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Gurukripas Guideline Answers for May 2015 CA Inter (IPC) Cost Accounting & Financial Management Exam

Gurukripas Guideline Answers to May 2015 Exam Questions


CA Inter (IPC) Cost Accounting & Financial Management
Question No.1 is compulsory (4 5 = 20 Marks).
Answer any five questions from the remaining six questions (16 5 = 80 Marks). [Answer any 4 out of 5 in Q.7]
Working Notes should form part of the answers.
Note:

Numbers for Page References are given as under


Book Title
Padhukas Students Handbook on Cost Accounting and Financial Management
Padhukas Cost Accounting and Financial Management A Practical Guide

Referred as
Handbook
Prac. Guide

Question 1(a): Marginal Costing Computation of PVR, BEP, etc.


5 Marks
ABC Limited started its operations in the year 2013 with a Total Production Capacity of 2,00,000 units. The following
information, for two years, are made available to you:
Year 2013
Year 2014
Sales (units)
80,000
1,20,000
34,40,000
45,60,000
Total Cost (`)
There has been to change in the Cost Structure and Selling Price and it is anticipated that it will remain unchanged in the year
2015 also. Selling Price is ` 40 per unit.
Calculate:(1) Variable Cost p.u. (2) PV Ratio, (3) BreakEven Point (in units), (4) Profit if the Firm operates at 75% of the capacity.
Solution:

Similar to Page 11.14 Illus 1 [M 09] and other Illustrations in Handbook.

1. Variable Cost per unit=


(using Level of Activity Method)
2. Fixed Cost

Difference in Costs
Difference in Prodn Quantity

` 45,60,000 ` 34,40,000
(1,20,000 80,000) units

= ` 28 per unit.

= Total Costs less Variable Costs (estimated using 80,000 units output level data)
= ` 34,40,000 (80,000 units` 28) = ` 12,00,000 [Note: 1,20,000 units level can also be taken here.]
Contribution p.u.
40 28
100 =
100 = 30%
Sale Pr ice p.u.
40

3.

PV Ratio =

4.

Break Even Quantity =

5.

Profit at 75% Sales Capacity

Fixed Costs
12,00,000
=
= 1,00,000 units.
40 28
Contribution per Unit

= Total Contribution Fixed Cost


= (2,00,000 units 75% ` 12 p.u.) ` 12,00,000 = ` 6,00,000

Question 1(b): Production and Cost Budget


5 Marks
XYZ Ltd is drawing a production plan for its two products Product xml and Product yml for the year 20152016. The
Companys Policy is to maintain Closing Stock of Finished Goods at 25% of the anticipated volume of sales of the
succeeding month.
The following are the estimated data for the two products:
Product
Budgeted Production (in units)
Direct Material (per unit)
Direct Labour (per unit)
Direct Manufacturing Expenses

xml
2,00,000
` 220
` 130
` 4,00,000

yml
1,50,000
` 280
` 120
` 5,00,000

May 2015.1

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Gurukripas Guideline Answers for May 2015 CA Inter (IPC) Cost Accounting & Financial Management Exam

The estimated units to be sold in the first four months of the year 20152016 are as under:
Product
April
May
June
xml
8,000
10,000
12,000
yml
6,000
8,000
9,000
Prepare: (1) Production Budget (Month wise), (2) Production Cost Budget (for first quarter of the year).
Solution:

July
16,000
14,000

Similar to Page 12.3 Illus 2 [RTP] in Practical Guide.


1. Production Budget (in units)
Product xml
April
May
June
Total
8,000
10,000
12,000
30,000

Particulars

Product yml
May
June
8,000
9,000

Total
Sales
23,000
Add:
Closing Stock (25% of
2,500
3,000
4,000
9,500
2,000
2,250
3,500
7,750
next months sales)
Less: Opening Stock
2,000
2,500
3,000
7,500
1,500
2,000
2,250
5,750
Production Quantity
8,500
10,500
13,000
32,000
6,500
8,250 10,250 25,000
Note: Opening Stock of April = Closing Stock of March, which is as per Companys Policy 25% of next months Sale.
Particulars
Direct Material
Direct Labour
Manufacturing Overhead

April
6,000

2. Production Cost Budget


Product xml

Product yml

32,000 units ` 220 = ` 70,40,000


32,000 units ` 130 = ` 41,60,000
4 ,00,000
32,000 units = ` 64,000
2,00,000

25,000 units ` 280 = ` 70,00,000


25,000 units ` 120 = ` 30,00,000
5,00,000
25,000 units = ` 83,333
1,50,000

Total
1,12,64,000
1,00,83,333
Note: Manufacturing OH is absorbed for the quantity produced during the above quarter on proportionate basis.

Question 1(c): Credit Granting Decision Decision Tree Analysis


5 Marks
A New Customer has approached a Firm to establish new business connection. The Customer require 1.5 month of credit. If
the proposal is accepted, the Sales of the Firm will go up by ` 2,40,000 per annum. The new customer is being considered as a
Member of 10% risk of nonpayment group.
The Cost of Sales amounts to 80% of Sales. The Tax Rate is 30% and the desired Rate of Return is 40% (after tax).
Should the Firm accept the offer? Give your opinion on the basis of calculations.
Solution:

Similar to Page 16.43 Illus 23 [N 11] in Handbook.

40%
= 57.14%
100% 30%
Since rotation of funds using Working Capital generates Operating Profit (i.e. EBIT), it is preferable to take Working
Capital related decisions on PreTax ROCE. Alternative assumptions / approaches exist in decisionmaking.

1. Since PostTax ROCE is 40% and Tax Rate is 30%, required PreTax ROCE =
Note:

2. Profitability of Sale to New Customer


Particulars
Less:

Sales Value
Cost of Sales at 80%

Less:

Interest Cost for ` 1,92,000 at 57.14% for 1.5 months = ` 1,92,000 57.14%

`
2,40,000
1,92,000

1.5
12

13,714

Net Benefit /Profit from Sale to New Customer


3. Evaluation of Risk of NonPayment

Possibility
Payment received

2,05,714
34,286

Chance
Benefit
90%
` 34,286

Expected Benefit

` 30,857

I Make Credit Sale

10,286

Options

10%
No Payment received
(` 2,05,714)
(` 20,571)
II Do not sell
No CostNo Benefit
Decision: As there is a Net Expected Benefit of ` 10,286, the offer from New Customer is acceptable.

` Nil

May 2015.2

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Gurukripas Guideline Answers for May 2015 CA Inter (IPC) Cost Accounting & Financial Management Exam
Alternative Approach: Assuming that 90% of Bill is fully recoverable and 10% is not recoverable at all, the computation
can be made as under
(without using Decision Tree Approach)
Particulars
`
Sales Value
2,40,000
Less: Cost of Sales at 80% of Sales
1,92,000
Less: Bad Debts at 10% of Sales
24,000
2,16,000
Pre Tax Income
24,000
Post Tax Income = Benefit (24,000 less 30% thereon)
16,800
1.5
Less: Interest Cost on Investment in Receivables = ` 1,92,000 40%
9,600
12
Net Benefit /(Cost) from Sale to New Customer

7,200

Question 1(d): Operating and Combined Leverage


5 Marks
Following information are related to four Firms of the same industry
Firm
Change in Revenue
Change in Operating Income
Change in Earnings Per Share
P
27%
25%
30%
Q
25%
32%
24%
R
23%
36%
21%
S
21%
40%
23%
Find out (1) Degree of Operating Leverage, and (2) Degree of Combined Leverage for all the Firms.
Solution:
Firm

P
Q
R
S

Similar to Page 17.3 Illus 5 [N 04] in Practical Guide.


