Solutions To November 2011 Cost Accounting and Financail Mangement Paper

SOLUTIONS TO NOVEMBER 2011 COST ACCOUNTING AND FINANCAIL MANGEMENT PAPER
CMA N RAVEENDRANATH KAUSHIK

MA,MPhil,MBA,ACMA,PG Tax Laws e-mail kaushik@accountspoint.com www.cmakaushik.blogspot.com
Ans1(a)
Calculation of Break Even Point (BEP)
BEP = Sales (MS Ratio X Sales)/100
MS Ratio = Margin of Safety
It is given in the problem MS Ratio = 40% and Sales Rs 5,00,000 Substituting in the formula above BEP = 5,00,000 (40%*5,00,000)/100 BEP (Rs.) = Rs, 3,00,000 BEP (Units) = Rs 3,00,000/1000(w1) = 300 units Sales in units to earn a Profit of 10% on Sales Let us assume Sales to be X, then Profit is 10% of X Sales = (Fixed Cost + Desired Profit)/ PV Ratio Sales is X, Desired Profit = 10%of X or 0.1X Fixed Cost to be found out and PV Ratio = 50% Computation of Fixed Cost Sales X PV Ratio = Profit + Fixed Cost Fixed Cost = Sales X PV Ratio Profit Fixed Cost = Rs,5,00,000 X 50% - Rs1,00,000(w2) Fixed Cost = Rs 1,50,000

Substituting the values in the below formula for calculating Sales Sales = (Fixed Cost + Desired Profit)/ PV Ratio X = (Rs1,50,000+0.1X)/ 50% Solving for X, X = Rs 3,75,000 So, Sales is Rs 3,75,000 at desired profit of 10% on Sales Sales(in Units) = Rs3,75,000/1000 = 375 Units
Workings W1 Selling Price Per Unit = Rs.50000/500 = Rs 1000/unit W2 Profit = Margin of Safety X PV Ratio Profit = (Rs 500000x40%) X 50% Profit = Rs 1,00,000
Ans1 (b)
1) Rowan Premium Plan Calculation of Total Wages Normal Wages Rs 1200 (Rs120X10) DA for 15 days Bonus Rs 450 (30X15) Rs 240 (24X10) --------------------Total Wages Rs. 1890

Computation of Bonus Hours Bonus Hours = (120X30)/150 = 24 Hours
2) Emmersions Efficiency method .
Normal Wages DA
Rs 1200 Rs 450 (30X15)
Bonus = (Time Allowed /Time Taken) X 100 = 150/120X100 = 125% Rate of Bonus up to 100% = 20% of Normal Wages Rate of Bonus 101% to 125% = 25% of Normal Wages So, total bonus is 45% (20%+25%) of Normal Wages Which is Rs 1200X45% = Rs 540 Total Wages = Normal Wages+DA+Total Bonus = Rs1200+Rs450+Rs540 Total Wages = Rs 2,190

Ans. 1 (C)
Evaluation of Credit Policy
1) Calculation of Net Profit After Tax Sales Increase Less : Cost of Sales Rs1,20,000 (Rs1,02,000) [ 85% ] --------------Rs 18,000 Less : Bad Debts loss (Rs 12,000) [ 10% on sales ] --------------Rs.6,000 Less : 30% Tax Rs 1,800 --------------Net Profit After Tax Rs 4,200 ----- 1 2) Opportunity Cost of Investment In Receivables Rs 5,100 40% on Rs12,750* 3) Net Loss ( 1 2 ) (Rs 900)
-----
Decision : It is found that the estimated Profit after tax is less than the Opportunity Cost of Investment in Receivable, the proposal cannot be aceepted. Workings Calculation of Investment in Receivables = Cost of Sales/Receivable Turnover (times) = Rs1,02,000/8 = Rs 12,750 Receivable Turnover = 12 months/months of credit = 12/1.5 = 8times

