CA PE II Group II : Cost Accounting and Financial Management - November 2008

CA PE II - Group II • Cost Accounting and Financial Management • November 2008

This Paper has 26 answerable questions with 0 answered.

Roll No……………
Total No. of Questions — 9]	[Total No. of Printed Pages — 5
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)

A product passes through three processes ‘X’, ‘Y’ and ‘Z’. The output of process ‘X’ and ‘Y’ is transferred to next process at cost plus 20 per cent each on transfer price and the output of process ‘Z’ is transferred to finished stock at a profit of 25 per cent on transfer price. The following informations are available in respect of the year ending 31st March, 2008:

	Process X Rs.	Process Y Rs.	Process Z Rs.	Finished Stock Rs.
Opening stock Material Wages Manufacturing Overheads Closing stock Inter process profit included in Opening stock	15,000 80,000 1,25,000 96,000 20,000 NIL	27,000 65,000 1,08,000 72,000 32,000 4,000	40,000 50,000 92,000 66,500 39,000 10,000	45,000 50,000 20,000

Stock in processes is valued at prime cost. The finished stock is valued at the price at which it is received from process ‘Z’. Sales of the finished stock during the period was Rs. 14,00,000.
You are required to prepare:

(i)
(ii)
(iii)

Process accounts and finished stock account showing profit element at each stage.
Profit and Loss account.
Show the relevant items in the Balance Sheet.

(0)

(b)

What are the limitations of inter–firm comparison system?

(0)

(c)

What is cost plus contract? State its advantages.

(0)

(a)

A transport company has 20 vehicles, which capacities are as follows:

No. of Vehicles
5
6
7
2

Capacity per vehicle
9 tonne
12 tonne
15 tonne
20 tonne

The company provides the goods transport service between stations ‘A’ to station ‘B’. Distance between these stations is 200 kilometres. Each vehicle makes one round trip per day an average. Vehicles are loaded with an average of 90 per cent of capacity at the time of departure from station ‘A’ to station ‘B’ and at the time of return back loaded with 70 per cent of capacity. 10 per cent of vehicles are laid up for repairs every day. The following informations are related to the month of October, 2008:

Salary of Transport Manager
Salary of 30 drivers
Wages of 25 Helpers
Wages of 20 Labourers
Consumable stores
Insurance (Annual)
Road License (Annual)
Cost of Diesel per litre
Kilometres run per litre each vehicle
Lubricant, Oil etc.
Cost of replacement of Tyres, Tubes, other parts etc.
Garage rent (Annual)
Transport Technical Service Charges
Electricity and Gas charges
Depreciation of vehicles

Rs. 30,000
Rs. 4,000 each driver
Rs. 2,000 each helper
Rs. 1,500 each labourer
Rs. 45,000
Rs. 24,000
Rs. 60,000
Rs. 35
5 Km.
Rs. 23,500
Rs. 1,25,000
Rs. 90,000
Rs. 10,000
Rs. 5,000
Rs. 2,00,000

There is a workshop attached to transport department which repairs these vehicles and other vehicles also. 40 per cent of transport manager’s salary is debited to the workshop. The transport department is charged Rs. 28,000 for the service rendered by theworkshop during October, 2008. During the month of October, 2008 operation was 25 days.
You are required:

(i)
(ii)

Calculate per ton–km operating cost.
Find out the freight to be charged per ton–km, if the company earned a profit of 25 per cent on freight.

(0)

(b)

Explain the following:

(i)

Job costing and batch costing.

(0)

(ii)

Profit centres and investment centres.

(0)

(iii)

Period cost and discretionary costs.

(0)

(a)

In a manufacturing company factory overheads are charged as fixed percentage basis on direct labour and office overheads are charged on the basis of percentage of factory cost. The following informations are available related to the year ending 31st March, 2008 :

	Product A	Product B
Direct Materials Direct Labour Sales Profit	Rs. 19,000 Rs. 15,000 Rs. 60,000 25% on cost	Rs. 15,000 Rs. 25,000 Rs. 80,000 25% on sales price

You are required to find out:

(i)
(ii)

The percentage of factory overheads on direct labour.
The percentage of office overheads on factory cost.

