Shree Guru Kripas Institute of Management

COST ACCOUNTING AND FINANCIAL MANAGEMENT

Registration No. Topics covered: Full Portions Duration: 3 Hours Date: 26.03.2012 Total Number of Printed Pages: 6 Maximum Marks : 100

Q.No.1 is Compulsory. Answer any five from the remaining Questions 2 to 7. Question 1 (a): 5 Marks The following data have been extracted from the financial accounts of a Manufacturing firm for the first year of its operation Particulars Direct Materials Consumption Direct Wages Factory Overheads Administrative Overheads Sales Overheads Bad Debts Preliminary Expenses written off ` 1,00,00,000 60,00,000 32,00,000 14,20,000 19,20,000 1,60,000 80,000 Particulars Sales (1,20,000 units) Interest on Deposits Dividend Received Closing Stock: WIP FG (4,000 units) ` 2,40,00,000 40,000 2,00,000 4,80,000 6,40,000

The Cost Accounts for the same period reveal that Direct Material Consumption was ` 1,12,00,000. Factory Overhead is recovered at 20% on Prime Cost. Administration Overhead is recovered at ` 12 per unit of production. Selling and Distribution Overheads are recovered at ` 16 per unit sold. Prepare Profit Statements both as per financial records and as per cost records. Reconcile the profits.

Question 1 (b): 5 Marks A Company estimates its Cost of Debt and Cost of Equity for different DebtEquity mix, as under. % of Debt 0% 20% 40% 60% 80% 90% Cost of Debt 10% 10% 12% 14% 16% Cost of 18% 19% 21% 25% 32% 40% Equity 1. Compute the Overall Cost of Capital and Optimal Debt Equity Mix under the Traditional Theory. 2. Consider the Cost of Debt at different DebtEquity Mix as given above. If M & M Approach were to hold good, what will be the Cost of Equity Capital at different DebtEquity Mix? What will be the Risk Premium?

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Cost & FM CA IPCC Model Exam

Question 1 (c): 5 Marks In a Factory, a Machine is considered to work for 624 hours in a month. It includes Maintenance Time of 24 hours and a Set Up Time of 60 hours. The cost of the Machine is ` 15,00,000. Its useful life is 10 years at the end of which the scrap value will be ` 60,000. The expense data relating to the Machine are as under Repairs and Maintenance per annum Consumable Stores per annum Rent of Building per annum (The machine under reference occupies 1/6th of the area) Supervisors Salary per month (Common to three Machines) Wages of Operator per machine per month General Lighting per month allocated to the Machine Power (25 units per hour) ` 1,81,440 ` 1,42,560 ` 2,16,000 ` 18,000 ` 7,500 ` 3,000 ` 6 per unit.

Power is required for productive purposes only. Set up time, though productive, does not require power. The Supervisor and Operator are permanent. Repairs and Maintenance and Consumable Stores vary with the running of the machine. Calculate a twotier machine hour rate for (a) Set Up time and (b) Running Time.

Question 1 (d): 5 Marks Nine Gems Ltd has just installed Machine R at a cost of ` 2 Lakhs. The machine has a 5year life with no Residual Value. The annual volume of production is estimated at 1,50,000 units, which can be sold at ` 6 per unit. Annual Operating costs are estimated at ` 2 Lakhs (excluding depreciation) at this output level. Fixed Costs are estimated at ` 3 per unit for the same level of production. The Company has just come across another model Machine S, capable of giving the same output at an annual operating cost of ` 1.80 Lakhs (excluding depreciation). There will be no change in Fixed Costs. Machine S costs ` 2.50 Lakhs, its Residual Value will be Nil after a useful life of 5 years. Nine Gems Ltd has an offer for sale of Machine R for ` 1,00,000. The cost of dismantling and removal will be ` 30,000. As the Company has not yet commenced operations, it wants to dispose off Machine R and install Machine S. The Company will be a zerotax Company for seven years in view of several incentives and allowances available. The cost of capital is 14% and the PV factors are as under Year PV Factor @ 14% 1 0.877 2 0.769 3 0.675 4 0.592 5 0.519

Advise whether the Company should opt for replacement. Will your answer be different if the Company has not installed Machine R and is in the process of selecting either R or S?

