Scanner Appendix. IPCC Gr. I (Solution of May ) Paper - 3 : Cost Accounting and Financial Management. Paper - 3A : Cost Accounting

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1 Solved Scanner Appendix IPCC Gr. I (Solution of May ) Paper - 3 : Cost Accounting and Financial Management Paper - 3A : Cost Accounting Chapter - 1 : Basic Concepts May [5] (a) Basis of Cost Control Distinction Meaning Objective Cost control is defined as the the guidance and regulations by executing action of cost of operating and undertaking; cost control implies that cost should not exceed the budgeted or standard units. If it exceeds investigation is necessary. Its main objective is to Control the cost so, as not to exceed the budgeted or standard unit. Cost Reduction Cost reduction is defined as the achievement of real and permanent reduction in the u n i t c o s t o f g o o d s manufactured or services rendered without impairing their suitability for the use intended. Cost reduction means waste reduction, expenses reduction & increased production. Its main objective is to achieve real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for 1

2 Solved Scanner Appendix IPCC Gr. I Paper Assumption Its assumes the existence of standards. the use intended. It assume the existence of concealed potential savings in the standards. Nature It is corrective tool. It is preventive tool. Emphasis Its emphasis is or past and present. Its emphasis is an present and future May [7] (b) The main objective of cost accounting are as follows: 1. To Ascertain Cost: The basic objective of cost accounting is to ascertain the cost of a cost entre (i.e. a location, person or item of equipment or group of these). Cost ascertainment is the process of determining costs after they have been incurred. Basically, there are two methods of cost ascertainment-job costing and process costing. Different industries follows different method of costing because of the differences in the nature of their activity. 2. To Control Cost: Cost accounting aims at controlling costs by using various techniques such as budgetary control, standard costing, inventory control etc. 3. To provide information for decision making: Cost accounting aims at providing information for various managerial decisions like- whether to make or buy a component whether to retain or replace an existing machine whether to process further or not whether to shut down or continue operations. 4. To Determine Selling Price: Cost accountings provides cost information to determine the selling price of product or services. During period of depression, it guides the management to decide How much price is to be charged. 5. To ascertain costing profit: Cost accounting aims at ascertaining the costing profit or loss of any activity on an objective basis by matching cost with revenue of that activity.

3 Solved Scanner Appendix IPCC Gr. I Paper May [7] (e) (ii) Profit Centres: Profit Centres is a branch or division of a company that is accounted for an a standalone basis for the purpose of profit calculation. A profit center is responsible for generating its own result and earnings, and as such, its managers generally name decision making authority related to product pricing and operating expenses. Profit centres are crucial in determining which units are the most and least profitable within as organisation. Chapter - 2 : Material Cost May [5] (b) (i) Cash discount: It should be excluded from cost accounts because it is an item of purely financial nature. (ii) Subsidy Grant/Incentive: It should be reduced from the material cost. (iii) VAT or State Sales Tax: It should be taken into account and added (iv) to the material cost. Commission or brokerage paid: Commission and Brokerage paid is added with cost of purchase. Chapter - 4 : Overheads May [1] {C} (a) Statement Showing the Computation of Machine Hour Rate: Particulars A. Standing charges: Operator wages ( ) 6 = 2,000 = 1 Per hour (`) 1.00 Departmental and General Overhead = 1 B. Machine Expenses: Depreciation

4 Solved Scanner Appendix IPCC Gr. I Paper (10,000-1,000) 10 = 900 = Electricity (16 unit hrs) 2,000 Special Chemical Solution (` 20 50) 2, Maintenance (1,200 2,000) C. Machine hour rate 4.94 Working Note: (i) Calculation of Machine hours: Budgeted hours 2,200 Less: Maintenance hours 200 2,000 Chapter - 5 : Integrated & Non-Integrated Accounts May [2] (a) Ledgers Accounts: Dr. Creditors A/c Cr. Particulars ` Particulars ` To Bank A/c To Closing balance 5,80,000 40,000 By Opening balance By Stores ledger control A/c 25,000 5,95,000 6,20,000 6,20,000 Dr. Stores Ledger Control A/c Cr. Particulars ` Particulars ` To Opening balance 40,000 By WIP Control A/c 5,70,000 To Creditors A/c 5,95,000 By Closing balance 65,000 6,35,000 6,35,000 Dr. Wages Control A/c Cr. Particulars ` Particulars `

