Ca Ipcc Costing and Financial Management Suggested Answers May 2015

Gurukripa’s Guideline Answers for May 2015 CA Inter (IPC) Cost Accounting & Financial Management Exam
Gurukripa’s 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 Referred as
Padhuka’s Students Handbook on Cost Accounting and Financial Management Handbook
Padhuka’s Cost Accounting and Financial Management – A Practical Guide 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
Total Cost (`) 34,40,000 45,60,000
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) Break–Even 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= Difference in Costs ` 45,60,000 – ` 34,40,000

= = ` 28 per unit.
(using Level of Activity Method) Difference in Prodn Quantity (1,20,000 – 80,000) units
2. Fixed Cost = 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
3. PV Ratio = × 100 = × 100 = 30%
Sale Pr ice p.u. 40
Fixed Costs 12,00,000

4. Break Even Quantity = = = 1,00,000 units.
Contribution per Unit 40 − 28
5. Profit at 75% Sales Capacity = 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 2015–2016. The
Company’s 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 xml yml
Budgeted Production (in units) 2,00,000 1,50,000
Direct Material (per unit) ` 220 ` 280
Direct Labour (per unit) ` 130 ` 120
Direct Manufacturing Expenses ` 4,00,000 ` 5,00,000
May 2015.1

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The estimated units to be sold in the first four months of the year 2015–2016 are as under:
Product April May June July
xml 8,000 10,000 12,000 16,000
yml 6,000 8,000 9,000 14,000
Prepare: (1) Production Budget (Month wise), (2) Production Cost Budget (for first quarter of the year).
Solution: Similar to Page 12.3 Illus 2 [RTP] in Practical Guide.

1. Production Budget (in units)
Particulars Product xml Product yml
April May June Total April May June
Total
Sales 8,000 10,000 12,000 30,000 6,000 8,000 9,000
23,000
Add: Closing Stock (25% of
2,500 3,000 4,000 9,500 2,000 2,250 3,500 7,750
next month’s 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 Company’s Policy 25% of next month’s Sale.
2. Production Cost Budget

Particulars Product xml Product yml
Direct Material 32,000 units × ` 220 = ` 70,40,000 25,000 units × ` 280 = ` 70,00,000
Direct Labour 32,000 units × ` 130 = ` 41,60,000 25,000 units × ` 120 = ` 30,00,000
4 ,00,000 5,00,000
Manufacturing Overhead × 32,000 units = ` 64,000 × 25,000 units = ` 83,333
2,00,000 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 non–payment 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%
1. Since Post–Tax ROCE is 40% and Tax Rate is 30%, required Pre–Tax ROCE = = 57.14%
100% − 30%
Note: Since rotation of funds using Working Capital generates Operating Profit (i.e. EBIT), it is preferable to take Working
Capital related decisions on Pre–Tax ROCE. Alternative assumptions / approaches exist in decision–making.
2. Profitability of Sale to New Customer

Particulars `
Sales Value 2,40,000
Less: Cost of Sales at 80% 1,92,000
1.5
Less: Interest Cost for ` 1,92,000 at 57.14% for 1.5 months = ` 1,92,000 × 57.14% × 13,714 2,05,714
12
Net Benefit /Profit from Sale to New Customer 34,286
3. Evaluation of Risk of Non–Payment Possibility Chance Benefit Expected Benefit

Payment received 90% ` 34,286 ` 30,857
I – Make Credit Sale 10,286
Options No Payment received 10% (` 2,05,714) (` 20,571)
II – Do not sell No Cost–No Benefit ` Nil
Decision: As there is a Net Expected Benefit of ` 10,286, the offer from New Customer is acceptable.
May 2015.2

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: Similar to Page 17.3 Illus 5 [N 04] in Practical Guide.
% Change in EBIT % Change in EPS

Firm DOL = DCL =
% Change in Sales % Change in Sales
25% 30%
P = 0.926 = 1.11
27% 27%
32% 24%
Q = 1.280 = 0.96
25% 25%
36% 21%
R = 1.565 = 0.91
23% 23%
40% 23%
S = 1.905 = 1.09
21% 21%
Question 2(a): VOH & FOH Variances 8 Marks

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 10,000 14,000
Total Overheads (`) 1,80,000 2,10,000 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

Solution: Similar to Page 10.26 Illus 10 [M 12] in Handbook.
1. Basic Calculations
Variable OH Fixed OH
Δ OH 2,10,000 − 1,80,000 30,000 FOH Std Rate p.u = Total Std Absorption Rate
VOH Std Rate pu= = = =` 15 pu
Δ Qtty (10,000 − 8,000) uts 2,000 uts ` 20 p.u – VOH ` 15 p.u = ` 5 p.u
` 15 pu ` 5 pu
VOH Std Rate p.h. = = ` 3 p.h. FOH Std Rate p.h. = = ` 1 p.h.
` 5 ph ` 5 ph
` 20 pu
Note: Standard Time p.u. = = 5 hours p.u
` 4 ph
2.VOH Variance Computation based on Time