DOL =

% Change in EBIT
% Change in Sales
25%
27%
32%
25%
36%
23%
40%
21%

DCL =

% Change in EPS
% Change in Sales
30%
27%
24%
25%
21%
23%
23%
21%

= 0.926
= 1.280
= 1.565
= 1.905

= 1.11
= 0.96
= 0.91
= 1.09

Question 2(a): VOH & FOH Variances


QS Ltd has furnished the following information
Standard Overhead Absorption Rate per unit
` 20
Standard Rate per hour
`4
Budgeted Production
12,000 units
Actual Production
15,560 units
Actual Working Hours
` 74,000
Actual Overheads amounted to ` 2,95,000 out of which ` 62,500 are fixed.
Overheads are based on the following Flexible Budget.
Production (units)
8,000
1,80,000
Total Overheads (`)

10,000
2,10,000

8 Marks

14,000
2,70,000

Calculate the following Overhead Variances (on the basis of hours)


(i) Variable Overhead Efficiency and Expenditure Variance.
(ii) Fixed Overhead Efficiency and Capacity Variance.
May 2015.3

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Gurukripas Guideline Answers for May 2015 CA Inter (IPC) Cost Accounting & Financial Management Exam
Solution:

Similar to Page 10.26 Illus 10 [M 12] in Handbook.


1. Basic Calculations
Variable OH

Fixed OH
FOH Std Rate p.u = Total Std Absorption Rate
` 20 p.u VOH ` 15 p.u = ` 5 p.u
` 5 pu
FOH Std Rate p.h. =
= ` 1 p.h.
` 5 ph

OH
2,10,000 1,80,000
30,000
VOH Std Rate pu=
=
=
=` 15 pu
Qtty (10,000 8,000) uts 2,000 uts

VOH Std Rate p.h. =

` 15 pu
= ` 3 p.h.
` 5 ph

Note: Standard Time p.u. =

` 20 pu
= 5 hours p.u
` 4 ph

2.VOH Variance Computation based on Time


Col.(1): SH SR
Col.(2):AH SR

(15,560 units 5 hrs) ` 3 p.h. = ` 2,33,400

74,000 hrs 3 p.h. = ` 2,22,000

VOH Efficiency Variance


= ` 2,33,400 ` 2,22,000
= ` 11,400 F

Col.(3):AVOH

2,95,000 62,500 = ` 2,32,500

VOH Expenditure Variance


= ` 2,22,000 ` 2,32,500
= ` 10,500 A

Total VOH Cost Variance


= ` 2,33,400 ` 2,32,500 = ` 900 F

Col. (1): AO SR

15,560 units ` 5 p.u


= ` 77,800

3.Computation of FOH Variances


Col. (2): AH SR
Col. (3): BFOH
74,000 hrs 1 p.h.
12,000 units ` 5
= ` 74,000
= ` 60,000

FOH Efficiency Variance


= ` 77,800 ` 74,000 = ` 3,800 F

FOH Capacity Variance


= ` 74,000 ` 60,000=` 14,000 F

FOH Volume Variance = ` 77,800 ` 60,000=` 17,800 F

Col. (4): AFOH

` 62,500 (Given)

FOH Expenditure Variance


= ` 60,000 ` 62,500 = ` 2,500 A

+ FOH Expenditure Variance b/fd as above =` 2,500 A

Total FOH Cost Variance = ` 77,800 ` 62,500 = ` 15,300 F


Note: All Variance Computations are shown above for clarity purposes.

Question 2(b): P & L Account and Balance Sheet Preparation from Ratios
SSR Ltd has furnished the following ratios and information for the year ending 31st March.
Sales
` 60,00,000 Current Ratio
Return on Net Worth
25% Cost of Goods Sold
Tax Rate
50% Interest on Debentures at 15%
Share Capital to Reserves
7 : 3 Sundry Debtors & Sundry Creditors
Net Profit to Sales (after Tax)
6.25% Inventory T/O (based on COGS and Closing Stock)

8 Marks
2 times
` 18,00,000
` 60,000
Each ` 2,00,000
12 Times

You are required to (1) Calculate the Operating Expenses for the year, and prepare a Balance Sheet as at 31st March.
Solution:

Same as Page 14.14 Illus 14 [RTP] in Practical Guide.


Working Notes and Calculations

` 18,00,000
` 18,00,000
Cost of Goods Sold
=
= 12.
So, Closing Stock=
= ` 1,50,000
Average Stock
12
Average Stock
Note: As specified in the Question, Inventory T/o is taken based on Closing Stock, rather than Average Stock.

1. Stock T/O =

May 2015.4

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Gurukripas Guideline Answers for May 2015 CA Inter (IPC) Cost Accounting & Financial Management Exam
2. Current Ratio =

Current Assets
Current Liabilities

= 2 times. So,

Current Assets = 2 Current Liabilities = 2 Creditors

Hence, Current Assets = 2 ` 2,00,000 = ` 4,00,000


Inventory
(WN 1) = ` 1,50,000

3.

Return on Net Worth (posttax) =

Debtors
(given) = ` 2,00,000

Cash and Bank


(bal. fig) ` 50,000

` 3,75,000
` 3,75,000
EAT
=
= 25%. So, Equity =
= ` 15,00,000
Equity
25%
Equity
Share Capital
Reserves & Surplus
7
3
= ` 10,50,000
= ` 4,50,000
10
10

4. Profit and Loss Statement (to compute Operating Expenses as bal. figure)
Particulars
Computation
Less:
Less:
Less:
Less:

I
(1)
(2)

Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
EBIT
Interest on Debentures
EBT
Tax at 50%
EAT

Given
Given
(balancing figure) (i.e. Gross Profit less EBIT)
By reverse working (EBT + Interest)
Given
By reverse working (EAT + Tax)
Since Tax Rate = 50% on EBT, EAT = balance 50%. Hence, Tax = EAT
= Net Profit after Tax = 6.25% on Sales of ` 60,00,000

5. Balance Sheet as on 31st March


Particulars as at 31st March
EQUITY AND LIABILITIES:
Shareholders Funds:
(WN 3)
Share Capital
Reserves and Surplus
(WN 3)
NonCurrent Liabilities

(3)

Current Liabilities:

II
(1)
(2)

ASSETS
NonCurrent Assets
Current Assets:
(a) Inventories
(b) Trade Receivables
(c) Cash and Cash Equivalents

15% Debentures

` 60,000

15%
Trade Payables, i.e. Creditors (given)
Total

Fixed Assets (balancing figure)

Note

This Year

`
60,00,000
18,00,000
42,00,000
33,90,000
8,10,000
60,000
7,50,000
3,75,000
3,75,000

Prev. Yr

10,50,000
4,50,000
4,00,000
2,00,000
21,00,000
17,00,000
1,50,000
2,00,000
50,000
21,00,000

(WN 1)
Debtors (given)
(WN 2)
Total

Question 3(a): Operating Costing


8 Marks
A MiniBus, having a capacity of 32 Passengers, operates between two places A and B. The distance between the Place A
and Place B is 30 km. The Bus makes 10 round trips in a day for 25 days in a month. On an average, the Occupancy Ratio is
70% and is expected throughout the year.
The details of other expenses are as under: Amount in `
Insurance
Garage Rent
Road Tax
Repairs
Salary of Operating Staff

15,600 per annum


2,400 per quarter
5,000 per annum
4,800 per quarter
7,200 per month
May 2015.5

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Gurukripas Guideline Answers for May 2015 CA Inter (IPC) Cost Accounting & Financial Management Exam

Tyres and Tubes


3,600 per quarter
Diesel: (one Litre is consumed for every 5 km)
13 per Litre
Oil and Sundries
22 per 100 km run
Depreciation
68,000 per annum
Passenger Tax @ 22% on Total Taking is to be levied and Bus Operator requires a Profit of 25% on Total Taking.
Prepare Operating Cost Statement on annual basis and find out the Cost per Passenger Kilometer and OneWay Fare per
Passenger.
Solution:

1.