5 Solved Scanner Appendix IPCC Gr. I Paper To Bank 4,00,000 By WIP Control A/c 3,20,000 By Production OH A/c 80,000 4,00,000 4,00,000 Dr. Work in Progress Control A/c Cr. Particulars ` Particulars ` To Opening balance 50,000 By Finished goods A/c 8,70,000 To Wages A/c To Stores ledger control A/c 3,20,000 By Closing balance 5,70,000 ( ,000) 70,000 9,40,000 9,40,000 Dr. Production Overheads A/c Cr. Particulars ` Particulars ` To Wages control A/c To Bank A/c 80,000 60,000 By Work in Process A/c By Profit & Loss A/c (Under absorbed OH W/O) 1,28,000 12,000 1,40,000 1,40,000 Chapter - 8 : Contract Costing May [7] (a) Cost plus contract refers to that contract under which the contact price is ascertained by adding a fixed percentage a profit to the cost of the contract. Advantages: From the point of view of contractor: 1. He is assured of fixed percentage of profit. 2. He is protected against the rise in the cost of materials labour etc. From the point of view of contractee: 1. He can ensure himself about the cost of contract as he is empowered to examine the books and documents of contractor to ascertain the accuracy of the cost of contract. 2. He gets the benefit of a decline in prices of materials, labour etc. 3. He is ensured that the price to be paid will depend on cost rather than

6 Solved Scanner Appendix IPCC Gr. I Paper an arbitrary commitment. Chapter - 11 : Joint Products & By Products May [4] (a) Statement Showing the Apportionment of Joint Cost: Particulars A B Total - Sales value after further processing 16,000 8,000 24,000 Less: Estimated Profit 4,000 1,600 5,600 Total Cost of Sales 12,000 6,400 18,400 Less: Selling & Distribution Expenses Total Cost of Good sold 11, , ,000 Less: Further Processing Costs 5,000 3,000 8,000 Net Value 6, , ,000 Statement Showing Cost of Production: Particulars A B Total Joint Costs 6, , ,000 Further Processing Cost 5, , ,000 Cost of Production 11, , ,000 Add: Selling Expenses Cost of Sales 12,000 6,400 18,400 Chapter - 12 : Standard Costing May [3] (a) (a) Statement Showing Equivalent Unit: Particulars Unit Return % of Complete unit Labour % of Complete Unit Overhead % of Complete Unit Op WIP % % % 150 Unit introduced and completed % % % 650 ( ) Cl. WIP %

7 Solved Scanner Appendix IPCC Gr. I Paper Statement Showing Cost per Equivalent Unit: Particulars Cost of Op. WIP Current Cost Total Cost Equivalent Unit Cost Per Equivalent Unit Labour 12,000 1,78,000 1,90, Overhead 5,000 90,000 95, (b) Actual Cost of Return in Process on 31 st March Labour = = 5,562.5 Overhead = = 2, ,375.0 (c) Standard Cost Per Return Labour = 5 40 = 200 Overhead = 5 20 = (d) Labour Rate Variance = ( ) 4,000 = 18,000 (A) Labour Efficiency Variance = (4,000-4,000) 40 = 0 Overhead Volume Variance ( ) 100 =15,000 (A) Overhead Expenditure Variance 98,000-90,000 = 8,000 (A) Chapter - 13 : Marginal Costing May [1] {C} (b) For the year 2016 = fixed cost 20,000 ( ) =24,00,000 73,600 ( ) =55,20,000 93,600 79,20,000 BEP in Unit = 93,600

