III/IV B.Tech Degree Examination (November 2018) Solution and Scheme Evaluation for ENGINEERING ECNOMMMICS and ACCOUNTANCY 14ME506/A

Transcription

1 III/IV B.Tech Degree Examination (November 2018) Solution and Scheme Evaluation for ENGINEERING ECNOMMMICS and ACCOUNTANCY 14ME506/A Prepared by: Mr.S.Krugon Assistant Professor Department of Mechanical Engineering Bapatla Engineering College Bapatla 1

2 2

3 3

4 1. (12M) a) Want: In economics, a want is something that is desired. It is said that every person has unlimited wants, but limited resources (economics is based on the assumption that only limited resources are available to us). b) Wealth: Wealth measures the value of all the assets of worth owned by a person, community, company or country. Wealth is determined by taking the total market value of all physical and intangible assets owned, then subtracting all debts c) Elasticity: Elasticity measures the relationship between a good and its price based on consumer demand, consumer income, and its available supply. d) Sleeping partner: A sleeping partner is a person who provides some of the capital for a business but who does not take an active part in managing the business. e) Fixed Cost: In economics, fixed costs, indirect costs or overheads are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs. (Or) A fixed cost is an expense or cost that does not change with an increase or decrease in the number of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any business activity. f) Marginal Cost: The increase or decrease in the total cost of a production run for making one additional unit of an item. (Or) In economics, marginal cost is the change in the opportunity cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good g) MOS: Margin of safety (safety margin) is the difference between the intrinsic value of a stock and its market price. Another definition: In break-even analysis, from the discipline of accounting, margin of safety is how much output or sales level can fall before a business reaches its break-even point h) Straight line method of depreciation: Straight line depreciation is the default method used to gradually reduce the carrying amount of a fixed asset over its useful life. The method is designed to reflect the consumption pattern of the underlying asset, and is used when there is no particular pattern to the manner in which the asset is to be used over time. Use of the 4

5 straight-line method is highly recommended, since it is the easiest depreciation method to calculate, and so results in few calculation errors. i) Depletion: j) Ledger: A ledger is the principal book or computer file for recording and totaling economic transactions measured in terms of a monetary unit of account by account type, with debits and credits in separate columns and a beginning monetary balance and ending monetary balance two account. k) Trading account: A trading account can be any investment account containing securities, cash or other holdings. Most commonly, trading account refers to a day trader's primary account. l) Nominal Account: Nominal accounts are the accounts that report revenues, expenses, gains, and losses. (The owner's drawing account is also a temporary account, even though it is not an income statement account.) Nominal or temporary accounts are closed at the end of each accounting year. UNIT-I 2. (12M) i) Wealth is determined by taking the total market value of all physical and intangible assets owned, then subtracting all debts. Essentially, wealth is the accumulation of resources. Specific people, organizations and nations are said to be wealthy when they are able to accumulate many valuable resources or goods. Money is the most common means of measuring wealth. The value of a product or material used as the basis for a monetary system depends on how much others are willing to trade or provide labor in exchange for it. Another factor is the degree of universal acceptance the material or commodity has. If no one outside a community is willing to accept the money in exchange for goods or services, it has no value outside of the society that uses it. The extent to which outside forces can manipulate the value of money can have a dramatic impact on measuring wealth. One of the major problems with paper currency is that it is subject to manipulation and devaluation by the acts of one or a few individuals through counterfeiting and unscrupulous trading. Another problem is that it is relatively easy for governments and banks to manipulate the value of money by printing more and making it easy to borrow, or by printing less and increasing credit restrictions. For these reasons, financial instruments and investments, land, resources and even livestock can be used to measure and evaluate wealth. ii) Value (economics) Economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured relative to units of currency, and the interpretation is therefore "what is the maximum amount of money a specific actor is willing and able to pay for the good or service"? 5