Similar to Page 9.9 Illus 11 [RTP] in Practical Guide.

No. of Passengers = 3270%= 22.4; No. of Kms p.a. = 10 trips 2 ways 30 kms 25 days 12 months =1,80,000
So, Total Number of PassengerKms p.a. = 22.4 1,80,000 = 40,32,000

2. Statement of Operating Costs and Revenues p.a.


Particulars
Computation
Insurance
Fixed
Given
Garage Rent
Fixed
(` 2,400 per quarter 4 quarters)
Road Tax
Fixed
Given
Repairs
Fixed
(` 4,800 per quarter 4 quarters)
Salary of Operating Staff
Fixed
(` 7,200 per month 12 months)
Tyres & Tubes
Fixed
(` 3,600 per quarter 4 quarters)
1,80,000 kms
` 13 per litre
Diesel
Variable
5 kms

Oil & Sundries

Variable

Depreciation
Total Operating Costs
Passenger Tax
Add:
Add:
Profit Margin
Total Takings

Fixed

`
15,600
9,600
5,000
19,200
86,400
14,400
4,68,000

1,80,000 kms
` 22
100 kms
Given
100% 25% 22% = 53% of Takings
Given 22% of Takings
Given 25% of Takings
100%

39,600
68,000
7,25,800
3,01,275
3,42,358
13,69,433

Note: It is given that Profit=25% of Takings, & Passenger Tax=22% of Takings. Hence, Total Operating Cost = 100% 25%
7,25,800
22% = 53% of Total Takings, which equals ` 7,25,800. Hence, Total Takings =
= ` 13,69,433. Now, Profits and
53%
Passenger Tax are calculated at 25% and 22% respectively, on Total Takings.
7,25,800
= ` 0.18
40,32,000

13,69,433
= ` 0.34
40,32,000
Hence, OneWay Fare per Passenger = 30 km ` 0.34 = ` 10.20

Question 3(b): Reverse Working with IRR, PI and NPV

8 Marks

3. Cost per PassengerKm. =

Given below are the data on a Capital Project M:


Annual Cost Saving
Useful Life
Internal Rate of Return
Profitability Index
Salvage Value
Given the following table of discount factors
Discount Factor
15%
1 year
0.869
2 years
0.756
3 years
0.658
4 years
0.572

Fare per PassengerKm =

` 60,000
4 years
15%
1.064
0

You are required to calculate for this Project M


1. Cost of Project
2. Payback Period
3. Cost of Capital
4. Net Present Value

14%
0.877
0.769
0.675
0.592

13%
0.885
0.783
0.693
0.613

12%
0.893
0.797
0.712
0.636

May 2015.6

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Solution:

Same as Page 20.6 Illus 05 [M 09] in Practical Guide.

1. Since IRR = 15%, Discounted Cash Inflows at 15% = Initial Investment in the Project.
So, Cost of Project = Initial Investment = CFAT p.a. Cum. PVF at 15% for 4 years = ` 60,000 2.855

` 1,71,300

` 1,71,300
Initial Investment
2. Payback Period =
=
=
` 60,000
CFAT per annum
3. Profitability Index =

2.855 yrs

Total DCFAT
= 1.064 (given). So, Total DCFAT = PI Initial Investment =
Initial Investment

1.064 1,71,300
= ` 1,82,263

DCFAT = CFAT p.a. PVF at Ko. On substitution, ` 1,82,263 = ` 60,000 PVF at Ko.
` 1,82,263
On solving, PVF at Ko =
= 3.038. From the above Table, Ko= 12%
` 60,000

Ko= 12%

4. NPV = Total DCFAT (WN 3) Initial Investment (WN 1) = ` 1,82,263 ` 1,71,300

` 10,963

Question 4(a): By Product Income Accounting


8 Marks
A Company manufactures one Main Product (M1) and two byproducts B1 and B2. For the month of January, the following
details are available:
Total Cost upto Separation Point ` 2,12,400
M1
B1
B2
Cost after separation

` 35,000
` 24,000
No. of units produced
4,000
1,800
3,000
Selling Price per unit
` 100
` 40
` 30
Estimated Net Profit as Percentage to Sales Value

20%
30%
Estimated Selling Expenses as Percentage to Sales Value
20%
15%
15%
There are no beginning or closing inventories. You are required to prepare a statement showing
(i) Allocation of Joint Cost, and
(ii) Product Wise and Overall Profitability of the Company for January.
Solution:

Less:

2.

Particulars
Final Sales Value
Estimated Profit
Estimated SOH
Post Separation Costs
Estimated NRV

Same as Page 7.14 Illus 12 [M 13] in Handbook.


1. Computation of Estimated NRV of ByProduct
B1
1800 40 = 72,000
20 % = (14,400)
15% = (10,800)
(35,000)
11,800

Joint Cost allocable to M1

Particulars
(a) Sales Value
(b) Costs:
Joint Cost (WN 1 & WN 2)
Post Separation Costs
SOH
Total Costs
(c) Profit

B2
3,000 30 = 90,000
30% = (27,000)
15% = (13,500)
(24,000)
25,500

= Total Joint Cost Estimated NRV of ByProducts B1 & B2


= 2,12,400 (11,800 + 25,500)
= ` 1,75,100

3. Profit Statement
M1
B1
4000 100 = 4,00,000
1800 40 = 72,000

B2
3000 30 = 90,000

Total
5,62,000

1,75,100

11,800

25,500

2,12,400

Nil
20% = 80,000
2,55,100
1,44,900

35,000
10,800
57,600
14,400

24,000
13,500
63,000
27,000

59,000
1,04,300
3,75,700
1,86,300

Question 4(b): Computation of Kd Ke and WACC


8 Marks
A Ltd wishes to raise additional finance of ` 30 Lakhs for meeting its investment plans. The Company has ` 6,00,000 in the
form of Retained Earnings available for investment purposes. The following are further details
May 2015.7

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1.
2.
3.
4.
5.
6.
7.

Debt Equity Ratio 30:70.


Cost of Debt at the rate of 11% (before tax) upto ` 3,00,000 and 14% (before tax) beyond that.
Earnings Per Share = ` 15.
Dividend Payout = 70% of Earnings.
Expected Growth Rate in Dividend 10%.
Current Market Price per Share = ` 90.
Companys Tax Rate is 30% and Shareholders Personal Tax Rate is 20%.

Calculate the following


1. Post Tax Average Cost of Additional Debt.
2. Cost of Retained Earnings and Cost of Equity.
3. Overall Weighted Average (after tax) Cost of Additional Finance.
Solution:

Similar to Page 18.8 Illus 17 [M 08] in Practical Guide.


Particulars

Result

1. Loan required = 30% of ` 30 Lakhs

` 9,00,000
` 1,17,000

2. Interest on Loan = (` 3,00,000 11%) + (` 6,00,000 14%) = ` 33,000 + ` 84,000


Interest (100% Tax Rate)
` 1,17,000x(100% 30%)
3. Kd =
=
Net Pr oceeds of Issue
9,00,000
4. Kr = Ke =

9.10%

` 15 x 70% Dividend x 110%


DPS1
+g=
+ 10% = 12.83% + 10%
` 90
MPS0

22.83%
18.711%

5. Ko = (Kd Wd) + (Ke We) = (9.10% 30%) + (22.83% 70%) = 2.730% + 15.981%
Note:

DPS1 has been considered in computation of Ke. Alternatively, EarningsGrowth model may also be applied.
Shareholders Personal Tax Rate is not considered since Dividends are exempt from Tax in their hands.

