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CA IPCC : Question Paper (with Answers) - COST ACCOUNTING & FINANCIAL MANAGEMENT May 2014

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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 answers. Question 1 (a) SHA Limited provides the following trading results: Year Sale Profit 2012-13 ` 25,00,000 ` 20,00,000 10% of Sale 2013-14 8% of Sale You are required to calculate: (i) Fixed Cost (ii) Break Even Point (iii) Amount of profit, if sale is ` 30,00,000 (iv) Sale, when desired profit is ` 4,75,000 (v) Margin of Safety at a profit of ` 2,70,000 (b) A manufacturing company has disclosed net loss of ` 48,700 as per their cost accounting records for the year ended 31st March, 2014. However their financial accounting records disclosed net profit of ` 35,400 for the same period. A scrutiny of data of both the sets of books of accounts revealed the following informations: ` (i) Factory overheads under absorbed 30,500 (ii) Administrative overheads over absorbed 65,000 (iii) Depreciation charged in financial accounts 2,25,000 (iv) Depreciation charged in cost accounts 2,70,000 (v) Income-tax provision 52,400 (vi) Transfer fee (credited in financial accounts) 10,200 (vii) Obsolescence loss charged in financial accounts 20,700 (viii) Notional rent of own premises charged in cost accounts 54,000 (ix) Value of opening stock: (a) in cost accounts 1,38,000 (b) in financial accounts 1,15,000 The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT (x) 49 Value of closing stock: (a) in cost accounts 1,22,000 (b) in financial accounts 1,12,500 Prepare a Memorandum Reconciliation Account by taking costing loss as base. (c) NOOR Limited provides the following information for the year ending 31st March, 2014: Equity Share Capital Closing Stock `25,00,000 `6,00,000 Stock Turnover Ratio 5 times Gross Profit Ratio 25% Net Profit / Sale 20% Net Profit / Capital 1 4 You are required to prepare: Trading and Profit & Loss Account for the year ending 31st March, 2014. (d) The following details are provided by the GPS Limited : ` Equity Share Capital 12% Preference Share Capital 15% Redeemable Debentures 10% Convertible Debentures 65,00,000 12,00,000 20,00,000 8,00,000 The cost of equity capital for the company is 16.30% and Income Tax rate for the company is 30%. You are required to calculate the Weighted Average Cost of Capital (WACC) of the company. (4 5 = 20 Marks) Answer (a) Workings: Profit in year 2012-13 = ` 25,00,000 10% = ` 2,50,000 Profit in year 2013-14 = ` 20,00,000 8% = ` 1,60,000 So, P/V Ratio = Change inPr ofit 100 Change inSales The Institute of Chartered Accountants of India 50 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 = = (i) Fixed Cost ` 2,50,000 ` 1,60,000 100 ` 25,00,000 ` 20,00,000 ` 90,000 100 = 18% ` 5,00,000 = Contribution (in year 2012-13) Profit (in year 2012-13) = (Sales P/V Ratio) ` 2,50,000 = (` 25,00,000 18%) ` 2,50,000 = ` 4,50,000 ` 2,50,000 = ` 2,00,000 (ii) Break-even Point (in Sales) = = (iii) FixedCost P / V Ratio ` 2,00,000 = ` 11,11,111 (Approx) 18% Calculation of profit, if sale is ` 30,00,000 Profit = Contribution Fixed Cost = (Sales P/V Ratio) Fixed Cost = (` 30,00,000 18%) - ` 2,00,000 = ` 5,40,000 ` 2,00,000 = ` 3,40,000 So profit is ` 3,40,000, if Sale is ` 30,00,000. (iv) Calculation of Sale, when desired Profit is ` 4,75,000 Contribution Required = Desired Profit + Fixed Cost = ` 4,75,000 + ` 2,00,000 = ` 6,75,000 Sales = Contribution P / V Ratio = ` 6,75,000 = ` 37,50,000 18% Sales is ` 37,50,000 when desired profit is ` 4,75,000. Margin of Safety = Pr ofit P / V Ratio = (v) ` 2,70,000 = ` 15,00,000 18% So Margin of Safety is ` 15,00,000 at a profit of ` 2,70,000 The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT (b) 51 Memorandum Reconciliation Accounts Dr. Cr. Particulars Amount (`) Particulars Amount (`) To Net Loss as per Cost Accounts 48,700 By Administration overheads over recovered in Cost Accounts 65,000 To Factory overheads under absorbed in Cost Accounts 30,500 By Depreciation overcharged in Cost Accounts (` 2,70,000 ` 2,25,000) 45,000 To Provision for Income tax 52,400 By 10,200 20,700 9,500 By By Transfer fees in Financial Accounts Notional Rent of own premises Overvaluation of Opening stock in Cost Accounts* To To Obsolescence loss Overvaluation of closing stock in Cost Accounts** To Net Profit (as per Financial Accounts) 35,400 1,97,200 1,97,200 * Overvaluation of Opening Stock as per Cost Accounts = Value in Cost Accounts Value