The Institute of Chartered Financial Analysts of India University 2005 PE- II Costing and Financial Management - Question Paper
CAPE - II:: Cost Accounting and Financial Management: November 2005
Roll No.....................
Total No. of Questions 9] [Total No. of Printed Pages10
Time Allowed : 3 Hours Maximum Marks : 100
Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers in Hindi, his answers in Hindi
will not be valued.
Question Nos.l and 6 are compulsory.
Attempt three questions out of the remaining Question numbers 2, 3, 4 and 5 and attempt two questions
from the remaining Question numbers 7, 8 and 9.
Working notes should form part of the answer.
Marks
1. (a) ABC Limited manufactures two radio models, the Nova which has been 4+4+2 produced for five years and sells for Rs. 900, and the Royal, a new model =10 introduced in early 2004, which sells for Rs. 1,140. Based on the following income statement for the year 2004-05, a decision has been made to concentrate ABC Limited's marketing resources on the Royal model and to begin to phase out the Nova mode.
ABC Limited Income statement for the year ending March 31, 2005
|
Royal |
Nova |
Total | |
|
Model |
Model | ||
|
Rs. |
Rs. |
Rs. | |
|
Sales |
45,60,000 1,98,00,000 |
2,43,60,000 | |
|
Cost of Goods sold |
31.92.000 1.25.40.000 |
1.57.32.000 | |
|
Gross margin |
13,68,000 |
72,60,000 |
86,28,000 |
|
Selling & |
9.78.000 |
58.30.000 |
68.08.000 |
|
Administrative |
3.90.000 |
14.30.000 |
18.20.000 |
|
Expenses |
4,000 |
22,000 | |
|
Net Income |
97.50 |
65 | |
|
Unit Produced and | |||
|
sold | |||
|
Net Income per unit | |||
|
sold | |||
Royal Nova Model Model Rs. Rs.
Direct materials 584 208
Direct Labour
Royal (3.5 hrs x Rs. 12) 42
Nova (1.5 hrs x Rs. 12) 18
Machine usage
Royal (4 hrs x Rs. 18) 72
Nova (8 hrs x Rs. 18) 144
Manufacturing overheads (applied on the basis of machine hours at a pre-determined rate of
Rs. 25 per hour) 100 200
Standard Cost 798 570
ABC Ltd's Controller is advocating the use of activity-based costing and activity-based cost management and has gathered the following information about the company's manufacturing overheads cost for the year ending March 31, 2005.
Activity center Traceable Number of Events
|
Royal |
Nova |
Total |
|
3,85,000 |
11,85,000 |
15,70,000 |
|
3,800 |
16,200 |
20,000 |
|
21,300 |
56,200 |
77,500 |
|
1,09,980 |
80,100 |
1,90,080 |
|
16,000 |
1,76,000 |
1,92,000 |
|
14,000 |
16,000 |
30,000 |
(Cost driver) costs
Rs.
Soldering (Number of solder joints)
Shipments (Number of shipments)
9.42.000
8.60.000 12,40,000
9,50,400
57,600
7,50.000
48,00,000
Quality control (Number of inspections)
Purchase orders (Number of orders)
Machine power (Machine hours)
Machine setups (Number of setups)
Total Traceable costs
RK Contind.
Required:
(i) Prepare a Statement showing allocation of manufacturing overheads using the principles of activity-based costing.
.... Prepare a Statement showing product cost and profitability using activity-based costing
..... Should ABC Ltd. continue to emphasize the Royal model and phase out the Nova model? Discuss.
(b) Discuss the essentials of a good Cost Accounting system. 4
(c) Discuss ABC analysis as a technique of inventory control. 4
From the following Information for the month ending October, 2005, prepare 14
Process Cost accounts for Process III. Use First-in-first-out (FIFO) method to
value equivalent production.
|
Direct materials added in process III (Opening WIP) Transfer from Process II Transferred to Process IV Closing stock of Process III Units scrapped Direct material added in Process III Direct wages Production Overheads |
2.000 units at Rs. 25,750 53.000 units at Rs. 4,11,500 48.000 units 5.000 units 2.000 units Rs. 1,97,600 Rs. 97,600 Rs. 48,800 |
|
Opening Stock |
Closing Stock |
Scrap | |
|
Materials |
80% |
70% |
100% |
|
Labour |
60% |
50% |
70% |
|
Overheads |
60% |
50% |
70% |
The normal loss in the process was 5% of production and scrap was sold at Rs. 3 per unit.
RK
3. (a) Discuss the circumstances under which a Cost Audit is ordered and the purpose of Cost Audit.
(b) The following is the Trading and Profit & Loss Account of Omega Limited
3+3+
4=10
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
deposits |
55,57,500
Omega Limited manufactures a standard unit.
