CA PE II Question Papers Group II

Cost Accounting and Financial Management May 2005

 

 

 

This Paper has 26 answerable questions with 0 answered.

Total No. of Questions— 9]
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.1 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.
Marks
1. (a) Discuss the essential requisites for the installation of uniform costing system. 3 (0)
(b) Discuss the treatment of spoilage and defectives in cost accounting. 3 (0)
(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 :
Products
Production (units)
Cost per unit:
Direct material (Rs.)
Direct labour (Rs.)
Machine hour rate (per unit) A
100

30
25
5 B
110

40
30
4 C
120

35
30
3 D
150

45
40
4
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 Rs.
22,500
8,100
12,200
4,600
9,600
57,000
The cost drivers for these overheads are detailed below :

Cost
Factory works expenses
Stores receiving costs
Machine set up costs
Cost relating to quality control
Material handling and dispatch Cost drivers
Machine hours
Requisitions raised
No. of production runs
No. of production runs
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.
Required:

(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.
4+4+4=12 (0)
2. (a) Distinguish between : 3+2=5
(i) Explicit and Implicit cost (0)
(ii) Job costing and Contract costing (0)
(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
Maintenance
Cost drivers : Rs.
6,00,000
17,00,000
3,00,000
2,40,000
Factory office department :
Snow mobile engine department
Boat engine department
Maintenance department No. of employees
1,080
270
150
1,500

Maintenance department :
Snow mobile engine department
Boat engine department
Maintenance department
No. of work orders
570
190
40
800
Required

(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 non–reciprocal method/step method.
2+3=5 (0)
(c) SK Enterprise manufactures a special product “ZE”. The following particulars were collected for the year 2004 :
Annual consumption
Cost per unit
Ordering cost
Inventory carrying cost
Normal lead time
Safety stock 12,000 units (360 days)
Re. 1
Rs. 12 per order
24%
15 days
30 days consumption
Required:

(i) Re – order quantity.
(ii) Re – order level.
(iii) What should be the inventory level (ideally) immediately before the material order is received?
2+1+1=4 (0)
3. (a) Discuss the area of activity in respect of which cost accounting records are to be maintained. 4 (0)
(b) In order to develop tourism. ABCL airline has been given permit to operate 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
Commission

Fixed cost :
Aircraft lease
Landing charges 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
Required:

(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.
3+2=5 (0)
(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. 2+3=5 (0)
4. (a) Discuss the treatment of research and development expenditures in cost accounting. 3 (0)
(b) Explain the area of cost reduction at product design stage. 3 (0)
(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. Rs.
32,000
1,58,000
80,000
1,60,000
20,000
6,000
60,000
65,000
2,40,000
45,000
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. 2,50,000.
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. 2+2+1+1+2=8 (0)
5. (a) Explain :- 2+3=5
(i) Single and multiple overhead rate (0)
(ii) Sunk cost. (0)
(b) A company produces two joint product X and Y, from the same basic materials. The processing is completed in three departments.
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. 1,80,000.
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 :

Quantity sold (kgs)
Sales price per kg (Rs.) Product X
90,000
10 Product Y
1,15,000
4
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.
Required :

(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 product wise 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.
2+3+2+2=9 (0)
6. (a) XYZ Co. Ltd. is a pipe manufacturing company. Its production cycle indicates that materials, are introduced in the beginning of the production 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
Selling price of finished pipes 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
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.
5+5=10 (0)
(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
P.V. factor 1
.862 2
.743 3
.641 4
.552
6 (0)
7. (a) “Decision tree analysis is helpful in managerial decisions.”Explain with an example. 5 (0)
(b) The R & G Company has following capital structure at 31st March, 2004, which is considered to be optimum :

13% debenture
11% preference share capital
Equity share capital (2,00,000 shares) Rs.
3,60,000
1,20,000
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
EPS (Rs.) 1995
1.00 1996
1.120 1997
1.254 1998
1.404 1999
1.574 2000
1.762 2001
1.974 2002
2.211 2003
2.476 2004
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.
2+1+2+2=7 (0)
8. (a) Explain the relevance of time value of money in financial decisions. 2 (0)
(b) Discuss the eligibility criteria for issue of commercial paper. 3 (0)
(c) The following is the income statement of XYZ Company for the year 2004 :

Sales
Add. : Equity in ABC Company’s earning

(Rs.)
1,62,700
6,000
1,68,700
Expenses :
Cost of goods sold
Salaries
Depreciation
Insurance
Research and development
Patent amortisation
Interest
Bad debts Rs.
89,300
34,400
7,450
500
1,250
900
10,650
2,050
Income tax :
Current
Deferred
Total expenses
Net income
6,600
1,550

8,150

1,54,650
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.
(vii) Changes in Current Assets and Current Liabilities were as follows :

Cash
Marketable securities
Accounts receivable
Allowance for bad debt
Inventory
Prepared insurance
Accounts payable (for merchandise)
Salaries payable
Dividends payable Increase
(Decrease)
Rs.
500
1,600
(7,150)
(1,900)
2,700
700
5,650
(2,050)
(3,000)
7 (0)
9. (a) Write notes on : 2+3=5
(i) Venture capital financing (0)
(ii) Seed capital assistance (0)
(b) With the help of the following information complete the Balance Sheet of MNOP Ltd. :
Equity share capital
The relevant ratios of the company are as follows :
Current debt to total debt
Total debt to owner’s equity
Fixed assets to owner’s equity
Total assets turnover
Inventory turnover Rs. 1,00,000

.40
.60
.60
2 Times
8 Times
7 (0)