in Financial Accounts = ` 1,38,000 ` 1,15,000 = ` 23,000. ** Overvaluation of Closing Stock as per Cost Accounts = Value in Cost Accounts Value in Financial Accounts = ` 1,22,000 ` 1,12,500 = ` 9,500. (c) Working Notes: (i) Net Profit Capital Net Profit 25,00,000 Net Profit (ii) Net Profit Sale Sale = 1 4 = 1 4 = 6,25,000 = 20% = 54,000 23,000 6,25,000 0.20 The Institute of Chartered Accountants of India = 31,25,000 52 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 (iii) Gross Profit Ratio = 25 Sales = = (iv) Stock Turnover 31,25,000 = Average Stock 100 7,81,250 COGS Average Stock 31,25,000 - 7,81,250 Average Stock = = (v) Average Stock = 5 4,68,750 Closing Stock + Opening Stock = Opening Stock 23,43,750 = 4,68,750 100 31,25,000 25 = 5 100 Gross Profit = Gross Profit Gross Profit 2 6,00,000 + Opening Stock 2 9,37,500 6,00,000 = 3,37,500 Trading A/c for the year ending 31st March, 2014 To Opening Stock To Purchases (Balancing figure) To Gross Profit c/f to P&L A/c ` 3,37,500 By Sales 26,06,250 By Closing Stock 7,81,250 37,25,000 ` 31,25,000 6,00,000 37,25,000 Profit & Loss A/c for the year ending 31st March, 2014 ` ` To Miscellaneous Expenses (balancing figure) 1,56,250 By Gross Profit b/f from Trading A/c To Net Profit 6,25,000 - 7,81,250 7,81,250 The Institute of Chartered Accountants of India 7,81,250 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 53 (d) Calculation of Weighted Average Cost of Capital (WACC) Source Amount (`) Weight Equity Capital 12% Preference Capital 15% Redeemable Debentures 10% Convertible Debentures Total 65,00,000 12,00,000 20,00,000 8,00,000 1,05,00,000 Cost of Capital WACC after tax 0.163 0.1009 0.120 0.0137 0.105* 0.020 0.07** 0.0053 0.1399 0.619 0.114 0.190 0.076 1.0000 * Cost of Debentures (after tax) = 15 (1 0.30) = 10.5% = 0.105 ** Cost of Debentures (after tax) = 10 (1 0.30) = 7% = 0.07 Weighted Average Cost of Capital = 0.1399 = 13.99% (Note: In the above solution, the Cost of Debentures has been computed in the above manner without considering the impact of special features i.e. redeemability and convertibility in absence of requisite information.) Question 2 (a) A company manufactures a product from a raw material, which is purchased at ` 80 per kg. The company incurs a handling cost of ` 370 plus freight of ` 380 per order. The incremental carrying cost of inventory of raw material is ` 0.25 per kg per month. In addition, the cost of working capital finance on the investment in inventory of raw material is ` 12 per kg per annum. The annual production of the product is 1,00,000 units and 2.5 units are obtained from one kg. of raw material. Required: (i) Calculate the economic order quantity of raw materials. (ii) Advise, how frequently company should order for procurement be placed. (iii) If the company proposes to rationalize placement of orders on quarterly basis, what percentage of discount in the price of raw materials should be negotiated? Assume 360 days in a year. (8 Marks) (b) A company had the following Balance Sheet as on 31st March, 2014: Liabilities Equity Share Capital (50 lakhs shares of ` 10 each) Reserves and Surplus 15% Debentures Current Liabilities The Institute of Chartered Accountants of India ` (In crores) Assets (` In crores) 5 1 10 4 20 Fixed Assets (Net) Current Assets 12.5 7.5 20 54 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 The additional information given is as under: Fixed cost per annum (excluding interest) ` 4 crores Variable operating cost ratio 65% Total assets turnover ratio 2.5 Income Tax rate 30% Required: Calculate the following and comment: (i) Earnings Per Share (ii) Operating Leverage (iii) Financial Leverage (iv) Combined Leverage (8 Marks) Answer (a) (i) Calculation of Economic Order Quantity (E.O.Q) Annual requirement (usage) of raw material in kg. (A) = Ordering Cost (Handling & freight cost) (O) 1,00,000units = 40,000kg. 2.5unitsper kg. = ` 370 + ` 380 = ` 750 Carrying cost per unit per annum (C) i.e. inventory carrying cost + working capital cost = (`0.25 12 months) + ` 12 = `15 per kg. E.O.Q. = 2AO C = 2 40,000kg. ` 750 = 2,000 kg. `15 (ii) Frequency of placing orders for procurement: Annual consumption (A) = 40,000 kg. Quantity per order (E.O.Q) = 2,000 kg. No. of orders per annum ( 40,000kg. A ) = 2,000kg. E.O.Q Frequency of placing orders (in days) = The Institute of Chartered Accountants of India 360days 20orders = 20 orders = 18 days PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 55 (iii) Percentage of discount in the price of raw materials to be negotiated: Particulars 1. 