Cost Accounting and Financial Management

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

QUESTIONS
Material
1. HBL Limited produces product 'M' which has a quarterly demand of 20,000 units. Each
product requires 3 kg. and 4 kg. of material X and Y respectively. Material X is supplied by
a local supplier and can be procured at factory stores at any time, hence, no need to keep
inventory for material X. The material Y is not locally available, it requires to be purchased
from other states in a specially designed truck container with a capacity of 10 tons.
The cost and other information related with the materials are as follows:
Particulars Material –X Material-Y
Purchase price per kg. (excluding GST) `140 `640
Rate of GST 18% 18%
Freight per trip (fixed, irrespective of quantity) - `28,000
Loss of materials in transit* - 2%
Loss in process* 4% 5%
*On purchased quantity
Other information:
- The company has to pay 15% p.a. to bank for cash credit facility.
- Input credit is available on GST paid on materials.
Required:
(i) Calculate cost per kg. of material X and Y
(ii) Calculate the Economic Order quantity for both the materials.
Labour
2. ADV Pvt. Ltd. manufactures a product which requires skill and precision in work to get
quality products. The company has been experiencing high labour cost due to slow speed
of work. The management of the company wants to reduce the labour cost but without
compromising with the quality of work. It wants to introduce a bonus scheme but is
indifferent between the Halsey and Rowan scheme of bonus.
For the month of November 2019, the company budgeted for 24,960 hours of work. The
workers are paid `80 per hour.
Required:
© The Institute of Chartered Accountants of India

84 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019
Calculate and suggest the bonus scheme where the time taken (in %) to time allowed to
complete the works is (a) 100% (b) 75% (c) 50% & (d) 25% of budgeted hours.
Overheads
3. PLR Ltd. manufacturers a single product and recovers the overheads by adopting a single
blanket rate based on machine hours. The budgeted production overheads of the factory
for the FY 2019-20 are `50,40,000 and budgeted machine hours are 6,000.
For a period of first six months of the financial year 201920, following information were
extracted from the books:
Actual production overheads `34,08,000
Amount included in the production overheads:
Paid as per court’s order `4,50,000
Expenses of previous year booked in current year `1,00,000
Paid to workers for strike period under an award `4,20,000
Obsolete stores written off `36,000
Production and sales data of the concern for the first six months are as under:
Production:
Finished goods 1,10,000 units
Works-in-progress
(50% complete in every respect) 80,000 units
Sale:
Finished goods 90,000 units
The actual machine hours worked during the period were 3,000 hours. It is revealed from
the analysis of information that 40% of the over/under-absorption was due to defective
production policies and the balance was attributable to increase in costs.
You are required:
(i) to determine the amount of over/ under absorption of production overheads for the
period,
(ii) to show the accounting treatment of over/ under-absorption of production overheads,
and
(iii) to apportion the over/ under-absorbed overheads over the items.
Non-Integrated Accounting
4. As of 30th September, 2019, the following balances existed in a firm’s cost ledger, which
is maintained separately on a double entry basis:

PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 85
Debit (` ) Credit (` )
Stores Ledger Control A/c 15,00,000 
Work-in-progress Control A/c 7,50,000 
Finished Goods Control A/c 12,50,000 
Manufacturing Overhead Control A/c  75,000
Cost Ledger Control A/c  34,25,000
35,00,000 35,00,000
During the next quarter, the following items arose:
(` )
Finished Product (at cost) 11,25,000
Manufacturing overhead incurred 4,25,000
Raw material purchased 6,25,000
Factory wages 2,00,000
Indirect labour 1,00,000
Cost of sales 8,75,000
Materials issued to production 6,75,000
Sales returned (at cost) 45,000
Materials returned to suppliers 65,000
Manufacturing overhead charged to production 4,25,000
Required:
Prepare the Cost Ledger Control A/c, Stores Ledger Control A/c, Work-in-progress Control
A/c, Finished Stock Ledger Control A/c, Manufacturing Overhead Control A/c, Wages
Control A/c, Cost of Sales A/c and the Trial Balance at the end of the quarter.
Contract Costing
5. GVL Ltd. commenced a contract on April 1, 2018. The total contract was for
` 1,08,50,000. It was decided to estimate the total profit and to take to the credit of Costing
P & L A/c the proportion of estimated profit on cash basis which work completed bear to
the total contract. Actual expenditure in 2018-19 and estimated expenditure in 2019-20 are
given below:
2018-19 2019-20
Actual (` ) Estimated (` )
Material issued 18,24,000 32,56,000

Labour : Paid 12,20,000 15,20,000

: Outstanding at end 96,000 1,50,000
Plant purchased 9,00,000 -
Expenses : Paid 4,00,000 7,00,000
: Outstanding at the end - 1,00,000
: Prepaid at the end 90,000 -
Plant returned to stores (at historical cost) 3,00,000 6,00,000
(on Sep. 30, 2019)
Material at site 1,20,000 3,00,000
Work-in progress certified 51,00,000 Full
Work-in-progress uncertified 1,60,000 ----
Cash received 40,00,000 Full
The plant is subject to annual depreciation @ 20% of WDV cost. The contract is likely to
be completed on September 30, 2019.
Required:
(i) Prepare the Contract A/c for the year 2018-19.
(ii) Estimate the profit on the contract for the year 2018-19 on prudent basis which has
to be credited to Costing P & L A/c.
Batch Costing
6. BTL LLP. manufactures glass bottles for HDL Ltd., a pharmaceutical company, which is in
ayurvedic medicines business..
BTL can produce 2,00,000 bottles in a month. Set-up cost of each production run is `5,200
and the cost of holding one bottle for a year is `1.50.
As per an estimate HDL Ltd. can order as much as 19,00,000 bottles in a year spreading
evenly throughout the year.
At present the BTL manufactures 1,60,000 bottles in a batch.
Required:
(i) Compute the Economic Batch Quantity for bottle production.
(ii) Compute the annual cost saving to BTL by adopting the EBQ of a production.
Job Costing
7. Ispat Engineers Limited (IEL) undertook a plant manufacturing work for a client. It will
charge a profit mark up of 20% on the full cost of the jobs. The following are the information
related to the job:

Direct materials utilised – `1,87,00,000

Direct labour utilised – 2,400 hours at `80 per hour
Budgeted production overheads are Rs. 48,00,000 for the period and are recovered on the
basis of 24,000 labour hours.
Budgeted selling and administration overheads are `18,00,000 for the period and
recovered on the basis of total budgeted total production cost of `36,00,00,000.
Required:
Calculate the price to be charged for the job.
Operating Costing
8. A transport company has a fleet of four trucks of 10 tonne capacity each plying in different
directions for transport of customer's goods. The trucks run loaded with goods and return
empty. The distance travelled, number of trips made and the load carried per day by each
truck are as under:
Truck No. One way No. of trips Load carried
Distance Km per day per trip / day tonnes
1 48 4 6
2 120 1 9
3 90 2 8
4 60 4 8
The analysis of maintenance cost and the total distance travelled during the last two years
is as under
Year Total distance travelled Maintenance Cost `
1 1,60,200 1,38,150
2 1,56,700 1,35,525
The following are the details of expenses for the year under review:
Diesel ` 60 per litre. Each litre gives 4 km per litre of diesel on an
average.
Driver's salary ` 22,000 per truck per month
Licence and taxes ` 15,000 per annum per truck
Insurance ` 80,000 per annum for all the four trucks
Purchase Price per `30,00,000, Life 10 years. Scrap value at the end of life is
truck `1,00,000.

