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The Institute of Chartered Financial Analysts of India University 2006 PE- II Costing and Financial Management - Question Paper

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CAPE - II:: Cost Accounting and Financial Management: November 2006

1. (a) ABC Ltd. Manufactures two types of machinery equipments Y and Z and 10+4+4 applies/absorbs overheads on the basis of direct-labour hours. The budgeted overheads and directlabour hours for the month of December,

2006 are Rs. 12,42,500 and 20,000 hours respectively. The information about Companys products is as follows:

Equipment

Y

2,500 units Rs. 300 per unit


Equipment

Z

3,125 units Rs. 450 per unit


Budgeted Production volume

Direct material cost

Direct labour cost

Y : 3 hours @ Rs. 150 per hour

X : 4 hours @ Rs. 150 per hour


Rs. 450


Rs. 600


ABC Ltd.s overheads of Rs. 12,42,500 can be identified with three major activities:

Order Processing (Rs. 2,10,000), machine processing (Rs. 8,75,000), and product inspection (Rs. 1,57,500). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. The data relevant to these activities is as follows:


Orders

processed

350

250

600


Machine hours worked

23.000

27.000

50.000


Inspection

hours

4.000

11.000 15,000


Y Z Total

Required

(i)    Assuming use of direct-labour hours to absorb/apply overheads to production, compute the unit manufacturing cost of the equipments Y and Z, if the budgeted manufacturing volume is attained.

(ii)    Assuming use of activity-based costing, compute the unit manufacturing costs of the equipments Y and Z, if the budgeted manufacturing volume is achieved.

(iii)    ABC Ltd.s selling prices are based heavily on cost. By using direct-labour hours as an application base, calculate the amount of cost distortion (under-costed or overcosted) for each equipment.


(iv) Discuss, how an activity-based costing might benefit ABC Ltd.

(b)    Discuss the use of perpetual inventory records and continuous stock verification, and its advantages.

(c)    Discuss the various reports provided by Cost Accounting Department.

RJ

P.T.O.

Marks

6+4+4


(2)

RJ

2. A Chemical Company carries on production operation in two processes. The material first pass through Process I, where Product A is produced.

Following data are given for the month just ended:

Material input quantity Opening work-in-progress quantity (Material 100% and conversion 50% complete)

2,00,000 kgs.

40.000    kgs. 1,60,000 kgs.

30.000    kgs. Rs. 75,000

Rs. 1,02,000

Rs. 20,000 Rs. 12,000

of material input.


Work completed quantity Closing work-in-progress quantity (Material 100% and conversion two-third complete)

Material input cost Processing cost

Opening work-in-progress cost Material cost Processing cost

Normal process loss in quantity may be assumed to be 20%

It has no realisable value.

Any quantity of Product4 A can be sold for Rs. 1.60 per kg.

Alternatively, it can be transferred to Process II for further processing and then sold as Product AX for Rs. 2 per kg. Further materials are added in Process

II, which yield two kgs. of product AX for every kg. of Product A of Process I.

Of the 1,60,000 kgs. per month of work completed in Process I, 40,000 kgs are sold as Product A and 1,20,000 kgs. are passed through Process II for sale as Product AX. Process II has facilities to handle upto 1,60,000 kgs. of Product A per month, if required.

The monthly costs incurred in Process II (other than the cost of Product A) are:

Materials Cost    1,32,000    1,76,000

A input Rs.


A input Rs.


Processing    1 20,000    1,40,000

Costs

Required:

(i)    Determine, using the weighted average cost method, the cost per kg. of Product A in Process I and value of both work completed and closing work-in-progress for the month just ended.

(ii)    Is it worthwhile processing 1,20,000 kgs. of Product A further?

(iii)    Calculate the minimum acceptable selling price per kg., if a potential buyer could be found for additional output of Product AX that could be produced with the remaining Product A quantity.

3. (a) A Manufacturing Company has an installed capacity of 1,50,000 units 10+4 per annum. Its cost structure is given below:

Rs.

(i)    Variable cost per unit

Materials    10

Labour (subject to a minimum of Rs. 1,00,000 per    10

month)    4

Overheads

(ii)    Fixed overheads per annum    1,92,300

(iii)    Semi-variable overheads per annum at 75% capacity

(It will    60,000

will increase by Rs. 4,000 per annum for increase of every 5% of the

capacity utilisation or any part thereof)

RJ    Contind...

(3)

RJ    Marks

The capacity utilisation for the next year is budgeted at 75% for first three months, 80% for the next six months and 90% for the remaining three months.

Required:

If the company is planning to have a profit of 20% on the selling price, calculate the selling price per unit for the next year.

(b) Discuss briefly the principles to be followed while taking credit for profits on incomplete contracts.

4. (a) Distinguish between any two of the following:    4+10

(i) Cost control and Cost reduction.

(ii)    Controllable costs and Uncontrollable costs.

(iii)    Absolute ton-kms and Commercial ton-kms.

(b) PQR Ltd., manufactures a special product, which requires ZED. The following particulars were collected for the year 2005-06:

(i)    Monthly demand of Zed

7,500 units Rs. 500 5 to 8 weeks Rs. 60 10%

500 units per week 250 units per week 750 units per week


(ii)    Cost of placing an order

(iii)    Re-order period

(iv)    Cost per unit

(v)    Carrying cost % p. a.

(vi)    Normal usage

(vii)    Minimum usage

(viii)    Maximum usage

Required:

(i)    Re-order quantity.

(ii)    Re-order level.

(iii)    Minimum stock level.

(iv)    Maximum stock level.

