PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Question Nos. 1 and 6 are compulsory.

Attempt three questions out of remaining Question Nos. 2, 3, 4 and 5 and attempt
two questions from the remaining questions Nos. 7, 8 and 9.
Working notes should form part of the answer.
Question 1
(a) A product passes through three processes ‘X’, ‘Y’ and ‘Z’. The output of process ‘X’ and
‘Y’ is transferred to next process at cost plus 20 per cent each on transfer price and the
output of process ‘Z’ is transferred to finished stock at a profit of 25 per cent on transfer
price. The following informations are available in respect of the year ending 31st March,
2008:
Process Process Process Finished
X Y Z Stock
Rs. Rs. Rs. Rs.
Opening stock 15,000 27,000 40,000 45,000
Material 80,000 65,000 50,000
Wages 1,25,000 1,08,000 92,000
Manufacturing Overheads 96,000 72,000 66,500
Closing stock 20,000 32,000 39,000 50,000
Inter process profit included in
Opening stock NIL 4,000 10,000 20,000
Stock in processes is valued at prime cost. The finished stock is valued at the price at
which it is received from process ‘Z’. Sales of the finished stock during the period was
Rs. 14,00,000.
You are required to prepare:
(i) Process accounts and finished stock account showing profit element at each stage.
(ii) Profit and Loss account.
(iii) Show the relevant items in the Balance Sheet.
(b) What are the limitations of inter-firm comparison system?
(c) What is cost plus contract? State its advantages. (12 + 3 + 3 = 18 Marks)
2 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

Answer
(a) Process ‘X’ Account
Dr. Cr.
Particulars Cost Profit Total Particulars Cost Profit Total

Rs. Rs. Rs. Rs. Rs. Rs.

To Opening Stock 15,000  15,000 By Process ‘Y’ 2,96,000 74,000 3,70,000

A/c (Transfer)

To Material 80,000  80,000

To Wages 1,25,000  1,25,000

Total 2,20,000  2,20,000

Less: Closing stock 20,000  20,000

Prime Cost 2,00,000 2,00,000

To Manufacturing
Overheads 96,000  96,000

Total cost 2,96,000  2,96,000

To Profit and Loss A/c

(20% on transfer Price

Or 25% on cost) _______ 74,000 74,000 _______ ______ _______

2,96,000 74,000 3,70,000 2,96,000 74,000 3,70,000

Process ‘Y’ Account

Dr. Cr.
Particulars Cost Profit Total Particulars Cost Profit Total

Rs. Rs. Rs. Rs. Rs. Rs.

To Opening Stock 23,000 4,000 27,000 By Process ‘Z’ A/c 5,36,379 2,26,121 7,62,500
(Transfer)

To Process ‘X’ A/c 2,96,000 74,000 3,70,000

To Material 65,000  65,000

To Wages 1,08,000  1,08,000

Total 4,92,000 78,000 5,70,000

Less: Closing stock 27,621 4,379 32,000

Prime Cost 4,64,379 73,621 5,38,000

To Manufacturing
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 3

Overheads 72,000  72,000

Total cost 5,36,379 73,621 6,10,000

To Profit and Loss  1,52,500 1,52,500

A/c

(20% on transfer Price

or 25% on cost) _______ _______ _______ _______ ______ _______

5,36,379 2,26,121 7,62,500 5,36,379 2,26,121 7,62,500

Process ‘Z’ Account

Dr. Cr.
Particulars Cost Profit Total Particulars Cost Profit Total

Rs. Rs. Rs. Rs. Rs. Rs.

To Opening Stock 30,000 10,000 40,000 By Finished Stock 7,45,629 5,50,371 12,96,000
A/c (Transfer)

To Process ‘Y’ A/c 5,36,379 2,26,121 7,62,500

To Material 50,000  50,000

To Wages 92,000  92,000

Total 7,08,379 2,36,121 9,44,500

Less: Closing stock 29,250 9,750 39,000

Prime Cost 6,79,129 2,26,371 9,05,500

To Manufacturing
Overheads 66,500  66,500

Total cost 7,45,629 2,26,371 9,72,000

To Profit and Loss  3,24,000 3,24,000

A/c

(25% on transfer Price

or 33 1/3% on
cost) ______ _______ _______ _______ _______ _______

7,45,629 5,50,371 12,96,000 7,45,629 5,50,371 12,96,000

4 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

Finished Stock Account

Dr. Cr.
Particulars Cost Profit Total Particulars Cost Profit Total

Rs. Rs. Rs. Rs. Rs. Rs.

To Opening Stock 25,000 20,000 45,000 By Finished Stock 7,41,862 6,58,138 14,00,000
A/c (Transfer)

To Process ‘Z’ A/c 7,45,629 5,50,371 12,96,000

Total 7,70,629 5,70,371 13,41,000

Less: Closing stock 28,767 21,233 50,000

To Profit and Loss 7,41,862 5,49,138 12,91,000

A/c

_______ 1,09,000 1,09,000 _______ _______ ________

7,41,862 6,58,138 14,00,000 7,41,862 6,58,138 14,00,000

Profit and Loss Account

for the year ending 31 st March, 2008
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Provision for unrealized profit By Provision for unrealized profit
on closing stock on opening stock
(Rs. 4,379 + 9,750 + 21,233) 35,362 (Rs. 4,000 + 10,000 + 34,000
20,000)
To Net Profit 6,58,138 By Process X A/c 74,000
By Process Y A/c 1,52,500
By Process Z A/c 3,24,000
_______ By Finished Stock A/c 1,09,000
6,93,500 6,93,500

