SUGGESTED ANSWERS TO QUESTIONS

PART – A
SECTION–I

1. (a)
(i) (B)
(ii) (B)
(iii) (A)
(iv) (B)
(v) (D)
(vi) (B)

1. (b)
(i) (C)
(ii) (H)
(iii) (E)
(iv) (F)

1. (c)
(i) False
(ii) True
(iii) True
(iv) False

SECTION–II

2. (a)
Estimated Sales = ₹ 24,00,000

2. (b)
Overall Contribution per unit = ₹ 15.8974

3.(a)
Particulars 50% 90%
Sales (In Units) 10000 18000
Sales (In ₹) ₹ 20,00,000 ₹ 36,00,000
Total Variable Costs ₹ 4,00,000 ₹ 7,20,000
Contribution (Sales – Variable Costs) ₹ 16,00,000 ₹ 28,80,000
Total Fixed Costs ₹ 9,60,000 ₹ 9,60,000
Profit (Contribution – Fixed Costs) ₹ 6,40,000 ₹ 19,20,000

3. (b)
 Efficiency Ratio = 0.9375 or 93.75%
 Activity Ratio = 0.90 or 90%
 Capacity Ratio = 0.96 or 96%
 Calendar Ratio = 0.96 or 96%
 Idle Capacity Ratio = 0.04 or 4%
 Standard Capacity Usage Ratio = 0.8333 or 83.33%
 Actual Usage of Maximum Capacity Ratio = 0.80 or 80%
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4. (a)
Skilled Workers = 14
Semi-skilled Workers = 7
Unskilled Workers = 4

4. (b)
Variable Overheads Efficiency Variance = ₹ 2,948.40 (A)
Fixed Overheads Efficiency Variance = ₹ 8,283.60 (A)
Fixed Overhead Calendar Variance = ₹ 3,540 (F)

5. (a)
Break-even Analysis is a method for examining the relationship between sales revenue, variable costs and
fixed costs to determine the minimum value of production necessary to break even. Break Even means the
volume of production or sales where there is no profit or loss. In other words, Break Even Point is the
volume of production or sales where total costs are equal to revenue. It helps in finding out the relationship
between costs and revenues to output. In understanding the breakeven point, cost, volume and profit are
always used. The break-even analysis is used to answer many questions of the management in day-to-day
business.
Variance Analysis is nothing but the differences between Standard Cost and Actual Cost. In ordinary
language we call it difference; in statistics, we call it deviations and in costing terminology we call it
variances. When Standard Costing is adopted, the standards are set for all the costs, revenue and profit, and
if the difference in case of cost is more than the standard we call it adverse variance, symbolized (A) and if
the difference is less than the standard, we call it favourable variance, symbolized (F). However, in the case
of sales and profit, if the standard is more than the actual it is an adverse variance and if the standard is less
than the actual it is a favourable variance. From this, we understand that variances can be calculated in all
the elements of costs, sales and profit too.
Budget Manual is a document which contains standing instructions regarding the procedures to be followed
at the time of budget preparation.

5. (b) Basic Differences:

