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CMA Intermediate · Management Accounting · Divisional Performance Measurement

Himalaya Cements' Division R has operating profit of ₹30,00,000 before depreciation of ₹6,00,000, so profit after depreciation is ₹24,00,000. Capital employed is ₹1,20,00,000 at year-end, of which ₹20,00,000 was a new asset bought on the last day of the year; cost of capital is 18%. RI is measured on profit after depreciation and on opening capital employed. What is RI?

The first option is wrong; RI is actually ₹6,00,000. Opening capital is ₹1,00,00,000 after excluding the asset bought on the last day, so the charge at 18% is ₹18,00,000. Profit after depreciation of ₹24,00,000 less this gives ₹6,00,000.

  1. A₹2,40,000Correct
  2. B₹2,40,000 less ₹3,60,000, i.e. ₹(1,20,000)
  3. C₹6,00,000
  4. D₹1,20,000 positive after charging 18% on ₹1,00,00,000 only plus ₹6,00,000

Explanation

Opening capital = 1,20,00,000 − 20,00,000 = ₹1,00,00,000. Charge = 18% × 1,00,00,000 = ₹18,00,000. RI = 24,00,000 − 18,00,000 = ₹6,00,000. Using closing capital gives 24,00,000 − 21,60,000 = ₹2,40,000, which is the mistake in the first option.

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