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The Institute of Chartered Financial Analysts of India University 2005 PE- II Costing and Financial Management - exam paper

Thursday, 31 January 2013 01:50Web

CAPE - II:: Cost Accounting and Financial Management: May 2005

Roll No.....................

Total No. of Questions 9] Time Allowed : 3 Hours


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 Questions Nos. 7, 8 and 9.

Working notes should form part of the answer.


Discuss the essential requisites for the installation of uniform costing




(b)    Discuss the treatment of spoilage and defectives in cost accounting.




(c)    A B C D Co. Ltd. produces and sells four products A, B, C and D. These products are similar and usually produced in production runs of 10 units and sold in a batch of 5 units. The production details of these products are as follows :






Production (units)





Cost per unit:

Direct material (Rs.)





Direct labour (Rs.)





Machine hour rate (per unit)






The production overheads during the period are as follows


Factory works expenses


Stores receiving costs


Machine set up costs


Cost relating to quality control


Material handling and dispatch



The cost drivers for these overheads are detailed below :

Cost    Cost drivers

Factory works expenses    Machine hours

Stores receiving costs    Requisitions raised

Machine set up costs    No. of production runs

Cost relating to quality control    No. of production runs

Material handling and dispatch    No. of orders executed

The number of requisitions raised on the stores was 25 for each product and number of orders executed was 96, each order was in a batch of 05 units.


(i)    Total cost of each product assuming the absorption of overhead on machine hour basis;

(ii)    Total cost of each product assuming the absorption of overhead by using activity base costing; and

(iii)    Show the differences between (i) and (ii) and comments.

2. (a) Distinguish between :    3+2=5

(i)    Explicit and Implicit cost

(ii)    Job costing and Contract costing


(b) An engine manufacturing company has two production departments : (i) Snow mobile engine and (ii) Boat engine and two service departments: (i) Maintenance and (ii) Factory office. Budgeted cost data and relevant cost drivers are as follows:

Departments costs


Snow mobile engine


Boat engine


Factory office




Cost drivers :

Factory office department:

No. of employees

Snow mobile engine department


Boat engine department


Maintenance department



Maintenance department:

No. of work

Snow mobile engine department


Boat engine department


Maintenance department





(i)    Compute the cost driver allocation percentage and then use these percentage to allocate the service department costs by using direct method.

(ii)    Compute the cost driver allocation percentage and then use these percentage to allocate the service department costs by using nonreciprocal method/step method.

(c) SK Enterprise manufactures a special product "ZE". The following    2+1+1

particulars were collected for the year 2004 :    =4

12,000 units (360 days) Re. 1

Annual consumption Cost per unit Ordering cost inventory carrying cost Normal lead time Safety stock

Rs. 12 per order 24%

15 days

30 days consumption


(i)    Re-order quantity

(ii)    Re-order level what should be the inventory level (ideally) immediately before the


material order is received?

(a) Discuss the area of activity in respect of which cost accounting records are to be maintained.


(b) In order to develop tourism. ABCL airline has been given permit to operate 3+2=5 three flights in a week between X and Y cities (both side). The airline operates a single aircraft of 160 seats capacity. The normal occupancy is estimated at 60% through out the year of 52 weeks. The one way fare is Rs.

7, 200.

The cost of operation of flights are

Fuel cost (variable)

Food served on board on non-chargeable basis


Rs. 96,000 per flight Rs. 125 per passenger 5% of fare applicable for all booking

Rs. 3,50,000 per flight Rs. 72,000 per flight

Fixed cost: Aircraft lease Landing charges


(i)    Calculate the net operating income per flight.

(ii)    The airline expects that its occupancy will increase to 108 passengers per flight if the fare is reduced to Rs. 6,720. Advise whether this proposal should be implemented or not.


(c) A manufacturing unit has purchased and installed a new machine of Rs.

12,70,000 to its fleet of 7 existing machines. The new machine has an estimated life of 12 years and is expected to realise Rs. 70,000 as scrap at the end of its working life. Other relevant data are as follows :

(i)    Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 300 hours for plant maintenance and 92 hours for setting up of plant.

(ii)    Estimated cost of maintenance of the machine is Rs. 25,000 (p. a.)

(iii)    The machine require a special chemical solution, which is replaced at the end of each week (6 days in a week) at a cost of Rs. 400 each time.

(iv)    Four operators control operation of 8 machines and the average wages per person amounts to Rs. 420 per week plus 15% fringe benefits.

(v)    Electricity used by the machine during the production is 16 units per hour at a cost of Rs. 3 per unit. No current is taken during maintenance and setting up.

(vi)    Departmental and general works overhead allocated to the operation during last year was Rs. 50,000. During the current year it is estimated to increase 10% of this amount.

Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive.

( . Discuss the treatment of research and development expenditures in cost accounting.




(b)    Explain the area of cost reduction at product design stage.

(c)    The following figures have been extracted from the cost records of a manufacturing unit:


Stores : Opening balance


Purchases of material


Transfer from work-in-progress


Issues to work-in-progress


Issues to repair and maintenance


Deficiencies found in stock taking


Work-in-progress : Opening balance


Direct wages applied


Overheads applied


Closing balance of W.I.P.



Finish Products : Entire output is sold at a profit of 10% on actual cost from work-in-progress. Wages incurred Rs. 70,000, overhead incurred Rs.


Items not included in cost records : Income from investment Rs. 10,000,

Loss on sale of capital assets Rs. 20,000.

Draw up Store Control account, Work-in-progress Control account,

Costing Profit and Loss account, Profit and Loss account and Reconciliation statement.

5. (a) Explain:    2+3=5

(i)    Single and multiple overhead rate

(ii)    Sunk cost.

