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CA IPCC : Question Paper (with Answers) - COST ACCOUNTING & FINANCIAL MANAGEMENT May 2013

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DISCLAIMER The Suggested Answers hosted in the website do not constitute the basis for evaluation of the students answers in the examination. The answers are prepared by the Faculty of the Board of Studies with a view to assist the students in their education. While due care is taken in preparation of the answers, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies. The Council of the Institute is not in anyway responsible for the correctness or otherwise of the answers published herein. The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. Working Notes should form part of the answer . Question 1 Answer the following: (a) Following are the details of the product Phomex for the month of April 2013: Standard quantity of material required per unit 5 kg Actual output 1000 units Actual cost of materials used ` 7,14,000 Material price variance ` 51,000 (Fav) Actual price per kg of material is found to be less than standard price per kg of material by ` 10. You are required to calculate: (i) Actual quantity and Actual price of materials used. (ii) Material Usage Variance (iii) Material Cost Variance (b) MFN Limited started its operation in 2011 with the total production capacity of 2,00,000 units. The following data for two years is made available to you: 2011 2012 Sales units 80,000 1,20,000 Total cost (`) 34,40,000 45,60,000 There has been no change in the cost structure and selling price and it is expected to continue in 2013 as well. Selling price is ` 40 per unit. You are required to calculate: (i) Break-Even Point (in units) (ii) Profit at 75% of the total capacity in 2013 (c) A company issued 40,000, 12% Redeemable Preference Share of ` 100 each at a premium of ` 5 each, redeemable after 10 years at a premium of ` 10 each. The floatation cost of each share is ` 2. You are required to calculate cost of preference share capital ignoring dividend tax. (d) The following information relates to Beta Ltd. for the year ended 31st March 2013: The Institute of Chartered Accountants of India 44 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 Net Working Capital ` 12,00,000 Fixed Assets to Proprietor s Fund Ratio 0.75 Working Capital Turnover Ratio 5 Times Return on Equity (ROE) 15% There is no debt capital. You are required to calculate: (i) Proprietor s Fund (ii) Fixed Assets (iii) Net Profit Ratio. (4 x 5 = 20 Marks) Answer 1. (a) (i) Actual Quantity and Actual Price of material used Material Price Variance = Actual Quantity (Std. Price Actual Price) = `51,000 Or, AQ (SP AP) = ` 51,000 Or, 10 AQ = ` 51,000 Or, AQ = 5,100 kgs Actual cost of material used is given i.e. AQ x AP or, 5,100 AP AP = ` 7,14,000 = = ` 7,14,000 ` 140 Actual price is less by ` 10 So, Standard Price = ` 140 + ` 10 = ` 150 per kg Actual Quantity = 5,100 kgs Actual Price = ` 140/kg (ii) Material Usage Variance Std. Price (Std. Quantity Actual Quantity) Or, SP (SQ AQ) = ` 150 (1,000 units x 5 kg 5,100 kg) = ` 15,000 (A) (iii) Material Cost Variance = Std. Cost Actual Cost = (SP x SQ) (AP x AQ) = ` 150 x 5,000 ` 140 x 5,100 The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT = ` 7,50,000 ` 7,14,000 = ` 36,000 (F) OR Material Price Variance + Material Usage Variance ` 51,000 (F) + ` 15,000 (A) = ` 36,000 (F) (b) Sales Units Sale Value @ ` 40 Total Cost ` Variable Cost per unit (change in total cost/change in sales volume) Total Fixed Cost (`) Break-even point in units Capacity at 75% Contribution per unit Contribution (`) Fixed Cost Profit 2011 80,000 32,00,000 34,40,000 2012 1,20,000 48,00,000 45,60,000 Difference 40,000 16,00,000 11,20,000 11,20,000/40,000 = ` 28 45,60,000 1,20,000 x 28 = ` 12,00,000 Or 34,40,000 80,000 x 28 = ` 12,00,000 Fixed Cost/Contribution per unit = ` 12,00,000/ ` (40-28) = 12,00,000/12 = 1,00,000 units 1,50,000 units (2,00,000 x 75%) ` 12 1,50,000 x ` 12 = ` 18,00,000 ` 12,00,000 Contribution Fixed Cost = ` 18,00,000 12,00,000 = ` 6,00,000 (c) Calculation of Cost of Preference Shares (Kp) Preference Dividend (PD) = 0.12 x 40,000 x 100 = 4,80,000 Floatation Cost = 40,000 x 2 = ` 80,000 Net Proceeds (NP) = 42,00,000 80,000 = 41,20,000 The Institute of Chartered Accountants of India 45 46 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 Redemption Value (RV) = 40,000 x 110 = 44,00,000 Cost of Redeemable Preference Shares = Kp = = = PD + (RV - NP) / N RV + NP 2 4,80,000 + (44,00,000 - 41,20,000)/10 44,00,000 + 41,20,000 2 4,80,000 + (2,80,000)/10 85,20,000/2 4,80,000 + 28,000 42,60,000 = 5,08,000 42,60,000 = 0.1192 Kp = 11.92% (Note: Kp may be computed alternatively by taking the RV and NP for one unit of preference shares. Final figure would remain unchanged). (d) (i) Calculation of Proprietor s Fund Since Ratio of Fixed Assets to Proprietor s Fund = 0.75 Therefore, Fixed Assets = 0.75 Proprietor s Fund Net Working Capital = 0.25 Proprietor s Fund 12,00,000 = 0.25 Proprietor s Fund Therefore, Proprietors Fund = 12,00,000 0.25 = 48,00,000 (ii) Calculation of Fixed Assets Fixed Assets = 0.75 Proprietor s Fund = 0.75 x 48,00,000 = 36,00,000 (iii) Calculation of Net Profit Ratio Net Working Capital = 0.25 x 48,00,000 = 12,00,000 The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Working Capital Turnover Ratio = 47 Sales Working Capital Sales = 60,00,000 ROE = PAT Equity 0.15 = PAT 48,00,000 PAT = 7,20,000 Net Profit Ratio = = Net Profit Ratio Net Profit Sales 7,20,000 60,00,000 x100 x 100 = 12% [Note: Fixed Assets may be computed alternatively by (Net Working Capital Fixed Assets to Proprietor s Fund Ratio) and Proprietor s Fund by (Fixed Assets + Net Working Capital)]. Question 2 (a) The summarized Balances Sheets of MPS Limited as on 31-3-2012 and 31-3-2013 are as under: Liabilities 31-3-2012 31-3-2013 Assets 31-3-2012 31-3-2013 ` ` 27.00 25.00 1.00 Plant & Machinery 25.00 34.00 11.00 Investments (Long Term) 3.00 8.00 12.70 Stock 7.50 9.80 ` Equity share capital Securities Premium Account General Reserve Profit & Loss Account 40.00 8.00 10.30 50.00 Land & Building 10% Debentures Sundry Creditors 5.00 4.90 3.00 Debtors 6.20 Bills Receivable 9.25 1.77 11.15 1.65 Provision for Tax 5.00 7.00 Cash & Bank 4.50 7.70 The Institute of Chartered Accountants of India 48 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 Balance Proposed Dividend 4.80 6.00 Preliminary Expenses Corporate Dividend Tax 0.82 1.02 78.82 97.92 0.80 0.62 78.82 97.92 Additional Information: (i) On 1.4.2012, the company redeemed debentures of ` 2,00,000 at par. (ii) During 2012-13 the company has issued equity shares for cash at a premium of 10%. (iii) Provision for tax made during the year 2012-13 for ` 6,80,000. (iv) Dividend received on investment ` 50,000 in July 2012. (v) A machine costing ` 8,00,000 (WDV ` 1,20,000) was sold for ` 50,000 during the year 2012-13. (vi) Depreciation for 2012-13 charged on plant & machinery ` 3,30,000 and ` 2,00,000 on land and building. (vii) Proposed Dividend and Corporate Dividend Tax of 2011-12 paid during the year 2012-13. Prepare a Cash Flow Statement as per Accounting Standard (AS)-3. (10 Marks) (b) A skilled worker is paid a guaranteed wage rate of ` 120 per hour. The standard time allowed for a job is 6 hour. He took 5 hours to complete the job. He is paid wages under Rowan Incentive Plan. (i) Calculate his effective hourly rate of earnings under Rowan Incentive Plan. (ii) If the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain the same effective hourly rate of earnings, calculate the time in which he should complete the job. (6 Marks) Answer (a) Cash Flow Statement (` in lakhs) (A) Cash Flow from Operating Activities Profit and Loss A/c (12.70 10.30) 2.40 Add: General Reserves (11.00 8.00) 3.00 5.40 The Institute of Chartered Accountants of India (` in lakhs) PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Add: Provision for tax 49 6.8 12.20 Add: Proposed dividend Corporate dividend tax Profit before tax Add: Interest on debentures 6.00 1.02 19.22 0.30 Loss on Sale of Machinery 0.70 Depreciation on Plant & Machinery 3.30 Depreciation on Land & Building 2.00 Preliminary Expenses written off 0.18 25.70 Less: Dividend received on Investment (0.50) Cash flow before W/C adjustments 25.20 Less:Increase in Current Assets Stock (2.30) Debtors (1.90) 21.00 Add: Decrease in Current Assets Bills receivables 0.12 Add: Increase in Current Liabilities Sundry Creditors Cash Generated from Operations 1.30 22.42 Less:Income tax paid [(5.00+6.80) 7.00] (4.80) Cash Flow from Operating Activities (B) Cash Flow from Investing Activities Sale of Plant & Machinery Purchase of Plant & Machinery Purchase of Investment Dividend Received on Investment Cash Flow from Investing Activities (C) 17.62 Cash Flow from Financing Activities The Institute of Chartered Accountants of India 0.50 (13.50) (5.00) 0.50 (17.50) 50 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 Issue of Share Capital 10.00 Securities Premium 1.00 Redemption of Debentures (2.00) Interest on debentures (0.30) Proposed Dividend (4.80) Corporate dividend tax (0.82) Cash flow from Financing Activities 3.08 Net increase in Cash and Cash Equivalent (A+B+C) 3.20 Cash and Cash equivalent at beginning of year 4.50 Cash and Cash Equivalent at end of year 7.70 Working Notes: Provision for Tax A/c Particulars Amount (`) Particulars Amount (`) 4.80 By Bal. b/d 7.00 By P/L 5.00 6.80 To Cash b/f To Balance c/d 11.80 11.80 Land & Building A/c Particulars Amount (`) Particulars To Bal. b/d 27.00 By Depreciation By Balance c/d 27.00 Amount (`) 2.00 25.00 27.00 Plant & Machinery A/c Particulars Amount (`) Particulars Amount (`) To Balance b/d 25.00 By Bank 0.50 To Bank b/f 13.50 By P/L 0.70 By Depreciation By Balance c/d 38.50 The Institute of Chartered Accountants of India 3.30 34.00 38.50 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT (b) (i) 51 Effective hourly rate of earnings under Rowan Incentive Plan Earnings under Rowan Incentive plan = (Actual time taken wage rate) + Time Saved Time taken Wage rate Time Allowed = 1 hour (5 hours `120) + 5 hours ` 120 6 hours = ` 600 + `100 = `700 Effective hourly rate = `700/5 hours = ` 140 /hour (ii) Let time taken = X Effective hourly rate = Earnings under Halsay Scheme Time Taken Or, Effective hourly rate under Rowan Incentive plan = (Time taken Rate) + 50% Rate (Time allowed Time taken) TimeTaken Or, `140 = (X ` 120) + 50% `120 (6 X) X Or, 140X = 120X + 360 60X Or, 80X = 360 Or, X= 360 = 4.5 hours 80 Therefore, to earn effective hourly rate of `140 under Halsey Incentive Scheme worker has to complete the work in 4.5 hours Question 3 (a) ABX Company Ltd. provides the following information relating to Process-B: (i) Opening Work-in-progress - (ii) Units Introduced NIL 45,000 units @ ` 10 per unit (iii) Expenses debited to the process: Direct material - ` 65,500 Labour - ` 90,800 Overhead - ` 1,80,700 (iv) Normal loss in the process The Institute of Chartered Accountants of India - 2% of Input 52 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 (v) Work-in progress - 1800 units - 42,000 units Degree of completion Materials - 100% Labour - 50% Overhead - 40% (vi) Finished output (vii) Degree of completion of abnormal loss: Materials - 100% Labour - 80% Overhead - 60% (viii) Units scrapped as normal loss were sold at ` 5 per unit. (ix) All the units of abnormal loss were sold at ` 2 per unit. You are required to prepare: (a) Statement of equivalent production. (b) Statement showing the cost of finished goods, abnormal loss and closing balance of work-in-progress. (c) Process-B account and abnormal loss account. (10 Marks) (b) The following information related to XL Company Ltd. for the year ended 31 st March, 2013 are available to you: Equity share capital of ` 10 each ` 25 lakh 11% Bonds of ` 1000 each ` 18.5 lakh Sales ` 42 lakh