MOCK TEST PAPER 1 INTERMEDIATE (IPC): GROUP I

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1 MOCK TEST PAPER 1 INTERMEDIATE (IPC): GROUP I Test Series: February, 2015 PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. Working notes should form part of the answer. Time Allowed 3 Hours Maximum Marks Answer the following: (a) Aditya Ltd. is engaged in heavy engineering works on the basis of job order received from industrial customers. The company has received a job order of making turbine from a power generating company. Below are some details of stores receipts and issues of copper wire, used in the manufacturing of turbine: Feb. 1 Feb. 5 Feb. 6 Feb. 7 Feb. 9 Feb. 15 Feb. 17 Feb. 20 Opening stock of 1,200 Rs. 475 per kg. Issued 975 kgs. to mechanical division vide material requisition no. Mec 09/13 Received 3,500 Rs. 460 per kg vide purchase order no. 159/2013 Issued 2,400 kgs. to electrical division vide material requisition no. Ele 012/13 Returned to stores 475 kgs. by electrical division against material requisition no. Ele 012/13. Received 1,800 Rs. 480 per kg. vide purchase order no. 161/ 2013 Returned to supplier 140 kgs. out of quantity received vide purchase order no. 161/2013. Issued 1,900 kgs. to electrical division vide material requisition no. Ele 165/ 2013 On 28 th February, 2014 it was found that 180 kgs. of wire was fraudulently misappropriated by the stores assistant and never recovered by the company. From the above information you are required to prepare the Stock Ledger account using Weighted Average method of valuing the issues. (b) Maxim Ltd. manufactures a product N-joy. In the month of August 2014, 14,000 units of the product N-joy were sold, the details are as under:

2 (c) (d) Sale Revenue 2,52,000 Direct Material 1,12,000 Direct Labour 49,000 Variable Overheads 35,000 Fixed Overheads 28,000 A forecast for the month of September 2014 has been carried out by the General manger of Maxim Ltd. As per the forecast, price of direct material and variable overhead will be increased by 10% and 5% respectively. Required to calculate: Number of units to be sold to maintain the same quantum of profit that made in August (ii) Margin of safety in the month of August 2014 and September For Alpha Limited the average receivables balance is Rs. 30,00,000 and credit sales are Rs. 4,00,00,000. You are required to compute the receivable collection period. (1 Year = 365 days) Mr. Grewal borrowed Rs. 10,00,000 from a bank on a one-year 16% term loan, with interest compounded quarterly. Determine the effective annual interest on the loan? (4 5 = 20 Marks) 2. (a) J&J Ltd. produces an article by blending two basic raw materials. The following standards have been set up for raw materials: Material Standard Mix Standard Price per kg. A 40% Rs B 60% Rs The standard loss in processing is 10%. During March, 2014, the company produced 2,250 kg. of finished output. The position of stock and purchases for the month of March, 2014 is as under: Material Stock on Stock on Purchase during March, 2014 A 40 kg. 20 kg. 800 kg. for Rs.4,800 B 50 kg. 15 kgs 1800 kg. for Rs. 7,560 Calculate the following variances: Material Price Variance

3 (b) (ii) Material Usage Variance (iii) Materials Yield Variance (iv) Materials Mix Variance (v) Material Cost Variance Assume FIFO method for issue of material. The opening stock is to be valued at standard price. (8 Marks) The capital structure of Beta Limited is as follows: 10% Preference shares of Rs. 10 each Rs. 50,00,000 Equity shares of Rs. 100 each Rs. 70,00,000 Additional Information: Rs. 1,20,00,000 Profit after tax (50%) 15,00,000 Depreciation 6,00,000 Equity dividend paid 10% Market price per equity share 200 You are required to compute the following: (ii) The cover for the preference and equity dividend, The earnings per share, (iii) The price earnings ratio, and (iv) The net funds flow. (8 Marks) 3. (a) Giant Construction Ltd. has been constructing a flyover for 15 months and is under progress. The following information relating to the work on the contract has been prepared for the period ended 31 st March, Amount Contract price 65,00,000 Value of work certified at the end of the year 57,20,000 Cost of work not yet certified at the end of the year 1,20,000 Opening balances: Cost of work completed Materials on site Costs incurred during the year: 8,00,000 80,000

4 Material delivered to site Wages Hire of plant Other expenses 15,90,000 14,95,000 2,86,000 2,30,000 Closing balance: Material on site 40,000 (b) As soon as materials are delivered to the site, they are charged to the contract account. A record is kept on actual use basis, periodically a stock verification is made and any discrepancy between book stock and physical stock is transferred to a general contract material discrepancy account. The stock verification at the year end revealed a stock shortage of Rs. 15,000. In addition to the direct charges listed above, general overheads are charged to contracts at 5% of the value of work certified. General overheads of Rs. 35,000 had been absorbed into the cost of work completed at the beginning of the year. It has been estimated that further costs to complete the contract will be Rs. 5,72,000. This estimate includes the cost of materials on site at the end of the year ( ) and also a provision for rectification. Required: (ii) Determine profitability of the above contract and recommend how much profit should be taken for the year just ended. (Provide a detailed schedule of costs). State how your recommendation in would be affected if the contract price was Rs. 80,00,000 (rather than Rs. 65,00,000) and if no estimate has been made of costs to completion. (8 Marks) Given below are the balance sheets of Gamma Limited for the years ending 31 st July, 2013 and 31 st July, Balance Sheet for the year ending on 31 st July Capital and Liabilities Share capital 3,00,000 3,50,000 General reserve 1,00,000 1,25,000 Capital reserve (profit on sale of investment) - 5,000 Profit and loss account 50,000 1,00,000 15% Debentures 1,50,000 1,00,000 Accrued expenses 5,000 6,000

