Management Accounting Solved Question Paper 2023 PDF [Gauhati University B.Com 5th Sem]

In this post we have Shared Gauhati University Management Accounting Question Paper Solution 2023 Pdf, B.Com 5th Sem CBCS GU, Which can be very benefi
Management Accounting Solved Question Paper 2023 PDF [Gauhati University B.Com 5th Sem]

In this post we have Shared Gauhati University Management Accounting Question Paper Solution 2023 Pdf, B.Com 5th Sem CBCS GU, Which can be very beneficial for your upcoming exam preparation. So read this post from top to bottom and get familiar with the question paper solution .

Management Accounting Solved Question Paper 2023


4 (Sem-5/CBCS) COM НЕ1 (МА)

2023

COMMERCE

(Honours Elective)

Paper: COM-HE-5016

(Management Accounting)

FULL MARKS: 80


1. Answer as directed : 1×10=10


(a) Is it true that Management Accounting aims at providing decisions to the management?
Answer: True

(b) What is Angle of Incidence?
Answer: Angle of Incidence refers to the point where the total revenue line and the total cost line intersect on a breakeven chart.

(c)_______ contains many information which are required for effective budgetary planning.

(Fill in the blank)

Ans:- Budget Manual. 


(d) Trading on equity refers to the use of fixed interest bearing securities by a firm to earn more than their cost so as to increase the return on owners equity. 

(State whether the statement is True or False)

Answer:- True


(e) _______refers to the ability of a concern to meet its current obligations as and when they become due.

(Fill in the blank)

Ans:- Liquidity


(f) When does an unfavorable material price variance occur?
(i) There is an increase in the price of raw materials.
(ii) There is a decrease in the price of raw materials.
(iii) Wastage is less than anticipated in the manufacturing process.
(iv) Wastage is more than anticipated in the manufacturing process.
Answer: (i) There is an increase in the price of raw materials

(g) How is Break-even analysis interpreted in its narrower sense?
Answer: In its narrower sense, Break-even analysis is interpreted as a tool used to determine the level of sales at which the company neither makes a profit nor incurs a loss.

(h) What happens at the break-even point?
(i) There is neither profit nor loss.
(ii) Total revenue is equal to total costs.
(iii) Contribution is equal to fixed costs.
(iv) All of the above.
Answer: (iv) All of the above

(i) What type of budget does not consider any change in expenditure due to changes in the level of activity?
Answer: Fixed budget does not take into consideration any change in expenditure arising out of changes in the level of activity.

(j) Which transaction will improve the current ratio?
(i) Purchase of goods for cash.
(ii) Payment to trade payables.
(iii) Credit purchase of goods.
(iv) Collection of cash from trade receivables.
Answer: (ii) Payment to trade payables


2. Give brief answers to the following questions : 2×5=10

(a) Mention two managerial uses of ratio analysis.

Answer:

  1. Performance Evaluation: Ratios help in assessing the financial performance of a company over time and against industry benchmarks.

  2. Decision-Making: They provide insights for strategic decisions like investment, budgeting, and operational improvements.

(b) Write any two characteristic features of management accounting.

Answer:

  1. Future-Oriented: Management accounting focuses on forecasting and planning for future activities rather than merely recording past transactions.

  2. Internal Reporting: It provides information specifically for internal management to facilitate decision-making and control.

(c) What is PV ratio?

Answer:
The PV ratio, also known as the profit-volume ratio or contribution margin ratio, measures the contribution of sales to covering fixed costs and generating profit. It is calculated as:

PV Ratio=Contribution Sales×100

where Contribution = Sales - Variable Costs.

(d) What do you mean by Material Price Variance?

Answer:
Material price variance is the difference between the actual cost of materials purchased and the standard cost expected for those materials, multiplied by the quantity purchased. It helps in assessing how well the purchasing department manages material costs.

(e) Mention two limitations of Ratio analysis.

Answer:

  1. Static Analysis: Ratios provide a snapshot of financial performance and do not account for changes over time or external factors affecting the business.