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Cost & FM CA IPCC Model Exam

Question 2 (a): 8 Marks From the following information and ratios, prepare the Profit and Loss Account and Balance Sheet of M/s. Sivaprakasam & Co, an export Company. [Take 1 year = 360 days] (Ignore Taxation). Current Assets to Stock 3:2 Current Ratio 3.00 Acid Test Ratio 1.00 Financial Leverage (i.e. EBIT EBT) 2.20 Earnings Per Share (each of ` 10) ` 10.00 Book Value per Share ` 40.00 Average Collection Period 30 days Fixed Asset Turnover Ratio 1.20 Total Liabilities to Net Worth 2.75 Net Working Capital ` 10 Lakhs Net Profit to Sales 10% Variable Cost 60% Long Term Loan Interest 12% Stock Turnover Ratio 5.00

Question 2 (b): 8 Marks Budgetary Control and Standard Costing are used within a Life Insurance Company and a Standard Cost of ` 40 has been set for obtaining and issuing each new Life Policy. Prior to the commencement of the annual financial period, the Life Business Manager had forecast that 7,500 Policies would be sold during the year and ` 40 Standard Cost was based on the following Budgeted Costs for the Department. Actual Costs are also known. Code 301 302 303 431 599 Total Description Sales Salaries Staff Commission Staff Expenses Underwriting Staff Salaries Other Admin Costs Budget (`) 60,000 60,000 30,000 90,000 60,000 3,00,000 Actual (`) 67,500 57,000 26,000 1,00,000 66,000 3,16,500

At the end of the year it was ascertained that 6,750 new life policies had been issued. Sales Staff and Underwriting Staff received as Salaries, a pay award of 12.5% which had been back dated to the beginning of the year and this had not been included in the Budget. Expenses on Codes 302, 303 and 431 are regarded as Direct Costs which vary with activity, and those on Code 301 are treated as a Direct Fixed Cost whilst those on Code 599 are an Indirect Fixed Cost. Required: 1. Present a statement (or Control Report) for the Life Business Manager showing the variances which have arisen. 2. Comment on the likely cause(s) for each Variance, identifying, so far as you can from the information given, how much of each Variance arises from price differences and how much can be related to efficiency or inefficiency.

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Cost & FM CA IPCC Model Exam

Question 3 (a): 6 Marks From the given data, compute the following Machine Time required per unit = 10 minutes. Past Average Sales Demand of Product = 2,70,000 units. Manufacturers Specification as to Possible Machine Operation Time per annum = 50,000 hours. PreDetermined Total OH for the period = ` 22,50,000 Actual Machine Hours used during the period = 42,000 Actual OH incurred during the period = ` 24,75,000 Required: 1. Production in Units per Machine Hour 2. Normal Capacity in hours 3. Maximum Capacity in units 4. Idle Capacity in hours 5. OH Recovery Rate per hour 6. Under / Over Absorption of OH

Question 3 (b): 10 Marks Balance Sheets of a Company as on 31st March 20X1 and 20X2 were as follows Liabilities 31.03.20X1 31.03.20X2 Assets 31.03.20X1 31.03.20X2 Equity Share Capital 10,00,000 10,00,000 Goodwill 1,00,000 80,000 8% Preference 2,00,000 3,00,000 Land and Building 7,00,000 6,50,000 Share Capital General Reserve 1,20,000 1,45,000 Plant and Machinery 6,00,000 6,60,000 Securities Premium 25,000 Invst. (NonTrading) 2,40,000 2,20,000 Profit and Loss 2,10,000 3,00,000 Stock 4,00,000 3,85,000 Account 11% Debentures 5,00,000 3,00,000 Debtors 2,88,000 4,15,000 Creditors 1,85,000 2,15,000 Cash and Bank 88,000 93,000 Provision for Tax 80,000 1,05,000 Prepaid Expenses 15,000 11,000 Proposed Dividend 1,36,000 1,44,000 Premium on Redemption 20,000 of Debentures Total 24,31,000 25,34,000 Total 24,31,000 25,34,000 Additional Information: 1. Investments were sold during the year at a profit of ` 15,000. 2. During the year, an old machine costing ` 80,000 was sold for ` 36,000. Its WDV was ` 45,000. 3. Depreciation charged on Plant and Machinery at 20% on the Opening Balance. 4. There was no purchase or sale of Land and Building. 5. Provision for tax made during the year was ` 96,000. 6. Preference Shares were issued for consideration of cash during the year. From the above, prepare (a) Cash Flow Statement as per AS 3, (b) Schedule of Changes in Working Capital. 4

