Overheads: Absorption Costing Method – CA Inter Costing Study Material is designed strictly as per the latest syllabus and exam pattern.

Overheads: Absorption Costing Method – CA Inter Costing Study Material

1. Meaning of certain terms:
Overheads: Overheads represent expenses that have been incurred in providing certain ancillary facilities or services which facilitate or make possible the carrying out of the production process; by themselves these services are not of, any use.

• Cost allocation: It refers to assignment or allotment of an entire item of cost to a particular cost center or cost unit.
• Cost apportionment: It implies the allotment of proportions of items of cost to cost centres or departments.
• Re-apportionment: It is the process of assigning sendee department overheads to production departments.
• Absorption: It is the process of recovering overheads of a department or any other cost center from its output.

2. Methods of Re-apportionment:

• Direct Re-distribution Method: Costs are apportioned over the produc¬tion departments only, ignoring the services rendered by one service department to the other.
• Step Method or Non-reciprocal Method: It considers service rendered by one service department to another and the sequence of apportionment begins with the department that renders maximum number of services to the other service department(s).
• Reciprocal Service Method: The inter-departmental services are to be given due weight.

Methods for dealing with reciprocal services:

• Simultaneous equation method.
• Trial and error method.
• Repeated distribution method.

3. Types of overheads rate:
Normal Rate: It is also known as actual rate.
= \(\frac{\text { Actual overheads }}{\text { Actual base }}\)

Pre-determined Overhead Rate: It is determined in advance by estimating overhead for the period in which it is to be used.
= \(\frac{\text { Budgeted overheads }}{\text { Budgeted base }}\)

Departmental Overhead Rate: It refers to the computation of one j single overhead rate for a particular production unit or department.
= \(\frac{\text { Overheads of department or cost centre }}{\text { Corresponding base }}\)

Blanket Overhead Rate: It refers to the computation of one single overhead rate for the whole factory. It is different from departmental overhead rate where separate rate is used for each individual cost centre or department.
= \frac{\text { Total factory overheads }}{\text { Total No. of units of base for the factory }}

4. Capacity Related Concept:

• Installed /Rated capacity: Maximum capacity of producing goods or providing services. Also known as theoretical capacity.
• Practical capacity: Actually utilised capacity of a plant. Also known as operating capacity or net capacity or available capacity. It considers loss of time due to repairs, maintenance, minor breakdown, idle time etc.
• Normal capacity: Volume of production or services achieved or achievable on an average over a period under normal circumstances considering reduction in capacity resulting from planned maintenance.
• Actual capacity: Capacity actually achieved during a given period.
• Idle capacity: Part of capacity of a plant, machine or equipment which cannot be effectively utilised in production.

Theory Questions

Question 1.
Distinguish between Fixed overheads and Variable overheads. [CA Inter May 2010, 2 Marks]
Answer:
Fixed Overheads Vs. Variable Overheads
Fixed overheads are the costs which are incurred for a period, and which, within certain output and turnover limits, tend to be unaffected by fluctuations in the levels of activity (output or turnover). They do not tend to increase or decrease with the changes in output. Eg. Salary paid to permanent employees, Depreciation of building, Interest on capital, Insurance, etc.

Whereas, variable overheads are the costs that tend to vary with the volume of activity. Any increase or decrease in the activity results in an increase or decrease in the variable cost. Eg. materials, power and fuel, lubricants, etc.

Question 2.
Distinguish between allocation and apportionment of cost. [CA Inter May 2008, May 2014, 4 Marks]
Answer:
Cost Allocation:
The term ‘allocation’ refers to the direct assignment of cost to a cost object which can be traced directly. It implies relating overheads directly to the various departments. The estimated amount of various items of manufacturing overheads should be allocated to various cost centres or departments. For example – if a separate power meter has been installed for a department, the entire power cost ascertained from the meter is allocated to that department.

Cost Apportionment:
There are some items of estimated overheads (like the salary of the works manager) which cannot be directly allocated to the various departments and cost centres. Such unallocable expenses are to be spread over the various departments or cost centres on an appropriate basis. This is called apportionment. Thus, apportionment implies “the allotment of proportions of items of cost to cost centres or departments”.

Question 3.
State the bases of apportionment of following overhead costs: [CA Inter Nov. 2018, 5 Marks]
(i) Air-conditioning
(ii) Time keeping
(iii) Depreciation of plant and machinery
(iv) Power/steam consumption
(v) Electric power (Machine operation)
Answer:
Basis for apportionment of overhead costs:

Overhead costs	Basis for Apportionment
(i) Air-conditioning	Floor area or volume of department
(ii) Time-keeping	Number of workers
(iii) Depreciation of plant and machinery	Capital \aloes
(iv) Power/steam consumption	Technical estimates
(v) Electric power (machine operation)	Horse power of machines, number of machine hour, value of machines or units consumed.

Question 4.
What are the methods of re-apportionment of service department ex-penses over the production departments? Discuss. [CA Inter Nov. 2010, 4 Marks]
Answer:
The re-apportionment of service department expenses over the production departments may be carried out by using any one of the following methods:

(i) Direct Re-distribution Method: Service department costs under this method are apportioned over the production departments only, ignoring the services rendered by one service department to the other. The basis of apportionment could be No. of workers, H.P of machines, etc.

(ii) Step Method or Non-reciprocal method: This method gives cognizance to the services rendered by service department to another service de-partment. Therefore, as compared to previous method, this method is more complicated because a sequence of apportionments has to be se-lected here. The sequence here begins with the department that renders maximum number of services to the other service departments.

(iii) Reciprocal Service Method: This method recognises the fact that where there are two or more service departments they may render services to each other and, therefore, these inter-departmental services are to be given due weight while re-distributing the expenses of the service departments.

The methods available for dealing with reciprocal services are:

• Simultaneous equation method;
• Trial and error method;
• Repeated distribution method.

Question 5.
Discuss the step method and reciprocal service method of secondary distribution of overheads. [CA Inter Nov. 2004, 4 Marks]
Answer:
Step Method:
Step method gives cognizance to the services rendered by service department to another service department. The cost of the service department that serves the largest number of services to the other service department(s) and production department(s) is distributed first. After this, the cost of service department serving the next largest number of departments is apportioned. This process continues till the cost of last service department is apportioned. The cost of last service department is apportioned among production departments only.

Reciprocal Service Method:
Reciprocal service method recognises the fact that where there are two or more service departments that may render services to each other and, therefore, these inter-departmental services are to be given due weight while re-distributing the expenses of the service departments.
The methods available for dealing with reciprocal services are:
(a) Simultaneous equation method: Firstly, the costs of service departments are ascertained and thereafter re-distributed to production departments on the basis of given percentages.

(b) Trial and Error Method: The cost of one service cost centre is apportioned to another service cost centre. The cost of another service centre plus the share received from the first cost centre is again apportioned to the first cost centre. This process is repeated till the amount to be apportioned becomes negligible, that means repeated distribution method is followed to the extent of service departments only.

(c) Repeated Distribution Method: Service departments’ costs are distributed to other service and production departments on agreed percentages and this process continues to be repeated, till the figures of service departments are either exhausted or reduced to too small a figure.

Question 6.
Explain Blanket Overhead Rate. [CA Inter Nov. 2007, 2 Marks]
Answer:
Blanket overhead rate refers to the computation of one single overhead rate for the whole factory. The use of blanket rate may be proper in factories producing only one major product in a continuous process or where the work performed in every department is fairly uniform or standardised.
Blanket Rate = \(\frac{\text { Total overheads for the factory }}{\text { Total No. of units of base for the factory }}\)

Question 7.
Explain Blanket Overhead Rate and Departmental Overhead Rate. How they are calculated? State the conditions required for the application of Blanket Overhead Rate. [CA Inter Jan. 2021, 5 Marks]
Answer:
Blanket Overhead Rate: Blanket overhead rate refers to the computation of one single overhead rate for the whole factory.
This overhead rate is computed as follows:
Blanket Rate = \(\frac{\text { Total overheads for the factory }}{\text { Total No. of units of base for the factory }}\)

Departmental Overhead Rate: It refers to the computation of one single overhead rate for a particular production unit or department.
This overhead rate is determined by the following formula:
Departmental overhead Rate = \(\frac{\text { Overheads of department or cost centre }}{\text { Corresponding base }}\)

Conditions required for the Application of Blanket Overhead:
A blanket rate should be applied in the following cases:
(1) Where only one major product is being produced.
(2) Where several products are produced, but
(a) All products pass through all departments; and
(b) All products are processed for the same length of time in each department.

Question 8.
Discuss the treatment of Under-absorbed and Over-absorbed overheads in Cost Accounting. [CA Inter May 2006, 6 Marks]
Answer:
Overhead expenses are usually applied to production on the basis of pre-determined rates.
Pre-determined overhead rate = \(\frac{\text { Estimated/normal overheads for the period }}{\text { Budgeted number of units during the period }}\)
The under/over absorption may take place due to variation in actual overhead rate due to any of the following:
(i) The actual level of production may be different from budgeted level during the period.
(ii) The actual overheads incurred during the period may be different from the budgeted overheads.
(iii) Both the overheads and level of activity may be different from budgeted levels during the period.
If the amount of under/over absorption is insignificant/small, it may be transferred to Costing Profit and Loss Account.

• Where the difference is large due to wrong estimation, it would be desirable to adjust the cost of products manufactured as otherwise the cost figures would convey a misleading impression.
• However, over or under recovery of overheads due to abnormal reasons, such as abnormal over or under capacity utilisation should be transferred to Costing Profit and Loss Account.

Question 9.
Explain briefly the conditions when supplementary rates are used. [CA Inter May 2007, 2 Marks]
Answer:
When the amount of under absorbed and over absorbed overhead is signifi-cant or large, because of differences due to wrong estimation, then the cost of product needs to be adjusted by using supplementary rates (under and over absorption/actual overhead) to avoid misleading impression.

Question 10.
Discuss the accounting of Selling and Distribution overheads. [CA Inter May 2006, 4 Marks]
Answer:
Accounting of Selling and Distribution Overheads:
It is difficult to determine an entirely satisfactory basis for computing the overhead rate for absorbing selling and distribution overheads.
The basis usually adopted is:

• Sales value of goods
• Cost of goods sold
• Gross profit on sales
• Number of orders or units sold

Expenses	Basis for allocation
Salaries in Sales Department.	Estimated time devoted to the sale of various products.
Advertisements	Actual amount incurred for each product
Showroom expenses	Average space occupied by each product
Rent of finished goods, godowns and expenses on own delivery vans.	Average quantities delivered during a period

Question 11.
Explain the following concepts related to capacity.
(i) Installed/Rated capacity
(ii) Practical capacity
(iii) Normal capacity
(iv) Actual capacity
(v) Idle capacity [ICM Module]
Answer:
(i) Installed /Rated capacity: It is the maximum capacity of producing goods or providing services which is determined either on the basis of technical specification or through technical evaluation.

(ii) Practical capacity: It is defined as actually utilised capacity of a plant. It is also known as operating capacity. It takes into account loss of time due to repairs, maintenance, minor breakdown, idle time, set up time, normal delays, Sundays and holidays, stock taking etc.

(iii) Normal capacity: Normal capacity is the volume of production or services achieved or achievable on an average over a period under normal circumstances taking into account the reduction in capacity resulting from planned maintenance.

(iv) Actual capacity: It is the capacity actually achieved during a given period. It is presented as a percentage of installed capacity.

(v) Idle capacity: It is that part of the capacity of a plant, machine or equipment which cannot be effectively utilised in production.
(a) Normal Idle Capacity: It is the difference between Installed capacity and Normal capacity.
(b) Abnormal Idle Capacity: It is the difference between Normal capacity and Actual capacity utilization where the actual capacity is lower than the normal capacity.
The idle capacity may arise due to lack of product demand, non-availability of raw material, shortage of skilled labour, absenteeism, shortage of power fuel or supplies, seasonal nature of product etc.

Question 12.
How do you deal with the following in cost accounts?
(i) Packing Expenses
(ii) Fringe benefits. [CA Inter May 2011, 4 Marks]
Answer:
(i) Packing expenses: Cost of primary packing necessary for protecting the product or for convenient handling, should become a part of the production cost. The cost of packing to facilitate the transportation of the product from the factory to the customer should become a part of the distribution cost. If the cost of special packing is at the request of the customer, the same should be charged to the specific work order or the job. The cost of fancy packing necessary to attract customers is an advertising expenditure which shall be treated as a selling overhead.

(ii) Fringe benefits: These are the additional payments or facilities provided to the workers apart from their salary and direct cost-allowances like house rent and city compensatory allowances. If the amount of fringe benefit is considerably large, it may be recovered as direct charge by means of a supplementary wage or labour rate; otherwise these may be collected as part of production overheads.

Question 13.
Explain:
(i) Research and Development Expenses
(ii) Training Expenses. [CA Inter Nov. 2000, 4 Marks]
Answer:
(i) Research and Development Expenses: Research expenses are the expenses of searching for new or improved products, new application of materials, or new or improved methods. Development expenses are the expenses of the process which begins with the implementation of the decision to produce a new or improved product.

If research is conducted in the methods of production, the research expenses should be charged to the production overhead. If the research relates to administration, the expenditure becomes a part of the administration overhead and similarly, market research expenses are charged to the selling and distribution overhead.

Development costs incurred in connection with a particular product should be charged directly to that product. General research expenses of a routine nature incurred on new or improved methods of manufacture or the improvement of the existing products should be charged to the general overhead.

(ii) Training Expenses: Training is an essential input for industrial workers. Training expenses includes wages of workers, costs incurred in running training department, loss arising from the initial lower production, extra spoilage etc. Training expenses of factory workers are treated as part of the cost of production. The training expenses of office; sales or distribution workers should be treated as office; sales or distribution overhead as the case may be. These expenses can be spread over various departments of the concern on the basis of the number of workers on roll.

Question 14.
Explain the cost accounting treatment of unsuccessful Research and Development cost. [CA Inter Nov. 2007, 2 Marks]
Answer:
Cost of unsuccessful research and development should be excluded from costs and charged to the costing Profit and Loss Account.

Question 15.
How you deal with the following in cost accounts?
1. Interest and financing charges
2. Expenses on removal and re-erection of machines
3. Canteen expenses
4. Carriage and cartage expenses .
5. Expenses for welfare activities
6. Night shift allowance [JCAJ Module]
Answer:
1. Interest and financing charges: It includes any payment in nature of interest for use of non-equity funds and incidental cost that an entity incurs in arranging those funds. Examples are interest on borrowings, financing charges in respect of finance leases, cash discount allowed to customers.

2. Expenses on removal and re-erection of machines: Such expenses may be incurred due to factors like change in the method of production; an addition or alteration in the factory building, change in the flow of production, etc. All such expenses are treated as production overheads.

3. Canteen expenses: It will be treated as production overhead. If the canteen is meant only for factory workers, it will be apportioned on the basis of the number of workers. If office workers also take advantage of canteen facility, a suitable share should be treated as office overhead.

4. Carriage and cartage expenses: It includes the expenses incurred on the movement (inward and outwards) and transportation of materials and goods. Transportation expenses related to direct material may be included in the cost of direct material and those relating to indirect material (stores) may be treated as factory overheads. Expenses related to the transportation of finished goods may be treated as distribution overhead.

5. Expenses for welfare activities: All expenses incurred on the welfare activities of employees in a company are part of general overheads. Such expenses should be apportioned between factory, office, selling and distribution overheads on the basis of number of persons involved.

6. Night shift allowance: Workers in the factories, which operate during night time are paid some extra amount known as ‘night shift allowance’.

• Incurred due to the general pressure of work beyond normal capacity level: Treated as production overhead and recovered as such.
• Incurred to meet some specific customer order: Charged directly to the order concerned.
• Night shifts are run due to abnormal circumstances: Charged to the costing profit and loss account.

Question 16.
Distinguish between Cost Allocation and Cost Absorption. [CA Inter May 2013, 4 Marks]
Answer:
Cost Allocation refers to the direct assignment of cost to a cost object which can be traced directly. It implies relating overheads directly to the various departments. Example, if a separate power meter has been installed for a department, the entire power cost ascertained from the meter is allocated to that department.

Cost Absorption is the process of recovering overheads of a department or any other cost center from its output. The overhead expenses can be absorbed by estimating the overhead and then working out an absorption rate.

Question 17.
Explain the treatment of over and under absorption of overheads in cost accounts. [CA In ter May 2010, Nov. 2010, Nov. 2014,
Answer:
Treatment of over and under absorption of overheads are:
(i) Writing off to costing P&L A/c: Small difference between the actual and absorbed amount should simply be transferred to costing P&L A/c, if difference is large then investigate the causes and after that abnormal loss/gain shall be transferred to costing P&L A/c.

(ii) Use of supplementary Rate: Under this method the balance of under and over absorbed overheads may be charged to cost of W.I.P., finished stock and cost of sales proportionately with the help of supplementary rate of overhead.

(iii) Carry Forward to Subsequent Year: Difference should be carried for-ward in the expectation that next year the position will be automatically corrected.

Question 18.
How would you account for idle capacity cost in Cost Accounting? [CA Inter Nov., 2015, Nov. 2001, 4 Marks]
Answer:
Idle capacity costs are treated in the following ways in Cost Accounts:
(i) If the idle capacity cost is due to unavoidable reasons such as repairs, maintenance, changeover of job etc. a supplementary overhead rate may be used to recover the idle capacity cost. In this case, the costs are charged to the production capacity utilised.

(ii) If the idle capacity cost is due to avoidable reasons such as faulty planning, power failure, etc. the cost should be charged to Costing Profit and Loss Account.

(iii) If the idle capacity cost is due to seasonal factors, then the cost should be charged to cost of production by inflating overhead rates.

Practical Questions

Methods Of Re-Appropriation

Question 1.
M/s. NOP Limited has its own power plant and generates its own power. Information regarding power requirements and power used are as follows:

During the quarter ended September 2020, costs for generating power amounted to ₹ 12.60 lakhs out of which ₹ 4.20 lakhs was considered as fixed cost.

Service department X renders services to departments. A, B and Y in the ratio of 6:4:2 whereas department Y renders services to department A and B in the ratio of 4:1. The direct labour hours of department A and B are 67,500 hours and 48,750 hours respectively.

Required:
(i) Prepare overheads distribution sheet.
(ii) Calculate factory overhead per labour hour for the deptt. A and deptt. B. • [CA Inter Nov, 2018, 5 MarksJ
Answer:
(i) Overhead Distribution Sheet

(ii) Calculation of the Factory Overhead per Labour hour:

Item	Production Departments
	A(₹)	B(₹)
Total Overhead	6,75,000	5,85,000
Direct labour hours	67,500	48,750
Factory overhead per hour	10	12

Question 2.
RST Ltd. has two production departments Machining and Finishing.
There are three service departments Human Resource (HR), Maintenance and Design. The budgeted costs in these service departments are as follows:

The usage of these Service Departments’ output during the year just completed is as follows:
Provision of Service Output (in hours of service)

Required:
(i) Use the direct method to re-apportion RST Ltd.’s service department cost to its production departments.
(ii) Determine the proper sequence to use in re-apportioning the firm’s service department cost by step-down method.
(iii) Use the step-down method to reapportion the firm’s service department cost. [CA Inter Nov. 2006, 7 Marks]
Answer:
(i) Re-apportion of service departments cost to its production department by using direct method:

(ii) Sequence of re-apportionment:
Since, H.R. department serves large number of departments so its cost should be first re-apportioned then overhead of maintenance department should be re-apportioned and lastly overhead of design department should be re-apportioned.

(iii) Use of step down method for re-apportioning overhead of service department:

Question 3.
SNS Trading Company has three Main Departments and Service Departments. The date for each department below:

The Cost of Maintenance Department and Personnel Department is Distributed on the basis of ‘Area in Square Metres’ and ‘Number of Employees’ respectively.
You are required to:
(i) Prepare a Statement showing the distribution of expenses of service Departments to the Main departments using the “Step Ladder method” of Overhead Distribution.
(ii) Compute the Rate per hour of each Main Department, given that the Purchase Department, Packing Department and Distribution Department works for 12 hours a day. 24 hours a day and 8 hours a day respectively. Assume that are 365 days in years and there are no holidays. [CA Inter July 2021, 5 Marks]
Answer:
Statement showing distribution of expenses of service departments

Calculation showing rate per hour:

Question 4.
The following account balances and distribution of indirect charges are taken from the accounts of a manufacturing concern for the year ending on 31st March, 2021:

The following departmental data are also available:

Expenses charged to the service departments are to be distributed to other departments by the following percentages:

Prepare an overhead distribution statement to show the total overheads of production departments after re-apportioning service departments overhead by using simultaneous equation method. Show all the calculations to the nearest rupee. [CA Inter Nov. 2012, 8 Marks]
Answer:
Primary distribution of overhead:

Re-distribution of Overheads of Service Department A and B:
Total overheads of service departments may be distributed using simultaneous equation method.
Let, the total overheads of service department A be ‘a’ and the total overheads of service department B be ‘b’.
a = 1,57,250 + 0.10 b (i)
or, 10a – b = 15,72,500 [(i) × 10]
b = 90,250 + 0.20 a (ii)
or, – 0.20a + b = 90,250
10a – b = 15,72,500
-0.2a + b = 90,250
9.8a = 16,62,750
a = 1,69,668
Putting the value of a in equation (ii),we get
b = 90,250 + 0.20 × 1,69,668
b = 1,24,184

Secondary Distribution of Overheads:

Question 5.
TEE Ltd. is a manufacturing company having three production departments ‘P’, ‘0’ and ‘R’ and two service departments ‘X’ and ‘Y’ detail pertaining to which are as under:

The expenses are as follows:

	₹
Rent and rates	10,000
General lighting	600
Indirect wages	3,450
Power	3,500
Depreciation on machines	70,000
Sundries (apportionment on the basis of direct wages)	13,800

The expenses of service departments are allocated as under:

Product ‘A’ is processed for manufacture in Departments P, 0 and R for 6, 5 and 2 hours respectively.
Direct Costs of Product A are:
Direct material cost is 65 per unit and Direct labour cost is ₹ 40 per unit.
You are required to:
(i) Prepare a statement showing distribution of overheads production and service departments.
(it) Calculate recovery rate per hour of each production department after redistributing the service department costs.
(iii) Find out the Total Cost of a ‘Product A’. [CA Inter Nov. 2020, 10 Marks]
Answer:
(i) Statement showing distribution of Overheads Primary Distribution Summary

Secondary Distribution using simultaneous equation method:
Overheads of service cost centres
Let, X be the overhead of service cost centre X
Y be the overhead of service cost centre Y
X = 9,750 + 0.10 Y
Y = 13,400 + 0.10 X
Substituting the value of Y in X we get
X = 9,750 + 0.10 (13,400 + 0.10 X)
X-9,750+ 1,340 + 0.01 X
0. 99 X = 11,090
X = ₹ 11,202
Y = 13,400 + 0.10 × 11,202
= ₹ 14,520

Secondary Distribution Summary

(ii) Calculation of Overhead recovery rate per hour

	P(₹)	Q(₹)	R (₹)
Total overheads cost           ,	39,573	26,585	37,992
Working hours	13,191	7,598	14,995
Rate per hour (₹)	3	3.50	2.53

(iii) Cost of Product A

	₹
Direct material	65.00
Direct labour	40.00
Prime cost	105.00
Production overheads : P 6 hours × ₹ 3.00 = ₹ 18.00 Q 5 hours × ₹ 3.50 = ₹ 17.50 R 2 hours × ₹ 2.53 = ₹ 5.06
	40.56
Total cost	145.56

Question 6.
Delta Ltd. is a manufacturing concern having two production departments – P₁ and P₂ and two service departments S₁ and S₂. After making a primary distribution of factory overheads, the total overheads of all departments are as under:

Department	₹
P1	4,02,000
P2	2,93,000
S1	3,52,000
S2	33,000

Overheads of service departments are reapportioned as below:

A product ‘Z’ passes through all the two production departments – P₁ and P₂ and each unit of product remain there in process for 2 and 3 hours respectively. The material and labour cost of one unit of product ‘Z’ is ₹ 500 and ₹ 350 respectively.
The company run for all the 365 days of the year and 16 hours per day.
You are required:
(i) To make secondary distribution of overheads of service departments by applying Simultaneous Equation method and
(ii) Determine the total cost of one unit of product Z. [CA Inter May 2018, 8 Marks]
Answer:
(i) Secondary distribution using Simultaneous Equation method:
Overheads of service cost centres
Let S₁ be the overhead of service cost centre S₁ and
S₂ be the overhead of service cost centre S₂.
S₁ = 3,52,000 + 0.10 S₂
S₂ = 33,000 + 0.10 S₁
Substituting the value of S₂ in S₁ we get
S₁ = 3,52,000 + 0.10 (33,000 + 0.10 S₁)
S₁ = 3,52,000 + 3,300 + 0.01 S₁
0.99 S₁ = 3,55,300
S₁ = ₹ 3,58,889
S₂ = 33,000 + 0.10 × 3,58,889 = ₹ 68,889

Secondary Distribution Summary

(ii) Working for Overhead rate per hour

	P1	P2
Total overheads cost (₹) Production hours worked Rate per hour (₹)	5,80,001 5,840 99.32	5,00,001 5,840 85.62

Calculation of per unit Total Cost of Product Z

	(₹)
Direct material	500.00
Direct labour	350.00
Prime cost	850.00
Production on overheads
P1 2 hours × ₹ 99.32 = 198.64
P2 3 hours × ₹ 85.62 = 256.86  .	455.50
Total cost	1,305.50

Question 7.
A company has three production departments (M₁, M₂, and A₁,) and three service department, one of which Engineering service department, servicing the M₁ and M₂, only. The relevant information are as follows:

	Product X	Product Y
M1	10 Machine hours	6 Machine hours
M2	14 Machine hours	14 Machine hours
A1	14 Direct Labour hours	18 Direct Labour hours

The annual budgeted overhead cost for the year is:

	Indirect Wages (₹)	Consumable Supplies (₹)
M1	46,520	12,600
M2	41,340	18,200
A1	16,220	4,200
Stores	18,200	2,800
Engineering Service	5,340	4,200
Genera! Service	7,520	3,200

	₹
Depreciation on Machinery	39,600
Insurance of Machinery	7,200
Insurance of Building	3,240 (Total building insurance cost for Mi, is one third of annual premium)
Power	6,480
Light	5,400
Rent	12,675 (The general service deptt is located in a building owned by the company. It is valued at ₹ 6,000 and is charged into cost at notional value of 8% per annum. This cost is additional to the rent shown above)

The value of issues of materials to the production departments are in the same proportion as shown above for the Consumable supplies.
The following data are also available:

Required:
(i) Prepare a overhead analysis sheet, showing the bases of apportionment of overhead to departments.
(ii) Allocate service department overheads to production department ignoring the apportionment of service department costs among service departments.
(iii) Calculate suitable overhead absorption rate for the production departments.
(iv) Calculate the overheads to be absorbed by two products X & Y. [CA Inter May 2007, 15 Marks]
Answer:
(i) Summary of Appointment of Overheads

(ii) Allocation of service departments overheads

(iii) Overhead absorption rate

	M1	M2	A1
Total overhead allocated	1,03,361	1,01,630	40,424
Machine hours	40,000	50,000	–
Labour hours	–	–	3,00,000
Rate per machine hours	2.584	2.033	–
Rate per direct labour	–	–	0.135

(iv) Statement showing overhead absorption for Products X and Y

Question 8.
E-books is an online book retailer. The Company has four departments. The two sales departments are Corporate Sales and Consumer Sales. The two support – departments are Administrative (Human Resources Accounting) and Information Systems each of the sales departments conducts merchandising and marketing operations independently.
The following data are available for October, 2020:

Cost incurred in each of four departments for October, 2020 are as follow:

Corporate Sales	₹ 12,97,751
Consumer Sales	₹ 6,36,818
Administrative	₹ 94,510
Information systems	₹ 3,04,720

The company uses number of employees as a basis to allocate Administrative costs and processing time as a basis to allocate Information systems costs.
Required:
(i) Allocate the support department costs to the sales departments using the direct method.
(ii) Rank the support departments based on percentage of their services rendered to other support departments. Use this ranking to allocate support costs based on the step-down allocation method.
(iii) How could you have ranked the support departments differently?
(iv) Allocate the support department costs to two sales departments using the reciprocal allocation method. [CA Inter Nov. 2003, 10 Marks]
Answer:
(i) Statement showing the allocation of support department costs to the sales departments (using the Direct Method)

(ii) Ranking of support departments based on percentage of their services rendered to other support departments
Administration support department provides 23.077% (21 × 100/42 + 28 + 21) of its services to information systems support department Thus 23.077% of ₹ 94,510 = ₹ 21,810.

Information system support department provides 8.33% (400/2,400 + 2,000 + 400 × 100) of its services to Administration support department. Thus 8.33% of ₹ 3,04,720 = ₹ 25,383.

(iii) An alternative ranking is based on the rupee amount of services rendered to other service departments, using the rupee figures obtained under requirement (ii). This approach would use the following sequence of ranking.

• Allocation of information systems overheads as first (₹ 25,383 provided to administrative).
• Allocated administrative overheads as second (₹ 21,810 provided to information systems).

(iv) Working notes:
1. Percentage of services provided by each service department to other service department and sales departments.

2. Total cost of the support department: (By using simultaneous equation method).
Let AD and IS be the total costs of support departments Administrative and Information systems respectively. These costs can be determined by using the following simultaneous equations:
AD = 94,510 + 0.0833
IS = 3,04,720 + 0.2308
Or, AD = 94,510 + 0.0833 {3,04,720 + 0.2308 AD}
Or, AD = 94,510 + 25,383 + 0.01922 AD
Or, 0.90877 AD = 1,19,893
Or, AD = ₹ 1,22,243
and IS = ₹ 3,32,934

Statement showing the allocation of support department costs to sales departments
(Using reciprocal allocation method)

	Sales department
	Corporate Sales (₹)	Consumer sales (₹)
Costs incurred	12,97,751	6,36,818
Re-allocation of cost administrative department (46.16% and 30.77% of ₹ 1,22,243)	56,427	37,614
Re-allocation of costs of information systems department (50% and 41.67% of ?3,32,934)	1,66,467	1,38,734
Total	15,20,645	8,13,166

Comprehensive Machine Hour Rate

Question 9.
A machine costing ₹ 10 lakhs was purchased on 1.4.2021. The expected life of the machine is 10 years. At the end of this period its scrap value is likely to be ₹ 10,000. The total cost of all the machines including new one was ₹ 90 lakhs.
The other information is given as follows:
(i) Working hours of the machine for the year was 4,200 including 200 non-productive hours.
(ii) Repairs and maintenance for the new machine during the year was ₹ 5,000.
(iii) Insurance Premium was paid for all the machine ₹ 9,000.
(iv) New machine consumes 8 units of electricity per hour, the rate per unit being ₹ 3.75.
(v) The new machine occupies \(\frac{1}{10}\)th area of the department. Rent of the department is ₹ 2,400 per month.
(vi) Depreciation is charged on straight line basis.
Compute machine hour rate for the new machine. [CA Inter May 2012, 5 Marks]
Answer:
Computation of Machine Hour Rate of New Machine

Working Note:
Computation of productive Machine hour rate

Question 10.
M/s. Zaina Private Limited has purchased a machine costing ₹ 29,14,800 and it is expected to have a salvage value of ₹ 1,50,000 at the end of its effective life of 15 years. Ordinarily the machine is expected to run for 4,500 hours per annum but it is estimated that 300 hours per annum will be lost for normal repair & maintenance. The other details in respect of the machine are as follows:
(i) Repair & Maintenance during the whole fife of the machine are expected to be ₹ 5,40,000.
(ii) Insurance premium (per annum) 2% of the cost of the machine.
(iii) Oil and Lubricants required for operating the machine (per annum) ? 87,384.
(iv) Power consumptions: 10 units per hour @ ₹ 7 per unit. No power consumption during repair and maintenance.
(v) Salary to operator per month ₹ 24,000. The operator devotes one third of his time to the machine.
You are required to calculate comprehensive machine hour rate. [CA Inter May 2019, 5 Marks]
Answer:
Effective Machine hours = 4,500 hours – 300 hours = 4,200 hours.

Calculation of Comprehensive Machine hour rate:

Standing Charges
(i) Insurance Premium (₹ 29,14,800 × 2%)	₹ 58,296
(ii) Salary to operator (₹ 24,000 × 12 × 1/3)	₹ 96,000
Machine Expenses:
(i) Repairs & Maintenance (₹ 5,40,000 ÷ 15 years)	₹ 36,000
(ii) Depreciation \( \left(\frac{₹ 29,14,800-₹ 1,50,000}{15 \text { years }}\right) \)	₹ 1,84,320
(iii) Oil and Lubricants	₹ 87,384
(iv) Power (4,200 hrs × 10 units × ₹ 7)	₹ 2,94,000
Total Cost	₹ 7,56,000
Effective Machine Hours	4,200 hours
Machine hour rate	₹ 180

Question 11.
The following particulars refers to process used in the treatment of material subsequently, incorporated in a component forming part of an electrical appliance:
(i) The original cost of the machine used (Purchased in June 2012) was ₹ 10,000. Its estimated life is 10 years, the estimated scrap value at the end of its life is ₹ 1,000, and the estimated working time per year (50 weeks of 44 hours) is 2,200 hours of which machine maintenance etc., is estimated to take up 200 hours. No other loss of working time expected, setting up time, estimated at 100 hours, is regarded as productive time. (Holiday to be ignored.)
(ii) Electricity used by the machine during production is 16 units per hour at cost of a 9 paisa per unit. No current is taken during maintenance or setting up.
(iii) The machine required a chemical solution which is replaced at the end of week at a cost of ₹ 20 each time.
(iv) The estimated cost of maintenance per year is ₹ 1,200.
(v) Two attendants control the operation of machine together with five other identical machines. Their combined weekly wages, insurance and the employer’s contribution to holiday pay amount ₹ 120.
(vi) Departmental and general works overhead allocated to this machine for the current year amount to ₹ 2,000.
You are required to calculate the machine hour rate of operating the machine. [CA Inter May 2016, 5 Marks]
Answer:
Total Productive hours = Estimated Working hours – Machine Maintenance hours
= 2,200 hours – 200 hours = 2,000 hours

Computation of Machine Hour Rate:

Question 12.
A machine shop has 8 identical machines manned by 6 operators. The machine cannot work without an operator wholly engaged on it. The original cost of all the 8 machines works out to ₹ 32,00,000. The following particulars are furnished for a six months period:

Normal available hours per month per operator	208
Absenteeism (without pay) hours per operator	18
Leave (with pay) hours per operator	20
Normal unavoidable idle time- hours per operator	10
Average rate of wages per day of 8 hours per operator	₹ 100
Production bonus estimated	10% on wages
Power consumed	₹ 40,250
Supervision and Indirect Labour	₹ 16,500
Lighting and Electricity	₹ 6,000
The following particulars are given for a year:
Insurance	₹ 3,60,000
Sundry work Expenses	₹ 50,000
Management Expenses allocated	₹ 5,00,000
Depreciation	10% on the original cost
Repairs and Maintenance (including consumables)	5% of the value of all the machines.

Prepare a statement showing the comprehensive machine hour rate for the machine shop. [CA Inter Jan. 2021, 5 Marks]
Answer:
Calculation of effective working hours:

	Hours
Normal available hours per month (208 × 6 months × 6 operators) Less: Absenteeism hours (18 × 6 operators)	7,488 (108)
Paid hours Less: Leave hours (20 × 6 operators) Less: Normal idle time (10 × 6 operators)	7,380 (120) (60)
Effective working hours	7,200

Computation of Comprehensive Machine Hour Rate:

	₹
Operators wages (7,380/8 × 100)	92,250
Production bonus (10% on wages)	9,225
Power consumed	40,250
Supervision and indirect labour	16,500
Lighting and Electricity	6,000
Repair and maintenance [(5% × ₹ 32,00,000)/2]	80,000
Insurance (₹ 3,60,000/2)	1,80,000
Depreciation [(₹ 32,00,000 × 10%)/2]	1,60,000
Sundry Work expenses (₹ 50,000/2)	25,000
Management expenses (₹ 5,00,000/2)	2,50,000
Total	8,59,225
Comprehensive xMachine Hour Rate = ₹ 8,59,225/7,200 hours	₹ 119.33

Question 13.
A machine shop cost centre contains three machines of equal capacities. To operate these three machines nine operators are required i.e, three operators on each machine. Operators are paid ₹ 20 per hour. The factory works for 48 hours in a week which includes 4 hours set up time. The work is jointly done by operators. The operators are paid fully for the forty eight hours. In additions they are paid a bonus of 10% of productive time. Costs are reported for this company on the basis of thirteen four-weekly period.

The company for the purpose of computing machine hour rate includes the direct wages of the operator and also recoups the factory overheads allocated to the machines. The following details of factory overheads applicable to the cost centre are available:

• Depreciation 10% per annum on original cost of the machine. Original cost of the each machine is ₹ 52,000.
• Maintenance and repairs per week per machine is ₹ 60.
• Consumable stores per week per machine are ₹ 75.
• Power: 20 units per hour per machine at the rate of ₹ 80 paise per unit.
• Apportionment to the cost centre: Rent per annum ₹ 5,400, Heat and Light per annum ₹ 9,720, foreman’s salary per annum ₹7 12,960 and other miscellaneous expenditure per annum ₹ 18,000.

Required:
(i) Calculate the cost of running one machine for a four week period.
(ii) Calculate machine hour rate. [CA Inter Nov. 2007, May 2015, 8 Marks]
Answer:
Effective Machine hour for four-week period
= Total working hours – unproductive set-up time
= {(48 hours × 4 weeks) – {(4 hours × 4 weeks)} .
= (192 – 16 hours) = 176 hours.