Workings:
Calculation of amount of unrealized profit on closing stock:
Process ‘X’ = Nil
Rs. 78,000
Process ' Y'   Rs. 32,000  Rs. 4,379.
Rs. 5,70,000
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 5

Rs. 2,36,121
Process ' Z'   Rs. 39,000  Rs. 9,750.
Rs. 9,44,500
Rs. 5,50,371
Finished stock   Rs. 50,000  Rs. 21,233.
Rs. 12,96,000
Balance Sheet as on 31st March, 2008 (Extract)
Liabilities Amount Assets Amount Amount
Rs. Rs. Rs.
Net profit 6,58,138 Closing stock
Process – X 20,000
Process – Y 32,000
Process – Z 39,000
Finished stock 50,000
1,41,000
Less: Provision for
unrealized profit 35,362 1,05,638
(b) Limitations of inter-firm comparison system: Various limitations of inter-firm
comparison system are:
(i) Top management feels that secrecy will be lost.
(ii) Middle management is usually not convinced with the utility of such a comparison.
(iii) In the absence of a suitable cost accounting system, the figures supplied may not
be reliable for the purpose of comparison.
(iv) Suitable basis for comparison may not be available.
(c) Cost plus contract: Under cost plus contract, the contract price is ascertained by adding
a percentage of profit to the total cost of the work. 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, labour services etc.
Following are the advantages of cost plus contract:
(i) The contractor is assured of a fixed percentage of profit. There is no risk of
incurring any loss on the contract.
(ii) It is useful specially when the work to be done is not definitely fixed at the time of
making the estimate.
(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.
6 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

Question 2
(a) A transport company has 20 vehicles, which capacities are as follows:
No. of Vehicles Capacity per vehicle
5 9 tonne
6 12 tonne
7 15 tonne
2 20 tonne

The company provides the goods transport service between stations ‘A’ to station ‘B’.
Distance between these stations is 200 kilometres. Each vehicle makes one round trip
per day an average. Vehicles are loaded with an average of 90 per cent of capacity at
the time of departure from station ‘A’ to station ‘B’ and at the time of return back loaded
with 70 per cent of capacity. 10 per cent of vehicles are laid up for repairs every day.
The following informations are related to the month of October, 2008:
Salary of Transport Manager Rs. 30,000
Salary of 30 drivers Rs. 4,000 each driver
Wages of 25 Helpers Rs. 2,000 each helper
Wages of 20 Labourers Rs. 1,500 each labourer
Consumable stores Rs. 45,000
Insurance (Annual) Rs. 24,000
Road Licence (Annual) Rs. 60,000
Cost of Diesel per litre Rs. 35
Kilometres run per litre each vehicle 5 Km.
Lubricant, Oil etc. Rs. 23,500
Cost of replacement of Tyres, Tubes, other parts etc. Rs. 1,25,000
Garage rent (Annual) Rs. 90,000
Transport Technical Service Charges Rs. 10,000
Electricity and Gas charges Rs. 5,000
Depreciation of vehicles Rs. 2,00,000
There is a workshop attached to transport department which repairs these vehicles and
other vehicles also. 40 per cent of transport manager’s salary is debited to the workshop.
The transport department is charged Rs. 28,000 for the service rendered by the
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 7

workshop during October, 2008. During the month of October, 2008 operation was 25
days.
You are required:
(i) Calculate per ton-km operating cost.
(ii) Find out the freight to be charged per ton-km, if the company earned a profit of 25
per cent on freight.
(b) Explain the following:
(i) Job costing and batch costing.
(ii) Profit centres and investment centres.
(iii) Period cost and discretionary costs. (8 + 6 = 14 Marks)
Answer
(a) (i) Operating Cost Sheet
for the month of October, 2008
Particulars Amount
(Rs.)
A. Fixed Charges:
60 18,000
Manager’s salary: Rs. 30,000 
100
Drivers’ Salary : Rs. 4,000  30 1,20,000
Helpers’ wages : Rs. 2,000  25 50,000
Labourer wages : Rs. 1,500  20 30,000
Rs. 24,000 2,000
Insurance :
12
Rs. 60,000 5,000
Road licence :
12
Rs. 90,000 7,500
Garage rent:
12
Transport Technical Service Charges 10,000
Share in workshop expenses 28,000
Total (A) 2,70,500
8 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

B. Variable Charges:
Cost of diesel 12,60,000
Lubricant, Oil etc. 23,500
Depreciation 2,00,000
Replacement of Tyres, Tubes & other parts 1,25,000
Consumable Stores 45,000
Electricity and Gas charges 5,000
Total (B) 16,58,500
C. Total Cost (A + B) 19,29,000
D. Total Ton-Kms. 18,86,400
E. Cost per ton-km. (C/D) 1.022

(ii) Calculation of Chargeable Freight

Cost per ton-km. Rs. 1.022
Add: Profit @ 25% on freight or 33⅓% on cost Re. 0.341
Chargeable freight per ton-km. Rs. 1.363 or Rs. 1.36

Workings:
1. Cost of Diesel:
Distance covered by each vehicle during October, 2008 = 200  2  25  90/100 = 9,000 km.
9,000  20
Consumption of diesel =  36,000 litres.
5
Cost of diesel = 36,000  Rs. 35 = Rs. 12,60,000.
2. Calculation of total ton-km:
Total Ton-Km. = Total Capacity  Distance covered by each vehicle  Average Capacity Utilisation ratio.