Oil and sundries ` 525 per 100 km run.

General Overhead ` 1,10,840 per annum
The trucks operate 24 days per month on an average.
Required:
(i) Prepare an Annual Cost Statement covering the fleet of four trucks.
(ii) Calculate the cost per km. run.
(iii) Determine the freight rate per tonne km. to yield a profit of 30% on freight.
Process Costing
9. A product is manufactured in two sequential processes, namely Process-1 and Process-2.
The following information relates to Process-1. At the beginning of June 2019, there were
1,000 WIP goods (60% completed in terms of conversion cost) in the inventory, which are
valued at `2,86,020 (Material cost: `2,55,000 and Conversion cost: `31,020). Other
information relating to Process-1 for the month of June 2019 is as follows;
Cost of materials introduced- 40,000 units (`) 96,80,000

Conversion cost added (`) 18,42,000
Transferred to Process-2 (Units) 35,000
Closing WIP (Units) (60% completed in terms of conversion cost) 1,500
100% of materials are introduced to Process-1 at the beginning. Normal loss is estimated
at 10% of input materials (excluding opening WIP).
Required:
(i) Prepare a statement of equivalent units using the weighted average cost method and
thereby calculate the following:
(ii) Calculate the value of output transferred to Process-2 and closing WIP.
Standard Costing
10. JVG Ltd. produces a product and operates a standard costing system and value material
and finished goods inventories at standard cost. The information related with the product
is as follows:
Particulars Cost per unit (`)
Direct materials (30 kg at `350 per kg) 10,500
Direct labour (5 hours at `80 per hour) 400
The actual information for the month just ended is as follows:

(a) The budgeted and actual production for the month of September 2019 is 1,000 units.
(b) Direct materials –5,000 kg at the beginning of the month. The closing balance of direct
materials for the month was 10,000 kg. Purchases during the month were made at
`365 per kg. The actual utilization of direct materials was 7,200 kg more than the
budgeted quantity.
(c) Direct labour – 5,300 hours were utilised at a cost of ` 4,34,600.
Required:
Calculate (i) Direct material price and usage variances (ii) Direct labour rate and efficiency
variances.
Marginal Costing
11. PVC Ltd sold 55,000 units of its product at `375 per unit. Variable costs are `175 per unit
(manufacturing costs of `140 and selling cost `35 per unit). Fixed costs are incurred
uniformly throughout the year and amount to `65,00,000 (including depreciation of
` 15,00,000). There is no beginning or ending inventories.
Required:
(i) Estimate breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Estimate the P/V ratio.
(iii) Estimate the number of units that must be sold to earn an income (EBIT) of `5,00,000.
(iv) Estimate the sales level achieve an after-tax income (PAT) of `5,00,000, assume
40% corporate tax rate.
Budget and Budgetary Control
12. KLM Limited has prepared its expense budget for 50,000 units in its factory for the year
2019-20 as detailed below:
(` per unit)
Direct Materials 125
Direct Labour 50
Variable Overhead 40
Direct Expenses 15
Selling Expenses (20% fixed) 25
Factory Expenses (100% fixed) 15
Administration expenses (100% fixed) 8
Distribution expenses (85% variable) 20
Total 298
Prepare an expense budget for the production of 35,000 units and 70,000 units.

Miscellaneous
13. (i) Differentiate between Cost Accounting and Management Accounting.
(ii) Explain the meaning of Budget Manual.
(iii) Explain the term Equivalent units used in process industries.
SUGGESTED ANSWERS/HINTS
1. Working Notes:
(a) Annual purchase quantity for material X and Y:
Annual demand for product M- 20,000 units × 4 = 80,000 units
Particulars Mat-X Mat-Y
Quantity required for per unit of product M 3 kg. 4 kg.
Net quantity for materials required 2,40,000 kg. 3,20,000 kg.
Add: Loss in transit - 6,881 kg.
Add: Loss in process 10,000 kg. 17,204 kg.
Purchase quantity 2,50,000 kg. 3,44,085 kg.
Note- Input credit on GST paid is available; hence, it will not be included in cost of material.
(i) Calculation of cost per kg. of material X and Y:
Purchase quantity 2,50,000 kg. 3,44,085 kg.
Rate per kg. `140 `640
Purchase price `3,50,00,000 `22,02,14,400
Add: Freight 0 `9,80,000*
Total cost `3,50,00,000 `22,11,94,400
Net Quantity 2,40,000 kg. 3,20,000 kg
Cost per kg. `145.83 `691.23
3,44,085kg.
*No. of trucks = = 34.40 trucks or 35 trucks
10ton 1,000
Therefore, total freight = 35 trucks × `28,000 = `9,80,000

(ii) Calculation of Economic Order Quantity (EOQ) for Mat.-X and Y:

2  Annual Re quirement  Order cos t
EOQ =
Carryingcos t per unit p.a.

Annual Requirement 2,50,000 kg. 3,44,085 kg.
Ordering cost 0 `28,000
Cost per unit `145.83 `691.23
Carrying cost 15% 15%
Carrying cost per unit p.a. 0* `103.68
EOQ 0 13,632.62 kg.
2. The Cost of labour under the bonus schemes are tabulated as below:
Time Time Wages (`) Bonus (`) Total Wages (`) Earning per hour
Allowed taken (`)
Halsey* Rowan** Halsey Rowan Halsey Rowan
(1) (2) (3) (4) (5) (6) (7) (8) (9)
= (2) ×`80 = (3) + (4) = (3) + (5) = (6)/(2) = (7)/(2)
24,960 24,960 19,96,800 - - 19,96,800 19,96,800 80.00 80.00
24,960 18,720 14,97,600 2,49,600 3,74,400 17,47,200 18,72,000 93.33 100.00
24,960 12,480 9,98,400 4,99,200 4,99,200 14,97,600 14,97,600 120.00 120.00
24,960 6,240 4,99,200 7,48,800 3,74,400 12,48,000 8,73,600 200.00 140.00
* Bonus under Halsey Plan = 50% of (Time Allowed – Time Taken) × Rate per hour
Time taken
** Bonus under Rowan Plan =  Time saved  Rateper hour
Time allowed
Rowan scheme of bonus keeps checks on speed of work as the rate of incentive increases
only upto 50% of time taken to time allowed but the rate decreases as the time taken to
time allowed comes below 50%. It provides incentives for efficient workers for saving in
time but also puts check on careless speed. On implementation of Rowan scheme, the
management of ADV Pvt. Ltd. would resolve issue of the slow speed work while
maintaining the skill and precision required maintaining the quality of product.
3. (i) Amount of over/ under absorption of production overheads during the period of first
six months of the year 2019-20:

Amount Amount
(` ) (` )
Total production overheads actually incurred during 34,08,000
the period
Less: Amount paid to worker as per court order 4,50,000
Expenses of previous year booked in the current 1,00,000
year
Wages paid for the strike period under an award 4,20,000
Obsolete stores written off 36,000 10,06,000
24,02,000
Less: Production overheads absorbed as per machine
hour rate (3,000 hours × `840*) 25,20,000
Amount of over absorbed production overheads 1,18,000
` 50,40,000
*Budgeted Machine hour rate (Blanket rate) =  `840 per hour
6,000 hours
(ii) Accounting treatment of over absorbed production overheads: As, 40% of the
over absorbed overheads were due to defective production policies, this being
abnormal, hence should be credited to Costing Profit and Loss Account.
Amount to be credited to Costing Profit and Loss Account
= `1,18,000× 40% = `47,200.
Balance of over absorbed production overheads should be distributed over Works in
progress, Finished goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = `1,18,000× 60% = `70,800
` 70,800
Supplementary rate =  ` 0.295 per unit
2,40,000 units
(iii) Apportionment of over absorbed production overheads over WIP, Finished goods and
Cost of sales:
Equivalent Amount
completed units (` )
Work-in-Progress (80,000 units × 50% ×0.472) 40,000 18,880
Finished goods (20,000 units × 0.472) 20,000 9,440
Cost of sales (90,000 units × 0.472) 90,000 42,480
Total 1,50,000 70,800

4. Cost Ledger Control Account

Dr. Cr.
(` ) (` )
To Store Ledger Control 65,000 By Opening Balance 34,25,000
A/c
To Balance c/d 47,10,000 By Store ledger control A/c 6,25,000
By Manufacturing Overhead
Control A/c 4,25,000
By Wages Control A/c 3,00,000
47,75,000 47,75,000
Stores Ledger Control Account

Dr. Cr.
(` ) (` )
To Opening Balance 15,00,000 By WIP Control A/c 6,75,000
To Cost ledger control 6,25,000 By Cost ledger control A/c 65,000
A/c (Returns)
By Balance c/d 13,85,000
21,25,000 21,25,000
WIP Control Account

Dr. Cr.
(` ) (` )
To Opening Balance 7,50,000 By Finished Stock 11,25,000
Ledger Control A/c
To Wages Control A/c 2,00,000 By Balance c/d 9,25,000
To Stores Ledger Control 6,75,000
A/c
To Manufacturing 4,25,000
Overhead Control A/c
20,50,000 20,50,000

Finished Stock Ledger Control Account

Dr. Cr.
(` ) (` )
To Opening Balance 12,50,000 By Cost of Sales 8,75,000
To WIP Control A/c 11,25,000 By Balance c/d 15,45,000
To Cost of Sales A/c (Sales 45,000
Return)
24,20,000 24,20,000
Manufacturing Overhead Control Account

Dr. Cr.
(` ) (` )
To Cost Ledger Control A/c 4,25,000 By Opening 75,000
Balance
To Wages Control A/c 1,00,000 By WIP Control A/c 4,25,000
By Under recovery 2 5,000
c/d
5,25,000 5,25,000
Wages Control Account

Dr. Cr.
(` ) (` )
To Transfer to Cost Ledger 3,00,000 By WIP Control A/c 2,00,000
Control A/c
By Manufacturing Overhead 1,00,000
Control A/c
3,00,000 3,00,000
Cost of Sales Account

Dr. Cr.
(` ) (` )
To Finished Stock Ledger 8,75,000 By Finished Stock Ledger 45,000
Control A/c Control A/c (Sales
return)

By Balance c/d 8,30,000

8,75,000 8,75,000
Trial Balance
(` ) (` )
Stores Ledger Control A/c 13,85,000
WIP Control A/c 9,25,000
Finished Stock Ledger Control A/c 15,45,000
Manufacturing Overhead Control A/c 25,000
Cost of Sales A/c 8,30,000
Cost ledger control A/c ---- 47,10,000
47,10,000 47,10,000
5. GVL Ltd.
Contract A/c
(April 1, 2018 to March 31, 2019)
Particulars Amount Particulars Amount
(` ) (` )
To Materials Issued 18,24,000 By Plant returned to 2,40,000
Stores
(Working Note 1)
To Labour 12,20,000 By Materials at Site 1,20,000
Add: Outstanding 96,000 13,16,000 By W.I.P.
To Plant Purchased 9,00,000 Certified 51,00,000
To Expenses 4,00,000 Uncertified 1,60,000 52,60,000
Less: Prepaid 90,000 3,10,000 By Plant at Site

(Working Note 2) 4,80,000
To Notional Profit c/d 17,50,000
61,00,000 61,00,000
To Costing Profit & Loss A/c 6,45,899 By Notional Profit b/d 17,50,000
(Refer to Working Note 5)

To Work-in-Progress A/c 11,04,101

(Profit-in-reserve)
17,50,000 17,50,000
GVL Ltd.
Contract A/c
(April 1, 2018 to September 30, 2019)
(For Computing estimated profit)
Particulars Amount (` ) Particulars Amount (` )
To Materials Issued 50,80,000 By Material at Site 3,00,000
(` 18,24,000 + `32,56,000)
To Labour Cost 28,90,000 By Plant returned to 2,40,000
(`12,20,000+`96,000+` 14,24,000* Stores on 31.03.2019.
+ `1,50,000)
To Plant purchased 9,00,000 By Plant returned to 4,32,000
Stores on 30.09.2019
(Working Note 3)
To Expenses 12,00,000 By Contractee A/c 1,08,50,000
(`3,10,000+`7,90,000+ `1,00,000)
To Estimated profit 17,52,000
1,18,22,000 1,18,22,000
* Labour paid in 2019-20: `15,20,000 – `96,000 = `14,24,000
Working Notes
(` )
1. Value of the Plant returned to Stores on 31.03.2019
Historical Cost of the Plant returned 3,00,000
Less: Depreciation @ 20% of WDV for one year (60,000)
2,40,000
2. Value of Plant at Site 31.03.2019
Historical Cost of Plant at Site (`9,00,000 – `3,00,000) 6,00,000
Less: Depreciation @ 20% on WDV for one year (1,20,000)
4,80,000
3. Value of Plant returned to Stores on 30.09.2019
Value of Plant (WDV) on 31.3.2019 4,80,000
Less: Depreciation @ 20% of WDV for a period of 6 months (48,000)
4,32,000

4. Expenses Paid for the year 2018-19

Total expenses paid 4,00,000
Less: Pre-paid at the end (90,000)
3,10,000
5. Profit to be credited to Costing Profit & Loss A/c on March
31, 2019 for the Contract likely to be completed on September
30, 2019.
Work Certified Cash received
Estimated Profit × 
Total Contract Price Work Certified
51,00,000 40,00,000 6,45,899
= `17,52,000 × 
1,08,50,000 51,00,000
2DS
6. Economic Batch Quantity (EBQ) =
C
Where, D = Annual demand for the product
S = Setting up cost per batch
C = Carrying cost per unit of production
(i) Computation of EBQ :
2 19,00,000 `5,200
=
`1.5
= 1,14,775 bottles
(ii) Computation of savings in cost by adopting EBQ:
Batch Size No. of Set-up cost Carrying cost Total Cost
Batch
1,60,000 62,400 1,20,000
12 1,82,400
bottles (`5,200 × 12) (`1.5 × ½ × 1,60,000)
1,14,775 88,400 86,081.25
17 1,74,481.25
bottles (`5,200 × 17) (`1.5 × ½ × 1,14,775)
Saving 7,918.75
7. Calculation of job price
Particulars Amount (`)
Direct materials 1,87,00,000
Direct wages (`80 × 2,400 hours) 1,92,000

 `48,00,000  4,80,000
Production overheads   2,400hrs 
 24,000hrs 
Production cost 1,93,72,000
Selling and administration overheads 96,860
 `18,00,000 
 `36,00,00,000 `1,93,72,000 
 
