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

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1 Solved Scanner Appendix IPCC Gr. I (Solution of May ) Paper - 3A : Cost Accounting Chapter - 1: Basic Concepts May [5] (a) Sunk Cost: Sunk costs are historical costs incurred in the past are known as Sunk Costs. They play no role in decision making during the current period. Sunk Costs are independent of any event that may occur in the future. e.g. in case of a decision related to the replacement of a machine, the written down value of the existing machine is a sunk cost and therefore, not considered. Opportunity Cost: This cost refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. Eg. the opportunity cost of going to college is the money you would have earned if you worked instead, on the one hand, you lose four years of salary while getting your degree, on other hand, you hope to earn more during your career, thanks to your education to offset the lost wages May [7] (a) Cost Centre: It is defined as a location, person, or an item of equipment (or group of these) for which cost may be ascertained and used for the purpose of cost control. It is a part of an organization that does not produce direct profits and adds to the cost of running a company. Eg. R&D, marketing departments, help desk and customer services. Cost Centre are of two types: 1

2 Solved Scanner Appendix IPCC Gr. I Paper (i) Personal (ii) Impersonal A personal cost centre consists of a person and an impersonal Cost Centre of a location or item of equipment. In a manufacturing concern there are two main types of cost centre, as below: 1. Production Cost Centre: It is cost centre where raw material is handled for conversion into finished product. Here both direct & indirect expenses are incurred. Machine shops, welding shops and assembly shops are examples of production Cost Centre. 2. Service Cost Centre: It is Cost Centre which serves as an ancillary unit to a production cost centre. Power house, gas production shop, material service centres, and plant maintenance centres are examples of service Cost Centre. 3. Profit Centre: Centres, which have the responsibility of generating and maximizing profits are called profit centres. The profit centre s revenues and expenses are kept separate from the main company s profit in order to maintain the profit centre s profitability. 4. Investment Centres: Investment centres are similar to profit centres but they have additional decision rights in terms of capital expenditure & investment. The manager is assumed to have better knowledge of input & output markets but also investment opportunities. Chapter - 4: Overheads May [6] (a) (i) Calculation for Cost of running one machine for four week period: Particulars Amount Standing Charges Rent p.a. Heat & Light p.a

3 Solved Scanner Appendix IPCC Gr. I Paper Foreman s Salary 540 (ii) Depreciation 217 Running Charges Maintenances & Repair (60 4) 240 Consumable Stores (75 4) 300 Power = ( ) 768 Total cost for running one machine for four week 2695 Calculation for Machine Hour Rate: 20 units per hour so in 48 hours there is 960 units & 80 paise per units is paid. So = = 16 Machine hour rate = ` 16 Chapter - 5: Integrated & Non-Integrated Accounts May [7] (b) Benefits of Integrated Accounting: Since there is one set of accounts, thus there is one figure of profit. Hence, the question of reconciliation of cost profit and financial profit does not arise. Efforts in duplicate recording of entries and to maintain separate set of books are saved. Thus, there is saving of time & labour. The operation of the system is facilitated with the use of mechanized accounting. Costing data are available from books of original entry and hence, no day is caused in obtaining information. Combination of two sets of books and centralization of accounting function results in economy. Complete analysis of cost and sales is kept. Complete details of all receipts and payments in cash are kept. Complete details of all assets and liabilities are kept and this system does not use notional account to represent impersonal accounts.

4 Solved Scanner Appendix IPCC Gr. I Paper Since financial books are subject to a rigorous accuracy, checking integrated accounts ensures similar checks for cost account. Chapter - 8: Contract Costing May [5] (b) Escalation Clause: This clause is often provided in contracts to cover any likely changes in the prize or utilization of materials and labour. Thus, a contractor is entitled to suitably enhance the contract price the cost raises beyond a given percentage. The object of this clause is to safeguard the interest of the contractor against unfavorable changes in cost. The escalation clause is of particular importance where prices of material and labour are anticipated to increase or where quantity of material and labour time cannot be accurately estimated. Chapter - 9: Operating Costing May [3] (a) (i) Calculation for Operating Cost Per Annum: Particulars Standing Charges Insurance Garage Rent (2,400 4) Road Tax Salary of staff (7,200 12) Tyres & Tubes (3,600 4) Depreciation Maintenance Charges Repairs (4,800 4) Running Charges Diesel Oil Sundries Total (+) Passenger 22% Amount ` 15,600 9,600 5,000 86,400 14,400 68,000 19,200 4,68,000 39,600 7,25,800 1,59,676

