CA PE - II :: Cost Accounting and Financial Management : November 2005

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

(a)

ABC Limited manufactures two radio models, the Nova which has been produced for five years and sells for Rs. 900, and the Royal, a new model introduced in early 2004, which sells for Rs. 1,140. Based on the following Income statement for the year 2004-05, a decision has been made to concentrate ABC Limited's marketing resources on the Royal model and to begin to phase out the Nova mode.

4+4+2
=10

ABC Limited
Income statement
for the year ending March 31, 2005

	Royal Model Rs.	Nova Model Rs.	Total Rs.
Sales Cost of Goods sold Gross margin Selling & Administrative Expenses Net Income Unit Produced and sold Net Income per unit sold	45,60,000 31,92,000 13,68,000 9,78,000 3,90,000 4,000 97.50	1,98,00,000 1,25,40,000 72,60,000 58,30,000 14,30,000 22,000 65	2,43,60,000 1,57,32,000 86,28,000 68,08,000 18,20,000

P.T.O.

( 2 )

Marks

The standard unit costs for the Royal and Nova models are as follows :

	Royal Model Rs.	Nova Model Rs.
Direct materials Direct Labour Royal (3.5 hrs x Rs. 12) Nova (1.5 hrs x Rs. 12) Machine usage Royal (4 hrs x Rs. 18) Nova (8 hrs x Rs. 18) Manufacturing overheads (applied on the basis of machine hours at a pre-determined rate of Rs. 25 per hour) Standard Cost	584 42 72 100 798	208 18 144 200 570

ABC Ltd's Controller is advocating the use of activity-based costing and activity-based cost management and has gathered the following information about the company's manufacturing overheads cost for the year ending March 31, 2005.

Activity center Traceable Number of Events

(Cost driver) costs Royal Nova Total

Rs.

Soldering (Number of solder joints)
Shipments (Number of shipments)
Quality control (Number of inspections)
Purchase orders (Number of orders)
Machine power (Machine hours)
Machine setups (Number of setups)
Total Traceable costs 9,42,000
8,60,000
12,40,000
9,50,400
57,600

7,50,000
48,00,000 3,85,000
3,800
21,300
1,09,980
16,000
14,000 11,85,000
16,200
56,200
80,100
1,76,000
16,000 15,70,000
20,000
77,500
1,90,080
1,92,000
30,000

RK	Contind...

( 3 )

Marks

Required :

(i)	Prepare a Statement showing allocation of manufacturing overheads using the principles of activity-based costing.
(ii)	Prepare a Statement showing product cost and profitability using activity-based costing
(iii)	Should ABC Ltd. continue to emphasize the Royal model and phase out the Nova model? Discuss.

(b)

Discuss the essentials of a good Cost Accounting system.

(c)

Discuss ABC analysis as a technique of inventory control.

From the following Information for the month ending October, 2005, prepare Process Cost accounts for Process III. Use First-in-first-out (FIFO) method to value equivalent production.

Direct materials added in process III (Opening WIP)
Transfer from Process II
Transferred to Process IV
Closing stock of Process III
Units scrapped
Direct material added in Process III
Direct wages
Production Overheads 2,000 units at Rs. 25,750
53,000 units at Rs. 4,11,500
48,000 units
5,000 units
2,000 units
Rs. 1,97,600
Rs. 97,600
Rs. 48,800

Opening
Stock Closing
Stock Scrap

Materials
Labour
Overheads 80%
60%
60% 70%
50%
50% 100%
70%
70%

The normal loss in the process was 5% of production and scrap was sold at Rs. 3 per unit.

P.T.O.

( 4 )

Marks

(a)

Discuss the circumstances under which a Cost Audit is ordered and the purpose of Cost Audit.

(b)

The following is the Trading and Profit & Loss Account of Omega Limited :

3+3+
4=10

Dr.		Cr.
Particulars	RS.	Particulars	Rs.
To Materials consumed To Direct wages To Production Overheads To Administration Overheads To Selling and Distribution Overheads To Preliminary Expenses written off To Goodwill written off To Fines To Interest on Mortgage To Loss on Sale of machine To Taxation To Net Profit for the year	23,01,000 12,05,750 6,92,250 3,10,375 3,68,875 22,750 45,500 3,250 13,000 16,250 1,95,000 3,83,500	By Sales (30,000 units) By Finished goods stock(1,000 units) By Work-in-progress : Materials 55,250 Wages 26,000 Production Overheads 16,250 By Dividends received By Interest on bank deposits	48,75,000 1,30,000 97,500 3,90,000 65,000
	55,57,500		55,57,500

Omega Limited manufactures a standard unit.