Col.(1): SH × SR Col.(2):AH× SR Col.(3):AVOH
(15,560 units × 5 hrs) × ` 3 p.h. = ` 2,33,400 74,000 hrs × 3 p.h. = ` 2,22,000 2,95,000– 62,500 = ` 2,32,500
VOH Efficiency Variance + VOH Expenditure Variance

= ` 2,33,400 – ` 2,22,000 = ` 2,22,000 – ` 2,32,500
= ` 11,400 F = ` 10,500 A
Total VOH Cost Variance

= ` 2,33,400 – ` 2,32,500 = ` 900 F
3.Computation of FOH Variances

Col. (1): AO × SR Col. (2): AH × SR Col. (3): BFOH Col. (4): AFOH
15,560 units × ` 5 p.u 74,000 hrs × 1 p.h. 12,000 units × ` 5 ` 62,500 (Given)
= ` 77,800 = ` 74,000 = ` 60,000
FOH Efficiency Variance + FOH Capacity Variance + FOH Expenditure Variance

= ` 77,800 – ` 74,000 = ` 3,800 F = ` 74,000 – ` 60,000=` 14,000 F = ` 60,000 – ` 62,500 = ` 2,500 A
FOH Volume Variance = ` 77,800 – ` 60,000=` 17,800 F + 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 8 Marks
SSR Ltd has furnished the following ratios and information for the year ending 31st March.
Sales ` 60,00,000 Current Ratio 2 times
Return on Net Worth 25% Cost of Goods Sold ` 18,00,000
Tax Rate 50% Interest on Debentures at 15% ` 60,000
Share Capital to Reserves 7 : 3 Sundry Debtors & Sundry Creditors Each ` 2,00,000
Net Profit to Sales (after Tax) 6.25% Inventory T/O (based on COGS and Closing Stock) 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
Cost of Goods Sold ` 18,00,000 ` 18,00,000

1. Stock T/O = = = 12. So, Closing Stock= = ` 1,50,000
Average Stock Average Stock 12
Note: As specified in the Question, Inventory T/o is taken based on Closing Stock, rather than Average Stock.
May 2015.4

Current Assets
2. Current Ratio = = 2 times. So, Current Assets = 2 × Current Liabilities = 2 × Creditors
Current Liabilities
Hence, Current Assets = 2 × ` 2,00,000 = ` 4,00,000
Inventory Debtors Cash and Bank

(WN 1) = ` 1,50,000 (given) = ` 2,00,000 (bal. fig) ` 50,000
EAT ` 3,75,000 ` 3,75,000

3. Return on Net Worth (post–tax) = = = 25%. So, Equity = = ` 15,00,000
Equity Equity 25%
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 `
Sales Given 60,00,000
Less: Cost of Goods Sold Given 18,00,000
Gross Profit 42,00,000
Less: Operating Expenses (balancing figure) (i.e. Gross Profit less EBIT) 33,90,000
EBIT By reverse working (EBT + Interest) 8,10,000
Less: Interest on Debentures Given 60,000
EBT By reverse working (EAT + Tax) 7,50,000
Less: Tax at 50% Since Tax Rate = 50% on EBT, EAT = balance 50%. Hence, Tax = EAT 3,75,000
EAT = Net Profit after Tax = 6.25% on Sales of ` 60,00,000 3,75,000
5. Balance Sheet as on 31st March

Particulars as at 31st March Note This Year Prev. Yr
I EQUITY AND LIABILITIES:
(1) Shareholders’ Funds: Share Capital (WN 3) 10,50,000
Reserves and Surplus (WN 3) 4,50,000
(2) ` 60,000
Non–Current Liabilities 15% Debentures 4,00,000
15%
(3) Current Liabilities: Trade Payables, i.e. Creditors (given) 2,00,000
Total 21,00,000
II ASSETS
(1) Non–Current Assets Fixed Assets (balancing figure) 17,00,000
(2) Current Assets:
(a) Inventories (WN 1) 1,50,000
(b) Trade Receivables Debtors (given) 2,00,000
(c) Cash and Cash Equivalents (WN 2) 50,000
Total 21,00,000
Question 3(a): Operating Costing 8 Marks

A Mini–Bus, 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 15,600 per annum
Garage Rent 2,400 per quarter
Road Tax 5,000 per annum
Repairs 4,800 per quarter
Salary of Operating Staff 7,200 per month
May 2015.5

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 One–Way Fare per
Passenger.
Solution: Similar to Page 9.9 Illus 11 [RTP] in Practical Guide.
1. No. of Passengers = 32×70%= 22.4; No. of Kms p.a. = 10 trips × 2 ways × 30 kms × 25 days × 12 months =1,80,000
So, Total Number of Passenger–Kms p.a. = 22.4 × 1,80,000 = 40,32,000
2. Statement of Operating Costs and Revenues p.a.