  2. Comparative Limitations: Ratios can be misleading if used for comparison without considering the context of different industries or company sizes.


3. Answer the following questions : (any four) 5×4=20


(a) Explain briefly the role of a management accountant in a business enterprise.

Ans:- Role of a Management Accountant in a Business Enterprise

A management accountant plays a crucial role in a business enterprise by providing financial insights and analyses that support decision-making processes. Key responsibilities include:

  1. Financial Planning and Analysis: They prepare budgets, forecasts, and financial models to guide business strategy and resource allocation.

  2. Cost Management: Management accountants analyze costs and expenses to identify areas for efficiency improvements and profitability enhancement.

  3. Performance Measurement: They establish performance metrics and analyze financial results to evaluate the effectiveness of operations, helping management to make informed decisions.

  4. Risk Management: They assess financial risks and recommend strategies to mitigate those risks, ensuring the financial health of the organization.

  5. Reporting: Management accountants prepare detailed reports for internal stakeholders, focusing on operational efficiency and strategic direction rather than just financial statements.

(b) Describe briefly any five requisites for a successful budgetary control system.

Ans:-  Five Requisites for a Successful Budgetary Control System

A successful budgetary control system requires several key elements:

  1. Clear Objectives: Establishing specific, measurable, achievable, relevant, and time-bound (SMART) objectives helps ensure that the budget aligns with the organization’s strategic goals.

  2. Comprehensive Budgeting Process: A thorough budgeting process that involves all relevant departments and stakeholders ensures that all aspects of the business are considered.

  3. Regular Monitoring and Review: Ongoing monitoring of actual performance against budgeted figures allows for timely adjustments and corrective actions when deviations occur.

  4. Effective Communication: Clear communication of budgetary goals and expectations across the organization fosters accountability and encourages collaboration among departments.

  5. Flexibility: A successful budgetary control system should be adaptable to changes in the business environment, allowing for adjustments in response to unforeseen circumstances or new opportunities.

These components are essential to ensure that the budget serves as an effective tool for managing resources and achieving organizational goals.

(c) Sale of a company for two consecutive months 3,80,000 and ₹4,20,000. The company's net profit for these months amounted to ₹24,000 and ₹40,000 respectively. Assuming that there is no any other change, calculate P/V ratio and fixed cost.

Ans:- Calculation of P/V Ratio and Fixed Cost

Given Data:

  • Month 1:

    • Sales = ₹3,80,000

    • Profit = ₹24,000

  • Month 2:

    • Sales = ₹4,20,000

    • Profit = ₹40,000

Step 1: Calculate Changes

  • Change in Profit: ₹40,000−₹24,000=₹16,000 

  • Change in Sales: ₹4,20,000−₹3,80,000=₹40,000 

Step 2: Calculate P/V Ratio

P/V Ratio=₹16,000/₹40,000×100=40% 


 Step 3: Calculate Variable Costs

  • Month 1 Variable Cost: ₹3,80,000−₹24,000=₹3,56,000 

  • Month 2 Variable Cost: ₹4,20,000−₹40,000=₹3,80,000 

  • Step 4: Calculate Fixed Cost

Using Month 1:

Fixed Cost=Sales−Variable Cost−Profit=₹3,80,000−₹3,56,000=₹24,000 Summary:

  • P/V Ratio: 40%

  • Fixed Cost: ₹3,56,000


(d) Distinguish between Budgetary Control and Standard Costing.

Ans:- Distinction between Budgetary Control and Standard Costing

Aspect

Budgetary Control

Standard Costing

Definition

A system that involves preparing budgets to control income and expenditure.

A technique that involves the establishment of standard costs for products or services to assess performance.

Purpose

To set financial targets and measure actual performance against those targets.

To analyze variances between actual costs and standard costs to improve efficiency.

Focus

Overall financial planning and control at various levels of management.

Cost control at a detailed level, focusing on individual processes and products.

