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CA IPCC : Question Paper (with Answers) - COST ACCOUNTING & FINANCIAL MANAGEMENT Nov 2011

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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 answer. Question 1 (a) The P/V Ratio of Delta Ltd. is 50% and margin of safety is 40%. The company sold 500 units for ` 5,00,000. You are required to calculate: (i) Break even point, and (ii) Sales in units to earn a profit of 10% on sales (b) X executes a piece of work in 120 hours as against 150 hours allowed to him. His hourly rate is ` 10 and he gets a dearness allowance @ ` 30 per day of 8 hours worked in addition to his wages. You are required to calculate total wages received by X under the following incentive schemes: (i) Rowan Premium Plan, and (ii) Emerson's Efficiency Plan (c) A new customer with 10% risk of non-payment desires to establish business connections with you. He would require 1.5 month of credit and is likely to increase your sales by ` 1,20,000 p.a. Cost of sales amounted to 85% of sales. The tax rate is 30%. Should you accept the offer if the required rate of return is 40% (after tax)? (d) Beeta Ltd. has furnished the following information: - Earning per share (ESP) `4 - Dividend payout ratio ` 25% - Market price per share ` 40 - Rate of tax 30% - Growth rate of dividend 8% The company wants to raise additional capital of ` 10 lakhs including debt of ` 4 lakhs. The cost of debt (before tax) is 10% upto ` 2 lakhs and 15% beyond that. Compute the after tax cost of equity and debt and the weighted average cost of capital. (4 x 5 = 20 Marks) Answer (a) (i) P/V Ratio - 50% Margin of Safety - 40% The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 40 Sales 500 Units for ` 5,00,000 Sales Per Unit - ` 1000 Calculation of Break Even Point (BEP) Margin of Safety Ratio = 40 = BEP = Sales - BEP 100 Sales 5,00,000 - BEP 100 5,00,000 ` 3,00,000 BEP Per Unit = 3,00,000/1000 = 300 Units (ii) Sales in units to earn a profit of 10 % on sales Sales = Fixed Cost + Desired Pr ofit P / VRatio Let the sales be x Profit = 10% of x i.e. 0.1X. = 1,50,000 + 0.1X 50% = ` 3,75,000 Thus x or x To find out sales in units amount of sales ` 3,75,000 is to be divided by Selling Price Per unit Thus = 3,75,000 1000 = 375 Units = ` 5,00,000/` 500 = Sales (in units ) ` 1000 per unit Working Notes 1. 2. Selling price Variable cost per unit Selling Price - (Selling Price x P/V Ratio) 1000 (1000 x 50%) = ` 500 The Institute of Chartered Accountants of India 41 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 3. Profit at present level of sales Margin of Safety Margin of Safety = Pr ofit = P / V Ratio 40% of ` 5,00,000 = ` 2,00,000 2,00,000 Pr ofit 50% Profit = ` 1,00,000 = (Sales x P/V Ratio) Profit = 4. = 5,00,000 x 50% 1,00,000 = `1,50,000 Fixed Cost Note: Alternative ways of calculation of Break Even Point and required sales to earn a profit of 10% of sales can be adopted to solve the problem. (b) (i) Rowan Premium Plan ` Normal wages (10 x 120) 1,200 D.A. for 15 days (30 x 15 ) 450 Bonus : Bonus hours = Bonus (24 x 10) Total Wages 120 30 = 24 Hours 150 240 = 1890 (ii) Emersion`s Efficiency Plan Normal wages 1200 D.A. (15 x 30) 450 Bonus : = Time Allowed 100 Time Taken Efficiency Level = 150 hours 100 = 125 % 120 Rate of Bonus up to 100% = 20% From 101% to 125% = 25% 45% The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 Bonus being 45% normal wages 45 1200 100 = 540 = Total Wages 42 2190 (c) Evaluation of Credit to New Customer A. Profit on Additional Sales Increase in Annual Sales 1,20,000 Less: Cost of Sales being 85% 1,02,000 18,000 Less: Bad Debts Loss (10% on sales) 12,000 Profit before Tax Less: Tax @ 30% 1,800 Net Profit after Tax B. 6,000 4,200 Opportunity Cost of Investment in Receivables (12,750 x 40) C. 5,100 Net Benefit/Loss (A-B) (900) Decision: Since the estimated profit after tax on additional sales ` 4200 is less than the required return on additional investment of ` 5,100 in receivables, hence the offer should not be accepted. Working