Ans 1 (d)
i) Calculation of Cost of Equity (Ke) Ke (after tax) = (DPS/MPS*100) + G DPS = Dividend Per Share MPS = Market Price Per Share G = Annual Growth Rate Given, DPS = 25% of Rs 4 = Re 1 MPS = Rs 40 and G= 8% Ke = (1/40X100) + 8 Ke 10.5% ii) Calculation of Cost of Debt (Kd) Kd (after tax) = (Interest/value of Debt) X100 (1-T) Interest = 10% of Rs2,00,000 =Rs20000 and 15% of Rs2.00.000 =Rs 30000 So, Interest = Rs 50,000 Value of Debt = Rs 4,00,000 and Taxrate =30% Kd = (50000/400000)X100(1-30%) Kd= 8.75% iii) Weighted Average Cost of Capital (WACC) Amount 1 6,00,000 4,00,000 Weights 2 0.6 0.4 Cost of Capital 3 .105 .0875 WACC (2X3) .063 .035
Equity Debt
WACC = .063+.035 = .098 = 9.8%

Ans. 2 (a)
Absorbed Overhead = Actual Man days X Rate = Rs1,50,000 X50 = Rs 75,00,000 Under Absorption of Overheads = Actual Overheads Absorbed Overheads = Rs 79,00,000 Rs 75,00,000 = Rs 4,00,000 Defective Planning Rs 4,00,000 X 60% = Rs 2,40,000 Increase in Overhead Cost - Rs 4,00,000 X 40% = Rs 1.60,000 Treatment of Unabsorbed Overhead 1. Unabsorbed Overhead of Rs 2,40,000 due to Defective Planning is to be treated as abnormal loss and charged to Costing Profit and Loss Account. 2. Unabsorbed Overhead of Rs 1,60,000 due to Increase in Overhead Cost is to charged based on Supplementary Rate. Working of Supplementary Rate = Rs 1,60,000 / (30000+5000+50% 10000) = Rs 4/unit Unabsorbed overheads as below Cost of Sales Account = 30000unitsXRs4 = Rs 1,20,000 Finished Stock Account = 5000 units X Rs4= Rs 20,000 WIP Account = 5000 units X Rs4 = Rs 20,000

Ans. 2 (b)
i) Quick Ratio = Liquid Asset / Current Liabilities Liquid Asset = Current Asset Stock- Prepaid Expenses = Rs 30,50,000-Rs 21,60,000-Rs 10,000 = Rs 8,80,000 Quick Ratio = Rs 8,80,000/10,00,000 = .88 ii) Debt Equity Ratio = Long term debt / Shareholders Fund = Rs 16,00,000/ (Rs 20,00,000+ Rs 8,00,000) Debt Equity Ratio = .57 iii) Return on Capital Employed (ROCE) ROCE = (PBIT / Capital Employed) X100 = (Rs12,00,000/Rs 44,00,000) X 100 = 27.27% iv) Average Collection Period = (Sundry Debtors / Credit Sales) X 360 = (Rs 4,00,000 / Rs 32,00,000)X360 = 45 days

Ans. 3 (a)
i) Statement of Equivalent Production
PARTICULARS Production Units completed Closing WIP Normal Loss 8% ** Total Less : Abnormal Loss Total
UNITS 1,58,000 18,000 15,200 1,91,200 1,200 1,90,000
MATERIAL (Units) 1 , 58 , 000 18,000 1, 76, 000 1, 200 1, 74, 000
LABOUR (Units) 1, 58, 000 12,600* 1, 70, 600 1, 200 1, 69, 400
* Working for Closing WIP of Labour 70% of 18000 = 12,600 units ** Working for Normal Loss = 8% of 190000units (1.82,000+8,000) = 15,200
ii) PARTICULARS WIP Opening Balance Materials Added Expenses Total Less Scrap Realised (Sale of Normal Loss items) Net Cost 1 Equivalent Units 2 Cost Per Unit ( 1 / 2) Rs / Unit
Cost Statement MATERIAL 63,900 7,56,900 8,20,800 1,21,600 LABOUR 10,800 3,28,000 3,38,800 (Amount in Rs.) OVERHEAD 5,400 1,64,000 1,69,400
6,99,000 1,74,800 4
3,38,800 1,69,400 2
1,69,400 1,69,400 1
So, Total Cost Per Unit = (Cost/ unit of Material+Labour+Overhead) = (Rs4+Rs3+Re1) = Rs7