2. 3. 4. On Quarterly Basis On E.O.Q Basis 40,000 kg. 10,000 kg. 4 ` 3,000 40,000 kg. 2,000 kg. 20 ` 15,000 (4 order ` 750) Annual Usage (in Kg.) Size of the order No. of orders (1 2) Cost of placing orders or Ordering cost (20 orders ` 750) (No. of orders Cost per order) 5. Inventory carrying cost ` 75,000 ` 15,000 (Average inventory Carrying cost per unit) (10,000 kg. ` 15) (2,000 kg. ` 15) ` 78,000 ` 30,000 6. Total Cost (4 + 5) When order is placed on quarterly basis the ordering cost and carrying cost increased by ` 48,000 (`78,000 - `30,000). So, discount required = ` 48,000 Total annual purchase = 40,000 kg. ` 80 = ` 32,00,000 So, Percentage of discount to be negotiated = (b) Total Assets ` 48,000 100 = 1.5% ` 32,00,000 = ` 20 crores Total Asset Turnover Ratio = 2.5 Hence, Total Sales = 20 2.5 = ` 50 crores Computation of Profit after Tax (PAT) (` in crores) Sales 50.00 Less: Variable Operating Cost @ 65% 32.50 Contribution 17.50 Less: Fixed Cost (other than Interest) EBIT Less: Interest on Debentures (15% 10) PBT 4.00 13.50 1.50 12.00 Less: Tax @ 30% 3.60 PAT 8.40 The Institute of Chartered Accountants of India 56 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 (i) Earnings per Share EPS = = 8.40 crores Number of Equity Shares 8.40 crores = ` 16.80 50,00,000 It indicates the amount the company earns per share. Investors use this as a guide while valuing the share and making investment decisions. It is also a indicator used in comparing firms within an industry or industry segment. (ii) Operating Leverage Operating Leverage = = Contribution EBIT 17.50 13.50 = 1.296 It indicates the choice of technology and fixed cost in cost structure. It is level specific. When firm operates beyond operating break-even level, then operating leverage is low. It indicates sensitivity of earnings before interest and tax (EBIT) to change in sales at a particular level. (iii) Financial Leverage EBIT Financial Leverage = PBT 13.50 = 12.00 = 1.125 The financial leverage is very comfortable since the debt service obligation is small vis- -vis EBIT. (iv) Combined Leverage Combined Leverage = Or, Contribution EBIT EBIT PBT = Operating Leverage Financial Leverage = 1.296 1.125 = 1.458 The combined leverage studies the choice of fixed cost in cost structure and choice of debt in capital structure. It studies how sensitive the change in EPS is vis- -vis The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 57 change in sales. The leverages operating, financial and combined are measures of risk. Question 3 (a) M J Pvt. Ltd. produces a product "SKY" which passes through two processes, viz. Process-A and Process-B. The details for the year ending 31st March, 2014 are as follows: Process A 40,000 Units introduced at a cost of Material Consumed Direct Wages Manufacturing Expenses Output in Units Normal Wastage of Input Scrap Value (per unit) Selling Price (per unit) Process - B ` 3,60,000 ` 2,42,000 ` 2,58,000 ` 1,96,000 2,25,000 1,90,000 1,23,720 37,000 27,000 5% 10% ` 15 ` 37 20 61 Additional Information: (a) 80% of the output of Process-A, was passed on to the next process and the balance was sold. The entire output of Process- B was sold. (b) Indirect expenses for the year was ` 4,48,080. (c) It is assumed that Process-A and Process-B are not responsibility centre. Required: (i) Prepare Process-A and Process-B Account. (ii) Prepare Profit & Loss Account showing the net profit I net loss for the year. (8 Marks) (b) FH Hospital is considering to purchase a CT-Scan machine. Presently the hospital is outsourcing the CT -Scan Machine and is earning commission of `15,000 per month (net of tax). The following details are given regarding the machine: ` Cost of CT -Scan machine 15,00,000 Operating cost per annum (excluding Depreciation) 2,25,000 Expected revenue per annum 7,90,000 Salvage value of the machine (after 5 years) 3,00,000 Expected life of the machine The Institute of Chartered Accountants of India 5 years 58 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Assuming tax rate @ 30%, whether it would be profitable for the hospital to purchase the machine? Give your recommendation under: (i) Net Present Value Method, and (ii) Profitability Index Method. PV factors at 12% are given below: Year 1 2 3 4 5 PV factor 0.893 0.797 0.712 0.636 0.567 (8 Marks) Answer (a) (i) Process- A Account Particulars Units Amount (`) Particulars To Input 40,000 3,60,000 By Normal wastage Units Amount (`) 2,000 30,000 