Notes: (i) Receivables Turnover = 12 = 8 Times 1.5 (ii) Average Investment in Receivables = Cost of Sales 1,02,000 = 8 Receivables Turnover = ` 12,750 (iii) Opportunity Cost of Funds Blocked = 12,750x 40/100 = 5,100 (d) (i) Cost of Equity Share Capital (Ke) Ke (after tax) = DPS 100 + G MPS DPS = 25% of ` 4 = ` 1.00 The Institute of Chartered Accountants of India 43 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Ke = 1 100 + 8 40 Ke = 10.5% (ii) Cost of Debt (Kd) Kd (After tax) = Interest 100 (1 T) Net Pr oceeds Interest on ` 2,00,000 @ 10% = 20,000 Interest on ` 2,00,000 @ 15% = 30,000 50,000 = 50,000 100 (1 0.3) 4,00,000 = Kd 8.75 % (iii) Weighted Average Cost of Capital (WACC) Source (1) Amount (2) In ` Weights (3) Cost of Capital (4) Weighted Average Cost (5) = (3)x(4) Equity Debt 6,00,000 4,00,000 0.6 0.4 0.105 0.0875 0.063 0.035 Weighted Average Cost of Capital 0.098 or 9.8% [Note: Ke can be computed alternatively taking growth rate into consideration (D0(1+g)/P0 +g). The values of Ke and WACC then would change accordingly as 10.7% and 9.92% respectively.] Question 2 (a) X Ltd. recovers overheads at a pre-determined rate of ` 50 per man-day. The total factory overheads incurred and the man-days actually worked were ` 79 lakhs and 1.5 lakhs days respectively. During the period 30,000 units were sold. At the end of the period 5,000 completed units were held in stock but there was no opening stock of finished goods. Similarly, there was no stock of uncompleted units at the beginning of the period but at the end of the period there were 10,000 uncompleted units which may be treated as 50% complete. On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defective planning and the balance were attributable to increase in overhead cost. How would unabsorbed overheads be treated in cost accounts? The Institute of Chartered Accountants of India (8 Marks) INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 44 (b) The financial statements of a company contain the following information for the year ending 31st March, 2011: Particulars ` Cash 1,60,000 Sundry Debtors 4,00,000 Short-term Investment 3,20,000 Stock 21,60,000 Prepaid Expenses 10,000 Total Current Assets 30,50,000 Current Liabilities 10% Debentures 10,00,000 16,00,000 Equity Share Capital Retained Earnings 20,00,000 8,00,000 Statement of Profit for the year ended 31st March, 2011 Sales (20% cash sales) 40,00,000 Less: Cost of goods sold 28,00,000 Profit before Interest & Tax 12,00,000 Less: Interest 1,60,000 Profit before tax 10,40,000 Less: Tax @ 30% 3,12,000 Profit After Tax 7,28,000 You are required to calculate: (i) Quick Ratio (ii) Debt-equity Ratio (iii) Return on Capital Employed, and (iv) Average collection period (Assuming 360 days in a year). (8 Marks) Answer (a) Absorbed overheads = Actual Man days x Rate = 1,50,000 x 50 = ` 75,00,000 Under absorption of overheads = Actual overheads Absorbed overheads = 79,00,000 75,00,000 = ` 4,00,000 The Institute of Chartered Accountants of India 45 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Reasons for under-absorption: 1. Defective Planning 4,00,000 x 60% = `2,40,000 2. Increase in overhead cost 4,00,000 x 40% = `1,60,000 Treatment in Cost Accounts: (i) The unabsorbed overheads of ` 2,40,000 on account of defective planning to be treated as abnormal and thus be charged to costing profit & loss account. (ii) The balance of unabsorbed overheads i.e. ` 1,60,000 be charged as below on the basis of supplementary overhead absorption rate Supplementary Rate = ` 1,60,000/(30,000+5,000+50% of 10,000) = ` 4 per unit (a) To Cost of Sales Account = 30,000 x4 = ` 1,20,000 (b) To Finished Stock Account = 5,000 x 4 = ` 20,000 (c) To WIP Account = 50% of 10,000 x 4 = ` 20,000 ` 1,60,000 Quick Ratio = Quick Assets Current Liabilities Quick Assets = Current Assets Stock Prepaid Expenses = 30,50,000- 21,60,000-10,000 Quick Assets = 8,80,000 Quick Ratio = 8,80,000/10,00,000 = (b) (i) 0.88 : 1 (ii) Debt-Equity Ratio = Long term debt Shareholders Funds = 16,00,000 (20,00,000 + 8,00,000) = 0.57:1 (iii) Return