Paper - 3: Cost Accounting and Financial Management Part I: Cost Accounting Questions Short Answer Type Questions From Misc Chapters

PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
PART I : COST ACCOUNTING

QUESTIONS
Short Answer Type Questions from Misc Chapters

1. Give brief answers to the following:
(i) If margin of safety is ` 2, 40,000 (40% of sales) and P/V ratio is 30% of Gupta Ltd,
calculate its (1) Break even sales, and (2) Amount of profit on sales of ` 9,00,000.
(ii) In a period, 5640 kg of material were used at a total standard cost of ` 23,124. The
material usage variance was ` 246 (Adverse). What was the standard weight of
material allowed for the period?
(iii) What is the difference between a Cost centre and Cost unit.
(iv) Differentiate between Period cost and Product cost.
(v) How is Absorption Costing different from Marginal Costing?
Material
2. (a) The purchase department of a company has received an offer of quantity discounts
on its orders of materials as under:
Price per ton Tons ordered
`
1,200 less than 500
1,180 500 and less than 1,000
1,160 1,000 and less than 2,000
1,140 2,000 and less than 3,000
1,120 3,000 and above
The annual requirement for the material is 5,000 tons. The ordering cost per order is
` 1,200 and the stock holding cost is estimated at 20% of material cost per annum.
You are required to compute the most economical purchase level.
(b) What will be your answer to the above question, if there are no discount offered and
the price per ton is ` 1,500?
Labour
3. Three workers Sachin, Sourav, Rahul produced 80, 100 and 120 pieces respectively of a
product X on a particular day in May in a factory. The time allowed for 10 units of
Product X is 1 hour and their hourly rate is ` 4. Calculate followings for each of these
three workers :
The Institute of Chartered Accountants of India

72 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011
(1) Earnings for the day, and

(2) Effective Rate of Earnings per hour under: (a) Straight piece-rate, (b) Halsey
Premium Bonus and (c) Rowan Premium Bonus methods of labour remuneration.
4. (A) Calculate the monthly remuneration of three workers X, Y and Z from the following
data:
(a) Standard production per month per worker 4,000 units
(b) Actual production during the month: X 3,400 units
Y 3,000 units
Z 3,800 units
(c) Piece work rate is 25 paise per unit.
(d) Additional production bonus is Rs. 10 for each percentage of actual production
exceeding 80% standard production (e.g., 79% nil, 80% nil, 81% ` 10, 82%
` 20 and so on).
(e) Fixed dearness allowance, ` 150 per month
(B). The Cost Accountant of Rounak Ltd. has computed labour turnover rates for the
quarter ended 31st March, 2011 as 10%, 5% and 3% respectively under Flux
method,Replacement method and Separation method.
If the number of workers replaced during that quarter is 30, find out the number of (i)
workers left and discharged and (ii) workers recruited and joined.
Non Integrated Accounts
5. Cost Ledger of Beta Ltd. shows the following balances as on 31 st March.
Dr. Cr.
` `
Stores ledger control A/c 6,02,870 -
Work-in-progress ledger control A/c 2,44,730 -
Finished stock ledger control A/c 5,03,890 -
Manufacturing overhead control A/c 21,050
Cost ledger control A/c - 13,30,440
13,51,490 13,51,490
During the next three months, the transactions that took place is as follows:
`
Finished product (at cost) 4,21,670
Manufacturing overhead incurred 1,83,020
Raw materials purchased 2,46,000

PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 73
Factory wages 1,01,060

Indirect labour 43,330
Cost of sales 3,71,780
Materials issued to production 2,54,630
Sales returned at cost 10,760
Materials returned to suppliers 5,800
Manufacturing overhead charged to production 1,54,400
You are required to write up the accounts and schedule the balances stating what each
balance represents.
Process Costing
6. A factory has two production processes. Normal loss in each process is 10% and
scrapped units sell for ` 0.50 each from process 1 and ` 3 each from process 2.
Relevant information for costing purposes relating to period 5 is as follows:
Process 1 Process 2
Direct materials Units 2,000 1,250
Direct materials Cost ` 8,100 ` 1,900
Direct labour ` 4,000 ` 10,000
Production overhead 150% of 120% of
direct labour cost direct labour cost
Output to process 2/finished 1,750 units 2,800 units
goods
Actual production overhead ` 17,800
Required:
Prepare the accounts for Process 1, Process 2, Scrap, Abnormal loss or Abnormal gain
and Production overhead.
Standard Costing
7. The following standards have been set to manufacture a product:
Direct materials: `
2 units of P at ` 4 per unit 8.00
3 units of Q at ` 3 per unit 9.00
15 units of R at ` 1 per unit 15.00
32.00
Direct labour 3 hours @ ` 8 per hour 24.00
Total standard prime cost 56.00
The company manufactured and sold 6,000 units of the product during the year.

Direct material costs were as follows:

12,500 units of P at ` 4.40 per unit
18,000 units of Q at ` 2.80 per unit
88,500 units of R at ` 1.20 per unit
The company worked 17,500 direct labour hours during the year. For 2,500 of theses
hours the company paid at ` 12 per hour while for the remaining the wages were paid at
the standard rate.
Calculate material price, usage variances, labour rate, and efficiency variances.
Budgetary Control
8. Cambridge School has a total of 150 students consisting of 5 sections with 30 students
per section. The school plans for a picnic around the city during the week-end to places
such as Alipur zoo, the Niko Park, Birla planetarium etc. A private transport operator has
come forward to lease out the buses for taking the students. Each bus will have a
maximum capacity of 50 (excluding 2 seats reserved for the teachers accompanying the
students). The school will employ two teachers for each bus, paying them an allowance
of ` 50 per teacher. It will also lease out the required number of buses. The following are
the other cost estimates:
Cost per student
Breakfast `5
Lunch 10
Tea 3
Entrance fee at zoo 2
Rent ` 650 per bus.
Special permit fee ` 50 per bus.
Block entrance fee at the planetarium ` 250.
Prizes to students for games ` 250.
No cost are incurred in respect of the accompanying teachers (except the allowance of
` 50 per teacher).
You are required to prepare:
(a) A flexible budget estimating the total cost for the levels of 30, 60, 90,120 and 150
students. Each item of cost is to be indicated separately.
(b) Compare the average cost per student at these levels.
(c) What will be your conclusions regarding the break-been level of student if the
school proposes to collect ` 45 per student?

Marginal Costing
9. An Automobile manufacturing company produces different models of cars. The budget in
respect of model 1000 for the month of September, 2011 is as under:
Budgeted output 40,000 units

Variable Costs: (` Lakhs)
Materials 264
Labour 52
Direct expenses 124 440
Fixed costs:
Specific fixed costs 90.00
Allocated fixed costs 112.50 202.50
Total costs 642.50
Add: Profit 57.50
Sales 700.00
Calculate:
(i) Profit with 10% increase in selling price with a 10% reduction in sales volume.
(ii) Volume to be achieved to maintain the original profit after a 10% rise in material
costs, at the originally budgeted selling price per unit.
Overheads
10. A company has two production departments and two service departments. The data
relating to a period are as under:
Production Departments Service Departments
PD1 PD2 SD1 SD2
Direct materials(`) 80,000 40,000 10,000 20,000
Direct wages(`) 95,000 50,000 20,000 10,000
Overheads(`) 80,000 50,000 30,000 20,000
Power requirement at normal 20,000 35,000 12,500 17,500
capacity operations(Kwh.)
Actual power consumption 13,000 23,000 10,250 10,000
during the period(Kwh.)
The power requirements of these departments are met by a power generation plant. The
said plant incurred an expenditure, which is not included above, of ` 1,21,875 out of

which a sum of ` 84,375 was variable and the rest is fixed,. After apportionment of power
generation plant costs to the four departments, the service department overheads are to
be redistributed on the following basis:
PD1 PD2 SD1 SD2
SD1 50% 40% ----- 10%
SD2 60% 20% 20% ---
You are required to:
(i) Apportion the power generation plant costs to the four departments.
(ii) Re-apportion service department costs to production departments.
(iii) Calculate the overhead rates per direct labour hour of production departments,
given that the direct wage rates of PD1 and PD2 are ` 5 and ` 4 per hour
respectively.
Job Costing
11. From the records of a manufacturing company, the following budgeted details are
available:
` `
Direct Materials 1,99,000
Direct Wages:
Machine Shop (12,000 hours) 63,000
Assembly Shop (10,000 hours) 48,000 1,11,000
Works Overhead:
Machine Shop 88,200
Assembly Shop 51,800 1,40,000
Administrative Overhead 90,000
Selling Overhead 81,000
Distribution Overhead 62,100
You are required to:
(a) Prepare a Schedule of Overhead Rates from the figures available stating the basis
of overhead recovery rates used under the given circumstances.
(b) Work out a Cost Estimate for the following job based on overhead calculated on
above basis.
Direct Material: 25 kg @ ` 16.80/kg
15 kg @ ` 20.00/kg

