PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Question No. 1 is compulsory.
Attempt any five questions from the remaining six questions.
Working notes should form part of the answers.
Question 1
Answer the following:
(a) The following particulars refer to process used in the treatment of material subsequently,
incorporated in a component forming part of an electrical appliance:
(i)

The original cost of the machine used (Purchased in June 2008) was ` 10,000. Its
estimated life is 10 years, the estimated scrap value at the end of its life is ` 1,000,
and the estimated working time per year (50 weeks of 44 hours) is 2,200 hours of
which machine maintenance etc., is estimated to take up 200 hours.
No other loss of working time expected, setting up time, estimated at 100 hours, is
regarded as productive time. (Holiday to be ignored).

(ii) Electricity used by the machine during production is 16 units per hour at cost of a 9
paisa per unit. No current is taken during maintenance or setting up.
(iii) The machine required a chemical solution which is replaced at the end of week at a
cost of ` 20 each time.
(iv) The estimated cost of maintenance per year is ` 1,200.
(v) Two attendants control the operation of machine together with five other identical
machines. Their combined weekly wages, insurance and the employer's contribution
to holiday pay amount ` 120.
(vi) Departmental and general works overhead allocated to this machine for the current
year amount to ` 2,000.
You are required to calculate the machine hour rate of operating the machine.
(b) A dairy product company manufacturing baby food with a shelf life of one year furnishes
the following information:
(i)

On 1st January, 2016, the company has an opening stock of 20,000 packets whose
variable cost is `180 per packet.

(ii) In 2015, production was 1,20,000 packets and the expected production in 2016 is
1,50,000 packets. Expected sales for 2016 is 1,60,000 packets.

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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

47

(iii) In 2015, fixed cost per unit was ` 60 and it is expected to increase by 10% in 2016.
The variable cost is expected to increase by 25%. Selling price for 2016 has been
fixed at ` 300 per packet.
You are required to calculate the Break-even volume in units for 2016.
(c) (i)

What is a sinking fund and how is it calculated ?

(ii) A company has purchased a plant for ` 10,00,000 with a useful life of 6 years. It
expects that ` 15,00,000 will be required to replace the plant after 6 years. To
ensure that money is available at the time of replacement, the company has created
a sinking fund.
You are required to determine the amount to be deposited annually, if the fund
earns interest at 8% per annum. Given CVFA0.08,6 = 7.336.
(d) A company had the following balance sheet as on 31st March, 2015
Liabilities

Assets

Amount (`)

40,00,000 Fixed Assets (Net)

1,28,00,000

Amount (`)

Equity share capital of ` 10 each
Reserve & Surplus

8,00,000 Current Assets

15% Debentures

80,00,000

Current Liabilities

32,00,000
1,60,00,000

32,00,000

1,60,00,000

The additional information given is as under:
Fixed cost per annum (excluding interest)

` 32,00,000

Variable operating cost ratio
Total assets turnover ratio

70%
2.5

Income tax rate

30%

Calculate the following:
(i)

Operating Leverage

(ii) Financial Leverage
(iii) Combined Leverage
(iv) Earning per share

(5 × 4 = 20 Marks)

Answer
(a)

Working Notes:
(i)

Total Productive hours

= Estimated Working hours – Machine Maintenance hours
= 2,200 hours – 200 hours = 2,000 hours

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000 1.` 1.000 units) (110% of ` 72.000) 180 225 (125% of ` 180) Calculation of Break-even Point (in units): Since.50 (vi) Maintenance cost 1.00.900hours      2.000 = ` 900 10 years (iii) Chemical solution cost per annum = ` 20 × 50 weeks = ` 1.20. opening stock is to be sold first.20.000 (` 60 × 1. shelf life of the product is one year only.42 (b) Working Notes: Particulars Fixed Cost Variable Cost 2015 (`) 72.60 (iv) Electricity  ` 0. 2016 (ii) Depreciation per annum = ` 10.000 .000  Standing Charges per hour   B.000 Total Standing Charge 3.000hours Machine operating cost per hour (A + B) 4.200 0.09×16units×1. Standing Charge (i) Wages of attendants 1.00. hence.000 6 machines Calculation of Machine hour rate Particulars Amount (per annum) Amount (per hour) A.45 - 1.000 0.000 2016 (`) 79.5  3.000 (iv) Wages of attendants (per annum) = ` 120 × 50 weeks = ` 1.37 (v) Chemical solution 1.000 (ii) Departmental and general works overheads 2.000   2. © The Institute of Chartered Accountants of India . Machine Expense (iii) Depreciation 900 0.48 INTERMEDIATE (IPC) EXAMINATION: MAY.

