Question 1

From the ratios and other data given below for Bharat Auto Accessories Ltd. indicate your interpretation
of the companys financial position, operating efficiency and profitability.

Year I

Year II Year III

Current Ratio

265%

278%

302%

Acid Test Ratio

115%

110%

99%

Working Capital Turnover (times)

2.75

3.00

3.25

Receivables Turnover

9.83

8.41

7.20

Average Collection Period (Days)

37

43

50

Inventory to Working Capital

95%

100%

110%

Inventory Turnover (times)

6.11

6.01

5.41

Income per Equity Share

5.10

4.05

2.50

Net Income to Net Worth

11.07% 8.5%

7.0%

Operating Expenses to Net Sales

22%

23%

25%

Sales increase during the year

10%

16%

23%

Cost of goods sold to Net Sales

70%

71%

73%

Dividend per share

Rs. 3

Rs. 3

Rs. 3

Fixed Assets to Net Worth

16.4%

18%

22.7%

Net Profit on Net Sales

7.03%

5.09%

2.0%

Question 2
(a) What is Master Budget? How it is different from Cash Budget?
(b) What are the various methods of inventory valuation? Explain the effect of inventory valuation
methods on profit during inflation. What are the provisions of Accounting Standard 2 (AS-2)
with regards to inventory valuation?

Case study

Labor standards
Geeta & Company has experienced increased production costs. The primary area of
concern identified by management is direct labor. The company is considering adopting a
standard cost system to help control labor and other costs. Useful historical data are not
available because detailed production records have not been maintained.
To establish labor standards, Geeta & Company has retained an engineering consulting
firm. After a complete study of the work process, the consultants recommended a labor
standard of one unit of production every 30 minutes, or 16 units per day for each worker. The
consultants further advised that Geeta's wage rates were below the prevailing rate of Rs per
hour.
`Geeta's production vice-president thought that this labor standard was too tight, and
from experience with the labor force, believed that a labor standard of 40 minutes per unit or
12 units per day for each worker would be more reasonable. he president of Geeta & Company
believed the standard should be set at a high level to motivate the workers and to provide
adequate information for control and reasonable cost comparison. After much discussion,

management decided to use a dual standard. The labor standard of one unit every 30 minutes,
recommended by the consulting firm, would be employed in the plant as a motivation device,
while a cost standard of 40 minutes per unit would be used in reporting. Management also
concluded that the workers would not be informed of the cost standard used for reporting
purposes. The production vice-president conducted several sessions prior to implementation
in the plant, informing the workers of the new standard cost system and answering questions.
The new standards were not related to incentive pay but were introduced when wages were
increased to Rs7 per hour.
The standard cost system was implemented on January 1, 19--. At the end of six
months of operation, these statistics on labor performance were presented to executive
management:
January February

March

April

May

June

Production (units)

5,100

5,000

4,700

4,500

4,300

4,400

Direct labor hours

3,000

2,900

2,900

3,000

3,000

3,100

Quantity Variances:
Variance based on labor
standard
(one unit each 30 minutes)
Variance based on cost
standard
(one unit each 40 minutes)

Rs3150
Rs3,850
Rs2,800 U
Rs5,250
U*
U
Rs2,800 F Rs3,033 F Rs1,633 F

-0-

U Rs5,950

U Rs6,300

Rs933

U Rs1,167

*U = Unfavorable; F = Favorable
Materials quality, labor mix, and plant facilities and conditions have not changed to a
significant extent during the six month period.

Ques. 1
Describe the impact of different types of standards on motivations, and specifically,
the likely effect on motivation of adopting the labor standard recommended for Geeta & Company by
the engineering firm.

Ques.2
Please advise the company in reviewing the standards.

Case study -2
Electron Control, Inc., sells voltage regulators to other manufacturers, who then customize and
distribute the products to quality assurance labs for their sensitive test equipment. The yearly
volume of output is 15,000 units. The selling price and cost per unit are shown below:
Selling price
Costs:
Direct material
Direct labor
Variable overhead
Variable selling expenses
Fixed selling expenses
Unit profit before tax

$200
$35
50
25
25
15

150
$ 50

Management is evaluating the alternative of performing the necessary customizing to allow

Electron Control to sell its output directly to Q/A labs for $275 per unit. Although no added
investment is required in productive facilities, additional processing costs are estimated as:
Direct labor
Variable overhead
Variable selling expenses
Fixed selling expenses

$25 per unit

$15 per unit
$10 per unit
$100,000 per year

Question :Calculate the incremental profit Electron Control would earn by customizing its instruments and
marketing directly to end users.