Fixed cost (Excluding Interest) ` 3.48 lakh Financial leverage 1.39 Profit-Volume Ratio 25.55% Income Tax Rate Applicable 35% You are required to calculate: (i) Operating Leverage; (ii) Combined Leverage; and (iii) Earning per Share. The Institute of Chartered Accountants of India (6 Marks) PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 53 Answer (a) Statement of Equivalent Production Input Details Units Output Particulars 45,000 Finished Unit Introduced output Equivalent Production Units Material % 42,000 Labour Units Overhead % 100 42,000 Units % Units 100 42,000 100 42,000 Normal loss (2% of 45,000) 900 - - - - - - Abnormal loss 300 100 300 80 240 60 180 1,800 100 1,800 50 900 40 720 Closing W-I-P 45,000 45,000 44,100 43,140 42,900 (b) Statement of Cost Particulars Rate (`) 42,000 17.9042 Material 300 11.5873 3,476.19 Labour 240 2.1048 505.15 Overhead 180 4.2121 758.18 1,800 11.5873 20,857.14 Labour 900 2.1048 1,894.32 Overhead (i) Units 720 4.2121 3,032.71 Finished goods Amount (`) Amount (`) 7,51,976.40 (ii) Abnormal Loss 4,739.52 (iii) Closing W-I-P: Material 25,784.17 Cost per Unit Particulars (i) Direct Material : Unit Introduced Add: Material The Institute of Chartered Accountants of India Amount (`) 4,50,000 65,500 Units Per Unit (`) 54 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 5,15,500 Less: Value of normal loss (900 units `5) (4,500) 5,11,000 90,800 1,80,700 (ii) Labour (iii) Overhead 44,100 43,140 42,900 11.5873 2.1048 4.2121 17.9042 (c) Process B A/c Particulars Amount (`) 4,50,000 65,500 90,800 1,80,700 7,87,000 Units To Input To Direct Material To Labour To Overhead 45,000 45,000 Particulars By Normal loss By Abnormal loss By Finished goods By Closing W-I-P Units 900 300 42,000 1,800 45,000 Amount (`) 4,500 4,740 7,51,976 25,784 7,87,000 Abnormal Loss A/c Particulars Units To Process-B A/c 300 300 (b) Profit Volume Ratio = Amount Particulars (`) 4,740 By Cost ledger control A/c or Bank A/c By Costing Profit & loss A/c 4,740 Contribution Sales Contribution 25.55 = Contribution x 100 = 10,73,100 (i) 42,00,000 Operating Leverage = = = Contribution Contribution - Fixed Cost 10,73,100 10,73,100 - 3,48,000 10,73,100 7, 25,100 The Institute of Chartered Accountants of India 300 Amount (`) 600 300 4,140 4,740 Units PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 55 = 1.48 (ii) Combined Leverage = Operating Leverage x Financial Leverage = 1.48 x 1.39 = 2.06 (iii) Earnings per Share (EPS) Number of Equity Shares = 2,50,000 Earnings before Tax (EBT) = Sales Variable Cost Fixed Cost Interest = 42,00,000 31,26,900 3,48,000 2,03,500 EBT = 5,21,600 Profit after Tax (PAT) = EBT Tax = 5,21,600 1,82,560 = 3,39,040 3,39,040 EPS = EPS = 1.36 2,50,000 = 1.3561 Question 4 (a) A company manufactures one main product (M1) and two by-products B1 and B2. For the month of January 2013, following details are available: Total Cost upto separation Point ` 2,12,400 M1 B1 B2 Cost after separation - ` 35,000 ` 24,000 No. of units produced 4,000 1,800 3,000 Selling price per unit ` 100 ` 40 ` 30 - 20% 30% 20% 15% 15% Estimated net profit as percentage to sales value Estimated selling expenses as percentage to sales value There are no beginning or closing inventories. Prepare statement showing: (i) Allocation of joint cost; and (ii) Product-wise and overall profitability of the company for January 2013. (8 Marks) (b) The following information is provided by the DPS Limited for the year ending 31st March, 2013. The Institute of Chartered Accountants of India 56 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 Raw material storage period 55 days Work-in-progress conversion period 18 days Finished Goods storage period 22 days Debt collection period 45 days Creditors payment period Annual Operating cost 60 days ` 21,00,000 (Including depreciation of ` 2,10,000) [1 year = 360 days] You are required to calculate: (i) Operating Cycle period. (ii) Number of Operating Cycle in a year. (iii) Amount of working