(i) Computation of cost of running one machine for a four week period

(ii) Machine hour rate = ₹ 17,513.54/176 hrs = ₹ 99.51

Question 14.
You are given the following information of the three machines of a manufacturing department of X Ltd.

(The foreman and the attendant control all the three machines and spend equal time on them.)
The following additional information is also available:

	Machines
	A	B	c
Estimated Direct Labour Hours	1,00,000	1,50,000	1,50,000
Ratio of K.W. Rating	3	2	3
Floor space (sq. ft.)	40,000	40,000	20,000

There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The manufacturing department works 8 hours in a day but Saturdays are half days. All machines work at 90% capacity throughout the year and 2% is reasonable for breakdown.

You are required to:
Calculate predetermined machine hour rates for the above machines after taking into consideration the following factors:

• An increase of 15% in the price of spare parts.
• An increase of 25% in the consumption of spare parts for machines B’ & ‘C’ only.
• 20% general increase in wages rates. [CA Inter May 2011, 8 Marks]

Answer:
Computation of Machine Hour Rate

Working Notes:
1. Calculation of effective working hours:
No. of holidays 52 (Sundays) + 12 (other holidays) = 64
Saturday (52 – 2) = 50
No. of days (Work full time) = 365 – 64 – 50 = 251

	Hours
Full days work (251 × 8)	= 2,008
Half days work (50 × 4)	= 200
	2,208
	Hours
Effective capacity 90% of 2,208	1,987 (Rounded off)
Less: Normal loss of time (Breakdown) 2%	40 (Rounded off)
Effective running hour	1,947

2. Amount of spare parts:

3. Amount of Indirect labour:

	₹
Preliminary estimates	20,000
Add: Increase in wages @ 20%	4,000
	24,000

4. Interest on capital outlay is a financial matter and therefore it has been excluded from the cost accounts;

Question 15.
From the details furnished below you are required to compute comprehensive machine hour rate:

Original purchase price of the machine	₹ 3,24,000
(subject to depreciation at 10% per annum on original cost)
Normal working hours for the month	200 hours
(The machine works to only 75% of capacity)
Wages of Machine man	125 per day (of 8 hours)
Wages for a Helper (Machine attendant)	75 per day (of 8 hours)
Power cost for the month for the time worked	₹ 15,000
Supervision charges apportioned for the machine centre for the month	₹ 3,000
Electricity and Lighting for the month	₹ 7,500
Repairs and maintenance (machine) including consumable stores per month	₹ 17,500
Insurance of Plant and Building (apportioned) for the year	₹ 16,250
Other general expenses per annum	₹ 27,500

The workers are paid a fixed dearness allowance of 1,575 per month. Production bonus payable to workers in terms of an award is equal to 33.33% of basic wages and dearness allowance. Add 10% of the basic wage and dearness allowance against leave wages and holidays with pay to arrive at a comprehensive labour wage for debit to production. [CA Inter Nov. 2005, 14 Marks]
Answer:
Effective machine working hours p.m. = 200 hrs. × 75% = 150 hours

Computation of Comprehensive Machine Hour Rate:

Wages per machine hour:

	Machine Man (₹)	Helper (₹)
Wages for 200 hours:
Machine Man (₹ 125 × 25)	3,125	–
Helper (₹ 75 × 25)	–	1,875
Dearness allowance (DA)	1,575	1,575
	4,700	3,450
Production bonus (1 /3rd of Basic DA)	1,567	1,150
	6,267 470	4,600 345
Leave Wages (10% of Basic and DA)
	6,737	4,945
Effective wage rate per machine hour	44.91	32.97

Question 16.
Calculate Machine Hour Rate from the following particulars:

Cost of Machine	₹ 25,00,000
Salvage Value	₹ 1,25,000
Estimated life of the machine	25,000 Hours
Working Hours (per annum)	3,000 Hours
Hours required for maintenance	400 Hours
Setting-up time required	8% of actual working hours

Additional Information:
(i) Power 25 units @ ₹ 5 per unit per hour.
(ii) Cost of repairs and maintenance ₹ 26,000 per annum.
(iii) Chemicals required for operating the machine ₹ 2,600 per month.
(iv) Overheads chargeable to the machine ₹ 18,000 per month.
(v) Insurance Premium (per annum) 2% of the cost of machine.
(vi) No. of operators – 02 (looking after three other machines also).
(vii) Salary per operator per month ₹ 18,500. [CA Inter Nov 2013, 8 Marks]
Answer:
Computation of Machine hour Rate

Question 17.
A manufacturing company has added a new machine to its fleet of 11 existing machines. New machine is purchased for ₹ 12,70,000 with installation cost of ₹ 40,000.
The machine has an estimated life of 10 years and is expected to realise ₹ 90,000 as scrap at the end of its useful life. Other relevant data are as follows:
(i) Budgeted annual working hours are 2,400 based on 8 hours per day for 300 days. This includes 180 hours for plant maintenance and 120 hours of productive set-up time.
(ii) Electricity used by the new machine is 12 units per hour at a cost of ₹ 6.50 per unit. No current is drawn during maintenance and setup.
(iii) Three operators control the operations of all the twelve machines and average rate of wages per operator per day is ₹ 600 and production bonus is 10% of wages.
(iv) Annual insurance premium for the new machine is ₹ 12,600.
(v) Annual maintenance cost of new machine including consumable stores is ₹ 32,500.
(vi) Rent of the factory is ₹ 24,000 per month. Area occupied by new machine 200 sq ft. and area occupied by other machines is 2800 sq ft.
Required: Compute the comprehensive machine hour rate. [CA Inter May 2019, 5 Marks]
Answer:
Computation of Comprehensive Machine hour Rate

Working Notes:
1. Effective machine hour:
= Budgeted working hours – maintenance time
= (2,400 – 180) hours = 2,220 hours.

2. Electricity consumption hours:
= Budgeted working hours – Maintenance time – Set-up time
= (2,400 – 180 – 120) hours = 2,100 hours.

3. Operators’ wages per annum
Basic wages (3 operators × ₹ 600 × 300 days) = ₹ 5,40,000
Add: Production bonus (10% of ₹ 5,40,000) ₹ 54,000

4. Depreciation per annum
\(\frac{₹(12,70,000+40,000)-₹ 90,000}{10 \text { years }}\) = ₹ 1,22,000

5. Apportioned cost for factory rent:
\(\frac{₹ 24,000 \times 12}{3,000 \mathrm{sq} . \mathrm{ft}}\) × 200 sq.ft. = ₹ 19,200

Question 18.
In a factory, a machine is considered to work for 208 hours in a month. It includes maintenance time of 8 hours and set up time of 20 hours.
Cost of the machine is 5,00,000. Life 10 years. Estimated scrap value at the end of life is 20,000.
The expense data relating to the machine are as under:

	₹
Repairs and maintenance per annum	60,480
Consumable stores per annum	47,520
Rent of building per annum (The machine under reference occupies 1 /6 of the area)	72,000
Supervisor’s saiary per month (Common to three machines)	6,000
Wages of operator per month per machine	2,500
General lighting charges per month allocated to the machine	1,000
Power 25 units per hour at 2 per unit.

Power is required for productive purposes only. Set up time, though productive, does not require power. The Supervisor and Operator are permanent. Repairs and maintenance and consumable stores vary with the running of the Machine.
Required: Calculate a two-tier machine hour rate for (a) set up time and (b) running time. [CA Inter May 2002, 8 Marks]
Answer:
Computation of Two-tier machine hour rate:

	Set up time rate per machine hour (₹)	Running time rate per machine hour (₹)
Standing Charges	20.00	20.00
Machine expenses:
Depreciation Repair and maintenance Consumable stores Power	20.00 – – –	20.00 28.00 22.00 50.00
Machine hour rate of overheads Wages	40.00 12.50	140.00 12.50
Comprehensive machine hour rate	52.50	152.50

Working Notes:
(i) Standing Charges per hour
Effective hours for standing charges (208 hours – 8 hours) = 200 hours

	Cost per hour (₹)	Cost per hour (₹) (Cost per month ÷ 200 hours)
Supervisor’s salary (₹ 6,000 3 machines)	2,000	10.00
Rent of building (₹ 72,000/12 months × 1/6)	1,000	5.00
General lighting	1,000	5.00
Total Standing Charges	4,000	20.00

(ii) Machine running expenses per hour
Effective hours for variable costs (208 hours – 28 hours) = 180 hours

Question 19.
A manufacturing unit has purchased and installed a new machine of ₹ 12,70,000 to its fleet of 7 existing machines. The new machine has an estimated life of 12 years and is expected to realise 70,000 as scrap at the end of its working life. Other relevant data are as follows:
(i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 300 hours for plant maintenance and 92 hours for setting up of plant.
(ii) Estimated cost of maintenance of the machine is 25,000 (p.a.).
(iii) The machine requires a special chemical solution, which is replaced at the end of each week (6 days in a week) at a cost of 400 each time.
(iv) Four operators control operation of 8 machines and the average wages per person amounts to 420 per week plus 15% fringe benefits.
(v) Electricity used by the machine during the production is 16 units per hour at a cost of 3 per unit. No current is taken during maintenance and setting up.
(vi) Departmental, and general works overhead allocated to the operation during last year was 50,000. During the current year it is estimated to increase 10% of this amount.
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive. [CA Inter May 2005, 5 Marks]
Answer:
Computation of Machine hour Rate

Note: It is assumed that while setting up the plant, there is no consumption of electricity by the manufacturing unit.

Working Note:
(i) Effective machine hour when set-up time is unproductive:
= Budgeted working hours – (Maintenance time + Setting-up time)
= [2,592 – (300 + 92)] hours = 2,200 hours

(ii) Effective machine hour when set-up time is productive:
= Budgeted working hours – Maintenance time
= (2,592 – 300) hours = 2,292 hours

(iii) Operators’ wages per annum
Basic wages (4 operators × ₹ 420 × 54 weeks)
Add: Fringe benefits (15% of ₹ 90720)

(iv) Depreciation per annum
\(\frac{₹ 12,70,000 – ₹ 70,000}{12 \text { years }}\) = ₹ 1,00,000

(v) Cost of special chemical solution
324 days ÷ 6 days × ₹ 400 = ₹ 21,600

Treatment of Under/Over Absorbed Overheads

Question 20.
The total overhead expenses of a factory are ₹ 4,46,380. Taking into account the normal working of the factory, overhead was recovered in production at ₹ 1.25 per hour. The actual hours worked were 2,93,104. How would you proceed to close the books of account, assuming that besides 7,800 units produced of which 7,000 were sold, there were 200 equivalent units in work-in-progress?
On investigation, it was found that 50% of the unabsorbed overhead was on account of increase in the cost of indirect materials and indirect labour and the remaining 50% was due to factory inefficiency. Also give the profit implication of the method suggested. [CA Inter Nov. 2000, 6 Marks]
Answer:
Calculation of Unabsorbed Overheads:

	₹
Actual overheads incurred Less: Overheads Absorbed (₹ 1.25 × 2,93,104 Hrs.)	4,46.380 3,36,380
Unabsorbed Overheads	80,000
Unabsorbed Overheads due to increase in cost of Indirect materials and labour (₹ 80,000 × 50%) Unabsorbed Overheads due to factory inefficiency (₹ 80,000 × 50%)	40,000 40,000

Treatment of Unabsorbed Overhead and its Implication on Profit:
(i) The unabsorbed Overhead on account of increase in cost of indirect material and labour of ₹ 40,000 should be adjusted by applying Positive Supplementary Rates.
Supplementary rate = \(\frac{\text { Unabsorbed Overhead }}{\text { Equivalent completed units of Production }}\)

Calculation of Equivalent completed units:
Unit sold = 7,000
Units in closing stock of Finished Goods (7,800 – 7,000) = 800
Equivalent WIP units = 200
Total Equivalent Completed Units = 8,000

Supplementary Rate = ₹ 40,000/8,000 Units
= ₹ 5 per equivalent completed units
The unabsorbed O/H of ₹ 40,000 should be applied by using supplementary rate of ₹ 5 per equivalent completed unit as under:

This will reduce the Profit by ₹ 35,000, since the cost of sales has been increased. Moreover, the value of stock of Finished Goods and WIP will increase by ₹ 4,000 and ₹ 1,000 respectively.

(ii) The unabsorbed Overhead of ₹ 40,000 due to factory inefficiency being in the nature of abnormal loss should be charged to costing P&L A/c and thereby the profit would be reduced by ₹ 40,000.

Question 21.
XYZ Ltd. manufactures a single product. It recovers factory overheads at a pre-determined rate of ₹ 20 per man-day.
During the year 2020-21, the total factory overheads incurred and the man- days actually worked were ₹ 35.50 lakhs and ₹ 1.50 lakh days respectively. Out of the amount of ₹ 35.50 lakhs, ₹ 2.00 lakhs were in respect of wages for stick period and ₹ 1.00 lakh was in respect of expenses of previous year booked in this current year. During the period, 50,000 units were sold. At the end of the period, 12,000 completed units were held in stock but there was no opening stock of finished goods. Similarly, there was no stock of uncompleted units at the beginning of the period but at the end of the period there were 20,000 uncompleted units which may be treated as 65% complete in all respects.
On investigation, it was found that 40% of the unabsorbed overheads were due to factory inefficiency and the rest were attributable to increase in the cost of indirect materials and indirect labour. You are required to:
(i) Calculate the amount of unabsorbed overheads during the year 2020-21.
(ii) Show the accounting treatment of unabsorbed overheads in cost accounts and pass journal entry. [CA Inter Dec. 2021, Nov. 2017, Nov. 2011, 10 Marks]
Answer:
(i) Calculation of unabsorbed overheads during the year 2020-21

	₹
Total factory overheads Incurred	35,50,000
Less: Strike	2,00,000
Less: Cost of previous year	1,00,000
Net factory overheads actually incurred	32,50,000
Overheads actually absorbed (₹ 20 per man day × 1,50,000 man days)	30,00,000
Unabsorbed overheads	2,50,000

(ii) Accounting treatment of unabsorbed overheads in cost accounts:
Unabsorbed overheads of 4096 (ie. ₹ 1,00,000) due to factory inefficiency will be debited costing profit and loss account.
Unabsorbed overheads of balance 60% (ie. ₹ 1,50,000) attributable to increase in the cost of indirect materials and indirect labour should be distributed over work-in-progress, finished goods and cost of sales by using supplementary rate.

Total Units for absorption of overheads:

Supplementary overhead absorption rate = 1,50,000 ÷ 75,000 = ₹ 2/unit

Journal Entry

Question 22.
ABS Enterprises produces a product and adopts the policy to recover factory overheads applying blanket rale based on machine hours. The cost records of the concern reveal following information:

Budgeted production overheads	₹ 10,35,000
Budgeted machine hours	90,000
Actual machine hours worked	45,000
Actual production overheads	₹ 8,80,000
Production overheads (actual) include
Paid to worker as per court’s award	₹ 50,000
Wages paid for strike period	₹ 38,000
Stores written off	₹ 22,000
Expenses of previous year booked in current year	₹ 18,500
Production
Finished goods	30,000 units
Sale of finished goods	27,000 units

The analysis of cost information reveals that 1/3rd of the under absorption of overheads was due to defective production planning and the balance was attributable to increase in costs.
You are required:
(i) To find out the amount of under absorbed production overheads.
(ii) To give the ways of treating it in Cost Accounts.
(iii) To apportion the under absorbed overheads over the items. [CA Inter Nov. 2019, 10 Marks]
Answer:
(i) Amount of under absorption of production overheads:

Budgeted Machine hour rate (Blanket rate) = ₹ 10,35,000/90,000 = ₹ 11.50 per hour.

(ii) Accounting treatment of under absorbed production overheads:
(a) As, 1 /3rd of the under absorbed overheads were due to defective production policies, this being abnormal, hence should be debited to Costing Profit and Loss Account.
Amount to be debited to Costing Profit and Loss Account = 2,34,000 × 1/3 = 78,000
(b) Balance of under absorbed production overheads should be distributed over work-in-progress, finished goods and cost of sales by applying supplementary rate.
Amount to be distributed = ₹ 2,34,000 × 2/3 = ₹ 1,56,000
Supplementary rate = ₹ 1,56,000/30,000 units = ₹ 5.20 per unit.

(iii) Apportionment of under absorbed production overheads over Finished goods and Cost of sales:

	Units	₹
Finished goods (3000 units × ₹ 5.20)	3,000	15.600
Cost of Sales (27,000 units × ₹ 5.20)	27,000	1,40,400
Total	30,000	1,56,000

Question 23.
PLR Ltd. manufactures a single product and recovers the overheads by adopting a single blanket rate based on machine hours. The budgeted production overheads of the factory for the FY 2020-21 are ₹ 50,40,000 and budgeted machine hours are 6,000,
For a period of first six months of the financial year 2020-21, following information were extracted from the books:

Actual production overheads	₹ 34,08,000
Amount included in the production overheads:
Paid as per court’s order	₹ 4,50,000
Expenses of previous year booked in current year	₹ 1,00,000
Paid to workers for strike period under an award	₹ 4,20,000
Obsolete stores written off	₹ 36,000

Production and sales data of the concern for the first six months are as under:
Production:
Finished goods 1,10,000
Work-in-progress
(50% complete in every respect) 80,000 units
Sale:
Finished goods 90,000 units
The actual machine hours worked during the period were 3,000 hours. It is revealed from the analysis of information that 40% of the over/under-absorption was due to defective production policies and the balance was attributable to increase in costs.
You are required
(i) To determine the amount of over/under absorption of production overheads for the period.
(ii) To show’ the accounting treatment of over/under-absorption of production overheads, and
(iii) To apportion the over, under-absorbed overheads over the items. [CA Inter Nov\ 2019 RTP]
Answer:
(i) Amount of over/under absorption of production overheads during the period of first six months of the year 2020-21:

Budgeted Machine hour rate (Blanket rate) = \(\frac{₹ 50,40,000}{₹ 840}\) = 6,000 hours

(ii) Accounting treatment of over absorbed production overheads: As, 40% of the over absorbed overheads were due to defective production policies, this being abnormal, hence should be credited to Costing Profit and Loss Account.
Amount to be credited to Costing Profit and Loss Account
= ₹ 1,18,000 × 40% = ₹ 47,200.

Balance of over absorbed production overheads should be distributed over Work-in-progress, Finished goods and Cost of sales by applying supplementary rate.
Amount to be distributed = ₹ 1,18,000 × 60% = ₹ 70,800
Supplementary rate = \(\frac{₹ 70,800}{1,50,000 \text { units }}\) = ₹ 0.472 per unit

(iii) Apportionment of over absorbed production overheads over WIP, Finished goods and Cost of sales:

	Equivalent completed units	₹
Work-in-Progress (80,000 units × 50% × 0.472)	40,000	18,880
Finished goods (20,000 units × 0.472)	20,000	9,440
Cost of sales (90,000 units × 0.472)	90,000	42,480
Total	1,50,000	70,800

Capacity Related Concept

Question 24.
A machine was purchased from a manufacturer who claimed that ma chine could produce 36.5 tonnes In a year consisting of 365 days. Holidays, break-down, etc., were normally allowed In the factory for 65 days. Sales were expected to be 25 tonnes during the year and the plant actually produced 25.2 tonnes during the year. You are required to state the following figures:
(i) Rated capacity
(ii) Practical capacity
(iii) Normal capacity
(iv) Actual capacity [CA Inter Nov. 2008, 2 Marks]
Answer:
(i) Rated Capacity
It is the maximum capacity of producing goods or providing services. 36.5 tonnes

(ii) Practical Capacity [(36.5 tonnes/365 days) × (365 days – 65 days)]
It is the available capacity after considering loss of 30 tonnes time due to repairs, maintenance, minor breakdown, idle time, set-up time, normal delays, sundays and holidays, stock taking, etc.

(iii) Normal Capacity
It is the volume of production or services achieved 25 tonnes or achievable on an average over a period under normal circumstances considering the reduction in capacity resulting from planned maintenance.

(iv) Actual Capacity
It is the capacity actually achieved during a given period. 25.2 tonnes

Miscellaneous

Question 25.
PQR Ltd. has its own power plant, which has two users, Cutting Department and Welding Department. When the plans were prepared for the power plant, top management decided that its practical capacity should be 1,50.000 machine hours. Annual budgeted practical capacity fixed costs are ₹ 9,00,000 and budgeted variable costs are ₹ 4 per machine-hour. The following data are available:

Required.:
(i) Allocate the power plant’s cost to the cutting and the welding department using a single rate method in which the budgeted rate is calculated using practical capacity and costs are allocated based on actual usage.
(ii) Allocate the power plant’s cost to the cutting and welding departments, using the dual – rate method in which fixed costs are allocated based on practical capacity and variable costs are allocated based on actual usage.
(iii) Allocate the power plant’s cost to the cutting and welding departments using the dual rate method in which the fixed-cost rate is calculated using practical capacity, but fixed costs are allocated to the cutting and welding department based on actual usage. Variable costs are allocated based on actual usage.
(iv) Comment on your results in requirements (i), (ii) and (iii). [CA inter May 2003 8 Marks]
Answer:
Working Notes:
(1) Fixed practical capacity cost per machine hour:
Practical capacity (machine hours) 1,50,000
Practical capacity fixed costs ₹ 9,00,000
Fixed practical capacity cost per machine hour
(₹ 9,00,000 ÷ 1,50,000 hours) ₹ 6

(2) Budgeted rate per machine hour (using practical capacity):
= Fixed practical capacity cost per machine hour + Budgeted variable cost per machine hour
= ₹ 6 + ₹ 4 = ₹ 10

(i) Statement showing Power Plant’s cost allocation to the Cutting & Welding departments by using single rate method on actual usage of machine hours.

	Cutting Department (₹)	Welding Department (₹)	Total (₹)
Power plants cost allocation by using actual usage (machine hours) (Refer to Working Note 2)	6,00,000 (60,000 hours × ₹ 10)	4,00.000 (40,000 hours × ₹ 10)	10,00,000

(ii) Statement showing Power Plant’s cost allocation to the Cutting & Welding departments by using dual rate method.

(iii) Statement showing Power Plant’s cost allocation to the Cutting & Welding Departments using dual rate method

(iv) Comments:
Under dual rate method, under (iii) and single rate method under (i), the allocation of fixed cost of practical capacity of plant over each department are based on single rate. The major advantage of this approach is that the user departments are allocated fixed capacity costs only for the capacity used. The unused capacity cost ₹ 3,00,000 (₹ 9,00,000 – ₹ 6,00,000) will not be allocated to the user departments. This highlights the cost of unused capacity.
Under (ii) fixed cost of capacity are allocated to operating departments on the basis of practical capacity, so all fixed costs are allocated and there is no unused capacity identified with the power plant.

Question 26.
In an engineering company, the factory overheads are recovered on a fixed percentage basis on direct wages and the administrative overheads are absorbed on a fixed percentage basis on factory cost.
The company has furnished the following data relating to two jobs under-taken by it in a period:

	Job 101	Job 102
	(₹)	(₹)
Direct materials	54,000	37,500
Direct wages	42,000	30,000 |
Selling price	1,66,650	1,28,250
Profit percentage on Total Cost	10%	20%

Required:
(i) Computation of percentage recovery rates of factory overheads and administrative overheads.
(ii) Calculation of the amount of factory overheads, administrative overheads and profit for each of the two jobs.
(iii) Using the above recovery rates determine the selling price of job 103. The additional data being:
Direct materials ₹ 24,000
Direct wages ₹ 20,000
Profit percentage on selling price 12.5% [ICAI Module]
Answer:
(i) Computation of percentage recovery rates of factory overheads and administrative overheads.
Let the factory overhead recovery rate as percentage of direct wages be F and administrative overheads recovery rate as percentage of factory cost be A.
Factory Cost = Direct materials + Direct wages + Factory overhead
For Job 101 = ₹ 54,000 + ₹ 42,000 + ₹ 42,000F = ₹ 96,000 + ₹ 42,000F
For Job 102 = ₹ 37,500 + ₹ 30,000 + ₹ 30,000F = ₹ 67,500 + ₹ 30.000F
Total Cost = Factory cost + Administrative overhead For Job 101:
= ₹ 96,000 + ₹ 42,000F + (₹ 96,000 + ₹ 42.000F) A = ₹ 1,51,500
= ₹ 96,000 + ₹ 42,000F + ₹ 96.000A + ₹ 42.000AF = ₹ 1,51,500 eqn (i)
For Job 102:
= ₹ 67,500 + ₹ 30,000F + (₹ 67,500 + ₹ 30,000F) A = ₹ 1,06,875
= ₹ 67,500 + ₹ 30,000F + ₹ 67,500A + ₹ 30,000AF = ₹ 1,06,875 eqn (ii)
Multiply equation (i) by 5 and equation (ii) by 7

7,500 A = 9,325 – 7,500
A = 0.25
96.000 + 42.000F + 24,000 + 10,500F = 1,51,500
52,500F = 1,51,500 – 1,20,000
F = 0.6
Percentage recovery rates:
Factory overheads = 60% of wages
Administrative overheads = 25% of factory cost.

Working note:

(ii) Statement of jobs, showing amount of factory overheads, administrative overheads and profit.

(iii) Selling price of Job 103.

Material Cost – CA Inter Costing Study Material is designed strictly as per the latest syllabus and exam pattern.

Material Cost – CA Inter Costing Study Material

Inventory Control Levels:
Re-order Level (ROL): It is the level at which fresh order needs to be
ROI. = Max. Consumption × Max. Re-order Period
Or
Min. Stock Level – (Avg. Consumption × Average Re-order period!
Safety Stock – Avg. lead time consumption
Re-order period is also known as Lead Time.

Re-order Quantity/Economic Order Quantity (ROQ/EOQ): It is the size of the order for which total ordering and total carrying costs are minimum.
EOQ = \(\sqrt{\frac{2 \times \text { Annual Requirement }(A) \times \text { Cost per order }(\mathrm{O})}{\text { Carrying cost per unit p.a.(C) }}}\)

Minimum Stock Level:
It is the minimum quantit) which must he retained in stock.
= ROL – (Avg. Consumption × Average Re-order Period)

Maximum Stock Level:
It is the maximum limit up to which stock can be stored at any time.
= ROL + RQQ – (Min. Consumption × Min. Re-order Period)

Average Inventory Level:
It is the quantity of material that is normally held in stock over a period.
= Minimum Stock Level + 1/2 Re-order Quantity
OR
\(\frac{\text { Maximum Stock Level }+ \text { Minimum Stock Level }}{2}\)

Danger Level:
The level where normal issue of materials is stopped and only emergency materials are issued.
= Avg. Consumption × Lead time for emergency purchase
Some time minimum consumption is also used.

Classification of items in ABC Analysis:

• A Category: Quantity less than 10% but value more than 70%
• B Category: Quantity less than 20% but value ahout 20%
• C Category: Quantity about 70% but value less than 10%

Inventory Turnover Ratio:
It is used for measuring inventory performance. High inventory turnover – Indicates that material is a fast moving one.
Low turncn cr ratio – Indicates over-investment and locking up of working capital in inventories.
Cost of Materials Consumed
Inventor Turnover Ratio = \(\frac{\text { Cost of Materials Consumed }}{\text { Cost of Average Stock }}\)
Average Stock = 1/2 (opening stock + closing stock)
Average No. of days of Inventory holding = \(=\frac{365 \text { Days or } 12 \text { Months }}{\text { Inventory turnover Ratio }}\)

Theory Questions

Question 1.
State the objectives of system of material control. [ICAIModule]
Answer:
(i) Minimising interruption in production process: Material Control system ensures that no activity, particularly production, suffers from interruption for want of materials and stores. This requires constant availability of every item needed in the production process.

(ii) Optimisation of Material Cost: The overall material costs includes price, ordering costs and holding costs. Since all the materials and stores are acquired at the lowest possible price considering the required quality and other relevant factors like reliability in respect of delivery, etc., holding cost too needs to be minimized.

(iii) Reduction in Wastages: It aims at avoidance of unnecessary losses and wastages that may arise from deterioration in quality due to defective or long storage or from obsolescence.

(iv) Adequate Information: The system of material control maintains proper records to ensure that reliable information is available for all items of materials and stores. This not only helps in detecting losses and pilferages but also facilitates proper production planning.

(v) Completion of order in time: Proper material management is very nec-essary for fulfilling orders of the firm. This adds to the goodwill of the firm.

Question 2.
What is Bill of Material? Describe the uses of Bill of Material in following ‘ departments:
(i) Purchases Department
(ii) Production Department
(iii) Stores Department ‘
(iv) Cost/Accounting Department [CA Inter-Dec, 2021, 5 Marks]
Answer:
It is a detailed list specifying the standard quantities and qualities of materials and components required for producing a product or carrying out of any job.

Uses of Bill of Material

Marketing (Purchase) Dept.	Production Dept.	Stores Dept.	Cost /Accounting Dept.
Materials are procured (purchased) on the basis of specifications mentioned in it.	Production is planned according to the nature, volume of the materials required to be used. Accordingly, material requisition lists are prepared.	It is used as . a reference document while issuing materials to the requisitioning department.	It is used to estimate cost and profit. Any purchase, issue and usage are compared/verified against this document.

Question 3.
Distinguish between Bill of Material and Material Requisition note. [CA Inter May 2012, 4 MarksJ
Answer:
Differences between Bill of Material and Material Requisition Note

Bill of Material	Material Requisition Note
It is the document prepared by the engineering or planning department.	It is prepared by the production or other consuming department.
It is a complete schedule of component parts and raw materials required for a particular job or work order.	It is a document asking Storekeeper to issue materials to the consuming department.
It often serves the purpose of a material requisition as it shows the complete schedule of materials required for a particular job ie. it can replace material requisition.	It cannot replace a bill of materials.
It can be used for the purpose of quotations.	It is useful in arriving at historical cost only.
It helps in keeping a quantitative control on -materials drawn through the material requisition.	It shows the material actually drawn from stores.

Question 4.
Write the treatment of items associated with the purchase of material:
(i) Cash discount
(ii) Subsidy/ Grant/ Incentives
(iii) GST
(iv) Commission brokerage paid [CA Inter May 2016, 4 Marks]
Answer:

• Cash discount: Cash discount is not deducted from the purchase price. It is treated as interest and finance charges. It is to be ignored.
• Subsidy/Grant/Incentive: Any subsidy/grant/incentive received from the Government or from other sources deducted from the cost of purchase.
• GST: It is excluded from the cost of purchase if credit for the same is available. Unless mentioned specifically it should not form part of cost of purchase.
• Commission or brokerage paid: Commission or brokerage paid is added with the cost of purchase.

Question 5.
State how the following items are treated in arriving at the value of cost of material purchased:
(i) Detention Charges/Fines
(ii) Demurrage
(iii) Cost of Returnable containers
(iv) Central Goods and Service Tax (CGST)
(v) Shortage due to abnormal reasons. /CAtnterJan, 2021,5Marks]
Answer:
Treatment of items in arriving at the value of cost of material Purchased

Items	Treatment
1. Detention charges/Fine	Detention charges/fines imposed for non-compliance of rule or law by any statutory authority. It is an abnormal cost and not included with cost of Purchase
2. Demurrage	Demurrage is a penalty imposed by the transporter for delay in uploading or offloading of materials. It is an abnormal cost and not included with cost of purchase.
3. Cost of returnable containers	If the containers are returned and their- costs arc ref unded, then cost of containers should not be considered in the cost of purchase. If the amount of refund on returning the container is less than the amount paid, then, only the short fall is added with the cost of purchase.
4. Central Goods and Service Tax (CGST)	Central Goods and Service Tax (CGST) is paid on manufacture and supply of goods and Collected from the buyer. It is excluded from the cost of purchase if the input credit is available for the same. Unless mentioned specifically CGST is not added with the cost of purchase.
5. Shortage due to abnormal reasons	Shortage arises due to abnormal reasons such as material mishandling, pilferage, or due to any avoidable reasons are not absorbed by the good units. Losses due to abnormal reasons are debited to costing profit and loss account.

Question 6.
State how the following items are treated in arriving at the value of cost of material purchased:
(i) Trade discount
(ii) Insurance charges
(iii) Freight inwards
(iv) Cost of non-returnable containers
(v) Shortage due to normal reasons flCAIModule/
Answer:

Items	Treatment
1. Trade discount	Trade discount is deducted from the purchase price if it is not shown as deduction in the invoice.
2. Insurance charges	Insurance charges are paid for protecting goods during transit. It is added with the cost of purchase.
3. Freight inwards	It is added with the cost of purchase as it is directly attributable to procurement of material.
4. Cost of non-returnable containers	The cost of non-returnable containers is added with the cost of purchase of materials.
5. Shortage due to normal reasons	Good units absorb the cost of shortage due to normal reasons. Losses due to breaking of bulk, evaporation, or due to any unavoidable conditions etc. are the reasons of normal loss.

Question 7.
Distinguish clearly between Bin Cards and Stores Ledgers. [CA Inter Nov 2017, Nov 2004, May 2003, May 2002, May 2000, 4 Marks]
Answer:

Bin cards	Stores Ledger
Bin Cards is maintained by the store keeper in the store.	Store ledger is maintained in cost accounting department.
It contains only quantitative details of material received, issued and returned to stores.	It contains information both in quantity and value.
Entries are made when transaction takes place.	It is always posted after the transaction.
Each transaction is individually posted.	Transactions may be summarized and then posted.
Inter-department transfers do not appear in Bin Card.	Material transfers from one job to another job are recorded for costing purposes.

Question 8.
Define Inventory control and given its objectives. List down the basis to be adopted for inventory control. [CA Inter Nov, 2019, 5 Marks]
Answer:
The Chartered Institute of Management Accounts (CIMA) defines Inventory Control as “The function of ensuring that sufficient goods are retained in stock to meet all requirements without carrying unnecessarily large stocks”.
The objective of inventory control is to make a balance between sufficient stock and over-stock.

The stock maintained should be sufficient to meet the production requirements so that uninterrupted production flow can be maintained. Insufficient stock not only pause the production but also cause a loss of revenue and goodwill.

On the other hand, Inventory requires some funds for purchase, storage, maintenance of material with a risk of obsolescence, pilferage etc. A trade-off between stock-out and over-stocking is required. The management may employ various methods of inventory a balance.

Management may adopt the following basis for Inventory Control:

• By Setting Quantitative Levels
• On the basis of Relative Classification
• Using Ratio Analysis
• Physical control

Question 9.
Explain ‘Just In Time1 (JIT) approach of inventory management. [CA Inter May 2018, 5 Marksj
Answer:
JIT is a system of inventory management with an approach to have a zero inventories in stores. According to this approach material should only be purchased when it is actually required for production.
JIT is based on two principles

• Produce goods only when it is required and .
• The products should be delivered to customers at the time only when they want.

It is also known as ‘Demand pull’ or ‘Pull through’ system of production. In this system, production process actually starts after the order for the products are received. Based on the demand, production process starts and the requirement for raw materials is sent to the purchase department for purchase. The steps followed in this system are as follows:

Question 10.
Discuss ABC Analysis as a system of Inventory Control. [CA Inter May 2000, Nov. 2004, Nov. 2005, May 2008, Nov, 2011, May 2017, 4 Marks]
Answer:
It is an important technique of inventory control on selective basis whereby the measure of control over an item of inventory varies with its usage value. It exercises discriminatory control over different items of stores grouped on the basis of the investment involved.

Usually the items of material are grouped into three categories viz A, B and C according to their use value during a period:

• ‘A’ Category of items consists of only a small percentage ie., about 10% of the total items of material handled by the stores but require heavy investment i.e., about 70% of inventory value, because of their high prices and heavy requirement.
• ‘B’ Category of items comprises of about 20% of the total items of material handled by stores. The percentage of investment required is about 20% of the total investment in inventories.
• ‘C’ category of items does not require much investment. It may be about 10% of total inventory value but they are nearly 70% of the total items handled by stores.

Question 11.
What are the advantages of ABC analysis. [ICAIModule]
Answer:

• Continuity in production: It ensures that, without there being any danger of interruption of production for want of materials or stores, minimum investment will be made in inventories.
• Lower cost: The cost of placing orders, receiving goods and maintaining stocks is minimised specially if the system is coupled with the determination of proper economic order quantities.
• Less attention required: Management time is saved since attention need to be paid only to some of the items rather than all the items.
• Systematic working: With the introduction of the ABC system, much of the work connected with purchases can be systematized on a routine basis, to be handled by subordinate staff.

Question 12.
How is slow-moving and non-moving item of stores detected and what steps are necessary to reduce such stocks? (CA Inter Nov. 2001, 4 Marks]
Answer:
Slow moving and non-moving items of stores can be detected in the following ways:

• By preparing & scanning periodic reports showing the status of different items of stores.
• By calculating the stock holding of various items in terms of numbers of days/months of consumption as a percentage.
• By computing ratios periodically, relating to the issues of average stock held
• By implementing the use of a well designed information system.

Steps to reduce stock of slow moving and non-moving items of stores:

• Proper procedures and guidelines should be laid down for the disposal of non-moving items, before they further deteriorates in value.
• Diversity in production to use up such materials.
• Use these materials as substitute in place of other materials.

Question 13.
Write a short note on VED analysis of Inventory Control. (CA Inter July 2021, 5 Marks]
Answer:
Vital, Essential and Desirable (VED): Under this system of inventory analysis, inventories are classified on the basis of its criticality for the production function and final product. This classification is done for spare parts which are used for production.

• Vital: Items are classihed as vital when its unavailability can interrupt the production process and cause a production loss. Items under this category are strictly controlled by setting re-order level.
• Essential: Items under this category are essential but not vital. The unavailability can cause sub-standardization and loss of efficiency in production process. Items under this category are reviewed periodically and get the second priority.
• Desirable: Items under this category are optional in nature, unavailability does not cause any production or efficiency loss.