8 Solved Scanner Appendix IPCC Gr. I Paper Working Notes: (i) Variable Cost in 2015 = 180 per packet increase by 25% = 45 in 2016 = 225 P.U. (ii) Fixed cost in 2015 = 1,20,000 ` 60 = 72,00,000 increase by 10% = 7,20,000 in 2016 = 79,20,000 Assume, that selling price in 2015 is same as in 2016 (i.e. ` 300) May [6] (a) (i) Statement Showing Evaluation of Process: Particulars Process A Process B Sales price (per unit) Less: Variable Cost (per unit) (12) (14) Contribution 8 6 Less: Fixed Cost (per unit) (6.977) (4.2) Net Profit (x) No. of unit sold 4,00,000 4,00,000 Total Profit 4,08,000 7,20,000 Less: Under absorption of fixed cost (2,09,310) (4,20,000) Actual Profit 1,98,690 3,00,000 (i) Process B should be chosen. As profit is higher in process B as compared to process A. (ii) Statement Showing Evaluation of Process: Particulars Process A Process B Sales price (per unit) Less: Variable Cost (per unit) (12) (14) Contribution 8 6 Less: Fixed Cost (per unit) (5) (4.2)

9 Solved Scanner Appendix IPCC Gr. I Paper Net Profit (x) No. of unit sold 4,00,000 4,00,000 Total Profit 12,00,000 7,20,000 Less: Under absorption of fixed cost (10,00,000) (4,20,000) Actual Profit 2,00,000 3,00,000 (ii) Process B should be chosen. Profit is higher in process B, Ans will not change as fixed cost in total remain same. Only absorption rate will change. Chapter - 14 : Budgets and Budgetary Control May [6] (a) (ii) Difference between Fixed Budget & Flexible Budget: Fixed Budget Flexible Budget 1. It does not change with actual volume of activity achieved. Thus, it is known as rigid inflexible budget. 2. It operate on level of activity and under one set of conditions. It assumes that there will be no change in the prevailing conditions, which is unrealistic. 3. Since all cost like-fixed, variable and semi-variable are related to only one level of activity, variable analysis does not give useful information. It can be recasted on the basis of activity level to be achieved. Thus, it is not rigid. It consist of various budget for different level of activity. Here analysis of variance provides useful information as each cost is analysed according to its behaviour.

10 Solved Scanner Appendix IPCC Gr. I Paper It the budgeted and actual activity levels differ significantly then the aspects like cost ascertainment and price fixation do not give a correct picture. 5. Comparison of actual performance with budgeted targets will be measuring less specially when there is a difference between the two activity level. Flexible budgeting at different levels of activity, facilitates the ascertainment of cost, fixation of selling price, and tendering of quotation. It provides a meaningful basis of comparison of the actual performance with budgeted targets. Paper - 3B : Financial Management Chapter - 2 : Time Value of Money May [1] {C} (c) (i), (ii) (i) Sinking fund is a fund created to accumulate the specified amount of sum in a future by way of regular periodic payment for some specific purpose. Basically, here the problem involves the determination of amount of annuity for a given future value after a given period at a given rate of interest. Hence, formula relating to future value of annuity is used for the purpose. (ii) Future value of an annuity of ` 1 after 6 years = Let the amount of an annuity be Therefore, x = 15,00,000 x = = 2,04,471. Hence, amount required to be invested every year is ` 2,04,471 Chapter - 3 : Financial Analysis and Planning May [2] (b) Dr. Trading A/c & Profit and Loss A/c Cr.

11 Solved Scanner Appendix IPCC Gr. I Paper Particulars ` Particulars ` To Opening stock To Purchase To Gross Profit 80,000 27,20,000 8,00,000 By Sales By Closing stock 32,00,000 4,00,000 36,00,000 36,00,000 To Sundry expenses (balance figure) 1,60,000 By Gross Profit b/d 8,00,000 To Net Profit 6,40,000 8,00,000 8,00,000 Balance Sheet Liabilities ` Assets ` Capital Liabilities Working Notes: (i) = 32,00,000 64,00,000 Fixed Assets Investment Current Assets Closing Stock Other Current Assets 40,00,000 4,00,000 52,00,000 96,00,000 96,00,000 Total Current asset = 56,00,000 (ii) = = =

