CA PE - II :: Cost Accounting and Financial Management : November 2004


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

Time Allowed : 3 Hours Maximum Marks : 100
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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 Question numbers 7, 8 and 9.
Working notes should form part of the answer.
Marks
1. (a)Discuss the limitations of Uniform costing.2
(b)Discuss the three methods of Calculating labour turnover.3
(c)

Pokemon Chocolates manufactures and distributes chocolate products. It purchases Cocoa beans and processes them into two intermediate products :

8+2+
3=13
  •    Chocolate powder liquor base
    		•
  •    Milk-chocolate liquor base.
    		•

    These two intermediate products become separately indentifiable at a single split off point, Every 500 pounds of cocoa beans yields 20 gallons of chocolate-powder liquor base and 30 gallons of milk-chocolate liquor base.

    The chocolate powder liquor base is further processed into chocolate powder. Every 20 gallons of chocolate-powder liquor base yields 200 pounds of chocolate powder. The milk-chocolate liquor base is further processed into milk-chocolate. Every 30 gallons of milk-chocolate liquor base yields 340 pounds of milk chocolate.
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    ( 2 )

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    Production and sales data for October, 2004 are :
  •    Cocoa beans processed
    		• 7,500 pounds
  •    Costs of processing Cocoa beans to split off point
    • (including purchase of beans)Rs. 7,12,500

     
    ProductionSalesSelling Price
    Chocolate powder3,000 pounds3,000 poundsRs. 190 per pound
    Milk Chocolate5,100 pounds5,100 poundsRs. 237.50 per pound

    The October, 2004 separable costs of processing chocolate-powder liquor into chocolate powder are Rs. 3,02,812.50. The October, 2004 separable costs of processing milk-chocolate liquor base into milk-chocolate are RS. 6,23,437.50.

    Pokemon fully processes both of is intermediate products into chocolate powder or milk-chocolate. There is an active market for these intermediate products. In October, 2004, Pokemon could have sold the chocolate powder liquor base for Rs. 997.50 a gallon and the milk-chocolate liquor base for Rs. 1,235 a gallon.
    Required :
    (i)

    Calculate how the joint cost of Rs. 7,12,500 would be allocated between the chocolate powder and milk-chocolate liquor bases under the following methods :
    (a)Sales value at split off point
    (b)Physical measure (gallons)
    (c)Estimated net realisable value, (NRV) and
    (d)constant gross-margin percentage NRV.

    (ii)

    What is the gross-margin percentage of the chocolate powder and milk-chocolate liquor bases under each of the methods in requirement (i)?
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    ( 3 )

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    (iii)

    Could Pokemon have increased its operating income by a change in its decision to fully process both of its intermediate products? Show your computations.

    2.(a)Discuss cost classification based on variability and controllability.4
    (b)Discuss ABC analysis as a system of Inventory control.4
    (c)

    RST Limited has received an offer of quantity discount on its order of materials as under :
    Price per tonneTonnes number
    Rs. 9,600Less than 50
    Rs. 9,36050 and less than 100
    Rs. 9,120100 and less than 200
    Rs. 8,880200 and less than 300
    Rs. 8,640300 and above

    		4+2=6

    The annual requirement for the material is 500 tonnes. The ordering cost per order is Rs. 12,500 and the stock holding cost is estimated at 25% of the material cost per annum.
    Required :
    (i)Compute the most economical purchase level.
    (ii)

    Compute EOQ if there are no quantity discounts and the price per tonne is Rs. 10,500.
    3.(a)Discuss the treatment of overtime premium in Cost accounting3
    (b)

    Discuss the Gantt task and bonus system as a system of wage payment and incentives

    		3
    (c)

    Popeye Company is a metal and wood cutting manufacturer, selling products to the home construction market. Consider the following data for the month of October, 2004 :

    		6+2=8
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    ( 4 )

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    Rs.
    Sandpaper5,000
    Material-handling costs1,75,000
    Lubricants and Coolants12,500
    Miscellaneous indirect manufacturing labour1,00,000
    Direct manufacturing labour7,50,000
    Direct materials, October 1, 20041,00,000
    Direct materials, October 31, 20041,25,000
    Finished goods, October 1, 20042,50,000
    Finished goods, October 31, 20043,75,000
    Work-in-process, October 1, 200425,000
    Work-in-process, October 31, 200435,000
    Plant-leasing costs1,35,000
    Depreciation-plant equipment90,000
    Property taxes on plant equipment10,000
    Fire Insurance on plant equipment7,500
    Direct materials purchased11,50,000
    Sales revenues34,00,000
    Marketing promotions1,50,000
    Marketing salaries2,50,000
    Distribution costs1,75,000
    Customer-service costs2,50,000
    Required :
    (i)

    Prepare an income statement with a separate supporting schedule of cost of goods manufactured.