Total cost of sales 1,94,68,860
Profit mark-up @ 20% 38,93,772
Price for the job 2,33,62,632
8. (i) Annual Cost Statement of four vehicles
(` )
Diesel {(4,21,632 km. ÷ 4 km) × ` 60) (Refer to Working Note 1) 63,24,480
Oil & sundries {(4,21,632 km. ÷ 100 km.) × ` 525} 22,13,568
Maintenance {(4,21,632 km. × ` 0.75) + ` 18,000} 3,34,224
(Refer to Working Note 2)
Drivers' salary {(`22,000 × 12 months) × 4 trucks} 10,56,000
Licence and taxes (` 15,000 × 4 trucks) 60,000
Insurance 80,000
Depreciation {(`29,00,000 ÷ 10 years) × 4 trucks} 11,60,000
General overhead 1,10,840
Total annual cost 1,13,39,112
(ii) Cost per km. run
Totalannual cos t of vehicles
Cost per kilometer run = (Refer to Working Note 1)
Totalkilometre travelled annually
`1,13,39,112
=  ` 26.89
4,21,632 Kms
(iii) Freight rate per tonne km (to yield a profit of 30% on freight)
Total annual cos t of three vehicles
Cost per tonne km. = (Refer to Working Note 1)
Total effective tonnes kms. per annum
`1,13,39,112
=  ` 7.04
16,10,496 kms

 `7.04 
Freight rate per tonne km.    1 = ` 10.06
 0.7 
Working Notes:
1. Total kilometre travelled and tonnes kilometre (load carried) by four trucks in one year
Truck One way No. of Total Load Total
number distance in trips distance carried per effective
kms covered in trip / day tonnes km
km per day in tonnes
1 48 4 384 6 1,152
2 120 1 240 9 1,080
3 90 2 360 8 1,440
4 60 4 480 8 1,920
Total 1,464 5,592
Total kilometre travelled by four trucks in one year

(1,464 km. × 24 days × 12 months) = 4,21,632
Total effective tonnes kilometre of load carried by four trucks during one year
(5,592 tonnes km. × 24 days × 12 months) = 16,10,496
2. Fixed and variable component of maintenance cost:
Difference in maintenanc e cost
Variable maintenance cost per km =
Difference in distance travelled
` 1,38,150 – ` 1,35,525
=
1,60,200 kms – 1,56,700 kms
= ` 0.75
Fixed maintenance cost = Total maintenance cost–Variable maintenance cost
= `1,38,150 – 1,60,200 kms × ` 0.75 = ` 18,000
9. (i) Statement of Equivalent Production
Particulars Input Particulars Output Equivalent Production
Units Units
Material Conversion
cost
% Units % Units
Opening WIP 1,000 Completed and transfer re d 35,000 100 35,000 100 35,000
to Process-2

Units introduced 40,000 Normal Loss (10% of 4,000 -- -- -- --

40,000)
Abnormal loss 500 100 500 60 300
(Balancing figure)
Closing WIP 1,500 100 1,500 60 900
41,000 41,000 37,000 36,200
(ii) Calculation of value of output transferred to Process-2 & Closing WIP

Amount (` ) Amount (` )
1. Value of units completed and transferred 1,12,08,750
(35,000 units × ` 320.25) (Refer working note)
3. Value of Closing W-I-P:
- Materials (1,500 units × ` 268.51) 4,02,765
- Conversion cost (900 units × ` 51.74) 46,566 4,49,331
Workings:
Cost for each element
Particulars Materials Conversion Total
(` ) (` ) (` )
Cost of opening work-in-process 2,55,000 31,020 2,86,020
Cost incurred during the month 96,80,000 18,42,000 1,15,22,000
Total cost: (A) 99,35,000 18,73,020 1,18,08,020
Equivalent units: (B) 37,000 36,200
Cost per equivalent unit: (C) = (A ÷ B) 268.51 51.74 320.25
10. Working:
Quantity of material purchased and used.
No. of units produced 1,000 units
Std. input per unit 30kg.
Std. quantity (Kg.) 30,000 kg.
Add: Excess usage 7,200 kg.
Actual Quantity 37,200 kg.
Add: Closing Stock 10,000 kg.
Less: Opening stock 5,000 kg.
Quantity of Material purchased 42,200 kg.

(i) Direct Material Price Variance:

= Actual Quantity purchased (Std. Price – Actual Price)
= 42,200 kg.(`350 – `365) = 6,33,000 (Adverse)
Direct Material Usage Variance:
= Std. Price (Std. Quantity – Actual Quantity)
= `350 (30,000 kg. – 37,200 kg.) = `25,20,000 (Adverse)
(ii) Direct Labour Rate Variance:
= Actual hours (Std. Rate – Actual Rate)
= 5,300 hours (`80 – `82) = `10,600 (Adverse)
Direct Labour Efficiency Variance:
= Std. Rate (Std. hours – Actual hours)
= `80 (1,000 units × 5 hours – 5,300 hours) = `24,000 (Adverse)
11. (i) Contribution = `375 - `175 = `200 per unit.
Fixed cost ` 65,00,000
Break even Sales Quantity = = = 32,500 units
Contribution margin per unit ` 200
Cash Fixed Cost `50,00,000
Cash Break even Sales Qty= = = 25,000 units.
Contribution margin per unit `200
Contribution/ unit ` 200
(ii) P/V ratio = 100 =  100 = 53.33%
Selling Pr ice / unit ` 375
(iii) No. of units that must be sold to earn an Income (EBIT) of `5,00,000
Fixed cost  Desired EBIT level 65,00,000  5,00,000
= = 35,000 units
Contribution margin per unit 200
(iv) After Tax Income (PAT) = `5,00,000
Tax rate = 40%
`5,00,000
Desired level of Profit before tax = 100 = `8,33,333
60
FixedCost  DesiredPr ofit
Estimate Sales Level =
P / V ratio
 FixedCost  DesiredPr ofit 

Or,   SellingPr ice per unit 
 Contributionper unit 

`65,00,000  `8,33,333
= = `1,37,50,859
53.33%
12. Expense Budget of KLM Ltd.
Particulars 50,000 Units 35,000 Units 70,000 Units
(` ) (` ) (` )
Direct Material 62,50,000 43,75,000 87,50,000
(50,000 x 125) (35,000 x 125) (70,000 x 125)
Direct Labour 25,00,000 17,50,000 35,00,000
(50,000 x 50) (35,000 x 50) (70,000 x 50)
Variable Overhead 20,00,000 14,00,000 28,00,000
(50,000 x 40) (35,000 x 40) (70,000 x 40)
Direct Expenses 7,50,000 5,25,000 10,50,000
(50,000 x 15) (35,000 x 15) (70,000 x 15)
Selling Expenses (Variable)* 10,00,000 7,00,000 14,00,000
(50,000 x 20) (35,000 x 20) (70,000 x 20)
Selling Expenses (Fixed)* 2,50,000 2,50,000 2,50,000
(5 x 50,000)
Factory Expenses (Fixed) 7,50,000 7,50,000 7,50,000
(15 x 50,000)
Administration Expenses (Fixed) 4,00,000 4,00,000 4,00,000
(8 x 50,000)
Distribution Expenses 8,50,000 5,95,000 11,90,000
(Variable)** (17 x 50,000) (17 x 35,000) (17 x 70,000)
Distribution Expenses (Fixed)** 1,50,000 1,50,000 1,50,000
(3 x 50,000)
1,49,00,000 1,08,95,000 2,02,40,000
*Selling Expenses: Fixed cost per unit = `25 x 20% = `5

