Cost Accounting & Financial Management

Gurukripa’s Guideline Answers for Nov 2013 CA Inter (IPC) Cost Accounting & Financial Management Exam

Gurukripa’s Guideline Answers to Nov 2013 Exam Questions CA Inter (IPC) Cost Accounting & Financial Management Question No.1 is compulsory (4 X 5 = 20 Marks). Answer any five questions from the remaining six questions (16 X 5 = 80 Marks). [Answer any 4 out of 5 in Q.7] Working Notes should form part of the answers.

Question 1(a): EOQ and Stock Levels (5 Marks) Primex Limited produces Product ‘P’. It uses annually 60,000 units of a Material ‘Rex’ costing ` 10 per unit. Other relevant information are: Cost of Placing an Order ` 800 per Order Carrying Cost 15% per Annum of Average Inventory Re–order Period 10 days Safety Stock 600 Units The Company operates 300 days in a year. You are required to calculate: (i) Economic Order Quantity of Material ‘Rex’. (ii) Maximum Stock Level (iii) Re–Order Level (iv) Average Stock Level Solution:

1. EOQ =

Similar to Page No.2.43, Q.No.40

2 AB , where C

2. Re–Order Level

A = Annual Requirement of Raw Materials = 60,000 units. B = Buying Cost per order = ` 800 per order (given) C = Carrying Cost per unit per annum = ` 10 × 15% = ` 1.50 p.u. p.a. On substitution, EOQ = 8,000 units.

= Safety Stock + Lead Time Consumption = 600 + (60,000 × 10/300) = 600 + 2,000

= 2,600 units

3. Minimum Level

= Safety Stock (given)

= 600 units.

4. Maximum Level

= ROL + ROQ – (Min. Usage × Min. Lead Time) = = 2,600 + 8,000 – (Lead Time Consumption assumed 2,000)

= 8,600 units.

= Min Level + ½ ROQ = 600 + ½ (8,000)

= 4,600 units.

5. Average Level

Question 1(b): Journal Entries under Integrated System Journalise the following transactions assuming Cost and Financial Accounts are integrated: Particulars (i) Materials issued : Direct Indirect (ii) Allocation of Wages (25% Indirect) (iii) Under/Over absorbed OH: Factory (Over) Administration (Under) (iv) Payment to Sundry Creditors (v) Collection from Sundry Debtors Solution:

(5 Marks) ` 3,25,000 1,15,000 6,50,000 2,50,000 1,75,000 1,50,000 2,00,000

Similar to Page No.5.26, Q.No.12 Journal Entries under Integrated System of Accounting Particulars

1.

Dr.

Work–in–Progress Control A/c

Dr.

3,25,000

Production Overheads Control A/c

Dr.

1,15,000

To Raw Material Control A/c

Cr.

4,40,000

(Being Raw Materials issued for Direct and Indirect Purposes) Nov 2013.1

Gurukripa’s Guideline Answers for Nov 2013 CA Inter (IPC) Cost Accounting & Financial Management Exam Particulars 2.

Dr.

Work–in–Progress Control A/c

(75% of 6,50,000)

Dr.

4,87,500


(25% of 6,50,000)

Dr.

1,62,500

To Wages Control A/c

Cr.

6,50,000

(Being Direct and Indirect Wages allocated) 3.


Dr.

2,50,000

To Profit & Loss A/c

2,50,000

(Being POH overabsorbed, and transferred to Profit and Loss A/c at period end) 4.

Profit & Loss A/c

Dr.

1,75,000

To Administration Overheads Control A/c

1,75,000

(Being AOH under absorbed, and transferred to Profit and Loss A/c at period end) 5.

Suppliers / Sundry Creditors A/c

Dr.

1,50,000

To Cash / Bank A/c

1,50,000

(Being payment made to Sundry Creditors) 6.

Cash / Bank A/c

Dr.