Insurance Fixed Given 15,600
Garage Rent Fixed (` 2,400 per quarter × 4 quarters) 9,600
Road Tax Fixed Given 5,000
Repairs Fixed (` 4,800 per quarter × 4 quarters) 19,200
Salary of Operating Staff Fixed (` 7,200 per month × 12 months) 86,400
Tyres & Tubes Fixed (` 3,600 per quarter × 4 quarters) 14,400
1,80,000 kms
Diesel Variable × ` 13 per litre 4,68,000
5 kms
1,80,000 kms
Oil & Sundries Variable × ` 22 39,600
100 kms
Depreciation Fixed Given 68,000
Total Operating Costs 100% – 25% – 22% = 53% of Takings 7,25,800
Add: Passenger Tax Given 22% of Takings 3,01,275
Add: Profit Margin Given 25% of Takings 3,42,358
Total Takings 100% 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 13,69,433
3. Cost per Passenger–Km. = = ` 0.18 Fare per Passenger–Km = = ` 0.34
40,32,000 40,32,000
Hence, One–Way Fare per Passenger = 30 km × ` 0.34 = ` 10.20
Question 3(b): Reverse Working with IRR, PI and NPV 8 Marks

Given below are the data on a Capital Project ‘M’: You are required to calculate for this Project ‘M’
Annual Cost Saving ` 60,000 1. Cost of Project
Useful Life 4 years 2. Payback Period
Internal Rate of Return 15% 3. Cost of Capital
Profitability Index 1.064 4. Net Present Value
Salvage Value 0
Given the following table of discount factors –
Discount Factor 15% 14% 13% 12%
1 year 0.869 0.877 0.885 0.893
2 years 0.756 0.769 0.783 0.797
3 years 0.658 0.675 0.693 0.712
4 years 0.572 0.592 0.613 0.636
May 2015.6

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
Initial Investment ` 1,71,300
2. Payback Period = = = 2.855 yrs
CFAT per annum ` 60,000
Total DCFAT 1.064 × 1,71,300
3. Profitability Index = = 1.064 (given). So, Total DCFAT = PI × Initial Investment =
Initial Investment = ` 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% Ko= 12%
` 60,000
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 by–products 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: Same as Page 7.14 Illus 12 [M 13] in Handbook.

1. Computation of Estimated NRV of By–Product
Particulars B1 B2
Final Sales Value 1800 × 40 = 72,000 3,000 × 30 = 90,000
Less: Estimated Profit 20 % = (14,400) 30% = (27,000)
Estimated SOH 15% = (10,800) 15% = (13,500)
Post Separation Costs (35,000) (24,000)
Estimated NRV 11,800 25,500
2. Joint Cost allocable to M1 = Total Joint Cost – Estimated NRV of By–Products B1 & B2
= 2,12,400 – (11,800 + 25,500) = ` 1,75,100
3. Profit Statement
Particulars M1 B1 B2 Total
(a) Sales Value 4000 × 100 = 4,00,000 1800× 40 = 72,000 3000 × 30 = 90,000 5,62,000
(b) Costs:
1,75,100 11,800 25,500 2,12,400
Joint Cost (WN 1 & WN 2)
Post Separation Costs Nil 35,000 24,000 59,000
SOH 20% = 80,000 10,800 13,500 1,04,300
Total Costs 2,55,100 57,600 63,000 3,75,700
(c) Profit 1,44,900 14,400 27,000 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

1. Debt Equity Ratio 30:70.

2. Cost of Debt at the rate of 11% (before tax) upto ` 3,00,000 and 14% (before tax) beyond that.
3. Earnings Per Share = ` 15.
4. Dividend Payout = 70% of Earnings.
5. Expected Growth Rate in Dividend 10%.
6. Current Market Price per Share = ` 90.
7. Company’s Tax Rate is 30% and Shareholder’s 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
2. Interest on Loan = (` 3,00,000 × 11%) + (` 6,00,000 × 14%) = ` 33,000 + ` 84,000 ` 1,17,000
Interest × (100% − Tax Rate) ` 1,17,000x(100% − 30%)
3. Kd = = 9.10%
Net Pr oceeds of Issue 9,00,000
DPS1 ` 15 x 70% Dividend x 110%
4. Kr = Ke = +g= + 10% = 12.83% + 10% 22.83%
MPS0 ` 90
5. Ko = (Kd × Wd) + (Ke × We) = (9.10% × 30%) + (22.83% × 70%) = 2.730% + 15.981% 18.711%
Note: DPS1 has been considered in computation of Ke. Alternatively, Earnings–Growth model may also be applied.
Shareholders’ Personal Tax Rate is not considered since Dividends are exempt from Tax in their hands.
Question 5: Theory – Various Topics 4 × 4 = 16 Marks