5 Solved Scanner Appendix IPCC Gr. I Paper Total Operating Cost ` 8,85,476 (ii) Calculation for Cost Per Passenger Kilometer: Total Operating Cost Total Passenger Km. Particulars Amount (`) 8,85,476 39,60,000 Cost Per Passenger Km. ` (iii) Calculation for One Way Fare per Passenger: Particulars Total Cost P.a. Profit (25% of total takings) (7,25,800 25%) One way (2) One way total Passenger Km. = Amount (`) 8,85,476 1,81,450 Total 10,66, ,33,463 19,80,000 Per Passenger fare for one way ` *Working Note: 1. Calculation for passenger kilometer and total km.- = [30 km 10 round trip 2 25 working days] Total = 15,000 km. 12 months Km. = 1,80,000 km. Per annum Total Passenger km. = 15, = 39,60,000 Passenger km. Chapter - 11: Joint Products & By Products May [4] (a)

6 Solved Scanner Appendix IPCC Gr. I Paper (i) Calculation for Allocation of Joint Cost: No. of unit Produced Selling price per unit (`) Particulars B 1 B 2 Sales value (`) ( ) Estimated Profit (B 1 = 20%, B 2 = 30%) Cost of Sales ( ) Estimated selling Expenses (B 1-15, B 2-15 ) Cost of Production ( ) Cost after Separation 1, ,000 (14,400) 57,600 (10,800) 46,800 (35,000) 3, ,000 (27,000) 63,000 (13,500) 49,500 (24,000) Joint Cost allocated 11,800 25,500 (ii) Statement of Profitability: Particulars M 1 (`) B 1 (`) B 2 (`) Sales value (-) Joint Cost (-) Cost after separation (-) Selling exp. (20,15,15) 4,00,000 (4, ) 1,75,100 (2,12,400-11,800-25,500) - 80,000 72,000 11,800 35,000 10,800 90,000 25,500 24,000 13,500 (B) 2,55,100 57,600 36,000 Profit (A - B) 1,44,900 14,400 27,000 Overhead Profit = 1,44, , ,000 = 1,86,300 Chapter - 12: Standard Costing May [2] (a)

7 Solved Scanner Appendix IPCC Gr. I Paper (i) Variable overhead efficiency variance: Variable overhead efficiency variance = Standard rate per hour = 4 = Standard rate Budgeted hours = 60,000 hours Variable overhead efficiency variance = (60,000-74,000) 4 = (-14,000) 4 = 56,000 Adverse (ii) Variable overhead expenditure variance: Variable overhead expenditure variance = (Standard rate - Actual rate) Actual hours = 74,000 = (4-3.14) 74,000 = 63,500 Favourable (iii) Fixed overhead efficiency variance: Fixed overhead efficiency variance = = (60,000-74,000) 20 = 2,80,000 Adverse (iv) Fixed overhead capacity variance: Fixed overhead capacity variance = = (74,000-60,000) 20 = 14, = 2,80,000 Favourable Chapter - 13: Marginal Costing May [1] {C} (a) Recovery rate Recovery rate

8 Solved Scanner Appendix IPCC Gr. I Paper (i) Calculation for variable cost per unit: Particulars Difference Sale units 80,000 1,20,000 40,000 Sale ` 40 32,00,000 48,00,000 16,00,000 total cost ` 34,40,000 45,60,000 11,20,000 Variable cost per unit ` = ` 28 (ii) Fixed cost = 45,60,000-1,20, = ` 12,00,000 or = 34,40,000-80, = ` 12,00,000 Variable cost per unit = ` 28 Calculation of PV Ratio: PV Ratio = 100 Sales = 32,00,000 V.C. = (28 80,000) = (22,40,000) Contribution = 9,60,000 PV Ratio = 100 PV Ratio = 30% (iii) Calculation for Break even points (in units):