4 4 = 16 Marks

Question 5: Theory Various Topics


Question
(a) Explain Sunk Cost and Opportunity Cost.
(b) Write Notes on Escalation Clause.
(c) Explain Sales and Lease Back.
(d) Explain MillerOrr Cash Management Model.

Page Reference in Handbook


Page No.1.7, Para 1.1.17, Point A(3) & B(1)
[N 00, M 03, M 05, M 12 Qn] See Practical Guide Page 1.20
Page No.6.10, Para 6B.1.6
[M 95, N 00, M 02, N 07, N 13 Qn] See Practical Guide Page 6.29
Page No.21.6, Para 21.3.6
Page No.16.12, Para 16.2.13
[M 04, N 05, N 07, M 11, N 13 Qn] See Practical Guide Page 16.49

Question 6(a): Comprehensive Machine Hour Rate


8 Marks
A Machine Shop Cost Centre contains three machines of equal capacities. Three operators are employed on each machine,
payable ` 20 per hour each. The Factory works for fortyeight hours in a week which includes 4 hours setup time. The work is
jointly done by Operators. The Operators are paid fully for the fortyeight hours. In addition, they are paid a bonus of 10% of
productive time. Costs are reported for this Company on the basis of thirteen fourweekly period.
The Company for the purpose of computing machine hour rate includes the Direct Wages of the Operator and also recoups the
Factory Overheads allocated to the machines. The following details of Factory OH applicable to the Cost Centre are available
Depreciation 10% per annum on original cost of the machine. Original Cost of each machine is ` 52,000.
Maintenance and Repairs per week per machine is ` 60.
Consumable Stores per week per machine are ` 75.
Power 20 units per hour per machine at the rate of 80 paise per unit.
Apportionment to the Cost Centre: Rent p.a. ` 5,400, Heat and Light p.a. ` 9,720, and Foremans Salary p.a. ` 12,960.
Calculate (a) Cost of running one machine for a fourweek period, and (b) Machine Hour Rate.
May 2015.8

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Solution:

Same as Page 4.19 Illus 22 [N 07] in Practical Guide.

1. Effective Working Hours (excluding SetUp Time) = (48 4) 4 Weeks = 176 hours for 4week period.
2. Statement of OH for 4weekly period
Computation

Particulars

Operators Wages
Operators Bonus
Depreciation
Repairs & Maintenance
Consumable Stores

3 Operators 48 hours per week 4 weeks ` 20 per Hour


10% of Wages
` 52,000 10% p.a. 4/52
` 60 per week 4 weeks
` 75 per week 4 weeks

Rent
Heat and Light
Foremans Salary
Power (including for Setup Time)

` 5,400 4/52 1/3rd (i.e. 3 machines)


` 9,720 4/52 1/3rd (i.e. 3 machines)
` 12,960 4/52 1/3rd (i.e. 3 machines)

3. Machine Hour Rate =


Note:

20 units 48 hours per week 4 weeks 0.80 per unit


Total OH for 4week period

Total OH
Effective Machine Hours

` 17,403
176 hours

`
11,520
1,152
400
240
300
138
249
332
3,072
17,403

= ` 98.88 per hour.

Setup Time is not considered in calculation of Effective Machine Hours. However, it is assumed that Power is
consumed during Setup Time also. Alternative assumptions and treatments exist.

Question 6(b): Operating Cycle Basic Computations


8 Marks
The following information is provided by DVP Limited for the year ending 31st March
Raw Material Storage period
50 days
WorkinProgress Conversion period
18 days
Finished Goods Storage period
22 days
Debt Collection period
45 days
Creditors Payment period
55 days
Annual Operating Cost (including Depreciation of ` 2,10,000)
` 21,00,000
You are required to calculate:
[Note: Take 1 year = 360 days]
1. Operating Cycle Period.
2. Number of Operating Cycles in a year.
3. Amount of Working Capital required for the Company on a Cash Cost basis.
4. The Company is a market leader in its product, there is virtually no competitor in the market. Based on a Market
Research, it is planning to discontinue sales on credit and deliver products based on prepayments. Thereby, it can
reduce its Working Capital Requirement substantially. What would be the reduction in working Capital Requirement due
to such decision?
Solution:

1.
2.

3.

4.

Similar to Page 16.24 Illus 1 [M 13] in Handbook.

Operating Cycle (days) = (RM Stock Holding Period + WIP Conversion Period + Finished Goods Storage Period +
Debtors Collection Period) Less: Creditors Collection Period) (all in days) = (50 + 18 + 22 + 45 55)= 80 days.
360
No of Operating Cycles in a year =
= 4.5
80
Cash Operating Expenses p.a. = 21,00,000 2,10,000 = ` 18,90,000
80
So, Working Capital required = ` 18,90,000
= ` 4,20,000
360
If Debtors Collection Period is Nil, the Operating Cycle will be = 80 45 = 35 days.
35
Hence, revised Working Capital requirement = ` 18,90,000
= ` 1,83,750.
360
So, reduction in Working Capital requirement = ` 4,20,000 ` 1,83,750 = ` 2,36,250.

May 2015.9

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4 4 = 16 Marks

Question 7: Theory Various Topics Answer any four of the following


Question

Page Reference in Handbook

(a) Define Cost Centre and state its types.

(b) State benefits of Integrated Accounting.


(c) Differentiate between Factoring and Bill Discounting.
(d) Discuss the Conflicts in Profit versus Wealth
Maximization Principle of the Firm.
(e) Define Present Value and Perpetuity.

Page No.1.12, Para 1.3.3


[RTP, N 91, N 92, M 95, M 97, N 02, M 08, M 11 Qn]
See Practical Guide Page 1.20
Page No.5.3, Para 5.2.2
[N 91, N 97, M 02, M 07, M 10, M 12 Qn]
See Practical Guide Page 5.30
Page No.16.23, Para 16.4.7
[N 09, M 13 Qn] See Practical Guide Page 16.49
Page No.13.5, Para 13.2.4
[N 06, N 07, M 09, N 10, N 12 Qn]
See Practical Guide Page 13.20
Page No.19.7, Para 19.3.1 and
Page No.19.10, Para 19.3.3 [RTP Qn]
See Practical Guide Page 19.6

May 2015.10

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Additional Questions for Practice


Question 1: Material Cost EOQ, Multiple Materials and Markets
RTP
Aditya Agro Ltd (AAL) produces edible oils of different varieties. The monthly demand pattern for the Finished Products are
Mustard Oil: 45,000 Litres,
Soybean Oil: 15,000 Litre,
Olive Oil: 3,000 Litre
To produce 1 litre of Mustard Oil, Soybean Oil and Olive Oil, 5 kg of Mustards, 6 kg of Soybeans and 4.5 kg of Olives are
required respectively. There is no Opening and Closing Stock of Materials. AAL can purchase the Materials either from the
Farmers directly or from the Wholesale Market. Following is the materialwise summary related with the purchase of Materials:
Particulars
Mustards
Soya beans
Olive
Source of Purchase
Wholesale
Farmers Wholesale Farmers
Wholesale
Farmers
Any 13,50,000
Any
2,70,000
Any
1,62,000 Kg
Minimum Quantity to be purchased
quantity
kg.
quantity
Kg
quantity
11.00
9.00
36.00
28.00
15.00
12.50
Purchase Price per kg (`)
Duties / Taxes
CST at 2%
VAT at 4%

Special Tax 10%


6,000
15,000
9,000
12,000
3,000
11,000
Transportation Cost per purchase (`)