Ans. 3(b)
Total Assets = Rs 48,00,000 Total Assets Turnover Ratio = 2.5 Total Sales = Rs 48,00,000X 2.5 = Rs1,20,000 Computation of PAT Sales Less VC Rs 1,20,00,000 Rs 72,00,000 ************ Contribution Rs 48,00,000 Less Fixed Cost Rs 28,00,000 ************ Profit before Interest Rs. 20,00,000 Less Interest (15%) Rs 4,20,000 ************ PBT Rs. 15,80,000 Less Taxt 30% Rs. 4,74,000 ************ Profit After Tax (PAT) Rs. 11,06,000
Earning Per Share (EPS) = Profit available Equity Share Holders (PAT) ************************************** Number of Equity Shares Outstanding = 11,06,000 / 1,00,000 = Rs. 11.06
Degree of Combined Leverage = Contribution / PBT = Rs 48,00,000 / Rs15,80,000 = 3.04

Ans. 4 (a)
Workings of Operating Cycle
Rawmaterial Period = Average Stock of Rawmaterial ie Opening+Closing)/2 -------------------------------------Daily Consumption of Rawmaterial = (1,80,000+2,00,000)/2 ---------------------------- = 63.33 Days 10,80,000/360
Conversion Period = Average WIP / Daily Average Production Cost = (60000+100000)/2 ----------------------- = 18.7 Days 1540000/360
Finished Goods Period = Average Finished Goods / Average cost of goods sold = (2,60,000 + 3,00,000)/2 ------------------------------ = 67.19 Days 15,00,000/360 Debtors Collection Period = Average Debtors / Daily Average Sales = (150000+200000)/2 ------------------------- = 31.5 Days 20,00,000 / 360 Creditors Payment Period = Average Creditors / Daily Average Pruchases = (2,00,000+2,40,000)/2 ----------------------------- = 72 Days 11,00,000/360 OPERATING CYCLE = Raw Material + WIP+Finished Goods+Debtors Creditors = 63.33+18.7+67.19+31.5-72 = 108.72 days

Calculation of Working Capital

Cost of Production Add Administrative and Selling Expeneses Rs 15,00,000 (W1)
Rs 2,50,000 *********** Operating Expenses Rs 17,50,000
Working Capital Required = Operating Expenses / Number of Operating Cycle in a Year Number of Operating Cyle = Total Operating Cycle / 360 days in a year = 3.3 times So, Working Capital Required = Rs17,50,000/ 3.3 = Rs 5,28,541
Workings W 1 computation of Cost of Production Opening Stock of WIP Opening Stock of Finished Goods Add: Raw Material Consumed Rs 10,80,000 Wages Rs 3,00,000 Expenses Rs 2,00,000 ---------------Less : Closing Stock of WIP Closing Stock of Finished Goods Cost of Production Rs 60000 Rs 2,60,000
Rs.15,80,000 (Rs. 1,00,000) (Rs. 3,00,000) ----------------Rs 15,00,000

Ans. 4 (b)
LEDGER ACCOUNTS Dr. Cr.
Stores Ledger Control Account

Particulars To Balance B/d To Cost Ledger Control a/c To WIP control a/c Amount (Rs.) 9, 000 48,000 24,000 Particulars By WIP Control A/c By Production Overhead control a/c By Costing Profit and Loss a/c (Stock ) By Balance C/d (balancing figure) Amount (Rs.) 48,000 6,000 1,800 25,200
81,000
81,000
Dr.
Cr.
Direct Wages Control Account

Particulars To Cost Ledger Control a/c Amount (Rs.) 21,000 Particulars By WIP Control A/c (Direct Wages) By Costing Profit and Loss a/c (balancing figure) Amount (Rs.) 18,000 3,000 21,000
21,000
Dr.
Cr.
WIP Control Account

