Suggested Answer_Syl12_Dec2015_Paper 8

INTERMEDIATE EXAMINATION
GROUP I
(SYLLABUS 2012)

SUGGESTED ANSWERS TO QUESTIONS

DECEMBER 2015

Paper-8: COST ACCOUNTING AND FINANCIAL MANAGEMENT

Time Allowed: 3 Hours Full Marks : 100

The figures in the margin on the right side indicate full marks.
All questions are compulsory, subject to internal choices
as per instruction provided against each question.
All working must form part of your answers.

Wherever necessary, candidates may make suitable assumptions and clearly state them in the answer.
No present value factor table or other table will be provided along with this question paper.

I. Answer all sub-divisions: 2×10 =20

(a) A worker has produced 154 units in 10 hours instead of 15 hours. If the normal wages rate is
`30 per hour find his remuneration under Rowan Premium Plan.
(b) If current ratio is 2.4 : 1 and working capital is `25,20,000, find the amount of current assets
and current liabilities.
(c) G Ltd. issues 20,000,12% debentures of `100 each at premium of 10 per cent. The debentures
are redeemable after the expiry of a fixed period of 10 years at 20 per cent premium.
Calculate the cost of debt after 30% tax.
(d) Factory cost is `3,80,000 and cost of production is `4,10,000. Office and administrative
overheads are 20% of factory overheads. What would be amount of prime cost? Assume
no stock adjustments.
(e) State two main differences between scrap and spoilage.
(f) In the specimen cost sheet of a production centre, how would you arrive at the cost of
sale from the prime cost?
(g) The M-M hypothesis on capital structure assumes a perfect capital market. State 4 features
of such a market assumed by the hypothesis.
(h) A firm earns a contribution of `4,80,000. Its operating leverage and financial leverage are
respectively 4 and 5. Find the firm's PAT if the effective tax rate is 25%.

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(i) If a factory worked 3 shifts/day for 365 days it can produce 8,03,000 units.
52 Sundays during the year are holidays. There are 12 festival holidays. Breakdown of
machine normally happens for 6 days. Labour shortage/Inventory taking etc. consume 8
clays per annum. In the forthcoming year as well as in future, the market share of the
company's product will be sufficient to demand only lesser quantities due to competition.
Hence it is estimated that two shift working will be enough for the future. Determine the
practical capacity and the normal capacity for the forthcoming year.
(j) An examination centre has many rooms. 800 students are allotted seats @ 50 students per
room. Every room requires two invigilators at `2,000/- per invigilator.
Based on cost behavior, under which type of cost will you classify the invigilator costs, if
the cost object is (i) an individual student (ii) a batch of 50 students?

Answer:
I. (a)
Remuneration under Rowan Plan `
Normal wages: 10 hrs × ` 30 = 300
H  R   S  H  10 (15  10)
Add: Bonus =  =  30 = 100
S 15
Where, H = Hours worked
S = Standard Hrs.
and R = Rate per Hour

Remuneration under Rowan Plan = 400

(b) Let, Current liability be ‘x’ and current assets be 2.4x

Then, Working capital = 2.4x – x = `25,20,000
X (Current liabilities) = `25,20,000/1.4 = `18,00,000
Current Assets = 18,00,000 × 2.4 = `43,20,000.

 RV  NP   120 110 
I(1 t)   12(1 0.3)  
 N   10 
(c) Kd  
 RV  NP  120  110
 
 2  2

= (8.4 +1)/115 = 0.081739 or 8.1739%.

(d) Amount of office and administrative overheads = `4,10,000 – 3,80,000 = `30,000

Factory overheads =Office and Administrative Overhead/20% = `30,000/20% = `1,50,000
Prime Cost = `3,80,000 – `1,50,000 = `2,30,000.

(e)
Scrap Spoilage
Incidental material residue in a process in small Damage due to defective working
amounts

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It has low market value Market value can range from zero to
substantial portion of selling price
Normally involves material wastage It involves wastage of Material,
Labour, Direct Expenses and
Overheads up to point of spoilage.
Scrap should always be physically available. The components/materials are
damaged in such a way that they
cannot be bought back to normal
specifications by repairs or
reconditioning.