1,000 27,000 29,600 7,99,200 7,400 1,99,800 (2,000 units ` 15) To Material --- 2,42,000 By Abnormal loss A/c (1,000 units ` 27) To Direct wages --- 2,58,000 By Process- B To Manufacturing Exp. --- 1,96,000 By Profit & Loss A/c (29,600 units ` 27) (7,400 units ` 27) 40,000 10,56,000 40,000 10,56,000 ` 10,56,000 ` 30,000 = ` 27 per unit 40,000units 2,000units Cost per unit = Normal wastage = 40,000 units 5% = 2,000 units Abnormal loss = 40,000 units (37,000 units + 2,000 units) = 1,000 units Transfer to Process- B = 37,000 units 80% = 29,600 units Sale = 37,000 units 20% = 7,400 units Process- B Account Particulars Units To Process- A A/c 29,600 Amount (`) Particulars 7,99,200 By Normal wastage (2,960 units ` 20) The Institute of Chartered Accountants of India Units 2,960 Amount (`) 59,200 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT To Material --- 2,25,000 By Profit & Loss A/c 59 27,000 12,96,000 (27,000 units ` 48) To Direct Wages To Manufacturing Exp. To Abnormal Gain A/c ----360 1,90,000 1,23,720 17,280 29,960 13,55,200 (360 units ` 48) Cost per unit = 29,960 13,55,200 `13,37,920 `59,200 = ` 48 per unit 29,600units 2,960units Normal wastage = 29,600 units 10% = 2,960 units Abnormal gain = (27,000 units + 2,960 units) 29,600 units = 360 units (ii) Profit & Loss Account Particulars Amount (`) Particulars To Process- A A/c To Process- B A/c Amount (`) 1,99,800 By Sales: 12,96,000 - Process-A 2,73,800 (7,400 units ` 37) To Abnormal loss A/c 12,000 - Process- B 16,47,000 (27,000 units ` 61) To Indirect Expenses 4,48,080 By Abnormal gain By Net loss 19,55,880 10,080 25,000 19,55,880 Working Notes: Normal wastage (Loss) Account Particulars Units Amount (`) Particulars Units Amount (`) To ProcessA A/c To ProcessB A/c 2,000 30,000 By Abnormal Gain A/c 360 7,200 2,960 (360 units ` 20) 59,200 By Bank (Sales) 4,600 82,000 4,960 89,200 4,960 89,200 Abnormal Loss Account Particulars To ProcessA A/c Units 1,000 Amount (`) Particulars 27,000 By Bank A/c The Institute of Chartered Accountants of India (1,000 units ` 15) Units 1,000 Amount (`) 15,000 60 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 By Profit & Loss A/c 1,000 27,000 --1,000 12,000 27,000 Abnormal Gain Account Particulars Units To Normal loss A/c Amount (`) 360 Particulars Units Amount (`) 7,200 By Process- B A/c 360 17,280 360 17,280 (360 units ` 20) To Profit & Loss A/c 10,080 360 17,280 (b) Advise to the Hospital Management Determination of Cash inflows Sales Revenue Less: Operating Cost ` 7,90,000 2,25,000 5,65,000 2,40,000 3,25,000 97,500 2,27,500 2,40,000 4,67,500 1,80,000 2,87,500 Less: Depreciation (15,00,000 3,00,000)/5 Net Income Tax @ 30% Earnings after Tax (EAT) Add: Depreciation Cash inflow after tax per annum Less: Loss of Commission Income Net Cash inflow after tax per annum In 5th Year : New Cash inflow after tax Add: Salvage Value of Machine Net Cash inflow in year 5 2,87,500 3,00,000 5,87,500 Calculation of Net Present Value (NPV) Year CFAT PV Factor @10% Present Value of Cash inflows 1 to 4 2,87,500 3.038 8,73,425.00 5 5,87,500 0.567 3,33,112.50 12,06,537.50 Less: Cash Outflows 15,00,000.00 NPV The Institute of Chartered Accountants of India (2,93,462.50) PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Profitability Index = Sum of discounted cash inflows Present value of cash outflows = 12,06,537.50 15,00,000 61 = 0.804 Advise: Since the net present value is negative and profitability index is also less than 1, therefore, the hospital should not purchase the CT-Scan machine. Question 4 (a) XYZ Co. Ltd. provides the following information: Standard 4,000 Units 20 ` 40,000 ` 12,000 Production Working Days Fixed Overhead Variable Overhead Actual 3,800 Units 21 ` 39,000 ` 12,000 You are required to calculate following overhead variances: (a) Variable Overhead Variance (b) Fixed Overhead Variances (i) Expenditure Variance (ii) Volume Variance (8 Marks) (b) The Balance Sheets of Z Ltd. as on 31st March, 2013 and 31st March, 2014 are as under: Liabilities Proposed Dividend 2014 ` Equity share capital 12% Redeemable pref. share cap. General Reserve Profit & Loss A/c Creditors Outstanding Expenses Provision for Tax 2013 ` Assets 2013 ` 2014 ` 15,00,000 20,00,000 Goodwill 5,75,000 4,50,000 7,50,000 5,00,000 Land 8,50,000 & 10,00,000 Building 2,00,000 3,50,000 Plant 4,00,000 10,00,000 1,50,000 2,40,000 Debtors 8,00,000 12,60,000 2,75,000 4,15,000 Stock 4,85,000 4,35,000 1,00,000 80,000 Marketable 75,000 50,000 Securities 2,00,000 2,50,000 Cash 50,000 40,000 and