Question 14.
Describe perpetual inventory records and continuous stock verification. [CA Inter May 2001, 3 Marks]
Answer:
Perpetual Inventory Records:
Perpetual inventory represents a system of records maintained by the stores department. It comprises of:

• Bin Cards, and
• Stores Ledger.

The success of perpetual inventory depends upon the following:
(a) The Stores Ledger showing quantities and amount of each item.
(b) Stock Control cards (or Bin Cards).
(c) Reconciling the quantity balances shown by stores ledger and bin cards.
(d) Checking the physical balances of a number of items every day systematically and by rotation.
(e) Explaining promptly the causes of discrepancies, if any, between physical balances and the book figures.
(f) Making corrective entries wherever required and
(g) Removing the causes of the discrepancies.

Continuous Stock Verification:
The checking of physical inventory is an essential feature of every sound system of material control. The system of continuous stock-taking consists of physical verification of items of inventory. The stock verification may be done by internal audit department but are independent of the store and pro-duction staff. Stock verification is done at appropriate interval of time without prior notice. The element of surprise is essential for effective control of the system.

Question 15.
Discuss the advantages of perpetual inventory records and continuous stock verification, [CA Inter Nov, 2006, 4 Marks]
Answer:
Advantages of Perpetual Inventory Records:

• Physical stocks can be counted and book balances can be adjusted as and when desired without waiting for the entire stock-taking to be done.
• Quick compilation of Profit and Loss Account for interim period due to prompt availability of stock figures.
• Discrepancies are easily located and thus corrective action can be promptly taken.
• It reveals the existence of surplus, dormant, obsolete and slow-moving materials, so that remedial measures may be taken in time.
• Fixation of the various stock levels and checking of actual balances in hand with these levels assist the store keeper in maintaining stocks within limits and in initiating purchase requisitions for correct quantity at the appropriate time.

Advantages of Continuous Stock Taking:

• Closure of normal functioning is not necessary.
• Stock discrepancies are likely to be brought to the notice and corrected much earlier than under the annual stock-taking system.
• The system generally has a sobering influence on the stores staff because of the element of surprise present therein.
• The movement of stores items can be watched more closely by the stores auditor so that chances of obsolescence buying are reduced.
• Final Accounts can be ready quickly. Interim accounts are possible quite conveniently.

Question 16.
“Perpetual inventory system comprises Bin Card and Stores Ledger, but the efficacy of the system depends on continuous stock-taking.” Comment. [CA Inter May 2013, 4 MarksJ
Answer:
Perpetual Inventory system represents a system of records maintained by the stores department.

Records comprise of

• Bin Cards and
• Stores Ledger.

Bin Card maintains a quantitative record of receipts, issues and closing balances of each item of stores. Like a bin card, the Stores Ledger is maintained to record all receipt and issue transactions in respect of materials. It is filled up with the help of goods received note and material requisitions. But a perpetual inventory system’s efficacy depends on the system of continuous stock taking.

Continuous stock taking means the physical checking of the records ie. Bin cards and store ledger with actual physical stock. Perpetual inventory is essentially necessary for material control. It incidentally helps continuous stock taking.

The main advantages of continuous stock taking are as follows:

1. Closure of normal functioning is not necessary.
2. Stock discrepancies are likely to be brought to the notice and corrected much earlier than under the annual stock-taking system.
3. The system generally has a sobering influence on the stores staff because of the element of surprise present therein.
4. The movement of stores items can be watched more closely by the stores auditor so that chances of obsolescence buying are reduced.
5. Final Accounts can be ready quickly. Interim accounts are possible quite conveniently.

Question 17.
Explain FIFO and UFO method of stores issue. [CA Inter May 2018> 2.5 Marks]
Answer:
First-in First-out (FIFO) method: It is a method of pricing the issues of mate-rials, in the order in which they are purchased. In other words, the materials are issued in the order in which they arrive in the store or the items longest in stock are issued first. Thus each issue of material only recovers the purchase price which does not reflect the current market price.

It is suitable in times of falling price since the material cost charged to pro-duction will be high while the replacement cost of materials will be low. But, in case of rising prices, if this method is adopted, the charge to production will be high while the replacement cost of material will be low.
Consequently, it would be difficult to purchase the same volume of materials (as in the current period) in future without having additional capital resources.

Last-in-First-out (LIFO) method: It is a method of pricing the issues of materials on the basis of assumption that the items of the last batch (lot) purchased are the first to be issued. Therefore, under this method, the prices of the last batch (lot) are used for pricing the issues, until it is exhausted. Where the quantity of issue is more than the quantity of the latest lot, then earlier lot and its price will also be taken into consideration.
During inflationary period or period of rising prices, the use of LIFO would help to ensure that the cost of production determined on the above basis is approximately the current one.

Question 18.
Explain, why the Last in First out (LIFO) has an edge over First in First out (FIFO) or any other method of pricing material issues. [CA inter Nov, 2907, 3 Marks]
Answer:
LIFO has following advantages:
(a) The cost of the material issued will be reflecting the current market price.
(b) The use of the method during the period of rising prices does not reflect undue high profit in the income statement.
(c) In the case of falling price, profit tend to rise due to lower material cost, yet the finished goods appear to be more competitive and are at market price.
(d) During the period of inflation, LIFO will tend to show the correct profit.

Question 19.
Explain the meaning of waste, spoilage, defectives and scrap and give the accounting treatment for each one.
[CA Infer Nov, 2019, Nov. 2015, May 2009, Nov. 2008, May 2007, May 2005, Nov. 2003, May 2003, May 2000, 8 Marks]
Answer:
Waste: It is the portion of raw material which is lost during storage or production and discarded. The waste may or may not have any value.

Accounting Treatment:

• Normal Wastage: Cost of normal waste is absorbed by good production units.
• Abnormal Wastage: The cost of abnormal loss is transferred to Costing Profit and loss account.
• Spoilage: Spoilage is the term used for materials which are badly damaged in manufacturing operations, and they cannot be rectified economically and hence taken out of the process to be disposed of without further processing.

Accounting Treatment:
Normal Spoilage: Normal spoilage (ie., which is inherent in the operation) costs are included in costs, either by charging it to the production order or to the production overhead so that it is spread over all the products. Any value realised from spoilage is credited to production order or production overhead account, as the case may be.

Abnormal Spoilage: Abnormal Spoilage (ie., arising out of causes not inherent in the manufacturing process) costs are charged to Costing Profit and Loss Account. When spoiled work is the result of rigid specification, the cost of spoiled work is absorbed by good production while the cost of disposal is charged to production overhead.

Defectives: Defectives are those units or portions of production which do not meet the quality standards due to sub-standard materials, bad-supervision, bad-planning, poor workmanship, inadequate-equipment and careless inspection.

Accounting Treatment:

• Normal Defects: An amount equal to the cost less realisable value on sale of defectives is charged to material cost of good production.
• Abnormal Defects: Material Cost of abnormal defectives are not included in material cost but treated as loss after giving credit to the realisable value of such defectives and is transferred to costing profit and loss account.
• Scrap: Scraps are the materials which are discarded and disposed of without further treatment. Generally, scrap has either no value or insignificant value. Sometimes, it may be reintroduced into the process as raw material.

Accounting Treatment:

• Normal Scrap: The cost of scrap is borne by good units and income arises on account of realisable value is deducted from the cost. ‘
• Abnormal Scrap: The scrap account should be charged with full cost and the credit is given to the job or process concerned. The profit or loss in the scrap account due to realization will be transferred to the Costing Profit and Loss Account.

Question 20.
Explain obsolescence and circumstances under which materials become obsolete, state the steps to be taken for its treatment. [CA Inter Nov, 2018, 5 Marks]
Answer:
Obsolescence is the loss in the intrinsic value of an asset due to its supersession. In other words, it refers to the loss in the value of an asset due to technological advancements.

Materials may become obsolete under any of the following circumstances:

• when it is a spare part or component of a machinery used in manufacture and that machinery become obsolete,
• where it is used in the manufacture of a product which has now become obsolete
• where the material itself is replaced by another material due to either improved quality or fall in price.

Treatment:
In all three cases, the value of the obsolete material held in a stock is a total loss and immediate steps should be taken to dispose it off at the best available price. The loss arising out of obsolete materials is an abnormal loss and it does not form part of the cost of manufacture.

Question 21.
Differentiate between ‘scrap’ and ‘defectives’ and how they are treated in cost accounting. [CA Inter Nov. 2015, Nov. 2008, 4 Marks]
Answer:
Difference between Scrap and Defectives

Scrap	Defectives
It is the loss, connected with the output	It is the loss connected with the output as well as input.
Scraps are not intended but cannot be elim­inated due to nature of material or process itself.	Defectives also are not intended but can be eliminated through proper control system.
Generally scraps are not used or rectified.	Defectives can be used after rectifi­cation.
Scraps have insignificant recoverable value.	Defectives are sold at a lower value from that of the good one.

Practical Questions

Question 1.
SKD Company Ltd., not registered under GST, purchased material P from a company which is registered under GST. The following information is available for the one lot of 1,000 units of material purchased:

Listed price of one lot	₹ 50,000
Trade discount	@ 10% on Listed price
CGST and SGST (Credit Not available)	12%(6% CGST + 6% SGST)
Cash discount (Will be given only if payment is made within 30 days.)	@10%
Freight and Insurance	₹ 3,400
Toll Tax paid	₹ 1,000
Demurrage	₹ 1,000
Commission and brokerage on purchases	₹ 2,000
Amount deposited for returnable containers	₹ 6,000
Amount of refund on returning the container	14,000
Other Expenses	@ 2% of total cost

20% of material shortage is due to normal reasons.
The payment to the supplier was made within 20 days of the purchases.
You are required to calculate cost per unit of material purchased to SKD Company Ltd. [CA InterRTPMay 2022]
Answer:
SKD Company Ltd.

Notes:

• GST is payable on net price i.e., listed price less discount.
• Cash discount is treated as interest and finance charges and hence it is to be ignored.
• Demurrage is not to be included in cost of purchase.
• Shortage due to normal reasons should not be deducted from cost and it is to be absorbed by good units.

Question 2.
The following information relating to a type of Raw material is available:

Annual demand	2,000 units
Unit price	₹ 20
Ordering cost per order	₹ 20
Storage cost	2% p.a.
Interest rate	8% p.a.
Lead time	Half- month

Calculate economic order quantity and total annual inventory coat of the raw material. [CA Inter Nov. 2019, Nov. 2009, 5 Marks]
Answer:
Annual demand (A) = 2,000 units
Ordering Cost (O) = ₹ 20
Carrying cost per unit per annum (c × i) = [Storage cost + Interest cost]
= [(₹ 20 × 296) + (₹ 20 × 8%)]
= ₹ 2

EOQ = \(\sqrt{\frac{2 \mathrm{AO}}{\mathrm{c} \times \mathrm{i}}}\)
= \(\sqrt{\frac{2 \times 2,000 \times ₹ 20}{₹ 2}}\)
= \(\sqrt{\frac{80,000}{2}}\) = 200 units

Total Annual Inventory cost

Purchase cost (₹ 2,000 units × ₹ 20)	₹ 40,000
Total Ordering cost (\(\frac{2,000}{200}\) × ₹ 20)	₹ 200
Total Carrying cost (\(\frac{200}{2}\) × ₹ 20 × 10%)	₹ 200
	₹ 40,400

Question 3.
(i) Compute EOQ and the total cost for the following:
Annual Demand = 5,000 units
Unit price = ₹ 20.00
Order cost = ₹ 16.00
Storage rate = 2% per annum
Interest rate = 12% per annum
Obsolescence rate = 6% per annum
(ii) Determine the total cost that would result for the items if a new price of ₹ 12.80 is used.
Answer:
(i) Annual Demand (A) = 5,000 units
Ordering Cost (O) = ₹ 16
Carrying cost per unit p.a. (c × i)
= [Storage cost (2%) + Int. cost (1296) + Obsolescence cost (696)] – 20%
= ₹ 20 × 20% = ₹ 4 per unit p.a.
E.O.Q = \(\sqrt{\frac{2 \mathrm{AO}}{\mathrm{c} \times \mathrm{i}}}=\sqrt{\frac{2 \times 5,000 \times ₹ 16}{₹ 4}}=\sqrt{40,000}\) = 200 units

Total Annual Inventory cost:

Purchase cost (5,000 units × ₹ 20.00)	₹ 1,00,000
Ordering cost (\(\frac{5,000}{200}\) × ₹ 16)	₹ 400
Carrying cost [\(\frac{200}{2}\) × ₹ 4]	₹ 400
Total cost	₹ 1,00,800

(ii) If the new price of ₹ 12.80 is used:
C = 2096 of ₹ 12.80 = ₹ 2.56 per unit p.a.
EOQ = \(\sqrt{\frac{2 \times 5,000 \times ₹ 16}{₹ 2.56}}\) = 250 units

Total Annual Inventory cost:

Purchase cost (5,000 units × ₹ 12.80)	₹ 64,000
Ordering cost (\(\frac{5,000}{250}\) × ₹ 16)	₹ 320
Carrying cost [\(\frac{250}{2}\) × ₹ 2.56]	₹ 320
Total cost	₹ 64,640

Question 4.
The demand for a certain product is random. It has been estimated that the monthly demand of the product has a normal distribution with a mean of 390 units. The unit price of product is ₹ 25. Ordering cost is ₹ 40 per order and inventory carrying cost is estimated to be 35 per cent per year.
Required; Calculate Economic Order Quantity (EOQ). [CA Inter Nov. 2907,2 Marks]
Answer:
Calculation of Economic Order Quantity (EOQ)
Monthly demand = 390 units, Annual demand (A) = 390 × 12 = 4,680 units
Ordering cost (O) = ₹ 40 per order
Cost per unit = ₹ 25.
Inventory carrying cost of one unit (CC) = ₹ 25 × 3596 = ₹ 8.75
EOQ = \(\sqrt{\frac{2 \times \mathrm{A} \times \mathrm{O}}{\mathrm{CC}}}=\sqrt{\frac{2 \times 4,680 \times 40}{8.75}}\) = 206.85 or 207 units.

Question 5.
M/s. X Private Limited is manufacturing a special product which requires a component “SKY BLUE”. The following particulars are available for the year ended 31st March, 2021:

Annual demand of “SKY BLUE”	12.000 Units
Cost of placing an order	₹ 1,800
Cost per unit of “SKY BLUE”	₹ 640
Carrying cost per annum	18.75%

The company has been offered a quantity discount of 5% on the purchases of “SKY BLUE” provided the order size is 3,000 components at a time.
You are required to:
(i) Compute the Economic Order Quantity.
(ii) Advise whether the quantity discount offer can be accepted.
[CA Inter May 2018, 5 Marks]
Answer:
Annual demand (A) = 12,000 units
Ordering Cost (O) = ₹ 1,800
Carrying cost per unit per annum (c × i) = ₹ 640 × 18.7596 = ₹ 120
(i) Calculation of Economic Order Quantity:
EOQ = \(\sqrt{\frac{2 \mathrm{AO}}{\mathrm{c} \times \mathrm{i}}}=\sqrt{\frac{2 \times 12,000 \times ₹ 1,800}{₹ 120}}\) = 600 units

(it) Evaluation of Profitability of Different Options of Order Quantity

	When EOQ is ordered	When discount of 5% is accepted and order size is 3,000 units
Size of the order	600 units	3,000 units
No. of orders	20(12,000 ÷ 600)	4(12,000 ÷ 3,000)
Total Purchase Cost	₹ 76,80,000(12,000 kgs × ₹ 640)	₹ 72,96,000(12,000 kgs × ₹ 608)
Total ordering cost	₹ 36,000(₹ 1,800 × 20 orders)	₹ 7,200(X 1,800 X 4 orders)
Total carrying cost	₹ 36,000(600 units × ½ x ₹ 640 × 18.75%)	₹ 1,71,000(3,000 units × ½  x ₹ 608 × 18.7596)
Total Cost	₹ 77,52,000	₹ 74,74,200

Note: Here, it is assumed that the carrying cost varies due to discount in the purchase price. Alternatively, it may be assumed that the carrying cost per unit is fixed and does not vary due to discount in purchase price. In such case the Total carrying cost, for order size is 3000 units, shall be ₹ 1,80,000 (3,000 units × ½ × ₹ 640 × 18.75%)

Advice: The total cost is lower if Company accept an offer of 5% discount by the supplier. The company is advised not to accept the EOQ.

Question 6.
PQR Limited produces a product which has a monthly demand of 52,000 units. The product requires a component X which is purchased at ₹ 15 per unit. For every finished product, 2 units of Component X are required. The Ordering cost Is ₹ 350 per order and the carrying cost is 12% p.a.
Required;
(i) Calculate the economic order quantity for component X.
(ii) If the minimum lot size to be supplied is 52,000 units, what is the extra cost, the company has to incur?
(iii) What is the minimum carrying cost, the Company has to incur? [CA Inter May 2006, 8 Marks]
Answer:
Annual demand (A) = 52,000 units × 2 × 12 = 12,48,000 units
Ordering Cost (O) = ₹ 350
Carrying cost per unit per annum (c × i) = ₹ 15 × 12% = ₹ 1.80
(i) EOQ = \(\sqrt{\frac{2 \mathrm{AO}}{\mathrm{c} \times \mathrm{i}}}\)
= \(\sqrt{\frac{2 \times 12,48,000 \times 350}{₹ 1.80}}\)
= 22,030 units

(ii) Extra cost incurred by the company:

	Minimum lot size	EOQ
Size of the order	52,000 units	22,030 units
Total ordering cost	₹ 8,400 (\( \frac{52,000 \times 2 \times 12}{52,000} \)         × 350)	₹19,827.50 (\( \frac{52,000 \times 2 \times 12}{22,030} \) × 350)
Total carrying cost	₹ 46,800 (52,000 units × ½ × ₹ 15 X 12%)	₹ 19,827.50 (22,030 units × ½ × ₹ 15 × 12%) 1296))
Total Cost	₹ 55,200	₹ 39,655

Extra cost incurred = ₹ 55,200 – ₹ 39,655= ₹ 15,545

(iii) Minimum carrying cost, the company has to incur:
= \(\frac{\mathrm{EOQ}}{2}\) × c × i = \(\frac{22,030}{2}\) × ₹ 15 × 12% = ₹ 19,827.50

Question 7.
A company manufactures a product from a raw material, which is purchased at ₹ 60 per kg. The company incurs a handling cost of ₹ 360 plus freight of ₹ 390 per order. The incremental carrying cost of inventory of raw material is ₹ 0.50 per kg. per month. In addition, the cost of working capital finance on the investment in inventory of raw material is ₹ 9 per kg. per annum. The annual production of the product is 1,00,000 units and 2.5 units are obtained from one kg. of few material.
Required:
(i) Calculate the economic order quantity of raw material
(ii) Advise, how frequently should orders for procurement be placed
(iii) If the company proposes to rationalise placement of orders on quarterly basis, what percentage or discount in the price of raw material should be negotiated?
Assume 360 days in a year. [CA Inter May 2014, Nov. 2001, 8 Marks]
Answer:
Annual requirement of raw material in kg. (A) = 1,00,000/2.5 units per kg = 40,000 kg
Ordering Cost (Handling & freight cost) (O) = ₹ 360 + ₹ 390 = ₹ 750
Carrying cost per unit per annum (c × i) = Inventory carrying cost+ working capital cost
= (₹ 0.5 × 12 months) + ₹ 9
= ₹ 15 per kg

(i) EOQ = \(\sqrt{\frac{2 \mathrm{AO}}{\mathrm{c} \times \mathrm{i}}}\)
= \(\sqrt{\frac{2 \times 40,000 \times ₹ 750}{₹ 15}}\) = 2,000 kg

(ii) Frequency of orders for procurement:
No. of order per annum = \(\frac{\text { Annual requirement }}{\mathrm{EOQ}}\)
= \(\frac{40,000 \mathrm{~kg} \cdot}{2,000}\) = 20 orders
Frequency of placing order (in days) = \(\frac{360 \text { days }}{20 \text { times }}\) = 18 days

(iii) Percentage of discount in the price of raw materials to be negotiated:

	Quarter order	EOQ
Size of the order	10,000 kg.	2,000 kg.
No. of orders	4	20
Total ordering cost	₹ 3,000 (₹ 750 × 4 orders)	₹ 15,000 (₹ 750 × 20 orders)
Total carrying cost	₹ 75,000 (10,000 kg × ½  × ₹ 15)	₹ 15,000 (2,000 kg × ½  × ₹ 15)
Total Cost	₹ 78,000	₹ 30,000

Increase in total cost if quarterly orders are placed = ₹ 78,000 – ₹ 30,000 = ₹ 48,000
Reduction expected in purchase price of raw material (per kg) = \(\frac{\text { Increase in total cost }}{\text { Annual requirement }}\)
= \(\frac{₹ 48,000}{40,000 \mathrm{~kg}}\) = 1.20 per kg
Discount in the price of raw material to be = \(\frac{₹ 1.20}{₹ 60}\) = 2% negotiated

Question 8.
The annual carrying cost of material ‘X’ is ₹ 3.6 per unit and its total carrying cost is ₹ 9,000 per annum. What would be the Economic order quantity for material ‘X’, if there is no safety stock of material ‘X’? [CA Inter Nov. 2008, 2 Marks]
Answer:
Total Carrying Cost at EOQ level = \(\frac{\mathrm{EOQ}}{2}\) × Carrying cost per unit
₹ 9,000 = \(\frac{\mathrm{EOQ}}{2}\) × ₹ 3.60
EOQ = (₹ 9,000 × 2) ÷ ₹ 3.60 = 5,000 units

Question 9.
HBL Limited produces product ‘M’ which has a quarterly demand of 20,0 units. Each product requires 3 kg. and 4 kg. of material X and Y respectively. Material X is supplied by a local supplier and can be procured at factory stores at any time, hence, no need to keep inventory for material X. The material Y is not locally available, it requires to be purchased from other states in a specially designed truck container with a capacity of 10 tons.
The cost and other information related with the materials are as follows:

	Material X	Material Y
Purchase price per kg. (excluding GST)	₹ 140	₹ 640
Rate of GST	18%	18%
Freight per trip (fixed, irrespective of quantity)	–	₹ 28,000
Loss of materials in transit	–	2%
Loss in process on purchased quantity	4%	5%

Other information:

• The company has to pay 15% p,a. to bank for cash credit facility.
• Input credit is available on GST paid on materials.

Required:
(i) Calculate cost per kg. of material X and Y
(ii) Calculate the Economic Order quantity for both the materials [CA Inter Nov. 2019, RTPJ
Answer:
Annual demand for product M – 20,000 units × 4 = 80,000 units
Calculation of Annual purchase quantity

	Material X	Material Y
Quantity required for per unit of product M	3 kg.	4 kg.
Net quantity for materials required	2,40,000 kg.	3,20,000 kg.
Add: Loss in transit	–	6,882 kg.
Add: Loss in process	10,000 kg.	17,204 kg.
Purchase quantity	2,50,000 kg.	3,44,086 kg.

Note: ITC on GST paid is available and therefore, it will not be included in cost of material.

(i) Calculation of cost per kg. of Material X and Y:

	Material X	Material Y
Purchase quantity	2,50,000 kg.	3,44,085 kg.
Rate per kg.	₹ 140	₹ 640
Purchase price	₹ 3,50,00,000	₹ 22,02,14,400
Add: Freight	0	₹ 9,80,000
Total cost	₹ 3,50,00,000	₹ 22,11,94,400
Net Quantity	2,40,000 kg.	3,20,000 kg
Cost per kg.	₹ 145.83	₹ 691.23

No. of trucks = \(\frac{3,44,085 \mathrm{~kg} .}{10 \text { tons } \times 1,000}\) = 34.40 trucks or 35 trucks.
Therefore, total freight = 35 trucks × ₹ 28,000 = ₹ 9,80,000

(ii) Calculation of Economic Order Quantity (EOQ) for Material X and Y:

	Material X	Material Y
Annual Requirement	2,50,000 kg	3,44,085 kg.
Ordering cost	0	₹ 28,000
Cost per unit	₹ 145.83	₹ 691.23
Carrying cost	15%	15%
Carrying cost per unit p.a.	₹ 21.88	₹ 103.68

EQQ = \(\sqrt{\frac{2 \times \text { Annual Requirement } \times \text { Order cost }}{\text { Carrying cost per unit p.a }}}\)
For Material X
As the ordering cost is ‘O’, EOQ cannot be defined.
For Material Y
EOQ = \(\sqrt{\frac{2 \times 3,44,085 \times ₹ 28,000}{₹ 103.68}}\) = 13,633 units

Question 10.
KL Limited produces product ‘M’ which has a quarterly demand of 8,000 units. The Product requires 3 kgs quantity of material ‘X’ for every finished unit of product. The other information is as follows:

Cost of material ‘X’	₹ 20 per kg
Cost of placing an order	₹ 1,000 per order
Carrying cost	15% per annum of average inventory

Required:
(a) Calculate the Economic Order Quantity for material ‘X’.
(b) Should the company accept an offer of 2% discount by the supplier, if he wants to supply the annual requirement of material ‘X’ in 4 equal quarterly instalments? [CA Inter Nov. 2012, 5 Marks]
Answer:
Annual Demand of material ‘X’ (A):
= 8,000 units per quarter × 4 quarters in a year × 3 kg. for every finished product
= 96,000 kgs.
Ordering Cost (O) = ₹ 1,000
Carrying cost per unit per annum (c X i) = ₹ 20 × 1596 = ₹ 3

(i) Calculation of EOQ for material ‘X’:
EOQ = \(\sqrt{\frac{2 \mathrm{AO}}{\mathrm{c} \times \mathrm{i}}}=\sqrt{\frac{2 \times 96,000 \times ₹ 1,000}{₹ 3}} .\) = 8,000 kgs.

(ii) Evaluation of Cost under different options of ‘order quantity’.

	When EOQ is ordered	When discount of 2% is accepted and supply is made in 4 equal instalments
Size of the order	8,000 Kgs.	24,000 (96,000 ÷ 4)
No. of orders	12 (96,000 ÷ 8,000)	4 (96,000 ÷ 24,000)
Total Purchase Cost	₹ 19,20,000 (96, 000 kgs × ₹ 20)	₹ 18,81,600 (96, 000 kgs × ₹ 19.6)
Total ordering cost	₹ 12,000 (₹ 1,000 × 12 orders)	₹ 4,000 (₹ 1,000 × 4 orders)
Total carrying cost	₹ 12,000 (8,000 units × ½  × ₹ 20 × 15%)	₹ 35,280 (24,000 units × ½ × ₹ 19.6 × 15%)
Total Cost	₹ 19,44,000	₹ 19,20,880

Note: Here, it is assumed that the carrying cost varies due to discount in the purchase price. Alternatively, it may be assumed that the carrying cost per unit is fixed and does not vary due to discount in purchase price. In such case the Total carrying cost, for order size is 24,000 units, shall be ₹ 36,000 (24,000 units × ½ × ₹ 20 × 15%)

Advice: The total Cost is lower if Company accept an offer of 2% discount by the supplier, when supply of the annual requirement of material ‘X’ is made in 4 equal instalments.

Question 11.
SK Enterprise manufactures a special product “ZE”. The following particulars were collected for the year 2021:

Annual consumption	12,000 units (360 days)
Cost per unit	₹ 1
Ordering cost	₹ 12 per order
Inventory carrying cost	24%
Normal lead time	15 days
Safety stock	30 days consumption

Required:
(i) Re-order quantity
(ii) Re-order level
(iii) What should be the inventory materia] order is received?
Answer:
Annual demand (A) = 12,000 units
Ordering Cost (O) = ₹ 12
Carrying cost per unit per annum (c × i) = ₹ 1 × 24% = ₹ 0.24

(i) ROQ or EOQ = \(\sqrt{\frac{2 \mathrm{AO}}{\mathrm{c} \times \mathrm{i}}}\)
= \(\sqrt{\frac{2 \times 12,000 \times ₹ 12}{₹ 0.24}}\) = 1,095.4 units or 1,100 units
= Safety stock + Normal lead time consumption
=1,000 + 500 = 1,500 units

(ii) ROL = Safety stock + Normal lead time consumption
= (\(\frac{12,000}{360}\) × 30) + (\(\frac{12,000}{360}\) × 15)
= 1,000 + 500 = 1,500 units

(ii) Inventory level required immediately before the material ordered is received i.e. safety stock
Safety Stock = [\(\frac{12,000}{360}\) × 30) = 1,000 units

Question 12.
ABC Limited has received an offer of quantity discounts on its order of materials as under:

Price per tonne (₹)	Tonnes
4,800	Less than 50
4,680	50 and less than 100
4,560	100 and less than 200
4,440	200 and less than 300
4,320	300 and above

The annual requirement for the material is 500 Tonnes. The ordering cost per order is ? 6,250 and the stock holding is estimated at 25% of the material cost per annum.
Required:
(1) Compute the most economical purchase level.
(2) Compute EQQ if there are no quantity discounts and the price per tonne is ₹ 5,250. [CA Inter Nov. 2010, Nov. 2004, 5 Marks]
Answer:
(i) Calculation of most economical purchase level:
A = Annual requirement = 500 tonnes.

Since the total cost of 500 tonnes including ordering and carrying cost is minimum (? 23,32,437.50) when the order size is 300 tonnes. Therefore, the most economical purchase level is 300 Tonnes.

(ii) Calculation of EOQ, where no discount is available:
EOQ = \(\sqrt{\frac{2 \mathrm{AO}}{\mathrm{c} \times \mathrm{i}}}=\sqrt{\frac{2 \times 500 \times ₹ 6,250}{₹ 5,250 \times 0.25}}\) = 69 tonnes

Question 13.
ZED Company supplies plastic crockery to fast food restaurants in met-ropolitan city. One of its products is a special bowl, disposable after initial use, for serving soups to its customers. Bowls are sold in pack 10 pieces at a price of ₹ 50 per pack.
The demand for plastic bowl has been forecasted at a fairly steady rate of 40,000 packs every year. The company purchases the bowl direct from manufacturer at ₹ 40 per pack within a three days lead time. The ordering and related cost is ₹ 8 per order. The storage cost is 10% per annum of average inventory investment.
Required:
(i) Calculate Economic Order Quantity.
(ii) Calculate number of orders needed every year.
(iii) Calculate the total cost of ordering and storage bowls for the year.
(iv) Determine when should the next order to be placed. Assuming that the company does maintain a safety stock and that the present inventory level is 333 packs with a year of 360 working days. [CA Inter May 2008, 8 Marks]
Answer:
Annual demand (A) = 40,000 packs
Ordering Cost (O) = ₹ 8
Carrying cost per unit per annum (c × i) = ₹ 40 × 10% = ₹ 4

(i) Economic Order Quantity:
EOQ = \(\sqrt{\frac{2 \times 40,000 \text { packs } \times ₹ 8}{₹ 4}}\) = 400 packs

(ii) Number of orders per year = \(\frac{\text { Annual requirement }}{\text { EOQ }}=\frac{40,000}{400}\) = 100 order

(iii) Ordering and storage costs:

Ordering costs (100 orders × ₹ 8)	₹ 800
Storage cost [(400 = 2) × ₹ 40 × 10%]	₹ 800
Total Cost	₹ 1,600

(iv) Timing of next order
(a) Day’s requirement served by each order.
Number of days requirement = \(\frac{\text { No. of working days }}{\text { No. of order in a year }}\)
= \(\frac{360}{100}\) = 3.6 days supply
This implies that each order of 400 packs supplies for requirements of 3.6 days only.

(b) Days requirement covered by inventory
= \(\frac{\text { Units in inventory }}{\text { Units required per day }}\)
= \(\frac{333 \text { units }}{\frac{40,000 \text { units }}{360 \text { days }}}\) = 3 days requirement

(c) Time interval for placing next order
= Inventory left for day’s requirement – Lead time of delivery = 3 days – 3 days = 0 days
This means that the next order for the replenishment of supplies has to be placed immediately.

Question 14.
A company manufactures 5,000 units of a product per month. The cost of placing an order is ₹ 100. The purchase price of the raw material is ₹ 10 per kg. The Re-order period is 4-8 weeks. The consumption of Raw materials varies from 100 kgs. to 450 kg per week, the average consumption being 275 kg. The carrying cost of inventory is 20% per annum.
You are required to calculate:
1. Re-order quantity
2. Re-order level
3. Maximum level
4. Minimum level .
5. Average stock level. [CA Inter Nov. 2006, Nov. 2002, 10 Marks]
Answer:
Annual consumption of raw material (A) [275 kg. × 52 weeks] = 14,300 kg.
Cost of placing an order (O) = ₹ 100
Carrying cost per kg. Per annum (c × i) = ₹ 10 × 20% = ₹2
(i) Re-order Quantity (ROQ):
ROQ or EOQ = \(\sqrt{\frac{2 \mathrm{AO}}{\mathrm{c} \times \mathrm{i}}}=\sqrt{\frac{2 \times 14,300 \times ₹ 100}{₹ 2}}\) = 1,196 kgs. (approx)

(ii) Re-order Level (ROL) = Maximum usage × Maximum re-order period
= 300 kg × 7 weeks = 2,100 kg.

(iii) Maximum Level = ROL + ROQ – (Minimum usage × Minimum re-order period)
= 2,100 kg. + 2,000 kg. – (200 kg. × 5 weeks)
= 3,100 kg.

(iv) Minimum Level = ROL – (Normal usage × Normal re-order period)
= 2,100 kg. – (250 kg. × 6 weeks)
= 600 kg.

(v) Average Stock Level = (Minimum level + Maximum level) = 2
= (600 kg. + 3,100 kg.) ÷ 2
= 1,850 kg.

Question 15.
M/s. SJ Private Limited manufactures 20,000 units of a product per month. The cost of placing an order is ₹ 1,500. The purchase price of the raw material is ₹ 100 per kg. The re-order period is 5 to 7 weeks. The consumption of raw materials varies from 200 kg to 300 kg per week, the average consumption being 250 kg. The carrying cost of inventory is 9.75% per annum.

You are required to calculate:
(i) Re-order quantity
(ii) Re-order level
(iii) Maximum level
(iv) Minimum level
(v) Average stock level [CA Inter Nov. 2018, 5 Marks]
Answer:
Annual consumption of raw material (A) [250 kg. × 52 weeks] = 13,000 kg.
Cost of placing an order (O) = ₹ 1,500
Carrying cost per kg. per annum (c × i) = ₹ 100 × 9.75% = ₹ 9.75

(i) Re-order Quantity (ROQ):
(ii) Re-order Level (ROL) = Maximum usage × Maximum re-order period
= 300 kg × 7 weeks = 2,100 kg.

(iii) Maximum Level = ROL + ROQ – (Minimum usage × Minimum re-order period)
= 2,100 kg. + 2,000 kg. – (200 kg. × 5 weeks)
= 3,100 kg.

(iv) Minimum Level = ROL – (Normal usage × Normal re-order period)
= 2,100 kg. – (250 kg. × 6 weeks)
= 600 kg.

(v) Average Stock Level = (Minimum level + Maximum level) = 2
= (600 kg. + 3,100 kg.) ÷ 2
= 1,850 kg.

Question 16.
Supreme Limited is a manufacturer of energy-saving bulbs. To manufacture the finished product one unit of component ‘LED’ is required. Annual requirement of component ‘LED’ is 72,000 units, the cost being ₹ 300 per unit. Other relevant details for the year 2020-2021 are:
Cost of placing an order ₹ 2,250
Carrying cost of inventory 12% per annum

Lead time:

Maximum	20 days
Minimum	8 days
Average	14 days
Emergency purchase	5 days

Consumption:

Maximum	400 units per day
Minimum	200 units per day
Average	300 units per day

You are required to calculate:
(i) Re-order quantity
(ii) Re-ordering level
(iii) Minimum stock level
(iv) Maximum stock level
(v) Danger level [CA Inter Nov. 2016, 5 Marks]
Answer:
Annual demand (A) = 72,000 units
Ordering Cost (0) = ₹ 2,250
Carrying cost per unit per annum (c × i) = ₹ 300 × 1296 = ₹ 36
(i) Re-order Quantity (ROQ):

(ii) Re-order Level (ROL) = Maximum usage × Maximum re-order period
= 400 units × 20 days
= 8,000 units

(in) Minimum Level = ROL – (Average usage × Average re-order period)
= 8,000 units – (300 units × 14 days)
= 3,800 units

(iv) Maximum Level = ROL + ROQ – (Minimum usage × Minimum re-order period)
= 8,000 units + 3,000 units – (200 units × 8 days)
= 9,400 units

(v) Danger Level = Average usage × Emergency delivery time
= 300 units × 5 days
= 1,500 units

Question 17.
POR Tubes Ltd. are the manufacturer of picture tubes for T.V. The following are the details of their operations during 2021-22:

Ordering cost	₹ 100 per order
Inventory carrying cost	20% p.a.
Cost of tubes	₹ 500 per tube
Normal usage	100 tubes per week
Minimum usage	50 tubes per week
Maximum usage	200 tubes per week
Lead time to supply	6-8 weeks

Required:
(i) Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of 5%, is it worth accepting?
(ii) Re-order level
(iii) Maximum level of stock
(iv) Minimum level of stock. [CA Inter May 2000, 4 Marks]
Answer:
Annual demand (A) = 100 tubes × 52 = 5,200 tubes
Ordering Cost (O) = ₹ 100
Carrying cost per unit per annum (c × i) = ₹ 500 × 20% = ₹ 100
(i) Calculation of EOQ for material ‘X’:
EOQ = \(\sqrt{\frac{2 \mathrm{AO}}{\mathrm{c} \times \mathrm{i}}}=\sqrt{\frac{2 \times 5,200 \times ₹ 100}{₹ 100}}\) = 102 tubes (approx)

Evaluation of Cost under different options of ‘order quantity’

	When EOQ is ordered	When discount of 5% is accepted and quarterly order size is 1,500 units
Size of the order	102	1,500
No. of orders	50.98 (5,200 102)	3.47 (5,200 ÷ 1,500)
Total Purchase Cost	₹ 26,00,000 (5,200 × ₹ 500)	₹ 24,70,000 (5,200 × ₹ 475)
Total Ordering Cost	₹ 5,098 (50.98 orders × ₹ 100)	₹ 347 (3.47 orders × ₹ 100)
Total Carrying Cost	₹ 5,100 (102/2 × ₹ 500 × 20%)	₹ 71,250 (1,500/2 × ₹ 475 × 20%)
Total cost	₹ 26,10,198	₹ 25,41,597

Since, Total inventory cost is lower, if the re-order quantity is fixed at 1,500 units, so the discount offer should be accepted :

(ii) Re-order Level (ROL) = Maximum usage × Maximum re-order period ‘
= 200 tubes × 8 weeks
= 1,600 tubes

(iii) Maximum Level = ROL + ROQ – (Minimum usage × Minimum re-order period)
= 1,600 + 102 – (50 tubes × 6 weeks)
= 1,402 tubes

(iv) Minimum Level = ROL – (Average usage × Average re-order period)
= 1,600 – (100 tubes × 7 weeks)
= 900 tubes

Question 18.
A Lid. produces a product ‘X’ using a raw material ‘D’. To produce one unit of X, 4 kg. of D is required. As per the sales forecast conducted by the company, it will be able to sale 20,006 units of X in the coming year.
The following are the information related to the raw material D:
(i) The Re-order quantity is 400 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 40 kg. more than the average consumption per day.
(iii) There is an opening stock of 2,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is ₹ 250 per kg.
There is an opening stock of 1,800 units of the finished product X.
The carrying cost of inventory is 14% p.a.
To place an order company has to incur ₹ 1,340 on paper and documentation work from the above information FIND OUT the followings in relation to raw material D:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ
[Take 300 days for a year] [CA Inter RTP May, 2021]
Answer:
Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘D’:

Sales forecast of the product ‘X’	20,000 units
Less: Opening stock of ‘X’	1,800 units
Fresh units of ‘X’ to be produced	18,200 units
Raw material required to produce 18,200 units of ‘X’( 18,200 units × 4 kg.)	72,800 kg.
Less: Opening Stock of ‘D’	2,000 kg.
Annual demand for raw material ‘D’	70,800 kg.