000 = Sinking fund amount × (1+0.600 Add: Opening stock from 2015 20.600 packets.04. Alternatively.600 (c) (i) It is the fund created for a specified purpose by way of sequence of periodic payments over a time period at a specified interest rate. ` 300 − ` 225 Break-even volume in units for 2016 Packets From 2016 production 73.08 Sinking fund amount to be deposited = `2. (1 + i)n − 1 Maturity value of Sinking Fund = Sinking Fund deposit × i (ii) Amount to be deposited annually = Future Value ` 15.n)] Where.336 CVFA (8%. ‘R’ is the periodic payment and ‘n’ the payment period.000 93. amount to be deposited can be calculated as follows: (1 + i)n − 1 Maturity value of Sinking Fund = Sinking Fund deposit × i 6 15.00. the sinking fund amount can be calculated by using following formula.00.08) – 1 / 0.10 7.PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 49 (`) Total Contribution required to recover total fixed cost in 2016 and to reach break-even volume.464 © The Institute of Chartered Accountants of India .20.20.000 = 73.471.6 years) Alternatively. 79.000 {20.04.000 units × (` 300 – ` 180)} Units to be produced to get balance contribution = ` 55.00.000 = = ` 2. ‘FVA’ is the amount to be saved.000 Less: Contribution from opening stock 24.000 Balance Contribution to be recovered 55. Size of the sinking fund is calculated as follows: FVA = R[FVIFA (i.20.

00.000 Less: Interest on Debenture (15% of ` 80.58 ` 76.16 ` 76.00. Sales = 2.00.50 INTERMEDIATE (IPC) EXAMINATION: MAY.60.000) (2.00.000 Or Combined Leverage = Operating Leverage × Financial Leverage = 1.00.00.00.00.000 = = 1.00. Sales = 2.00.000) Earnings Before Interest and Tax (EBIT) 88.00.36 EBIT ` 88.e.000) (12.80.80.00.000) Contribution 1.00.000 (ii) Financial Leverage = EBIT EBT = Contribution ` 1.000 EBT (iii) Combined Leverage = ` 88.of Shares 4.5 Total Assets Since total Assets = ` 1.20.00.00.000 Less: Income Tax @30% (22.000 shares Question 2 (a) The following information is available from a company's records for March.20.000 = = ` 13.00.60.00.000 Computation of Profit after tax (PAT/ EAT): Particulars Amount (`) Sales Turnover 4.30 No.00. 2016 (d) Workings: Total Assets Turnover Ratio i.5 × ` 1.000 = = 1.000 Less: Variable Cost (70% of ` 4.00.000) Earnings Before Tax (EBT) 76.000 Less: Fixed Costs (32.36 × 1.16 = 1.00.000 = ` 4.58 (iv) Earning per share = PAT / EAT ` 53.20.000 So.00. 2016: © The Institute of Chartered Accountants of India .000) Earnings After Tax (EAT or PAT) 53.00.000 = 1.20.000 (i) Operating Leverage = Contribution ` 1.20.

000 Closing Stock Stock turnover ratio 10 Gross profit ratio Net profit ratio 25 percent 20 percent Net profit to capital Capital to total liabilities 1/5 1/2 Fixed assets to capital Fixed assets/Total current assets 5/4 5/7 (8 Marks) Answer (a) Creditors A/c Dr.000 (i) Inventory of WIP at the end of the month includes material worth ` 35.000 By Balance b/d © The Institute of Chartered Accountants of India (`) 25.00.000 for budgeted direct labour hours 1.000 .PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT (a) Opening Balance of Creditors Account (b) Closing Balance of Creditors Account (c) Payment made to Creditors (d) Opening Balance of Stores Ledger Control Account (e) Closing Balance of Stores Ledger Control Account (f) Wages paid (for 8000 hours) 20% relate to indirect workers (g) Various indirect expenses incurred (h) Opening balance of WIP control account 51 ` 25.80.000 ` 60. (k) Budgeted overhead cost is ` 20.000 ` 5.80.000 ` 50. Profit and Loss Account and Balance Sheet of ABC Company.000 ` 65. Stores Ledger Control A/c.80.000 `4.00.000 on which 400 labour hours have been booked.000.000 ` 4. (`) Particulars 5. WIP Control A/c. You are required to prepare Creditors A/c. (j) Factory overhead is charged to production at budgeted rate based on direct labour hours.000 ` 40. Particulars To Bank A/c Cr.04. (8 Marks) (b) With the following ratios and further information given below prepare a Trading Account.00. Wages Control A/c and Factory Overhead Control A/c. Fixed Assets `40.000 ` 40.