Bank 2,10,000 2,50,000 33,85,000 40,85,000 33,85,000 40,85,000 Additional Information: (i) Depreciation charged on Plant and Land & Buildings during the year was ` 50,000 and ` 1,00,000 respectively. The Institute of Chartered Accountants of India 62 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 (ii) Income-Tax ` 1,75,000 was paid during the year 2013-14. (iii) An Interim Dividend of ` 1,00,000 has been paid in 2013-14. Prepare Cash Flow Statement. (8 Marks) Answer (a) Workings: Standard Variable Overhead rate per unit = Standard Fixed Overhead rate per unit = ` 12,000 =`3 4,000units ` 40,000 = ` 10 4,000units (a) Variable Overhead Variance = Recovered Variable Overhead - Actual Variable overhead = 3,800 units ` 3 ` 12,000 = ` 11,400 `12,000 = ` 600 (Adverse) (b) (i) Fixed Overhead Expenditure Variance = Budgeted Overhead Actual Overhead = ` 40,000 ` 39,000 = ` 1,000 (Favourable) (ii) Fixed Overhead Volume Variance = Recovered Overhead Budgeted Overhead = 3,800 units ` 10 ` 40,000 = ` 38,000 ` 40,000 = ` 2,000 (Adverse) (b) Cash Flow Statement for the year ending 31st March, 2014 ` A. Cash flow from Operating Activities Profit and Loss A/c as on 31.3.2014 Less: Profit and Loss A/c as on 31.3.2013 Add: Transfer to General Reserve Provision for Tax Interim Dividend paid during the year Proposed Dividend Profit before Tax Adjustment for Depreciation: Land and Building The Institute of Chartered Accountants of India ` 2,40,000 (1,50,000) 90,000 1,50,000 2,25,000 1,00,000 2,50,000 1,00,000 7,25,000 8,15,000 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Plant and Machinery 50,000 Goodwill written off Operating Profit before Working Capital Changes Adjustment for Working Capital Changes: Decrease in Outstanding Expenses (20,000) Decrease in Stock 50,000 Increase in Debtors (4,60,000) Increase in Creditors 1,40,000 Cash generated from Operations Income tax paid Net Cash Inflow from Operating Activities (a) B. Cash flow from Investing Activities Proceeds from Sale of Building Purchase of Plant and Machinery Net Cash Outflow from Investing Activities (b) C. Cash Flow from Financing Activities Proceeds from Issuance of Share Capital Redemption of Preference Shares Interim Dividend Paid Final Dividend Paid Net Cash Outflow from Financing Activities (c) Net increase in Cash and Cash Equivalents during the year (a+b+c) Cash and Cash Equivalents at the beginning of the year (Cash and Bank and Marketable Securities) Cash and Cash Equivalents at the end of the year 63 1,50,000 1,25,000 10,90,000 (2,90,000) 8,00,000 (1,75,000) 6,25,000 50,000 (6,50,000) (6,00,000) 5,00,000 (2,50,000) (1,00,000) (2,10,000) (60,000) (35,000) 1,25,000 90,000 Working Notes: 1. Provision for the Tax Account ` ` To Bank (paid) 1,75,000 By Balance b/d 2,00,000 To Balance c/d 2,50,000 By Profit and Loss a/c 2,25,000 4,25,000 2. 4,25,000 Plant and Machinery Account ` To Balance b/d The Institute of Chartered Accountants of India 4,00,000 By ` Depreciation 50,000 64 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Bank a/c (Purchases) (Balancing figure) To 6,50,000 By Balance c/d 10,50,000 3. 10,00,000 10,50,000 Land and Building Account ` To Balance b/d ` 10,00,000 By Depreciation By Bank a/c (Sales) (Balancing figure) By Balance c/d 10,00,000 1,00,000 50,000 8,50,000 10,00,000 (Note: In the above solution it has been assumed that marketable securities have insignificant risk of changes in value.) Question 5 (a) Distinguish between cost control and cost reduction. (b) Explain the following: (i) Explicit costs (ii) Engineered costs (c) Discuss emerging issues affecting the future role of Chief Financial Officer (CFO). (d) State the main features of Global Depository Receipts (GDRs) and American Depository Receipts (ADRs). (4 4 = 16 Marks) Answer (a) Difference between Cost Control and Cost Reduction 1. 2. 3. Cost Control Cost control aims at maintaining the costs in accordance with the established standards. 1. Cost control seeks to attain 2. lowest possible cost under existing conditions. In case of Cost Control, 3. emphasis is on past and present The Institute of Chartered Accountants of India Cost Reduction Cost reduction is concerned with reducing costs. It challenges all standards and endeavours to better them continuously Cost reduction recognises no condition as permanent, since a change will result in lower cost. In case of cost reduction it is on present and future. PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 4. Cost Control is a preventive function 4. 