Trending ▼   ResFinder  

CA IPCC : Revision Test Paper (with Answers) - COST ACCOUNTING & FINANCIAL MANAGEMENT Nov 2013

34 pages, 22 questions, 0 questions with responses, 0 total responses,    0    0
CA IPCC
Tilak Vidyalaya Higher Secondary School (TVHSS), Kallidaikurichi
+Fave Message
ProfileTimelineUploadsQ & A
 Home > ca_ipcc >

Formatting page ...

PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT PART I : COST ACCOUNTING QUESTIONS Material 1. RTC Limited uses chemical-X in one of its finished products. The chemical-X is purchased from a vendor outside India. RTC Limited purchases 36,000 ltr of chemical-X per year at the rate of ` 900 per ltr plus import duty @10% on such purchases. The chemical-X is used evenly throughout the year in the production process on a 360-day-per-year basis. The company incurs ` 1,75,000 on one year agreement for material supply with the vendor and it estimates that ` 35,000 will be incurred to place a single purchase order. The chemical-X is needed to be kept in a very carefully controlled temperature and humidity conditions. RTC Ltd. incurs 1.5% and 0.2676% of the value of inventory as storage cost and as insurance cost respectively. Delivery from the vendor generally takes 12 days, but it can take as much as 16 days. The days of delivery time and percentage of their occurrence are shown in the following tabulation: Delivery time (days) : 12 13 14 15 16 Percentage of occurrence : 70 10 10 5 5 Required: (i) Compute the economic order quantity (EOQ). (ii) Assume the company is willing to assume a 10% risk of being out of stock. What would be the safety stock? The re-order point? (iii) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one year? Labour 2. A Company is undecided as to what kind of wage scheme should be introduced. The following particulars have been compiled in respect of three workers. Which are under consideration of the management. I Actual hours worked Hourly rate of wages (in `) Productions in units Product A Product B The Institute of Chartered Accountants of India II 380 40 100 50 III 540 60 210 360 - 600 1,350 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Product C Standard time allowed per unit of each product is: Minutes 460 A 15 63 250 - B 20 C 30 For the purpose of piece rate, each minute is valued at ` 1/You are required to calculate the wages of each worker under: (i) Guaranteed hourly rate basis (ii) Piece work earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly rate if his earning are less than 50% of basic pay.) (iii) Premium bonus basis where the worker received bonus based on Rowan scheme. Overheads 3. Aditya Ltd. has three production departments P1, P2 and P3 and two service departments S1 and S2. The following data are extracted from the records of the Company for the month of May, 2013: (`) Rent and rates 1,23,500 General lighting 72,000 Indirect Wages 68,200 Power Depreciation on machinery 85,000 3,25,000 Insurance of machinery Other Information: Direct wages (`) Horse Power of Machines used Cost of machinery (`) Floor space (Sq. ft) Number of light points Production hours worked 95,000 P1 84,000 P2 66,000 P3 72,000 S1 24,000 S2 6,000 80 14,00,000 3,000 30 40 16,00,000 3,500 20 60 10,00,000 4,000 20 20 3,00,000 1,000 15 10 4,50,000 500 10 6,240 4,150 4,050 The Institute of Chartered Accountants of India 64 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Expenses of the service departments S1 and S2 are reapportioned as below: S1 S2 P1 30% 40% P2 20% 30% P3 30% 15% S1 S2 20% 15% Required: (i) Compute overhead absorption rate per production hour of each production department. (ii) Determine the total cost of product X which is processed for manufacture in department P1, P2 and P3 for 5 hours, 3 hours and 4 hours respectively, given that its direct material cost is ` 1,215 and direct labour cost is ` 975. Non Integrated Accounts 4. The financial books of a company reveal the following data for the year ended 31st March, 2013: Opening Stock: (`) Finished goods 625 units 53,125 Work-in-process 01.04.2012 to 31.03.2013 46,000 Raw materials consumed Direct Labour 8,40,000 6,10,000 Factory overheads Administration overheads 4,22,000 1,98,000 Dividend paid Bad Debts 1,22,000 18,000 Selling and Distribution Overheads Interest received Rent received Sales 12,615 units 72,000 38,000 46,000 22,80,000 Closing Stock: Finished goods 415 units 45,650 Work-in-process 41,200 The cost records provide as under: Factory overheads are absorbed at 70% of direct wages. Administration overheads are recovered at 15% of factory cost. The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 65 Selling and distribution overheads are charged at ` 3 per unit sold. Opening Stock of finished goods is valued at ` 120 per unit. The company values work-in-process at factory cost for both Financial and Cost Profit Reporting. Required: (i) Prepare statements for the year ended 31 st March, 2013 show the profit as per financial records the profit as per costing records. (ii) Present a statement reconciling the profit as per costing records with the profit as per Financial Records. Method of Costing (I) 5. Arnav Automobiles distribute its goods to a regional dealer using a single lorry. The dealer s premises are 20 kilometers away by road. The lorry has a capacity of 10 tonnes and makes the journey twice a day 90% loaded on the outward journeys and 10% on return journeys. The following information is available for a four weekly period during the year 2013: Petrol consumption 6 killometer per litre Petrol cost Cost of lorry (excluding tyres) ` 64 per litre ` 125 per week ` 2,000 per week ` 1,250 per week `1,30,000 per annum ` 9,80,000 Life of lorry 80,000 kilometers Insurance Other overhead cost ` 13,650 per annum ` 28,000 ` 1,80,000 ` 5,200 per annum ` 45,500 per annum Life of tyres 28,000 kilometers Lubricants Driver s salary Repairs Garage rent Cost of tyres Estimated value of lorry at end of its life Vehicle licence cost The lorry operates on a six days week The Institute of Chartered Accountants of India 66 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Required: (a) A statement to show the total cost of operating the vehicle for the four weekly period. (b) Calculate the vehicle cost per kilometre and per tonne kilometre. Method of Costing (II) 6. From the following information for the month of January, 2013, prepare Process-III cost accounts. Opening WIP in Process-III 1,600 units at ` 24,000 Transfer from Process-II 55,400 units at ` 6,23,250 Transferred to warehouse 52,200 units Closing WIP of Process-III 4,200 units Units Scrapped 600 units Direct material added in Process-III ` 2,12,400 Direct wages ` 96,420 Production overheads Degree of completion: ` 56,400 Opening Stock Closing Stock Scrap Material 80% 70% 100% Labour 60% 50% 70% Overheads 60% 50% 70% The normal loss in the process was 5% of the production and scrap was sold @ ` 5 per unit. (Students may treat material transferred from Process II as Material A and fresh material used in Process III as Material B) Standard Costing 7. Compute the missing data indicated by the question marks from the following: Particulars A B Standard Price/ unit ` 12 ` 15 Actual Price/ unit ` 15 ` 20 Standard Input (kgs.) 50 ? Actual Input (kgs.) ? 