(f)
` `
PRIME COST xxxxx
Add: Production Overheads xxxxx
Add: Opening Work in process xxxxx
Less: Closing Work in process xxxxx xxxxx
FACTORY COST OR WORK COST A xxxxx
Add: Administrative Overheads xxxxx
COST OF GOODS MANUFACTURED B xxxxx
Add: Opening Stock of Finished Goods xxxxx
Less: Closing Stock of Finished Goods xxxxx xxxxx
COST OF FINISHED GOODS SOLD C xxxxx
Add: Selling and Distribution Overheads xxxxx
COST OF GOODS SOLD D xxxxx

(g) The features of the capital markets assumed by MM hypothesis are:

(i) Investors are free to buy and sell securities.
(ii) They can borrow funds without restriction at the same to me as the firms do.
(iii) Investors behave rationally.
(iv) They are well informed.
(v) These are no transaction costs.
(vi) There is no transaction cost
(vii) Dividend Policy has no effect on the firm’s Cost of Equity.

(h) Combined Leverage = Operating Leverage × Financial Leverage = 4×5 = 20

Combined leverage = Contribution/ EBT
EBT = Contribution/Combined Leverage = `4,80,000/20 = `24,000
PAT = EBT × (1 – Tax rate) = 24,000 × (1 – 0.25) = `18,000.

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(i) Theoretical Capacity = 8,03,000 (based on 365 days)
[365  (52  12  6  8)]
Practical Capacity = x 8,03,000  6,31,400units
365
Thus Practical capacity is about 78.63% of theoretical Capacity.
Normal Capacity is based on long term sales expectancy
6,31,400
= 2 shifts x = 4,20,933 units.
3 shifts

(j) If the cost object is an individual student, invigilator cost is Fixed Cost.

If batch of 50 is cost object then, invigilator cost is Variable Cost.

II. Answer any three sub-divisions from (a) to (d): 16×3=48

(a) (1) A Ltd. was ordering (in economic order quantities) (EOQ) its raw material RM at a price of
`750 per unit. The average annual consumption was 18000 units. Carrying cost was 20% of
average inventory and the ordering cost was `1500 per order. A Ltd. wants to move
towards the Just-In-Time system and the new policy proposes as follows: the average
number of units held in stock will be 100 units; ordering cost per order will be `1510; carrying
cost will be 20% of average inventory. However the purchase price will increase. The total
new ordering cost will be 9 times the new carrying cost.
(i) What was the EOQ before the new policy?
(ii) Calculate the inventory turnover ratio before and after the new policy.
(iii) How much is the increase in purchase price under the new policy? Compare the two
policies regarding raw material management and offer your comments. 3+4+5=12

(2) In each of the following independent situations, state with a brief reason, the method of
overhead absorption you would recommend as a Cost Accountant:
(i) Product: hand crafted statues for corporate gifts

`/unit
Material 360
Direct labour 300
Direct Expenses 120
Selling price 1,000

(ii) Product: Mass- manufactured 10mm bearings, produced by stamping machines.

Bearings of varying sizes are mass- manufactured by the factory.

`/unit
Material 80
Direct labour 15
Direct Expenses 20
Selling price 250
2+2=4
Answer:

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II. (a) (1)

(i) Let, ‘q’ be the EOQ.

At EOQ, Ordering cost = Carrying cost

18,000 q
x 1,500  750 x 20% x
q 2
18,000 x 1500 x 2
q2=
750 x 20%
q = 600

Therefore, before the new policy the EOQ was 600 units.

Cost of goods sold

(ii) Inventory turnover ratio =
Average inventory
18,000 x 750 18,000
Before the new policy =   60 times
600 300
x 750
2
18,000 x 750 18,000
After the new policy =   180 times
100 x 750 100

(iii) Let ‘X’ be the new purchase price

As per the question,

9 (20% x 100 x X) = (18,000/200) x 1510 [assuming the EOQ = 100 x 2 = 200 units]
Or, 180 X = 1,35,900
Or, X = 755
Therefore, increase in purchase price is ` 5 p.u.

