COST ACCOUNTING AND FINANCIAL MANAGEMENT

Reg. No……………………..

Total Number of Questions: 8 Total Number of Printed Pages: 5

Time Allowed: 3 Hours Maximum Marks: 100

All questions are compulsory.

Working Notes should form part of the answer.

CF – IP – 03

1. Answer the following: 5 X 2 = 10 Marks

(i) What is Distribution Cost? Give two examples.

(ii) List any two criteria for selection of appropriate method of pricing material issues.
(iii) Normal Wage Rate is Rs.50 per hour, but Worker “a” earns an effective rate of Rs.75 per hour.
If time taken is 4 hours, what is the standard time allowed for the job?
(iv) What is Escalation Clause?
(v) The annual requirement of Product x is 50,000 units. Each unit of x requires 16 pounds of
Material k. The set–up cost comes to Rs.250 per batch order, and the carrying cost is 5% of the
production cost of Rs.500. Calculate what lot size is optimal for production.

2. JUMBO Enterprises manufactures one product, and the entire product is sold as soon as it is
produced. There are no stocks and WIP is negligible. The Standard Cost Card for the Company’s
product is as follows –
Particulars Description / Computation Rs.
Direct Material 0.5 kg at Rs.4 per kg 2.00
Direct Wages 2 hours at Rs.2 per hour 4.00
Variable Overheads 2 hours at Rs.0.30 per hour 0.60
Fixed Overheads 2 hours at Rs.3.70 per hour 7.40
Standard Cost 14.00
Standard Profit 6.00
Standard Selling Price 20.00

In the Company’s variance analysis system, SOH and AOH are not included in the standard cost and
are deducted from profit as a period cost. Budgeted Output for April was 5,100 units. The actual
results were –
• Production of 4,850 units was sold for Rs.95,600.
• Material consumed in production amounted to 2,300 kg. at a total cost of Rs.9,800.
• Labour hours paid for was 8,500 hours at a total cost of Rs.16,800.
• Actual Operating Hours were 8,000 hours.

1
Shree Guru Kripa’s Institute of Management Cost & FM – CA IPCC

• Variable & Fixed Overheads incurred for the month were Rs.2,600 and Rs.42,300 respectively.
• SOH and AOH amounted to Rs.18,000.

Calculate all variances and calculate the Actual Profit for the month ended 30th April. 15 Marks

3. (a) The following information of a Company is available for the year 2009 –
Sales Rs.40,000
Raw Materials Rs.20,000
Direct Wages Rs. 6,000
Variable and Fixed OH Rs.10,000
Profit Rs.4,000
Units sold 200 Nos.

In the year 2010, Wages Rate will increase by 50% and Fixed Cost will decrease by Rs.600. If 300
units are sold in 2010, the total Fixed and Variable OH will be 11,400.

How many units should be sold in Year 2010, so that the same amount of profit per unit as in year
2009 may be earned? 8 Marks

(b) A product passes through 3 processes A, B and C. 10,000 units at a cost of Rs.1.10 were issued to
Process A. The other direct expenses were as follows –
Particulars Process A Process B Process C
Direct Material Rs.1,500 Rs.1,500 Rs. 500
Direct Labour Rs.4,500 Rs.8,000 Rs.6,500
Direct Expenses Rs.1,000 Rs.1,000 Rs. 991
The wastage of Process ‘A’ was 5% and that of Process ‘B’ was 4%. The wastage of Process ‘A’ was
sold at Rs.0.25 per unit and that of ‘B’ at Rs.0.50 per unit and that of ‘C’ at Rs.1.00 per unit.

Overheads are charged at 160% of Direct Labour. The Final product was sold at Rs.10 per unit
fetching a profit of 20% on Sales.

Find out the percentage of wastage in Process C. 8 Marks

4. Answer the following: 3 X 3 = 9 Marks

(i) Discuss the methods of treating By Product Revenues in Cost Accounts.

(ii) Operating Cost and Operation Cost do not refer to the same concept. Comment.
(iii) Compute Machine Hour Rate from the following data –
• Cost of Machine (with useful life of 5 years and Scrap Value Rs.50,000) = Rs.3,80,000.
• Power = Rs.12 per power unit. The machine requires ½ unit of power for hour of operation.
• Carriage Inwards = Rs.1,12,000 p.a.
• Factory Rent = Rs.3,00,000 per annum. This machine occupies 1/10th of Total Factory Area.
• Consumables, Spares and other Machine related expenses = Rs.12,000 per quarter.
• Estimated Machine Operating Hours = 300 days p.a. of 8 hours each.

2
Shree Guru Kripa’s Institute of Management Cost & FM – CA IPCC

5. Answer the following: 5 X 2 = 10 Marks

(i) List any four forms of Promoter’s Contribution.