The Cost Accounting records of Omega Ltd. show the following :

(i)	Production overheads have been charged to work-in-progress at 20% on Prime cost.
(ii)	Administration Overheads have been recovered at Rs. 9.75 per finished Unit
(iii)	Selling & distribution Overheads have been recovered at Rs. 13 per Unit sold.
(iv)	The Under-or Over-absorption of Overheads has not been transferred to costing P/L A/c.

RK	Contind...

( 5 )

Marks

Required :

(i)	Prepare a proforma Costing Profit & Loss account, indicating net profit.
(ii)	Prepare Control accounts for production overheads, administration Overheads and selling & distribution Overheads.
(iii)	Prepare a statement reconciling the profit disclosed by cost records with that shown in Financial accounts.

(a)

A Re-roller produced 400 metric tons of M.S. bars spending Rs. 36,00,000 towards materials and Rs. 6,20,000 towards rolling charges. Ten percent of the output was found to be defective, which had to be sold at 10% less than the price for good production. If the sales realization should give the firm an Overall profit of 12.5% on cost, find the selling price metric ton of both the categories of bars. The scrap arising during the rolling process fetched a realization of Rs. 60,000.

(b)

The existing Incentive system of Alpha Limited is as under :

Normal working week

Rate of Payment

Average output per operator for 49-hours week i.e. including 3 late shifts.

5days of 8 hours each plus 3 late shifts of 3 hours each
Day work : Rs. 160 per hour
Late shift : Rs. 225 per hour

120 articles

2x4=8

In order to Increase output and eliminate Overtime, it was decided to switch on to a system of payment by results. The following Information is obtained :

Time-rate (as usual)
Basic time allowed for 15 articles
Piece-work rate
Premium Bonus :
:
:
: Rs. 160 per hour
5 hours
Add 20% to basic piece-rate
Add 50% to time.

Required :

(i)	Prepare a Statement showing hours worked, weekly earnings, number of articles produced and labour cost per article for one operator under the following systems :
	(a) Existing time-rate
	(b) Straight piece-work

P.T.O.

( 6 )

Marks

(d) Halsey premium system

Assume that 135 articles are produced in a 40-hour week under straight piece work, Rowan Premium system, and Halsey premium system above and worker earns half the time saved under Halsey premium system.

(a)

From the details furnished below you are required to Compute a comprehensive machine-hour rate :

Original purchase price of the machine
  (subject to depreciation at 10% per annum on original cost)
Normal working hours for the month
  (The machine works to only 75% of capacity)
Wages of Machine man
Wages for a Helper (Machine attendant)
Power cost for the month for the time worked
Supervision charges apportioned for the
  machine centre for the month
Electricity & Lighting for the month
Repairs & maintenance (machine) including
  Consumable stores per month

Rs. 3,24,000

200 hours
Rs. 125 per day (of 8 hours)
RS. 75 per day (of 8 hours)
Rs. 15,000

Rs. 3,000
Rs. 7,500

Rs. 17,500

Insurance of Plant & Building (apportioned) for the year
Other general expenses per annum

Rs. 16,250
Rs. 27,500

The workers are paid a fixed Dearness allowance of Rs. 1,5755 per month. Production bonus payable to workers in terms of an award is equal to 33.33% of basic wages and dearness allowance. Add 10% of the basic wage and dearness allowance against leave wages and holidays with pay to arrive at a comprehensive labour-wage for debit to production.

RK	Contind...

( 7 )

Marks

The following are the Balance Sheets of Gama Limited for the year ending March 31, 2004 and March 31, 2005 :

Balance Sheet as on March, 31

	2004 Rs.	2005 Rs.
Capital and Liabilities Share capital General Reserves Capital Reserve (Profit on Sale of investment) Profit & Loss Account 15% Debentures Accrued Expenses Creditors Provision for Dividends Provision for Taxation	6,75,000 2,25,000 — 1,12,500 3,37,500 11,250 1,80,000 33,750 78,750	7,87,500 2,81,250 11,250 2,25,000 2,25,000 13,500 2,81,250 38,250 85,500
Total	16,53,750	19,48,500
Assets Fixed Assets Less : Accumulated depreciation Net Fixed Assets Long-term Investments (at cost) Stock (at cost) Debtors (net of provision for doubtful debts of Rs. 45,000 and Rs. 56,250 respectively for 2004 and 2005 respectively) Bills receivables Prepaid Expenses Miscellaneous Expenditure	11,25,000 2,25,000 9,00,000 2,02,500 2,25,000 2,53,125 45,000 11,250 16,875	13,50,000 2,81,250 10,68,750 2,02,500 3,03,750 2,75,625 73,125 13,500 11,250
Total	16,53,750	19,48,500

P.T.O.