on Capital Employed (ROCE) = PBIT 100 Capital Employed = ROCE 12,00,000 100 = 27.27% 44,00,000 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 46 [Note: ROCE can be computed alternatively taking Average total assets into consideration (EBIT (1 T)/Average Total Assets). The value of ROCE would then change accordingly as 15.56%] (iv) Average Collection Period = Sundry Debtors 360 Credit Sales = 4,00,000 360 32,00,000 = 45 days Question 3 (a) The following details are available of Process X for August 2011: (1) Opening work-in-progress Degree of completion and cost: 8,000 units Material (100%) ` 63,900 ` 10,800 ` 5,400 ` 7,56,900 ` 3,28,000 ` 1,64,000 Labour (60%) Overheads (60%) (2) Input 1,82,000 units at (3) Labour paid (4) Over heads incurred (5) Units scrapped Degree of completion: 14,000 Material Labour and overhead 100% 80% (6) Closing work-in-process Degree of completion: 18000 units Material 100% Labour and overhead (7) 1,58,000 units were completed and transferred to next process. (8) Normal loss is 8% of total input including opening work-in-process (9) Scrap value is `. 8 per unit to be adjusted in direct material cost You are required to compute, assuming that average method of inventory is used: (i) Equivalent production, and The Institute of Chartered Accountants of India 70% 47 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT (ii) Cost per unit (8 Marks) (b) Alpha Ltd. has furnished the following Balance Sheet as on March 31, ,2011: Liabilities Equity Share Capital (1,00,000) equity shares of ` 10 each) General Reserve ` Assets ` 10,00,000 Fixed Assets 30,00,000 Current Assets 18,00,000 2,00,000 15% Debentures 28,00,000 Current Liabilities 8,00,000 48,00,000 48,00,000 Additional Information: (1) Annual Fixed Cost other than Interest 28,00,000 (2) (3) Variable Cost Ratio Total Assets Turnover Ratio 60% 2.5 (4) Tax Rate 30% You are required to calculate: (i) Earnings per Share (EPS), and (ii) Combined Leverage. (8 Marks) Answer (a) (i) Statement of Equivalent Production Particulars Units Material Labour and Overhead % Production units completed Normal Loss 8% of (1,82,000 + 8,000) Closing WIP Total Less : Abnormal Gain Total The Institute of Chartered Accountants of India Units % Units 1,58,000 15,200 100 - 1,58,000 - 100 - 1,58,000 - 18,000 100 18,000 70 12,600 1,91,200 - 1,76,000 1,200 100 1,200 1,90,000 1,74,800 100 1,70,600 1,200 1,69,400 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 48 (ii) Statement of cost Particulars Materials Labour Overhead ` ` ` 63,900 10,800 5,400 Input of Materials Expenses 7,56,900 - 3,28,000 1,64,000 Total 8,20,800 3,38,800 1,69,400 Less : Sale of Scrap (15,200 x 8 ) 1,21,600 - - Net cost 6,99,200 3,38,800 1,69,400 Equivalent Units 1,74,800 1,69,400 1,69,400 ` 4.00 ` 2.00 ` 1.00 Opening WIP Cost Per Unit Total cost per unit = 4+2+1 = ` 7.00 Note: The treatment of scrap can be done alternatively as follows and rest of the problem (Calculation of Cost per Equivalent units and Statement of Cost) can be solved accordingly. Statement of Equivalent Production: Output Units to Next process Closing WIP Abnormal gain Equivalent Units Units Materials Labour Overheads 158000 100 158000 100 158000 100 158000 18000 (1200) 174800 Normal Loss 100 18000 100 (1200) 174800 70 80 12600 (960) 169640 = 8% of (8000+182000) = 15200 Units = ` 48,00,000 Total Assets Turnover Ratio = 2.5 Total Sales = 12600 (960) 169640 8% of (opening WIP + New Inputs) = 70 80 48,00,000 2.5 = ` 1,20,00,000 (b) Total Assets Computation of Profit after Tax (PAT) Particulars Sales Less: Variable Cost ( 60% of Sales Contribution) Contribution The Institute of Chartered Accountants of India Amount 1,20,00,000 72,00,000 48,00,000 49 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Less: Fixed Cost (other than Interest) 28,00,000 20,00,000 4,20,000 15,80,000 4,74,000 11,06,000 Less: Interest on Debentures (15% of 28,00,000) PBT Less: Tax @ 30% PAT (ii) DCL Or PAT No. of Equity Shares 11,06,000 = ` 11.06 1,00,000 = Contribution EBIT x EBIT PBT = Contribution PBT = EPS = = (i) 48,00,000 = 3.04 15,80,000 Question 4 (a) The Trading and Profit and Loss Account of Beta Ltd. for the year ended 31st March, 2011 is given below: Particulars To Opening Stock: Raw Materials Work- in- progress Finished Goods To Purchases (credit) To Wages To Production Expenses To Gross Profit c/d To Administration Expenses To Selling Expenses To Net Profit Amount (` ) Particulars (`) By Sales (Credit) 1,80,000 By Closing Stock: 60,000 Raw Materials 2,60,000 5,00,000 Work-in-progress 11,00,000 Finished Goods 3,00,000 2,00,000 5,00,000 26,00,000 1,75,000 By Gross Profit b/s 75,000 2,50,000 5,00,000 The Institute of Chartered Accountants of India Amount (`) 20,00,000 2,00,000 1,00,000 3,00,000 6,00,000 26,00,000 5,00,000 5,00,000 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 50 The opening and closing balances of debtors were ` 1,50,000 and ` 2,00,000 respectively whereas opening and closing creditors were ` 2,00,000 and ` 2,40,000 respectively. You are required to ascertain the working capital requirement by operating cycle method. (8 Marks) (b) The following information have been extracted from the cost records of a manufacturing company: * * * * * * * * * * * * * Stores Opening balance Purchases Transfer from WIP Issue to work-in-progress Issue for repairs Deficiency found in stock Work-in-Progress: Opening balance Direct Wages applied Overhead charged Closing balance Finished Production : Entire production is sold at a profit of 10% on cost from work-inprogress Wages paid. Overhead incurred ` 9,000 48,000 24,000 48,000 6,000 1,800 18,000 18,000 72,000 12,000 21,000 75,000 Draw the Stores Leger Control A/c, Work-in-Progress Control A/c, Overheads Control A/c and Costing Profit and Loss A/c. (8 Marks) Answer (a) Computation of Operating Cycle (1) Raw Material Storage Period (R) Raw Material Storage Period (R)= = Average Stock of Raw Material Daily Average Consumption of Raw material (1,80,000 + 200000 )/2 = 63.33 Days 10,80,000 /360 Raw Material Consumed = Opening Stock + Purchases Closing Stock The Institute of Chartered Accountants of India 51 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT = 1,80,000 + 11,00,000 2,00,000 = `10,80,000 (2) Conversion/Work-in-Process Period (W) Conversion/Processing Period = = Average Stock of WIP Daily Average Pr oduction cos t (60,000 + 1,00,000 )/2 = 18.7 days 15,40,000/360 Production Cost: Opening Stock of WIP Add: Raw Material Consumed Add: Wages Add: Production Expenses Less: Closing Stock of WIP Production Cost (3) Finished Goods Storage Period (F) Finished Goods Storage Period = = = = = = = 60,000 10,80,000 3,00,000 2,00,000 16,40,000 1,00,000 15,40,000 Average Stock of Finished Goods Daily Average Cost of Good Sold (2,60,000 + 3,00,000) / 2 = 67.19 Days 15,00,000 / 360 Cost of Goods Sold ` Opening Stock of Finished Goods Add: Production Cost 2,60,000 15,40,000 18,00,000 Less: Closing Stock of Finished Goods 3,00,000 15,00,000 (4) Debtors Collection Period (D) Debtors Collection Period = (150000 + 200000)/ 2 Average Debtors = = 31.5 Days 20,00,000/ 360 Daily Average Sales (5) Creditors Payment Period (C) Creditors Payment Period = Average Creditors Daily Average Purchase The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 = 52 (2,00,000 + 2,40,000)/ 2 = 72 Days 11,00,000/ 360 (6) Duration of Operating Cycle (O) O = R+W+F+D C = 63.33 + 18.7 + 67.19 + 31.5 72 = 108.72 days Computation of Working Capital (i) Number of Operating Cycles per Year = 360/Duration Operating Cycle = 360/108.72 = 3.311 (ii) Total Operating Expenses ` Total Cost of Production 15,00,000 Add: Administration Expenses 1,75,000 Selling Expenses 75,000 17,50,000 (iii) Working Capital Required Working Capital Required = = Total Operating Expenses Number of Operating Cycles per year 17,50,000 = ` 5,28,541 3.311 [Note: For computational purposes, the above solution is based on 360 days a year. The solution can also be solved on the basis of 365 days a year. Work-in-process (W) can be computed alternatively taking Administration Expenses as part of Cost of Production. This would lead to