Direct labour: (On the basis of hourly rate Machine shop 30 hours
For machine shop and assempbly shop) Assembly shop 42 hours
Contract Costing
12. Deluxe Limited undertook a contract for ` 5, 00,000 on 1st April 2010. On 31st March
2011 when the accounts were closed, the following details about the contract were
gathered:
`
Materials purchased 1,00,000
Wages paid 45,000
General expenses 10,000
Plant purchased 50,000
Material in hand 31.3.2011 25,000
Wages accrued 31.3.2011 5,000
Work certified 2,00,000
Cash received 1,50,000
Work uncertified 15,000
Depreciation of plant 5,000
The contract contained an escalation clause, which read as follows:

In the event of increase(s) of prices of materials and rates of wages by more than 5%,
the contract price would be increased accordingly by 25% of the rise of the cost of
materials and wages beyond 5% in each case.
It was found that since the date of signing the agreement, the prices of materials and
wage rates increased by 25%. The value of the work certified does not take into account
the effect of the above clause.
Prepare the contract account. The workings should form part of your answer.
Basic Concepts of Cost Accounting
13. (a) Cost Accounting has become an essential tool of Management of a business
concern. Explain the statement.
(b) Discuss the factors which should be considered before installing a Costing system
in a manufacturing firm.

SUGGESTED ANSWERS/HINTS
100
1. (i) Total Sales = 2,40,000 = ` 6,00,000
40
Contribution = 6,00,000 30% = ` 1,80,000
Profit = M/S P/V ratio = 2,40,000 30% = ` 72,000
Fixed cost = Contribution Profit
= 1,80,000 72,000 = ` 1,08,000
F 1,08,000
(1) Break-even Sales = = = ` 3,60,000
P/V ratio 30%
(2) Profit = (Sales P/V ratio) Fixed cost
= (9,00,000 30%) 1,08,000 = ` 1,62,000
(ii) Usage must have been higher than standard because the usage variance is adverse.
` 23,124
Standard price per kilogram of material: = ` 4.10
` 5640
Usage variance is equal to the excess usage multiplied by the standard price per kg
of material
` 246
Excess usage: = 60 kg.
` 4.1
So, Standard usage: 5640 kg 60 kg = 5580 kg.
(iiii) Cost Centre may be defined as a location, person, or an item of equipment for
which cost may be ascertained and used for the purpose of cost control. In such a
responsibility centre, the manager is responsible for costs only. Cost Unit is a unit of
product, service or time (or combination of these) in relation to whom the costs may
be ascertained or expressed.
(iv) Period costs are costs which are not assigned to products but are charged as
expenses against revenue of the period in which they are incurred. All non
manufacturing costs such as selling and distribution expenses, administration
expenses etc are recognised as period costs. Product costs are those costs which
are associated with the purchase and sale of goods (in the case of merchandise
inventory). In a manufacturing scenario, inventoriable costs are known as Product
Costs.
(v) Absorption costing is a method of inventory costing in which the variable
manufacturing costs and all fixed manufacturing costs are included as inventoriable
costs. Marginal costing can be defined as the ascertainment of marginal costs and

of the effect on profit of changes in volume or type of output by differentiating

between fixed and variable costs In a Marginal costing system, fixed costs are not
included as inventoriable cost.
2. (a)
Order size (tons) 400 500 1,000 2,000 3,000
annual requirement
No. of order 13 10 5 3 2
orde rsize
[see Note]
ordersize
Average stock 200 250 500 1,000 1,500
2
Price per ton 1,200 1,180 1,160 1,140 1,120
Average stock value (average stock
price per ton) 2,40,000 2,95,000 5,80,000 11,40,000 16,80,000
` ` ` ` `
Cost of material (5,000 price per ton) 60,00,000 59,00,000 58,00,000 57,00,000 56,00,000
Ordering cost (No. of orders `1,200)

15,600 12,000 6,000 3,600 2,400
Stock carrying cost (20% of average stock 48,000 59,000 1,16,000 2,28,000 3,36,000
value)
Total cost 60,63,600 59,71,000 59,22,000 59,31,600 59,38,400
The above table shows that the lowest total cost is ` 59, 22,000, i.e., when the
quantity ordered is 1,000 tons. This is, therefore, the most economical purchase
level.
Note: When calculating the number of orders if a fraction comes, the next whole
number has to be considered.
2AS
(b) EOQ =
Cc
Where A = consumption per annum in units
S = ordering cost per order
Cc = carrying cost of one unit of stock for one year
2 5,000 `1,200
= = 200 tons.
20% of ` 1,500

3. Statement of Earnings
Sachin Sourav Rahul
(i) Production (units) 80 100 120
(ii) Time allowed (Hours @ 10 pieces per hour) 8 10 12
(iii) Piece rate (`4 10) 0.40 0.40 0.40
(iv) Time taken (Assumed 1 day = 8 hours) 8 8 8
(v) Time saved (Time allowed-Time Taken) 0 2 4
Earnings per day (`)
(a) Straight Piece Rate 80 0.4 100 0.4 120 0.4
= 32.00 = 40.00 = 48.00
(b) Halsey Premium Bonus (See Note) 32.00 36.00 40.00
(c) Rowan Premium Bonus (See Note) 32.00 38.40 42.60
Effective Rate of Earning per hour (Earning Hours)
` ` `
(a) Straight Piece Rate 4.00 5.00 6.00
(b) Halsey Premium Bonus 4.00 4.50 5.00
(c) Rowan Premium Bonus 4.00 4.80 5.33
Notes:
1. Halsey Premium Bonus
Wages = (Time taken + 50% of time saved) Time rate
Sachin = (8 + 0) ` 4 = ` 32
Sourav = (8 + 1) ` 4 = ` 36
Rahul = (8 + 2) ` 4 = ` 40
2. Rowan Premium Bonus
Time saved
Wages = Time taken Rate + Time taken Rate
Time allowed
0
Sachin = 8 4 + 8 4 = ` 32
8
2
Sourav = 8 4 + 8 4 = ` 38.40
10
4
Rahul = 8 4 + 8 4 = ` 42.67
12

4. (A) Statement of Monthly Remuneration

Worker Standard Actual % of Piece Bonus D.A. Total
production production actual to wages earnings
(units) (units) standard @`
production 0.25
` ` `
X 4,000 3,400 85% 850 50* 150 1,050
Y 4,000 3,000 75% 750 - 150 900
Z 4,000 3,800 95% 950 150** 150 1,250
*Additional 5% (85% - 80%), So Bonus is ` 10 5 = ` 50.
**Additional 15% (95% - 80%), So Bonus is ` 10 15 = ` 150.
(B) Average number of workers on payroll:
Number or wor ker s replaced
Labour turnover rate (Replacement method) = 100
Average number on payroll
5 30
or, =
100 Average number on payroll
30 100
or, Average number of workers on payroll = = 600.
5
(i) Number of workers left and discharged:
Number of wor ker s separated
Labour turnover rate (Separation method) = 100
3 Number of wor ker sseparated

or, =
100 600
3 600
or, Number of workers separated (i.e., left and discharged) = = 18.
100
(ii) Number of workers recruited and joined:
Number separated + Number recruited and joined
Labour turnover rate (Flux method) = 100
10 18 + Number of wor ker s recruited and joined

or, =
100 600
600 10
or, Number of workers recruited and joined = - 18 = 42.
100

5. COST LEDGER
Dr. Cost Ledger Account Cr.
Particulars ` Particulars `
To Stores ledger control A/c 5,800 By Balance b/d 13,30,440
To Finished stock ledger 3,71,780 By Stores ledger 2,46,000
control A/c control A/c
To Balance c/d 15,37,030 By Wages control A/c 1,01,060
By Works overhead 43,330
control A/c
By Works overhead 1,83,020
control A/c
By Finished stock
ledger control A/c 10,760
19,14,610 19,14,610
By Balance b/d 15,37,030
Dr. Stores Ledger Control Account Cr.