70 The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 67 Material Price Variance ? ? Material Usage Variance ? ` 300 Adverse Material Cost Variance ? Material mix variance for both products together was ` 45 Adverse. ? Marginal Costing 8. A laboratory carrying out various tests on products produced by various drug companies to ascertain whether drugs are fit for medical use or not. At present, the laboratory carries out 10,000 tests each year and a survey carried out by the laboratory shows a rise in number of tests to 15,000 tests a year, to carrying out all these tests would require an additional shift to be worked. The current cost of carrying out a full test is: ` per test Materials 1,500 Technicians fees 130 Variable expenses 25 Fixed cost 100 Working the additional shift would (i) require a shift premium of 50 per cent to be paid to the technicians on the additional shift; (ii) enable a quantity discount of 10 per cent to be obtained for all materials if an order was placed to cover 15,000 tests; (iii) increase fixed costs by ` 5,00,000 per year. The current fee per test is ` 2,000. Required (a) Calculate the profit for the period at the current capacity of 10,000 tests. (b) A profit statement if the additional shift was worked and 15,000 tests were carried out . Budget and Budgetary Control 9. Jigyasa Ltd. is drawing a production plan for its two products Minimax (MM) and Heavyhigh (HH) for the year 2013-14. The company s policy is to hold closing stock of finished goods at 25% of the anticipated volume of sales of the succeeding month. The following are the estimated data for two products: The Institute of Chartered Accountants of India 68 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Minimax (MM) Heavyhigh (HH) 1,80,000 1,20,000 (`) (`) Direct material cost per unit 220 280 Direct labour cost per unit 130 120 Manufacturing overhead 4,00,000 5,00,000 The estimated units to be sold in the first four months of the year 2013-14 are as under Budgeted Production units April May June July Minimax 8,000 10,000 12,000 16,000 Heavyhigh 6,000 8,000 9,000 14,000 Prepare production budget for the first quarter in monthwise. Miscellaneous 10. (a) You have been asked to install a costing system in a manufacturing company. What practical difficulties will you expect and how will you propose to overcome the same? (b) M/s. Builders & Co. is proposing to take a contract to build a housing project for a big client. M/s. Builders & Co. is less confident about the price to be quoted for the contract. Suggest the appropriate contract pricing method to M/s. Builders &Co. (c) A Ltd. is engaged in production of sugar. While producing sugar molasses is also produced. Molasses is identified as by-product of sugar. Suggest the treatment of molasses in the cost accounts of A Ltd. (d) Z Ltd. Produces product ZZ in batches, management of the Z Ltd. wants to know the number of batches of product ZZ to be produced where the cost incurred on batch setup and carrying cost of production is at optimum level. SUGGESTED ANSWERS / HINTS Cost Accounting 1. Workings 1. Risk of being out of stock Delivery Time Percentage of occurrence (%) Cumulative percentage of occurrence (%) Risk of non occurrence (%) 12 days 70 70 30 The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 69 13 days 80 20 14 days 10 90 10 15 days 5 95 5 16 days 2. 10 5 100 0 (a) Ordering cost per order (O)- ` 35,000 (b) Cost per litre of Chemical X Rate per litre ` 900 Add: Import duty @10% ` 90 ` 990 Carrying cost per litre per annum of Chemical-X (C) 1.7676% (1.5% + 0.2676%) of ` 990 = ` 17.50 Answer to questions (i) Economic Order Quantity (E.O.Q) = (ii) 2AO = C 2 36,000Ltrs. `35,000 = 12,000 litres ` 17.50 Safety Stock at 10% risk of being out of stock Safety stock required for two days i.e. for 13th and 14th day Safety stock = 36,000ltr x 2days = 200 litres 360days Re-Order Point = Minimum Stock level + Average lead time x Average consumption = 200 + 12 x 100 = 1400 litres (iii) At 5% risk of being out stock, safety stock will be safety stock for three days 100 ltr. x 3 days = 300 ltr. Total Ordering cost = 36,000ltr x ` 35,000 = ` 1,05,000 12,000ltr Total Carrying cost of inventory = (Safety stock + Average inventory) Carrying cost per litre per annum The Institute of Chartered Accountants of India 70 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 = (300 + 1 x 12,000 ltr.) ` 17.50 = ` 1,10,250 2 Total cost of ordering & carrying inventory = 1,05,000 + 1,10,250 = ` 2,15,250 [Note: Amount of ` 1,75,000 incurred on making agreement for material supply will be apportioned over the entire quantity of 36,000 ltr and included with cost of Chemical-X. However, for the purpose of calculating carrying cost i.e. storage cost and insurance cost only invoice cost of material is taken. Invoice cost consist of cost per litre of chemical-X plus import duty.] 2. (i) Computation of wages of each worker under guaranteed hourly rate basis Worker Actual hours worked (Hours) Hourly wage rate (`) Wages (`) I 380 40 15,200 II 100 50 5,000 III 540 60 32,400 (ii) Computation of Wages of each worker under piece work earning basis Piece rate per unit (`) Units 15 20 30 Product 210 360 460 A B C Total Worker-I Wages (`) 3,150 7,200 13,800 24,150 Worker-II Units 250 Wages (`) 7,500 7,500 Worker-III Units 600 1,350 - Wages (`) 9,000 27,000 36,000 Since each worker s earnings are more than 50% of basic pay. Therefore, worker-I, II and III will be paid the wages as computed i.e. ` 24,150, ` 7,500 and ` 36,000 respectively. Working Notes: 1. Piece rate per unit Product A B C Standard time per unit in minute 15 20 30 The Institute of Chartered Accountants of India Piece rate each minute (`) 1 1 1 Piece rate per unit (`) 15 20 30 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 2. 