Question Page Reference in Handbook
Page No.1.7, Para 1.1.17, Point A(3) & B(1)
(a) Explain ‘Sunk Cost’ and Opportunity Cost’.
[N 00, M 03, M 05, M 12 Qn] See Practical Guide Page 1.20
Page No.6.10, Para 6B.1.6
(b) Write Notes on ‘Escalation Clause’.
[M 95, N 00, M 02, N 07, N 13 Qn] See Practical Guide Page 6.29
(c) Explain ‘Sales and Lease Back’. Page No.21.6, Para 21.3.6
Page No.16.12, Para 16.2.13
(d) Explain ‘Miller–Orr Cash Management Model’.
[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 forty–eight hours in a week which includes 4 hours set–up time. The work is
jointly done by Operators. The Operators are paid fully for the forty–eight hours. In addition, they are paid a bonus of 10% of
productive time. Costs are reported for this Company on the basis of thirteen four–weekly 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 Foreman’s Salary p.a. ` 12,960.
Calculate – (a) Cost of running one machine for a four–week period, and (b) Machine Hour Rate.
May 2015.8

Solution: Same as Page 4.19 Illus 22 [N 07] in Practical Guide.
1. Effective Working Hours (excluding Set–Up Time) = (48 – 4) × 4 Weeks = 176 hours for 4–week period.
2. Statement of OH for 4–weekly period

Operator’s Wages 3 Operators × 48 hours per week × 4 weeks × ` 20 per Hour 11,520
Operator’s Bonus 10% of Wages 1,152
Depreciation ` 52,000 × 10% p.a. × 4/52 400
Repairs & Maintenance ` 60 per week × 4 weeks 240
Consumable Stores ` 75 per week × 4 weeks 300
Rent ` 5,400 × 4/52 × 1/3rd (i.e. 3 machines) 138
Heat and Light ` 9,720 × 4/52 × 1/3rd (i.e. 3 machines) 249
Foreman’s Salary ` 12,960 × 4/52 × 1/3rd (i.e. 3 machines) 332
Power (including for Set–up Time) 20 units × 48 hours per week × 4 weeks × 0.80 per unit 3,072
Total OH for 4–week period 17,403
Total OH ` 17,403
3. Machine Hour Rate = = = ` 98.88 per hour.
Effective Machine Hours 176 hours
Note: Set–up Time is not considered in calculation of Effective Machine Hours. However, it is assumed that Power is
consumed during Set–up 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
Work–in–Progress 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 pre–payments. Thereby, it can
reduce its Working Capital Requirement substantially. What would be the reduction in working Capital Requirement due
to such decision?
Solution: Similar to Page 16.24 Illus 1 [M 13] in Handbook.

1. 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
2. No of Operating Cycles in a year = = 4.5
80
3. 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
4. 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

Question 7: Theory – Various Topics – Answer any four of the following 4 × 4 = 16 Marks
Question Page Reference in Handbook

Page No.1.12, Para 1.3.3
(a) Define ‘Cost Centre’ and state its types. [RTP, N 91, N 92, M 95, M 97, N 02, M 08, M 11 Qn]
See Practical Guide Page 1.20
(b) State benefits of Integrated Accounting. [N 91, N 97, M 02, M 07, M 10, M 12 Qn]
Page No.16.23, Para 16.4.7
(c) Differentiate between ‘Factoring and ‘Bill Discounting’.
[N 09, M 13 Qn] See Practical Guide Page 16.49
(d) Discuss the Conflicts in Profit versus Wealth
[N 06, N 07, M 09, N 10, N 12 Qn]
Maximization Principle of the Firm.
Page No.19.7, Para 19.3.1 and
(e) Define ‘Present Value’ and ‘Perpetuity’. Page No.19.10, Para 19.3.3 [RTP Qn]
May 2015.10

