Pravinn Mahajan CA Ipcc Cost &; Fm Nov 2011 Solution

PRAVEEN MAHAJAN CLASSESCLASSES FOR CA FINAL SFM/ IPCC- Cost & FM

BG3-3E, PASCHIM VIHAR, NEW DELHI9871255244, 8800684854

IPCC- COST ACCUNTING AND FINANCIAL MANAGEMENT- NOV 2011 (SOLUTION) MARKS

1 a The P/V ratio of Delta Ltd. is 50% and Margin of safety is 40%. The Company sold 500 5units for Rs 5,00,000. Calculatea) BEPb) Sales in units to earn a profit of 10% on sales

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854 CLASSES FOR CA FINAL SFM/IPCC COST FM

SOLUTIONPV ratio – 50% Variable cost ratio – 50%M/S ratio – 40% BEP – 60%Sales Rs 5,00,000 @ 500 unitsSP per unit-Rs 1,000

a) BEP = total sales x Break even ratio5,00,000 x 0.6 = Rs 3,00,000 i.e 300 units

BEP = Fixed cost P/V ratio

Rs 3,00,000 = Fixed cost 0.50

Fixed cost = 3,00,000 x 0.50 = Rs 1,50,000

Statement of marginal cost (500 units)Rs/unit Rs

Sales 1,000 5,00000Variable cost (50%) 500 2,50000Contribution 500 2,50,000Fixed cost 1,50,000Profit 1,00,000

Contd.

b) Sales to earn a profit of 10% on sales

P/V ratio = Fixed cost + Profit Sales

Let sales be x, so desired profit is 10% of x0.50 = 1,50,000 + 0.10x

x .50x – 0.10x = 1,50,000

0.40 x = 1,50,000X = 1,50,000

0.40= Rs 3,75,000

Or (alternative solution)

Sales = Fixed cost + profitPV ratio

(If information is desired in quantity terms contribution per unit is used instead of P/V ratio)Sales = Fixed cost + profit

Contribution/unitX = 1,50,000 + (0.10) (1000)x

500

500x = 1,50,000 + 100x

400x = 1,50,000

X = 1,50,000 = 375 units 400

b. X executes a piece of work in 120 hours as against 150 hours allowed to him. His hourly rate is Rs 10 and he gets a Dearness allowance of Rs 30 per day of 8 hours worked, in addition to his wages. You are required to calculate total wages received by X under the following incentive schemesa Rowan premium planb Emerson efficiency plan

c A new customer with a 10% risk of nonpayment desires to establish business connections with 5

you. He would require 1.5 months credit, and is likely to increase your sales by Rs 1,20,000 p.a. Cost of sales amounts to 85% of sales. Tax Rate is 30%. Should you accept the offer, if the required rate of return is 40% (after Tax)?


Solution Dearness Allowance Rs 30/day of 8 hoursNo. of days worked 120 hours = 15 days

8hrs/dayDearness Allowance received 15 days x Rs 30 per day = Rs 450

Time allowed 150 hoursActual time taken 120 hoursTime saved 30 hours

Basic wage rate per hour Rs 10

Rowan Plan = Basic wages + Dearness allowance + (Time saved x basic wage rate)x Time taken Time

allowed 120x10 + 450 + 30 x 10 x 120

1501200 + 450 +240

= Rs 1,890

Emerson Plan = wages under Emerson plan depends on efficiency ratioEfficiency Ratio = Time Allowed x 100 = 150 x 100 = 125%

Time Taken 120 According to Emerson efficiency plan if efiiency is above 100%, Bonus is 20 % of

basic wage rate + 1% increase for every 1% increase in efficiencyTotal wages = Basic wage + Dearness Allowance + 0.20 x Basic wage + 0.25 x Basic Wage

120 x 10 + 450 + 0.20 x 120 x 10 + 0.25 x 120 x 10 = Rs 2190

Solution on next

d Beta Ltd has furnished following information

Earning per shareDividend payout RatioMarket price per share

Rs 4 25% Rs 40

Rate of taxGrowth rate of dividend

30% 8%

The company wants t raise additional capital of Rs 10 Lakhs including Debt to Rs 4Lakhs. The cost of debt (before tax) is 10% upto Rs 2 Lakhs, and 15% beyond that. Compute the after tax cost of capital


Statement of profitRs

Sales 1,20,000Less Bad debts 12,000_

1,08,000Less Cost of sales(0.85 x 1,20,000) 1,02,000Profit before tax 6,000Less Income tax (30%) 1,800Profit after tax 4,200

Average collection period 12monthsDebtors turnover ratio

Debtors turnover ratio 12months = 8 times1.5 months

Debtors turnover ratio Cost of salesAverage Debtors

Average Debtors 1,02,000 = Rs 12,750 8

Required tate of return 40%Opportunity cost Average debtors x Required rate

12,750 x 0.40 = 5,100

Net Profit (Loss) 4,200 - 5,100= Rs (900)

Since, sale to new customer yields a loss of Rs 900, so offer of new customer should not be accepted.