Time Frame

Usually annual or for specific periods (monthly, quarterly).

Can be established for a longer term (yearly) but often reviewed periodically.

Nature of Information

Involves aggregate financial information.

Involves detailed cost information and analysis.

Responsibility

Generally involves top and middle management in setting and controlling budgets.

Involves operational management and cost accountants focused on cost management.

Variability

Budgets can be flexible or fixed based on management decisions.

Standards are typically set and compared with actual performance; variances are analyzed.


(e) What do you mean by variance analysis? Discuss its importance briefly.

Ans:- Definition: Variance analysis is the process of comparing actual financial performance with budgeted or standard performance to identify discrepancies (variances). It involves analyzing the reasons for these variances to understand their impact on financial performance.

Importance:

  1. Performance Evaluation: Helps in assessing the efficiency of operations by comparing actual results to planned targets.

  2. Cost Control: Identifies areas where costs exceed budgets, allowing management to take corrective actions.

  3. Decision-Making: Provides valuable insights that aid in strategic planning and resource allocation.

  4. Accountability: Encourages responsibility among managers and departments for financial performance.

  5. Improvement Opportunities: Highlights areas needing improvement, enabling continuous enhancement of processes and practices.


(f) Write any five limitations of Financial Statement analysis.

Ans:- Limitations of Financial Statement Analysis

  1. Historical Data: Financial statements are based on past data, which may not accurately reflect future performance or current market conditions.

  2. Inflation Effects: Financial statements do not account for inflation, making it difficult to compare figures over time without adjusting for price changes.

  3. Subjectivity: The analysis may be influenced by the accounting policies and estimates chosen by management, leading to potential bias.

  4. Limited Scope: Financial statements provide a snapshot of financial performance and do not capture qualitative factors like employee satisfaction or market trends.

  5. Inter-company Comparisons: Differences in accounting practices, industry norms, or financial structures make it challenging to compare financial statements across different companies.

These limitations underscore the need for a comprehensive analysis that includes both quantitative and qualitative factors when evaluating a company's financial health.


4. Answer the following questions : (any four)


(a) "The subject of management accounting is very important and useful for optimum utilisation of resources. It is an indispensable discipline for management.” Elucidate this statement. 10

Ans:- Importance of Management Accounting for Optimum Utilization of Resources

Management accounting is essential for effective decision-making and resource allocation in an organization. Here’s how it contributes to optimum utilization of resources:

  1. Strategic Planning: Management accounting provides financial and non-financial data that helps in formulating long-term strategies. By analyzing market trends, competitor performance, and internal capabilities, management accountants assist in identifying resource allocation areas that can lead to sustainable growth.

  2. Cost Control and Reduction: It helps in analyzing costs associated with various business activities, allowing organizations to identify inefficiencies and areas for cost reduction. By employing techniques such as variance analysis and activity-based costing, management accountants help in monitoring costs and ensuring that resources are used efficiently.

  3. Performance Measurement: Management accounting establishes performance metrics (KPIs) that evaluate how well resources are utilized. By comparing actual performance against budgeted figures, management can identify areas needing improvement and take corrective actions.

  4. Budgeting and Forecasting: Management accountants develop budgets and financial forecasts that align with organizational objectives. This process ensures that resources are allocated based on realistic assessments of revenue and expenditure, promoting efficient resource utilization.

  5. Decision Support: Management accounting provides critical insights for decision-making regarding investments, pricing strategies, and resource allocation. Techniques such as break-even analysis and profitability analysis assist management in making informed decisions that optimize resource usage.

  6. Risk Management: By identifying and analyzing financial risks, management accounting helps in implementing strategies to mitigate those risks. This proactive approach ensures that resources are safeguarded and utilized effectively, contributing to overall business stability.

  7. Continuous Improvement: Management accounting emphasizes continuous monitoring and improvement of processes and resource allocation. By regularly reviewing performance data, organizations can adapt to changing circumstances and improve efficiency.