5. Cost control ends when targets are achieved 5. (b) (i) 65 Cost reduction is a corrective function. It operates even when an efficient cost control system exists. Cost reduction has no visible end. Explicit Costs - These costs are also known as out of pocket costs and refer to costs involving immediate payment of cash. Salaries, wages, postage and telegram, printing and stationery, interest on loan etc. are some examples of explicit costs involving immediate cash payment. (ii) Engineered Costs - These are costs that result specifically from a clear cause and effect relationship between inputs and outputs. The relationship is usually personally observable. Examples of inputs are direct material costs, direct labour costs etc. (c) Emerging Issues/Priorities Affecting the Future Role of Chief Financial Officer (CFO) (i) Regulation: Regulation requirements are increasing and CFOs have an increasingly personal stake in regulatory adherence. (ii) Globalisation: The challenges of globalisation are creating a need for finance leaders to develop a finance function that works effectively on the global stage and that embraces diversity. (iii) Technology: Technology is evolving very quickly, providing the potential for CFOs to reconfigure finance processes and drive business insight through big data and analytics. (iv) Risk: The nature of the risks that organisations face is changing, requiring more effective risk management approaches and increasingly CFOs have a role to play in ensuring an appropriate corporate ethos. (v) Transformation: There will be more pressure on CFOs to transform their finance functions to drive a better service to the business at zero cost impact. (vi) Stakeholder Management: Stakeholder management and relationships will become important as increasingly CFOs become the face of the corporate brand. (vii) Strategy: There will be a greater role to play in strategy validation and execution, because the environment is more complex and quick changing, calling on the analytical skills CFOs can bring. (viii) Reporting: Reporting requirements will broaden and continue to be burdensome for CFOs. (ix) Talent and Capability: A brighter spotlight will shine on talent, capability and behaviours in the top finance role. (Note: Students may answer any four of the above issues) The Institute of Chartered Accountants of India 66 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 (d) Global Depository Receipts and American Depository Receipts Global Depository Receipts (GDRs) are basically negotiable certificates denominated in US dollars that represent a non-US company s publicly traded local currency equity shares. These are created when the local currency shares of Indian company are delivered to the depository s local custodian bank, against which the depository bank issues Depository Receipts in US dollars. American Depository Receipts (ADRs) are securities offered by non-US companies who want to list on any of the US exchange. Each ADR represents a certain number of a company's regular shares. ADRs allow US investors to buy shares of these companies without the costs of investing directly in a foreign stock exchange. ADRs are issued by an approved New York bank or trust company against the deposit of the original shares. These are deposited in a custodial account in the US. Such receipts have to be issued in accordance with the provisions stipulated by the SEC USA which are very stringent. Question 6 (a) M/s ABID Constructions undertook a contract at a price of ` 171.00 lacs. The relevant data for the year ended 31st March, 2014 are as under: Material issued at site Direct Wages paid Site office cost Material return to store Work certified Work uncertified Progress Payment Received Prepaid site office cost as on 31-03-2014 Direct wages outstanding as on 31-03-2014 Material at site as on 31-03-2014 (` 000) 7700 3300 550 175 12650 225 10120 50 100 110 Additional Information: (a) A plant was purchased for the contract at ` 8,00,000 on 01-12-2013. (b) Depreciation @ 15% per annum is to be charged. (c) Material which cost ` 1,30,000 was destroyed by fire. Prepare: (i) Contract Account for the year ended 31st March, 2014 and compute the profit to be taken to the Profit & Loss Account. (ii) Account of Contractee. (iii) Profit & Loss Account showing the relevant items. The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT (iv) Balance Sheet showing the relevant items. 