Solution on next page

2 a X Ltd recovers Overhead at a predetermined rate of Rs 50 per man – day. The total . 8Factory overhead incurred and the man - days actually worked were Rs 79 lakhs and 1.5 lakh days respectively. During this period 30,000 units were sold. At the end of the period . 5,000 units were held in stock but there was no opening stock of Finished goods. Similarly, though there was no stock of uncompleted units at the beginning of the period, at the end of the period there were 10,000 uncompleted units, which may be reckoned at 50% complete.On analyzing the reasons, it was found that 60% of the Unabsorbed OH were due to defective planning and the rest were attributable to increase in OH costs. How would Unabsorbed OH be treated in cost accounts


SOLUTION EPS Rs 4DPS 0.25 x 4 = 1Market Price Rs 40Tax 30%g 8%

Ke = d1 + g P0

1(1.08) + 0.08 = .107 or 10.7% 40

Kd ( upto Rs 2 lacs) = Interest (1- Tax rate) Net proceeds2,00,000 x 0.10 + 2,00,000 x 0.15 = 8.75%

4,00,000Statement of overall cost of capital

Source weight Cost of capital ProductEquity 6,00,000 0.107 64,200Debt 4,00,000 0.0875 35,000

99,200Ko = Product = 99,200 = 0.0992 or 9.92%

Weight 10,00,000

Solution Recovered OH = No. of man days x Rate per Man Day= 1,50,000 x 50 = Rs 75,00,000

Actual OH = =Rs 79,00,000 Under recovery = Actual OH – Recovered OH

79,00,000 – 75,00,000 = Rs 4,00,000Under recovery of OH due to abnormal reasons (Defective Planning) is transferred (Debited) to Costing P & LA/CUnder recovery of OH due to normal reasons ( Increase in costs) is charged to production using supplementary rate contd.

b The Financial statements of a company contain the following information for the year 8ending 31st march-

Statement of Profit for year ended 31st MarchParticulars Rs

Sales (20% cash sales) 40,00,000Less Cost of goods sold 28,00,000

Profit before interest and tax 12,00,000Less Interest 1,60,000

Profit before tax 10,40,000Less tax at 30% 3,12,000

Profit after tax 7,28,000Calculate a. Quick ratio

b. Debt equity ratioc. Return on capital employed raiod. Average collection period (assuming 360 day year)


Under recovery due to defective planning = 60% = 60% of Rs 4,00,000 = Rs 2,40,000Debited to costing Profit and loss A/c)

Under recovery due to increase in cost = 40% = 40% of Rs 4,00,000 = Rs 1,60,000

Supplementary Rate = Under recovered OH = Rs 4,00,000 x 0.40______ Equivalent Production (30,000 + 5,000+ 10,000x0.5) units

= Rs 1,60,000 = Rs 4 / unit 40,000 units

Statement of under recovery charged to productionIncrease in cost of Units Sold = 30,000 x 4 = Rs 1,20,000Increase in cost of closing stock = 5,000 x 4 = Rs 20,000Increase in cost of work-in progress = 10,000x0.5x4 = Rs 20,000

ParticularsCashSundry debtorsShort term investmentsStockPrepaid Expenses Total current assetsCurrent liabilities10% DebentuesEquity share capitalRetained earnings

Rs 1,60,000 4,00,000 3,20,000 21,60,000 10,000 30,50,000 10,00,000 16,00,000 20,00,000 8,00,000

3 a. The following details are available of process X for AugustOpening Work-in-progress 8,000 units

Degree of Completion & costMaterials (100%) Rs 63,900Labour ( 60%) Rs 10,800Overheads (60%) Rs 5,400

Input 1,82,000 units at Rs 7,56,900Labour paid Rs 3,28,000Overheads Incurred Rs 1,64,000Units Completed and transferred to next process 1,58,000 unitsUnits Scrapped 14,000 unitsDegree of Completion

Materials 100 %Labour and overhead 70 %

Scrap value to be adjusted in Direct material cost Rs 8 per unitNormal loss is 8% of Total input including opening work in process.

Assuming Average Method of Inventory is used, you are required to compute Equivalent production and cost per unit.