capital required for the company on a cash cost basis. (iv) The company is a market leader in its product, there is virtually no competitor in the market. Based on a market research it is planning to discontinue sales on credit and deliver products based on pre-payments. Thereby, it can reduce its working capital requirement substantially. What would be the reduction in working capital requirement due to such decision? (8 Marks) Answer (a) (i) Statement showing allocation of Joint Cost Particulars No. of units Produced Selling Price Per unit (`) Sales Value (`) Less:Estimated Profit (B1 -20% & B2 -30%) Cost of Sales Less: Estimated Selling Expenses (B1 -15% & B2 15%) Cost of Production Less:Cost after separation Joint Cost allocated The Institute of Chartered Accountants of India B1 B2 1,800 3,000 40 30 72,000 90,000 (14,400) (27,000) 57,600 63,000 (10,800) (13,500) 46,800 49,500 (35,000) (24,000) 11,800 25,500 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT (ii) 57 Statement of Profitability Particulars M1 (`) B2 (`) 4,00,000 72,000 90,000 11,800 25,500 - 35,000 24,000 80,000 10,800 13,500 (B) 2,55,100 57,600 63,000 (A B) Sales Value B1 (`) 1,44,900 14,400 27,000 (A) (4,000x `100) Less:- Joint Cost 1,75,100 (2,12,400 -11,800 25,500) - Cost after separation - Selling Expenses (M1- 20%, B1-15% & B2-15%) Profit Overall Profit = 1,44,900 + 14,400 + 27,000 = ` 1,86,300 (b) (i) Calculation of Operating Cycle Period Operating Cycle Period = R + W + F + D C = 55 + 18 + 22 + 45 60 = 80 days (ii) Number of Operating Cycle in a Year = = 360 Operating Cycle Period 360 80 = 4.5 (iii) Amount of Working Capital Required = = Annual Operating Cost Number of Operating Cycle 18,90,000 4.5 = 4,20,000 (iv) Reduction in Working Capital Operating Cycle Period = R + W + F C = 55 + 18 + 22 60 = 35 The Institute of Chartered Accountants of India 58 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 Amount of Working Capital Required = 18,90,000 35 360 = 1,83,750 Reduction in Working Capital = 4,20,000 1,83,750 = 2,36,250 Question 5 (a) Cost of a product or service is required to be expressed in suitable cost unit. State the cost units for the following industries: (i) Steel (ii) Automobile (iii) Transport (iv) Power (b) Distinguish between cost allocation and cost absorption. (c) What is debt securitization? And also state its advantages. (d) Distinguish between factoring and bill-discounting. (4x4=16 Marks) Answer (a) Industry Cost Unit (i) Steel Tonne (ii) Automobile Numbers (iii) Transport (iv) Power (b) Passenger Kilo-meter/ Tonne Kilo-meter Kilo-watt hour (Kwh) Distinguish between Cost allocation and Cost absorption: Cost allocation is the allotment of whole item of cost to a cost centre or a cost unit. In other words, it is the process of identifying, assigning or allowing cost to a cost centre or a cost unit. Cost absorption is the process of absorbing all indirect costs or overhead costs allocated or apportioned over particular cost centre or production department by the units produced. The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 59 (c) Debt Securitisation and its Advantages Debt securitisation is a method of recycling of funds and is especially beneficial to financial intermediaries to support lending volumes. Under debt securitisation a group of illiquid assets say a mortgage or any asset that yields stable and regular cash flows like bank loans, consumer finance, and credit card payment are pooled together and sold to intermediary. The intermediary then issues debt securities. The advantages of debt securitisation to the originator are the following: (i) The asset is shifted off the Balance Sheet, thus giving the originator recourse to off balance sheet funding. (ii) It converts illiquid assets to liquid portfolio. (iii) It facilitates better balance sheet management; assets are transferred off balance sheet facilitating satisfaction of capital adequacy norms. (iv) The originator s credit rating enhances. (Note: Students may answer any two of the above advantages) (d) Differentiation between Factoring and Bills Discounting The differences between Factoring and Bills discounting are: (i) Factoring is called as Invoice Factoring whereas Bills discounting is known as Invoice discounting. (ii) In Factoring, the parties are known as the client, factor and debtor whereas in Bills discounting, they are known as drawer, drawee and payee. (iii) Factoring is a sort of management of book debts whereas bills discounting is a sort of borrowing from commercial banks. (iv) For factoring there is no specific Act, whereas in the case of bills discounting, the Negotiable Instruments Act is applicable. Question 6 (a) Pentax Limited has prepared its expense budget for 20,000 units in its factory for the year 2013 as detailed below: ` per unit Direct Materials 50 Direct Labour 20 Variable Overhead 15 Direct Expenses Selling Expenses (20% fixed) The Institute of Chartered Accountants of India 6 15 60 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 Factory Expenses (100% fixed) 7 Administration expenses (100% fixed) 4 Distribution expenses (85% variable) 12 Total ` 129 Prepare an expense budget for the production of 15,000 units and 18,000 units. (7 Marks) (b) PQR Company Ltd. Is considering to select a machine out of two mutually exclusive machines. The company s cost of capital is 12 per cent and corporate tax rate is 30 per cent. Other information relating to both machines is as follows: Machine I ` 15,00,000 Cost of Machine Machine II ` 20,00,000 Expected Life 5 Yrs. 5 Yrs. Annual Income (Before Tax and Depreciation) ` 6,25,000 ` 8,75,000 Depreciation is to be charged on straight line basis: You are required to calculate: (i) Discounted Pay Back Period (ii) Net Present Value (iii) Profitability Index The present value factors of ` 1 @ 12% are as follows: Year 01 02 03 04 05 PV factor @ 12% 0.893 0.797 0.712 0.636 0.567 (9 Marks) Answer Expense Budget of M/s Pentax Ltd. (a) Particulars Direct Material Direct Labour Variable Overhead Direct Expenses The Institute of Chartered Accountants of India 20,000 Units (`) 15,000 Units (`) 10,00,000 (20,000 x 50) 4,00,000 (20,000 x 20) 3,00,000 (20,000 x 15) 1,20,000 (20,000 x 6) 7,50,000 (15,000 x 50) 3,00,000 (15,000 x 20) 2,25,000 (15,000 x 15) 90,000 (15,000 x 6) 18,000 Units (`) 9,00,000 (18,000 x 50) 3,60,000 (18,000 x 20) 2,70,000 18,000 x 15) 1,08,000 18,000 x 6) PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Selling Expenses (Variable)* Selling Expenses (Fixed)* Factory Expenses (Fixed) Administration Expenses (Fixed) Distribution Expenses (Variable)** 2,40,000 1,80,000 (20,000 x 12) (15,000 x 12) 60,000 60,000 (3 x 20,000) 1,40,000 1,40,000 (7 x 20,000) 80,000 80,000 (4 x 20,000) 2,04,000 1,53,000 (10.20 x 20,000) (10.20 x 15,000) Distribution Expenses (Fixed)** 61 2,16,000 (18,000 x 12) 60,000 1,40,000 80,000 36,000 20,14,000 36,000 (1.80 x 20,000) 25,80,000 1,83,600 (10.20 x 18,000) 36,000 23,53,600 *Selling Expenses: Fixed cost per unit = `15 x 20% = `3 Fixed Cost = `3 x 20,000 units = `60,000 Variable Cost Per unit = `15 `3 = `12 **Distribution Expenses: Fixed cost per unit = `12 x 15% = `1.80 Fixed Cost = `1.80 x 20,000 units = `36,000 Variable cost per unit = `12 `1.80 = `10.20 (b) Working Notes: Depreciation on Machine I = Depreciation on Machine II = 15,00,000 5 = ` 3,00,000 20,00,000 = ` 4,00,000 5 Particulars Machine-I (`) Machine II (`) Annual Income (before Tax and Depreciation) 6,25,000 8,75,000 Less: Depreciation 3,00,000 4,00,000 Annual Income (before Tax) 3,25,000 4,75,000 97,500 1,42,500 Annual Income (after Tax) 2,27,500 3,32,500 Add: Depreciation 3,00,000 4,00,000 Annual Cash Inflows 5,27,500 7,32,500 Less: Tax @ 30% The Institute of Chartered Accountants of India 62 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 Machine I Year PV of Re 1 @ 12% Cash flow Machine - II PV Cumulative PV Cash flow PV Cumulative PV 1 0.893 5,27,500 4,71,058 4,71,058 7,32,500 