parking of surplus funds in marketable securities to optimise return.
2. Funding Management
Planning of long-term, medium-term, and short-term cash needs. Participation in decisions concerning capital structure, dividend payout, etc. Obtaining the fund requirements from sources like Bank Loans, Public Issues, etc.
3. Currency Management
Managing foreign currency risk exposure through hedging/forwards! futures. Timely settling or setting off of intra-group indebtedness, between divisions in various countries. Matching transactions of receipts and payments in the same currency to save transaction costs. Decision on currency to be used while invoicing Export Sales.
4. Corporate Finance
Advising on various issues such as buy-back, mergers, acquisitions, and divestments, and planning the financial needs thereof Investor Relationships. Capital Market Intelligence-obtaining information on market trends, timing of public issues, etc.
5. Banking
Maintaining cordial and good relationships with Bankers and Financing Institutions. Coordinating, liaising, and negotiating with the Lenders during the course of obtaining finance.
Question 2.
Answer the following:
Evaluate the role of cash budget in effective cash management system. (Nov 2015, 4 marks)
Answer:
Cash Budget
A cash budget is a forecast of estimates showing the amount of cash which will be available for future period taking into account all the sources of cash received and channel in which payments are made. In cash budget no accrual concept is taken under consideration.
Role of Cash
- This Budget helps to determine, whether the cash Budget being collected is sufficient to own the business.
- It helps to preserve liquidity in the business.
- It helps to determine, when & how the funds will be utilized and where also.
- It is known by cash budget the availability of cash discounts and control of quantum of cash.
Question 3.
A new manufacturing company ¡sto be incorporated from January 1, 2000. Its authorized capital will be ₹ 2 crores divided into 20 Iakh equity shares of ₹ 10 each. It intends to raise capital by issuing equity shares of ₹ 1 crore (fully paid) on 1st January. Besides a loan of ₹ 13 lakh @ 12% per annum will be obtained from a financial institution on 1st January and further borrowings will be made at the same rate of interest on the first day of the month in which borrowing is required. All borrowings will be repaid along with interest on the expiry of one year. The company will make payment for the following assets in January:
(2) Gross profit margin will be 25% on sales.
(3) The company will make credit sales only and these will be collected in the second month following sales.
(4) Creditors will be paid in the first month following credit purchases. There will be credit purchases only.
(5) The company will keep minimum stock of raw materials of ₹ 10 lakh.
(6) Depreciation will be charged @ 10% per annum on cost on all Property Plant and Equipment.
(7) Payment of preliminary expenses of ₹ 1 lakh will be made in January.
(8) Wages and salaries will be ₹ 2 lahks each month and will be paid on the first day of the next month.
(9) Administrative expenses of ₹ 1 lakh per month will be paid in the month of their incurrence.
Assume no minimum required cash balance.
You are required to prepare the monthly cash budget (January-June), the projected Income Statement for the 6-month period, and the projected Balance Sheet as on 30th June, 2000. (May 2000, 20 marks)
Answer:
Note: In February 2000 there is a shortage of cash of by ₹ 2.5 Lakhs, so it will be met by borrowing at the beginning of the said month.
2. Computation of Payment to the Creditors:
Purchase = Cost of goods sold – Wages and salaries
Purchases for January = (75% of 35 lakhs) – ₹ 2 = ₹ 20.50 lakhs
Since Creditors are paid in the first month following purchases.
Therefore, payment in February is the purchase of January i.e. ₹ 20.50 lakhs.
Same procedure will be followed for other months.
Total Purchases = ₹ 125 lakhs (for Jan.- May) + ₹ 31.75 lakhs (for June) + ₹ 10 lakhs (stock)
= ₹ 166.75 lakhs
3. Amount of depreciation for six months:
Dep. = ₹ 80,00,000 × 10% × 6/12) = ₹ 4,00,000
Question 4.
Alcobex Metal Company (AMC) does business in three products P1, P2, and P3. Products P1 and P2 are manufactured in the company, while product P3 is procured from outside and resold as a combination with either product P1 or P2. The sales volume budgeted for the three products for the year 2000- 2001 (April-March) are as under:
Based on the budgeted Sales value, the cash flow forecast for the company is prepared based on the following assumptions:
1. Sales realization is considered at:
50% Current month
25% Second month
25% Third month
2. Production Programme for each month is based on the sales value of the next month.
3. Raw Material consumption of the company is kept at 59% of the month’s production.
4. 81 % of the raw materials consumed are components.
5. Raw materials and components to the extent, at 25% are procured through import.
6. The Purchases budget is as follows:
(i) Indigenous raw materials are purchased two months before the actual consumption.
(ii) Components are procured in the month of consumption.
(iii) Imported raw materials and components are bought three months prior to the month of consumption.
7. The company avails of the following credit terms from suppliers:
(i) Raw materials are paid for in the month of purchases;
(ii) Company gets one month’s credit for its components,
(iii) For imported raw materials and components payments are made one month prior to the dates of purchases.
8. Currently the company has a cash credit facility of ₹ 140.88 lakhs.
9. Expenses are given below and are expected to be constant throughout the year:
Wages and Salaries ₹ 312 lakhs
Administrative Expenses ₹ 322 lakhs
Selling and Distribution Exp. ₹ 53 Iakhs.
10. Dividend of ₹ 58.03 lakhs is to be paid in October.
11. Tax of ₹ 23.92 lakhs will be paid in equal instalments in four quarters: i.e., January, April, July, and October.
12. The term loan of ₹ 237.32 lakhs is repayable in two equal instalments half-yearly. i.e., June-December.
13. Capital expenditure of ₹ 292.44 lakhs for the year is expected to be spread equally during the 12-month period.
You are required to prepare a Cash Flow Statement (Cash Budget) for the period of June – November 2000. (May 2001, 20 marks)
Answer:
Assumptions: The said problem can be solved on the basis of some assumptions:
- Since opening cash balance is not given, ¡t is assumed that credit facility received by the company (i.e. ₹ 140.88 lakhs) is its opening balance.
- For the complete information some working flotes are calculated from December otherwise they have no relevance. .
- Said problem does not provide information regarding purchase price and payment terms to the creditors of product ‘P3’ which is procured from outside and sold out as a combined product with P1 or P2. So, it is assumed that the product P3 is manufactured within the company and production costs is same as to the other product P1 or P2.
Question 5.
The following details are forecasted by a company for the purpose of effective utilization and management of cash:
(i) Estimated sales and manufacturing costs:
| Year and month 2010 | Sales ₹ | Materials ₹ | Wages ₹ | Overheads ₹ |
| April | 4,20,000 | 2,00,000 | 1,60,000 | 45,000 |
| May | 4,50,000 | 2,10,000 | 1,60,000 | 40,000 |
| June | 5,00,000 | 2,60,000 | 1,65,000 | 38,000 |
| July | 4,90,000 | 2,82,000 | 1,65,000 | 37,500 |
| August | 5,40,000 | 2,80,000 | 1,65,000 | 60,800 |
| September | 6,10,000 | 3,10,000 | 1,70,000 | 52,000 |
(ii) Credit terms:
Sales 20 percent sales are on cash, 50 percent of the credit sales are collected next month, and the balance in the following month. Credit allowed by suppliers is 2 months. Delay in payment of wages is ½ (one-half) month and of overheads is 1 (one) month.
(iii) Interest on 12 percent debentures of ₹ 5,00,000 is to be paid half yearly in June and December.
(iv) Dividends on investments amounting to ₹ 25,000 are expected to be received in June, 010.
(v) A new machinery will be installed in June. 2010 at a cost of ₹ 4,00,000 which is payable in 20 monthly instalments from July 2010 onwards.
(vi) Advance income tax to be paid in August 2010 is ₹ 15,000.
(vii) Cash balance on 1st June 2010 is expected to be ₹ 45,000 and the company wants to keep it at the end of every month around this figure, the excess cash (in multiple of thousand rupees) being put in fixed deposit. You are required to prepare monthly Cash budget on the basis of above information for four months beginning from June, 2010. (May 2010, 7 marks)
Answer:
(2) Payment of Wages
June = 80,000 + 82,500 = 1,62,500;
July = 82,500 + 82,500 = 1,65,000;
Aug. = 82,500 + 82,500 = 1,65,000; and
Sept. = 82,500 + 85,000 = 1,67,500
(Notes: Its has been assumed that the company wants to keep minimum cash balance of 45,000 at the end of every month.)
Question 6.
Slide Ltd. is preparing a cash flow forecast for the three-month period from January to the end of March. The following sales volumes have been forecasted;
| December | January | February | March | April | |
| Sales (units) | 1800 | 1875 | 1950 | 2100 | 2250 |
Selling price per unit is ₹ 600. Sales are all on one month’s credit. Production of goods for sale takes place one month before sales. Each unit produced requires two units of raw materials costing ₹ 150 per unit. No raw material inventory is held. Raw materials purchases are on one-month credit. Variable overheads and wages equal to ₹ 100 per unit are incurred during production and paid In the month of production. The opening cash balance on 1st ‚ January is expected to be ₹ 35,000. A long-term loan of ₹ 2,00,000 is expected to be received in the month of March. A machine costing ₹ 3,00,000 will be purchased in March.
(a) Prepare a cash budget for the months of January, February, and March and calculate the cash balance at the end of each month in the three-month period.
(b) Calculate the forecast current ratio at the end of the three-month period. (Nov 2019, 10 marks)
Answer:
Question 7.
