Institute of Chartered Financial Analysts of India (ICFAI) University 2008 C.A Chartered Accountant Cost-Fm Solved - Question Paper

PAPER 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

All questions are compulsory.

Wor king notes should form part of the answer.

Quest ion 1

Answer any five of the following:

(i) What ar e the main objectives of cost accounting?

(ii) Discuss the treatment of over time premium in cost accounting.

(iii) Explain contr ollable and non-controllable cost with examples.

(iv) What ar e the main advantages of cost plus contract?

(v) Discuss the difference between allocation and apportionment of over head.

(vi) Standar d output in 10 hour s is 240 units; actual output in 10 hours is 264 units. Wages

r ate is Rs. 10 per hour. Calculate the amount of bonus and total wages under Emerson

Plan.

(5 2 = 10 Marks)

Answer

(i) The Main objectives of Cost Accounting are

1. Ascertainment of cost.

2. Determination of selling price.

3. Cost control and cost r eduction.

4. Ascertaining the pr oject of each activity.

5. Assisting management in decision-making.

6. Determination of break even point.

(ii) Treatment of over time premium under Cost Accounting:

The overtime premium is treated as follows:

1. If the overtime is resorted to at the desire of the customer, then the overtime

premium may be charged to the job directly.

2. If over time is required to cope with general production or for meeting ur gent orders,

the overtime pr emium should be treated as overhead cost of the par ticular

department or cost centre which wor ks over time.

3. If overtime is worked in a depar tment due to fault of another depar tment, the

overtime premium should be charged to the latter department.

PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2008

2

4. Overtime wor ked on account of abnormal conditions such as flood, earthquakes,

civil disturbance etc. should not be charged to cost but to costing Pr ofit and Loss

Account.

(iii) Contr ollable costs are those which can be influenced by the action of a specified member

of an undertaking. A business organization is usually divided into a number of

r esponsibility centres and each such centre is headed by an executive. Controllable

costs incurr ed in a par ticular responsibility centr e can be influenced by the action of the

executive heading that r esponsibility centre. Direct costs compr ising dir ect labour, direct

mater ials, direct expenses and some of the overhead are generally controllable by the

shop level management.

Non-controllable costs are those which cannot be influenced by the action of a specified

member of an undertaking. For example, expenditure incurred by the tool room is

contr ollable by the tool room manager but the share of the tool room expense which is

appor tioned to the machine shop cannot be controlled by the machine shop manager. It

is only in relation to a par ticular individual that a cost may be specified as controllable or

not.

Note: 1. A supervisor may be unable to control the amount of managerial remuneration

allocated to his depar tment but for the top management this would be a

controllable cost.

2. Depreciation would be a non-contr ollable cost in the shor t-term but controllable

in the long terms.

(iv) Costs plus contracts have the following advantages:

1. The contractor is assured of a fixed percentage of profit. There is no r isk of

incur ring any loss on the contract.

2. It is useful especially when the work to be done is not definitely fixed at the time of

making the estimate.

3. Contractee can ensure himself about the cost of the contract, as he is empowered

to examine the books and document of the contractor to ascertain the veracity of

the cost of the contract.

(v) The following are the differences between allocation and apportionment.

1. Allocation costs ar e directly allocated to cost centre. Over head which cannot be

dir ectly allocated are apportioned on some suitable basis.

2. Allocation allots whole amount of cost to cost centr e or cost unit where as

apportionment allots par t of cost to cost centr e or cost unit.

3. No basis r equired for allocation. Apportionment is made on the basis of area,

assets value, number of worker s etc.

PAPER 4 : COST ACCOUNTING AND FINANCI AL MANAGEMENT 3

(vi) Efficiency percentage = 110%

100

240

264

As per Emerson plan, in case of above 100% efficiency bonus of 20% of basic wages

plus 1% for each 1% increase in efficiency is admissible.

So, new bonus per centage = 20 + (110 100) = 30

30

Total Bonus =

hour)

per

rate

worked

(hours

100

30

= 30

Rs.

10

10

100

Total wages = Rs. (10 10) + 30 = Rs. 130.

