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

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1 ISBN: Solved Scanner (Solution of May 2017) IPCC Gr. I Paper 3: Cost Accounting and Financial Management [Chapter 3] Employee Cost Paper 3A: Cost Accounting 1. (a) (5 marks) 1. Average Number of workers on roll during the year: Labour turnover rate under Replacement method = Average Number of workers on roll = Number of workers left and discharged: 10% = Labour turnover rate under Separation method = 5% = Number of Separations = Number of workers recruited and joined: Labour turnover rate under Flux Method = Number of the Accession = 75 20% = 1

2 Solved Scanner Solution IPCC Gr.I Paper 3 2 [Chapter 12 ] Standard Costing 1. (b) Calculation of Fixed Overheads Variances (5 marks) Output Absorbed OH (F 1 ) Input Absorbed OH (F 2 ) = Actual Production Budgeted Fixed O.H. p/unit = 22,000 ` 1.50 p/unit = 33,000 = Actual hrs. Budgeted Fixed O.H. p/hour = 31,500 hrs. ` 1 = 31,500 Possible OH (F 3 ) = Possible Production Budgeted Fixed O.H. (per/unit) = 21,600 units ` 1.50 p/unit = ` 32,400 Budgeted OH (F 4 ) = ` 30,000 Actual OH (F 5 ) = ` 31,000 Budgeted FOH per unit = = = ` 1.50 per unit Possible Production = Actual Days Std. Production in 1 day = 27 Days = 27 Days = 21,600 units Calculation of FOH Variances 1. F.OH Efficiency Variance = F1 F2 = = 1500 (F) 2. F.OH Capacity Variance = F2 F3 = = 900 (A) 3. F.OH Calendar Variance = F3 F4 = = 2400 (F) 4. F.OH Volume Variance = F1 F4 = = 3000 (F) 5. F.OH Expenditure Variance = F4 F5 = = 1000 (A)

3 Solved Scanner Solution IPCC Gr.I Paper 3 3 [Chapter 10] Process Costing 2. (a) Process XM A/c To Opening Stock To Material To Wages Prime Cost () Closing Stock Net Balance To Mfd. OH Cost Profit Total (`) 30,000 1,60,000 2,50,000 4,40,000 (40,000) 4,00,000 1,92,000 30,000 By Process 1,60,000 YM A/c 2,50,000 4,40,000 (40,000) 4,00,000 1,92,000 Total Cost 5,92,000 5,92,000 To Costing P&L A/c (20% on cost) 1,48,000 1,48,000 (8 marks) Cost Profit Total (`) 5,92,000 1,48,000 7,40,000 5,92,000 1,48,000 7,40,000 5,92,000 1,48,000 7,40,000 Statement to calculate Profit % on Cost Particulars Process XM Process YM Process ZM Transfer Price/ Selling Price (`) (Assumed) ( ) Profit (`) 20 (20% on transfer price) (20% on transfer price) 25 (25% on transfer price) Cost (`) 80 (Bal.) 80 (Bal.) 75 (Bal.) % of Profit on Cost (A) Cost for Process (B) Total Column fig. = 25% = 25% = 33.33% 5,92,000 12,20,000 19,44,000 Profit (B A) 1,48,000 3,05,000 6,48,000

4 Solved Scanner Solution IPCC Gr.I Paper 3 4 To Opening Stock To Process XM A/c To Material To Wages Prime Cost () Closing Stock Cost = Process YM A/c Cost Profit Total (`) 46,000 5,92,000 1,30,000 2,16,000 9,84,000 (55,242) 8,000 1,48,000 1,56,000 (8,758) 54,000 By Process 7,40,000 ZM A/c 1,30,000 2,16,000 11,40,000 (64,000) Cost Profit Total (`) 10,72,758 4,52,242 15,25,000 Net Balance To Mfd. OH Total Cost To Costing P&L A/c (25% on cost) 9,28,758 1,44,000 1,47,242 10,72,758 1,47,242 3,05,000 10,76,000 1,44,000 12,20,000 3,05,000 10,72,758 4,52,242 15,25,000 10,72,758 4,52,242 15,25,000 To Opening Stock To Process YM A/c To Material To Wages Prime Cost () Closing Stock Cost = Process ZM A/c Cost Profit Total (`) 60,000 10,72,758 1,00,000 1,84,000 14,16,758 (58,500) 20,000 4,52,242 4,72,242 (19,500) 80,000 By 15,25,000 Finished 1,00,000 Goods 1,84,000 18,89,000 (78,000) Cost Profit Total (`) 14,91,258 11,00,742 25,92,000 Net Balance To Mfd. OH Total Cost To Costing P&L A/c (33.33% on cost) 13,58,258 1,33,000 14,91,258 4,52,742 4,52,742 6,48,000 18,11,000 1,33,000 19,44,000 6,48,000 14,91,258 11,00,742 25,92,000 14,91,258 11,00,742 25,92,000