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 material–wise 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
Purchase Price per kg (`) 15.00 12.50 11.00 9.00 36.00 28.00
Duties / Taxes CST at 2% – VAT at 4% – – Special Tax 10%
Transportation Cost per purchase (`) 6,000 15,000 9,000 12,000 3,000 11,000
Sorting & Piling Cost per purchase (`) – 1,200 – 800 1,800 –
Loading Cost per 50 kg. (`) 10.00 5.00 10.00 3.00 10.00 25.00
Unloading Cost per 50 kg. (`) 2.00 2.00 2.00 2.00 2.00 2.00
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
Add: Duties/ Taxes CST 2%= 0.30 Nil Nil Nil Nil Spl Tax 10%=2.80
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
2. Computation of EOQ
Particulars Mustards Soybeans Olives
(45,000 Ltr.× 5 Kg × 12 (15,000 Ltr. × 6 Kg × 12 (3,000 Ltr. × 4.5 Kg × 12
Annual Requirement (A)
Months) = 27,00,000 Kg Months) = 10,80,000 Kg Months) = 1,62,000 Kg
Market Wholesale Farmers Wholesale Farmers Wholesale Farmers
Buying Cost per Order (B)
(a) Transportation 6,000 15,000 9,000 12,000 3,000 11,000
(b) Sorting and Piling Cost – 1,200 – 800 1,800 –
Total 6,000 16,200 9,000 12,800 4,800 11,000
Carrying Cost per Kg p a. (C)
(a) Interest at 12.5% on
1.9425 1.5800 1.4050 1.1375 4.5300 3.9175
Purchase Cost as per WN 1
(b) Warehouse Rent at ` 1 / Kg 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
Total 2.9425 2.5800 2.4050 2.1375 5.5300 4.9175
2AB
EOQ = (in kgs) 1,04,933.53 1,84,138.47 89,906.40 1,13,730.98 16,769.90 26,921.34
C
May 2015.11

3.Best Purchase Option for Olives

Particulars Wholesale Farmers
(a) Annual Requirement (A) (Kg.) 1,62,000 1,62,000
(b) Quantity purchased every time (Q) 16,769.90 1,62,000
(c) No. of Orders p a. (A ÷ Q) 9.66 or 10 1
(d) Average Inventory (Q ÷ 2) 8,384.95 Kg 81,000 Kg
(e) Buying Cost p.a. (9.66 Orders × ` 4,800) = ` 46,369 (1 Order × 11,000) = ` 11,000
(f) Carrying Cost p.a. (8,384.95 Kg × ` 5.5300) = ` 46,369 (81,000 Kg × 4.9175) = ` 3,98,318
(g) Purchase Cost p.a. (1,62,000 Kg×` 36.24) = ` 58,70,880 (1,62,000 Kg×` 31.34) = ` 50,77,080
(h) Total Cost (e) + (f) + (g) ` 59,63,618 ` 54,86,398
Conclusion: Purchasing Olives directly from the Farmers is better due to lower Costs.
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 Re–Order 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) Re–Order Quantity,
(b) Maximum Stock Level, (c) Minimum Stock Level, and (d) Impact on the Company’s 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
Less: Opening Stock of ‘Exe’ 900 units
Hence, Exe’ to be produced 9,100 units
Raw Material required to produce 9,100 units of ‘Exe’ (9,100 units × 2 kg) 18,200 kg.
Less: Opening Stock of ‘Dee’ 1,000 kg.
Annual Demand for Raw Material ‘Dee’ 17,200 kg.
2. Computation of Economic Order Quantity (EOQ) & ROQ:

2 × Annual demand of ' Dee ' × Ordering Cost 2 × 17,200 Kg × 720 2 × 17,200 Kg × 720
(a) EOQ = = = = 1,200 Kg
Carrying Cost Per unit Per annum 125 × 13.76% 17.2
(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
4. Computation of Stock Levels

(a) Re–Order Level (ROL) = (Maximum Usage per day × Maximum Lead Time) = 70 Kg× 8 days= 560 Kg.
(b) Maximum Stock level = ROL + ROQ – (Min. Usage × Min. Lead Time)
= 560 kg + 1,000 kg – (30 kg × 4 days) = 1,440 kg.
(c) Minimum Stock Level = ROL – (Average Usage × Average Lead Time)
= 560 kg – (50 kg × 6 days) = 260 kg.
Note: Average Lead Time = ½ of (4+8) = 6 days.
May 2015.12

