CA PE II Group II : Cost Accounting and Financial Management - November 2007

CA PE II - Group II • Cost Accounting and Financial Management • November 2007

This Paper has 20 answerable questions with 0 answered.

Roll No………
Total No. of Questions— 9]	[Total No. of Printed Pages—10
Time Allowed : 3 Hours	Maximum Marks : 100

Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers in Hindi, his answers in Hindi will not be valued.
Question Nos.1 and 6 are compulsory.
Attempt three questions out of the remaining question numbers 2, 3, 4 and 5 and attempt two questions from the remaining Questions Nos. 7, 8 and 9.
Working notes should form part of the answer.
Marks

(a)

PQR Ltd. manufactures four products, namely A, B, C and D using the same plant and process. The following information relates to production period October, 2007:

Product	A	B	C	D
Output in units Cost per unit: Direct Materials Direct Labour Machine hours per unit	1440 Rs. 42 Rs. 10 4	1200 Rs. 45 Rs. 9 3	960 Rs. 40 Rs. 7 2	1008 Rs. 48 Rs. 8 1

The four products are similar and are usually produced in production runs of 48 units per batch and are sold in batches of 24 units. Currently, the production overheads are absorbed using machine hour rate. The production overheads incurred by the company for the period October, 2007 are as follows:

	Rs.
Machine department costs (rent, depreciation and supervision) Set–up Costs Store receiving costs Inspection Material handling and despatch	1,26,000 40,000 30,000 20,000 5,184

During the period October, 2007, the following cost drivers are to be used for allocation of overheads cost:

Cost
Set–up Costs
Stores receiving
Inspection
Material handling and despatch

Cost driver
Number of production runs (batches)
Requisition raised
Number of production runs (batches)
Orders executed

It is also determined that:

(i)	Machine department costs should be apportioned among set–up, stores receiving and inspection activities in proportion of 4 : 3 : 2.
(ii)	The number of requisitons raised on stores are 50 for each product. The total number of material handling and despatch orders executed during the period are 192 and each order being for a batch size of 24 units of product.

Required

(i)	Calculate the total cost of each product, if all overhead costs are absorbed on machine – hour rate basis.

(ii)	Calculate the total cost of each product using activity based costing.

(iii)

Comment briefly on as to how an activity based costing might benefit PQR Ltd.

3+6+2=11

(0)

(b)

Distinguish between Cost control and Cost reduction.

(0)

(c)

Discuss the reasons for disagreement of profits as per Cost Accounting and Financial Accounting.

(0)

(a)

A Company manufactures a special product which requires a component ‘Alpha’. The following particulars are collected for the year 2008:

(i)
(ii)
(iii)
(iv)

Annual demand of Alpha
Cost of placing an order
Cost per unit of Alpha
Carrying cost % p.a.

:
:
:
:

8,000 units
Rs. 200 per order
Rs. 400
20%

The company has been offered a quantity discount of 4% on the purchase of ’Alpha‘, provided the order size is 4,000 components at a time.

Required:

(i)	Compute the economic order quantity.

(ii)	Advise whether the quantity discount offer can be accepted.

2+3=5

(0)

(b)

Two workers ’A’ and ’B’ produce the same product using the same material. Their normal wage rate is also the same. ’A’ is paid bonus according to Rowan scheme while ’B’ is paid bonus according to Halsey scheme. The time allowed to make the product is 50 hours. ’A’ takes 30 hours while ’B’ takes 40 hours to complete the product. The factory overhead rate is Rs. 5 per person–hour actually worked. The factory cost of product manufactured by ’A’ is Rs. 3,490 and for product manufactured by ’B’ is Rs. 3,600.

Required:

(i)	Compute the normal rate of wages.

(ii)	Compute the material cost.

(iii)

Prepare a statement comparing the factory cost of the product as made by two workers.