Annual demand of raw material ‘D’ (A) = 70,800 kg.
Ordering Cost (0) = ₹ 1,340
Carrying cost per unit per annum (c × i) = ₹ 250 × 14% = ₹ 35

(ii) Computation of Economic Order Quantity (EOQ):
EOQ = \(\sqrt{\frac{2 \times \text { Annual demand of } \mathrm{D}^{\prime} \times \text { Ordering cost }}{\text { Carrying cost per unit per annum }}}\)
= \(\sqrt{\frac{2 \times 70,800 \mathrm{~kg} . \times ₹ 1,340}{₹ 35}}\)
= 2,328 kg.

(iii) Re-Order level:
= (Maximum consumption per day × Maximum lead time)
= {(Annual Consumption of ‘D’/300 days + 40 kg.) × 8 days}
= {(70,800 kg./300 days + 40 kg.) × 8 days]
= 2,208 kg.

(iv) Minimum consumption per day of raw material ‘D’:
Average Consumption per day = 236 Kg.
Hence, Maximum Consumption per day = 236 kg. + 40 kg. = 276 kg.
So, Minimum consumption per day will be
Average Consumption = Min. consumption + Max. consumption/2
Or, 236 kg. = Min. consumption + 276 kg./2
Or, Min. consumption = 472 kg – 276 kg. = 196 kg.

(a) Re-order Quantity :
EOQ – 400 kg. = 2,328 kg. – 400 kg.
= 1,928 kg.

(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time)
= 2,208 kg. + 1,928 kg. – (196 kg. × 4 days)
= 4,136 kg. – 784 kg.
= 3,352 kg

(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 2,208 kg. – (236 kg. × 6 days)
= 792 kg.

(d) Impact on the profitability of the company by not ordering the EOQ

	When purchasing the ROQ	When purchasing the EOQ
Order quantity	1,928 kg.	2,328 kg.
No. of orders in a year	70,800 kg/1,928 kg = 36.72 orders	70,800 kg/2,328 kg = 30.41 orders
Ordering Cost	36.72 orders × ₹ 1,340 = ₹ 49,204.8	30.41 orders × ₹ 1,340 = ₹ 40,749.4
Average Inven­tory            –	1,928 kg/2 = 964 kg.	2,328 kg/2 = 1,164 kg.
Carrying Cost	964 kg × ₹ 35 = f 33,740	1,164 kg. × ₹ 35 = ₹ 40,740
Total Cost	₹ 82,944.8	₹ 81,489.4

Question 19.
A company uses four raw materials A, B, C and D for a particular product for which the following data apply:

Weekly production varies from 550 to 1,250 units, averaging 900 units of the said product. What would be the following quantities:-
(i) Minimum Stock of A?
(ii) Maximum Stock of B?
(iii) Re-order level of C?
(iv) Average stock level of A?
(v) Re-order level of D?
(vi) Minimum Stock level of D? [CA Inter Nov. 2020, RTP]
Ans.
(i) Minimum stock of A
Re-order level – (Average consumption × Average time required to obtain delivery)
= 60,000 kg. – (900 units × 12 kg. × 3 weeks)
= 27,600 kg.

(if) Maximum stock of B
Re-order level + Re-order quantity- (Min. Consumption × Min. Re-order period)
= 70,000 kg. + 8,000 kg – (550 units × 8 kg. × 5 weeks).
= 78,000 – 22,000
= 56,000 kg.

(iii) Re-order level of C
Maximum re-order period × Maximum Usage
= 7 weeks × (1,250 units × 6 kg.)
= 52,500 kg.
OR
= Minimum stock of C+ (Average consumption × Average delivery time)
= 25,500 kg. + [(900 units × 6 kg.) × 5 weeks]
= 52,500 kg.

(iv) Average stock level of A
= Minimum stock + Maximum stock/2 = 27,600 + 58,800/2 = 43,200 kg.
Working note:
Maximum stock of A = ROL + ROQ – (Minimum consumption × Minimum re-order period)
= 60,000 kg. + 12,000 kg. – [(550 units × 12 kg.) × 2 weeks]
= 58,800 kg.

(v) Re-order level of D
Maximum re-order period × Maximum Usage
= 3 weeks × (1,250 units × 5 kg.)
= 18,750 kg.

(vi) Minimum stock level of D
Re-order level – (Average consumption × Average time required to obtain delivery)
= 18,750 kg. – (900 units × 5 kg. × 2 weeks)
= 9,750 kg.

Question 20.
Following details are related to a manufacturing concern:

Re-order Level	1,60,000 units
Economic Order Quantity	90,000 units
Minimum Stock Level	1,00,000 units
Maximum Stock Level	1,90,000 units
Average Lead Time	6 days

Difference between minimum lead time and Maximum lead time 4 days
Calculate:
(i) Maximum consumption per day
(ii) Minimum consumption per day [CA Inter Nov. 2014, 5 Marks]
Answer:
Difference between Minimum lead time and Maximum lead time = 4 days
Max. lead time – Min. lead time = 4 days
Or, Max. lead time = Min. lead time + 4 days ………….(i)
Average’ lead time is given as 6 days i.e.
\(\frac{\text { Max. lead time }+ \text { Min. lead time }}{2}\) = 6 days ………..(ii)
Putting the value of (i) and (ii)
\(\frac{\text { Max. lead time }+4 \text { days }+ \text { Min. lead time }}{2}\) = 6 days
Or, Min. lead time + 4 days + Min. lead time =12 days
Or, 2 Min. lead time = 8 days
Or, Minimum lead time = 4 days
Therefore, Maximum lead time = 4 days + 4 days = 8 days

(i) Maximum consumption per day:
Re-order level (ROL) = Max. Re-order period × Maximum Consumption per day
1,60,000 units = 8 days × Maximum Consumption per day
Or, Maximum Consumption per day = \(\frac{1,60,000}{8 \text { days }}\) = 20,000 units

(ii) Minimum Consumption per day:
Maximum Stock Level = ROL + ROQ – (Min. lead time × Min. Consumption per day)
Or, 1,90,000 units = 1,60,000 units + 90,000 units – (4 days × Min. Consumption per day)
Or, 4 days × Min. Consumption per day = 2,50,000 units – 1,90,000 units
Or, Minimum Consumption per day = \(\frac{1,60,000}{4 \text { days }}\) = 15,000 units

Question 21.
An automobile company purchases 27,000 spare parts for its annual requirements. The cost per order is ₹ 240 and the annual carrying cost of average inventory is 12.5%. Each spare part costs ₹ 50.
At present, the order size is 3,000 spare parts.
(Assume that number of days in a year = 360 days)
Find out:
(i) How much the company’s cost would be saved by opting EOQ model?
(ii) The Re-order point under EOQ model if lead time is 12 days.
(iii) How frequently should orders for procurement be placed under EOQ model? [CA Inter Nov. 2020, 8 Marks]
Answer:
Annual demand (A) = 27,000 spare parts
Ordering Cost (O) = ₹ 240
Carrying cost per unit per annum (c × i) = ₹ 50 × 12.5% = ₹ 6.25
EOQ = \(\sqrt{\frac{2 \times 27,000 \times ₹ 240}{₹ 6.25}}\) = 1,440 spare parts

(i) Calculation of saving by opting EOQ:

	Existing Order policy	EOQ Model
No. of orders	9 (27.000 4- 3,000)	18.75 or 19 (27,000 ÷ 1,440)
Ordering Cost (₹)	2,160 (9 × ₹ 240)	4,500 [(27,000 ÷ 1,440) × 240]
Carrying cost (₹)	₹ 9,375 (3,000 units × ½ × ₹ 50 × 12.5%)	₹ 4,500 (1,440 units × ½  × ₹ 50 × 12.5%)
Total cost (₹)	11,535	9,000

Savings of Cost by opting EOQ Model = ₹ 11,535 – ₹ 9,000 = ₹ 2,535

(ii) Re-order point under EOQ:
ROL = Maximum consumption × Maximum lead time
Consumption per day = 27,000 ÷ 360 days = 75 units
ROL = 75 units × 12 days = 900 units

(iii) Frequency of Orders (in days) = 360 days ÷ No. of orders per year
= 360 days ÷ 19 = 18.95 or 19 days

Question 22.
Re-order quantity of material ‘X’ is 5,000 kg.; Maximum level 8,000 kg.; Minimum Usage 50 kg. per hour; minimum re-order period 4 days; daily working hours in the factory is 8 hours. You are required to calculate the re-order level of material ‘X’. [CA Inter May 2010, 2 Marks]
Answer:
Maximum Level = Re-order level ÷ Re-order Quantity – (Min. usage × Min. Re-order Period)
Re-order Level = Maximum Level – [Re-order Quantity – (Min. usage × Min. Re-order Period)
= 8,000 kg. – [5,000 kg. – (400 kg* × 4 days)]
= 8,000 kg. – 3,400 kg. = 4,600 kg.
Hence, Re-order level is 4,600 kg.
Minimum usage per day = 50 kg. × 8 hours = 400 kg.

Question 23.
Primex Limited produces product ‘P’. It uses annually 60,000 units of a material ‘Rex’ costing ₹ 10 per unit. Other relevant information are:

Cost of placing an order	₹ 800 per order
Carrying cost	15% per annum of average inventory
Re-order period	10 days
Safety stock	600 units

The company operates 300 days in a year.
You are required to calculate:
(i) Economic Order Quantity for material ‘Rex’.
(ii) Re-order Level
(iii) Maximum Stock Level
(iv) Average Stock Level [CA Inter Nov. 2013, 5 Marks]
Answer:
Annual demand (A) = 60,000
Ordering Cost (O) = ₹ 800
Carrying cost per unit per annum (c × i) = ₹ 10 × 15% = ₹ 1.50

(ii) Re-order Level = Safety Stock + [Normal daily Usage × Reorder period]
= 600 units + [(60,000 units × 300 days) × 10 days]
= 2,600 units

(iii) Maximum stock level = E.O.Q (Re-order Quantity) + Safety Stock
= 8,000 units + 600 units
= 8,600 units

(iv) Average stock level = (Minimum level* + Maximum level) × 2
= (600 units + 8,600 units) × 2
= 4,600 units
‘Minimum Level = Safety stock level = 600 units

Question 24.
ACE Ltd. produces a product EMM using a material ‘REX’. To produce one unit of EMM 0.80 kg of ‘REX’ is required. As per the sales forecast conducted by the company it will be able to sell 45,600 units of product EMM in the coming year. There is an opening stock of 3,150 units of product EMM and company desires to maintain closing stock equal to one month’s forecasted sale. Following is the information regarding material ‘REX’:

(i) Purchase price per kg	₹ 25
(ii) Cost of placing order	₹ 240 per order
(iii) Storage cost	2% per annum
(iv) Interest rate	10% per annum
(v) Average lead time	8 days
(vi) Difference between minimum and maximum lead time	6 days
(vii) Maximum usage	₹ 150 kg
(viii) Minimum usage	90 kg

Opening stock of material ‘REX’ is 2,100 kg and closing stock will be 10% more than opening stock.
Required:
(i) Compute the EOQ and total cost as per EOQ.
(ii) Compute the re-order level and maximum level.
(iii) If the company places an order of 7,500 kg of REX at a time, it gets 2% discount, should the offer be accepted? [CA Inter May 2019, 8 Marks]
Answer:
(i) Computation of EOQ:

Total cost as per EOQ:

Material purchase cost (₹ 25 × 37,210 kgs)	9,30,250
Add: Ordering costs (240 × 15.25 orders)	3,660
Add: Carrying cost (240 × 3)	3,660
Total Cost	9,37,570

(ii) Computation of Re-order level & Maximum level:
Re-order level (ROL) Max. usage × Max. lead time
= 150 kg × 11 days= 1,650kg
Maximum level:
= ROL ÷ Re-order Quantity (EOQ) – (Min. usage × Min. lead time)
= 1,650 kg + 2,440 kg – (90 kg × 5 days)
= 41090 – 4503,640 kg

(iii) Analysis of Offer at order level of 7,500 kgs:
No. of orders = \(\left(\frac{37,210}{7,500}\right)\) = 4.96
Carrying cost per unit per annum = ₹ 25 × 98% × 12% = ₹ 2.94
Total cost at 7,500 order level:

	Amount (₹)
Material purchase cost (₹ 25 × 9896) × 37,210 kgs)!	9,11,645
Add: Ordering costs (₹ 240 × 4.96 orders)	1,191
Add: Carrying cost (\( \frac{7,500}{2} \) × 2.941)	1,025
Total Cost	9,23,861

Since, ordering 7,500 kg. at a time, the company saves ₹ 13,709 (₹ 9,37,570 – ₹ 9,23,861). Hence, the company should accept the offer of 2% discount and 7,500 order size.

Working Notes:
1. No. of production units of product EMM:
= Forecasted sales + Closing stock – Opening stock
= 45,600 + \(\frac{45,600}{12}\) – 3,150
= 45,600 + 3,800 – 3,150
= 46,250 units of EMM

2. Quantity of REX to be purchased:

	In Kgs.
No. of units of EMM to be produced	46,250
Quantity of REX required to produce one unit of EMM	0.8 kg
Quantity of REX for 46,250 units	37,000 kg
Less: Opening stock of REX	(2,100)
Add: Closing Stock of REX	2,310
Quantity of REX to be purchased	37,210 kgs

3. Computation of Lead times:
Average Lead time = \(\frac{\text { Max. lead time }+ \text { Min. lead time }}{2}\) = 8 days
Or, Max. + Min. lead time = 16 days ………..(i)
And Max – Min. lead time = 6 days (given) ………(ii)
Solving both the equations

Thus,
Minimum lead time = 5 days and
Maximum lead time = 5 + 6 = 11 days

Question 25.
XYZ Ltd. uses two types of raw materials – ‘Material A’ and ‘Material B’ in the production process and has provided the following data for the year ended on 31st March, 2021:

Particulars	Material A (₹)	Material 13 (₹)
Opening stock as on 01.04.2020	30,000	32,000
Purchase during the year	90.000	51.000
Closing stock as on 31.03.2021	20,000	14.000

(i) You are required to calculate:
(a) The inventory turnover ratio of ‘Material A’ and ‘Material B’.
(b) The number of days for which the average inventory is held for both materials ‘A’ and ‘B’.

(ii) Based on above calculations, advice which of the two materials is fast moving. (Assume 360 days in a year.) [CA Inter Dec. 2021, May 2018, 5 Marks]
Answer:
(i) Calculation of Inventory Turnover Ratio and number of days

(ii) Advice
Comparatively, Material B is slower than Material A since Inventory holding period ot ‘B’ is 120 days in Comparison to ‘A’ i.e. 90 days. Different business has their own expected rates for inventory turnover like food shops have fast inventory turnover, shop selling furniture etc. will have slower inventory turnover while manufacturers of large items of plant will have very long inventory turnover.

If it is not as per the Industry Standard, then a slow turnover may indicate that excessive inventory is held and risk of obsolete or spoiled inventory will increase. Large quantity of slow moving material means that capital is locked up in business and not earning revenue. It is advisable to make proper investigations into slow moving materials and take steps to minimize the loss arises therefrom as.it may impact overall financial health of the organisation.

Question 26.
The quarterly production of a company’s product which has a steady market is 20,000 units. Each unit of a product requires 0.3 kg. of raw material. The cost of placing one order for raw material is ₹ 100 and the inventory carrying cost is ₹ 2 per annum. The lead time for procurement of raw material is 36 days and a safety stock of 1,000 kg. of raw materials is maintained by the company. The company has been able to negotiate the following discount structure with the raw material supplier:

Order quantity (kg)	Discount (₹)
Up to 6,000	NIL
6,1 – 8,000	400
8.1 – 16,000	2,000
16.1 – 30,000	3,200
30.1 – 45,000	4,000

You are required to:
(i) Calculate the re-order point taking 30 days in a month.
(ii) Prepare a statement showing the total cost of procurement and storage of rawr material after considering the discount of the company elects to place one, two, four or six orders in the year.
(iii) State the number of orders which the company should place to minimize the costs after taking EOQ also into consideration. [CA Inter May 2002, 8 Marks]
Answer:
Annual production of the product (₹ 20,000 units per quarter × 4 quarters) = 80,000 units
Annual requirement of the raw material (A) (80,000 units × 0.5 kg. per unit) = 40,000 kgs.
Ordering Cost (O) = ₹ 100
Carrying cost per unit per annum (c × i) = ₹ 2
EOQ = \(\sqrt{\frac{2 \times 40,000 \times ₹ 100}{₹ 2}}\) = 2,000 kgs.

Total Cost at EOQ level:

(i) Re-order level or point = Safety stock + Lead time consumption
= 1,000 kg + [(40,000 ÷ 360 days) × 36 days]
= 1,000 kg + 4,000 kg
= 5,000 kg.

(ii) Statement showing the total cost of procurement and storage of raw materials:

(iii) Number of orders which the company should place to minimize the costs after taking EOQ also into consideration is 20 orders each of size 2,000 kg. The total cost of procurement and storage in this case comes to ₹ 4,000, which is minimum.

Question 27.
IPL Ltd uses a small casting in one of its finished products. The casting is purchased from a foundry. IPL Ltd purchases 54,000 castings per year at a cost of ₹ 800 per casting.
The castings are used evenly throughout the year in the production process on a 360-days-per-year basis. The company estimates that it costs ₹ 9000 to place a single purchase order and about ₹ 300 to carry one casting in inventory for a year. The high carrying costs result from the need to keep the castings in carefully controlled temperature and humidity conditions, and from the high cost of insurance.
Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of delivery time and percentage of their occurrence are shown in the following tabulation:

(i) Compute the Economic Order Quantity (EOQ).
(ii) Assume the company is willing to assume a 15% risk of being out of stock. What would be the safety stock? The re-order point?
(iii) Assume the company is willing to assume a 5% risk of being out of stock. What would be the safety stock? The re-order point?
(iv) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one year?
(v) Refer to the original data. Assume that using process re-engineering the company reduc & its cost of placing a purchase order to only ? 600. In addition, company estimates that when the waste and inefficiency caused by inventories are considered, the true cost of carrying a unit in stock is ₹ 720 per year.
(a) Compute the new EOQ
(b) How frequently would the company be placing an order, as compared to the old purchasing policy? [CA Inter May 2004, 9 Marks]
Answer:
(i) Computation of Economic Order Quantity (EOQ)
A = Annual Usage = 54,000 castings
O = Ordering cost per order = ₹ 9,000
C = Carrying cost per unit = ₹ 300
EOQ = \(\sqrt{\frac{2 \mathrm{AO}}{\mathrm{C}}}\)
= \(\sqrt{\frac{2 \times 54,000 \times ₹ 9,000}{₹ 300}}\)
= 1,800 castings.

(ii) Safety Stock (Assuming a 15% risk of being out of stock)
Safety stock for one day = 54,000/360 days = 150 castings. .
Re-order point = Minimum stock level + (Average lead time × average usage)
=150 + (6 × 150)
= 1,050 casting.

(iii) Safety stock (Assuming a 5% risk of being out of stock)
Safety stock for 3 days = 150 × 3 days = 450 castings.
Re-order Point = 450 castings + 900 casting = 1, 350 castings

(iv) Total cost of ordering = (54,000/1,800) × ₹ 9,000
= ₹ 2,70,000
Total cost of carrying = (450 + 1,800/2) × ₹ 300
= ₹ 4,05,00

(v) Computation of new EOQ
Total number of orders to be placed in a year will be 180 (54,000/300).
Each order is to be placed after 2 days (as year = 360 days).
Under old purchasing policy each order is placed after 12 days.

Question 28.
Prepare a Store Ledger Account from the following transactions of XY Company Ltd. April, 2021:
1. Opening balance 200 units @ ₹ 10 per unit
5. Receipt 250 units costing ₹ 2,000
8. Receipt 150 units costing ₹ 1,275
10. Issue 100 units
15. Receipt 50 units costing ₹ 500
20. Shortage 10 units
21. Receipt 60 units costing ₹ 540
22. Issue 400 units
The issues up to 10-4-21 will be priced at LIFO and from 11-4-21 issues will be priced at FIFO.
Shortage will be charged as overhead. [CA Inter May 2011, 5 Marks]
Answer:

Question 29.
The following are the details of receipt and issue of material ‘CXE’ in a manufacturing Co. during the month of April 2021:

Opening stock as on 01.04.2021 is 1,000 kg @ ₹ 15 per kg.
On 30th April, 2021 it was found that 50 kg. of material ‘CXE’ was fraudulently misappropriated by the store assistant and never recovered by the Company.
Required:
(i) Prepare a store ledger account under each of the following method of pricing the issue:
(a) Weighted Average Method
(b) LIFO
(ii) What would be the value of material consumed and value of closing stock as on 30.04.2021 as per these two methods? [CA Inter May 2019, 10 Marks]
Answer:
(i) (a) Stores Ledger Account for the month of April, 2021 (Weighted Average Method)

(b) Stores Ledger Account for the month of April, 2021 (LIFO)

(ii) Value of Material Consumed and the value of Closing Stock:

Question 30.
Imbrios India Ltd. is recently incorporated start-up company back in the year 2019. It is engaged in creating Embedded products and Internet of Things (IoT) solutions for the Industrial market. It is focused on innovation, design, research and development of products and services. One of its embedded products is LogMax, a system on module (SoM) Carrier board for industrial use. It is a small, flexible and embedded computer designed as per industry specifications. In the beginning of the month of September 2021, company entered into a job agreement of providing 4800 Log Max to NIT, Mandi. Following details w.r.t. issues, receipts, returns of Store Department handling Micro-controller, a component used in the designated assembling process have been extracted for the month of September, 2021:

Sep. 1	Opening stock of 6,000 units @ ₹ 285 per unit
Sep. 8	Issued 4875 units to mechanical division vide material requisition no. Mech 009/20
Sep. 9	Received 17,500 units @ ₹ 276 per unit vide purchase order no. 159/2020
Sep. 10	Issued 12.000 units to technical division vide material requisition no. Tech 012/20
Sep. 12	Returned to stores 2375 units by technical division against material requisition no. Tech 012/20.
Sep. 15	Received 9,000 units @ ₹ 288 per units vide purchase order no. 160/ 2020
Sep. 17	Returned to supplier 700 units out of quantity received vide purchase order no.160/2020.
Sep, 20	Issued 9,500 units to technical division vide material requisition no. Tech 165/20

On 25th September, 2021, the stock manager of the company expressed his need to leave for his hometown due to certain contingency and immediately left the job same day. Later, he also switched his phone off.
As the company has the tendency of stock-taking every end Of the month to check and report for the loss due to rusting of the components, the new stock manager, on 30th September, 2021, found that 900 units of Micro-controllers were missing which was apparently misappropriated by the former stock manager. He, further, reported loss of 300 units due to rusting of the components.
From the above information you are required to prepare the Stock Ledger account using ‘Weighted Average’ method of valuing the issues. [ICAI Module]
Answer:
Store Ledger of Imbrios India Ltd. (Weighted Average Method)

* Abnormal loss of 900 units is to be transferred to Costing Profit &Loss A/c,
** Normal loss of 300 units is to be absorbed by good units.

Question 31.
M/s XYZ Traders is a distributor of an electronic calculator. A periodic inventory of electronic calculator on hand is taken when books are closed at the end of each quarter. The following summary of information is available for the quarter ended on 30th September, 2021:
Sales ₹ 1,46,20,000
Opening Stock 25,000 calculator @ ₹ 200 per calculator
Administrative Expenses ₹ 3,75,000

Purchases (including freight inward):

• July 1, 2021 50,000 calculator @ ₹ 191 per calculator
• September 30, 2021 25,000 calculator@ ₹ 210percalculator

Closing stock- September 30, 2021 32,000 calculator
You are required to compute the following by WAM (Weighted Average Method), FIFO method and LIFO method.
(i) Value of Inventory on 30th September, 2021.
(ii) Profit or loss for the quarter ended on 30th September, 2021. [CA Inter Nov. 2019, 8 Marks]
Answer:
(i) Computation of Value of Inventory as on 30th September 2021:

Weighted average rate = \(\frac{₹ 50,00,000+₹ 95,50,000+₹ 52,50,000}{25,000+50,000+25,000}\) = ₹ 198

(ii) Computation of Profit or Loss for the Quarter ended on 30th September 2021

	WAM (₹)	FIFO (₹)	LIFO (₹)
Sales Less: Consumption	1.46.20.000 1.34.64.000	1.46.20.000 1.32.13.000	1.46.20.000 1.34.63.000
Less: Administrative Exp.	3,75,000	3,75,000	3,75,000
Profit or Loss	7,81,000	10,32,000	7,82,000

Note: It is assumed that the issue/consumption pattern was even throughout the quarter.

Question 32.
Arnav Electronics manufactures electronic home appliances. It follows weighted average Cost method for inventory valuation. Following are the data of component X:

*GRN- Goods Received Note; **MRN- Material Returned Note
Based on the above data, you are required to calculate:
(i) Re-order level
(ii) Maximum stock level
(iii) Minimum stock level
(iv) Prepare Store Ledger for the period January, 2021 and determine the value of stock as on 31-01-2021.
(v) Value of components used during the month of January, 2021.
(vi) Inventory turnover ratio. [CA Inter May 2020, RTP]
Answer:
Workings:
Consumption is calculated on the basis of material requisitions:
Maximum component usage = 4,500 units (Material requisition on 10-01-2021) Minimum component usage = 1,500 units (Material requisition on 24-01-2021) Lead time is calculated from purchase order date to material received date Maximum lead time = 21 days (15-12-2020 to 05-01-2021)
Minimum lead time = 14 days (30-12-2020 to 13-01-2021)
Calculations:
(i) Re-order level
= Maximum usage × Maximum lead time
= 4,500 units × 21 days
= 94,500 units

(ii) Maximum stock level
= Re-order level + Re-order Quantity – (Min. Usage × Min. lead time)
= 94,500 units + 10,000 units – (1,500 units × 14 days)
= 1,04,500 units – 21,000 units
= 83,500 units

(iii) Minimum stock level
= Re-order level – (Avg. consumption × Avg. lead time)
= 94,500 units – (3,000 units × 17.5 days)
= 94,500 units – 52,500 units
= 42,000 units

(iv) Store Ledger for the month of January 2020:

Value of stock as on 31-01-2021 (‘000) = ₹ 1,39,001

(v) Value of components used during the month of January, 2021:
Sum of material requisitions 011 to 016 (‘000)
= ₹ 29,694 + ₹ 44,541 + ₹ 21,611 + ₹ 14,734 + ₹ 39,156 + ₹ 31,325
= ₹ 1,81,061

(vi) Inventory Turnover Ratio
= Value of materials used/Average stock value
= ₹ 1,81,061/₹ (1,39,001 + 34,335)/2
= ₹ 1,81,061/₹ 86,668
= 2.09

Risk Analysis in Capital Budgeting – CA Inter FM Study Material is designed strictly as per the latest syllabus and exam pattern.

Risk Analysis in Capital Budgeting – CA Inter FM Study Material

Theory Questions

Question 1.
What is certainty equivalent?
Answer:
Certainty equivalent method: The certainty equivalent is a confirmed return that the management would accept rather than accepting a higher but uncertain return. In this approach we use risk less or certain cash flow is generated in place of the original cash flows and discount it with risk free rate of discount to compute present value of cash flow.

Step 1 : Calculate Certain Cash:
Certain Cash = Expected Cash Flow × C.E. Coefficient
Step 2 : Calculate NPV on the basis of certain cash flow and risk free discount rate.

Question 2.
Write two main reasons for considering risk in Capital Budgeting decisions. (2 Marks Nov 2018)
Answer:
There are two main reasons for considering risk in capital budgeting decisions:

1. Funds used in any proposal has their opportunity cost according to level of risk associated with proposal. We have to make adjustment of risk for correct evaluation of project. If return from proposal is appropriate according to risk associated with project then we will accept the offer otherwise reject.
2. To know the real value or present value of cash inflows we have to make adjustment of risk. Higher risk will lead to higher risk premium and also expectation of higher return.

Question 3.
Explain the steps of Sensitivity Analysis. (4 Murks May 2019)
Answer:
Sensitivity Analysis is conducted by following the steps as below:

Step 1: Finding variables, which have an influence on the NPV (or IRR) of the project.
Step 2: Establishing mathematical relationship between the variables.
Step 3: Analysis the effect of the change in each of the variables on the NPV (or IRR) of the project.

Question 4.
What is Risk Adjusted Discount Rate? (2 Marks Nov 2020)
Answer:
It is a sum of risk free rate and risk premium. The Risk Premium is based on degree of risk associated with proposal. It is calculated as:
Risk adjusted discount rate = Risk free rate + Risk premium

Practical Problems

Question 1.
From the following details relating to a project, analyze the sensitivity of the project to changes in initial project cost, annual cash inflow and cost of capital:

Initial Project Cost (₹) 2,00,000
Annual Cash Inflow (₹) 60,00,000
Project Life (Years) 5
Cost of Capital 10%

To which of the three factors, the project is most sensitive if the variable is adversely affected by 10%? (Use annuity factors: for 10% 3.791 and 11% 3.696). (5 Marks Nov 2018)

Answer:

Calculation of NPV through Sensitivity Analysis:
NPV(Base) = 60,00,000 × 3.791 – 2,00,00,000 = 27,46,000

Situation	NPV	Changes in NPV
Base (present)	₹ 27,46,000	–
If initial project cost is varied adversely by 10%	(₹ 2,27,46,000 – ₹ 2,20,00,000) = ₹7,46,000	(₹ 27,46,000 – ₹ 7,46,000)/₹27,46,000 = 72.83%
If annual cash flow is varied adversely by 10%	(₹ 54,00,000 × 3.791) – ₹ 2,00,00,000 = ₹ 4,71,400	(₹ 27,46,000 – ₹ 4,71,400)/₹27,46,000 = 82.83%
If cost of capital is varied adversely by 10% i.e. 11%	(₹ 60,00,000 × 3.696) – ₹ 2,00,00,000 = ₹ 21,76,000	(₹ 27,46,000 – ₹ 21,76,000)/₹ 27,46,000 = 20.76%

Conclusion: Project is most sensitive to ‘annual cash inflow’.

Question 2.
Kanoria Enterprises wishes to evaluate two mutually exclusive projects

The cut off rate is 14%. The discount factor at 14% are:

Year	1	2	3	4	5	6	7	8
DF	0.877	0.769	0.675	0.592	0.519	0.456	0.400	0.351

Advise management about the acceptability of projects X and Y. (5 Marks May 2019)
Answer:
The Possible Outcomes of Project X and Project Y are as follows:

In pessimistic situation project X will be better as it gives low but positive NPV whereas Project Y yield highly negative NPV under this situation. In most likely situation both the project will give same result. However, in optimistic situation Project Y will be better as it will give very high NPV.

So, project X is a risk less project as it gives positive NPV in all the situation whereas Y is a risky project as it will result into negative NPV in pessimistic situation and highly positive NPV in optimistic situation. So acceptability of project will largely depend on the risk taking capacity (Risk seeking/Risk aversion) of the management.

Question 3.
Door Ltd. is considering an investment of ₹ 4,00,000 this investments expected to generate substantial cash inflows over the next five years. Un-fortunately the annual cash flows from this investment is uncertain, but the following probability distribution has been established:

Annual Cash Flow (₹)	Probability
50,000	0.3
1,00,000	0.3
1,50,000	0.4

At the end of its 5 years life, the investment is expected to have a residual value of ₹ 40,000. The cost of capital is 5%.
(1) Calculate NPV under the three different scenarios.
(2) Calculate expected net present value
(3) Advise Door Ltd. on whether the investment is to be undertaken.

Year	1	2	3	4	5
DF @ 5%	0.952	0.907	0.864	0.823	0.784

(5 Marks Nov 2019)
Answer:
(1) NPV under different scenarios:
NPV = PV of inflow – Initial Investment
Situation I = 50,000 × 4.33 + 40,000 × 0.784 – 4,00,000 = (1,52,140)
Situation 2 = 1,00,000 × 4.33 + 40,000 × 0.784 – 4,00,000 = 64,360
Situation 3 = 1,50,000 × 4.33 + 40,000 × 0.784 – 4,00,000 = 2,80,860

(2) Expected NPV:
Expected NPV = PV of expected inflow – Initial Investment
= 1,05,000 × 4.33 + 40,000 × 0.784 – 4,00,000 = 86,010
Expected Inflow = 50,000 × 0.3 + 1,00,000 × 0.3 + 1,50,000 × 0.4 = 1,05,000

(3) Advise: Door Ltd. should accept the proposal having positive expected NPV.

Question 4.
A Ltd. is considering two mutually exclusive projects X and Y. You have been given below the Net Cash Flow probability distribution of each project:

(1) Compute the following:

(а) Expected Net Cash Flow of each project.
(b) Variance of each project.
(c) Standard Deviation of each project.
(d) Coefficient of variation of each project.

Answer:

(a) Expected Net Cash Flow:

ENCF (X) = Σfx
= 50,000 × 0.30 + 60.000 × 0.30 + 70,000 × 0.40
= 61,000
ENCF (Y) = 1,30,000 × 0.20 + 1,10,000 × 0.30 + 90,000 × 0.50
= 1,04,000

(b) Variance:

Variance (X) = (50,000 – 61,000)² (0.3) + (60,000 – 61,000)² (0.3) + (70,000 – 61,000)² (0.4)
= 6,90,00,000
Variance (Y) = (1,30,0001,04,000)²(0.2) + (1,10,0001.04,000)²(0.3) + (90,000 – 1,04,000)² (0.5)
= 24,40,00,000

(c) Standard Deviation:

Standard Deviation (X) = \(\sqrt{6,90,00,000}\) = 8,306.62
Standard Deviation (Y) = \(\sqrt{24,40,00,000}\) = 15,620.50

(d) coefficient of variation:

Coefficient of variation (X) = \(\frac{8,306.62}{61,000}\) = 0.1362
Coefficient of variation (Y) = \(\frac{15,620.50}{1,04,000}\) = 0.1502

(2) Identify which project do you recommend? Give reason. (10 Marks Nov 2020)
Answer:
In project X risk per rupee of cash flow is 0.1362 while in project Y it is 0.1502. Therefore, Project X is better than Project Y.

Question 5.
A project requires an initial outlay of ₹ 3,00,000. The company uses certainty equivalent method approach to evaluate the project. The risk free rate is 7%.