2,00,000

To Sundry Debtors A/c

2,00,000

(Being collections received from Sundry Debtors)

Question 1(c): Leverage – Computation of DOL, DFL and DCL (5 Marks) Calculate the Degree of Operating Leverage, Degree of Financial Leverage and the Degree of Combined Leverage for the following Firms: Particulars N S D Production (in units) 17,500 6,700 31,800 Fixed Costs ` 4,00,000 ` 3,50,000 ` 2,50,000 Interest on Loan Nil ` 1,25,000 ` 75,000 Selling Price per unit ` 85 ` 130 ` 37 Variable Cost per unit ` 38.00 ` 42.50 ` 12.00 Solution:

Similar to Page No.17.10, Q.No.9 N

Firm Total Contribution Less:

S

D

(85 – 38) × 17,500 units = ` 8,22,500

(130 – 42.5) × 6,700 Units = ` 5,86,250

(37 – 12) × 31,800 Units = ` 7,95,000

` 4,00,000 ` 4,22,500

` 2,50,000 ` 5,45,000

Fixed Costs Interest

`

1,25,000

` 3,50,000 ` 2,36,250 ` 75,000

EBT

` 2,97,500

` 1,61,250

` 5,45,000

1.95

2.48

1.46

1.42

1.47

1.00

2.77

3.64

1.46

EBIT Less:

Degree of Operating Leverage = Degree of Financial Leverage =

Contribution EBIT

EBIT EBT

Degree of Combined Leverage = DOL × DFL

Question 1(d): EBIT – EPS Indifference Point X Ltd is considering the following two alternative Financing Plans:

Nov 2013.2

–

(5 Marks)


Particulars

Plan – I ` 4,00,000 2,00,000 –

Plan – II ` 4,00,000 – 2,00,000

Total

` 6,00,000

` 6,00,000

Equity Shares of ` 10 each 12% Debentures Preference Shares of ` 100 each

The Indifference Point between the Plans is ` 2,40,000. Corporate Tax Rate is 30%. Calculate the Rate of Dividend on Preference Shares. Solution:

Refer Page No.18.38, Q.No.43 Plan 1

Plan 2

ESC = ` 4 Lakhs, PSC = Nil and Debt=` 2 Lakhs

ESC = ` 4 Lakhs, Debt= Nil and PSC = ` 2 Lakhs

2,40,000 24,000

2,40,000 Nil

2,16,000 64,800 1,51,200 Nil 1,51,200 40,000 Shares

2,40,000 72,000 1,68,000 X 1,68,000 – X 40,000 Shares

1,51,200 = 3.78 40,000 Shares

1,68,000 − X = 3.78 40,000 Shares

Particulars (amounts in `) Description Less: Less: Less:

EBIT (given) Interest at 12% of ` 2,00,000 EBT Tax at 30% EAT Preference Dividend Residual Earnings for Equity Shareholders Number of Equity Shares (4,00,000 ÷ 10) EPS =

Re sidual Earnings No. of Equity Shares

For Indifference between the above alternatives, EPS should be equal. So, On solving, X = 16,800. So, Rate of Preference Dividend =

1,51,200 1,68,000 − X = 3.78 = 40,000 Shares 40,000 Shares

16,800 = 8.4% 2,00,000

Question 2(a): Fare Computation for Passenger Transport Service The following information relates to a Bus Operator: Cost of the Bus Insurance Charges Manager-cum Accountant’s Salary Annual Tax Garage Rent Annual Repair & Maintenance Expected Life of the Bus Scrap Value at the end of 15 years Driver’s Salary Conductor’s Salary Stationery Engine Oil, Lubricants for (1200 kms.) Diesel and Oil (For 10 kms.) Commission to Driver and Conductor (shared equally) Route Distance

(8 Marks) ` 18,00,000 3% p.a. ` 8,000 p.m. ` 50,000 ` 2,500 p.m. ` 1,50,000 15 years ` 1,20,000 ` 15,000 p.m. ` 12,000 p.m. ` 500 p.m. ` 2,500 ` 52 10% of collections 20 km long

The Bus will make 3 round trips for carrying on the average 40 passengers in each trip. Assume 15% Profit on collections. The bus will work on the average 25 days in a month. Calculate Fare per passenger–km. Nov 2013.3

Gurukripa’s Guideline Answers for Nov 2013 CA Inter (IPC) Cost Accounting & Financial Management Exam Solution:

Similar to Page No.9.16, Q.No.18 1. Passenger Kms per Month

(a) No. of Passengers = Given = 40 (b) No. of Kms per Month = 1 Bus × 3 Trips × 2 ways × 20 Kms × 25 days = 3,000 Kms p.m. (c) Passenger Kms p.m = 40 × 3,000 = 1,20,000.