800
1,800

1,200
Sorting & Piling Cost per purchase (`)
10.00
3.00
10.00
25.00
10.00
5.00
Loading Cost per 50 kg. (`)
2.00
2.00
2.00
2.00
2.00
2.00
Unloading Cost per 50 kg. (`)
The Company is paying 12.5% p.a. as Interest to its Bank for Cash Credit facility and ` 100 per 100 kg, as Rent to the
Warehouse. Note: Credit is available only for VAT, and not for CST or Special Tax.
1. Calculate the Purchase Cost of each Material (a) from Wholesale Market, and (b) from the Farmers.
2. Calculate Economic Order Quantity of each Material under the both options.
3. Recommend the Best Purchase Option for the Material Olive.
Solution:
1. Computation of Purchase Cost per Kg. of Materials (all amounts in ` Per Kg)
Particulars
Mustards
Soybeans
Olives
Market
Wholesale
Farmers
Wholesale
Farmers
Wholesale
Farmers
Purchase Price
15.00
12.50
11.00
9.00
36.00
28.00
CST 2%= 0.30
Nil
Nil
Nil
Nil Spl Tax 10%=2.80
Add: Duties/ Taxes
Add: Loading
` 10 50 Kg
` 5 50 Kg ` 10 50 Kg =
` 3 50 ` 10 50 Kg
` 25 50 Kg
=0.20
= 0.10
0.20
Kg= 0.06
=0.20
= 0.50
Add: Unloading
` 2 50 Kg =
` 2 50 Kg
` 2 50 Kg =
` 2 50 Kg
` 2 50 Kg
` 2 50 Kg =
0.04
= 0.04
0.04
= 0.04
= 0.04
0.04
Total Cost
15.54
12.64
11.24
9.10
36.24
31.34
Particulars

Annual Requirement (A)


Market
Buying Cost per Order (B)
(a) Transportation
(b) Sorting and Piling Cost
Total
Carrying Cost per Kg p a. (C)
(a) Interest at 12.5% on
Purchase Cost as per WN 1
(b) Warehouse Rent at ` 1 / Kg
Total

EOQ =

2AB
C

(in kgs)

2. Computation of EOQ
Mustards
Soybeans
(15,000 Ltr. 6 Kg 12
(45,000 Ltr. 5 Kg 12
Months) = 10,80,000 Kg
Months) = 27,00,000 Kg
Wholesale
Farmers
Wholesale
Farmers

Olives
(3,000 Ltr. 4.5 Kg 12
Months) = 1,62,000 Kg
Wholesale
Farmers

6,000

6,000

15,000
1,200
16,200

9,000

9,000

12,000
800
12,800

3,000
1,800
4,800

11,000

11,000

1.9425

1.5800

1.4050

1.1375

4.5300

3.9175

1.0000

1.0000

1.0000

1.0000

1.0000

1.0000

2.9425

2.5800

2.4050

2.1375

5.5300

4.9175

1,04,933.53

1,84,138.47

89,906.40

1,13,730.98

16,769.90

26,921.34

May 2015.11

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(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)

Particulars
Annual Requirement (A) (Kg.)
Quantity purchased every time (Q)
No. of Orders p a. (A Q)
Average Inventory (Q 2)
Buying Cost p.a.

Carrying Cost p.a.


Purchase Cost p.a.

3.Best Purchase Option for Olives


Wholesale
1,62,000
16,769.90
9.66 or 10
8,384.95 Kg
(9.66 Orders ` 4,800) = ` 46,369

Farmers
1,62,000
1,62,000
1
81,000 Kg
(1 Order 11,000) = ` 11,000

(8,384.95 Kg ` 5.5300) = ` 46,369


(1,62,000 Kg` 36.24) = ` 58,70,880

(81,000 Kg 4.9175) = ` 3,98,318


(1,62,000 Kg` 31.34) = ` 50,77,080

Total Cost (e) + (f) + (g)


` 59,63,618
Conclusion: Purchasing Olives directly from the Farmers is better due to lower Costs.

` 54,86,398

Question 2: Material Cost Stock Levels, EOQ Reverse Working


RTP
Aditya Ltd produces a product Exe using a Raw Material Dee. To produce one unit of Exe, 2 kg of Dee is required. As per the
sales forecast conducted by the Company, it will able to sell 10,000 units of Exe in the coming year. The following is the
information regarding the Raw Material Dee:
(i) The ReOrder Quantity is 200 kg less than the Economic Order Quantity (EOQ).
(ii) Maximum Consumption per day is 20 kg more than the Average Consumption per day.
(iii) There is an Opening Stock of 1,000 kg.
(iv) Time required to get the Raw Materials from the Suppliers is 4 to 8 days.
(v) The Purchase Price is `125 per kg.
There is an Opening Stock of 900 units of the Finished Product Exe. The Rate of Interest charged by Bank on Cash Credit
Facility is 13.76%. To place an order, the Company has to incur ` 720 on Paper and Documentation Work.
From the above and taking 364 days for a year, find out the following in relation to Raw Material Dee (a) ReOrder Quantity,
(b) Maximum Stock Level, (c) Minimum Stock Level, and (d) Impact on the Companys Profitability by not ordering the EOQ.
Solution:
1. Computation of Annual Consumption & Annual Demand for Raw Material Dee
Sales Forecast of Product Exe
10,000 units
900 units
Less: Opening Stock of Exe
9,100 units
Hence, Exe to be produced
Raw Material required to produce 9,100 units of Exe (9,100 units 2 kg)
18,200 kg.
1,000 kg.
Less: Opening Stock of Dee
Annual Demand for Raw Material Dee
17,200 kg.
2. Computation of Economic Order Quantity (EOQ) & ROQ:

(a) EOQ =

2 Annual demand of ' Dee ' Ordering Cost


Carrying Cost Per unit Per annum

2 17,200 Kg 720
125 13.76%

2 17,200 Kg 720
17.2

= 1,200 Kg

(b) ROQ = EOQ 200 = 1,000 Kg


3.Computation of Max & Min Usage Rates
Annual Usage
18,200 Kg
(a) Average Consumption per day =
=
= 50 Kg.
364 days
364
(b) So, Maximum Consumption per day = 50 Kg + 20 Kg = 70 Kg
Max + Min
(c) Hence, Minimum Consumption per day = 30 Kg (using the formula
= Avg).
2

(a) ReOrder Level (ROL)


(b) Maximum Stock level
(c) Minimum Stock Level

4. Computation of Stock Levels


= (Maximum Usage per day Maximum Lead Time) = 70 Kg 8 days= 560 Kg.
= ROL + ROQ (Min. Usage Min. Lead Time)
= 560 kg + 1,000 kg (30 kg 4 days)

= 1,440 kg.