Following information is available:

PV factor at 7%

Year	1	2	3	4	5
PV Factor	0.935	0.873	0.816	0.763	0.713

Evaluate the above. Is investment in the project beneficial? (5 Marks Jan 2021)
Answer:
Statement Showing the Net Present Value of Project

Important Questions

Question 1.
Probabilities for net cash flows for 3 years a project are as follows:

Calculate the expected net cash flows. Also calculate the net present value of the expected cash flow, using 10 per cent discount rate. Initial Investment is ₹ 10,000.
Answer:

The net present value of the expected value of cash flow at 10 per cent discount rate has been determined as follows:
Expected NPV = 6,000 × 0.909 + 4,800 × 0.826 + 4,200 × 0.751 – 10,000
= ₹ 2,573

Question 2.
Calculate Variance, Standard Deviation and Coefficient of Variation on the basis of figure given below:

Answer:
Project A:
Variance = (8,000 – 12,000)² (0.1) + (10,000 – 12,000)² (0.2) + (12,000 – 12,000)² (0.4) + (14,000 – 12,000)² (0.2) + (16,000 – 12.000)² (0.1) = 48,00,000
Standard Deviation = \(\sqrt{48,00,000}\) = 2,190.90
Coefficient Variation = 2,190.90 ÷ 12,000 = 0.1826

Project B:
Variance = (24,000 – 16,000)² (0.1) + (20,000 – 16,000)² (0.15) + (16,000 – 16,000)² (0.5) + (12,000 – 16,000)² (0.15) + (8,000- 16000)² (0.1) = 1,76,00,000
Standard Deviation = \(\sqrt{1,76,00,000}\) = 4,195.23
Coefficient of variation = 4,195.23 ÷ 16,000 = 0.2622

Working note:
Expected Cash Flow = Σfx
Project A = 8,000(0.1) + 10,000 (0.2) + 12,000(0.4) + 14.000(0.2) + 16,000 (0.1) = 12,000
Project B = 24,000 (0.1) + 20,000 (0.15) + 16,000 (0.5) + 12,000(0.15) + 8,000(0.1) = 16,000

Question 3.
Following information have been retrieved from the finance department of Corp Finance Ltd. relating to Projects X, Y and Z:

You are required to determine the risk adjusted net present value of the projects considering that the Company selects risk-adjusted discount on the basis of the coefficient of variation:

Answer:
Statement showing the determination of the risk adjusted net present value

Question 4.
X Ltd is considering its New Product with the following details of three years project:


1. Calculate the NPV of the project.
2. Find the impact on the project’s NPV of a 2.5 per cent adverse variance in each variable. Which variable is having maximum effect.
Answer:
1. Calculation of Net Cash Inflow per year:

Calculation of Net Present Value (NPV) of the Project:

Here NPV represent the most likely outcomes and not the actual out-comes. The actual outcome can be lower or higher than the expected outcome.

2. Sensitivity Analysis considering 2.5% Adverse Variance in each variable

The above table shows that by varying one variable at a time by 2.5% while keeping the others constant, the impact in percentage terms on the NPV of the project. Thus it can be seen that the change in selling price has the maximum effect on the NPV by 24.82%.

Question 5.
PNR Ltd. is considering a project with the following cash flows:

The cost of capital is 12%. Measure the sensitivity of the project to changes in this levels of plant cost, running cost and savings (considering each factor at a time) such that the NPV becomes zero. The P.V. factors at 12% are as under:

Year	0	1	2	3
PV factor@12%	1	0.892	0.797	0.711

Determine the factor which is the most sensitive to affect the accept lability of the project?
Answer:
Present value (PV) of Cash Flows

Determination of the most Sensitive factor:

(i) Sensitivity Analysis w.r.t. Plant cost:
NPV of the project would be zero when the cost of the plant is increased by ₹ 5,86,40,000
∴ Percentage change in the cost
= 5,86,40,000 ÷ (4,00,000 × 0.892) + (5,00,000 × 0.797) + (6,00,000 × 0.711) × 100 = 49.61%

(ii) Sensitivity Analysis w.r.t. Running cost:
NPV of the project would be zero when the running cost is increased by ₹ 5,86,40,000
∴ Percentage change in the cost
= {5,86,40,000 ÷ (4,00,00,000 × 0.892) + (5,00,00,000 × 0.797) + (11,00,00,000 × 0.711)} × 100 = 49.61%

(iii) Sensitivity Analysis w.r.t. Savings:
NPV of the project would be zero when the savings decreased by ₹ 5,86,40,000
∴ Percentage change in the savings
= {5,86,40,000 ÷ (12,00,00,000 × 0.892) + (14,00,00,000 × 0.797) + (11,00,00,000 × 0.711)} × 100 = 19.75%
The Savings factor is the most sensitive as only a change beyond 19.75% in savings makes the project unacceptable.

Question 6.
A&R Ltd. has under its consideration a project with an initial investment of ₹ 90,00,000. Three probable cash inflow scenarios with their probabilities of occurrence have been estimated as below:

Annual cash inflow (₹)	20,00,000	30,00,000	40,00,000
Probability	0.2	0.7	0.1

The project life Is 5 years and the desired rate of return is 18%. The estimated terminal values for the project assets under the three probability alternatives, respectively, are ₹ 0, ₹ 20,00,000 and ₹ 30,00,000.

You are required to:

(a) Calculate the probable NPV:
(b) Calculate the worst-case NPV and the best-case NPV; and
(c) State the probability occurrence of the worst case, if the cash flows are perfectly positively correlated over time.

Answer:

(a) Calcualation of probable NPV.’
NPV = PV of inflows – PV of outflows
= [{20,00,000 × 0.2) + (30,00,000 × 0.7) + (40,00,000 × 0.1) × 3.127 + {(0 × 0.2) + (20,00,000 × 0.7) + (30,00,000 × 0.1)}] × 0.437 – 90,00,000
= 29,00,000 × 3.127 + 17,00,000 × 0.437 – 90,00,000
= 8,11,200

(b) Calculation of worst-case and best-case NPV:
Worst-case NPV = PV of inflows – PV of outflows
= 20,00,000 × 3.127 – 90,00,000
= (27,46,000)
Best-case NPV PV of inflows – PV of outflows
= 40,00,000 × 3.127 + 30,00,000 × 0.437 – 90,00,000
= 48,19,000

The cash flows are perfectly positively correlated over time means cash flow in first year will be cash flows in subsequent years. The cash flow of ₹ 20,00,000 is the worst case cash flow and its probability is 20%, thus, possibility of worst case is 20% or 0.2.

Types of Financing – CA Inter FM Study Material is designed strictly as per the latest syllabus and exam pattern.

Types of Financing – CA Inter FM Study Material

Theory Questions

Question 1.
What is debt securitization? Explain the basic debt securitization process. (4 Marks May 2011)
Answer:
Debt Securitisation:
It is a process of conversion of existing loans of financial institutions into securities. Existing car loans, credit card etc. are transferred to special purpose vehicle (SVP), who convert these loans into securities and sold these securities to pension fund, provident fund etc. It is a process of recycling of funds. It supports to financial intermediaries to support the lending volumes.

Assets generating steady cash flows are packaged together and against this asset pool, market securities can be issued, e.g. housing finance, auto loans, and credit card receivables. These assets are generally secured by personal or real property such as automobiles, real estate, or equipment loans but in some cases are unsecured.

Process of Debt Securitisation
1. The origination function. First a borrower apply for a loan with a finance company, bank, HDFC. The creditworthiness of borrower is evaluated and contract is entered into with repayment schedule structured over the life of the loan.

2. The pooling function: An underlying pool of assets is created by clubbing of similar loans on receivables together. The pool is transferred in favour of Special purpose Vehicle (SPV), which acts as a trustee for investors.

3. The securitisation function: SPV creates structure and issue securities against asset pool. The securities carry a coupon and expected maturity which can be asset based mortgage based. These are generally sold to investors through merchant bankers. Investors are: pension funds, mutual funds, insurance funds.

Question 2.
Distinguish between Operating lease and financial lease. (4 Marks Nov. 2011, Nov. 2014, May 2016)
Answer:
Difference between Operating lease and Financial lease

Sl. No.	Operating Lease	Financial Lease
1	The lessee is only provided the use of the asset for a certain time. Risk incident to ownership belongs only to the lessor.	The risk and reward incident to ownership are passed on the lessee. The lessor only remains the legal owner of the asset.
2	The lessor bears the risk of obsoles­cence.	The lessee bears the risk of obsoles­cence.
3	The lease is kept cancellable by the lessor.	The lease is non-cancellable by either party under it.
4	Usually, the lessor bears the cost of repairs, maintenance or operations.	The lessor does not bear the cost of repairs, maintenance or operations.
5	The lease is usually non-payout.	The lease is usually full payout

Question 3.
Explain Bridge finance. (2 Marks Nov. 2011, Nov. 2016)
Answer:
Under bridge finance bank provides short term loan to a company (which has pre-approved term loan) to fulfil requirements of funds upto date of sanction of term loan. Flowever, once the loans are approved in principle, firms in order not to lose further time in starting their projects arrange for bridge finance.

Such temporary loan is normally repaid out of the proceeds of the principal term loans. It is secured by hypothecation of movable assets, personal guarantees and demand promissory notes. Generally rate of interest on bridge finance is higher as compared with that on term loans.

Question 4.
What is venture capital financing? Discuss factors that a venture capitalist should consider before financing any risky project. (4 Marks May 2012, May 2013)
Answer:
Venture capital financing:Fmancing of new high risky startups by talented and qualified entrepreneurs who lack experience and funds to shape their ideas into a successful business. In broad sense, under venture capital financing, venture capitalist make investment to purchase equity or debt securities from inexperienced entrepreneurs who undertake highly risky ventures with potential to succeed in future.

Factors to be considered by a venture capitalist before financing any risky project are:

1. Management team should be efficient. They are required to show a high level of commitment to the project.
2. Technical team should be able to develop and produce a new product or service.
3. Technical feasibility of the new product or service should be considered.
4. Venture capitalists should be ensured that the prospects for future profits compensate for the risk.
5. Venture capitalists should be ensured that there is a market for the new product. A research must be carried out to ensure.
6. The venture capitalist himself should have the capacity to bear risk or loss, if the project fails.
7. There should be exit routes for venture capitalist.
8. Venture capitalist should have a place on the Board of Directors.

Question 5.
Write short note on Deep Discount Bonds. (2 Marks May 2012)
Answer:
Deep Discount Bonds (DDBs) are in the form of zero interest bonds. These bonds are sold at a discounted value and on maturity face value is paid to the investors. In such bonds, there is no interest payout during lock-in period. IDBI was first to issue a Deep Discount Bonds (DDBs) in India in January 1992. The bond of a face value of ₹ 1 lakh was sold for ₹ 2,700 with a maturity period of 25 years.

Question 6.
“Financing a business through borrowing is cheaper than using equity.” Briefly explain. (4 Marks Nov. 2012)
Answer:
Debt capital is cheaper than equity capital from the point of its cost and interest being deductible for income tax purpose, whereas no such deduction is allowed for dividends. Issue of new equity dilutes existing control pattern while borrowing does not result in dilution of control. In a period of rising prices, borrowing is advantageous. The fixed monetary outgo decreases in real terms as the price level increases.

Question 7.
What is debt securitization? And also state its advantages. (4 Marks May 2013, Nov. 2016)
Answer
Debt Securitisation:
It is a process of conversion of existing loans of financial institutions into securities. Existing car loans, credit card etc. are transferred to special purpose vehicle (SVP), who convert these loans into securities and sold these securities to pension fund, provident fund etc. It is a process of recycling of funds. It supports to financial intermediaries to support the lending volumes.

Assets generating steady cash flows are packaged together and against this asset pool, market securities can be issued, e.g. housing finance, auto loans, and credit card receivables. These assets are generally secured by personal or real property such as automobiles, real estate, or equipment loans but in some cases are unsecured.

Advantages:
The asset is shifted off the Balance Sheet, thus giving the originator recourse to off balance sheet funding. It facilitates better balance sheet management; assets are transferred off balance sheet facilitating satisfaction of capital adequacy norms. It converts illiquid assets to liquid portfolio.

The originator’s credit rating enhances. These funds also help the company disburse further loans. Similarly, the process is beneficial to the investors also as it creates a liquid investment in a diversified pool of assets, which may be an attractive option to other fixed income instruments.

Question 8.
State the main elements of leveraged lease. (2 Marks Nov. 2013, May 2016)
Answer:
Under this lease, a third party is involved beside lessor and lessee. The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party ie., lender. The asset so purchased is held as security against the loan. The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. The lessor is entitled to claim depreciation allowance.

Question 9.
State the main features of Global Depository Receipts (GDRs) and American Depository Receipts (ADRs). (4 Marks May 2014, May 2017)
Answer:
Global Depository Receipts (GDRs):
When a company wants to issue its shares in foreign country then it can be done by issuing GDR. One unit of GDR represents a certain number of a company’s regular shares. Company who wants to issue its shares has to deposits its original shares with custodian bank of foreign country and against these deposited shares GDR will be issued.

American Depository Receipts (ADRs):
If any non-US company wants to sell its securities on New York Stock Exchange then it can be done by issuing ADR. One unit of ADR represents a certain number of a company’s regular shares. Non-US Company has to deposits its original shares with custodian bank of US and against these deposited shares ADR will be issued.

The Indian companies have preferred the GDRs to ADRs because the US market exposes them to a higher level or responsibility than a European listing in the areas of disclosure, costs, liabilities and timing.

Question 10.
Name any four financial instruments, which are related to international financial market. (2 Marks May 2014)
Answer:
Some of the various financial instruments dealt with in the international market are Euro Bonds, Foreign Bonds, Fully Hedged Bonds, Medium Term Notes, Floating Rate Notes, External Commercial Borrowings, Foreign Currency Futures, Foreign Currency Option, Euro Commercial Papers.

Question 11.
State the different types of Packing credit. (4 Marks Nov, 2014)
Answer:
Types of Packing Credit:

1. Clean packing credit: Under this type of credit exporter gets credit by just showing confirm export order or letter of credit. There is no charge or control of bank over raw material or finished goods.
2. Packing credit against hypothecation of goods: Under this type of credit goods are hypothecated.
3. Packing credit against pledge of goods: Under this type of credit the possession of the goods lies with the bank.

Question 12.
Explain ‘Sales and Lease Back’. (4 Marks May 2015)
Answer:
Sale and Lease Back: Legal owner of asset sells asset to second party after this transfer second party leases back it to first party. Under this arrangement, the asset is not physically exchanged but it all happen in records only. The main advantage of this method is that the lessee can satisfy himself completely regarding the quality of an asset and after possession of the asset convert the sale into a lease agreement.

Under this transaction, the seller assumes the role of lessee (as the same asset which he has sold came back to him in the form of lease) and the buyer assumes the role of a lessor (as asset purchased by him was leased back to the seller). So, the seller gets the agreed selling price and the buyer gets the lease rentals.

Question 13.
What is meant by venture capital financing? State its various methods. (4 Marks Nov. 2015, Nov, 2020)
Answer:
Venture capital financing:Financing of new high risky startups by talented and qualified entrepreneurs who lack experience and funds to shape their ideas into a successful business. In broad sense, under venture capital financing, venture capitalist make investment to purchase equity or debt securities from inexperienced entrepreneurs who undertake highly risky ventures with potential to succeed in future.

Methods of Venture Capital Financing:

1. Equity Financing:Financial institute purchase equity of business but not more than 49% of the total equity capital of venture capital undertakings.
2. Conditional Loan: In case of conditional loan 2-15 per cent royalty is payable instead of interest.
3. Income Note: It is a combination of normal loan and conditional loan.
4. Participating Debenture: During first phase no interest is charged, during second phase a low rate of interest is charged and in last phase a high rate of interest is charged.

Question 14.
Distinguish between the Preference Shares and Debentures. (2 Marks Nov. 2015)
Answer:
Difference between Preference Shares and Debentures

Sl. No.	Preference Shares	Debentures
1	Preference Share Capital is a special kind of share, preference shareholders are the partial owners of the company.	Debenture holders are creditors of the company.
2	Preference shareholders receive fixed payment of dividend.	Debenture holders receive fixed payment of interest.
3	Preference shares are a hybrid form of financing with some characteristic of equity shares and some attributes of debt capital.	Debentures are instrument for raising long term capital with a fixed period of maturity, it is pure debt fund.
4	Preference shares are the source of long term financial requirements.	Debentures are the sources of short to medium term finance.
5	Preference shares are unsecured or not backed up by any collateral.	Debentures are issued by creating a charge on the company’s assets, hence secured.

Question 15.
Explain Operating Lease. (2 Marks Nov. 2017)
Answer:
Operating Lease:
An operating lease is a form of lease in which the right to use the asset is given by the lessor to the lessee. However, the ownership right of the asset remains with the lessor. The lessee gives a fixed amount of periodic lease rentals to the lessor for using the asset.

Further, the lessor also bears the insurance, maintenance and repair costs etc. of the asset. In operating lease, the lease period is short. So, the lessor may not be able to recover the cost of the asset during the initial lease period and tend to lease the asset to more than one lessee. Normally, these are callable lease and are cancellable with proper notice.

The term of this type of lease is shorter than the asset’s economic life. The lessee is obliged to make payment until the lease expiration, which approaches useful life of the asset.

An operating lease is particularly attractive to companies that continually update or replace equipment and want to use equipment without ownership, but also want to return equipment at lease end and avoid technological obsolescence.

Question 16.
What are Masala Bonds? (2 Marks May 2018)
Answer:
Masala (means spice) bond is an Indian name used for Rupee denominated bond that Indian corporate borrowers can sell to investors in overseas markets. These bonds are issued outside India but denominated in Indian Rupees. NTPC raised ₹ 2,000 crores via masala bonds for its capital expenditure in the year 2016.

Question 17.
Explain in brief following financial instruments:
(1) Euro Bonds
(2) Floating Rate Notes
(3) Euro Commercial Paper
(4) Fully Hedged Bond (4 Marks Nov. 2018)
Answer:
(1) Euro Bonds:
Euro bonds are debt instruments which are not denominated in the currency of the country in which they are issued e.g. a Yen note floated in Germany. Such bonds are generally issued in a bearer form rather than as registered bonds and in such cases they do not contain the investor’s names or the country of their origin. These bonds are an attractive proposition to investors seeking privacy.

(2) Floating Rate Notes (FRN):
These are issued up to seven years maturity. Interest rates are adjusted to reflect the prevailing exchange rates. They provide cheaper money than foreign loans.

(3) Euro Commercial Papers (ECP):
ECPs are short term money market instruments. They have maturity period of less than one year. They are usually designated in US Dollars.

(4) Fully Hedged Bonds:
As mentioned above, in foreign bonds, the risk of currency fluctuations exists. Fully hedged bonds eliminate the risk by selling in forward markets the entire stream of principal and interest payments.

Question 18.
Explain in brief the following bonds: (2 Marks Jan. 2021)

1. Callable Bonds
2. Puttable Bonds

Answer:

1. Callable bonds: A callable bond has a call option which gives the issuer the right to redeem the bond before maturity at a predetermined price known as the call price (Generally at a premium).
2. Puttable bonds: Puttable bonds give the investor a put option (ie. the right to sell the bond) back to the company before maturity.

Scope and Objectives of Financial Management – CA Inter FM Study Material is designed strictly as per the latest syllabus and exam pattern.

Scope and Objectives of Financial Management – CA Inter FM Study Material

Theory Questions

Question 1.
Elucidate the responsibilities of Chief Financial Officer. (4 Marks Nov. 2011)
Answer:
One of the key person of an organisation is chief financial officer, he plays vital role in management, and his main responsibilities are:

1. Financial analysis and planning: CFO estimates requirement of amount of funds to be invested in the business, size of business firm and growth of organisation.
2. Investment decisions: CFO decides which asset should be purchased and which should not be.
3. Financial and capital structure decisions: CFO arranges funds from various sources with consideration of cost, risk and control.
4. CFO manages short term financial resources like: short term loan, over-draft, creditors etc.
5. Risk Management: It is the responsibility of CFO that business assets should be risk free.

Question 2.
“The profit maximization is not an operationally feasible criterion.” Comment on it. (4 Marks May 2012)
Answer:
“The profit maximisation is not an operationally feasible criterion.” A company cannot follow profit maximisation as its sole objective. Profit maximisation is a short term objective. When a company focus on profit maximisation it starts to ignore maximizing the owner’s economic welfare. It cannot work towards economic efficiency and might be unethical.

Following are the limitations of profit maximisation approach:

1. Profit is vague term: What is the meaning of profit? Is it short term profit or long term profit? Is it PAT or PBT? Term profit is not clear so company goal to maximise profit is also vague.
2. Timing of Return is ignored: Profit maximisation criteria ignores concept of time value of money. If we receives any amount today then it differs from amount receivable at future date.
3. It avoids the risk factor: If any organisation wants to earn higher profit then it has to accept higher degree of risk and in case of adverse situation stakeholders will suffer higher losses even in worst situation bankruptcy.
4. It’s as an objective is not ethical In today’s world corporate social responsibility is very famous term which means apart from government of any country, corporates are also responsible for welfare of country’s people. When company wants to maximize its profit, company don’t take any step toward CSR even most of the time company take unethical steps.

Question 3.
Discuss the conflicts in profit verses wealth maximization principle of the firm or Distinguish between Profit maximisation and Wealth maximisation objective of the firm. (4 Marks Nov. 2012, May 2015, May 2017)
Answer:
The main two objectives of any business firm are:
A. The maximisation of firm’s profit.
B. The maximisation of firm’s wealth.

Since every business firm is established to earn profit, therefore profit maximization is as an implied objective of a business firm. To maximise profit, management may take decision which are unethical and risky. Many times results of management decisions leads to financial distress and in worst situation bankruptcy and fails to provide higher profit and growth.

Market price of share indicates value or wealth of a firm. Market price of share of any company is based on various factor like: timely payment of dividend, product or service quality, goodwill of company, CRS activities, research and development steps taken by company, present and future expected income and growth of company, timing of earning and risk associated with business etc.

The value maximisation objective of a firm is superior to its profit maximisation objective due to following reasons.

1. Business firm considers all future cash flows, dividends, earning per share, risk of a decision etc. for wealth maximisation whereas business firm does not consider the effect of EPS, dividend paid or any other returns to shareholders or the wealth of the shareholder under profit maximisation objective.

2. To maximise the shareholders wealth firm may pay regular dividends whereas a firm with the objective of profit maximisation may prefer to retain earning instead of dividend payment.

3. Shareholders of any company always prefer increase in value of shares over increase in EPS.

4. Market price of share is based on expectations of shareholders, timing of return, goodwill of company, CSR activities, product and service quality, risk associated with projects, debt equity ratio, timely distribution of income and timing of return etc.

5. The main objective of any firm is wealth maximisation and profit is a part of the wealth maximisation strategy.

Question 4.
Discuss emerging issues affecting the future role of Chief Financial Officer (CFO) or List the emerging issues (any four) affecting the future role of CFO. (4 Marks May 2014, Nov. 2016)
Answer:
Future role of Chief Financial Officer (CFO) is affected by the following major emerging issues:

1. Regulation: CFOs have to look after personally in day by day increasing regulatory requirements.
2. Globalisation: Globalisation creates new financial challenges in front of CFOs. Now CFOs has to develop a finance function to perform effectively on the global stage.
3. Technology.-Nowadays technology is evolving very fast, and CFOs require to reconfigure finance processes and drive business insight through large data and analytics.
4. Risk: Changing nature of the risks, requiring more efficient risk man-agement approaches. CFOs have a role to play in ensuring safeguard of assets.
5. Transformation: CFOs have to transform their finance functions to provide a better service to the business without additional cost.
6. Stakeholder Management: CFOs become the representative of business firm and responsible to handle stakeholder management and maintain principle agent relationship.
7. Strategy: CFOs play a greater role in strategy validation and execution, because of increasing environment complexity and quick changing behaviour.
8. Reporting: CFOs are responsible to fulfil increasing reporting require-ments.
9. Talent and Capability: A person with talent, capability and good behaviour can execute the top finance role.

Question 5.
Briefly explain the three finance function decisions. (4 Marks Nov. 2017, 3 Marks Nov. 2019)
Answer:
Following are the three long term financial function decisions in financial management:
1. Investment decisions (I):
It is related to selection of assets in which long term funds will be employed. Finance manager arranged funds from various sources with consideration of cost, risk and control and invest these funds in various types of business assets. Long term funds are used to purchase fixed assets and also a portion of fixed asset is used to finance permanent current assets. Finance manager use capital bud-geting techniques to evaluate long term investment proposals.

2. Financing decisions (F):
Finance manager arranges funds from various sources with consideration of cost, risk and control. Finance manager chooses capital structure for business firm and try to maintain optimum capital structure. Neither these funds should be over nor less, estimation of requirements of funds and accordingly fulfilment of such requirement covered under financing decisions. Funds are arranged to finance fixed assets and working capital. Financing decisions also require a good knowledge of evaluation of risk associated with finance like: excessive debt may lead situation of financial distress and at worst level bankruptcy.

3. Dividend decisions (D):
Company has two options related to profit available for equity shareholders, first is to distribute profit and second is to retain such profit and reinvest it in business. Dividend decisions are related to balancing between profit distribution and retention of earnings. It is advised to retain profit in business when business is growing i.e. internal rate of return is higher than cost of capital. On the other hand is company retain entire profit then in equity investor may disappoint and market value of shares will decrease. Finance manager has to maintain balancing between distribution of profit and retention of profit to maximise shareholders wealth.

Question 6.
What are the roles of Finance Executive in Modern World? (2 Marks May 2018, 4 Marks Nov. 2020)
Answer:
In today’s world apart from accounting, financial reporting and risk management, the role of chief financial officer is much broader. Finance officer is the face of corporate brand and strategic business partner of the firm. In modern world CEO plays a vital role in budgeting, forecasting, managing merger & acquisitions, profitability analysis, pricing analysis, decisions about outsourcing, overseeing the IT function, overseeing the HR function, strategic planning, regulatory compliance and risk management etc.

Question 7.
What are the two main aspects of the Finance Function? (2 Marks May 2018)
Answer:
Two main aspects of Finance function are:
1. Procurement of Funds:
Finance manager arranges funds from various sources with consideration of cost, risk and control. Finance manager chooses capital structure for business firm and try to maintain optimum capital structure. Neither these funds should be over nor less, estimation of requirements of funds and accordingly fulfilment of such requirement covered under financing decisions.

Funds are arranged to finance fixed assets and working capital. Financing decisions also require a good knowledge of evaluation of risk associated with finance like: excessive debt may lead situation of financial distress and at worst level bankruptcy.

2. Effective Utilization of Funds:
It is related to selection of assets in which long term funds will be employed. Finance manager arranged funds from various sources with consideration of cost, risk and control and invest these funds in various types of business assets. Long term funds are used to purchase fixed assets and also a portion of fixed asset is used to finance permanent current assets.

Finance manager use capital budgeting techniques to evaluate long term investment proposals. The Finance Manager has to keep in mind that funds are not kept idle or there is no improper use of funds. The funds are to be invested in a efficient way such that they generate returns higher than the cost of capital to the firm.

Question 8.
Write two main objectives of financial management. (2 Marks Nov. 2018)
Answer:
Two main objectives of financial management are:
1. Profit Maximisation:
Since every business firm is established to earn profit, therefore profit maximization is as an implied objective of a business firm. To maximise profit, management may take decision which are unethical and risky. Many times results of management decisions leads to financial distress and in worst situation bankruptcy and fails to provide higher profit and growth. Profit maximisation is secondary goal of the company and it helps in wealth maximisation.

2. Wealth or Value Maximisation:
Market price of share indicates value or wealth of a firm. Market price of share of any company is based on various factor like: timely payment of dividend, product or service quality, goodwill of company, CRS activities, research and development steps taken by company, present and future expected income and growth of company, timing of earning and risk associated with business etc. it is the primary goal of the firm.

Question 9.
State four tasks involved to demonstrate the importance of good Financial Management. (4 Marks Jan. 2021)
Answer:
Following are the main task involved to demonstrate the importance of good financial management is to:

1. Look after not to over-invest in fixed assets,
2. Maintain balancing of cash outflow with cash inflows,
3. Maintaining sufficient level of short term working capital,
4. Preparation of growing sales budget,
5. Set correct pricing for products or services to increase gross profit,
6. Look after and control general and administrative expenses, and
7. Focusing on tax planning to minimize the taxes.

CA Inter EIS SM Multiple Choice Questions – CA Inter EIS SM Notes is designed strictly as per the latest syllabus and exam pattern.

CA Inter EIS SM Multiple Choice Questions

Case Study 8

A bank XYZ has many branches all over India. They provide major products and services through its various branches. However, the competent authority intends to bring all the branches together under one umbrella and make it centralized. Crosys is a leading Information technology company in India offering quality software products and services both in the domestic and international markets. The Bank has signed a strategic IT partnership with Crosys. Accordingly, XYZ Bank has licensed Prosys Banking software which includes Banksoft – the Core Banking Solution, eConnect – the Financial Middleware, and eBanker – the Internet Banking Solution. XYZ Bank intends to deploy Banksoft across 3000 branches over the next 2 years.

Question 1.
Based on the above case scenario, answer the following questions:
(a) Regulatory compliance
(b) Information Accuracy
(c) Resource optimization
(d) Customer centric
Answer:
(b) Information Accuracy

Question 2.
Which one of the following is not an example of CBS Software?
(a) Finacle
(b) FinnOnc
(c) Oracle
(d) BankMate
Answer:
(c) Oracle

Question 3.
Branch Banking is a _____
(a) Back End Applications
(b) Front End Applications
(c) Integrated Applications
(d) Non-Integrated Applications
Answer:
(b) Front End Applications

Question 4.
Which one of the following is not a Key Aspect in built into Architecture of CBS?
(a) Regulatory compliance
(b) Information Accuracy
(c) Resource optimization
(d) Customer centric
Answer:
(b) Information Accuracy

Question 5.
This Server performs necessary operations and this updates the account of the customer.
(a) Database Server
(b) Application Server
(c) Web Server
(d) Proxy Server
Answer:
(b) Application Server

Question 6.
A client connects to the____________ server, and then requests a connection, file, or other resource available on a different server.
(a) Database Server
(b) Application Server
(c) Web Server
(d) Proxy Server
Answer:
(d) Proxy Server

Application Based
Multiple Choice Questions

Question 1.
Under Asynchronous attacks in a telecommunication network system, ____ involves spying on information being transmitted over communication network.
(a) Wire-tapping
(b) Data Leakage
(c) Subversive Attacks
(d) Piggybacking
Answer:
(a) Wire-tapping

Question 2.
A Bank ABC gave an undertaking to the third party, supplier of goods/ services to pay amount of Rs. 2 crore to him on behalf of a businessman Mr. X; provided the terms and conditions of the undertaking are complied with. This service of banks is known as –
(a) Issuing letter of Guarantee
(b) Issuing letter of Comfort
(c) Issuing letter of Credit
(d) Issuing letter of Understanding
Answer:
(c) Issuing letter of Credit

Question 3.
An aspiring CA in his interview was asked to provide correct sequence of the following sub-processes that represent Accounting Process Flow. The sub-processes are –
(1)Source Document,
(2) Financial Statement,
(3) Adjustments
(4) Ledger,
(5) Adjusted Trial Balance,
(6) Closing Entries,
(7) Journal and
(8) Trial Balance.
What should be the answer?
(a) (1 )-(2)-(3)-(4)-(5)-(6)-(7)-(8)
(b) (4)-(3)-(7)-(6)-( 1 )-(2)-(8)-(5)
(c) (1 )-(7)-(4)-(8)-(3)-(5)-(6)-(2)
(d) (8)-(5)-(3)-( 1 )-(2)-(4)-(6)-(7)
Answer:
(c) (1 )-(7)-(4)-(8)-(3)-(5)-(6)-(2)

Question 4.
In an organization, there are certain risks that would prevent an organization from accomplishing its objectives and meeting its goals. These are referred as ____ risks.
(a) Operational
(b) Strategic
(c) Financial
(d) Reputational
Answer:
(b) Strategic

Question 5.
Mr. A visited an e-commerce website and placed an order for a pair of shoes. He made his payment of Rs. 2,000 through credit card and received a confirmation mail on his registered email-id. With respect to e-commerce architecture, which layer of the software is he working on?
(a) Database Layer
(b) Application Layer
(c) Presentation Layer
(d) Client Layer
Answer:
(b) Application Layer

Question 6.
Which of the following statement is incorrect?
(a) A Proxy Server is a computer that offers a computer network service to allow clients to make indirect network connections to other network services.
(b) The term Information Security refers to ensure Confidentiality, Integrity and Availability of infor mation.
(c) Any Application Software has primarily four gateways through which enterprise can control functioning, access and use the various menus and functions of the software – Configuration, Masters, Transactions and Reports.
(d) Section 66C of Information Tech-nology Act, 2000 provides for the punishment for cheating by person-ation by using computer resource.
Answer:
(d) Section 66C of Information Tech-nology Act, 2000 provides for the punishment for cheating by person-ation by using computer resource.

Question 7.
An amount of ₹ 100 is to be written off as same is not recovered from customer since last three years. Which voucher is best suited for the transaction?
(a) Journal
(b) Sales
(c) Purchase
(d) Contra
Answer:
(a) Journal

Question 8.
While doing a concurrent audit in a bank, Mr. X noticed that some changes have been made to advance master data files of the database. He uses an audit technique to identify such suspicious transactions. This technique shall be defined as ___.
(a) Continuous and Intermittent Sim-ulation (CIS)
(b) System Control Audit Review File (SCARF)
(c) Audit Hook
(d) Integrated Test Facility (ITF)
Answer:
(c) Audit Hook

Question 9.
During an audit of financial transactions in an enterprise XYZ, it was found that simple errors of data entry were occurring when two digit that were either individual or part of larger sequence of number were reversed when posting a transaction. Which type of error is this?
(a) Addition Error
(b) Truncation Error
(c) Substitution Error
(d) Transposition Error
Answer:
(d) Transposition Error

Question 10.
While auditing the input controls in an enterprise ABC, which of the following controls will not fall under the purview of input controls?
(a) Source Document Controls
(b) Data Coding Controls
(c) Boundary Control
(d) Batch Controls
Answer:
(c) Boundary Control

Question 11.
Which are the controls that are responsible for maintaining a chronology of the events from the time a sender dispatches a message to the time a receiver obtains the message?
(a) Boundary Controls
(b) Communication Controls
(c) Input Controls
(d) Database Controls
Answer:
(b) Communication Controls

Question 12.
In ABC, financial institution, the authorized officials identified existence of numerous accounts numbers of inactive accounts in their usage data of active customers. Complaint was reported to their IT team. Which type of controls can be exercised by the IT Team in the given case?
(a) Corrective controls
(b) Detective Controls
(c) Preventive controls
(d) Compensatory Controls
Answer:
(b) Detective Controls

Question 13.
Mr. X entered into a contract with Mr. Y for purchase of house hold products via online stores on Cash on Delivery (CoD). As per the terms, it was to be delivered within 3 days of the order placed. Due to delivery on the fourth day, Mr. X denied for the performance of the contract. This can be said to be a ___.
(a) Risk associated with controls
(b) Risk associated with security
(c) Risk associated with transaction
(d) Risk associated with e-Commerce
Answer:
(d) Risk associated with e-Commerce

Question 14.
XBL bank gave an undertaking to the third party for the supply of goods/ services to pay amount of Rs. 2 crore on behalf of the Mr. X, a business man, provided the terms and conditions of the undertaking are complied with this services of banks is known as-
(a) Issuing letter of guarantee
(b) Issuing letter of Comfort
(c) Issuing letter of credit
(d) Issuing letter of understanding
Answer:
(c) Issuing letter of credit

Question 15.
Under Data Resources Manage-ment Controls, ____ Controls are designed to prevent unauthorized individual from viewing, retrieving, computing or destroying the entity’s data in any organization.
(a) Access
(b) Backup
(c) Concurrency
(d) Quality
Answer:
(a) Access

Question 16.
Name the Module in ERP – Business Process Modules that includes the software designs specifically for production planning and management.
(a) Production Planning
(b) Material Management
(c) Sales and Distribution Module
(d) Supply Chain Module
Answer:
(a) Production Planning

Question 17.
Which of the following does not form part of Human Resources (HR) Management?
(a) Training and Development
(b) Career Development
(c) Leadership Management
(d) Invoicing
Answer:
(d) Invoicing

Question 18.
In this work place, an employee Mr. X wants to maintain a record of physical receipts of goods purchased from a vendor Mr. G in his Accounting System. Which Voucher type shall he use?
(a) Delivery Note
(b) Receipt Note
(c) Sales
(d) Purchase
Answer:
(b) Receipt Note

Question 19.
Which of the following transactions are not recorded in the Voucher Type “Contra” of the Accounting System?
(a) Cash deposit in bank
(b) Cash withdrawal from bank
(c) Cash transfer from one location to another
(d) Recording of all types of trading sales by any mode
Answer:
(d) Recording of all types of trading sales by any mode

Question 20.
In 3-Tier Architecture, name the layer that is responsible of receiving the inputs from the users and perform certain validations.
(a) Application Layer
(b) Database Layer
(c) Operating System Layer
(d) Network Layer
Answer:
(a) Application Layer

Question 21.
An aspiring CA in his interview CA in his interview CA was asked to provide correct sequence of the following sub-processes that represent Accounting Process Flow. The sub-processes are
(1) Source Document,
(2) Financial Statement,
(3) Adjustments
(4) Ledger
(5) Adjusted Trail Balance,
(6) Closing Entries,
(7) Journal and
(8) Trail Balance. What should be the answer?
(a) (1 )-(2)-(3)-(4)-(5)-(6)-(7)-(8)
(b) (4)-(3)-(7)-(6)-(l)-(2)-(8)-(5)
(c) (1)-(7)-(4)-(8)-(3)-(5)-(6)-(2)
(d) (8)-(5)-(3)-(l)-(2)-(4)-(6)-(7)
Answer:
(c) (1)-(7)-(4)-(8)-(3)-(5)-(6)-(2)

Question 22.
Which feature of operating system helps in allocating resources to make optimum utilization of resources?
(a) User Interface
(b) Memory Management
(c) File Management
(d) Task Management
Answer:
(d) Task Management

Question 23.
“Installation of Firewalls” in telecommunication network is a classic example of ____ controls under
Information System’ Controls.
(a) Managerial
(b) Application
(c) Preventive
(d) Corrective
Answer:
(c) Preventive

Question 24.
Which features of operating System Controls how memory is accessed and also maximizes the memory availability and storages?
(a) User Interface
(b) Memory Management
(c) File Management
(d) Task Management
Answer:
(b) Memory Management

Question 25.
Under Asynchronous attacks in telecommunication network systems, involves spying on information
being transmitted over communication network.
(a) Wire-tapping
(b) Data leakage
(c) Subversive attacks
(d) Piggybacking
Answer:
(a) Wire-tapping

Question 26.
Provide the correct sequences of phase of Program Development Life Cycle.
(1) operations and maintenance,
(2) coding,
(3) control,
(4) Design,
(5) testing and
(6) planning
(a) (4)-(6)-(2)-(3)-(1)-(5)
(b) (6)-(3)-(4)-(2)-(5)-( 1)
(c) (1)-(6)-(3)-(5)-(4)-(2)
(d) (3)-(5)-(2)-(1)-(6)-(4)
Answer:
(b) (6)-(3)-(4)-(2)-(5)-( 1)

Question 27.
In ABC, financial institution, the authorized official identified of numerous accounts numbers of inactive in their usage data of active customers. Complaint was reported to their it team. Which type of controls can be exercise by the IT Team in the given case?
(a) Corrective Controls
(b) Preventive Controls
(c) Detective Controls
(d) Compensatory Controls
Answer:
(c) Detective Controls

Question 28.
Mr. Hope of Delhi ordered raw material for manufacturing of products for domestic use from supplier in j Kolkata. Service to deliver the raw material was fixed “within 10 days from j the date of order”. State the subsequent stage of order to cash cycle-
(a) Collections
(b) Invoicing
(c) Delivery Note
(d) Order Fulfilment
Answer:
(c) Delivery Note

Question 29.
An organization ABC used to make payment of the salaries to its employees by transferring of funds to their saving accounts. This mode of transfer made by an ABC is ____.
(a) Remittances
(b) ECS Credit
(c) ECS Debit
(d) Deposits
Answer:
(c) ECS Debit

Question 30.
Mr. Mysterious used to chat on internet under the name of Mrs. Ritu. He also her landline telephone number for further for chatting. Ms. Ritu was a senior executive of the credit rating information sources of India Ltd. Mr. Mysterious was employed as financial analyst but had been forced to terminate the job earlier. Ritu started receiving mischievous calls. In the light of the given facts, state the liability of Mr. Mysterious within the purview of the Information Technology Act, 2000.
(a) Punishable for offence related to web defacement
(b) Punishable for phishing and email scam
(c) Theft of confidential information
(d) Harassment via fake public on social networking site.
Answer:
(d) Harassment via fake public on social networking site.