SolutionQuick ratio = Current Assets – Stock – Prepaid expenses

Current Liabilities= 30,50,000 - 21,60,000 - 10,000 = 0.88 times

10,00,000

Debt- equity ratio = _____________Debt______________Equity share capital + Retained earnings

= ___________16,00,000_________20,00,000 + 8,00,000

Return on capital = EBIT__________ Employed Equity + Retained earnings + Debt

= 12,00,000________ 20,00,000 + 8,00,000 + 16,00,000

= 27.27%

Average collection period = 360 days____ x average debtorsNet credit sales

= 360_____ x 4,00,00040,00,000 x 0.8

= 45 days

Solution Statement of Equivalent productionInput units Output Units Equivalent production

Materials Labour & overheads

Op WIP 8,000 Normal Loss 15,200 - -

32

b. Alpha Ltd. has furnished the following Balance sheet as on 31st March - 8Liabilities Amount Assets AmountEquity Share Capital(1,00,000 Equity shares of Rs 10 each) 10,00,000

Fixed Assets 30,00,000

General Reserve 2,00,000 Current Assets 18,00,00015% Debentures 28,00,000Current liabilities 8,00,000 Total 48,00,000 Total 48,00,000

Additional InformationAnnual Fixed cost other thanInterest 28,00,000

Tax rate 30%

Variable Cost ratio 60% Total Asset turnover ratio 2.5You are required to calculate-a. EPSb. Combined Leverage


Solution Statement of Equivalent productionInput units Output Units Equivalent production

Materials Labour & overheads

Op WIP 8,000 Normal Loss 15,200 - -

4 a The trading and profit & loss A/c of Beta Ltd for the year ended 31st March 2011 is given 8 . below:

Particulars Amount Particulars AmountTo Opening stock Raw materials 1,80,000 Work in progress 60,000 Finished goods 2,60,000To Purchases (Credit)To WagesTo Production ExpensesTo Gross Profit c/d

5,00,00011,00,0003,00,0002,00,0005,00,000

By Sales (Credit)By Closing Stock: Raw materials 2,00,000 Work in progress 1,00,000 Finished Goods 3,00,000

20,00,000

6,00,000

Total 26,00,000 Total 26,00,000To administration ExpensesTo Selling ExpensesTo Net Profit

1,75,00075,0002,50,000

By Gross Profit 5,00,000

Total 5,00,000 Total 5,00,000The Opening and Closing Balances of Debtors were Rs 1,50,000 and Rs 2,00,000 respectively, whereas Opening and Closing Creditors were Rs 2,00,000 and Rs 2,40,000 respectively. Compute Working Capital Requirement by Operating Cycle Method


Solution Asset turnover ratio = Sales___ Total assets

2.5 = Sales ______ 48,00,000

Sales = 48,00,000 x 2.5 = Rs 120,00,000

Statement of ProfitSales 120,00,000Variable cost 72,00,000Contribution 48,00,000Fixed cost 28,00,000Profit before Interest Tax 20,00,000Interest 15% of 28,00,000 4,20,000Profit before tax 15,80,000 Tax (30%) 4,74,000Profit after tax 11,06,000EPS = PAT_____ = 11,06,000 = 11.06

No. of equity shares 1,00,00098]lgfqCombined Leverage = Operating leverage x Financial leverage

Contribution x EBIT EBIT EBT

= 48,00,000 x 20,00,000 = 3.038 times 20,00,000 15,80,000

Solution Computation of Operating Cycle

Raw material conversion period = 365 x Average Stock of Raw material Raw material consumed

= 365 x 1,80,000 + 2,00,000 2___________


Solution Computation of Operating Cycle

Raw material conversion period = 365 x Average Stock of Raw material Raw material consumed

= 365 x 1,80,000 + 2,00,000 2___________

b. The following figures have been extracted from the cost records of a 8 manufacturing company

Stores Amount WIP AmountOpening BalancePurchase of MaterialTransfer from WIPIssues to WIPIssues to Repairs and MaintenanceDeficiencies found in Stock taking

9,00048,00024,00048,000

6,000

1,800

Opening BalanceDirect Wages AppliedOverheads AppliedClosing balance of WIP

18,00018,00072,000

12,000

Finished Products Entire Output is sold at a Profit of 10% on actual cost from Work-in-progress

Others Wages incurred Rs 21,000, Overhead Incurred Rs 75,000Draw a. Stores Ledger Control A/c

b. Work-in-progress Control A/cc. Overheads Control A/cd. Costing Profit & Loss A/c

5 Distinguish between


______STORES LEDGER CONTROL A/c Bal b/d 9,000 Wip LC 48,000GLA Fac OH (Purch) 48,000 Control A/c

(Repairs) 6,000WIP LC Cost P&L A/C(Tr. Frm WIP) 24,000 (Abnormal Loss) (B/F) 1,800 C l. Bal 25,200

81,000 81000

Work in progres Ledger Control A/CBal b/d 18,000 Tr. To SLC 24,000Wages Cost.P/L A/c