= 5  9 6  12 7  15 2  20 9,000  90%  70% 

2
= 45  72  105  40  9,000  80%
= 262  9,000  80%.
= 18,86,400 ton-km.
(b) (i) Job Costing and Batch Costing: In case of Job Costing, the cost of each job is
ascertained separately. It is suitable in case of printing press, motor workshop etc.
Batch Costing is the extension of job costing. A batch may represent a number of
small orders passed through the factory in batch. Each batch is treated as a unit of
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 9

cost and therefore separately costed. Here cost per unit is determined by dividing
the cost of batch by the number of units produced in the batch.
(ii) Profit Centres and Investment Centres: Centres which have the responsibility of
generating and maximizing profits are called profit centres.
Those centres which are concerned with earning an adequate return on investment
are known as Investment centres.
(iii) Period Costs and Discretionary Costs: Period costs are the costs, which are not
assigned to the products but are charged as expenses against the revenue of the
period in which they are incurred. All non-manufacturing costs such as general and
administrative expenses, selling and distribution expenses are recognized as period
costs.
Discretionary Costs are not tied to a clear cause and effect relationship between
inputs and outputs. They usually arise from periodic decisions regarding the
maximum outlay to be incurred. Examples include advertising, public relations,
training etc.
Question 3
(a) In a manufacturing company factory overheads are charged as fixed percentage basis on
direct labour and office overheads are charged on the basis of percentage of factory
cost. The following informations are available related to the year ending 31st March,
2008 :
Product A Product B
Direct Materials Rs. 19,000 Rs. 15,000
Direct Labour Rs. 15,000 Rs. 25,000
Sales Rs. 60,000 Rs. 80,000
Profit 25% on cost 25% on sales price
You are required to find out:
(i) The percentage of factory overheads on direct labour.
(ii) The percentage of office overheads on factory cost.
(b) The following information is collected from the personnel department of ST limited
for the year ending 31st March, 2008:
Number of workers at the beginning of the year 8,000
Number of workers at the end of the year 9,600
Number of workers left the company during the year 500
Number of workers discharged during the year 100
Number of workers replaced due to left and discharges 700
Additional workers employed for expansion during the year 1,500
10 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

You are required to calculate labour turnover rate by using separation method,
replacement method and flux method.
(c) Discuss briefly the benefits of “Direct Product Profitability”.
(d) How cost audit is useful to the society ? Discuss. (6 + 3 + 2 + 3 = 14 Marks)
Answer
(a) Let, the percentage of factory overheads on direct labour is ‘x’ and the percentage of
office overheads on factory cost is ‘y’, then the total cost of product A and product B will
be as follows:
Product A Product B
(Rs.) (Rs.)
Direct Materials 19,000 15,000
Direct labour 15,000 25,000
Prime Cost 34,000 40,000
Factory overheads (Direct labour  x) 150 x 250 x
Factory cost (i) 34,000 + 150 x 40,000 + 250 x
Office overheads (Factory cost  y) (ii) 340 y + 1.5 x y 400 y + 2.5 x y
Total Cost [(i) + (ii)] 34,000 + 150 x 40,000 + 250 x
+ 340 y + 1.5 x y +400 y + 2.5 x y
Total cost on the basis of sales is:
Product A Product B
(Rs.) (Rs.)
Sales 60,000 80,000
Less: Profit
Product A – 25% on cost or 20% on Sales 12,000
Product B – 25% on sales ______ 20,000
Total Cost 48,000 60,000
Thus,
Total Cost of A is 34,000 + 150x + 340y + 1.5 xy = 48,000
or 150x + 340y + 1.5 xy = 14,000…………………….(i)
Total Cost of B is 40,000 + 250x + 400y + 2.5 xy = 60,000
or 250x + 400y + 2.5 xy = 20,000…………………….(ii)
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 11

Equation (ii) multiplied by 0.6 and after deducting from equation (i), we get
150x + 340y + 1.5xy = 14,000………………………….(i)
150x  240y  1.5xy = 12,000…………..….....………(ii)
100y = 2,000
or y = 20

Putting value of y in equation (i), we get

150x + 340  20 + 1.5x  20 = 14,000
or 150x + 30x = 14,000 – 6,800
or 180x = 7,200
or x = 40.
Hence, (i) the percentage of factory overheads on direct labour = 40 and
(ii) the percentage of office overheads on factory cost = 20.

(b) Calculation of labour turnover rate:

1. Separation method:
Number of workers separated during the year
Labour turnover rate   100
Average number of workers on rolls during the year
600
  100
8,800
= 6.82%.

Average Number of workers separated during the year = Number of workers left the
company during the year +
Number of workers
discharged during the year
= 500 + 100 = 600.
8,000  9,600
Average number of workers on rolls during the year   8,800
2
12 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

2. Replacement Method:

Number of workers replaced during the year

Labour turnover rate   100
Average number of workers on rolls during the year
700
  100
8,800
= 7.95%.

3. Flux Method:

Number of workers separated  Number of workers replaced

Labour turnover rate   100
Average number of workers on rolls during the year
600  700
  100
8,800
= 14.77%.
(c) Benefits of ‘Direct Product Profitability’: Various benefits of Direct Product Profitability
are:
(i) Better cost analysis.
(ii) Better pricing decisions.
(iii) Better management of stores and warehouse space.
(iv) The rationalization of product ranges.
(d) Cost audit is useful to the society as under:
(i) Cost audit is often introduced for the purpose of fixation of price. The prices so fixed
are based on the correct costing data and so the consumers are saved from
exploitation.
(ii) Since price increase by the industry is not allowed without proper justification so as
to increase in cost of production, consumers can maintain their standard of living.
Question 4
(a) The following are the details of receipts and issues of a material of stores in a
manufacturing company for the period of three months ending 30th June, 2008:
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 13

Receipts:
Date Quantity (kgs) Rate per kg.
(Rs.)
April 10 1,600 5
April 20 2,400 4.90
May 5 1,000 5.10
May 17 1,100 5.20
May 25 800 5.25
June 11 900 5.40
June 24 1,400 5.50

There was 1,500 kgs. in stock at April 1, 2008 which was valued at Rs. 4.80 per kg.