(b) A company produces two joint product X and Y, from the same basic 2+3+2 materials. The processing is completed in three departments.    +2=9

Materials are mixed in department I. At the end of this process X and Y get separated. After separation X is completed in the department II and Y is finished in department III. During a period 2,00,000 kgs of raw material were processed in department I, at a total cost of Rs. 8,75,000, and the resultant 60% becomes X and 30% becomes Y and 10% normally lost in processing.

In department II 1/6 of the quantity received from department I is lost in processing. X is further processed in department II at a cost of Rs.


In department III further new material added to the material received from department I and weight mixture is doubled, there is no quantity loss in the department and further processing cost (with material cost) is Rs. 1,50,000.

The details of sales during the year :

Product X 90,000 10

Product Y 1,15,000 4

Quantity sold (kgs) Sales price per kg (Rs.)

There were no opening stocks. If these products sold at split-off-point, the selling price of X and Y would be Rs. 8 and Rs. 4 per kg respectively.

(i)    Prepare a statement showing the apportionment of joint cost to X and

Y in proportion of sales value at split off point.

(ii)    Prepare a statement showing the cost per kg of each product indicating joint cost, processing cost and total cost separately.

(iii)    Prepare a statement showing the productwise profit for the year.

(iv)    On the basis of profits before and after further processing of product X and Y, give your comment that products should be further processed or not.

6. (a) XYZ Co. Ltd. is a pipe manufacturing company. Its production cycle    5+5

indicates that materials, are introduced in the beginning of the production =10 cycle; wages and overhead accrue evenly through out the period of the cycle. Wages are paid in the next month following the month of accrual.

Work in process includes full units of raw materials used in the beginning of the production process and 50% of wages and overheads are supposed to be conversion costs. Details of production process and the components of working capital are as follows :

Production of pipes Duration of the production cycle Raw material inventory held Finished goods inventory held for Credit allowed by creditors Credit given to debtors Cost price of raw materials Direct wages Overheads

12,00,000 units One month

One month consumption

Two months

One month

Two months

Rs. 60 per unit

Rs. 10 per unit

Rs. 20 per unit

Rs. 100 per unit

Selling price of finished pipes

Required to calculate :

(i)    The amount of working capital required for the company.

(ii)    Its maximum permissible bank finance under all the three methods of lending norms as suggested by the Tondon Committee, assuming the value of crore current assets : Rs. 1,00,00,000.


(b) D Ltd. is foreseeing a growth rate of 12% per annum in the next two years. The growth rate is likely to be 10% for the third and fourth year. After that the growth rate is expected to stabilise at 8% per annum. If the last dividend was Rs. 1.50 per share and the investor's required rate of return is 16%, determine the current value of equity share of the company.

The P.V. factors at 16%

Year    12 3 4

P.V. factor .862 .743 .641 .552

( . "Decision tree analysis is helpful in managerial decisions." Explain with an example.




(b) The R & G Company has following capital structure at 31st March, 2004, which is considered to be optimum :


13% debenture    3,60,000

11% preference share capital    1,20,000

Equity share capital (2,00,000 shares) 19,20,000

The company's share has a current market price of Rs. 27.75 per share. The expected dividend per share in next year isa 50 percent of the 2004 EPS. The EPS of last 10 years is as follows. The past trends are expected to continue :

Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 EPS (Rs.) 1.00 1.120 1.254 1.404 1.574 1.762 1.974 2.211 2.476 2.773

The company can issue 14 percent new debenture. The company's debenture is currently selling at Rs. 98. The new preference issue can be sold at a net price of Rs. 9.80, paying a dividend of Rs. 1.20 per share. The company's marginal tax rate is 50%.

(i)    Calculate the after tax cost (a) of a new debts and new preference share capital, (b) of ordinary equity, assuming new equity comes from retained earnings.

(ii)    Calculate the marginal cost of capital.

(iii)    How much can be spent for capital investment before new ordinary share must be sold? Assuming that retained earning available for next year's investment are 50% of 2004 earnings.




(iv) What will be marginal cost of capital (cost of fund raised in excess of the amount calculated in part (iii) if the company can sell new ordinary shares to net Rs. 20 per share? The cost of debt and of preference capital is constant.

8. (a) Explain the relevance of time value of money in financial decisions.

(b)    Discuss the eligibility criteria for issue of commercial paper.

(c)    The following is the income statement of XYZ Company for the year 2004 :


1.62.700 6,000



Add. : Equity in ABC Company's earning

Expenses :    Rs.

Cost of goods sold    89,300

Salaries    34,400

Depreciation    7,450

Insurance    500

Research and development    1,250

Patent amortisation    900

Interest    10,650

Bad debts    2,050 Income tax :


Deferred 6,600    8,150 Total expenses 1.550 1,54,650 Net income 14,050

Additional informations are :

(i)    70% of gross revenue from sales were on credit.

(ii)    Merchandise purchases amounting to Rs. 92,000 were on credit.

(iii)    Salaries payable totalled Rs. 1,600 at the end of year.

(iv)    Amortisation of premium on bonds payable was Rs. 1,350.


(v)    No dividends were received from the other company.

(vi)    XYZ Company declared cash dividend of Rs. 4,000.






Marketable securities


Accounts receivable


Allowance for bad debt




Prepared insurance


Accounts payable (for




Salaries payable


Dividends payable

(a)    Write notes on :



(i)    Venture capital financing

(ii)    Seed capital assistance.

(b)    With the help of the following information complete the Balance Sheet of MNOP Ltd. :

Equity share capital    Rs. 1,00,000

The relevant ratios of the company are as follows :    .40

Current debt to total debt    .60

Total debt to owner's equity    .60

Fixed assets to owner's equity    2 Times

Total assets turnover    8 Times

Inventory turnover



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