Solution of Cost & F.M November,2012

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1 Solution of Cost & F.M November, (a) BEP in units = 20,000 Fixed Cost = 20,000 x 5 = 1,00,000 Per Unit Sales 14 (-) V.C. 9 Contribution 5 Income Statement of 25,000 Units & 30,000 Units Particulars 25,000 Units 30,000 Units Sales 3,50,000 4,20,000 (-) Variable Cost 2,25,000 2,70,000 Contribution 1,25,000 1,50,000 (-) Fixed Cost 1,00,000 1,00,000 EBIT 25,000 50,000 Operating Leverage (b) Let the total number of labour = T Separation Method: 6% = 36/T x 100 T = 600 Now No. of Replacement = R/600 x 100 = 8% = 48 Flux = (Additions + Separated & Replaced)/ 600 x 100 = 14% = 84 I. No. of worker Recruited & joined = 48 II. No. of worker left & discharged = 36 1.(c) (i) A = P(1 + r) n = 2,40,000(1 +.10) 3 = 3,19,440 (ii) 2,40,000(1 +.05) 6 = 3,21,623 1.(d) A = 8,000 x 3 x 4 = 96,000 (i) EOQ = O = 1,000 per order C i = 3 2 x 96,000 x 1,000 3 = 8,000 Units (ii) 2% Discount E.O.Q. Total ordering cost 4,000 12,000 Total carrying cost 36,000 12,000 (-) Discount (38,400) - Total Cost 1,600 24,000 Yes, the Company should accept 2% Discount.

2 2.(a) Statement Showing Primary Distribution X Y Z A B Indirect Material 20,000 30,000 45,000 25,000 5,000 Direct Labour 45,000 50,000 70,000 60,000 35,000 Superintendent Salary , Fuel & Heat 1,500 3,000 4,500 3,750 2,250 Power 52,500 60,000 45,000 22,500 - Rent & Rates 44,000 40,000 30,000 24,000 12,000 Insurance 4,000 6,000 5,000 1,000 2,000 Meal Charges 12,000 14,000 24,000 6,000 4,000 Depreciation 60,000 90,000 75,000 15,000 30,000 2,39,000 2,93,000 3,94,500 1,57,250 90,250 Let, X to be overhead of A; Y to be overhead of B X = 1,57, % of Y Y = 90, % of X Therefore, Y = 90, /5 (1,57,250 + Y/10) Or, Y = 90, ,450 + Y/50 Or, Y Y/50= 1,21,700 Or, 49 Y /50= 1,21,700 Or, Y = 1,21,184 X = 1,57, ,418 = 1,69,668 Statement showing Secondary Distribution X Y Z A B Overhead as Given 2,39,000 2,93,000 3,94,500 1,57,250 90,250 Overhead of B 31,046 49,674 31,046 12,418 (1,24,184) Overhead of A 50,900 50,900 33,934 (1,69,668) 33,934 3,20,946 3,93,574 4,59, (b) Informations: Total Sales = 30,00,000 Cash Sales = 4,00,000 Credit Sales = 26,00,000 Gross Profit = 7,50,000 COGS = 22,50,000 Working Capital = 2,80,000 (i) Inventory T.O. Ratio COGS/ Average Inventory = 6 Or, 22,50,000/Avg. Inventory = 6 Average Inventory = 3,75,000 Average Inventory = (OP + CL)/ 2 Or, 3,75,000 = {OP + (OP + 80,000)}/2 Or, 7,50,000 = 2OP + 80,000 OP = 3,35,000 (ii) COGS = OP + Purchase CL Or, 22,50,000 = 3,35,000 + Purchase 4,15,000 Purchase = 23,30,000

3 (iii) (iv) Debtors T.O. Ratio = Credit Sale/Average Debtors Or, 8 = 26,00,000/Average Debtors Average Debtors = 3,25,000 Creditor T.O. Ratio = Credit Purchase/Average Creditors Or, 10 = /Average Creditors Avg. Creditors = 2,33,000 (v) Average Payment Period = 360/Cr.T.O ` Or, Average Payment Period = 360/10 Average Payment Period = 36 days (vi) Average Collection Period = 360/Dr T.O. Or, Average Collection Period = 360/8 Average Collection Period = 45 days (vii) Working Capital = CA CL Or, 2,80,000 = 2.4 CL CL Or, CL = 2,00,000 Or, CA = 4,80,000 (viii) CL = 2,00,000 3.(a) Dr. Machinery Account Cr. To Balance 22,00,000 By Depreciation 3,00,000 By Bank 1,50,000 To Bank 13,70,000 By Profit & Loss 20,000 By Balance 31,00,000 35,70,000 35,70,000 Dr. Land Account Cr. To Balance 20,00,000 By Depreciation 50,000 By Bank 4,50,000 To Bank 3,00,000 By Balance 18,00,000 23,00,000 23,00,000 Dr. Investment Account Cr. To Balance 2,00,000 By Dividend 1,50,000 By Balance 3,50,000 3,50,000 3,50,000 Dr. Proposed Dividend Account Cr. To Bank 2,50,000 By Balance 8,00,000 To Balance 11,00,000 By Profit & Loss 5,50,000 13,50,000 13,50,000

