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P. V. Ratnam

THE financial statements of Excel AMP Graphics Ltd are as shown in Tables 16 and 17.

Required: a) Compute and analyse the return on capital employed (ROCE) in a Du-Pont control chart framework.

b) Compute and analyse the average inventory holding period and average collection period.

c) Compute and analyse the return on equity (ROE) by bringing out clearly the impact of financial leverage.

Return on capital employed = (Profit before tax / sales) x (sales / capital employed x 100)

Year 2000: Capital employed = net block + net current assets.

ROCE = 1,586/1,7849 x 1,7849 x 100/3,186 + 5,868 = 17.52 per cent

Profit ratio = PBT/sales x 100 = 1586/17,849 x 100 = 8.89 per cent

Investment turnover = Sales/capital employed = 17,849/9,054 = 1.97 times

ROCE =Profit ratio x investment turnover

= 8.89 per cent x 1.97=17.52 per cent

Year 2001:

ROCE = 1,912/23,436 x 23,436 x 100/3,517 + 6,804 = 18.525 per cent

Profit ratio = 1,912/23,436 x 100 = 8.16 per cent

Investment turnover = 23,436/10,321 = 2.27 times

ROCE = 8.16 per cent x 2.27 = 18.525 per cent

Analysis: ROCE is improved from 17.52 per cent to 18.525 per cent in 2001. But profit ratio has come down from 8.89 per cent to 8.16 per cent in 2001; though sales improved from Rs 17,849 to Rs 23,436 crore. Investment turnover is also improved from 1.97 times to 2.27 times in 2001. Even this is not good. Investment turnover should be four or five times. Profit ratio also should be improved to 10 per cent or more.

Analysis: The average inventory holding period is worked out in Table 18. It has improved in 2001, that is, holding period reduced from 55 days to 45 days. It is good.

Average collection period (Table 19): It has also improved in 2001, that is, the collection period reduced from 190 days to 145 days.

Even then, efforts should be made to collect the dues within 120 days, that is, four months' credit. Table 20 presents the ratios for the years 2000 and 2001.

Process costing

FROM the information given in Table 12 for October 2003, prepare Process III cost accounts. The degree of completion is given in Table 13.

The normal loss in the process was 5 per cent of the production and scrap was sold at Rs 6.75 per unit.

Working note (WN) 1: Process III

Opening WIP — 1,800 units

Transfer from process II — 47,700 units

Total input — 49,500 units

Less: Units scrapped — (-) 1800 units

Less: Closing WIP — (-) 4,500 units

Transferred to warehouse — 43,200 units

WN2: Actual units scrapped — 1,800 units

Normal loss, 5 per cent production, that is, 5 per cent of

(49,500 - 4,500) = 2,250 units

Abnormal gain — 450 units

WN3: Statement of equivalent production (EQP) is presented in Table 14.

WN4: Statement of evaluation:

Cost of opening WIP (1,800 units) — Rs 27,000

Opening WIP for completion:

Material A — Nil

Material B (360 x 3.65839) = Rs 1,317

Labour (720 x 2) = Rs 1,440

Overheads (720 x 1) = 720

Sub-total = Rs 3,477

Completed during October 2003 (41,400 units)

41,400 x 18.46532 = Rs 7,64,465

Value of output transferred to warehouse = Rs 7,94,942

Closing WIP: (4,500 units)

Material A: 4,500 x 11.80693 = Rs 53,131

Material B: 3,150 x 3.65839 = Rs 11,524

Labour: 2,250 x 2 = Rs 4,500

Overheads: 2,250 x 1= Rs 2,250

Sub-total = Rs 71,405

Abnormal gain (450 units at 18.46532) = Rs 8,310

Solution: The Process III A/c is presented in Table 15.

(Suggested answers to the November 2003 CA (PE II) paper on cost accounting and financial management.)

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