Issues:
Date Quantity (kgs)
April 4 1,100
April 24 1,600
May 10 1,500
May 26 1,700
June 15 1,500
June 21 1,200

Issues are to be priced on the basis of weighted average method. The stock verifier of
the company reported a shortage of 80 kgs. on 31st May, 2008 and 60 kgs. on 30th
June, 2008. The shortage is treated as inflating the price of remaining material on
account of shortage.
You are required to prepare a Stores Ledger Account.
(b) What are the essential prerequisites of integrated accounting system?
(c) What do you mean by Idle time ? How would you treat idle time in cost accounting?
(7 + 4 + 3 = 14 Marks)
Answer
(a) Stores Ledger Account
for the three months ending 30 th June, 2008
(Weighted Average Method)
Receipts Issues Balance
Date GRN No. Qty. Rates Amounts Requisit- Qty. Rates Amount Qty. Amount Rate for
MRR No. (Kgs.) (Rs.) ion. No. (Kgs.) (Rs.) (Rs.) (Kgs.) (Rs.) further Issue
(Rs.)
2008
April 1 1,500 7,200 4.80
April 4 1,100 4.80 5,280 400 1,920 4.80
April 10 1,600 5.00 8,000 2,000 9,920 9,920
 4.96
2,000
April 20 2,400 4.90 11,760 4,400 21,680 21,680
 4.93
4,400
April 24 1,600 4.93 7,888 2,800 13,792 13,792
 4.93
2,800
May 5 1,000 5.10 5,100 3,800 18,892 18,892
 4.97
3,800
May 10 1,500 4.97 7,455 2,300 11,437 11,437
 4.97
2,300
May 17 1,100 5.20 5,720 3,400 17,157 17,157
 5.05
3,400
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 15

May 25 800 5.25 4,200 4,200 21,357 21,357

 5.09
4,200
May 26 1,700 5.09 8,653 2,500 12,704 12,704
 5.09
2,500
May 31 Shortage 80 2,420 12,704 12,704
 5.25
2,420
June 11 900 5.40 4,860 3,320 17,564 17,564
 5.29
3,320
June 15 1,500 5.29 7,935 1,820 9,629 9,629
 5.29
1,820
June 21 1,200 5.29 6,348 620 3,281 3,281
 5.29
620
June 24 1,400 5.50 7,700 2,020 10,981 10,981
 5.40
2,020
June 30 Shortage 60 1,960 10,981 10,981
 5.60
1,960
16 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

(b) Essential pre-requisites for integrated accounts:

The essential pre-requisites for integrated accounts include the following steps:
(i) The management’s decision about the extent of integration of the two sets of books.
Some concerns find it useful to integrate up to the stage of primary cost or factory
cost while other prefer full integration of the entire accounting records.
(ii) A suitable coding system must be made available so as to serve the accounting
purposes of financial and cost accounts.
(iii) An agreed routine, with regard to the treatment of provision for accruals, prepaid
expenses, other adjustment necessary for preparation of interim accounts.
(iv) Perfect coordination should exist between the staff responsible for the financial and
cost aspects of the accounts and an efficient processing of accounting documents
should be ensured.
(c) Idle Time: It is a time during which no production is carried out because the worker
remains idle even though they are paid. Idle time can be normal idle or abnormal idle
time. Normal idle time is that which is inherent in any work situation and cannot be
eliminated whereas abnormal idle time arises due to abnormal factors like lack of
coordination, power failure, breakdown of machines, non-availability of raw materials,
strikes and lockouts, etc.
Treatment of Idle time in Cost Accounting: Normal idle time is treated as a part of the
cost of production. In the case of direct workers, an allowance for normal idle time is built
into the labour cost rate. In the case of indirect workers, normal idle time is spread over
all the products or jobs through the process of absorption of factory overheads.
Abnormal idle time cost is not included as a part of production cost and is shown as a
separate item in the costing profit and loss account.
Question 5
(a) Maximum production capacity of JK Ltd. is 5,20,000 units per annum. Details of
estimated cost of production are as follows:
 Direct material Rs. 15 per unit.
 Direct wages Rs. 9 per unit (subject to a minimum of Rs. 2,50,000 per month).
 Fixed overheads Rs. 9,60,000 per annum.
 Variable overheads Rs. 8 per unit.
 Semi-variable overheads are Rs. 5,60,000 per annum up to 50 per cent capacity
and additional Rs. 1,50,000 per annum for every 25 per cent increase in capacity or
a part of it.
JK Ltd. worked at 60 per cent capacity for the first three months during the year 2008, but
it is expected to work at 90 per cent capacity for the remaining nine months.
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 17