71 Time allowed to each worker Worker Product-A Product-B Product-C I 210 units x 15 = 3,150 - 360 units x 20 =7,200 - 460 units x 30 = 13,800 250 units x 30 = 7,500 - II Total Time (Hours) 24,150/60 = 402.50 7,500/60 =125 600 units x 15 1, 350 units x 36,000/60 = = 9,000 20 = 27,000 600 (iii) Computation of wages of each worker under Premium bonus basis (where each worker receives bonus based on Rowan Scheme) III Worker Time Allowed (Hr.) I II III 402.5 125 600 Time Taken (Hr.) Time saved (Hr.) Wage Earnings Bonus Total Rate (`) (`)* Earning per (`) hour (`) 22.5 40 15,200 850 16,050 25 50 5,000 1,000 6,000 60 60 32,400 3,240 35,640 380 100 540 Time Taken x TimeSaved x WageRate Time Allowed 380 Worker-I = x 22.5 x 40 = 850 402.5 100 Worker-II = x 25 x 50 = 1,000 125 * Worker-III = 3. 540 x 60 x 60 = 3,240 600 Primary Distribution Summary Item of cost Rent and Rates General lighting Indirect wages Basis of apportionment Floor area [6 : 7 : 8 : 2 : 1] Light points [6 : 4 : 4 : 3 : 2] Direct wages [14 : 11 : 12 : 4 : 1] Total (`) 1,23,500 P1 (`) 30,875 P2 (`) 36,021 P3 S1 (`) (`) 41,167 10,292 S2 (`) 5,145 72,000 22,737 15,158 15,158 11,368 7,579 68,200 22,733 17,862 19,486 1,624 The Institute of Chartered Accountants of India 6,495 72 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Power Horse Power of machines used [8 : 4 : 6 : 2: 1] Depreciatio Value of n of machinery machinery [28 : 32 : 20 : 6 : 9] Insurance Value of of machinery machinery [28 : 32 : 20 : 6 : 9] 85,000 3,25,000 95,000 32,381 16,190 24,286 8,095 4,048 95,789 1,09,474 68,421 20,526 30,790 28,000 20,000 32,000 6,000 9,000 _______ ______ ______ ______ ______ _____ 7,68,700 2,32,515 2,26,705 1,88,518 62,776 58,186 Let S1 be the overhead of service cost centre S1 and S2 be the overhead of service cost centre S2. S1 = 62,776 + 0.15 S2 S2 = 58,186 + 0.20 S1 Substituting the value of S2 in S1 we get S1 = 62,776 + 0.15 (58,186 + 0.20 S1) S1 = 62,776 + 8,728 + 0.03 S1 0.97 S1 = 71,504 S1 = `73,715 S2 = 58,186 + 0.20 73,715 = `72,929 Secondary Distribution Summary Particulars (i) P1 P2 P3 (`) Allocated and Apportioned overheads as per primary distribution S1 S2 Total (`) (`) (`) 6,47,738 2,32,515 2,26,705 1,88,518 73,715 72,929 22,115 29,172 2,83,802 14,743 21,879 2,63,327 22,114 10,939 2,21,571 Overhead rate per hour P1 Total overheads cost Production hours worked Rate per hour (`) The Institute of Chartered Accountants of India P2 P3 `2,83,802 `2,63,327 `2,21,571 6,240 4,150 4,050 `45.48 `63.45 `54.71 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 73 (ii) Cost of Product X Direct material ` 1,215 Direct labour ` 975 Prime cost ` 2,190 Production on overheads P1 5 hours `45.48 = 227.40 P2 3 hours `63.45 = 190.35 P3 4 hours `54.71 = 218.84 `636.59 Factory cost 4. (i) ` 2,826.59 Statement of Profit as per financial records (for the year ended March 31, 2013) (`) To Opening stock of Finished Goods 53,125 By Sales To Work-in-process 46,000 By Closing stock of finished Goods (`) 22,80,000 45,650 To Raw materials consumed 8,40,000 By Work-in-Process 41,200 To Direct labour 6,10,000 By Rent received 46,000 To Factory overheads 4,22,000 By Interest received 38,000 To Administration overheads 1,98,000 To Selling & distribution overheads 72,000 To Dividend paid 1,22,000 To Bad debts 18,000 To Profit 69,725 24,50,850 24,50,850 Statement of Profit as per costing records (for the year ended March 31,2013) (`) Sales revenue (A) (12,615 units) 22,80,000 Cost of sales: Opening stock (625 units x ` 120) Add: Cost of production of 12,405 units The Institute of Chartered Accountants of India 75,000 21,64,070 74 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 (Refer to working note 2) Less: Closing stock 72,397 ` 21,64,070 415 units 12,405 units _______ Production cost of goods sold (12,615 units) 21,66,673 Selling & distribution overheads (12,615 units x ` 3) 37,845 Cost of sales: (B) 22,04,518 Profit: {(A) (B)} 75,482 (ii) Statement of Reconciliation (Reconciling the profit as per costing records with the profit as per financial records) (`) Profit as per Cost Accounts Add: Administration overheads over absorbed (` 2,82,270 ` 1,98,000) Opening stock overvalued (` 75,000 ` 53,125) Interest received Rent received Factory overheads over recovered (` 4,27,000 ` 4,22,000) Less: Selling & distribution overheads under recovery (` 72,000 ` 37,845) Closing stock overvalued (` 72,397 ` 45,650) Dividend Bad debts Profit as per financial accounts Working notes: 1. Number of units produced Sales Add: Closing stock Total The Institute of Chartered Accountants of India 84,270 (`) 75,482 21,875 38,000 46,000 5,000 34,155 26,747 1,22,000 18,000 1,95,145 2,70,627 (2,00,902) 69,725 Units 12,615 415 13,030 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Less: Opening stock Number of units produced 2. Cost Sheet 625 12,405 (`) 8,40,000 6,10,000 14,50,000 4,27,000 Raw materials consumed Direct labour Prime cost Factory overheads (70% of direct wages) Factory cost Add: Opening work-in-process Less: Closing work-in-process Factory cost of goods produced Administration overheads (15% of factory cost) Cost of production of 12,405 units (Refer to working note 1) Cost of production per unit: TotalCost of Pr oduction ` 21,64,070 = = = ` 174.45 No.of unitsproduced 12,405units 5. 75 18,77,000 46,000 41,200 18,81,800 2,82,270 21,64,070 (a) Statement of total cost of operating the vehicle for the four weekly period Amount (`) Particulars A. Running Costs: Petrol cost (Working Note-1) Lubricant (`125 x 4 weeks) Driver s Salary (` 2,000 x 4 weeks) Cost of tyres ( B. `28,000 x1,920km.) 28,000km Standing Charges: Depreciation ( ` 9,80,000 - `1,80,000 x1,920km.) 80,000km Insurance (` 13,650/52 x 4) Vehicle licence (` 5,200/52 x 4) Other overhead cost (45,500/52 x 4) The Institute of Chartered Accountants of India Amount (`) 20,480 500 8,000 1,920 30,900 19,200 1,050 400 3,500 24,150 76 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 C. Maintenance cost: Garage rent (1,30,000/ 52 x 4) Repairs (` 1,250 x 4 weeks) Total Cost (A+B+C) (b) Vehicle cost per kilometre = 10,000 5,000 15,000 70,050 `70,050 = ` 36.48 1,920km Cost per tonne-km. Outward journey: 20 km x 9 tonne x 24 days x 2 trip = 8,640 Inward journey: 20 km x 1 tonne x 24 days x 2 trip = 960 Total tonne-km 9,600 Cost per tonne-km = `70,050 = ` 7.30 9,600tonne km Working Note: 1. Distance travelled = 20 km x 2 ways x 4 weeks x 6 days x 2 trips = 1,920 km. Cost of petrol = 6. 