5.Impact of not ordering the EOQ

If ROQ Purchased If EOQ Purchased
(a) Quantity Purchased every time (Q) 1,000 kg 1,200 kg
17,200 kg 17,200 kg
(b) No. of Orders p.a. = (A ÷ Q) = 17.2 Orders = 14.33 Orders
1,000 kg 1,200 kg
(c) Buying Cost p.a = (b) × ` 720 17.2 orders × ` 720 = ` 12,384 14.33 orders × ` 720 = ` 10,320
Q 1,000 kg 1,200 kg
(d) Average Inventory = = 500 kg = 600 kg
2 2 2
(e) Carrying Cost p.a. = (d) × ` 17.20 500 kg × ` 17.2 =` 8,600 600 kg × ` 17.2 = ` 10,320
(f) 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) Calculate the amount of Loss that the Company has incurred due to incorrect rate selection.
(ii) What would be the Loss incurred by JBL due to incorrect rate selection if it had followed Rowan Scheme of bonus payment?
(iii) What is the amount that could have been saved if Rowan Scheme of Bonus Payment is followed?
(iv) Do you think Rowan Scheme of Bonus Payment is suitable for JBL?
Solution:
1. Computation of Time Saved
Particulars (in hrs) Ram Shyam
Time allowed 30 Pieces × 2 hrs = 60 42 Pieces × 2 hrs = 84
Less: Time Taken 28 40
Time Saved 32 44
2. Loss due to incorrect rate selection, i.e. Excess of `55 – 50 = ` 5 per hour
Ram Shyam Total
(a) Basic Wages (28 Hrs. × 5) = 140.00 (40 Hrs. × 5) = 200.00 340.00
(b) Bonus (Halsey Scheme) (50% × Time saved × (50% × 32 Hrs. × 5) (50% × 44 Hrs. × 5) =
190.00
Excess Rate) = 80.00 110.00
(c) Excess Wages paid = Loss (Halsey Scheme) (a + b) = 220.00 (a + b) = 310.00 530.00
(d) Bonus (Rowan Scheme)
28 40
TimeTaken ( ×32×5) = 74.67 ( × 44 × 5) = 104.76 179.43
( × Time Saved × Excess Rate) 60 84
Time Allowed
(e) Excess Wages paid = Loss (Rowan Scheme) (a + d) = 214.67 (a + d) = 304.76 519.43
(f) Amount that could have been saved if Rowan
5.33 5.24 10.57
Scheme is followed (c – e)
Conclusion: Rowan Scheme of Incentive Payment is suitable due to its benefits (Refer Illustration N 86 Question in
Page No.3.16 of Padhuka’s Students Handbook on Cost Accounting and Financial Management.
May 2015.13

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 Joined Left At the end
Data Processors 540 1,080 60 1,560
Payroll Processors ? 20 60 40
Supervisors ? 60 ––– ?
Voice Agents ? 20 20 ?
Assistant Managers ? 20 ––– 30
Senior Voice Agents 4 ––– ––– 12
Senior Data Processors 8 ––– ––– 34
Team Leaders ? ––– ––– ?
Employees transferred from the Subsidiary Company
Senior Voice Agents ––– 8 ––– –––
Senior Data Processors ––– 26 ––– –––
Employees transferred to the Subsidiary Company
Team Leaders ––– ––– 60 –––
Assistant Managers ––– ––– 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, Category–wise
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 transfer–in and transfer–
out are treated as Recruitment and Separation respectively.
• Separations (S) and Accessions (A) are given in the Question itself.
May 2015.14

• 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 Separations (S) New Recruitment Replacement Assertions (A) = Total

(Given) (N) (R) Joined (Given)
Data Processors 60 1,020 60 1,080
Payroll Processors 60 –– 20 20
Supervisors –– 60 –– 60
Voice Agents 20 –– 20 20
Assistant Managers Transferred = 10 10 10 20
Senior Voice Agents –– 8 –– Note 1 = 8
Senior Data Processors –– 26 –– Note 1 = 26
Team Leaders Transferred = 60 –– –– ––
Total 210 1,124 110 1,234
3. Computation of Labour Turnover Rates

772 + 1,796
(a) Average Labour Force = = 1,284 Employees.
2
Number of Re placements 110
(b) Labour Turnover Ratio by Replacement Method = = = 8.57%
Average Labour Force 1,284
Number of Separations 210
(c) Labour Turnover Ratio by Separation Method = = = 16.36%
Number of Separations + Accessions 210 + 1,234
(d) Labour Turnover Ratio by Flux Method = = = 112.46%
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 –
Amount in ` HP – 1 HP – 2
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
Value of Materials at Site as on 31 March 2016
st 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
A Concrete Mixture Machine was bought on 1 April 2015 for ` 8,20,000 and used for 180 days in HP–1 and for 100 days in HP–
st
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

Solution: Contract Account for the year ended 31st March 2016 (Amounts in `)
Particulars HP–1 HP–2 Particulars HP–1 HP–2
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 16,10,000
To Wages: (` 85,000 + ` 12,000) 97,000 Cost of Work Uncertified 1,90,000 1,40,000
(` 62,000 + ` 8,400) 70,400 By Material at site c/d 47,000 52,000
To Donation to Local Club (Note 1) 5,000 2,500
To Plant Hire Charges:
(` 72,000×1/3) and (` 57,000×1/3) 24,000 19,000
To Deprn on Concrete Mixture M/c:
(` 8,20,000 × 15% × 180/365) 60,658
(` 8,20,000 × 15% × 100/365) 33,699
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
2. Percentage of Completion = : HP–1= = 42.71% HP – 2 = = 44.72%
Contract Price 48,00,000 36,00,000
1 Cash Received
3. Profit to be recognized in P&L A/c =
× Notional Profit ×
3 Work Certified
1 1
HP–1: × 7,00,342 × 80% = ` 1,86,758 HP–2: × 5,86,401 × 80% = ` 1,56,374
3 3
Question 6: Operating Costing RTP