The selling price per unit was Rs. 44 during the first three months.
You are required, what selling price per unit should be fixed for the remaining nine
months to yield a total profit of Rs. 15,62,500 for the whole year.
(b) Calculate machine hour rate for recovery of overheads for a machine from the following
information:
Cost of machine is Rs. 25,00,000 and estimated salvage value is Rs. 1,00,000.
Estimated working life of the machine is 10 years. Annual working hours are 3,000 in the
factory. The machine is required 400 hours per annum for repairs and maintenance.
Setting-up time of the machine is 156 hours per annum to be treated as productive time.
Cost of repairs and maintenance for whole working life of the machine is Rs. 3,50,000.
Power used 15 units per hour at a cost of Rs. 5 per unit. No power is consumed during
maintenance and setting-up time. A chemical required for operating the machine is Rs.
9,880 per annum. Wages of an operator is Rs. 4,000 per month. The operator, devoted
one-third of his time to the machine. Annual insurance charges 2 per cent of cost of
machine.
Light charges for the department is Rs. 2,500 per month, having 48 points in all, out of
which only 8 points are used at this machine. Other indirect expenses are chargeable to
the machine are Rs. 6,500 per month. (8 + 6 = 14 Marks)
Answer
(a) Statement of Cost and Sales for the year 2008
Maximum production capacity = 5,20,000 units per annum

Particulars First 3 months Next 9 months Total

Capacity utilized 60% 90%
Production 5,20,000  3  60% 5,20,000  9  90%
12 12
= 78,000 units = 3,51,000 units 4,29,000 units
Rs. Rs. Rs.
Direct materials @ Rs. 15 per unit 11,70,000 52,65,000 64,35,000
Direct wages @ 9 per unit or Rs. 7,50,000 31,59,000 39,09,000
2,50,000 per month which ever is
higher
Prime cost (A) 19,20,000 84,24,000 1,03,44,000
Overheads
Fixed 2,40,000 7,20,000 9,60,000
Variable @ Rs. 8 per unit 6,24,000 28,08,000 34,32,000
18 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

Semi Variable 1,77,500 6,45,000 8,22,500

Total overheads (B) 10,41,500 41,73,000 52,14,500
Total Cost (C) [(A + B)] 29,61,500 1,25,97,000 1,55,58,500
Profit during first 3 months 4,70,500
Sales @ Rs. 44 per unit 34,32,000
Desired profit during next 9 months
(Rs. 15,62,500 – Rs. 4,70,500) (D) 10,92,000
Sales required for next 9 months __________
(E) [(C + D)] 1,36,89,000
Total profit 15,62,500
Total Sales 1,71,21,000

Total sales required for last 9 months

Required selling price per unit for last 9 months 
Units produced during last 9 months

1,36,89,000
 Rs.  Rs. 39 per unit.
35,10,000
Workings:
(1) Semi-variable overheads:
(a) For first 3 months at 60% capacity = Rs. (5,60,000 + Rs. 1,50,000)  3/12
= Rs. 7,10,000  3/12
= Rs. 1,77,500.
(b) For remaining 9 months at 90% capacity = Rs. (5,60,000 + Rs. 3,00,000)  9/12
= Rs. 8,60,000  9/12
= Rs. 6,45,000.
(b) Computation of Machine Hour Rate
Running Hours (3,000 – 400) = 2,600 per annum
Particulars Total Amount Rate per hour
Rs. Rs.
Fixed Charges (Standing Charges):
Rs. 4,000  12
Operator’s wages: 16,000
3
Insurance: 2% of Rs. 25,00,000 50,000
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 19

Rs. 2,500  12  8
Light charges : 5,000
48
Other indirect expenses: Rs. 6,500  12 78,000
Total Standing charges 1,49,000
Rs. 1,49,000
Hourly rate for fixed charges : 57.31
2,600
Variable Expenses (Machine Expenses) per hour
Rs. 25,00,000  Rs. 1,00,000
Depreciation : 92.31
10  2,600
Rs. 3,50,000
Repairs and Maintenance : 13.46
10  2,600
Rs. 5  15  2,444
Power: 70.50
2,600
Rs. 9,880
Chemical : 3.80
2,600
Machine Hour Rate 237.38

Question 6
(a) Balance Sheet of OP Ltd. as on 31st March, 2007 and 2008 are as follows:
Liabilities Amount Amount Assets Amount Amount
31.3.2007 31.3.2008 31.3.2007 31.3.2008
Rs. Rs. Rs. Rs.

Share capital 20,00,000 20,00,000 Land and Building 15,00,000 14,00,000

General Reserve 4,00,000 4,50,000 Plant and Machinery 18,00,000 17,50,000

Profit and Loss A/c 2,50,000 3,60,000 Investment 4,00,000 3,72,000
10% Debentures 10,00,000 8,00,000 Stock 4,80,000 8,50,000

Bank Loan (long-term) 5,00,000 6,00,000 Debtors 6,00,000 7,98,000

Creditors 4,00,000 5,80,000 Prepaid Expenses 50,000 40,000
Outstanding Expenses 20,000 25,000 Cash and Bank 1,40,000 85,000

Proposed Dividend 3,00,000 3,60,000

Provision for taxation 1,00,000 1,20,000
49,70,000 52,95,000 49,70,000 52,95,000
20 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

Additional informations:
(i) New machinery for Rs. 3,00,000 was purchased but an old machinery costing Rs.
1,45,000 was sold for Rs. 50,000 and accumulated depreciation thereon was Rs. 75,000.
(ii) 10% debentures were redeemed at 20% premium.
(iii) Investment were sold for Rs. 45,000, and its profit was transferred to general reserve.
(iv) Income-tax paid during the year 2007-08 was Rs. 80,000.
(v) An interim dividend of Rs. 1,20,000 has been paid during the year 2007-08.
(vi) Assume the provision for taxation as current liability and proposed dividend as non-
current liability.
(vii) Investment are non-trade investment.
You are required to prepare:
(i) Schedule of changes in working capital.
(ii) Funds flow statement.
(b) Explain the following:
(i) Seed capital assistance.
(ii) Bridge finance. (12 + 4 = 16 Marks)
Answer
(a) (i) Schedule of Changes in Working Capital
Particulars 31st March Working Capital
2007 2008 Increase Decrease
Rs. Rs. Rs. Rs.
A. Current Assets:
Stock 4,80,000 8,50,000 3,70,000 
Debtors 6,00,000 7,98,000 1,98,000 
Prepaid Expenses 50,000 40,000  10,000
Cash and Bank 1,40,000 85,000  55,000
Total (A) 12,70,000 17,73,000

