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COST ACCOUNTING AND FINANCIAL MANAGEMENT
Question no.1 is compulsory.
Answer any five from the remaining six questions.
Working notes should form part of the answer.
(Time allowed = 3 hours) (Maxi. Marks= 100)
Question 1
a. The annual carrying cost of material 'X' is Rs. 3.6 per unit and its total carrying cost is Rs.9,000 per annum. What would be the Economic order quantity for material 'X', if there is no safety stock of material X ?
b. Short notes on
i. Perpetual inventory
ii. Retention money
iii. Stores layout
c. TQM Ltd. has furnished the following information for the month ending 30th June, 2007:
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| Master Budget | Actual | Variance |
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| Units produced and sold | 80,000 | 72,000 |
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| Sales (Rs.) | 3,20,000 | 2,80,000 | 40,000 (A) |
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| Direct material (Rs.) | 80,000 | 73,600 | 6,400 (F) |
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| Direct wages (Rs.) | 1,20,000 | 1,04,800 | 15,200 (F) |
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| Variable overheads (Rs.) | 40,000 | 37,600 | 2,400 (F) |
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| Fixed overhead (Rs.) | 40,000 | 39,200 | 800 (F) |
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| Total Cost | 2,80,000 | 2,55,200 |
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| The Standard costs of the products are as follows: |
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| Per unit |
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| Direct materials (1 kg. at the rate of Re. 1 per kg.) 1.00 | 1.00 |
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| Direct wages (1 hour at the rate of Rs. 1.50) | 1.50 |
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| Variable overheads (1 hour at the rate of Re. .50) | 0.50 |
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| Actual results for the month showed that 78,400 kg. of material were used and 70,400 labour hours were recorded. |
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| (i) Prepare Flexible budget for the month and compare with actual results. |
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| (ii) Calculate material, labour, variable overhead, fixed overhead and Sales variance. |
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(2+6+12=20 Marks)
Question 2
a. From the following data calculate which material is the fast moving material.
| Particular | Material A (Rs) | Material B (Rs) |
| Opening stock | 10,000 | 9,000 |
| Purchase during the year | 52,000 | 27,000 |
| Closing Stock | 6,000 | 11,000 |
b. Two hours allowed to a worker to produce 5 units and wages has been paid at Rs.25 per hour. In a 48 hour week , the worker produced 170 units. Calculate the total earnings and effectively hourly rate of earning of the worker under the following incentive wage systems- (a) Halsey 50% system, (b) Rowan system, (c) Emerson's Efficiency system, and (d) Barth system.
C) Explain and illustrate cash break-even chart.
d) In manufacturing the main product A, a company processes the resulting waste material into two byproducts X1 and X2. Using the method of working back from sales value to an estimated cost prepare a comparative profit and loss statement of the three products from the following data.
Total cost up to separation point was Rs.1,36,000
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| A | X1 | X2 |
| Sale – Rs. | 3,28,000 | 32,000 | 48,000 |
| Costs after separation – Rs. |
| 9,600 | 14,400 |
| Estimated net profit % to Sales value |
| 20% | 30% |
| Estimated selling expenses as % of sale vale | 20% | 20% | 20% |
(3+4+3+6=16 marks)
Question 3
a. A company has a P/V ratio of 40%. By what percentage must sales be increased to offset: 20% reduction in selling price?
b. A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of `30 per hour. The standard time per unit for a particular product is 4 hours. P, a machineman, has been paid wages under the Rowan Incentive Plan and he had earned an effective hourly rate of `37.50 on the manufacture of that particular product.
Required What could have been his total earnings and effective hourly rate, had he been put on Halsey Incentive Scheme (50%)?
C. If P/V ratio is 60% and the Marginal cost of the product is Rs.20. What will be the selling price?
d. A Company produces a component, which passes through two processes. During the month of April, 2006, materials for 40,000 components were put into Process I of which 30,000 were completed and transferred to Process II. Those not transferred to Process II were 100% complete as to materials cost and 50% complete as to labour and overheads cost. The Process I costs incurred were as follows:
Direct Materials Rs.15,000
Direct Wages Rs.18,000
Factory Overheads Rs.12,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished goods stores. There was a normal loss with no salvage value of 200 units in Process II.
There were 1,800 units, remained unfinished in the process with 100% complete as to materials and 25% complete as regard to wages and overheads.
No further process material costs occur after introduction at the first process until the end of the second process, when protective packing is applied to the completed components. The process and packing costs incurred at the end of the Process II were:
Packing Materials Rs.4,000
Direct Wages Rs.3,500
Factory Overheads Rs.4,500
Required:
(i) Prepare Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) Prepare statement of Equivalent Production, Cost per unit and Process II A/c.
(2+3+2+9=16 marks)
Question 4
- Distinguish between Job evaluation and Merit rating.
- Pass journal entries in the cost books, maintained on integrated system, for the following:
(i) Issue of materials Direct Rs.5,50,000; Indirect Rs.1,50,000
(ii) Allocation of wages Direct Rs.2,00,000; Indirect Rs.40,000
(iii) Under/over absorbed Factory (over) Rs.20,000;
overheads Administration (under) Rs.10,000.
c. Following information is forecasted by the CS Limited for the year ending 31st March, 2010:
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| Balance as at 1st April, 2009 | Balance as at 31st March, 2010 |
| Raw Material Work-in-progress Finished goods Debtors Creditors | 45,000 35,000 60,181 1,12,123 50,079 | 65,356 51,300 70,175 1,35,000 70,469 |
| Annual purchases of raw material (all credit) Annual cost of production Annual cost of goods sold Annual operating cost Annual sales (all credit) | 4,00,000 7,50,000 9,15,000 9,50,000 11,00,000 | |
You are required to calculate:
(i) Net operating cycle period.