Comparison of policies
Particulars Computation Old policy New policy
Purchase cost 18,000 x 750 1,35,00,000
18,000 x 755 1,35,90,000
Ordering cost (18,000 ÷ 600) x 1500 45,000
(18000 ÷ 200) x 1510 1,35,900
Carrying cost 20% of (600 ÷ 2) x 750 45,000
20 % of (200 ÷ 2) x 755 15,100
Total 1,35,90,000 1,37,41,000

As the total cost is more in case of new policy, inventory management should be as per
EOQ method.

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II. (a)(2) Methods of Overhead Absorption:
 Percentage of Prime Cost
 Here, the product is standard one and Direct Material and Direct Labour costs
are not varying much.

 It is Mass Manufacturing by Machines.

 It should be on the basis of Machine Hour Rate.

(b) PQ Ltd. wishes to use standard costing system to report variances to the Management.

The following data is given:

Nature of Product: Single product PQ, an electronic component, produced by manual
assembly of purchased parts.

The following persons are involved in production:

Category Details
DW Direct workers involved in the assembly.
PA Production Assistants who are helpers in the shop floor.
SS Supervisory staff in the production shop floor.
OS Office staff exclusively meant for production.

Other Information
Shift: Single shift from 9-00 a.m. to 5-00 p.m.
Tea breaks: 15 minutes pre-lunch
15 minutes post-lunch
Lunch: 1 hour
Waiting time for spares, parts, etc. 2 hours / week (on an average 20 minutes/day)

Normally, according to past average, 5 units of PQ are finished by a direct worker during one
shift.
The details for labour pay- outs are as follows:
DW PA SS OS
No. of persons 35 4 7 2
Basic pay `75/hour ` 300/ shift `800/ shift `35,000/
month
Leave Travel Assistance ` 10,000 `8,000 `20,000 `25,000
(per annum per person)
Rates of pay on holidays `100/hour `500/ shift `1,000/shift `2,000/ day
(2 holidays per month other than
Sundays)
Attendance bonus for attendance
of 80% or more no. of days.
Flat rate `/person/month 2,000 1,500 3,000 4,000

The factory works on all holidays other than Sundays. Assume all the 52 Sundays are holidays
and are weekly offs. 80% of the DW category get the attendance bonus, while in other
categories, all the persons get the bonus.

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(i) For the DW category, arrive at the standard labour cost per unit and the standard number
of direct labour hours per unit of PQ to enable periodic reporting and corrective action by
comparing variances.
(ii) What amounts, on an annual basis, as per cost Accounting Standards would you show
under Direct Labour, Works Overhead, Administrative Overhead or charge directly to the
P&L A/c?
(Show workings per week x 52 weeks per annum). 4+12=16

Answer:

II. (b)
(i) Hours per week = 8 × 6 = 48.
Average no. of products = 5 × 6 = 30.
DW hours paid = `75/hr × 48 hrs/week = `3,600.
48 8 hrs
Standard DW hrs/ unit of production = = 1 hrs 36 min. per piece or, = 1.6 hrs/
30 5 pcs
piece.
`3,600
Standard Direct Labour Cost/ unit = = `120 / unit or, 1.6 × `75 = `120.
30
Note: Tea-break, normal waiting time for job should be part of the standard time.

A. Assuming that Production Assistants as Direct workers and Rates of pay for holidays is inclusive
of basic wages:

(ii)
Amounts in `
Particulars DW PA SS OS
No. of 35 4 7 2
persons
Basic Pay
Per week 75/hr × 8 hrs/day × 6 300/day × 6 days 800/day × 6 days × 35,000/ m × 2 OS =
Amount in ` days/ week × 35 DW × 4 pa = 7,200 7 SS = 33,600 70,000
= 1,26,000
Per annum 1,26,000 × 52 weeks = 7,200 × 52 weeks = 33,600 × 52 weeks 70,000 × 12 m =
Amount in ` 65,52,000 (Direct 3,74,400 (Direct = 17,47,200 8,40,000
Labour) Labour)) (Production (Administration
Overhead) Overhead)
LTA 10,000×35 = 3,50,000 8,000 × 4 = 32,000 20,000 × 7 = 25,000 × 2 =50,000
Amount in ` (Direct Labour) (Direct Labour) 1,40,000 (Administration
(Production Overhead)
Overhead)
Holiday (100-75) × 8 hrs/day × (500-300)/day × 2 (1,000-800)/day × 2 2,000/day × 2 days/
Premium 2 days/m × 12 m × 35 days/m × 12 m × 4 days/ m × 12 m × 7 m × 12m × 2 0S =
Amount in ` DW = 1,68,000 PA = 19,200 SS = 33,600 96,000
(Production (Production (Production (Administration
Overhead) Overhead) Overhead) Overhead)