In conclusion, management accounting is indispensable for management as it equips organizations with the tools and insights necessary for optimum utilization of resources, ensuring financial sustainability and competitive advantage.

(b) What is meant by Zero-based budgeting? State the advantages and limitations of Zero-based budgeting.  2+4+4=10

Ans:- Zero-Based Budgeting (ZBB)

Definition: Zero-based budgeting (ZBB) is a budgeting approach where all expenses must be justified for each new period, starting from a "zero base." Every function within an organization is analyzed for its needs and costs, rather than basing the budget on previous periods’ expenditures.

Advantages of Zero-Based Budgeting:

  1. Resource Allocation Efficiency: ZBB ensures that resources are allocated based on current needs rather than historical expenditures, promoting efficiency in spending and resource utilization.

  2. Cost Control: By requiring justification for all expenses, ZBB helps organizations identify and eliminate unnecessary costs, leading to more disciplined budgeting and spending.

  3. Enhanced Accountability: Managers are held accountable for justifying their budget requests, fostering a culture of responsibility and critical evaluation of expenditures.

  4. Flexibility and Adaptability: ZBB allows organizations to respond quickly to changes in business conditions and priorities, as budgets can be adjusted based on current needs rather than past performance.

Limitations of Zero-Based Budgeting:

  1. Time-Consuming Process: Developing a ZBB can be time-intensive, requiring significant effort and analysis to justify every expense, which may slow down the budgeting process.

  2. Complexity: The process can be complex, particularly for large organizations with multiple departments and functions, making it challenging to implement effectively.

  3. Potential for Short-Term Focus: ZBB may lead to a focus on short-term gains at the expense of long-term investments, as departments may cut essential expenses to justify lower budgets.

  4. Resistance from Employees: Employees may resist ZBB due to its rigorous evaluation process and the uncertainty it introduces regarding funding for their departments or projects.

(c) Describe briefly the limitations of Financial Accounting and point out how Management Accounting helps in overcoming them. 10

Ans:- Limitations of Financial Accounting and How Management Accounting Helps Overcome Them

Limitations of Financial Accounting:

  1. Historical Nature: Financial accounting primarily focuses on recording and reporting past financial transactions. It does not provide real-time data or insights into current business performance or future trends.

  2. Lack of Detailed Information: Financial statements present aggregated data, which may not provide sufficient detail for internal decision-making. This can make it difficult for managers to identify specific areas needing improvement.

  3. Inflexibility: Financial accounting adheres to strict regulations and accounting standards (such as GAAP or IFRS), making it less flexible in adapting to the unique needs of different organizations or industries.

  4. Focus on External Reporting: The primary purpose of financial accounting is to provide information to external stakeholders (investors, regulators, creditors), which may not align with the internal decision-making needs of management.

  5. Limited Usefulness for Managerial Decisions: Financial accounting is less useful for short-term decision-making, as it focuses on overall financial performance rather than operational metrics or specific departmental performance.

  6. Static Reporting: Financial accounting reports (like balance sheets and income statements) are typically prepared on a periodic basis (monthly, quarterly, annually), leading to potential delays in accessing current data for decision-making.

How Management Accounting Helps Overcome These Limitations:

  1. Real-Time Information: Management accounting provides timely and relevant information to support real-time decision-making. This allows managers to respond quickly to changes in the business environment.

  2. Detailed Analysis: It offers granular insights into costs, revenues, and operational performance through tools like variance analysis, budgeting, and performance metrics, enabling managers to pinpoint specific issues and areas for improvement.

  3. Flexibility in Reporting: Management accounting is not bound by strict external reporting standards, allowing for tailored reporting that meets the specific needs of the organization and its management.

  4. Internal Focus: Unlike financial accounting, management accounting is designed to meet the information needs of internal stakeholders, providing insights that align with the organization's strategic objectives.

  5. Support for Short-Term Decision-Making: Management accounting techniques, such as break-even analysis and cost-volume-profit analysis, equip managers with the tools to make informed short-term decisions regarding pricing, product lines, and resource allocation.


