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The Institute of Chartered Financial Analysts of India University 2005 PE- II Costing and Financial Management - Question Paper

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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

RK

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


Dr.

Cr.

Particulars

RS.

Particulars

Rs.

To Materials consumed

23,01,000

By Sales (30,000

48,75,000

To Direct wages

12,05,750

units)

1,30,000

To Production Overheads

6,92,250

By Finished goods

To Administration Overheads

3,10,375

stock( 1,000 units)

To Selling and Distribution

3,68,875

By Work-in-

Overheads

22,750

progress :

97,500

To Preliminary Expenses

45,500

Materials

3,90,000

written off

3,250

55,250

65,000

To Goodwill written off

13,000

Wages

To Fines

16,250

26,000

To Interest On Mortgage

1,95,000

Production

To Loss on Sale of machine

3,83,500

Overheads 16.250

To Taxation

Bv Dividends received

To Net Profit for the year

By Interest on bank

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

Year

1

2

3

4

5

PVIFo.i6i

0.8696

0.7561

0.6575

0.5718

0.4972

PVIF0.20.t

0.8333D

0.6944

0.5787

0.4823

0.4019

PVIF0.25.t

0.80

0.64

0.512

0.4096

0.3277

PVIFo.30.t

0.7692

0.5917

0.4552

0.3501

0.2693

PVIFo.35.t

0.7407

0.5487

0.4064

0.3011

0.2230

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

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