    (ii)

    For all manufacturing items, indicate by V or F whether each is basically a variable cost or a fixed cost (where the cost object is a product unit).
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    ( 5 )

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    4.(a)

    MNP suits is a ready-to-wear suit manufacturer. It has four customer : two wholesale-channel customers and two retail-channel customers.

    		6+2+
    2=10
    MNP suits has developed the following activity-based costing system :
    ActivityCost driverRate in 2004
    Order processing
    Sales visits
    Delivery-regular
    Delivery-rushed    		 Number of purchase orders
    Number of customer visits
    Number of regular deliveries
    Number of rushed deliveries    		 Rs. 1,225 per order
    Rs. 7,150 per visit
    Rs. 1,500 per delivery
    Rs. 4,250 per delivery

    List selling price per suit is Rs. 1,000 and average cost per suit is Rs. 550. The CEO of MNP suits wants to evaluate the profitability of each of the four customers in 2003 to explore opportunities for increasing profitability of his company in 2004. The following data are available for 2003 :
     

    Item    		WholesaleRetail
    CustomersCustomers
    WHRT
    Total number of orders
    Total number of sales visits
    Regular deliveries
    Rush deliveries
    Average number of suits per order
    Average selling price per suit    		 44
    8
    41
    3
    400
    Rs. 700    		 62
    12
    48
    14
    200
    Rs. 800    		 212
    22
    166
    46
    30
    Rs. 850    		 250
    20
    190
    60
    25
    Rs. 900
    Required :
    (i)Calculate the custmer-level operating income in 2003.
    (ii)

    What do you recommend to CEO of MNP suits to do to increase the Company's operating income in 2004?

    (iii)

    Assume MNP suits distribution channel costs are Rs.l 17,50,000 for its wholesale customers and Rs. 10,50,000 for the retail customers. Also, assume that its Corporate sustaining costs are Rs. 12,50,000. Prepare Income statement of MNP suits for 2003.
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    ( 6 )

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    (b)

    Discuss the step method and reciprocal service method of secondary distribution of overheads.

    		4
    5.(a)Distinguish between any three of the following :
    (i)Cost control and cost reduction
    (ii)Bin card and stores ledger
    (iii)Job costing and batch costing
    (iv)Cost audit and statutory audit.
    		2+2+
    2=6
    (b)

    Brock Construction Ltd. Commenced a contract on November 1, 2003. The total contract was for Rs. 39,37,500. It was decided to estimate the total profit on the contract and to take to the credit of P/L A/C that proportion of estimated profit on cash basis, which work completed bore to the total contract. Actual expenditure for the period November 1, 2003 to October 31, 2004 and estimated expenditure for November 1, 2004 to March 31, 2005 are given below :

    		8
    November 1, 2003November 1, 2004
    toto
    October 31, 2004March 31, 2005
    (Actuals)(Estimated)
    Rs.Rs.
    Materials issued6,75,00012,37,500
    Labour:Paid4,50,0005,62,500
    Prepaid25,000—
    Outstanding— 2,500
    Plant purchased3,75,000—
    Expenses:Paid2,00,0003,50,000
    Outstanding50,000 25,000
    Plant returns to store75,000 3,00,000
    (historical cost)(On March 31, 2004)(On March 31, 2005)
    Work certified20,00,000Full
    Work uncertified75,000
    Cash received17,50,000
    Material at site75,00037,500
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    ( 7 )

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    The plant is subject to annual depreciation @33% on written down value method. The contract is likely to be completed on March 31, 2005.
    Required :
    (i)

    Prepare the contract A/c. Determine the profit on the contract for the year November, 2003 to October, 2004 on prudent basis, which has to be credited to P/L A/C.
    6.