9 Solved Scanner Appendix IPCC Gr. I Paper Break even point (` in units) = = (iv) = Break even point = 1,00,000 units Profit if the firm operates at 75% of the capacity: Capacity at 75% = 2,00,000 75% Contribution per unit = ` 12 Profit = 1,50,000 units Contribution (`) = 1,50,000 ` 12 = ` 18,00,000 Fixed cost = ` 12,00,000 = Contribution - Fixed Cost = ` 18,00,000 - ` 12,00,000 Profit = ` 6,00,000 Chapter - 14: Budgets and Budgetary Control May [1] {C} (b) (i) Production Budget for Product xml Particulars April May June July Budgeted Sale (+) Closing stock (25%) 8,000 2,000 10,000 2,500 12,000 3,000 16,000 4,000 Total required stock (-) Opening stock 10,000-12,500 (2,000) 15,000 (2,500) 20,000 (3,000) Net Production 10,000 10,500 12,500 17,000 Production Budget for Product yml

10 Solved Scanner Appendix IPCC Gr. I Paper Particulars April May June July Budgeted Sale (+) Closing stock (25%) Total required stock (-) Opening stock 6,000 1,500 7,500-8,000 2,000 10,000 (1,500) 9,000 2,250 11,250 (2,000) 14,000 3,500 17,500 (2,250) Net Production 7,500 8,500 9,250 15,250 (ii) Production Cost Budget (for first quarter) (a) For Product xml Particulars April May June July Direct Material 22,00,000 (220 10,000) Direct Labour 13,00,000 (130 10,000) 23,10,000 (220 10,500) 13,65,000 (130 10,500) 27,50,000 (220 12,500) 16,25,000 (130 12,500) 37,40,000 (220 17,000) 22,10,000 (130 17,000) Manufacturing Exp. 20,000 21,000 25,000 34,000 Total Production Cost 35,20,000 23,31,000 27,75,000 37,74,000 (b) For product yml Particulars April May June July Direct Material 21,00,000 (280 7,500) Direct Labour 9,00,000 (120 7,500) 23,80,000 (280 8,500) 10,20,000 (120 8,500) 25,90,000 (280 9,250) 11,10,000 (120 9,250) 42,70,000 (280 15,250) 18,30,000 (120 15,250) Manufacturing Exp. 25,000 28,333 30,833 50,833 Total Production Cost 30,25,000 34,28,333 37,30,833 61,50,833

11 Solved Scanner Appendix IPCC Gr. I Paper Paper - 3B : Financial Management Chapter - 1: Scope and Objectives of Financial Management May [7] (d) Conflicts in Profit Versus Wealth Maximization: In favour of Wealth Maximization Wealth Maximization helps to achieve a higher growth rate. It helps to attain a large market share. It gains leadership in the market in terms of products & technology. It promotes employee welfare. It helps to increase customer satisfaction. In against of Wealth Maximization It is prescriptive idea. it is not necessarily socially desirable. There is some controversy as to whether the objective is to maximize stakeholders wealth or the wealth of the firm which includes other financial claims holders such as debenture holders, preference shareholders etc. The objective of wealth maximization may also difficulties when ownership and management are separated as is the case in most of the large corporate form of organizations. Chapter - 2: Time Value of Money May [7] (e) Present Value: The present value of a sum of money to be received at a future date is determined by discounting the future value at the interest rate that the money could earn over the period. This process is known as discounting. P O = or P O = Fun (1 + i) -n Where, Fun = Future value n years hence i = Rate of interest per annum n = Number of years for which discounting is done. Perpetuity:

12 Solved Scanner Appendix IPCC Gr. I Paper It is an annuity in which the periodic payments or receipts begin on a fixed date and continue indefinitely or perpetually. Chapter - 3: Financial Analysis and Planning May [2] (b) (i) Calculation for the operating expenses for the year ended 31 st March, 2015: Cost of goods sold Interest on debentures Income Tax Particulars Amount ` 18,00,000 60,000 3,75,000 Operating Expenses 22,35,000 (ii) Balance sheet as on 31 st March, 2015 Balance Sheet Particulars LF Amount (`) Sources of fund (a) Share capital 22,68,000 (b) Reserves & Surplus 9,72,000 (c) Long term borrowings 4,00,000 (d) Other current assets 2,00,000 38,40,000 Application of fund (e) Fixed assets (a) Tangible fixed assets 34,40,000 (f) (b) Intangible fixed assets Non current investment (g) Other non current assets (h) Current Assets