To Balance b/d 6,02,870 By Cost ledger control A/c 5,800
To Cost ledger control A/c 2,46,000 By Work-in-progress control 2,54,630
A/c
By Balance c/d 5,88,440
8,48,870 8,48,870
To Balance b/d 5,88,440
Dr. Manufacturing Overhead Control Account Cr.

To Cost ledger control A/c 1,83,020 By Balance b/d 21,050
To Cost ledger control A/c 43,330 By Work-in-progress control 1,54,400
A/c
By Balance c/d 50,900
2,26,350 2,26,350
To Balance b/d 50,900

Dr. Work-in-progress Control Account Cr.

To Balance b/d 2,44,730 By Finished stock ledger 4,21,670
control A/c
To Wages control A/c 1,01,060 By Balance c/d 3,33,150
To Stores ledger control A/c 2,54,630
To Works overhead control
A/c 1,54,400
7,54,820 7,54,820
Dr. Finished Stock Ledger Control Account Cr.

To Balance b/d 5,03,890 By Cost ledger control A/c 3,71,780
To Work-in-progress 4,21,670 By Balance c/d 5,64,540
To Cost ledger control A/c 10,760
9,36,320 9,36,320
Trial Balance
Dr. Cr.
Rs. Rs.
Cost ledger control account - 15,37,030
Stores ledger control account 5,88,440 -
Mfg. overhead control account 50,900 -
W.I.P. control account 3,33,150 -
Finished stock ledger control account 5,64,540
15,37,030 15,37,030
6. Output and losses
Process 1 Process 2
Units Units
Output 1,750 2,800
Normal loss (10% of input) 200 300

Abnormal loss 50 -
Abnormal gain - (100)
2,000 3,000*
* 1,750 units from Process 1 + 1,250 units input to process.
Cost per unit of output and losses
Process 1 Process 2
` `
Cost of input
-Material 8,100 1,900
-from process 1 - (1,750 `10) 17,500
-Labour 4,000 10,000
-Overhead (150% ` 4,000) 6,000 (120% ` 10,000) 12,000
18,100 41,400
Less scrap value (200 ` 0.50) (100) (300 ` 3) (900)
of normal loss
18,000 40,500
Expected output
90% of 2,000 1,800
90% of 3,000 2,700
Cost per unit
` 18,000 1,800 ` 10
` 40,500 2,700 ` 15
Total cost of output and losses
Process 1 Process 2
` `
Output (1,750 ` 10) 17,500 (2,800 `15) 42,000
Normal loss (200 ` 0.50)* 100 (300 ` 3)* 900
Abnormal loss (50 ` 10) 500 -
18,100 42,900
Abnormal gain - (100 ` 15) (1,500)
18,100 41,400
* Normal loss is valued at scrap value only.
Complete accounts

PROCESS 1 ACCOUNT
Units ` Units `
Direct material 2,000 8,100 Scrap a/c (normal 200 100
loss)
Direct labour 4,000 Process 2 a/c 1,750 17,500
Production overhead a/c ____ 6,000 Abnormal loss a/c 50 500
2,000 18,100 2,000 18,100
PROCESS 2 ACCOUNT
Units ` Units `
Direct materials
From process 1 1,750 17,500 Scrap a/c (normal loss) 300 900
Added materials 1,250 1,900 Finished goods a/c 2,800 42,000
Direct labour 10,000
Production 12,000
overhead
3,000 41,400
Abnormal gain 100 1,500 _____ ______
3,100 42,900 3,100 42,900
ABNORMAL LOSS ACCOUNT
` `
Process 1 (50 units) 500 Scrap a/c: sale of scrap of extra loss (50 units) 25
____ Profit and loss a/c 475
500 500
ABNORMAL GAIN ACCOUNT

` `
Scrap a/c (loss of scrap revenue due 300 Process 2 abnormal gain 1,500
to abnormal gain, 100 units ` 3) (100 units)
Profit and loss a/c 1,200 _____
1,500 1,500

SCRAP ACCOUNT
` `
Scrap value of normal loss Cash a/c cash received
Process 1 (200 units) 100 Loss in process 1(250 units) 125
Process 2 (300 units) 900 Loss in process 2 (200 units) 600
Abnormal loss a/c (process 1) 25 Abnormal gain a/c (process 2) 300
1,025 1,025
PRODUCTION OVERHEAD ACCOUNT
` `
Overhead incurred 17,800 Process 1 a/c 6,000
Over-absorbed overhead a/c Process 2 a/c 12,000
(or P & L a/c) 200 _____
18,000 18,000
7. Standard Quantity of Materials for Actual Output:
P 6,000 2 12,000 units
Q 6,000 3 18,000 units
R 6,000 15 90,000 units
Standard hours for Actual Output:
6,000 3 18,000 hours
Material price Variance:
(Standard Price for actual output - Actual Price) Actual Quantity `
P (` 4.00 - ` 4.40) 12,500 5,000 (A)
Q (` 3.00 - ` 2.80) 18,000 3,600 (F)
R (` 1.00 - ` 1.20) 88,500 17,700(A)
19,100(A)
Material Usage Variance:
(Standard Usage - Actual Usage) Standard Price
P (12,000 - 12,500) ` 4.00 2,000 (A)
Q (18,000 - 18,000) ` 3.00 Nil
R (90,000 - 88,500) ` 1.00 1,500 (F)
500 (A)

Labour Rate Variance:

(Standard Rate - Actual Rate) Actual hours
(` 8.00 - ` 12.00) 2,500 10,000 (A)
(` 8.00 - ` 8.00) 15,000 Nil
10,000 (A)
Labour Efficiency Variance:
(Standard hours - Actual hours) Standard Rate
(18,000 - 17,500) ` 8.00 4,000 (F)
8. (a) Flexible Budget for different levels
` ` ` ` `
No. of Students 30 60 90 120 150
VARIABLE COST
Breakfast 150 300 450 600 750
Lunch 300 600 900 1,200 1,500
Tea 90 180 270 360 450
Entrance fee 60 120 180 240 300
Sub-total (A) 600 1,200 1,800 2,400 3,000
Variable cost/unit 20 20 20 20 20
SEMI-VARIABLE COST
Bus rent 650 1,300 1,300 1,950 1,950
Special permit fee 50 100 100 150 150
Allowance for teachers 100 200 200 300 300
Sub-total (B) 800 1,600 1,600 2,400 2,400
FIXED COST
Block entrance fee 250 250 250 250 250
Prize to students 250 250 250 250 250
Sub total(C) 500 500 500 500 500
Total cost (A + B + C) 1,900 3,300 3,900 5,300 5,900
(b) Cost per student 63.33 55.00 43.33 44.17 39.33
(c) Break-even level
Collection per students = ` 45
Less Variable Cost 20
Contribution 25

Since semi-fixed costs relate to a block of 50 students, the fixed and semi-variable
cost for three level will be:
Level of Student Upto 50 51100 101150
Fixed + Semivariable cost `1,300 2,100 2,900
Contribution per unit 25 25 25
Break Even level of students 52 84 116
9.
`
Present selling price (` 700 lakhs /40,000 units) 1,750
Add: 10% increase (1,750 x 10/100) 175
Revised selling price 1,925
Units
Present sales volume 40,000
Less: 10% decrease (40,000 x 10/100) 4,000
Revised sales volume 36,000
Revised sales revenue = 36,000 unit x ` 1,925 = ` 693 lakhs
(`)
Materials 660
Labour 130
Direct expenses 310
Total variable cost 1,100
Profitability Statement (` Lakhs)

Sales 693.00
Less: Variable cost (36,000 units `1,100) 396.00
Contribution 297.00
Less: Fixed cost 202.50
Profit 94.50
Materials (` 660 + 10% of ` 660) 726
Labour 130
Direct expenses 310
Total variable cost p.u. 1,166
Calculation of sales Volume to be achieved to maintain the original profit of ` 57.50 lakhs.