(ii) Number of operating cycles in the year.
(iii) Amount of working capital requirement.
(4+6+6=16 marks)
Question 5
a. The following figures and ratios are related to a company:
(i) Sales for the year (all credit) Rs. 30,00,000
(ii) Gross Profit ratio 25 percent
(iii) Fixed assets turnover (based on cost of goods sold) 1.5
(iv) Stock turnover (based on cost of goods sold) 6
(v) Liquid ratio 1 : 1
(vi) Current ratio 1.5 : 1
(vii) Debtors collection period 2 months
(viii) Reserves and surplus to Share capital 0.6 : 1
(ix) Capital gearing ratio 0.5
(x) Fixed assets to net worth 1.20 : 1
You are required to prepare:
(a) Balance Sheet of the company on the basis of above details.
(b) The statement showing working capital requirement, if the company wants to make a provision for contingencies @ 10 percent of net working capital including such provision.
b. The following information for P.L. Forgings is given for your consideration:
Rs. in lakhs
Earnings before interest and tax (EBIT) 2,240
Profit before tax (PBT) 640
Fixed cost 1,400
You are required to calculate the percentage change in earnings per share if sales increased by 7 per cent.
c. The following is the capital structure of a Company:
| Source of capital | Book Value (Rs.) | Market Value (Rs.) |
| Equity Share @Rs.100 each | 80,00,000 | 1,60,00,000 |
| 9% cumulative preference Shares @ Rs.100 each | 20,00,000 | 24,00,000 |
| 11% debentures | 60,00,000 | 66,00,000 |
| Retained earnings | 40,00,000 | --- |
The current market price of the company's equity share is Rs.200. for the last year the company had paid equity dividend at 25 per cent and its dividend is likely to grow 5 per cent every year. The corporate tax rate is 30 per cent and share holders personal income tax rate is 20 per cent.
You are required to calculate:
(i) Cost of capital for each source of capital.
(ii) Weighted average cost of capital on the basis of book value weights.
(iii) Weighted average cost of capital on the basis of market value weights.
d. Explain briefly the features of External Commercial Borrowings. (ECB)
(6+2+5+3=16 marks)
Question 6
a. The Sales Manager of AB Limited suggests that if credit period is given for 1.5 months then sales may likely to increase by Rs. 1,20,000 per annum. Cost of sales amounted to 90% of sales. The risk of non-payment is 5%. Income tax rate is 30%. The expected return on investment is Rs. 3,375 (after tax). Should the company accept the suggestion of Sales Manager?
b. A company operates at a production level of 5,000 units. The contribution is Rs. 60 per unit, operating leverage is 6, combined leverage is 24. If tax rate is 30%, what would be its earnings after tax?
c. What is meant by Venture capital financing?
d. A company is evaluating its credit policy. The company sells the product on terms of net 30 days. Cost of goods sold is 87% of sales and fixed cost are further 5% sals. The company classifies its customers on a scale of 1 to 4. The experience of the company in the past are as below.
Classification Default as% of sales Average collection period in
days for non defaulting accounts
1 0 50
2 3 48
3 8 45
4 18 75
The average rate of interest is 16%. What conclusion do you draw about the company's credit,policy?
(4+3+3+6=16 marks)
Question 7
a. There are two firms P and Q which are identical except P does not use any debt in its capital structure, while Q has Rs.8,00,000, 9% Debentures in its capital structure. Both firms have EBIT of Rs.2,60,000 p.a and the capitalization rate is 10%. Assuming corporate tax 30%, calculate the value of these firm according to M&M hypothesis.
b. Name the various financial instruments dealt with in the International market.
c. A doctor is planning to buy an X-ray machine for his hospital. He has two options. He can either purchase it by making a cash payment of Rs.5 lacs or Rs.6,15,000 are to be paid in six equal annual installments. Which option do you suggest to the doctor assuming the rate of return is 12%? Present value of Re.1 at 12% rate of discount for 6 years is 4.111.
d. PR engineering Ltd is considering the purchase of a new machine which will carry out some operations which are at present performed by manual labour. The following information related to two alternative models- 'MX' and 'MY' are available:
| Particulars | Machine 'MX' | Machine 'MY' |
| Cost of machine Expected value Scrap value | Rs.8,00,000 6 years Rs.20,000 | Rs.10.20.000 6 years Rs.30,000 |
Estimated Net Income before Depreciation and taxes are as under:
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| Year1 | Year2 | Year3 | Year4 | Year5 | Year6 |
| Machine 'MX' Machine 'MY' | 2,50,000 2,70,000 | 2,30,000 3,60,000 | 1,80,000 3,80,000 | 2,00,000 2,80,000 | 1,80,000 2,60,000 | 1,60,000 1,85,000 |
Corporate tax rate this company is 30% and the company's required rate of return on investment proposals is 10%. Depreciation on straight line basis. You are required to:
1. Calculate the pay back period on each proposal.
2. Calculate the net present value on each proposal, if the PV factor at 10% is 0.909, 0.826, 0.751, 0.683, 0.621, and 0.564.
3. Which proposal would you recommend and why?
(4+3+3+6 = 16 marks)
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