(d) The expenses for the production of 5,000 units of a product in a factory are given as follow :

Description

Per Unit ₹

Materials

50.00

Labour

20.00

Variable factory overheads

15.00

Fixed factory overheads

10.00

Administrative expenses (5% variable)

10.00

Variable selling expenses (80% variable)

4.80

Fixed distribution expenses (10% fixed)

0.50


The total cost of sales per unit was ₹116.00. You are required to prepare a budget for the production of 8,000 units.

Ans:- Breakdown of Costs

  1. Variable Costs:

    • Materials: ₹50.00

    • Labour: ₹20.00

    • Variable Factory Overheads: ₹15.00

    • Administrative Expenses (5% variable): ₹10.00

    • Variable Selling Expenses (80% variable): ₹4.80

  2. Total Variable Costs per Unit:
    50+20+15+10+4.80=₹99.8050 + 20 + 15 + 10 + 4.80 = ₹99.80 

  3. Fixed Costs:

    • Fixed Factory Overheads: ₹10.00

    • Fixed Distribution Expenses (10% fixed): ₹0.50

  4. Total Fixed Costs per Unit (remains constant regardless of the production level):
    10+0.50=₹10.5010 + 0.50 = ₹10.50 

Budget for 8,000 Units

  1. Total Variable Costs for 8,000 Units:
    99.80×8,000=₹798,400 

  2. Total Fixed Costs (remains constant):

    1. Fixed Factory Overheads: ₹50,000

    2. Fixed Distribution Expenses: ₹2,500

  3. Total Fixed Costs:
    50,000+2,500=₹52,500 

  4. Total Cost for 8,000 Units:
    Total Variable Costs+Total Fixed Costs=₹798,400+₹52,500=₹850,900 

Summary Budget for 8,000 Units

Description

Amount (₹)

Total Variable Costs

798,400

Total Fixed Costs

52,500

Total Cost of Production

850,900

Cost per Unit for 8,000 Units

Total Cost per Unit=850,9008,000=₹106.36 


(e)(i) Given :

Profit ₹200

Sales ₹2,000

Variable Cost 75% of sales Find break-even sales and profit when sales are ₹3,200.

Ans:- Given:

  • Profit = ₹200

  • Sales = ₹2,000

  • Variable Cost = 75% of Sales

  1. Variable Costs for ₹2,000 sales = ₹1,500

  2. Contribution = ₹2,000 - ₹1,500 = ₹500

  3. Fixed Costs = Contribution - Profit = ₹500 - ₹200 = ₹300

  4. Contribution Ratio = 500/2000=25%

  5. Break-even Sales = 300/0.25=₹1,200 Profit for ₹3,200 sales:

    • Variable Costs = 75% of ₹3,200 = ₹2,400

    • Contribution = ₹3,200 - ₹2,400 = ₹800

    • Profit = ₹800 - ₹300 = ₹500

Conclusion:

  • Break-even Sales = ₹1,200

  • Profit for ₹3,200 Sales = ₹500


(ii) Given :

Break-even sales ₹8,000

Fixed Costs ₹3,200

Find profit when sales are ₹ 10,000 and sales when profit is ₹2,400.

Ans:- Given:

  • Break-even Sales = ₹8,000

  • Fixed Costs = ₹3,200

  1. Contribution Ratio = 3,200/8,000=40% 

  2. Profit for ₹10,000 Sales:

    • Contribution = 40% of ₹10,000 = ₹4,000

    • Profit = ₹4,000 - ₹3,200 = ₹800

  3. Sales for ₹2,400 Profit:

    • Required Contribution = ₹2,400 + ₹3,200 = ₹5,600

    • Sales = 5,600/0.40=₹14,000 

Conclusion:

  • Profit for ₹10,000 Sales = ₹800

  • Sales for ₹2,400 Profit = ₹14,000


(f) “Ratio analysis is only a technique for making judgements and not substitute for judgements." Explain. 