(` p.u.)
Selling price 1,750
Less: Variable cost 1,166
Contribution p.u. 584
Fixed cos t + Desired profit ` 202.50 s+ R` 57.50
Desired Sales = = = 44,521 Units.
Contribution p.u. R` 584 p
10. (i) Apportionment of Power Generation Plant Costs
Items of Basis of Production Service
Expenses Apportionment Total Departments Departments
PD1 PD2 SD1 SD2
` ` ` ` `
Fixed Expenses Power requirements
(kwh.) at normal
capacity 37,500 8,824 15,441 5,515 7,720
(8 : 14 : 5 : 7)
Variable Actual power

Expenses consumption (kwh.)
(13 : 23 : 10.25 : 10) 84,375 19,500 34,500 15,375 15,000
1,21,875 28,324 49,941 20,890 22,720
(ii) Overhead Distribution Summary and Re-apportionmentor Service Department

Costs
Production Departments Service Departments
Total PD1 PD2 SD1 SD2
` ` ` ` `
Power Generation Cost 1,21,875 28,324 49,941 20,890 22,720
Direct Materials 30,000 --- ---- 10,000 20,000
Direct Wages 30,000 --- ---- 20,000 10,000
Other Overheads 1,80,000 80,000 50,000 30,000 20,000
3,61,875 1,08,324 99,941 80,890 72,720
Reapportionment:
SD1 (5 : 4 : 1 ) 40,445 32,356 (-)80,890 8,089
SD2 (6 : 2 : 2 ) 48,485 16,162 16,162 (-)80,809
SD1 (5 : 4 : 1 ) 8,081 6,465 (-) 16,162 1,616
SD2 (6 : 2 : 2 ) 970 323 323 (-)1,616
SD1 ( 5: 4 : 1 ) 162 129 (-) 323 32
SD2 ( 6 : 2 ) 24 8 ---- (-) 32
Total 3,61,875 2,06,491 1,55,384 ---- -----

(iii) Calculation of Overhead Rates

PD1 PD2
Direct Wages (`) 95,000 50,000
Wages Rate per Hour (`) 5 4
Direct Labour Hours (Direct wages Wage rate) (Hours) 19,000 12,500
Overheads (`) 2,06,431 1,55,384
Overhead Rate per Hour (Overheads Labour hours (`) 10.87 12.43
11. (a) Job Cost Sheet for the period..
`
Direct materials 1,99,000
Direct wages:
Machine shop 63,000
Assembly shop 48,000 1,11,000
Prime Cost 3,10,000
Works overhead:
Machine shop 88,200
Assembly shop 51,800 1,40,000
Work Cost 4,50,000
Administration overhead 90,000
Cost of Production 5,40,000
Selling overhead 81,000
Distribution overhead 62,100
Total Cost 6,83,100
Schedule of Overhead Rate

(i) Works Overhead : Hourly rate = (Overhead amount. Hours)
Machine shop = (88,200 12,000) = ` 7.35 per hour
Assembly shop = (51,800 10,000) = ` 5.18 per hour
(ii) Administrative Overhead as a % of works cost
90,000
= 100 = 20%
4,50,000
(iii) Selling and distribution overhead as % of works cost
81,000 + 62,100
= 100 = 31.80%
4,50,000

Labour hour rates are calculated as under:

Machine shop = ` 63,000 12,000 hrs. = ` 5.25
Assembly shop = ` 48,00010,000 hrs. = ` 4.80
(b) Cost Estimate for Job
Direct Materials ` `
(i) 25 kg @ ` 16.80 per kg 420
(ii) 15 kg @ ` 20 per kg 300 720.00
Direct Labour
Machine shop (30 hrs. @ ` 5.25) 157.50
Assembly shop (42 hrs. @ 4.80) 201.60 359.10
Prime Cost 1079.10
Works Overhead
Machine shop (30 hours @ ` 7.35) 220.50
Assembly shop (42 hours @ 5.18) 317.56 438.06
Works Cost 1517.16
Administration overhead (20% of works cost) 303.43
Cost of Production 1820.59
Selling and distribution cost (31.8% of works cost) 482.46
Total Estimated Cost 2303.05
12.
Deluxe Limited
Contract account for the year ended 31st March 2011
Dr. Cr.
` `
To Materials 1,00,000 By Work-in-progress c/d
purchased
To Wages paid 45,000 Work certified 2,00,000
Add: Wages accrued 5,000 50,000 Work uncertified 15,000
To General 10,000 Effect of escalation
expenses clause 5,000 2,20,000
To Depreciation of By Materials in hand c/d
plant 5,000 25,000
To Notional profit c/d 80,000
2,45,000 2,45,000
To Profit and loss A/c 20,000 By Notional profit b/d 80,000
To Work-in-progress
c/d (Profit in reserve) 60,000
80,000 80,000

1.4.2011 1.4.2011
To Work-in-progress By Work-in-progress b/d 60,000
b/d
Work certified 2,00,000 (profit in reserve)
Work uncertified 15,000
Effect of escalation
clause 5,000 2,20,000
To materials in hand 25,000
b/d
Working notes
(i) Ascertainment of effect of escalation clause:
Total increase Increase up Increase beyond
25% to 5% 5%
` ` `
Materials:
Effect of increased price
25
(` 1,00,000 - ` 25,000) 15,000 3,000 12,000
125
Wages:
Effect of increased wage rates:
25
` 50,000 10,000 2,000 8,000
125
Total increase 25,000 5,000 20,000
Increase in value of work done (certified & uncertified)
to date: 25% of ` 20,000 = ` 5,000
(ii) Profit to be transferred to the profit and loss account:
Since the contract is between 1/4 and 1/2 complete, one-third of the notional profit,
reduced by the proportion of cash received to work certified, is to be transferred as
below:
1 Cash received
= Notional profit
3 Work certified
1 ` 1,50,000
= ` 80,000 = ` 20,000.
3 ` 2,00,000
13. (a) Importance of Cost Accounting to the management of a business concerns
Management of business concerns expects from Cost Accounting a detailed cost
information in respect of its operations to equip their executives with relevant
information required for planning, scheduling, controlling and decision making. To

be more specific, management expects from cost accounting - information and

reports to help them in the discharge of the following functions :
(a) Control of material cost: Cost of material usually constitute a substantial portion of
the total cost of a product. Therefore, it is necessary to control it as far as possible.
Such a control may be exercised by (i) Ensuring un-interrupted supply of material
and spares for production. (ii) By avoiding excessive locking up of funds/capital in
stocks of materials and stores. (iii) Also by the use of techniques like value
analysis, standardisation etc. to control material cost.
(b) Control of labour cost : It can be controlled if workers complete their work
within the standard time limit. Reduction of labour turnover and idle time too
help us, to control labour cost.
(c) Control of overheads : Overheads consists of indirect expenses which are incurred
in the factory, office and sales department ; they are part of production and sales
cost. Such expenses may be controlled by keeping a strict check over them.
(d) Measuring efficiency : For measuring efficiency, Cost Accounting department
should provide information about standards and actual performance of the
concerned activity.
(e) Budgeting : Nowadays detailed estimates in terms of quantities and
amounts are drawn up before the start of each activity. This is done to ensure
that a practicable course of action can be chalked out and the actual
performance corresponds with the estimated or budgeted performance. The
preparation of the budget is the function of Costing Department.
(f) Price determination: Cost accounts should provide information, which enables
the management to fix remunerative selling prices for various items of products
and services in different circumstances.
(g) Curtailment of loss during the off-season: Cost Accounting can also provide
information, which may enable reduction of overhead, by utilising idle capacity
during the off-season or by lengthening the season.
(h) Expansion: Cost Accounts may provide estimates of production of various
levels on the basis of which the management may be able to formulate its
approach to expansion.
(i) Arriving at decisions: Most of the decisions in a business undertaking involve
correct statements of the likely effect on profits. Cost Accounts are of vital help
in this respect. In fact, without proper cost accounting, decision would be like
taking a jump in the dark, such as when production of a product is stopped.
(b) Essential factors for installing a cost accounting system
As in the case of every other form of activity, it should be considered whether it would be
profitable to have a cost accounting system. The benefits from such a system must