1,920km x ` 64 = ` 20,480 6km / ltr. Statement of Equivalent Production Process III Input Details Units Output Particulars Units Material-A % Opening WIP Process-II Transfer 1,600 Work on Op. WIP 55,400 Introduced completed the month & during 1,600 Equivalent Production Material-B Units - % - Labour & Overhead Units 20 50,600 100 50,600 100 % 320 Units 40 640 50,600 100 50,600 Normal loss (5% of 52,800 units) 2,640 - - - - - - Closing WIP 4,200 100 4,200 70 2,940 50 2,100 (2,040) 100 (2,040) 100 (2,040) 100 (2,040) 57,000 51,300 Abnormal Gain 57,000 The Institute of Chartered Accountants of India 52,760 51,820 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 77 Working note: Production units = Opening units + Units transferred from Process-II Closing Units = 1,600 units + 55,400 units 4,200 units = 52,800 units Statement of Cost Cost (`) Material A (Transferred from previous process) Cost per equivalent units (`) 6,23,250 Less: Scrap value of normal loss (2,640 units ` 5) Equivalent units (13,200) 6,10,050 52,760 11.5627 2,12,400 51,820 4.0988 Labour 96,420 51,300 1.8795 Overheads 56,400 51,300 1.0994 Material B 9,75,270 18.6404 Statement of apportionment of Process Cost Amount Amount (`) (`) Opening WIP Material A 24,000 Completed opening WIP Material B (320 units ` 4.0988) 1311.62 units-1600 Wages (640 units ` 1.8795) 1202.88 Overheads (640 units ` 1.0994) 703.62 3,218.12 Introduced & Completed- 50,600 units ` 18.6404 9,43,204.24 50,600 units Total cost of 52,200 9,70,422.36 finished goods units Closing WIP units- 4,200 Material A (4,200 units ` 11.5627) 48,563.34 Material B (2,940 units ` 4.0988) 12,050.47 Wages (2,100 units ` 1.8795) 3,946.95 Overheads (2,100 units ` 1.0994) 2,308.74 66,869.50 Abnormal gain units- (2,040 units ` 18.6404) 38026.42 2,040 The Institute of Chartered Accountants of India 78 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Process III A/c Particulars Units To Balance b/d Amount (`) Units 55,400 To Direct material 24,000 By Normal loss Amount (`) 2,640 13,200 6,23,250 By Finished goods 52,200 9,70,422.36 2,12,400 By Closing WIP To Process II A/c 1,600 Particulars 4,200 66,874.06* To Direct wages 96,420 To Production overheads 56,400 To Abnormal gain 2,040 38,026.42 59,040 10,50,496.42 59,040 10,50,496.42 * Difference in figure due to rounding off has been adjusted with closing WIP 7. (i) Standard input (kgs.) of Material- B: Material usage variance = Std. Rate (Std. Quantity Actual Quantity) ` 300 Adverse = ` 15 (SQ 70) Or, -300 = 15 SQ 1,050 Or, SQ = 50 kgs. (ii) Actual Input (kgs) of Material- A: Let the actual input in for Material-A is X kgs. Material Mix Variance = Std. Price (Actual Quantity in Std. mix Actual Quantity) Or, Material Mix Variance (A+B) = Material Mix Variance for Material - A + Material Mix Variance for Material -B X + 70 X + 70 ) X}] + [ `15{( ) 70}] 2 2 Or, - 45 = [ `12{( Or, - 45 = [ `12{ X + 70 2X X + 70 140 } ] + [ `15{ }] 2 2 Or, - 45 = [ `12{ 70 X X 70 } ] + [ `15{ }] 2 2 Or, - 45 = [ - 6X + 420] + [ The Institute of Chartered Accountants of India 15X 1,050 ] 2 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 79 12X + 840 + 15X 1,050 ] 2 Or, - 45 = [ Or, - 90 = 3X 210 Or, X = 120 = 40kgs. 3 (iii) (a) Material Price Variance of A = Actual Quantity (Std. Rate Actual Rate) = 40 kg. (12 15) = ` 120 Adverse (b) Material Price Variance of B = 70 kg. (15 20) = ` 350 Adverse (iv) Material usage variance of A = Std. Rate (Std. Quantity Actual Quantity) = 12 (50 40) = ` 120 Favourable (v) (a) Material Cost variance of A = Std. Cost Actual Cost = (50 kgs. @ ` 12) (40 kgs. @ ` 15) = 600 600 = Nil (b) Material Cost variance of B = (50 kgs. @ ` 15) (70 kgs. @ ` 20) = 750 1,400 = ` 650 Adverse 8. Calculation of profit at current capacity of 10,000 tests Particulars Fee per test Less: Variable costs: Direct Materials Technician fees Other Variable expenses Contribution per test Total contribution (`345 10,000 tests) Less: Fixed Overhead (` 100 10,000) Profit Amount (`) 2,000 1,500 130 25 345 34,50,000 10,00,000 24,50,000 (b) Statement of Profit for expected 15,000 capacity, with additional shift Particulars Fees (15,000 tests ` 2,000) Less: Variable Costs: Direct materials (90% of 1,500) 15,000 tests The Institute of Chartered Accountants of India Amount (`) Amount (`) 3,00,00,000 2,02,50,000 80 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Technician s fee 10,000 tests @ ` 130 5,000 tests @ ` (130 150%) Other Variable expenses (` 25 15,000 tests) Contribution Less: Fixed Overheads (10,00,000 + 5,00,000) Profit 9. 13,00,000 9,75,000 22,75,000 3,75,000 71,00,000 (15,00,000) 56,00,000 Production budget of Product Minimax and Heavyhigh (in units) April MM 8,000 2,500 Sales Add: Closing Stock (25% of next month s sale Less: 2,000* Opening Stock Production 8,500 units May June Total HH 6,000 2,000 MM 10,000 3,000 HH 8,000 2,250 MM 12,000 4,000 HH 9,000 3,500 MM 30,000 9,500 HH 23,000 7,750 1,500* 2,500 2,000 3,000 2,250 7,500 5,750 6,500 10,500 8,250 13,000 10,250 32,000 25,000 * Opening stock of April is the closing stock of March, which is as per company s policy 25% of next month s sale. Production Cost Budget Rate (`) Element of cost Amount (`) MM HH MM (32,000 units) HH (25,000 units) Direct Material 220 280 70,40,000 70,00,000 Direct Labour 130 120 41,60,000 30,00,000 Manufacturing Overhead (4,00,000/ 1,80,000 x 32,000) (5,00,000/ 1,20,000 x 25,000) 71,111 1,04,167 1,12,71,111 1,01,04,167 The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 81 10. (a) The Practical difficulties with which a Cost Accountant is usually confronted with while installing a costing system in a manufacturing company are as follows: (i) Lack of top management support: Installation of a costing system does not receive the support of top management. They consider it as interference in their work. They believe that such, a system will involve additional paperwork. They also have a misconception in their minds that the system is meant for keeping a check on their activities. (ii) Resistance from cost accounting departmental staff: The staff resist because of fear of loosing their jobs and importance after the implementation of the new