3+1+2=6

(0)

(a)

RST Limited processes product Z through two distinct process — Process I and Process II. On completion, it is transferred to finished stock. From the following information for the year 2006–07, prepare Process I, Process II and Finished Stock A/c:

Particulars
Raw materials used
Raw materials cost per unit
Transfer to next process/finished stock
Normal loss (on inputs)
Direct wages
Direct expenses

Manufacturing overheads

Realizable value of scrap per unit

Process I
7,500 units
Rs. 60
7,050 units
5%
Rs. 1,35,750
60% of
direct wages
20% of
direct wages
Rs. 12.50

Process II
—
—
6,525 units
10%
Rs. 1,29,250
65% of
direct wages
15% of
direct wages
Rs. 37.50

6,000 units of finished goods were sold at a profit of 15% on cost. Assume that there was no opening or closing stock of work–in–progress.

(0)

(b)

Discuss the three methods of calculating labour turnover.

(0)

(a)

Discuss the treatment of spoilage and defectives in Cost Accounting.

(0)

(b)

Compute a conservative estimate of profit on a contract (which has been 90% complete) from the following particulars:

	Rs.
Total expenditure to date Estimated further expenditure to complete the contract (including contingencies) Contract Price Work certified Work uncertified Cash received	22,50,000 2,50,000 32,50,000 27,50,000 1,75,000 21,25,000

(0)

(c)

Discuss the various reports provided by Cost Accounting department.

(0)

(a)

ABC Ltd. has three production departments P₁, P₂ and two service departments S₁ and S₂. The following data are extracted from the records of the Company for the month of October, 2007:

	Rs.
Rent and rates General lighting Indirect Wages Power Depreciation on machinery Insurance of machinery	62,500 7,500 18,750 25,000 50,000 20,000

Other Information:

	P₁	P₂	P₃	S₁	S₂
Direct wages (Rs.) Horse Power of Machines used Cost of machinery (Rs.) Floor space (Sq. ft) Number of light points Production hours worked	37,500 60 3,00,000 2,000 10 2,225	25,000 30 4,00,000 2,500 15 4,050	37,500 50 5,00,000 3,000 20 4,100	18,750 10 25,000 2,000 10 –	6,250 – 25,000 500 5 –

Expenses of the service departments S₁ and S₂ are reapportioned as below:

	P₁	P₂	P₃	S₁	S₂
S₁	20%	30%	40%	—	10%
S₂	40%	20%	30%	10%	—

Required:

(i)	Compute overhead absorption rate per production hour of each production department.

(ii)	Determine the total cost of product X which is processed for manufacture in department P1, P2 and P3 for 5 hours, 3 hours and 4 hours respectively, given that its direct material cost is Rs. 625 and direct labour cost is Rs. 375.

8+2=10

(0)

(b)

Discuss the essential requisites for the installation of Uniform Costing system.

(0)

(a)

Consider the following mutually exclusive projects:

Cash flows (Rs.)
Projects	C₀	C₁	C₂	C₃	C₄
A B C D	–10,000 – 10,000 – 3,500 – 3,000	6,000 2,500 1,500 0	2,000 2,500 2,500 0	2,000 5,000 500 3,000	12,000 7,500 5,000 6,000

Required:

(i)	Calculate the payback period for each project.

(ii)	If the standard payback period is 2 years, which project will you select? Will your answer differ, if standard payback period is 3 years?

(iii)

If the cost of capital is 10%, compute the discounted payback period for each project. Which projects will you recommend, if standard discounted payback period is (i) 2 years; (ii) 3 years?

(iv)	Compute NPV of each project. Which project will you recommend on the NPV criterion? The cost of capital is 10%. What will be appropriate choice criteria in this case.?

The PV factor at 10% are:

Year
PV factor at 10%(PV/F 0.10t)

1
0.9091

2
0.8264

3
7513

4
0.6830

1+1+4+4=10

(0)

(b)

Consider the following information for Omega Ltd:

	Rs. in Lakhs
EBIT (Earnings before Interest and Tax) Earnings before Tax (EBT): Fixed Operating costs:	15,750 7,000 1,575

Required:

(i) Calculate percentage change in earnings per share, if sales increase by 5%.