Question 31.
X through his computer steals the data saved in Y’s computer of valuable customers of ABC Ltd. X sold this data to the competitor of ABC Ltd. This act of X is ____.
(a) Source code theft
(b) Theft of confidential information
(c) Email Account hacking
(d) Hacking
Answer:
(d) Hacking

Question 32.
Which of the following is not a rule to be followed while Voucher Numbering?
(a) Voucher number must be unique
(b) A voucher number may either have prefix or suffix or both
(c) Voucher numbers may be num bered randomly
(d) Every voucher type shall have a separate numbering series.
Answer:
(c) Voucher numbers may be num bered randomly

Question 33.
Which of the following statement is not type for internal control system?
(a) Facilitates the effectiveness and efficiency of operations.
(b) helps safeguarding the assets of the entity.
(c) Assist compliance is required in . flowchart, it can be easily done.
(d) Helps ensure the reliability of only internal financial reporting and not external financial reporting.
Answer:
(d) Helps ensure the reliability of only internal financial reporting and not external financial reporting.

Question 34.
Which of the following is not an advantage of flowchart?
(a) If any modification is required in a flowchart, it can be easily done.
(b) It’s a blueprint of a system that can be broken down into detailed parts of a study.
(c) Acts as a guide during the system analysis and program preparation phase.
(d) Aid in communicating the facts as of a business problem to those whose skills are needed for arriving at the solution.
Answer:
(a) If any modification is required in a flowchart, it can be easily done.

Question 35.
Arrange sequentially the following steps involved in general ledger process?
(i) Posting of transactions.
(ii) Reviewing transaction
(iii) Generating financial reports
(iv) Entering financial transaction into the system.
(v) Approving transactions.
(a) (iv), (i), (ii), (v), (iii)
(b) (i), (ii), (iii), (iv), (v)
(c) (iv), (ii), (v), (i) (iii)
(d) (v), (iv), (i), (iii), (ii)
Answer:
(c) (iv), (ii), (v), (i) (iii)

Question 36.
Arrange sequentially the activities involved in sales and distribution module?
(i) Inventory Sourcing
(ii) Payments
(iii) Billing
(iv) Pre-Sales Activities
(v) Sales Order Processing
(vi) Delivery
(a) (i), (ii), (vi), (iv), (v), (iii)
(b) (iv), (v), (i), (vi), (iii), (ii)
(c) (iv), (v), (i), (it), (vi), (iii)
(d) (i), (vi), (ii), (vi), (iii), (iv)
Answer:
(b) (iv), (v), (i), (vi), (iii), (ii)

Question 37.
Which of the following is not a technique of Cryptography?
(a) Transposition
(b) Substitution
(c) Product Cipher
(d) Transcription
Answer:
(d) Transcription

Question 38.
In an ERP System, which of the following is not true about integration of Modules with Financial and Account System?
(a) Master data across all the modules must be same.
(b) Common transaction data must be shared with other modules wher ever required.
(c) Common Voucher types to be used for each module for easy integra tion of department recording it.
(d) Separate Voucher types for each module for easy identification of department recording it.
Answer:
(c) Common Voucher types to be used for each module for easy integra tion of department recording it.

Question 39.
Tick the incorrect statement
(a) In Relation Database model, the named columns of the relation are called Domain.
(b) In Relation Database model, a re-lationship is a table with rows and columns
(c) In Relation Database model, the named columns of the relation are called attributes.
(d) In Relation Database model, the domain is the set of the values an attribute can take.
Answer:
(a) In Relation Database model, the named columns of the relation are called Domain.

Question 40.
In computer network packet switching, __________
(a) All packets pass through a common path.
(b) All packets arrive at the destination out of order.
(c) The receiving device restores the packets in the same order it re ceives them.
(d) All packets arrive at the destination in order.
Answer:
(b) All packets arrive at the destination out of order.

Question 41.
Which of the following is not a type Data Resource Management Controls under Managerial Controls?
(a) Existence Controls
(b) Concurrency Controls
(c) Production Controls
(d) Quality Control
Answer:
(c) Production Controls

Question 42.
Which of the following does not fit into best practices while dealing with passwords in order to avoid system failures?
(a) Periodic change of passwords
(b) Unlimited number of entry attempts
(c) Minimum password length
(d) Hashing of passwords
Answer:
(b) Unlimited number of entry attempts

Question 43.
Under emerging BYOD (Bring your Own Device) Threats, ____ risk refers to the data lost from stolen or lost devices.
(a) Network
(b) Application
(c) Device
(d) Implementation
Answer:
(c) Device

Question 44.
In Cloud Computing, which of the following instance of Software as a Service (SaaS) allows users to explore functionally of Web services such as Google Maps, Payroll Processing, and credit card processing services?
(a) API as a service (APIaaS)
(b) Testing as a Service (TaaS)
(c) Email as a service (EaaS)
(d) Data as a service (DaaS)
Answer:
(a) API as a service (APIaaS)

Question 45.
Which activity is not incorporated | during audit of Environment Controls?
(a) Backup Power
(b) Water Detection
(c) Fire detection and Suppression
(d) Guards and Dogs
Answer:
(d) Guards and Dogs

Question 46.
As an Information Systems Auditor, mention the activity that does not form part of audit of Logical Access Controls?
(a) Access violations
(b) Intrusion Detection and Prevention
(c) Backup Power
(d) Shared Accounts
Answer:
(c) Backup Power

Question 47.
In a three-tier architecture, which layer is responsible for performing certain validations like, if the user is authorized to request the transaction or not?
(a) Application Layer
(b) Presentation Layer
(c) Database Layer
(d) Session Layer
Answer:
(a) Application Layer

Question 48.
Suggest the control required to address the concerns raised with the following risk – “As everybody is connected to a single system and central database, in case of failure of system, the whole business may come to stand and may get affected badly.”
(a) This can be controlled and monitored by having proper and updated backup of data as well as alternate hardware/internet arrangements,
(b) This can be controlled by removing redundant data, using techniques like data warehousing and updat- 21 ing hardware on a continuous basis.
(c) Access rights need to be defined carefully and to be given on “need to know” and “Need to do” basis only.
(d) This can be controlled and min-imized with the help of proper training system, having help man-uals, having backup plans for staff turnover etc.
Answer:
(a) This can be controlled and monitored by having proper and updated backup of data as well as alternate hardware/internet arrangements

Question 49.
Suggest the control required to address the concerns raised with the following risk – “As data is maintained centrally the data size becomes more and more and it may reduce the speed i of operation.”
(a) This can be controlled and mon-itored by having proper and updated backup of data as well as alternate hardware/internet arrangements.
(b) This can be controlled by removing redundant data, using techniques like data warehousing and updat-ing hardware on a continuous basis.
(c) Access rights need to be defined carefully and to be given on “Need to know” and “Need to do” basis only.
(d) This can be controlled and min-imized with the help of proper staff training system, having help manuals, having backup plans for staff turnover etc.
Answer:
(b) This can be controlled by removing redundant data, using techniques like data warehousing and updat-ing hardware on a continuous basis.

Question 50.
In an Accounting Business Process Cycle, arrange the sub-processes in order.
(i) Journal
(ii) Ledger
(iii) Financial Statement
(iv) Closing Entries
(v) Source Document
(vi) Trial Balance
(vii) Adjusted Trial Balance
(viii) Adjustments
(a) (v), (i), (vii), (iii), (ii), (iv), (vi), (viii)
(b) (i), (ii), (iii), (viii), (vii), (vi), (v), (iv)
(c) (v), (i), (ii), (vi), (viii), (vii), (iv), (iii)
(d) (ii), (i), (v), (viii), (iv), (iii), (vi), (vii)
Answer:
(b) (i), (ii), (iii), (viii), (vii), (vi), (v), (iv)

Question 51.
As a telecommunication network operator, which internet working device will you suggest for regenerating the signal over the same network before the signal becomes too w eak or corrupted?
(a) Bridge
(b) Router
(c) Hub
(d) Repeater
Answer:
(d) Repeater

Question 52.
In this transmission mode, the data flows in one direction, but not both at the same time. Which transmission modes are referring to?
(a) Simplex
(b) Half-Duplex
(c) Duplex
(d) Packet switching
Answer:
(b) Half-Duplex

Question 53.
A business Continuity Plan (BCP) is an example of ____.
(a) Managerial
(b) Application
(c) Preventive
(d) Corrective
Answer:
(d) Corrective

Question 54.
In telecommunication network, ____ is the act of following an authorized person through a secured door or electronically attaching to an authorized telecommunication link that intercepts and alters transmissions. This involves intercepting communication between the operating system and the user and modifying them or substituting new messages.
(a) Wire tapping
(b) Piggybacking
(c) Subversive attacks
(d) Data Leakage
Answer:
(b) Piggybacking

Question 55.
One amongst the list is a not a threat.
(a) Virus
(b) Trojan
(c) Worm
(d) Firewall
Answer:
(d) Firewall

Question 56.
Which type of risk a company becomes vulnerable to when it adopts Bring Your Own Device (BYOD)?
(a) Confidentially Risk
(b) Device Risk
(c) Application Risk
(d) Implementation Risk
Answer:
(a) Confidentially Risk

Question 57.
Database Management System (DBMS) helps the organization to do various operations on the files.
(a) Adding or deleting files from data-base
(b) Inserting or modifying existing files
(c) Retrieving or deleting data from existing files
(d) Duplicating Files
Answer:
(d) Duplicating Files

Question 58.
A bank shares financial data of borrower with third party without constant of borrower. The bank has
violated _____ of sensitive Information and Personal Data Rules, 2011.
(a) Rule 3
(b) Rule 4
(c) Rule 5
(d) Rule 6
Answer:
(c) Rule 5

Question 59.
To enhance automation, a company defines re-order levels for regular consumption of raw material items in their ERP system. Once an item hits Re-order Level, the system creates a purchase requisition for Economic Order Quantity(EOQ)/Re-Order Quantity (ROQ) and emails the same to selected vendors asking them to send quotations. This method of doing business can be best defined as ____.
(a) Business Process Automation
(b) Business Process Integration
(c) Business Process Upgrade
(d) Business Process Module
Answer:
(a) Business Process Automation

Question 60.
A new system has been developed that ensures that as soon as inventory level goes below re-order level in INVENTORY SYSTEM, a purchase requisition is generated from PURCHASE SYSTEM. Which testing method shall be best suited to check whether the two systems are working properly?
(a) Unit Testing
(b) Program Testing
(c) Integration Testing
(d) Whole-of-Program Testing
Answer:
(c) Integration Testing

Question 61.
A Bank has updated its existing Corer Banking Systems (CBS) system to a new version. It is found that the new system is not automatically sending monthly Bank Statements to its custom-ers. The same feature was available in the previous system. This error is result of mistake in which step?
(a) Design
(b) Planning
(c) Implementation
(d) Maintenance
Answer:
(a) Design

Question 62.
An enterprise is configuring TALLY 9.1 ERP system for fixing monthly budgets for expenses. A heated argument is going on the issue of when to fix budget for any head. Please help management in deciding on when to create budgets.
(a) After 3 months from today based on the average expenses
(b) Today itself based on past years’ experience and future projected increase
(c) Cannot be fixed today
(d) Today itself based on future pro-jections for expenses
Answer:
(b) Today itself based on past years’ experience and future projected increase

Question 63.
Mr. X features in an advertisement of an Air conditioner of brand Z where he emphasizes that this Air Conditioner can be all controlled through a mobile.
This is perfect example of ____ technology.
(a) Cloud Computing
(b) Internet of Things (IoT)
(c) Artificial Intelligence
(d) Bring Your Own Device (BYOD)
Answer:
(b) Internet of Things (IoT)

Question 64.
Which objective of Business Process Automation (BPA) is achieved using Passwords in Information Systems?
(a) Confidentiality
(b) Integrity
(c) Timeliness
(d) Availability
Answer:
(a) Confidentiality

Question 65.
The most critical resource for an Enterprise Resource Planning (ERP) System is ____.
(a) Hardware
(b) Data
(c) Software
(d) People
Answer:
(b) Data

Question 66.
In computer networking, best example of a device working on HALF DUPLEX transmission mode is ____.
(a) Radio
(b) Television
(c) Mobile
(d) Walkie – Talkie
Answer:
(d) Walkie – Talkie

Question 67.
In computer network, a vulnerability is best defined as _____.
(a) Risk to system
(b) Weakness of controls
(c) Value of risk
(d) Possible Threat
Answer:
(b) Weakness of controls

Question 68.
Which of the following combination is not a violation of maker – Checker Rule for Internal Control?
(a) Cashier is also a Ledger Writer
(b) Auditor acting as an Implementa-tion Consultant
(c) System Developer acting as a Sys-tem Quality Control Personnel
(d) Auditor Suggesting Controls
Answer:
(d) Auditor Suggesting Controls

Question 69.
Auditor of a company finds that management policy of cash expenses limit of Rs. 5,000 is not being adhered to. There are many violations of the same during the year. Auditor of the company shall report on same under which clause of Companies Act, 2013?
(a) 134(4)
(b) 143(3)
(c) 134(3)
(d) 143(4)
Answer:
(b) 143(3)

Question 70.
Bills of Materials (BoM) is an important feature for any ERP software. The sub-system where a BoM is located is ____.
(a) Manufacturing
(b) Financials
(c) Projects
(d) Human Resource Management
Answer:
(a) Manufacturing

Question 71.
Database is a collection of Data. Various database models are used. The database models having using a primary key is ______.
(a) OODBMS
(b) RDBMS
(c) Network Database Model
(d) Hierarchical Database Model
Answer:
(b) RDBMS

Question 72.
Driverless cars are the future of personal transportation technology. Many companies have been testing these cars on roads across the world. Few fatalities have been caused by these driverless cars. The culprits are not yet booked. This reflects which risk of AI as a technology being used in driverless cars.
(a) The police investigations are poor.
(b) AI is not human.
(c) The law is not being able to meet the requirements of technology.
(d) No one is responsible
Answer:
(c) The law is not being able to meet the requirements of technology.

Question 73.
A company has purchased a luxury yacht in Monte Carlo from sale of property worth Rs. 100 crores. The sale was executed in cash and money was taken out of India through dubious means. This transaction is a money laundering act by the company. Purchase of luxury yacht is best classified as ________.
(a) Application
(b) Placement
(c) Integration
(d) Layering
Answer:
(c) Integration

Question 74.
Entity-Relationship (ER) Diagram, Data Flow Diagram, Flowcharts all use graphical symbols. All symbols given are used in all three except one.

Answer:
(b)

Question 75.
Pick the ODD one out.
(a) Accounting Information System
(b) Input
(c) Output
(d) Process
Answer:
(a) Accounting Information System

Question 76.
Pick the odd one out.
(a) Amazon Alexa
(b) Boss Speakers
(c) Apple Siri
(d) Google Talk
Answer:
(b) Boss Speakers

Question 77.
An element that has contributed to e-commerce success is payment gateways. One that does not fall in the definition is _____.
(a) SBI Buddy
(b) HDFCZapp
(c) Paytm
(d) Cash On Delivery
Answer:
(d) Cash On Delivery

Question 78.
In Core banking Systems, a ____ server is a computer that offers a computer network service to allow clients to make indirect network connections to other network services.
(a) ATM
(b) Network
(c) Proxy
(d) Internet Banking
Answer:
(c) Proxy

Strategic Management Integrated Case Studies

Case Study 1

Veggie Restaurant and Sai Restaurant are successfully competing in the business of ready to eat snacks in Delhi. Veggie Restaurant has been pioneer in introducing innovative products. These products will give them good sale. However, Sai Restaurant will introduce similar products in reaction to the products introduced by the Veggie Restaurant Foods taking away the advantage gained by the former.

Also Veggie Restaurant understands the importance of Strategic Management and has developed Strategic Vision, set the objectives and crafted the strategy.
To implement appropriate Strategy, Veggie Restaurant has hired expert Strategic Planners to analyse external and internal environment.

Soon the business of Veggie Restaurant result in expansion and multiple branches were opened. To formulate the Strategies at different levels became the necessity for Veggie Restaurant.

Based on the above case scenario, answer the multiple choice questions which are as follows:

Question 1.
Which one of the following is not a level of Strategy formulation for Veggie Restaurant?
(a) Corporate level
(b) Business level
(c) Divisional Level
(d) Functional level
Answer:
(c) Divisional Level

Question 2.
Which of the following is not a limitation of Strategic Management?
(a) It is difficult to understand the complex environment and exactly pinpoint how it will shape-up in future.
(b) Optimum utilization of resources is not possible due to too much planning
(c) Strategic management is a costly process.
(d) Difficult to clearly estimate the competitive responses
Answer:
(b) Optimum utilization of resources is not possible due to too much planning

Question 3.
Sai Restaurant is following which of the following strategy?
(a) Proactive
(b) Reactive
(c) Aggressive
(d) Differentiation
Answer:
(b) Reactive

Question 4.
If resources of Veggie Restaurant permit, it is better to be ____ rather than reactive.
(a) Proactive
(b) Reactive
(c) Aggressive
(d) Positive
Answer:
(b) Reactive

Question 5.
Strategic management helps the organization to develop certain core competencies and competitive advantages that would facilitate assist in its fight for survival and growth. This statement is:
(a) Advantage of Strategic Manage-ment
(b) Importance of Strategic Manage-ment
(c) Limitation of Strategic Manage-ment
(d) None of the above
Answer:
(b) Importance of Strategic Manage-ment

Case Study 2

Trepsico Trito Company is one of the most famous brands in food and beverages industry in the world. It has seventeen food and beverage brands worth more than 100 crores. Trepsico Trito, Crisppy Chips (subsidiary), Tasty Chips (acquisition), Tangy (joint venture), Twisters (acquisition), and Threshold drink are just some of the household names that Trepsico Trito Company manages.

Trepsico Trito’s mission is to provide consumers around the world with delicious, affordable, convenient and complementary foods and beverages from wholesome breakfasts to healthy and fun daytime snacks and beverages to evening treats. Convenient F&B defines Trepsico Trito’s business. Trepsico Trito’s vision is articulated as achieving business and financial success while leaving a positive imprint on society – delivering what it calls Performance with Purpose. For example, Trepsico Trito India’s Agri program presently benefits over 24,000 farmers across 14 states through various Agri and sourcing initiatives. All the potato used in Crisppy Chips and Tasty Chips is grown in India and sourced from Indian farmers. Through its 360-degree farmer connect initiatives for potato cultivation, Trepsico Trito provides training and seed support, advanced plant protection programs, and assured buy-back with reasonable returns. Besides backward integration with farmers it has invested in cold storages along its supply chain. Since 2009 it has been Water Positive by conserving, utilising and managing this important resource in a sustainable manner.

The company is geographically diverse too. Trepsico Trito operates all around the world- only 50 per cent of its sales come from the United States and Canada.

Given this breadth of business and market scope, Trepsico Trito faces a variety of strategic scenarios: capitalizing on scale advantage in its core brand where it is a global leader; building businesses in fast-developing and unpredictable markets, categories, and products more so on account of shifts in consumer behaviour such as a greater focus on healthy living away from its “star” carbonated beverages and “cash cow” fried snacks businesses; the need for greater experimentation and innovation, for example in new flavours of chips to create and capitalize on newer sources of growth.

It is not inconceivable that Trepsico Trito’s different businesses at different times go through different stages of strategy thus necessitating a portfolio approach to strategy formulation with reference to market/business growth and market share such as BCG Matrix. While it competes fiercely with Chilled drink in different countries, it proactively fosters strategic partnerships with quick service restaurants and multiplex players.

Based on the above Case Scenario, answer the Multiple Choice Questions which are as follows:

Question 1.
Match the columns in respect of the following elements of the strategic intent and their descriptions:

Column A	Column B
(i) Vision	(a) Product-Market Configuration
(ii) Business Model	(b) The way busi­ness is conduct­ed
(iii) Business Definition	(c) Aspiration for a desired future
(iv) Mission	(d) The scope of Business

(a) (i)-(a); (ii)-(b); (iii)-(c); (iv)-(d)
(b) (i)—(b); (ii)-(c); (iii)—(d); (iv)-(a)
(c) (i)—(c); (ii)-(b); (iii)-(d); (iv)-(a)
(d) (i—(d); (ii)-(c); (iii’)-(b); (iv)-(a)
Answer:
(c) (i)—(c); (ii)-(b); (iii)-(d); (iv)-(a)

Question 2.
State the two dimensions implied by portfolio approach to strategy formulation in Trepsico Trito’s experiences are:
(a) Vision and Mission
(b) Food Business and Beverages Business
(c) Market Growth and Relative Market Share
(d) Performance and Purpose
Answer:
(c) Market Growth and Relative Market Share

Question 3.
The business/product portfolio classification implied by BCG Matrix comprises which of the following combinations?
(a) Growth; Stability; Retrenchment; Turnaround
(b) Weakness-Threat; Weakness-Op portunity; Strength-Opportunity; Strength-Threat
(c) Cash-Cows; Stars; Question Marks; Dogs
(d) Market Penetration; Product De velopment; Market Development; Diversification
Answer:
(c) Cash-Cows; Stars; Question Marks; Dogs

Question 4.
Which of the following may be cited as instances of collaborative approach/ strategic alliance Trepsico Trito follows in its strategy?
(a) Diversification from carbonated drinks to.fruit juices
(b) Diversification from fried to baked chips
(c) Partnerships with quick service restaurants and multiplexes
(d) Diversification into breakfast ce-reals
Answer:
(c) Partnerships with quick service restaurants and multiplexes

Question 5.
Which of the following is the most correct corporate level strategic alternative by the overall strategic direction evident from Trepsico Trito’s corporate strategy?
(a) Growth/Expansion strategy
(b) Stability strategy
(c) Retrenchment strategy
(d) Turnaround strategy
Answer:
(a) Growth/Expansion strategy

Case Study 3

Connect Private Limited, a Mumbai based company is launching a smartphone, under the brand name of Poppy. The company recognizes plethora of options that customers have from Chinese manufacturers flooding the smartphone landscape. With recent COVID-19 pandemic hurting the global sentiment towards Chinese products, the company plans to play on the patriotic card and advertise Poppy as the “Desi” smartphone of India.

Strategic Arm of the company undertook an industry analysis and reported, that, budget phone segment was overtaken by the Chinese brands completely; however, the low segment of smartphones was still open for exploration. Thus, the company planned to enter the market with two models, Poppy A and Poppy B, priced at Rs. 4,499 and Rs. 5,499.

The company is also aware that their product can easily be imitated at same costing as well as pricing, and thus the very essence of their product can be lost. A team of marketing professionals was hired to tackle this issue. The solution they suggested was to take the first mover advantage by spending huge sums in advertising and promotion.

Based on sound consciousness of the competition from huge money backed international players, the company decided to manufacture smartphone covers and accessories with the same “Desi” tag, along with Poppy Smartphones. This shall help them mitigate the risk of being completely thrown out of business. Consequently, they invested a fairly good amount in manufacturing of these accessories.

The investors made it an objective for the team to reach an annual sales volume of 15,000 handsets and 70,000 pieces of accessories. The accessories sales surpassed the expectations by a fairly good margin. However, Poppy A and Poppy B did not receive the much anticipated response and the leadership decided to reduce the scope and focus purely on accessories business going forward.

With a new focus on accessories production, the “Desi” tag will still play an important part in the success. However, they need to ensure creation of strong barriers to entry for domestic players, and for that, they have plans to increase the production to enormous levels. This shall reduce their unit cost, thus, eliminating the new entrants due to extremely competitive pricing.

Based on the above case scenario, answer the multiple choice questions which are as follows:

Question 1.
Connect Private Limited, entered a saturated market of smartphones, after a due market study of understanding the competitive landscape. Put the below steps in correct sequence of understanding thecompetitivelandscape.
(I) Understanding the competitors
(II) Determining strengths and weak-nesses of the competitors
(III) Identify the competitors
(IV) Put all information gathered to-gether
(a) (I), (III), (II), (IV)
(b) (III), (I), (II), (IV)
(c) (II), (III), (IV),(I)
(d) (I), (III), (II), (IV)
Answer:
(b) (III), (I), (II), (IV)

Question 2.
Annual sales volume as an objective by the investors was crucial to establish the company in the market. In which stage of strategic management are such annual objectives especially important?
(a) Formulation
(b) Control
(c) Evaluation
(d) Implementation
Answer:
(d) Implementation

Question 3.
Following the sales numbers reported at the end of year, the leadership took a serious strategic stand point to move forward and shift to a new core business which was more profitable. Under which of the following category of business strategy can this decision be categorized?
(a) Retrenchment strategy
(b) Strategic alliance
(c) Diversification strategy
(d) Market development
Answer:
(a) Retrenchment strategy

Question 4.
After getting results from the market, accessories business of the company can be classified under which category of BCG’s growth share matrix?
(a) Star
(b) Question mark
(c) Cash cow
(d) Dog
Answer:
(c) Cash cow

Question 5.
In the second phase of shifting the business focus to peripheral accessories production, Connect Private Limited has planned setting up entries to barrier for its potential competitors. Which of the following barrier have they planned to implement?
(a) Capital requirement
(b) Product differentiation
(c) Access to distribution channels
(d) Economies of scale
Answer:
(d) Economies of scale

Case Study 4

Manoj Kumar is having his own medium size factory in Mumbai, manufacturing hardware consisting handles, hinges, tower bolts and so on. He has a staff of more than 220 employees in his organization. One of the leading brands of Hardware seller in India is rebranding and selling the material from his factory. Manoj Kumar believes in close supervision and takes all major and minor decisions in the organization.

However, a Strategic Consultant Mr. Arjun advised Manoj Kumar to concentrate mainly on strategic decisions which will have wide implications.

Mr. Arjun also advised Manoj to have clear Vision and Mission and formulate a Mission statement which will have to achieve the Strategic Intent of the Business. Mr. Arjun explained about the importance of Strategic Intent and how Strategic Intent gives an idea of what the organization desires to attain in future.

Based on the above case scenario, answer the multiple choice questions which are as follows:

Question 1.
State which of the point may be considered while writing a mission statement for the company of Manoj Kumar:
(a) The mission of a company should be to make profit.
(b) The mission of a company should not be to make profit.
(c) The mission of a company should not be unique
(d) The mission of a company should cover all aspects of organization
Answer:
(b) The mission of a company should not be to make profit.

Question 2.
Which one of the following is not a strategic element of Strategic Vision?
(a) Strategic vision delineates Organi-sation’s aspirations for the business
(b) Coming up with a mission state-ment that defines what business the company is presently in and conveys the essence of “Who we are and where we are now?”
(c) Using the mission statement as basis for deciding on a long-term course making choices about “Where we are going?”
(d) Communicating the strategic vision in clear, exciting terms that would arouse organization wide commit-ment.
Answer:
(a) Strategic vision delineates Organi-sation’s aspirations for the business

Question 3.
“It seeks to explain the business undertaken by the firm, with respect to the customer needs, target markets, and alternative technologies”. This statement belongs to one of the element of Strategic Intent:
(a) Mission
(b) Business Definition
(c) Vision
(d) Goals and Objectives
Answer:
(b) Business Definition

Question 4.
One of the dimensions of Strategic Decisions describes Strategic decisions involve commitment of _________
(a) Time
(b) Money
(c) Organizational Resources
(d) Strategic Intent
Answer:
(c) Organizational Resources

Question 5.
_____ is an answer to the basic question ‘what business are we in and what we do’.
(a) Vision
(b) Strategic Intent
(c) Mission
(d) Objectives
Answer:
(c) Mission

Case Study 5

Babulal started his FMCG Company “Babulal Mart” in the year 2001. Until the year 2007, Babulal was having only one shop under his company.

But after 2007, Babulal changed his strategy and focused on delegating the responsibilities and started opening more branches.

By the year 2019, Babulal Mart were having 63 Branches all over India. But due to the pandemic in 2020; many of the branches of were not working in a profitable position and Mr. Babulal consulted you to help his company come out of the tough situation.

Unfortunately, in the year 2022, “Babulal Mart” decided to closed down its 15 branches.
Later on, in the year 2023, Mr. Babulal started considering the purchase of a number of farms that provides them with a significant amount of its fresh produce. Babulal Mart feels that by purchasing the farms, it will have greater control over its supply chain.

Babulal Mart is also interested in acquiring another company located in Mumbai which is into making TV Serials.

Based on the above case scenario, answer the multiple choice questions which are as follows:

Question 1.
Until the year 2007, Babulal Mart was following which strategy?
(a) Concentric
(b) Expansion
(c) Stability
(d) Retrenchment
Answer:
(c) Stability

Question 2.
From the years 2007 to 2019, Babulal mart followed which strategy?
(a) Concentric
(b) Expansion
(c) Stability
(d) Retrenchment
Answer:
(b) Expansion

Question 3.
Mr. Babulal considering the pur chase of a number of farms that provides them with a significant amount of its fresh produce signifies which type of Diversification?
(a) Horizontally integrated diversifi-cation
(b) Concentric diversification
(c) Backward Integration
(d) Forward Integration
Answer:
(c) Backward Integration

Question 4.
Babulal Mart is also interested in acquiring another company located in Mumbai which is into making TV Serials.
(a) Vertically integrated diversification
(b) Horizontally integrated diversification
(c) Concentric diversificalion
(d) Conglomerate diversification
Answer:
(d) Conglomerate diversification

Question 5.
Directional strategy, also called as _____
(a) Stability Strategy
(b) Expansion Strategy
(c) Grand Strategy
(d) Divestment Strategy
Answer:
(c) Grand Strategy

Case Study 6

Four friends Mr. A, Mr. B, Mr. C, Mr. D formed 4 different companies A Ltd., B Ltd., C Ltd., D Ltd.
Mr. A makes all major decisions directly and monitors all activities of A Ltd.

B Ltd. has significantly diminished the role played by specialist managers of the middle management, by replacing many tasks of the middle management through Artificial Intelligence.

In C Ltd., functional and product forms are combined simultaneously at the same level of the organization. Employees have two superiors, a product or project manager and a functional manager.

D Ltd. has organized structure by product and services.

Based on the above case scenario, answer the multiple choice questions which are as follows:

Question 1.
Organization Structure followed by A Ltd. is—
(a) Functional Structure
(b) Simple Structure
(c) Hourglass Structure
(d) SBU Structure
Answer:
(b) Simple Structure

Question 2.
Organization Structure followed by B Ltd. is—
(a) Functional Structure
(b) Divisional Structure
(c) Hourglass Structure
(d) SBU Structure
Answer:
(c) Hourglass Structure

Question 3.
Organization Structure followed by C Ltd. is—
(a) Functional Structure
(b) Matrix Structure
(c) Hourglass Structure
(d) SBU Structure
Answer:
(b) Matrix Structure

Question 4.
Organization Structure followed by D Ltd. is—
(a) Functional Structure
(b) Simplè Structure
(c) Divisional Structure
(d) SBU Structure
Answer:
(c) Divisional Structure

Question 5.
This is not one of the phase proposed by Davis and Lawrence for development of matrix structure.
(a) Cross-functional task forces
(b) Functional Matrix
(c) Product/brand management
(d) Mature matrix
Answer:
(b) Functional Matrix

Application Based
Multiple Choice Questions

Question 1.
Which of the following statements correctly explain strategic management?
i Strategic management provides framework for major decisions.
ii Strategic management helps to en-hance the longevity of the business.
iii Strategic management is an inex-pensive process.
iv. Strategic management helps or-ganisation to be more reactive than proactive.
(a) (i) and (ii)
(b) (i), (ii) and (iii)
(c) (i), (ii) and (iv)
(d) (i), (iii) and (iv)
Answer:
(a) (i) and (ii)

Question 2.
Which of the following is not true for core competency:
(a) It distinguishes a company com-petitively.
(b) It is a source of competitive advan-tage.
(c) It is an individual skill and separate technique
(d) It is often visible in the form of organizational functions.
Answer:
(c) It is an individual skill and separate technique

Question 3.
Statement that is typically focused on present business scope and broadly describes an organizations present capabilities, customer focus, activities, and business makeup is:
(a) Vision
(b) Mission
(c) Strategy
(d) Goals
Answer:
(b) Mission

Question 4.
Arrange divestment, liquidation, stability and turnaround strategies in order of preference for adoption by a typical organisation.
(a) Turnaround, stability, liquidation and divestment.
(b) Divestment, liquidation, stability and turnaround.
(c) Stability, turnaround, liquidation and divestment.
(d) Stability, turnaround, divestment and liquidation.
Answer:
(d) Stability, turnaround, divestment and liquidation.

Question 5.
Best-cost provider strategy is related to providing customers more value for money by:
(a) Highlighting low cost and low quality difference.
(b) Emphasizing low cost and better quality difference.
(c) Producing high cost and low quality difference.
(d) Managing high cost and low quality difference.
Answer:
(b) Emphasizing low cost and better quality difference.

Question 6.
Supply chain refers to the linkages between:
(a) Suppliers
(b) Logistics
(c) Customers
(d) All the above
Answer:
(d) All the above

Question 7.
Which of the following is not true for SBUs
(a) It is relevant for multi-product, multi-business enterprises.
(b) It provides for more control at enterprise level with centralised strategic planning.
(c) A SBU has its own set of competi-tors.
(d) SBUs can be created for units at distant geographical locations.
Answer:
(b) It provides for more control at enterprise level with centralised strategic planning.

Question 8.
Strategy evaluation is difficult on account of following trends, except:
(a) There is dramatic increase in the environment’s complexity.
(b) It is difficult to predict future.
(c) Firms have unlimited resources.
(d) Obsolescence is rapid.
Answer:
(c) Firms have unlimited resources.

Question 9.
Acquisition of another organisation that was using your product in their manufacturing is:
(a) Horizontal integrated diversification
(b) Forward integrated diversification
(c) Backward integrated diversification
(d) conglomerate diversification
Answer:
(b) Forward integrated diversification

Question 10.
Porter’ cost leadership is a ______ strategy
(a) Functional level
(b) Business level
(c) Corporate level
(d) Implementation
Answer:
(b) Business level

Question 11.
Strategy is-
(a) Proactive in action
(b) Reactive in action
(c) A blend of proactive and reactive actions
(d) None of the above
Answer:
(c) A blend of proactive and reactive actions

Question 12.
‘Strategic group mapping’ helps in-
(a) Identifying the strongest rival com-panies
(b) Identifying weakest rival companies
(c) Identifying weakest and strongest rival companies
(d) None of the above
Answer:
(c) Identifying weakest and strongest rival companies

Question 13.
In which phase of strategic man-agement are annual objectives especially important?
(a) Formulation
(b) Control
(c) Evaluation
(d) Implementation
Answer:
(d) Implementation

Question 14.
Retrenchment strategy in the organization can be explained as
(a) Reducing trenches (gaps) created between individuals.
(b) Divesting a major product line or market.
(c) Removal of employees from job through the process of reorgani-zation.
(d) Removal of employees from job in one business to relocate them in other business.
Answer:
(b) Divesting a major product line or market.

Question 15.
Differentiation Strategy can be achieved by following measures:
1. Match products with tastes and preferences of customers.
2. Elevate the performance of the product.
3. Rapid product innovation Which of the above is true?
(a) (1) and (2)
(b) (1) and (3)
(c) (2) and (3)
(d) (1), (2) and (3)
Answer:
(d) (1), (2) and (3)

Question 16.
Supply chain refers to the linkages between:
(a) Suppliers
(b) Customers
(c) Manufacturers
(d) All the above
Answer:
(d) All the above

Question 17.
An entrepreneur is one who:
(a) Initiates and innovates a new con-cept.
(b) Does not recognize and utilizes opportunities.
(c) Does not want to face risks and uncertainties.
(d) None of these.
Answer:
(a) Initiates and innovates a new con-cept.

