CA PE II Question Papers Group II
Cost Accounting and Financial Management November 2006
This Paper has 21 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) ABC Ltd. Manufactures two types of machinery equipments Y and Z and 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 Company’s products is as follows:
Equipment
Y Equipment
Z
Budgeted Production volume
Direct material cost 2,500 units
Rs. 300 per unit 3,125 units
Rs. 450 per unit
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 Machine hours worked Inspection hours
Y
Z 350
250 23,000
27,000 4,000
11,000
Total 600 50,000 15,000
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.
10 (0)
(b) Discuss the use of perpetual inventory records and continuous stock verification, and its advantages. 4 (0)
(c) Discuss the various reports provided by Cost Accounting Department. 4 (0)
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)
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 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
Normal process loss in quantity may be assumed to be 20% of material input. It has no realisable value.
Any quantity of Product ’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:
1,20,000 kgs. of Product ’A‘ input
Rs. 1,60,000 kgs. of Product ’A‘ input
Rs.
Materials Cost
Processing Costs 1,32,000
1,20,000 1,76,000
1,40,000
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. 6+4+4=14 (0)
3. (a) A Manufacturing Company has an installed capacity of 1,50,000 units per annum. Its cost structure is given below:
Rs.
(i) Variable cost per unit
Materials
Labour (subject to a minimum of Rs. 1,00,000 per month)
Overheads
10
10
4
(ii) Fixed overheads per annum 1,92,300
(iii) Semi-variable overheads per annum at 75% capacity (It will
will increase by Rs. 4,000 per annum for increase of every 5% of the
capacity utilisation or any part thereof) 60,000
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.
10 (0)
(b) Discuss briefly the principles to be followed while taking credit for profits on incomplete contracts. 4 (0)
4. (a) Distinguish between any two of the following: 2+2=4
(i) Cost control and Cost reduction. (0)
(ii) Controllable costs and Uncontrollable costs. (0)
(iii) Absolute ton–kms and Commercial ton–kms. (0)
(b) PQR Ltd., manufactures a special product, which requires ‘ZED’. The following particulars were collected for the year 2005–06:
- Monthly demand of Zed
- Cost of placing an order
- Re–order period
- Cost per unit
- Carrying cost % p.a.
- Normal usage
- Minimum usage
Maximum usage :
:
:
:
:
:
:
: 7,500 units
Rs. 500
5 to 8 weeks
Rs. 60
10%
500 units per week
250 units per week
750 units per week
Required:
(i)
(ii)
(iii)
(iv)
(v) Re–order quantity.
Re–order level.
Minimum stock level.
Maximum stock level.
Average stock level.
10 (0)
5. (a) RST Ltd. has two production departments: Machining and Finishing. There are three service departments: Human Resource (HR), Maintenance and Design. The budgeted costs in these service departments are as follows:
HR
Rs. Maintenance
Rs. Design
Rs.
Variable
Fixed 1,00,000
4,00,000
5,00,000 1,60,000
3,00,000
4,60,000 1,00,000
6,00,000
7,00,000
The usage of these Service Department’s output during the year just completed is as follows:
Provision of Service Output (in hours of service)
Providers of Service
Users of Service HR Maintenance Design
HR
Maintenance
Design
Machining
Finishing Total —
500
500
4,000
5,000
10,000 —
—
500
3,500
4,000
8,000 —
—
—
4,500
1,500
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 firm’s service department cost by step–down method.
(iii) Use the step–down method to reapportion the firm’s service department cost.
7 (0)
(b) What are the essential pre–requisites of integrated accounting system? Discuss. 3 (0)
(c) What are the advantages of inter–firm comparison system? Discuss. 4 (0)
6. (a) A proforma cost sheet of a Company provides the following particulars:
Amount per unit
(Rs.)
Raw materials cost
Direct labour cost
Overheads cost
Total cost
Profit
Selling Price 100
37.50
75
212.50
37.50
250
The Company keeps raw material in stock, on an average for one month; work–in progress, 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.
12 (0)
(b) Discuss the conflicts in Profit versus Wealth maximization principle of the Firm. 4 (0)
7. (a) A Company had the following Balance Sheet as on March 31, 2006:
Liabilities and Equity
Equity Share Capital
(one crore shares of Rs. 10 each)
Reserves and Surplus
15% Debentures
Current Liabilities Rs. (in crores)
10
2
20
8
40 Assets
Fixed Assets (Net)
Current Assets Rs. (in crores)
25
15
40
The additional information given is as under:
Fixed Costs per annum (excluding interest)
Variable operating costs ratio
Total Assets turnover ratio
Income-tax rate
Rs. 8 crores
65%
2.5
40%
40
Required:
Calculate the following and comment:
(i)
(ii)
(iii)
(iv) Earnings per share
Operating Leverage
Financial Leverage
Combined Leverage.
8 (0)
(b) Discuss the need for social cost benefit analysis. 4 (0)
8. (a) Discuss the financial ratios for evaluating company performance on operating efficiency and liquidity position aspects. 4 (0)
(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 t1 t2 t3
PVIF0.09.t 0.9174 0.8417 0.7722
8 (0)
9. (a) Discuss the dividend–price approach, and earnings price approach to estimate cost of equity capital. 2 (0)
(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
Depreciation
Salaries and Wages
Operating Expenses
Provision for Taxation
1,98,00,000
6,00,000
24,00,000
8,00,000
8,80,000
(B) 2,44,80,000
Net Operating Profit (A – B)
Non–recurring Income – Profits on sale of equipment
Retained earnings and profits brought forward
Dividends declared and paid during the year
Profit and Loss Account balance as on March 31, 2006 7,20,000
1,20,000
8,40,000
15,18,000
23,58,000
7,20,000
16,38,000
Balance Sheet as on
Assets March 31, 2005
(Rs.) March 31, 2006
(Rs.)
Fixed Assets:
Land
Buildings and Equipment
Current Assets:
Cash
Debtors
Stock
Advances
4,80,000
36,00,000
6,00,000
16,80,000
26,40,000
78,000
90,78,000
9,60,000
57,60,000
7,20,000
18,60,000
9,60,000
90,000
1,03,50,000
Balance Sheet as on
Liabilities March 31, 2005
(Rs.) March 31, 2006
(Rs.)
Share Capital
Surplus in Profit and Loss Account
Sundry Creditors
Outstanding Expenses
Income–tax payable
Accumulated Depreciation
on Buildings and Equipment 36,00,000
15,18,000
24,00,000
2,40,000
1,20,000
12,00,000
90,78,000 44,40,000
16,38,000
23,40,000
4,80,000
1,32,000
13,20,000
1,03,50,000
The original cost of equipment sold during the year 2005–06 was Rs. 7,20,000.
10 (0)