5 Solved Scanner Solution IPCC Gr.I Paper 3 5 To Opening Stock To Process ZM A/c Prime Cost () Closing Stock Cost = Finished Stock A/c Cost Profit Total (`) 50,000 14,91,258 15,41,258 (57,468) 40,000 11,00,742 11,40,742 (42,532) 90,000 By Sales 25,92,000 A/c 26,82,000 (1,00,000) Cost Profit Total (`) 14,83,790 13,16,210 28,00,000 Net Balance To Costing P&L A/c 14,83,790 10,98,210 2,18,000 25,82,000 2,18,000 14,83,790 13,16,210 28,00,000 14,83,790 13,16,210 28,00,000 [Chapter 13] Marginal Costing 3. (a) (8 marks) Number of units selling which the company will neither loss or nor gain anything is (i) Break Even Points (in units) = = = 48,000 units Total Contribution = Total Sales Total Variable Cost (Material + Labour + Variable Overheads) = ` 20,00,000 (8,00, ,00, ,00,000) = ` 6,00,000 Contribution per unit = = = ` 7.50 per unit (ii) Desired Sales (in units) = units (Assumed) =

6 Solved Scanner Solution IPCC Gr.I Paper 3 6 On solving we get Desired Sales units (x) = 1,44,000 units Desired Sales (`) = Units Selling price p.u. = 1,44,000 units ` 25 = ` 36,00,000 (iii) When selling price is reduced by 20% New Selling Price = ` 25 80% = ` 20 New Contribution per unit = = 2.50 p.u. Desired Sales Units = = = 2,40,000 units Extra units to sold to maintain present profit = 2,40,000 units 80,000 units = 1,60,000 units When Selling Price is reduced by 25% New Selling Price = ` 25 75% = ` New C.P.U. = = 1.25 p.u. Desired Sales Units = = = 4,80,000 units Extra units to sold to maintain present profit = 4,80,000 units 80,000 units = 4,00,000 units (iv) Break Even Points (in units) = 10,000 units = On solving we get, Selling Price = ` 53.50

7 Solved Scanner Solution IPCC Gr.I Paper 3 7 [Chapter 5] Integrated & NonIntegrated Accounts 4. (a) Stores Ledger Control A/c (8 marks) Particulars (`) Particulars (`) To Balance b/d 90,000 By WIP Ledger Control A/c 4,80,000 To GLA A/c 4,80,000 By Works OH Control A/c 60,000 To WIP Ledger Control A/c 2,40,000 By Costing P&L A/c 18,000 By Balance c/d 2,52,000 8,10,000 8,10,000 Wages Control A/c Particulars (`) Particulars (`) To GLA A/c 2,10,000 By WIP Ledger Control A/c 1,80,000 By Works OH Control A/c 30,000 2,10,000 2,10,000 Works OH Control A/c Particulars (`) Particulars (`) ToStoresLedgerControlA/c 60,000 By WIP Ledger Control A/c 7,20,000 To Wages Control A/c 30,000 By Costing P&L A/c 1,20,000 To GLA A/c 7,50,000 8,40,000 8,40,000 WIP Ledger Control A/c Particulars (`) Particulars (`) To Balance b/d 1,80,000 By Stores Ledger Control A/c 2,40,000 To Stores Ledger Control A/c 4,80,000 By FG Ledger Control A/c 12,00,000 To Wages Control A/c 1,80,000 By Balance c/d 1,20,000 To Works OH Control A/c 7,20,000 15,60,000 15,60,000