5 Creditors 80,000 1,25,000 Provision for dividend 15,000 17,000 Provision for taxation 35,000 38,000 Total 7,35,000 8,66,000 Assets Fixed Assets 5,00,000 6,00,000 Less: Accumulated depreciation 1,00,000 1,25,000 Net fixed assets 4,00,000 4,75,000 Long-term investments (at cost) 90,000 90,000 Stock (at cost) 1,00,000 1,35,000 Debtors (net of provisions for doubtful debts of Rs. 20,000 and Rs. 25,000 respectively for 2013 and 2014) 1,12,500 1,22,500 Bills receivables 20,000 32,500 Prepaid expenses 5,000 6,000 Miscellaneous expenditure 7,500 5,000 Total 7,35,000 8,66,000 Additional Information: During the year 2014, fixed asset with a net book value of Rs. 5,000 (accumulated depreciation Rs. 15,000) was sold for Rs. 4,000. (ii) During the year 2014, investments costing Rs. 40,000 were sold, and also investments costing Rs. 40,000 were purchased. (iii) Debentures were retired at a premium of 10 percent. (iv) Tax of Rs. 27,500 was paid for (v) During 2014, bad debts of Rs. 7,000 were written off against the provision for doubtful debt account. (vi) The proposed dividend for 2013 was paid in You are required to prepare a funds flow statement (i.e. statement of changes in financial position on working capital basis) for the year ended 31 st July, (8 Marks) 4. (a) Arnav Ltd. has three production departments M, N and O and two service departments P and Q. The following particulars are available for the month of September, 2014:

6 Lease rental 35,000 Power & Fuel 4,20,000 Wages to factory supervisor 6,400 Electricity 5,600 Depreciation on machinery 16,100 Depreciation on building 18,000 Payroll expenses 21,000 Canteen expenses 28,000 ESI and Provident Fund Contribution 58,000 Followings are the further details available: Particulars M N O P Q Floor space (square meter) 1,200 1,000 1, Light points (nos.) Cost of machines 12,00,000 10,00,000 14,00,000 4,00,000 6,00,000 No. of employees (nos.) Direct Wages 1,72,800 1,66,400 1,53,000 36,000 53,000 HP of Machines Working hours (hours) 1,240 1,600 1,200 1,440 1,440 The expenses of service department are to be allocated in the following manner: M N O P Q P 30% 35% 25% - 10% Q 40% 25% 20% 15% - (b) You are required to calculate the overhead absorption rate per hour in respect of the three production departments. (8 Marks) Theta Limited is considering buying a new machine which would have a useful economic life of five years, a cost of Rs. 1,25,000 and a scrap value of Rs. 30,000, with 80 per cent of the cost being payable at the start of the project and 20 per cent at the end of the first year. The machine would produce 50,000 units per annum of a new project with an estimated selling price of Rs. 3 per unit. Direct costs would be Rs per unit and annual fixed costs, including depreciation calculated on a straight- line basis, would be Rs. 40,000 per annum.

7 In the first year and the second year, special sales promotion expenditure, not included in the above costs, would be incurred, amounting to Rs. 10,000 and Rs. 15,000 respectively. Evaluate the project using the NPV method of investment appraisal, assuming the company s cost of capital to be 10 percent. Year PVF (10%) (8 Marks) 5. (a) Ascent Ltd. is a manufacturing company which keeps its Cost Accounts and Financial Accounts separately. The Audit Committee of the company has advised the Board of Directors to integrate the above two accounts to avoid duplicity of work. The Finance Manager has requested you to identify few pre-requisites for the implementation of the Audit Committee s advice. (b) A management trainee of an engineering firm while attending a meeting with the Director Finance of his company, heard the term Cost Control and Cost Reduction. Management Trainee is curious to know the difference between the above two terms. You are requested to satisfy his curiosity. (c) Discuss the Relevance of Time Value of Money in Financial Decisions. (d) Write short note on the Major Considerations in Capital Structure Planning. (4 x 4 =16 Marks) 6. (a) The following information is available for Zeta Limited for your consideration: (ii) Production during the previous year was 60,000 units, it is planned that this level of activity should be maintained during the present year. The expected ratios of cost to selling price are raw materials 60%, direct wages 10%, and overheads 20%. (iii) Raw materials are expected to remain in stores for an average of two months before these are issued for production. (iv) Each unit of production is expected to be in process for one month. (v) Finished goods will stay in warehouse for approximately three months. (vi) Creditors allow credit for 2 months from the date of delivery of raw materials. (vii) Credit allowed to debtors is 3 months from the date of dispatch. (viii) Selling price per unit is Rs. 5. (xi) There is a regular production and sales cycle. You are required to prepare the working capital requirement forecast. (8 Marks)

8 (b) Oleum Refinery Ltd. refines crude oil and produces two joint product Gasoline and HSD in the ratio of 4:6. The refining is done in three processes. Crude oil is first fed in Process-A, from where the two products Gasoline and HSD are get separated. After separation from Process-A, Gasoline and HSD are further processed in Process- B and Process- C respectively. During the month of July, 2014, 4,50,000 Ltr. of crude oil were processed in Process-A at a total cost of Rs. 1,71,99,775. In Process-B, Gasoline is further processed at a cost of Rs. 10,80,000. In Process- C, HSD is further processed at a cost of Rs. 1,35,000. The Input output ratio for the each process is as follows: Process- A 1 : 0.80 Process- B 1 : 0.95 Process- C 1 : 0.90 The details of sales during the month are: Gasoline HSD Quantity sold (Ltr.) 1,32,000 1,88,000 Sales price per Ltr There were no opening stocks. If these products were sold at split-off point, the selling price of Gasoline and HSD would be Rs. 64 and Rs. 41 per Ltr. respectively. Required: (ii) Prepare a statement showing the apportionment of joint cost to Gasoline and HSD in proportion of sales value at split off point. Prepare a statement showing the cost per Ltr. of each product indicating joint cost, processing cost and total cost separately. (iii) Prepare a statement showing the product wise profit or loss for the month. 7. Answer any four of the following: (a) (8 Marks) Yanni Ltd. is witnessing high labour turnover for few past years. The Director Personnel has requested you to suggest few remedial steps to be taken to minimize the labour turnover. (b) Distinguish between Deep Discount Bonds and Zero Coupon Bonds.