6 The economic value of a good or service is determined by the preferences of a given population and the trade-offs its members make given their resources. Economic value is also directly correlated to the value that any given market places on an item. Economic Value of Consumer Goods Economic value is not a static figure; it changes when the price or quality of similar items changes. For example, if the price of milk increases, people may buy less milk and less cereal. This is likely to lead manufacturers and retailers to lower the cost of cereal to entice consumers to buy more. How people choose to spend their income and their time, therefore, determines a good or service's economic value. iii) Total Utility: Total utility would be the number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period. The higher a consumer s total utility, the greater that consumer s level of satisfaction. The total utility Henry Higgins obtains from attending movies. In drawing his total utility curve, we are imagining that he can measure his total utility. The total utility curve shows that when Mr. Higgins attends no movies during a month, his total utility from attending movies is zero. As he increases the number of movies he sees, his total utility rises. When he consumes 1 movie, he obtains 36 units of utility. When he consumes 4 movies, his total utility is 101. He achieves the maximum level of utility possible, 115, by seeing 6 movies per month. Seeing a seventh movie adds nothing to his total utility. Marginal Utility: The amount by which total utility rises with consumption of an additional unit of a good, service, or activity, all other things unchanged, is marginal utility. The first movie Mr. Higgins sees increases his total utility by 36 units. Hence, the marginal utility of the first movie is 36. The second increases his total utility by 28 units; its marginal utility is 28. The seventh movie does not increase his total utility; its marginal utility is zero. Notice that in the table marginal utility is listed between the columns for total utility because, similar to other marginal concepts, marginal utility is the change in utility as we go from one quantity to the next. Mr. Higgins s marginal utility curve is plotted in the values for marginal utility are plotted midway between the numbers of movies attended. The marginal utility curve is downward sloping; it shows that Mr. Higgins s marginal utility for movies declines as he consumes more of them. Mr. Higgins s marginal utility from movies is typical of all goods and services. Suppose that you are really thirsty and you decide to consume a soft drink. Consuming the drink increases your utility, probably by a lot. Suppose now you have another. That second drink probably increases your utility by less than the first. A third would increase your utility by still less. This tendency of marginal utility to decline beyond some level of consumption during a period is called the law of diminishing marginal utility. This law implies that all goods and services eventually will have downward-sloping marginal utility curves. It is the law that lies behind the negatively sloped marginal benefit curve for consumer choices that we examined in the chapter on markets, maximizers, and efficiency. 6

7 (OR) 3 (6M) a) The result of the interaction between consumers and producers in a competitive market determines Supply and Demand equilibrium, price and quantity. Market forces tend to drop the price if quantity supplied exceeds quantity demanded and prices rise if quantity demanded exceeds quantity supplied. The Demand Curve: The quantity demanded of a particular good is the amount of a product that consumers are willing and able to buy. A number of factors affect how much of a good a consumer wants to purchase: The price of the product The consumer s income The price of substitute goods The price of complementary goods The consumer s preferences or tastes The consumer s expectations of future prices To begin, we examine a demand schedule, a table that shows the relationship between the price of a product and the quantity demanded of that product. When we talk about a demand schedule, we assume that all of the other factors listed above (tastes, income, etc.) are held constant and only the price of the good changes. The demand curve is a graphical representation of the demand schedule. The curve shows the relationship between the price of a good and the quantity demanded of that good. An individual demand curve shows the relationship between the price of a good and the quantity demanded by an individual consumer. A market demand curve shows the relationship between price and quantity demanded by all consumers. The Supply Curve: Much of the logic for demand also applies to the supply side of the market. The quantity supplied is the amount of a product that firms are willing and able to sell. A number of factors affect the decision of the sellers: The price of the product The wage paid to workers The price of materials The cost of capital The state of production technology Expectations about future prices Government taxes and subsidies. we define a supply schedule as a table that shows the relationship between the price of a product and quantity supplied (holding all the other supply factors constant), and a supply curve as a curve showing the relationship between price and quantity supplied. Notice that these definitions are similar to the ones you learned for the demand schedule and the demand curve. b) (6M) Elasticity of Demand: Elasticity of demand explains the relationship between a change in price and consequent change in amount demanded. Marshall introduced the concept of elasticity of demand. Elasticity of demand shows the extent of change in quantity demanded to a change in price. In the words of Marshall, The elasticity of demand in a market is great or small according as the amount demanded increases much or little for a given fall in the price and diminishes much or little for a given rise in Price 7