Particulars

2. Statement of Operating Costs and Revenues per month Computation

Depreciation

18,00,000 − 1,20,000 1 × 15 years 12

18,00,000 × 3% ×

Insurance Manager cum Accountant’s Salary Road Tax Garage Rent

Driver’s Salary Conductor’s Salary Stationery

4,500

Given

8,000

1 50,000 × 12

4,167 2,500 12,500 15,000 12,000 500 6,250

3,000 Km × ` 52 10 Km

Diesel Oil

Add:

1 12

Given Given Given 3,000 Km × ` 2,500 1,200 Km

Engine Oil, Lubricants

Add:

9,333

Given 1,50,000 12

Repairs and Maintenance

85% – 10% =

Total Operating Costs excluding Commission Commission (Given) Total Costs Profit (Given) Total Takings / Revenue

`

15,600

75% 10%

100% – 15% =

85% 15% 100%

90,350 12,047 1,02,397 18,070 1,20,467

Note: 1. It is given that Profit = 15% of Takings, and Commission = 10% of Takings. Hence, Total Operating Cost = 100% – 90,350 = ` 1,20,467. Now, 15% – 10% = 75% of Total Takings, which equals ` 90,350. Hence, Total Takings = 75 % Commission & Profits are taken at 10% & 15% respectively, on Total Takings. 1,20,467 2. So, Fare per Passenger Km = = ` 1.00. 1,20,000

Question 2(b): Preparation of Balance Sheets from Ratios (8 Marks) The Assets of SONA Ltd consist of Fixed Assets and Current Assets, while its Current Liabilities comprise Bank Credit in the ratio of 2:1. You are required to prepare the Balance Sheet of the Company as on 31st March 2013 with the help of following information: Share Capital Average Collection Period 1.5 months ` 5,75,000 Working capital (CA–CL) Current Ratio 1.5:1 ` 1,50,000 Gross Margin 25% Quick Ratio 0.8:1 Inventory Turnover 5 times Reserves & Surplus to Bank & Cash 4 times Solution: Note:

Refer Principles in Chapter 14 – Q.No.10 to Q.No.18

Balance Sheet has been prepared in the format prescribed under Revised Schedule VI to the Companies Act. However, since the scope of the question is only on finding missing figures in the Balance Sheet using Ratios, the T–Shaped format may also be adopted for ease of computation.

Nov 2013.4


I (1)

(2)

II (1) (2)

Balance Sheet of Sona Ltd as on 31st March 2013 (Amount in ` ) Particulars as at 31st March Working Note This Year EQUITY AND LIABILITIES: Shareholders’ Funds: (a) Share Capital (given) 5,75,000 (b) Reserves and Surplus WN 9 2,60,000 Current Liabilities: (a) Trade Payables – Creditors WN 2 1,00,000 (b) Other Current Liabilities – Bank Credit WN 2 2,00,000 Total 11,35,000 ASSETS Non–Current Assets Fixed Assets: (Balancing Figure) 6,85,000 Current Assets: (a) Inventories WN 4 2,10,000 (b) Trade Receivables – Debtors WN 7 1,75,000 (c) Cash and Cash Equivalents – Cash & Bank WN 8 65,000 Total 11,35,000

Prev. Yr

Working Notes and Calculations

1. Current Ratio =

Current Assets Current Liabilities

2. Net Working Capital

= 1.5 times.

So,

Current Assets = 1.5 × Current Liabilities.

= Current Assets – Current Liabilities = 1.5 × CL – CL = 1,50,000 (given) 1,50,000 = 0.5 CL = 1,50,000. So, Current Liabilities = = 3,00,000 0.5

Bank Credit (2:1) Creditors 2,00,000 1,00,000 3. Current Assets = 1.5 × Current Liabilities = 1.5 × 3,00,000 = 4,50,000. 4. Quick Ratio =

Quick Assets = 0.8 times (given) Current Liabilities

4,50,000 – Stock 3,00,000

On substitution,

So,

= 0.8

Current Assets – Stock Current Liabilities

= 0.8

On solving, we get, Stock = ` 2,10,000

Quick Assets Quick Assets . If it is assumed as , it results in Stock Amount = Current Liabilities Quick Liabilities ` 3,70,000, Debtors Amount = ` 3,08,333, the total of which exceed the amount of Current Assets, leading to Negative Cash Balance and is hence inconsistent with the other data given in the Question. Hence, the above formula is applied.