(i) Direct Costing and Marginal Costing:
The primary difference between Direct Costing and Marginal Costing lies in the treatment of fixed
direct costs. In Marginal Costing, fixed direct costs are considered as period costs and are not
allocated to product costs. On the other hand, Direct Costing allocates both variable and fixed costs
directly related to the product to the product cost, absorbing all direct costs into the product cost.
(ii) Marginal Costing and Absorption Costing:
The key distinction between Marginal Costing and Absorption Costing is in the treatment of fixed
manufacturing direct and overhead costs. Marginal Costing treats fixed manufacturing direct and
overhead costs as period costs and does not allocate them to products. Conversely, Absorption
Costing allocates both variable and fixed manufacturing direct & overhead costs to products,
incorporating all manufacturing costs into the product cost.
(iii) Period Cost and Product Cost:
The fundamental difference between Period Cost and Product Cost lies in the timing of recognition.
Period costs are incurred and expensed during a specific accounting period and are not linked to the
production of goods or services. Conversely, Product Costs are incurred to create a product and are
recognized as part of the cost of goods sold or inventory.
(iv) Variable Cost and Direct Cost:
The main difference between Variable Cost and Direct Cost is in the treatment of fixed
manufacturing direct costs. Variable Costs consider all fixed costs as period costs and do not allocate
them to products. On the other hand, Direct Cost allocates both variable and fixed costs directly
related to the product to the product cost.
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5. (c)
Basic Differences:
(i) Fixed Budget and Flexible Budget:
The main difference between a Fixed Budget and a Flexible Budget lies in their adaptability to
changing conditions. A Fixed Budget remains unchanged regardless of the actual level of activity or
output achieved. It is based on a single level of activity, typically the budgeted level. In contrast, a
Flexible Budget adjusts to changes in the level of activity or output. It allows for different cost levels
corresponding to different levels of activity achieved, providing a more realistic assessment of
performance in dynamic business environments.
(ii) Sales Budget and Sales Forecast:
The key difference between a Sales Budget and a Sales Forecast is their purpose and level of detail. A
Sales Forecast is an estimate of future sales based on historical data, market trends, and other factors.
It serves as an essential input in the budgeting process. On the other hand, a Sales Budget is a formal
financial plan that outlines the expected sales revenue for a specific period, usually based on the Sales
Forecast. It provides a detailed breakdown of sales targets and is used for monitoring and control
purposes.
(iii) Cash Budget and Cash Flow Statement:
The primary difference between a Cash Budget and a Cash Flow Statement is their timing of
preparation and usage. A Cash Budget is a forward-looking financial plan that estimates the expected
cash inflows and outflows for a specific future period. It helps a company ensure it has sufficient cash
to meet its obligations and manage cash flows effectively. In contrast, a Cash Flow Statement is a
historical financial statement that provides a summary of cash inflows and outflows for a past period,
typically a month or a year. It reports on the actual cash movement within the organization.
(iv) Zero Base Budget and Conventional Budget (or Traditional Budget):
The main difference between Zero Base Budgeting and Conventional (or Traditional) Budgeting is
their approach to budget formulation. Conventional Budgeting involves adjusting the previous
period's budget (usually incremental changes) to arrive at the new budget. It starts with the existing
budget as a base. In contrast, Zero Base Budgeting requires each budget item to be justified from
scratch, regardless of whether it was present in the previous period's budget. It starts from a "zero
base," and all expenses must be justified based on their necessity and contribution to organizational
goals.

5. (d)
Basic Differences:
(i) Standard Cost and Estimated Cost:
The primary difference between Standard Cost and Estimated Cost is their purpose and usage.
Standard Cost represents the predetermined cost that management expects to incur for the production
of goods or services under normal operating conditions and efficiency levels. It serves as a
benchmark against which actual costs are compared for performance evaluation and cost control. On
the other hand, Estimated Cost is an approximate calculation of future costs based on available
information, but it is not necessarily used as a performance benchmark like Standard Cost.
(ii) Standard Costing and Historical Costing:
Standard Costing and Historical Costing are different costing methods used for performance
evaluation. Standard Costing involves the application of predetermined standard costs to measure and
evaluate performance. It compares actual costs with the predetermined standard costs to identify
variances and assess efficiency. Historical Costing, on the other hand, relies on actual historical costs
incurred for measuring performance. It does not involve the use of predetermined standards but rather
focuses on actual costs as the basis of evaluation.
(iii) Standard Costing and Budgetary Control:
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 Standard Costing and Budgetary Control are two distinct management control techniques used for
different purposes. Standard Costing focuses on measuring and evaluating the efficiency of the
production process by comparing actual costs with predetermined standard costs. It helps in cost
control and performance evaluation. Budgetary Control, on the other hand, involves the formulation
of budgets for various business functions and comparing actual results with budgeted amounts to
assess overall financial performance and achieve financial goals.
(iv) Standard Hour and Budgeted Hour:
Standard Hour refers to the predetermined time expected to be taken by a worker or a machine to
complete a specific task or produce output. These hours are based on the company's predetermined
standards or expectations for efficiency and productivity whereas Budgeted Hours, on the other hand,
are the anticipated or planned hours of work for a particular period, such as a month or a year. These
hours are part of the budgeting process and are used to estimate labour costs and resource
requirements for the planned level of production or operations.