20. Cr.000 8.20.000 - (80% of ` 4.35.68.000 By Balance c/d: To Wages control A/c 3. Particulars Particulars (`) To Balance b/d (`) 40.000) - Material 35.000 (Balancing figure) To Creditors A/c 5.70.000 By WIP control A/c © The Institute of Chartered Accountants of India (80% of ` 4.000) (`) 3.000/ 1. Cr.000 = ` 20 Wages Control A/c Dr.52 INTERMEDIATE (IPC) EXAMINATION: MAY.95.000 By Finished goods control A/c (Balancing figure) To Stores ledger control A/c 5. Particulars To Balance b/d (`) Particulars 50.35.000 6.000/ 6.000 Stores Ledger Control A/c Dr.000 6.000 Work-in-Process Control A/c Dr. 2016 To Balance c/d 40.000 By Balance c/d (Materials purchased) 65.000 63.20. Particulars To Bank A/c (`) Particulars 4.000 Labour 20.000 10.400 hours = ` 50 ** Factory Overhead Rate = ` 20.95.000 1.28.000 * Direct Labour Hour Rate = ` 3.80.000 By WIP control A/c 5.000 5.00.20.70.000 (` 50* × 400 hours) - Factory Oh (` 20** × 400 hours) To Factory Overhead control A/c (`) 10.68.000 By Stores ledger control A/c (Materials purchased)(Bal. figure) 6.20.05.00. Cr.000 .000 6.04.00.000 10.

000 = 10 Average Stock © The Institute of Chartered Accountants of India . Cr. Capital = (iii) Capital 1 = TotalLiabilities * 2 Or.e.40.000 (20% of ` 4. Total Current Assets = ` 40.000 (vii) Stock Turnover = Cost of GoodsSold(i.00.400 hours) (Indirect expenses) 1.000 1. Sales = ` 6.00.PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 53 By Factory OH Control A/c 80.000 By WIP control A/c To Bank A/c 60.000 (b) Workings: (i) Fixed Assets 5 = TotalCurrent Assets 7 Or.000 × 7 = ` 56.00.000) 4.00.000 4.40. Particulars (`) Particulars To Wages control A/c 80.00.28.40.000 Factory Overhead Control A/c Dr.000 (v) Net Pr ofit 1 = Sales 5 Or.00.000 × 1/5 = ` 6.40. Total liabilities = ` 32.000 × 2 = ` 64.000 = ` 8.Sales − Grossprofit) = 10 Average Stock = `32.000 12.00.000 5 *It is assumed that Total liabilities does not include capital.00.00. (iv) Net Pr ofit 1 = Capital 5 Or.00.000 (vi) Gross Profit = 25% of ` 32.000 By Balance c/d (` 20 × 6.00.00.00.000 5 (ii) Fixed Assets 5 = Capital 4 Or.000 × 4 = ` 32.000 (`) 1.000 × 5 = ` 32. Net Profit = ` 32.00.000 ` 40.000 − ` 8.00.

000 Or.00.000 Question 3 (a) X Associates undertake to prepare income tax returns for individuals for a fee.000 OpeningStock + ` 4.000 By Sales exp.00.00.000 Current Assets: Closing Stock Other Current Assets (Bal.00.000 (`) 40.000 Profit and Loss Account Particulars (`) Particulars To Operating Expenses 1.000 (`) 8.00.00.00.000 96.40. have been established as follows: Labour per return 5 hrs @ ` 40 per hour Overhead per return 5 hrs @ ` 20 per hour © The Institute of Chartered Accountants of India . for internal reporting.00.00. Opening Stock = ` 80.54 INTERMEDIATE (IPC) EXAMINATION: MAY.00. Or.000 27.000 36. They use the weighted average method and actual costs for the financial reporting purposes.00.000 8.40.000 52. The standards.20. Average Stock = ` 2. However. 2016 Or.000 Fixed Assets Liabilities 64.000 (Balancing figure) 8.00.000 = ` 2.00. figure) 96.00.000 2 Trading Account Particulars (`) To Opening Stock To Manufacturing Purchase Particulars 80.000 Balance Sheet Capital and Liabilities (`) Assets Capital 32.000 (Balancing figure) To Gross Profit b/d 8./ (`) 32.000 4. they use a standard costs system.000 By Closing Stock 36.000 By Gross Profit c/d To Net Profit 6.00.40.000 4.00.60. based on equivalent performance.

78.20. March 31 Return started in March Return-in-process (80% complete) 825 Nos 125 Nos Return-in-process labour ` 12.Overheads March 1 to 31 Labour : 4. wants to pursue a more liberal policy to improve sales. (c) The standard cost per return. The current bad-debts loss is 1%. (8 Marks) (b) A trader whose current sales are ` 4.000 per annum and an average collection period of 30 days.500 `63.PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 55 For March 2015 performance.000 3% 4% The selling price per unit is ` 3. Average cost per unit is `2. Assume a 360 days year.000 Overheads You are required to compute: (a) For each element.25 and variable cost per unit is ` 2. equivalent units of performance and the actual cost per equivalent unit. A study made by a management consultant reveals the following information: Credit Policy Increase in Collection Period Increase in Sales Present default anticipated I 10 days 1.000 ` 90.000 ` 5.000 for standard labour hours allowed.000 `52. The following additional information pertains to the month of March 2015: March 1 Return-in-process (25% complete) 200 No. (b) Actual cost of return-in-process on March 31.000 Cost Data: March 1 . Required return on additional investment is 20%. (d) The labour rate and labour efficiency variance as well as overhead volume and overhead expenditure variance.000 hours ` 1.5% II 30 days III 45 days ` 21. budgeted overhead is `98. Which of the above policies would you recommend for adoption? © The Institute of Chartered Accountants of India (8 Marks) .