8 Solved Scanner Solution IPCC Gr.I Paper 3 8 Fixed Goods (FG) Ledger Control A/c Particulars (`) Particulars (`) To WIP Ledger Control 12,00,000 By Cost of Sales A/c 12,00,000 A/c 12,00,000 12,00,000 Cost of Sales A/c Particulars (`) Particulars (`) To FG Ledger Control A/c 12,00,000 By Costing P&L A/c 12,00,000 Costing P&L A/c Particulars (`) Particulars (`) To Stores Ledger Control A/c 18,000 By GLA A/c 13,20,000 To Cost of Sales A/c 12,00,000 (12,00, %) To Works OH Control 1,20,000 By GLA A/c 18,000 13,38,000 13,38,000 GLA A/c Particulars (`) Particulars (`) To Costing P&L A/c 13,20,000 By Balance b/d 2,70,000 To Costing P&L A/c 18,000 (opening store + opening WIP) To Balance c/d 3,72,000 By Store Ledger Control 4,80,000 By Wages Control A/c 2,10,000 By Works OH Control 7,50,000 17,10,000 17,10,000 [Chapter 1] Basic Concepts 5. (a), (b) (4 marks each) (a) Cost Unit: It is a unit of product, service or time (or combination of these) in relation to which costs is ascertained or expressed. It is unit of measurement. For example the cost of carrying a passenger in terms of

9 Solved Scanner Solution IPCC Gr.I Paper 3 9 km, cost of hotel room expressed as cost per day etc. Cost Centre: It is a location, person or an item of equipment (or group of these) for which cost is ascertained and used for the purpose of cost control. The main purpose of ascertaining cost centre is to control the cost and to fix responsibility of the person in charge of a cost centre. Cost Centres are of two types: 1. Personal Cost Centre. 2. Impersonal Cost Centre. Cost centres in a manufacturing concern: 1. Production Cost Centre 2. Service Cost Centre. (b) Essential Factors for installing a Cost Accounting System: 1. Objective: The objective of cost system should be considered before installation. Whether to fix selling prices or control costs or both. 2. Nature of Business: The costing system, which is suitable to the business organisation, should be introduced. 3. Organisational Hierarchy: Costing system should fulfill the requirement of different level of management. Organisation structure should be studied to determine the manner in which costing system should be introduced. 4. Knowing the Product: Nature of Product determines the type of costing system to be implemented. The product which has byproducts requires costing system which account for byproducts as well. 5. Knowing the production process: A good costing system can never be established without the complete knowledge of production process. 6. Method of Maintenance of cost records: The manner in which Cost and Financial accounts could be interlocked into a single integral accounting system and in which results of separate sets of accounts, cost and financial, could be reconciled by means of control accounts.

10 Solved Scanner Solution IPCC Gr.I Paper 3 10 [Chapter 14] Budgets and Budgetary Control 6. (a) (8 marks) Flexible Budget Particulars 75% (`) 100% (`) Sales 2,40,00,000 3,20,00,000 Variable Expenses Materials 72,00,000 96,00,000 Labour 76,80,000 1,02,40,000 Others 11,40,000 15,20,000 Total Variable Expense (A) 1,60,20,000 2,13,60,000 SemiVariable Expenses Maintenance & repairs 5,50,000 6,00,000 Indirect Labour 21,78,000 23,76,000 Sales Department Salaries 6,38,000 6,96,000 Sundry Administration expenses 5,72,000 6,24,000 Total SemiVariable Expenses (B) 39,38,000 42,96,000 Wages and Salaries 16,80,000 16,80,000 Rent, Rates, Taxes 11,20,000 11,20,000 Depreciation 14,00,000 14,00,000 Sundry Administration Expenses 17,80,000 17,80,000 Total Fixed Expenses (C) 59,80,000 59,80,000 Profit (Sales A B C) (19,38,000) 3,64,000