Quest ion 2

TQM Ltd. has furnished the following information for the month ending 30th June, 2007:

Master Budget Actual Variance

Units produced and sold 80,000 72,000

Sales ( Rs.)

3,20,000 2,80,000 40,000 ( A)

Direct material ( Rs.)

80,000 73,600 6,400 (F)

Direct wages ( Rs.)

1,20,000 1,04,800 15,200 (F)

Variable overheads (Rs.) 40,000 37,600 2,400 (F)

Fixed overhead (Rs.)

40,000 39,200 800 (F)

Total Cost

2,80,000 2,55,200

The Standard costs of the products ar e as follows:

Per unit

( Rs.)

Direct materials (1 kg. at the rate of Re. 1 per kg.) 1.00

Direct wages ( 1 hour at the rate of Rs. 1.50) 1.50

Variable overheads (1 hour at the r ate of Re. .50) 0.50

Actual r esults for the month showed that 78,400 kg. of mater ial wer e used and 70,400 labour

hours were r ecorded.

Required:

(i) Prepare Flexible budget for the month and compar e with actual results.

(ii) Calculate mater ial, labour, sales price, variable overhead and fixed overhead expenditure

variances and sales volume (profit) var iance.

( 5 + 10 = 15 Marks)

PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2008

4

Answer

(i) Statement showing flexible budget and its comparison with act ual

Master

budget

Flexible budget (at

Actual for

Variance

standar d cost)

72,000

(80,000

units

units)

Per unit 72,000

units

A. Sales 3,20,000 4.00 2,88,000 2,80,000 8,000 ( A)

B. Dir ect material 80,000 1.00 72,000 73,600 1,600 ( A)

C. Dir ect wages 1,20,000 1.50 1,08,000 1,04,800 3,200 (F)

D. Variable overhead 40,000 0.50 36,000 37,600 1,600 ( A)

E. Total variable cost 2,40,000 3.00 2,16,000 2,16,000

F. Contr ibution 80,000 1.00 72,000 64,000

G. Fixed overhead 40,000 0.50 40,000 39,200 800 (F)

H. Net profit 40,000 0.50 32,000 24,800 7,200 ( A)

(ii) Variances:

Sales price variance = Actual Quantity (Standard Rate Actual Rate)

= 72,000 ( 4.00 3.89) = 8,000 (A)

Direct Material Cost Variance = Standar d Cost for actual output Actual cost

= 72,000 73,600 = 1,600 (A)

Direct Material Price Var iance = Actual Quantity ( Standard rate Actual Rate)

=

(F)

4,800

1.00

78,400

78,400

73,600

Direct Material Usage Variance = Standard Rate (Standar d Quantity Actual

Quantity)

= 1.0 (72,000 78,400) = 6,400 (A)

Direct Labour Cost Variance = Standard Cost for actual output Actual cost

= 1,08,000 1,04,800 = 3,200 ( F)

Direct Labour Rate Variance = Actual Hour ( Standard Rate Actual Rate)

1,04,800

=

(F)

800

1.5

70,400

70,400

PAPER 4 : COST ACCOUNTING AND FINANCI AL MANAGEMENT 5

Direct Labour Efficiency = Standard Rate (Standar d Hour Actual Hour)

Var iance = 1.5 (72,000 70,400) = 2,400 (F)

Var iable Overhead = Recovered variable over head Actual variable

overhead

= (72,000 0.50) 37,600 = 1,600 (A)

Fixed Overhead Expenditure = Budgeted fixed overhead Actual fixed

Variance

over head

= 40,000 39,200 = 800 (F)

Sales Volume (Profit) Var iance = Standard r ate of profit

(Budgeted Quantity Actual Quantity)

= .50 [80,000 72,000] = 4,000 (A)

Quest ion 3

(a) JK Ltd. produces a product AZE, which passes through two processes, viz., process I

and process II. The output of each process is treated as the r aw material of the next

process to which it is tr ansferred and output of the second process is transferr ed to

finished stock. The following data r elated to December , 2007:

Process I Process II

25,000 units intr oduced at a cost of Rs. 2,00,000

Mater ial consumed

Rs. 1,92,000 96,020

Dir ect labour

Rs. 2,24,000 1,28,000

Manufacturing expenses

Rs. 1,40,000 60,000

Nor mal wastage of input

10% 10%

Scr ap value of normal wastage (per unit) Rs. 9.90 8.60

Output in Units

22,000 20,000

Required:

( i) Prepare Process I and Process II account.