(v)    Average stock level.

(a) RST Ltd. has two production departments: Machining and Finishing. There 7+3+4 are three service departments: Human Resource (HR), Maintenance and Design. The budgeted costs in these service departments are as follows:

HR Maintenance Design Rs.    Rs.    Rs.

Variable

Fixed


1,00,000

4,00,000


1,60,000

3,00,000


1,00,000

6,00,000


5,00,000

4,60,000


7,00,000


The usage of these Service Departments output during the year just completed is as follows:

Provision of Service Output (in hours of service)

Providers of Service

Maintenance


Design


HR


500

3,500

4,000


4.500

1.500


Users of Service

HR    

Maintenance    500

Design    500

Machining    4,000

Finishing Total    5,000


10,000

,000


6,000


Required:

(i)    Use the direct method to re-apportion RST Ltd.s service department cost to its production departments.

(ii)    Determine the proper sequence to use in re-apportioning the firms service department cost by step-down method.

..... Use the step-down method to reapportion the firms service department cost.

RJ

P.T.O.


(4)

Marks

12+4


RJ

(b)    What are the essential pre-requisites of integrated accounting system? Discuss.

(c)    What are the advantages of inter-firm comparison system? Discuss.

6.    (a) A proforma cost sheet of a Company provides the following particulars:

Amount per unit (Rs.)

Raw materials cost    100

Direct labour cost    37.50

Overheads cost    75

Total cost    212.50

Profit    37.50

Selling Price    250

The Company keeps raw material in stock, on an average for one month; work-inprogress, on an average for one week; and finished goods in stock, on an average for two weeks.

The credit allowed by suppliers is three weeks and company allows four weeks credit to its debtors. The lag in payment of wages is one week and lag in payment of overhead expenses is two weeks.

The Company sells one-fifth of the output against cash and maintains cash-in-hand and at bank put together at Rs.37,500.

Required:

Prepare a statement showing estimate of Working Capital needed to finance an activity level of 1,30,000 units of production. Assume that production is carried on evenly throughout the year, and wages and overheads accrue similarly. Work-in-progress stock is 80% complete in all respects.

(b) Discuss the conflicts in Profit versus Wealth maximization principle of the Firm.

7.    (a) A Company had the following Balance Sheet as on March 31, 2006:

Liabilities and Equity

Rs. (in

Assets

Rs. (in

Equity Share Capital

crores)

Fixed Assets

crores)

(one crore shares of Rs.

(Net)

25

10 each)

10

Current

15

Reserves and Surplus

2

Assets

15% Debentures

20

40

The additional information given is as under:

40


Fixed Costs per annum (excluding interest)    Rs. 8

Variable operating costs ratio    crores

Total Assets turnover ratio    65%

Income-tax rate    2.5

40%

40

Required:

Calculate the following and comment:

(i)    Earnings per share

(ii)    Operating Leverage

(iii)    Financial Leverage

(iv)    Combined Leverage.

(b) Discuss the need for social cost benefit analysis.

RJ    Contind...

(5)

RJ    Marks

(a)    Discuss the financial ratios for evaluating company performance on    4+8 operating efficiency and liquidity position aspects.

(b)    Company UVW has to make a choice between two identical machines, in terms of Capacity, A and B\ They have been designed differently, but do exactly the same job.

Machine A costs Rs. 7,50,000 and will last for three years. It costs Rs.

2,00,000 per year to run.

Machine B is an economy model costing only Rs. 5,00,000, but will last for only two years. It costs Rs. 3,00,000 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 9%.

Required:

Which machine the company UVW should buy? The present value (PV) factors at 9% are:

Year    ti    t2    h

PVIFomt 0.9174 0.8417 0.7722

(a)    Discuss the dividend-price approach, and earnings price approach to estimate cost of equity capital.

(b)    From the information contained in Income Statement and Balance Sheet of A Ltd., prepare Cash Flow Statement:

Income Statement for the year ended March 31, 2006

Rs.

Net Sales

(A)

2,52,00,000

Less:

Cash Cost of Sales

1,98,00,000

Depreciation

6,00,000

Salaries and Wages

24,00,000

Operating Expenses

8,00,000

Provision for Taxation

8,80,000

(B)

2,44,80,000

Net Operating Profit (A - B) Non-recurring Income - Profits on sale of

7,20,000

equipment

1,20,000

Retained earnings and profits brought forward

8,40,000

15,18,000

Dividends declared and paid during the year

23,58,000

7,20,000

Profit and Loss Account balance as on March 31,

16,38,000

2006

P.T.O.

RJ


(6)

Assets

Fixed Assets:

Land

Buildings and Equipment Current Assets:

Cash

Debtors

Stock

Advances

RJ

Balance Sheet as on

March 31, 2005 (Rs.)

4.80.000

36.00.000

6.00.000

16.80.000

26.40.000

78.000

March 31, 2006 (Rs.)

Marks


9.60.000

57.60.000

7.20.000

18.60.000

9.60.000

90.000


Liabilities

March 31, 2005

March 31, 2006

(Rs.)

(Rs.)

Share Capital

36,00,000

44,40,000

Surplus in Profit and Loss Account

15,18,000

16,38,000

Sundry Creditors

24,00,000

23,40,000

Outstanding Expenses

2,40,000

4,80,000

Income-tax payable

1,20,000

1,32,000

Accumulated Depreciation on Buildings and Equipment

12,00,000

13,20,000

90,78,000

1,03,50,000

The original cost of equipment sold during the year 2005-06 was Rs. 7,20,000.

RJ







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