Question 18.
After an earnest attempt to bring in a strategic change in your organization, you the operational head of XYZ Ltd., succeeded but still your organization couldn’t achieve the desired competitive position in the market. Out of the follow-ing what could be the reason?
(a) Strategy Formulation
(b) Strategy Model
(c) Strategy Implementation
(d) Strategy Decision
Answer:
(c) Strategy Implementation

Question 19.
Which of the following are respon-sible for formulating and developing realistic and attainable strategies?
(a) Corporate level and business level managers
(b) Corporate level and functional level managers
(c) Functional managers and business level managers
(d) Corporate level managers, business level managers and functional level managers
Answer:
(d) Corporate level managers, business level managers and functional level managers

Question 20.
A tool by which management identifies and evaluates the various businesses that make up a company is termed as:
(a) Value Chain Analysis
(b) Portfolio Analysis
(c) Competition Analysis
(d) Strategic Analysis
Answer:
(b) Portfolio Analysis

Question 21.
Which one is not the element of strategic intent?
(a) Business model
(b) Vision
(c) Business definition
(d) Business standard
Answer:
(d) Business standard

Question 22.
Vertical integration may be bene-ficial when—
(a) Lower transaction costs and improved coordination are vital and achievable through vertical integration.
(b) Flexibility is reduced, providing a more stationary position in the competitive environment.
(c) Various segregated specializations will be combined.
(d) The minimum efficient scales of two corporations are different.
Answer:
(a) Lower transaction costs and improved coordination are vital and achievable through vertical integration.

Question 23.
Competitive rivalry has the most effect on the firm’s – strategies than the firm’s other strategies.
(a) Business level
(b) Corporate level
(c) Functional level
(d) All of these
Answer:
(a) Business level

Question 24.
The marketing strategy which is used to reduce or shift the demand is:
(a) Enlightened Marketing
(b) Synchro-Marketing
(c) Place Marketing
(d) Demarketing
Answer:
(d) Demarketing

Question 25.
In strategic management, there are two main styles of leadership. These are transformational and:
(a) Transparent
(b) Transitional
(c) Translational
(d) Transactional
Answer:
(d) Transactional

Question 26.
You being the core strategist of your company, entrusted with bringing about strategic change in your company, how will you initiate “unfreezing of the situation”?
(a) Promoting new ideas throughout the organization
(b) Promoting compliance throughout the organization
(c) Promoting change in process throughout the organization
(d) None of the above
Answer:
(a) Promoting new ideas throughout the organization

Question 27.
Velvet Limited is a full-service airline. The company is making the fol-lowing decisions:
i. Should a ‘no-frills’, ‘low-fare’ sub-sidiary be set-up?
ii. If it is set-up, how should the cabin staff be recruited?
Which of the above decisions will be taken by corporate level managers?
(a) Only (i)
(b) Only (ii)
(c) (i) & (ii)
(d) Neither (i) nor (ii)
Answer:
(a) Only (i)

Question 28.
Training Co. operates a network of accounting training centres through out Europe, the US and Australia. The business intends to enter developing markets in order to drive growth and has now decided to enter India which is 7,500 kilometres from the Training Co.’s UK headquarters. The Board has suggested that it will require externally focused management information to move into India. Which of the following is an external factor(s) that the Board should consider while implementing its strategy?
(a) Key local rivals and their strengths and weaknesses
(b) Courses are suitable for this market
(c) Timing of the courses (Public hol-idays, religious festivals, etc. to be avoided)
(d) All of the above
Answer:
(d) All of the above

Question 29.
GetWellSoon Limited is a health provider and has only large, edge of town hospitals. It is considering setting-up additional small city centre clinics ca pable of treating less-serious day cases. Which of the following will fall under “Strategy Implementation”?
(a) Acquiring and fitting out clinics
(b) Hiring and/or transferring staff
(c) Publicity, so that patients know where and when to go
(d) Liaison with general practitioners and the main hospitals
(a) Only (d)
(b) (b) & (d)
(c) (a), (b)&(d)
(d) (a), (b), (c) & (d)
Answer:
(d) (a), (b), (c) & (d)

Question 30.
A person who searched for business opportunity and starts a new enterprise to make use of that opportunity called
(a) Employee
(b) Entrepreneur
(c) Intrapreneur
(d) Investor
Answer:
(b) Entrepreneur

Question 31.
The Niche strategy is the best way to enter a:
(a) New market
(b) Growing market
(c) Matured market
(d) None of the above
Answer:
(c) Matured market

Question 32.
Human resource management has been accepted as a strategic partner in the formulation of organization’s strat egies and in the implementation of such strategies through human resource plan-ning, employment, training, appraisal and reward systems. Factors that influence on employee competence are:
i. Recruitment and selection
ii. Training
iii Appraisal of performance
iv. Compensation

(a) i, ii & iii
(b) ii, iii & iv
(c) i, ii, iii & iv
(d) iii & iv
Answer:
(c) i, ii, iii & iv

Question 33.
Perscopter, a manufacturer of private helicopter offers unique features that fulfil the demands of a narrow market. It competes in market based on its uniqueness and custom-oriented private helicopters. Perscopter provides limited number of high-end helicopters with ultimate features. Which business strategy is being followed by Perscopter?
(a) Differentiation
(b) Focused differentiation
(c) Cost leadership
(d) Focused cost leadership
Answer:
(b) Focused differentiation

Question 34.
Which of the following is more radical organisation design and is also called as non-structure which virtually eliminates in-house business functions and outsources many of them?
(a) Network structure
(b) Strategic business unit
(c) Hourglass structure
(d) Simple structure
Answer:
(a) Network structure

Question 35.
The process of creating, maintain ing, and enhancing strong, value-laden relationships with customers and other stakeholder is:
(a) Social marketing
(b) Augmented marketing
(c) Direct marketing
(d) Relationship marketing
Answer:
(d) Relationship marketing

Question 36.
Gennex industries are analyzing the technological forces for the firm which 1 may provide it opportunities and threats for which of the following stage/s of strategic management process?
(a) Strategy formulation
(b) Strategy implementation
(c) Strategy evaluation
(d) All of the above
Answer:
(d) All of the above

Question 37.
Strategic management allows an organization to be more:
(a) Authoritative
(b) Participative
(c) Commanding
(d) Proactive
Answer:
(d) Proactive

Question 38.
Which of the following is correct?
(a) Strategy is always pragmatic and not flexible
(b) Strategy is not always perfect, flawless and optimal
(c) Strategy is always perfect, flawless and optimal
(d) Strategy is always flexible but not pragmatic
Answer:
(b) Strategy is not always perfect, flawless and optimal

Question 39.
Which of the following are respon-sible for formulating and developing realistic and attainable strategies?
(a) Corporate level and business level managers
(b) Corporateleveland functional level managers
(c) Functional level managers and business level managers
(d) Corporate level managers, business level managers and functional level managers
Answer:
(d) Corporate level managers, business level managers and functional level managers

Question 40.
Competitive landscape requires the application of:
(a) Competitive advantage
(b) Competitive strategy
(c) Competitive acumen
(d) Competitive intelligence
Answer:
(d) Competitive intelligence

Question 41.
Which one is not the element of strategic intent?
(a) Business model
(b) Vision
(c) Business definition
(d) Business standard
Answer:
(d) Business standard

Question 42.
If suppliers are unreliable or too costly, which of these strategies may be appropriate?
(a) Horizontal integration
(b) Backward integration
(c) Market penetration
(d) Forward integration
Answer:
(b) Backward integration

Question 43.
In Michael Porter’s generic strate-gy emphasizes producing standardized products at a very low per unit-cost for consumers who are price sensitive.
(a) Cheap leadership
(b) Inferior product leadership
(c) Cost leadership
(d) Cost benefit
Answer:
(c) Cost leadership

Question 44.
A campaign advocating the mes-sage of ‘save water’ is:
(a) Services Marketing
(b) Holistic Marketing
(c) Social Marketing
(d) Direct Marketing
Answer:
(c) Social Marketing

Question 45.
____ leadership style may be appropriate in turbulent environment.
(a) Transactional
(b) Transformational
(c) Autocratic
(d) None of these
Answer:
(b) Transformational

Question 46.
The purpose of strategy evaluation is to:
(a) increase the budget annually
(b) alert management to problems or potential problems
(c) make budget changes
(d) evaluate employees’ performance
Answer:
(b) alert management to problems or potential problems

Question 47.
Strategic management can be effectively used by NGOs to:
(a) Use resource effectively
(b) Raise funds
(c) Achieve goals
(d) All the above
Answer:
(d) All the above

Question 48.
Anything that a firm does especially well compared to rival firms is referred to as—
(a) Competitive advantage
(b) Comparative advantage
(c) Opportunity cost
(d) Sustainable advantage
Answer:
(a) Competitive advantage

Question 49.
What is the first step in the comprehensive strategic -management model?
(a) Developing vision and mission statements
(b) Performing external audits
(c) Measuring and evaluating perfor-mance
(d) Establishing long-term objectives
Answer:
(a) Developing vision and mission statements

Question 50.
Which strategy is implemented after the failure of turnaround strategy?
(a) Expansion strategy
(b) Diversification strategy
(c) Divestment strategy
(d) Growth strategy
Answer:
(c) Divestment strategy

Question 51.
Best-cost provider strategy involves providing customers more value for the money by emphasizing:
(a) Low cost and low quality difference
(b) Low cost and better quality differ-ence
(c) High cost and low quality difference
(d) High cost and better quality differ-ence
Answer:
(b) Low cost and better quality differ-ence

Question 52.
Fora new product, an organization may choose:
(a) Skimming pricing strategy
(b) Penetration pricing strategy
(c) Both (a) and (b)
(d) None of these
Answer:
(c) Both (a) and (b)

Question 53.
A person who searched for business opportunity and starts a new enterprise to make use of that opportunity is called
(a) Employee
(b) Entrepreneur
(c) Intrapreneur
(d) Investor
Answer:
(b) Entrepreneur

Question 54.
Competitive landscape requires the application of-
(a) Competitive advantage
(b) Competitive strategy
(c) Competitive acumen
(d) Competitive intelligence
Answer:
(d) Competitive intelligence

Question 55.
‘Determinants Analysis’ falls in the purview of-
(a) External competitive strategy anal-ysis
(b) Internal competitive strategy anal-ysis
(c) Strategic risk
(d) Competitive landscape
Answer:
(a) External competitive strategy anal-ysis

Question 56.
The concept of ‘core competence’ has been advocated by-
(a) Gary Hamel and Peter Drucker
(b) C.K. Prahlad and Gary Hamel
(c) C.K. Prahlad and Michael Porter
(d) C.K. Prahlad and Peter Drucker
Answer:
(b) C.K. Prahlad and Gary Hamel

Question 57.
Corporate level strategy is con-cerned with the following-
(a) How do we want to compete?
(b) Where do we want to compete?
(c) How to support the strategy imple-mentation?
(d) all of the above
Answer:
(b) Where do we want to compete?

Question 58.
‘Customer Analysis’ and ‘Market Analysis’ are the part of-
(a) Internal analysis
(b) Strategy identification and selec tion
(c) External analysis
(d) None of the above
Answer:
(c) External analysis

Question 59.
‘Strategic group mapping’ involves-
(a) Identifying the strongest rival com-panies
(b) Identifying weakest rival compa nies
(c) Identifying weakest and strongest rival companies
(d) None of above
Answer:
(c) Identifying weakest and strongest rival companies

Question 60.
‘Attractiveness of firms’ while conducting industry analysis should be seen in-
(a) Relative terms
(b) Absolute terms
(c) Comparative terms
(d) all of the above
Answer:
(a) Relative terms

Question 61.
Which of the following is true of a transnational corporation:
(a) They have subsidiaries but do not have centralized management system
(b) They have no subsidiaries but have centralized management system
(c) They do not have subsidiaries and do not have centralized manage ment system
(d) They have subsidiaries and have a centralized management system
Answer:
(c) They do not have subsidiaries and do not have centralized manage ment system

Question 62.
A campaign advocating the mes-sage of ‘SAVE WATER’ is:
(a) Services Marketing
(b) Holistic Marketing
(c) Social Marketing
(d) Direct Marketing
Answer:
(c) Social Marketing

Question 63.
Entering into a ‘contract’ by MNCs is an example of:
(a) Partial Ownership Alliance
(b) Joint Venture Alliance
(c) Non-Equity Alliance
(d) Joint Ownership Alliance
Answer:
(c) Non-Equity Alliance

Question 64.
‘Competitor’s Differentiation’, Customer Value and ‘Application of Competitiveness’ are the three important areas of:
(a) Value chain analysis
(b) Business process Re-engineering
(c) Competitors Analysis
(d) Core Competence Concept
Answer:
(d) Core Competence Concept

Question 65.
“Inbound and Outbound logistics” are related to:
(a) Supply Chain Management
(b) Logistics Management
(c) Value Chain Analysis
(d) All of the above
Answer:
(b) Logistics Management

Question 66.
A tool by which management identi fies and evaluates the various businesses that make up a company is termed as:
(a) Value Chain Analysis
(b) Portfolio Analysis
(c) Competitive Analysis
(d) Strategic Analysis
Answer:
(a) Value Chain Analysis

Question 67.
‘Build,’ ‘Hold,’ Harvest,’ and ‘Divest’ are the strategies pursued in:
(a) Boston Consulting Group Growth Share Matrix
(b) Value chain analysis
(c) Managerial grid matrix
(d) Ansoff’s product matrix growth matrix
Answer:
(b) Value chain analysis

Question 68.
The low growth, low share busi-nesses in BCG matrix are:
(a) Cows
(b) Dogs
(c) Cats
(d) Question marks
Answer:
(b) Dogs

Question 69.
An advertisement says, ‘Have Roo- hafza with milk and lassi too.’ Which strategy is the company trying to use:
(a) Market Development
(b) Product Development
(c) Market penetration
(d) all of the above
Answer:
(c) Market penetration

Question 70.
ADL matrix has been propounded by:
(a) Arthur D. Lowey
(b) Arthur D. Little
(c) Arthur D. Levin
(d) Arthur D. Louise
Answer:
(b) Arthur D. Little

Question 71.
Geographical Diversification, prod-uct diversification and Entry Mode are the domains of:
(a) Functional Strategy
(b) Business Strategy
(c) Corporate Strategy
(d) all of the above
Answer:
(c) Corporate Strategy

Question 72.
Which of the following bases of competitive advantage is/are more sustainable:
(a) Benefit-based competitive advan tage
(b) price-based competitive advantage
(c) Cost-based competitive advantage
(d) all of the above
Answer:
(a) Benefit-based competitive advantage

Question 73.
The Niche strategy is the best way to enter a:
(a) New market
(b) Growing market
(c) Matured market
(d) None of the above
Answer:
(c) Matured market

Management and Administration – CA Inter Law MCQ is designed strictly as per the latest syllabus and exam pattern.

Management and Administration – CA Inter Law MCQ

Question 1.
Swiss Commodities Private Limited was incorporated in 2021. Company was not running its business properly due to unexpected ups and downs. It could not hold its first annual general meeting in the year 2022. The company is planning to apply for extension of time for holding the ACM from the Registrar of Companies. On which grounds Company can get an extension?

(a) They will not get any extension.
(b) If Company proves that their financial statements are confiscated.
(c) If they prove that directors have fell below numbers.
(d) If they prove that members are not available.

Answer:

(a) They will not get any extension.

Question 2.
The Board of Directors of Gama Ltd. did not call the Extra Ordinary General meeting within 21 days from the date of receipt of requisition from members, then the requisitionists may themselves call a meeting within a period of ____ from the date of requisition.

(a) 15 days
(b) 30 days
(c) 1 month
(d) 3 months

Answer:

(d) 3 months

Question 3.
Soya Limited was incorporated in 2014 and has its registered office in Noida. Company wants to call its 4th Annual General Meeting in Mumbai. Whether it is possible?

(a) It is not possible as Annual General Meeting has to be held in Noida.
(b) It is possible with consent of 50% members is received.
(c) It is possible if consent of 75% members is received.
(d) It is possible if consent of 100% members is received.

Answer:

(d) It is possible if consent of 100% members is received.

Question 4.
Mr. N is a Company Secretary of Mayo Private Limited. For calling Company’s Annual General meeting, Mr. N has to issue notice of that meeting before stipulated period of time. Draft notice is ready with him. However, he is confused on agenda items for which he has to attach explanatory statement to the notice. Please help him to understand which agenda item needs explanatory Statement?

(a) Consideration of Auditors Report.
(b) Fixing remuneration of Auditor.
(c) Fixing remuneration of Manager.
(d) Declaration of any dividend.

Answer:

(c) Fixing remuneration of Manager.

Question 5.
Wide Infra Limited is a Company with 1,350 members. Extraordinary General Meeting of Wide Infra Limited was scheduled on 15th November, 2022 at 11 a.m. On the day of meeting, 3 members were present at 10.45 a.m. What number of members is required to fulfil quorum requirement?

(a) Additional 4 members before 11.30 a.m.
(b) Additional 4 members before 11.15 a.m.
(c) Additional 12 members before 11.30 a.m.
(d) Additional 12 members before 11.15 a.m.

Answer:

(c) Additional 12 members before 11.30 a.m.

Question 6.
The members of Matrix Limited requisitioned for calling Extra Ordinary General Meeting to consider some urgent matters. The same was called by the company. Meeting was scheduled on 31st August, 2022. However, required quorum was not present at the meeting. In this case, what Matrix Limited shall do?

(a) Matrix Limited shall adjourn the meeting to the same day in the next week at the same time and place.
(b) Matrix Limited shall adjourn the meeting to such other day at such other time and place.
(c) The meeting shall be cancelled.
(d) Matrix Limited shall proceed ahead with the available quorum.

Answer:

(c) The meeting shall be cancelled.

Question 7.
In Annual General Meeting, which one of the following will be treated as special business?

(a) Declaration of any dividend.
(b) Fixing of the remuneration of the auditors.
(c) Appointment of directors in place of those retiring.
(d) Regularization of Director’s Appointment.

Answer:

(d) Regularization of Director’s Appointment.

Question 8.
Every listed company shall file with the Registrar a copy of the report on each annual general meeting within ____ of the conclusion of the annual general meeting.

(a) 7 days
(b) 30 days
(c) 60 days
(d) 90 days

Answer:

(b) 30 days

Questions From RTPs, MTPs AND PAST EXAMS (MEMORY BASED) OF ICAI

Question 9.
Annual general meeting need to be called by giving 21 days’ clear notice. However it can be called on a shorter notice if members entitled to vote in that meeting give their consent in writing or by electronic mode. In such case, how many members have to give their consents? [MTP-March 19]

(a) 75% of members entitled.
(b) 90% of members entitled.
(c) 91% of members entitled.
(d) 95% of members entitled.

Answer:

(d) 95% of members entitled.

Question 10.
Supertech Computers Pvt Ltd has 120 members. It sends notice to all of them. 20 members did not attend the meeting. Out of remaining 100 members, 20 members abstained from voting. Advice the company, how many members should vote in favour of resolution, if it has to be passed as a Special Resolution? [MTP-March 19]

(a) 60 votes
(b) 80 votes
(c) 41 votes
(d) 20 votes

Answer:

(a) 60 votes

Question 11.
ABC Infrastructures Limited is a listed company quoted at National Stock Exchange. The company closed its Register of Members in June and August, 2022 for 12 and 21 days respectively. The CFO of company has informed the company secretary to consider closing of register in December for another 15 days for some strategic reasons. Referring to the provisions of Companies Act, 2013, examine the validity of above action of the company. [MTP-April 19]

(a) Valid, as the closure of register of members by company each time is not exceeding 30 days.
(b) Invalid, as company cannot go for closure of Register of members more than twice in a year.
(c) Invalid, as the period of closing register of members exceeding 30 days in a year.
(d) Invalid, as the period of closing the Register of members by the company is exceeding 45 days in a year.

Answer:

(d) Invalid, as the period of closing the Register of members by the company is exceeding 45 days in a year.

Question 12.
The Annual General meeting of Tirupati Ltd. was scheduled for 28th December, 2022, Mr, Ananat, shareholder of Tirupati Ltd. has desired to inspect inspection of proxies lodged with the company. The notice for inspection should be given at least ____ before the meeting. [MTP- April 19]

(a) 24 hours
(b) 1 day
(c) 2 days
(d) 3 days

Answer:

(d) 3 days

Question 13.
In the current financial year Zunee Traders Limited, a non-listed company, has 556 members, increased from 451 members which it had in the immediate previous financial year. For the forthcoming Annual General Meeting (AGM), advise the company whether it is required to provide to its members the facility to exercise their right to vote at this AGM by electronic means. [MTP-Oct 19]

(a) Since the company has more than 500 members it is required to provide to its members the facility to exercise their right to vote at the forthcoming AGM by electronic means.
(b) The company is not required to provide to its members the facility to exercise their right to vote at the forthcoming AGM by electronic means since its members are less than 1,000.
(c) Though the company is required to provide to its members the facility to exercise their right to vote at the forthcoming AGM by electronic means because it has more than 500 members, it can, as a one-time measure, seek exemption from RoC beforehand and in that case, it need not provide facility of voting by electronic means.
(d) Only a listed company is required to provide to its members the facility to exercise their right to vote at the General Meetings by electronic means.

Answer:

(b) The company is not required to provide to its members the facility to exercise their right to vote at the forthcoming AGM by electronic means since its members are less than 1,000.

Question 14.
All the 40 members of Taxila Traders Limited have valid voting rights. Due to some urgency, its directors are desirous of convening Annual General Meeting (AGM) at a shorter notice than statutorily required. Is it possible for them to do so? [RTP-Nov. 19]

(a) Taxila Traders Limited cannot convene AGM at shorter notice than statutorily required.
(b) Taxila Traders Limited can convene AGM at shorter notice than statutorily required, if consent in writing or by electronic mode is accorded by all the 40 members who are entitled to vote at the AGM.
(c) Taxila Traders Limited can convene AGM at shorter notice than statutorily required if consent in writing or by electronic mode is accorded by at least 38 members who are entitled to vote at the AGM.
(d) Taxila Traders Limited can convene AGM at shorter notice than statutorily required if consent in writing or by electronic mode is accorded by at least 36 members who are entitled to vote at the AGM.

Answer:

(c) Taxila Traders Limited can convene AGM at shorter notice than statutorily required if consent in writing or by electronic mode is accorded by at least 38 members who are entitled to vote at the AGM.

Question 15.
Which one of the following requIres ordinary resolution? [MTP-May 201

(a) To change the name of the company.
(b) To alter the articles of association.
(c) To reduce the share capital.
(d) To declare dividends.

Answer:

(d) To declare dividends.

Question 16.
Red Flag Ltd., which has its registered office at Delhi and having 12,500 members is holding its Annual General Meeting in Ashoka Hotel. Despite swanky arrangements most of the members did not turn up and quorum was not present within half an hour of the schedule time of the meeting, as a result meeting was adjourned. However, due to heavy booking schedule, hotel authorities could not make available, for adjourned meeting, sufficient space in the same hall where meeting was originally called but allowed conduct of meeting in a different hall on a different floor next week at same time. Please advise the option available to board: [RTP-Nov. 20]

(a) The meeting stands adjourned automatically to the same place and time next week as per provisions of law. There is no alternate but to hold meeting in the same hall.
(b) As same banquet hall is not available meeting can be held at different place as may be decided appropriate by the Board.
(c) As the same hall is not available to conduct meeting after one week, a fresh notice of 21 days is needed for a different location.
(d) As the same hall is not available to conduct the meeting, the company needs to conduct meeting electronically through internet and give sufficient notice to shareholders.

Answer:

(b) As same banquet hall is not available meeting can be held at different place as may be decided appropriate by the Board.

Question 17.
Neha is a director of Primus Limited. She intends to participate in the board meeting through video conferencing and has intimated the same to the chairperson at the beginning of calendar year. Advise, Neha for how long such declaration shall be valid. [MTP-March 21, March 22]

(a) 1 month
(b) 6 months
(c) 1 year
(d) She has to furnish declaration for each meeting separately.

Answer:

(c) 1 year

Question 18.
A resolution shall be a special resolution when the votes cast in favour of the resolution by members are not less than ____ the number of votes, if any, cast against the resolution. [MTP-April 21, April 22]

(a) Twice
(b) Three times
(c) One third
(d) One fourth

Answer:

(b) Three times

Question 19.
The Annual General Meeting (AGM) of ALL-WELL Limited was held on 31.8.2022. Suppose the Chairman of the company after two days of AGM went abroad for next 31 days. Due to the unavailability of the Chairman, within time period prescribed for submission of copy of report of AGM with the registrar, the report as required was signed by two Directors of the company, of which one was additional Director of the company. Comment on the signing of this report of AGM.
[MTP-Nov. 21]

(a) Yes, the signing is in order as the report can be signed by any director in the absence of Chairman.
(b) No, the signing is not in order as only the Chairman is authorised to sign the report.
(c) Yes, the signing is in order, as in the absence of Chairman at least two directors should sign the report.
(d) No, the signing is not in order, since in case the Chairman is unable to sign, the report shall be signed by any two directors of the company, one of whom shall be the Managing director, if there is one and company secretary of the company.

Answer:

(d) No, the signing is not in order, since in case the Chairman is unable to sign, the report shall be signed by any two directors of the company, one of whom shall be the Managing director, if there is one and company secretary of the company.

Question 20.
The Annual General Meeting of Brother Limited was held on 25th May, 2022. According to the provisions of Companies Act, 2013, till what date the company should submit report of AGM to the registrar? [MTP-Nov, 21]

(a) 4.06.2022
(b) 9.06.2022
(c) 24.06.2022
(d) 25.06.2022

Answer:

(c) 24.06.2022

Question 21.
Gama Limited’s General Meetings are held at its registered office situated in Delhi. The minute book of General meetings of Gama Limited will be kept at: [MTP-May 20, Nov. 21, March 22]

(a) that place where members of Gama Limited will decide.
(b) that place where all employees of Gama Limited will decide.
(c) registered office of the company Gama Limited.
(d) that place where senior officials of Gama Limited will decide.

Answer:

(c) registered office of the company Gama Limited.

Question 22.
Amber Limited is a manufacturer of glassware. Its paid up share capital is divided into 20,000 shares of ₹ 100 each. The company is maintaining its register of members as per the provisions of the Companies Act, 2013. The company wanted to close its register of members for declaring dividend. It may do so by giving minimum ____ days’ notice. [RTP-May 22]

(a) 7 days.
(b) 10 days.
(c) 15 days.
(d) The register of members cannot be closed.

Answer:

(a) 7 days.

Incorporation of Company and Matters Incidental Thereto – CA Inter Law MCQ is designed strictly as per the latest syllabus and exam pattern.

Incorporation of Company and Matters Incidental Thereto – CA Inter Law MCQ

Question 1.
High Aim Pvt. Ltd. wants to change its object clause of the Memorandum of Association of the Company. It requires:
(a) Shareholders approval by way of Ordinary Resolution.
(b) No approval either from shareholders or Tribunal.
(c) Shareholders approval by way of Special Resolution.
(d) Approval from Tribunal.

Answer:

(c) Shareholders approval by way of Special Resolution.

Question 2.
Sapan and Sanjay made a name reservation application accompanied by requisite fee to the Registrar for forming a new private company. The Registrar accorded its approval for reservation of most preferred name Sapanjay Softwares Private Ltd. on 6th July, 2021. In how many days, necessary documents for incorporation of the company must be submitted to the Registrar so that the reserved name does not get lapsed.

(a) Within 10 days from the date of approval.
(b) Within 20 days from the date of approval.
(c) Within 45 days from the date of approval.
(d) Within 60 days from the date of approval.

Answer:

(b) Within 20 days from the date of approval.

Question 3.
Rukmani, a fresh science graduate, wants to make available the farmers good quality seeds and manure. For her business she is contemplating to form a company and is weighing various options. Sometimes before, she came to know that a ‘one person company’ has minimum one member and one director whereas a private company has minimum two members and 2 directors. As regards a public company, she has vague idea that there should be minimum three directors but she does not know about the minimum members required in this case. Advise.

(a) When there is requirement of minimum 3 directors, the public company can be formed by minimum 3 persons.
(b) There should be minimum 5 persons for formation of a public company though
requirement of minimum directors shall remain 3.
(c) There should be minimum 7 persons for formation of a public company though requirement of minimum directors shall remain 3.
(d) There should be minimum 9 persons for formation of a public company though requirement of minimum directors shall remain 3.

Answer:

(c) There should be minimum 7 persons for formation of a public company though requirement of minimum directors shall remain 3.

Question 4.
Jatin is desirous of forming a ‘One Person Company (OPC)’ for which he wants to nominate his wife Jasmin who in the event of his death shall become the member of OPC. However, he is not aware of as to which document should contain the name of the nominee. Advise him in the matter.

(a) Name of the nominee should be mentioned in the Articles of Association after the names of the directors.
(b) Name of the nominee should be mentioned in the Memorandum of Association.
(c) Either Articles of Association or Memorandum of Association may contain the name of the nominee.
(d) There is no need to mention the name of the nominee in either Articles of Association or Memorandum of Association; a simple consent letter obtained from the nominee and kept in the records is sufficient.

Answer:

(b) Name of the nominee should be mentioned in the Memorandum of Association.

Question 5.
Priyank and Priyanka, got reserved a name and thereafter a private limited company was formed using the reserved name on 1st June, 2021. Later on, a registered proprietor of a trade mark noted that the name of this private limited company was identical to the trade mark he had earlier got registered under the Trade Marks Act, 1999. Advise as to latest by which date, the proprietor of the registered trade mark can move an application to the Central Government against this anomaly.

(a) Latest by 30th November, 2021, the registered proprietor of trade mark should move an application to the Central Government for rectification of this anomaly.
(b) Latest by 30th May, 2022, the registered proprietor of trade mark should move an application to the Central Government for rectification of this anomaly.
(c) Latest by 30th May, 2023, the registered proprietor of trade mark should move an application to the Central Government for rectification of this anomaly.
(d) Latest by 30th May, 2024, the registered proprietor of trade mark should move an application to the Central Government for rectification of this anomaly.

Answer:

(d) Latest by 30th May, 2024, the registered proprietor of trade mark should move an application to the Central Government for rectification of this anomaly.

Question 6.
SNDT Ltd. decided to shift its registered office from jurisdiction of one Registrar to the jurisdiction of another Registrar. SNDT Ltd. complied with the provisions of Companies Act, 2013 and did all relevant filing within due period of time. Confirmation on such shifting was received by Regional Director on 26th June, 2021. By when SNDT Ltd has to file that confirmation with the Registrar?

(a) 11th July, 2021.
(b) 25th July, 2021.
(c) 11th August, 2021.
(d) 25th August, 2021,

Answer:

(d) 25th August, 2021

Question 7.
Mr. Pushkar wishes to start his own venture with an idea of recycling of plastic waste. He approaches you for your advice so as to decide on which type of entity he should incorporate mainly based on the aspects of taxation, capital funding and other monetary benefits to the promoters. Kindly suggest a suitable form of entity from the following:

(a) Limited Liability Partnership.
(b) Private Limited Company.
(c) Section 8 Company.
(d) Producer Company.

Answer:

(c) Section 8 Company.

Question 8.
DEF Private Limited altered its Articles of Association on its conversion into public Company. A copy of order of the competent authority approving the alteration, is required to be filed with Registrar. How many days Company have to file such order?

(a) 15 days.
(b) 30 days.
(c) 45 days.
(d) 60 days.

Answer:

(a) 15 days.

Question 9.
An Indian Company decided to shift its registered office within the jurisdiction of same Registrar in a Board meeting held on 25th May, 2021. Within how many days Company shall intimate such change to Registrar of Companies?

(a) Within 15 days from the date of such change.
(b) Within 30 days from the date of such change.
(c) Within 15 days from the date of Board meeting.
(d) Within 30 days from the date of Board meeting.

Answer:

(a) Within 15 days from the date of such change.

Question 10.
Seven Hospitality Limited (“Company”) was incorporated in 2013. Company run resorts and hotels nearby Mumbai. In 2022, Central government received an application from Mr. X (“proprietor”) who has registered trademark for word “Seven”. In ideal situation, what will be the Central Government’s stand?

(a) Central Government will ask to take permission from Registrar, as he has approved this name in first place.
(b) Central Government will ask them to mutually agree to use the word “Seven”.
(c) Central Government will direct the Company to change its name.
(d) Central Government will deny his application.

Answer:

(d) Central Government will deny his application.

Question 11.
Abha formed a ‘One Person Company (OPC)’ on 15-10-2021 with her husband Akhil as nominee and ₹ 10 lakhs as Authorised and paid-up share capital. In the month of April 2022 she got in touch with a foreigner and is expecting to receive a substantial export order by May 2022 whose final delivery must be completed by December 2022. She is contemplating to convert her OPC into a private limited company before she receives the export order in May 2022.

(a) Since Abha is the sole member of OPC she is having full discretion to voluntarily convert it into a private limited company any time after 15-10-2021.

(b) Abha can voluntarily convert her OPC into a private limited company only after the expiry of first financial year by which the accounts are closed [i.e. after 31-3-2022 without any restriction.)

(c) Abha can voluntarily convert her OPC into a private limited company only after she delivers duly audited first financial statements and Annual Return to the concerned Registrar of Companies by due date and without making payment of any additional fee.

(d) Abha can voluntarily convert her OPC into a private limited company only after expiry of two years from 15-10-2021 [i.e. on 15-10-2023 or thereafter).

Answer:

(d) Abha can voluntarily convert her OPC into a private limited company only after expiry of two years from 15-10-2021 [i.e. on 15-10-2023 or thereafter).

Question 12.
Arun along with his wife Arunima is running successfully a trading business. His friend Akash has suggested him to form a ‘One Person Company (OPC)’ whose striking feature is ‘limited liability’. Arun is all convinced to get incorporated OPC but he is in a dilemma as to how to depict the name of such OPC in the Memorandum. Select the best option for him.
(a) Aru & Aru (One Person Company) Trading Private Limited.
(b) One Person Company – Aru & Aru Trading & Co.
(c) Aru & Aru Trading (One Person Company).
(d) Aru & Aru Trading Private Limited (One Person Company).
Answer:
(d) Aru & Aru Trading Private Limited (One Person Company).

Question 13.
Arshi, is the sole member of his OPC and he has appointed Vishal (his dear friend) as his nominee. Now, Vishal is leaving India permanently and has set up his own business in Italy, Due to this fact, he has withdrawn his consent to continue as nominee in the said OPC.

(a) Vishal cannot withdraw his consent to act as a nominee of the OPC.
(b) Only Arshi has a right to remove Vishal as a nominee.
(c) Vishal can withdraw his consent to act as a nominee of the OPC by giving proper notice.
(d) Vishal cannot withdraw his consent only when he is disabled but not due to the reason that he has set up his own business.

Answer:

(c) Vishal can withdraw his consent to act as a nominee of the OPC by giving proper notice.

Question 14.
Vivek is in trading business whereby he supplies handmade gloves and socks to many charitable trusts who supports the elderly people. Vivek now wants to expand his business and wants to reap the benefits of company form of organisation by opening his business as an OPC registered u/s 8 of the Companies Act, 2013. Advise Vivek:

(a) Vivek cannot form an OPC as he is in trading business.
(b) Vivek cannot form an OPC to be registered u/s 8 of the Companies Act, 2013.
(c) Vivek can form an OPC to be registered u/s 8 of the Companies Act, 2013.
(d) Vivek can form an OPC as a private company and then convert it into a Sec. 8 company.

Answer:

(b) Vivek cannot form an OPC to be registered u/s 8 of the Companies Act, 2013.

Question 15.
A, B, C, D, E, F, G want to incorporate a public limited company, However, G wants his private limited company to be its member instead of himself. Following this proposition of G, D also wants his registered partnership firm to be its member instead of himself.

(a) Both G and D are required to sign the Memorandum of newly formed company in their individual capacity and not through their concerns.
(b) Private Limited Company of G can be the subscriber to the Memorandum of newly formed company but D has to sign the Memorandum in his individual capacity.
(c) Both G and D have to obtain the consent of other five persons in writing before their private limited company and partnership firm subscribe to the Memorandum.
(d) Private Limited Company of G cannot be the subscriber to the Memorandum of newly formed company but registered partnership firm of D can be the subscriber to the Memorandum.

Answer:

(b) Private Limited Company of G can be the subscriber to the Memorandum of newly formed company but D has to sign the Memorandum in his individual capacity.

Question 16.
Ravi and Ragini have formed a Sec. 8 company; date of incorporation being 18.02.2021 and they being the directors and also the shareholders. During June, 2021 it transpired that two unsuitable articles were required to be altered for smooth functioning of the company. Advise.

(a) Since articles regulate the internal management of the company, both Ravi and Ragini being directors and shareholders are themselves capable of altering the articles.
(b) In case of sec. 8 company, articles can be altered only if the company shows profits consecutively for two years.
(c) In case of sec. 8 company, prior approval of the Central Government is required to be obtained before its articles are altered.
(d) In case of sec. 8 company, at least one year must elapse from the date of its incorporation before its articles are altered but there is no need to obtain prior permission of the Central Government.

Answer:

(c) In case of sec. 8 company, prior approval of the Central Government is required to be obtained before its articles are altered.