Ans:- The statement "Ratio analysis is only a technique for making judgments and not a substitute for judgments" emphasizes that while ratio analysis provides valuable insights into a company's financial performance, it cannot replace human judgment or decision-making. Here’s a detailed explanation:

1. Tool for Interpretation

  • Ratio analysis involves calculating financial ratios from a company's financial statements, such as profitability ratios, liquidity ratios, efficiency ratios, and solvency ratios.

  • These ratios help interpret financial health by highlighting trends and relationships between financial data. For instance, a declining profitability ratio may indicate a problem, or a low liquidity ratio might suggest cash flow issues.

  • However, the ratios alone don't provide answers. They require interpretation and context to understand the actual underlying causes.

2. Lack of Context

  • Ratios do not capture the qualitative aspects of a business, such as market conditions, management decisions, industry trends, or external factors like economic shifts and competition.

  • For example, a company's debt-to-equity ratio may be high, but that doesn’t necessarily mean it’s in financial trouble. It could be part of a strategic move to expand operations in a growing market.

  • Therefore, judgment is needed to assess whether the ratio indicates a real concern or just reflects a temporary business condition.

3. Static Nature of Ratios

  • Ratios are based on historical data from financial statements, which means they reflect past performance and may not predict future outcomes.

  • Business environments are dynamic, so relying solely on ratios for decision-making without considering forward-looking factors and trends can lead to misjudgments.

4. Requires Comparison and Benchmarking

  • Financial ratios are most useful when compared with industry averages, competitors, or past performance.

  • Without comparison or context, the ratios lose much of their relevance. For example, a company's current ratio may seem low, but if the entire industry operates with low current ratios due to quick asset turnover, it might not be a cause for concern.

  • Managers must use judgment to assess whether the comparison is valid and appropriate for their specific situation.

5. Subject to Accounting Limitations

  • Financial ratios are based on accounting data, which can sometimes be affected by different accounting policies (e.g., inventory valuation methods, depreciation techniques).

  • Ratio analysis does not account for such variations, and judgment is needed to adjust and interpret the data in light of accounting differences.

6. Not a Complete Picture

  • Ratio analysis only provides quantitative insights, leaving out important qualitative factors such as brand strength, management quality, customer satisfaction, and innovation capabilities.


(g) From the following particulars find out : 10

(i) Material cost variance

(ii) Material price variance and

(iii) Material usage variance


Quantity of material purchased 3,000 units

Value of material purchased 3 9,000

Standard quantity of material required per tonne of finished product 25 units

Standard rate of material ₹2 per unit

Opening stock of material Nil

Closing stock of material 500 units

Finished production during the year 80 tonnes

Ans:- Given:

  • Quantity of material purchased = 3,000 units

  • Value of material purchased = ₹9,000

  • Standard quantity of material required per tonne of finished product = 25 units

  • Standard rate of material = ₹2 per unit

  • Opening stock of material = Nil

  • Closing stock of material = 500 units

  • Finished production during the year = 80 tonnes

Step 1: Calculate Actual Quantity of Material Used

Actual quantity of material used = Quantity purchased – Closing stock

Actual Quantity Used=3,000−500=2,500 units 

Step 2: Calculate Standard Quantity of Material Allowed for Production

Standard quantity of material required per tonne = 25 units
Total production = 80 tonnes

Standard Quantity Allowed=25×80=2,000 


Step 3: Calculate Actual Rate per Unit of Material

Actual Rate per Unit=Value of Material PurchasedQuantity Purchased=9,000/3,000=₹3 per unit 

(i) Material Cost Variance (MCV)

MCV=(Standard Cost−Actual Cost) 

Standard Cost = Standard Quantity Allowed × Standard Rate

Standard Cost=2,000×2=₹4,000  

Actual Cost = Actual Quantity Used × Actual Rate

Actual Cost=2,500×3=₹7,500 

Cost=2,500×3=₹7,500 MCV=4,000−7,500=−₹3,500 (Adverse) 

(ii) Material Price Variance (MPV)

MPV=(Standard Rate−Actual Rate)×Actual Quantity Used 

MPV=(2−3)×2,500=−₹2,500 


(iii) Material Usage Variance (MUV)

MUV=(Standard Quantity Allowed−Actual Quantity Used)×Standard Rate 

 MUV=(2,000−2,500)×2=−500×2=−₹1,000 (Adverse)


(h) 5+5=10


(i) Write an explanatory note on common-size statement.