Fixed Cost = `5 x 50,000 units = `2,50,000
Variable Cost Per unit = `25 – `5 = `20
**Distribution Expenses: Fixed cost per unit = `20 x 15% = `3
Fixed Cost = `3 x 50,000 units = `1,50,000
Variable cost per unit = `20 – `3 = `17

13. (i) Difference between Cost Accounting and Management Accounting

Basis Cost Accounting Management Accounting
(i) Nature It records the quantitative It records both qualitative
aspect only. and quantitative aspect.
(ii) Objective It records the cost of It Provides information to
producing a product and management for planning
providing a service. and co-ordination.
(iii) Area It only deals with cost It is wider in scope as it
Ascertainment. includes financial
accounting, budgeting,
taxation, planning etc.
(iv) Recording of It uses both past and It is focused with the
data present figures. projection of figures for
future.
(v) Development Its development is related It develops in accordance to
to industrial revolution. the need of modern business
world.
(vi) Rules and It follows certain It does not follow any
Regulation principles and procedures specific rules and
for recording costs of regulations.
different products.
(ii) Budget Manual: A budget manual is a collection of documents that contains key
information for those involved in the planning process. Typical contents could include
the following:
• An introductory explanation of the budgetary planning and control process,
including a statement of the budgetary objective and desired results.
• A form of organisation chart to show who is responsible for the preparation of
each functional budget and the way in which the budgets are interrelated.
• A timetable for the preparation of each budget. This will prevent the formation
of a ‘bottleneck’ with the late preparation of one budget holding up the
preparation of all others.
• Copies of all forms to be completed by those responsible for preparing budgets,
with explanations concerning their completion.
• A list of the organization’s account codes, with full explanations of how to use
them.
• Information concerning key assumptions to be made by managers in their
budgets, for example the rate of inflation, key exchange rates, etc.

(iii) Equivalent Units: Equivalent units or equivalent production units, means converting
the incomplete production units into their equivalent completed units. Under each
process, an estimate is made of the percentage completion of work-in-process with
regard to different elements of costs, viz., material, labour and overheads. It is
important that the estimate of percentage of completion should be as accurate as
possible. The formula for computing equivalent completed units is:
 Actualnumber of unitsin   Percentage of 
Equivalent completed units =   
 theprocessof manufacture   Work completed 
For instance, if 25% of work has been done on the average of units still under process,
then 200 such units will be equal to 50 completed units and the cost of work-in-
process will be equal to the cost of 50 finished units.

PART-II: FINANCIAL MANAGEMENT

QUESTIONS
Time Value of Money

1. A is 22 years old, recently joined a new job, wants to plan a tour to Europe after the end
of 5 years. The Europe tour will cost ` 5,00,000, for this purpose she wants to invest a
annually in mutual fund which will pay an average return of 12% p.a.
Required:
(i) Find out the annual investment to be made in the mutual fund.
Ratio Analysis
2. The following is the Profit and loss account and Balance sheet of KLM LLP.
Trading and Profit & Loss Account
Particulars Amount (` ) Particulars Amount (` )
To Opening stock 12,46,000 By Sales 1,96,56,000
To Purchases 1,56,20,000 By Closing stock 14,28,000
To Gross profit c/d 42,18,000
2,10,84,000 2,10,84,000
By Gross profit b/d 42,18,000
To Administrative expenses 18,40,000 By Interest on investment 24,600
To Selling & distribution 7,56,000 By Dividend received 22,000
expenses
To Interest on loan 2,60,000
To Net profit 14,08,600
42,64,600 42,64,600
Balance Sheet as on……….
Capital & Liabilities Amount (` ) Assets Amount (` )
Capital 20,00,000 Plant & machinery 24,00,000
Retained earnings 42,00,000 Building 42,00,000
General reserve 12,00,000 Furniture 12,00,000
Term loan from bank 26,00,000 Sundry receivables 13,50,000
Sundry Payables 7,20,000 Inventory 14,28,000
Other liabilities 2,80,000 Cash & Bank balance 4,22,000
1,10,00,000 1,10,00,000

106 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER 2019
You are required to compute:

(i) Gross profit ratio (ii) Net profit ratio (iii) Operating (iv) Operating profit
cost ratio ratio
(v) Inventory turnover (vi) Current ratio (vii) Quick ratio (viii) Interest coverage
ratio ratio
(ix) Return on capital (x) Debt to assets
employed ratio.
Fund Flow Analysis
3. The following are the Balance Sheet of Peacock Limited as on 31 st March, 20X8 and
31st March, 20X9.
Rupees Rupees
31 March, 20X8
st 31 March, 20X9
st
Liabilities
Share capital 88,00,000 1,32,00,000
Reserves and Surplus 55,00,000 77,00,000
Depreciation 17,60,000 26,40,000
Bank Loan 35,20,000 17,60,000
Sundry Creditors 26,40,000 29,70,000
Proposed dividend 8,00,000 12,00,000
Provision for taxation 8,00,000 11,00,000
2,38,20,000 3,05,70,000
Assets
Land 66,00,000 88,00,000
Plant and Machinery 1,01,20,000 1,38,60,000
Inventories 39,60,000 44,00,000
Sundry Debtors 22,00,000 34,10,000
Cash and Bank Balances 9,40,000 1,00,000
2,38,20,000 3,05,70,000
Additional Information:
(a) The machine which was purchased earlier for ` 12,00,000 was sold during the
financial year 20X8-20X9 for `80,000. The book value of the machine was
` 1,20,000. A new machine was purchased during the financial year.

(b) The company had issued new shares to the extent of ` 44,00,000.
You are required to prepare:
1. Statement showing changes in the Working Capital;
2. Statement of Sources and Application of funds
Cost of Capital
4. KM Ltd. has the following capital structure on September 30, 2019:
Sources of capital (` )
Equity Share Capital (40,00,000 Shares of ` 10 each) 4,00,00,000
Reserves & Surplus 4,00,00,000
12% Preference Shares 2,00,00,000
9% Debentures 6,00,00,000
16,00,00,000
The market price of equity share is `60. It is expected that the company will pay next year
a dividend of `6 per share, which will grow at 10% forever. Assume 40% income tax rate.
You are required to compute weighted average cost of capital using market value weights.
Capital Structure
5. The management of RT Ltd. wants to raise its funds from market to meet out the financial
demands of its long-term projects. T he company has various combinations of proposals
to raise its funds. You are given the following proposals of the company:
Proposal Equity shares (%) Debts (%) Preference shares (%)
P 100 - -
Q 50 50 -
R 50 - 50
(i) Cost of debt and preference shares is 12% each.
(ii) Tax rate –40%
(iii) Equity shares of the face value of `10 each will be issued at a premium of `10 per
share.
(iv) Total investment to be raised `8,00,00,000.
(v) Expected earnings before interest and tax `3,60,00,000.
From the above proposals the management wants to take advice from you for appropriate
plan after computing the following:
• Earnings per share