PART – B
SECTION–III
6. (a)

(i) (D)
(ii) (D)
(iii) (C)
(iv) (A)
(v) (D)
(vi) (C)

6. (b)
(i) (B)
(ii) (D)
(iii) (F)
(iv) (G)

6. (c)
(i) True
(ii) False
(iii) False
(iv) True

SECTION–IV

7. (a)
The Indifference point between Financial Plan I and Financial Plan II is indeterminate.
Financial Break-Even Point for Plan I = ₹ 60,000
Financial Break-Even Point for Plan II = ₹ 70,000

7. (b)
Return on Equity Shareholders Funds = 0.55 or 55%

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8. (a)

(i) Pay Back Period = 3.75 years or 3 years 9 months

(ii) Average Rate of Return = 0.2154 or 21.54%
(iii) Net Present Value = ₹ 2,66,934
(iv) Present Value of Cash inflows of 5th year = ₹ 4,06,134
Discounted Pay Back Period = 4.3427 years or 4 years 4.11 months
(v) Profitability Index = 1.2966

8. (b)
Marginal Cost of Capital = 0.17065 or 17.065%

9. (a)
Net Working Capital Requirements (On Cash Cost basis) = D 31,68,399

9.(b)
Cash Budget from January 2023 to March 2023
Particulars January 2023 February 2023 March 2023
(In ₹) (In ₹) (In ₹)
Opening Balance 50,000 1,74,960 3,55,280
Cash Sales 1,20,000 1,20,000 1,60,000
Received from Debtors 5,44,960 6,00,320 4,94,400
Payment to Creditors 5,40,000 5,40,000 7,20,000
Closing Balance 1,74,960 3,55,280 2,89,680

10. (a)
Meaning and Methods of Venture Capital Financing
Venture Capital Financing
Venture Capital is a form of equity financing especially designed for funding high-risk and high-reward
projects. The term ‘Venture Capital’ represents a financial investment in a highly risky project with the
objective of earning a high rate of return.
There is a common perception that Venture Capital is a means of financing high-technology projects.
However, Venture Capital is an investment of long-term finances made in:
1. Ventures promoted by technically or professionally qualified but unproven entrepreneurs, or
2. Ventures seeking to harness commercially unproven technology, or
3. High-risk ventures

Method of Venture Capital Financing

1) Equity: Most venture capital funds provide financial support to entrepreneurs in the form of equity
by financing 49% of the total equity. This is to ensure that the ownership and overall control remain
with the entrepreneur. Since there is a great uncertainty about the generation of cash inflows in the
initial years, equity financing is the safest mode of financing. A debt instrument on the other hand
requires periodical servicing of dept.
2) Conditional Loan: From a venture capitalist point of view, equity is an unsecured instrument hence
a less preferable option than a secured debt instrument. A conditional loan usually involves either
no interest at all or a coupon payment at a nominal rate. In addition, a royalty at agreed rates is
payable to the lender on the sales turnover. As the units pickup in sales levels, the interest rate is
increased and royalty amounts are decreased.
3) Convertible Loans: The convertible loan is subordinate to all other loans which may be converted
into equity if interest payments are not made within an agreed time limit.
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10. (b)
Assumptions and Criticisms of M-M Approach as to Capital Structure:
Assumptions of the MM Approach
1. There is a perfect capital market. Capital markets are perfect when:
(i) Investors are free to buy and sell securities,
(ii) They can borrow funds without restriction at the same terms as the firms do,
(iii) They behave rationally,
(iv) They are well-informed, and
(v) There are no transaction costs.
2. Firms can be classified into homogeneous risk classes. All the firms in the same risk class will have the
same degree of financial risk.
3. All investors have the same expectation of a firm’s net operating income (EBIT).
4. The dividend pay-out ratio is 100%, which means there are no retained earnings.
5. There are no corporate taxes.