Particulars To balance b/d To Stores Ledger Control a/c To Direct Wages Control a/c To Production OH control a/c Amount (Rs.) 18,000 48,000 18,000 72,000 1,56,000 Particulars By Stores Ledger Control A/c By Finished Stock control a/c (balancing figure) By Balance c/d Amount (Rs.) 24,000 1,20,000 12,000 1,56,000

Dr.
Cr.
Production Overhead Control Account

Particulars To Stores Ledger Control a/c To Cost Ledger Control a/c Amount (Rs.) 6,000 75,000 Particulars By WIP Control A/c (Overheads) By Costing Profit and Loss a/c (balancing figure) Amount (Rs.) 72,000 9,000
81,000
81,000
Dr.
Cr.
Costing Profit and Loss Account

Particulars To Cost of Sales a/c To Direct Wages control a/c To OH control a/c To Stores Ledger control a/c Amount (Rs.) 1,20,000 3,000 9,000 18,000 1,33,800 * Rs 1,20000 * 10% Particulars By Cost Ledger control a/c * By Cost Ledger control a/c (balancing figure - Loss) Amount (Rs.) 1,32,000 1,800
1,33,800

Ans. 6 (a) Working of annual saving in cash

Machine X Savings Wages Scrap realization Savings Less : Cash Outflow Materials Supervision Maintenance Annual Cash Saving Less Depreciation * Rs 30,000 -------------Rs 45,000 Rs 13,500 ------------Rs 31,500 Rs 30,000 ------------Rs 61,500 Rs 40,000 ---------------Rs 60,000 Rs. 18,000 -------------Rs 42,000 Rs.40,000 -------------Rs 82,000 Rs 90,000 Rs 10,000 -------------Rs 1,00,000 Machine Y Rs 1,20,000 Rs 15,000 -------------Rs 1,35,000
(Rs 6,000) (Rs 12,000) (Rs 7,000) -------------Rs 75,000
(Rs. 8,000) (Rs. 16,000) (Rs. 11,000) --------------Rs . 1,00,000
Less Tax 30%
Add : Depteciation Annual Cash Inflow Average Rate of Return Method
Machine X ARR = Average Annual Savings ------------------------------X100 Average Investment 31,500 -----------X100 75,000
Machine Y 42,000 ---------X100 1,20,000
Machine X to be chosen
42%
35%

Present Value Index Method
PV = Annual Cash InflowX PV factor Machine X = Rs 61,500 X 3.79 = Rs 2,33,085 (5 years) Machine Y = Rs 82,000 X 4.354 = Rs 3.57,028 (6 years) Machine X PV Index = Present Value / Investment 2,33,085 -----------1,50,000 = 1.55 MACHINE X IS PREFERRED Machine Y 3,57,028 -----------2,40,000 = 1.47
Ans. 6 (b)
Calculation of Material Cost Variance MCV = Actual Production (on standard) Material Usage = 48000*10*10 Rs 5,25,000 = Rs 45000 (Unfavorable) Calculation of Labour Cost Variance LCV = Actual production (on standard) - Labour Paid = 48000*6*5.50- Rs 1,55,000 = Rs. 3,400 Favorable

Calculation of Fixed Overhead Cost Variance FOCV = Fixed Overhead (at standard) Actual Fixed cost = 48000*Rs90 Rs 4,70,000 = Rs 38,000 (Unfavorable) Fixed Over head Rate = 30000labour hours/6hours = 5000units Fixed Overhead rate = Fixed OH cost/Units = Rs 4,50,000/5000 = Rs 90
Calculation of Variable Overhead Cost Variance
VOCV= Variable OH (at standard) Actual OH = (48000X6X10) 2,93,000 = Rs 5000 (Unfavorable)

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SOLUTIONS TO NOVEMBER 2011 COST ACCOUNTING AND FINANCAIL MANGEMENT PAPER

CMA N RAVEENDRANATH KAUSHIK

Calculation of Break Even Point (BEP)

BEP = Sales (MS Ratio X Sales)/100

MS Ratio = Margin of Safety