00 From previous month Cost per Equivalent Unit (b) Actual cost of returns in process on March 31: Numbers Stage of Completion Rate per Return (`) Total (`) Labour 125 returns 0.000 Total Cost 1.000 190.000 Overhead 125 returns 0.80 190.025 1.56 INTERMEDIATE (IPC) EXAMINATION: MAY.000 1. 2016 Answer (a) (a) Statement Showing Cost Elements Equivalent Units of Performance and the Actual Cost per Equivalent Unit Detail of Returns Details Detail of Input Units Equivalent Units Output Units Labour Units Overheads % Units % Returns in Process at Start 200 Returns Completed in March 900 900 100 900 100 Returns Started in March 825 Returns in Process at the end of March 125 100 80 100 80 1.000 During the month 1.00 95.50 © The Institute of Chartered Accountants of India .000 5.025 Costs: 1.00 19.78.90.00 9.500 (c) Standard Cost per Return: Labour Overhead 5 Hrs × ` 40 per hour = ` 200 5 Hrs × ` 20 per hour = ` 100 ` 300 Budgeted volume for March = ` 98.000 95.000 90.80 95.500 28.000 / 1000 = 980 Returns Actual labour rate = ` 178000 / 4000 = `44.000 (`) (`) 12.

500 4.000 hrs.000 1. 25% of returns (200) 50 50 950 950 Variance Analysis: Labour Rate Variance = Actual Time × (Standard Rate – Actual Rate) = Standard Rate × Actual Time – Actual Rate × Actual Time = ` 40 × 4. Expected Profit: (a) Credit Sales (b) Total Cost (other than © The Institute of Chartered Accountants of India .78.000(A) Labour Efficiency Variance = Standard Rate × (Standard Time – Actual Time) = Standard Rate × Standard Time – Standard Rate × Actual Time = ` 40 × (950 units × 5 hrs.000 4.000(F) Overhead Expenditure or Budgeted Variance = Budgeted Overhead – Actual Overhead = ` 98.000 – ` 90.000 A. = ` 30.e.000 hrs.000(F) Overhead Volume Variance (b) A. = Recovered/Absorbed Overhead – Budgeted Overhead = 950 Units × 5 hrs.72.PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 57 (d) Computation of Variances: Statement Showing Output (March only) Element Wise Labour Overhead Actual performance in March in terms of equivalent units as Calculated above 1.000 Less: Returns in process at the beginning of March in terms of equivalent units i.000(A) Statement showing the Evaluation of Debtors Policies (Total Approach) Particulars Present Policy (30 days) Proposed Policy I (40 days) Proposed Policy II (60 days) Proposed Policy III (75 days) (`) (`) (`) (`) 4.20.83.) – ` 40 × 4.000 4. × `20 – ` 98.000 = ` 18.000 = ` 8. – ` 1.41.000 = ` 3.

5% of 4.50. 20.000) (3% of 4.1: (i) Calculation of Fixed Cost = [Average Cost per unit – Variable Cost per unit] × No.615 14.311 11.58 INTERMEDIATE (IPC) EXAMINATION: MAY.000x 98.000 3.08.50.72.000 3.000/3)] = ` 35.200 (d) Expected Profit [(a) – (b) – (c)] B.000 3.175 19.000 2.500) (4% of 4.80. of Units sold = [(2.57.000x 75 20 x ) 360 100 91.800 1. Opportunity Cost of Investments in Receivables * (1% of 4.000 Total Cost (Variable Cost 3.385 1.000x x ) 360 100 360 100 95.e.57.29.250 (3. 2016 Bad Debts) (i) Variable Costs 2.000) 1.41.875 5.000 3.22.29.000 35. Note 2 : This question can also be solved based on incremental approach as well as by computing Expected Rate of Return.000 35.000 3.000 (ii) Fixed Costs (W.00.83. Question 4 (a) A factory producing article A also produces a by-product B which is further processed into finished product. Net Benefits (A – B) 30 20 40 20 x ) (3. Working Note.667 14. The joint cost of manufacture is given below: © The Institute of Chartered Accountants of India .06.25 – 2) × (` 4.15. increase in collection period by 10 days or total 40 days) should be adopted since the net benefits under this policy are higher as compared to other policies.000 35.15.325 1.000 6.805 Recommendation: The Proposed Policy I (i.000x C.94.20.000) (1. 35.074 60 20 x ) 360 100 96.550 (3.680 7.N.658 (3.000 *Calculation of Opportunity Cost of Average Investments Opportunity Cost = Total Cost × Collectionperiod Rate of return × 360 days 100 Note 1 : It is assumed that all sales are credit sales only.320 [Sales x ` 2/` 3] 1) + Fixed Cost) (c) Bad Debts 4.05.15.