( 8 )

Marks

Additional Information :

(i)	During the year 2004-05, fixed assets with a net book value of Rs. 1,250 (accumulated depreciation, Rs. 33,750) was sold for Rs. 9,000.
(ii)	During the year 2004-05, Investments costing Rs. 90,000 were sold, and also Investments costing Rs. 90,000 were purchased.
(iii)	Debentures were retired at a Premium of 10%
(iv)	Tax of Rs. 61,875 was paid for 2003-04.
(v)	During the year 2004-05, bad debts of Rs. 15,750 were written off against the provision for Doubtful Debt account
(vi)	The proposed dividend for 2003-04 was paid in 2004-05.

Required :
Prepare a Funds Flow Statement (Statement of changes in Financial Position on working capital basis) for the year ended March 31, 2005.

Using the following data, complete the Balance Sheet given below :

Gross Profits
Shareholders Funds
Gross Profit margin
Credit sales to Total sales
Total Assets turnover
Inventory turnover
Average collection period (a 360 days year)
Current ratio
Long-term Debt of Equity

Rs. 54,000
Rs. 6,00,000
20%
80%
0.3 times
4 times
20 days
1.8
40%

Balance Sheet

Creditors Long-term debt Shareholders funds	........ ........ ........	Cash Debtors Inventory Fixed assets	........ ........ ........

RK	Contind...

( 9 )

Marks

MNP Limited is thinking of replacing its existing machine by a machine by a new machine which would cost Rs. 60 lakhs. The company's current production is 80,000 units, and is expected to Increase to 1,00,000 units, if the new machine is bought. The selling price of the product would remain unchanged at Rs. 200 per unit. The following is the cost of producing one unit of product using both the existing and new machine :

8+3+
1=12

	Existing Machine (80,000 units)	New Machine (1,00,000 units)	Unit cost (Rs.) Difference
Materials Wages & salaries Supervision Repairs and Maintenance Power and Fuel Depreciation Allocated Corporate Overheads	75.0 51.25 20.0 11.25 15.50 0.25 10.0	63.75 37.50 25.0 7.50 14.25 5.0 12.50	(11.25) (13.75) 5.0 (3.75) (1.25) 4.75 2.50
	183.25	165.50	17.75

The existing machine has an accounting book value of Rs. 1,00,000, and it has been fully depreciated for tax purpose. It is estimated that machine will be useful for 5 years. The supplier of the new machine has offered to accept the old machine for Rs. 2,50,000. However, the market price of old machine today is Rs. 1,50,000 and it is expected to be Rs. 35,000 after 5 year. The new machine has a life of 5 years and a salvage value of Rs. 2,50,000 at the end of its economic life. Assume corporate Income-tax rate at 40% and depreciation is charged on straight line basis for Income-tax purposes. Further assume that book profit is treated as ordinary income for tax purpose. The opportunity cost of capital of the company is 15%.

Required :

(i)	Estimate net present value of the replacement decision.
(ii)	Estimate the internal rate of return of the replacement decision.

P.T.O.

( 10 )

Marks

(iii)

Should Company go ahead with the replacement decision? Suggest

Year	1	2	3	4	5
PVIF_0.16.t	0.8696	0.7561	0.6575	0.5718	0.4972
PVIF_0.20.t	0.8333	0.6944	0.5787	0.4823	0.4019
PVIF_0.25.t	0.80	0.64	0.512	0.4096	0.3277
PVIF_0.30.t	0.7692	0.5917	0.4552	0.3501	0.2693
PVIF_0.35.t	0.7407	0.5487	0.4064	0.3011	0.2230

(a)

A company needs Rs. 31,25,000 for the construction of new plant. The following three plans are feasible :

6+1+3
=10

(I)

The Company may issue 3,12,500 equity shares at Rs. 10 per share.

(II)

The company may issue 1,56,250 ordinary equity shares at Rs. 10 per share and 15,625 debentures of Rs. 100 denomination bearing a 8% rate of interest.

(III)

The company may issue 1,56,250 equity shares at Rs. 10 per share and 15,625 preference shares at Rs. 100 per share bearing a 8% rate of dividend.

(i)
If the Company's earnings before interest and taxes are Rs. 62,500, Rs. 1,25,000, Rs. 2,50,000, Rs. 3,75,000 and Rs. 6,25,000, what are the earnings per share under each of three financial plans? Assume a Corporate Income-tax rate of 40%.

(ii) Which alternative would you recommend and why?

(iii)
Determine the EBIT-EPS indifference points by formulae between Financing Plan I and Plan II and Plan I and Plan III.

(b)

Discuss Miller-Orr Cash Management model.