8 Elastic demand: A small change in price may lead to a great change in quantity demanded. In this case, demand is elastic. In-elastic demand: If a big change in price is followed by a small change in demanded then the demand in inelastic. UNIT-II 4. (12M) a) You must have heard about Reliance Industries Limited (RIL), Tata Iron and Steel Company Limited (TISCO), Steel Authority of India Limited (SAIL), Maruti Udyog Limited (MUL), etc. Have you ever thought who owns them? What is the volume of financial transactions of these companies? If you think about it, you will find that these organisations are quite large in size and their activities are spread all over the country. Thus, it is not possible for these organisations to be formed as sole proprietorship or partnership form of business. Then, how are they formed and managed? Actually, they are a different form of business organisation and require much more capital and manpower than sole proprietorship and partnership form of business organisation. A company form of business orgnisation is known as a Joint Stock Company. It is a voluntary association of persons who generally contribute capital to carry on a particular type of business, which is established by law and can be dissolved only by law. Persons who contribute capital become members of the company. This form of business has a legal existence separate from its members, which means even if its members die, the company remains in existence. This form of business organisations generally requires huge capital investment, which is contributed by its members. The total capital of a joint stock company is called share capital and it is divided into a number of units called shares. Thus, every member has some shares in the business depending upon the amount of capital contributed by him. Hence, members are also called shareholders. Characteristics of JSC: i) Legal formation: No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company comes into existence only when it has been registered after completion of all formalities required by the Indian Companies Act, ii. Artificial person: Just like an individual, who takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as its birth, existence and death are regulated by law and it does not possess physical attributes like that of a normal person. iii. Separate legal entity: Being an artificial person, a joint stock company has its own separate existence independent of its members. It means that a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. It can sue and can be sued by others in the court of law. The shareholders are not the owners of the property owned by the company. Also, the shareholders cannot be held responsible for the acts of the company 8

9 iv. Common seal: A joint stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organisation working on behalf of the company. Any document, on which the company's seal is put and is duly signed by any official of the company, become binding on the company. For example, a purchase manager may enter into a contract for buying raw materials from a supplier. Once the contract paper is sealed and signed by the purchase manager, it becomes valid. The purchase manager may leave the company thereafter or may be removed from the job or may have taken a wrong decision, yet for all purposes the contract is valid till a new contract is made or the existing contract expires. v. Perpetual existence: A joint stock company continues to exist as long as it fulfils the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members. For example, in case of a private limited company having four members, if all of them die in an accident the company will not be closed. It will continue to exist. The shares of the company will be transferred to the legal heirs of the deceased members. vi. Limited liability: In a joint stock company, the liability of a member is limited to the extent of the value of shares held by him. While repaying debts, for example, if a person owns 1000 shares of Rs. 10 each, then he is liable only upto Rs 10,000 towards payment of debts. That is, even if there is liquidation of the company, the personal property of the shareholder can not be attached and he will lose only his shares worth Rs. 10,000. vii. Democratic management: Joint stock companies have democratic management and control. That is, even though the shareholders are owners of the company, all of them cannot participate in the management of the company. Normally, the shareholders elect representatives from among themselves known as Directors to manage the affairs of the company. 5.a) (OR) Decision Making: Cost Concept # 1. Marginal Cost: (6M) Marginal cost is the total of variable costs, i.e., prime cost plus variable overheads. It is based on the distinction between fixed and variable costs. Fixed costs are ignored and only variable costs are taken into consideration for determining the cost of products and value of work-in-progress and finished goods. Decision Making: Cost Concept # 2. Out of Pocket Costs: This is that portion of the costs which involves payment to outsiders, i.e., gives rise to cash expenditure as opposed to such costs as depreciation, which do not involve any cash expenditure. Such costs are relevant for price fixation during recession or when make or buy decision is to be made. 9