9 (c) The Board of Directors of Rehman Ltd. has asked the finance department to prepare Fixed and Flexible Budget for the coming financial year. State the difference between Fixed and Flexible budgets. (d) Write a short note on Global Depository Receipts. (e) Rahul and you are a good friend, you had a discussion on the relevance of Marginal Costing, the topic studied at Intermediate level in Chartered Accountancy course. Rahul has of the opinion that there is no practical application of the Marginal Costing. Being a good friend of Rahul, you are expected to elaborate the practical application of Marginal Costing. (4 x 4 =16 Marks)

10 MOCK TEST PAPER 1 INTERMEDIATE (IPC): GROUP I Test Series: February, 2015 PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT Suggested Answers/ Hints 1. (a) Store Ledger of Aditya Ltd. (Weighted Average Method) Date Receipts Issues Balance of Stock Feb. Qty Rate Amount Qty Rate Amount Qty Rate Amount (kg.) (kg.) (kg.) , ,70, ,63, ,06, , ,10, , ,16, , ,06,175 1, ,10, ,18, , ,29, , ,64, , ,93, ,200 3, ,26, , ,93,133 1, ,33, * ,611 1, ,48,688 * 180 kgs. is abnormal loss shown as issue and it will be transferred to Costing Profit & Loss A/c. (b) Calculation of Profit made in the month of August 2014 by selling 14,000 units. Amount per unit Amount Sales Revenue ,52,000 Less: Variable Costs: - Direct Material ,12,000 - Direct Labour ,000 - Variable Overhead ,000 Contribution ,000 Less: Fixed Overhead ,000 Profit ,000 To maintain the same amount of profit i.e. Rs. 28,000 in September 2014 also, the company needs to maintain a contribution of Rs. 56,000.

11 (ii) Let, number of units to be sold in September 2014 is x, then the contribution will be Rs. 18 x [(Rs ) + Rs (Rs )] x = Rs. 56,000 Rs. 18 x (Rs Rs Rs ) x = Rs. 56,000 Or, x = Margin of Safety Rs. 56,000 Rs = 18, units or 18,212 units. August 2014 September 2014 Profit Rs. 28,000 Rs. 28,000 P/V Ratio Rs Rs.18 Rs.1,26,000 Margin of Safety 28, Pr ofit P / VRatio (c) Calculation of Receivable Collection Period Average receivables Receivable s collection period = Credit sales per day Rs Rs.18 Rs.1,63, , Rs.30,00,000 Receivable s collection period = Rs. 4,00,00,000 / 365 days = 27 days (d) Calculation of Effective Annual Interest Rate Effective Interest Rate (EAR) is calculated as follows: m r EAR = m 0.16 EAR = = = = 16.99%.

12 2. (a) Working Notes: (a) Standard input = Actual output 2,250 kg. = 90% 90% Standard input of material- A 2,500 kg. x 40% Standard input of material- B 2,500 kg. x 60% (b) Actual input = (Opening Stock + Purchases Closing Stock) (c) = 2,500 kg. = 1,000 kg. = 1,500 kg. Actual input of material- A (40 kg kg. 20 kg.) = 820 kg. Actual input of material- B (50 kg. + 1,800 kg. 15 kg.) = 1,835 kg. Total actual input Standard Cost 2,655 kg. Material- A 1000 kg.@ Rs per kg = Rs. 5,000 Material- B 1500 kg.@ Rs per kg = Rs. 6,000 (d) Actual Cost Material- A 40 Rs per kg = Rs. 200 Rs.11, Rs per kg = Rs. 4,680 = Rs. 4,880 Material- B 50 Rs per kg = Rs ,785 Rs per kg = Rs. 7,497 = Rs. 7,697 Rs. 12,577 (ii) Material Price Variance = Actual Quantity (Std. Rate Actual Rate) Material- A = 40 kg (Rs Rs. 5.00) = Nil 780 kg (Rs Rs. 6.00) = Rs. 780 (A) Material- B = 50 kg. (Rs Rs. 4.00) = Nil 1785 kg (Rs Rs. 4.20) = Rs. 357 (A) Rs. 1,137 (A) Material Usage Variance = Std. Rate (Standard Quantity Actual Quantity) Material- A = Rs (1,000 kg. 820 kg) = Rs. 900 (F) Material- B = Rs (1,500 kg kg.) = Rs.1,340 (A) Rs. 440 (A)

13 (iii) Material Yield Variance = Std. Rate (Std. Quantity Revised Std. Quantity) Material- A = Rs (1,000 kg. 2,655 x 40%) = Rs (1,000 kg. 1,062 kg.) = Rs. 310 (A) Material- B = Rs (1,500 kg 2,655 x 60%) = Rs (1,500 kg. 1,593 kg.) = Rs. 372 (A) Rs. 682 (A) (iv) Material Mix Variance = Std. Rate (Revised Std. Quantity Actual Quantity) (v) Material- A Material- B = Rs (2,655 x 40% kg.) = Rs (1,062 kg. 820 kg) = Rs. 1,210 (F) = Rs (2,655 x 60% - 1,835 kg.) = Rs (1,593 kg. 1,835 kg.) = Rs. 968 (A) Material Cost Variance = Std. Cost Actual cost 2. Cover for Preference and Equity Dividends Profit after tax Preference dividend + Equity dividend 15,00,000 = ,00, ,00,000 (ii) Earnings per share Net profit after preference dividend Number of equity shares 10,00,000 70,000 = Rs (iii) Price Earnings Ratio Market price per share Earningper share 200 = 14 times Rs. 242 (F) = Rs. 11,000 - Rs. 12,577 = Rs. 1,577 (A)

14 (iv) Net Funds Flow Rs. Profit after tax 15,00,000 Add : Depreciation 6,00,000 Net Funds Flow 21,00, (a) Schedule of costs Amount Amount Cost incurred: Opening balance 8,00,000 During the year Material consumed: Opening Stock 80,000 Add: Material delivered during the year 15,90,000 16,70,000 Less: Closing stock 40,000 16,30,000 Wages 14,95,000 Hire of plant 2,86,000 Other expenses 2,30,000 Material discrepancy (Actual) 15,000 General overheads 5% of Rs. 57,20,000 2,86,000 Less: Absorbed at the beginning of the year 35,000 2,51,000 47,07,000 Estimated further cost to complete 5,72,000 Estimated Total Cost 52,79,000 Contract Price 65,00,000 Estimated Total Profit 12,21,000 Profit to be transferred to Profit and loss account: Estimated Profit x Value of work certified Contract price x 12 months 15 months = Rs. 12,21,000 x 57,20, x = Rs. 8,59,584 65,00, (ii) If contract price was Rs. 80 lakhs and if no estimate has been made of costs to completion.

