Management Programme
Term-End Examination
June - 1999

Time: 3 hours
Maximum Marks: 100 (Weightage: 70%)

Note: There are two sections A and B. Attempt any three questions from Section A. Section B is compulsary. All questions carry equal marks.

Section A

1. 'Accounting is the oldest financial information system'. Discuss. Also bring out the role and functions of accountant in modern business.

2. What is a Budget? Explain the meaning, objectives and the process of performance budgeting. Distinguish between performance budgeting and traditional budgeting.

3. (a) "In managing cash the finance manger faces the problem of compromising the conflicting goals of liquidating and profitability." Comment

(b) List out the important factors which influence the requirement of working capital of a manufacturing firm.

4. The Modern Furniture Ltd. manufactures office chairs. It follows standard costing system. The direct material cost standards for its ‘Executive’ brand are established as follows:

Production schedule for the month of December’97: 5,000 chairs (Executive)
Direct material cost per chair:
Material A 10 kgs @ Rs. 30 per kg: Rs. 300
Material B 5 kgs @ Rs. 50 per kg: Rs. 250

Production records for the month of December’97 showed as follows:

Executive chairs manufactured: 6,000
Direct material used:
Material A: 60,000 kgs
Material B: 32,000 kgs

There was no closing stock in the month of November’97. You are required to

(a) Calculate direct material cost variances.
(b) Write a brief report indicating the extent and of total Direct material cost variance.

5. Distinguish between any three of the following

(a) Payback method and Net present value
(b) LIFO and FIFO
(c) Gross working capital and Net working capital
(d) Direct cost and Indirect cost
(e) Profit and Loss A/c and Balance Sheet

Section B

6. Read the following case carefully and answer the questions given a the end of the case.

Singh & Co is a small bottling company, founded by Jaswant Singh at the turn of the century. It was founded at the site of a mineral spring 40 miles from Shimla and distributes bottled water through Himachal Pradesh and Uttar Pradesh. Its cash sales have stabilized at Rs. 90 lakhs compared to cash expenses of Rs. 50 lakhs on its bottled-water operations.

There is considerable excitement in the office of Vijay Singh, the president and grandson of the founder. The company has been offered a 5-year lease on a well-known mineral spring near Palamput. The water from this spring has certain medicinal properties that make it valuable to physicians nationwide. Mr. Viswanathan, the company’s financial manager has just worked up figures on the possibility of taking over the lease.

Viswanathan estimates that an operation at the new mineral spring would increase the firm’s sales from Rs. 90 to Rs. 150 lakhs each year over the 5-year period. He also estimates an increase in cash expenses from Rs. 50 to Rs. 90 lakhs.

Viswanathan’s plan is to move the water by tank truck from the spring to the company’s main facilities for bottling. The problem is capacity. At the present level of sales, the firm cannot handle the additional bottling needs of the new spring. A check with a machinery foundry indicates that it will cost approximately Rs. 65 lakhs to purchase, transport and install new bottling machinery capable of handling the new spring. This machinery will replace the existing machinery and will have a 25 year service life. It will be depreciated at 20/32/24/16/8 percentages over a 5-year period.

The company’s existing machinery has been working fairly well. It is carried on the books at a Rs. 10 lakhs value, although it could be sold for only Rs. 5,00,000. The company is using staring line method of depreciation on this machine. It is expected to have zero salvage value at the end of 5 years.

Viswanathan has mentioned that the new operation would tie up an additional Rs. 3,00,000 in inventories and Rs. 4,00,000 in receivables during the life of the project. The firm has the funds to finance these amounts.

Viswanathan thinks the firm should seriously consider the new project and Vijay singh is also favorably inclined. But as Viswanathan left the office, Vijay Singh heard to call out, “I want to know our rate of return on the project first. If we’re not making our normal 12 percent after taxes, forget it,” The firm’s tax rate is 40 percent.

Questions:
1. What is the rate of return on this project?
2. What is the net present value at 12 percent?

Note:
Year – PV Factor
1 – 0.893
2 – 0.797
3 – 0.712
4 – 0.636
5 – 0.567