Note: Quick Ratio is assumed as

COGS COGS = = 5 times. So, Cost of Goods Sold = 2,10,000 × 5 = 10,50,000. 2,10,000 Stock

5.

Inventory Turnover =

6.

Since Gross Margin is 25% , COGS constitutes 75% of Sales. So Sales =

7.

Debtors = Sales ×

8.

Cash and Bank

9.

Re serves & Surplus = 4 times. So Reserves and Surplus = 65,000 × 4 = 2,60,000. Cash & Bank

10,50,000 = 14,00,000. 75 %

1.5 = 1,75,000. 12

= Total Current Assets – Stock – Debtors = 4,50,000 (WN 3) – 2,10,000 (WN 4) – 1,75,000 (WN 7) = 65,000.

Nov 2013.5


Question 3(a): Labour Turnover Rate – Reverse Working (8 Marks) The rate of change of labour force in a Company during the year ending 31st March, 2013 was calculated as 13%, 8% and 5% respectively under ‘Flux Method’, Replacement Method’ and ‘Separation Method’. The number of workers separated during the year is 40. You are required to calculate: (i) Average Number of Workers on roll. (ii) Number of Workers replaced during the year. (iii) Number of New Accessions, i.e. New Recruitment. (iv) Number of workers at the beginning of the year. Solution:

Similar to Page No. Nov 2012.1, Q.No.1(b) S 40 40 1. Separation Method = = = 5% (given). So, L = = 800. L L 5% R R = = 8%. So, R = 800 × 8% = 64. 2. Replacement Method = L 800 S + R +N 40 + 64 + N = = 13%. On solving, N = 0. 3. Flux Method = L 800 X+Y = 800. Let the No. of Workers at the Beginning be X and at the end be Y. 2 Y + X = 1600 –––––– (1)

Also, Accessions = No. of Workers at the end + No. of Separation (–) No. of Workers at the beginning. So, Accessions = R + N = 64 = Y + 40 – X Y + 40 – X = 64. Y – X = 24 –––––– (2) On solving the above equations, we get X = 788, Y = 812. Answer: (i) Average Number of Workers on Roll = 800 (ii) Number of Workers replaced during the year = 64

(iii) Number of New Accessions, i.e. New Recruitment = 0 (iv) Number of Workers at the beginning of the year = 788.

Question 3(b): Different Project Lives – EAC Method (8 Marks) APZ Limited is considering to select a Machine between two Machines ‘A’ and ‘B’. The two Machines have identical capacity, do exactly the same job, but designed differently. Machine ‘A’ costs ` 8,00,000, having useful life of three years. It costs ` 1,30,000 per year to run. Machine ‘B’ is an Economy Model costing ` 6,00,000, having useful life of two years. It costs ` 2,50,000 per year to run. The Cash Flows of machine ‘A’ and ‘B’ are real cash flows. The costs are forecasted in rupees of constant purchasing power. Ignore taxes. The Opportunity Cost of Capital is 10%. The Present Value Factors at 10% are: Year t1 t2 t3 0.9091 0.8264 0.7513 PVIF0.10.t PVIFA0.10.2 =1.7355 PVIFA0.10.3 = 2.4868 Which Machine would you recommend the Company to buy? Solution:

Similar to Page No.20.51, Q.N0.51 Since Project Lives are different, the Equivalent Annual Flows method is adopted. Particulars Machine A

1. Initial Investment ` 8,00,000 2. Life 3 years 3. Cash Expenses per annum = Cash Outflow p.a. ` 1,30,000 4. Annuity Factor at 10% during Project Life 2.4868 5. Equivalent Annual Investment (1 ÷ 4) ` 3,21,699 6. Total Outflow per annum (EAC) = 3 + 5 ` 4,51,699 8. Preference I Decision: The Company may prefer Machine A, due to lower EAC (Equivalent Annual Costs) Note: Depreciation is not relevant, since Taxes are ignored.