400 1.000 Overhead Selling prices are A ` 16.000 Labour Overhead Subsequent cost in ` are given below: A B Material 3.893 © The Institute of Chartered Accountants of India . Assume that selling and distribution expenses are in proportion of sales prices.000 600 500 5.000 3.000 ` 3.0417 Internal rate of return Salvage value 15% 0 You are required to calculate: (i) Annual cash flow (ii) Cost of capital (iii) Net present value (NPV) (iv) Discounted payback period Given the following table of discount factors: Discount Factor 15% 14% 13% 12% 1 years 0.PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Material 59 ` 5.885 0.000 B ` 8.28.877 0.000 1.500 Labour 1.000 Estimated profit on selling prices is 25% for A and 20% for B. (8 Marks) (b) Given below are the data on a capital project 'C': Cost of the project ` 2.000 ` 10. Show how you would apportion joint costs of manufacture and prepare a statement showing cost of production of A and B.400 Useful life Profitability index 4 years 1.869 0.000 ` 2.

2016 2 years 0.600 (25% of `16.400 (10.000 4.600) 18. 1.613 0.000 + ` 8.154 6.346 1.000) 400 .000) (8.000 1.733 3.133 1.756 0.000 Share of Joint cost 6.797 3 years 0.267 So.658 0.000) 267 (Refer working note) 133 (` 400 × 2/3) (` 400 × 1/3) Less: Subsequent cost 5.000) 12.000 600 500 Cost of production Total Cost A B 6.400 Cost of sales Less: Selling & Distribution exp.733 3.000 + ` 3.020 1.783 0.000 (5.712 4 years 0.675 0.946 11.769 0.367 3.633 980 654 Subsequent Cost A B 3.500 1.Subsequent costs (` 5.420 1.267 Working Note: Calculation of Selling and Distribution Expenses Particulars Total Sales Revenue (` 16.000 6.000 3. Joint cost of manufacture is to be distributed to A & B in the ratio of 6733 : 3267 Statement showing Cost of Production of A and B Elements of cost Material Labour Overheads Joint Cost A B 3.000 + ` 1.592 0.000 (20% of ` 8.600) Cost of Sales Less: Cost of production: .980 1.636 (8 Marks) Answer (a) Apportionment of Joint Costs Particulars Selling Price Less: Estimated profit A (`) B (`) 16.693 0.000) Selling and Distribution expenses (Balancing figure) © The Institute of Chartered Accountants of India (`) 24.400 1.000) Less: Estimated Profit (` 4.Joint Costs .60 INTERMEDIATE (IPC) EXAMINATION: MAY.572 0.000 8.367 2.

0417 = Sum of Discounted Cash inflows Cost of the Project Sum of Discounted Cash inflows ` 2. Cost of Capital = 13% (iii) Net Present Value (NPV): NPV = Sum of Present Values of Cash inflows – Cost of the Project = ` 2.28 Alternative NPV = Cost of Project × (Profitability Index – 1) = 2.800 70.28.1 @ 13% PV of Cash flow Cumulative PV of Cash inflow 1 80.400 Hence.855 (ii) Cost of Capital: Profitability index = 1.924.37.524.756 + 0. cumulative present value of cash inflows for 4 years is 2.0417 – 1) or 2.28.37.28 (iv) Discounted Payback Period : Year Annual Cash flow PV of Re.37.855 (0.800 © The Institute of Chartered Accountants of India .885 + 0.885 70.28.400 × (1.924.572) So.000 2.400 and Useful life = 4 years Considering the discount factor table @ 15%.924.400 = ` 80.400 × 0.28 Since.0417 = 9. initial cash outlay Cost of the Project = ` 2.000 From the discount factor table.974 80. Annual Cash flow = ` 2.974 (0.783 + 0.PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT (b) (i) 61 Annual Cash Flow: At 15% internal rate of return (IRR).28.28.400 = ` 9.28 Net Present Value = ` 9.400 × 1.0417 = ` 2.855 = ` 2. cumulative discount factor for 4 years = ` 2.28.28.524.000 Hence.693 + 0.28.869 + 0.658 + 0.000 0. the sum of total cash inflows = cost of the project i. Annual cash flow × 2. at discount rate of 13%.524.28 – ` 2.e. the cumulative discount factor for 4 years is 2.28 = 2.613 ) Hence. Annual Cash Inflows = ` 80.400 Sum of Discounted Cash inflows = ` 2.