The Cost Accounting records of Omega Ltd. show the following :
Production overheads have been charged to work-in-progress at 20% on Prime cost.
Administration Overheads have been recovered at Rs. 9.75 per finished
55,57,500
(i)
(>0
(iii)
Unit
Selling & distribution Overheads have been recovered at Rs. 13 per Unit sold.
The Under-or Over-absorption of Overheads has not been transferred to costing P/L A/c.
RK Contind.
RK
Required:
... Prepare a proforma Costing Profit & Loss account, indicating net profit.
(ii) Prepare Control accounts for production overheads, administration Overheads and selling & distribution Overheads.
(iii) Prepare a statement reconciling the profit disclosed by cost records with that shown in Financial accounts.
4. (a) A Re-roller produced 400 metric tons of M.S. bars spending Rs. 36,00,000 towards materials and Rs. 6,20,000 towards rolling charges. Ten percent of the output was found to be defective, which had to be sold at 10% less than the price for good production. If the sales realization should give the firm an Overall profit of 12.5% on cost, find the selling price metric ton of both the categories of bars. The scrap arising during the rolling process fetched a realization of Rs. 60,000.
6
(b) The existing Incentive system of Alpha Limited is as under :
2x4=8
Normal working week 5days of 8 hours each plus 3
late shifts of 3 hours each Rate of Payment Day work : Rs. 160 per hour
Late shift: Rs. 225 per hour
Average output per operator for 49-
hours week i.e. including 3 late shifts. 120 articles
In order to Increase output and eliminate Overtime, it was decided to switch on to a system of payment by results. The following Information is obtained :
Time-rate (as usual) : Rs. 160 per hour
Basic time allowed for 15 articles : 5 hours
Piece-work rate : Add 20% to basic piece-rate
Premium Bonus : Add 50% to time.
Required :
(i) Prepare a Statement showing hours worked, weekly earnings, number of articles produced and labour cost per article for one operator under the following systems :
(a) Existing time-rate
(b) Straight piece-work
RK
P.T.O.
RK
(c) Rowan system
(d) Halsey premium system
Assume that 135 articles are produced in a 40-hour week under straight piece work, Rowan Premium system, and Halsey premium system above and worker earns half the time saved under Halsey premium system.
(a) From the details furnished below you are required to Compute a comprehensive machine-hour rate :
14
Original purchase price of the machine (subject to depreciation at 10% per annum on original cost)
Rs. 3,24,000
200 hours Rs. 125 per day (of 8 hours)
RS. 75 per day (of 8 hours) Rs. 15,000
Rs. 3,000 Rs. 7,500
Normal working hours for the month (The machine works to only 75% of capacity)
Wages of Machine man Wages for a Helper (Machine attendant)
Power cost for the month for the time worked Supervision charges apportioned for the machine centre for the month Electricity & Lighting for the month Repairs & maintenance (machine) including Consumable stores per month
Rs. 17,500
Rs. 16,250 Rs. 27,500
Insurance of Plant & Building (apportioned) for the year
Other general expenses per annum
The workers are paid a fixed Dearness allowance of Rs. 1,5755 per month. Production bonus payable to workers in terms of an award is equal to 33.33% of basic wages and dearness allowance. Add 10% of the basic wage and dearness allowance against leave wages and holidays with pay to arrive at a comprehensive labour-wage for debit to production.
6. The following are the Balance Sheets of Gama Limited for the year ending March 31, 2004 and March 31, 2005 :
Balance Sheet as on March, 31
|
2004 |
2005 | |
|
Capital and Liabilities |
Rs. |
Rs. |
|
Share capital |
6,75,000 |
7,87,500 |
|
General Reserves |
2,25,000 |
2,81,250 |
|
Capital Reserve (Profit on Sale of |
11,250 | |
|
investment) |
1,12,500 |
2,25,000 |
|
Profit & Loss Account |
3,37,500 |
2,25,000 |
|
15% Debentures |
11,250 |
13,500 |
|
Accrued Expenses |
1,80,000 |
2,81,250 |
|
Creditors |
33,750 |
38,250 |
|
Provision for Dividends Provision for Taxation |
78,750 |
85,500 |
|
Total Assets |
16,53,750 |
19,48,500 |
|
Fixed Assets |
11,25,000 |
13,50,000 |
|
Less : Accumulated depreciation |
2,25,000 |
2,81,250 |
|
Net Fixed Assets |
9,00,000 |
10,68,750 |
|
Long-term Investments (at cost) |
2,02,500 |
2,02,500 |
|
Stock (at cost) Debtors (net of provision for doubtful debts of Rs. 45,000 and Rs. 56,250 respectively |
2,25,000 |
3,03,750 |
|
for |
2,53,125 |
2,75,625 |
|
2004 and 2005 respectively) |
45,000 |
73,125 |
|
Bills receivables |
11,250 |
13,500 |
|
Prepaid Expenses Miscellaneous Expenditure |
16,875 |
11,250 |
|
Total |
16,53,750 |
19,48,500 |
(i) During the year 2004-05, fixed assets with a net book value of Rs. 1,250 (accumulated depreciation, Rs. 33,750) was sold for Rs. 9,000.