(0)

(b)

The following information is collected from the personnel department of ST limited for the year ending 31st March, 2008:

Number of workers at the beginning of the year
Number of workers at the end of the year
Number of workers left the company during the year
Number of workers discharged during the year
Number of workers replaced due to left and discharges
Additional workers employed for expansion during the year

8,000
9,600
500
100
700
1,500

You are required to calculate labour turnover rate by using separation method, replacement method and flux method.

(0)

(c)

Discuss briefly the benefits of "Direct Product Profitability".

(0)

(d)

How cost audit is useful to the society ? Discuss.

(0)

(a)

The following are the details of receipts and issues of a material of stores in a manufacturing company for the period of three months ending 30th June, 2008:
Receipts:

Date	Quantity (kgs)	Rate per kg. Rs.
April 10 April 20 May 5 May 17 May 25 June 11 June 24	1,600 2,400 1,000 1,100 800 900 1,400	5 4.90 5.10 5.20 5.25 5.40 5.50

There was 1,500 kgs. in stock at April 1, 2008 which was valued at Rs. 4.80 per kg.
Issues:

Date
April 4
April 24
May 10
May 26
June 15
June 21

Quantity (kgs)
1,100
1,600
1,500
1,700
1,500
1,200

Issues are to be priced on the basis of weighted average method. The stock verifier of the company reported a shortage of 80 kgs. on 31st May, 2008 and 60 kgs. on 30th June, 2008. The shortage is treated as inflating the price of remaining material on account of shortage.
You are required to prepare a Stores Ledger Account.

(0)

(b)

What are the essential prerequisites of integrated accounting system?

(0)

(c)

What do you mean by Idle time ? How would you treat idle time in cost accounting?

(0)

(a)

Maximum production capacity of JK Ltd. is 5,20,000 units per annum. Details of estimated cost of production are as follows:

–	Direct material Rs. 15 per unit.
–	Direct wages Rs. 9 per unit (subject to a minimum of Rs. 2,50,000 per month).
–	Fixed overheads Rs. 9,60,000 per annum.
–	Variable overheads Rs. 8 per unit.
–	Semi–variable overheads are Rs. 5,60,000 per annum up to 50 per cent capacity and additional Rs. 1,50,000 per annum for every 25 per cent increase in capacity or a part of it.

JK Ltd. worked at 60 per cent capacity for the first three months during the year 2008, but it is expected to work at 90 per cent capacity for the remaining nine months.

The selling price per unit was Rs. 44 during the first three months.
You are required, what selling price per unit should be fixed for the remaining nine months to yield a total profit of Rs. 15,62,500 for the whole year.

(0)

(b)

Calculate machine hour rate for recovery of overheads for a machine from the following information:

Cost of machine is Rs. 25,00,000 and estimated salvage value is Rs. 1,00,000. Estimated working life of the machine is 10 years. Annual working hours are 3,000 in the factory. The machine is required 400 hours per annum for repairs and maintenance. Setting–up time of the machine is 156 hours per annum to be treated as productive time. Cost of repairs and maintenance for whole working life of the machine is Rs. 3,50,000. Power used 15 units per hour at a cost of Rs. 5 per unit. No power is consumed during maintenance and setting-up time. A chemical required for operating the machine is Rs. 9,880 per annum. Wages of an operator is Rs. 4,000 per month. The operator, devoted one-third of his time to the machine. Annual insurance charges 2 per cent of cost of machine.
Light charges for the department is Rs. 2,500 per month, having 48 points in all, out of which only 8 points are used at this machine. Other indirect expenses are chargeable to the machine are Rs. 6,500 per month.

(0)

(a)

Balance Sheet of OP Ltd. as on 31st March, 2007 and 2008 are as follows:

Liabilities	Amount 31.3.2007 Rs.	Amount 31.3.2008 Rs.	Assets	Amount 31.3.2007 Rs.	Amount 31.3.2008 Rs.
Share capital General Reserve Profit and Loss A/c 10% Debentures Bank Loan (long–term) Creditors Outstanding Expenses Proposed Dividend Provision for taxation	20,00,000 4,00,000 2,50,000 10,00,000 5,00,000 4,00,000 20,000 3,00,000 1,00,000	20,00,000 4,50,000 3,60,000 8,00,000 6,00,000 5,80,000 25,000 3,60,000 1,20,000	Land and Building Plant and Machinery Investment Stock Debtors Prepaid Expenses Cash and Bank	15,00,000 18,00,000 4,00,000 4,80,000 6,00,000 50,000 1,40,000	14,00,000 17,50,000 3,72,000 8,50,000 7,98,000 40,000 85,000
	49,70,000	52,95,000		49,70,000	52,95,000