2016 2 80. Cost control seeks to attain lowest possible cost under existing conditions.000 0. (4 × 4 = 16 Marks) Answer (a) Difference between Cost Control and Cost Reduction Cost Control Cost Reduction 1. 5.693 55. 1. (b) Write treatment of items associated with purchase of material: (i) Cash discount (ii) Subsidy/Grant/Incentives (iii) VAT or State Sales Tax (iv) Commission/ brokerage paid (c) Distinguish between operating lease and finance lease. Cost Control is a preventive function.8059 years 49.520 = 3.33. Cost control aims at maintaining the costs in accordance with the established standards. 3.040 2. 5.88.880 4 80.62 INTERMEDIATE (IPC) EXAMINATION: MAY.000 0. © The Institute of Chartered Accountants of India . Cost reduction recognises no condition as permanent.783 62. since a change will result in lower cost. 9 Months and 21 days Question 5 (a) State the difference between cost control and cost reduction.920 39. 2. emphasis is on past and present. Cost reduction has no visible end. Cost reduction is concerned with reducing costs. 4.640 1. It operates even when an efficient cost control system exists. 4. It challenges all standards and endeavours to better them continuously.000 0. In case of cost reduction it is on present and future. (d) Describe the three principles relating to selection of marketable securities. 2. In case of Cost Control.613 49. Cost control ends when targets are achieved.37. Cost reduction is a corrective function.040 Discounted Payback Period = 3+ Or = 3 years.440 1. 3.440 3 80.

Expenses borne Usually. Maturity: Matching of maturity and forecasted cash needs is essential. It is excluded from the cost of purchase if credit for the same is available. Purchase option The lessee does not have any It allows the lessee to have a option to buy the asset during purchase option during the lease the lease period. obsolescence. No. Prices of long term securities fluctuate more with changes in interest rates and are therefore. operations. or Commission or brokerage paid is added with the cost of purchase. maintenance or repairs. © The Institute of Chartered Accountants of India . The risk and reward incidental to ownership are passed on to the lessee. As the objective in this investment is ensuring liquidity. (c) Distinguish between Operating Lease and Financial Lease Point Operating Lease Finance Lease Ownership The lessee is only provided the use of the asset for a certain time. Unless mentioned specifically it should not form part of cost of purchase. (iii) VAT or State Sales Tax (iv) Commission brokerage paid State Sales Tax/VAT is paid on intra-state sale and collected from the buyers. The lessor only remains the legal owner of the asset. Bearing risk The lessor bears the risk of The lessee bears the risk of obsolescence. Risk incident to ownership belongs only to the lessor. minimum risk is the criterion of selection. more risky. Treatment Lease payment is treated like Finance lease is generally treated operating expenses like rent. Items Treatment (i) Cash discount Cash discount is not deducted from the purchase price.PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 63 (b) Treatment of items associated with purchase of material Sl. the lessor bears the cost The lessor does not bear the cost of of repairs. like a loan. (d) Three principles relating to selection of marketable securities are as follows Safety: Return and risks go hand in hand. maintenance or operations. (ii) Subsidy/Grant/Incentives Any subsidy/ grant/ incentive received from the Government or from other sources deducted from the cost of purchase. period.

000 units? Why? (4 Marks) (ii) State the difference between Fixed Budget and Flexible Budget.00.00.000 21.82 © The Institute of Chartered Accountants of India . (4 Marks) (b) The X Company has following capital structure at 31 st March. B .61 2007 1.00 2011 1.6.00. The following information is available: Particulars Process A (`) Process B (`) Variable cost per unit 12 14 Sales price per unit 20 20 30.000 5.00.10 2012 1.64 INTERMEDIATE (IPC) EXAMINATION: MAY.00.000 11% Preference Shares 1.000 shares) 16.000 20. in units) 4.30. The past trends are expected to continue. 2015 which is considered to be optimum. Year EPS (`) Year EPS (`) 2006 1. Would you change your answer as given above.00.00.00. ` 14% Debentures 3.000 Equity (1.000 4. The following are the earning per share figure for the company during proceeding ten years. Question 6 (a) (i) The M-Tech Manufacturing Company is presently evaluating two possible processes for the manufacture of a toy. Which process should be chosen? 2.00. speed and cost at which a security can be converted into cash.000 Anticipated sales (Next year.00.00.00.000 units. If the security can be sold quickly without loss of time and price it is highly liquid or marketable.60 per share.000 The company’s share has a current market price of `23.000 Total fixed costs per year Suggest: 1. The expected dividend per share next year is 50% of 2015 EPS.000 Capacity (in units) 4. if you were informed that the capacities of the two processes are as follows: A .5. 2016 Marketability: It refers to the convenience.