exceed the amount to be spent on it. This would depend upon many factors including the
nature of the business and the quality of the management. Management, which is prone to
making decisions on the basis of pre-conceived notions without taking into account the
information and data placed before it, cannot derive much benefit from a costing system.
On the other hand management, which is in the habit of studying information thoroughly
before making decisions, would require cost accounting system. Before setting up a
system of cost accounting the under mentioned factors should be studied:
(i) The objective of costing system, for example whether it is being introduced for
fixing prices or for insisting a system of cost control.
(ii) The areas of operation of business wherein the managements action will be
most beneficial. For instance, in a concern, which is anxious to expand its
operations, increase in production would require maximum attention. On the
other hand for a concern, which is not able, to sell the whole of its production
the selling effort would require greater attention. The system of costing in each
case should be designed to highlight, in significant areas, factors considered
important for improving the efficiency of operations in that area.
(iii) The general organisation of the business, with a view of finding out the manner
in which the system of cost control could be introduced without altering or
extending the organisation appreciably.
(iv) The technical aspects of the concern and the attitude and behaviour that will
be successful in winning sympathetic assistance or support of the supervisory
staff and workmen.
(v) The manner in which different variable expenses would be affected with
expansion or cessation of different operations.
(vi) The manner in which Cost and Financial accounts could be inter-locked 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.
(vii) The maximum amount of information that would be sufficient and how the
same should be secured without too much clerical labour, especially the
possibility of collection of data on a separate printed form designed for each
process; also the possibility of instruction as regards filling up of the forms in
writing to ensure that these would be faithfully carried out.
(viii) How the accuracy of the data collected can be verified? Who should be made
responsible for making such verification in regard to each operation and the form
of certificate that he should give to indicate the verification that he has carried out?
(ix) The manner in which the benefits of introducing Cost Accounting could be
explained to various persons in the concern, especially those in charge of
production department and awareness created for the necessity of promptitude,
frequency and regularity in collection of costing data.

PART II : FINANCIAL MANAGEMENT
QUESTIONS
1. Answer the following, supporting the same with reasoning/working notes:

(a) Mr. Khanna, a retired army officer, has opened an account with a reputed bank. He
is required to pay four equal annual payments of ` 15,000 each in his deposit
account that pays 8% interest per year. Find out the future value of annuity at the
end of 4 years.
(b) Discuss briefly the concept of bridge finance.
(c) Explain briefly about commercial paper. Also discuss its advantages.
(d) Discuss in brief Gross Profit Margin ratio and its importance.
(e) Suppose Rama deposited ` 1,000 in an account that pays 12 percent interest,
compounded quarterly. How much will be in the account after eight years if she
makes no withdrawals?
Working Capital Management
2. Sunshine Company is attempting to establish a current assets policy. Fixed assets are
` 6,00,000 and the company plans to maintain a 50 per cent debt-to-assets ratio. The
interest rate is 10 per cent on all debt. Three alternative current asset policies are under
consideration: 40, 50, and 60 per cent of projected sales. The company expects to earn
15 per cent before interest and taxes on sales of ` 30 lakhs. The Companys effective
tax rate is 40 per cent. You are required to determine the expected return on equity
under each alternative?
Investment Decisions
3. Mahalaxmi Limited is considering to spend ` 4,00,000 on a project to manufacture and
sell a new product.
The unit variable cost of the product is ` 6. It is expected that the new product can be
sold at ` 10 per unit. The annual fixed cost (only cash) will be ` 20,000. The cost of
capital of the company is 15%. The only uncertain factor is the volume of sales. To start
with, the company expects to sell at least 40,000 units during the first year. Ignore
taxation. You are required to calculate:
(i) Net Present value of the project based on the sales expected during the first year
and on the assumption that it will continue at the same level during the remaining
years.
(ii) The minimum volume of sales required to justify the project.

Financing Decisions
4. Alpha Limited has the following capital structure:
Equity Share Capital (` 10 each) ` 150 lakhs
10% Debentures ` 100 lakhs
Retained Earnings ` 50 lakhs
Other Information:
Market Price per Equity Share ` 49
Price-Earnings Ratio 7
Income Tax Rate 30%
Alpha Limited is considering an expansion plan and needs ` 100 lakhs. If expansion
programme is undertaken, company feels that there will be 25 percent increase in
present earnings before interest and tax. The company has the following alternatives
available for raising funds required for expansion:
I. Issue equity shares at ` 50 each.
II. Issue 12 percent debentures for ` 50 lakhs and for the balance, equity shares of
` 50 each.
III. Issue 9 percent preference shares for ` 60 lakhs and for the balance, equity shares
of ` 50 each.
You are required to advise Alpha Limited regarding the best alternative assuming price-
earnings ratio 7.50, 7.00 and 7.25 respectively for these alternatives.
Financing Decisions
5. The following information is given for Gamma Limited. You are required to compute the
weighted average cost of capital of the company.
(i) Total capital employed ` 20,00,000
(ii) Debt-Equity Mix 40% /60%
(iii) Cost of Debt:
Upto ` 4,80,000 10% (Before Tax)
Beyond ` 4,80,000 16% (Before Tax)
(iv) Earning Per Share `6
(v) Dividend Payout 50% of earnings
(vi) Expected Growth Rate in dividend 10%
(vii) Current Market Price Per Share ` 66
(viii) Tax Rate 50%

Financial Analysis and Planning

6. You are required to arrange and redraft the following Cash Flow Statement of Beta
Limited in proper order keeping in mind the requirements of AS 3:
` (in lakhs) ` (in lakhs)
Net Profit 60,000
Add: Sale of Investments 70,000
Depreciation on Assets 11,000
Issue of Preference Shares 9,000
Loan raised 4,500
Decrease in Stock 12,000
1,66,500
Less : Purchase of Fixed Assets 65,000
Decrease in Creditors 6,000
Increase in Debtors 8,000
Exchange gain 8,000
Profit on sale of investments 12,000
Redemption of Debenture 5,700
Dividend paid 1,400
Interest paid 945 1,07,045
59,455
Add: Opening cash and cash equivalent 12,341
Closing cash and cash equivalent 71,796
Financing Decisions
7. The net operating income of Ganesha Limited is `18,00,000. The capital structure of the
company has 10 percent debentures of ` 32,00,000 in addition to equity share capital.
Overall cost of capital of the company is 16 percent. You are required to compute:
(i) Value of Ganesha Limited by using Net Operating Income (NOI) Approach, and
(ii) Cost of Equity Share Capital.
Investment Decisions
8. You are a financial analyst for Samtech Electronics Limited. The director of finance has
asked you to analyse two proposed capital investments, Projects X and Y. Each project
has a cost of ` 10,000, and the cost of capital for each project is 12 per cent. The
projects expected net cash flows are as follows:

Expected Net Cash flows

Year Project X Project Y
` `
0 (10,000) (10,000)
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
(a) Calculate each projects payback period, net present value (NPV), internal rate of
return (IRR), and modified internal rate of return (MIRR).
(b) Which project or projects should be accepted if they are independent?
(c) Which project should be accepted if they are mutually exclusive?
Financial Analysis and Planning
9. Using the following data of Megatech Limited, you are required to complete the given
Balance-Sheet:
Gross Profit ` 64,800
Shareholders fund ` 7,20,000
Gross profit margin 20%
Credit sales to Total sales 80%
Total Assets Turnover 0.3 times
Inventory Turnover 4 times
(on the basis of cost of goods sold)
Average collection period 20 days
(A year may be taken as 360 days)
Current Ratio 1.8
Long Term Debt to Equity 40%
Balance Sheet
Liabilities ` Assets `
Shareholders Fund - Cash -
Long-term Debt - Debtors -
Creditors - Inventory -
Fixed Assets -
Total (`) - Total (`) -

Time Value of Money

10. Finmin Limited offers a fixed deposit scheme whereby ` 20,000 matures to ` 25,250
after two years on a half yearly compounding basis. If the company desires to amend the
scheme by compounding interest every quarter, you are required to determine the
revised maturity value?
Working Capital Management
11. The following annual figures relate to Fibroplast Limited:
`
Sales (at 3 months credit) 90,00,000
Materials consumed (Suppliers extend 1 months credit) 22,50,000
Wages paid (one month in arrear) 18,00,000
Manufacturing expenses outstanding at the end of year 2,00,000
(cash expenses are paid on month in arrear)
Total administration expenses (Cash expenses are paid one month in 6,00,000
arrear)
Sales promotion expenses for the year (Paid quarterly in advance) 12,00,000
The company sells its products on gross profit of 25 per cent assuming depreciation as a
part of cost of production. It keeps two months stock of raw materials as inventory. It
keeps cash balance of ` 2,50,000.
You are required to work out the working capital requirement of the company on cash-
cost basis. Ignore work-in-progress.
12. Differentiate between the following:
(a) Investment, Financing and Dividend Decisions
(b) Funds Flow Statement and Cash Flow Statement
(c) Leverage Ratios and Coverage Ratios.
13. Write short notes on the following:
(a) Growth of Venture Capital Financing in India
(b) External Commercial Borrowings
(c) Forms of Bank Credit.