10 Decision Making: Cost Concept # 3. Differential Costs: The change in costs due to change in the level of activity or pattern or technology or process or method of production is known as differential costs. If any change is proposed in the existing level or in the existing methods of production, the increase or decrease in total cost as a result of this decision is known as differential cost. If the change increases the cost, it will be called incremental cost. If there is decrease in cost resulting from decrease in output, the difference is known as decremental cost. Decision Making: Cost Concept # 4. Sunk Costs: A sunk cost is an irrecoverable cost and is caused by complete abandonment of a plant. It is the written down value of the abandoned plant less its salvage value. Such costs are historical which are incurred in the past and are not relevant for decision-making and are not affected by increase or decrease in volume. Thus, expenditure which has taken place and is irrecoverable in a situation is treated as sunk cost. For taking managerial decisions with future implications, a sunk cost is an irrelevant cost. If a decision has to be made for replacing the existing plant, the book value of the plant less salvage value (if any) will be a sunk cost and will be irrelevant cost for taking decision of the replacement of the existing plant. Sunk costs are not affected by increase or decrease of volume. Examples of such costs include depreciated fixed assets, development cost already incurred etc. Decision Making: Cost Concept # 5. Opportunity Cost: It is the maximum possible alternative earning that might have been earned if the productive capacity or services had been put to some alternative use. In simple words, it is the advantage, in measurable terms, which has been foregone due to not using the facility in the manner originally planned. It refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. For example, if an owned building is proposed to be used for a project, the likely rent of the building is the opportunity cost which should be taken into consideration while evaluating the profitability of the project. b) (6M) 10

11 Machine Hour rate= Total Cost/Number of hours Machine hour rate= (1, 14,800+5,400+5,000+12,000+3,000+8,640+1,200+1,080)/( ) =Rs 53.79/- UNIT-III 6a) (6M) The break-even analysis lets you determine what you need to sell, monthly or annually, to cover your costs of doing business your break-even point. The break-even analysis table calculates a break-even point based on fixed costs, variable costs per unit of sales, and revenue per unit of sales. Uses of BEA: (i) It helps in the determination of selling price which will give the desired profits. (ii) It helps in the fixation of sales volume to cover a given return on capital employed. (iii) It helps in forecasting costs and profit as a result of change in volume. (iv) It gives suggestions for shift in sales mix. (v) It helps in making inter-firm comparison of profitability. (vi) It helps in determination of costs and revenue at various levels of output. (vii) It is an aid in management decision-making (e.g., make or buy, introducing a product etc.), forecasting, long-term planning and maintaining profitability. (viii) It reveals business strength and profit earning capacity of a concern without much difficulty and effort. b) (6M) Various Cost Make Internally (A1) Buy From Outside (A2) Difference Better Decision Material Cost Rs 2.75/- Nil 2.75 (A2) Labour Cost Rs 1.75/- Nil 1.75 (A2) Other Rs 0.50/- Nil 0.50 (A2) Expenses Depreciation Rs 1.25/ Nil 1.25 (A2) & Fixed OH Total Cost Rs 6.25/- Rs 5.75/- 0.5 (A2) a) Purchase it in the market is the best decision b) Purchasing the same part with the supplier is best decision (OR) 7. (12M) 11