Explain the following:
(i) Concentration Banking
(ii) Lock Box System (May 2014, Nov 2017, 2 marks each)
Answer:
(i) Concentration Banking:
In concentration Banking the Company establishes a number of strategic collection centers in different regions instead of a single collection center at the head office. This system reduces the period between the time a customer mails In his remittances and the time when they become spendable funds with the company, payment received by different collection centres are deposited with their local Bank which in turn transfers all surplus funds to the concentration bank of head office.
The concentration bank with which the company has its major bank account is generally located at the headquarters. Concentration banking is one important and popular way of reducing the size of the float.
(ii) Lock Box System:
Another means to accelerate the flow of funds in lock box system. While concentration banking remittances are received by a collection centre and deposited in the bank after processing. The purpose of lock box system is t0 eliminate the time between the receipts of remittances by the company and deposited at bank. A lockbox arrangement usually is on regional basis which a company chooses according to its billing patterns.
Question 8.
Explain four kinds of float with reference to management of cash. (Nov 2014, 4 marks)
Answer:
Different kinds of float with reference to cash management are as under:
| 1. Billing float | This is the time formal document that a seller prepares and sends to the purchaser as the payment request for goods sold or services provided. |
| 2. Mail float | This is the time when a cheque is being processed by post office, messenger service, or other means of delivery. |
| 3. Cheque processing float | This is the time for the seller to sort, record & deposit the cheque after it has been received by the company. |
| 4. Bank processing float | This is the time from the deposit of the cheque to the crediting of funds in the seller’s A/c. |
Question 9.
Given below is summary of the 2007 Accounts of Universal Ltd.:
The company deals In a single product. The following estimates of Trading have been made for the year 2008:
(a) Sales will be 5,00,000 units at a price of ₹ 42 per unit. Sales in Nov. and Dec. will be 50,000 units per month, balance being equally spread for the rest of the year.
(b) The amount of wages and general expenses will be 20 percent higher than in 2007.
(c) ₹ 10 lakhs will be spent on new shop fitting in June 2008. The depreciation charges will be ₹ 7.50 lakhs.
(d) All sales and purchases will, as in the past, be made on credit for settlement two months after sale or purchase. Wages and general expenses will be paid immediately.
(e) Purchase will be 43,000 units por month at a price of ₹ 30 per unit.
(f) An interim dividend of ₹ 2 per share will be paid in Now. 2008.
Required: Prepare the Budgeted Profit and Loss Account, monthly Cash Budget for the year and Balance Sheet as at end of the year 2008.
Answer:
Working Notes:
(i) The Closing Balance of Debtors as on 31.12.2006 ( ₹ 26 lakhs)
represents the sales for two months-Nov. 2007 & Dec. 2007. Taking this balance equally spread over these months, sales for Nov. 2007 ₹ 13.00 lakhs & for Dec. 2007 ₹ 13.00 lakhs.
(iii) The Closing Balance of Creditors as on 31.12.2007 (₹ 20 lakhs) represents the purchases for two months-Nov. 2007 & Dec. 2007. Taking this balance equally spread over these months, purchases for Nov. 2007 ₹ 10 lakhs & for Dec. 2007 ₹ 10 lakhs.
Question 10.
X & Y agree to start a Ltd. Company and to take over partly an existing business of Z. They agreed to contribute ₹ 25,000 each in the form of equity shares and also agree that Z will provide any additional amount required to finance the company in 1 six months and they would not recourse to any bank overdraft. Z will provide funds in the form of 8% debentures, to the nearest ₹ 1,000 above the amount required. The debentures will be secured by freehold premises. The company will purchase freehold premises for ₹ 25,000, Stock for ₹ 8,000, and plant for ₹ 6,000 Settlement is to be made in the month of in corporation.
(b) Gross Profit on sales to be @ 20%. .
(c) Purchase: to be sufficient to secure Stock at the end of each month adequate to supply the sales of the following month.
(d) Creditors: To be paid at the end of month following the month of purchase.
(e) Debtors: To settle their accounts net by the aid of the second month after the month of sales.
(f) Expenses:
(i) Preliminary Expenses ₹ 800 to be paid in Feb.
(ii) General Exp. ₹ 600 per month.
(iii) Salaries and Wages ₹ 800 per month from Jan. to April and ₹ 900 thereafter.
(iv) Rates ₹ 400 per annum payable in June and Dec. to be paid in the month following in which it is due.
(d) Assume shares and debentures are issued on 1st January.
Required: Draw up a Cash budget and Budgeted final account and Balance Sheet to 30th June.
Answer:
Question 11.
Prepare Cash Budget for July-December from the following information:
(a) The estimated sales, expenses, etc. are as follows:
(b) 20% of the sales are on cash and the balance on credit.
(c) 1 % of the credit sales are returned by the customers. 2% of the Gross accounts receivable constitute bad debt losses. 50% of the good accounts receivables are collected in the month of the sales, and the rest in the next month.
(d) The time lag in the payment of misc. expenses and purchases is one month. Wages and salaries are paid fortnightly with a time lag of 15 days.
(e) The company keeps a minimum cash balance of ₹ 5 lakhs. Cash in excess of ₹ 7 Lakhs is invested in Govt. securities In the multiple of ₹ 1 lakh. Shortfalls in the minimum cash balance are made good by borrowing from banks. Ignore interest received and paid.
Answer:
The wordings used ¡n the question may also be interpreted to mean that bad debts at 2% is to be worked out from net credit sales figures after returns.
(ii) Payment of Wages & Salaries (Fortnightly with a lag of 15 days)
Question 12.
From the information given below, prepare a Cash Budget of M/s. Ram Ltd. for the first half year of 2009, assuming that cost would remain unchanged:
(a) Sales are both on credit and for cash the latter being one-third of the former;
(b) Realisations from debtors are 25% in the month of sale, 60% in month following that, and the balance in the month after that;
(c) The company adopts uniform pricing policy of the selling price being 25% over cost;
(d) Budgeted sales of each month are purchase1 and paid for in the preceding month;
(e) The company has outstanding debentures of ₹ 2 lakhs on 1st Jan. which carry interest at 15% per annum payable on the last date of each quarter on calendar years basis. 20% of the debentures are due for redemption on 30th June 2009;
(f) The company has to pay the last instalment of advance tax, for assessment year 2008-2009, amounting to ₹ 54,000;
(g) Anticipated office costs for the six-month period are; Jan. ₹ 25,000 Feb. ₹ 20,000 Mar. ₹ 40,000 Apr. ₹ 35,000 May ₹ 30,000 and June ₹ 45,000;
(h) The operating cash balance of ₹ 10,000 is the minimum cash balance to be maintained Deficits have to be met by borrowers in multiples of ₹ 10,000 on which interest on monthly basis has to be paid on the first date of the subsequent month at 12% p.a. Interest is payable for a minimum period of a month.
(i) Rent payable is ₹ 2,000 per month.
(j) Sales forecast for the different months are:
Oct. 2008 ₹ 1,60,000, Nov. ₹ 1,80,000, Dec. ₹ 2,00,000, Jan. 2009 ₹ 2,20,000, Feb. ₹ 1,40,000 Mar. ₹ 1,60,000, Apr. ₹1,50,000, May ₹ 2,00,000, June ₹ 1,80,000 and July ₹ 1,20,000.
Answer:
Question 13.
JPL has two dates when It receives its cash mf lows. i.e., Feb. 15, and Aug. 15. On each of these dates, it expects to receive ₹ 15 crore. Cash expenditure are expected to be steady throughout the subsequent 6 month period. Presently, the ROI in marketable securities is 8% per annum, and the cost of transfer from securities to cash is ₹ 125 each time a transfer occurs.
(i) What s the optimal transfer size using the EOQ model? what is the average cash balance?
(ii) What would be your answer to part (i), if the ROI were 12% per annum and the transfer costs were 75? Why do they differ from those in part (i)? (May 2001, 10 marks)
Answer:
(I) Computation of optimal transfer size by using EOQ model and the average cash balance:
C = 2FAT1−−−−√
Where C = Cash required each time to maintain a minimum cash balance.
F = Total annual cash required.
T = Transaction cost of one transfer between cash and securities.
I = Interest rate on securities.
Here, F = 30,00,00,000 I =8% p.a., T = ₹ 125/Transaction
C = 2×₹30,00,00,000×1250.08−−−−−−−−−−−−−√ = ₹ 9,68,245
∴ Average cash balance = C/2 = ₹6,12,3722 = ₹ 4,84,123
(ii) Optimum transfer size if ROI is 12% and T is ₹ 75/Transaction:
C = 2×₹30,00,00,000×₹750.12−−−−−−−−−−−−−√ = ₹ 6,12,372
Average cash balance = C/2 = ₹6,12,3722 = ₹ 3,06,186
Causes of difference In figure (II) from the figure of part (I)
(a) Transaction cost is lower as comparison to part (i)
(b) Higher opportunity cost of holding (ROI =12%) as comparison to part (i).
Question 14.