6,54,123 6,54,123 2 0.797 5,27,500 4,20,418 8,91,476 7,32,500 5,83,803 12,37,926 3 4 0.712 5,27,500 3,75,580 0.636 5,27,500 3,35,490 12,67,056 7,32,500 5,21,540 16,02,546 7,32,500 4,65,870 17,59,466 22,25,336 5 0.567 5,27,500 2,99,093 19,01,639 7,32,500 4,15,328 26,40,664 (i) Discounted Payback Period Machine I Discounted Payback Period = 3 + =3+ (15,00,000 12,67,056) 3,35,490 2,32,944 3,35,490 = 3 + 0.6943 = 3.69 years or 3 years 8.28 months Machine II Discounted Payback Period = 3+ =3+ (20,00,000 17,59,466) 4,65,870 2,40,534 4,65,870 = 3 + 0.5163 = 3.52 years or 3 years 6.24 months (ii) Net Present Value (NPV) Machine I NPV = 19,01,639 -15,00,000 = ` 4,01,639 Machine II NPV = 26,40,664 20,00,000 = ` 6,40,664 The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 63 (iii) Profitability Index Machine I Profitability Index = 19,01,639 = 1.268 15,00,000 Machine II Profitability Index = 26,40,664 = 1.320 20,00,000 Conclusion: Method Machine - I Machine - II Rank Discounted Payback Period 3.69 years 3.52 years II Net Present Value `4,01,639 `6,40,664 II 1.268 1.320 II Profitability Index Question 7 Answer any four of the following: (4x4=16 Marks) (a) Perpetual inventory system comprises Bin Card and Stores Ledger, but the efficacy of the system depends on continuous stock taking. Comment. (b) Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting system? (c) Operating risk is associated with cost structure, whereas financial risk is associated with capital structure of a business concern. Critically examine this statement. (d) What is venture capital financing? State the factors which are to be considered in financing any risky project. (e) State the advantage of Electronic Cash Management System. Answer (a) Perpetual Inventory system represents a system of records maintained by the stores department. Records comprise of (i) Bin Cards and (ii) Stores Ledger. Bin Card maintains a quantitative record of receipts, issues and closing balances of each item of stores. Like a bin card, the Stores Ledger is maintained to record all receipt and issue transactions in respect of materials. It is filled up with the help of goods received note and material requisitions. But a perpetual inventory system s efficacy depends on the system of continuous stock taking. Continuous stock taking means the physical checking of the records i.e. Bin cards and store ledger with actual physical stock. Perpetual inventory is essentially necessary for material control. It incidentally helps continuous stock taking. The Institute of Chartered Accountants of India 64 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 The main advantages of continuous stock taking are as follows: (1) Physical stocks can be counted and book balances adjusted as and when desired without waiting for the entire stock-taking to be done. (2) Quick compilation of Profit and Loss Accounts (for interim period) due to prompt availability of stock figures. (3) Discrepancies are easily located and thus corrective action can be promptly taken to avoid their recurrence. (4) A systematic review of the perpetual inventory reveals the existence of surplus, dormant, obsolete and slow-moving materials, so that remedial measures may be taken in time. (5) Fixation of the various levels and check of actual balances in hand with these levels assist the Storekeeper in maintaining stocks within limits and in initiating purchase requisitions for correct quantity at the proper time. (b) In integrated accounting system cost and financial accounts are kept in the same set of books. Such a system will have to afford full information required for Costing as well as for Financial Accounts. In other words, information and data should be recorded in such a way so as to enable the firm to ascertain the cost (together with the necessary analysis) of each product, job, process, operation or any other identifiable activity. It also ensures the ascertainment of marginal cost, variances, abnormal