further changes in figures of Finished Goods Storage Period, Duration of operating cycle, Number of operating cycles per year and amount of capital required.] (b) Stores Ledger Control A/c Particulars To Balance b/d To General Ledger Adjustment A/c To Work in Process A/c ` Particulars ` 9,000 By Work in Process 48,000 By Overhead Control A/c By Overhead Control A/c (Deficiency ) 24,000 By Balance c/d 25,200 81,000 81,000 The Institute of Chartered Accountants of India 48,000 6,000 1,800* 53 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT *Deficiency assumed as normal (alternatively can be treated as abnormal loss) Work in Progress Control A/c Particulars ` To Balance b/d To Stores Ledger Control A/c To Wages Control A/c To Overheads Control a/c Particulars ` 18,000 By Stores Ledger Control a/c 48,000 By Costing P/L a/c (Balancing figures being Cost of finished goods) 18,000 72,000 By Balance c/d 1,56,000 24,000 1,20,000 12,000 1,56,000 Overheads Control A/c Particulars ` To Stores Ledger Control A/c To Stores Ledger Control A/c To Wages Control A/c (21,000-18000) To General Ledger Adjustment A/c 6,000 1,800 3,000 Particulars ` By Work in Process A/c By Balance c/d (Under absorption) 72,000 13,800 75,000 85,800 85,800 Costing Profit & Loss A/c Particulars ` 1,20,000 To Work in progress To General Ledger 12,000 Adjustment A/c (Profit) Particulars ` By General ledger Adjustment A/c (Sales) (1,20,000+12,000) 1,32,000 1,32,000 1,32,000 Question 5 Distinguish between: (i) Cost Control and cost reduction (ii) Fixed and flexible budget. (iii) Operating lease and financial lease, and (iv) Net present value method and internal rate of return method. The Institute of Chartered Accountants of India (4 4 = 16 Marks) INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 54 Answer (i) Difference between Cost Control and Cost Reduction (1) Cost control aims at maintaining the costs in accordance with the established standards. While cost reduction is concerned with reducing costs. (2) Cost control seeks to attain lowest possible cost under existing conditions, while cost reduction recognizes no condition as permanent, since a charge will result in lower cost. (3) In case of cost control, emphasis is on past and present, while in case of cost reduction, it is on present and future. (4) Cost control is a preventive while cost reduction is corrective. (5) Cost control ends when targets are achieved, while cost reduction has visible end. (ii) Difference between fixed and flexible budgets S.No. Fixed Budget Flexible Budget 1. It does not change with actual volume It can be recasted on the basis of of activity achieved. Thus it is rigid activity level to be achieved. Thus it is not rigid. 2 It operates on one level of activity and It consists of various budgets for different level of activity. under one set of conditions 3 If the budgeted and actual activity It facilitates the cost ascertainment levels differ significantly, then cost and price fixation at different levels of ascertainment and price fixation do activity. not give a correct picture. 4. Comparisons of actual and budgeted It provided meaningful basis of targets are meaningless particularly comparison of actual and budgeted when there is difference between two targets. levels. (iii) Difference between Financial Lease and Operating Lease S.No. Finance Lease Operating Lease 1. The risk and reward incident to ownership are passed on the lessee. The lessor only remains the legal owner of the asset. The lessee is only provided the use of the asset for a certain time. Risk incident to ownership belongs only to the lessor. 2 The lessee bears obsolescence. the The Institute of Chartered Accountants of India risk of The lessee is only allowed the use of asset. 55 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 3 The lease is non-cancellable by either The lease is kept cancellable by the party under it. lessor. 4. The lessor does not bear the cost of Usually, the lessor bears the cost of repairs, maintenance or operations. repairs, maintenance or operations. 