(0)

(c)

Discuss Miller–Orr Cash Management Model.

(0)

(a)

A proforma cost sheet of a Company provides the following data:

	Rs.
Raw material cost per unit Direct Labour cost per unit Factory overheads cost per unit (includes depreciation of Rs. 18 per unit at budgeted level of activity) Total cost per unit Profit Selling price per unit	117 49 98 264 36 300

Following additional information is available:

Average raw material in stock
Average work–in–process stock

:
:

4 weeks
2 weeks

(% completion with respect to

Materials
Labour and Overheads

:
:

80%
60%

Finished goods in stock

Finished goods in stock
Credit period allowed to debtors
Credit period availed from suppliers
Time lag in payment of wages
Time lag in payment of overheads

:
:
:
:
:

3 weeks
6 weeks
8 weeks
1 week
2 weeks

The company sells one–fifth of the output against cash and maintains cash and maintains cash balance of Rs. 2,50,000.

Required:

Prepare a statement showing estimate of working capital needed to finance a budgeted activity level of 78,000 units of production. You may assume that production is carried on evenly throughout the year and wages and overheads accue similarly.

(0)

(b)

Discuss the major considerations in Capital structure planning.

(0)

Following are the financial statements of Zed Ltd:

Balance Sheet as on
	March 31, 2007 Rs.	March 31, 2006 Rs.
Capital and Liabilities: Share Capital, Rs. 10 par value Share premium Reserves and Surplus Debentures Long–term loans Creditors Bank Overdraft Accrued expenses Income–tax payable	1,67,500 3,35,000 1,74,300 2,40,000 40,000 28,800 7,500 4,350 48,250 10,45,700	1,50,000 2,37,500 1,23,250 — 50,000 27,100 6,250 4,600 16,850 6,15,550

Assets	March 31, 2007 Rs.	March 31, 2006 Rs.
Land Building, net of depreciation Machinery, net of depreciation Investment in ‘A’ Ltd. Stock Prepaid expenses Debtors Trade Investments Cash	3,600 6,01,800 1,10,850 75,000 58,800 1,900 76,350 40,000 77,400 10,45,700	3,600 1,78,400 1,07,050 — 46,150 2,300 77,150 1,05,000 95,900 6,15,550

Income Statement For the year ended March 31, 2007
	Rs.
Net Sales Less : Cost of goods sold and operating Expenses (including depreciation on buildings of Rs. 6,600 and depreciation on machinery of Rs. 11,400) Net Operating profit Gain on sale of trade investments Gain on sale of machinery Profits before tax Income–tax Profits after tax Additional information:	13,50,000 12,58,950 91,050 6,400 1,850 99,300 48,250 51,050

Additional information:

(i)	Machinery with a net book value of Rs. 9,150 was sold during the year.
(ii)	The shares of ‘A’ Ltd. were acquired by issue of debentures.

Required:

Prepare a Funds Flow Statement (Statement of changes in Financial position on working capital basis) for the year ended March 31, 2007.

(0)

(a)

Discuss the conflicts in Profit versus Wealth maximisation principle of the firm.

(0)

(b)

Using the conflicts in Profit versus Wealth maximisation principle of the firm.

(i) (ii) (iii) (iv)	Total debt to net worth Total assets turnover Gross profit on sales Average collection period (Assume 360 days in a year)	: : : :	1 : 2 2 30% 40 days
(v)	Inventory turnover ratio based on cost of goods sold and year – end inventory	:	3
(vi)	Acid test ratio	:	0.75

Balance Sheet as on March 31, 2007
Liabilities	Rs.	Assets	Rs.
Equity Shares Capital Reserves and Surplus Total Debt Current Liabilities	4,00,000 6,00,000 —	Plant and Machinery and other Fixed Assets Current Assets: Inventory Debtors Cash	— — — —

(0)

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