losses and gains. In fact all information that management requires from a system of Costing for doing its work properly is made available. The integrated accounts give full information in such a manner so that the profit and loss account and the balance sheet can be prepared according to the requirements of law and the management maintains full control over the liabilities and assets of its business. Since, only one set of books are kept for both cost accounting and financial accounting purpose so there is no necessity of reconciliation of cost and financial accounts. (c) Operating risk is associated with cost structure whereas financial risk is associated with capital structure of a business concern . Operating risk refers to the risk associated with the firm s operations. It is represented by the variability of earnings before interest and tax (EBIT). The variability in turn is influenced by revenues and expenses, which are affected by demand of firm s products, variations in prices and proportion of fixed cost in total cost. If there is no fixed cost, there would be no operating risk. Whereas financial risk refers to the additional risk placed on firm s shareholders as a result of debt and preference shares used in the capital structure of the concern. Companies that issue more debt instruments would have higher financial risk than companies financed mostly by equity. The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 65 (d) Venture Capital Financing and Factors to be considered in financing any Risky Project Under venture capital financing, venture capitalist makes investment to purchase debt or equity from inexperienced entrepreneurs who undertake highly risky ventures with potential of success. The factors to be considered in financing any risky project are: (i) Quality of the management team is a very important factor to be considered. They are required to show a high level of commitment to the project. (ii) The technical ability of the team is also vital. They should be able to develop and produce a new product / service. (iii) Technical feasibility of the new product / service should be considered. (iv) Since the risk involved in investing in the company is quite high, venture capitalists should ensure that the prospects for future profits compensate for the risk. (v) A research must be carried out to ensure that there is a market for the new product. (vi) The venture capitalist himself should have the capacity to bear risk or loss, if the project fails. (vii) The venture capitalist should try to establish a number of exit routes. (viii) In case of companies, venture capitalist can seek for a place on the Board of Directors to have a say on all significant matters affecting the business. (Note: Students may answer any two of the above factors) (e) Advantages of Electronic Cash Management System (i) Significant saving in time. (ii) Decrease in interest costs. (iii) Less paper work. (iv) Greater accounting accuracy. (v) More control over time and funds. (vi) Supports electronic payments. (vii) Faster transfer of funds from one location to another, where required. (viii) Speedy conversion of various instruments into cash. (ix) Making available funds wherever required, whenever required. (x) Reduction in the amount of idle float to the maximum possible extent. The Institute of Chartered Accountants of India 66 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013 (xi) Ensures no idle funds are placed at any place in the organization. (xii) It makes inter-bank balancing of funds much easier. (xiii) It is a true form of centralised Cash Management . (xiv) Produces faster electronic reconciliation. (xv) Allows for detection of book-keeping errors. (xvi) Reduces the number of cheques issued. (xvii) Earns interest income or reduce interest expense. (Note: Students may answer any four of the above advantages). The Institute of Chartered Accountants of India

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