Question 17.
Sukant and Sukriti, architects by profession and residents of Janakpuri, Delhi, have formed a company by the name Suk Architects and Consultants Private Limited, whose registered office is situated in a somewhat less inhibited market area of Gurugram, Haryana. They do not consider it to be a safe place. Therefore, to be on safer side they have kept all the documents and information relating to incorporation of their company (that were originally filed with Registrar for registration of Company) at Sukanfs residence. Is their action justified?

(a) It is their prerogative to keep all the documents and information relating to incorporation of their company at a place which they think is quite safe even if it is Janakpuri, Delhi.

(b) Considering registered office to be unsafe, they can keep all the documents and information relating to incorporation of their company at any place in Haryana only where Gurugram is situated but for this purpose they must seek permission of the ROC.

(c) If they do not want to seek permission of ROC, considering registered office to be unsafe, they can keep all the documents and information relating to incorporation of their company at any place which should be within three kms. of their registered office but in Gurugram only.

(d) They have to keep all the documents and information relating to incorporation of their company at the registered office only.

Answer:

(d) They have to keep all the documents and information relating to incorporation of their company at the registered office only.

Question 18.
Namita Ceramic Goods Limited having 152 members was incorporated with the main objects to manufacture ceramic goods, glazed, unglazed floor and wall tiles, etc. and to carry on trading in such products. After three years of successful operation, it wants to diversify its business by entering into the field of manufacturing electronic goods for which it is required to alter its objects clause. Advise the company in relation to alteration of Memorandum.

(a) The company can alter its Memorandum of Association by passing an ordinary resolution and getting it confirmed by the Regional Director (RD).
(b) The company can alter its Memorandum of Association by passing a special resolution in the shareholders’ meeting.
(c) The company can alter its Memorandum of Association in relation to the objects clause by passing a special resolution in the shareholders’ meeting and getting it confirmed by the Regional Director (RD).
(d) The company can alter its Memorandum of Association in relation to the objects clause by passing a special resolution in the shareholders’ meeting and simultaneously publishing the contents of special resolution in two newspapers (one in English and the other one in vernacular language) circulating in that area.

Answer:

(b) The company can alter its Memorandum of Association by passing a special resolution in the shareholders’ meeting.

Question 19.
Swara Musical Instruments Private Limited was incorporated on 10th October, 2021 by converting existing partnership firm into company. Sohini and Mohini became the promoters of the company. Sohlni’s premises which was rented out to the partnership firm was to be used as the registered office. Mention the documents which need to be filed with the Registrar of Companies (RoC) for verification of registered office.

(a) A notarised copy of rent agreement along with rent receipt which is not older than one month.
(b) A copy of the public notice published in a local newspaper that the premises is rented out to the company along with certified copy of rent agreement.
(c) A notarised copy of rent agreement along with rent receipt which is not older than two months.
(d) A notarised copy of rent agreement only.

Answer:

(a) A notarised copy of rent agreement along with rent receipt which is not older than one month.

Question 20.
In view of the fact that a private company enjoys a number of privileges, Orange Pharma Limited having 20 members is contemplating to convert itself into the private company. For this purpose the company needs to alter its articles by inserting three restrictive clauses as specified in Sec. 2(68) and the change in name is to be authorized by members by passing ____.

(a) A special resolution and after obtaining approval of the Central Government.
(b) A special resolution and after obtaining approval of the National Company Law Tribunal (NCLTJ.
(c) A special resolution and after obtaining approval of the Registrar of Companies (RoC).
(d) A special resolution and after obtaining approval of the State Government.

Answer:

(a) A special resolution and after obtaining approval of the Central Government.

Questions From RTPs, MTPs AND PAST EXAMS (MEMORY BASED) OF ICAI

Question 21.
Vinay and Sanjay made a name reservation application accompanied by requisite fee to the Registrar for forming a new private company. The Registrar accorded its approval for reservation of most preferred name Vinanjay Softwares Private Ltd. on 7th july, 2021. By which date necessary documents for incorporation of the company must be submitted to the Registrar so that the reserved name does not get lapsed. (MTP-March 19, RTP-May 19)

(a) Latest by 20th July, 2021.
(b) Latest by 27th July, 2021.
(c) Latest by 4th August, 2021.
(d) Latest by 4th September, 2021.

Answer:

(b) Latest by 27th July, 2021.

Question 22.
Rajesh has formed a ‘One Person Company (OPC)’ with his wife Roopaii as nominee. For the last two years his wife Roopaii is suffering from terminal illness and due to this hard fact he wants to change her as nominee. He has a trusted and experienced friend Ramnivas who could be made nominee or his (Rajesh) son Rakshak who is of 17 years of age. Whom should he nominate as nominee in place of his wife? (RTP-May 19]

(a) Since blood relation can only be appointed as nominee in case of OPC, Rajesh needs to appoint his son Rakshak.
(b) Rajesh can appoint his friend Ramnivas as nominee in his OPC.
(c) Roopaii is not agreeable to the proposal of Rajesh and hence, Rajesh cannot change her as the nominee.
(d) Either Rakshak or Mr. Ramnivas can be appointed as nominee.

Answer:

(b) Rajesh can appoint his friend Ramnivas as nominee in his OPC.

Question 23.
The Registrar shall register any alteration of the memorandum with respect to the objects of the company and certify the registration within a period of _____ from the date of filing of the special resolution. [MTP-Oct. 19]

(a) 30 days.
(b) 60 days.
(c) 90 days.
(d) 6 months.

Answer:

(a) 30 days.

Question 24.
Swastik Private Limited passed a Special Resolution to change its name to Swastik Darshan Private Limited on 30th May, 2021. Relevant MCA filing was done on due time and then Company got its new stationery printed on 1st July, 2021. However there was a delay in issue of Certificate and Company received new certificate on 20th August, 2021 which was issued on 10th August, 2021. Company wants to enter into a lease agreement for new premise. When can they do such agreement in new name of the Company? [MTP-May 20]

(a) 30th May, 2021.
(b) 1st July, 2021.
(c) 2 0th August, 2021.
(d) 10th August, 2021.

Answer:

(d) 10th August, 2021.

Question 25.
In Roopali Marketing Company Private Limited (Authorised capital 50,000 shares of ₹ 10 each and paid-up share capital of ₹ 4,50,000), 1,000 shares are jointly held by Abeer and Abheek; another 800 shares are jointly held by Seema and Srividya; and another 1,200 are jointly held by Ramesh, Raksha and Rajneesh. Further, 42,000 shares are held by 193 individual persons in their individual capacity. Is it possible for the company to induct more persons? [MTP-March 19, May 20]

(a) The company is unable to induct more persons since it already has 200 individual members.
(b) The company can induct 4 more persons as members.
(c) The company can induct another 20 persons (i.e. 10% of 200 individual members) after seeking permission from the concerned RoC.
(d) If the company does not want to seek permission of the concerned RoC, it can induct only 10 more persons (i.e. 5% of 200 individual members).

Answer:

(b) The company can induct 4 more persons as members.

Question 26.
If a company changes its name, which of the following is most accurate: [MTP-Oct. 20]

(a) It is not allowed to use old name in any way.
(b) New name should not be identical with old name.
(c) Old name should be painted/printed for next 1 year along with new name.
(d) Old name should be painted/printed for next 2 years along with new name.

Answer:

(d) Old name should be painted/printed for next 2 years along with new name.

Question 27.
Anu got incorporated ‘One Person Company’ with her sister Alpa as the nominee and about three years have passed satisfactorily. From time to time, Anu does a number of charitable works and is associated with three NGOs. In the meantime, her business under her OPC has also flourished. Now she is contemplating to convert the OPC either as a Sec. 8 company (i.e. formation of companies with charitable objects). Choose the correct option. [MTP-April 21]

(a) Since company belongs to Anu, she has full discretion to convert the OPC either as a sec. 8 company or as a private or public company.

(b) Since the company was formed as a private company, the only option available with Anu is to convert it into a public limited company.

(c) There is specific prohibition on converting OPC into a sec. 8 company; otherwise, it can be converted into a private or public company without any hindrance.

(d) Since Anu does a lot of charitable works there is no prohibition to convert his OPC into a sec. 8 company (companies formed with charitable objects).

Answer:

(c) There is specific prohibition on converting OPC into a sec. 8 company; otherwise, it can be converted into a private or public company without any hindrance.

Question 28.
Lalit made an offer to Managing Director (MD) of a company. MD accepted the offer though he had no authority to do so. Subsequently Lalit withdrew the offer but the company had already ratified the MD’s acceptance. State which of the statement given hereunder is correct: [MTP-April 21]

(a) Lalit is bound with the offer due to ratification.
(b) An offer once accepted cannot be withdrawn.
(c) Both option (a) & (b) is correct.
(d) Lalit is not bound to an offer.

Answer:

(c) Both option (a) & (b) is correct.

Question 29.
If a company is registered by furnishing incorrect information then its winding-up may be ordered by: [MTP-April 21]

(a) Central Government.
(b) Registrar of Companies.
(c) National Company Law Tribunal.
(d) Court.

Answer:

(c) National Company Law Tribunal.

Question 30.
____ cannot be a subscriber to the Memorandum of Association and Articles of Association. [MTP-April 22]

(a) A company
(b) Government
(c) Minor
(d) Major

Answer:

(c) Minor

Question 31.
In case of a private company, the provisions for entrenchment may be made at the time of formation of the company or by amendment of articles, ____. [MTP-April 22]

(a) By passing a special resolution.
(b) With the consent of all the members.
(c) By passing a special resolution and approval of the Central Government.
(d) With the consent of all the members and approval of the Central Government.

Answer:

(b) With the consent of all the members.

Question 32.
Where a company Is granted licence under section 8, it is not required to use the word even though it is a limited company:

(a) Guarantee company.
(b) Limited Liability Partnership.
(c) Limited or Private Limited, as the case may be.
(d) Development Authority. [MTP-April 22]

Answer:

(c) Limited or Private Limited, as the case may be.

Registration of Charges – CA Inter Law MCQ is designed strictly as per the latest syllabus and exam pattern.

Registration of Charges – CA Inter Law MCQ

Qestion 1.
A charge was created on assets of Pram Limited, Such charge is registered on 12th November, 2021. Any person acquiring such assets shall be deemed to have notice of the charge. (Give your answer as per the provisions of the Companies Act, 2013)

(a) from 12th November, 2021.
(b) from 13th November, 2021.
(c) from 12th December, 2021.
(d) from 12th January, 2021.

Answer:

(a) from 12th November, 2021.

Question 2.
Any person acquiring property (on which charge is registered u/s 77) shall be deemed to have notice of the charge from:

(a) 30 days of such charge.
(b) date of application for charge.
(c) date of acquiring the property.
(d) date of such registration.

Answer:

(d) date of such registration.

Questions From RTPs, MTPs AND PAST EXAMS (MEMORY BASED) OF ICAI

Question 3.
Purvi Pvt Ltd. is maintaining a register of charges along with all other necessary books and registers. The entry for every creation, modification and satisfaction of charges is being done properly. The company is also preserving every instrument related to such charges. From the following for how long the instrument of charges shall be maintained/ preserved by the company. [MTP-April 19]

(a) For minimum 8 years from the date of creation of charge.
(b) For minimum 10 years from the date of creation of charge.
(c) For minimum 8 years from the date of satisfaction of charge.
(d) Permanently without any time limit.

Answer:

(c) For minimum 8 years from the date of satisfaction of charge.

Question 4.
Eztech Machines Limited owns a plot of land which was mortgaged to Urbane Commercial Bank Limited for raising term loan of ₹ 2 crore. The mortgage was duly registered with the Central Registry. First loan instalment of ₹ 50 lakhs was released immediately after sanction of term loan with the condition that subsequent three instalments of ₹ 50 lakhs shall be released as soon as the earlier released instalment is utilized satisfactorily.

Is it necessary either for the company or the bank to register the charge on plot with the concerned Registrar of Companies (RoC) when the mortgage is registered with the Central Registry? [MTP-Oct. 19, RTP-Nov. 19]

(a) It is not necessary either for the bank or the company to register the charge on plot of land with the concerned Registrar of Companies (RoC] when the mortgage is registered with the Central Registry.
(b) It is necessary to get the charge on plot on land registered with the concerned Registrar of Companies (RoC] irrespective of the fact that mortgage is registered with the Central Registry.
(c) The charge on plot needs to be registered with the concerned Registrar of Companies (RoC] only when the actual liability of the company with the Bank exceeds ₹ 1 crore.
(d) The charge on plot needs to be registered with the concerned Registrar of Companies (RoC] only when the term loan sanctioned by the bank to the company exceeds ₹ 2 crores.

Answer:

(b) It is necessary to get the charge on plot on land registered with the concerned Registrar of Companies (RoC) irrespective of the fact that mortgage is registered with the Central Registry.

Question 5.
On receipt of intimation of satisfaction of charge, the registrar issues a notice to the holder calling a show cause within such time not exceeding ____ days as to why payment or satisfaction in full should not be regarded as intimated to the Registrar. (MTP-Oct. 19)

(a) 14
(b) 21
(c) 30
(d) 300

Answer:

(a) 14

Question 6.
With a view to augment its production, Surya Techno-Products Limited availed a loan of ₹ 50 lakhs from Shrilaxmi First Bank Limited for purchase of a new machinery by offering its factory worth ₹ 2.25 crores as security. However, the company did not initiate any steps to get the charge on factory registered in favour of lending banker within the specified time.

As soon as the charge-holder bank came to know about the non-registration of charge with the RoC, it applied to the Registrar for registration of charge along with the instrument creating the charge and paid the requisite fees when demanded. Advise the bank whether it can recover the fees so paid for registration of chaise from Surya Techno Products. [RTP-Nov. 19]

(a) Yes, the bank can recover the fees paid by it for registration of charge.
(b) No, the bank cannot recover the fees paid by it for registration of charge because the bank is equally responsible for getting the charge registered.
(c) Only when it obtains recovery orders from Regional Director (RD), the bank can recover the fees paid by it for registration of charge from the company.
(d) Only when it obtains recovery orders from National Company Law Tribunal (NCLT), the bank can recover the fees paid by it for registration of charge from the company.

Answer:

(a) Yes, the bank can recover the fees paid by it for registration of charge.

Question 7.
A charge was created by Cygnus Softwares Limited on its office premises to secure a term loan of ₹ 1 crore availed from NextGen Commercial Bank Limited through an instrument of charge executed by both the parties on 16th February, 2022. Inadvertently, the company could not get the charge registered with the concerned Registrar of Companies (RoC) within the first statutory period permitted by law and the default was made known to it by the lending banker with a stern warning to take immediate steps for rectification.

Advise the company regarding the latest date within which it must register the charge with the RoC so that it is not required to pay a specific type of fees for charge registration. [RTP-Nov. 19]

(a) With a view to avoid paying a specific type of fees for charge registration, the company must get the charge registered latest by 27th April, 2022.
(b) With a view to avoid paying a specific type of fees for charge registration, the company must get the charge registered latest by 17th April, 2022.
(c) With a view to avoid paying a specific type of fees for charge registration, the company must get the charge registered latest by 2nd May, 2022.
(d) The company cannot now get the charge register as the time prescribed by Law has expired.

Answer:

(b) With a view to avoid paying a specific type of fees for charge registration, the company must get the charge registered latest by 17th April, 2022.

Question 8.
Cyplish Games and Toys Limited was sanctioned a term loan of ₹ 60 lakhs by Zawnn Industrial Bank Limited on 21st November, 2021. As a security, the company offered its office premises situated at Bandra, Mumbai and an instrument of charge was executed. However, the company failed to get the charge registered with the concerned Registrar within the first as well as second statutory period available as per law.

This was adversely commented by the internal auditors of the bank and therefore, after a strict advisory received from Shahji, the senior manager of the bank, the company was prompted to take steps for registration of charge. Name the specific type of fees which the company is now required to pay for registration of charge. [RTP-Nov. 19]

(a) Special Fees.
(b) Ad valorem Fees.
(c) A Late Registration Fees.
(d) Ad valorem Duty.

Answer:

(b) Ad valorem Fees.

Question 9.
The instrument creating a charge or modification thereon shall be preserved for a period of ___ years from the date of satisfaction of charge by the company. [MTP-March 21]

(a) 5
(b) 7
(c) 8
(d) 15
Answer:

(c) 8

Question 10.
An interest or lien created on the property or assets of a company or any of its undertakings or both as security is known as: [MTP-March 21, March 22]

(a) Debt
(b) Charge
(c) Liability
(d) Hypothecation

Answer:

(b) Charge

Question 11.
The registrar shall keep a register of charges which shall be open to inspection by ____ on payment of fees: [MTP-April 22]

(a) the company
(b) the charge holder
(c) holder
(d) any person

Answer:

(d) any person

Declaration and Payment of Dividend – CA Inter Law MCQ is designed strictly as per the latest syllabus and exam pattern.

Declaration and Payment of Dividend – CA Inter Law MCQ

Question 1.
XP Ltd declared 12% dividend to its Equity Shareholders. However Company missed to transfer unpaid dividend to bank account even after 40 days from declaration of Dividend. In such case how much interest will be payable?
(a) 8% p.a.
(b) 16% p.a.
(c) 10% p.a.
(d) 12% p.a.
Answer:
(d) 12% p.a.

Question 2.
Mr. X is a shareholder of Mark Pvt. Ltd. He transferred his shares to his daughter Ms. D, in the month of February. Registration of such instrument of transfer is still pending by the Company. In this scenario, Companies Act, 2013 state certain provisions which have to be kept in mind by the Company. Which provision mentioned below in this regard is correct?

(a) Company has to transfer the dividend in relation to such shares to the Unpaid Dividend Account.
(b) Company has to transfer the dividend in relation to such shares in the name of transferee.
(c) Company has to issue fully paid-up bonus shares in the name of transferor.
(d) Company has to issue fully paid-up bonus shares in the name of transferee.
Answer:
(a) Company has to transfer the dividend in relation to such shares to the Unpaid Dividend Account.

Question 3.
Which of the following amount is not credited to IEPF Account?
(a) Amount in unpaid dividend account (UDA) of company.
(b) Amount of matured deposits with the company.
(c) Profit on sale of assets.
(d) Amount of matured debentures with the company.
Answer:
(c) Profit on sale of assets.

Question 4.
The authorised and paid-up share capital of Avantika Ayurvedic Products Limited is ₹ 50 lakhs divided into 5,00,000 equity shares of ₹ 10 each. At its Annual General Meeting (AGM) heid on 24th September, 2022, the company declared a dividend of ₹ 2 per share by passing an ordinary resolution. Mention the latest date by which the amount of dividend must be deposited in a separate account maintained with a scheduled bank.
(a) Latest by 29th September, 2022.
(b) Latest by 4th October, 2022.
(c) Latest by 9th October, 2022.
(d) Latest by 24th October, 2022.
Answer:
(a) Latest by 29th September, 2022.

Question 5.
The Directors of Silver Tongue Solutions Limited proposed dividend at 18% on equity shares for the financial year 2021-22. The same was approved in the Annual general body meeting held on 30th September, 2022. The Directors declared the approved dividends.

Mr. Jagan was the holder of 2,000 equity of shares on 31st March, 2022, but he transferred the shares to Mr. Rajiv on 8th August, 2022. Mr. Rajiv has sent the shares together with the instrument of transfer to the company for registration of the shares in his favour only on 25th September, 2022. The registration of the transfer of shares is pending on 30th September, 2022. With respect to the dividend declared the correct action to be taken by the company is:

(a) Pay the dividend to Mr. Jagan.
(b) Pay the dividend to Mr. Rajiv.
(c) Transfer the dividend in relation to such shares to the Unpaid Dividend Account.
(d) Transfer the dividend in relation to such shares to the Investor Education and Protection Fund.
Answer:
(c) Transfer the dividend in relation to such shares to the Unpaid Dividend Account.

Questions from RTPs, MTPs And Past Exams (Memory Based) of ICAI

Question 6.
In how many days from the date of declaration of interim dividend, it shall be deposited in a separate bank account. [MTP-April 19]
(a) 5 days
(b) 7 days
(c) 15 days
(d) 21 days
Answer:
(a) 5 days

Question 7.
After Declaration of dividend it should be paid within. [MTP-April 19]
(a) 14 days
(b) 21 days
(c) 30 days
(d) 45 days
Answer:
(c) 30 days

Question 8.
ABC Ltd., a listed company proposed a dividend @ 15% on equity shares for the financial year ended on 31st March, 2022. The Annual General Meeting (AGM) of the company was held on 15th July, 2021 and the proposed dividend was approved and declared in the same. Due to some technical issues, dividend on 600 shares neither be paid within the time limit prescribed by the Act nor was transferred to unpaid dividend account. In such a situation which regulatory authority can take action against the company and its officers in default? [MTP-April ]
(a) Central Government
(b) SEBI
(c) Tribunal
(d) Investor Education and Protection Fund Authority.
Answer:
(b) SEBI

Question 9.
Sumitra Healthcare and Hospitality Limited had issued 9% non-convertible debentures which matured four years back. However, 1,000 such debentures of ₹ 100 each are still remaining unclaimed and unpaid even after the maturity. State the period after which the company needs to transfer them to Investor Education and Protection Fund (IEPF) if they remain unclaimed and unpaid. [MTP-Oct. 19, RTP-Nov. 19]
(a) After the expiry of 5 years from the maturity date.
(b) After the expiry of 6 years from the maturity date.
(c) After the expiry of 7 years from the maturity date.
(d) After the expiry of 8 years from the maturity date.
Answer:
(c) After the expiry of 7 years from the maturity date.

Question 10.
Shreyas Mechanics Limited owns a plot of land which was purchased long before. As the property rates are going up, it is decided to revalue the plot at fair value which is moderately ten times the original price, thus resulting in a revaluation profit of ₹ 20 lakhs. The Board of Directors is keen to utilize ₹ 20 lakhs along with free reserves of ₹ 24 lakhs for declaration of dividend at the forthcoming Annual General Meeting (AGM) to be held on 28th September, 2022. Advise Hie company. [RTP-Nov. 20]

(a) ₹ 20,00,000 are to be excluded from the distributable profits as the same cannot be utilized towards declaration of dividend.
(b) Only 25% of ₹ 20,00,000 can be utilized as distributable profits towards declaration of dividend.
(c) Up to 50% of ₹ 20,00,000 can be utilized as distributable profits towards declaration of dividend.
(d) Up to 60% of ₹ 20,00,000 can be utilized as distributable profits towards declaration of dividend.
Answer:
(a) ₹ 20,00,000 are to be excluded from the distributable profits as the same cannot be utilized towards declaration of dividend.

Question 11.
The Board of Directors of Vidyut Limited are contemplating to declare interim dividend in the last week of July, 2022 but the company has incurred loss during the current financial year up to Hie end of June, 2022. However, it is noted that during the previous five financial years i.e., 2017-18, 2018-19, 2019-20, 2020-21 and 2021-22, the company had declared dividend at the rate of 8%, 9%, 12%, 11% and 10% respectively. Advise the Board as to the maximum rate at which they can declare interim dividend despite incurring loss during the current financial year. [MTP-Oct. 21]
(a) Maximum at the rate of 10%.
(b) Maximum at the rate of 11%.
(c) Maximum at the rate of 10.5%.
(d) Maximum at the rate of 11.5%.
Answer:
(b) Maximum at the rate of 11%.

Question 12.
Amount to be transferred to reserves out of profits before any declaration of dividend is ________. [MITP-Oct 21, April 22]
(a) 5%
(b) 7.5%
(c) 10%
(d) at the discretion of the company.
Answer:
(d) at the discretion of the company.

Question 13.
Mr. Guru bought 40,000 shares of Real Consultancy Services (RCS) of face value 10 each out of his savings. On such shares, the final call of ₹ 2 is due but unpaid by Mr. Guru. In the meantime, RCS declared dividend at a rate of 15%. Regarding unpaid call money by Mr. Guru, in light of dividend due to him from RCS, state which of the following statement is correct? [MTP-Nov.21]

(a) Dividend cannot be adjusted against the unpaid call money.
(b) The dividend of ₹ 48,000 can be adjusted against unpaid call money.
(c) The dividend of ₹ 48,000 can be adjusted against unpaid call money, only if consent is given by Mr. Guru.
(d) The dividend of ₹ 64,000 can be adjusted against unpaid call money, even if consent is not given by Mr. Guru.
Answer:
(b) The dividend of ₹ 48,000 can be adjusted against unpaid call money.

Question 14.
When the dividend is declared at the Annual General Meeting of the company, it is known as . [MTP-Nov. 21]
(a) Final Dividend
(b) Interim Dividend
(c) Dividend on preference shares
(d) Scrip Dividend
Answer:
(a) Final Dividend

Accounts of Companies – CA Inter Law MCQ is designed strictly as per the latest syllabus and exam pattern.

Accounts of Companies – CA Inter Law MCQ

Question 1.
From the following information in respect of company ABC Ltd. Compute the amount, the company is required to spend on account of Corporate Social Responsibility:

Financial Year Net Profit	(In Cr.)
2019-20	30
2020-21	22
2021-22	27

(a) 26 crore
(b) 52 lakhs
(c) 55 lakhs
(d) 26 lakhs
Answer:
(b) 52 lakhs

Question 2.
JX Limited, an unlisted public Company has its registered office in Mumbai. Due to a shortage of storage space, the Board of Directors of JX Limited has decided not to preserve the books of accounts and other related records of accounts. The Board has approached you, to seek an advice on this matter. Give suitable advice to the Board of JX Limited:

(a) The Company is not mandatorily required to maintain the Statutory Registers and Records at the Registered Office.
(b) The Company can make space by destroying all Statutory Registers and Records which are older than 8 years.
(c) Company can shift the Statutory Registers and Records at JX Limited’s branch office situated at Pune, where more than one- tenth of the total number of members entered in the register of members reside.
(d) Company can digitize all the Statutory Registers and Records.
Answer:
(c) Company can shift the Statutory Registers and Records at JX Limited’s branch office situated at Pune, where more than one- tenth of the total number of members entered in the register of members reside.

Question 3.
CSR Committee of the Board shall consist of:
(a) Directors forming 1/3rd of the total no. of directors.
(b) At least 2 directors out of which one shall be independent director.
(c) 3 or more directors out of which one shall be managing director.
(d) 3 or more directors, out of which at least 1 director shall be an independent director.
Answer:
(d) 3 or more directors, out of which at least 1 director shall be an independent director.

Question 4.
Provisions of CSR are applicable to:
(a) Companies with net worth of ₹ 250 crore or more but less than ₹ 500 crore.
(b) Companies with turnover of ₹ 1,000 crore or more.
(c) Companies with net profit of ₹ 1 crore or more but less than ₹ 5 crore in any financial year.
(d) Companies having aggregate outstanding loans and deposits exceeding ₹ 50 crore or more in any financial year.
Answer:
(b) Companies with turnover of ₹ 1,000 crore or more.

Question 5.
Vandana Operations Limited has reported a net profit of ₹ 2 crores for the half year ended 30th September, 2021. During the previous financial year 2020-21, the company has paid up share capital of ₹ 40 crore and outstanding loan from bank amounting to ₹ 80 crores on the date of last audited financial statement. Whether the company is required to appoint internal auditor for the current financial year ending on 31st March, 2022?

(a) Yes, the company is required to appoint internal auditor for FY ending on March 2022 as the net profit of the company is more than ₹ 1 crore.
(b) No, the company is not required to appoint internal auditor for FY ending on March 2022 as the outstanding loans during the previous year ending on March, 2021 is less than ₹ 100 crore.
(c) Yes, the company is required to appoint internal auditor for FY ending on March 2022 as the paid-up share capital of the company is more than 10 crore.
(d) No, the company is not required to appoint internal auditor for FY ended on March 2022 as the paid-up share capital of the company is less than ₹ 50 crore during the preceding financial year.
Answer
(c) Yes, the company is required to appoint internal auditor for FY ending on March 2022 as the paid-up share capital of the company is more than 10 crore.

Question 6.
Ayush Power Limited has reported a net profit of ₹ 6 crore, ₹ 7.5 crore and ₹ 3 crore for the financial year(s) ended on March 2019, March 2020 and March 2021 respectively. The board’s report of the company for the year ended on March 2022 did not disclose the composition of the CSR Committee on the grounds that company is not required to constitute CSR committee as net profit during the immediately preceding financial year is less than the statutory requirements laid down in sec. 135. You are required to examine in the given scenario whether the act of non-composition and non-disclosure of the composition of CSR committee in the Board’s Report is valid in law?

(a) No, the act of the company is not valid in law as every company is required to constitute a CSR committee and disclose the same in the board’s report in every financial year irrespective of the profits earned by the company.
(b) Yes, the act of the company is valid in law as the net profit of the company is less than ₹ 5 crore in the immediately preceding financial year.
(c) No, the act of the company is not valid in law as non-composition and non-disclosure of composition of CSR Committee will attract only if the profits of the company are less than 5 crore for a consecutive period of 3 financial years.
(d) The act of the company is valid only to the extent of non-disclosure of the composition of CSR committee as the net profit of the company is less than ₹ 5 crore in the immediately preceding financial year.
Answer:
(c) No, the act of the company is not valid in law as non-composition and non-disclosure of composition of CSR Committee will attract only if the profits of the company are less than 5 crore for a consecutive period of 3 financial years.

Question 7.
Ganesh Company Ltd, a public company incorporated under the Companies Act, 2013 has Mr. Jay- Director, Mr. Sagar – independent Director, Mr. Abhishek – Nominee Director and Mr. Yash – Whole time director. Mr. Abhishek wants to inspect the books of account of Shankar Company Limited, the subsidiary of Ganesh Company Limited. You are required to state whether Mr. Abhishek is eligible to inspect the books of account of Ganesh Company Limited?

(a) Yes, Mr. Abhishek can inspect the books of account of Shankar Company limited only on authorization of the public financial institution on whose behalf he has been so appointed in the board of the Ganesh Company Ltd.
(b) No, Mr. Abhishek being a nominee director can only inspect the books of account of Ganesh Company Ltd. and not its subsidiary company.
(c) Yes, Mr. Abhishek can inspect the books of account of Shankar Company limited only on authorization by way of resolution of the board of directors.
(d) Yes, Mr. Abhishek can inspect the books of account of Shankar Company limited only on authorization by way of resolution of the members holding not less than 25% of the paid-up share capital of the company.
Answer:
(c) Yes, Mr. Abhishek can inspect the books of account of Shankar Company limited only on authorization by way of resolution of the board of directors.

Questions from RTPs, MTPs And Past Fxams (Memory Based) of ICAI

Question 8.
Amex Limited is a public company having a net-worth of ₹ 950 crores, turnover of 200 crores (the company is just 5 years since the date of its incorporation) during the immediately preceding financial year, has to constitute a Corporate Social Responsibility (CSR) Committee. It has 9 Directors (A, B, C, D, E, F, G, H and 1). Further, Mr. F, G, H and I are independent directors. Out of the following statements which statement is correct: [MTP-March 19]
(a) CSR committee may constitute of A, B and C.
(b) CSR committee may constitute of A, B and D.
(c) CSR committee may constitute of A, F and G.
(d) There is no need to constitute a CSR committee as the turnover is just 200 crores during the immediately preceding financial year.
Answer:
(c) CSR committee may constitute of A, F and G.

Question 9.
Excellent Art Private Limited, has a paid-up capital of ₹ 50 crore, Turnover of ₹ 25 crore and borrowing of ₹ 25 crore and outstanding deposits of ₹ 30 crore. Decide if the Company needs to comply with internal audit requirements under the Act? [MTP-March 19]
(a) No. The provisions of Internal audit are not applicable on private companies.
(b) Yes. Company is having paid-up capital of ₹ 50 Crore and outstanding deposits more than ₹ 25 crore.
(c) No. Because the borrowings are less than ₹ 100 crore and turnover is less than ₹ 200 crore.
(d) None of the above.
Answer:
(c) No. Because the borrowings are less than ₹ 100 crore and turnover is less than ₹ 200 crore.

Question 10.
From the following information in respect of BMR Consultants Pvt Ltd., compute the amount company is required to contribute on account of CSR: [MTP-March 19]

Financial Year	Net Profit (in Lakhs)
2019-20	15
2020-21	50
2021-22	70

(a) Nil. If in any of the three financial years company has incurred losses, then company is not required to spend amount towards CSR but explain the reason for not spending the amount.
(b) ₹ 2.4 Lakhs.
(c) ₹ 90,000.
(d) ₹ 2.1 Lakhs.
Answer:
(c) ₹ 90,000.

Question 11.
A company can reopen/recast its books of account on an application to Tribunal made by: [MTP-April 19]
(a) Registrar
(b) Member
(c) Board of Directors
(d) Income-tax authorities
Answer:
(d) Income-tax authorities

Question 12.
ABC Ltd., a pharmaceutical company was having its manufacturing plant in Solan, Himachal Pradesh. The address of its registered office as informed to the Registrar of Companies was of one of its Director’s office, situated at Mumbai, Maharashtra. To comply with the provisions of the Companies Act, 2013 it was keeping all its books of account, other relevant papers and financial statements at its registered office. After sometime Directors of the company found it difficult to maintain such books etc. at the registered office, so in a duly convened meeting of the Board of the Directors, it was decided that the books of account and other relevant papers be kept at the office situated in Solan. Within which time period the Registrar must be given notice about such decision of the board: [MTP-April 19]

(a) Within 30 days from the date of taking such decision by the board.
(b) Within 15 days from the date it starts maintaining its books of account at the office situated at Solan.
(c) Within 30 days from the date it starts maintaining its books of account at the office situated at Solan.
(d) Within 7 days from the date of taking such decision by the board.
Answer:
(d) Within 7 days from the date of taking such decision by the board.

Question 13.
G Ltd. (a company having CSR Committee as per the provision of Sec. 135 of the Companies Act, 2013) decides to spend and utilize half of the amount of Corporate Social Responsibility on the activities for the benefit of all the employees of G Ltd. and the remaining half of the amount of Corporate Social Responsibility on the activities for the benefit of family members of employees of G Ltd. As per the provision of Companies Act, 2013 this would mean that: [RTP-May 20]

(a) This is the total amount spent on Corporate Social Responsibility activities by G Ltd. for that financial year.
(b) No amount spent on Corporate Social Responsibility activities by G Ltd. for that financial year.
(c) Half amount spent on Corporate Social Responsibility activities by G Ltd. for that financial year.
(d) Half amount spent on Corporate Social Responsibility activities and remaining half amount spent on other Activities by G Ltd. for that financial year.
Answer:
(b) No amount spent on Corporate Social Responsibility activities by G Ltd. for that financial year.

Question 14.
One Person Company shall file a copy of the duly adopted financial statements to the Registrar in: [RTP-Nov. 20, MTP-Oct 21]
(a) 30 days of the date of meeting in which it was adopted.
(b) 90 days of the date of meeting in which it was adopted.
(c) 90 days from the closure of the financial statement.
(d) 180 days from the closure of the financial statement.
Answer:
(d) 180 days from the closure of the financial statement.

Question 15.
During the half year ended September 2021, die Board of directors (BoD) of Gold Leaf Limited has made an application to the Tribunal for revision in the accounts of the company for the financial year ended on March, 2019. Further during die year ended on March, 2022, the BoD has again made an application to the Tribunal for revision in the board’s report pertaining to the year ended on March 2021. You are required to state the validity of the acts of the Board of directors. [MTP-Oct 21]

(a) The act of the BoD is valid only to the extent of application made for revisions in accounts as board’s report are not eligible for revision.
(b) The act of the BoD is valid as application made for revision in the accounts and board’s report pertains to 2 different financial year.
(c) The act of the BoD is invalid as the law provides for only one time application to be made in a financial year for revision of accounts and boards report.
(d) The act of the BoD is invalid as to the application made for revision in accounts pertains to a period beyond 2 years immediately preceding the year 2022. The application made for revision in the Board report is however valid in law.
Answer:
(b) The act of the BoD is valid as application made for revision in the accounts and board’s report pertains to 2 different financial year.

Question 16.
Shri Limited (a company having CSR Committee as per the provision of Sec. 135 of tiie Companies Act, 2013) decides to spend and utilize the amount of Corporate Social Responsibility on the activities for the benefit of all the employees of Shri Limited. As per the provision of Companies Act, 2013 this would mean that: [MTP-Nov. 21]

(a) This is the total amount spent on Corporate Social Responsibility activities by Shri Limited for that financial year.
(b) No amount spent on Corporate Social Responsibility activities by Shri Limited for that financial year.
(c) Only half of the total amount spent, shall be considered to be spent on Corporate Social Responsibility activities by Shri Limited for that financial year.
(d) Only the amount that has been spent on the employees having salary of ₹ 20,000 per month or less, shall be considered to be spent on Corporate Social Responsibility activities by Shri Limited for that financial year.
Answer:
(b) No amount spent on Corporate Social Responsibility activities by Shri Limited for that financial year.

Question 17.
As per the provisions of the Companies Act, 2013, which of the following statement is correct with respect to the surplus arising out of the CSR activities: [MTP-March 22]
(a) The surplus cannot exceed 5% of total CSR expenditure of the company for the financial year.
(b) The surplus shall not form part of the business profit of a company.
(c) The surplus cannot exceed 10% of total CSR expenditure of the company for the financial year.
(d) The surplus shall form part of the business profit of a company.
Answer:
(b) The surplus shall not form part of the business profit of a company.

Question 18.
Adani Enterprises Limited has its shares listed on a recognized stock exchange in India. During the current financial year ended on March, 2022, the Securities and Exchange Board of India (SEB1) has found some irregularities in the filings made by the company. Accordingly, SEB1 proposes to make an application to the Tribunal for reopening of tihe books of account of the Company. You, as an expert, are called upon by SEBI to advise with which last financial year for reopening of books of account an application can be made? [MTP-April 22]
(a) 2017-18.
(b) 2015-16.
(c) 2012-13.
(d) 2013-14.
Answer:
(d) 2013-14.