( ii) Prepare Abnor mal effective/wastage account as the case may be each pr ocess.

(b) ZED Company supplies plastic crocker y to fast food restaur ants in metropolitan city. One

of its products is a special bowl, disposable after initial use, for serving soups to its

customers. Bowls are sold in pack 10 pieces at a price of Rs. 50 per pack.

The demand for plastic bowl has been for ecasted at a fairly steady rate of 40,000 packs

every year. The company purchases the bowl dir ect from manufacturer at Rs. 40 per

pack within a three days lead time. The or dering and related cost is Rs. 8 per or der. The

storage cost is 10% per cent per annum of aver age inventory investment.

PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2008

6

Required:

( i) Calculate Economic Order Quantity.

( ii) Calculate number of orders needed ever y year .

( iii) Calculate the total cost of ordering and storage bowls for the year.

( iv) Determine when should the next order to be placed. ( Assuming that the company

does maintain a safety stock and that the present inventor y level is 333 packs with a

year of 360 working days.

(8 + 8 = 16 Marks)

Answer

(a)

Process I Account

Particulars Units Amount Particulars Units Amount

(in Rs.)

(in Rs.)

To Input 25,000 2,00,000 By Normal wastage 2,500 24,750

To Material 1,92,000 By Abnormal wastage 500 16,250

To Direct Labour 2,24,000 By Process II 22,000 7,15,000

To Manufacturing Exp. _____ 1,40,000

_____ _______

25,000 7,56,000

25,000 7,56,000

24,750

7,56,000

unit

per

32.50

Rs.

unit

per

Cost

2,500

25,000

Process II Account

Particular s Units Amount Particular s Units Amount

(in Rs.)

(in Rs.)

To Process I 22,000 7,15,000 By Normal wastage 2,200 18,920

To Material

96,020 By Finished stock 20,000 9,90,000

To Direct Labour 1,28,000

To Manufacturing Exp. 60,000

To Abnormal effect 200 9,900

_____ _______

22,200 10,08,920

22,200 10,08,920

18,920

9,99,020

unit

per

49.50

Rs.

unit

per

Cost

2,200

22,000

PAPER 4 : COST ACCOUNTING AND FINANCI AL MANAGEMENT 7

Abnormal Wastage Account

Particulars Units Amount Particulars Units Amount

(in Rs.)

(in Rs.)

T o Process I A/c 500 16,250 By Cash (Sal es) 500 4,950

By Costing Profit and

___ _____

Loss A/c ___ 11,300

500 16,250

500 16,250

Abnormal Effectives Account

Particulars

Unit Amount Particulars Units Amount

(in Rs.)

(in Rs.)

T o N ormal wastage 200 1,720 By Process II

A/c 200 9,900

T o C osting Profit and Loss ___ 8,180

___ ____

200 9,900

200 9,900

(b) (i) Economic Order Quantity

O

C

2

EOQ

UI

8

40,000

2

4

1,60,000 = 400 packs.

( ii) Number of orders per year

ts

requiremen

Annual

quantity

order

Economic

40,000

year

per

order

100

400

( iii) Ordering and storage costs

Rs.

Ordering costs : 100 or ders Rs. 8.00 800

Storage cost : (400/2) (10% of 40) 800

Total cost of ordering & stor age 1,600

( iv) Timing of next order

(a) Days requirement served by each order.

PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2008

8

days

working

of

No.

ts

requiremen

days

of

Number

year

a

in

order

of

No.

360

supply

days

3.6

100

This implies that each order of 400 packs supplies for r equirements of 3.6 days

only.

(b) Days requirement cover ed by inventor y

inventory

in

Units

order)

an

by

served

t

requiremen

(Day

quantity

order

Economic

t

requiremen

days

3

days

3.6

400

333

(c) Time interval for placing next order

Inventory left for days r equirement Lead time of delivery

3 days requirements 3 days lead time = 0

This means that next order for the replenishment of supplies has to be placed

immediately.