• Financial break-even-point
Compute the EBIT range among the plans for indifference.
Leverage
6. The following summarises the percentage changes in operating income, percentage
changes in revenues, and betas for four listed firms.
Firm Change in Change in operating income Beta
revenue
A Ltd. 35% 22% 1.00
B Ltd. 24% 35% 1.65
C Ltd. 29% 26% 1.15
D Ltd. 32% 30% 1.20
Required:
(i) Calculate the degree of operating leverage for each of these firms. Comment also.
(ii) Use the operating leverage to explain why these firms have different beta.
Capital Budgeting
7. MTR Limited is considering buying a new machine which would have a useful economic life of
five years, at a cost of `25,00,000 and a scrap value of `3,00,000, with 80 per cent of the cost
being payable at the start of the project and 20 per cent at the end of the first year. The machine
would produce 75,000 units per annum of a new product with an estimated selling price of `300
per unit. Direct costs would be `285 per unit and annual fixed costs, including depreciation
calculated on a straight- line basis, would be `8,40,000 per annum.
In the first year and the second year, special sales promotion expenditure, not included in the
above costs, would be incurred, amounting to `1,00,000 and `1,50,000 respectively.
Evaluate the project using the NPV method of investment appraisal, assuming the
company’s cost of capital to be 15 percent.
Management of Working Capital
8. Following are cost information of KG Ltd., which has commenced a new project for an annual
production of 24,000 units which is the full capacity:
Costs per unit (`)
Materials 80.00
Direct labour and variable expenses 40.00
Fixed manufacturing expenses 12.00
Depreciation 20.00

Fixed administration expenses 8.00

160.00
The selling price per unit is expected to be `192 and the selling expenses `10 per unit,
80% of which is variable.
In the first two years of operations, production and sales are expected to be as follows:
Year Production (No. of units) Sales (No. of
units)
1 12,000 10,000
2 18,000 17,000
To assess the working capital requirements, the following additional information is
available:
(a) Stock of materials 2 months’ average consumption
(b) Work-in-process Nil
(c) Debtors 2 month’s average sales.
(d) Cash balance ` 1,00,000
(e) Creditors for supply of 1 month’s average purchase during the year.
materials
(f) Creditors for expenses 1 month’s average of all expenses during the year.
Prepare, for the two years:
(i) A projected statement of Profit/Loss (Ignoring taxation); and
(ii) A projected statement of working capital requirements
Management of Working Capital
9. A regular customer of your company has approached to you for extension of credit facility
for purchasing of goods. On analysis of past performance and on the basis of information
supplied, the following pattern of payment schedule emerges:
Pattern of Payment Schedule
At the end of 30 days 20% of the bill
At the end of 60 days 30% of the bill.
Non-recovery 2% of the bill.
The customer wants to enter into a firm commitment for purchase of goods of `30 lakhs in
2019, deliveries to be made in equal quantities on the first day of each quarter in the

calendar year. The price per unit of commodity is `300 on which a profit of `10 per unit is
expected to be made. It is anticipated that taking up of this contract would mean an extra
recurring expenditure of `10,000 per annum. If the opportunity cost is 18% per annum,
would you as the finance manager of the company recommend the grant of credit to the
customer? Assume 1 year = 360 days.
Miscellaneous
10. Write short notes on the following:
(a) Write a short note on Payback Reciprocal.
(b) Write a short note on the functions of treasury department.
(c) Write short notes on Inter relationship between investment, financing and dividend
decisions.
SUGGESTED HINTS/ANSWERS
1. Annual investment (A) required:

 0.12 
A = `5,00,000  
 (1  0.12)  1 
5
 0.12 
A = `5,00,000   = `5,00,000×0.1574 = `78,700
 1.7623  1 
Grossprofit ` 42,18,000
2. (i) Gross profit ratio =  100 =  100 = 21.46%
Sales `1,96,56,000
Net profit `14,08,600
(ii) Net profit ratio =  100 =  100 = 7.17%
Sales `1,96,56,000
Operatingcos t
(iii) Operating ratio =  100
Sales
Operating cost = Cost of goods sold + Operating expenses
Cost of goods sold = Sales – Gross profit
= 1,96,56,000 - 42,18,000 = 1,54,38,000
Operating expenses = Administrative expenses + Selling & distribution expenses
= 18,40,000 + 7,56,000 = 25,96,000
1,54,38,000  25,96,000
Therefore, Operating ratio =  100
1,96,56,000

1,80,34,000
=  100 = 91.75%
1,96,56,000
(iv) Operating profit ratio = 100 – Operating cost ratio
= 100 – 91.75% = 8.25%
Cost of goods sold
(v) Inventory turnover ratio =
Average stock
1,54,38,000
=
(14,28,000  12,46,000) / 2
1,54,38,000
= = 11.55 times
13,37,000
Current assets
(vi) Current ratio =
Current liablities
Current assets = Sundry receivables + Inventory + Cash & Bank balance
= 13,50,000 + 14,28,000 + 4,22,000 = 32,00,000
Current liabilities = Sundry Payables + Other liabilities
= 7,20,000 + 2,80,000 = 10,00,000
32,00,000
Current ratio = = 3.2 times
10,00,000
Current assets  Inventories
(vii) Quick Ratio =
Current liablities
32,00,000  14,28,000
= =1.77 times
10,00,000
EBIDT Net profit  Interest
(viii) Interest coverage ratio = =
Interest Interest
14,08,600  2,60,000
= = 6.42 times
2,60,000
EBIT
(ix) Return on capital employed (ROCE) = 100
Capitalemployed
Capital employed = Capital + Retained earnings + General reserve + Term loan
= 20,00,000 + 42,00,000 + 12,00,000 + 26,00,000

= 1,00,00,000
16,68,600
Therefore, ROCE =  100 = 16.69%
1,00,00,000
Debts 26,00,000
(x) Debt to assets ratio = 100 =  100 =23.64%
Totalassets 1,10,00,000
3. (1) Schedule of Changes in Working Capital

Particulars 31st March Working Capital
20X8 20X9 Increase Decrease
(`) (`) (`) (` )
A. Current Assets:
Inventories 39,60,000 44,00,000 4,40,000 --
Sundry Debtors 22,00,000 34,10,000 12,10,000 --
Cash and Bank 9,40,000 1,00,000 -- 8,40,000
Total (A) 71,00,000 79,10,000
B. Current Liabilities:
Sundry Creditors 26,40,000 29,70,000 -- 3,30,000
Provision for Taxation 8,00,000 11,00,000 -- 3,00,000
Total (B) 34,40,000 40,70,000
Working Capital (A – B) 36,60,000 38,40,000
Increase in Working 1,80,000 1,80,000
Capital
Total 38,40,000 38,40,000 16,50,000 16,50,000
(2) Funds Flow Statement for the year ending 31st March, 20X9
(`)
A. Sources of Funds:
(i) Fund from Business Operations 54,00,000
(ii) Proceeds from issue of shares 44,00,000
(iii) Proceeds from sale of machinery 80,000
Total sources 98,80,000
B. Application of Funds:
(i) Payment of dividend 8,00,000
(ii) Repayment of bank loan 17,60,000