Write short notes on the following:
(d) William J Baumal vs. Miller-Orr Cash Management Model (May 2004, May 2011, 3 marks)
Answer:
William J Baumal vs. MIlIer-Orr Cash Management Model
| Particulars | Baumal’s Model | Miller-Orr Model |
| 1. Aim of the Model | This model tries to balance the income foregone on cash held by the firm against the transaction cost of converting cash into marketable securities or vice-versa. | The Miller Orr model attempts to answer the following two questions about the cash management. 1. When should transfer be effected between cash and marketable securities. 2. How much cash is to be converted into marketable securities and vice-versa. |
| 2. The Model | The optimum cash level is that level of cash where the carrying cost and the transaction cost are the minimum. Where; Carrying cost denotes cost of holding cash i.e. the interest foregone on marketable securities.Transaction cost denotes cost involved in converting marketable securities into cash. |
This model operates under uncertainties and random i.e. irregular cash flows. According to the model, control limits for cash transaction is set which when reached trigger off a transaction. There are 2 control limits, the upper control limit and the lower control limit. Within these control limits, the cash balance fluctuates.The optimum cash balance according to this model is the point where the holding cost and transaction cost are equal. When it hits the upper or the lower limit, action should be taken to restore the cash balance to its normal level within the control points. |
The Miller-On Model is More realistic:
- The limitation of Baumal Model is that it does not allow cash flows to fluctuate terms do not use their cash balance uniformly nor are they able to predict daily cash inflows and outflows.
- The miller or model overcomes this. This shortcoming and allows for daily cash flow variation within the lower and upper limit set.
- If the firms cash flows fluctuate randomly and hit the upper limit, then it buys sufficient marketable securities to come back to a normal level of cash balance and vice versa.
Question 15.
Discuss Miller-Orr Cash Management model. (Nov 2005, 3 marks)
OR
Explain ‘Miller-Orr Cash Management model’. (May 2015, 4 marks)
Answer:
Miller – Orr Cash Management Model
This stochastic model of cash management was presented by Miller and Orr in 1966. It is an expansion of Baumol’s EOQ model for optimum cash balance.
Aim of the Model: The Miller Orr model attempt to answer the following two questions about the cash management.
- When should transfer be effected between cash and marketable securities.
- How much cash is to be converted into marketable securities and vice-versa.
The Model: This model operates under uncertainties and random i.e. irregular cash flows.
According to the model, control limits for cash transaction is set which when reached trigger off a transaction. There are 2 control limits, the upper control limit and the lower control limit.
Within these control limits, the cash balance fluctuates. When it hits the upper or the lower limit, action should be taken to restore the cash balance to its normal level within the control points.
Explanation of the Model: The control limits are fixed on the basis of:
- Fixed cost associated with the securities transacted.
- The opportunity cost of holding cash.
- The degree of fluctuations in cash balances.
The upper limit is denoted by h, the lower limit by zero and the return point is denoted by Z. When the cash balance! reaches the upper limit, cash which is equal to (h-z) is invested in the marketable securities. When the cash balance reaches the lower limit, the cash is generated by selling the marketable securities. When the cash balance remains between the higher and lower levels, no transaction between the marketable securities and cash takes place.
Formula:
Z = 33Tσ2RI−−−−√
Where;
R = Return point.
T = Transaction cost.
σ = Variance of daily cash balance.
l = Interest rate ie. carrying cost per rupee of cash.
Assumptions:
- Out of cash and marketable securities, marketable securities has a marginal yield.
- The buying and selling of marketable securities takes place without any delay.
Limitations:
- It assumes a constant variability of cash flows.
- It cannot cope up with large transactions such as payment of dividends.
Question 16.
Answer the following:
(i) A firm maintains a separate account for cash disbursement. Total disbursements are ₹ 2,62,500 per month. The administrative and transaction cost of transferring cash to disbursement account is ₹ 25 per transfer. Marketable securities yield is 7.5% per annum. Determine the optimum cash balance according to William J. Baurmol’s model. (May 2009, 3 marks)
Answer:
Determination of Optimal Cash Balance according to William J. Baumol Model
Optimum Cash Balance = 2ABC−−−−√
Where,
A = Annual disbursement
B Administrative and transaction cost
C = Marketable securities yield.
C = 2×2,62,500×12×250.075−−−−−−−−−−−−√
= 15,75,00,0000.075−−−−−−−−√
= 2,10,00,00,000−−−−−−−−−−−−√
Optimum cash Balance, C = ₹ 45,826
Question 17.
Answer the following:
VK Co. Ltd. has total cash disbursement amounting ₹ 22,50,000 in the year 2017 and maintains a separate account for cash disbursements. Company has an administrative and transaction cost on transferring cash to disbursement account ₹ 15 per transfer. The yield rate on marketable securities is 12% per annum. You are required to determine optimum cash balance according to the William J. Baumol Model. (May 2017, 5 marks)
Answer:
Optimum Cash Balance = 2×AT×TH−−−−−−√
Where,
A = Annual Cash disbursements
T = Transaction Cost (fixed cost) per transaction
H = Opportunity Cost one rupee per annum (Holding Cost)
Optimum Cash Balance = 2×22,50,000×150.12−−−−−−−−−−√=56,25,00,000−−−−−−−−−−−√
Optimum Cash Balance = ₹ 23,717
Thus, Optimum Cash Balance according to William J. Boumol Model is ₹ 23,717.
Question 18.
The annual cash requirement of X Ltd. is ₹ 10 lakhs. The company has marketable secucities in lot size8 of ₹’ 50,000, ₹ 1,00000, ₹’ 2,00,000 ₹ 2,50,000 and ₹’ 5,00,000. Cost of conversion of marketable securities per lot is ₹ 1,000. The company can earn 5% annual yield on its securities. You required to prepare a table indicating which lot size will have to be sold by the company. Also show that the economic lot size can be obtained by the Baumal Model.
Answer:
Economic lot size is ₹ 2,00,000 at which total costs are minimum.
Economic Lot Size = 2×A×TH−−−−−√
Where; A = Annual Cash requirement = ₹ 10,00,000
T = Transaction Cost per lot = ₹ 1,000
H = Holding Cost interest earned on marketable securities per annum =5%
Economic Lot Size = 2×10,00,000×1,0000.05−−−−−−−−−−−−√ = ₹ 2,00,000
Question 19.
The annual cash requirement of X Ltd. is ₹ 15 Lakhs. The Company has Marketable Securities in Lot Sizes of ₹ 50,000, ₹ 1,50,000 and ₹ 2,50,000. Cost of conversion of Marketable Securities per lot is ₹ 1,500. The Company can earn 10% annual yield on its securities. Prepare a table indicating which Lot Size will have to be sold by the Company. Also show the Economic Lot Size, which can be obtained by the Baumol’s model.
Answer:
Conclusion: From the above table, the Economic Lot Size is ₹ 2,50,000, since Associated Cost is the least at that level.
2. Optimum Investment Size = 2AT1−−−−√
Where;
A = Annual Cash Requirement = ₹ 15,00,000
T = Transaction Cost per purchase/sate = 1,500
I = Interest Rate per rupee per annum = 10%
On substitution, Optimum Investment Size = ₹ 2,12,132
Question 20.
X Ltd. requires a minimum cash balance of ₹ 6,000 and the variance of daily cash flows is estimated to be ₹ 22,50000. The interest rate is 0.025% per day and the transaction cost for each sale or purchase of securities is ₹ 20. Calculate the spread, the upper limit, and the return point.
Answer:
(i) Spread = 3×34×T+σ21−−−−−−−−√3
= 3×34×20+(22,50,000)20.025%−−−−−−−−−−−−−√
= 15,390
(ii) Return Point = Lower Limit +13 rd of Spread
= 6,000 + 13×15,390
= 11,130
(iii) Upper Limit = Lower Limit + Spread
= 6,000 + 15,390
= 21,390
(iv) Average Cash Balance = Lower Limit +49 of Spread
= 6,000 + 49×15,390
= 12,840
Question 21.
Answer the following:
State the advantages of Electronic Cash Management System. (May 2013, 4 marks)
Answer:
Advantages of Electronic Cash Management System
- Significant saving in time.
- Greater accounting accuracy.
- More control over time and funds:
- Decrease in interest costs.
- Less paperwork.
- Speedy conversion of various instruments into cash.
- Faster transfer of funds from one location to another, where required.
- Supports electronic payments.
- Reduction in the amount of ‘idle float’ to the maximum possible extent.
- Ensures no idle funds are placed at any place in the organization.
- It makes inter-bank balancing of funds much easier.
- Making available funds wherever required, whenever required.
- Produces faster electronic reconciliation.
- It is a true form of centralised ‘Cash Management’.
- Allows for detection of book-keeping errors.
- Earns interest income or reduces interest expense.
- Reduces the number of cheques issued.
Question 22.
What is Virtual Banlcing? State its advantages. (Nov 2013, 4 marks)
Answer:
Virtual Banking
| Concept | It refers to the provisions of Banking and related services through the use of Information Technology (IT) without direct interaction between Bank employees and customers. |
| Origin | The origin of virtual banking in the developed countries can be traced back to the seventies with the installation of Automated Teller Machine (ATMS). Subsequently, driven by the competitive market environment as well as various technological and customer pressures, other types of virtual banking services have grown in prominence throughout the world. |
Service Offered:
- Computerized settlement of clearing transactions.
- Use of Magnetic Ink Character Recognition (MICR) technology.
- Provision of inter-city clearing facilities and high-value clearing facilities.
- Electronic Clearing Service Scheme (ECSS).
- Electronic Funds Transfer (EFT) scheme.
- Delivery vs. Payment (DVP) for Government securities transactions.
- Setting up of Indian Financial Network(INFINET) etc.
Advantages:
- Lower cost of handing a transaction.
- Virtual banking allows the possibility of improved and a range of services being made available to the customer rapidly, accurately and at his convenience.
- High speed Leads to prompt services with perfect accuracy
- Cost Efficiency by lower cost of handling a transaction.
