AFM ASSIGNMENT-3

Topic: Standard costing and variance analysis QUES. ABC Ltd. Has a current level of EBIT of Rs. 17 lacs which is likely to be unchanged. It has decided to raise Rs.5,00,000 of additional capital funds and has identified two mutually exclusive alternative financial plans. Information1. Present capital structure is Rs.3,00,000 equity share of Rs. 10 each and 10% bonds of Rs.20 lacs. 2. Tax rate 50%. 3. Current EBIT Rs. 17 lacs. 4. Current EPS Rs. 25. 5. Current market price Rs. 25 per share. Financial plan 1- 20,000 equity shares @ Rs. 25 per share. Financial plan 2- 12% debentures of Rs. 5,00,000. What is the indifference level of EBIT? SolutionPARTICULARS Owners funds FINANCIAL PLAN 1 (3,00,000 X 10) + (20,000 X 25) =35,00,000 20,00,000 55,00,000 X 20,00,000 X 10% =2,00,000 X- 2,00,000 1/2X-1,00,000 1/2X-1,00,000 3,00,000+20,000 =3,20,000 (1/2X-1,00,000)/3,20,000 FINANCIAL PLAN 2 3,00,000 X 10 =30,00,000 20,00,000+5,00,000 =25,00,000 55,00,000 X (20,00,00 X 10%) +(5,00,000 X 12%) =2,60,000 X-2,60,000 1/2X-1,30,000 1/2X-1,30,000 3,00,000 (1/2X-1,30,000)/3,00,000

borrowed funds Total capital employed EBIT(let it be X) less: interest

EBT Less: tax at 50% EAT No. of equity shares EPS

For indifference between the above alternatives, EPS should be equal. Hence, we have (1/2X-1,00,000)/3,20,000 = (1/2X-1,30,000)/3,00,000

On Cross Multiplication, 15X - 30 Lakhs = 16X - 41.6 Lakhs; or X = 11.6 Lakhs Hence EBIT should be Rs.11.60 Lakhs and at that level, EPS will be Rs.1.50 under both alternatives. QUES. Calculate from the following data: (a) the material price variance, (b) the material mixture variance, (c) the material yield variance, (d) the material usage variance, and (e) the material cost variance. Material Standard price Standard Actual usage Actual price per lb. weight per for output of per lb. unit of output 36 units lb. A Rs.10 2 72 Rs.12 B Rs. 1 4 108 Rs. 1 C Rs. 5 3 126 Rs. 4 Total 9 306 Solution: (a) DMPV = Actual quantity*(standard price-actual price) A B C 72*(10-12) = Rs.144 ( Adverse) 108*(1-1) = -126*(5-4) = Rs.126 (Favourable) -----------

Total material

Price variance = Rs. 18 (Adverse) ---------(b) DMMV = Standard price *(Revised std. quantity Actual quantity) Revised std. quantity = Total weight of actual mix * Standard quantity Total weight of standard mix Standard quantityFor A = 2*36 = 72 Units For B = 4*39 = 144 Units

For C = 3*36 = 108 Units Total weight of standard mix = 9*39 = 324 lb. Revised standard quantity: For A: 306/324*72 = 68lb. For B: 306/324*144 = 136lb. For C: 306/324*108 = 102lb. (c) Material mix variance: For A: Rs.10*(68-72) = Rs. 40 (Adverse) For B: Re.1*(136-108) = Rs. 28 (favourable) For C: Rs.5*(102-126) = Rs.120 (Adverse) Rs. 132 (Adverse) DMYC = Standard cost per unit*(standard output for actual mix- actual output) Std. output= Actual usage/Standard weight per unit = 306lb./9lb. = 34 Units. Actual output is 36 units. Standard price per lb. Rs.10 Rs.1 Rs.5 Standard weight per unit of output 2 4 3 Standard cost per unit of output Rs.20 Rs.4 Rs.15 Rs.39

A B C Total

DMYC = Rs. 39*(36-34) = Rs.78 (favourable) (d) DMUV = Standard price*(Standard qty. for actual output actual qty.) A: Rs.10*(72-72) = Nil B: Rs.1*(144-108) = Rs.36 (favourable) C: Rs.5*(108-128) = Rs.90 (Adverse) Rs.54 (Adverse)

Otherwise, also the total of DMMV and DMYC is the DMUV. (e) Material cost variance = Standard cost Actual cost Standard price (Rs.) 10 1 5 Standard qty. 72 144 108 Standard cost 720 144 540 1404 Actual price 12 1 4 Actual qty. 72 108 126 Actual cost 864 108 504 1476

A B C Total

Material cost variance = Rs. 1404- Rs.1476 = Rs.72 (Adverse). Thus, Material variance. Material mixture variance Rs.132 (A) Material yield variance Material usage variance Material cost variance Rs.78 (F) Rs. 54 (Adverse) Rs. 72 (Adverse).