13 Solved Scanner Appendix IPCC Gr. I Paper (a) Trade receivables (b) Inventories (c) Cash & Cash Equivalents 2,00,000 1,50,000 50,000 38,40,000 Working Notes: 1. Calculation of NP: NP = = 100 NP = 60 lakhs 6.25% NP = ` 3,75, Calculation for Profit Before Tax: Profit After Tax = 3,75,000 (+) Income Tax (50%) = 3,75,000 Profit Before Tax = 7,50, Calculation for Profit Before Interest & Tax: Profit Before Tax = 7,50,000 (+) Interest = 60,000 Profit Before Interest & Tax = 8,10, Calculation for Average Inventory: Inventory Turnover Ratio = 12 = Closing stock = Closing stock = 1,50, Calculation for Cash & Bank Balance:

14 Solved Scanner Appendix IPCC Gr. I Paper Current Ratio = 2 = 4,00,000 = 3,50,000 + Cash & Bank Cash & Bank = ` 50, Calculation for debentures: Debentures 15% = Interest on debentures Debentures = 15% debentures = ` 4,00, Calculation of Net worth: Profit Before Interest & Tax = Net worth Return on net worth 8,10,000 = Net worth 25% Net worth = Net worth = ` 32,40, Calculation for Share Capital & Reserve: Net worth = Share Capital + Reserve Share Capital = 32,40,000 = 22,68,000 Reserves = 32,40,000-22,68,000 Reserves = ` 9,72,000 Chapter - 4: Financing Decisions-Cost of Capital & Capital Structure May [4] (b) (i) Calculation for Post Tax Average Cost of Addition Debt: Total additional finance = 30 lakhs (-) Retained earnings = (6 lakhs) Outsiders = 24 lakhs 30% = 7.2 lakhs (-) before (30,000) = (3.0 lakhs)

15 Solved Scanner Appendix IPCC Gr. I Paper Post debt 14% = 4.2 lakhs = lakhs (ii) Calculation for Cost of Retained Earnings & Cost of Equity: Cost of retained earnings (k r ) = K (I - T p ) = 0.10 (1-0.2) = 0.10 (0.8) = 8% Cost of Equity (K e ) = = 10.11% * Calculation for dividend: 70% of earning = 6,00,000 70% = 4,20,000 (iii) Calculation for WACC: = = Particulars Amount Cost Proportion WACC Equity 16,80, % Debt 7,20,000 14% Retained earnings 6,00,000 8% - 8%

16 Solved Scanner Appendix IPCC Gr. I Paper Chapter - 5: Business Risk, Financial Risk & Leverage May [1] {C} (d) (i) Degree of operating leverage: Degree of operating leverage = P = Q = R = S = = times = 1.28 times = 1.57 times = 1.90 times (ii) Degree of combined leverage: Degree of combined leverage = P = = 1.11 times Q = = 0.96 times R = = 0.91 times S = = times Chapter - 6: Types of Financing May [5] (c) Sale and Lease Back: Under this type of lease, the owner of an asset sells the asset to a party (the buyer), who in turn leases back the same asset to the owner in consideration of a lease rentals. Under this agreement, the asset is not physically exchanged but it all happen in records only. The main advantage of this method is that the lessee can satisfy himself completely regarding the quality of an asset and after possession of the asset convert the sale into a lease agreement.