Quest ion 4

Answer any three of the following:

(i) Explain and illustrate cash break-even char t.

(ii) Discuss ABC analysis as a technique of inventory control.

(iii) Distinguish between Job evaluation and Merit r ating.

(iv) A company has fixed cost of Rs. 90,000, Sales Rs. 3,00,000 and Profit of Rs. 60,000.

Required:

(i) Sales volume if in the next period, the company suffered a loss of Rs. 30,000.

(ii) What is the margin of safety for a profit of Rs. 90,000? (3 3 = 9 Marks)

Answer

(i) In cash break- even chart, only cash fixed costs are considered. Non-cash items like

depreciation etc. are excluded from the fixed cost for computation of br eak- even point. It

depicts the level of output or sales at which the sales revenue will equal to total cash

outflow. It is computed as under:

Cost

Fixed

Cash

(Units)

BEP

Cash

Units

per

Cost

PAPER 4 : COST ACCOUNTING AND FINANCI AL MANAGEMENT 9

Hence for example suppose insur ance has been paid on 1st January, 2006 till 31st

December, 2010 then this fixed cost will not be consider ed as a cash fixed cost for the

period 1st January, 2008 to 31st December, 2009.

(ii) ABC Analysis as a technique of Inventory Control:

It is a system of inventor y control. It exer cises discriminating contr ol over different items

of stores classified on the basis of investment involved. Usually they are divided into

thr ee categories according to their importance, namely, their value and frequency of

r eplenishment during a period.

A categor y of items consists of only a small percentage i.e. about 10% of total items

handles by the stores but require heavy investment about 70% of inventory value,

because of their high price or heavy requirement or both.

B categor y of items are r elatively less important 20% of the total items of material

handled by stores and % of investment required is about 20% of total investment in

inventories.

C category 70% of total items handled and 10% of value.

For A category items, stocks levels and EOQ are used and effective monitor ing is done.

For B categor y same tools as in A category are applied.

For C category of items, there is no need of exer cising constant control. Or ders for

items in this group may be placed after 6 months or once in a year, after ascertaining

consumption requir ement.

(iii) Job Evaluation and Merit Rat ing:

Job evaluation is the assessment of the relative worth of jobs within a company and

merits rating are the assessment of the relative worth of the man behind the job.

PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2008

10

Job evaluation and its accomplishment are means to set up a rational wage and

salar y structure wher e as mer its rating provides a scientific basis for determining

fair wages for each wor ker based on his ability and perfor mance.

Job evaluation simplifies wage administration by bringing an uniformity in wage

rates wher e as mer its rating is used to determine fair r ate of pay for different

workers.

on

Contributi

(iv)

100

ratio

P/V

Sales

1,50,000

50%

100

3,00,000

( i) If in the next period company suffer ed a loss of Rs. 30,000, then

Contribution = Fixed Cost Profit

= Rs. 90,000 Rs. 30,000 (as it is a loss)

= Rs. 60,000.

60,000

on

Contributi

Then Sales =

1,20,000.

Rs.

or

.50

ratio

P/V

So, there will be loss of Rs. 30,000 at sales of Rs. 1,20,000.

90,000

Profit

( ii)

1,80,000.

Rs.

or

safety

of

Margin

.50

ratio

PV

Alternative solution of t his part:

Cost

Fixed

90,000 = Rs. 1,80,000

Break-even Sales =

Ratio

PV

.5

Profit

Cost

Fixed

Sales at profit of Rs. 90,000 =

Ratio

PV

90,000

90,000

= .5

1,80,000

= .5

= Rs. 3,60,000.

Mar gin of Safety = Sales Break-even Sales

= 3,60,000 1,80,000

= Rs. 1,80,000.

PAPER 4 : COST ACCOUNTING AND FINANCI AL MANAGEMENT 11

Quest ion 5

Answer any five of the following:

(i) Explain the r elevance of time value of money in financial decisions.