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Attendance 2,000 × 12 m × 80% of 1,500 × 12 m × 4 3,000 × 12m × 7 SS 4,000 × 12 m × 2 OS
Bonus 35 DW =6,72,000 PA = 72,000 = 2,52,000 = 96,000
Amount in ` (Production (Production (Production (Administration
Overhead) Overhead) Overhead) Overhead)

Particulars Direct Labour ` Production Overhead ` Administration Overhead `

Basic Pay
DW 65,52,000
PA 3,74,400
ss 17,47,200
OS 8,40,000
LTA
DW 3,50,000
PA 32,000
SS 1,40,000
OS 50,000
Holiday Premium
DW 1,68,000
PA 19,200
SS 33,600
OS 96,000
Attendance bonus
DW 6,72,000
PA 72,000
SS 2,52,000
OS 96,000
Total 73,08,400 31,03,800 10,82,000

ALTERNATIVELY:

B. Assuming that Production Assistants as Direct workers and Rates of pay for holidays is exclusive
of basic wages:

(ii)
Amounts in `
Particulars DW PA SS OS
No. of persons 35 4 7 2
Basic Pay
Per week 75/hr × 8 hrs/day × 300/day × 6 days 800/day × 6 days × 7 35,000/m × 2 OS =
Amount in ` 6 days/week × 35 × 4 PA = 7,200 SS = 33,600 70,000
DW = 1,26,000
Per annum 1,26,000×52 weeks 7,200 × 52 weeks = 33,600 × 52 weeks = 70,000 × 12 m =

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Amount in ` = 65,52,000 (Direct 3,74,400 (Direct 17,47,200 (Production 8,40,000
Labour) Labour) Overhead) (Administration
Overhead)
LTA 10,000×35 = 8,000 × 4 = 32,000 20,000 × 7 = 1,40,000 25,000 × 2 =50,000
Amount in ` 3,50,000 (Direct Labour) (Production (Administration
(Direct Labour) Overhead) Overhead)
Holiday 75/hr × 8 hrs/day × 300/day × 2 days 800/day × 2day/m × 2,000 / day × 2
Premium 2 days/m × 12 m × /m × 12 m 4 PA = 12m × 7SS = 1,34,400 days/m × 12m × 2
Amount in ` 35 DW = 5,04,000 28,800 (Direct (Production 0S = 96,000
(Direct Labour) Labour)(500-300) Overhead) (Administration
(100-75) × 8hrs/day /day × 2 days/m × (1,000-800)/day × 2 Overhead)
× 2 days/m × 12 m 12 m × 4 PA days/ m × 12 m×7SS
× 35 DW = 1,68,000 = 19,200 = 33,600
(Production (Production (Production
Overhead) Overhead) Overhead)
Attendance 2,000 × 12 m × 80% 1,500 × 12 m × 4 3,000 × 12m × 7 SS = 4,000 × 12 m × 2
Bonus of 35 DW =6,72,000 PA = 72,000 2,52,000 (Production OS = 96,000
Amount in ` (Production (Production Overhead) (Administration
Overhead) Overhead) Overhead)

Particulars Direct Labour ` Production Overhead ` Adm. Overhead `

Basic Pay
DW 65,52,000
PA 3,74,400
SS 17,47,200
OS 8,40,000
LTA
DW 3,50,000
PA 32,000
SS 1,40,000
OS 50,000
Holiday Premium
DW 5,04,000 1,68,000
PA (28,800+19,200) i.e. 48,000
SS (1,34,400+33,600) i.e. 1,68,000
OS 96,000
Attendance bonus
DW 6,72,000
PA 72,000
SS 2,52,000
OS 96,000
Total 78,12,000 32,67,000 10,82,000