B. Current Liabilities:
Creditors 4,00,000 5,80,000  1,80,000
Outstanding Expenses 20,000 25,000  5,000
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 21

Provision for Taxation 1,00,000 1,20,000  20,000

Total (B) 5,20,000 7,25,000 ________ _______
Working Capital (A – B) 7,50,000 10,48,000 5,68,000 2,70,000
Increase in Working Capital _______ 2,98,000
Total 5,68,000 5,68,000

(ii) Funds Flow Statement

for the year ending 31st March, 2008
Sources of Funds Amount Application of Funds Amount
Rs. Rs.
Funds from operations 10,63,000 Redemption of debentures 2,40,000
Bank loan taken 1,00,000 Purchase of machinery 3,00,000
Sale of Machinery 50,000 Dividend paid 3,00,000
Sale of Investment 45,000 Interim Dividend paid 1,20,000
Increase in working capital 2,98,000
12,58,000 12,58,000

Workings:
1. Funds from operations:
Adjusted Profit and Loss A/c
Rs. Rs. Rs.
To General Reserve 33,000 By Balance b/d 2,50,000
To Depreciation By Funds from
operations 10,63,000
On Land and Building 1,00,000 (Balancing figure)
On Plant & Machinery 2,80,000 3,80,000
To Loss on Sale of Machine 20,000
To Premium on Redemption of
Debentures 40,000
To Proposed Dividend 3,60,000
To Interim Dividend 1,20,000
To Balance c/d 3,60,000
13,13,000 13,13,000
22 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

2. Depreciation on Land and Building = Rs. 15,00,000 – Rs. 14,00,000

= Rs. 1,00,000.
3. Loss on Sale of Old Machine = Cost Rs. 1,45,000 – Rs. 75,000 (Cum-Dep.) –
Rs. 50,000 (Sales value) = Rs. 20,000
4. Depreciation on Plant and Machinery:
Plant and Machinery A/c
Dr. Cr.
Rs. Rs.
To Balance b/d 18,00,000 By Bank A/c (Sold) 50,000
To Bank A/c (Purchases) 3,00,000 By Profit and Loss A/c 20,000
(Loss on Sales)
By Depreciation 2,80,000
(Balancing figure)
________ By Balance c/d 17,50,000
21,00,000 21,00,000

5. Premium on Redemption of Debentures:

Amount of Debenture Redeemed = Rs. 10,00,000 – Rs. 8,00,000
= Rs. 2,00,000
Premium = Rs. 2,00,000  20/100
= Rs. 40,000
6. Profit on sale of investment:
Investment A/c
Dr. Cr.
Rs. Rs.
To Balance b/d 4,00,000 By Bank A/c (Sales) 45,000
To General Reserve 17,000 By Balance c/d 3,72,000
(Profit on Sales)
4,17,000 4,17,000
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 23

7. Amount transferred to General Reserve from Profit and Loss A/c:

General Reserve A/c
Dr. Cr.
Rs. Rs.
To Balance c/d 4,50,000 By Balance b/d 4,00,000
By Investment A/c 17,000
_______ By Profit and Loss A/c 33,000
4,50,000 4,50,000

(b) (i) Seed Capital Assistance: This scheme is designed by IDBI for professionally or
technically qualified entrepreneurs / persons possessing relevant experience, skills
and entrepreneurial traits. All the projects eligible for financial assistance from IDBI,
directly or indirectly through refinance are eligible under the scheme. The project
cost should not exceed Rs. 2 crores and the maximum assistance under the project
will be restricted to 50 per cent of the required promoters contribution or Rs. 15
lakhs, whichever is less. The seed capital assistance is interest free but carries a
service charge of 1 per cent per annum for the first five years and at increasing rate
thereafter. However, IDBI will have the option to charge interest at such rates as
may be determined by IDBI on the loan if the financial position and profitability of
the company so permits during the currency of the loan.
(ii) Bridge Finance: Bridge finance refers to loans taken by a company normally from
commercial banks for short-term, pending disbursement of loans sanctioned by
financial institutions. Normally, it takes time for financial institutions to disburse
loans to companies. However, once the loans are approved by financial institutions,
companies, in order not to lose further time in starting their projects, arrange short
term loans from commercial banks. Bridge loans are also provided by financial
institutions pending the signing of regular term loan agreement, which may be
delayed due to non-compliance of conditions stipulated by the institutions while
sanctioning the loan. The bridge loans are repaid / adjusted out of the term loans as
and when disbursed by the concerned institutions. Bridge loans are normally
secured by hypothecating movable assets, personal guarantees and demand
promissory notes. Generally, the rate of interest on bridge finance is higher as
compared with that on term loans.
Question 7
(a) WX Ltd. has a machine which has been in operation for 3 years. Its remaining estimated
useful life is 8 years with no salvage value in the end. Its current market value is Rs.
2,00,000. The company is considering a proposal to purchase a new model of machine
to replace the existing machine. The relevant informations are as follows:
24 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