15 Value of work certified at the end of year = Rs. 57,20,000 i.e. 71.5% of contract value. In such a case notional profit has to be calculated instead of estimated profit. Value of work certified Rs. 57,20,000 Add: Cost of work not certified Rs. 1,20,000 58,40,000 Less: Cost of work upto the end of year 47,07,000 Notional Profit Rs. 11,33,000 Recommendation in above would be affected as follows: Profit to be credited to Profit and loss A/c. for the year just ended months x Notional profit x 3 15 months 2 12 x Rs.11,33,000 x 3 15 = Rs. 6,04,267 [It has been assumed that cash received is equals to value of work certified] (b) Funds Flow Statement for the year ended 31 st July, 2014 Sources Working capital from operations 1,71,000 Sale of fixed asset 4,000 Sale of investments 45,000 Share capital issued 50,000 Total Funds Provided 2,70,000 Uses Purchase of fixed assets 1,20,000 Purchase of investments 40,000 Payment of debentures (at a premium of 10%) 55,000 Payment of dividend 15,000 Payment of taxes 27,500 Total Funds Applied 2,57,500 Increase in Working Capital 12,500 Working Notes: (a) Funds from Operations:

16 Rs. Profit and loss balance on 31 st July, ,00,000 Add: Depreciation 40,000 Loss on sale of asset 1,000 Misc. expenditure written off 2,500 Transfer to reserve 25,000 Premium on redemption of debentures 5,000 Provision for dividend 17,000 Provision for taxation 30,500 2,21,000 Less: Profit and loss balance on 31 st July, ,000 Funds from Operations 1,71,000 (b) Depreciation for the year 2014 was Rs. 40,000. The accumulated depreciation on 31 st July, 2013 was Rs. 1,00,000 of which Rs. 15,000 was written off during the year on account of sale of asset. Thus, the balance on 31 st July, 2014 should have been Rs. 85,000. Since the balance is Rs. 1,25,000, the company would have provided a depreciation of Rs. 40,000 (i.e. Rs. 1,25,000 Rs. 85,000) during the year (c) Fixed assets were of Rs. 5,00,000 in With the sale of a fixed asset costing Rs. 20,000 (i.e. Rs. 5,000 + Rs. 15,000) this balance should have been Rs. 4,80,000. But the balance on 31 st July, 2014 is Rs. 6,00,000. This means fixed assets of Rs. 1,20,000 were acquired during the year. (d) Profit on the sale of investment, Rs. 5,000 has been credited to capital reserve account. It implies that investments were sold for Rs. 45,000 (i.e. Rs. 40,000 + Rs. 5,000). (e) The provision for taxation during the year 2014 is Rs. 30,500 [i.e. Rs. 38,000 (Rs. 35,000 Rs. 27,500)]. (f) Bad debts written off against the provision account have no significance for funds flow statement, as they do not affect working capital. 4. (a) Primary Distribution Summary Item of cost Lease rental Power & Fuel Basis of apportionment Floor space (6 : 5 : 8 : 2 : 4) HP of Machines Working hours (93: 144 : 72) Total M Production Dept. N O Service Dept. P Q 35,000 8,400 7,000 11,200 2,800 5,600 4,20,000 1,26,408 1,95,728 97,

17 Factory supervisor s wages* Electricity Depreciation on machinery Depreciation on building Payroll expenses Canteen expenses ESI and PF contribution Working hours (31 : 40 : 30) Light points (21: 26: 16 : 9 : 8) Value of machinery (6 : 5 : 7 : 2 : 3) Floor space (6 : 5 : 8 : 2 : 4) No. of employees (48: 52: 45: 15: 25) No. of employees (48: 52: 45: 15: 25) Direct wages (864: 832: 765: 180: 265) 6,400 1,964 2,535 1, ,600 1,470 1,820 1, ,100 4,200 3,500 4,900 1,400 2,100 18,000 4,320 3,600 5,760 1,440 2,880 21,000 5,448 5,903 5,108 1,703 2,838 28,000 7,265 7,870 6,811 2,270 3,784 58,000 17,244 16,606 15,268 3,593 5,289 6,08,100 1,76,719 2,44,562 1,49,932 13,836 23,051 * Wages to factory supervisor is to be distributed to production departments only. Let P be the overhead of service department P and Q be the overhead of service department Q. P = 13, Q Q = 23, P Substituting the value of Q in P we get P = 13, (23, P) P = 13, , P P = 17, P = Rs. 17,557 Q = 23, ,557 = Rs. 24, or Rs. 24,807

18 Particulars Allocated and Apportioned over-heads as per primary distribution Secondary Distribution Summary Total M N O 5,71,213 1,76,719 2,44,562 1,49,932 P (90% of Rs.17,557) 15,801 5,267 6,145 4,389 Q (85% of Rs.24,807) 21,086 9,923 6,202 4,961 Overhead rate per hour 1,91,909 2,56,909 1,59,282 M N O Total overheads cost 1,91,909 2,56,909 1,59,282 Working hours 1,240 1,600 1,200 Rate per hour (b) Calculation of Net Cash flows Contribution = ( ) 50,000 = Rs. 62,500 Fixed costs = 40,000 (1,25,000 30,000)/5 = Rs. 21,000 Year Capital Contribution Fixed costs Adverts Net cash flow 0 (1,00,000) (1,00,000) 1 (25,000) 62,500 (21,000) (10,000) 6, ,500 (21,000) (15,000) 26, ,500 (21,000) 41, ,500 (21,000) 41, ,000 62,500 (21,000) 71,500 Calculation of Net Present Value Year Net cash flow 10% discount factor Present value 0 (1,00,000) (1,00,000) 1 6, , , , , ,167