(ii) Discuss the features of Secured Premium Notes ( SPNs).

(iii) The following data relate to RT Ltd:

Rs.

Earning befor e interest and tax (EBIT) 10,00,000

Fixed cost

20,00,000

Earning Befor e Tax (EBT)

8,00,000

Required: Calculate combined lever age

(iv) Explain the concept of closed and open ended lease.

(v) Discuss the advantages of pr eference share capital as an instrument of raising funds.

(vi) Explain the principles of Trading on equity.

(5 2 = 10 Marks)

Answer

(i) Time value of money means that worth of a rupee received today is differ ent from the

wor th of a rupee to be received in future. The prefer ence of money now as compared to

futur e money is known as time pr eference for money.

A r upee today is more valuable than rupee after a year due to several reasons:

Risk there is uncertainty about the receipt of money in future.

Preference for pr esent consumption Most of the persons and companies in

general, pr efer current consumption over futur e consumption.

Inflation In an inflationary period a rupee today r epresents a greater r eal

pur chasing power than a rupee a year hence.

Investment opportunities Most of the persons and companies have a preference

for present money because of availabilities of opportunities of investment for

ear ning additional cash flow.

Many financial problem involve cash flow accruing at different points of time for

evaluating such cash flow an explicit consideration of time value of money is requir ed.

(ii) Secured premium notes is issued along with detachable warrant and is r edeemable after

a notified period of say 4 to 7 years. This is a kind of NCD attached with war rant. It was

fir st intr oduced by Tisco, which issued the SPNs to existing shar eholders on r ight basis.

Subsequently the SPNs will be repaid in some number of equal instalments. The warrant

PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2008

12

attached to SPNs gives the holder the right to apply for and get allotment of equity

shares as per the conditions within the time per iod notified by the company.

(iii) Cont ribution:

C = S V and

EBIT = C F

10,00,000 = C 20,00,000

C = 30,00,000

Operating lever age = C / EBIT = 30,00,000/10,00,000 = 3 times

Financial leverage = EBIT/EBT = 10,00,000/8,00,000 = 1.25 times

Combined leverage = OL x FL = 3 x 1.25 = 3.75 times

(iv) In the close-ended lease, the assets gets transferred to the lessor at the end of lease,

the risk of obsolescence, r esidual values etc. r emain with the lessor being the legal

owner of the assets. In the open-ended lease, the lessee has the option of pur chasing

the assets at the end of lease period.

(v) Advantages of Issue of Preference Shar es are:

( i) No dilution in EPS on enlarged capital base.

( ii) There is no risk of takeover as the prefer ence shareholders do not have voting

rights.

( iii) There is leveraging advantage as it bear s a fixed charge.

( iv) The prefer ence dividends are fixed and pre-decided. Preference shareholders do

not par ticipate in sur plus profit as the ordinar y shar eholder s

( v) Preference capital can be redeemed after a specified period.

(vi) The term trading on equity means debts are contracted and loans ar e raised mainly on

the basis of equity capital. Those who provide debt have a limited share in the firms

earning and hence want to be pr otected in ter ms of earnings and values repr esented by

equity capital. Since fixed charges do not var y with firms earning befor e interest and tax,

a magnified effect is produced on earning per share. Whether the leverage is favour able,

in the sense, increase in earning per share more propor tionately to the increased earning

before interest and tax, depends on the pr ofitability of investment proposal. If the r ate of

r eturns on investment exceeds their explicit cost, financial leverage is said to be positive.

PAPER 4 : COST ACCOUNTING AND FINANCI AL MANAGEMENT 13

Quest ion 6

The financial statement and operating r esults of PQR revealed the following position as on

31st March, 2006:

Equity share capital (Rs. 10 fully paid shar e)

Rs. 20,00,000

Wor king capital

Rs. 6,00,000

Bank overdr aft

Rs. 1,00,000

Cur rent ratio

2.5 : 1

Liquidity ratio

1.5 : 1

Propr ietary ratio ( Net fixed assets/Propr ietary fund)

.75 : 1

Cost of sales

Rs. 14,40,000

Debtors velocity

2 months

Stock turnover based on cost of sales

4 times

Gross profit ratio

20% of sales

Net profit ratio

15% of sales

Closing stock was 25% higher than the opening stock. There wer e also fr ee reserves brought

forward from earlier year s. Cur rent assets include stock, debtors and cash only. The cur rent

liabilities expect bank overdr aft treated as creditors.