Existing Machine New Machine

Cost of machine Rs. 3,30,000 Rs. 10,00,000
Estimated life 11 years 8 years
Salvage value Nil Rs. 40,000
Annual output 30,000 units 75,000 units
Selling price per unit Rs. 15 Rs. 15
Annual operating hours 3,000 3,000
Material cost per unit Rs. 4 Rs. 4
Labour cost per hour* Rs. 40 Rs. 70
Indirect cash cost per annum Rs. 50,000 Rs. 65,000
The company follow the straight line method of depreciation. The corporate tax rate is 30
per cent and WX Ltd. does not make any investment, if it yields less than 12 per cent.
Present value of annuity of Re. 1 at 12% rate of discount for 8 years is 4.968. Present
value of Re. 1 at 12% rate of discount, received at the end of 8th year is 0.404. Ignore
capital gain tax.
Advise WX Ltd. whether the existing machine should be replaced or not.
* In the question paper this word was wrongly printed as ‘unit’ instead of word ‘hour’. The
answer provided here is on the basis of correct word i.e. ‘Labour cost per hour’.
(b) Discuss the factors to be taken into consideration while determining the requirement of
working capital. (8 + 4 = 12 Marks)
Answer
(a) (i) Calculation of Net Initial Cash Outflows:
Rs.
Cost of new machine 10,00,000
Less: Sale proceeds of existing machine 2,00,000
Net initial cash outflows 8,00,000

(ii) Calculation of annual depreciation:

Rs. 3,30,000
On old machine =  Rs. 30,000 per annum.
11 years
Rs. 10,00,000  Rs. 40,000
On new machine =  Rs. 1,20,000 per annum.
8 years
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 25

(iii) Calculation of annual cash inflows from operation:

Particulars Existing New Differential
machine Machine
(1) (2) (3) (4)
=(3) – (2)
Annual output 30,000 units 75,000 units 45,000 units
Rs. Rs. Rs.
(A) Sales revenue @ Rs. 15 per unit 4,50,000 11,25,000 6,75,000
(B) Less: Cost of Operation
Material @ Rs. 4 per unit 1,20,000 3,00,000 1,80,000
Labour
Old = 3,000  Rs. 40 1,20,000 90,000
New = 3,000  Rs. 70 2,10,000
Indirect cash cost 50,000 65,000 15,000
Depreciation 30,000 1,20,000 90,000
Total Cost (B) 3,20,000 6,95,000 3,75,000
Profit Before Tax (A – B) 1,30,000 4,30,000 3,00,000
Less: Tax @ 30% 39,000 1,29,000 90,000
Profit After Tax 91,000 3,01,000 2,10,000
Add: Depreciation 30,000 1,20,000 90,000
Annual Cash Inflows 1,21,000 4,21,000 3,00,000

(iv) Calculation of Net Present Value:

Rs.
Present value of annual net cash
Inflows: 1 – 8 years = Rs. 3,00,000  4.968 14,90,400
Add: Present value of salvage value of new machine at
the end of 8th year (Rs. 40,000  0.404) 16,160
Total present value 15,06,560
Less: Net Initial Cash Outflows 8,00,000
NPV 7,06,560
26 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

Alternative Solution:
Calculation of Net Present Value (NPV)
Particulars Period Cash Present Value Present
(Year) Flow Factor (PVF) Value (Rs.)
(Rs.) @ 12%
Purchase of new machine 0 8,00,000 1.00 8,00,000
Incremental Annual Cash Inflow 1–8 3,00,000 4.968 14,90,400
Salvage value of new machine 8 40,000 0.404 16,160
Net Present Value (NPV) 7,06,560
Hence, existing machine should be replaced because of NPV is positive.
(b) Factors to be taken into consideration while determining the requirement of working
capital:
(i) Production Policies (ii) Nature of the business
(iii) Credit policy (iv) Inventory policy
(v) Abnormal factors (vi) Market conditions
(vii) Conditions of supply (viii) Business cycle
(ix) Growth and expansion (x) Level of taxes
(xi) Dividend policy (xii) Price level changes
(xiii) Operating efficiency.
Question 8
(a) The following is the capital structure of a Company:
Source of capital Book value Market value
Rs. Rs.
Equity shares @ Rs. 100 each 80,00,000 1,60,00,000
9 per cent cumulative preference
shares @ Rs. 100 each 20,00,000 24,00,000

11 per cent debentures 60,00,000 66,00,000

Retained earnings 40,00,000 
2,00,00,000 2,50,00,000

The current market price of the company’s equity share is Rs. 200. For the last year the
company had paid equity dividend at 25 per cent and its dividend is likely to grow 5 per
cent every year. The corporate tax rate is 30 per cent and shareholders personal income
tax rate is 20 per cent.
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 27

You are required to calculate:

(i) Cost of capital for each source of capital.
(ii) Weighted average cost of capital on the basis of book value weights.
(iii) Weighted average cost of capital on the basis of market value weights.
(b) Annual sales of a company is Rs. 60,00,000. Sales to variable cost ratio is 150 per cent
and Fixed cost other than interest is Rs. 5,00,000 per annum. Company has 11 per cent
debentures of Rs. 30,00,000.
You are required to calculate the operating, Financial and combined leverage of the
company.
(c) What is “Internal Rate of Return”? State its acceptance rule. (7 + 3 + 2 = 12 Marks)
Answer
(a) (i) Calculation of Cost of Capital for each source of capital:
1. Cost of Equity Capital:
DPS (1  g)
Ke   100  g
MP
25 (1  0.05)
  100  5
200
26.25
  100  5
200
= 13.125 + 5
= 18.125%.
2. Cost of preference capital or K p = 9%.
3. Cost of Debentures: K d (after tax) = r (1 – T)
= 11 (1 – 0.3)
= 7.7%.
4. Cost of Retained Earnings: K r = Ke (1 – Tp)
= 18.125 (1 – 0.2)
= 14.5%.
28 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