11 Solved Scanner Solution IPCC Gr.I Paper 3 11 [Chapter 8] Contract Costing 7. (a) (4 marks) Principles to be Followed While Taking Credit for Profit on Incomplete Contract: There are no hard and fast rules as to how much portion of profit on incomplete contract should be credited to Profit & Loss Account. However, the following principles may be followed: 1. The costs incurred upto date should be clearly identified. 2. The stage of contract performance completed should be reasonably estimated. 3. The costs to complete the contract should be reasonably estimated. 4. The total contract revenues to be received should be reliable estimated. 5. The work certified should be valued in terms of contract price and its value should be treated as contract revenue for the accounting period. 6. The uncertified work should be valued at cost and should be treated like closing inventory at the end of accounting period. 7. The national profit on incomplete contract should be estimated as under: National profit = Value of work certified + cost of uncertified work costs incurred to date. 8. The amount of profit to be credited to profit and loss account can be calculated as under: Statement showing the amount of profit to be credited profit & loss account. Value of work certified... Amount of profit to be credited to Profit and Loss Account (i) If less than 25% of the contract price (ii) If equal to or more than 25% but less than 50% of the contract price. (iii) If equal to or more than 50% but less than 90% of the No profit is taken into account. The entire amount is treated as reserve. National Profit National Profit

12 Solved Scanner Solution IPCC Gr.I Paper 3 12 contract price (iv) If equal to or more than 90% of the contract price The amount of profit to be credited to Profit & Loss A/c may be ascertained by adopting only of the following formula: (i) Estimated total profit (ii) Estimated total profit Notes: (i) Estimated Total Cost = cost of contract upto date + costs to be incurred (ii) Estimated Total Profit = Total contract price Estimated Total Cost. [Chapter 1] Basic Concepts 7. (b) (4 marks) Basis Cost Accounting Management Accounting 1. Nature I t r e c o r d s t h e quantitative aspect only. 2. Objective It records the cost of producing a product and providing a service. 3. Area It only deals with cost Ascertainment. 4. Recording of Data 5. Development It uses both past and present figures. It s development is related to industrial revolution. It records both qualitative and quantitative aspect. It provides information to management for planning and coordination. It is wider in scope as it includes F.A., budgeting, Tax, planning. It is focused with the projection of figures for future. It develops in accordance to the need of modern business world.

13 Solved Scanner Solution IPCC Gr.I Paper Rules and Regulation It follows certain p r i n c i p l e s a n d p r o c e d u r e s f o r recording costs of different products. It does not follow any specific rules and regulations. [Chapter 2] Material Cost 7. (d) (ii) (2 marks) A.B.C. Analysis: It is a system of selection inventory control whereby the measure fo control over an item of inventory varies with its usage value. It exercises discriminatory control over different items of stores grouped on the basis of the investment involved. Usually the items of material are grouped into three categories viz; A, B and C according to their use value during a period. In other words, the high use value items are controlled more closely than the items of low use value.

14 Solved Scanner Solution IPCC Gr.I Paper 3 14 Paper 3 B Financial Management [Chapter 5] Business Risk, Financial Risk and Leverage 1. (c) (5 marks) Name of Firm Change in Revenue Change in Operating Income Change in EPS Operating Leverage = Combined Leverage = M N P Q R [Chapter 10] Treasury & Cash Management 1. (d) Optimum Cash Balance = (5 marks) Where, A = Annual Cash disbursements T = Transaction Cost (fixed cost) per transaction H = Opportunity Cost one rupee per annum (Holding Cost) Optimum Cash Balance = Optimum Cash Balance = ` 23,717 Thus Optimum Cash Balance according to William J. Boumol Model is ` 23,717.

15 Solved Scanner Solution IPCC Gr.I Paper 3 15 [Chapter 9] Meaning, Concept & Policies of Working Capital 2. (b) (8 marks) Statement Showing Working Capital Requirements Particulars Calculations Amount Amount Current Assets: Debtors: Domestic Sales 7,50,000 Debtors: Exports 11,25,000 Stock of Raw Materials 3,75,000 Stock of Finished Goods 11,25,000 Cash and Bank [10,00,000 5,00,000] 5,00,000 Total Current Assets 38,75,000 Current Liabilities: Creditors for Material 7,50,000 Wages 1,50,000 Manufacturing Exp. o/s 4,50,000 Admin. Exp. o/s 1,00,000 Income Tax Payable 3,75,000 Total Current Liabilities 18,25,000