19 4 41, , , ,402 The net present value of the project is Rs. 31, , (a) The Ascent Ltd. has been maintaining separate books of account for Cost Accounting and Financial Accounting purposes. As per the advice of the Audit Committee, the books of account for the above two purposes will be integrated into one i.e. Integrated System of Accounting will be followed. Few pre-requisites for the above purpose are as follows: (ii) The management s decision about the extent of integration of the two sets of books. A suitable coding system must be made available so as to serve the accounting purposes of financial and cost accounts. (iii) An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other adjustments necessary for preparation of interim accounts. (iv) Perfect coordination should exist between the staff responsible for the financial and cost aspects of the accounts and an efficient processing of accounting documents should be ensured. (b) As requested by the Management Trainee, the following points of distinction between the Cost Control and Cost Reduction can be explained to him: (1) Cost Control aims at maintaining the costs in accordance with the established standards. While Cost Reduction is concerned with reducing the costs. (2) Cost Control seeks to attain lowest possible cost under existing conditions, while Cost Reduction recognizes no condition as permanent, since a change will result in lower cost. (3) In case of Cost Control, emphasis is on past and present, while in case of Cost Reduction, it is on present and future. (4) Cost Control is a preventive while Cost Reduction is corrective. (5) Cost Control ends when targets are achieved, while Cost Reduction has visible end. (c) Relevance of Time Value of Money in Financial Decisions A rupee today is more valuable than a rupee after a year due to several reasons: Risk: There is uncertainty about the receipt of money in future.

20 Preference for Present Consumption: Most of the persons and companies in general, prefer current consumption to future consumption. Inflation: In an inflationary period, a rupee today represents a greater real purchasing power than a rupee a year hence. Investment Opportunities: Most of the persons and the companies have a preference for present money because of availabilities of opportunities of investment for earning additional cash flow. Many financial problems involve cash flows accruing at different points of time. For evaluating such cash flows an explicit consideration of time value of money is required. (d) Major Considerations in Capital Structure Planning Three factors, i.e., risk, cost and control determine the capital structure of a particular business undertaking at a given point of time. The finance manager attempts to design the capital structure in such a manner that his risk and costs are the least and the control of the existing management is diluted to the least extent. However, there are also subsidiary factors like marketability of the issue, maneuverability and flexibility of the capital structure and timing of raising the funds which affect the capital structure planning. These considerations help the finance manager in determining the proportion in which he can raise funds from various sources. Risk is of cash insolvency and of variation in the expected earnings available to the equity shareholders. Since a business should be at least capable of earning enough revenue to meet its cost of capital and finance its growth. Hence, along with risk as a factor, the finance manager has to consider the cost aspect carefully while determining the capital structure. 6. (a) Working Notes: Calculation of Cost and Sales Particulars For 60,000 units Rs. Per unit Rs. Raw Materials 1,80, Direct Wages 30, Overheads 60, Cost of Sales 2,70, Profit (balancing figure) 30, Sales 3,00, Computation of Current Assets and Current Liabilities 1. Raw Material inventory 2 months consumption = Rs. 1,80,000 2/12 = Rs. 30,000

21 2. Work-in-progress inventory 1 month production Raw material = Rs. 1,80, (100%) Rs. = 15,000 Direct Wages = Rs. 30, (50%) = 1,250 Overheads = Rs. 60, (50%) Finished goods inventory 3 months production = 2,500 = Rs. 18,750 = Rs. 2,70,000 3/12 = Rs. 67, Debtors 3 months (Cost of Sales) = Rs. 2,70,000 3/12 = Rs. 67, Creditors 2 months raw material consumption = Rs. 1,80,000 2/12 = Rs. 30,000 Statement of Working Capital Requirement forecast Particulars Holding period months Amount Rs. Current Assets Raw Materials 2 30,000 Work-in-Progress 1 18,750 Finished Goods 3 67,500 Debtors 3 67,500 1,83,750 Less: Current Liabilities 2 30,000 Working Capital 1,53,750 (b) Calculation of quantity produced Process- A (Ltr.) Process- B (Ltr.) Process- C (Ltr.) Input 4,50,000 1,44,000 2,16,000 Normal Loss (90,000) (7,200) (21,600)

22 (ii) (20% of 4,50,000 ltr.) (5% of 1,44,000 ltr.) (10% of 2,16,000 ltr.) 3,60,000 1,36,800 1,94,400 Production of 1,44, , Gasoline Production of HSD 2,16, ,94,400 Statement of apportionment of joint cost on the basis of sale value at split-off point Gasoline HSD Output at split-off point (Ltr.) 1,44,000 2,16,000 Selling price per Ltr Sales value 92,16,000 88,56,000 Share in Joint cost (128:123) 87,71,200 84,28,575 Statement of cost per Litre. Rs.1,71,99, Rs.1,71,99, Gasoline HSD Output (Ltr.) 1,36,800 1,94,400 Share in joint cost 87,71,200 84,28,575 Cost per Ltr. (Joint cost) Further processing cost 10,80,000 1,35,000 Further processing cost per Ltr Total cost per Ltr (iii) Statement of profit Gasoline HSD Output (Ltr.) 1,36,800 1,94,400 Sales (Ltr.) 1,32,000 1,88,000 Closing stock (Ltr.) 4,800 6,400 Rs.68 and Rs.46 for Gasoline and 89,76,000 86,48,000 HSD respectively Add: closing stock (Ltr.) (at full cost) 3,45,600 2,81,920 Value of production 93,21,600 89,29,920 Less: Share in joint cost 87,71,200 84,28,575 Further processing 10,80,000 1,35,000 Profit/ (Loss) (5,29,600) 3,66,345

23 7. (a) The suggestive remedial steps that will be helpful for Yanni Ltd. to minimize the labour turnover are as follows: (a) Exit interview: An interview to be arranged with each outgoing employee to ascertain the reasons of his leaving the organization. (b) Job analysis and evaluation: to ascertain the requirement of each job and allot appropriate job to appropriate persons. (c) Organisation should make use of a scientific system of recruitment, placement and promotion for employees. (d) Organisation should create healthy atmosphere, providing education, medical and housing facilities for workers. (e) Committee for settling workers grievances. (b) Distinction between Deep Discount Bonds (DDBs) and Zero Coupon Bonds (ZCBs) Deep discount bonds are in the form of zero interest bonds. These bonds are sold at a discounted value and on maturity face value is paid to the investors. In such bonds, there is no interest payout during lock-in period. IDBI was first to issue a deep discount bonds in India in January The bond of a face value of Rs.1 lakh was sold for Rs. 2,700 with a maturity period of 25 years. Whereas, on the other hand, zero coupon bond does not carry any interest but it is sold by the issuing company at a discount. The difference between discounted value and maturing or face value represents the interest to be earned by the investor on such bonds. (c) Difference between fixed and flexible budgets are as follows: S.No. Fixed Budget Flexible Budget 1. It does not change with actual volume of activity achieved. Thus it is rigid 2 It operates on one level of activity and under one set of conditions 3 If the budgeted and actual activity levels differ significantly, then cost ascertainment and price fixation do not give a correct picture. 4. Comparisons of actual and budgeted targets are It can be re-casted on the basis of activity level to be achieved. Thus it is not rigid. It consists of various budgets for different level of activity. It facilitates the cost ascertainment and price fixation at different levels of activity. It provided meaningful basis of comparison of actual and budgeted