00 14.40.00.000 3.000 21.30.00.000 4.1 per share) were also issued.000 30.000 .00.00.PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 2008 1.000 Profit 2.A (`) Process. Preference shares ` 9.00.B should be chosen as it gives more profit.40.00.00.33 2014 2.000) (` 6 × 5.00.000) 30.000 24.95 2009 1.00.00.30.21 2013 1.000) 30.00 32.46 2015 2.00.00.000 21.00.000 5.20 (with dividend of ` 1.00.000 Contribution per unit Total Contribution (` 8 × 4.00 Less: Variable Cost per unit 12. The company is in 50% tax bracket.000 Process.000 9. (2) Particulars *Capacity (units) © The Institute of Chartered Accountants of India Process.15 2010 1. (iv) What will be the marginal cost of capital when the funds exceeds the amount calculated in (iii).00. (iii) How much can be spent for capital investment before new ordinary shares must be sold? Assuming the retained earning for next year's investment are 50% of 2015. (ii) Calculate marginal cost of capital when no new shares was issued.00.00 8.00 6.00 20.000 Less: Total fixed costs Total Contribution at full capacity Fixed Cost Profit 34.36 65 The company issued new debentures carrying 16% rate of interest and the current market price of debenture is ` 96. assuming new equity is issued at ` 20 per share? (8 Marks) Answer (a) (i) (1) Comparative Profitability Statements Particulars Process.000 5.000) (` 6 × 4.000 (` 8 × 4.B (`) Selling Price per unit 20. (i) Calculate after tax cost of (a) New debt (b) New Preference share (c) New equity share (consuming new equity from retained earnings).A (`) Process.000 *Capacity (units) 4.B (`) 6.

*Note: It is assumed that capacity produced equals sales. Thus it it is rigid is not rigid.000 (` 8 × 6. Thus activity level to be achieved.00.000 21. It does not change with actual It can be re-casted on the basis of volume of activity achieved.10 x 100 = 11.000) (` 6 × 5. then and price fixation at different levels of cost ascertainment and price activity. 4.96% ` 9.00. If the budgeted and actual activity It facilitates the cost ascertainment levels differ significantly.66 INTERMEDIATE (IPC) EXAMINATION: MAY.33% = ` 96 NP New Preference Shares (Kp) = Preference Dividend Net Proceed = ` 1.00.00.5) x 100 = 8.00.000 30.00.000 9. 2.000) Fixed Cost 30. fixation do not give a correct picture.00. Comparisons of actual and It provided meaningful basis of budgeted targets are comparison of actual and budgeted meaningless particularly when targets.20 (b) Equity Shares (Consuming New Equity from Retained Earnings) (Ke) = Expecteddividend(D1 ) + Growthrate (G) Current market price (P0 ) © The Institute of Chartered Accountants of India . (ii) Difference between Fixed and Flexible Budgets Fixed Budget (b) (i) Flexible Budget 1. 2016 Total contribution 48. there is difference between two levels. Calculation of after tax cost of the followings: (a) New Debentures (Kd) = I(1.000 Process-A be chosen. It operates on one level of activity It consists of various budgets for and under one set of conditions different level of activity.t) `16 (1-0.00.000 Profit 18. 3.

15 (Approximate 10% figure is taken because of decimal figures) [*Alternative calculation of Growth rate:.14 + 10.PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT = 67 50% of ` 2.85 (iii) The company can spent for capital investment before issuing new equity shares and without increasing its marginal cost of capital: Retained earnings can be available for capital investment = 50% of 2015 EPS × equity shares outstanding © The Institute of Chartered Accountants of India .36 . using the CVF table.01 or 10% Or.60 * Growth rate (on the basis of EPS) is calculated as below : EPS in current year . This has resulted in increase of ` 1.e.36 = 1 ( 1 + g)9 .00 Marginal cost of capital 13.33% 1.36 100 + 10% * = 5% + 10% = 15% ` 23.] (ii) Calculation of Marginal cost of capital (on the basis of existing capital structure): Source of capital Weight (a) After tax Cost of capital (%) (b) Weighted Average Cost of Capital [WACC (%)] (a) × (b) Debenture 0.EPS in previous year EPS in previous year = ` 2.05 11.36 at the end of 9th year at the compound interest rate of 10%. ` 1 becomes ` 2.76 = 90.27 + 13.77 + 10. Therefore. the growth rate is taken at 10%. 10 + 10 + 9.00% 12. The EPS for 2006 is given `1 and whereas for 2015 is given at ` 2.04 + 7.25 + 9.15 / 9 =10.96% 0.` 2.25 Preference shares 0.36.80 15.15  100 = 10% ` 2.36 over a period of 9 years.15 8. The growth rate can be calculated by using formula: Et = E0 ( 1 + g)t 2.92 + 9.60 Equity shares 0.Growth rate is calculated on basis average growth of EPS i.