Criticisms of the M-M Approach

The arbitrage process is the behavioural and operational foundation for M M Hypothesis. But this process
fails the desired equilibrium because of the following limitations.
(i) Rates of interest are not the same for individuals and firms. The firms generally have a higher credit
standing because of which they can borrow funds at a lower rate of interest as compared to
individuals.
(ii) Home – Made leverage is not a perfect substitute for corporate leverage. If the firm borrows, the
risk to the shareholder is limited to his shareholding in that company. But if he borrows personally,
the liability will be extended to his personal property also. Hence, the assumption that personal or
homemade leverage is a perfect substitute for corporate leverage is not valid.
(iii) The assumption that transaction costs do not exist is not valid because these costs are necessarily
involved in buying and selling securities.
(iv) The working of arbitrage is affected by institutional restrictions, because institutional investors are
not allowed to practice homemade leverage.
(v) The major limitation of M – M hypothesis is the existence of corporate taxes. Since the interest
charges are tax deductible, a levered firm will have a lower cost of debt due to tax advantage when
taxes exist.

10. (c)
Basic Differences:
(i) The basic difference between Asset Securitisation and Debt Securitisation is the nature of the
underlying assets. In Asset Securitisation, a pool of diversified financial assets (e.g., mortgages,
loans) is converted into tradable securities, while in Debt Securitisation, the focus is on converting
existing debt obligations (e.g., bonds, loans) into marketable securities, backed by the debtors'
repayment commitments.
(ii) Capital Structure and Financial Structure are terms often used interchangeably, but there is a subtle
difference. Capital Structure refers specifically to the mix of long-term debt, equity, and other
financial instruments used to finance a company's assets. On the other hand, Financial Structure
encompasses a broader perspective, including both short-term and long-term sources of funds and
how they are allocated to various assets and operations within the organization.
(iii) Net Operating Income theory and Net Income theory of capital structure differ in their focus. Net
Operating Income (NOI) theory suggests that the cost of capital is solely influenced by the operating
income generated by a firm's assets, irrespective of the financing mix. In contrast, the Net Income
theory asserts that the capital structure decision affects the overall cost of capital, as financial

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 leverage impacts the cost of equity capital, leading to changes in the firm's net income and its
market value.
(iv) Internal Rate of Return (IRR) and Modified Internal Rate of Return (MIRR) are both measures of
investment performance. The key difference lies in how they handle cash flows. IRR assumes that
cash flows are reinvested at the project's IRR, which may not be practical. MIRR addresses this
limitation by assuming that positive cash flows are reinvested at a firm's cost of capital and
computes a single, more realistic rate of return for the investment.

10. (d)
Basic Differences:
(i) The basic difference between the Aggressive Approach and the Conservative Approach of
Financing Current Assets lies in their risk and profitability trade-off. The Aggressive Approach
involves financing a significant portion of current assets with short-term debt, aiming to maximize
profitability through increased leverage. However, this exposes the company to higher liquidity and
refinancing risks. On the other hand, the Conservative Approach relies on more long-term financing
and less short-term debt, prioritizing lower risk even though it might result in slightly lower
profitability.
(ii) The key difference between Non-recourse Factoring and Recourse Factoring is the party assuming
credit risk. In Non-recourse Factoring, the factor assumes the credit risk of the accounts receivables,
meaning if the debtor fails to pay, the factor absorbs the loss. In Recourse Factoring, the seller
retains the credit risk, and if the debtor defaults, the factor has the right to seek payment from the
seller, shifting the risk back to them.
(iii) Factoring and Forfaiting are both methods of financing receivables, but they differ in the type of
transactions involved. Factoring is typically used for short-term domestic receivables and involves
the outright purchase of receivables by the factor. Forfaiting, on the other hand, is used for long-
term export receivables and involves the purchase of trade receivables related to exports without
recourse to the exporter. It is a form of financing with fixed, negotiable terms.
(iv) Baumol's Model and Miller-Orr's Model are cash management models that differ in their approach
to cash balance management. Baumol's Model suggests maintaining a constant cash balance to
minimize transaction costs and opportunity costs associated with holding cash. In contrast, Miller-
Orr's Model uses upper and lower control limits to determine when to invest or disinvest excess
cash. It aims to minimize the costs of both holding cash and making transactions, providing a more
dynamic approach to cash management.

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