12 Solved Scanner Appendix IPCC Gr. I Paper Capital = 32,00,000 (iii) = = Total Liabilities = 64,00,000 (iv) = = Net Profit = 6,40,000 (v) Net Profit Ratio = 100 Sales = 32,00, = 100 (vi) Gross Profit Ratio = 100 (vii) 25 = 100 Gross Profit = 8,00,000 Cost of Goods Sold = Sales - GP = 32,00,000-8,00,000 = 24,00,000 (viii) Stock T/O Ratio = 10 = Average Stock = 2,40,000 (ix) Average Stock = 2,40,000 = Opening Stock = 80,000

13 Solved Scanner Appendix IPCC Gr. I Paper (x) Cost of Goods Sold = Opening Stock + Purchase - Closing Stock 24,00,000 = 80,000 + purchase - 4,00,000 Purchase = 27,20, May [7] (c) The following would result in inflow/ outflow of fund: (i) Sale of fixed asset at a loss of ` 7,000 cash inflow of ` 27,000 form a part of current asset. Hence, its cash inflow of fund, for working capital. (ii) Payment of final dividend already declared. As the cash will decrease by paying dividend. Hence, it is cash outflow of fund for working capital. Chapter - 4 : Financing Decisions-Cost of Capital & Capital Structure May [6] (b) (i) (a) K d = (ii) (b)k p = = = K d = 8.33% K p = = K p = 11.96% (i) (c) K e = + g = = 0.15

14 Solved Scanner Appendix IPCC Gr. I Paper (ii) (iii) (iv) K e = 0.15% Marginal Cost of Capital at Existing Capital Structure: Types of capital Proportion Specific Cost Product Debt Preference Equity Company can spend the following amount without increasing its NCC and without selling the new share Retained earning = ,00,000 = 1,18,000 The ordinary equity is 80% of total capital. Thus, investment before issuing equity 100 = 1,47,500 If company spends more than ` 1,47,500, it will have to issue new shares. The cost of new issue of ordinary share is K e = 0.10 = Marginal Cost of Capital If New Equity Shares Are Also Issued: Source of Capital Proportion Specific Cost Product Debt Preference Equity May [7] (d) 1. Cost Principle: According to this principle an ideal pattern or capital structure is one that minimise cost of capital structure and maximise Earning Per Share. (EPS). 2. Risk Principle: According to this principle, reliance is placed more on common equity for financing capital requirement than excessive use of

15 Solved Scanner Appendix IPCC Gr. I Paper debt. Use of more and more debt means higher commitment in form of interest payout. This would lead to erosion of shareholder value is unfavorable business situation. 3. Control Principle: While deigning a capital structure, the finance manager may also keep in mind that existing management control and ownership remains undisturbed. 4. Flexibility Principle: It means that the management chooses such a combination of sources of financing which it finds easier to adjust according to changes in need of fund in future too. 5. Other Considerations: Besides above principles, other factors such as nature of industry, timing of issue and competition in the industry should also be considered. Chapter - 5 : Business Risk, Financial Risk & Leverage May [1] {C} (d) Statement Showing the Calculation of Degree of Various Leverages: Particulars Amount (`) Sales (1,60,00, ) 4,00,00,000 Less: Variable cost (@ 70%) (2,80,00,000) Contribution 1,20,00,000 Less: Fixed cost 32,00,000 EBIT 88,00,000 Less: Interest 12,00,000 EBT 76,00,000 Less: 30% 22,80,000 EAT 53,20,000 No. of Equity Shares 4,00,000 EPS 13.3 Operating leverage Financial leverage = = 1.364

16 Solved Scanner Appendix IPCC Gr. I Paper = = Combined Leverage Operating leverage financial leverage = 1.58 ( ) Chapter - 6 : Types of Financing May [5] (c) Finance Lease Operating Lease 1. Lease term is for major part of the economic life of the asset. 2. Under finance lease, the lessor transfers substantially all the risk and rewards incident to ownership of an asset to the lessee. 3. The risk of obsolescence falls on the lessee. 4. Continuation of lease is reasonably certain. 5. Finance lease are generally noncancellable unless contract provide otherwise. 6. Annual maintenance cost is generally borne by the lessee unless contract provide otherwise Lease term is significantly less than the economic life of the asset. Under operating lease, the lessor does not transfer substantially all the risks and rewards incidental to ownership of an assets to the lessee. The risk of obsolescence falls on the lessor. Continuation of lease is not reasonably certain. Operating lease are generally cancellable unless contract provide otherwise. Annual maintenance cost is borne by the lessor unless contract provide otherwise May [7] (e) (i) Leveraged Lease: A lease agreement that is partially financed by the lessor through of third party financial institution. In a leveraged lease, the lending company holds the little to the issued asset, while the lessor creates the agreement with the lessee and collects the payments. The payments are then passed on to the lender.