24 meaningless particularly when there is difference between two levels. targets. (d Global Depository Receipts (GDRs) Global Depository Receipts are negotiable certificates denominated in US dollars which represent a Non-US company s publicly traded local currency equity shares. GDRs are created when the local currency shares of an Indian company are delivered to depository s local custodian bank against which the depository bank issues depository receipts in US dollars. The GDRs may be traded freely in the overseas market like any other dollar-expressed security either on a foreign stock exchange or in the over-the-counter market or among qualified institutional buyers. (e) The followings are the few practical applications of Marginal Costing that can be elaborated to Rahul: Pricing Policy: Since marginal cost per unit is constant from period to period, firm decisions on pricing policy can be taken particularly in short term. (ii) Decision Making: Marginal costing helps the management in taking a number of business decisions like make or buy, discontinuance of a particular product, replacement of machines, etc (iii) Ascertaining Realistic Profit: Under the marginal costing technique, the stock of finished goods and work-in-progress are carried on marginal cost basis and the fixed expenses are written off to profit and loss account as period cost. This shows the true profit of the period. (iv) Determination of production level: Marginal costing helps in the preparation of break-even analysis which shows the effect of increasing or decreasing production activity on the profitability of the company.

25 MOCK TEST PAPER 2 INTERMEDIATE (IPC): GROUP I Test Series: March, 2015 PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT Answers are to be given only in English except in the case of the candidates who have opted for Hindi medium. If a candidate has not opted for Hindi medium his/ her answers in Hindi will not be valued. Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. Working notes should form part of the answer. Time Allowed 3 Hours Maximum Marks Answer the following: (a) Sree Gopal Ltd. having fifteen different types of automatic machines furnishes information as under for (ii) Overhead expenses: Factory rent Rs. 1,80,000 (Floor area 1,00,000 sq. ft.), Heat and gas Rs. 60,000 and supervision Rs. 1,50,000. Wages of the operator is Rs. 200 per day of 8 hours. Operator attends to one machine when it is under set up and two machines while they are under operation. In respect of machine B (one of the above machines) the following particulars are furnished: (ii) Cost of machine Rs.1,80,000, life of machine - 10 years and scrap value at the end of its life will be Rs. 10,000. Annual expenses on special equipment attached to the machine are estimated as Rs. 12,000. (iii) Estimated operation time of the machine is 3,600 hours, while set up time is 400 hours per annum. (iv) The machine occupies 5,000 sq. ft. of floor area. (v) Power costs Rs. 5 per hour while machine is in operation. Find out the comprehensive machine hour rate of Machine B. Also find out machine costs to be absorbed in respect of use of Machine B on the following two work orders. Work order- 1 Work order-2 Machine set up time (Hours) Machine operation time (Hours)

26 (b) S Travels has been promised a contract to run a tourist car on a 20 km. long route for a multinational firm. He buys a car costing Rs. 4,50,000. The annual cost of insurance and taxes are Rs. 7,500 and Rs respectively. He has to pay Rs per month for a garage where he keeps the car when it is not in use. The annual repair costs are estimated at Rs. 12,000. The car is estimated to have a life of 10 years at the end of which the scrap value is likely to be Rs. 50,000. (c) He hires a driver who is to be paid Rs. 3,000 per month plus 10% of the takings as commission. Other incidental expenses are estimated at Rs. 2,000 per month. Petrol and oil will cost Rs. 220 per 100 kms. The car will make 4 round trips each day. Assuming that a profit of 15% on takings is desired and that the car will be on the road for 25 days on an average per month, what should he charge per roundtrip? Mr. Shyam invested Rs. 2,40,000 at annual rate of interest of 10 percent. What is the amount after 3 years if the compounding is done? (ii) Annually Semi-annually. (d) Alpha Limited issued 40,000 12% redeemable preference share of Rs. 100 each at a premium of Rs. 5 each, redeemable after 10 years at a premium of Rs. 10 each. The floatation cost of each share is Rs. 2. You are required to calculate cost of preference share capital ignoring dividend tax. (4 5 = 20 Marks) 2. (a) A Light Motor Vehicle manufacturer has prepared sales budget for the next few months, and the following draft figures are available: Month No. of vehicles October 4,000 November 3,500 December 4,500 January 6,000 February 6,500 To manufacture a vehicle a standard cost of Rs. 2,85,700 is incurred and sold through dealers at an uniform selling price of Rs. 3,95,600 to customers. Dealers are paid 12.5% commission on selling price on sale of a vehicle. Apart from other materials four units of Part - X are required to manufacture a vehicle. It is a policy of the company to hold stocks of Part-X at the end of the each month to cover 40% of next month s production. 4,800 units of Part-X are in stock as on 1 st October. There are 950 nos. of completed vehicles are in stock as on 1 st October and it is policy to have stocks at the end of each month to cover 20% of the next month s sales.