67 (8 Marks) (b) Black Limited has furnished the following cost sheet: ` / Per Unit Raw Material Direct Labour Factory Overhead (Includes depreciation of ` 15 per unit at budgeted level of activity) Total Cost Profit Selling Price 98 53 88 239 43 282 Additional Information: (i) (ii) Average raw material in stock Average work-in-progress (% of completion with respect to Material- 75% Labour & Overhead - 70%) (iii) Finished goods in stock (iv) Credit allowed to debtors (v) Credit allowed by creditors (vi) Time lag in payments of labour (vii) Time lag in payments of factory overheads (viii) Company sells, 25% of the output against cash (ix) Cash in hand and bank is desired to be maintained (x) Provision for contingencies is required @ 4% of working capital requirement including that provision. 3 weeks 2 weeks 4 weeks 2 weeks 3 weeks 2 weeks 1 weeks ` 2,25,000 You may assume that production is carried on evenly throughout the year and labour and factory overheads accrue similarly. You are required to prepare a statement showing estimate of working capital needed to finance a budgeted activity level of 1,04,000 units of production. Finished stock, debtors and overhead are taken at cash cost. (8 Marks) Answer (a) (i) M/s ABID Constructions Contract Account Particulars To Material issued Amount (` in 000) Particulars 7,700 By Material returned The Institute of Chartered Accountants of India Amount (` in 000) 175 68 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 To Direct wages 3,300 Add: Outstanding 100 To Site Office Cost 550 Less: Prepaid By Profit & Loss A/c (Material Destroyed by fire) 130 3,400 By W-I-P: - Work uncertified 50 500 To Depreciation* 225 - Work certified 12,650 12,875 40 By Material at site To Notional Profit 110 1,650 13,290 13,290 To Profit & Loss A/c (Working Note -2) 880 By Notional Profit To W-I-P (Reserve) 1,650 770 1,650 1,650 4 months = ` 40,000 * Depreciation on plant = ` 8,00,000 15% 12 months (ii) Particulars Contractee s Account Amount (` in 000) To Balance c/d (iii) Particulars Particulars Amount (` in 000) 10,120 By Bank A/c 10,120 10,120 10,120 Relevant items of Profit & Loss Account Amount (` in 000) To Contract A/c Particulars Amount (` in 000) 130 By Contract A/c (loss of material due to fire) 880 (Profit on contract) To Net Profit 750 880 (iv) 880 Balance Sheet (Extracts) as on 31st March, 2014 (Amount in 000) Liabilities Amount Amount Assets (` ) (` ) Amount (` ) Plant at cost Add: Profit 750 800 Less: Dep. 40 Contract W-I-P: The Institute of Chartered Accountants of India Amount (` ) 760 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Outstanding Wages 100 -Uncertified 69 225 -Certified 12,650 -Reserve (770) Less: Advances (10,120) 1,985 Materials at site 110 Prepaid exp. 50 Working Notes: 1. Percentage of Completion = = Work Certified 100 Value of ontract ` 1,26,50,000 100 `1,71,00,000 = 73.98% 2. Profit from the incomplete contract = Notional Profit = ` 16,50,000 2 CashRe ceived 3 Work Certified 2 ` 1,01,20,000 3 `1,26,50,000 = ` 8,80,000 (Note: The above figures calculated on traditional prudent basis followed in Contract costing.) (b) Statement of Estimation of Working Capital Needs Current Assets I ` Investment in Inventory (i) Raw material Inventory = 1,04,000 (ii) 3 5,88,000 Work-in-Process Inventory Material = 1,04,000 2 52 52 ` 98 0.75 98 = 2,94,000 Labour and Overheads Cost (other than depreciation) 2 = 1,04,000 0.70 126 = 3,52,800 52 The Institute of Chartered Accountants of India 6,46,800 70 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 (iii) Finished Goods Inventory (Cash Cost) 4 = 1,04,000 224 52 Investment in Debtors (Cash Cost) 2.5 = 1,04,000 0.75 224 52 Cash Balance Investment in Current Assets II III 17,92 ,000 8,40,000 2,25 ,000 40,91,800 Current Liabilities and Deferred Payment 3.5 (i) Creditors = 1,04,000 (ii) Wages outstanding = 1,04,000 (iii) Overheads outstanding (cash cost) = 1,04,000 52 ` 98 6,86,000 2 52 53 2,12,000 1.5 52 73 2,19,000 Total Deferred Payments 11,17,000 Net Working Capital (Current assets Non-interest bearing current liabilities) = 40,91,800 11,17,000 29,74,800 Add: Provision for Contingencies @ 4 percent (` 29,74,800 1/24) 1,23 ,950 Working Capital Requirement including Provision 30,98,750 (Note: For calculation purpose, 4 weeks maybe taken as equivalent to a month and 52 weeks in a year.) Question 7 Answer any four of the following: (a) Distinguish between allocation and apportionment of cost. (b) Describe the salient features of budget manual. (c) Explain the following: (i) Concentration Banking (ii) Lock Box