Gopal Milk Co–Operative 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 GMCS’s 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.
Toll Tax paid p.m. (`) 2,850 3,020 –––
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) ` 18,000 p.m.
Salary to a Cleaner (a Cleaner for each vehicle) ` 11,000 p.m.
Allocated Garage Parking fee ` 1,350 per vehicle per month
Servicing Cost ` 3,000 for every complete 5,000 k.m. run.
Price of Diesel per litre ` 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

Solution: 1.Basic Computations

Particulars Ramgarh Pratapgarh Devgarh
(4 Vehicles × 3 Trips × 2 × (3 Vehicles × 2 Trips × 2 × (5 Vehicles × 2 Trips ×
(a) Total Distance covered per
24 km. × 30 days) 34 km. × 30 days) 2 × 16 km. × 30 days)
month
= 17,280 Km = 12,240 Km = 9,600 Km
(b) Mileage per litre of diesel 8 kmpl 10 kmpl 6 kmpl
(c) Diesel Consumption=(a÷ b) 2,160 litres 1,224 litres 1,600 litres
(d) Cost of Diesel Consumption
` 1,25,280 ` 70,992 ` 92,800
at ` 58 per Litre (`)
(e) Free Service Warranty? No Yes No
(f) No. of Services Required =
3 2 1
(a) ÷ 5,000 Km
(g) Total Service Cost (`) (` 3,000 × 3) = 9,000 Nil (` 3,000 × 1) = 3,000
`11,02,000 × 4 Vehicles ` 13,12,000 × 3 Vehicles ` 9,25,000 × 5 Vehicles
(h) Total Cost of Vehicles
= ` 44,08,000 = ` 39,36,000 = ` 46,25,000
` 44,08,000 × 10% × 1/12 ` 39,36,000 × 10% × 1/12 ` 46,25,000×10%×1/12
(i) Depreciation per month
= ` 36,733 = ` 32,800 = ` 38,542
(25,000 ltr. × 70% × 4 (25,000 ltr. × 70%× 3 (25,000 ltr. × 70% × 5
(j) Total Volume of Milk Carried
Vehicles × 3 Trips × 30 Vehicles × 2 Trips × 30 days) Vehicles × 2 Trips × 30
(in litres)
days) = 63,00,000 = 31,50,000 days) = 52,50,000
Note: Total Milk Carried = 63,00,000 + 31,50,000 + 52,50,000 = 1,47,00,000 litres.
2. Computation of Operating Cost per month for each Vehicle

Particulars Ramgarh Pratapgarh Devgarh Total
A. Running Costs:
Diesel [WN (1d)] 1,25,280 70,992 92,800 2,89,072
Servicing [WN (1g)] 9,000 – 3,000 12,000
(A) 1,34,280 70,992 95,800 3,01,072
B. Fixed Costs:
(4 Drivers × (3 Drivers × (5 Drivers ×
Salary to Drivers 2,16,000
` 18,000) = 72,000 ` 18,000) = 54,000 ` 18,000) = 90,000
(4 Cleaners × (3 Cleaners × (5 Cleaners ×
Salary to Cleaners 1,32,000
` 11,000) = 44,000 ` 11,000) = 33,000 ` 11,000) = 55,000
(4 Vehicles × (3 Vehicles × (5 Vehicles ×
Garage Parking Fee 16,200
` 1,350) = 5,400 ` 1,350) = 4,050 ` 1,350) = 6,750
Depreciation [WN (1i)] 36,733 32,800 38,542 1,08,075
Toll Tax 2,850 3,020 ––– 5,870
(B) 1,60,983 1,26,870 1,90,292 4,78,145
C. Total Cost [A + B] 2,95,263 1,97,862 2,86,092 7,79,217
D. Operating Cost per vehicle (` 2,95,263 ÷ 4) (` 1,97,862 ÷ 3) (` 2,86,092 ÷ 5) (` 7,79,217 ÷ 12)
= C ÷ No. Of. Vehicles = ` 73,815.75 = ` 65,954.00 = ` 57,218.40 = ` 64,934.75
Total Operating Cost 7,79,217

E. Vehicle Operating Cost per Litre of Milk = = = ` 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 R–9. The following figures have been collected from cost records of last year for
the product R–9:
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

Elements of Cost Variable Cost portion Fixed Cost

General & Administration Overhead 2% of Cost of Goods Sold ` 71,000
Selling & Distribution Overhead 4% of Cost of Sales ` 68,000
Last Year, 5,000 units were sold at `185 per unit. From the given data find the following:
(a) Break–Even 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.
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 Variable Cost (`) Fixed Cost (`)
Direct Material 7,00,000 × 30% = 2,10,000 –
Direct Labour 7,00,000 × 15% = 1,05,000 –
Factory Overhead 7,00,000 × 10% = 70,000 2,30,000
General & Administration OH 7,00,000 × 2% = 14,000 71,000
Selling & Distribution OH 8,00,000 × 4% = 32,000 68,000
Total 4,31,000 3,69,000
Contribution Sales (-) Variable Costs (185 x 5,000 units) (-) 4,31,000
4. PV Ratio = × 100 = × 100 = × 100 = 53.41%
Sales Sales (185 x 5,000 units)
5. Computations:
Fixed Costs 3,69,000
(a) Break–Even Sales = = = ` 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
Total Sales (-) BES 9,25,000 (-) 6,90,882