(iii) Purchase of land 22,00,000

(iv) Purchase of machinery 49,40,000
Total uses 97,00,000
Net Increase in Working Capital (A – B) 1,80,000
Working Notes:
1. Computation of Funds from Business Operation
(`)
Reserve and surplus as on March 31, 20X9 77,00,000
Add: Provision for depreciation 19,60,000
Proposed dividend 12,00,000
Loss on sale of machinery 40,000
1,09,00,000
Less: Profit and loss as on March 31, 20X8 55,00,000
Fund from Operations 54,00,000
2. Provision for Depreciation A/c
(` ) (` )
To Plant & Machinery A/c 10,80,000 By Balance b/d 17,60,000
To Balance c/d 26,40,000 By Profit & Loss A/c 19,60,000
(Balancing figure)
37,20,000 37,20,000
3. Plant & Machinery A/c
(`) (` )
To Balance b/d 1,01,20,000 By Prov. for Dep. A/c 10,80,000
To Bank (Purchases) 49,40,000 By Cash 80,000
By Profit & Loss A/c (Loss 40,000
on Sale)
By Balance c/d 1,38,60,000
1,50,60,000 1,50,60,000
4. Workings:
D1 `6
(i) Cost of Equity (Ke) = g = + 0.10 = 0.20 = 20%
P0 ` 60

(ii) Cost of Debentures (Kd) = I (1 - t) = 0.09 (1 - 0.4) = 0.054 or 5.4%

Computation of Weighted Average Cost of Capital (WACC u sing market value
weights)
Source of capital Market Weight Cost of WACC (%)
Value of capital (%)
capital (`)
9% Debentures 6,00,00,000 0.1875 5.40 1.01
12% Preference Shares 2,00,00,000 0.0625 12.00 0.75
Equity Share Capital 24,00,00,000 0.7500 20.00 15.00
(` 60 × 40,00,000 shares)
Total 32,00,00,000 1.00 16.76

5. (i) Computation of Earnings per Share (EPS)
Plans P (` ) Q (`) R (` )
Earnings before interest & tax (EBIT) 3,60,00,000 3,60,00,000 3,60,00,000
Less: Interest charges -- (48,00,000) --
Earnings before tax (EBT) 3,60,00,000 3,12,00,000 3,60,00,000
Less : Tax @ 40% (1,44,00,000) (1,24,80,000) (1,44,00,000)
Earnings after tax (EAT) 2,16,00,000 1,87,20,000 2,16,00,000
Less : Preference share dividend -- -- (48,00,000)
Earnings available for equity 2,16,00,000 1,87,20,000 1,68,00,000
shareholders
No. of equity shares 40,00,000 20,00,000 20,00,000
E.P.S 5.40 9.36 8.40
(ii) Computation of Financial Break-even Points
Proposal ‘P’ =0
Proposal ‘Q’ = `48,00,000 (Interest charges)
Proposal ‘R’ = Earnings required for payment of preference share
dividend i.e. `48,00,000  0.6 = `80,00,000
(iii) Computation of Indifference Point between the Proposals
Combination of Proposals
(a) Indifference point where EBIT of proposal “P” and proposal ‘Q’ is equal

EBIT(1- 0.4) (EBIT - `48,00,000)(1- 0.4)

=
40,00,000shares 20,00,000shares
0.6 EBIT = 1.2 EBIT – `57,60,000
EBIT = `96,00,000
(b) Indifference point where EBIT of proposal ‘P’ and proposal ‘R’ is equal:
EBIT(1- 0.40) EBIT(1- 0.40) `48,00,000
=
40,00,000shares 20,00,000shares
0.6EBIT 0.6EBIT - `48,00,000
=
40,00,000shares 20,00,000shares
0.30 EBIT = 0.6 EBIT – `48,00,000
` 48,00,000
EBIT = =`1,60,00,000
0.30
(c) Indifference point where EBIT of proposal ‘Q’ and proposal ‘R’ are equal
(EBIT - `48,00,000)(1- 0.4) EBIT(1- 0.4) - `48,00,000
=
20,00,000shares 20,00,000shares
There is no indifference point between proposal ‘Q’ and proposal ‘R’
% Change in Operating income
6. (i) Degree of operating leverage =
% Change in Revenues
A Ltd. = 0.22 / 0.35 = 0.63
B Ltd. = 0.35 / 0.24 = 1.46
C Ltd. = 0.26 / 0.29 = 0.90
D Ltd. = 0.30 / 0.32 = 0.94
It is level specific.
(ii) High operating leverage leads to high beta. So when operating leverage is lowest i.e.
0.63, Beta is minimum (1) and when operating leverage is maximum i.e. 1.46, beta is
highest i.e. 1.65.
7. Calculation of Net Cash flows
Contribution = (300 – 285)  75,000 = `11,25,000
Fixed costs = 8,40,000 – [(25,00,000 – 3,00,000)/5] = `4,00,000
Year Capital (` ) Contribution Fixed costs Adverts Net cash
(`) (` ) (`) flow (`)
0 (20,00,000) (20,00,000)

1 (5,00,000) 11,25,000 (4,00,000) (1,00,000) 1,25,000

2 11,25,000 (4,00,000) (1,50,000) 5,75,000
3 11,25,000 (4,00,000) 7,25,000
4 11,25,000 (4,00,000) 7,25,000
5 3,00,000 11,25,000 (4,00,000) 10,25,000
Calculation of Net Present Value
Year Net cash flow 12% discount Present value
(`) factor (` )
0 (20,00,000) 1.000 (20,00,000)
1 1,25,000 0.892 1,11,500
2 5,75,000 0.797 4,58,275
3 7,25,000 0.711 5,15,475
4 7,25,000 0.635 4,60,375
5 10,25,000 0.567 5,81,175
1,26,800
The net present value of the project is `1,26,800.
8. (i) Projected Statement of Profit / Loss
(Ignoring Taxation)
Year 1 Year 2
Production (Units) 12,000 18,000
Sales (Units) 10,000 17,000
(`) (` )
Sales revenue (A) 19,20,000 32,64,000
(Sales unit × `192)
Cost of production:
Materials cost 9,60,000 14,40,000
(Units produced × `80)
Direct labour and variable expenses 4,80,000 7,20,000
(Units produced × `40)
Fixed manufacturing expenses 2,88,000 2,88,000
(Production Capacity: 24,000 units × `12)
Depreciation 4,80,000 4,80,000
(Production Capacity : 24,000 units × `20)

Fixed administration expenses 1,92,000 1,92,000

(Production Capacity : 24,000 units × `8)
Total Costs of Production 24,00,000 31,20,000
Add: Opening stock of finished goods --- 4,00,000
(Year 1 : Nil; Year 2 : 2,000 units)
Cost of Goods available for sale 24,00,000 35,20,000
(Year 1: 12,000 units; Year 2: 20,000 units)
Less: Closing stock of finished goods at average cost (4,00,000) (5,28,000)
(year 1: 2000 units, year 2 : 3000 units)
(Cost of Production × Closing stock/ units produced)
Cost of Goods Sold 20,00,000 29,92,000
Add: Selling expenses – Variable (Sales unit × `8) 80,000 1,36,000
Add: Selling expenses -Fixed (24,000 units × `2) 48,000 48,000
Cost of Sales : (B) 21,28,000 31,76,000
Profit (+) / Loss (-): (A - B) (-) 2,08,000 (+) 88,000
Working Notes:
1. Calculation of creditors for supply of materials:
Year 1 (`) Year 2 (` )
Materials consumed during the year 9,60,000 14,40,000
Add: Closing stock (2 month’s average consumption) 1,60,000 2,40,000
11,20,000 16,80,000
Less: Opening Stock --- 1,60,000
Purchases during the year 11,20,000 15,20,000
Average purchases per month (Creditors) 93,333 1,26,667
2. Creditors for expenses:
Year 1 (`) Year 2 (` )
Direct labour and variable expenses 4,80,000 7,20,000
Fixed manufacturing expenses 2,88,000 2,88,000
Fixed administration expenses 1,92,000 1,92,000
Selling expenses (variable + fixed) 1,28,000 1,84,000
Total 10,88,000 13,84,000
Average per month 90,667 1,15,333