Question 23.
Explain Electronic Cash Management System. (Jan 2021, 4 marks)
Question 24.
Answer the following:
‘Management of marketable securities is an integral part of investment of cash.’ Comment. (Nov 2013, 4 marks)
OR
Describe the three principles relating to selection of marketable securities. (May 2016, 4 marks)
Answer:
Management of marketable securities serves the purpose of liquidity and cash provided choice of investment is done accurately. The selection of securities should be guided by 3 principles:
- Safety
- Maturity
- Marketability
Safety
Returns and risks are directly related to each other. Higher the default risk, higher the return from securities and lower the default risk, lower the return from securities. The default risk means the possibility of default in payment of interest or/and principal on time. To minimize default risk, the access cash should be invested in safe securities.
Maturity
Maturity refers to the time period cover which interest and principal are to be paid. Matching of maturity forecasting cash need is essential. Prices of long-term securities fluctuate more with changes in interest rates therefore, more risky. To avoid the fluctuation in prices of securities the excess cash should be invested in short-term securities.
Marketability
It refers to the convenience, speed, and cost at which a security can be converted into cash. If the security can be sold quickly without loss of time and price it is highly liquid or marketable. Thus, in situations when working capital needs are fluctuating, investment of excess funds should be done in short-term securities, so as to maintain the liquidity.
Question 1.
Explain the “Equivalent Production.” [CA Inter Nov. 2013, 4 Marks]
Answer:
Equivalent Production:
When opening and closing stocks of work-in-process exist, unit costs cannot be computed by simply dividing the total cost by total number of units still in process. We can convert the work-in-process units into finished units called equivalent production units so that the unit cost of these uncompleted (WIP) units can be obtained. Equivalent Production units = Actual number of units in production × Percentage of work completed. It consists of balance of work done on opening work-in-process, current production done fully and part of work done on closing WIP with regard to different elements of costs viz., ma-terial, labour and overhead.
Question 2.
Explain briefly the procedure for the valuation of Work-in-process. [CA Inter Nov. 2002, 2 Marks]
Answer:
Valuation of Work-in process: The valuation of work-in-process can be made in the following three ways, depending upon the assumptions made regarding the flow of costs.
- First-in-first-out (FIFO) method
- Last-in-first-out (LIFO) method
- Average cost method
A brief account of the procedure followed for the valuation of work-in-process under the above three methods is as follows:
FIFO method: According to this method the units first entering the process are completed first. Thus the units completed during a period would consist partly of the units which were incomplete at the beginning of the period and partly of the units introduced during the period.
The cost of completed units is affected by the value of the opening inventory, which is based on the cost of the previous period. The closing inventory of work-in-process is valued at its current cost.
LIFO method: According to this method units last entering the process are to be completed first. The completed units will be shown at their current cost and the closing work-in-process will continue to appear at the cost of the opening inventory of work-in-progress along with current cost of work-in-progress if any.
Average cost method: According to this method opening inventory of work-inprocess and its costs are merged with the production and cost of the current period, respectively. An average cost per unit is determined by dividing the total cost by the total equivalent units, to ascertain the value of the units completed and units in process.
Question 3.
What is inter-process profit? State its advantages and disadvantages. [CA Inter Nov. 2012, 4 Marks]
Answer:
Definition of Inter-Process Profit and its advantages and disadvantages:
In some process industries, the output of one process is transferred to the next process not at cost but at market value or cost plus a percentage of profit. The difference between cost and the transfer price is known as inter-process profits.
The advantages and disadvantages of using inter-process profit, in the case of process type industries are as follows:
Advantages:
- Comparison between the cost of output and its market price at the stage of completion is facilitated.
- Each process is made to stand by itself as to the profitability.
Disadvantages:
- The use of inter-process profits involves complication.
- The system shows profits which are not realised because of stock not sold out.
Question 4.
“Operation costing is defined as refinement of Process costing.” Explain it. [CA Inter May 2007, 3 Marks]
Answer:
Operation costing is concerned with the determination of the cost of each operation rather than the process:
- In the industries where process consists of distinct operations, the operation costing method is applied.
- It offers better control and facilitates the computation of unit operation cost at the end of each operation.
Question 5.
What are the steps to be followed for preparing the production cost report which is prepared at the end of each accounting period? [ICAI Module]
Answer:
Step-1: Analysis of physical flow’ of production units The first step is to determine and analyse the number of physical units in the form of inputs (introduced fresh or transferred from previous process, beginning WIP) and outputs (completed and WIP).
Step-2: Calculation of equivalent units for each cost elements
The second step is to calculate equivalent units of production for each cost element i.e. for material, labour and overheads.
Step-3: Determination of total cost for each cost element
Total cost for each cost element is collected and accumulated for the period.
Step-4: Computation of cost per equivalent unit for each cost element In this step, the cost per equivalent unit for each cost element is calculated by dividing the total cost determined in Step-3 by the equivalent units as deter-mined in Step-2.
Step-5: Assignment of total costs to units completed and ending WIP In this step, the total cost for units completed, units transferred to next process, ending WIP, abnormal loss etc. are calculated and posted in the process account and production cost report.
Practical Questions
Normal Loss, Abnormal Loss & Abnormal Gain
Question 1.
A product passes through Process-I and Process-II.
Particulars pertaining to the Process-I are:
Materials issued to Process-I amounted to ₹ 80,000, Wages ₹ 60,000 and manufacturing overheads were ₹ 52,500. Normal Loss anticipated was 5% of input, 9,650 units of output were produced and transferred out from Process-I to Process-II. Input raw materials issued to Process-I were 10,000 units.
There were no opening stocks.
Scrap has realizable value of ₹ 5 per unit.
You are required to prepare:
(i) Process-I Account
(ii) Abnormal Gain/Loss Account [CA Inter Dec. 2021, Nov. 2008, 5 Marks]
Answer:
(i)
(ii)
Question 2.
A product passes through two processes. The output of Process I becomes the input of Process II and the output of Process II is transferred to warehouse. The quantity of raw materials introduced into Process I is 20,000 kg at 10 per kg. The cost and output data for the month under review are as under:
| Process I | Process II | |
| Direct materials | ₹ 60,000 | ₹ 40,000 |
| Direct labour | ₹ 40,000 | ₹ 30,000 |
| Production overheads | ₹ 39,000 | ₹ 40,250 |
| Normal loss: | 8% | 5% |
| Output | 18,000 | 171400 |
| Loss realisation/Unit | 2.00 | 3.00 |
The company’s policy is to fix the Selling price of the end product in such a way as to yield a Profit of 20% on Selling price.
Required:
(i) Prepare the Process Accounts
(ii) Determine the Selling price per unit of the end product. [CA Inter Nov. 2002, 9 Marks]
Answer:
Process I Account
Process II Account
Working Notes:
1. Valuation of abnormal loss & units finished & transfer to process II A/c:
Total Expenditure incurred in the Process – Scrap realisation of normal loss
= Units introduced in the Process – Normal loss unit
= 2,00,000+60,000+40,000+39,000−3,20020,000−1,600
= 3,35,80018,400
= ₹ 18.25
2. Valuation of Abnormal gain & units finished & transfer to warehouse:
3. Determination of selling price per Unit of the end Product:
Uet the S.P. be ₹ 100
Profit = 20% of 100 = ₹ 20
Cost = ₹ 100 – ₹ 20 = ₹ 80
It the cost price is 25.5, the selling price of the end product
= 25.5080 × 100 = ₹ 31.875
Question 3.
Alpha Ltd. is engaged in the production of a product A which passes through 3 different process – Process P, Process 0 and Process R. The following data relating to cost and output is obtained from the books of account for the month of April 2021:
Production overheads of ₹ 90,000 were recovered as percentage of direct labour. 10,000 kg. of raw material @ ₹ 5 per kg. was issued to Process P. There was no stock of materials or work-in-process. The entire output of each process passes directly to the next process and finally to warehouse. There is normal wastage, in processing, of 10%. The scrap value of wastage is ₹ 1 per kg. The output of each process transferred to next process and finally to warehouse are as under:
Process P = 9,000 kg.
Process 0 = 8,200 kg.
Process R = 7,300 kg.
The company fixes selling price of the end product in such a way so as to yield a profit of 25% selling price.
Prepare Process P, Q and R accounts. Also calculate selling price per unit of end product. [CA Inter May 2018, 10 Marks]
Answer:
Process P Account
Cost Per Unit:
= ₹1,40,500−₹1,00010,000kgs−1,000kgs
= ₹1,39,5009,000kgs
= ₹ 15.50
Process Q Account
Cost Per Unit:
= ₹2,52,000−₹9009000kgs−900kgs
= ₹2,51,0008100kgs
= ₹ 31
Process R Account
Cost per unit
= ₹3,84,580–₹8208200kgs−820kgs
= ₹ 52
Calculation of Selling Price:
| Cost per unit | ₹ 52 |
| Add: Profit 25% on selling price ie. 1/3rd of cost | ₹ 17.33 |
| Selling price per unit | ₹ 69.33 |
Question 4.
A product passes through two processes A and B. During the year 2021, the input to process A of basic raw material was 8,000 units @ ₹ 9 per unit. Other information for the year is as follows:
| Process A | Process B | |
| Output units | 7,500 | 4,800 |
| Normal loss (% to input) | 5% | 10% |
| Scrap value per unit (₹) | 2 | 10 |
| Direct wages (₹) | 12,000 | 24,000 |
| Direct expenses (₹) | 6,000 | 5,000 |
| Selling price per unit (₹) | 15 | 25 |
Total overheads ₹ 17,400 were recovered as percentage of direct wages. Selling expenses were ₹ 5,000. These are not allocated to the processes. 2/3rd of the output of Process A was passed on to the next process and the balance was sold. The entire output of Process B was sold.