System (d) Comment on the Debt Service Coverage Ratio. The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT (e) 71 (i) Name any four financial instruments, which are related to international financial market. (ii) State the unit of cost for the followings: (1) Transport (2) Power (3) Hotel (4) Hospital (4 x 4 = 16 Marks) Answer (a) Distinguish between allocation and apportionment of cost. Cost allocation: The term allocation refers to assignment or allotment of an entire item of cost to a particular cost centre or cost unit. It implies relating overheads directly to the various departments. The estimated amount of various items of manufacturing overheads should be allocated to various cost centres or departments. For example- if a separate power meter has been installed for a department, the entire power cost ascertained from the meter is allocated to that department. Cost apportionment: There are some items of estimated overheads (like the salary of the works manager) which cannot be directly allocated to the various departments and cost centres. Such unallocable expenses are to be spread over the various departments or cost centres on an appropriate basis. This is called apportionment. (b) Salient features of Budget Manual Budget manual contains many information which are required for effective budgetary planning. A budget manual is a collection of documents that contains key information for those involved in the planning process. An introductory explanation of the budgetary planning and control process, including a statement of the budgetary objective and desired results is included in Budget Manual Budget Manual contains a form of organisation chart to show who is responsible for the preparation of each functional budget and the way in which the budgets are interrelated. In contains a timetable for the preparation of each budget. Copies of all forms to be completed by those responsible for preparing budgets, with explanations concerning their completion is included in Budget Manual. The Institute of Chartered Accountants of India 72 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 (c) (i) Concentration Banking: In concentration banking the company establishes a number of strategic collection centres in different regions instead of a single collection centre at the head office. This system reduces the period between the time a customer mails in his remittances and the time when they become spendable funds with the company. Payments received by the different collection centers are deposited with their respective local banks which in turn transfer all surplus funds to the concentration bank of head office. (ii) Lock Box System: Another means to accelerate the flow of funds is a lock box system. The purpose of lock box system is to eliminate the time between the receipts of remittances by the company and deposited in the bank. A lock box arrangement usually is on regional basis which a company chooses according to its billing patterns. (d) Comment on Debt Service Coverage Ratio (DSCR) Debt service coverage ratio indicates the capacity of a firm to service a particular level of debt i.e. repayment of principal and interest. High credit rating firms target DSCR to be greater than 2 in its entire loan life. High DSCR facilitates the firm to borrow at the most competitive rates. Lenders are interested in this ratio to judge the firm s ability to pay off current interest and installments. The debt service coverage ratio can be calculated as under: Debt Service Coverage Ratio = Earnings available for debt service Interest + Installments Or, Debt Service Coverage Ratio = (e) (i) EBITDA Principal Repayment Due Interest + 1 Tc Financial Instruments in the International Market Some of the various financial instruments dealt with in the international market are: (a) Euro Bonds (b) Foreign Bonds (c) Fully Hedged Bonds (d) Medium Term Notes (e) Floating Rate Notes (f) External Commercial Borrowings (g) Foreign Currency Futures The Institute of Chartered Accountants of India PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT (h) Foreign Currency Option (i) Euro Commercial Papers. (Note: Students may answer any four of the above financial instruments) (ii) Industry 1. Transport 2. Power 3. Hotel Unit of Cost Per passenger k.m. or per tonne k.m. Per Kilo watt (kw) hour Per room day / or per meal 4. Per Patient day / or per bed/day Hospital The Institute of Chartered Accountants of India 73

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