(ii) During the year 2004-05, Investments costing Rs. 90,000 were sold, and also Investments costing Rs. 90,000 were purchased.
(iii) Debentures were retired at a Premium of 10%
(iv) Tax of Rs. 61,875 was paid for 2003-04.
(v) During the year 2004-05, bad debts of Rs. 15,750 were written off against the provision for Doubtful Debt account
(vi) The proposed dividend for 2003-04 was paid in 2004-05.
Required :
Prepare a Funds Flow Statement (Statement of changes in Financial Position on working capital basis) for the year ended March 31, 2005.
7. Using the following data, complete the Balance Sheet given below : 12
Gross Profits Shareholders Funds Gross Profit margin Credit sales to Total sales Total Assets turnover Inventory turnover
Rs. 54,000 Rs. 6,00,000 20%
80%
0.3 times 4 times 20 days 1.8 40%
Average collection period (a 360 days year)
Current ratio
Long-term Debt of Equity
Balance Sheet
Creditors ........ Cash
Long-term debt ........ Debtors
Shareholders ........ Inventory
funds Fixed assets
8. MNP Limited is thinking of replacing its existing machine by a machine by a 8+3+ new machine which would cost Rs. 60 lakhs. The company's current production 1=12 is 80,000 units, and is expected to Increase to 1,00,000 units, if the new machine is bought. The selling price of the product would remain unchanged at Rs. 200 per unit. The following is the cost of producing one unit of product using both the existing and new machine :
|
Existing |
New |
Unit cost | |
|
Machine |
Machine |
(Rs.) | |
|
(80,000 units) |
(1,00,000 units) |
Difference | |
|
Materials |
75.0 |
63.75 |
(11.25) |
|
Wages & salaries |
51.25 |
37.50 |
(13.75) |
|
Supervision |
20.0 |
25.0 |
5.0 |
|
Repairs and |
11.25 |
7.50 |
(3.75) |
|
Maintenance |
15.50 |
14.25 |
(1.25) |
|
Power and Fuel |
0.25 |
5.0 |
4.75 |
|
Depreciation Allocated Corporate Overheads |
10.0 |
12.50 |
2.50 |
|
183.25 |
165.50 |
17.75 |
The existing machine has an accounting book value of Rs. 1,00,000, and it has been fully depreciated for tax purpose. It is estimated that machine will be useful for 5 years. The supplier of the new machine has offered to accept the old machine for Rs. 2,50,000. However, the market price of old machine today is Rs. 1,50,000 and it is expected to be Rs. 35,000 after 5 year. The new machine has a life of 5 years and a salvage value of Rs. 2,50,000 at the end of its economic life. Assume corporate Income-tax rate at 40% and depreciation is charged on straight line basis for Income-tax purposes. Further assume that book profit is treated as ordinary income for tax purpose. The opportunity cost of capital of the company is 15%.
Required :
(i) Estimate net present value of the replacement decision.
(ii) Estimate the internal rate of return of the replacement decision.
|
RK (iii) Should Company go ahead with the replacement decision? Suggest | ||||||||||||||||||||||||||||||||||||
|
6+1+3 =10
9. (a) A company needs Rs. 31,25,000 for the construction of new plant. The following three plans are feasible :
(I) The Company may issue 3,12,500 equity shares at Rs. 10 per share.
(II) The company may issue 1,56,250 ordinary equity shares at Rs. 10 per share and 15,625 debentures of Rs. 100 denomination bearing a 8% rate of interest.
(Ill) The company may issue 1,56,250 equity shares at Rs. 10 per share and 15,625 preference shares at Rs. 100 per share bearing a 8% rate of dividend.
(i) If the Company's earnings before interest and taxes are Rs.
62,500, Rs. 1,25,000, Rs. 2,50,000, Rs. 3,75,000 and Rs.
6,25,000, what are the earnings per share under each of three financial plans? Assume a Corporate Income-tax rate of 40%.
(ii) Which alternative would you recommend and why?
(iii) Determine the EBIT-EPS indifference points by formulae between Financing Plan I and Plan II and Plan I and Plan III.
(b) Discuss Miller-Orr Cash Management model.
RK
2
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Attachment: |
| Earning: Approval pending. |