Prepare Process A and B Accounts. [CA Inter May 2012, 8 Marks]
Answer:
Process I Account
Cost of Abnormal Loss in Process A = 95,800−8008,000−400 = 95,0007,600 = ₹ 12.50 per unit
Process II Account
Cost of Abnormal gain = 1,03,100−5,0005,000−500 = 98,1004,500 = 21.80 per unit
Working Note:
Profit & Loss Account
Note:
1. As mentioned selling expenses are not allocable to process which is debited directly to the Profit & Loss A/c.
2. It is assumed that Process A and Process B are not responsibility centres and hence, Process A and Process B have not been credited to direct sales. P/L A/c is prepared to arriving at profit/loss.
Question 5.
M J Pvt. Ltd, produces a product “SKY” which passes through two processes, viz. Process A and Process B. The details for the year ending 31st March, 2021 are as follows:
| Process A | Process B | |
| 40.000 Units introduced at a cost of | ₹ 3,60,000 | |
| Material Consumed | ₹ 2,42,000 | ₹ 2,25,000 |
| Direct Wages | ₹ 2,58,000 | ₹ 1,90,000 |
| Manufacturing Expenses | ₹ 196,000 | ₹ 1,23,720 |
| Output in Units | 37,000 | 27,000 |
| Normal Wastage of Inputs | 5% | 10% |
| Input Scrap Value(per unit) | ₹ 15 | ₹ 20 |
| Selling Price (per unit) | ₹ 37 | ₹ 61 |
Additional Information:
(a) 80% of the output of Process A, was passed on to the next process and the balance was sold. The entire output of Process B was sold.
(b) Indirect expenses for the year was ₹ 4,48,080.
(c) It is assumed that Process A and Process B are not responsibility centre.
Required:
(i) Prepare Process A and Process B Account.
(ii) Prepare Profit & Loss Account showing the net profit/net loss for the year. [CA Inter May 2014, 8 Marks]
Answer:
Process A A/c
Cost per unit = ₹10,56,000−₹30,000₹40,000 unit −2,000 units = ₹
Normal wastage = 40,000 units × 5% = 2,000 units
Abnormal loss = 40,0000 units – (37,000 units + 2,000 units)
= 1,000 units
Transfer to Process B = 37,000 units × 80%
= 29,600 units
Sale = 37,000 units × 20%
= 7,400 units
Process B Account
Cost per unit = ₹13,37,920−₹59,200₹29,600 units −2,960 units = ₹ 48 per unit
Normal wastage = 29,600 units × 10%
= 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units
= 360 units
Profit & Loss Account
= 1,000 units
Transfer to Process B = 37,000 units × 80%
= 29,600 units
Sale = 37,000 units × 20%
= 7,400 units
Process B Account
Cost per unit = ₹13,37,920−₹59,200₹29,600 units −2,960 units = ₹ 48 per unit
Normal wastage = 29,600 units × 10%
= 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units
= 360 units
Profit & Loss Account
= 1,000 units
Transfer to Process B = 37,000 units × 80%
= 29,600 units
Sale = 37,000 units × 20%
= 7,400 units
Process B Account
Cost per unit = ₹13,37,920−₹59,200₹29,600 units −2,960 units = ₹ 48 per unit
Normal wastage = 29,600 units × 10%
= 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units
= – 360 units
Profit & Loss Account
Working notes:
Question 6.
JK Ltd. produces a product “AZE”, which passes through two processes, viz., process I and process II. The output of each process is treated as the raw material of the next process to which it is transferred and output of the second process is transferred to finished stock. The following data related to December, 2020:
| Process I | Process II | |
| 25,000 units introduced at a cost of | ₹ 2,00,000 | – |
| Material consumed | ₹ 1,92,000 | ₹ 96,200 |
| Direct labour | ₹ 2,24,000 | ₹ 1,28,000 |
| Manufacturing expenses | ₹ 1,40,000 | ₹ 60,000 |
| Normal wastage of input | 10% | 10% |
| Scrap value of normal wastage (per unit) | ₹ 9.90 | 8.60 |
| Output in Units | 22,000 | 20,000 |
Required:
(i) Prepare Process I and Process II account.
(ii) Prepare Abnormal effective/wastage account as the case may be in each process. [CA Inter May 2008, 8 Marks]
Answer:
Question 7.
PQR Ltd. processes a range of product including a toy ‘Alpha’, which passes through three processes before completion and transfer to the finished goods warehouse. The information relating to the month of October 2021 are as follows:
The production overhead is absorbed as a percentage of direct wages. There was no opening and closing stock.
Prepare the following accounts:
(i) Process-I
(ii) Process-II
(iii) Process-Ill
(iv) Abnormal Loss
(v) Abnormal Gain [CA Inter Nov 2019, 8 Marks]
Answer:
(i)
Cost per unit = ₹45,400−₹4002,000 units – 200 units = ₹ 25 Per unit
(ii) Process II Account
Cost per unit = ₹87,860−₹4601,840 units – 92 units = ₹ 50 per unit
(iii) Process- III Account
Cost per unit = ₹1,42,680−₹1,7401,740 units – 174 units = ₹ 90 per unit
(iv) Abnormal Loss Account
(v) Abnormal Gain Account
Question 8.
A product passes through two distinct processes before completion. Following information are available in this respect:
| Process 1 | Process 2 | |
| Raw materials used | 10,000 units | – |
| Raw material cost (per unit) | ₹ 75 | |
| Transfer to next process/Finished good | 9,000 units | 8,200 units |
| Normal loss (on inputs) | 5% | 10% |
| Direct wages | ₹ 3,00,000 | ₹ 5,60,000 |
| Direct expenses | 50% of direct wages | 65% of direct |
| Manufacturing overheads | 25% of direct wages | 15% of direct wages |
| Realisable value of scrap (per unit) | ₹ 13.50 | ₹ 145 |
8,000 units of finished goods were sold at a profit of 15% on cost. There was no opening and closing stock of work-in-progress.
Prepare:
(i) Process 1 and Process 2 Account
(ii) Finished goods Account
(iii) Normal Loss Account
(iv) Abnormal Loss Account
(v) Abnormal Gain Account [CA Inter Nov. 2019, 10 Marks]
Answer:
Process 1 Account
Cost per unit of Completed units and abnormal loss:
= ₹12,75,000−₹6,75010,000 units −500 units
= ₹12,68,2509,500 units
= ₹ 133.50
Process 2 Account
Cost per unit of Completed units and abnormal loss:
= 22,09,500−₹1,30,5009,000 units −900 units
= ₹20,79,0008,100 units
= ₹ 256.67
Finished Goods Account
Equivalent Production: fifo Method
Question 9.
Following details have been provided by M/s AR Enterprises:
(i) Opening work-in-progress 3,000 units (70% complete)
(ii) Units introduced during the year 17,000 units
(in) Cost of the process (for the period) ₹ 33,12,720
(tv) Transferred to next process 15,000 units
(v) Closing work-in-progress 2,200 units (80% complete)
(vi) Normal loss is estimated at 12% of total input (including units in process in the beginning). Scraps realise ? 50 per unit. Scraps are 100% complete
Using FIFO method, compute:
(i) Equivalent production
(ii) Cost per equivalent unit [CA Inter Nov. 2018, 5 Marks]
Answer:
Computation of cost per equivalent production unit:
Cost of the Process (for the period) = ₹ 33,12,720
Less: Scrap value of normal loss (₹ 50 × 2,400 units) = ₹ 1,20,000
Total process cost = ₹ 31,92,720
Cost per Equivalent unit = ₹31,92,72015,060 units
Question 10.
The following information relate to Process A:
(i) Opening WIP – 8,000 units at ₹ 75,000
(ii) Degree of Completion:
Material – 100%
Labour and Overhead – 60%
(iii) Input 1,82,000 units at – ₹ 7,37,500
(iv) Wages paid – ₹ 3,40,600
(v) Overheads paid – ₹ 1,70,300
Units scrapped – 14,000
Degree of Completion:
Material – 100%
Wages and Overheads – 80%
(vi) Closing WIP 18,000 units
Degree of Completion:
Material – 100%
Wages and Overheads – 70%
(vii) Units completed and transferred 1,58,000 to next Process
(viii) Normal loss 5% of total input including opening WIP.
(ix) Scrap value is ₹ 5 per unit to be adjusted out of direct material cost You are required to compute on the basis of FIFO basis:
(i) Equivalent Production
(ii) Cost Per Unit
(iii) Value of Units transferred to next process. [CA Inter Nov, 2014, 8 Marks]
Answer:
Statement of Equivalent Production
(FIFO Method)
Total cost per unit = ₹ (4.00 + 2.0106 + 1.0053) = ₹ 7.0159
Value of units transferred to next process:
Question 11.
The following information is furnished by ABC Company for Process II of its manufacturing activity for the month of April 2021:
(i) Opening Work-in-Progress-Nil
(ii) Units transferred from Process I – 55,000
(iii) Expenditure debited to Process II
Consumables – ₹ 1,57,200
Labour – ₹ 1,04,000
Overhead – ₹ 52,000
(iv) Units transferred to Process III – 51,000 units
(v) Closing WIP- 2,000 units (Degree of completion)
Consumables – 80%
Labour – 60%
Overhead – 60%
(vi) Units scrapped – 2,000 units, scrapped units were sold at ₹ 5 per unit
(vii) Normal loss 4% of units introduced
You are required to:
(i) Prepare a Statement of Equivalent Production.