1,20,000Control A/c 18,000 (B/F)Fac.OHCont A/c 72,000(Rec OH)SLC 48,000 Bal c/d 12,000(Receipts From Stores___________________________Factory overhead control A/c______

SLC WIP

(Repairs) 6,000 (Rec OH) 72,000GLA (OH incurred) 75,000 Wage Cost.P/L A/c

Control A/c 3,000 (B/F)

Costing Profit & Loss A/c________WIP LC 1,20,000 Sales 1,32,000Gross Profit 12,000 (10% of sales) ___ _______

1,32,000 1,32,000SLC A/C Gross Pr. 12,000(Ab Loss) 1,800

WIP. LC 12,000(Under recovery) GLA (Loss Tr) (b/f) 1,800

Wage Control A/c____GLA 21,000 WIP.LC 18,000 (Wages Fac OHPaid) Control A/c 3,000

21,000

a. Cost Reduction and Cost Controlb. Fixed Budget and Flexible Budgetc. Operating Lease and Financial Leased. Net present value Method and Internal Rate of return

6 a A Ltd is considering the purchase of a machine which will perform some .operations which are at present performed by workers. Machines X and Y are the alternative . models. The following details are available:Particulars Machine X Machine YCost of Machine 1,50,000 2,40,000Estimated Life of Machine 5 years 6 yearsEstimated cost of Maintenance p.a 7,000 11,000Estimated cost of Indirect material p.a 6,000 8,000Estimated Savings in Scrap p.a. 10,000 15,000Estimated cost of supervision p.a. 12,000 16,000Estimated savings in Wages p.a 90,000 1,20,000

Depriciation will be charged on Straight Line basis. Tax rate is 30%. Evaluate the alternatives according to-(a) Averag rate of return method(b) Present value Index Method assuming Cost of capital being 10%

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854 CLASSES FOR CA FINAL SFM/IPCC COST FM Solution Statement of Cash outflows and Cash inflows Of Machine X_______________________________

Amount Period Factor@5% Present valueCash outflows

Solution next page


Solution Statement of Cash outflows and Cash inflows Of Machine X_______________________________

Amount Period Factor@5% Present valueCash outflows

Statement of Cash outflows and Cash inflows Of Machine Y___________________________ Amount Period Factor@5% Present value

Cash outflowsPurchase price 2,40,000 0 1 2,40,000

Contd. Next page

b. Gama Ltd has furnished the following information 8


Statement of Cash outflows and Cash inflows Of Machine Y___________________________ Amount Period Factor@5% Present value

Cash outflowsPurchase price 2,40,000 0 1 2,40,000

Standard cost data per unit of Production Actual cost data for August monthMaterials: 10 kgs@ Rs 10per Kg Material used: 50,000 Kg @ Rs 5,25,000Labour: 6 hours @ 5.50 per hour Labour paid : Rs 1,55,000 for 31000 hrs worked

Variable OH: 6 hours @ 10 per hour Variable OH: Rs 2,93,000Fixed OH: Rs 4,50,000 per month Fixed OH: Rs 4,70,000

(based on Normal volume of 30,000 hrs) Actual Production: 4,800 unitsCompute a. Material cost variance

b. Labour cost Variancec. Fixed OH cost varianced. Variable OH cost variance


SOLUTIONStandard (5,000 units) Actual (4,800 units)(30,000 hrs/6 hrs per unit)Units per unit Total Units per unit Total

Materials 50,000 10 5,00,000 50,000 10.5 5,25,000Labour 30,000 5.5 1,65,000 31,000 5 1,55,000Variable OH 30,000 10 3,00,000 31,000 2,93,000Fixed OH

Budgeted Recovered ActualHrs per hr Total Std hrs per hr Total Hrs per hr Total

For actual production

30,000 15 4,50,000 4,800x6 15 4,32,000 31,000 4,70,000

Material Cost Variance = Std. Cost for actual production - Actual Cost5,00,000 x 4800 - 5,25,000

5000= 45,000 Adverse

Labour Cost Variance = Std. Cost for actual production - Actual Cost

1,65,000 x 4800 - 1,55,000 5000

= 3400 FavourableVariable OH Cost Variance = Std. Cost for actual production - Actual Cost

3,00,000 x 4800 - 2,93,000 5000

= 5,000 AdverseFixed OH Cost Variance = Recovered OH - Actual OH

4,32,000 - 4,70,000= 38,000 Adverse

7 Attempt any four out of five questionsa. Elucidate the responsibilities of chief financial officerb. Explain the relevance of Time value of Moneyc. Discuss ABC analysis as a system of Inventory controld. Explain the terms Notional Profit and Retention money in contract cosinge. Explain a. Bridge Finance b. Essentials of Budget


Pravinn Mahajan CA Ipcc Cost &; Fm Nov 2011 Solution

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