17 Solved Scanner Appendix IPCC Gr. I Paper Chapter - 8 : Capital Budgeting and Investment Decisions May [4] (b) At IRR NPV is Zero Cost of Project = Annual cash flow Commutative factor IRR 2,28,400 = Annual Cash inflow (i) Annual Cash Inflow = 80,000 Profitability Index (PI) = = PV of Cash Inflow = 2,37, Annual Cash Inflow PV factor = PV of Inflow 80,000 PV Factor = 2,37, Commutative PV factor = (ii) Cost of Capital =13% Net Present Value (NPV) = PV of Inflow - Outflow = 2,37, ,28,400 NPV = (iii) Discounted Payback Period = 3 years + (iv) 3 = Year + = Discounted Payback Period = or 3 years and 8 months. Chapter - 9 : Meaning, Concept & Policies of Working Capital May [3] (b) Evaluation of Credit Policy: Credit Policy Present I II III Average Collection Period A. Sales Revenue 4,20,000 4,41,000 4,72,500 4,83,000 Less: Variable Cost (2,80,000) (2,94,000) (3,15,000) (3,22,000) Contribution 1,40,000 1,47,000 1,57,500 1,61,000 Less: Fixed Cost 35,000 35,000 35,000 35,000

18 Solved Scanner Appendix IPCC Gr. I Paper Profit 1,05,000 1,12,000 1,22,500 1,26,000 Less: Bad debt 4,200 6,615 14,175 19,320 1,00,800 1,05,385 1,08,325 1,06,680 Interest on Investments (5,250) (7,311) (11,667) (14,875) Net benefits 95,550 98,074 96,658 91,805 B. Investment in Debtors Total Cost + (Vc + Fc) 3,15,000 3,29,000 3,50,000 3,57,000 Debtor T/O Ratio (360/ Average Collection Period) Average Investment in Deb. 2, , , ,4375 Additional investment compared to present level 10, , ,8125 Cost of Additional 20% 2, , ,625 C. Incremental Profit 4, , ,375 Recommendation = Credit Policy III is recommended since, it yields maximum profit of ` 11,375 Chapter - 10 : Treasury & Cash Management May [5] (d) 1. Safety: Returns and risks are directly related to each other. Higher the default risk, higher the return from securities and lower the default risk, lower the return from securities. The default risk means the possibility of default in payment of interest or/and principal on time. To minimise default risk, the access cash should be invested in safe securities. 2. Maturity: Maturity refers to the time period cover which interest & principal are to be paid. Matching of maturity forecasting cash need is essential. Prices of long term securities fluctuate more with change in interest rate therefore, more risky. To avoid the fluctuation in prices of securities the excess cash should be invested in short term securities. 3. Marketability: It refers to the convenience, speed and cost at which the

19 Solved Scanner Appendix IPCC Gr. I Paper securities can be converted into cash. If the securities can be sold quickly without loss of time and price, it is highly liquid or marketable. To avoid the loss of time in realizing the securities the excess cash should be invested in highly liquid marketable securities. Shuchita Prakashan (P) Ltd. 25/19, L.I.C. Colony, Tagore Town, Allahabad Visit us:

Scanner. Scanner Appendix

Scanner. Scanner Appendix Free of Cost ISBN : 978-93-5034-817-8 Solved Scanner Appendix Scanner IPCC Gr. I November - 2013 Paper - 3 : Cost Accounting and Financial Management Part A (Cost Accounting) Chapter - 2 : Material Cost