(ii) Determine the cost per unit.
(iii) Determine the value of Work-in-Process and units transferred to Process III. [CA Inter Nov. 2015, 8 Marks]
Answer:
(i) Statement of Equivalent Production
(ii) Determination of Cost per Unit
(iii) Determination of value of Work-In-Process and units transferred to Process-III
Question 12.
From the following Information for the month ending October, 2021. Prepare Process 111 Cost Accounts:
| Opening WIP In Process III | 1,800 units at ₹ 27,000 |
| Transfer from Process II | 47,700 units at ₹ 5,36,625 |
| Transferred to Warehouse | 43,200 units |
| Closing WIP of Process III | 4,500 units |
| Units scrapped | 1,800 units |
| Direct material added in Process III | ₹ 1,77,840 |
| Direct Wages | ₹ 87,840 |
| Production overheads | ₹ 43,920 |
| Degree of completion: | Opening Stock | Closing Stock | Scrap |
| Materials | 80% | 70% | 100% |
| Labour | 60% | 50% | 70% |
| Overheads | 60% | 50% | 70% |
The normal loss in the process was 5% of the production and scrap was sold @ ₹ 6.75 per unit. [CA Inter Nov. 2003, 10 Marks]
Answer:
Statement of Equivalent Production:
Statement of cost per unit
Statement of Evaluation
Process III Account
Question 13.
From the following Information for the month ending October, 2020, prepare Process Cost accounts for Process III. Use First-in-first-out (FIFO) method to value equivalent production.
Direct materials added in Process III (Opening WIP) – 2,000 units at ₹ 25,750
Transfer from Process II – 53,000 units at ₹ 4,11,500
Transferred to Process IV – 48,000 units
Closing stock of Process III – 5,000 units
Units scrapped – 2,000 units
Direct material added in Process III – ₹ 1,97,600
Direct wages – ₹ 97,600
Production Overheads – ₹ 48,800
Degree of completion:
| Opening Stock | Closing Stock | Scrap | |
| Materials | 80% | 70% | 100% |
| Labour | 60% | 50% | 70% |
| Overheads | 60% | 50% | 70% |
The normal loss in the process was 5% of production and scrap was sold at ₹ 3 per unit. [CA Inter Nov. 2005, 14 Marks]
Answer:
Process III Process Cost Sheet (FIFO Method) Period
Op. Stock: 2,000 units
Introduced: 53,000 units
Statement of Equivalent Production
Statement of Cost for each Element
Statement of Evaluation
Process III Account
Question 14.
A Company produces a component, which passes through two processes. During the month of April, 2021, materials for 40,000 components were put into Process I of which 30,000 were completed and transferred to Process II. Those not transferred to Process II were 100% complete as to materials cost and 50% complete as to labour and overheads cost. The Process I costs incurred were as follows:
| Direct Materials | ₹ 15,000 |
| Direct Wages | ₹ 18,000 |
| Factory Overheads | ₹ 12,000 |
Of those transferred to Process II, 28,000units were completed and transferred to finished goods stores. There was a normal loss with no salvage value of 200 units in Process II. There were 1,800 units, remained unfinished in the process with 100% complete as to materials and 25% complete as regard to wages and overheads.
No further process material costs occur after introduction at the first process until the end of the second process, when protective packing is applied to the completed components. The process and packing costs incurred at the end of the Process II were:
| Direct Materials | ₹ 4,000 |
| Direct Wages | ₹ 3,500 |
| Factory Overheads | ₹ 4,500 |
Required:
(i) Prepare Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) Prepare statement of Equivalent Production, Cost per unit and Process II A/c. [CA Inter May 2006, 10 Marks]
Answer:
(i) Statement of Equivalent Production
Statement of Cost
Cost Analysis (Process I):
Finished and passed to next process
Process I Account
(ii) Statement of Equivalent Production
Total Cost per unit = 1.52159
Cost Analysis (Process II):
Process II Account:
Question 15.
XP Ltd. furnishes you the following information relating to process II.
Opening work-in-progress – NIL
Units introduced 42,000 units @ ₹ 12
Expenses debited to the process:
(a) Direct material ₹ 61,530
(b) Labour ₹ 88,820
(c) Overhead ₹ 1,76,400
Normal loss in the process = 2%.of input
Closing work-in-progress – 1,200 units
Degree of completion:
Materials – 100%
Labour – 50%
Overhead – 40%
Finished output – 39,500 units
Degree of completion of abnormal loss:
Material – 100%
Labour – 80%
Overhead – 60%
Units scraped as normal loss were sold at ₹ 4.50 per unit.
All the units of abnormal loss were sold at ₹ 9 per unit.
Prepare:
(a) Statement of equivalent production;
(b) Statement showing the cost of finished goods, abnormal loss and closing WIP;
(c) Process II account and abnormal loss account.
[CA Inter Nov. 2009, 8 Marks]
Answer:
(a) Statement of Equivalent Production
(b) Statement of Cost
(c) Process II Account
Question 16.
Following information is available regarding Process A for the month of October 2020:
Production Record:
| (i) Opening work-in progress | 40,000 Units |
| (ii) (Material: 100% complete, 25% complete for labour & overheads) | |
| (iii) Units Introduced | 1,80,000 Units |
| (iv) Units Completed | 1,50,000 Units |
| (v) Units in process on 31.10.2020 (Material: 100% complete, 50% complete for labour & overheads) |
70,000 Units |
Cost Records:
Opening Work-in-progress
| Material | ₹ 1,00,000 |
| Labour | ₹ 25,000 |
| Overheads | ₹ 45,000 |
Cost incurred during the month:
| Material | ₹ 6,60,000 |
| Labour | ₹ 5,55,000 |
| Overheads | ₹ 9,25,000 |
Assure that FIFO method is used for W.I.P. inventory valuation.
Required:
(i) Statement of Equivalent Production.
(ii) Statement showing Cost for each element
(iii) Statement of apportionment of Cost
(iv) Process A Account. [CA Inter Nov. 2010, 8 Marks]
Answer:
Statement of Equivalent Production
(FIFO Method)
Statement showing the Cost for each element
Statement of Evaluation
Process A A/c
Question 17.
ABX Company Ltd. provides the following information relating to Process B:
(i) Opening Work-in-progress – NIL
(ii) Units Introduced – 45,000 units @ ₹ 10 per unit
(iii) Expenses debited to the process
Direct material – ₹ 65,500
Labour – ₹ 90,800
Overhead – ₹ 1,80,700
(iv) Normal loss in the process – 2% of Input
(v) Work-in progress – 1,800 units
Degree of completion
Materials – 100%
Labour – 50%
Overhead – 40%
(vi) Finished output – 42,000 units
(vii) Degree of completion of abnormal loss:
Direct material – 100%
Labour – 80%
Overhead – 60%
(viii) Units scrapped as normal loss were sold at ₹ 5 per unit.
(ix) All the units of abnormal loss were sold at ₹ 2 per unit.
You are required to prepare:
(a) Statement of equivalent production.
(b) Statement showing the cost of finished goods, abnormal loss and closing balance of work-in-progress.
(c) Process-B account and abnormal loss account. [CA Inter May 2013, 10 Marks]
Answer:
Question 18.
Answer the following:
MNO Ltd. has provided following details:
- Opening work-in-progress is 10,000 units at ₹ 50,000 (Material 100%, Labour and overheads 70% complete).
- Input of materials is 55,000 units at ₹ 2,20,000. Amount spent on Labour and Overheads is ₹ 26,500 and ₹ 61,500 respectively.
- 9,500 units were scrapped; degree of completion for material 100% and for labour & overheads 60%.
- Closing work-in-progress is 12,000 units; degree of completion for material 100% and for labour & overheads 90%.
- Finished units transferred to next process are 43,500 units.
Normal loss is 5% of total input including opening work-in-progress. Scrapped units would fetch ₹ 8.50 per unit.
You are required to prepare using FIFO method:
(i) Statement of Equivalent production
(ii) Abnormal Loss Account [CA Inter January 2021, 5 Marks]
Answer:
Statement of Equivalent Production (Using FIFO method)
Working Notes:
Equivalent Production: Weighted Average Method
Question 19.
The following details are available of Process X for August 2020:
Opening work-in-progress 8,000 units
Degree of completion and cost:
| Material (100%) | ₹ 63,900 |
| Labour (60%) | ₹ 10,800 |
| Overheads (60%) | ₹ 5,400 |
| Input 1,82,000 units at | ₹ 7,56,900 |
| Labour paid | ₹ 3,28,000 |
| Over heads incurred | ₹ 1,64,000 |
| Units scrapped | 14,000 |
Degree of completion:
| Material | 100% |
| Labour and overhead | 80% |
| Closing work-in-process | 18,000 units |
Degree of completion
| Material | 100% |
| Labour and overhead | 70% |
1,58,000 units were completed and transferred to next process.
Normal loss is 8% of total input including opening work-in-process.
Scrap value is ₹ 8 per unit to be adjusted in direct material cost.