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Cost & FM CA IPCC Model Exam

Question 4 (a): 8 Marks A newly formed Company has applied to a Commercial Bank for the first time for financing its working capital requirements. The following information is available about the projections for the current year Estimated level of activity: 1,04,000 completed units of production plus 4,000 units of WIP. Based on the above activity, the estimated cost per unit is Raw Material Direct Wages Overheads (exclusive of depreciation) Total Cost Selling Price ` 80 per unit ` 30 per unit ` 60 per unit ` 170 per unit ` 200 per unit

Raw Materials in Stock: Average 4 weeks consumption, WIP (assume 50% completion in respect of Conversion Cost and that Materials are issued at the start of the processing), Finished Goods in Stock = 8,000 units. Credit allowed by Suppliers: Average 4 weeks. Credit allowed to Debtors / Receivables: Average 8 weeks. Lag in payment of Wages: Average 1 weeks. Cash at Bank (for smooth operation) is expected to be: ` 25,000. Assume that production is carried on evenly throughout the year (52 weeks) and Wages and Overheads accrue similarly. All Sales are on credit basis only.

From the above data, find out the Net Working Capital required. Also, determine the Maximum Permissible Bank Finance under the 1st & 2nd Methods of financing as per Tandon Committee Norms.

Question 4 (b): Compute the missing data, indicated by question marks in the following table. Particulars Standard Sales Quantity (units) Actual Sales Quantity (units) Standard Price per unit ` Actual Price per unit ` Sales Price Variance Sales Volume Variance Sales Value Variance Product R ? 500 12 15 ? ` 1,200 Favourable ?

8 Marks

Product S 400 ? 15 20 ? ? ?

Sales Mix Variance for both the products together was ` 450 Favourable.

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Cost & FM CA IPCC Model Exam

5. Answer the following questions: 4 4 Marks = 16 Marks (a) Write short notes on Imputed Costs and Sunk Costs. (b) Distinguish between Operating Lease and Finance Lease. (c) What do you understand by Key Factor or Limiting Factor? (d) Distinguish between Profit Maximization and Wealth Maximization.

Question 6 (a): 8 Marks Minimum Stock Level and Average Stock Level of Material X is 400 kg and 750 kg respectively. The Company follows EOQ Policy for Material X and makes 8 orders in a year, at a cost of ` 1,000 per Order. The Price of Material X is ` 200 per kg. From the above data, find out the following (1) Annual Consumption of Material X, (2) Percentage of Carrying Cost to Purchase Price. (3) Total Cost of Inventory Holding and Ordering p.a.

Question 6 (b): The following cashflow streams need to be analysed Cash Flow Stream A B C D ` 400 ` 1,000 Year end 1 ` 200 ` 1,200 Year end 2 ` 400 Year end 3 ` 400 Year end 4 ` 600

8 Marks

Year end 5 ` 600 ` 2,400 ` 600

1. Calculate the Terminal Value of each stream at the end of year 5 with an interest rate of 10%. 2. Compute the Present Value of each stream if the Discount Rate is 14%. 3. Compute Internal Rate of Return of each stream, if the Initial Investment at time 0 were ` 1,200.

7. Answer ANY FOUR of the following questions: 4 4 Marks = 16 Marks (a) Write short notes on accounting treatment for material spoilage. (b) What is meant by Seed Capital Assistance? (c) What do you mean by Cost Plus Contract? List its merits and demerits. (d) Explain in brief about EPS Indifference Point. (e) Write short notes on Flexible Budget.