16 Solved Scanner Solution IPCC Gr.I Paper 3 16 Net Current Assets 20,50, % for Contingencies 3,07,500 Working Capital Requirement Working Note: Cash cost of sales is calculated as under: 23,57,500 Domestic Sales ( ) Gross Profit (1,20,00,000 25%) Export Sales ( ) Gross Profit (54,00,000/0.90) 15% (`) (`) 1,20,00,000 (30,00,000) 90,00,000 54,00,000 (9,00,000) 45,00,000 1,35,00,000 [Chapter 4] Financing DecisionsCost of Capital and Capital Structure 3. (b) (8 marks) 1. Calculation of Value of Firms PNR and PXR according to MM Hypothesis: (a) Market value of Firm PNR (Unlevered) V u = V u = V u = 17,50,000 (b) Market value of Firm PXR (Levered) V E = V u + DT V E = 17,50,000 + (20,00, ) V E = 23,50, Weighted Average Cost of Capital (According to MM) (a) WACC for PNR = 20% (Same as given in Que. Since only equity in capital)

17 Solved Scanner Solution IPCC Gr.I Paper 3 17 (b) WACC for PXR EBIT 5,00,000 () Interest (12%) (2,40,000) EBT 2,60,000 () 30% (78,000) PAT 1,82,000 Value of Firm 23,50,000 () Value of Debt (20,00,000) Value of Equity 3,50,000 K e = = = 52% K d = Int (1 t) = 12 (1 0.3) = 8.4% Weighted Average Cost of Capital Capital Amount Weight Cost W C Equity 3,50, % 7.75% Debt 20,00, % 7.15% 23,50,000 WACC 15% [Chapter 3] Financial Analysis and Planning 4. (b) (8 marks) 1. Sales and COGS: G.P. Ratio = = 100 Sales = Sales = 16,00,000

18 Solved Scanner Solution IPCC Gr.I Paper 3 18 COGS = Sales Gross Profit = 16,00,000 4,00,000 COGS = 12,00, Sundry Debtors: Debtors Velocity = Closing Stock Debtors = 3 = 12 Debtors = 4,00,000 Stock Turnover Ratio = 1.5 = Average Stock = 8,00,000 Average Stock = 8,00,000 = 16,00,000 = 2 Opening Stock + 10,000 Opening Stock = 7,95,000 Closing Stock = Opening Stock + 10,000 = 7,95, ,000 Closing Stock = 8,05, Sundry Creditors COGS = Opening Stock + Purchase Closing Stock 12,00,000 = 7,95,000 + Purchase 8,05,000 Purchase = 12,10,000

19 Solved Scanner Solution IPCC Gr.I Paper 3 19 Creditors Velocity = 12 2 = 12 Creditors = Creditors = 2,01, Fixed Assets FATR = 4 = Fixed Assets = 4,00, (c) (4 marks) S. No Basis Fund Flow Cash Flow 1. Meaning It ascertains the changes in financial position between two accounting period. 2. Analysis It analyses the reasons for change in Financial Position between balance sheets at two different dates. 3. Reveals It reveals the sources and application of funds. 4. Tool for It helps to test whether working capital has been effectively used or not. It ascertains the changes in balance of cash in hand and bank. It Analyses the reasons for changes in balance of cash in hand and bank. It shows inflows and outflows of cash. It is an important tool for short term Analysis.

20 Solved Scanner Solution IPCC Gr.I Paper 3 20 [Chapter 1] Scope and Objectives of Financial Management 5. (d) (4 marks) Aspects Profit Maximisation Wealth Maximisation Short/ Long term Gain Risk or Uncertainty Timing of Returns Link to The Financial Decisions Emphasizes on the short term gain I g n o r e s r i s k o r uncertainty Ignores the timing of returns Easy to determine the link between financial decisions and profits Emphasizes on the long term gain Recognizes risk or uncertainty Recognizes the timing of returns O f f e r n o c l e a r relationship between financial decisions and share prices Management Experience Easy to calculate Profits C a n l e a d t o management anxiety and frustration [Chapter 8] Capital Budgeting and Investment Decisions 6. (b) (8 marks) Year Cash Flow Cumulative 0 80,00, ,00,000 14,00, ,00,000 28,00, ,00,000 42,00, ,00,000 56,00, ,00,000 70,00, ,00,000 86,00, ,00,000