4 Dr. Provision for Taxation Account Cr. To Bank 3,80,000 By Balance 4,00,000 To Balance 5,00,000 By Profit & Loss 4,80,000 8,80,000 8,80,000 Fund Flow from Operations Profit & Loss Account 5,30,000 6,70,000 General Reserve 4,00,000 6,00,000 Goodwill 5,00,000 4,20,000 Share Issue Expenses 80,000 60,000 Depreciation on March 3,00,000 Depreciation on Land & Building 50,000 Loss on Sale of Plant 20,000 Proposed Dividend 5,50,000 PFT 4,80,000 15,10,000 36,30,000 Fund Flow from Operation (36,30,000 15,10,000) = 21,20,000 Changes in Working Capital Current Assets: Stock 8,60,000 12,70,000 Sundry Debtors 10,20,000 13,00,000 Bills Receivables 1,00,000 70,000 Cash 7,20,000 8,90,000 Current Liabilities Bills Payable 2,00,000 1,80,000 Sundry Creditors 3,50,000 4,60,000 32,50,000 41,70,000 Changes in Working Capital = (41,70,000 32,50,000) = 9,20,000 Fund from Operation Application Amount(`) Source Amount(`) Machinery 13,70,000 Equity Share Capital 5,00,000 Land 3,00,000 Machinery 1,50,000 Proposed Dividend 2,50,000 Land 4,50,000 PFT 3,80,000 Fund from Operation 21,20,000 Increase in Working Capital 9,20,000 32,20,000 32,20,000 3.(b) Method 1 Profit 10,00,000 5,10,000 x x 8,16,000 = 2,72,000 15,30,000 10,00,000 Method 2 Profit 5,10,000 x 10,00,000 = 3,33,333 15,30,000 Contract Price 15,30,000 (-) Expenditure 8,50,000 (-) Estimated Expenses 1,70,000 Estimated Profit 5,10,000

5 Method 3 Profit 8,50,000 5,10,000 x x 8,16,000 = 3,46,800 10,20,000 10,00,000 Method 4 Profit 4.(a) (i) (ii) (iii) 4.(b) 5,10,000 x 8,50,000 = 4,25,000 10,20,000 Standard Hour Standard Rate Actual Hour Actual Rate Skilled 2, , Semi Skilled , Unskilled Labour Cost Variance 2,000 (45 50) = 10,000 (A) 1,200 (30 35) = 6,000 (A) 800 (15 10) = 4,000 F 12,000 (A) Labour Efficiency Variable 45 (2,600 2,000) = 27,000 F 30 (800 1,200) = 12,000 (A) 15 ( ) = 3,000 (A) 12,000 F Labour Idle time Variable 45 (2) = 90 (A) 30 (2) = 60 (A) 12 (2) = 30 (A) 180 (A) Calculation of Cash Flows NM A 1 NM A 2 Savings in Direct Wages 7,00,000 9,00,000 Saving in Scraps 60,000 1,00,000 (-) Additional Indirect Material (30,000) (90,000) Indirect Labour (40,000) (50,000) Cost of Repairs (45,000) (85,000) + Tax shield on Depreciation 1,20,000 1,50,000 7,65,000 9,25,000 (i) Pay Back Period 4,70,000 6,50, = ,65,000 9,25,000 = 2.70 (ii) Average Profit / Average Investment (iii) PI = PVIF/PVOF 7,65,000 20,00, ,25,000 25,00, = = ,57,653 = ,34,418 = ,00,000 25,00,000