Ans:- Explanatory Note on Common-Size Statement

A common-size statement is a financial statement in which each line item is expressed as a percentage of a base item. This method of analysis is primarily used in financial reporting and helps in comparing financial data over different periods or among different companies, regardless of their size.

Key Features:

  1. Standardization: By converting absolute figures into percentages, common-size statements allow for easier comparison. For example, in an income statement, each item can be expressed as a percentage of total sales, while in a balance sheet, each item can be expressed as a percentage of total assets.

  2. Analysis of Trends: Common-size statements facilitate trend analysis over time, as changes in the relative proportions of different financial items can be observed easily.

  3. Benchmarking: Companies can use common-size statements to compare their performance with industry averages or competitors, helping them identify areas for improvement.

  4. Financial Health: Stakeholders, including investors and creditors, can assess a company's financial health by looking at the proportions of various expenses, profits, and assets.

Applications:

  • Income Statement: Each item (like cost of goods sold, operating expenses) can be expressed as a percentage of total sales, allowing analysis of profitability margins.

  • Balance Sheet: Each asset, liability, and equity item can be expressed as a percentage of total assets, providing insights into capital structure.

(ii) Given :

Sales ₹3,50,000

Sales returns ₹ 20,000

Gross profit ratio 20%

Inventory turnover ratio 8 times

Opening inventory exceeds closing inventory by ₹ 14,000.

Find opening and closing inventory.


Ans:- Given:

  • Sales = ₹3,50,000

  • Sales Returns = ₹20,000

  • Gross Profit Ratio = 20%

  • Inventory Turnover Ratio = 8 times

  • Opening Inventory exceeds Closing Inventory by ₹14,000.

Steps:

  1. Calculate Net Sales:
    Net Sales=Sales−Sales Returns=3,50,000−20,000=₹3,30,000

 Sales=Sales−Sales Returns=3,50,000−20,000=₹3,30,000

  1. Calculate Gross Profit:
    Gross Profit=Net Sales×Gross Profit Ratio=3,30,000×0.20=₹66,000 

Gross Profit=Net Sales×Gross Profit Ratio=3,30,000×0.20=₹66,000

  1. Calculate Cost of Goods Sold (COGS):
    COGS=Net Sales−Gross Profit=3,30,000−66,000=₹2,64,000 COGS=Net Sales−Gross Profit=3,30,000−66,000=₹2,64,000

  2. Use Inventory Turnover Ratio to find Average Inventory:
    Inventory Turnover Ratio=COGSAverage Inventory  Turnover Ratio=Average InventoryCOGS​
    Rearranging gives:
    Average Inventory=COGSInventory Turnover Ratio=2,64,0008=₹33,000 Average Inventory=Inventory Turnover RatioCOGS​=82,64,000​=₹33,000

  3. Use the relationship between Opening and Closing Inventory: LetC = Closing Inventory. 

Then:
Opening Inventory=C+14,000
Average Inventory is given by:
Average Inventory=Opening Inventory+Closing Inventory/2 


Substituting for Opening Inventory:
33,000=(C+14,000)+C/2

66,000=2C+14,000

2C=66,000−14,000=52,000

C=52,000/2=₹26,000 

  1. Find Opening Inventory:
    Opening Inventory=C+14,000=26,000+14,000=₹40,000 Inventory=C+14,000=26,000+14,000=₹40,000

Summary:

  • Opening Inventory = ₹40,000

  • Closing Inventory = ₹26,000



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