= ROL (Average Usage Average Lead Time)


= 560 kg (50 kg 6 days)
= 260 kg.
Note: Average Lead Time = of (4+8) = 6 days.
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5.Impact of not ordering the EOQ
If ROQ Purchased
Quantity Purchased every time (Q)
1,000 kg
17,200 kg
= 17.2 Orders
No. of Orders p.a. = (A Q)
1,000 kg

(a)
(b)
(c)

Buying Cost p.a = (b) ` 720


Q
Average Inventory =
2

(d)
(e)
(f)

17.2 orders ` 720 = ` 12,384


1,000 kg
= 500 kg
2

If EOQ Purchased
1,200 kg
17,200 kg
= 14.33 Orders
1,200 kg

14.33 orders ` 720 = ` 10,320


1,200 kg
= 600 kg
2

Carrying Cost p.a. = (d) ` 17.20


500 kg ` 17.2 =` 8,600
600 kg ` 17.2 = ` 10,320
Associated Cost p.a. [(c) + (e)]
` 20,984
` 20,640
Extra Cost incurred due to not ordering EOQ =` 20,984 ` 20,640 = ` 344

Question 3: Labour Rowan vs Halsey Effect of Incorrect Wage Rate


RTP
Jigyasa Boutiques LLP (JBL) takes contract on job works basis. It works for various Fashion Houses and Retail Stores. It has
employed 26 workers and pays them on time rate basis. On an average, an employee is allowed 2 hours for Boutique Work on a
piece of garment. In the month of March, two workers Ram and Shyam were given 30 pieces and 42 pieces of garments
respectively for Boutique Work. The following are the details of their work:
Ram
Shyam
Work assigned
30 pieces
42 pieces
Time Taken
28 hours
40 hours
Workers are paid Bonus as per Halsey System. The existing rate of wages is ` 50 per hour. As per the new Wages Agreement,
the workers will be paid ` 55 per hour w.e.f. 1st April 2015. At the end of the month, the Accountant of the Company has
calculated Wages to these two workers taking ` 55 per hour.
(i)
(ii)
(iii)
(iv)

Calculate the amount of Loss that the Company has incurred due to incorrect rate selection.
What would be the Loss incurred by JBL due to incorrect rate selection if it had followed Rowan Scheme of bonus payment?
What is the amount that could have been saved if Rowan Scheme of Bonus Payment is followed?
Do you think Rowan Scheme of Bonus Payment is suitable for JBL?

Solution:
1. Computation of Time Saved

Less:

(a)
(b)
(c)
(d)

(e)
(f)

Particulars (in hrs)


Time allowed
Time Taken
Time Saved

Ram
30 Pieces 2 hrs = 60
28
32

Shyam
42 Pieces 2 hrs = 84
40
44

2. Loss due to incorrect rate selection, i.e. Excess of `55 50 = ` 5 per hour
Ram
Shyam
Basic Wages
(28 Hrs. 5) = 140.00
(40 Hrs. 5) = 200.00
Bonus (Halsey Scheme) (50% Time saved
(50% 32 Hrs. 5)
(50% 44 Hrs. 5) =
Excess Rate)
= 80.00
110.00
Excess Wages paid = Loss (Halsey Scheme)
(a + b) = 220.00
(a + b) = 310.00
Bonus (Rowan Scheme)
28
40
TimeTaken
(
325) = 74.67
(
44 5) = 104.76
(
Time Saved Excess Rate)
60
84
Time Allowed
Excess Wages paid = Loss (Rowan Scheme)
Amount that could have been saved if Rowan
Scheme is followed (c e)

Total
340.00

190.00
530.00

179.43

(a + d) = 214.67

(a + d) = 304.76

519.43

5.33

5.24

10.57

Conclusion: Rowan Scheme of Incentive Payment is suitable due to its benefits (Refer Illustration N 86 Question in
Page No.3.16 of Padhukas Students Handbook on Cost Accounting and Financial Management.

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Question 4: Labour Cost Labour Turnover Rates Reverse Working


RTP
Query Consultancy Ltd is engaged in BPO industry. One of its Trainee Executives in the Personnel Department has calculated
Labour Turnover Rate 24.92% for the last year using Flux method.
Following is the some data provided by the Personnel Department for the last year:
Employees
At the beginning
Data Processors
540
Payroll Processors
?
Supervisors
?
Voice Agents
?
Assistant Managers
?
Senior Voice Agents
4
Senior Data Processors
8
Team Leaders
?
Employees transferred from the Subsidiary Company
Senior Voice Agents

Senior Data Processors

Employees transferred to the Subsidiary Company


Team Leaders

Assistant Managers

Joined
1,080
20
60
20
20

Left
60
60

20

At the end
1,560
40
?
?
30
12
34
?

8
26

60
10

At the beginning of the year there were total 772 Employees on the Payroll of the Company. The opening strength of the
Supervisors, Voice Agents and Assistant Managers were in the ratio of 3 : 3 : 2.
The Company has decided to abandon the post of Team Leaders and consequently all the Team Leaders were transferred to
the Subsidiary Company. The Company and its Subsidiary are maintaining separate set of books of account and separate
Personnel Department.
(a) Calculate the Labour Turnover Rate using Replacement Method and Separation Method.
(b) Verify the Labour Turnover Rate calculated under Flux Method by the Trainee Executive.
Solution:

1. Computation of Employees at the beginning and end of the year, Categorywise


Category
At the Beginning of the
At the end of the
Net
year
year
Change
Data Processors
Given = 540
Given = 1,560
+ 1020
Payroll Processors [Left 60 + Closing 40 Joined 20]
80
Given = 40
40
Supervisors
Note 1 = 30
Note 2 = 90
+ 60
Voice Agents
Note 1 = 30
Note 2 = 30
Nil
Assistant Managers
Note 1 = 20
Given = 30
+ 10
Senior Voice Agents
Given = 4
Given = 12
+8
Senior Data Processors
Given = 8
Given = 34
+ 26
Team Leaders
Transfer to Subsidiary = 60 All Transferred, So = 0
60
Total
Given 772
1,796
+ 1,024
Note:
1. At the beginning of the year:
(a) Total of Supervisors, Voice Agents and Asst. Managers = [772 {540 + 80 + 4 + 8 + 60} = 80 Employees]
3
3
2
(b) Apportioned in 3:3:2, Hence, Supervisors: 80 = 30, Voice Agents: 80 = 30 & Asst. Managers: 80 = 20.
8
8
8
2. At the end of the year:
(a) Supervisors = (Opening 30 + Joined 60) = 90, (b) Voice Agents = (Opening 30 + Joined 20 Left 20) = 30
2. Computation of Employees Separated, Replaced and Newly Recruited during the year
Note:

Since the Company and its Subsidiary are maintaining separate Personnel Departments, the transferin and transfer
out are treated as Recruitment and Separation respectively.

Separations (S) and Accessions (A) are given in the Question itself.
May 2015.14

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Accessions (A) = Replacement (R) + New Recruitments (N). Here, Accessions are given and Replacements (R) are
computed by comparing with Separations (S), and Net Change in the Labour Force as per WN 1. For example
(a) Data Processors: 60 Left (Separations), and hence taken as fully replaced with 60 persons.
(b) Payroll Processors: 60 left, but Labour Force at end is less by 40 persons. Hence, Replacement = only 20 persons.

After computing Replacements (R) as above, New Recruitment (N) = Accessions (A) Replacements (R).
Particulars

Data Processors
Payroll Processors
Supervisors
Voice Agents
Assistant Managers
Senior Voice Agents
Senior Data Processors
Team Leaders
Total

(a)
(b)
(c)
(d)

Separations (S)
(Given)
60
60

20
Transferred = 10

Transferred = 60
210

New Recruitment
(N)
1,020

60

10
8
26

1,124

Replacement
(R)
60
20

20
10

110

Assertions (A) = Total


Joined (Given)
1,080
20
60
20
20
Note 1 = 8
Note 1 = 26

1,234

3. Computation of Labour Turnover Rates


772 + 1,796
Average Labour Force =
= 1,284 Employees.
2
Number of Re placements
110
=
= 8.57%
Labour Turnover Ratio by Replacement Method =
Average Labour Force
1,284
Number of Separations
210
Labour Turnover Ratio by Separation Method =
=
= 16.36%
Average Labour Force
1,284
Number of Separations + Accessions
210 + 1,234
=
= 112.46%
Labour Turnover Ratio by Flux Method =
Average Labour Force
1,284

Conclusion: Labour Turnover of 24.92% calculated by the Executive Trainee of the Personnel Department is not correct. It
has been taken as Separation + Replacement = 16.36% + 8.57% = 24.92% and he has not taken the Number of New
Recruitments, in using the Flux Method.