SUGGESTED ANSWERS/HINTS
1. (a) Computation of Future Value of Annuity

(1+i) n -1
R
i
FVA =
= ` 15,000 (4.507)
= ` 67,605
(b) Bridge Finance: Bridge Finance refers to loans taken by a company normally from
commercial banks for a short period because of pending disbursement of loans
sanctioned by financial institutions. Normally, it takes time for financial institutions
to disburse loans to companies. Once the loans are approved by the lending
institutions, then the companies, in order not to lose time in starting their projects,
arrange short-term loans from commercial banks.
The bridge loans are repaid/adjusted out of the term loans as and when disbursed
by the concerned institutions. They are secured by hypothecating movable assets,
personal guarantees and demand promissory notes. The rate of interest on bridge
loans is higher as compared to term loans.
(c) Commercial Paper (CP): It is unsecured promissory note issued by a firm to raise
funds for a short period. It enables highly rated corporate borrowers for short-term
borrowings and provides an additional financial instrument to investors with freely
negotiable interest rate.
Advantages of CP
(i) It is sold on unsecured basis and there are no restrictive conditions.
(ii) Maturing CP can be repaid by selling new CP and hence it is continuous
source of funds.
(iii) Maturing of CP can be tailored to suit requirement of firm.
(iv) It can be issued as a source of fund, even when market is tight.
(v) Cost of CP to the issuing firm is lower than bank loans.
(d) Gross Profit Margin and its Importance
This ratio tells us about the business's ability consistently to control its production
costs or to manage the margins it makes on products it buys and sells. Whilst sales
value and volumes may move up and down significantly, the gross profit margin is
usually quite stable (in percentage terms). However, a small increase (or decrease)
in profit margin, however caused can produce a substantial change in overall
profits.

Gross Profit
Gross Profit Margin = 100
Sales
(e) Computation of Future Value
PV = ` 1,000 i = 12%/4 = 3% per quarter n = 8 x 4 = 32 quarters
FV = PV (1 + i)n
= 1,000(1.03)32
= 2,575.10
The Amount after 8 years = ` 2,575
2. Balance Sheets for Sunshine Company for each Alternative Policy
Restricted Moderate Relaxed
(40%) (50%) (60%)
` ` `
Current assets 12,00,000 15,00,000 18,00,000
Fixed assets 6,00,000 6,00,000 6,00,000
Total assets 18,00,000 21,00,000 24,00,000
Debt 9,00,000 10,50,000 12,00,000
Equity 9,00,000 10,50,000 12,00,000
Total liabilities and equity 18,00,000 21,00,000 24,00,000
Profit & Loss Accounts for Sunshine Company for each Alternative Policy
Restricted Moderate Relaxed
(40%) (50%) (60%)
` ` `
Sales 30,00,000 30,00,000 30,00,000
EBIT 4,50,000 4,50,000 4,50,000
Interest (10%) 90,000 1,05,000 1,20,000
Earnings before taxes 3,60,000 3,45,000 3,30,000
Taxes (40%) 1,44,000 1,38,000 1,32,000
Net income 2,16,000 2,07,000 1,98,000
ROE 24.0% 19.7% 16.5%

3. (i) Computation of Net Present Value of the Project

`
Selling price per unit 10
Less: Variable Cost per unit 6
Contribution per unit 4
Total Annual Contribution (40,000 units 4) 1,60,000
Less: Fixed cost 20,000
Net Annual Cash Inflow 1,40,000
Annuity factor of ` 1 for 6 years 3.7845
\ Total present value of net cash inflow 5,29,830
Add: Present value of scrap (` 20,000 0.4323) 8,646
Present value of total cash inflow 5,38,476
Less: Initial Investment 4,00,000
Net Present Value 1,38,476
(ii) Calculation of Minimum Volume of Sales Required to Justify the Project

Let the number of units to be sold be x
At this level, NPV should be zero.
\ (4x 20,000) 3.7845 + 8,646 Rs.4,00,000 = 0
\ 15.138x 75,690 + 8,646 4,00,000 = 0
\ 15.138 x = 4,67,044
\ x = 30,853 units
Minimum Volume of Sales Required to Justify the Project = 30,853 units
4. Evaluation of Different Alternatives and Advice to the Company

Market price per day ` 49
Price Earnings Ratio 7
Earnings Per Share (MPS/ Price Earnings Ratio) 49
=` 7
7
Total Earnings after tax = Number of equity shares EPS
15,00,000 7 = Rs.1,05,00,000

Earnings before tax EAT

1- t
= 1,05,00,000
(1 - 0.30)
Earnings before tax = ` 1,50,00,000
EBIT EBT + Interest on Debentures
= ` 1,50,00,000 + ` 10,00,000
Earnings before Interest & Tax = ` 1,60,00,000
Evaluation of Different Alternatives
Equity 12% 9% of
Shares Debentures & Preference
Equity shares Shares &
Equity Shares
I II III
EBIT (Present plus 25% increase) 2,00,00,000 2,00,00,000 2,00,00,000
Less: Interest on Debentures 10,00,000 16,00,000 10,00,000
Earnings before tax 1,90,00,000 1,84,00,000 1,90,00,000
Tax 57,00,000 55,20,000 57,00,000
Earnings after tax 1,33,00,000 1,28,80,000 1,33,00,000
Less: Preference Dividend 5,40,000
Earnings available to equity 1,33,00,000 1,28,80,000 1,27,60,000
shareholders
Number of Equity Shares 17,00,000 16,00,000 15,80,000
Earnings per share 7.82 8.05 8.08
Price Earnings Ratio 7.5 7 7.25
Market Price Per Share 58.65 56.35 58.58
Advise: Alpha Limited should choose Alternative-I i.e., Issue of Equity shares because
market price per share of this Alternative is highest.
5. Calculation of Weighted Average Cost of Capital (WACC)
Equity : 60% of ` 20,00,000 = ` 12,00,000
Debt : 40% of ` 20,00,000 = ` 8,00,000
Total Capital = ` 20,00,000

(i) Determination of Post-tax Average Cost of Debt
Debt at interest 10% p.a. = ` 4,80,000

and debt at interest 16% p.a. = 8,00,000 4,80,000 = ` 3,20,000
Cost of Debt (kd) = I (1-T)
on ` 4,80,000, kd = 10% (1- 0.5) = 5% or 0.05
on ` 3,20,000, kd = 16% (1- 0.5) = 8% or 0.08
4,80,000 .05 + 3,20,000 .08
\ Average Cost of Debt = 100
8,00,000
= 6.2%
(ii) Determination of Cost of Equity

D1
Ke= +g
Po
Do = Dividend payout = 50% of ` 6 = ` 3
G = Growth rate = 10%
Po = Current market price per share = ` 66
` 3 (1.1)
Ke = + 10%
66
= 5% + 10% = 15%
(iii) Calculation of Overall Weighted Cost of Capital

` Weights Cost of Capital
Equity 12,00,000 0.60 15%
Debt 8,00,000 0.40 6.2%
\ WACC = 15% 0.60 + 6.2% 0.40