You are required to compute, assuming that average method of inventory is used:
(i) Equivalent production, and
(ii) Cost per unit [CA Inter Nov. 2011, 8 Marks]
Answer:
(i) Statement of Equivalent Production
(ii) Statement of cost
Total cost per unit = ₹ 4 + ₹ 2 + ₹ 1 = ₹ 7.00
Question 20.
Following details are related to the work done in Process-I during the month of May 2021:
Opening work-in-process (3,000 units)
| Materials | ₹ 1,80,500 |
| Labour | ₹ 32,400 |
| Overheads | ₹ 90,000 |
| Materials introduced in Process-I (42,000 units) | ₹ 36,04,000 |
| Labour | ₹ 4,50,000 |
| Overheads | ₹ 15,18,000 |
| Units Scrapped | 4,800 units |
Degree of completion
| Materials | 100% |
| Labour & overhead | 70% |
| Closing Work-in-process | 4,200 units |
Degree of completion
| Materials | 100% |
| Labour & overhead | 50% |
Units finished and transferred to Process-II (36,000 units)
Normal loss:
4% of total input including opening work-in-process
Scrapped units fetch ₹ 62.50 per piece
Prepare:
(i) Statement of equivalent production.
(ii) Statement of cost per equivalent unit
(iii) Process-I A/c
(iv) Normal Loss Account and
(v) Abnormal Loss Account [CA Inter Nov. 2020, 10 Marks]
Answer:
(i) Statement of Equivalent Production (Weighted Average method)
(ii) Statement showing cost for each element
(iii) Process-I Account
(iv) Normal Loss account
(v) Abnormal Loss Account
Question 21.
A product is manufactured in two sequential processes, namely Process-1 and Process-2. The following information relates to Process-1. At the beginning of June 2021, there were 1,000 WIP goods (60% completed in terms of conversion cost) in the inventory, which are valued at ₹ 2,86,020 (Material cost: ₹ 2,55,000 and Conversion cost: ₹ 31,020). Other information relating to Process-1 for the month of June 2021 is as follows:
| Cost of materials introduced-40,000 units (₹) | 96,80,000 |
| Conversion cost added (₹) | 18,42,000 |
| Transferred to Process 2 (Units) | 35,000 |
| Closing WIP (Units) (60% completed in terms of conversion cost) | 1,500 |
100% of materials are introduced to Process-1 at the beginning.
Normal loss is estimated at 10% of input materials (excluding opening WIP).
Required:
(i) Prepare a statement of equivalent units using the weighted average cost method and thereby calculate the following.
(ii) Calculate the value of output transferred to Process-2 and closing WIP. [CA Inter Nov. 2019 RTP]
Answer:
(i) Statement of Equivalent Production
(ii) Calculation of value of output transferred to Process-2 & Closing WIP
Working Note:
Cost for each element
Question 22.
ABC Limited manufactures a product ‘ZX’ by using the process namely RT. For the month of May, 2021, the following data are available:
Work-in-process:
| Process RT | |
| Material introduced (units) | 16,000 |
| Transfer to next process (units) | 14,400 |
| Work-in-process: | |
| At the beginning of the month (units) (4/5 completed) | 4,000 |
| At the end of the month (units) (2/3 completed) | 3,000 |
| Cost records: | |
| Work-in-process at the beginning of the month | |
| Material | ₹ 30,000 |
| Conversion cost | ₹ 29,200 |
| Cost during the month: materials | ₹ 1,20,000 |
| Conversion cost | ₹ 1,60,800 |
Normal spoiled units are 10% of goods finished output transferred to next process.
Defects in these units are identified in their finished state. Material for the product is put in the process at the beginning of the cycle of operation, whereas labour and other indirect cost flow evenly over the year. It has no realizable value for spoiled units.
Required:
(i) Statement of equivalent production (Average cost method);
(ii) Statement of cost and distribution of cost;
(iii) Process accounts. [CA Inter Nov. 2007, 8 Marks]
Answer:
Statement of equivalent production of Process RT
Statement of apportionment of cost:
Inter Process Profits
Question 23.
Pharma Limited produces product ‘Glucodin’ which passes through two processes before it is completed and transferred to finished stock. Following data relates to March, 2021.
Output of process I is transferred to process II at 25% profit on the transfer price, whereas output of process II is transferred to finished stock at 20% on transfer price. Stock in processes are valued at prime cost. Finished stock is valued at the price at which it is received from process II. Sales for the month is ₹ 28,00,000.
You are required to prepare Proce$s*I a/c, Process-II a/c, and Finished Stock a/c showing the profit element at each stage. [CA Inter May 2019, May 2010, 10 Marks]
Answer:
Process I Account
Process II Account
Working Note:
Profit element in closing stock = 3,00,00018,00,000 × 90,000 = ₹ 15,000
Finished Stock Account
Working Note:
Profit element in closing finished Stock = 9,00,00027,00,000 × 2,25,000 = ₹ 75,000
Calculation of Profit on Sale:
Question 24.
ABC Ltd. produces an item which is completed in three processes – X, Y and Z. The following information is furnished for process X for the month of March, 2021:
Opening work-in-progress (5,000 units):
| Materials | ₹ 35,000 |
| Labour | ₹ 13,000 |
| Overheads | ₹ 25,000 |
Units introduced into process X (55,000 units):
| Materials | ₹ 20,20,000 |
| Labour | ₹ 8,00,000 |
| Overheads | ₹ 13,30,000 |
Units scrapped: 5,000 units
Degree of completion:
| Materials | 100% |
| Labour & Overheads | 60% |
Closing work-in-progress (5,000 units):
Degree of completion:
| Materials | 100% |
| Labour & Overheads | 60% |
Units finished and transferred to Process Y: 50,000 units
Normal loss: 5% of total input (including opening works-in-progress). Scrapped units fetch ₹ 20 per unit.
Presuming that average method of inventory is used, prepare
(i) Statement of Equivalent production
(ii) Statement of Cost for each element
(iii) Statement of distribution of cost
(iv) Abnormal loss account [CA Inter May 2018, 8 Marks]
Answer:
(i) Statement of Equivalent Production
(ii) Statement of Cost for each element
(iii) Statement of Distribution of Cost
(iv) Abnormal Loss Account
Question 25.
KMR Ltd. produces product AY, which passes through three processes ‘XM’, ‘YM’ and ‘ZM\ The output of process ‘XM’ and ‘YM’ Is transferred to next process at cost plus 20 per cent each on transfer price and the output of process ‘ZM’ is transferred to finished stock at a profit of 25 per cent on transfer price. The following information are available in respect of the year ending 31st March, 2021:
Stock in processes is valued at prime cost. The finished stock is valued at the price at which it is received from process ‘ZM*. Sales of the finished stock during the period was ₹ 28,00,000.
You are required to prepare:
(i) All process accounts and
(ii) Finished stock account showing profit element at each stage. [CA Inter May 2017, 8 Marks]
Answer:
Process ‘XM’ Account
Process ‘YM’ Account
Process ‘ZM’ Account
Miscellaneous
Question 26.
RST Ltd. manufactures Plastic moulded Chair. Three models of moulded chairs, all variation of the same design are Standard, Deluxe and Executive. The Company uses an Operation Costing system, RST Ltd. has Extrusion, Form, Trim and Finish Operations. Plastic Sheets are produced by the Extrusion Operation. During the Forming Operation, the Plastic Sheets are moulded into Chair Seats and the legs are added. The Standard Model is sold after this operation. During the Trim Operation, the arms are added to the Deluxe and Executive Models, and the chair edges are smoothed. Only the Executive Model enters the Finish Operation, in which padding is added. All of the units produced receive the same steps within each operation. In April, units of production and Direct Materials Cost incurred are as follows:
The total Conversion Costs for the month of April, are:
Required:
1. For each product produced by RST Ltd. during April, determine the Unit Cost and the Total Cost.
2. Now consider the following information for May. All unit costs in May
are identical to the April unit cost calculated as above in (1). At the end of May, 1,500 units of the Deluxe Model remain in Work-in-Progress. These units are 100% complete as to Materials and 65% complete in the Trim Operation. Determine the cost of the Deluxe Model Work-in Process inventory at the end of May. [CA Inter May 2003]
Answer:
1. Computation of Cost per Equivalent Unit for each Operation
2. Computation of Total and Unit Model
3. Valuation of WIP Inventory (1,500 units of Deluxe Model)
Question 27.
A Chemical Company carries on production operation in two processes. The material first pass through Process I, where Product ‘A’ is produced.
Following data are given for the month just ended:
| Material input quantity | 2,00,000 kgs |
| Opening work-in-progress quantity | |
| (Material 100% and conversion 50% complete) | 40,000 kgs |
| Work completed quantity- | 1,60,000 kgs |
| Closing work-in-progress quantity | |
| (Material 100% and conversion two-third complete) | 30,000 kgs |
| Material input cost | ₹ 75,000 |
| Processing cost | ₹ 1,02,000 |
| Opening work-in-progress cost | ₹ 20,000 |
| Material cost Processing cost | ₹ 12,000 |
Normal process loss in quantity may be assumed to be 20% of material input. It has no realisable value.
Any quantity of Product ‘A’ can be sold for ₹ 1.60 per kg.
Alternatively, it can be transferred to Process II for further processing and then sold as Product ‘AX’ for 12 per kg. Further materials are added in Process II, which yield two kgs. of Product ‘AX’ for every kg. of Product ‘A’ of Process I.
Of the 1,60,000 kgs. per month of work completed in Process I, 40,000 kgs are sold as Product ‘A’ and 1,20,000 kgs. are passed through Process II for sale as Product ‘AX’. Process II has facilities to handle upto 1,60,000 kgs. of Product ‘A’ per month, if required.