Question 5: Contract Costing Profit Recognition, Columnar Accounts


RTP
Dream House (P) Ltd is engaged in building two Residential Housing Projects in the city, with particulars as under
HP 1
HP 2
Amount in `
Work in Progress on 1st April 2015
7,80,000
2,80,000
Materials Purchased
6,20,000
8,10,000
Land purchased near to the Site to open an Office

12,00,000
Brokerage and Registration Fee paid on the above purchase

60,000
Wages paid
85,000
62,000
Wages outstanding as on 31st March, 2016
12,000
8,400
Donation paid to Local Clubs
5,000
2,500
Plant Hire Charges paid for three years effecting from 1st April 2015
72,000
57,000
st
Value of Materials at Site as on 31 March 2016
47,000
52,000
Contract Price of the Projects
48,00,000
36,00,000
Value of Work Certified
20,50,000
16,10,000
Work not Certified
1,90,000
1,40,000
st
A Concrete Mixture Machine was bought on 1 April 2015 for ` 8,20,000 and used for 180 days in HP1 and for 100 days in HP
2. Depreciation is provided @ 15% p.a.(This machine can be used for any other projects). As per the contract agreement, the
Contractee shall retain 20% of Work Certified as Retention Money.
Prepare Contract A/c for the two Housing Projects showing the Profit or Loss on each project for the year ended 31.03.2016.

May 2015.15

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Contract Account for the year ended 31st March 2016 (Amounts in `)
Particulars
HP1
HP2
Particulars
HP1
To WIP b/d
7,80,000
2,80,000 By WIP:
To Material purchased
6,20,000
8,10,000 Value of Work Certified
20,50,000
97,000
Cost of Work Uncertified
1,90,000
To Wages: (` 85,000 + ` 12,000)
70,400 By Material at site c/d
47,000
(` 62,000 + ` 8,400)
To Donation to Local Club (Note 1)
5,000
2,500
To Plant Hire Charges:
24,000
19,000
(` 72,0001/3) and (` 57,0001/3)
Solution:

HP2

16,10,000
1,40,000
52,000

To Deprn on Concrete Mixture M/c:


60,658
(` 8,20,000 15% 180/365)
33,699
(` 8,20,000 15% 100/365)
To Notional Profit (balancing figure)
7,00,342
5,86,401
Total
22,87,000
18,02,000
Total
22,87,000 18,02,000
To P & L A/c (Note 3)
1,86,758
1,56,374 By Notional Profit b/d
7,00,342
5,86,401
To Reserve Profit c/d (bal. fig.)
5,13,584
4,30,027
Total
7,00,342
5,86,401
Total
7,00,342
5,86,401
Note:
1. Donation paid to Local Club is assumed as exclusively for the above projects, hence included in the Contract Account.
Work Certified
20,50,000
16,10,000
: HP1=
= 42.71% HP 2 =
= 44.72%
2. Percentage of Completion =
Contract Price
48,00,000
36,00,000
3.

Cash Received
1
Notional Profit
Work Certified
3
1
1
HP1:
7,00,342 80% = ` 1,86,758
HP2:
5,86,401 80% = ` 1,56,374
3
3

Profit to be recognized in P&L A/c =

Question 6: Operating Costing


RTP
Gopal Milk CoOperative Society (GMCS) collects raw milk from the farmers of Ramgarh, Pratapgarh and Devgarh Panchayats
and processes these milk to make various dairy products. GMCS has its own Vehicles (Tankers) to collect and bring the milk to
the Processing Plant. Vehicles are parked in the GMCSs Garage situated within the Plant Compound. Following are the some
information related with the Vehicles:
Ramgarh
Pratapgarh
Devgarh
No. of Vehicles assigned
4
3
5
No. of trips a day
3
2
2
One Way distance from the Processing Plant
24 k.m.
34 k.m.
16 k.m.
2,850
3,020

Toll Tax paid p.m. (`)


All the 5 Vehicles assigned to Devgarh Panchayat, were purchased five years back at a cost of ` 9,25,000 each. The 4 vehicles
assigned to Ramgarh Panchayat, were purchased two years back at a cost of ` 11,02,000 each and the remaining vehicles
assigned to Pratapgarh were purchased last year at a cost of ` 13,12,000 each. With the purchase of each Vehicle, a two years
Free Servicing Warranty is provided. A Vehicle gives 10 kmpl mileage in the first two year of purchase, 8 kmpl in next two years
and 6 kmpl afterwards. The vehicles are subject to depreciation of 10% p.a. on straight line basis irrespective of usage. A
Vehicle has the capacity to carry 25,000 litres of milk but on an average only 70% of the total capacity is utilized.
The following expenditure is related with the vehicles:
Salary to a Driver (a Driver for each vehicle)
Salary to a Cleaner (a Cleaner for each vehicle)
Allocated Garage Parking fee
Servicing Cost
Price of Diesel per litre

` 18,000 p.m.
` 11,000 p.m.
` 1,350 per vehicle per month
` 3,000 for every complete 5,000 k.m. run.
` 58.00

From the above information you are required to calculate


(a) Total Operating Cost per month for each Vehicle. (Take 30 days for the month)
(b) Vehicle Operating Cost per Litre of Milk.
May 2015.16

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Solution:
Particulars

(a) Total Distance covered per


month
(b) Mileage per litre of diesel
(c) Diesel Consumption=(a b)
(d) Cost of Diesel Consumption
at ` 58 per Litre (`)

1.Basic Computations
Ramgarh
Pratapgarh
(4 Vehicles 3 Trips 2
(3 Vehicles 2 Trips 2
24 km. 30 days)
34 km. 30 days)
= 17,280 Km
= 12,240 Km
8 kmpl
10 kmpl
2,160 litres
1,224 litres

Devgarh
(5 Vehicles 2 Trips
2 16 km. 30 days)
= 9,600 Km
6 kmpl
1,600 litres

` 1,25,280

` 70,992

` 92,800

No

Yes

No

(g) Total Service Cost (`)

(` 3,000 3) = 9,000

Nil

(` 3,000 1) = 3,000

(h) Total Cost of Vehicles

`11,02,000 4 Vehicles
= ` 44,08,000

` 13,12,000 3 Vehicles
= ` 39,36,000

` 9,25,000 5 Vehicles
= ` 46,25,000

` 44,08,000 10% 1/12


= ` 36,733

` 39,36,000 10% 1/12


= ` 32,800

` 46,25,00010%1/12
= ` 38,542

(e) Free Service Warranty?


(f) No. of Services Required =
(a) 5,000 Km

(i)

Depreciation per month

(25,000 ltr. 70% 5


(25,000 ltr. 70% 3
(25,000 ltr. 70% 4
Vehicles 2 Trips 30
Vehicles 3 Trips 30 Vehicles 2 Trips 30 days)
days) = 52,50,000
= 31,50,000
days) = 63,00,000
Note: Total Milk Carried = 63,00,000 + 31,50,000 + 52,50,000 = 1,47,00,000 litres.

(j) Total Volume of Milk Carried


(in litres)

Particulars
A. Running Costs:
Diesel [WN (1d)]
Servicing [WN (1g)]

2. Computation of Operating Cost per month for each Vehicle


Ramgarh
Pratapgarh
Devgarh

(A)

1,25,280
9,000
1,34,280

70,992

70,992

92,800
3,000
95,800

Total

2,89,072
12,000
3,01,072

B. Fixed Costs:

Salary to Drivers
Salary to Cleaners
Garage Parking Fee
Depreciation [WN (1i)]
Toll Tax
(B)
C. Total Cost [A + B]
D. Operating Cost per vehicle
= C No. Of. Vehicles
E.