    PQR Ltd. is evaluating a proposal to acquire new equipment would cost Rs. 3.5 million and was expected to generate cash inflows of Rs. 4,70,000 a year for nine years. After that point, the equipment would be obsolete and have no significant salvage value. The company's weighted average cost of capital is 16%.

    		5+3+5
    +3=16

    The management of the PQR Ltd. seemed to be convinced with the merits of the investment but was not sure about the best way to finance it. PQR Ltd. could raise the money by issuing a secured eight-year note at an interest rate of 12%. However, PQR Ltd. had huge tax-loss carry forwards from a disastrous foray into foreign exchange options. As a result, the company was unlikely to be in a position of tax-paying for many years. The CEO of PQR Ltd. thought it better to lease the equipment than to buy it. The proposals for lease have been obtained from MGM Leasing Ltd. and Zeta Leasing Ltd. The terms of the lease are as under :
    MGM Leasing Ltd.Zeta Leasing Ltd.
    Lease period offered
    Number of lease rental payments with initial lease payment due on entering the lease contract
    Annual lease rental
    Lease terms equivalent to borrowing cost (Claim of lessor)
    Leasing Proposal coverage

    Tax rate    		 9 years


    10
    Rs. 5,44,300

    11.5% p.a.
    Entire Rs. 3.5 million
    cost of equipment
    35%    		 7 years


    8
    Rs. 6,19,140

    11.41% p.a.
    Entire Rs. 3.5 million
    cost of equipment
    35%

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    ( 8 )

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    Both the Leasing companies were in a tax-paying and write off their investment in new equipment using following rate :
    Year123456
    Depreciation rate20%32%19.20%11.52%11.52%5.76%
    Required :
    (i)Calculate the NPV to PQR Ltd. of the two lease proposals.
    (ii)

    Does the new equipment have a positive NPV with (i) ordinary financing (ii)lease financing?

    (iii)

    Calculate te NPVs of the leases from the lessors view points. Is there a chance that they could offer more attractive terms?

    (iv)Evaluate the terms presented by each of the lessors.
    7.(a)

    You are analysing the beta for ABC Computers Ltd. and have divided the Company into four broad business groups, with market values and betas for each group.
    Business groupMarket valueUnleveraged
    of equitybeta
    Main frames
    Personal Computers
    Software
    Printers    		 Rs. 100 billion
    Rs. 100 billion
    Rs.   50 billion
    Rs. 150 billion    		 1.10
    1.50
    2.00
    1.00

    		2+4=6
    ABC Computers Ltd. had Rs. 50 billion in debt outstanding.
    Required :
    (i)

    Estimate the beta for ABC Computers Ltd. as a Company. Is this beta going to be equal to the beta estimated by regressing past returns on ABC Computers stock against a market index. Why or Why not?

    (ii)

    If the treasury bond rate is 7.5%, estimate the cost of equity for ABC Computers Ltd. Estimate the cost of equity for each division. Which cost of equity would you use to value the printer division ? The average market risk premium is 8.5%.
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    ( 9 )

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    (b)Explain the 'Ageing Schedule' in the context of monitoring of receivables.3
    (c)Discuss any three ratios computed for investment analysis.3
    8.(a)

    The following summarizes the percentage changes in operating income, percentage changes in revenues, and betas for four pharmaceutical firms.
    FirmChange inChange inBeta
    revenueoperating income
    PQR Ltd.
    RST Ltd.
    TUV Ltd.
    WXY Ltd.    		 27%
    25%
    23%
    21%    		 25%
    32%
    36%
    40%    		 1.00
    1.15
    1.30
    1.40

    		3+3=6
    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.
    (b)What is debt Securitisation? Explain the basic debt securitisation process.6
    9.(a)

    Consider a firm that has existing assets in which it has capital invested of Rs. 100 crores. The after-tax operating income on assets-in-place is Rs. 15 crores. The return on capital employed of 15% is expected to be sustained in perpetuity, and company has a cost of capital of 10%. Estimate the present value of economic value added (EVA) of the firm from its assets in place.

    		4
    (b)

    A firm is considering offering 30-day credit to its customers. The firm like to charge them an annualized rate of 24%. The firm wants to structure the credit in terms of a cash discount for immediate payment. How much would the discount rate have to be?

    		4
    (c)Discuss the risk-considerations in financing of current assets.4
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