= 9% + 2.48%
WACC = 11.48%

6. Beta Limited
Cash Flow Statement
Cash flows from operating activities (` in lakhs)
Net profit 60,000
Less: Exchange gain (8,000)
Less: Profit on sale of investments (12,000)
40,000
Add: Depreciation on assets 11,000
Change in current assets and current liabilities 51,000
(-) Increase in debtors (8,000)
(+) Decrease in stock 12,000
(-) Decrease in creditors (6,000) (2,000)
Net cash from operating activities 49,000
Cash flows from investing activities
Sale of investments 70,000
Purchase of fixed assets (65,000)
Net cash from Investing activities 5,000
Cash flows from financing activities
Issue of preference shares 9,000
Loan raised 4,500
Redemption of Debentures (5,700)
Interest paid (945)
Dividend paid (1,400)
Net cash from financing activities 5,455
Net increase in cash & cash equivalents 59,455
Add: Opening cash and cash equivalents 12,341
Closing cash and cash equivalents 71,796

7. (i) Computation of Value of the Company by using NOI Approach
EBIT 18,00,000
Less: Interest on Debentures 3,20,000
Earnings available to equity shareholders 14,80,000
Total Cost of Capital 16%
Value of the Firm 18,00,000
0.16
= 1,12,50,000
Value of Debt = 32,00,000
Value of Equity = 80,50,000
(ii) Computation of Cost of Equity Share Capital (Ke)

V D
Ke = Ko Kd
S S
1,12,50,000 32,00,000
= 0.16 0.10
80,50,000 80,50,000
= (0.16 1.3975) (0.10 0.3975)
= 0.2236 0.03975
= 0.18385 = 18.39%.
8. (a) Payback Period Method
The cumulative cash flows for each project are as follows:
Cumulative Cash Flows
Year Project X Project Y
` `
0 (10,000) (10,000)
1 (3,500) (6,500)
2 (500) (3,000)
3 2,500 500
4 3,500 4,000

` 500
Payback = 2 + = 2.17 years.
x ` 3,000
` 3,000
Payback = 2 + = 2.86 years.
y ` 3,500
Net Present Value (NPV)
` 6,500 ` 3,000 ` 3,000 ` 1,000
NPV = -` 10,000 + + + +
x 1 2 3
(1.12) (1.12) (1.12) (1.12) 4
= ` 966.01.
` 3,500 ` 3,500 ` 3,500 ` 3,500
NPV = -` 10,000 + + + +
y
(1.12)1 (1.12)2 (1.12)3 (1.12) 4
= ` 630.72.
Internal Rate of Return (IRR)
To solve for each projects IRR, find the discount rates that equate each NPV to
zero:
IRRx = 18.0%.
IRRy = 15.0%.
Modified Internal Rate of Return (MIRR)
To obtain each projects MIRR, begin by finding each projects terminal value (TV)
of cash inflows:
TVx = ` 6,500(1.12)3 + ` 3,000 (1.12)2 + ` 3,000 (1.12)1 + ` 1,000
= ` 17,255.23.
TVy = ` 3,500(1.12)3 + ` 3,500 (1.12)2 + ` 3,500 (1.12)1 + ` 3,500
= ` 16,727.65.
Now, each projects MIRR is that discount rate that equates the present value of the
terminal value to each projects cost, ` 10,000:
MIRRx = 14.61%.
MIRRy = 13.73%.
(b) The following table summarizes the project rankings by each method:
Project that ranks higher
Payback X
NPV X

IRR X
MIRR X
Analysis: All methods rank Project X over Project Y. In addition, both projects are
acceptable under the NPV, IRR, and MIRR criteria. Thus, both projects should be
accepted if they are independent.
(c) If the projects are mutually exclusive, then the project with the higher NPV at k = 12%, or
Project X would be accepted.
9. Working Notes:
(i) Gross Profit =` 64,800
Gross Profit Margin = 20%
Gross Pr ofit 64,800
\ Sales = = = ` 3,24,000
Gross Pr ofit M arg in 0.20
(ii) Credit Sales to Total Sales = 80%
\ Credit Sales = 3,24,000 0.80 = ` 2,59,200
(iii) Cost of Goods Sold (COGS) = Sales Gross Profit
= 3,24,000 64,800
= ` 2,59,200
Inventory turnover = 4 times of COGS
COGS 2,59,200
\ Inventory = = =` 64,800
4 4
(iv) Average collection period = 20 days
360
\ Debtors turnover = = 18
Average collectionPeriod i.e. 20
Credit sales 2,59,200
\ Debtors = = = ` 14,400
18 18
(v) Long term debt to Equity = 40%
Shareholders Fund = ` 7,20,000
\ Long term debt = ` 7,20,000 0.40 = ` 2,88,000
(vi) Total Assets Turnover = 0.3 times
Sales 3,24,000
\ Total Assets = = = ` 10,80,000
0.3 0.3

(vii) Total Assets = Total Liabilities = Shareholder Funds + Long-term Debt + Creditors
\ Creditors = 10,80,000 7,20,000 2,88,000 = ` 72,000
(viii) Debtors + Inventory + Cash
Current Ratio =
Creditors
14,400 + 64,800 + Cash
\ 1.8 =
72,000
\ Cash = 1.8 72,000 14,400 64,800
= ` 50,400
Balance Sheet of Megatech Limited

Liabilities Rs. Assets Rs.
Creditors 72,000 Cash 50,400
Long-term debt 2,88,000 Debtors 14,400
Shareholders fund 7,20,000 Inventory 64,800
Fixed assets (Balancing Figure) 9,50,400
10,80,000 10,80,000
10. Computation of Revised Maturity Value

A = P (1 + i)n
Where,
Amount (A) = ` 25,250
Principal (P) = ` 20,000
i = rate of interest half yearly
n = 2 years on half yearly basis i.e., 2 2 = 4
\ 25, 250 = 20,000 (1 + i)4
\ (1 + i) 4 = 1.2625
\ 1 + i = 1.06
\i = 0.06 i.e., 6% rate half yearly and 12% rate yearly.

24
12 1
If compounded quarterly, revised maturity value = 20,000 1 +
100 4
= 20,000 (1.03)8
= 20,000 1.267 = ` 25,340
11. Estimation of Working Capital Requirement based on Cash Cost basis
Working Notes:
`
(i) Calculation of Total Manufacturing Expenses
Sales 90,00,000
Less:Gross Profit 25% 22,50,000
Total manufacturing cost 67,50,000
Less:Materials 22,50,000
Wages 18,00,000 40,50,000
Total manufacturing expenses 27,00,000
(ii) Calculation of Depreciation
Total manufacturing expenses 27,00,000

Less:Cash manufacturing expenses (` 2,00,000 12) 24,00,000
Depreciation 3,00,000
(iii) Calculation of Total Cash Cost
Total manufacturing cost 67,50,000

Less: Depreciation 3,00,000
64,50,000
Add: Adm. expenses 6,00,000
Add: Sales promotion expenses 12,00,000
Total Cash Cost 82,50,000

Estimation of Current Assets

3 20,62,500
Debtors (3 months of total cash cost) = 82,50,000
12
1 1,87,500
Raw material stock (1 month of material cost) = 22,50,000
12
2 13,75,000
Finished goods stock (2 months of cash cost) = 82,50,000
12
1 3,00,000
Pre-paid sales promotion expenses 12,00,000
4
Cash Balance 2,50,000
Total Current Assets = 41,75,000
Estimation of Current Liabilities