Additional informations:

(i)	New machinery for Rs. 3,00,000 was purchased but an old machinery costing Rs. 1,45,000 was sold for Rs. 50,000 and accumulated depreciation thereon was Rs. 75,000.
(ii)	10% debentures were redeemed at 20% premium.
(iii)	Investment were sold for Rs. 45,000, and its profit was transferred to general reserve.
(iv)	Income–tax paid during the year 2007–08 was Rs. 80,000.
(v)	An interim dividend of Rs. 1,20,000 has been paid during the year 2007–08.
(vi)	Assume the provision for taxation as current liability and proposed dividend as noncurrent liability.
(vii)	Investment are non-trade investment. You are required to prepare: (i) Schedule of changes in working capital. (ii) Funds flow statement.

(0)

(b)

Explain the following:

(i)

Seed capital assistance.

(0)

(ii)

Bridge finance.

(0)

(a)

WX Ltd. has a machine which has been in operation for 3 years. Its remaining estimated useful life is 8 years with no salvage value in the end. Its current market value is Rs. 2,00,000. The company is considering a proposal to purchase a new model of machine to replace the existing machine. The relevant informations are as follows:

	Existing Machine	New Machine
Cost of machine Estimated life Salvage value Annual output Selling price per unit Annual operating hours Material cost per unit Labour cost per hour^∗ Indirect cash cost per annum	Rs. 3,30,000 11 years Nil 30,000 units Rs. 15 3,000 Rs. 4 Rs. 40 Rs. 50,000	Rs. 10,00,000 8 years Rs. 40,000 75,000 units Rs. 15 3,000 Rs. 4 Rs. 70 Rs. 65,000

The company follow the straight line method of depreciation. The corporate tax rate is 30 per cent and WX Ltd. does not make any investment, if it yields less than 12 per cent. Present value of annuity of Re. 1 at 12% rate of discount for 8 years is 4.968. Present value of Re. 1 at 12% rate of discount, received at the end of 8th year is 0.404. Ignore capital gain tax.

Advise WX Ltd. whether the existing machine should be replaced or not.

^∗In the question paper this word was wrongly printed as ‘unit’ instead of word ‘hour’. The answer provided here is on the basis of correct word i.e. ‘Labour cost per hour’.

(0)

(b)

Discuss the factors to be taken into consideration while determining the requirement of working capital.

(0)

(a)

The following is the capital structure of a Company:

Source of capital	Book value Rs.	Market value Rs.
Equity shares @ Rs. 100 each 9 per cent cumulative preference shares @ Rs. 100 each 11 per cent debentures Retained earnings	80,00,000 20,00,000 60,00,000 40,00,000	1,60,00,000 24,00,000 66,00,000 —
	2,00,00,000	2,50,00,000

The current market price of the company’s equity share is Rs. 200. For the last year the company had paid equity dividend at 25 per cent and its dividend is likely to grow 5 per cent every year. The corporate tax rate is 30 per cent and shareholders personal income tax rate is 20 per cent.

You are required to calculate:

(i)
(ii)
(iii)

Cost of capital for each source of capital.
Weighted average cost of capital on the basis of book value weights.
Weighted average cost of capital on the basis of market value weights.

(0)

(b)

Annual sales of a company is Rs. 60,00,000. Sales to variable cost ratio is 150 per cent and Fixed cost other than interest is Rs. 5,00,000 per annum. Company has 11 per cent debentures of Rs. 30,00,000.
You are required to calculate the operating, Financial and combined leverage of the company.

(0)

(c)

What is "Internal Rate of Return"? State its acceptance rule.

(0)

(a)

A publishing house purchases 72,000 rims of a special type paper per annum at cost Rs. 90 per rim. Ordering cost per order is Rs. 500 and the carrying cost is 5 per cent per year of the inventory cost. Normal lead time is 20 days and safety stock is NIL. Assume 300 working days in a year:
You are required:

(i)	Calculate the Economic Order Quantity (E.O.Q).
(ii)	Calculate the Reorder Inventory Level.
(iii)	If a 1 per cent quantity discount is offered by the supplier for purchases in lots of 18,000 rims or more, should the publishing house accept the proposal?

(0)

(b)

What is Capital rationing? Describe various ways of implementing it.

(0)

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