5. The lease is usually full payout. The lease is usually non-payout. (iv) Difference between Net Present Value (NPV) Method and Internal Rate of Return (IRR) Method 1. The results of NPV and IRR methods regarding the choice of an asset under certain circumstances are mutually contradictory under two methods. 2. The NPV is expressed in financial values whereas IRR is expressed in percentage terms. 3. In the NPV, cash flows are assumed to be reinvested at cost of capital rate whereas in IRR, reinvestment is assumed to be made at IRR rates. 4. Under IRR method, a project is selected when IRR is greater than cut-off date, whereas, under NPV method, a project is accepted with positive NPV. Question 6 (a) A Ltd. is considering the purchase of a machine which will perform some operations which are at present performed by workers. Machines X and Y are alternative models. The following details are available: Machine X Machine Y (` ) (` ) 1,50,000 5 years 2,40,000 6 years Estimated cost of maintenance p.a. Estimated cost of indirect material, p.c. 7,000 6,000 11,000 8,000 Estimated savings in scrap p.a. Estimated cost of supervision p.a. 10,000 12,000 15,000 16,000 Estimated savings in wages pa. 90,000 1,20,000 Cost of machine Estimated life of machine Depreciation will be charged on straight line basis. The tax rate is 30%. Evaluate the alternatives according to: (i) Average rate of return method, and (ii) Present value index method assuming cost of capital being 10%. (The present value of ` 1.00 @ 10% p.a. for 5 years is 3.79 and for 6 years is 4.354) The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 56 (8 Marks) (b) Gama Ltd. has furnished the following standard cost data per' unit of production: * Material 10 kg @ ` 10 per kg. * Labour 6 hours @ ` 5.50 per hour * Variable overhead 6 hours @ `. 10 per hour. * Fixed overhead ` 4,50,000 per month (Based on a normal volume of 30,000 labour hours.) The actual cost data for the month of August 2011 are as follows: * Material used 50,000 kg at a cost of ` 5,25,000. * Labour paid ` 1,55,000 for 31,000 hours worked * Variable overheads` 2,93,000 * Fixed overheads ` 4,70,000 * Actual production 4,800 units. Calculate: (i) Material cost variance. (ii) Labour cost variance. (iii) Fixed overhead cost variance. (iv) Variable overhead cost variance. Answer (a) Working Notes: Depreciation on Machine X = 1,50,000 = ` 30,000 5 Depreciation on Machine Y = 2,40,000 = ` 40,000 6 Particulars Machine X (`) Machine Y (`) Wages 90,000 1,20,000 Scrap 10,000 15,000 1,00,000 1,35,000 6,000 12,000 8,000 16,000 7,000 11,000 Annual Savings: Total Savings (A) Annual Estimated Cash Cost : Indirect Material Supervision Maintenance The Institute of Chartered Accountants of India 57 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Total Cash Cost (B) 25,000 35,000 Annual Cash Savings (A-B) Less : Depreciation 75,000 30,000 1,00,000 40,000 Annual Savings Before Tax 45,000 60,000 Less : Tax @ 30% 13,500 18,000 Annual Savings/Profit (After Tax) Add : Depreciation 31,500 30,000 42,000 40,000 Annual Cash Inflows 61,500 82,000 Evaluation of Alternatives (i) Average Rate of Return Method (ARR) ARR = Average Annual Net Savings Average Investment Machine X = 31,500 100 = 42% 75,000 Machine Y = 42,000 100 = 35% 1,20,000 Decision : Machine X is better. [Note: ARR can be computed alternatively taking initial investment as the basis for computation (ARR = Average Annual Net Income/Initial Investment). The value of ARR for Machines X and Y would then change accordingly as 21% and 17.5% respectively] (ii) Present Value Index Method Present Value = Annual Cash Inflow x P.V. Factor @ 10% Machine X = 61,500 x 3.79 = ` 2,33,085 = 82,000 x 4.354 = ` 3,57,028 P.V. Index = Pr esent Value Investment Machine X = 2,33,085 = 1.5539 1,50,000 Machine Y The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 Machine Y 58 3,57,028 = 1.4876 2,40,000 = Decision : Machine X is better. (b) Budgeted Production 30,000/6 = 5,000 units Budgeted Fixed Overhead Rate = 4,50,000/5,000 = 1. 