(c) Margin of Safety (%) = = = 25.31%
Total Sales 9,25,000
(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 short–term sources, an increase in interest rates will reduce its Profits. Hence, it
may choose to switch to long–term financing. This will be at a higher rate and profitability will be diminished.
2. If the Company is financed mainly from long–term 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

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 ` in Crores
A. CASH FLOWS FROM OPERATING ACTIVITIES
Cash Sales (135 × 0.6) 81
Cash Receipts from Debtors [OB 45+ Credit Sales (135 × 40%) – CB 50] 49
Cash Purchases (20% of 55) (11)
Cash Payments to Suppliers [OB 21+ Credit Purch. (55 × 80%) – CB 23] (42)
Cash Paid to Employees (22)
Cash Payments for Overheads (Adm. and Selling OH) (18)
Cash Generated from Operations 37
Less: Income Tax Paid (8)
Net Cash Generated from Operating Activities [A] 29
B. CASH FLOWS FROM INVESTING ACTIVITIES
Sale of Investments (12+ 2.40) 14.4
Payments for Purchase of Fixed Assets (11)
Net Cash Used in Investing Activities [B] 3.4
C. CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of Debentures (22–15) (7)
Interest Paid (1.5)
Dividend Paid + Dividend Distribution Tax at 17% = (10 + 1.7) (11.7)
Net Cash Used in Financing Activities [C] (20.2)
D. Net Increase in Cash and Cash Equivalents (A + B + C) 12.2
E. Cash and Cash Equivalents at Beginning of the period 6.0
F. Cash and Cash Equivalents at end of the period (D + E) 18.2
May 2015.19

STUDENTS’ NOTES
May 2015.20


Ca Ipcc Costing and Financial Management Suggested Answers May 2015

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

Gurukripa’s Guideline Answers to May 2015 Exam Questions

Note: Numbers for Page References are given as under –

Question 1(a): Marginal Costing – Computation of PVR, BEP, etc. 5 Marks

1. Variable Cost per unit= Difference in Costs ` 45,60,000 – ` 34,40,000

Fixed Costs 12,00,000

5. Profit at 75% Sales Capacity = Total Contribution – Fixed Cost

Question 1(b): Production and Cost Budget 5 Marks

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

2. Production Cost Budget

Question 1(c): Credit Granting Decision – Decision Tree Analysis 5 Marks

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

2. Profitability of Sale to New Customer

3. Evaluation of Risk of Non–Payment Possibility Chance Benefit Expected Benefit

Question 1(d): Operating and Combined Leverage 5 Marks

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

% Change in EBIT % Change in EPS

Question 2(a): VOH & FOH Variances 8 Marks

Overheads are based on the following Flexible Budget.

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

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

2.VOH Variance Computation based on Time

VOH Efficiency Variance + VOH Expenditure Variance

Total VOH Cost Variance

3.Computation of FOH Variances

FOH Efficiency Variance + FOH Capacity Variance + FOH Expenditure Variance

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

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

Working Notes and Calculations

Cost of Goods Sold ` 18,00,000 ` 18,00,000

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

Inventory Debtors Cash and Bank

EAT ` 3,75,000 ` 3,75,000

5. Balance Sheet as on 31st March

Question 3(a): Operating Costing 8 Marks

Tyres and Tubes 3,600 per quarter

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

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

Question 3(b): Reverse Working with IRR, PI and NPV 8 Marks

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

Question 4(a): By Product Income Accounting 8 Marks

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

Question 4(b): Computation of Kd Ke and WACC 8 Marks

1. Debt Equity Ratio 30:70.

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

Question 5: Theory – Various Topics 4 × 4 = 16 Marks

Question 6(a): Comprehensive Machine Hour Rate 8 Marks

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

2. Statement of OH for 4–weekly period

Question 6(b): Operating Cycle – Basic Computations 8 Marks

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

Question Page Reference in Handbook

Additional Questions for Practice

3.Best Purchase Option for Olives

Question 2: Material Cost – Stock Levels, EOQ – Reverse Working RTP

2. Computation of Economic Order Quantity (EOQ) & ROQ:

4. Computation of Stock Levels

5.Impact of not ordering the EOQ

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

Question 4: Labour Cost – Labour Turnover Rates – Reverse Working RTP

Particulars Separations (S) New Recruitment Replacement Assertions (A) = Total

3. Computation of Labour Turnover Rates

Question 5: Contract Costing – Profit Recognition, Columnar Accounts RTP