(4 Drivers

(3 Drivers

(5 Drivers

` 18,000) = 72,000

` 18,000) = 54,000

` 18,000) = 90,000

(4 Cleaners

(3 Cleaners

(5 Cleaners

` 11,000) = 44,000

` 11,000) = 33,000

` 11,000) = 55,000

2,16,000
1,32,000

(4 Vehicles

(3 Vehicles

(5 Vehicles

` 1,350) = 5,400

` 1,350) = 4,050

` 1,350) = 6,750

36,733
2,850
1,60,983
2,95,263

32,800
3,020
1,26,870
1,97,862

38,542

1,90,292
2,86,092

1,08,075
5,870
4,78,145
7,79,217

(` 2,95,263 4)
= ` 73,815.75

(` 1,97,862 3)
= ` 65,954.00

(` 2,86,092 5)
= ` 57,218.40

(` 7,79,217 12)
= ` 64,934.75

Vehicle Operating Cost per Litre of Milk =

16,200

Total Operating Cost


7,79,217
=
= ` 0.053
Total Milk Carried
1,47,00,000 Litres

Question 7: Marginal Costing PVR, BEP, MOS, etc.


Marks
Arnav Ltd manufactures and sells its Product R9. The following figures have been collected from cost records of last year for
the product R9:
Elements of Cost
Variable Cost portion
Fixed Cost
Direct Material
30% of Cost of Goods Sold

Direct Labour
15% of Cost of Goods Sold

Factory Overhead
10% of Cost of Goods Sold
` 2,30,000
May 2015.17

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Elements of Cost
Variable Cost portion
General & Administration Overhead
2% of Cost of Goods Sold
Selling & Distribution Overhead
4% of Cost of Sales
Last Year, 5,000 units were sold at `185 per unit. From the given data find the following:
(a) BreakEven Sales (in Rupees)
(b) Profit earned during last year
(c) Margin of Safety (in %)
(d) Profit if the Sales were 10% less than the Actual Sales.

Fixed Cost
` 71,000
` 68,000

Solution:

1.

Cost of Goods Sold (COGS) = Material + Labour + FOH + General & AOH
So, COGS = (30% + 15%+ 10% + 2%) = 57% of COGS + 2,30,000 +71,000
3,01,000
So, 0.43 COGS = 3,01,000. Hence, COGS =
= 7,00,000
0.43

2.

Cost of Sales (COS) = COGS + S&D OH


So, COS = 7,00,000 + 4% of COS + 68,000
7,68,000
So, 96% COS = 7,68,000. So, COS =
= 8,00,000
96%

3.

Variable and Fixed Costs:


Particulars

Direct Material
Direct Labour
Factory Overhead
General & Administration OH
Selling & Distribution OH
Total

Variable Cost (`)


7,00,000 30% = 2,10,000
7,00,000 15% = 1,05,000
7,00,000 10% = 70,000
7,00,000 2% = 14,000
8,00,000 4% = 32,000
4,31,000

Fixed Cost (`)

2,30,000
71,000
68,000
3,69,000

(185 x 5,000 units) (-) 4,31,000


Contribution
Sales (-) Variable Costs
100 =
100 =
100 = 53.41%
(185 x 5,000 units)
Sales
Sales

4.

PV Ratio =

5.

Computations:

(a) BreakEven Sales =

Fixed Costs
3,69,000
=
= ` 6,90,882.
PVR
53.41%

(b) Profit earned during the last year = (Sales Total Variable Costs) Total Fixed Costs
= (` 9,25,000 ` 4,31,000) ` 3,69,000 = ` 1,25,000
(c) Margin of Safety (%) =

9,25,000 (-) 6,90,882


Total Sales (-) BES
= 25.31%
=
9,25,000
Total Sales

(d) Profit if the Sales were 10% less than the Actual Sales: (Assumed 10% reduction in Sale Qtty).
Profit

= 90% of (` 9,25,000 ` 4,31,000) ` 3,69,000 = ` 4,44,600 ` 3,69,000 = ` 75,600

Question 8: If a Company finds that its Cost of Capital has changed, does this affect the profitability of the Company?

RTP

1.

If the Company is financed mainly from shortterm sources, an increase in interest rates will reduce its Profits. Hence, it
may choose to switch to longterm financing. This will be at a higher rate and profitability will be diminished.

2.

If the Company is financed mainly from longterm sources, an increase in interest rates will not affect its profits
directly. However, higher interest rates may depress economic activity and its profits may fall accordingly.

3.

If the Company is financed mainly from Retained Earnings or Equity, an increase in the required return of Shareholders
will lead to pressure for higher dividends. The Company may have insufficient funds to meet such demands.

May 2015.18

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Question 9: Cash Flow Statement Direct Method


RTP
You are required to prepare Cash Flow Statement using Direct Method for Luna Limited for the year ending 31st March 2015
from the following information:
(a) Sales for the year amounted to ` 135 Crores out of which 60 percent was Cash Sales.
(b) Purchases for the year amounted to ` 55 Crores out of which Credit Purchase was 80 percent.
(c) Administrative and selling expenses amounted to ` 18 Crores and Salary paid amounted to ` 22 Crores.
(d) Luna Limited redeemed Debentures of ` 20 Crores at a premium of 10 percent. Debenture holders were issued Equity
Shares of ` 15 Crores towards redemption and the balance was paid in cash. Debenture Interest paid during the year was
`1.5 Crores.
(e) Dividend paid during the year amounted to ` 10 Crores. Dividend Distribution Tax @ 17% was also paid.
(f) Investment costing ` 12 Crores were sold at a Profit of ` 2.4 Crores.
(g) ` 8 Crores was paid towards Income Tax during the year.
(h) A New Plant costing ` 21 Crores was purchased in part exchange of an Old Plant. The Book Value of the Old Plant was ` 12
Crores but the Vendor took over the Old Plant at a value of ` 10 Crores only. The balance was paid in cash to the Vendor.
(i) The following balances are also provided for your consideration:
Particulars
01.04.2014 31.03.2015
Debtors
45
50
Creditors
21
23
Bank
6

Solution:

Cash Flow Statement for the year ended 31st March 2015 using Direct Method
Particulars
` in Crores

A. CASH FLOWS FROM OPERATING ACTIVITIES


Cash Sales (135 0.6)
Cash Receipts from Debtors [OB 45+ Credit Sales (135 40%) CB 50]
Cash Purchases (20% of 55)
Cash Payments to Suppliers [OB 21+ Credit Purch. (55 80%) CB 23]
Cash Paid to Employees
Cash Payments for Overheads (Adm. and Selling OH)
Cash Generated from Operations
Less: Income Tax Paid
Net Cash Generated from Operating Activities [A]
B. CASH FLOWS FROM INVESTING ACTIVITIES
Sale of Investments (12+ 2.40)
Payments for Purchase of Fixed Assets
Net Cash Used in Investing Activities [B]
C. CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of Debentures (2215)
Interest Paid
Dividend Paid + Dividend Distribution Tax at 17% = (10 + 1.7)
Net Cash Used in Financing Activities [C]
D. Net Increase in Cash and Cash Equivalents (A + B + C)
E. Cash and Cash Equivalents at Beginning of the period
F. Cash and Cash Equivalents at end of the period (D + E)

` in Crores

81
49
(11)
(42)
(22)
(18)
37
(8)
29
14.4
(11)
3.4
(7)
(1.5)
(11.7)
(20.2)
12.2
6.0
18.2

May 2015.19

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STUDENTS NOTES

May 2015.20

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