Sundry Creditors (1.5 months material cost) = 2,81,250
1.5
22,50,000
12
Manufacturing expenses outstanding 2,00,000
1 1,50,000
Wages outstanding = 18,00,000
12
1
Adm. Expenses outstanding = 6,00,000 50,000
12
Total Current Liabilities 6,81,250
Working Capital = CA CL 34,93,750
12. (a) Investment, Financing and Dividend Decisions: The finance functions are
divided into three major decisions, viz., investment, financing and dividend
decisions. These decisions are inter-related because the underlying objective of
these three decisions is the same, i.e. maximisation of shareholders wealth. The
decision to invest in a new project needs finance for the investment. The financing
decision, in turn, is influenced by and influences dividend decision because retained
earnings used in internal financing deprive shareholders of their dividends. An
efficient financial management can ensure optimal joint decisions. This is possible
by evaluating each decision in relation to its effect on the shareholders wealth.
Investment decision: The investment of long-term funds is made after a careful
assessment of the various projects through capital budgeting and uncertainty

analysis. However, only that investment proposal is to be accepted which is

expected to yield at least so much return as is adequate to meet its cost of
financing. This has an influence on the profitability of the company and ultimately
on its wealth.
Financing decision: Funds can be raised from various sources. Each source of
funds involves different issues. The finance manager has to maintain a proper
balance between long-term and short-term funds. With the total volume of long-
term funds, he has to ensure a proper mix of loan funds and owners funds. The
optimum financing mix will increase return to equity shareholders and thus
maximise their wealth.
Dividend decision: The finance manager is also concerned with the decision to pay
or declare dividend. He assists the top management in deciding as to what portion
of the profit should be paid to the shareholders by way of dividends and what
portion should be retained in the business. An optimal dividend pay-out ratio
maximises shareholders wealth.
(b) Funds Flow Statement vs. Cash Flow Statement
Cash Flow Statement Funds Flow Statement
(i) It ascertains the changes in balance (i) It ascertains the changes in
of cash- in-hand and bank financial position between two
accounting periods.
(ii) It analyses the reasons for changes in (ii) It analyses the reasons for
balance of cash-in-hand and at bank. change in financial position
between two balance sheets.
(iii) It shows the inflows and outflows of (iii) It reveals the sources and
cash. application of funds.
(iv) It is an important tool for short-term (iv) It helps to test whether working
analysis. capital has been effectively
used or not.
(c) Leverage Ratios and Coverage Ratios: The capital structure/leverage ratios may
be defined as those financial ratios which measure the long term stability and
structure of the firm. These ratios indicate the mix of funds provided by owners and
lenders and assure the lenders of the long term funds with regard to:
(i) Periodic payment of interest during the period of the loan; and
(ii) Repayment of principal amount on maturity.
Whereas on the other hand, Coverage ratios, measure the firms ability to service
the fixed liabilities. These ratios establish the relationship between fixed claims and
what is normally available out of which these claims are to be paid. The fixed claims
consist of:

(i) Interest on loans;

(ii) Preference dividend; and
(iii) Amortisation of principal or repayment of the instalment of loans or redemption
of preference capital on maturity.
13. (a) Growth of Venture Capital Financing in India: In India, Venture Capital financing
was first the responsibility of developmental financial institutions such as the
Industrial Development Bank of India (IDBI), the Technical Development and
Information Corporation of India (now known as ICICI) and the State Finance
Corporations(SFCs). In the year 1988, the Government of India took a policy
initiative and announced guidelines for Venture Capital Funds (VCFs). In the same
year, a Technology Development Fund (TDF) financed by the levy on all payments
for technology imports was established. This fund was meant to facilitate the
financing of innovative and high risk technology programmes through the IDBI.
A major development in venture capital financing in India was in the year 1996 when
the Securities and Exchange Board of India (SEBI) issued guidelines for venture
capital funds to follow. These guidelines described a venture capital fund as a fund
established in the form of a company or trust, which raises money through loans,
donations, issue of securities or units and makes or proposes to make investments
in accordance with the regulations. This move was instrumental in the entry of
various foreign venture capital funds to enter India. The guidelines were further
amended in April 2000 with the objective of fuelling the growth of Venture Capital
activities in India. A few venture capital companies operate as both investment and
fund management companies; others set up funds and function as asset
management companies.
It is hoped that the changes in the guidelines for the implementation of venture
capital schemes in the country would encourage more funds to be set up to give the
required momentum for venture capital investment in India.
(b) External Commercial Borrowings(ECBs) : ECBs refer to commercial loans (in
the form of bank loans, buyers credit, suppliers credit, securitised instruments ( e.g.
floating rate notes and fixed rate bonds) availed from non-resident lenders with
minimum average maturity of 3 years. Borrowers can raise ECBs through
internationally recognised sources like (i) international banks, (ii) international
capital markets, (iii) multilateral financial institutions such as the IFC, ADB, etc, (iv)
export credit agencies, (v) suppliers of equipment, (vi) foreign collaborators and (vii)
foreign equity holders.
External Commercial Borrowings can be accessed under two routes viz (i)
Automatic route and (ii) Approval route. Under the Automatic route there is no need
to take the RBI/Government approval whereas such approval is necessary under
the Approval route. Companys registered under the Companies Act and NGOs

engaged in micro-finance activities are eligible for the Automatic Route whereas
Financial Institutions and Banks dealing exclusively in infrastructure or export
finance and the ones which had participated in the textile and steel sector
restructuring packages as approved by the government are required to take the
Approval Route.
(c) Forms of Bank Credit: The bank credit will generally be in the following forms:
Cash Credit: This facility will be given by the banker to the customers by
giving certain amount of credit facility on continuous basis. The borrower will
not be allowed to exceed the limits sanctioned by the bank.
Bank Overdraft: It is a short-term borrowing facility made available to the
companies in case of urgent need of funds. The banks will impose limits on
the amount they can lend. When the borrowed funds are no longer required
they can quickly and easily be repaid. The banks issue overdrafts with a right
to call them in at short notice.
Bills Discounting: The company which sells goods on credit, will normally
draw a bill on the buyer who will accept it and sends it to the seller of goods.
The seller, in turn discounts the bill with his banker. The banker will generally
earmark the discounting bill limit.
Bills Acceptance: To obtain finance under this type of arrangement a
company draws a bill of exchange on bank. The bank accepts the bill thereby
promising to pay out the amount of the bill at some specified future date.
Line of Credit: Line of Credit is a commitment by a bank to lend a certain
amount of funds on demand specifying the maximum amount.
Letter of Credit: It is an arrangement by which the issuing bank on the
instructions of a customer or on its own behalf undertakes to pay or accept or
negotiate or authorizes another bank to do so against stipulated documents
subject to compliance with specified terms and conditions.
Bank Guarantees: Bank guarantee is one of the facilities that the commercial
banks extend on behalf of their clients in favour of third parties who will be the
beneficiaries of the guarantees.

Paper - 3: Cost Accounting and Financial Management Part I: Cost Accounting Questions Short Answer Type Questions From Misc Chapters

Uploaded by

Copyright:

Available Formats

Paper - 3: Cost Accounting and Financial Management Part I: Cost Accounting Questions Short Answer Type Questions From Misc Chapters

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Paper - 3: Cost Accounting and Financial Management Part I: Cost Accounting Questions Short Answer Type Questions From Misc Chapters

Uploaded by

Copyright:

Available Formats

PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

PART I : COST ACCOUNTING

Short Answer Type Questions from Misc Chapters

The Institute of Chartered Accountants of India

(1) Earnings for the day, and

The Institute of Chartered Accountants of India

Factory wages 1,01,060

The Institute of Chartered Accountants of India

Direct material costs were as follows:

The Institute of Chartered Accountants of India

Budgeted output 40,000 units

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

The contract contained an escalation clause, which read as follows:

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

of the effect on profit of changes in volume or type of output by differentiating

Order size (tons) 400 500 1,000 2,000 3,000

Ordering cost (No. of orders `1,200)

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

4. (A) Statement of Monthly Remuneration

3 Number of wor ker sseparated

10 18 + Number of wor ker s recruited and joined

The Institute of Chartered Accountants of India

Dr. Stores Ledger Control Account Cr.

Dr. Manufacturing Overhead Control Account Cr.

The Institute of Chartered Accountants of India

Dr. Work-in-progress Control Account Cr.

Dr. Finished Stock Ledger Control Account Cr.

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

ABNORMAL GAIN ACCOUNT

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

Labour Rate Variance:

The Institute of Chartered Accountants of India

Profitability Statement (` Lakhs)

The Institute of Chartered Accountants of India

Variable Actual power

(ii) Overhead Distribution Summary and Re-apportionmentor Service Department

The Institute of Chartered Accountants of India

(iii) Calculation of Overhead Rates

Schedule of Overhead Rate

The Institute of Chartered Accountants of India

Labour hour rates are calculated as under:

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

be more specific, management expects from cost accounting - information and

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

1. Answer the following, supporting the same with reasoning/working notes:

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

Financial Analysis and Planning

The Institute of Chartered Accountants of India

Expected Net Cash flows

The Institute of Chartered Accountants of India

Time Value of Money