system. (iii) Non co-operation from user departments: The foremen, supervisor and other staff members may not cooperate in providing requisite data, as this would not only add to their responsibilities but will also increase paper work of the entire team as well. (iv) Shortage of trained staff: Since cost accounting system s installation involves specialised work, there may be a shortage of trained staff. To overcome these practical difficulties, necessary steps required are: - Sell the idea to top management and convince them of the utility of the system. - Resistance and non co-operation can be overcome by behavioural approach. To deal with the staff concerned effectively. - Proper training should be given to the staff at each level - Regular meetings should be held with the cost accounting staff, user departments, staff and top management to clarify their doubts/ misgivings. (b) M/s. Builder & Co. should follow cost plus contract to quote price for the contract. Cost-plus contract provide for the payment by the contractee of the actual cost of manufacture plus a stipulated profit, mutually decided between the two parties. The main features of these contracts are as follows: (i) The practice of cost-plus contracts is adopted in the case of those contracts where the probable cost of the contracts can not be ascertained in advance with a reasonable accuracy. (ii) These contracts are preferred when the cost of material and labour is not steady and the contract completion may take number of years. (iii) The different cost to be included in the execution of the contract are mutually agreed, so that no dispute may arise in future in this respect. Under such type of contacts, contractee is allowed to check or scrutinize the concerned books, documents and accounts. The Institute of Chartered Accountants of India 82 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 (iv) Such a contract offers a fair price to the contractee and also a reasonable profit to the contractor. (v) The contract price here is ascertained by adding a fixed and mutually pre-decided component of profit to the total cost of the work. Since, M/s Builders & Co. is not confident in quoting the price, so cost plus contact is better option to safeguard it from unexpected losses. (c) Molasses is a by product of sugar and treatment of by-product in cost accounting is as follows. (i) When they are of small total value, the amount realized from their sale may be dealt as follows: - Sales value of the by-product may be credited to Profit and Loss Account and no credit be given in Cost Accounting. The credit to Profit and Loss Account here is treated either as a miscellaneous income or as additional sales revenue. The sale proceeds of the by-product may be treated as deduction from the total costs. The sales proceeds should be deducted either from production cost or cost of sales. (ii) When they require further processing: In this case, the net realisable value of the by-product at the split-off point may be arrived at by subtracting the further processing cost from realisable value of by-product. If the value is small, it may be treated as discussed in (i) above. (d) Economic batch quantity in Batch Costing: In batch costing the most important problem is the determination of Economic Batch Quantity . The determination of economic batch quantity involves two type of costs viz, (i) set up cost and (ii) carrying cost. With the increase in the batch size, there is an increase in the carrying cost but the set up cost per unit of product is reduced. This situation is reversed when the batch size is reduce. Thus there is one particular batch size for which both set up and carrying costs are minimum. This size of a batch is known as economic or optimum batch quantity. Economic batch quantity can be determined with the help of table, graph or mathematical formula. The mathematical formula usually used for its determination is as follows: E.B.Q = 2DS C Where, D= Annual demand for the product S = Setting up cost per batch C = Carrying cost per unit of production per annum The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 83 PART II: FINANCIAL MANAGEMENT QUESTIONS 1. Answer the following, supporting the same with reasoning/working notes: (a) Financial Managers should concentrate on meeting the needs of shareholders by maximising earnings per share no other stakeholders matter. Do you agree with this statement? (b) The higher risk of a project can be recognised by decreasing the required rate of return of the project . Comment. (c) Describe the term coupon rate as applicable in debenture shares? (d) Assuming that the market interest rates remain unchanged, an increase in the coupon rate of a bond will have what effect on its selling price? (e) If a company s profits are more sensitive to changes in sales volume, then what would be effect on the company s operating leverage? Working Capital Management 2. Alpha Limited sells its products on a gross profit of 20 percent on sales. The following information is extracted from its annual accounts for the current year ended March 31. Sales at 3 months credit Raw Material Wages paid-average time lag 15 days Manufacturing expenses paid-one month in arrears Administrative expenses paid-one month in arrears Sales promotion expenses-payable half-yearly in advance ` 40,00,000 12,00,000 9,60,000 12,00,000 4,80,000 2,00,000 The company enjoys one month s credit from the suppliers of raw materials and maintains 2 months stock of raw materials and one and a half month s stock of finished goods. The cash balance is maintained at `1,00,000 as a precautionary measure. Assuming a 10 percent margin, you are required to estimate the working capital requirements of Alpha Limited. Investment Decisions 3. Beta Limited receives ` 15,00,000 a year after taxes from an investment in an automatic plant that has 12 more years of service life. The company s required rate is 12%. Beta Limited can make improvements to the plant to raise its service life to 20 years and its annual after tax cash flow to ` 48,00,000 per year. These investments would cost ` 2,10,00,000. With the improvements, the plant s value at the end of 12 years would rise from `7,50,000 to `75,00,000. Would the improvements produce a return satisfactory to Beta Limited? The Institute of Chartered Accountants of India 84 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Financing Decisions 4. Company