45,000 (A) = Total Standard Cost of labour for Actual Output Total Actual Cost of labour 48,00x 6.0 x 5.50 1,55,000 = 1,58,400 1,55,000 = 3400 (F) = Recovered Fixed overhead - Actual Fixed overhead = 90 x 4,800 4,70,000 = 38,000 (A) = Recovered Variable overheads Actual Variables overheads = 4,800 x 6 x 10 = 2,88,00 - 2,93,000 = 4. VOCV 4.80,000 5,25,000 = FOCV 4,800x10x10-5,25,000 = 3. Total Standard Cost for Actual Output Total Actual Cost = LCV = = 2. MCV ` 90 per unit 5,000 (A) [MCV- Material Cost Variance, LCV- Labour Cost Variance, FOCV- Fixed Overhead Cost Variance, VOCV- Variable Overhead Cost Variance] Question 7 Answer any four of the following: (a) Elucidate the responsibilities of Chief Financial Officer. (b) Explain the relevance of time value of money. (c) Discuss ABC analysis as a system of inventory control (d) Explain the terms notional profit and retention money in contract costing. . (e) Explain the following: The Institute of Chartered Accountants of India 59 PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT (i) Bridge finance (ii) Essentials of budget (4 4 = 16 Marks) Answer (a) Main Responsibilities of Chief Financial Officer (CFO) The main responsibilities of Chief Financial Officer (CFO) are as follows: 1 Financial analysis and planning. 2. Investment decisions - Efficient utilization of funds to specific assets/projects. 3. Capital structure decisions. 4. Management of short-term financial resources (working capital). 5. Risk management. (b) Relevance of Time Value of Money in Financial Decisions A rupee today is more valuable than rupee after a year due to several reasons: 1. Risk: There is uncertainty about the receipt of money in future. 2. Preference for Present Consumption: Most of the person and companies in general, prefer current consumption over future consumption. 3. Inflation: In an inflationary period a rupee today represents a greater real purchasing power than a rupee after a year. 4. 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 times for evaluating such cash flow an explicit consideration of time value of money is required. (c) ABC analysis exercises discriminating control over different items of stores classified on the basis of investment involved. A category items consists of only a small proportion i.e. approximately 10% of total items of stores but needs huge investment. Say about 70% of inventory vogue, because of their high prices or heavy requirement. 'B' category items are relatively 20% of the total items of stoles. The proportion of investments requires is also approximately 20% of total inventory investment. C category items do not require much investment. It may be about 10% total inventory value but they are nearly 70% of the total items of stores. (d) Notional Profit in contract costing ; It represents the difference between the value of work certified and cost of work certified. The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 Notional Profit = 60 Value of work Certified Less Cost of work Certified Retention money in contract Costing: A contractor does not receive the full payment of work certified by the surveyor of work certified by the surveyor. Contractee retains some amount to be paid after some time, when it is ensured that there is no default in the work done by the contractor. If any deficiency or defect is noticed it is to be rectified by the contractor before the release of the retention money. Thus retention money provides a safe guard against the default risk in contract (e) (i) Bridge Finance It refers to loans taken by a company normally from commercial banks for a short period because of pending disbursement of loans sanctioned by financial institutions. (ii) Essentials of budget It is prepared in advance and is based on a future plan of actions It relates to a future period and is based on objectives to be attained. It is a statement expressed in monetary and/or physical units prepared for the implementation of policy formulated by management. The Institute of Chartered Accountants of India

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