17 Solved Scanner Appendix IPCC Gr. I Paper Chapter - 8: Capital Budgeting and Investment Decisions May [3] (b) (i) Calculation for Cost of Project: Cost of project at 15% Internal rate of return, the sum of total cash inflows = Cost of the Project i.e. initial cash outlay. Annual cash inflow = ` 60,000 Useful life = 4 years Considerating discounting 15%, cummulative cash inflow for 4 years is Hence, total cash flow for 5 years for the project = ` 60, Cost of Project = ` 1,71,300 (ii) Calculation for Payback Period: Pay-back Period = Pay-back Period = years. (iii) Calculation for Cost of Capital: = Profitability Index = = Sum of discounted cash inflows = ` 1,82,263.2 Hence, Cumulative discount factor for four years = = From the discount factor table, at discount rate of 12% the cumulative discount factor for 5 years is Hence, Cost of Capital is 12%. (iv) Calculation for Net Present value (NPV): NPV = Sum of Present values of cash inflows - Cost of Project = NPV = `

18 Solved Scanner Appendix IPCC Gr. I Paper Chapter - 9: Meaning, Concept & Policies of Working Capital May [6] (b) (i) Calculation for Operating Cycle Period: Operating Cycle = RM Period + WIP Period + FG Period + Debtor Collection Period - Creditor Collection period = 50 days + 18 days + 22 days + 45 days - 55 days Operating Cycle = 80 days. (ii) No. of Operating Cycle in a year: One operating cycle is for 80 days. So (iii) No. of Operating Cycle in a year = 4.5 times. Calculation for Amount of working capital required for company on cash cost basis: Annual operating cost = 21 lakhs depreciation = ` 2,10,000 Cash operating cost = Annual Cost - Depreciation = ` 21 Lakhs - 2,10,000 Cash operating cost = 18,90,000 = = 4,20,000 Working Capital Required = ` 4,20,000 (iv) Reduction in working capital: Working Capital = ` 6,56,250 = =

19 Solved Scanner Appendix IPCC Gr. I Paper Chapter - 10: Treasury & Cash Management May [5] (d) Miller-Orr Cash Management model: According to this model, the net cash flow is completely stochastic. When changes in cash balance occur randomly the application of control theory serves a useful purpose. The miller-orr model is one of such control limit models. This model is designed to determine the time & size of transfers between an investment account and cash account. In this model, limits are set for cash balances. These limits may consists of h as upper limit, z as the return point and zero as lower limit. When cash balance reaches the upper limit the transfer of cash equal to h, is invested in marketable securities account. When it touches the lower limit, a transfer from marketable securities account to cash account is made. During the period when cash balance says between h and o i.e. high and low limits of cash balance are set up on the basis of fixed cost associated with the securities transaction, the opportunity cost of holding cash and degree of likely fluctuations in cash balance. This limits satisfy the demands for cash at the lower possible total costs. Theory: This model operates as under: (a) Cash outflows are not uniform during the year. (b) Upper and lower limits can be fixed for cash balances, as outflows do not exceed a certain limit on any day. These limits are determined based on fixed transaction costs, interest foregone on marketable securities and degree of likely fluctuations in cash balances. (c) When cash balance reaches the upper limit, Surplus cash is invested in marketable securities, to bring down the cash balance to the average limit or return point. (d) When cash balance touches the lower limit, investments are disposed off so that cash balances goes upto the average limit or return point. (e) During the period when cash balance stays between high & low limits, there are no transactions between cash & marketable securities. Formula: R =

20 Solved Scanner Appendix IPCC Gr. I Paper Chapter - 12: Management of Receivables May [1] {C} (c) Debtors = 2,40,000 Debtors = ` 30,000 10% = 3,000 Cost of Sales = 80% i.e. 2,40,000 80% = 1,92,000 Sales = 2,40,000 (-) Cost = (1,92,000) Profit = 48,000 (-) Tax = (14,400) Profit after tax = 33,600 Rate of return = 33,600 40% = 13,440 The firm should accept the offer because the benefit for acceptance is better than ignorance. Chapter - 13: Financing of Working Capital May [7] (c) Differentiate between Factoring & Bill discounting. Factoring: Factoring refers to the giving the bill to other as a security that money is payable on due date. The organization can get finance by factoring bill from the parties. Bill discounting: Bill discounting refers to the bill given to the bank & bank than gives the finance of that bill. This is used where there is urgent need of funds. Shuchita Prakashan (P) Ltd. 25/19, L.I.C. Colony, Tagore Town, Allahabad Visit us :

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