XYZ is unlevered and has a cost of equity of 20 percent and a total market value of `10,00,00,000. Company ABC is identical to XYZ in all respects except that it uses debt finance in its capital structure with a market value of `4,00,00,000 and a cost of 10 percent. Find the market value of equity, weighted average cost of capital and cost of equity of ABC if the tax advantage of debt is 25 percent. Financing Decisions 5. The following current data are available concerning Theta Limited: Share issued 10,000 Market price per share `20 Interest rate 12% Tax Rate 46% Expected EBIT `15,000 The company requires an additional `50,000 for the coming year. You are required to determine: (i) Which financing option (debt or equity issue) will give higher EPS for the expected EBIT? (ii) What is indifference level of EBIT for the two alternatives? (iii) What is EPS for that EBIT? Financial Analysis and Planning 6. Given here is the Balance Sheet as on March 31, years 1 and 2 for Zeta Limited. Sales for year 2 was `2,10,000. Net income after tax was `7,000. In arriving at net profit, items deducted from sales included, among others, Cost of goods sold `1,65,000; Depreciation - `5,000; Wages and Salaries `20,000 and a gain of `1,000 on the sale of a plant. The plant had a historical cost of `6,000, a depreciation of `4,000 had been accumulated for it and it was sold for `3,000. This was the only asset written off during the year. The company declared and paid `6,000 as dividends during the year. Balance Sheet March 31, Year 1 March 31, Year 2 ` ` Accounts Payable 20,000 18,000 Accrued expenses 2,000 4,000 Liabilities The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Income Tax payable 85 1,000 1,100 Capital Stock 30,000 37,000 Retained earnings 12,650 13,650 65,650 73,750 5,000 6,000 Accounts receivable 14,000 14,000 Inventory Prepaid Insurance 22,000 200 8,000 250 150 100 300 4,000 400 8,000 Assets Cash Prepaid rent Pre-paid property tax Land Plant & Equipment Less: Accumulated Dep. 30,000 10,000 20,000 48,000 11,000 65,650 37,000 73,750 You are required to prepare funds flow statement and describe the most significant development revealed by this statement. Investment Decisions 7. A machine purchased six years back for `1,50,000 has been depreciated to a book value of `90,000. It originally had a projected life of fifteen years and zero salvage value. A new machine will cost `2,50,000 and result in a reduced operating cost of `30,000 per year for the next nine years. The older machine could be sold for `50,000. The new machine shall also be depreciated on a straight-line method on nine-year life with salvage value of `25,000. The company's tax rate is 50% and cost of capital is 10%. Determine whether the old machine should be replaced. Given: Present Value of Re. 1 at 10% on 9th year = 0.424; and Present Value of an annuity of Re. 1 at 10% for 8 years = 5.335. Financial Analysis and Planning 8. The following information was taken from the financial statements of Gamma Limited (amount in thousands of rupees). Particulars Total Assets Credit Sales Year 1 750 420 The Institute of Chartered Accountants of India Year 2 850 520 Year 3 860 550 86 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Cost of goods sold Cash Debtors Inventory Net Fixed Assets Creditors Short term debt Long-term Debt Equity 450 50 150 130 120 75 125 125 200 595 60 165 160 250 85 175 185 210 645 55 180 170 250 100 170 175 - You are required to calculate those ratios which indicate the efficient use of assets and discuss potential sources of trouble. Working Capital Management 9. Delta Limited currently makes all sales on credit and offers no cash discounts. It is considering a 2 percent discount for payments within 10 days (terms offered 2/10 net 30 ). The firm s current average collection period is 30 days, sales are 10,000 units, selling price is ` 100 per unit and variable cost per unit is ` 50; its existing total fixed costs are ` 2,00,000 which are likely to remain unchanged with production/ sales volume of 12,000 units. It is expected that the offer of cash discount will result in an increase in sales to 11,000 units and the average collection period will be 20 days as a result. However, due to increased sales, increased working capital required will be for ` 20,000 (without taking into account the effect of debtors). Assuming that 50 percent of the total sales will be on cash discount and 20 percent is the required return on investment, should the proposed discount be offered? 10. Answer the following: (a) Explain the concept of Indian depository receipts. (b) Discuss the advantages of preference share capital as an instrument of raising funds. (c) Explain the relevance of time value of money in financial decisions. SUGGESTED ANSWERS / HINTS 1. (a) Financial managers are concerned with managing the company s funds on behalf of the shareholders, and producing information which reflects the effect of management decisions on shareholders wealth. However, management decisions will be made only after considering other stakeholders also and a good financial The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 87 manager will be aware that financial information is only one input to the final decision. (b) The higher risk of a project can be recognised by decreasing the required rate of return of the project. This statement is not true. In fact the higher the risk of the project, the greater is the required rate of return of the project. (c) The coupon rate as in debenture shares gives the annual interest based on the nominal value of the debenture shares. (d) If the market interest rates remain unchanged, the yield to maturity will also remain unchanged. If the coupon rate increases, the annual interest payment will increase. Therefore, in order for the yield to remain unchanged, the selling price of the bond must increase. (e) If a company s profits are more sensitive to changes in sales volume, then the contribution will increase, with a resultant increase in the company s operating leverage. Operating Leverage = 2. Contribution EBIT Statement Showing the Estimation of Working Capital Requirements of Alpha Limited ` (A) Current Assets : Cash balance Inventories : Raw materials (`12,00,000 2/12) 2,00,000 Finished goods (`32,00,000 * 1.5/12) 4,00,000 Debtors (`32,00,000 3)/12 Prepaid sales expenses (` 2,00,000 6)/12 (B) Current Liabilities Creditors for raw