6 5.(a) (b) (c) (d) 6.(a) Essential features of Good Cost Accounting System i. Tailor made: A Good Cost Accounting system should be Practical, Tailor made in nature. ii. Accurate: A Good Cost Account system should endeavour to show Accurate accounting adjustments. iii. Cost Effective: A good Cost Accounting System should not be more costly but should be cost effective. iv. Bug less System: A Good Cost Accounting System should endeavour to eliminate the Bug in system which is regular in initial years. Inter Process Profit: Inter Process Profits means profits are being kept while transferring from one process to another. Advantages: i. Clear Profit is seen at each process. ii. Reason for deviation from Standard if any would be analysed easily. Disadvantages: i. If finished goods are not sold, then also the profit will be booked. ii. Inter Process Profit are not usually as per Accounting Rules. Operating Costing: In general, costing is a method of costing used by the service rendering concerns for computing the cost of providing or operating the standardized services. Operating Costing is that form of operating costing which applies where standardized services are provided either by an undertaking or by a service cost centre with in an undertaking. This method may also be used where the services are not completely standardized but it is convenient to regard it as such. (i) Cost Principle: This principle deals with the ideal capital structure which should minimize cost of financing and maximize the earnings per share. The cheaper form of capital structure is debt capital. (ii) Risk Principle: This principle deals with the capital structure which should not accept high risk. If company issue large amount of preference shares out of the earnings of the company then less amount will be left out for equity shareholders as dividend is paid after the preference shares. (iii) Control Principle: This principle deals with the capital structure which is keeping the controlling position of owners. Preference shareholders possesses no voting rights and don't disturb positions. (iv) Flexibility Principle: This principle deals with capital structure which can have additional requirements of funds in future. Income Statement Sales 48,00,000 (-) Variable Cost 36,00,000 Contribution 12,00,000 (-) Fixed Cost 6,00,000 PROFIT 6,00, Fixed Cost = (48,00,000 x 50%) x 25% = 6,00, Profit = 6,00, Sales = 11,00, ,00,00 = 68,00,000 25% 4. At BEP Cost = 6,00,000 + (150 x 12,000) Cost = 24,00,000 Profit = 6,00,000 (25%) Sales = 30,00,000 Units = 30,00,000 / 200 = 15,000 Units 5. Calculation of Total Cost Fixed Cost = 6,00,000 Variable Cost of 4,000 Units = 6,00,000 a. 12,00,000 Selling Price= 12,00,000 / 4,000 = `300 Per Unit.

7 6.(b) 7.(a) 7.(b) 7.(c) 7.(d) 7.(e) Statement showing Reconciliation Add: Factory Overhead over Recovered 1,35,000 Dividend Received 20,000 Bank Interest Cr. In F.A. 13,600 Opening over Valued 20,000 Closing under Valued 6,500 Less: Administrative Overhead under Recovered 25,500 Depreciation under charged 26,000 Loss due to obsolence in F.A. 16,800 Income Tax Provided 43,600 Goodwill written off 25,000 Provisional for Doubtful Debts 15,000 Notional Rent 60,000 (35,400) Profit Maximization Profit Maximization is the principal in which firm tries to maximize Profit only. Maximize EPS Ignore uncertainly Generally not accepted by society. Considerations on which Capital Expenditure Budget is prepared are: i. Clearly identify financial objectives. ii. Solicit support for specific funding properties. iii. Collect the data necessary to estimate funding of capital. iv. Consider the feasibility at any Capital Expenditure such as New Equipments. v. Examine other alternatives. vi. Draft a proposal budget. Wealth Maximization Wealth Maximization is the principal in which firms tries to maximize Wealth. Maximize MPS Analysis uncertainly Generally accepted by society. Business Risk Financial Risk 1) Business Risk is inherent to business. 1) Financial Risk is not inherent to business 2) It is Operating Risk. 2) It is Financial Risk. 3) Arises during the course of business. 3) Arises while financing. 4) Example: Fixed Cost 4) Example: Interest Different forms at Bank Credit i. Bills Discount ii. Cash Credit iii. Credit Card iv. Bank Overdraft. Trading on Equity: As per concept of Trading on Equity financing a business through borrowing is cheap per than using through raising Equity. Here, borrowing means loans where as Equity means owner fund. Borrowings bears fixed interest where as equity does not. Condition for Trading on Equity: Rate of Return > Cost of Debt.

Sree Lalitha Academy s Key for CA IPC Costing & FM- Nov 2013

Sree Lalitha Academy s Key for CA IPC Costing & FM- Nov 2013 1. a. Question No.1 is compulsory Answer any 5 questions from the remaining 6 questions (Key Covers only Problems does not include theory) i. Annual Demand 60,000 Units Cost Rs. 10 Per unit Cost of Placing