27 You are required to Prepare Production budget (in nos.) for the month of October, November, December and January. (ii) Prepare a Purchase budget for Part-X (in units) for the months of October, November and December. (iii) Calculate the budgeted gross profit for the quarter October to December. (8 Marks) (b) You are a financial analyst for Beta Limited. The director of finance has asked you to analyse two proposed capital investments, Projects X and Y. Each project has a cost of Rs. 10,000 and the cost of capital for each project is 12 per cent. The project s expected net cash flows are as follows: (ii) Expected net cash flows Year Project X Project Y 0 (10,000) (10,000) 1 6,500 3, ,000 3, ,000 3, ,000 3,500 Calculate each project s payback period, net present value (NPV) and internal rate of return (IRR). Which project or projects should be accepted if they are independent? Rs. Rs. (8 Marks) 3. (a) Aditya Ltd. manufactures Ordinary Portland Cement (OPC). The standard data for the raw materials that are used to manufacture OPC are as follows: Raw Material Composition (%) Rate per Metric Ton Limestone Silica 20 4,800 Alumina 5 32,100 Iron ore 5 1,800 Others 5 2,400 During the month of February 2015, Aditya Ltd. produced 500 MT OPC. Actual data related with the consumption and costs are as follows:

28 Raw Material Quantity (MT) Total Cost Limestone 340 1,90,400 Silica 105 5,09,250 Alumina 25 8,12,500 Iron ore 30 53,400 Others 23 51,750 (b) You are required to find out the following variances related with the production of OPC for the month of February 2015: (ii) Material Price Variance Material Mix Variance (iii) Material Yield Variance (iv) Material Cost Variance. (8 Marks) Gamma Limited has the following capital structure, which it considers to be optimal: Capital Structure Weightage (in percentage) Debt 25 Preference Shares 15 Equity Shares 60 Gamma Limited s expected net income this year is Rs. 34,285.72, its established dividend payout ratio is 30 per cent, its tax rate is 40 per cent, and investors expect earnings and dividends to grow at a constant rate of 9 per cent in the future. It paid a dividend of Rs per share last year, and its shares currently sell at a price of Rs. 54 per share. Gamma Limited requires additional funds which it can obtain in the following ways: Preference Shares: New preference shares with a dividend of Rs. 11 can be sold to the public at a price of Rs. 95 per share. Debt: Debt can be sold at an interest rate of 12 per cent. You are required to: (ii) Determine the cost of each capital structure component; and Compute the weighted average cost of capital (WACC) of Gamma Limited. 100 (8 Marks) 4. (a) ZED Limited is working by employing 50 skilled workers. It is considering the introduction of incentive scheme-either Halsey scheme or Rowan scheme of wage

29 payment for increasing the labour productivity to cope up the increasing demand for the product. It is believed that proposed incentive scheme could bring about an average incentive of 20% on the basic wages to the workers; it could act as sufficient incentive for them to produce more. Because of assurance, the increase in productivity has been observed as revealed by the figures for the month of April, Hourly rate of wages (guaranteed) Rs. 30 Average time for producing one unit by one worker at the previous performance (This may be taken as time allowed) hours Number of working days in the month 24 Number of working hours per day of each worker 8 Actual production during the month Required: (ii) 6,120 units Calculate the effective rate of earnings under the Halsey scheme and the Rowan scheme. Calculate the savings to the ZED Limited in terms of direct labour cost per piece. (iii) Advise ZED Limited about the selection of the scheme to fulfill their assurance. (b) Theta Limited provides the following information for your consideration: Cost (per unit): (8 Marks) Raw materials 52.0 Direct labour 19.5 Overheads 39.0 Total cost ( per unit) Profit 19.5 Selling price Average raw material in stock is one month; average materials in process are half a month. Credit allowed by suppliers is one month; credit allowed to debtors is two months. Time lag in payment of wages is one and a half weeks and Overheads is one month. One-fourth of sales are on cash basis. Cash balance is expected to be Rs. 1,20,000. Rs.

30 You are required to prepare a statement showing the working capital needed to finance a level of activity of 70,000 units of output. You may assume that production is carried on evenly, throughout the year and wages and overheads accrue similarly. (For calculation purposes 1 month = 30 days). (8 Marks) 5. (a) Given below is a list of eight industries. Give the method of costing against each industry. (ii) Nursing Home Coal (iii) Bicycles (iv) Bridge Construction (v) Interior Decoration (vi) Advertising (vii) Furniture (viii) Sugar company having its own sugarcane fields. (b) You and Kunal have been asked by a CA firm where you are serving as articled assistants to visit to one of its client s factory for stock verification. Since, it is Kunal s first audit assignment he wants to know the difference between the Perpetual Inventory System and Continuous Stock taking. As a senior audit fellow of Kunal, you are required to satisfy his query. (c) (d) Discuss the factors to be considered by a venture capitalist before financing any risky project. Discuss the role of Chief Financial Officer (CFO) in an organisation. (4 x 4 =16 Marks) 6. (a) Abstruse Ltd. manufactures a product called Z9 which goes through three sequential processes namely P1, P2 and P3 before producing the final product. In P3 a by-product called BP arises. After further processing BP at a cost of Rs. 5 per kg., it can be sold at Rs. 25 per kg in the market. Rs. 3 per BP kg. has to be incurred as selling and distribution expenses. Particulars P-1 P- 2 P- 3 BP Direct Material introduced (12,000 kg.) 60, Other material added (ignore the 18,000 20,000 30,000 - weight) Direct wages 16,000 20,000 36,000 - Direct expenses 9,000 6,880 22,520 - Scrap value Output per month (kg.) 9,600 9,400 7, Normal loss (%) 10% 5% 10%

31 Company has budgeted production overheads of Rs.2,70,000 per month, absorbed as a percentage of direct wages for each process. Using the information given above prepare the accounts for processes P1, P2, P3 and the by- product BP. (8 Marks) (b) The Balance Sheet of Zeta Limited as on 31st March, 2015 is as follows: Liabilities Rs. ( 000) Assets Rs. ( 000) Equity Share Capital 6,000 Fixed Assets (at cost) 16,250 8% Preference Share Capital 3,250 Less: Depreciation written off 5,200 11,050 Reserves and Surplus 1,400 Stock 1,950 10% Debentures 1,950 Sundry Debtors 2,600 Sundry Creditors 3,250 Cash 250 Total 15,850 15,850 The following additional information is available: The stock turnover ratio based on cost of goods sold would be 6 times. (ii) The cost of fixed assets to sales ratio would be 1.4 (iii) Fixed assets costing Rs. 30,00,000 to be installed on 1st April, 2015 and payment would be made on March 31, (iv) In March, 2016, a dividend of 7 per cent on equity capital would be paid. (v) Rs. 5,50,000, 11% Debentures would be issued on 1st April, (vi) Rs. 30,00,000, Equity shares would be issued on 31st March, (vii) Creditors would be 25% of materials consumed. (viii) Debtors would be 10% of sales. (ix) The cost of goods sold would be 90 per cent of sales including material 40 per cent and depreciation 5 per cent of sales. (x) The profit is subject to debenture interest and 30 per cent. You are required to prepare: The projected Balance Sheet as on 31st March, (ii) The projected Cash Flow Statement in accordance with AS-3. (8 Marks) 7. Answer any four of the following: (a) Explain the following: Advantages of cost plus contact.