9% + 10% = 15. investment before issuing equity  ×100 = ` 1.500 as calculated in part (iii) above.000  Thus.36 × 1. if the funds were defined as working capital.33 1.000) shall be financed by issuing New Debenture and New Preference Shares in the ratio of 3 : 1 (3.18.18. it will have to issue new shares at ` 20 per share.e. 47.00.80 15. (i) Purchase of a fixed asset on credit of two months.05 11.000) at a loss of `7.000 : 1. the retained earnings should be equal to 80% of total additional capital for investment. 47.00. 2016 = 50% of ` 2.60 Equity shares 0.00. marginal cost of capital is to be maintained at the current level i.47.e.500 i.36 + Growthrate (g) = 100 + 10% Current market price (P0 ) `20 = 5.68 INTERMEDIATE (IPC) EXAMINATION: MAY.000 Since.9% Calculation of marginal cost of capital (assuming the existing capital structure will be maintained): Source of capital Weight Cost (%) (a) (b) Weighted Average Cost of Capital [WACC (%)] Debenture 0.85%. The cost of new issue of equity shares will be: Ke= Expecteddividend(D1 ) 50% of `2. (` 1.96 0.500 – ` 1.25 Preference shares 0.15 8. © The Institute of Chartered Accountants of India .72 Marginal cost of capital (a) × (b) 14.90 12. (ii) Sale of a fixed asset (book value ` 8.000 ) respectively.500   80 The remaining capital of ` 29.18. which of the following would result in inflow/outflow of funds. (c) State.000. (iv) If the company spends more than ` 1.000 shares = ` 1.  ` 1.57 Question 7 Answer any four of the following: (a) What is cost plus contract? What are its advantages? (b) Narrate the objectives of cost accounting. 13.

Such types of contracts are entered into when it is not possible to estimate the contract cost with reasonable accuracy due to unstable condition of material. © The Institute of Chartered Accountants of India . (e) Explain what do you mean by: (i) Leveraged Lease (ii) Profit Centres (4×4 =16 Marks) Answer (a) Cost plus contract: Under cost plus contract. labour services etc. (b) The main objectives of introduction of a Cost Accounting System in a manufacturing organization are as follows: (i) Ascertainment of cost: The main objective of a Cost Accounting system is to ascertain cost for cost objects. (iv) Ascertainment of profit of each activity: Cost Accounting System helps to classify cost on the basis of activity to ascertain activity wise profitability. (iii) Contractee can ensure himself about the ‘cost of contract’ as he is empowered to examine the books and documents of the contractor to ascertain the veracity of the cost of contract. (iii) Cost control and Cost reduction: Cost Accounting System equips the cost controller to adhere and control the cost estimate or cost budget and assist them to identify the areas of cost reduction. (d) State the principles that should be followed while designing the capital structure of a company. There is no risk of incurring any loss on the contract.PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 69 (iii) Payment of final dividend already declared. Costing may be post completion or continuous but the aim is to arrive at a complete and accurate cost figure to assist the users to compare. Following are the advantages of cost plus contract: (i) The contractor is assured of a fixed percentage of profit. the contract price is ascertained by adding a percentage of profit to the total cost of the work. (ii) Determination of selling price: Cost Accounting System in a manufacturing organisation enables to determine desired selling price after adding expected profit margin with the cost of the goods manufactured. (iv) Writing off Bad debts against a provision for doubtful debts. control and make various decisions. (ii) It is useful specially when the work to be done is not definitely fixed at the time of making the estimate.

current liability then payment of final dividend is considered as out flow of fund. reliance is placed more on common equity for financing capital requirements than excessive use of debt. OR If examinees assumed that proposed dividend as Non. (iii) Control Principle: While designing a capital structure.70 INTERMEDIATE (IPC) EXAMINATION: MAY. Both the total current assets and current liabilities remain unchanged. Result in inflow/ outflow of funds (i) outflow. (ii) Risk Principle: According to this principle. No. (e) (i) Leveraged Lease: Under this lease. (iii) No effect. a third party is involved beside lessor and lessee. (iv) No effect. an ideal pattern or capital structure is one that minimises cost of capital structure and maximises earnings per share (EPS). timing of issue and competition in the industry should also be considered. 2016 (v) Assisting in managerial decision making: Cost Accounting System provides relevant cost information and assists managers to make various decisions. (v) Other Considerations: Besides above principles. current assets are increased but total current liabilities remain unchanged. the finance manager may also keep in mind that existing management control and ownership remains undisturbed. (d) The fundamental principles are: (i) Cost Principle: According to this principle. Use of more and more debt means higher commitment in form of interest payout. (iv) Flexibility Principle: It means that the management chooses such a combination of sources of financing which it finds easier to adjust according to changes in need of funds in future too. Neither the total current assets nor the total current liabilities are affected.e. This would lead to erosion of shareholders value in unfavourable business situation. Total current liabilities are increased but total current assets remain unchanged.. (ii) Inflow. The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i. lender and asset so purchased is held as security against the © The Institute of Chartered Accountants of India . other factors such as nature of industry. (c) Sl.

PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 71 loan. (ii) Profit Centres are the part of a business which is accountable for both cost and revenue. These are responsible for generating and maximizing profits. The lessor is entitled to claim depreciation allowance. The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. © The Institute of Chartered Accountants of India . Performance of these centres is measured with the volume of profit it earns.