12 Given Data, Initial Cost, C=Rs 1, 20,000- Rs 30,000= Rs 80,000/- Scrap Value, S= Rs 20,000/- Life of the vehicle (N) = 8 Years Percentage, X=20%=0.2 Value of Vehicle for 1 st year=90,000-(0.2*90,000) = Rs 72,000/- Depreciation for 1 st year =Rs 90,000-72,000= Rs 18,000/- Value of Vehicle for 2 nd year=72,000-(0.2*72,000) = Rs 57,600/- Depreciation for 2 nd year =Rs 72,000-57,600= Rs 14,400/- Value of Vehicle for 3 rd year=57,600-(0.2*57,600) = Rs 46,080/- Depreciation for 3 rd year =Rs 57,600-46,080= Rs 11,520/- Value of Vehicle for 4 rth year=46,080-(0.2*46,080) = Rs 36,864/- Depreciation for 4 rth year =Rs 46,080-36,864= Rs 9,216/- Value of Vehicle for 5 th year=36,864-(0.2*36,864) = Rs 29,492/- Depreciation for 5 th year =Rs 36,864-29,492= Rs7372 /- Value of Vehicle for 6 th year=29,492-(0.2*29,492) = Rs 23,594/- Depreciation for 6 th year =Rs 29,492-23,594= Rs 5898/- 8 UNIT-IV a) (6M) 2017 Particulars Debit Credit March 1 Goods sold for cash March 3 Goods purchased for cash March 6 Purchase of Goods on credit from Vishnu March 10 Sale of Goods to Mahesh on credit \ March 12 Cash received from Mahesh March 15 Cash Paid to Vishnu Total

13 b) (6M) 2016 Particulars Debit Credit April 1 Started Business with Capital April 2 Sold goods Muthu on Credit April 6 Sold goods to Anand for Cash April8 Goods returned by Muthu 100 April 14 Purchased goods from Murali on credit April 22 Paid Cash to Murali 1700 Total (OR) Particulars Dr Rs Particulars Cr Rs Electricity 14,000 Interest 16,000 Land 3,56,000 Discount 6,000 Wages 50,000 Sales 8,00,000 Opening Stock 20,000 Purchase Returns 10,000 Rent 24,000 Creditors 60,000 Office expenses 30,000 Capital 3,02,000 Building 4,00,000 Bills payable 15,000 Salaries 90,000 Power, Gas, and Water 30,000 Sales Returns 20,000 Furniture 1,15,000 Debtors 60,000 Trading account of MR TIRUMALESH for the year ending 31 st MARCH 2017 Particulars Amount Particulars Amount To opening stock 20,000 By sales 8,00,000 (4M) To purchases Less: returns 20,000 7,80,000 Less: returns 10,000 10,000 By closing stock 50,000 To carriage inwards To wages 50,000 13

14 To freight To customs duty, octroi To gas, fuel, coal, Water 2,00,000 30,000+14,000+3,56,000 To factory expenses 30,000 To other man. Expenses 1,15,000 To productive expenses To gross profit c/d 8,50,000 8,50,000 PROFIT AND LOSS A/C OF MR TIRUMALESH FOR THE YEAR ENDING 31 st MARCH 2017 (4M) PARTICULARS Amount PARTICULARS Amount TO office salaries 90,000 By gross profit b/d 1,68,000 TO rent,rates,taxes 24,000 Interest received 16,000 TO Printing and Discount received 6,000 stationery TO Legal charges Commission received Audit fee Income from investments 10,000 TO Insurance Dividend on shares 60,000 TO General expenses 30,000 Miscellaneous 3,02,000 investments TO Advertisements Rent received TO Bad debts 60,000 TO Carriage outwards TO Repairs TO Depreciation TO interest paid TO Interest on capital 16,000 TO Interest on loans TO Discount allowed 6,000 TO Commission TO Net profit ,68,000 (transferred to capital a/c) 3,94,000 3,94,000 14

15 BALANCE SHEET OF TIRUMALESH AS ON ENDING 31 st MARCH 2017 (4M) Liabilities and capital Amount Assets Amount Creditors 60,000 Cash in hand 1,02,000 Bills payable 15,000 Cash at bank 1,00,000 Bank overdraft Bills receivable Loans Debtors 10,000 Mortgage Closing stock 50,000 Reserve fund Investments 1,02,000 Capital 3,02,000 3,02,000 Furniture and fittings 1,15,000 Add: Plats &machinery Net Profit 1,68,000 Land & buildings 1,56, Patents, tm,copyrights Goodwill Prepaid expenses Less: Outstanding incomes Drawings 5,45,000 5,45,000 15