material (`12,00,000 1) /12 Wages (`9,60,000 0.5) /12 Manufacturing expenses (`12,00,000 1)/12 Administrative expenses (`4,80,000 1) / 12 (C) Net working capital (A B) Add : Margin (0.10) Working Capital Requirements of Alpha Limited * ` 40,00,000 80% The Institute of Chartered Accountants of India ` 1,00,000 6,00,000 8,00,000 1,00,000 Total16,00,000 1,00,000 40,000 1,00,000 40,000 Total 2,80,000 13,20,000 1,32,000 14,52,000 88 3. INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Calculation of the Present value of the inflows before improvements to the automatic plant ` Income after taxes per year 15,00,000 Income after taxes for 12 years (`15,00,000 6.194) 92,91,000 Plant value at the end of 12 years (`7,50,000 0.257) Total present value of the inflows before improvements to the plant: (A) 1,92,750 94,83,750 Calculation of the Present value of the inflows after improvement to the automatic plant ` Income after taxes per year Income after taxes for 12 years (`48,00,000 6.194) Plant value at the end of 12 years (`75,00,000 0.257) Present value after improvements to the plant: (B) 48,00,000 2,97,31,200 19,27,500 3,16,58,700 Differential Present value of the inflow after improvements to the automatic plant = ` 3,16,58,700 (B) ` 94,83,750 (A) = ` 2,21,74,950 Net Present value from the investments in the automatic plant = P.V. of Cash Inflow Cash Outflow = ` 2,21,74,950 ` 2,10,00,000 = ` 11,74,950 Advise: Since the NPV is positive, the improvements produce a satisfactory return to the firm. 4. Computation of Market Value of Equity of Company ABC Total market value of company ABC VABC =V XYZ + Bt .(i) Where, VABC = Market value of leveraged company. The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT VXYZ = Market value of unleveraged company. B = Market value of debt. t = Tax rate. Now, given Vxyz = `10,00,00,000 B = `4,00,00,000 t = 25% By substituting values in equation (i) above, we have VABC = `10,00,00,000 + `4,00,00,000 0.25% = `11,00,00,000 The market value of equity (s) of company ABC, = `11,00,00,000 `4,00,00,000 = `7,00,00,000 Weighted Average Cost of Capital of Company ABC WACCABC = WACCXYZ[1- Bt/VABC] 4,00,00,000 = 20% 1 0.25 11,00,00,000 = 18.18% Where, WACCABC is the weighted average cost of capital of the levered company ABC WACCXYZ is the weighted average cost of capital of the unlevered company XYZ. Cost of Equity of Company ABC REabc = RExyz+ [(1 - t)B/E(RExyz- RB)] = 20%+[(1-.25)400,00,000/700,00,000(.20-.10)] = 24.28% approx. Where, REABC is the cost of equity in the levered company ABC. RExyz is the cost of equity in the unlevered company XYZ. E is the market value of equity. B is the market value of debt. The Institute of Chartered Accountants of India 89 90 5. INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 (i) Computation of Earnings Per Share (EPS) for the Expected Earnings Before Interest and Taxes(EBIT) for the Expected EBIT. Debt ` Expected earnings before interest & tax Equity ` 15,000 15,000 Less: Interest (12% of ` 50,000) 6,000 - Earnings before tax (EBT) 9,000 15,000 Less: Tax (@ 46%) of EBT (`9000 X 46%) 4,140 6,900 Earnings available to equity shareholder: (A) 4,860 8,100 10,000 12,500 Number of shares issued: (B) (Refer to working note) Earnings per shares: (A) / (B) 0.486 0.648 Conclusion: Earnings per share is higher when the company raises additional funds by issue of equity shares. Working note Number of new shares to be issued: Amount required: (i) ` 50,000 Market price per share (ii) ` 20 No. of new shares to be issued: (i) / (ii) 2,500 (ii) Computation of indifference level of EBIT for the two alternatives (EBIT - ` 6,000) (1- 0.46) EBIT (1- 0.46) 10,000 shares or, = 12,500 shares EBIT = ` 30,000 Therefore, Indifference level of EBIT for two alternatives is `30,000. (iii) The EPS for the EBIT at the indifference level. EPS = ` 30,000 (1- 0.46) 12,500 shares = `1.296 per share The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 6. Funds Flow Statement of Zeta Limited for the year 2 91 ` Sources of funds: Funds from business operations (Refer to working note (i)) Sale of non-current assets: Plant Issuance of long-term liabilities: Capital Stock 11,000 Sources : (A) 21,000 3,000 7,000 Application of funds: Purchase of non-current assets: Land 4,000 Plant & Equipment 24,000 [Refer to working note (ii)] Recurring payment to investors: Dividend paid 6,000 Applications: (B) 34,000 Decrease in working capital [(B) (A)] 13,000 Comment: The most significant development revealed by the funds flow statement is that Working Capital (WC) has been used to acquire assets. This is not a sound financing policy. WC has declined from `18,650 in year 1 to less than one-third, that is `5,650 in year 2. [Refer to working note (iii)]. As a result, current ratio [(refer to working note (iv]) has substantially decreased to 1.24 in year 2 from 1.81 in year 1. The fresh issue of stock of `7,000 made during the year does not seem to be planned properly; the amount of the issue should have been more, at least by ` 13,000. Working Notes: (i) Funds from business operations: Net income after taxes Add: Depreciation Less: Gain on sale of plant ` 7,000 5,000 1,000 11,000 The Institute of Chartered Accountants of India 92 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Plant and Equipment Account (ii) Particulars Amount (`) To Balance b/d 20,000 Particulars Amount (`) By Cash (sale of plant) 3,000 1,000 By Depreciation 5,000 24,000 By Balance c/d 37,000 To P & L A/c (Profit on the sale of plant) To Cash (Purchases, balancing figures) 45,000 45,000 Working Capital (iii) Year 1 (`) Current Assets : Cash Accounts receivable Inventory Prepaid Insurance Prepaid Rent Prepaid Property taxes Less: Current Liabilities: 5,000 14,000 22,000 200 150 300 Accounts payable Accrued expenses Income tax payable Working capital (iv) Current Ratio : 20,000 2,000 1,000 Year 2 (`) 41,650 23,000 18,650 6,000 14,000 8,000 250 100 400 18,000 4,000 1,100 (Current ratio in year 2 )= 23,100 5,650 ` 28,750 Current assets = = 1.24 Current liabilities ` 23,100 (Current ratio in year 1) = 28,750 ` 41,650 = 1.81 ` 23,000 7. Cash outflow ` Cost of new machine Less: Sale of old machine The Institute of Chartered Accountants of India 2,50,000.00 50,000.00 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 93 20,000.00 Less: Tax saving from loss due to sale of old machine `40,000 (` 90,000 ` 50,000) 50% Net Cash Outflow 1,80,000.00 Cash inflow Amount before tax ` ` 30,000 Cost savings Tax savings on depreciation: New machine Old machine Differential depreciation Tax savings on `15,000 @ 50% Cash flow after tax (1 to 8 years) Salvage value of new machine (9th year) Cash flow after tax ( 9th year) Amount after tax 15,000 25,000 10,000 15,000 7,500 22,500 25,000 47,500 Determination of Net Present Value Year (1) 1-8 9 Cash in flow after tax (`) (2) 22,500 47,500 Present value factor at (10%) (3) 5.335 0.424 Total Cash Inflow Less: Net Cash Outflow Net Present Value Present value of cash inflows (`) (4)=(2) X (3) 1,20,038 20,140 1,40,178 1,80,000 (39,822) Decision: Since the net present value is negative, the old machine should not be replaced. 