The monthly costs incurred in Process II (other than the cost of Product ‘A’) are:
| 1,20,000 kgs. of Product ‘A’ input | 1,60,000 kgs. of Product ‘A’ input | |
| Materials Cost | ₹ 1,32,000 | ₹ 1,76,000 |
| Processing Costs | ₹ 1,20,000 | ₹ 1,40,000 |
Required:
(i) Determine, using the weighted average cost method, the cost per kg. of Product ‘A’ in Process I and value of both work completed and closing work-in-progress for the month just ended.
(ii) Is it worthwhile processing 1,20,000 kgs. of Product ‘A’ further?
(iii) Calculate the minimum acceptable selling price per kg., if a potential buyer could be found for additional output of Product ‘AX’ that could be produced with the remaining Product ‘A’ quantity. [CA Inter Nov. 2006, 14 Marks]
Answer:
Statement of equivalent production:
(i) Calculation of cost of equivalent production
Cost per kg of product A (₹ 0.475 + ₹ 0.600) = ₹ 1.075 per unit
Value of work completed (1,60,000 × 1.075) = ₹ 1,72,000
Value of closing W.I.P (30,000 × 0.475) = 14,250
(20,000 × 0.600) = 12,000
14,250 + 12,000 = 26,250
(ii) Evaluation of further processing of 1,20,000 kg. of Product A:
| (2,40,000 kg. of product AX produced) | ₹ |
| Cost in process-I (1,20,000 × 1.60) | 1,92,000 |
| Material | 1,32,000 |
| Processing Cost | 1,20,000 |
| Cost of processing of product AX | 4,44,000 |
| Sales value (2,40,000 × 2) | 4,80,000 |
| Net gain | 36,000 |
(iii) Cost of processing of 40,000 kg. of Product A:
Question 28.
A Manufacturing unit manufactures a product ‘XYZ’ which passes through three distinct Processes-X, Y and Z. The following data is given:
| Process X | Process Y | Process Z | |
| Material consumed (in ₹) | 2,600 | 2,250 | 2,000 |
| Direct wages (in ₹) | 4,000 | 3500 | 3000 |
- The total Production Overhead of ₹ 15,750 was recovered @150% of direct wages.
- 15,000 units at ₹ 2 each were introduced to Process “X”.
- The output of each process passes to the next process and finally, 12,000 units were transferred to Finished Stock Account from Process “Z”.
- No stock of materials or work-in-progress was left at the end.
The following additional information is given:
| Process | % of wastage to normal input | Value of Scrapper unit(₹) |
| X | 6% | 1.10 |
| Y | ? | 2.00 |
| Z | 5% | 1.00 |
You are required to:
(i) Find out the percentage of wastage in process ‘Y’, given that the output of Process ‘Y’ is transferred to Process ‘Z’ at ₹ 4 per unit.
(ii) Prepare Process accounts for all the three processes X, Y and Z. [CA Inter July, 2021, 10 Marks]
Answer:
(i) Calculation of percentage of wastage in process Y
Let assume x be the unit of normal loss in process Y
Cost per unit in process Y = Total cost − Sale of scrap Total units − Normal loss units
= ₹52,610−2×14,100−x
Output of Process Y is transferred to Process Z at ₹ 4 per unit. Therefore, per unit cost in Process Y = ₹ 4.
4 = ₹52,610−2×14,100−x
4(14,100 – x) = 52,610 – 2x
56,400 – 4x = 52,610 – 2x
3,790 = 2x
x = 3,7902 = 1,895 units
Percentage of wastage = 1,895 units 14,100 units units × 100 = 13.44%
(ii) Process X Account
Process Y Account
Process Z Account
Cost per unit = Total cost − Sale of scrap Total units – Normal loss units
= ₹58,320−₹61012,205−610
= ₹ 4.977 per unit
Question 29.
The following information is given in respect of Process No, 3 for the month of January, 2021,
Opening stock – 2,000 units made-up of:
| Direct Materials-I | ₹ 12,350 |
| Direct Materials-II | ₹ 13,200 |
| Direct Labour | ₹ 17,500 |
| Overheads | ₹ 11,000 |
Transferred from Process No. 2: 20,000 units @6.00 per unit.
Transferred to Process No. 4:17,000 units.
Expenditure incurred in Process No. 3
| Direct Materials | ₹ 30,000 |
| Direct Labour | ₹ 60,000 |
| Overheads | ₹ 60,000 |
Scrap: 1,000 units-Direct Materials 100%, Direct Labour 60%, Overheads 40% Normal Loss 10% of production.
Scrapped units realised ₹ 4 per unit.
Closing Stock:4,000 units-Degree of completion: Direct Materials 80%, Direct Labour 60% and overheads 40%,
Prepare Process No. 3 Account using average price method, along with necessary supporting statements. [CA Inter May 2001,10 Marks]
Answer:
Process 3 Account
Working Note:
Statement of Equivalent Production
(Average cost method)
Working Note:
Normal loss given is 10% of production. Here production there fore means those units which come upto the state of inspection. In that case, opening stock plus receipts minus closing stock of WIP will represent units of production (2,000 units + 20,000 units-4,000 units). In such case, the units of production comes to 18,000 units and hence 1,800 units as normal loss units.
Question 30.
Star Ltd. manufactures chemical solutions for the food processing industry. The manufacturing takes place in a number of processes and the company uses FIFO method to value work-in-process and finished goods. At the end of the last month, a fire occurred in the factory and destroyed some of papers containing records of the process operations for the month.
Star Ltd. needs your help to prepare the process accounts for the month during which the fire occurred. You have been able to gather some information about the month’s operating activities but some of the information could not be retrieved due to the damage. The following information was salvaged:
- Opening work-in-process at the beginning of the month was 1,600 litres, 70% complete for labour and 60% complete for overheads. Opening work-in-process was valued at ₹ 1,06,560.
- Closing work-in-process at the end of the month was 320 litres, 30% complete for labour and 20% complete for overheads.
- Normal loss is 10% of input and total losses during the month were 1,200 litres partly due to the fire damage.
- Output sent to finished goods warehouse was 8,400 litres.
- Losses have a scrap value of ₹ 15 per litre.
- All raw materials are added at the commencement of the process.
- The cost per equivalent unit (litre) is ₹ 78 for the month made up as follows:
| ₹ | |
| Raw Material | 46 |
| Labour | 14 |
| Overheads | 18 |
| 78 |
Required:
(i) CALCULATE the quantity (in litres) of raw material inputs during the month.
(ii) CALCULATE the quantity (in litres) of normal loss expected from the process and the quantity (in litres) of abnormal loss/ gain experienced in the month.
(iii) CALCULATE the values of raw material, labour and overheads added to the process during the month.
(iv) PREPARE the process account for the month. [CA Inter May 2020 RTP]
Answer:
(i) Calculation of Raw Material inputs during the month:
(ii) Calculation of Normal Loss and Abnormal Loss/Gain
| Litres | |
| Total process losses for month | 1,200 |
| Normal Loss (10% input) | 832 |
| Abnormal Loss (balancing figure) | 368 |
(iii) Calculation of values of Raw Material, Labour and Overheads added to the process
Workings:
Statement of Equivalent Units (litre)
(iv) Process Account for the month
[(320 × ₹ 46) + (320 × 0.30 × ₹ 14) + (320 × 0.20 × 18)] = 17,216
Question 31.
M Ltd. produces a product-X, which passes through three processes, I, II and III. In Process-Ill a by-product arises, which after further processing at a cost of 185 per unit, product Z is produced. The information related for the month of August 2020 is as follows:
Production overhead for the month is ₹ 2,88,000, which is absorbed as a percentage of direct wages.
The scraps are sold at ₹ 10 per unit.
Product-Z can be sold at ₹ 135 per unit with a selling cost of ₹ 15 per unit No. of units produced:
Process-I – 6,600; Process-II – 5,200, Process-III – 4,800 and Product-Z – 600
There is not stock at the beginning and end of the month
You are required to PREPARE accounts for:
(i) Processes-I, II and III
(ii) By-product process. [CA Inter Nov. 2020 RTP]
Answer:
Process-I Account
= 3,42,000−3,5007,000−350 = ₹ 50.9022
Process-II Account
= ₹6,49,955−6,6006,600−660 units = ₹ 108.3089
Process-III Account
= (8,05,406−2,600−21,000)(5,200−260−600 units ) = ₹ 180.1396
Realisable value = ₹ 135 – (85 + 15) = ₹ 35
By-Product Process Account
Question 32.
TheM-Tech Manufacturing Company is presently evaluating two possible processes for the manufacture of a toy. The following information is available:
| Process A (₹) | Process B (₹) | |
| Variable cost per unit | 12 | 14 |
| Sales price per unit | 20 | 20 |
| Total fixed costs per year | 30,00,000 | 21,00,000 |
| Capacity (in units) | 4,30,000 | 5,00,000 |
| Anticipated sales (Next year, in units) | 4,00,000 | 4,00,000 |
Suggest:
1. Which process should be chosen?
2. Would you change your answer as given above, if you were informed that the capacities of the two processes are as follows:
A – 6,00,000 units; B – 5,00,000 units? Why? [CA Inter May 2016, 4 Marks]
Answer:
(1) Comparative Profitability Statements
Process-B should be chosen as it gives more profit.
(2)
Process-A be chosen.
‘Note: It is assumed that capacity produced equals sales.