Expenses include depreciation of Rs. 90,000.

The following infor mation was collected from the records for the year ended 31s t Mar ch, 2007:

Total sales for the year were 20% higher as compared to pr evious year.

Balances as on 31s t Mar ch, 2007 were : Stock Rs. 5,20,000, Creditors Rs. 4,15,000,

Debtors Rs. 4,95,000 and Cash balance Rs. 3,10,000.

Per centage of Gr oss profit on tur nover has gone up from 20% to 25% and ratio of

net profit to sales from 15% to 16%.

A portions of Fixed assets was very old ( book values Rs. 1,80,000) disposed for

Rs. 90,000. ( No depreciations to be provided on this item).

Long-term investments were pur chased for Rs. 2,96,600.

Bank overdraft fully dischar ged.

Per centage of depreciation to Fixed assets to be pr ovided at the rate in the

previous year.

Required:

(i) Prepare Balance Sheet as on 31s t March, 2006 and 31s t March, 2007.

(ii) Prepar e the fund flow statement for the year ended 31s t March, 2007. (15 Marks)

PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2008

14

Answer

Balance Sheet

Rs.

Rs.

Liabilities 31 March

31 March

Assets 31 March

31 March

2006

2007

2006

2007

Equity share capital

(Rs. 10 each fully

paid)

20,00,000 20,00,000 Fixed Assets

(Rs.18,90,000 Rs.90,000) 18,00,000 15,39,000

Reserve and

Surplus (balancing)

1,30,000 1,30,000 Long term investment 2,96,600

Profit & Loss A/c

(15% of sales)

2,70,000 6,15,600 Current Assets

(Rs. 10,00,000)

Current L iabilities

Stock 4,00,000 5,20,000

Bank Overdraft 1,00,000 Sundry D ebtors 3,00,000 4,95,000

Creditors 3,00,000 4,15,000 Cash at Bank (Balancing) 3,00,000 3,10,000

Total 28,00,000 31,60,600 Total 28,00,000 31,60,600

Calculat ion for 31 March, 2006

(i) Calculation of Curr ent Liabilities

Suppose that Curr ent Liabilities = x, then current assets will be 2.5 x

Wor king capital = Current Assets Current Liabilities

6,00,000 = 2.5x x

x = 6,00,000 / 1.5 = Rs. 4,00,000 (C.L.)

Other Current Liabilities = Current Liabilities Bank Overdr aft

( Creditors) 4,00,000 1,00,000 = Rs. 3,00,000

Cur rent Assets = 2.5 x 4,00,000 = Rs. 10,00,000

(ii) Liquid Ratio = Liquid Assets / Curr ent Liabilities or 1.5 = Liquid Assets / 4,00,000

= Rs.6,00,000

Liquid assets = Curr ent Assets Stock

6,00,000 = 10,00,000 Stock

So, Stock = Rs. 4,00,000

(iii) Calculation of fixed assets: Fixed assets to pr oprietary fund is 0.75, wor king capital is

therefore 0.25 of propr ietary fund. So,

6,00,000 / 0.25 x 0.75 = Rs. 18,00,000

PAPER 4 : COST ACCOUNTING AND FINANCI AL MANAGEMENT 15

(iv) Debtors = 2 / 12 Sales

2 / 12 18,00,000 = Rs. 3,00,000

(v) Sales = (14,40,000 / 80) 100 = Rs. 18,00,000

(vi) Net profit = 15% of Rs.18,00,000 = Rs. 2,70,000

Calculat ion for the year 31st March, 2007

(vii) Sales = 18,00,000 + ( 18,00,000 0.2) = 21,60,000

(viii) Calculation of fixed assets

Rs.

Rs.