32 (b) (c) (ii) Limitation of Marginal Costing. Treatment of spoiled and defective work in job costing method. Differentiate between Factoring and Bills Discounting (d) Ratio Analysis can be used to study liquidity, turnover, profitability, etc. of a firm. What does Debt-Equity Ratio help to study? (e) What are the forms of bank credit? (4 x 4 =16 Marks)

33 MOCK TEST PAPER 2 INTERMEDIATE (IPC): GROUP I PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT Suggested Answers/ Hints 1. (a) Calculation of Comprehensive machine hour rate for Machine B Standing Charges: Factory rent Rs.1,80,000 5,000 sq.ft. 1,00,000 sq.ft. Test Series: March, ,000 Heat and Gas (Rs. 60, machines) 4,000 Supervision (Rs.1,50, machines) 10,000 Depreciation [(Rs. 1,80,000 Rs. 10,000) 10 years] 17,000 Annual expenses on special equipment 12,000 Total Standing Charges 52,000 Estimated working hours (Operation + set-up) 4,000 hours Standing Charges per hour 13 Set up rate Per hour Operational rate Per hour Standing charges Power cost Wages to operator Comprehensive Machine hour rate per hr Machine costs to be absorbed on the two work orders Hours Work order-1 Rate Amount Hours Work order-2 Rate Amount Set up time cost ,140 Operation time cost , ,795 3,620 6,935

34 (b) Statement of Operating cost. Per Annum Per Month Standing charges: Depreciation [(4,50,000-50,000)/10] 40,000 3, Insurance 7, Taxes 1, Garage (Rs. 2,500 12) 30,000 2, Annual repairs 12,000 1, Driver's Salary (Rs. 3,000 12) 36,000 3, Incidental expenses (Rs. 2,000 12) 24,000 2, Variable expenses: Petrol and Oil 1,51,300 12, , ,000 * kms kms. Rs Total Cost (without commission) 21, [* 20 km. 2 4 round trips 25 days = 4,000 km.] Let X be the total takings per month Driver's Commission = 10% of X = 15 3X Profit = 15% of X = X = Total takings per month = Total cost + Driver's Commission + Profit or X = Rs. 21, or X X 20 3X X X = Rs. 21, X 10 or or 20X 3X 2X 20 15X 20 = Rs. 21, = Rs. 21,408.33

35 (c) or X = Rs. 21, X = Rs. 28, Total number of round trips per month: 25 days 4 round trips per day = 100 trips Hence the charge per round trip = Computation of Future Value Principal (P) = Rs. 2,40,000 Rate of Interest = 10% p.a. Time period (n) = 3 years Amount if compounding is done: (ii) Annually Future Value = P (1 + i )n 10 = 2,40, = 2,40,000 ( ) 3 = 2,40,000 x = Rs. 3,19,440 Semi-Annually 10 Future Value = 2,40, x 2 = 2,40,000 ( ) 6 = 2,40,000 x ( 1.05) 6 = 2,40,000 x = Rs. 3,21,624 3 Rs. 28, = Rs x2

36 (d) Calculation of Cost of Preference Shares (K p) Preference Dividend (PD) = 0.12 x 40,000 x 100 = 4,80,000 Floatation Cost = 40,000 x 2 = Rs. 80,000 Net Proceeds (NP) = 42,00,000 80,000 = 41,20,000 Redemption Value (RV) = 40,000 x 110 = 44,00,000 Cost of Redeemable Preference Shares = K p = PD + (RV - NP) / N RV + NP 2 4,80,000 + (44,00,000-41,20,000) / 10 44,00, ,20, ,80,000 + (2,80,000) / 10 = 85,20,000 / 2 4,80, ,000 5,08,000 = = 42,60,000 42,60,000 = K p = 11.92% (Note: K p may be computed alternatively by taking the RV and NP for one unit of preference shares. Final figure would remain unchanged.) 2. (a) Preparation of Production Budget (in units) October November December January Demand for the month (Nos.) 4,000 3,500 4,500 6,000 Add: 20% of next month s demand ,200 1,300 Less: Opening Stock (950) (700) (900) (1,200) Vehicles to be produced 3,750 3,700 4,800 6,100 (ii) Preparation of Purchase budget for Part-X October November December Production for the month (Nos.) 3,750 3,700 4,800 Add: 40% of next month s production 1,480 (40% of 3,700) 1,920 (40% of 4,800) 2,440 (40% of 6,100) 5,230 5,620 7,240 No. of units required for 20,920 22,480 28,960

37 (b) production (5,230 4 units) (5,620 4 units) (7,240 4 units) Less: Opening Stock (4,800) (5,920) (1,480 4 units) (7,680) (1,920 4 units) No. of units to be purchased 16,120 16,560 21,280 (iii) Budgeted Gross Profit for the Quarter October to December October November December Total Sales in nos. 4,000 3,500 4,500 12,000 Net Selling Price per unit* 3,46,150 3,46,150 3,46,150 Sales Revenue (Rs. in lakh) 13,846 12, , ,538 Less: Cost of Sales (Rs. in lakh) 11,428 9, , ,284 (Sales unit Cost per unit) Gross Profit (Rs. in lakh) 2,418 2, , ,254 * Net Selling price unit = Rs. 3,95, % commission on Rs. 3,95,600 = Rs. 3,46,150 Payback Period Method The cumulative cash flows for each project are as follows: Cumulative Cash Flows Year Project X Project Y Rs. Rs. 0 (10,000) (10,000) 1 (3,500) (6,500) 2 (500) (3,000) 3 2, ,500 4,000 Rs. 500 Payback years. x = + Rs. 3,000 = Rs. 3,000 Payback years. y = + Rs. 3,500 = Net Present Value (NPV) Rs. 6,500 Rs. 3,000 Rs. 3,000 Rs. 1,000 NPV = Rs. 10, x (1.12) (1.12) (1.12) (1.12) = Rs