(ii) Projected Statement of Working Capital requirements

Year 1 (`) Year 2 (`)
Current Assets:
Inventories:
- Stock of materials 1,60,000 2,40,000
(2 month’s average consumption)
- Finished goods 4,00,000 5,28,000
Debtors (2 month’s average sales) (including profit) 3,20,000 5,44,000
Cash 1,00,000 1,00,000
Total Current Assets/ Gross working capital (A) 9,80,000 14,12,000
Current Liabilities:
Creditors for supply of materials 93,333 1,26,667
(Refer to working note 1)
Creditors for expenses 90,667 1,15,333
(Refer to working note 2)
Total Current Liabilities: (B) 1,84,000 2,42,000
Estimated Working Capital Requirements: (A-B) 7,96,000 11,70,000
9. Statement showing the Evaluation of credit Policies
Particulars Proposed Policy `
A. Expected Profit:
(a) Credit Sales 30,00,000
(b) Total Cost
(i) Variable Costs 29,00,000
(ii) Recurring Costs 10,000
29,10,000
(c) Bad Debts 60,000
(d) Expected Profit [(a) – (b) – (c)] 30,000
B. Opportunity Cost of Investments in Receivables 1,00,395
C. Net Benefits (A – B) (70,395)
Recommendation: The Proposed Policy should not be adopted since the net benefits
under this policy are negative

Working Note: Calculation of Opportunity Cost of Average Investments

Collection period Rate of Return
Opportunity Cost = Total Cost × 
360 100
Particulars 20% 30% 30% 18% Total
A. Total Cost 5,82,000 8,73,000 8,73,000 5,23,800 28,51,800
B. Collection period 30/360 60/360 90/360 100/360
C. Required Rate of Return 18% 18% 18% 18%
D. Opportunity Cost 8,730 26,190 39,285 26,190 1,00,395
(A × B × C)
10. (a) As the name indicates it is the reciprocal of payback period. A major drawback of the
payback period method of capital budgeting is that it does not indicate any cut off
period for the purpose of investment decision. It is, however, argued that the
reciprocal of the payback would be a close approximation of the Internal Rate of
Return (later discussed in detail) if the life of the project is at least twice the payback
period and the project generates equal amount of the annual cash inflows. In
practice, the payback reciprocal is a helpful tool for quick estimation of rate of return
of a project provided its life is at least twice the payback period.
The payback reciprocal can be calculated as follows:
Average annual cash in flow
Payback Reciprocal =
Initial investment
(b) 1. Cash Management: It involves efficient cash collection process and managing
payment of cash both inside the organisation and to third parties.
There may be complete centralization within a group treasury or the treasury
may simply advise subsidiaries and divisions on policy matter viz.,
collection/payment periods, discounts, etc.
Treasury will also manage surplus funds in an investment portfolio. Investment
policy will consider future needs for liquid funds and acceptable levels of risk as
determined by company policy.
2. Currency Management: The treasury department manages the foreign
currency risk exposure of the company. In a large multinational company (MNC)
the first step will usually be to set off intra-group indebtedness. The use of
matching receipts and payments in the same currency will save transaction
costs. Treasury might advise on the currency to be used when invoicing
overseas sales.

The treasury will manage any net exchange exposures in accordance with
company policy. If risks are to be minimized then forward contracts can be used
either to buy or sell currency forward.
3. Fund Management: Treasury department is responsible for planning and
sourcing the company’s short, medium and long-term cash needs. Treasury
department will also participate in the decision on capital structure and forecast
future interest and foreign currency rates.
4. Banking: It is important that a company maintains a good relationship with its
bankers. Treasury department carry out negotiations with bankers and act as
the initial point of contact with them. Short-term finance can come in the form
of bank loans or through the sale of commercial paper in the money market.
5. Corporate Finance: Treasury department is involved with both acquisition and
divestment activities within the group. In addition, it will often have responsibility
for investor relations. The latter activity has assumed increased importance in
markets where share-price performance is regarded as crucial and may affect
the company’s ability to undertake acquisition activity or, if the price falls
drastically, render it vulnerable to a hostile bid.
(c) Inter-relationship between Investment, Financing and Dividend Decisions: The
finance functions are divided into three major decisions, viz., investment, financing
and dividend decisions. It is correct to say that these decisions are inter-related
because the underlying objective of these three decisions is the same, i.e.
maximisation of shareholders’ wealth. Since investment, financing and dividend
decisions are all interrelated, one has to consider the joint impact of these decisions
on the market price of the company’s shares and these decisions should also be
solved jointly. The decision to invest in a new project needs the 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.
The above three decisions are briefly examined below in the light of their inter-
relationship and to see how they can help in maximising the shareholders’ wealth i.e.
market price of the company’s shares.
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 have
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 owner’s 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.
The above discussion makes it clear that investment, financing and dividend
decisions are interrelated and are to be taken jointly keeping in view their joint effect
on the shareholders’ wealth.

Cost Accounting and Financial Management

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PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT

PART-I: COST ACCOUNTING

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Labour : Paid 12,20,000 15,20,000

© The Institute of Chartered Accountants of India

Direct materials utilised – `1,87,00,000

© The Institute of Chartered Accountants of India

Oil and sundries ` 525 per 100 km run.

Cost of materials introduced- 40,000 units (`) 96,80,000

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Therefore, total freight = 35 trucks × `28,000 = `9,80,000

© The Institute of Chartered Accountants of India

(ii) Calculation of Economic Order Quantity (EOQ) for Mat.-X and Y:

Particulars Mat-X Mat-Y

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

4. Cost Ledger Control Account

Stores Ledger Control Account

WIP Control Account

© The Institute of Chartered Accountants of India

Finished Stock Ledger Control Account

Manufacturing Overhead Control Account

Wages Control Account

Cost of Sales Account

© The Institute of Chartered Accountants of India

By Balance c/d 8,30,000

To Plant Purchased 9,00,000 Certified 51,00,000

To Expenses 4,00,000 Uncertified 1,60,000 52,60,000

Less: Prepaid 90,000 3,10,000 By Plant at Site

© The Institute of Chartered Accountants of India

To Work-in-Progress A/c 11,04,101

© The Institute of Chartered Accountants of India

4. Expenses Paid for the year 2018-19

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Total kilometre travelled by four trucks in one year

© The Institute of Chartered Accountants of India

Units introduced 40,000 Normal Loss (10% of 4,000 -- -- -- --

(ii) Calculation of value of output transferred to Process-2 & Closing WIP

© The Institute of Chartered Accountants of India

(i) Direct Material Price Variance:

 FixedCost  DesiredPr ofit 

© The Institute of Chartered Accountants of India

*Selling Expenses: Fixed cost per unit = `25 x 20% = `5

© The Institute of Chartered Accountants of India

13. (i) Difference between Cost Accounting and Management Accounting

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

PART-II: FINANCIAL MANAGEMENT

Time Value of Money

© The Institute of Chartered Accountants of India

You are required to compute:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Fixed administration expenses 8.00