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UNIT - 1 Company Act, 2013

The Companies Act, 2013
Background Of Companies Act
The Companies Act, 2013 is a comprehensive legislation governing the formation,
management, and regulation of companies in India
...

Below is its background:
1
...

o There was a need for a law addressing modern corporate practices, fraud
prevention, and governance issues
...
Development:
o The Companies Bill, 2012, was introduced in Parliament and received
Presidential assent on August 29, 2013
...

3
...


Salient Features Of Companies Act
The Companies Act, 2013 is highly beneficial in reforming corporate governance,
transparency, and accountability in India
...

1
...
This provision has made India one of the first
countries to provide legal mandates for CSR for eligible companies
...

2
...
Provision for the same will be made wherein the benefits of limited
liability will accrue to individuals without the necessity of the presence of multiple
shareholders, hence facilitating enhanced entrepreneurship
...
Independent Directors and Board Composition
The Companies Act, 2013 brings about independent directors to the extent required in
corporate boards so that better oversight and fairness are assured
...


1 | Piyush

UNIT - 1 Company Act, 2013

4
...
The size of an audit firm dictates whether they change auditors every 5 or 10
years
...

5
...
This act safeguards the interests of investors as well as other
stakeholders
...
Harsh Penalties for Non-Compliance
The Companies Act, 2013 has infused fiercer punishment for non-compliance, which
would help curb corporate fraud and adherence to the legal framework
...

7
...


Company Means
In the words of Professor Haney, "A company is an incorporated association, which is an
artificial person created by law, having a separate entity, with a perpetual succession and a
common seal
...

However, the Act defines the term company a bit differently
...
"Company means a company incorporated under this
Act or under any previous company law"
...
Separate Legal Entity
•

A company is a legal entity distinct from its owners (shareholders) or managers
...

o Enter into contracts
...


Example: If a company owes money to someone, the liability is on the
company itself, not on the personal assets of its owners
...
Perpetual Succession
•

•

A company continues to exist indefinitely, irrespective of changes in its
ownership or management
...

• Example: Even if all the original shareholders of a company pass away, the
company will still exist and carry on its business
...
Limited Liability
• Shareholders' liability is limited to the amount unpaid on their shares
...

• Example: If you own shares worth ₹10,000 in a company, your liability is limited
to that ₹10,000
...

4
...

• This means:
o It can act through its representatives (like directors) and conduct business
...

• Example: A company can sign contracts, file lawsuits, and own assets, but it
cannot physically "act" as a human would
...
Types of Companies Based on Liability
A
...

• Example: If a shareholder has 100 shares worth ₹10 each and has paid ₹5 per
share, they are liable only for the remaining ₹5 per share
...
g
...

B
...

• Common in non-profit organizations, educational institutions, or charitable
organizations
...

C
...


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UNIT - 1 Company Act, 2013

If the company’s assets are insufficient to pay its debts, members are personally
liable without any limit
...

2
...
One Person Company (OPC)
• Formed by a single individual
...

• Features:
o Maximum turnover of ₹2 crore
...

B
...

• Features:
o Minimum 2 and maximum 200 members
...

o Restricted transfer of shares
...
Small Company
• Defined under Section 2(85) of the Companies Act
...

o Turnover does not exceed ₹40 crore in the previous financial year
...

D
...

• Features:
o Minimum 7 members, no maximum limit
...

o Required to comply with stricter regulatory norms
...
Types of Companies Based on Control
A
...

o Controlling the composition of the subsidiary’s board of directors
...
Subsidiary Company
•

•

A company that is controlled by another (holding) company
...


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UNIT - 1 Company Act, 2013

C
...


• Significant influence means owning at least 20% of the share capital
...
Foreign Company
•

A company incorporated outside India but:
o Conducts business in India
...


• Example: Google India Pvt
...
is a foreign company operating in India
...
Companies formed with Charitable Objects (Section 8)
•

•

Formed for promoting charitable objectives such as:
o Education, religion, arts, culture, or sports
...


Features:
o Profit cannot be distributed among members
...

o Exempted from certain compliances and taxes
...


No separate legal entity; partners are
collectively considered the business
...


Formed by an agreement, with or without
registration under the Partnership Act
...

guarantee
...


Owned and managed by the partners
themselves
...

agreed)
...


Minimum 2 partners; maximum 50 in
certain cases
...


Ownership cannot be transferred without
the consent of all partners
...


Governed by the Indian Partnership Act,
1932
...


Taxed as a firm; profits are distributed
among partners, taxed individually
...
g
...

Profit Sharing
Dissolution

Profits are distributed as
dividends to shareholders
...

Comparatively simpler, with fewer
compliance requirements
...


Can only be dissolved through Can be dissolved by mutual consent or on
legal procedures
...


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UNIT - 1 Company Act, 2013

Corporate Veil
The term Corporate Veil refers to the concept that members of a company are shielded
from liability connected to the company's actions
...
In other words, they enjoy corporate insulation
...

Now the question arises whether this corporate veil personality can be lifted or pierced???

Instances of Lifting the Corporate Veil
1
...

• For example:
o To determine if a company is under foreign control in times of war or conflict
...
Ltd
...
Continental Tyre and Rubber Co
...

2
...

• Example:
o If a company is set up solely to shift profits to a lower-tax jurisdiction, the
court may ignore its separate entity status
...
Commissioner of Income Tax
o The company was a sham created to avoid tax, so the corporate veil was lifted
...
To Avoid a Legal Obligation
• If the company is being used to circumvent legal obligations or defraud creditors, the
corporate veil may be lifted
...

4
...

• Example:
o When a parent company tries to limit its liabilities by channelling risky
business through a subsidiary
...
Company Formed by Fraud, Improper Conduct, or to Defeat Law
• When a company is created with fraudulent intent or to achieve illegal objectives,
courts can hold the individuals behind it accountable
...

Case Example: Gilford Motor Co
...
v
...
The court lifted
the veil and held him liable
...
It involves registering the company with the Registrar of Companies (RoC)
under the Ministry of Corporate Affairs (MCA)
...
Stages of Formation
The process of forming and incorporating a company can be divided into three main
stages:
A
...

1
...

o They undertake necessary formalities like preparation of documents and
financing
...
Preliminary Work:
o Conduct feasibility studies (economic, financial, and technical)
...

3
...

o Director Identification Number (DIN) for proposed directors
...
Incorporation Stage
This stage involves the actual registration of the company
...
Preparation of Documents:
o Memorandum of Association (MoA): Defines the scope and objectives of the
company
...

o Other documents like Form INC-9 (declaration by directors) and consent of
directors
...
Application for Name Approval:
o File SPICe+ (Simplified Proforma for Incorporating Company
Electronically Plus) Part A for name reservation
...

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UNIT - 1 Company Act, 2013

3
...

4
...

5
...

C
...

1
...

2
...

3
...

4
...


Memorandum of Association (MoA)

The Memorandum of Association (MoA) is a fundamental document that defines the
constitution of the company and specifies the scope of its activities
...

Key Features of MoA
1
...

2
...

3
...

Contents of MoA (As per Section 4)
The MoA must contain the following clauses:
1
...

o For private companies, "Private Limited" must be included, while for public
companies, "Limited" must follow the name
...
Registered Office Clause:
o Indicates the state where the company’s registered office is located
...
Object Clause:
o Main Objects: The primary activities the company will undertake
...

4
...

o For limited companies, liability can be limited by shares or guarantee
...
Capital Clause:
o Specifies the company’s authorized share capital and its division into shares of
fixed amounts
...
Association Clause:
o Declaration by subscribers to the MoA that they agree to form the company
and subscribe to its shares
...

• Regulatory Compliance: Helps regulatory authorities ensure the company adheres to
its stated purpose
...

Key Features of AoA
1
...

2
...

3
...

Contents of AoA
The AoA generally contains provisions regarding:
1
...

2
...

3
...


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UNIT - 1 Company Act, 2013

4
...

5
...

6
...


Difference between MoA & AoA
Aspect

Memorandum of Association (MoA)

Purpose

Defines the company's scope of activities
...


Alteration
Content

Requires special resolution and approval from
authorities (if applicable)
...


Articles of Association (AoA)
Specifies the rules for internal
management
...

Can usually be altered by a special
resolution
...


Doctrine of Constructive Notice
The Doctrine of Constructive Notice states that a person dealing with a company is
presumed to have knowledge of the contents of its public documents, such as the
Memorandum of Association (MoA) and Articles of Association (AoA)
...

Key Points
1
...

2
...

3
...

4
...

Purpose
• To protect the company from fraudulent claims or liabilities arising from unauthorized
acts by its officers or agents
...
Ram Murthy: The court held that if a person acts contrary
to the provisions of the company’s MoA and AoA, they cannot hold the company
liable
...
It protects outsiders dealing with a company by assuming that the company’s internal
procedures have been duly followed, as long as the act is within the authority conferred by
the MoA and AoA
...
No Inquiry into Internal Affairs:
o Outsiders are not expected to verify whether the company has followed all its
internal procedures (e
...
, board resolutions or approvals)
...
Protects Outsiders:
o If the company acts within its powers (as per the MoA and AoA), third parties
are entitled to assume compliance with internal formalities
...
Reasonable Assumption:
o Outsiders can assume that all internal approvals, consents, and resolutions
have been obtained
...
Knowledge of Irregularity:
o If the outsider is aware of any irregularity or non-compliance
...
Forgery:
o It does not protect outsiders if the documents or transactions involve forgery
...
Ultra Vires Acts:
o If the act is beyond the scope of the company’s powers under the MoA and
AoA, the doctrine does not apply
...
Lack of Authority:
o When the agent or officer has no actual or apparent authority to act
...

Case Law:
• Royal British Bank v
...


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UNIT - 1 Company Act, 2013

Difference between Doctrine of Constructive Management
and Doctrine of Indoor Management
Aspect

Doctrine of Constructive Notice

Focus

Protects the company from outsiders
...


Protection

Protects the company against
unauthorized claims
...


Doctrine of Indoor Management
Protects outsiders dealing with the
company
...

Protects third parties acting in good
faith
...


What does Prospectus mean?
A prospectus is a formal legal document issued by a company to invite the public to subscribe
to its securities (shares, debentures, etc
...

As per Section 2(70) of the Companies Act, 2013, a prospectus includes:
• Any document described or issued as a prospectus
...

Types of Prospectuses
1
...

2
...

o Typically used by financial institutions or companies raising funds in tranches
...
Red Herring Prospectus (Section 32):
o Issued before the price or quantity of securities is finalized
...

4
...

5
...
g
...

Contents of a Prospectus
As per Section 26 of the Companies Act, 2013, a prospectus must include:
1
...

o Details of directors, promoters, and key managerial personnel
...

13 | Piyush

UNIT - 1 Company Act, 2013

2
...

o Details of equity and debt securities being issued
...
Offer Details:
o The purpose of the issue (e
...
, business expansion, debt repayment)
...

4
...

o Reports from the company’s auditors on profits, losses, and assets
...
Risk Factors:
o A statement detailing potential risks associated with the investment
...
Other Key Information:
o Minimum subscription amount required
...

o Details of underwriting arrangements
...
Registration of Prospectus (Section 26):
o A prospectus must be filed with the Registrar of Companies (RoC) before
issuance
...

2
...

3
...

o Both civil and criminal liabilities can be imposed on those responsible
...
Minimum Subscription (Section 39):
o The company must collect a minimum subscription amount (as stated in the
prospectus) within a specified time frame
...
Penalty for Fraudulent Prospectus (Section 36):
o If a prospectus is issued with fraudulent intent, severe penalties, including
imprisonment and fines, can be imposed
...
Variation in Terms (Section 27):
o Terms mentioned in the prospectus cannot be altered without shareholder
approval
...
Issue of Prospectus by Private Companies:
o Private companies are generally not allowed to issue a prospectus, as they
cannot invite the public to subscribe to their securities
...

• Transparency: Discloses all material facts about the company and its financial
health
...


Deemed Prospectus (Section 25)
A Deemed Prospectus refers to a document that is not formally labelled as a prospectus
but is treated as one under the law
...

Key Features
1
...

2
...
g
...

3
...

Example:
• A company allots shares to a broker with the intention of the broker selling those
shares to the public
...


Shelf Prospectus (Section 31)
A Shelf Prospectus is a single prospectus issued by a company that allows it to make
multiple offers of securities over a specified period without issuing a separate prospectus for
each offer
...
Validity:
o A shelf prospectus is valid for one year from the date of its first issue
...
Who Can Issue:
o Financial institutions, banks, and certain companies authorized by the
Securities and Exchange Board of India (SEBI) are allowed to issue a shelf
prospectus
...
Information Memorandum:
o For every subsequent offer of securities, the company must file an
information memorandum containing updates or material changes since the
issuance of the shelf prospectus
...
Purpose:
o Designed for companies that frequently raise funds through securities,
reducing the administrative burden of issuing a prospectus for every offer
...


Red Herring Prospectus (Section 32)
A Red Herring Prospectus (RHP) is a type of prospectus issued before the price and
quantity of securities to be offered are finalized
...

Key Features
1
...

2
...

3
...

4
...

Example:
• A company planning an IPO files an RHP with indicative price bands but finalizes the
price based on investor feedback during the bidding process
...


Multiple securities
offers over a period
...


Key Feature

Document is treated as a
prospectus
...


Authorized
companies (e
...
,
banks, FIs)
...

Requires filing with
the RoC initially
...

Companies using
book-building for
IPOs
...

Filed with SEBI and
RoC 3 days before the
issue
...
It serves as an alternative
disclosure to ensure transparency about the company’s financial status and objectives
...

• Private companies are exempt from issuing a prospectus or a statement in lieu of a
prospectus, as they cannot raise public funds
...
Filing Requirement:
o The statement must be filed with the Registrar of Companies (RoC) under
prescribed rules before allotting shares or debentures
...
Contents:
o The statement must contain information similar to a prospectus, such as:
 Authorized and issued share capital
...

 Financial status and business objectives
...
Purpose:
o Ensures compliance with transparency standards even in the absence of a
formal prospectus
...
Legal Consequences:
o If the company fails to file the statement or includes false information,
penalties and liabilities apply
...
Any
false or misleading statement can lead to civil and criminal liabilities under the Companies
Act, 2013
...


Civil Liability (Section 35)
1
...
g
...

2
...

3
...

 They were unaware of the misstatement and took reasonable steps to
verify the information
...


Criminal Liability (Section 34)
1
...

2
...

o Fine: Not less than ₹50,000, but it may extend to ₹3,00,000
...
Liable Parties:
o Includes every person who authorized the issue of the prospectus, except
those who can demonstrate they acted without fraudulent intent
...
Unawareness of Misstatement:
o A person can avoid liability if they were unaware of the misstatement despite
reasonable diligence
...
Withdrawal of Consent:
o If the person withdrew their consent to issue the prospectus before its
publication, they are not liable
...
Correction of Statement:
o Liability can be avoided if the misleading statement is corrected before the
securities are subscribed
...
Criminal Liability
Aspect

Civil Liability

Criminal Liability

Purpose

Compensation for losses incurred
...


Nature of
Liability

Monetary (compensation to investors)
...


Burden of
Proof

Proving the loss suffered due to
reliance on the prospectus
...


19 | Piyush

UNIT - 2 Company Act, 2013

Various Modes of Raising Capital
1
...
Shareholders benefit through
dividends and voting rights
...

• Private Placement: Shares are issued to a select group of investors, such as private
equity investors or venture capitalists
...
g
...

• Rights Issue: Existing shareholders are offered additional shares in proportion to their
current holdings
...

2
...
These can be:
• Cumulative or Non-Cumulative
• Redeemable or Non-Redeemable
• Convertible or Non-Convertible
3
...

• Secured Debentures: Backed by the company’s assets as collateral
...

• Convertible Debentures: Can be converted into equity shares after a specified period
...

4
...

• Public deposits are regulated by the Reserve Bank of India (RBI) and the Ministry of
Corporate Affairs (MCA)
...
Loans
Companies can borrow funds through loans from:
• Banks and Financial Institutions: Secured or unsecured loans
...

• Inter-Corporate Loans: Loans from other companies as per Section 186
...
Issue of Commercial Papers
Commercial papers are short-term unsecured promissory notes issued by companies with
high credit ratings to meet working capital requirements
...
External Commercial Borrowings (ECBs)
Indian companies can raise debt in foreign currency from non-resident lenders under the
ECB framework set by the RBI
...
Venture Capital and Private Equity
Startups and growing businesses often raise funds through:
• Venture Capital: Investments made by venture capital funds in exchange for equity
...

9
...

10
...

11
...

12
...

13
...

• Optionally Convertible Debentures (OCDs): Conversion is optional
...
Warrants
Warrants give the holder the right to buy shares at a specific price on or before a certain
date
...
Rights and Offer to Members
Companies can raise funds by offering existing members securities or inviting
applications for securities under Section 62
...
They represent shares of the issuing
company and are traded on foreign stock exchanges
...


21 | Piyush

UNIT - 2 Company Act, 2013

Representation of Shares: GDRs are negotiable certificates issued by an overseas
depository bank, representing a specified number of equity shares of the issuing
company
...

• Currency: GDRs are generally denominated in foreign currencies, typically in USD
or Euros
...

Regulatory Framework
The issuance of GDRs by Indian companies is governed by:
1
...

o A company must pass a special resolution in a general meeting to authorize
the issuance of GDRs
...
Depository Receipts Scheme, 2014:
o Issued by the Ministry of Finance under the Foreign Exchange Management
Act (FEMA), 1999
...

3
...

4
...

Process of Issuing GDRs
1
...

o Shareholders must pass a special resolution under Section 41 of the
Companies Act, 2013
...
Appointment of Intermediaries:
o The company appoints a depository bank (e
...
, JP Morgan, Citibank) and a
custodian in India to hold the underlying shares
...
Depository Agreement:
o An agreement is signed between the issuing company, the depository bank,
and the custodian
...
Issuance of Shares:
o Shares are issued and deposited with the custodian in India
...

5
...

Benefits of GDRs
1
...

2
...

3
...

4
...

Restrictions and Compliance
• GDRs cannot be issued by companies prohibited by Indian law or sectors restricted
under the FDI policy
...

• Companies must comply with disclosure and reporting requirements under SEBI and
FEMA regulations
...
It involves price discovery based on demand generated by investors within a
specified price band
...

Definition
Book building is defined as the process of price discovery where:
• Investors bid for shares at different prices within a price band set by the company
...

The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, provide
detailed procedures for book building in public offerings
...
Section 23: Governs public offers and private placements
...

2
...

3
...

23 | Piyush

UNIT - 2 Company Act, 2013

Key Features of Book Building
1
...
g
...

o The lower limit is the floor price, and the upper limit is the cap price
...
Bidding Process:
o Investors submit bids indicating the quantity of shares and the price they are
willing to pay within the price band
...

3
...

o The final issue price, also called the cut-off price, is determined by assessing
the demand at different price points
...
Transparency:
o Bids are recorded electronically, ensuring transparency
...

5
...

Steps in the Book Building Process
1
...

2
...
It contains details about the company, the price band, and the issue
...
Opening of Issue:
o The issue is opened for a specified period (typically 3–10 days), allowing
investors to place bids
...
Bidding by Investors:
o Retail investors, Qualified Institutional Buyers (QIBs), and Non-Institutional
Investors (NIIs) participate by submitting their bids
...
Determination of Final Price:
o The final issue price is determined based on the demand generated at various
price levels
...
Allotment of Shares:
o Shares are allocated to investors based on the final price and their bid
quantities
...


24 | Piyush

UNIT - 2 Company Act, 2013

7
...

SEBI Regulations on Book Building
• At least 75% of the issue size must be allocated to Qualified Institutional Buyers
(QIBs) for book-built issues
...

• Issuers must comply with disclosure norms, including details of the price band and
bidding process
...
Private Placement (Section 42)
Private placement involves offering securities to a select group of investors, excluding
the general public
...
Eligible Investors: Securities can be offered to not more than 200 persons in a
financial year, excluding Qualified Institutional Buyers (QIBs) and employees
receiving securities under ESOS
...
Offer Letter: A private placement offer letter (Form PAS-4) must be issued
...
Subscription and Payment: Payments must be made from the bank account of the
person subscribing to the securities, and no cash transactions are allowed
...
Filing with the Registrar: The company must file Form PAS-3 with the Registrar of
Companies (ROC) within 15 days of the allotment
...
Restrictions: Securities cannot be advertised or marketed to the general public
...

• Avoiding regulatory complexities of public offerings
...
Public Issue (Section 23)
Public issue refers to offering securities to the general public, typically through an Initial
Public Offering (IPO) or a Follow-on Public Offering (FPO)
...
Eligibility: Companies, other than private companies, can raise funds through public
issues
...
SEBI Compliance: Listed companies must comply with SEBI (ICDR) Regulations,
including disclosure and listing requirements
...
Prospectus: A detailed prospectus must be issued, containing all relevant details
about the company and the offering
...
Underwriting and Pricing: The issue can be priced through fixed pricing or book
building
...

• Enhancing the company’s visibility and reputation
...
Rights Issue (Section 62(1)(a))
Rights issues allow companies to offer shares to existing shareholders in proportion to
their existing holdings
...
Offer to Existing Shareholders: Shares are offered to existing shareholders first,
who have the right to renounce them
...
Notice Period: A notice must be sent to shareholders, allowing them at least 15–30
days to subscribe
...
No Regulatory Approval: Rights issues do not require SEBI or ROC approval unless
the company is listed
...

• Avoiding dilution of control for existing shareholders
...
Bonus Shares (Section 63)
Bonus shares are issued to existing shareholders from the company's free reserves,
securities premium account, or capital redemption reserve
...
Source of Funds: Bonus shares cannot be issued from revaluation reserves or
unrealized profits
...
Authorization: Must be authorized by the company’s Articles of Association (AOA)
and approved by shareholders in a general meeting
...
Fully Paid Shares Only: Bonus shares can only be issued as fully paid shares
...

• Increasing the company’s share capital
...
Employee Stock Option Scheme (ESOS) (Section 62(1)(b))
ESOS allows companies to offer shares to employees as part of their remuneration or
incentive package
...
Eligibility: Shares can be offered to employees, directors, or officers of the company
...
Approval: Requires approval from shareholders via a special resolution
...
Price and Terms: The price and terms must be disclosed in the shareholders’
resolution
...
Lock-in Period: Employees may be required to hold shares for a specified period
before selling
...

26 | Piyush

UNIT - 2 Company Act, 2013

Aligning employee interests with the company’s growth
...
Sweat Equity Shares (Section 54)
Sweat equity shares are issued to employees or directors for providing know-how,
intellectual property, or other value to the company
...
Eligibility: Issued to employees or directors who have provided value through
expertise or intellectual property
...
Approval: Requires a special resolution from shareholders
...
Lock-in Period: Sweat equity shares are subject to a lock-in period of three years
...
Valuation: The valuation of sweat equity shares must be conducted by a registered
valuer
...

• Retaining talent with unique skills or expertise
...
It is a mechanism for reducing the share capital of the company
...
Sources for Buyback:
o Free reserves
...

o Proceeds of an earlier issue (not from fresh issue)
...
Limits:
o A company cannot buy back more than 25% of its total paid-up equity
capital in a financial year
...

3
...

o Shareholders’ approval via a special resolution is required for buybacks
exceeding 10%
...
Restrictions:
o Buyback cannot be done through subsidiary companies or investment
companies
...

5
...

Purpose:
• To enhance shareholder value
...

• To consolidate ownership or increase EPS
...

Key Provisions:
1
...

o Refunds are mandatory within 15 days if allotment does not occur
...
Board Approval:
o The Board of Directors must approve the allotment and file Form PAS-3 with
the Registrar of Companies (ROC) within 30 days of allotment
...
Share Certificates:
o Share certificates must be issued within 2 months of allotment for private
companies and 1 month for public companies
...
Compliance:
o Companies must comply with SEBI regulations for listed entities and follow
disclosure norms for public issues
...

• To invite investment through public or private sources
...
g
...

Key Provisions:
1
...

o A proper call notice must be issued specifying the amount due and providing a
reasonable time for payment
...
Procedure:
o A resolution must be passed by the Board of Directors
...

o Shares are forfeited if the shareholder fails to pay within the specified time
...
Effect of Forfeiture:
o The forfeited shares become the property of the company and may be reissued
...

Purpose:
• Enforcing payment discipline among shareholders
...


Transfer of Securities
Transfer refers to the voluntary transfer of ownership of securities by a shareholder to
another person
...
Key Provisions:
o The Articles of Association (AOA) regulate transfer procedures
...

2
...

o The form must be delivered to the company along with the original share
certificate
...

3
...

o No restriction is allowed for public companies, except as permitted under the
law
...

1
...

o Legal heirs or nominees must provide proof, such as a death certificate or
probate, for transmission
...
Procedure:
o A request for transmission must be made to the company, along with
supporting documents
...

o The company must register the transmission within 7 days (for listed
companies) or a reasonable time (for unlisted companies)
...
No Restrictions:
o Transmission cannot be refused by the company as it is a legal obligation
...
The Board of Directors manages the company and exercises its
powers as per the Articles of Association and the Act
...
Women Director
A woman director is appointed to ensure gender diversity and compliance with statutory
requirements
...
Applicability:
o Every listed company must have at least one-woman director
...

o Compliance must be achieved within 6 months from the date of incorporation
...
Role and Responsibilities:
o Contribute to decision-making with a gender-diverse perspective
...

3
...

Purpose:
• Promote gender diversity in corporate governance
...


30 | Piyush

UNIT - 2 Company Act, 2013

B
...

Legal Provisions (Section 149(4)):
1
...

o Certain public companies must appoint at least 2 independent directors:
 Paid-up share capital of ₹10 crore or more, or
 Turnover of ₹100 crore or more, or
 Aggregate outstanding loans, debentures, and deposits exceeding ₹50
crore
...
Eligibility Criteria (Schedule IV):
o Must not have any pecuniary relationship with the company
...

o Must possess relevant expertise and qualifications
...
Duties:
o Protect the interests of minority shareholders
...

o Monitor governance practices and regulatory compliance
...
Tenure:
o Independent directors can serve for a maximum of 2 consecutive terms of 5
years each
...

• Promote transparency and accountability in corporate governance
...
Shareholder Director
A shareholder director is appointed to represent the interests of shareholders, especially
in cases where the Articles of Association or agreements require such representation
...
Appointment:
o May be nominated or elected by shareholders holding a specified percentage
of shares
...

2
...

o Ensure the company’s policies and decisions align with shareholder interests
...
Limitations:
o Cannot act solely in the interests of a particular group of shareholders
...

31 | Piyush

UNIT - 2 Company Act, 2013

Purpose:
• Represent shareholder concerns in Board decisions
...


Director Identification Number (DIN)
The Director Identification Number (DIN) is a unique identification number assigned to an
individual who intends to become a director of a company or is already a director in an Indian
company
...


Appointment of Directors
The appointment of directors is governed by Section 152 of the Companies Act, 2013
...
Minimum and Maximum Number of Directors:
o Private company: At least 2 directors
...

o One Person Company (OPC): At least 1 director
...

2
...

o Must obtain a Director Identification Number (DIN)
...
Appointment Methods:
o First Directors: Appointed by the subscribers of the Memorandum of
Association (MOA) or Articles of Association (AOA)
...

 Appointed by the Board of Directors, subject to AOA provisions
...

o Independent Directors: Appointed as per the criteria under Section 149
...
Special Categories:
o Women Directors: Mandatory for certain listed and large public companies
...


Qualifications of Directors
A director must possess the necessary qualifications to fulfill their responsibilities effectively
...
DIN Requirement: Must hold a valid Director Identification Number (DIN)
...
Competence: Possess knowledge, skills, and expertise relevant to the company's
operations
...
Age: Must be at least 18 years old
...
Other Specific Qualifications: Independent directors must meet the criteria set forth
under Schedule IV of the Act, which includes financial, legal, or governance
expertise
...
General Disqualifications:
o Declared insolvent and has not been discharged
...

o Failure to pay calls on shares for 6 months
...

2
...

o Company has failed to repay deposits, debentures, or interest for 1 year
...
As Agents: Represent the company in contracts and transactions
...
As Trustees: Safeguard company assets and act in the company’s best interests
...
As Officers: Ensure compliance with statutory provisions
...
General Powers:
o Manage the company’s operations
...

2
...

o Invest company funds
...

3
...

o Borrow beyond paid-up capital and free reserves
...
Fiduciary Duties:
o Act in good faith for the benefit of the company
...

2
...

o Approve and sign financial statements
...
Disclosure Duties:
o Disclose personal interests in contracts with the company
...


Removal of Directors (Section 169)
A director can be removed before the expiry of their term by the company, subject to certain
conditions
...
Special Notice: Shareholders must issue a special notice proposing the removal
...
Right to Be Heard: The director being removed is entitled to a hearing
...
Resolution: A resolution for removal must be passed in a general meeting by a
majority vote
...


Remedies for Breach of Duties
If a director breaches their duties, the following remedies are available:
1
...

o Restoration of misappropriated assets
...
Criminal Penalties:
o Fines or imprisonment for fraudulent activities
...
g
...

3
...


Loans to Directors (Section 185)

Loans to directors are strictly regulated to prevent misuse of company funds
...
Companies cannot provide loans, guarantees, or security to:
o Directors
...

o Partners or firms in which the director is interested
...
Loans are allowed if:
o The company is in the business of lending and provides loans as part of its
ordinary business
...


34 | Piyush

UNIT - 2 Company Act, 2013

Remuneration to Directors (Section 197)
Remuneration to directors is regulated to ensure fairness and avoid misuse
...
Overall Cap:
o Public companies can pay up to 11% of net profits as director remuneration
...
Independent Directors:
o Only entitled to sitting fees and profit-related commission, but not salaries
...
Approval:
o Shareholders’ approval is required for remuneration exceeding prescribed
limits
...
Fixed salary
...
Commission linked to profits
...
Sitting fees for Board meetings
...
Audit Committee (Section 177)
• Applicability:
o Required for:
 Every listed company
...

 Turnover of ₹100 crore or more
...

• Composition:
o Minimum 3 directors, with a majority being independent directors
...

• Functions:
o Oversee financial reporting and disclosures
...

o Approve related-party transactions
...

2
...

• Composition:
o Minimum 3 non-executive directors, with a majority being independent
...

35 | Piyush

UNIT - 2 Company Act, 2013

Functions:
o Identify suitable candidates for Board positions
...

o Evaluate directors' performance
...
Corporate Social Responsibility (CSR) Committee (Section 135)
• Applicability:
o Companies with:
 Net worth of ₹500 crore or more
...

 Net profit of ₹5 crore or more
...

• Functions:
o Formulate and recommend the CSR policy
...

o Ensure at least 2% of average net profits are spent on CSR initiatives
...
Stakeholders Relationship Committee (Section 178(5))
• Applicability:
o Companies with more than 1,000 shareholders, debenture holders, or other
security holders
...

• Functions:
o Resolve grievances of shareholders and other security holders
...

5
...

• Composition:
o Board members and senior executives
...

o Ensure a robust risk management framework is in place
...
The Act makes it mandatory
for certain companies to appoint KMPs
...
Managing Director (MD):
o A director entrusted with substantial powers of management
...

o Appointed as per Section 196
...
Whole-Time Director (WTD):
o A director in full-time employment of the company
...

3
...

o Functions under the control and supervision of the Board
...
Company Secretary (CS):
o A compliance officer responsible for ensuring adherence to legal and
regulatory requirements
...

5
...

o Plays a key role in strategic planning and decision-making
...
Chief Financial Officer (CFO):
o Manages the company’s finances, including budgeting, reporting, and
financial planning
...

7
...

o Ensures local governance and representation
...
Applicability:
o Mandatory for:
 Listed companies
...

2
...

o A single individual cannot hold more than one KMP position in the same
company
...
Filing with ROC:
o Appointment details must be filed with the Registrar of Companies in Form
DIR-12
...
Authorized to act on behalf of the company in legal, contractual, and operational
matters
...
Execute Board decisions and ensure strategic goals are met
...

2
...

4
...

Safeguard the company’s interests
...

Ensure that statutory filings, tax returns, and financial reports are accurate and timely
...
Limits:
o Total managerial remuneration for public companies cannot exceed 11% of
net profits
...

2
...

3
...


38 | Piyush

UNIT - 3 Company Act, 2013

Prevention and Oppression of Mis-Management

OPPRESSION: Involves conduct that is burdensome, harsh, or wrongful, adversely
affecting the rights or interests of shareholders, particularly minority shareholders
...

MISMANAGEMENT: Refers to actions or omissions by the company's management
that lead to financial loss or prejudice the company's affairs
...


Application to the Tribunal (Section 241)
Members of a company can approach the National Company Law Tribunal (NCLT) if
they believe:
• The company's affairs are being conducted in a manner prejudicial to public interest,
the company's interest, or oppressive to any member
...


Who Can Apply? (Section 244)
The right to apply is granted to:
• For Companies with Share Capital:
o At least 100 members or 10% of the total number of members, whichever is
less
...

• For Companies without Share Capital:
o At least one-fifth of the total number of members
...


Powers of the Tribunal (Section 242)
Upon receiving an application, the NCLT can:
• Regulate the conduct of the company's affairs in the future
...

• Restrict the transfer or allotment of the company's shares
...

• Appoint new directors or remove existing ones
...


Consequences of Non-Compliance
If a company fails to comply with the Tribunal's orders:
• The company may face fines ranging from ₹1 lakh to ₹25 lakhs
...


Class Action Suits (Section 245)
Members or depositors can file a class action suit against the company, its directors,
auditors, or advisors if they believe that the management or conduct of the company's affairs
are prejudicial to their interests
...


MEETING
A Meeting under the Companies Act, 2013, is a formal gathering of a company's
members, directors, or stakeholders to discuss and decide on business matters
...
The purpose is to deliberate on key issues like approving financial statements,
appointing directors, declaring dividends, or addressing urgent concerns
...
Statutory Meeting (Section 165)
• Applicability: Only for public companies with a share capital
...

• Timeframe: Held between 1 to 6 months from the commencement of business
...

• Relevance in 2013 Act: Omitted under the Companies Act, 2013
...
Annual General Meeting (AGM) (Section 96)
• Applicability:
o Mandatory for all companies except One-Person Companies (OPC) and
private companies (unless specified otherwise)
...

o Subsequent AGMs: Held within 6 months of the financial year end but not
later than 15 months from the previous AGM
...

o Declare dividends
...

o Review the directors' report
...


40 | Piyush

UNIT - 3 Company Act, 2013

3
...

• Who Can Call:
o The Board of Directors
...

o Tribunal can order an EGM if the Board fails to call it
...

4
...

• Purpose: To seek approval for actions affecting their rights (e
...
, alteration of class
rights)
...

5
...

• Applicability: Includes Board Meetings, AGMs, and EGMs
...

o Recordings and attendance tracking are mandatory
...

o Reduces logistical costs
...
Meetings of Stakeholders (Section 230(6))
• Applicability: Convened in cases of mergers, acquisitions, or arrangements
...

• Stakeholders: Includes creditors, shareholders, and other affected parties
...


REQUISITES of a Valid Meeting
For any meeting to be valid under the Companies Act, 2013, the following must be ensured:
1
...
g
...

2
...

• Contents: Include date, time, venue, agenda, and details of resolutions
...

3
...

• For General Meetings:
o Private Companies: 2 members
...

 15 members (if 1,001–5,000 members)
...

4
...

5
...

6
...

7
...

• Must be signed by the Chairperson and kept as a permanent record
...
The
company ceases its operations, and its legal existence is terminated
...
The process
is intended to:
• Pay off the company’s debts
...

• Dissolve the company’s legal existence
...
Once dissolved, the company ceases to exist and can no longer operate
or sue or be sued
...


Winding-Up by the Tribunal (Compulsory Winding-Up) (Section 271)
Compulsory winding-up refers to the liquidation of a company through a court order
...

• The company has passed a special resolution for winding-up
...

• The company has exceeded its objects or has engaged in illegal activities
...

• If the Tribunal is satisfied, it appoints a liquidator and directs the company’s assets to
be realized to pay debts
...

•

Members’ Voluntary Winding-Up (Section 304)
This type of winding-up occurs when the company is solvent and able to pay its debts in
full within a specified time
...

Conditions:
• A special resolution is passed by the shareholders for voluntary winding-up
...

Procedure:
• A liquidator is appointed to wind up the company’s affairs
...

• Once all debts are settled, the remaining assets are distributed to the shareholders
...


Creditors’ Voluntary Winding-Up (Section 305)
Creditors' voluntary winding-up occurs when the company is insolvent and unable to pay
its debts
...

Conditions:
• The company’s directors declare the company as insolvent
...

• Creditors appoint a liquidator
...

• The liquidator takes control of the company’s assets and liabilities
...

• After all debts are paid, if any assets remain, they are distributed to shareholders
...


43 | Piyush

UNIT - 3 Company Act, 2013

Differences between Members’ and Creditors’ Voluntary Winding-Up
Criteria

Members' Voluntary
Winding-Up

Creditors' Voluntary Winding-Up

Solvency

Company is solvent
...


Initiation

Initiated by members
...


Declaration of
Solvency
Liquidator
Appointment

Required
...


Members appoint the
liquidator
...


Debt Payment

Debts can be paid in full
...


Winding-Up Control

Controlled by members
...


44 | Piyush

UNIT - 1 Economic Environment

Economic Environment
Economic Environment
The economic environment refers to the external economic conditions, policies, and
systems that influence the functioning of businesses and overall economic activities in a
country
...

Components:
1
...


• Economic growth rates and national income levels also play a critical role
...
Economic Policies:
•

Fiscal Policy: Government actions regarding taxation and public expenditure
...


• Trade Policy: Export-import regulations and foreign trade agreements
...
Economic Systems:
•

India follows a mixed economy where both the private and public sectors
coexist
...


Importance:
• A favourable economic environment attracts investments, creates employment
opportunities, and ensures sustainable growth
...

• Policymakers rely on economic conditions to make informed decisions about resource
allocation
...
It
includes social, political, cultural, legal, and technological dimensions
...
Social Environment:
o Demographics, literacy levels, cultural norms, lifestyles, and consumer
preferences shape demand and workforce characteristics
...
Cultural Environment:
o Cultural values, traditions, and ethics influence consumer behaviour and
business practices
...
Political Environment:
o Government stability, political ideologies, and administrative efficiency affect
the ease of doing business
...

4
...

5
...

o India's growing focus on digitalization (e
...
, Digital India initiative) influences
industries significantly
...

• A stable political and legal environment minimizes operational risks
...


Investment
Investment refers to the allocation of resources (capital, time, effort) in activities or assets
aimed at generating future returns
...

Trends:
•

Increasing shift toward sustainable and green investments
...


•

Enhanced focus on emerging markets for diversification
...
It forms the basis of consumption, savings, and investment
...


•

Growth in gig and freelance income sources due to changing work patterns
...


46 | Piyush

UNIT - 1 Economic Environment

Saving
Savings are the portion of disposable income not spent on consumption
...

Trends:
•

Shift from traditional savings accounts to more lucrative options like mutual funds,
ETFs, and cryptocurrency
...


•

Governments encouraging savings through tax-exempt options and pension schemes
...
Globalization and Trade:
•

Rising trade interdependencies and regional trade agreements shape investment
and income flows
...

2
...


• Investment in tech startups and R&D is on the rise
...
Inflation and Interest Rates:
•

Moderate inflation and favorable interest rates encourage investment and
savings
...

4
...


Post-COVID trends show governments promoting economic recovery through
stimulus packages
...
Demographic Changes:
•

•

Aging populations in developed economies influence savings behavior and
pension fund dynamics
...

6
...


•

Savings and investments are increasingly directed toward renewable energy, ecofriendly businesses, and sustainability-focused funds
...

• Increased Savings → Greater availability of funds for capital investments
...

•

♦ Income:
Grows steadily, driving
other factors
...

♦ Investment:
Grows faster, fueled by
rising savings
...


Economic Planning
Economic planning refers to the process by which a central authority (usually the
government) formulates, directs, and controls policies to achieve specific economic
objectives over a defined period
...

• Allocating Resources: Ensuring optimal use of scarce resources
...

Types of Economic Planning:
• Indicative Planning: Used in mixed economies, where the government guides the
private sector
...


Importance of Economic Planning
1
...

2
...

48 | Piyush

UNIT - 1 Economic Environment

3
...

4
...

5
...

6
...

7
...

8
...


Objectives of Economic Planning
1
...

2
...

3
...

4
...

5
...

6
...

7
...

8
...

49 | Piyush

UNIT - 1 Economic Environment

Achievements of Planning in India
Economic planning in India, initiated post-independence, has been instrumental in
shaping the nation's economic landscape
...
Industrial Growth:
• A strong industrial base was established, especially in sectors like steel, power,
and heavy machinery
...

2
...

• Investment in irrigation and modern farming techniques improved rural incomes
...
Poverty Alleviation and Employment:
• Programs like IRDP (Integrated Rural Development Programme) and
MGNREGA provided employment and reduced rural poverty
...
Infrastructure Development:
• Significant improvements in transportation (roads, railways), power generation,
and communication networks
...
Economic Diversification:
• Shift from an agrarian economy to a more diversified economy with growing
contributions from industry and services
...
Social Development:
• Enhanced focus on literacy, healthcare, and gender equality through targeted
programs and policies
...

Key Features:
1
...

2
...

3
...

4
...


50 | Piyush

UNIT - 1 Economic Environment

Economic Reforms of India (Post-1991 Liberalization)
India's 1991 economic reforms marked a paradigm shift from a controlled to a marketoriented economy
...
Liberalization:
• Reduced government control over industries
...

2
...

• Focused on efficiency and reducing the fiscal burden
...
Globalization:
• Opened the Indian economy to foreign investment and trade
...

4
...

5
...

Impact of Reforms:
• Rapid GDP growth
...

• Reduction in poverty rates and improved standard of living
...

1
...

2
...

3
...

• Focuses on sectors like electronics, defense, and textiles
...
Energy Transition:
• Commitment to achieving Net Zero emissions by 2070
...


51 | Piyush

UNIT - 1 Economic Environment

5
...

• Programs like Startup India and AIM encourage entrepreneurship
...
Rural Development:
• Focus on doubling farmers’ incomes through agricultural reforms and
infrastructure development in rural areas
...
Skill Development:
• Programs like Skill India and PMKVY aim to enhance employability and
workforce productivity
...
Financial Inclusion:
• Schemes like Jan Dhan Yojana and Mudra Loans aim to bring banking services
to unbanked regions
...
Governments design specific programs to stimulate
industrial growth and create a robust industrial base
...


•

Employment Generation: Creates jobs across multiple sectors
...


•

Export Promotion: Expands foreign exchange earnings
...


Key Industrial Programs in India:
1
...

• Aims to boost India's position as a global manufacturing hub
...
Production-Linked Incentive (PLI) Scheme (2020):
• Provides incentives for domestic production in high-growth sectors like
semiconductors, textiles, and pharmaceuticals
...
Industrial Estates and Special Economic Zones (SEZs):
• Facilitates infrastructure for industries with tax benefits and reduced regulatory
burdens
...
Micro, Small, and Medium Enterprises (MSME) Development:
• Support schemes like Credit Guarantee Scheme and interest subvention programs
aim to boost MSMEs, which are crucial for employment and exports
...
Digital and Green Industrialization:
• Focus on Industry 4
...


Programme of Rural Development
Rural development focuses on improving the economic and social conditions of rural
populations
...

Importance of Rural Development:
• Alleviation of Poverty: Most of the rural population depends on agriculture and
informal employment
...

• Balanced Regional Growth: Reduces rural-urban disparities
...


53 | Piyush

UNIT - 2 Economic Environment

Key Rural Development Programs in India:
1
...

2
...

3
...

4
...

5
...

6
...

7
...


Interrelation Between Industrialization and Rural Development
1
...

2
...

3
...


Poverty and its Dimensions
Poverty is a condition in which a person is unable to fulfill their basic needs such as
food, clothing, shelter, education, and healthcare
...

In the context of India, poverty is measured using income levels and consumption patterns,
with classifications based on the poverty line set by institutions like the NITI Aayog
(previously Planning Commission)
...

54 | Piyush

UNIT - 2 Economic Environment

Steps Taken by India to Remove Poverty
1
...

o PMEGP (Prime Minister’s Employment Generation Programme): Aims
to generate self-employment opportunities in rural and urban areas
...
Skill Development Initiatives:
o Skill India Mission: Focuses on equipping youth with skills that enhance
employability and entrepreneurial abilities
...

3
...

o Direct Benefit Transfer (DBT): Directly transfers subsidies and welfare
payments to beneficiaries, reducing leakages
...
Food Security Programs:
o National Food Security Act (NFSA): Ensures subsidized food grains for
poor households
...

5
...

o Swachh Bharat Abhiyan: Focuses on improving sanitation and eliminating
open defecation
...
Health and Education:
o Ayushman Bharat Scheme: Provides health insurance to economically
vulnerable families
...

7
...

o Focus on promoting entrepreneurship through Startup India and Standup
India
...
In India, income inequality is influenced by factors like caste system, education
disparity, rural-urban divide, and access to resources
...
Progressive Taxation: Imposing higher taxes on higher income groups to reduce the
income gap
...
Minimum Wages: Ensuring fair wages for workers, particularly in the unorganized
sector
...
Redistributive Policies: Subsidies, welfare programs, and social security measures
target income redistribution
...
Empowerment of Marginalized Groups: Focus on education, healthcare, and job
opportunities for women, SCs, STs, and OBCs
...
Balanced Regional Development: Investments in underdeveloped states and rural
areas to reduce regional disparities
...
V
...
Manmohan Singh
...

The policy aimed to remove unnecessary controls and regulations, promote competition,
and encourage foreign investment, technological advancements, and industrial growth in
India
...


Key Features of the New Industrial Policy
1
...

o This move reduced bureaucratic hurdles and encouraged private sector
participation
...
Reduction in Public Sector Monopoly:
o The number of industries reserved exclusively for the public sector was
reduced from 17 to 8, including areas like atomic energy, railways, and
defense
...

3
...

o Automatic approval for FDI up to 51% equity was introduced in highpriority industries
...
Disinvestment in Public Sector Enterprises (PSEs):
o Emphasis on privatization of loss-making and non-strategic public sector
enterprises
...

5
...

o The policy aimed at making Indian industries globally competitive
...
Technology and Modernization:
o Encouraged the adoption of advanced technology through collaborations and
partnerships with foreign firms
...

7
...

o Emphasis shifted from controlling monopolies to promoting fair competition
...
Small-Scale Sector Reforms:
o Enhanced investment limits for small-scale industries (SSIs) to encourage
modernization
...

9
...


Objectives of the New Industrial Policy
1
...

2
...

3
...

4
...

5
...


57 | Piyush

UNIT - 2 Economic Environment

Impact of the New Industrial Policy
1
...

2
...

3
...

4
...

5
...


Criticism of the New Industrial Policy
1
...

2
...

3
...

4
...


International Investment in India
International investment refers to the inflow of capital, resources, and expertise from
foreign countries into India's economy
...

India's economic reforms since 1991 have been instrumental in attracting international
investment, particularly in the form of Foreign Direct Investment (FDI) and Foreign
Portfolio Investment (FPI)
...


58 | Piyush

UNIT - 2 Economic Environment

Foreign Direct Investment (FDI)
FDI refers to an investment made by a foreign entity (individual, company, or
government) in the productive assets of another country, such as establishing businesses,
acquiring companies, or setting up new ventures
...


Key Features of FDI in India
1
...

2
...

o Some sectors like atomic energy and lotteries remain prohibited for FDI
...
Routes for FDI:
o Automatic Route: FDI does not require prior approval from the government
or regulatory bodies, applicable in most sectors
...
g
...

4
...

 74% in telecom under the automatic route
...


Importance of FDI in India
1
...

2
...

3
...

4
...


59 | Piyush

UNIT - 2 Economic Environment

5
...

6
...


Government Initiatives to Attract FDI
1
...

o Improved India's ranking in the World Bank's Ease of Doing Business Index
...
FDI Liberalization:
o Removal of sectoral restrictions and increased caps on FDI in sectors like
retail, defense, and insurance
...
Make in India:
o Focus on making India a global manufacturing hub, attracting FDI in
manufacturing and innovation
...
Production-Linked Incentive (PLI) Scheme:
o Incentives provided to encourage foreign investment in priority sectors like
electronics, pharmaceuticals, and solar energy
...
Special Economic Zones (SEZs):
o Creation of SEZs with tax benefits, world-class infrastructure, and ease of
business setup to attract foreign investments
...
Startup India:
o Support for startups with easier funding access, tax exemptions, and
collaboration with foreign investors
...
Regulatory Issues:
o Complex and lengthy approval processes in certain sectors can deter investors
...
Political and Economic Risks:
o Policy instability, corruption, and slow judicial processes affect investor
confidence
...
Infrastructure Bottlenecks:
o Inadequate infrastructure, especially in rural areas, limits large-scale foreign
investments
...
Social and Cultural Resistance:
o Sectors like retail face opposition due to concerns over the displacement of
small businesses
...

Key sectors attracting FDI include telecom, IT, construction, e-commerce,
renewable energy, and pharmaceuticals
...


Rural Industrialization in India
Rural industrialization refers to the promotion and development of industries in rural
areas
...
Rural industries typically include agrobased, handloom, handicrafts, and small-scale industries, which utilize local resources and
labor
...
Employment Generation:
o Provides non-agricultural employment opportunities in rural areas, reducing
dependency on agriculture
...
Poverty Alleviation:
o Increases income levels in rural areas, leading to an improved standard of
living
...
Balanced Regional Development:
o Reduces economic disparities between urban and rural areas
...
Utilization of Local Resources:
o Promotes the use of locally available raw materials, minimizing costs and
boosting local economies
...
Check on Urban Migration:
o By providing employment and development opportunities in rural areas, it
discourages migration to cities, reducing urban congestion and associated
problems
...
Support for Agriculture:
o Agro-industries provide value addition to agricultural produce, improving
farmers' incomes and reducing wastage
...
Self-Reliance:
o Encourages rural entrepreneurship and self-sustaining economies
...
Agro-Based Industries:
o Industries based on agricultural produce, such as sugar, cotton, jute, and food
processing industries
...
Forest-Based Industries:
o Industries utilizing forest resources, such as paper, bamboo, lac, and woodbased products
...
Mineral-Based Industries:
o Small-scale industries using local minerals like clay, stone, and sand for
manufacturing bricks, tiles, and cement
...
Handicrafts and Handloom:
o Traditional crafts like pottery, weaving, embroidery, and wood carving
...
Cottage Industries:
o Small-scale industries operating from homes, producing goods like candles,
pickles, toys, and artisanal products
...
Village Industries:
o Industries promoted by the Khadi and Village Industries Commission
(KVIC), focusing on products like khadi, soaps, and handicrafts
...
Khadi and Village Industries Commission (KVIC):
o Established to promote and develop khadi and village industries
...

2
...

3
...

4
...

5
...

6
...

7
...

8
...


62 | Piyush

UNIT - 2 Economic Environment

Challenges to Rural Industrialization in India
1
...

2
...

3
...

4
...

5
...

6
...


Suggestions for Promoting Rural Industrialization
1
...

2
...

3
...

4
...

5
...

6
...


63 | Piyush

UNIT - 3 Economic Environment

Public Sector In India
The Public Sector refers to industries, businesses, and enterprises owned, controlled, and
operated by the government
...

The public sector in India emerged as a key player after independence, primarily to accelerate
economic development, reduce regional imbalances, and ensure self-reliance in critical
industries
...
Government Ownership and Control:
•

Public sector enterprises (PSEs) are wholly or partially owned by the
government (central or state)
...

2
...

3
...

4
...

5
...

6
...


Objectives of the Public Sector in India
1
...

2
...

3
...

4
...

64 | Piyush

UNIT - 3 Economic Environment

5
...

6
...

7
...


Types of Public Sector Enterprises
1
...

o Examples: Indian Railways, Post and Telegraph Services
...
Statutory Corporations:
o Created by a special act of Parliament or State Legislature
...

3
...

o Examples: ONGC, BHEL, SAIL
...
Public-Private Partnerships (PPP):
o Collaborative projects between the government and private sector for
infrastructure and service delivery
...


Role of the Public Sector in India's Economic Environment
1
...

2
...

3
...

4
...
g
...


65 | Piyush

UNIT - 3 Economic Environment

5
...

6
...


Government Initiatives for Public Sector Reforms
1
...

o Example: Air India privatization (2021)
...
Professionalization of Management:
o Adopting modern management practices to improve performance and
accountability
...
NavRatna, MiniRatna, and MahaRatna Status:
o Special status and autonomy given to PSEs based on their performance
...

4
...

5
...

6
...


Challenges Faced by the Public Sector
1
...

2
...

3
...

4
...

5
...

66 | Piyush

UNIT - 3 Economic Environment

Small Business
A Small Business refers to a business entity that operates on a relatively smaller scale,
with limited capital investment, workforce, and production capacity
...

Characteristics of Small Businesses
• Limited Investment: Small capital requirements compared to large enterprises
...

• Personalized Management: Managed directly by the owner or a small team
...

• Employment Generation: Provide jobs, especially in rural and semi-urban areas
...

Examples of Small Businesses
• Small retail stores
• Handicraft shops
• Tailoring businesses
• Bakery and food production units
• Printing and bookbinding businesses
• Agro-based businesses like dairy farms and poultry
Role of Small Businesses in the Economic Environment
1
...

2
...

3
...

4
...

5
...

Government Support for Small Businesses
• Micro, Small, and Medium Enterprises (MSME) Act, 2006:
o Defines businesses based on investment and turnover
...

• Stand-Up India Scheme:
o Supports entrepreneurs from SC/ST and women categories
...


Cottage Industries

Cottage industries are small-scale, home-based industries where family members or small
groups produce goods using traditional methods
...

Characteristics of Cottage Industries
• Home-Based: Operated from homes or small workshops
...

• Family-Owned: Usually run by families with limited external labour
...

• Handcrafted Goods: Focus on artistry and craftsmanship over mass production
...
g
...
g
...
Employment Generation:
o Provides self-employment opportunities, especially in rural and tribal areas
...
Preservation of Cultural Heritage:
o Helps maintain India’s traditional crafts and skills
...
Supports Rural Economy:
o Uses locally available resources, boosting rural development
...
Women Empowerment:
o Many cottage industries involve female workers, improving women’s
financial independence
...
Export Potential:
o Handicrafts and handmade goods have significant demand in international
markets
...

• SFURTI (Scheme of Fund for Regeneration of Traditional Industries):
o Supports traditional industries like handicrafts, handlooms, and coir
...

National Handicrafts Development Programme (NHDP):
o Assists artisans in training, infrastructure development, and marketing
...
In India, economic
planning began in 1951 with the launch of the First Five-Year Plan and continued until
2017, after which the Five-Year Plan system was discontinued
...


Objectives of Economic Planning in India
The primary goals of economic planning in India are:
1
...

2
...

3
...

4
...

5
...


69 | Piyush

UNIT - 3 Economic Environment

6
...

7
...

8
...


Transition from Five-Year Plans to NITI Aayog
Discontinuation of Five-Year Plans
• India followed the Five-Year Plan model from 1951 to 2017 under the Planning
Commission
...

• In 2015, the NITI Aayog was established to replace the Planning Commission,
shifting the approach from rigid centralized planning to a more flexible, policy-based,
and real-time decision-making framework
...

Why Five-Year Plans Were Replaced?
1
...

2
...

3
...

4
...


Latest Economic Strategy (Post Five-Year Plan Era)
15-Year Vision (2017–2032) by NITI Aayog
The government has adopted a long-term vision plan, which focuses on sustainable and
inclusive growth
...

• 7-Year Strategy (2017–2024) → Medium-term framework for policy
implementation
...


Objectives and Targets of the Latest Economic Planning Strategy
Key Focus Areas of the 15-Year Vision Plan
1
...

70 | Piyush

UNIT - 3 Economic Environment

2
...

3
...

4
...

5
...

6
...

7
...

8
...

Key Targets by 2030 (Aligned with Sustainable Development Goals - SDGs)
• GDP Growth Rate: Targeting an average 8% GDP growth per year
...

• Poverty Reduction: Reduce the poverty ratio to less than 5%
...

• Education & Health: 100% literacy and improved public healthcare facilities
...
Public-Private Partnership (PPP):
o Encouraging private sector investment in infrastructure, healthcare, and
education
...
Make in India:
o Boosting domestic manufacturing to create jobs and reduce imports
...
Digital India:
o Expanding digital infrastructure and e-governance
...
Startup India & Stand-Up India:
o Supporting new businesses, especially from underprivileged sections
...
Atmanirbhar Bharat (Self-Reliant India):
o Promoting domestic production across various sectors
...
Agricultural Reforms:
o Modernizing farming techniques and improving supply chain logistics
...
Foreign Direct Investment (FDI):
o Liberalizing FDI policies to attract international investments
...
Skill India:
o Enhancing vocational training programs to make the workforce job-ready
...
Slow Job Creation: Unemployment and underemployment persist
...
Income Inequality: The rich-poor divide continues to widen
...
Agricultural Distress: Farmers still struggle with low incomes and climate-related
risks
...
Slow Industrial Growth: Manufacturing sector growth remains inconsistent
...
Environmental Concerns: Industrialization and urbanization cause pollution and
resource depletion
...
Bureaucratic Delays: Policy implementation can be slow due to administrative
inefficiencies
...
It is formulated by the Ministry of
Commerce and Industry and aims to promote foreign trade, enhance exports, and regulate
imports
...

• Reduce the trade deficit by balancing imports and exports
...

• Improve India's global competitiveness in trade
...

Key Features of EXIM Policy 2023:
• Export Promotion Schemes: SEZ (Special Economic Zones), EPCG (Export
Promotion Capital Goods Scheme), and MEIS (Merchandise Exports from India
Scheme)
...

• Focus on Free Trade Agreements (FTAs): Expanding trade partnerships with other
nations
...


Employment Policy
The Employment Policy consists of government strategies to promote job creation,
improve working conditions, and ensure fair wages
...

• Improve job security and worker rights
...

• Promote entrepreneurship and self-employment
...

• MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act):
Provides 100 days of guaranteed rural employment per year
...

• National Career Service (NCS): Digital job-matching and career counselling
platform
...

• Mismatch between education and job market needs
...


Population Policy
The Population Policy aims to regulate population growth, improve health standards,
and enhance human resource development
...

• Improve maternal and child health
...

• Ensure universal education and gender equality
...

o Promotes contraceptive use, delayed marriage, and family planning
...

• Mission Indradhanush: Vaccination drive for children and mothers
...

Challenges:
• High birth rate in some regions
...

• Resistance to contraceptive use in rural areas
...

Objectives:
• Prevent labour disputes and strikes
...

• Encourage collective bargaining between employers and unions
...


Key Laws & Reforms:
• Industrial Disputes Act (1947): Regulates strikes, layoffs, and industrial conflicts
...

• Code on Wages (2019): Ensures minimum wages across all industries
...

Challenges:
• Frequent strikes and protests
...

• Slow implementation of labour reforms
...

Objectives:
• Control inflation and ensure price stability
...

• Promote economic growth by managing money supply
...

Key Tools of Monetary Policy:
• Repo Rate: Interest rate at which banks borrow from RBI (Higher repo rate = Higher
interest rates)
...

• CRR (Cash Reserve Ratio): Percentage of deposits banks must hold in cash
...

• OMO (Open Market Operations): Buying/selling of government securities to
regulate liquidity
...

• Stable interest rates to support economic recovery
...


Fiscal Policy
The Fiscal Policy refers to the government’s use of taxation and public spending to
influence the economy
...

Objectives:
• Economic stability and growth
...

• Revenue generation through taxation
...

74 | Piyush

UNIT - 3 Economic Environment

Types of Fiscal Policy:
1
...

2
...

Key Fiscal Policy Tools:
• Taxes: Corporate tax, income tax, GST
...

• Fiscal Deficit Management: Keeping the deficit under 4
...

Challenges:
• High fiscal deficit due to excessive borrowing
...

• Balancing welfare spending with economic growth
...
It serves as the
backbone for e-commerce, enabling businesses and consumers to connect across the world
...
It enables digital transactions, online marketing, and customer interactions, making it
essential for modern commerce
...

• Payment Gateways – Secure systems for online payments (e
...
, Paytm, Razorpay)
...

• Logistics & Customer Service – Order tracking, shipping, and support via digital
platforms
...
Website Development & Maintenance – Cost of creating and maintaining an online
store
...
Hosting & Domain – Paying for a website domain (e
...
com,
...

3
...

4
...
g
...

5
...

6
...

7
...

These costs vary depending on the business model (B2B, B2C, C2C, etc
...


Basics of E-Market
An E-Market (Electronic Market) is an online platform where buyers and sellers
interact to conduct transactions digitally
...
Examples include Amazon, Flipkart, Alibaba, and
eBay
...
Business-to-Business (B2B) – Transactions between businesses (e
...
, IndiaMART,
Alibaba)
...
Business-to-Consumer (B2C) – Businesses selling directly to customers (e
...
,
Amazon, Flipkart)
...
Consumer-to-Consumer (C2C) – Individuals selling to other individuals (e
...
, OLX,
eBay)
...
Consumer-to-Business (C2B) – Consumers offering services/products to businesses
(e
...
, freelance platforms like Fiverr, Upwork)
...
Business-to-Government (B2G) – Businesses providing products/services to
government entities (e
...
, government e-tendering portals)
...

• Lower Costs – No need for physical stores
...

• Data-Driven Marketing – Analyse customer behaviour to improve sales
...

For Buyers (Consumers)
• Convenience – Shop from anywhere at any time
...

• Easy Price Comparison – Compare different sellers instantly
...

• Customer Reviews & Ratings – Helps in making informed decisions
...
Security Risks – Fraud, hacking, and data breaches
...
Payment Issues – Delays or failures in online payments
...
Legal & Regulatory Compliance – Following tax laws, privacy laws, and trade
regulations
...
Logistics & Delivery Challenges – Shipping delays, product damages, and returns
...
Customer Trust & Satisfaction – Ensuring quality and handling complaints
effectively
...
Unlike single-vendor websites, an e-marketplace hosts multiple
businesses, offering customers a variety of choices
...

• Types:
o Vertical Marketplace – Specializes in a specific industry (e
...
, Nykaa for
beauty products)
...
g
...

77 | Piyush

UNIT - 1 E-Commerce

Global Marketplace – Allows international trade (e
...
, Alibaba, eBay)
...

o

Need for E-Commerce
1
...

o Small businesses can compete with large companies by selling online
...
24/7 Availability
o Unlike physical stores, online stores are open all the time, increasing sales
opportunities
...

3
...

o Automated processes reduce the need for a large workforce
...
Convenience for Customers
o Consumers can browse, compare, and purchase products from anywhere
...

5
...

o Businesses can offer targeted promotions and discounts
...
Efficient Inventory & Supply Chain Management
o Real-time tracking of stock and automated reordering improves efficiency
...

7
...

o Secure payment gateways ensure safe transactions
...
Increased Competition & Better Pricing
o Multiple sellers lead to competitive pricing, benefiting customers
...

9
...

o Dropshipping and on-demand services have become more popular
...
Pandemic & Changing Consumer Behaviour
o COVID-19 accelerated the shift to online shopping
...


78 | Piyush

UNIT - 1 E-Commerce

Business Models in E-Commerce
E-commerce businesses operate under different models based on how they generate
revenue and interact with customers
...
It is similar to a traditional physical store but operates on a digital
platform
...

• Direct interaction with customers
...

• Examples: Nike’s official website, Apple Store, Tanishq Online
...

• Upselling and cross-selling
...


Membership Model
The Membership Model charges users a recurring fee (monthly or yearly) to access
exclusive content, products, or services
...

• Encourages long-term customer retention
...

• Examples: Amazon Prime, Netflix, Coursera, Shopify Plus
...

• Exclusive discounts or benefits for members
...
The portal itself does not own the inventory
but facilitates transactions between buyers and sellers
...

• The platform handles payments, logistics, and customer support
...

79 | Piyush

UNIT - 1 E-Commerce
•

Examples: Amazon, Flipkart, Meesho, eBay, IndiaMART
...

• Advertising fees for promoted listings
...


Online Marketing & Advertisement Model
This model focuses on generating revenue by displaying advertisements and promoting
products/services online
...

• Businesses pay for ad space to increase visibility
...

• Examples: Google Ads, Facebook Ads, YouTube monetization, affiliate
marketing websites
...

• Sponsored content and influencer marketing
...


80 | Piyush

UNIT - 2 E-Commerce

Business-to-Consumer (B2C)
Business-to-Consumer (B2C) E-Commerce refers to online transactions where
businesses sell products or services directly to individual customers through digital platforms
...


Key Features of B2C:
•
•
•
•
•

Businesses sell directly to consumers
...

Uses digital marketing to attract customers
...

Examples: Amazon, Flipkart, Myntra, Swiggy, Netflix, Nykaa
...
Convenience – Shop from anywhere, anytime
...
Wide Product Variety – Access to a large selection of products
...
Easy Price Comparison – Compare prices and read reviews before purchasing
...
Better Deals & Discounts – Frequent sales, discounts, and loyalty programs
...
Doorstep Delivery – Home delivery eliminates the need to visit stores
...
Lower Operational Costs – No need for physical stores, reducing expenses
...
Global Reach – Ability to sell to customers worldwide
...
Data-Driven Marketing – Businesses can personalize promotions based on customer
behaviour
...
Faster Transactions – Orders are placed and processed instantly
...
Scalability – Easier to expand the business without physical limitations
...

Key Features of an Online Catalogue:
• Detailed product descriptions, images, and specifications
...

• Customer ratings and reviews
...

• Examples: Amazon product pages, Flipkart listings, Nykaa beauty catalogue
...

• Allows instant updates to prices and product availability
...


81 | Piyush

UNIT - 2 E-Commerce

Ordering System in B2C
The Ordering System is the process through which customers place and manage orders
online
...
Product Selection – Customers browse the online catalogue and select items
...
Adding to Cart – Chosen products are added to a virtual shopping cart
...
Checkout Process – Customers enter shipping details and payment information
...
Payment Processing – Transactions are completed through credit cards, UPI, wallets,
or cash on delivery (COD)
...
Order Confirmation – A confirmation email or SMS is sent
...
Order Fulfilment & Delivery – The business processes and ships the order
...
Post-Purchase Support – Customers can track orders, request returns, or get
customer support
...

• Reduces human errors in order-taking
...

• Improves customer satisfaction with real-time updates and tracking
...
Global Market Expansion
o Businesses can sell products worldwide without physical store limitations
...

2
...

o Mobile apps, progressive web apps (PWAs), and mobile payment options
enhance user experience
...
Personalized Shopping Experience
o AI and data analytics help businesses offer personalized recommendations
...

4
...

o Influencer collaborations drive brand awareness and conversions
...
Subscription-Based E-Commerce
o Membership models (e
...
, Amazon Prime, Netflix, Nykaa Prive) ensure
recurring revenue
...

6
...
g
...

82 | Piyush

UNIT - 2 E-Commerce

Businesses optimize websites for voice search to capture this market
...
Omnichannel Selling
o Integration of physical stores with online platforms enhances customer
experience
...

o

Current Challenges in E-Commerce
1
...

o Secure payment gateways and compliance with data protection laws are
necessary
...
Logistics & Supply Chain Issues
o Timely delivery, especially in remote areas, remains a challenge
...

3
...

o Heavy discounting impacts profit margins
...
Regulatory & Legal Compliance
o E-commerce businesses must comply with tax laws, data privacy regulations
(GDPR, IT Act), and consumer protection policies
...

5
...

o Businesses must focus on transparency and quality assurance
...
Payment Failures & Fraudulent Transactions
o Technical failures, chargebacks, and online scams affect both buyers and
sellers
...

7
...

o Returns increase operational costs and affect profitability
...
It is crucial for customer satisfaction and brand loyalty
...
Order Tracking & Delivery Updates
o Customers receive real-time updates on shipping status
...

83 | Piyush

UNIT - 2 E-Commerce

2
...

o Quick refunds and hassle-free exchanges improve brand reputation
...
Customer Support & Helpdesk
o 24/7 customer service via chatbots, emails, and calls enhances satisfaction
...

4
...

o Extended warranty options boost sales and customer trust
...
Loyalty Programs & Re-engagement
o Reward points, discounts, and personalized offers encourage repeat purchases
...

6
...

o Feedback helps improve products and services
...
A well-structured and user-friendly website
enhances trust, improves navigation, and facilitates smooth transactions
...
Its design
influences how customers interact with the brand and affects overall business performance
...
Enhances User Experience (UX) – A well-designed website ensures smooth
navigation, fast loading speed, and easy product discovery
...
Builds Brand Credibility – A professional, aesthetically pleasing website increases
customer trust
...
Improves Conversion Rates – A clean layout, clear CTAs (Call-to-Action), and an
easy checkout process boost sales
...
Supports SEO (Search Engine Optimization) – Good design with proper structure
improves search engine rankings
...
Optimized for Mobile Users – A responsive design ensures compatibility with
mobile devices, increasing sales through mobile commerce
...
Different models cater to different business needs
...
Static Website Model
o Displays fixed content with minimal updates
...

o Example: A small business showcasing a catalogue of jewellery without
online sales
...
Dynamic Website Model
o Uses databases to generate real-time content updates
...

o Example: Amazon, Flipkart, Myntra
...
Single-Page Website Model
o Entire content is loaded on one page, enhancing user engagement
...

o Example: A landing page for a subscription-based service
...
Marketplace Model
o A multi-vendor platform where different sellers list their products
...

5
...

o Example: Shopify stores with integrated blogs and video content
...

Key Principles:
1
...

2
...

3
...

4
...

5
...

6
...

7
...

8
...


85 | Piyush

UNIT - 2 E-Commerce

Push & Pull Technology
Push Technology:
• Information is "pushed" to users without their request
...

• Examples:
o Email newsletters
o Mobile app push notifications
o Auto-updates on websites
Pull Technology:
• Users actively "pull" or request information from a website
...

• Examples:
o Searching for a product on Amazon
o Using filters to refine search results
o Clicking on personalized recommendations
Comparison:
Feature

Push Technology

Pull Technology

User Action

No user request needed

User requests data

Use Cases

Notifications, ads, alerts

Search, browsing, recommendations

Examples

SMS alerts, email campaigns

Search engines, e-commerce filters

Role of E-Mail
Email plays a vital role in e-commerce marketing, customer communication, and
transactional updates
...
Marketing & Promotions – Sending newsletters, discounts, and exclusive deals
...
Order Confirmations – Customers receive email updates after placing an order
...
Cart Abandonment Emails – Reminders to complete pending purchases
...
Customer Support – Handling queries, complaints, and feedback
...
Loyalty Programs & Referrals – Encouraging repeat purchases with rewards
...

• Flipkart sends discount coupons to customers via email
...
They have revolutionized how
businesses and consumers conduct transactions, making online shopping convenient and
accessible
...
Security
o Encryption and SSL certificates protect sensitive information
...

2
...

o Supports multiple devices like smartphones, tablets, and computers
...
Speed
o Reduces transaction time compared to traditional methods like cheques
...

4
...

o Minimizes paperwork and administrative expenses
...
Global Accessibility
o Facilitates cross-border transactions in multiple currencies
...

6
...

o Transparent transaction histories help in financial management
...
Integration with Other Systems
o Easily integrates with e-commerce platforms, accounting software, and CRM
systems
...


Types of Electronic Payment Systems
1
...

o Providers: Visa, MasterCard, RuPay
...
Digital Wallets
o Store card details and facilitate quick payments
...

3
...

o Used for online shopping, utility bills, and more
...
UPI (Unified Payments Interface)
o Real-time bank transfers using mobile devices
...

5
...

o Gaining acceptance in niche markets
...
Mobile Payments
o Payments via mobile apps and NFC (Near Field Communication)
...

7
...

o Examples: Amazon Gift Card, Paytm Prepaid Card
...
Buy Now, Pay Later (BNPL)
o Allows customers to purchase goods on credit and pay later
...


Development Checks in Electronic Payment Systems
When developing or integrating an EPS, it is essential to follow certain checks to ensure
security, functionality, and compliance:
1
...

o Regular vulnerability assessments and penetration testing
...
User Authentication
o Implement multi-factor authentication (MFA)
...

3
...

o End-to-end encryption for sensitive data
...
User Experience
o Ensure intuitive design for ease of use
...

5
...

o Monitor unusual transaction patterns
...
Regulatory Compliance
o Adhere to local and international regulations (e
...
, GDPR, IT Act in India)
...

7
...

o Design systems to handle peak loads during sales or events
...
Reporting & Analytics
o Provide detailed transaction reports and insights
...


Bank Transfer in E-Commerce
Bank Transfer is a traditional yet widely used electronic payment method, enabling
direct transfer of funds from one bank account to another
...
NEFT (National Electronic Funds Transfer):
o Suitable for large transfers, processed in batches
...

2
...

o Immediate settlement with no waiting period
...
IMPS (Immediate Payment Service):
o Real-time, 24/7 fund transfer
...

4
...

o Secure and used for cross-border payments
...

• Suitable for large transactions and international payments
...


Challenges of Bank Transfer:
• May involve processing fees for international transactions
...

• Less convenient than digital wallets or cards for small, frequent transactions
...
It replaces paper-based transactions,
reducing processing time and errors
...

• Uses structured document formats (e
...
, ANSI X12, EDIFACT)
...

Example:
A retailer automatically sends a purchase order to a supplier via EDI, eliminating manual
paperwork
...

How It Works in E-Commerce:
• Customers enter credit card details on a payment gateway
...

• Funds are transferred from the bank to the merchant’s account
...


✔ Enables Buy Now, Pay Later flexibility
...


Challenges:

❌ Risk of card fraud and data breaches
...


ATM (Automated Teller Machine)
An ATM is a self-service banking terminal that allows customers to withdraw cash,
transfer funds, and check account balances
...

• Deposits for online transactions: Customers can deposit cash into their bank
accounts for online purchases
...


Bank Transactions in E-Commerce
Banks play a critical role in digital payments by facilitating online banking, fund
transfers, and payment processing
...
Net Banking: Customers log in to their bank accounts to transfer money, pay bills, or
shop online
...
Mobile Banking: Allows fund transfers and bill payments via banking apps
...
UPI (Unified Payments Interface): A real-time interbank fund transfer system
...
It is stored electronically and used for secure online payments
...

• Prepaid digital currencies issued by banks
...

✔ No need for a bank account
...


Challenges:

❌ Difficult to trace in case of fraud
...


Electronic Purse (E-Wallets)
An electronic purse (or e-wallet) is a digital payment system where users store money
digitally and use it for online transactions
...

How It Works:
1
...

2
...

3
...

Advantages:
✔ Faster checkout process
...


✔ Supports multiple funding sources (bank, UPI, credit card)
...

How It Works in E-Commerce:
• Customers enter their debit card number, CVV, and OTP to complete payments
...

Advantages:
✔ No risk of accumulating debt
...


✔ Secure with OTP and PIN verification
...

❌ No credit benefits like cashback or rewards
...


Security

Encryption and authentication reduce fraud
...


Lower Costs

Reduces paperwork and transaction fees
...


Transparency

Digital records help track transactions easily
...


Transaction Failures

Payment failures due to network issues
...


Chargeback Fraud

Customers falsely claim refunds for transactions
...


Digital Signature in E-Commerce
A digital signature is an electronic method of verifying the authenticity and integrity
of digital documents and transactions
...
A unique cryptographic key is generated
...
The sender encrypts the document using their private key
...
The recipient decrypts it using the sender’s public key to verify authenticity
...

✔ Prevents unauthorized tampering
...


Example in E-Commerce:
• E-contracts between businesses use digital signatures to authenticate agreements
...


92 | Piyush

UNIT - 1 Cost & Management Accounting

Cost & Management Accounting
Cost Accounting
Cost Accounting is a branch of accounting that focuses on recording, analysing, and
controlling costs incurred in a business
...
Unlike
financial accounting, which deals with overall financial performance, cost accounting
provides detailed insights into product or service costs, enabling better managerial control
and decision-making
...
Ascertainment of Cost
o Determines the cost of products, services, and operations
...

2
...

o Ensures efficient use of resources to minimize wastage
...
Budgeting and Planning
o Assists in preparing budgets and setting financial targets
...

4
...

o Aids in deciding whether to continue or discontinue a product line
...
Decision Making
o Supports managerial decisions like make-or-buy, pricing strategies, and
investment planning
...

6
...

o Ensures accurate financial reporting and tax compliance
...
Fixation of Selling Price
o Helps in determining the appropriate selling price by considering production
and overhead costs
...

8
...

o Encourages cost-saving initiatives and process improvements
...
Compliance with Legal and Tax Requirements
o Ensures adherence to cost accounting standards and tax regulations
...

10
...

• Helps in monitoring operational efficiency and controlling deviations
...
Fixed Cost – Costs that remain constant regardless of production levels, such as rent,
salaries, and insurance
...
Variable Cost – Costs that change in direct proportion to production, such as raw
materials and direct labour
...
Semi-Variable Cost – Costs that have both fixed and variable components, like
electricity bills (fixed charge + variable usage)
...
Direct Cost – Costs that can be directly attributed to a product or service, such as raw
materials and wages of workers involved in production
...
Indirect Cost – Costs that cannot be directly linked to a specific product, like factory
rent and administrative expenses
...
Product Cost – Costs incurred to produce goods, including direct materials, direct
labour, and factory overheads
...
Period Cost – Costs not directly related to production but incurred over a period,
such as office rent and marketing expenses
...
Opportunity Cost – The potential benefit lost when choosing one alternative over
another, such as investing in one project instead of another
...
Sunk Cost – Costs that have already been incurred and cannot be recovered, such as
research and development expenses
...
Marginal Cost – The additional cost incurred when producing one extra unit of a
product
...
Standard Cost – A pre-determined cost used for budgeting and performance
evaluation
...
Controllable and Uncontrollable Cost
• Controllable Cost – Costs that management can regulate, such as overtime wages
...


Elements of Cost
The total cost of production is classified into three major elements:
1
...
g
...

o Indirect Material – Materials used but not directly traceable to the product
(e
...
, lubricants, stationery)
...
Labor Cost
o Direct Labor – Wages paid to workers directly involved in production
...

3
...
g
...

o Administrative Overheads – Costs related to office and administration (e
...
,
salaries of managers)
...
g
...


Cost Unit
A Cost Unit is a measurable unit of a product or service for which costs are determined
...

• Examples of Cost Units:
o In the textile industry: Per meter of fabric
o In the automobile industry: Per vehicle
o In the electricity industry: Per kilowatt-hour
o In transportation: Per kilometre travelled

Cost Centre
A Cost Centre is a department, location, machine, or individual responsible for costs
incurred in an organization
...

Types of Cost Centres:
1
...
g
...

2
...
g
...

3
...
g
...

4
...
g
...


Types of Costing
Different industries use various costing methods to determine the cost of products or
services
...
Based on Costing Method
1
...

2
...

3
...


95 | Piyush

UNIT - 1 Cost & Management Accounting

4
...

5
...

6
...

7
...

B
...
Marginal Costing – Focuses on variable costs for decision-making, ignoring
fixed costs
...
Absorption Costing – Considers both fixed and variable costs in cost calculation
...
Activity-Based Costing (ABC) – Allocates costs based on activities involved in
production
...
Standard Costing – Uses pre-determined costs for performance evaluation
...
Target Costing – Determines the cost based on the target selling price and
desired profit margin
...
Life Cycle Costing – Considers the total cost of a product over its entire life
cycle
...
The steps involved
include:
Steps in Installing a Costing System
1
...

2
...

3
...

4
...

5
...

6
...

7
...


96 | Piyush

UNIT - 1 Cost & Management Accounting

Cost Structure and Control
A
...
It
typically includes:
1
...
Indirect Costs (Overheads – Factory, Administrative, Selling & Distribution)
3
...
Cost Control
Cost control involves monitoring and reducing unnecessary costs without affecting
quality
...
Budgetary Control – Setting budgets and comparing actual costs with
planned costs
...
Standard Costing – Comparing actual costs with standard costs to find
variances
...
Cost-Reduction Techniques – Improving efficiency through automation,
waste reduction, and better resource allocation
...
Objectives of Material Cost Control
• Reduce wastage of raw materials
...

• Maintain an optimal stock level to avoid overstocking or stock shortages
...
Techniques of Material Cost Control
1
...

2
...

o EOQ (Economic Order Quantity) – Determining the optimal order
quantity to minimize costs
...

3
...


Labour Cost Control
A
...

• Improve productivity and efficiency
...


97 | Piyush

UNIT - 1 Cost & Management Accounting

B
...
Workforce Planning – Proper scheduling of workers to avoid overstaffing or
understaffing
...
Time Keeping & Time Booking – Recording worker attendance and job
performance accurately
...
Incentive Schemes – Using methods like Halsey Plan, Rowan Plan, and PieceRate System to increase productivity
...
Training & Development – Enhancing worker skills to improve efficiency
...
Reducing Idle Time – Ensuring machines and materials are available to avoid
work stoppages
...
These costs cannot be directly traced to a specific
product or service but need to be distributed appropriately across different cost centers or
units
...

• It is done when the overhead expense is entirely related to a particular department or
cost centre
...

• Depreciation of machinery in Department A is allocated only to Department A
...

• It is used when expenses are shared by more than one department
...


Absorption of Overheads
•
•

Absorption is the process of charging overheads to the cost of the product or
service based on a predetermined rate
...


99 | Piyush

UNIT - 2 Cost & Management Accounting

Methods of Overhead Absorption
Method
Direct Labour Hour Rate
Machine Hour Rate
Percentage on Direct
Labour Cost
Percentage on Direct
Material Cost
Rate per Unit of Output

Formula
Total Overheads ÷ Total Labour Hours

Total Overheads ÷ Total Machine Hours

(Overheads ÷ Direct Labour Cost) × 100

(Overheads ÷ Direct Material Cost) × 100
Total Overheads ÷ Total Units Produced

Suitable for
Labour-intensive
industries
Machine-based
industries
Service-based
industries
Manufacturing units
Simple production
processes

Example:
• If total overheads for a factory are ₹1,00,000 and total machine hours are 10,000,
then:
o Machine Hour Rate = ₹10 per machine hour
o If a product takes 5 machine hours, the absorbed overhead cost per unit = ₹50

Unit Costing aka Output Costing
•
•

Used for industries producing a single, uniform product in large quantities
...

Formula:

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑃𝑃𝑒𝑒𝑒𝑒 𝑈𝑈𝑛𝑛𝑛𝑛𝑛𝑛 =

Industries Using Unit Costing:
• Cement industry
• Steel manufacturing
• Electricity production
• Oil refining

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

Job Costing
Used when products are custom-made as per specific customer requirements
...

Features:
• Every job is unique
...

• Overheads are allocated based on labour or machine hours
...

• Each batch is treated as a separate cost unit
...

• Costs are accumulated per contract, and revenue is recognized based on the
percentage of completion
...

• Direct costs like materials, labour, and overheads are charged to the contract
...

Industries Using Contract Costing:
• Real estate and construction
• Road and bridge development
• Civil engineering projects
•

Process Costing
Used when production occurs in continuous processes, passing through multiple
stages
...

Industries Using Process Costing:
• Chemical and paint manufacturing
• Textile industry
• Paper and sugar mills
Process Costing Includes:
A
...

• The total cost is apportioned among joint products based on a suitable basis
(e
...
, sales value or physical units)
...

• Cotton and cottonseed from raw cotton
...

B
...

• The cost of by-products is either subtracted from the total cost or recorded as
additional revenue
...

• Wood chips in furniture making
...


Conclusion
a)
b)
c)
d)
e)

Unit Costing → Large-scale, uniform production
...

Batch Costing → Group-based production
...

Process Costing → Continuous production, including joint products and byproducts
...
It focuses on internal reporting to improve business efficiency and profitability
...

• Focuses on future projections rather than historical data
...

• No fixed format—customized reports for management
...
Its scope
includes:
Area

Description

Financial Planning &
Analysis

Helps in budgeting, forecasting, and cost estimation
...


Performance Evaluation

Assesses business performance using financial ratios and key
indicators
...


Working Capital
Management

Ensures smooth business operations by managing current assets
and liabilities
...
planned performance to improve efficiency
...


Financial Accounting vs
...


Helps management in decisionmaking
...


Internal users (managers,
executives)
...


Future-oriented (forecasts and
plans)
...


No standard rules—customized as
per business needs
...


Flexible reports for internal use
...
Management Accounting
Basis

Cost Accounting

Management Accounting

Purpose

Determines the cost of
products/services
...


Focus

Cost control and cost reduction
...


Scope

Deals with product costing and cost Covers broader areas, including finance,
analysis
...


Users

Cost accountants and production
managers
...


Analysis and Interpretation of Financial Statements
Financial statement analysis is the process of examining financial data to assess a
company's financial position, profitability, and overall performance
...

• Profit & Loss Account (Income Statement) → Displays revenue, expenses, and net
profit
...


Objectives of Financial Statement Analysis:
•
•
•
•

Evaluate profitability, liquidity, and solvency
...

Assist in decision-making for management, investors, and lenders
...


Methods of Financial Statement Analysis:
Method

Description

Comparative Statement
Analysis

Compares financial data over different periods to identify
trends
...


Trend Analysis

Analyses financial data over multiple years to identify patterns
...


Fund Flow and Cash Flow
Analysis

Examines movement of funds and cash to assess financial
stability
...

Key Performance Indicators (KPIs):
1
...


♦ 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =
♦ 𝑁𝑁𝑁𝑁𝑁𝑁 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =

𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆

𝑁𝑁𝑁𝑁𝑁𝑁 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆

× 100

× 100

𝑁𝑁𝑁𝑁𝑁𝑁 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

♦ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 (𝑅𝑅𝑅𝑅𝑅𝑅) =

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸

2
...


♦ 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =
♦ 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =

× 100

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 − 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿

3
...


♦ 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑡𝑡𝑡𝑡 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷

𝑆𝑆ℎ𝑎𝑎𝑎𝑎𝑎𝑎ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑠𝑠 ′ 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒

♦ 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸

EBIT – Earning Before Interest And Tax
EBIT=Revenue-COGS-Operating Expenses

𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸

4
...


♦ 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =
♦ 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =

Marginal Costing

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼

𝑁𝑁𝑁𝑁𝑁𝑁 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑒𝑒

Marginal costing is a costing technique where only variable costs are considered for
decision-making, while fixed costs are treated as period costs and charged to the Profit &
Loss account
...

Key Formulae in Marginal Costing:

1
...
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 − 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
3
...
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 − 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 (𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢) =

5
...
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑜𝑜𝑜𝑜 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 – 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 − 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆
105 | Piyush

UNIT - 3 Cost & Management Accounting

Uses of Marginal Costing:
• Helps in decision-making (e
...
, pricing, product mix)
...

• Aids in determining optimal production levels
...


Types of Managerial Reports
Type
Financial Reports
Operational Reports
Budget Reports
Sales & Marketing
Reports
Variance Analysis
Reports

Purpose
Analyse profitability, costs, and financial health
...

Compare actual vs
...

Evaluate sales trends, customer preferences, and revenue
growth
...


Components of a Managerial Report:
1
...

2
...

3
...

4
...

Example of Managerial Report Use:
• A retail company may prepare a sales performance report comparing actual vs
...


Management Information Systems (MIS)
A Management Information System (MIS) is a structured approach to collecting,
processing, and analysing business data to support decision-making
...

• Processing & Analysis → Converts raw data into useful insights
...

• Decision Support → Helps managers make strategic and operational decisions
...
Hardware & Software → Computers, servers, databases
...
Data Processing System → Stores and processes business data
...
Reporting Tools → Dashboards, financial reports, and forecasting models
...
Users → Managers and decision-makers
...


Production MIS

Tracks production output, efficiency, and material usage
...


Human Resource
MIS

Manages employee records, payroll, and performance
...


107 | Piyush

Numerical Problems Of Cost And Management Accounting UNIT - 1

UNIT - 1
Cost Sheet Preparation
Problem 1:
XYZ Manufacturing produced 1,000 units during the month
...

Solution:
1
...
Total Production Cost:
Sum of all production-related costs (Direct Materials, Direct Labor, and Factory
Overhead):
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 100,000 + 50,000 + 30,000 = $180,000
3
...
Total Cost:
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 + 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑁𝑁𝑁𝑁𝑁𝑁 − 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
= 180,000 + 15,000 = $195,000
5
...
Compute the cost of goods sold (COGS) and the value of
the closing inventory using:
a) FIFO
b) LIFO
c) Weighted Average Method
Solution:
(a) FIFO Method
FIFO (First-In, First-Out) assumes that the earliest goods purchased are sold first
...
Determine the units sold from each layer:
o 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹, 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 100 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡ℎ𝑒𝑒 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑎𝑎𝑎𝑎 $10 𝑒𝑒𝑒𝑒𝑒𝑒ℎ
...

o 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 = 100 + 200 = 300 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
...
COGS Calculation:
o 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖: 100 × $10 = $1,000
o 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 5 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑎𝑎𝑎𝑎𝑎𝑎: 200 × $12 = $2,400
o 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 = $𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎 + $𝟐𝟐, 𝟒𝟒𝟒𝟒𝟒𝟒 = $𝟑𝟑, 𝟒𝟒𝟒𝟒𝟒𝟒
3
...

o 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰 = 𝟏𝟏𝟏𝟏𝟏𝟏 × $𝟏𝟏𝟏𝟏 = $𝟏𝟏, 𝟔𝟔𝟔𝟔𝟔𝟔
109 | Piyush

Numerical Problems Of Cost And Management Accounting UNIT - 1

(b) LIFO Method
LIFO (Last-In, First-Out) assumes that the most recent purchases are sold first
...
Determine the units sold from each layer (starting with the latest):
o 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹, 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 150 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡ℎ𝑒𝑒 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 15 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑎𝑎𝑎𝑎𝑎𝑎 𝑎𝑎𝑎𝑎 $11 𝑒𝑒𝑒𝑒𝑒𝑒ℎ
...

o 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁, 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 150 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡ℎ𝑒𝑒 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 5 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑎𝑎𝑎𝑎𝑎𝑎 𝑎𝑎𝑎𝑎 $12 𝑒𝑒𝑒𝑒𝑒𝑒ℎ
...

2
...
Closing Inventory:
o Remaining inventory includes:
 Beginning inventory: 100 units at $10 each
...

o 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰 = (𝟏𝟏𝟏𝟏𝟏𝟏 × $𝟏𝟏𝟏𝟏) + (𝟓𝟓𝟓𝟓 × $𝟏𝟏𝟏𝟏)
o 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰 = $𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎 + $𝟔𝟔𝟔𝟔𝟔𝟔 = $𝟏𝟏, 𝟔𝟔𝟔𝟔𝟔𝟔
(c) Weighted Average Method
1
...
Weighted Average Cost per Unit:
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 5,050450 ≈ $11
...
COGS Calculation:
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 300 × 11
...
Closing Inventory:
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 = (450 − 300) × 11
...
22 ≈ $1,683
Summary of Answers for Problem 2:
Method

COGS

Closing Inventory

FIFO

$3,400

$1,650

LIFO

$3,450

$1,600

Weighted Average

$3,366 (approx
...
)

110 | Piyush

Numerical Problems Of Cost And Management Accounting UNIT - 1

EOQ (Economic Order Quantity) Calculation
Problem 3:
A company has an annual demand of 10,000 units
...
Calculate the EOQ
...


Inventory Turnover Ratio
Problem 4:
A company reported a Cost of Goods Sold (COGS) of $500,000 and an average inventory of
$100,000 during the year
...

Solution:
Inventory Turnover Ratio is Calculated as:
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
Substitute the Given Value:
500000
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =
= 5 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇
100000
Answer: The inventory turnover ratio is 5 times
...
For a given week, the worker worked 45
hours
...
5 times the regular rate
...

Solution:
1
...
Overtime Hours: 45 – 40 = 5 hours
o 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = 1
...
Total Wages:
800 + 150 = $950
Answer: The worker's total wage for the week is $950
...
If the worker produces 300
units in a day, what is the total wage for that day?
Solution:
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊 = 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑜𝑜𝑜𝑜 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 × 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑝𝑝𝑝𝑝𝑝𝑝 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 = 300 × 2 = $600
Answer: The total wage for the day is $600
...
A worker
completes the task in 8 hours
...
Calculate the total
wage using the Halsey plan, where the bonus is calculated as 50% of the time saved
multiplied by the hourly rate
...
𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻: 8 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
2
...
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺: 10 – 8 = 2 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
4
...
𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩: 50% 𝑜𝑜𝑜𝑜 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 × ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = 0
...
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾:
120 + 15 = $135
Answer: The worker’s total wage under the Halsey plan is $135
...
The worker’s hourly rate is $15
...

Explanation of the Rowan Plan:
Under the Rowan plan, the bonus is computed as a fraction of the actual wages
...
𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨 𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾: 8 × 15 = $120
2
...
𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩 𝑭𝑭𝑭𝑭𝑭𝑭𝑭𝑭𝑭𝑭𝑭𝑭: 2�8 = 0
...
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾: 120 × (1 + 0
...
25 = $150120
Answer: The worker’s total wage under the Rowan premium plan is $150
...
Primary Distribution:
o Total overhead to be allocated: $𝟏𝟏𝟏𝟏𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎
o This is allocated to three departments—A, B, and C—in the ratio of direct
labour hours 𝟑𝟑 ∶ 𝟐𝟐 ∶ 𝟏𝟏
...
Secondary Distribution:
o Departments B and C are service departments
...

o Department B has used 40 machine hours and Department C has used 60
machine hours for department A
...

Solution:
Step 1
...

• 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑹𝑹𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂 𝑷𝑷𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂 = 3 + 2 + 1 = 6 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
Allocation:
• 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝑨𝑨: 3� × 100,000 = $50,000
6
• 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝑩𝑩: 2� × 100,000 = $33,333
...
67 (𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎)
Step 2
...
33 + 16,666
...
Final Overhead Absorbed by Department A
• 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑡𝑡𝑡𝑡 𝐴𝐴 𝑖𝑖𝑖𝑖 𝑡𝑡ℎ𝑒𝑒 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 = $50,000
• 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃, 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝐵𝐵 = $20,000

114 | Piyush

Numerical Problems Of Cost And Management Accounting UNIT - 2

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃, 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝐶𝐶 = $30,000
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑓𝑓𝑓𝑓𝑓𝑓 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐴𝐴 = 50,000 + 20,000 + 30,000 = $100,000
Answer: Department A absorbs a total overhead of $100,000
...
incurs total overhead expenses of $180,000, which is divided into two components:
• Variable Overhead: $50,000 (to be absorbed on the basis of direct labour hours)
• Fixed Overhead: $80,000 (to be absorbed on the basis of machine hours)
• The remaining overhead ($50,000) is apportioned among two production departments
(A and B) as follows:
o 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐴𝐴: 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻 = 200; 𝑀𝑀𝑀𝑀𝑀𝑀ℎ𝑖𝑖𝑖𝑖𝑖𝑖 𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻 = 150
o 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐵𝐵: 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻 = 300; 𝑀𝑀𝑀𝑀𝑀𝑀ℎ𝑖𝑖𝑖𝑖𝑖𝑖 𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻 = 250
Assume:
• Variable overhead is absorbed at the rate computed on the total direct labour hours
(200 + 300 = 500 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜)
...

Required:
Compute the overhead absorbed by each department
...
Absorption of Variable Overhead
• 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽 𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶: $50,000
• 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳 𝑯𝑯𝑯𝑯𝑯𝑯𝑯𝑯𝑯𝑯: 200 + 300 = 500 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
• 𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽 𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶 𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹: 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = 50000�
500 = $100 𝑝𝑝𝑝𝑝𝑝𝑝 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ℎ𝑜𝑜𝑜𝑜𝑜𝑜
Allocation:
• 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝑨𝑨: 200 × 100 = $20,000
• 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝑩𝑩: 300 × 100 = $30,000
Step 2
...
Apportionment of the Remaining Overhead
The remaining overhead amount is $50,000
...

• 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓 𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑: 200 + 300 = 500
• 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝑨𝑨: 200500 × 50,000 = $20,000

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Numerical Problems Of Cost And Management Accounting UNIT - 2
•

𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝑩𝑩: 300500 × 50,000 = $30,000

Step 4
...
The costs incurred are
as follows:
• 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴: $10,000
• 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳: $5,000
• 𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶: 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑎𝑎𝑎𝑎 150% 𝑜𝑜𝑜𝑜 𝑡𝑡ℎ𝑒𝑒 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
...

Solution:
Step 1
...
5 × $5,000 = $7,500

Step 2
...
Calculate Unit Cost
𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑜𝑜𝑜𝑜 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈
= 22500�500 = $45 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
Answer:
• 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝒃𝒃𝒃𝒃𝒃𝒃𝒃𝒃𝒃𝒃 𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄: $22,500
• 𝑼𝑼𝑼𝑼𝑼𝑼𝑼𝑼 𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄: $45 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢

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Numerical Problems Of Cost And Management Accounting UNIT - 2

Contract Costing
Problem 4:
A contractor is engaged in a contract worth $1,200,000
...

• 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰 𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅 𝒕𝒕𝒕𝒕𝒕𝒕 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚: $600,000
Required:
Compute:
a) The amount of Retention Money withheld
b) The cash receivable (i
...
, certified work after deducting retention)
c) The profit recognized in the current year (assume profit recognized is computed on the
basis:
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 = (𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 + 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈) – 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼)
...
Calculate Retention Money
•

Retention is 10% of certified work:
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = 10% × 800,000 = $80,000

Step 2
...
Compute Profit Recognized
Using the formula provided:
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = (𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 + 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈) − 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
Substitute the values:
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = (720,000 + 50,000) − 600,000
= 770,000 − 600,000 = $170,000
Answer:
a) 𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹 𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴: $80,000
b) 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹: $720,000
c) 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹: $170,000

Process Costing – Normal Loss, Abnormal Loss/Gain

Problem 5:
A processing department starts with 10,000 units
...
At the end of the period, the actual loss recorded is 600 units
...


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Numerical Problems Of Cost And Management Accounting UNIT - 2

Required:
a) Calculate the number of units expected as normal loss
...

c) Compute the cost adjustment due to abnormal loss/gain
...
Calculate Normal Loss
• 𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳 = 5% 𝑜𝑜𝑜𝑜 10,000 = 0
...
Determine Abnormal Loss or Gain
• 𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳 = 600 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳 = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 – 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿
= 600 − 500 = 100 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 (𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙)
(If actual loss were less than 500, it would have been an abnormal gain
...
Cost Adjustment
• 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 = $5
• 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝒐𝒐𝒐𝒐 𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳: 100 × 5 = $500

Answer:
a) 𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳: 500 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
b) 𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳: 100 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
c) 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨 𝒅𝒅𝒅𝒅𝒅𝒅 𝒕𝒕𝒕𝒕 𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳: $500

Joint Product and By-Product Costing

Problem 6:
A processing plant produces two joint products, Product A and Product B, from a common
raw material
...
At the split-off point, the products have the
following sales values:
• 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 𝑨𝑨: $80,000
• 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 𝑩𝑩: $20,000
Additionally, a by-product C is produced, which has a net realizable value of $5,000
...

b) Show how the by-product is accounted for when its net realizable value is deducted from
the joint cost
...
Allocate Joint Cost to Joint Products (Excluding the By-Product)
Total Sales Value of Joint Products: 80,000 + 20,000 = $100,000
Proportional allocation:
• Product A’s share: 80000�
100000 × 50,000 = 0
...
2 × 50,000 = $10,000

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Numerical Problems Of Cost And Management Accounting UNIT - 2

Step 2
...
There are two common methods to
account for this:
1
...

o 𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨 𝑱𝑱𝑱𝑱𝑱𝑱𝑱𝑱𝑱𝑱 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪: 50,000 − 5,000 = $45,000
o Re-allocate Adjusted Joint Cost:
 Product A: 80000�
100000 × 45,000 = 0
...
2 × 45,000 = $9,000
o

By-Product C is then recorded separately at its NRV of $5,000
...
Separate Sale Method:
o The by-product is sold and its proceeds (or NRV) are treated as other income
...

Answer (Using the Deduction Method):
a) Before adjusting for the by-product:
• 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐴𝐴: $40,000
• 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐵𝐵: $10,000
b) After deducting the by-product’s NRV:
• 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = $45,000
• 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 𝑨𝑨: $36,000
• 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 𝑩𝑩: $9,000
• 𝑩𝑩𝑩𝑩 − 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 𝑪𝑪 𝑖𝑖𝑖𝑖 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑎𝑎𝑎𝑎 $𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎
...
Gross Profit Ratio
2
...
Return on Investment (ROI)
4
...
Quick Ratio
6
...
Interest Coverage Ratio
8
...
Debtors Turnover Ratio
Solution:
1
...
Net Profit Ratio

3
...


5
...


7
...


9
...
67
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 300,000
Quick Ratio
(Excludes inventory and prepaid expenses)
𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 = 𝐶𝐶𝐶𝐶𝐶𝐶ℎ + 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = 100,000 + 200,000 = 300,000
𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴
300,000
𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =
=
= 1
...
67
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸
600,000
Interest Coverage Ratio
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸
200,000
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =
=
= 10 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑛𝑛𝑠𝑠𝑠𝑠
20,000
Inventory Turnover Ratio
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
600,000
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 =
=
= 4 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 150,000
Debtors Turnover Ratio
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆
10,00,000
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 =
=
= 5 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷
2,00,000
𝑁𝑁𝑁𝑁𝑁𝑁 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = �

Answer Summary for Problem 1:
• Gross Profit Ratio: 40%
• Net Profit Ratio: 18%
• ROI: 18%
• Current Ratio: 1
...
0
• Debt to Equity Ratio: 0
...

b) Compute the Profit/Volume (P/V) Ratio
...

Solution:
1
...
Profit/Volume (P/V) Ratio:
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐸𝐸𝑣𝑣𝑣𝑣𝑣𝑣 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 =
𝑃𝑃/𝑉𝑉 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑃𝑃𝑒𝑒𝑒𝑒 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈
10
× 100 =
× 100 = 50%
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃𝑃𝑃 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈
20

3
...
5%
8,000

Answer Summary for Problem 2:
• Break-even Point: 5,000 units
• P/V Ratio: 50%
• Margin of Safety: 3,000 units (or 37
...
The following cost and pricing details apply:
• 𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 𝒑𝒑𝒑𝒑𝒑𝒑 𝑼𝑼𝑼𝑼𝑼𝑼𝑼𝑼 (𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹): $15
• 𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝒑𝒑𝒑𝒑𝒑𝒑 𝑼𝑼𝑼𝑼𝑼𝑼𝑼𝑼: $8
• 𝑭𝑭𝑭𝑭𝑭𝑭𝑭𝑭𝑭𝑭 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪: $70,000 (𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡ℎ𝑒𝑒 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦)
A one-time special order is received for 500 units at a reduced selling price of $10 per
unit
...

Required:
Determine whether the company should accept the special order based on marginal
(incremental) analysis
...
Regular Contribution per Unit:
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 15 − 8
= $7 (𝑁𝑁𝑁𝑁𝑁𝑁 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡ℎ𝑒𝑒 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑)

2
...
Total Incremental Profit from Special Order:
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 = 500 × 2 = $1,000
Since fixed costs are not affected and the capacity is available, any positive incremental
contribution adds to overall profit
...


Budgetary Control and Variance Analysis
Problem 4:
XYZ Ltd
...
The budget assumed a variable cost
ratio of 60% of sales
...

Required:
a) Calculate the Budgeted Variable Cost and the Actual Variable Cost
...

Solution:
1
...
60 × 500,000 = $300,000
123 | Piyush

Numerical Problems Of Cost And Management Accounting UNIT - 3

2
...
65 × 550,000 = $357,500

3
...
Variable Cost Variance:
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 =
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 − 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 (𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑡𝑡𝑡𝑡 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠)

First, determine the expected variable cost on actual sales if the budgeted ratio were
maintained:
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = 60% × 550,000
= 0
...
In one month, the
following information is recorded:
• 𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺 (𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩) 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪: $180,000
• 𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪: $200,000
This adverse variance of $20,000 is further analysed, and the following sub-variances
are identified:
• 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽: $5,000 (𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈)
• 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳 𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬 𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽: $3,000 (𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈)
• 𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶 𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺 𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽: $2,000 (𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈)
• The remaining variance is attributed to an unfavourable mix or inefficiencies in
production processes
...

b) Explain how the breakdown of variances helps management in decision making and cost
control
...
) is:
20,000 − 10,000 = $10,000 (𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈)

b) Analysis for Managerial Decision Making:
• Direct Material Price Variance ($5,000 Unfavourable): Indicates that the company
paid more per unit of material than planned
...

• Direct Labor Efficiency Variance ($3,000 Unfavourable): Suggests that labour
hours exceeded standard expectations
...

• Overhead Spending Variance ($2,000 Unfavourable): Implies that overhead costs
(utilities, maintenance, etc
...
This calls for a review of cost
control measures in overhead spending
...
Detailed
investigation into production processes, machine utilization, or wastage may help in
identifying corrective actions
...

Answer Summary for Problem 5:
a) Total unfavourable variance is $20,000, with identified sub-variances of $5,000
(materials), $3,000 (labour), $2,000 (overhead), and an additional $10,000 due to other
inefficiencies
...

• Reviewing supplier contracts, labour efficiency, and overhead controls
...


125 | Piyush



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