8. The efficient use of assets is indicated by the following key ratios: (a) Current assets turnover, (b) Debtors' turnover, (c) Inventory turnover, (d) Fixed assets turnover, and (e) Total assets turnover. Computation of Ratios: Year 1 (a) Current assets turnover ratio (Cost of goods sold / Total current assets) (b) Debtor's turnover The Institute of Chartered Accountants of India Year 2 Year 3 1.36 1.55 1.59 2.8* 3.30 3.19 94 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 (Credit sales / Average debtors) (c) Inventory turnover (Cost of goods sold/ Average inventory) (d) Fixed assets turnover (Cost of goods sold/ Fixed Assets) (e) Total assets turnover (Cost of goods sold/ Total assets) 3.46* 4.10 3.91 3.75 2.38 2.58 1.00 0.93 0.98 * Based on Debtors and Inventory at the end, as their opening balances are not available. Comments: The first three ratios indicate the efficiency of Current Assets usage, and the latter two, namely, Fixed assets turnover and Total assets turnover ratio, show the efficiency of utilisation of these. Current assets utilisation appears to be very satisfactory as reflected in the first three types of ratios. No major change is noticeable in their values over a period of time, which is presumably indicative of consistency in Debtors collection period and inventory turnover. There does not seem to be any significant problem regarding utilisation of Current assets. However, it appears that fixed assets are not being fully utilised. Investments in fixed assets have more than doubled during years 2 and 3. The Fixed assets turnover ratio has sharply fallen to 2.58 in year 3 from 3.75 in year 1. Thus, investment in fixed assets are either excessive, or the capacity of the additional plant is under utilised. This is corroborated by the fact that sales in the latter 2-year have increased by around 15%. Therefore, the remedy lies in utilising the plant capacity by increasing production and sales. 9. Incremental analysis whether cash discount should be offered Particulars Amount (` ) Incremental sales revenues (1,000 units `100) 1,00,000 Less: Variable costs (1,000 units ` 50) 50,000 Incremental contribution 50,000 Add: Savings in interest cost due to decrease in investment in debtors 3,333 [(Refer to working note (iii)] 53,333 Less: Cost of additional working capital required (` 20,000 0.20) 4,000 Less: Cash discount (0.02 X 11,000 units 0.5 ` 100) 11,000 Incremental profit 38,333 Recommendation: It is advised that the firm should offer cash discount. The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 95 Working Notes: (i) Savings due to decrease in collection period: Present investment in debtors (without cash discount) = [(10,000 ` 50) + ` 2,00,000] /12 (360 days/ 30) = ` 58,333 (ii) Expected investment in debtors (with cash discount) [(11,000 `50) + ` 2,00,000] /18 (360 days/ 20) = ` 41,667 (iii) Decrease in investment in debtors = `58,333 - `41,667 = ` 16,666 (Refer to working notes (i) & (ii) Savings in interest cost (`16,666 0.20) = `3,333 10. (a) Concept of Indian Depository Receipts: The concept of the depository receipt mechanism which is used to raise funds in foreign currency has been applied in the Indian capital market through the issue of Indian Depository Receipts (IDRs). Foreign companies can issue IDRs to raise funds from Indian market on the same lines as an Indian company uses ADRs /GDRs to raise foreign capital. The IDRs are listed and traded in India in the same way as other Indian securities are traded. (b) Advantages of Issue of Preference Shares are: (i) No dilution in EPS on enlarged capital base. (ii) There is no risk of takeover as the preference shareholders do not have voting rights. (iii) There is leveraging advantage as it bears a fixed charge. (iv) The preference dividends are fixed and pre-decided. Preference shareholders do not participate in surplus profit as the ordinary shareholders (v) Preference capital can be redeemed after a specified period. (c) Time value of money means that worth of a rupee received today is different from the worth of a rupee to be received in future. The preference of money now as compared to future money is known as time preference for money. A rupee today is more valuable than rupee after a year due to several reasons: Risk there is uncertainty about the receipt of money in future. Preference for present consumption Most of the persons and companies in general, prefer current consumption over future consumption. Inflation In an inflationary period a rupee today represents a greater real purchasing power than a rupee a year hence. Investment opportunities Most of the persons and companies have a preference for present money because of availabilities of opportunities of investment for earning additional cash flow. Many financial problems involve cash flow accruing at different points of time for evaluating such cash flow an explicit consideration of time value of money is required. The Institute of Chartered Accountants of India

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

Formatting page ...

 

  Print intermediate debugging step

Show debugging info


 


Tags : CA IPCC, sample / model / mock / past / previous / old / online test papers, Group I, Group II, accounting technician course, atc, accounts, accounting, business laws, ethics, communiation, cost accounts, cost accounting, financial management, fm, tax, taxation, advanced accounting, audit, auditing, assurance, itsm, it & sm, information technology, strategic management, Integrated Professional Competence Course, may, november, 2015, 2014, 2013, 2012, 2011, 2010, 2009.  


© 2010 - 2025 ResPaper. Terms of ServiceContact Us Advertise with us

 

ca_ipcc chat