Nov 2013.6

Machine B

` 6,00,000 2 years ` 2,50,000 1.7355 ` 3,45,722 ` 5,95,722 II


Question 4(a): Standard Costing – All Variances Computation (8 Marks) SP Limited produces a product ‘Tempex’ which is sold in a 10 kg packet. The Standard Cost Card per packet of ‘Tempex’ are as follows: Particulars ` 450 Direct Materials 10 kg @ ` 45 per kg 400 Direct Labour 8 hours @ ` 50 per hour 80 Variable Overhead 8 hours @ ` 10 per hour Fixed Overhead 200 Total 1,130 Budgeted output for the third quarter of a year was 10,000 Kg. Actual output is 9,000 kg. Actual Cost for this quarter are as follows: Particulars

` 4,09,400 3,64,000 72,500 1,92,000

Direct Materials 8,900 Kg @ ` 46 per Kg. Direct Labour 7,000 hours @ ` 52 per hour Variable Overhead incurred Fixed Overhead incurred You are required to calculate: (i) Material Usage Variance (iii) Material Cost Variance (v) Labour Rate Variance (vii) Variable Overhead Cost Variance Solution:

(ii) Material Price Variance (iv) Labour Efficiency Variance (vi) Labour Cost Variance (viii) Fixed Overhead Cost Variance

Similar to Nov 2011, Q.No.6(b) [See Page 8 of Nov 2011 QP] 1.

Col. (1): SQ × SP

Computation of Material Cost Variance Col. (2): AQ × SP

9,000 × ` 45 = ` 4,05,000

8,900 × ` 45 = ` 4,00,500

Usage Variance= ` 4,05,000 – ` 4,00,500 = ` 4,500 F

+

Col. (3): AQ × AP

8,900 × ` 46 = ` 4,09,400

Price Variance = ` 4,00,500 – ` 4,09,400 = ` 8,900 A

Total Material Cost Variance = ` 4,05,000 – ` 4,09,400 = ` 4,400 A 2. Col. (1): SH × SR 8 9,000 × * × ` 50 = ` 3,60,000 10

Computation of Labour Cost Variance Col. (2): AH × SR

7,000 × ` 50 = ` 3,50,000

Efficiency Var= ` 3,60,000 – ` 3,50,000 = ` 10,000 F

+

Col. (3): AH × AR

7,000 × ` 52 = ` 3,64,000

Rate Variance= ` 3,50,000 – ` 3,64,000 = ` 14,000 A

Total Labour Cost Variance = ` 3,60,000 – ` 3,64,000= ` 4,000 A * Note: 8 Hours for 10 Kgs. 3. 4.

8 × 10) – 72,500 = 500 A. 10 200 ) – 1,92,000 = 12,000 A. Computation of FOH Cost Variance = (AO × SR) – AFOH = (9,000 × 10

Computation of VOH Cost Variance = (SH × SR) – AVOH = (9,000 ×

Question 4(b): Funds Flow Statement The following are the summarized Balance Sheet of Flexon Limited as on 31st March 2012 and 2013: Nov 2013.7

(8 Marks) (in `)


Liabilities Share Capital General Reserve Profit & Loss A/c Sundry Creditors Bills payable Provision for Tax Total

31–03–2012 8,00,000 1,40,000 1,60,000 1,71,000 20,000 1,60,000

31–03–2013 8,00,000 1,80,000 2,70,000 1,67,000 30,000 1,80,000

14,51,000

16,27,000

Assets Goodwill Building Plant Investment (Long–Term) Stock Debtors Cash & Bank Total

31–03–2012 15,000 4,00,000 3,70,000 1,20,000 3,00,000 1,80,000 66,000 14,51,000

31–03–2013 15,000 3,60,000 5,20,000 1,50,000 2,30,000 2,00,000 1,52,000 16,27,000

Additional Information: (1) Depreciation charged during the year 2012–2013: – On Plant = ` 40,000 – On Building = ` 40,000 (2) Provision for Tax of ` 1,90,000 was made during the year 2012–2013. (3) Interim Dividend paid during the year 2012–2013: – Interim Dividend = ` 80,000 – Corporate Dividend Tax = ` 13,596 Prepare: (i) Statement of Changes in Working Capital (ii) Funds Flow Statement for the year ended 31st March 2013. Solution:

Refer Principles in Chapter 15 – Q.No.1 to Q.No.6

1. Schedule of Changes in Working Capital Particulars 31.3.2012 31.03.2013 A. Current Assets: Stock 3,00,000 2,30,000 Sundry Debtors 1,80,000 2,00,000 Cash and Bank Balances 66,000 1,52,000 Sub–Total Current Assets 5,46,000 5,82,000 B. Current Liabilities: Sundry Creditors 1,71,000 1,67,000 Bills Payable 20,000 30,000 Sub–Total Current Liabilities 1,91,000 1,97,000 C. Net Working Capital (A – B) 3,55,000 3,85,000 Adjustment: Increase in Working Capital 30,000 Total 3,85,000 3,85,000

Increase – 20,000 86,000 1,06,000 – 10,000 10,000 96,000 96,000

Decrease 70,000 – – 70,000 4,000 – 4,000 66,000 30,000 96,000

2. Provision for Taxation A/c Particulars

To Bank – Tax Paid

1,70,000

To balance c/d (given) Total

Particulars

` 1,80,000

`

By balance b/d

1,60,000

By P&L A/c – Tax Provision for the year

1,90,000

3,50,000

Total

3,50,000

3. Plant A/c Particulars

To balance b/d (given)

Particulars

` 3,70,000

By Depreciation

` 40,000

To Bank– Plant item Purchased during the year (balancing figure) Total

1,90,000

By balance c/d (given)

5,20,000

5,60,000

Total

5,60,000

Nov 2013.8

Gurukripa’s Guideline Answers for Nov 2013 CA Inter (IPC) Cost Accounting & Financial Management Exam 4. Adjusted P & L A/c (to compute Funds from Operations) Particulars Particulars `

To Depreciation (40,000 + 40,000) To Provision for Taxation To Interim Dividend & Corporate Dividend Tax thereon (80,000 + 13,596) To General Reserve (1,80,000 – 1,40,000) To Profit after all adjustments and years (2,70,000 – 1,60,000) Total

80,000 1,90,000 93,596 40,000 1,10,000 5,13,596

`

By Funds from Operations (bal. fig.)

5,13,596

Total

5,13,596

4. Statement of Sources and Application of Funds (Funds Flow Statement) Sources of Funds Application of Funds `

Funds from Operations (WN 3)

Total

5,13,596

5,13,596

`

Net Increase in Net Working Capital (WN 1) Purchase of Plant Item (WN 4) Purchase of Long Term Investment (1,50,000 – 1,20,000) Tax Paid (WN 2) Dividend Paid (Including Corporate Dividend Tax thereon) Total

Question 5: Theory – Various Topics

(4 × 4 = 16 Marks)

(a) Explain the following terms in relation to process costing: (i) Equivalent Production, (ii) Inter–Process profit.

(i) Page No. 8.5, Q.No.8, (ii) Page No. 8.6, Q.No.10

(b) Elaborate the practical application of Marginal Costing.

Page No. 11.11, Q.No.31

(c) What is Virtual Banking? State its advantages.

Page No. 16.13, Q.No.33

(d) What is Overcapitalization? State its causes and consequences.

Page No. 17.5, Q.No.11

Question 6(a): Comprehensive Machine Hour Rate Calculate Machine Hour Rate from the following particulars: Cost of Machine – Salvage Value – Estimated life of the Machine – Working Hours (per annum) – Hours required for Maintenance – Setting–Up Time required – Additional Information: (i) Power 25 units @ ` 5 per unit per hour. (ii) Cost of Repairs and Maintenance ` 26,000 per annum. (iii) Chemicals required for operating the Machine ` 2,600 per month. (iv) Overheads chargeable to the Machine ` 18,000 per month. (v) Insurance Premium (per annum) 2% of the cost of Machine (vi) No. of Operators – 02 (looking after three other Machines also) (vii) Salary per Operator per month ` 18,500 Solution:

1.

30,000 1,90,000 30,000 1,70,000 93,596 5,13,596

(8 Marks) ` 25,00,000 ` 1,25,000 25,000 Hours 3,000 Hours 400 Hours 8% of actual working hours

Similar to Page No. 17.5, Q.No.11

Assumptions – (a) Assumed that Maintenance and Set up are included in the Total Working Hours of 3,000 Hours. (b) Maintenance Hours of 400 Hours is Per Annum. (c) Maintenance and Set up time is non–productive, i.e. not absorbed for production purposes. (d) Power Cost is incurred only for Effective Hours, net of Maintenance and Set up.