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ALTERNATIVELY:

C. Assuming that Production Assistants as not direct workers and Rates of pay for holidays is
inclusive of basic wages:

(ii)
Amounts in `
Particulars DW PA SS OS
No. of persons 35 4 7 2
Basic Pay
Per week 75/hr × 8 hrs/day × 300/day × 6 days 800/day × 6 days 35,000/m × 2 OS =
Amount in ` 6 days/week × 35 × 4 pa = 7,200 ×7 SS = 33,600 70,000
DW = 1,26,000
Per annum 1,26,000 × 52 weeks 7,200 × 52 weeks 33,600 × 52 weeks 70,000 × 12 m =
Amount in ` = 65,52,000 (Direct = 3,74,400 = 17,47,200 8,40,000
Labour) (Production (Production (Administration
Overhead) Overhead) Overhead)
LTA 10,000×35 = 8,000 ×4 = 32,000 20,000 ×7= 1,40,000 25,000 × 2 =50,000
Amount in ` 3,50,000 (Direct (Production (Production (Administration
Labour) Overhead) Overhead) Overhead)
Holiday (100-75) ×8 hrs/day (500-300)/day × 2 (1,000 -800)/day × 2,000/day × 2 days/
Premium × 2 days/m × 12 m days/m × 12 m × 2 days/ m ×12m × m × 12m ×2 0S =
Amount in ` × 35 DW = 1,68,000 4 PA = 19,200 7SS = 33,600 96,000
(Production (Production (Production (Administration
Overhead) Overhead) Overhead) Overhead)
Attendance 2,000 × 12 m × 80% 1,500 × 12 m × 4 3,000 × 12m × 7 SS 4,000 × 12 m ×2 OS =
Bonus of 35 DW =6,72,000 PA = 72,000 = 2,52,000 96,000
Amount in ` (Production (Production (Production (Administration
Overhead) Overhead) Overhead) Overhead)

Particulars Direct Labour ` Production Overhead ` Administration Overhead `

Basic Pay
DW 65,52,000
PA 3,74,400
SS 17,47,200
OS 8,40,000
LTA
DW 3,50,000
PA 32,000
SS 1,40,000
OS 50,000
Holiday Premium
DW 1,68,000

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PA 19,200
SS 33,600
OS 96,000
Attendance bonus
DW 6,72,000
PA 72,000
SS 2,52,000
OS 96,000
Total 69,02,000 35,10,400 10,82,000

ALTERNATIVELY:

D. Assuming that Production Assistants are not Direct Workers and that the holiday rates are
exclusive of basic wages (i.e. holiday rates are over and above basic wages):
(ii)
Amounts in `
Particulars DW PA SS OS
No. of persons 35 4 7 2
Basic Pay
Per week 75/ hr × 8 hrs/day × 300/day × 6 days × 800/ day × 6 days × 35,000/ m × 2 OS =
Amount in ` 6 days/ week × 35 4 PA = 7,200 7 SS = 33,600 70,000
DW = 1,26,000
Per annum 1,26,000×52 weeks 7,200 × 52 weeks = 33,600 × 52 weeks 70,000 × 12 m =
Amount in ` = 65,52,000 (Direct 3,74,400 = 17,47,200 8,40,000
Labour) (Production (Production (Administration
Overhead) Overhead) Overhead)
LTA 10,000×35 = 8,000 × 4 = 32,000 20,000×7= 1,40,000 25,000 × 2 =50,000
Amount in ` 3,50,000 (Production (Production (Administration
(Direct Labour) Overhead) Overhead) Overhead)
Holiday 75/hr × 8 hrs/day × 300/day × 2 days/ 800/day × 2day/m 2,000 / day × 2
Premium 2 days/m × 12 m × m × 12 m 4 PA = × 12 m × 7 SS = days/m × 12m ×2 0S
Amount in ` 35 DW = 5,04,000 28,800 (Production 1,34,400 = 96,000
(Direct Labour) