PREVIOUS YEAR ANNA UNIVERSITY QB / ANSWER KEY VTHT/R2013

CH6704/PROCESS ECONOMICS

YEAR/SEM IV/VII

1. Discuss the meaning objectives and factors determining production, planning and
control.(Dec 11,13, 14)
PLANNING:
Planning is the process of thinking before doing and determining the course of action to
be taken. It is all about looking ahead, to chart the best courses of future action. This is to
achieve the desired results with greatest certainty and economy, without which the activities
of an enterprise may become confuses and ineffective. It is a decision making process, to
decide in advance, what is to be done, when it is to be done, how it is to be done, by whom it
is to be done, and where it is to be done. In total planning can be defined as a decision
making process to determine organizational objectives, policies, programs, procedures,
schedules and methods to achieve them by considering environmental factors that affect the
planning.

Strategic planning: Long range planning to set organizational goals, objectives, and policies
to determine strategies, tactics, and programs for achieving them.
– Top management makes strategic plans.
– Middle Management makes annual plans (to implement the above).
– For supervisors the planning period is usually a week, day, or shift (to deal with daily
work).
Forecasting: Predicting future needs on the basis of historical data, present conditions, and
assured future. It controls staffing, purchasing, and production decisions.
Qualities of good Planning: Provides a workable solution and meets the stated objectives.
Is comprehensive; it raises all relevant questions and answers them. It minimizes the degree
of risks. It is specific as to time, place, supplies, tools, etc. It has to be flexible (can be
adapted to a change in the situation).
Types of Planning: (i). Standing Plan: It is established routine, formula, or set of
procedures designed to be used in a reoccurring situation. Potential drawback is rigidity,
must make them flexible enough to deal with daily realities and these plans must be updated
regularly.
(ii). Single Use Plan: It is a onetime plan developed for a single occasion or purpose. The
amount of time spend on it depends on its nature and importance. Often its purpose is a
major change of some sort or budgets.
(iii). Day to day planning: It is the top priority of the first line supervisor. Its primary
concern is what is to be done, who will be doing it, and adjusting various standing plans. It
has to be planned before the day begins.
(iv)Planning for a change: In this first define problem and set objectives. Gather past,
present, and probable future data. Evaluate pros and cons, generate alternatives. Make the
necessary decisions. Implement the plan. Planning for change must be done carefully and
 thoroughly. It is very much like making other plans but the main differences are the extent of
forecasting, the degree of risk, and providing for the impact of the change.

Explain and elaborate the steps involved in method study and time study(Dec 11, June 13,
June 14, Dec 17) 3. Explain how to determine the value of money.ii) Explain the
relationship between interest and time value of money.(Dec12. Dec 17) iii) Explain the
various cost concepts.(Dec 12, June 13)
2. Method study

Method study is defined as the branch of science of eliminating un productive activities and in
efficient motions. Various resources utilized for a manufacturing process may be man material
machines money time and technology. The best combination of the above provides a basis to
analyze the existing process and to develop most efficient method. Method study is also defined
as a systematic recording and critical examination of existing and proposed methods of doing the
job with an objective to develop simple and easier and more effective method with least cost.

Objectives
1) Improvement of process and procedure
2) Improvement of plant design and equipment
3) Improvement of plant layout
4) Improvement of utilization of various resources
5) Improvement of flow of production and activities
6) Improvement of safety standards
7) Efficient material handling
8) Economy in human effort and reduction of undesirable strain and fatigue
9) Methods standardization
10) Development of better work environment
Procedure of method study
Following are the steps in the procedure
1) SELECT the work to be studied
2) RECORD all the relevant data of the present method by direct observation
3) EXAMINE the data critically by applying suitable techniques
4) DEVELOP the most efficient and economic method with less defectives
Other
(a) Eliminate unnecessary activities.
(b) Combine two or more activities.
(c) Resequence activities so as to reduce time and effort.
(d) Simplify process to reduce number of operations
(e) Attack on constraints, which are preventing the method to perform better.
5) DEFINE the new method with variables and parameters
 6)INSTALL: Installation of new process is a major step towards fulfilling the objective of
the entire approach.
(i) Selling the proposal:
(ii) Preparation for installation:
(iii) Commencement of new method
(iv) Initial monitoring of installation activities:
7) MAINTAIN the standard method by regular or periodic test.

Motion and Time Study:

Motion and time study can reduce and control costs, improve working conditions and
environment, and motivate people. The basic purpose is to improve the work and to reduce
waste.
1. Motion analysis techniques
2. Time study techniques
3. Uses of time standards.
Manufacturing management and engineering students are being prepared to design work stations,
develop efficient and effective work methods, establish time standards, balance assembly lines,
estimate labor costs, develop effective tooling, select proper equipment, and layout
manufacturing facilities. However, the most important thing is to learn how to train production
workers in these skills and techniques so they can become motion and time conscious.

Motion study offers a great potential for savings in any area of human effort. We can reduce the
cost by combining elements of one task with elements of another. Motion study uses the
principles of motion economy to develop work stations that are friendly to the human body and
efficient in their operation. Motion study must consider the operator’s safety. Time study can
reduce cost significantly well. Time standards are goals to strive for. In organizations that
operate without time standards, 60% performance is typical. When time standards are set,
performance improves to an average of 85%. This is a 42% increase in performance:
85 % - 60 %
------------------ = 42% performance increase.
60%

Incentive systems can improve performance even further. Incentive system performances
average 120%, that is another 42% increase in performance:
120% - 85%
---------------------- = 42% performance increase.
85%

Manufacturing plants with no standards average 60% performance. Manufacturing plants with
time standards average 85% performance. Manufacturing plants with incentive systems average
120% performance. If additional production output is required, don’t buy more machinery, don’t
add a second shift, and don’t build a new plant. Just establish a motion and time study program.
Motion and time study is considered to be the backbone of industrial engineering, industrial
technology, and industrial management programs because the information that time studies
generate affects so many other areas, including the following:
1. Cost estimating
2. Production and inventory control
3. Plant layout
4. Materials and processes
5. Quality
6. Safety

Motion study comes first before the setting of time standards. Motion study is a detailed analysis
of the work method in an effort to improve it. Motion studies are used to
1. Develop the best work method.
2. Develop motion consciousness on the part of all employees.
3. Develop economical and efficient tools, fixtures, & production aids.
4. Assist in the selection of new machines and equipment.
5. Train new employees in the preferred method.
6. Reduce effort and cost.

Motion study is for cost reduction, and time study is for cost control. Motion study is the creative
activity of motion and time study. Motion study is design, while time study is measurement.
Once the importance of motion and time study is understood and accepted, the techniques of
motion and time study are introduced.

Flow diagrams
Multi activity charts
Operation charts
Flow process charts
Process charts
Operations analysis chart
Work station design
Motion economy
Flow patterns
Predetermined time standards system (PTSS).

The techniques of time study start with the last motion study technique, which shows the close
relationship between motion study and time study. The techniques of time study are:

Predetermined time standards system (PTSS).

Stopwatch time study
Standard data formula time standards
Work sampling time standards
Expert opinion and historical data time standards.

MOTION STUDY
Motion studies are performed to eliminate waste. Before any improvement in quality or quantity
of output, any study of operations time, any scheduling of work or balancing of workload or any
calculation of standard time, a study of the current and proposed method is required. Studies of
overall factory flow or process, called macromotion studies, and then additional studies of detail
or operations, called micromotion studies, should be completed for a project. Motion studies
were conducted by Frank and Lillian Gilbreth about a century ago in a search for the “one best
way.” It is important to note that such studies seek to minimize and simplify manual efforts.

TIME STANDARD

The definition of a time standard is “the time required to produce a product at a work station
with the following three conditions:

(1) a qualified, well-trained operator,

(2) Working at a normal pace,
(3) Doing a specific task.

These three conditions are essential to the understanding of time study.

The importance of time standards can be shown by the three statistics 60%, 85%, and 120%
performance. The time standard is one of the most important pieces of information produced in
the manufacturing department. It is used to develop answers for the following problems:

Time standard helps us in determining the number of machine tools to buy, determining the
number of production people to employ, determining manufacturing costs and selling prices
scheduling the machines, operations, and people to do the job and deliver on time, determining
the assembly line balance, determining the conveyor belt speed, loading the work cells with the
correct amount of work, and balancing the work cells, determine individual worker performance
and identifying operations that are having problems so the problems can be corrected, paying
incentive wages for outstanding team or individual performance, evaluating cost reduction ideas
and picking the most economical method based on cost analysis, not opinion, evaluating new
equipment purchases to justify their expense developing operation personnel budgets to measure
management. performance.
3. Explain the various organizational structures which are commonly adopted in industrial
organizations .ii)Breifly discuss the various types of business organizations. Bring out their
advantages and disadvantages.(Dec 12,14, may 15) 6. Discuss in detail about the horizontal,
vertical and diagonal organization towards the chemical works.
Organization as a process and a structure; Types of Organizations.

Organization is a particular pattern of structure, people, tasks and techniques. Any

operating organization should have its own structure in order to operate efficiently. For an
organization, the organizational structure is a hierarchy of people and its functions.
The organizational structure of an organization tells you the character of an organization and the
values it believes in. Therefore, when you do business with an organization or getting into a new
job in an organization, it is always a great idea to get to know and understand their
organizational structure.

Formalization: The extent to which jobs activities and behaviour are standardized and the
means by which the standardization is accomplished.

Centralization: The degree to which decision-making power and control are concentrated.

Vertical differentiation: Hierarchical structure consisting of a vertical dimension of

differentiated levels of authority and responsibility. Differentiation by degrees of authority.

Horizontal differentiation: Differentiation by specialization often referred to as

departmentalization. People with similar abilities working together on specialized tasks. Growth
is a key impetus for horizontal differentiation, but is not the sole one. Environment and
technology may also demand specialization. There are four major forms of departmentalization:

1. -Function: departments are set up in an organization according to the function being

carried out. E.g. manufacturing, finance, marketing, etc. This is the most common form of
departmentation.
2. -Process: people and jobs are grouped together which are needed to implement a certain
process. E.g. departments organized around machines or data processing equipment
3. -Location: segregation by territories, regions, districts or countries. Where location makes
a difference, a rationale exists for departmentalization on this basis.
4. -Product or service: the grouping of jobs and activities that are associated with a specific
product. GM is a prime example with its different divisions.
5. -Client: activities and positions are grouped together in a way that is compatible with the
unique needs of specific clients.

These different types of departmentalization are usually applied in some combination. For
example an organization which has a product or location departmentation, may have functional
units within the product or geographical departments.

Span of control: refers to the number of subordinates a manager supervises. This number
depends on the complexity of the task performed and the amount of subordinate-superior
interaction required. There is no optimal amount. Span of control is reflected in the
organization's height. Flat vs hierarchical. Flat is less centralized. The larger the span of control,
the flatter the organization.

Line and staff: Line refers to the basic person boss relationship or chain of command that
extends from top to bottom of the organization. Staff facilitates the work of the line performing
services for it and providing advice and information in their special areas of competence. Eg.
personnel, marketing. This relates to the view of the organization with its technical core and need
for buffering.
Major Organizational Forms
These various characteristics are combined into four common organizational forms:
Centralized functional: More prevalent in smaller firms. In these organizations,
departmentalization is by function.
Decentralized divisional: Consists of organizational units (divisions) that address a specific
product market under the direction of a manager who has complete strategic and operating
decision-making authority.
Hybrid: These structures are most often found in large multi-product organizations, where some
centralized functions are maintained.
Matrix: Organization according to ad hoc project teams from the different functional units of the
organization.
Sociotechnical Systems: This represents a radical departure from traditional, hierarchical
organizations both structurally and philosophically. The principles of sociotech can be
summarized as follows.

a) The work system, comprised of a set of activities that make up a functioning whole, is the
basic unit, rather than single individual jobs
b) The work group, therefore, becomes central, rather than the individual job holder
c) Work is internally regulated by the group, rather than externally by supervisors. This includes
purchasing, scheduling, hiring and firing, decisions about bonuses and vacations.
d) Workers develop multiple skills to increase the response repertoire of the group. There is
vertical integration of the work process. Workers are paid according to the number of skills
attained. The organization is committed to supporting the education of the worker to acquire new
skills
e) The individual is treated as complimentary to the machine, rather than an extension of it.

5. Explain i)Routing ii)scheduling iii) Despatching iv) role of control charts in

production.(Dec 12, may 15)
ROUTING

 Routing is the planning process, which is undertaken to find the best possible path for
manufacturing a certain product.
 It determines what work will be done on a product and how it will be done. It establishes
the operations, their path and sequence, and the proper class of machines that require
performing specific operations.
 Routing prescribes the flow of work in the plant and it is related to the considerations of
layout, temporary location for raw materials and components and material handling
system.
 The main aim of routing is to determine the best and cheapest Production Planning and
control.
 Routing procedure involves the following different activities:
(1) An analysis of the article to determine what to make and what to buy.
(2) To determine the quality and type of material
(3) Determining the manufacturing operations and their sequence.
(4) A determination of lot sizes
(5) Determination of scrap factors
(6) An analysis of cost of the article.

SCHEDULING
 The next step after routing is scheduling. Scheduling is the allocation of resources
applying the limiting factors of time and cost to perform a collection of tasks.
 It involves the assignment of starting and completion times for the various operations
to be performed.
 Therefore scheduling can bring productivity in shop floor by providing a schedule/
routine for processing a set of jobs.
 Scheduling finds the total time needed for manufacturing of a product. It also finds
the time required in each machines to perform each task.
 The purpose of scheduling is to execute a customer’s order well in time.
 For example, if we order for a car, the manufacturer will estimate the time required
for its production and then will give us the delivery date.
 Scheduling is that phase of production and control, which rates the work in order of
its priority and then provide for its release to the plant at the proper time and in
correct sequence.
 Thus, scheduling is concerned with when the work shall be performed on a product.
Routing and scheduling activities are complementary to each other.
 One cannot route properly without having previously designed schedule and
scheduling is impossible without the knowledge of required routing.
DESPATCHING

 Dispatching is the transition from planning phase to action phase. In this phase, the
worker is ordered to start manufacturing the product. Dispatching involves the actual
granting of permission to proceed according to plans already laid down. In dispatching,
orders are issued in terms of their priority.

The dispatch section of the PPC is responsible for the following task:

(i). Checking the availability of material and then taking appropriate action to have it transferred
from the main stores to the point at which it is needed.
(ii). Ensuring that all production aid is ready when needed and then having them issued to
manufacturing departments.
(iii). Obtaining specific drawings from the drawing office.
(iv). Informing the process section that production is commencing.
(v). At the conclusion of the manufacturing, ensure that all the drawings, layout and tools are
withdrawn and returned to their correct location.
Dispatching is an important step as it translates production plans into actual production.
  Once production has been set in motion, it is necessary to check that it is proceeding
according to the plan.
 Every production programme involves determination of the progress of work, removing
bottlenecks in the flow of work and ensuring that the productive operations are taking
place in accordance with the plans. It spots delays or deviations from the production
plans.
 It helps to reveal defects in routing and scheduling, misunderstanding of orders and
instruction, under loading or overloading of work etc. All problems or deviations are
investigated and remedial measures are undertaken to ensure the completion of work by
the planned date.

GENERALLY PRODUCTION is assumed to progress as expected. But there may be

differences which may arise due to the following reasons:

•(i). Materials may be delivered late or may not be delivered at all.

(ii). Associated departments may have fallen behind in their own production.
(iii). There may be excessive absenteeism on the part of the worker.
(iv). The customer may insist on changing the specification or delivery date.
(v). Machines may break down.
(vi). There may be errors in drawings.
(vii). There may be too many rejections due to poor material quality.

Other things related to production are inspection and corrective actions.

Inspection: This is mainly to ensure the quality of goods. It can be required as effective agency
of production control.
Corrective measures: Corrective action may involve any of those activities of adjusting the route,
rescheduling of work, changing the workloads, repairs and maintenance of machinery or
equipment, control over inventories, poor performance of the employees. Certain personnel
decisions like training, transfer, demotion etc. may have to be taken. Alternative methods may be
suggested to handle peak loads.

6. Define Communication and its elements, types of communication and rules for effective
communication.( June 14,Dec 17)
COMMUNICATION:

It is the art of developing and attaining understanding between people. It is the process of
exchanging information and feelings between 2 or more people.

How can you make communication effective ?

a) Senders of messages must clarify in their minds what they want to communicate.
b) effective communication requires that encoding and decoding be done with symbols that are
familiar to the sender and the receiver of the message.
c) The planning of the communication should not be done in a vacuum.
d) It is important to consider the needs of the receivers of the information.
e) The tone of voice, the choice of language, and the congruency between what is said and how it
is said influence the reactions of the receiver of the message.
f) Communication is complete only when the message is understood by the receiver. Therefore
feedback is essential.
g) Communication is vital for creating an environment in which people are motivated to work
toward the goals of the enterprise while they achieve their personal aims.
h) Effective communicating is the responsibility not only the sender but also of the receiver of
the information.

Basics of Communication:

1. Communication is the process of transferring signals/messages between a sender and a

receiver through various methods (written words, nonverbal cues, spoken words). It is also the
mechanism we use to establish and modify relationships.
2. Have courage to say what you think. Be confident in knowing that you can make
worthwhile contributions to conversation. Take time each day to be aware of your opinions and
feelings so you can adequately convey them to others. Individuals who are hesitant to speak
because they do not feel their input would be worthwhile need not fear. What is important or
worthwhile to one person may not be to another and may be more so to someone else.
3. Practice. Developing advanced communication skills begins with simple interactions.
Communication skills can be practiced every day in settings that range from the social to the
professional. New skills take time to refine, but each time you use your communication skills,
you open yourself to opportunities and future partnerships.
4. Make eye contact. Whether you are speaking or listening, looking into the eyes of the
person with whom you are conversing can make the interaction more successful. Eye contact
conveys interest and encourages your partner to be interested in you in return.
5. Use gestures. These include gestures with your hands and face. Make your whole body
talk. Use smaller gestures for individuals and small groups. The gestures should get larger as the
group that one is addressing increases in size.
6. Don’t send mixed messages. Make your words, gestures, facial expressions and tone
match. Disciplining someone while smiling sends a mixed message and is therefore ineffective.
If you have to deliver a negative message, make your words, facial expressions, and tone match
the message.
7. Be aware of what your body is saying. Body language can say so much more than a
mouthful of words. An open stance with arms relaxed at your sides tells anyone around you that
you are approachable and open to hearing what they have to say.
a. Arms crossed and shoulders hunched, on the other hand, suggest disinterest in
conversation or unwillingness to communicate. Often, communication can be stopped before it
starts by body language that tells people you don't want to talk.
b. Appropriate posture and an approachable stance can make even difficult conversations
flow more smoothly.
8. Manifest constructive attitudes and beliefs. The attitudes you bring to communication
will have a huge impact on the way you compose yourself and interact with others. Choose to be
honest, patient, optimistic, sincere, respectful, and accepting of others. Be sensitive to other
people's feelings, and believe in others' competence.
9. Develop effective listening skills: Not only should one be able to speak effectively, one
must listen to the other person's words and engage in communication on what the other person is
speaking about. Avoid the impulse to listen only for the end of their sentence so that you can
blurt out the ideas or memories your mind while the other person is speaking.
10. Enunciate your words. Speak clearly and don’t mumble. If people are always asking you
to repeat yourself, try to do a better job of articulating yourself in a better manner.
11. Pronounce your words correctly. People will judge your competency through your
vocabulary. If you aren’t sure of how to say a word, don’t use it.
12. Use the right words. If you’re not sure of the meaning of a word, don’t use it. Grab a
dictionary and start a daily habit of learning one new word per day. Use it sometime in your
conversations during the day.
13. Slow your speech down. People will perceive you as nervous and unsure of yourself if
you talk fast. However, be careful not to slow down to the point where people begin to finish
your sentences just to help you finish.
14. Develop your voice – A high or whiny voice is not perceived to be one of authority. In
fact, a high and soft voice can make you sound like prey to an aggressive co-worker or make
others not take you seriously. Begin doing exercises to lower the pitch of your voice. Try
singing, but do it an octave lower on all your favorite songs. Practice this and, after a period of
time, your voice will begin to lower.
15. Animate your voice. Avoid a monotone and use dynamics. Your pitch should raise and
lower periodically. Radio DJ's are usually a good example of this.
16. Use appropriate volume. Use a volume that is appropriate for the setting. Speak more
softly when you are alone and close. Speak louder when you are speaking to larger groups or
across larger spaces. Barriers of Communication:

1) Lack of planning
2) Un clarified assumptions
3) Semantic distortion
4) Poorly expressed messages
5) Communication barriers in the International Environment
6) Loss by transmission and poor retention
7) Poor listening and premature evaluation
8) Impersonal communication
9) Distrust, threat and fear.
7. Use a Production possibility factor to describe the idea of Efficiency(May 18)
 Planning
 Staffing
 Controlling
 Directing
 Coordination
  Communication
 Cost and cost control
 Inventory
 Forecasting
 Sales Forecsating and organisation

8.What are the factors affecting investment and production control.(June 13). List out the
elements of cost and in detail(June 14, Dec 14, Dec 15)

COSTS AND COST CONTROL:

 Production control is the process of planning production in advance of operations,

establishing the exact route of each individual item part or assembly, setting, starting and
finishing for each important item, assembly or the finishing production and releasing the
necessary orders as well as initiating the necessary follow-up to have the smooth function
of the enterprise.
 The production control is of complicated nature in small industries. The production
planning and control department can function at its best in small scale unit only when the
work manager, the purchase manager, the personnel manager and the financial controller
assist in planning production activities.
 The production controller directly reports to the works manager but in small scale unit,
all the three functions namely material control, planning and control are often performed
by the entrepreneur himself.
 Production control starts with dispatching and ends up with corrective actions.
 Production technique is an updating and revising procedure, through which the
requirements of implementation, the labour assignments, the machine assignments, the
job priorities, the production routes etc may be revised.
 It is a correcting mechanism which goes on throughout the implementation process of the
already drawn out production plan and schedule.
 In order to perform the function of PPC properly, managers require some techniques to
control any deviations.

Following are the some of the technical tools used by the managers:

1. Control Charts and Graphs: Gantt chart is an effective control chart used to gauge the planned
and actual progress. Again a simple graph will be highly useful to compare actual progress with
the scheduled progress.

2. Control Boards: A control board is a device for automatically indicating the progress of the
work. Control boards are generally used for repetitive productions.

3. Communication systems: Quick exchange of information and instructions is highly useful for
controlling productions.
4. Quantitative techniques: With the help of quantitative techniques like, PERT, CPM or linear
programming, managers can control production.

Following are the advantages of using PPC in any plant:

(i). PPC forecasts sales orders and makes sales order more economical in production.
(ii). It co-ordinates the operations of several departments.
(iii). It ensures better service to customers by delivering quality goods within the specified time
period.
(iv). Reduces production costs through orderly scheduling of work activities and reducing
wastages.
(v). Reduces employee idle time.
(vi). Ensures a better control of material and contributes to efficient buying.

14. Explain the functions of manager with suitable examples (Dec 15)

9.In detail the classification of inventory and give suitable examples. ii) Identify the factors
affecting inventory and explain.(June 14, Dec17)
INVENTORY AND INVENTORY CONTROL
The term inventory is used to indicate various items of stores kept in stock in order to meet
future demands. In any organization, there may be following four types of inventory:
(a) Raw materials & parts-- These may include all raw materials, components and assemblies
used in the manufacture of a product;
(b) Consumables & Spares -- These may include materials required for maintenance and day-to-
day operation;
(c) Work in progress -- These are items under various stages of production not yet converted as
finished goods;
(d) Finished Products -- Finished goods not yet sold or put into use.
Need for Inventory: (i). The time to procure regular raw materials may be longer due to various
reasons and it may not be possible to procure these materials when instantaneously required. It
is, therefore, necessary to keep stocks of such items.
(ii). Even for those items which are readily available in the market, it may not be economical to
buy these items every time as buying in piecemeal involves additional costs to the
administration. Therefore, we may find it cheaper to buy in bulk and to stock some of these items
and supply our indenters through such stocks.
(iii).There is always some fluctuations in demand as well as fluctuations in the time within which
material can be procured. It is therefore, not possible to forecast our requirements exactly and
time the purchases in such a way so that the materials will arrive just when they are physically
required. It, therefore, becomes necessary to maintain stocks of these items.
BASIC PROBLEMS OF INVENTORY MANAGEMENT :
 From the above discussions, it will be seen that on the one hand inventories are idle and
valuable resource i.e. capital remains locked up in the inventories which can be used for
other productive purposes but on the other hand, they are desirable to satisfy
manufacturing, maintenance or operation requirement of the organization.
 Hence basic problem of inventory management is to optimize the stock levels of different
materials so that their stocks are maintained at optimum levels without affecting the
production or day-to-day maintenance. Three basic problems associated with this
optimization of stocks are ;
(a) When to initiate purchase of the materials
(b) How much quantities are to be purchased at a time and
(c) What should be the stock levels of different items.

Various Costs Related To Inventory Management:

(i). Costs Of Ordering Or Costs Of Acquisition: For a large organization, it becomes necessary to
have a separate purchase office to purchase thousands of items.
 The demands received are technically scrutinized and for purchasing them, inquiries are
issued, tenders are received and evaluated, orders are progressed, materials are received
and inspected and lastly, the payments are arranged.
 All these mean additional costs to the organization. All these costs together constitute
what is called cost of ordering or cost of acquisition.
(ii). Inventory Carrying Costs: The very fact that the items are required to be kept in stock means
additional expenditure to the organization. The different elements of costs involved in holding
inventory are as follows:
(a) Interest on capital / cost of capital / opportunity costs: When materials are kept in stock
money representing the value of materials is blocked.
(b) Obsolescence and depreciation: The costs because of obsolescence and depreciation are very
important even though they are very difficult to assess.
 (c) The cost of storage, handling and stock verification: There are additional costs because of the
clerical work involved in handling of materials in the ward, in stock verification, in preservation
of materials as well as the costs because of various equipments and facilities created for the
purpose of materials.
(d) Insurance Costs: Materials in stocks are either insured against theft, fire etc., or we may have
to employ watch & ward organization and also fire fighting organizations. Cost of this may also
be 1 to 2%. The average inventory carrying costs can, therefore, be as follows:
Interest/costs of capital/opportunity cost 15 to 25%
Obsolescence and depreciation cost 2 to 5%
Storage, handling etc. 3 to 5%
Insurance costs 1 to 2%
Total 21 to 37%

Shortage Or Stock Out Costs: Whenever an item is out of stock and as such cannot be supplied,
it means that some work or the other is delayed and this, in turn, leads to financial loss associated
with such stoppage or delay of work.
Systems Costs: These are the costs which are associated with the nature of the control systems
selected.
INVENTORY MANAGEMENT - CONSTRAINS & PROBLEMS :

Problems of inventory management vary from organization to organization depending upon

various variables; some of them are as under:
(a) Whether the demand for the goods is one time (static) or of repetitive nature (dynamic).
(b) In case of demands of dynamic (repetitive) items, whether future requirements can be
assessed with certainty or uncertainty or under risk (probability). Also, whether the demand is
fixed over a time or is variable.
(c) Whether the material is manufactured in house or is to be purchased through outside
suppliers.
(d) Whether the lead time during which material can be arranged is fixed or is variable.

Economic Order Quantity:

Depending upon various variables, different inventory models have been developed.
Different models take different costs into account.
One of the popular model developed for items of repetitive nature (dynamic), future
demands for which can be projected with certainty is Economic Order Quantity (EOQ) model.
This model can be developed mathematically by differentiating total cost of inventory (ordering
cost + inventory carrying cost) with respect to Quantity. The formula so derived is given below:

Economic Order Quantity (EOQ) = Where

R = Annual Consumption Quantity

C = Cost of placing one order
F = Annual inventory carrying cost represented as fraction
P = Unit Cost (Rate/Unit) of the material
H=

INVENTORY CONTROL:

 Inventory Control is the art and science of maintaining the stock level of a given group of
items, incurring the least total cost, consistent with other relevant targets and objectives
set by the management.
 Generally, this is measured in terms of service level which is measured in terms of
percentage of compliance of demands (requisitions for materials) of user departments and
Inventory Turnover ratio as explained above.
 Inventory Control Techniques : Various techniques employed for controlling stock levels
are ;
(a) Selective Management
(b) Management by exception
(c) Designing of recoupments policies
(d) Rationalization
(e) Value Analysis
(f) Computerization
(g)A-B-C Analysis
This analysis is done on the computer as explained below:
(a) First of all annual issue values of all the items which were issued from all the depots are
added together to find total issues (in rupees) of the Railway;
(b) Then all the items are sorted in descending sequence of their issue value on the entire
Railway (i.e. after adding issues of individual depots);
(c) Then we go on counting the items adding issue value of the item to a 'cumulative issue value'
counter. When the value in this counter represents 70% of total issue- value worked out in step
(a), after reading a particular item, all the items from top to this item are classified as 'A' category
items;
(d) The reading of items is further continued when after reading a particular item and adding its
issue value to 'cumulative issue value' counter, value in the counter is equal to 90% of total
issues, we mark all items from item next to last A category item to this item as B category item;
(e) All remaining items are classified as C category items.
V-E-D Classification: A-B-C Classification is on the basis of consumption value of an item and
does not give any importance to the criticality of the item and therefore, only A-B-C
Classification is not adequate. Classification done on the basis of criticality of the item is known
as V-E-D, where the items are classified as Vital, Essential and Desirable.
Vital items are those items which are very critical for the operations and do not permit
any corrective time i.e. they cannot be procured off the shelf if they are not available.
Essential items are comparatively less vital and work without them cannot be managed
for few days.
 UNIT II
1. Define Depreciation and its methods.(Dec 13, June 13)
2. i) Discuss in detail about the various capital requirements in process plant. ii) Discuss in detail
about working capital (Dec 11, Dec 13, may 15, Dec 17)iii How does the equipment cost
influence the capital requirement of the process plant.(May 15)
3. The original value of the equipment is 22000/ its salvage value is Rs 2000/. At the end of a
useful life is 10 Years. Determine the book value of the tank at the end of the 5 year by i)st.line
method.
ii)declining balance method.
iii)Double declining balance method
iii) Sum years digit methods.(Dec 12, May 15, Dec 17 June 14, Dec 11)
4. A process plant has an initial investment of Rs 500000/.The estimated salvage value is Rs
200000/. It has the life of 8 years. Estimate the book value of the plant after 5 years by
i)Straight.line method.
ii)Declining balance method.
iii) Sinking fund method with the sinking fund intrest rate of 10%(Dec11, Dec15,Dec14)

Given: Vs= $2000 a= 5 years

V=$22000 service life = 10 years= N
a) St. line method
V-Vs
Depreciation of=
N
22000-2000
of=
10
Depreciation of = $ 2000 / year
Anotization cost=20000$
Asset value
Va=V-ad
Va=22000-2000(s)
Va=$12000
b) Declining balance method.
 1
N
V 
F  1  s 
V 
1
 2000 10
=1-  
 22000 
F  0.2132
Time value at the end of 5years
Va=V(1-f)a

=22000(1-0.2132)5
Va=$6633.52(excluding depreciation)
C) Depreciation cost
Vf(1-F)a-1
=22000x0.2132(1-0.2132)

D=$1797.49
Time value of the end of 5 year.
=Va-d
=6633.52
Va=$4836.03
5. Discuss the following with examples.
i)Cost Indices. ii)Capital requirement for process plants(Dec 11)
6. Interms of Plant location, what are the important factors that should be considered and which
factors become even more important as the size of the plant is increased?(Dec 18)
7. Determine the life Period of the following. The installed value of a machine is Rs 1,15, 000/-.
The scrap value of the machine is Rs 15000/- after its useful life periods. The Yearly cost due to
depreciation of Rs 5,42780/-. The depreciation fund will be accumulated at an annual interest
rate of 7-5%(Dec 15)
( or)
8. An equipment cost is $ 20,000 the service life of the equipment is estimated by 5 years
salvage value of equipment after service life is $ 2000. Find out the depreciation nest for
each year using sum of the year digit method.

5
Depreciation cost for I year=  20000  2000  $6000
15
14
Depreciation cost for II year= 18000  $4800
15
3
Depreciation cost for IIIrd year= 18000  $3600
15
2
Depreciation cost for IVth year= 18000  $2400
15
1
Depreciation cost for Vth year= 18000  $1200
15

Depreciation cost at the end of 5 year is Rs.18000

 Depreciation cost after I year=$6000
Depreciation cost after II year=$10800

Depreciation cost after IIIrd year  $14400

Depreciation cost after IVth year  $16800
Depreciation cost after Vth year  $18000

Year Depreciation Depreciation Time value

cost cost (Book value)

1. 6000 6000 14000

2. 4800 10800 9200

3. 3600 14400 5600

4. 2400 16800 3200

5. 1200 18000 2000

9. An equipment costing Rs. 60,000 has a salvage value of Rs. 3000 and service life of
12years and interest rate is 20% calculate 1).depreciation cost for 6years 2) the Book value
of the equipment at the end of 7 years of service life using.
* Straight line method * DDB method.

Given data

V= Rs. 60,000, Vs= Es. 3000 N= 12 years I= 2%

a) Straight line method.

V  Vs
d  Rs.4750 / yr.
N

d for 6 year =Rs. 28500(ie4750 x 6)

Book value at the end of 7 year

Va = v-ad

Va-60000-28500

Va-Rs31500

‘d’ for 7 year= Rs. 4750 x7 = Rs. 33250

Book value at the end of 7 years.

Va=v-d

Va=60000-33250=Rs.26750

b) Double Declining Balance method.

 d
Depreciation rate. F 
v

4750

6000
F  0.0791

For double declining balance method

F= 2 x 0.0791= 0.158 = 15.8%

Depreciation cost for I year=VF

=0.158  60000=Rs.9480
Depreciation cost for II year=Rs. 7982.16
Depreciation cost for IIIrd year=Rs. 6720.9
Depreciation cost for IVth year=Rs. 5659.06
Depreciation cost for Vth year=Rs. 4764.93
Depreciation cost for VIth year=Rs. 4012.07
Depreciation cost for VIIth year=Rs. 3378.16

Total depreciation cost at the end of 7 year = Rs. 41997.28

Book value at the end of the 7 year

=(60000-41997.28)

Rs. = 18002.72

10. Repeat the previous problem for sum of year digit method.
12
Depreciation cost for I year= 60000  3000  Rs.8769.23
78
11
Depreciation cost for II year= 57000  Rs.8038.46
78
10
Depreciation cost for IIIrd year= 57000  Rs.7307.69
78
9
Depreciation cost for IVth year= 57000  Rs.6576.92
78
8
Depreciation cost for Vth year= 57000  Rs.5846.15
78
7
Depreciation cost for VIth year= 57000  Rs.5115.38
78
6
Depreciation cost for VIIth year= 57000  Rs.4384.61
78
 Depreciation Depreciation Book value at
Year
cost for cost at end the end of

1 8769.23 8769.23 51230.77

2 8038.46 16807.69 43192.31

3 7307.69 24115.38 35884.6

4 6576.92 30692.3 29307.7

5 5846.15 36538.45 23461.55

6 5115.38 41653.83 18346.17

7 4384.61 46038.44 13961.56

11. If money is considered to be 10%howmany years would be required for automatic

packing machine costing Rs. 12000 will no salvage value To pay for itself if it saved Rs.
2400 a year in a labour cost. When used for packing cement for shipment.

Given:

P=Rs. 12000

I=10%

R=2400

1  PI   log 1  12000  0.1 

 log   
N  R    2400 
log(1  I ) log(1  0)
 log 1  0.5
N
log 1.1
0.3010
N N= 7. 288 years
0.0413

12. A pump Installation costing Rs. 3000 with a life of 3yearsand having no salvage value
requires. Rs. 200a year for maintenance and operation, money worth is 8% what is present
worth of service rendered by the pump.
Given:
Installation cost = Rs. 3000

Service life, Vs=0

Selvage Value, Vs=0

Maintenance and operation test =Rs.200/yr.

Money is worth8% = I
a) Present worth of capital invested = Rs

Pr esent worth of annual   1  I  N  1 

P  R N 
expenditure   I 1  I  
 1.08 3  1 
p=200  3
 0.08 1.08  

P=515.42Rs.

Total present worth = 3000+515.42

Rs. =3515.42

200
Present worth for Ist year expenditure=
1
1+0.08 
200
Present worth for IInd year expenditure=  Rs.171.467 Total present worth
2
1+0.08 
200
Present worth for IIIrd year expenditure=  Rs.158.766
3
1+0.08 
=3000+(185+171.467+158.766)

Rs.3515.418

13.What interest is earned by an investment of Rs. 100000 for a distillation column which
will reduce uniform payment by Rs.16800, a year. The column will have an estimate life of
8 years and salvage value of Rs.8000
Given:

P=Rs. 100000 R= Rs=16800 N=8years L=Rs.8000

 1  I  N I 
R   P  L  N  +LI
 1  I   1
 1  I 8 I 
16800  100000  8000   8   8000 I
 1  I   1 
By trial end error method

I=0.1

 1.18  0.1 
R.H .S 92000  8   800  rS .18044.8  C .H .S
 1.1  1 

I  0.09 R.H.S=17342.04=17692.19  C.H .S

I  0.095; R.H.S=17692.19  C.H .S
I  0.07; R.H.S=Rs.15967.03  C.H .S
I  0.083; R.H.S=Rs.16856.08  C.H .S
I  0.082; R.H.S=16787.07  C.H .S

Interest rate I=8.2%

14. In order to make if worth wile to purchase a new piece of equipment, the annual
depreciation test shouldn’t exceed Rs. 3000 at any time. The original cost of equipment is
Rs. 30000 and has no salvage value. Determine the service life necessary if the equipment is
depreciated by

*SYDM *) SLM

SLM:

V=Rs. 3000Vs=0 d= Rs3000

V  VS 30000
d  S N=
n 3000
N  10 years

*SOYDM

N
A Depreciation west for N Year=  30000 
N  N+1
N  60000 
3000  Ñ
 N  N  1
3000 N  3000  60000
3000 N  60000  3000
57000
N
3000
N  19 years.

15. A reactor which will contain corrosive fluids has been designed. If the reactor is made of
mild stee, the initial installed cost will be Rs 5Lakhs and useful life periods is 5 Years. Since SS
is highly resistant to the corrosive action of the alternative mild steel of Installed cost is RS
15Lakhs . the scrap value at the end of the useful life would be zero for either type of reactor and
both could be replaced at accost equal to original prices. On the basis of equal capitalized costs
for both types of reactors, what should be the useful period for the SS reactors if money is worth
6% compounded annually?(June 14)
Pharmaceutical drugs have an inelastic demand and computers have an elastic demand. Suppose
that technological advance doubles the supply of the both products(quantity supplied at each
price is twice it was)
i)What happen to the equilibrium price and quantity in each market?
ii) Which product experiences a larger change in price?(Dec 18)
(or)

16.A concern has a total income of Rs. 10 lakh per annually and all expresses except
depreciation west of Rest. 6 lakhs per annual.

At the states of Pst year, the composite accountant of all depreciate show a value of Rs. 85000 and
overall service life of 20 years salvage value Rs. 50000(30%of all the profit must be paid as income
taxes)what would be the reduction in the tax charges for theist year of operation if SOYDM were
cured in stead of straight line depreciation.

Given:

Total income = Rs. 1000000

Expenses= Rs. 600000

Profit = income – Expenses

=1000000=60000

Rs. = 400000.

BYSLM

V= Rs.850000;vs=Rs. 50000

N=20 years

V  VS 850000-50000
d 
n 20
 Rs.40000 / yr.
Netprofit =400000-40000
30
Rs. 360000  Tax = Rs. 108000
100
BYSODYM

-20
D. cost for Istyear (850000  5000)
210
=Rs. 76190.47
Net profit = 400000-76190.47 Rs. 323809.53

323809.53  30
Tax 
100
Rs.57142.859

Reduction in tax=108000-97142.859

Rs.=10857.141

17. A pump Installation testing Rs. 20000 with a life of 5 years having No salvage value
requires Rs. 500 for annual maintenance expenses money is worth 10%
1. What is the present worth of service rendered by pump
2. What is the future worth of 3 year service rendered by pump.
3. What is the capitalized cost of this operation.

Given:

P=Rs. 20000 ; n=5 years R= Rs.500 I=10%

Present worth of capital invested = Rs. 20000 present worth of annual maintenance expenses.

 1  i  n  1 
P  R n 
 1  i  
 1.15  1 
 
P  P  Rs.1895.39
5
  0.11.1 
Total Present worth 
  20000  1895.39
of service rendered bypump 

n = 3 years

Future worth for capital Invested

S =P(1+I)n
S = 20000 (1.1)3  Rs.26620
Future worth for annual maintenance

 1  1n  1
S  R 
i
 
 1.13  1 
S  500    S = Rs. 1665
 0.1 
 
Future worth of 3 years 
  26620 + 1665 =
service reduced by pump 
= Rs 28275

Capitalised cost for equipment

Cv + (Cv-L)
k
(1  i)n  1
20000
k  20000  5
1.1  1
k  Rs.52759.49
present worth of annual maintenance cost
P=Rs.1895.39
capitalised cost for the case of maintenance

k= 1895.39+
1895.39 
5
1.1  1
k  Rs.5000
Totalcapitalisd cos t Rs.57759.49

18. a. An equipment costing Rs.2lakhs have a life of 10years and a salvage value of Rs.25,000 permit
elimination of one operator per shift of 8hrs due to automizing of operation at a labour cost of Rs.5
per hour and 300days of operation per year. What is earned.

Given : P=Rs.200000; n=10yrs l=Rs.25000

One operator is eliminated per shift of 8hrs.

three operators are eliminated per day. Since the operation during is 300 day

year

No. of operators eliminated per year = 900

Labour cost / hr =Rs.5

Labour cost / day =Rs.120

Labour cost / yr =300 x 120

Labour cost that can be saved per year Rs.36000

 1  i n i 
R  P  L   n   Li
 1  i   1
 1  i10  i  
36000  200000  25000  10   25000i
 1  i   1 
i  0.1, 36000= 30980  L.H.S
i = 0.133 = 36000 = 35963 = L.H.S
i = 13.3%

19.A heat energy exchanges needs replacement year at a cost of Rs.5000 with interest rate at 12%
calculate the present worth of capital needed for service of 5years.

Given: R = Rs.5000; i= 12% ; n = 5years

Present worth of capital needed

 1  i n  1
P  R n 
 i 1  i 
 1.12 5  1 
P  5000  5 
 0.12 1.12  
P  Rs.18023.88

20. A material testing was purchased for Rs.20000 and was to be used for 5 year with an expected
salvage value Rs.500. calculate the annual depreciation charge and annual book value obtained by
using

 SLM  SOY DM

 SLM Depreciation cost d = V-VS

d = 20000 – 500

d = Rs.3900/yr

Since in SLM, equal amount is charged for every year, Depreciation charge (annual) Rs.3900.

Book Value = 20000 – 3900 = Rs.16100

 SOY DM

D.Cost for 1st year = 5/15 (20000-500) = Rs.6500

D.Cost for 2nd year = 4/15(20000-500) = Rs.5200

D.Cost for 3rd year = 3/15 (20000-500) = Rs.3900

D.Cost for 4th year = 2/15 (20000-500) = Rs.2600

D.Cost for 5th year =20000 – 500 = Rs.1300

15

Year D cost for the D cost for D cost at end Book value
year year of year

1 3900 6500 6500 13500

2 3900 5200 11700 8300

3 3900 3900 15600 4400

4 3900 2600 18200 1800

5 3900 1300 19500 500

21. It is decided to have a specially insulated floor at cost of Rs.5lakh in an industry. It is sufficient
if this floor is maintained by spending Rs.10000 annually. The floor is expected to have a very long
life of 10years.

CV   CV  L 
K n
1  i 1

K  500000 
 50000  0  ;K  Rs813726.97
10
1.1  1
present worth for annual maintenance cost
 1+i n  1
P=R  n 
 i 1  i 
 1.110  1
P  10000  10 
 0.11.1 
P  Rs.61445.67

Capitalised cost for annual maintenance cost

K = 61445.67 + (61445.67)

(1.1)10 – 1

K = Rs.100000 Total capitalized cost = Rs.913727.96

 Unit III
PART B
1. Discuss the estimation of Project Profitability and sensitivity analysis using examples. May
18 June 16 June13 Dec 13. Write a brief note on the following
i)Effect of inflation on profitability analysis.
ii) Pay back period. Dec14
iii) Net return Dec 15 Dec14
iv) Discounted cash flow rate of return. May 18 Dec 17
v) Present value Dec 15 Dec 12
vi) Profitability index. Dec14
vii) Book value and Operating time and rate of production. Dec14
 Total profit alone cannot be used as the deciding profitability factor in determining if an
investment should be made.
 The profit goal of a company is to maximize income above the cost of the capital which
must be invested to generate the income. If the goal were merely to maximize profits, any
investment would be accepted which would give a profit, no matter how low the return or
how great the cost.
 The rate of return, rather than the total amount of profit, is the important profitability
factor in determining if the investment should be made.
 The basic aim of a profitability analysis is to give a measure of the attractiveness of the
project for comparison to other possible courses of action. It is, therefore, very important
to consider the exact purpose of a profitability analysis before the standard reference or
base case is chosen.
Methods for Profitability Evaluation
Classified into two types:
Traditional techniques:
1. Payback period,
2. average rate of return
Discounting method:
1. Net present value,
2. profitability index
3. Internal rate of return.
1. Payback period: Measures the number of years required for the cash inflow to payback to
original outlay required in an investment proposal.
PBP= Cash outflow/ Annual cash inflow
Criteria: Lesser payback period better the project
2. Average rate of return (ARR): It is based on accounting information rather than cash flow.
Estimated in two different methods:
(i). On original investment:
(Average annual profits after depreciation and tax/ original invest) x 100
(ii). On average investment:
(Average annual profits after depreciation and tax/ average investment) x 100
Average investment = ((cost of project – scrap)/2) + working capital + scrap
 Criteria: higher the ARR, better the project.
3.Net present value (NPV): summation of the present value of cash proceeds(CFAT) minus
present values of cash outflows. (NPV= PV of cash inflow – PV of cash outflow
It is the difference between discounted cash inflows and initial investment.
Criteria: NPV > zero, accept the project, NPV < zero, reject the project
4. Profitability Index: Profitability index is the ratio between the present value of cash inflows
and the present value of cash outflows. It is used to indicate the profitability at a glance. If the
profitability index is less than one, the proposal has to be rejected, if it is equal to one the project
is just break even, if it is higher than one, then the project is profitable. (PI) measures the present
value of returns per rupee invested = PV of cash inflows/ PV cash outflows
Criteria: PI > 1 , accept the project PI < 1, reject the project. 5. Internal rate of returns: rate of
return that a project earns. It is defined as the discount rate which equates the aggregate PV of
the net cash inflow with the aggregate present value of cash out flows of a project. Or it is that
rate which gives the project NPV of zero. Estimated on trial and error method. F=I/C, where I is
original investment and C is the cash inflow, to identify the interest rate range and find out the
exact IRR. Criteria:
IRR > cut-off rate, accept the project
IRR < cut-off rate , reject the project.
Higher the IRR, better the project.

2.Write notes on Forecasting sales, inflation and its impact. May 18 Dec 17 May 15 Dec14
Dec 13 Dec 12
INFLATION:
 Inflation is defined as a general rise in prices of all commodities. It is the overall rise in
the prices of all the goods and services manufactured and consumed within the territory
of a nation.
 When we say that the monthly rate of Inflation is 12%, what it means is that on an
average, the prices of all goods and services have increased by 12% in the period of last
one month.
 Types of Inflation on Rising Prices Types of inflation on the basis of rising prices or rate
of inflation:-
1. Creeping Inflation : When prices are gently rising, it is referred as Creeping Inflation. It is
the mildest form of inflation and also known as a Mild Inflation or Low Inflation. When prices
rise by not more than (upto) 3% per annum (year), it is called Creeping Inflation.
2. Chronic Inflation : If creeping inflation persist (continues to increase) for a longer period of
time then it is often called as Chronic or Secular Inflation.
3. Walking Inflation : When the rate of rising prices is more than the Creeping Inflation, it is
known as Walking Inflation. When prices rise by more than 3% but less than 10% per annum (i.e
between 3% and 10% per annum), it is called as Walking Inflation.
4. Running Inflation : A rapid acceleration in the rate of rising prices is referred as Running
Inflation. When prices rise by more than 10% per annum, running inflation occurs. Though
economists have not suggested a fixed range for measuring running inflation, we may consider
price rise between 10% to 20% per annum (double digit inflation rate) as a running inflation.
5. Galloping Inflation : According to Prof. Samuelson, if prices rise by double or triple digit
inflation rates like 30% or 400% or 999% per annum, then the situation can be termed as
Galloping Inflation.
6. Hyperinflation : Hyperinflation refers to a situation where the prices rise at an alarming high
rate. The prices rise so fast that it becomes very difficult to measure its magnitude. However, in
quantitative terms, when prices rise above 1000% per annum (quadruple or four digit inflation
rate), it is termed as Hyperinflation.
Causes of inflation:
Changes in money supply
Disposable income
Business and consumer expenditure
Foreign demand
Control of inflation situation
Monetary measures: bank rate, open market, curbs on unproductive lending
Fiscal measures: taxation , public borrowing, deficit spending
Direct measures: price control, rationing
Measures of Inflation:
In India, Inflation is measured using WPI (Wholesale Price Index). It is very tedious to track
each and every commodity and calculate its price rise. Instead of that an Index of several goods
and services is prepared. India's WPI is a weighted-index of 435 commodities. It means price-
rise of all commodities will not be treated equally. The price-rise of rice will have more weight-
age than price-rise of a Maruti-car.
This phenomenon is called Cost-Push Inflation.
Demand-Pull Inflation is another type of inflation. In this case, the cost of factors of production
remains same. However, due to increase in the demand of the commodity by consumers in the
market relative to its supply, the owner will naturally increase the prices. In this case, demand
has increased, but supply has remined constant
Liquidity: The term Liquidity is usually used to identify hard cash. In fact Liquidity just means
money in any form. Liquidity is also referred to the ability and ease with which an asset could be
converted to money.
Remedial Measures to control Inflation: In India, the Ministry of Finance and the RBI
(Reserve Bank of India) always strive to control inflation. They control inflation by directly
affecting the demand pull inflation by changing the amount of liquidity circulating in the
economy. The RBI (the Central Bank of India) can change the liquidity by its various tools viz.
CRR, Bank-Rate (REPO and Reverse-REPO), SLR, etc. CRR (Cash Reserve Ratio) is the
proportion of amount which each commercial bank has to maintain in the form of hard cash. All
commercial banks accept deposits from individuals and lend it to borrowers at a higher interest
rate.
Types of Inflation on Causes
Types of inflation on the basis of different causes:-
1. Deficit Inflation : Deficit inflation takes place due to deficit financing.
2. Credit Inflation : Credit inflation takes place due to excessive bank credit or money supply in
the economy.
3. Scarcity Inflation : Scarcity inflation occurs due to hoarding. Hoarding is an excess
accumulation of basic commodities by unscrupulous traders and black marketers.
4. Profit Inflation : When entrepreneurs are interested in boosting their profit margins, prices
rise.
5. Pricing Power Inflation : It is often referred as Administered Price inflation. It occurs when
industries and business houses increase the price of their goods and services with an objective to
boost their profit margins.
6. Tax Inflation : Due to rise in indirect taxes, sellers charge high price to the consumers.
7. Wage Inflation : If the rise in wages in not accompanied by a rise in output, prices rise.
8. Build-In Inflation : Vicious cycle of Build-in inflation is induced by adaptive expectations of
workers or employees who try to keep their wages or salaries high in anticipation of inflation.
9. Development Inflation : During the process of development of economy, incomes increases,
causing an increase in demand and rise in prices.
10. Fiscal Inflation : It occurs due to excess government expenditure or spending when there is
a budget deficit.
11. Population Inflation : Prices rise due to a rapid increase in population.
12. Foreign Trade Induced Inflation : It is divided into two categories, viz., (a) Export-Boom
Inflation, and (b) Import Price-Hike Inflation.
13. Export-Boom Inflation : Considerable increase in exports may cause a shortage at home
(within exporting country) and results in price rise (within exporting country). This is known as
Export-Boom Inflation.
14. Import Price-Hike Inflation : If a country imports goods from a foreign country, and the
prices of imported goods increases due to inflation abroad, then the prices of domestic products
using imported goods also rises.
15. Sectoral Inflation : It occurs when there is a rise in the prices of goods and services
produced by certain sector of the industries.
16. Demand-Pull Inflation : Inflation which arises due to various factors like rising income,
exploding population, etc., leads to aggregate demand and exceeds aggregate supply, and tends
to raise prices of goods and services. This is known as Demand-Pull or Excess Demand Inflation.
17. Cost-Push Inflation : When prices rise due to growing cost of production of goods and
ervices, it is known as Cost-Push (Supply-side) Inflation. For e.g. If wages of workers are raised
then the unit cost of production also increases. As a result, the prices of end-products or end-
services being produced and supplied are consequently hiked.
3.Explain the various investment appraisal methods with suitable examples. Dec 17 June 14
June13 . List out the factors to be considered when alternate investments and replacements
with a case study. Alternative Investments June 16 Dec 13
 In industrial operations, it is often possible to produce equivalent products in different ways.
Although the physical results may be approximately the same, the capital required and the
expenses involved can vary considerably depending on the particular method chosen.
 Similarly, alternative methods involving varying capital and expenses can often be used to carry
out other types of business ventures. It may be necessary, therefore, not only to decide if a given
business venture would be profitable, but also to decide which of several possible methods would
be the most desirable.
 The final decision as to the best among alternative investments is simplified if it is recognized
that each dollar ofadditional investment should yield an adequate rate of return.
  In practical situations, there are usually a limited number of choices, and the alternatives must be
compared on the basis of incremental increases in the necessary capital investment.
 A general rule for making comparisons of alternative investments can be stated as follows: The
minimum investment which will give the necessary functional results and the required rate of
return should always be accepted unless there is a specific reason for accepting an alternative.
Replacements

The term “replacement,” as used in this chapter, refers to a special type of alternative in which
facilities are currently in existence and it may be desirable to replace these facilities with
different ones.
 Although intangible factors may have a strong influence on decisions relative to
replacements, the design engineer must understand the tangible economic implications
when a recommendation is made as to whether or not existing equipment or facilities
should be replaced.
 The reasons for making replacements can be divided into two general classes, as follows:
An existing property must be replaced or changed in order to continue operation and
meet the required demands for service or production. Some examples of reasons for this
type of necessary replacement are: a. The property is worn out and can give no further
useful service.
 The property does not have sufficient capacity to meet the demand placed upon it.
 Operation of the property is no longer economically feasible because changes in design
or product requirements have caused the property to become obsolete.
 An existing property is capable of yielding the necessary product or service, but more
efficient equipment or property is available which can operate with lower expenses.
When the reason for a replacement falls in the first general type, the only alternatives are
to make the necessary changes or else go out of business.
 Under these conditions, the final economic analysis is usually reduced to a comparison
of alternative investments.
 The correct decision as the the desirability of replacing an existing property which is
capable of yielding the necessary product or service depends on a clear understanding of
theoretical replacement policies plus a careful consideration of many practical factors.
 In order to determine whether or not a change is advisable, the operating expenses with
the present equipment must be compared with those that would exist if the change were
made.
 Practical considerations, such as amount of capital available or benefits to be gained by
meeting a competitor’s standards, may also have an important effect on the final decision.
 Methods of Profitability Evaluation for Replacements The same methods that were
explained and applied earlier are applicable for replacement analyses.
 Net-present-worth and discounted-cash flow methods give the soundest results for
maximizing the overall future worth of a concern.
 However, for the purpose of explaining the basic principles of replacement economic
analyses, the simple rate-ofreturn- on-investment method of analysis is just as effective as
those methods involving the time value of money.
3.Compare the two projects by NPV (7%.7.5%) June 14, Dec14, June13
Project Initial Year 1 2 3 4 5 6 7 8
A 20,00000 4 4 4 8 2 - - -
B 20,0000 8 6 2 2 2 2 2 2
I=7% I=7.5%
 Present worth of Ist year P = 25000

30000
P  27,272.7
1  0.1
Present worth of IInd Year P = 21527.77

31000
P 2
 25619.8
1  0.1
Present worth of IIIrd Year] P = 20833.83

36000
P 3
 27047.3
1  0.1
Present worth of IV year P=19290.12

40000
P 4
 27320.5
1.1
Present worth of V year P = 17280.75

43000
P 5
 26699.6
1.1
Rs. 133959.9 Rs.133933.45

4. What are the comparable present worth methods for the HX A and B used to finished product
if money is worth of 10%. Exchanger A cost is `10 Lakhs Vs=1 Lakhs and 10 Yrs. HX B =9
Lakhs Vs=70000/- requires 25000 operating cost/year> Unit B gives annual Energy saving is
15,000/-If it is desired to have perpetual operation what installation would you prefer? Dec 12

Unit IV
PART B
1.Explain the important features of balance sheet and its advantages. May 18 Dec 17 May 15
Dec 15 June 14 June13
The Balance Sheet:
 According to Howard, a Balance sheet may be defined as – „a statement which reports
the values owned by the enterprise and the claims of the creditors and owners against
 these properties‟. The Balance sheet is a statement that is prepared usually on the last day
of the accounting year, showing the financial position of the concern as on that date. It
comprises of a list of assets, liabilities and capital.
 An asset is any right or thing that is owned by a business. Assets include and, buildings,
equipment and anything else a business owns that can be given a value in money terms
for the purpose of financial reporting. To acquire its assets, a business may have to obtain
money from various sources in addition to its owners (shareholders) or from retained
profits.
 The various amounts of money owed by a business are called its liabilities. To provide
additional information to the user, assets and liabilities are usually classified in the
balance sheet as: - Current: those due to be repaid (Current liabilities) or converted into
cash within 12 months of the balance sheet date (Current Assets). - Long-term: those due
to be repaid (Long term liabilities) or converted into cash more than 12 months after the
balance sheet date (Fixed Assets).
 Fixed Assets A further classification other than long-term or current is also used for
assets. A "fixed asset" is an asset which is intended to be of a permanent nature and
which is used by the business to provide the capability to conduct its trade.
 Examples of "tangible fixed assets" include plant & machinery, land & buildings
and motor vehicles. "Intangible fixed assets" may include goodwill, patents,
trademarks and brands - although they may only be included if they have been
"acquired".
 Investments in other companies which are intended to be held for the long-term can also
be shown under the fixed asset heading.Capital As well as borrowing from banks and
other sources, all companies receive finance from their owners.
 This money is generally available for the life of the business and is normally only repaid
when the company is "wound up". To distinguish between the liabilities owed to third
parties and to the business owners, the latter is referred to as the "capital" or "equity
capital" of the company.
 In addition, undistributed profits are re-invested in company assets (such as stocks,
equipment and the bank balance).
 Although these "retained profits" may be available for distribution to shareholders - and
may be paid out as dividends as a future date - they are added to the equity capital of the
business in arriving at the total "equity shareholders' funds".
 At any time, therefore, the capital of a business is equal to the assets (usually cash)
received from the shareholders plus any profits made by the company through trading
that remain undistributed The basic functions of a balance sheet are:
1. It gives the financial position of a company on any given date
2. It gives the liquidity picture of the concern
3. It gives the solvency position of the concern
The basic components of a balance sheet are:
LIABILITIES ASSETS
1. Net Worth
2. Non-current liabilities / long term
Liabilities 3. Current liabilities
1. Fixed assets
2. Intangible assets
3. Current assets
4. Deferred expenditure
5. Other assets

TOTAL LIABILITIES TOTAL ASSETS

Common Adjustments Affecting the Preparation Of Balance Sheet:
1. Income received in advance: Income received in respect of which service has not been
rendered is known as income received in advance.
2. In order to calculate the exact profit or less made during the year, such income should
not be taken in to account while preparing profit and loss account.
3. Hence this amount must be deducted from the respective income account in the profit and
loss account and must be treated as a liability in the balance sheet. The adjustment entry
is Income account Dr. To income received in advance.
4. Closing stock : Closing stock appears on the credit side of trading account and assets
side of balance sheet if it is given in the adjustments. If it is given in the trial balance it
will appear only on the assets side of the balance sheet. The entry passed is Closing Stock
A/c Dr. To Trading Account.
5. Outstanding expenses : Outstanding expenses refer to those expenses which have
become due during the accounting period for which financial statements are being
prepared, but not yet have been paid.
6. Such expenses if given in the adjustments, should be added to the respective expenditure
account on the debit side of profit and loss account and must be shown as liabilities in the
balance sheet.
7. If such expenses are given in the trial balance they should be recorded only on the
liability side of the balance sheet. The journal entry to be passed is Respective
Expenditure A/c Dr.To Outstanding Expenditure
8. Pre-paid expenses : They are those expenses which have been paid in advance. They are
also known as unexpired expenses.
9. If given in adjustments, they should be deducted from the respective expenditure account
on the debit side of the profit and loss account and must be shown on the asset side of the
balance sheet.
10. If given in the trial balance, they must be shown only on the asset side of the balance
sheet. The adjustment entry is Pre-paid expenditure A/c Dr. To Respective Expenditure
11. Outstanding or accrued income : This is the income which has been earned during the
current accounting year and has become due but not yet received by the firm. If given in
the adjustments, it must be added to the respective income account on the credit side of
the profit and loss account and must be shown on the assets side of the balance sheet. But
if given in the trial balance, it must be shown only on the asset side of the balance sheet.
The entry is Outstanding/Accrued Income A/c Dr. To Respective Income
12. Depreciation : It is a reduction in the value of the asset due to wear and tear, lapse of
time, obsolescence, exhaustion and accident. It is charged on fixed assets of the business.
If given in the adjustments, it must be shown on the debit side of the profit and loss
 account and must be deducted from the respective asset account in the balance sheet. If
given in the trial balance, it must be shown only on the debit side of the profit and loss
account. The entry isDepreciation A/c Dr.To Respective Fixed Asset
13. Bad Debts : They represent that portion of credit sales (debtors) that had become bad due
to the inability ofthe debtor to repay the amount. It is a loss to the business and gain to
the debtor. This is a real loss to thebusiness and as such must be deducted from the
debtors before deducting any reserves created on debtors. Ifgiven in the adjustments it
must be shown on the debit side of the profit and loss account and must bededucted from
the debtors account on the asset side of the balance sheet. If given in the trial balance this
amount must be shown only in the profit and loss account. The entry is Bad debts A/c Dr.
To Debtor‟s personal account
14. Provision for bad debts : This represents a provision made by the business for any
potential bad debts. It is charged to the profit and loss account debit side and must be
deducted from the debtors after deducting the bad debts if any on the asset side of the
balance sheet, if given in the adjustments. If given in the trial balance, it must be
considered only in preparing the profit and loss account. The entry is Profit and loss A/c
Dr. To Provision for bad debts
15. Provision for doubtful debts: This represents a provision made by the business for any
potential doubtful debts. If given in the adjustments, it must be charged to the profit and
loss account debit side and must be deducted from the debtors after deducting the bad
debts (if any) and reserve for bad debts on the asset side of the balance sheet. If given in
the trial balance, it must be considered only in preparing the profit and loss account. The
entry isProfit and loss A/c Dr.To Provision for doubtful debts
16. Reserve for discount on creditors: This represents a provision made by the business for
any potential discount to be allowed by the creditors of the business. If given in the
adjustments, it must be charged to the profit and loss account credit side and must be
deducted from the creditors on the liabilities side of the balance sheet. If given in the trial
balance, it must be considered only in preparing the profit and loss account. The entry is
Reserve for discount on creditors A/c Dr To Profit and Loss A/c
17. Interest on capital: This is the return the owners of the business will get for investing in
the business.Usually it is paid or added to the capital at a fixed percentage. If given in the
adjustments, it is shown on the debit side of the profit and loss account and is usually
added to the capital account on the liabilities side of the balance sheet. If given in the trial
balance, it must be shown on the debit side of profit and loss account.
18. The entries are :Profit and Loss A/c To Interest on capital Interest on capital A/c Dr To
capital A/c
19. Interest on Drawings: Drawings represents the withdrawals made by the owners during
the accounting year either in the form of stock, cash or withdrawal from bank for
personal use. They must be deducted from the capital account on the liabilities side of the
balance sheet. Sometimes, firms charge interest on such drawings made by the owners to
discourage them from withdrawing their investment. Usually it is levied as a fixed
percentage. It is an income to the business and a loss to the owner. Hence, if given in the
adjustments, it must be shown on the credit side of the profit and loss account and
 deducted from the capital in the balance sheet. If given in the trial balance, it must be
shown only in the profit and loss account.

2..Draw the balance sheet workout economic ratios and comment on the financial stability of the
company with following details..Current Assests: 500 Lakhs;Current Liabilities 65 L; Stocks and
shares :400 lakhs Quick assests:250 L Surplus:600 Lakhs; Funded debts:100 lakhs depreciation
Curve:500 Lakhs May 18 June 16, May 15 Dec 13 Dec 12 (or)
Cash = Rs.30000

Common stock = Rs.50000

Account Payable I Company B= Rs.2000

Company C = Rs.8000

Inventories = Rs.1500

Account receivable = Rs.9500

Surplus = Rs.2000

Martage payable = Rs.5000

Furniture cost = Rs.18000

Machinery cost = Rs.5000

Asset Liabilities
I. Cash Rs.30000Account Account Payable =
Receivable = Rs.1000Account Crude taxes =
Rs.9500Inventories = Rs.1500 Rs.0Accrued Interest =
Rs.0Current liabilities =
Prepaid Expenses =0 Rs.10000

Current assent = Rs.41000

II. Properties cost = Rs.0 Out standing bond = Rs.0

Marketing facilities = Rs.0 Mortages = Rs.5000

Pt and equipment cost = Rs.0 Funded debt = Rs.5000

Fixed asset = Rs.18000 + 5000

Total Fixed asset = Rs.23000

III. Depreciation = Rs.0 Surplus = Rs.2000

Net fixed asset = Rs.23000 Stocks = Rs.50000Owner’s

Investment = Rs.52000
IV. Other asset = Rs.3000
V. Total asset = Rs.67000 Total liabilities =Rs.67000

(Current asset + Net fixed (Current liabilities + funded

 asset + other asset) debt + owner’s Investment)

3.Explain in detail about the financial statements. Dec 15 Dec 13

Preparation of Financial Statements
 Every business has to prepare its own financial statements at the end of each accounting
year.
 Financial statements are the statements that show the operational results of a business for
a given period and also give the financial position of a concern on a given date.
 The financial statements prepared by a manufacturing firm include – Manufacturing
account, Trading account, Profit and Loss account and Balance sheet.
 The financial statements prepared by a trading firm include – the Trading account, Profit
and loss account and Balance sheet Trading account is a statement that is prepared for a
period of one year.
 It shows all manufacturing or factory expenses on the debit side and shows sales revenue
and closing stock on the credit side.
 The expenses are matched against the revenues and the result may be Gross profit or
Gross Loss. This is carried forward to the Profit & Loss account.
 Profit and Loss account is the second statement that is prepared by all the businesses after
the trading account.
 This account shows all expenses other than manufacturing expenses, (office and
administration expenses, selling and distribution expenses) and both operating and non-
operating losses on its debit side.
 It shows all incomes and gains, both operating and non-operating on its credit side. The
matching of both expenses & losses with the incomes & gains gives the operational
results for the year.
 Usually all businesses follow the mercantile system of accounting (accrual system) while
preparing their final accounts.
 When expenses are less than the incomes, the resulting figure is known as Net profit and
if the expenses are more than the incomes, then it will result in Net Loss.
 This net profit or net loss is carried forward to the Balance sheet to be adjusted against
the capital.
 Balance sheet is a statement showing the financial position of a business on a given date,
which is usually the last day of the financial year / accounting year.
 This statement shows the balances of all liabilities it owes to the outsiders on the debit
side and the balances of assets on the credit side of the statement.
 All outstanding expenses which belong to the current year but have not yet been paid will
be shown on the liabilities and all expenses which are paid for the future period are
shown on the credit side of the statement.
 Similarly, all incomes which belong to the current year, but have not yet been received
will be shown on the credit side of the statement and all incomes which belong to the
future but have already been received in advance are shown on the debit side of the
statement.
  The general rule is that both the sides must be the same, showing that every debit has an
While preparing the final accounts, all the adjustments which have not been made to the
balances must be adjusted.

4.Explain the Liquidity ratios, Leverage ratios, Activity ratios and Profitability ratios. June
14 Dec14 Dec 13
Liquidity Ratios (Short Term Solvency Ratios): These Ratios measure the ability of the firm to meet its
current obligations. They indicate whether the firm has sufficient liquid resources to meet its short term
liabilities.
The various liquidity ratios are :-
(i) Current Ratio: This Ratio measures the ability of the firm to pay debts in the short term
Current Ratio = Current Assets
……………….. (Ideal Ratio = 2:1)
Current Liabilities
ii)Quick / Liquid / Acid-Test Ratio: This Ratio measures the short term debt paying ability of the
firm
Quick / Liquid / Acid-Test Ratio = Quick Assets
……….……. (Ideal Raito = 1:1)
Current Liabilities
iii) Absolute Liquid Ratio / Cash position Ratio =Cash in hand & at Bank + Short term Marketable
securities Current Liabilities (Ideal Ratio = 0.75:1, or even 0.50:1)
Profitability Ratios: These Ratios measure the profitability of a firm‟s business operations. They may be
related to sales (ex- Gross Profit Ratio) or investments (ex – Return on Assets or Return on Capital
Employed) (i) Gross Profit Ratio = Gross Profit X 100
---------------------
Sales
(ii) Net Profit Ratio = Net Profit X 100
-------------
Sales
(iii) Operating Ratio = Cost of Goods Sold + Operating Expenses X 100
--------------------------------------
Sales
(iv) Return on Capital Employed (ROCE) : This Ratio measures the overall profitability and efficiency of
the business.
ROCE = Net Profit + Interest + Taxes X 100
----------------------
Average Capital Employed
Where Capital Employed = Fixed Assets + Current Assets – Current Liabilities (or) Shareholders‟
Funds + Long Term Liabilities.
(v) Profit Margin : This Ratio gives the amount of Net Profit earned by each rupee of revenue.
Profit Margin = Profit after Tax
--------------
Net Sales
(vi) Asset Turnover: This Ratio measures the efficiency with which Assets are utilized
Asset Turnover = Net Sales
-----------------
Average Total Assets
(vii) Return on Assets (ROA): This Ratio measures the profitability from a given level of investment
Return on Assets (ROA) = Profit after Tax
------------------------
Average Total Assets
Activity Ratios: These Ratios indicate the number of times stock is replaced during a year. A high Ratio
indicates quick movement of stock and vice-versa. i.e, Activity Ratios measure the efficiency of asset
management. The efficient utilization of assets would be reflected by the speed with which they are
converted into sales.
(i) Stock / Inventory Turnover Ratio = Cost of Goods sold
------------------------
Average stock
(Where Average Stock = Opening stock + Closing Stock )
2 Debtor’s Turnover Ratio = Debtors + Bills Receivable X No. of working days
------------------------
Credit sales in a year
This Ratio shows the speed with which Debtors / Accounts Receivable are collected.
(iii) Creditor’s Turnover Ratio : This Ratio shows the no. of days taken by the firms to pay its creditors.
Creditor‟s Turnover Ratio = Creditors + Bill Payable X No of working days in a
--------------------
Credit Purchases year
5.With suitable example fund flow statement for a process industry and explain the
contents. Dec14
Statement – III –Preparation of the Funds Flow Statement : This statement is prepared by taking into
account the various changes in the Fixed Assets and Long Term Liabilities.
Format for preparing the Funds Flow Statement
Sources of Funds Application of Funds Application of Funds

1.Loss from Business Operations

1. Funds from Business Operations 2. Payment of Dividends
2. Sale of Fixed Assets 3. Payment of Tax
3. Issue of Shares 4. Purchase of Fixed Asets
4. Issue of Debentures 5. Payment of Long Term Loans
5. Long Term Borrowings 6. Redemption of Debentures
6. Decrease in Working Capital 7. Redemption of Preference Shares
8. Increase in Working Capital
From the Funds Flow Statement, it can be concluded that :
1. Increase in non-current assets = Application of Funds
2. Decrease in non-current assets = Sources of Funds
3. Increase in non-current Liabilities = Sources of Funds
4. Decrease in non-current Liabilities = Application of Funds
The guiding rule in the preparation of these statements is that Sources of Funds must be equal to the
Application of Funds. Hence, Increase in Liabilities + Decrease in Assets = Decrease in Liabilities +
Increase in Assets.
Treatment of Provision for Taxation and Proposed Dividend: While preparing the Funds Flow
Analysis, the treatment of Provision for Taxation and Proposed Dividend are very important.
(a) Provision for Taxation : There are two ways in which this item can be treated. – i) It can be
treated as a Current Liability. Then, it will decrease the Working Capital in the Schedule of
Changes in Working Capital / Financial Position (SCFP). However, payment of tax does not
affect Working Capital because it involves both Current Assets and Current Liabilities account,
i.e, payment decreases Cash / Bank balance on the one hand and decreases the Current Liability
(Tax Provision) by the equivalent amount on the other hand. ii) It can be treated as an
appropriation of profit – i.e, like an internal reserve. Under this treatment, Working Capital
position is not changed. Provisions made for Taxation during the current year is transferred to
adjusted Profit & Loss account (or calculation of Funds from Operations). The amount paid as
Tax is shown as an application of Fund.
6. The balance sheet of the company is as follows:
Plant and equipment cost = Rs.640000Land Building cost Rs.80000 (Fixed Cost)Stocks
(Shares)= Rs.1000000Surplus (retained earning) = Rs.368000 Inventories= Rs.480000 Bills
Payable= Rs.200000 Other current liabilities = Rs.124000Cash= Rs.160000Bills receivable =
Rs.320000,Prepaid expenses= Rs.12000Prepare a Balance Sheet and work out atleast 6 ratio.

Asset Liabilities
1. Current Asset = Cash + accounts receivable + Current liabilities = accounts
Inventories + Prepaid expenses payable

Current asset Current liabilities

= 160000 + 320000  Rs.200000

+ 124000
+ 480000 + 2000
Rs.324000
Current asset = Rs.972000

C.A. = Rs.972000

2. Total Fixed cost = Plant and equipment cost Owner’s Investment

Total Fixed cost =Rs.1000000 + 368000

= Rs.1368000

= Rs.640000
3. Net fixed cost = Total fixed asset + depreciation Net Total liabilities = Current
fixed cost = Rs.640000 liabilities + funded debt +
owner’s investment =200000
+ 1000000 + 368000 +
124000 = Rs.1692000

4. Total asset = Current asset + Net fixed asset + Other

asset =972000 + 640000 + 80000=Rs.1612000+80000

=Rs.1692000
Thus total asset = total liabilities

7. Balance Sheet of a Company is as follows:

Current asset = Rs.16000

Stock = Rs.1000000
Retained earning = Rs.80000
Plant asset cost = Rs.960000
Depreciation = Rs.160000
Long turn Investment = Rs.240000
Current Liabilities = Rs.120000
Prepare a Balance Sheet
Asset Liabilities

I. Current asset = Rs.160000 I. Current liabilities = Rs.120000

II. Plant asset cost = Rs.960000 II. Funded debt = Rs.0

Total fixed cost = Rs.960000

III. Depreciation = Rs.160000 Stocks = Rs.1000000

Surplus = Rs.80000
Net fixed asset = Total fixed cost – Net worth = Rs.1080000
depreciation

NFA = 960000 – 160000

NFA= Rs.800000

IV. Other asset =Rs.240000

V. Total asset =NFA + OA TTA Total liabilities = Current liabilities + Net worth
=160000 + 800000 + 240000
TA = Rs.1200000 TL=120000 + 1080000

TL = Rs.1200000
8. Find the Sex ratio of for the above problem?

Current asset
Current ratio=
Current liabilities
41000
=  4.1
10000

Net worth
Worth debt ratio=
Total liabilities
52000
=  0.7761
67000

Quick asset
Acid test ratio=
current liabilities
41000-1500
=  3.95
10000

Net fixed asset

Fixed asset worth ratio=
Networth
23000
=  0.4423
52000
 Total Inventory
Inventory ratio=
Total Investment
1500
=
23000+3000+41000-10000
=0.0263

Total Fixed asset

Fixed asset ratio=
Total Investment
23000
=
57000
=0.4035

Working capital
Working capital ratio=
Total Investment
41000-10000
=  0.5438
57000

9.The annual variable production cost for a plant operating at 70% capacity 280000 and
may be considered not to change with production rate. The total annual sales are 560000
and the product sells for 4Kg. What is a breakeven point in kgs of product per year? What
are the GAP Gj and NAP for this plant at 100 % capacity if the income taxes is 35%
percent of Gross Profit. May 18
(Or)
10. Determination of profit at optimum production rate
i) Nos of Units = P units/day
ii) VC/unit = Rs.47.73/unit +0.1P1.2
iii) Other Fixed expenses = Rs.7325/day
iv) Selling price = Rs.173/unit
To Find 1.Daily profit at Production corresponding to minimum cost per unit2.Daily profit at
production giving maximum daily profit 3. production at Break even point
Solution:
Profit = sales – cost
c) Maximum profit =0
173P-47.73P-0.1xP1.2xP-9075=0
173-47.73-0.1P1.2 = P=87.35
11. A plant operating at 40% capacity has annual fixed costs Rs.60000 with net sales of
Rs.110000/- variable cost Rs.60000/- A.What capacity is required to show a profit? If Profit tax
rate =38%B.What is the net profit at 100% capacity?
Solution:
Fixed cost = Rs.60000
Selling Price = Rs.110000
Variable cost = Rs.60000
120% capacity is required to show the profit
 40% 110000
100% 2
P100% = Capacity x S.P-(F.C+V.CxCap)
=275000-(60000+150000)
= Rs.65000

Unit V
Part B
1.Discuss the economic balance for heat transfer & insulation . Dec 17 May 18 Dec 15 June
14 Dec 13 Dec 12
Economic analysis must be two possibilities.
 The fluid is available at high pressure and eventually will be throttled to a low pressure
so that energy needed to overcome friction losses may come from pressure drop.
 Not in high pressure, so pump or compressor is needed to overcome.
 Power to run the pump
 Maintenance charges on pump and line
 Capital cost charges for both line and pump.
 Larger the pipe diameter greater the capital charges.
 The maintenance is not much affected by pipe size.
 The pumping cost goes down rapidly as the pipe size goes up.
 The pumping cost is proportional to the pressure drop.
 Velocity is proportional to the square of the pipe diameter.
 Purchase price=PP.Pipe diaX Pipe Length
 Annual capital Charge=CCXPP
 Annual pumping cost=PCX Pump Power.
 Total Annual Cost=PC POXCC PP diameter Length
 To overcome the friction.
2.Explain the economic balance approach for an evaporation . Dec 17 June 14 Dec14 June
13 Dec 12 Dec 12
 Evaporator is directly proportional to the number of effects or cost of water evaporated
decreases into number of effects.
 Fixed cost increases with increase in effects.
 Two options
 Heat transfer area is constant.
 Fixed cost vs no of effects and the variable cost.
 Total cost is minimized by varying the optimum number of effects.
 Problem can be solved graphically or statistically with respect to the number of cost.
 Optimum number of effects is rounded of to the nearest variable.
 No of effects also constant and the variable is to be optimized.
 Cost is proportional to the heat transfer area.
 Only fixed cost will be the major parameter.
 Unequal and equal area of heat transfer and their optimum are also plotted preferably
3. The Annual fixed costs for insulating a certain steam pipe installation can be expressed as
Fixed cost CF = 40 + 30 sDirect Variable Cost CD = 100/ S, S = Thickness of Insulations. a.
Determine graphically the optimum Insulation thickness b. Determine Algebraically the optimum
Annual Insulation thickness
Solution :
Total cost = Fixed cost + Direct cost

T.C = F.C + D.C

40 + 30s + 100/ s

Diff w.r.t to s

d  T.C   
 30   100   30 100
ds 
 s
2  s2
dT  0
ds
30  100
s2
s2  100s  100  1.83
30 30

Graphical method

Insulation Annual Fixed AnnualDirect Total Annual

cost dollars cost dollars
Thickness Cost dollars

½ 55 200 255

1 70 100 170

1.5 85 66.6 151.6

20 100 50 150

2.5 115 40 155

3.0 130 33.3 163.3

4.0 160 25 185

From the graph

Optimum Insulation Thickness = 1.83 inches

4. A furnace Installation ‘A’ costs Rs.1.2lakhs with an operating cost of Rs.48000 per annum. It
has a life of 10 years the installation ‘B’ generators guarantees. Same performance with an
operating cost of Rs.38000 with an Initial cost of Rs.2.5 lakhs salvage value for both is Rs.10000
what increase in life would be required for ‘B’ to warrant its selection if money is worth 10% for
the same annual cost.
Solution:
Plan A Plan B
Installation Cost Rs.1.2lakhs Rs.2.5lakhs
Operating cost Rs.48000 Rs.38000
Salvage value Rs10000 Rs.10000
Service life 10 8
Money is worth 10% 10%
Total Annual cost for Plan A
Total annual less for plan B
By using trial and error method substitute n = 20.5
66901 = 66901 66963
n = 20.5 years