(ii) Explain briefly any two assumptions of Capital Structure Theories.
(iii) If an investment doubles itself in 6 years when compounded annually, what is the rate of interest?
Given 21/7 = 1.1173.
(iv) List any two objectives of Cash Management.
(v) Distinguish between Funds Flow Statement and Balance Sheet.

6. A Company is considering the replacement of its existing machine with a new one. The Written
Down Value of the existing machine is Rs.50,000 and its Cash Salvage Value is Rs.20,000. The
removal of this machine would cost Rs.5,000 by way of Labour Charges, etc.

The Purchase Price of the new machine is Rs.20 Lakhs and its expected life is 10 years. The Company
follows straight–line method of depreciation without considering Scrap Value. The other expenses
associated with the new machine are –
(a) Carriage Inward and Installation Charges Rs.15,000
(b) Cost of training workers to handle the new machine Rs.5,000
(c) Additional Working Capital Rs.10,000 (which is assumed to be received back by sale of scraps in
last year), and
(d) Fees already paid to a Consultant for his advice to buy the new machine Rs.10,000.
The annual savings (before tax) from the new machine would amount to Rs.2,00,000. The Income Tax
Rate applicable to the Company is 50%. The Company’s required rate of return is 10%.

Evaluate the proposal and give your advice. [Given Cumulative Present Value of Re.1 received
annually at 10% discount rate for 10 years is 6.145, and Present Value of Re.1 received at the end of
10 years at 10% discount rate is 0.386.] 15 Marks

7 (a) A Company currently has an annual turnover of Rs.50 Lakhs and an average collection period of
30 days. The Company wants to experiment with a more liberal credit policy on the ground that
increase in collection period will generate additional sales.

From the following information, kindly indicate which policy the Company should adopt:
Credit Policy Average Collection Period Annual Sales (Rs. in Lakhs)
A 45 days 56
B 60 days 60
C 75 days 62
D 90 days 63

You may consider the following additional information –

• Variable Cost is 80% of Sales.
• Fixed Cost is Rs.6 Lakhs per annum.
• Required (pre–tax) return on investment is 20%.
• A year may be taken to comprise of 360 days. 8 Marks

3
Shree Guru Kripa’s Institute of Management Cost & FM – CA IPCC

7 (b) Quick Play Ltd is engaged in the manufacture and sale of graded plastic toys. It is engaged in
preparing the next year’s budget and working capital estimate, for the purpose of enhancement of
credit limits with its Bankers.

The following information is made available to you on the cost structure of the product –
Particulars Details Amount per unit
Raw Materials 10 components Rs.250.00
Labour for Toy Manufacture 5 hours at Rs.80 per hour Rs.400.00
Manufacturing Overheads: Variable: 5 hours at Rs.15 Rs.75
Fixed: (based on normal capacity) Rs.25 Rs.100.00
Selling and Distribution Overheads: Commission: 5% of Sale Price Rs.100
Fixed: (based on sales expectancy) Rs. 50 Rs.150.00
Total Cost Rs.900.00
Add: Profit Rs.100.00
Sale Price Rs.1,000.00
-*
The following data is obtained from the Company’s past experience and current market trends –

1. Suppliers of Raw Materials will allow 2 months credit. On an average, 70% of the purchases will
be on credit basis.
2. Of the Total Sales by the Company, 40% will be to a wholesaler of Toys who will pay cash
immediately on delivery. The rest of the sales are on credit, on which the average credit period
availed by customers is about 2 months.
3. The Company enjoys a time lag of 1 month for payment of Wages and all Overheads.
4. Ignore Depreciation, Income Tax and Work–in–Progress.
5. Stock of Finished Goods should be maintained at 2 months sales and Stock of Raw Materials
should be maintained at 3 months consumption.
6. Cash and Bank balances should be maintained at an average level of Rs.2,50,000.
7. Budgeted Production and Sales for the next year will be at 5,000 units per month.

Prepare a statement estimating the Working Capital required for the next year’s activity, and find out
the amount of credit limits to be applied for, if the Company’s Bankers insist on a 20% Margin for
Working Capital purposes. 8 Marks

8. Answer the following: 3 X 3 = 9 Marks

(i) Differentiate between Annuity and Perpetuity.

(ii) A Company uses 12% Debt, 15% Preference Share Capital and Equity Share Capital in the
ratio of 30%, 45% and 25% respectively, in its overall capital structure. The required rate of
return for Equity Capital in this line of business is 24%, and the Company pays tax at 40%.
Compute the Average Cost of Capital of the Company.

(iii) “Tax Policy and Tax Law Provisions have to be fully understood by the Finance Manager”.
Comment on this statement, giving three areas of Financial Management where Taxation plays a
significant effect.