Nov 2013.9

Gurukripa’s Guideline Answers for Nov 2013 CA Inter (IPC) Cost Accounting & Financial Management Exam 2.

Effective Hours p.a. (for absorption purposes) = 3,000 – 8% thereon – 400 = 2,360 hours.

3. Particulars

Statement of OH per annum Computation

`

Depreciation

3,000 (` 25,00,000 – ` 1,25,000) × 25,000

2,85,000

Repairs and Maintenance Power Chemicals Overheads Insurance

Given 2,360 hours ¯ 25 units ¯ ` 5 per unit 2,600 p.m. × 12 months 18,000 p.m × 12 months 25,00,000 × 2%

26,000 2,95,000 31,200 2,16,000 50,000

Operator’s Salary

(` 18,500 p.m × 12 months × 2 persons) ×

1 4

1,11,000

Total OH

Total OH

4. Machine Hour Rate =

Effective Machine Hours

` 10,14,200

=

2,360 hours

10,14,200

= ` 429.75 per machine hour.

Question 6(b): Credit Period Decision (8 Marks) PTX Limited is considering a change in its present credit policy. Currently it is evaluating two polices. The company is required to give a Return of 20% on the Investment in new Accounts Receivables. The Company’s Variable Costs are 70% of the Selling Price. Information regarding present and proposed policies are as follows: Present Policy Policy Option 1 Policy Option 2 Annual Credit Sales ` 30,00,000 ` 42,00,000 ` 45,00,000 Debtors Turnover Ratio 4 times 3 times 2.4 times Loss due to Bad Debts 3% of Sales 5% of Sales 6% of Sales Note:

Return on Investment in new Accounts Receivable is based on Cost of Investment in Debtors.

Which Option would you recommend? Solution: Particulars

Refer Principles in Chapter 16, Q.No.41 to Q.No.49 Present Option I

1. Sales

Option II

3. Contribution (1 – 2)

` 30,00,000 ` 21,00,000 ` 9,00,000

` 42,00,000 ` 29,40,000 ` 12,60,000

` 45,00,000 ` 31,50,000 ` 13,50,000

4. Cost of Sales = Variable Cost only

` 21,00,000

` 29,40,000

` 31,50,000

4 times

3 times

2.4 times

` 5,25,000 ` 1,05,000 3% = ` 90,000 ` 7,05,000

` 9,80,000 ` 1,96,000 5% = ` 2,10,000 ` 8,54,000

` 13,12,500 ` 2,62,500 6% = ` 2,70,000 ` 8,17,500

2. Variable Cost at 70%

5. Debtors Turnover Ratio 6. Average Debtors = 4 ÷ 5 7. Interest on Average Debtors at 20% 8. Bad Debts (as % of Sales) 9. Net Benefit (3 – 7 – 8)

Conclusion: Option I is preferable due to Maximum Net Benefit.

Question 7: Theory – Various Topics – any 4 out of 5

(4 × 4 = 16 Marks)

(a) What is the meaning of Margin of Safety (MOS)? State the relationship between Operating Leverage and Margin of Safety Ratio.

Page No. 11.7, Q.No.23 and Page No. 17.2, Q.No.4, pt 4(d)

(b) Describe the steps involved in the Budgetary Control Technique.

Page No. 12.3, Q.No.8

Nov 2013.10


(c) ‘Management of Marketable Securities is an integral part of investment of Cash.’ Comment.

Page No. 16.11, Q.No.27, 25, 26

(d) What do you mean by Capital Structure? State its significance on Financing Decision.

Page No. 18.6, Q.No.16, 18, 19

(e) (i) State the main elements of Leveraged Lease. (ii)State the Escalation Clause in Contract Costing.

(i) Page No. 21.5, Q.No.15, (ii) Page No. 6.14, Q.No. 6

Nov 2013.11

Gurukripa’s Guideline Answers for Nov 2013 CA Inter (IPC) Cost Accounting & Financial Management Exam Students’ Notes

Nov 2013.12