21 Solved Scanner Solution IPCC Gr.I Paper ,00, ,00, ,00, Payback Period = 5 Year + = Years Year Cash Flow 10% PV 15% PV 1 14,00, ,72, ,18, ,00, ,56, ,59, ,00, ,51, ,21, ,00, ,56, ,00, ,00, ,69, ,95, ,00, ,04, ,91, ,00, ,28, ,52, ,00, ,01, ,81, ,00, ,50, ,68, ,00, ,08, ,97,600 PV of CIF PV of COF 97,97,800 (80,00,000) 78,85,400 (80,00,000) NPV 17,97,800 1,14, % = ` 17,97, % = = = IRR = 10 + = 10 +

22 Solved Scanner Solution IPCC Gr.I Paper 3 22 = 14.70% (Approx.) Final Answer: 1 Payback Period Years 2 NPV 17,97,800 3 PI IRR 14.70% [Chapter 13] Financing of Working Capital 7. (c) (4 marks) Factoring: Factoring involves provisions of specialized services relating to credit investigation, sales ledger management purchase and collection of debts, credit protection as well as provision of finance against receivables and risk bearing. In factoring, accounts receivables are generally sold to a financial institutions (a subsidiary of commercial bank called factor ), who charges commission and bears the credit risks associated with the accounts receivables purchased by it. Advantages of Factoring: 1. The Firm can converts accounts receivables into cash without bothering about repayment. 2. Factoring ensures a definite pattern of cash inflows. 3. Continuous factoring virtually eliminates the need for the credit department. Factoring is gaining popularity as useful source of financing shortterm fund requirements of business enterprises because of the interant advantage of flexibility it affords to the borrowing firm. The seller firm may continue to finance its receivables on a more or less automatic basis. If sales expand or contract it can vary the financing proportionally. 4. Unlike an unsecured loan, compensating balances are not required in this case. Another advantage consists of relieving the borrowing firm of substantially credit and collection costs and from a considerable part of cash management.

23 Solved Scanner Solution IPCC Gr.I Paper 3 23 [Chapter 2] Time Value of Money 7. (d) (i) (2 marks) Time Value of Money: Time Value of money means that worth of a rupee received today is different from the worth of a rupee received in future. The preference of money now as compared to future money is known as time preference of money. A Rupee today is more valuable than rupee after a year due to several reasons: 1. Risk. 2. Preference for present consumption. 3. Inflation. 4. Investment opportunities. [Chapter 7] International Financing 7. (e) (4 marks) American Depository Receipts (ADR): Shares of many nonus companies trade on us stock exchanges through ADRs. ADRs are denominated and pay dividends in us dollars and may be traded like regular shares of stock. This is an excellent way for the public in US to buy shares in a non US company while realizing any dividends and capital gains in U.S. Dollars. One ADR may represents a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADRs are sponsored, the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADR. Unsponsored ADRs do not receive such assistance. Fees associated with the creating or releasing of ADRs from ordinary shares, charged by the commercial banks with correspondent banks in the international sites. Global Depository Receipt: A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank.

24 Solved Scanner Solution IPCC Gr.I Paper 3 24 The shares trade as domestic shares, but are offered for sale globally through the various bank branches. Several international banks issue GDRs, such as JP Morgan Chase, Citigroup, Deutsche Bank, the Bank of New York Mellon. GDRs are often listed in the Frankfurt Stock Exchange, Luxembourg Stock Exchange and in the London Stock Exchange, where they are traded on the International Order Book (IOB) Shuchita Prakashan (P) Ltd. 25/19, L.I.C. Colony, Tagore Town, Allahabad Visit us :

Solution to Cost Paper of CA IPCC COST MAY Solution to Question 1 (a) 10% = Avg. No. of workers on roll = 500

Solution to Cost Paper of CA IPCC COST MAY 2017 Solution to Question 1 (a) Average no. of workers on roll during the year No.of replacements 1. Labour turnover rate under replacement method = x 100 Average