To Opening balance 18,00,000 By Banks ( Sale)

90,000

By Loss on sales of Fixed asset 90,000

By P & L ( Dep) ( 5% as in

previous year) 81,000

________ By Balance b/d 15,39,000

Total 18,00,000

18,00,000

(ix) Net profit for the year 2007, 16% 21,60,000 = Rs. 3,45,600

Total Profit = 2,70,000 + 3,45,600 = Rs. 6,15,600

Calculation of fund from operat ion:

Net profit for the year 2007

= Rs. 3,45,600

Add: Depreciation Rs. 81,000

Loss on sale of assets Rs. 90,000 = Rs. 1,71,000

Total

= Rs. 5,16,600

Fund Flow Statement

Rs.

Rs.

Fund fr om operation 5,16,600 Increase in WC 3,10,000

Sales of fixed assets 90,000 Pur . of investment 2,96,600

6,06,600

6,06,600

PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2008

16

Schedule of changing working capital

31 March

31 March

Increase

Decrease

2006

2007

(+)

( )

A. Current Assets Rs. Rs. Rs. Rs.

Stock

4,00,000 5,20,000 1,20,000

Sundr y debtors 3,00,000 4,95,000 1,95,000

Cash at bank 3,00,000 3,10,000 10,000

10,00,000 13,25,000

B. Current Liabilities

Bank overdr aft 1,00,000 1,00,000

Sundr y creditors 3,00,000 4,15,000 1,15,000

4,00,000 4,15,000

Working capital 6,00,000 9,10,000

Increase in working capital 3,10,000

3,10,000

9,10,000 9,10,000 4,25,000 4,25,000

Quest ion 7

(a) ABC Ltd. wishes to r aise additional finance of Rs. 20 lakhs for meeting its investment

plans. The company has Rs.4,00,000 in the form of retained earnings available for

investment purposes. The following are the further details:

Debt equity ratio 25 : 75.

Cost of debt at the rate of 10 percent (before tax) upto Rs. 2,00,000 and 13%

(before tax) beyond that.

Ear ning per share, Rs. 12.

Dividend payout 50% of earnings.

Expected gr owth r ate in dividend 10%.

Current mar ket pr ice per shar e, Rs.60.

Companys tax rate is 30% and shar eholder s personal tax rate is 20%.

Required:

( i) Calculate the post tax average cost of additional debt.

( ii) Calculate the cost of retained ear nings and cost of equity.

( iii) Calculate the overall weighted average ( after tax) cost of additional finance.

( 8 Marks)

(b) C Ltd. is considering investing in a project. The expected original investment in the

project will be Rs. 2,00,000, the life of project will be 5 year with no salvage value. The

PAPER 4 : COST ACCOUNTING AND FINANCI AL MANAGEMENT 17

expected net cash inflows after depreciation but befor e tax during the life of the project

will be as following:

Year 1 2 3 4 5

Rs. 85,000 1,00,000 80,000 80,000 40,000

The pr oject will be depreciated at the rate of 20% on original cost. The company is

subjected to 30% tax rate.

Required:

( i) Calculate pay back period and aver age rate of return (ARR)

( ii) Calculate net present value and net pr esent value index, if cost of capital is 10%.

( iii) Calculate internal rate of retur n.

Note:The P.V. factors are:

Year P.V. at 10% P.V. at 37% P.V. at 38% P.V. at 40%

1 .909 .730 .725 .714

2 .826 .533 .525 .510

3 .751 .389 .381 .364

4 .683 .284 .276 .260

5 .621 .207 .200 .186

(8 Marks)

Answer

(a) Patter n of r aising capital = 0.25 20,00,000

Debt

=

5,00,000

Equity

= 15,00,000

Equity fund ( Rs. 15,00,000)

Retained earning = Rs. 4,00,000

Equity (additional) = Rs. 11,00,000

Total

= Rs. 15,00,000

Debt fund (Rs. 5,00,000)

10% debt = Rs. 2,00,000

13% debt = Rs. 3,00,000

Total

= Rs. 5,00,000

( i) Kd = Total Interest ( 1 t) / Rs. 5,00,000

= [20,000 + 39,000] (1 0.3)/ 5,00,000 or (41,300 / 5,00,000) 100 = 8.26%

PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2008