(ii) Weighted average cost of capital:

(On the basis of Book Value Weights)
Source Amount Weights Cost of Capital WACC
(Book Value) (after tax) (%)
(Rs.) (%)
(1) (2) (3) (4) (5) = (3)  (4)
Equity Capital 80,00,000 0.4 18.125 7.25
Preference Capital 20,00,000 0.1 9 0.90
Debentures 60,00,000 0.3 7.7 2.31
Retained earnings 40,00,000 0.2 14.5 2.90
2,00,00,000 1.00 13.36
Hence, WACC on the basis of Book Value Weights = 13.36%.
(iii) Weighted Average Cost of Capital
(On the basis of Market value weights)
Source Amount Weights Cost of Capital WACC
(Market Value) (after tax) (%)
(Rs.) (%)
(1) (2) (3) (4) (5) = (3)  (4)
Equity Capital 1,60,00,000 0.640 18.125 11.600
Preference Capital 24,00,000 0.096 9 0.864
Debentures 66,00,000 0.264 7.7 2.033
Retained earnings    
2,50,00,000 1.000 14.497
Hence, WACC on the basis of Market Value Weights = 14.497%
(b) Calculation of Leverages:
Rs.
Sales 60,00,000
 100  40,00,000
Less: Variable Cost  Sales  
 150 
Contribution 20,00,000
Less: Fixed Cost 5,00,000
EBIT 15,00,000
Less: Interest on Debentures 3,30,000
EBT 11,70,000
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 29

Contribution
Operating Leverage 
EBIT
Rs. 20,00,000

Rs. 15,00,000
= 1.3333
EBIT
Financial Leverage 
EBT
Rs. 15,00,000

Rs. 11,70,000
= 1.2821
Contribution
Combined Leverage  OL  FL or
EBT
Rs. 20,00,000
 1.3333 1.2821 or
Rs. 11,70,000
= 1.7094.
(c) Internal Rate of Return: Internal rate of return is that rate at which the sum total of cash
inflows after discounting equals to the discounted cash outflows. The internal rate of
return of a project is the discount rate which makes net present value of the project equal
to zero.
Acceptance Rule: The use of IRR, as a criterion to accept capital investment decision
involves a comparison of IRR with the required rate of return known as cut-off-rate. If IRR
is greater than cut-off-rate, the project should be accepted. If IRR is less than the cut-off-
rate, the project is rejected. In case, the IRR is equal to the cut-off-rate, the firm is
indifferent.
Question 9
(a) A publishing house purchases 72,000 rims of a special type paper per annum at cost Rs.
90 per rim. Ordering cost per order is Rs. 500 and the carrying cost is 5 per cent per
year of the inventory cost. Normal lead time is 20 days and safety stock is NIL. Assume
300 working days in a year:
You are required:
(i) Calculate the Economic Order Quantity (E.O.Q).
(ii) Calculate the Reorder Inventory Level.
(iii) If a 1 per cent quantity discount is offered by the supplier for purchases in lots of
18,000 rims or more, should the publishing house accept the proposal?
30 PROFESSIONAL EDUCATION (EXAMINATION–- II) : NOVEMBER 2008

(b) What is Capital rationing? Describe various ways of implementing it. (8 + 4 = 12 Marks)
Answer
2 SC 0
(a) (i) EOQ 
ic 1
Where,
S = Annual consumption
C0 = Ordering cost per order
ic1 = Stock carrying cost per unit per annum
2  72,000  500

5% of Rs. 90
 1,60,00,000
= 4,000 Rims.
(ii) Re-order Level = Normal Lead Time  Normal Usage
= 20  240
= 4,800 Rims.
Note:
Annual usage
Normal Usage 
Normal working days in a year
72,000
 = 240 Rims.
300
(iii) Evaluation of Quantity Discount Offer:
EOQ Discount Offer
Size of order 4,000 Rims 18,000 Rims
No. of orders in a year 18 4
 Order size  2,000 Rims 9,000 Rims
Average inventory  
 2 
Cost: Rs. Rs.
Ordering Cost @ Rs. 500 per order 9,000 2,000
Inventory carrying cost
At EOQ – (4,000/2)  Rs. 4.5 9,000 -
At Discount offer – (18,000/2)  Rs. 4.455 - 40,095
 PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 31

Purchases Cost
At EOQ – 72,000  Rs. 90 64,80,000 
At discount offer – 72,000  Rs. 89.10 ________ 64,15,200
Total Cost 64,98,000 64,57,295

The total cost is less in case of quantity discount offer. Hence, quantity discount
offer should be accepted.
(b) Capital Rationing: Generally, firms fix up maximum amount that can be invested in
capital projects during a given period of time, say a year. The firm then attempts to
select a combination of investment proposals, that will be within the specific limits
providing maximum profitability, and rank them in descending order according to their
rate of return, such a situation is of capital rationing.
A firm should accept all investment projects with positive NPV, with an objective to
maximise the wealth of shareholders. However, there may be resource constraint due to
which a firm may have to select from among various projects. Thus, capital rationing
situation may arises when there may be internal or external constraints on procurement
of necessary funds to invest in all investment proposals with positive NPVs.
Ways of implementing Capital Rationing:
(i) It may be implemented through budgets.
(ii) It can be done by putting up a ceiling when it has been financing investment
proposals only by way of retained earnings.
(iii) It can also be done by ‘Responsibility Accounting’, whereby management may
authorise a particular department to make investment only up to a specified limit,
beyond which the investment decisions are to be taken by higher-ups.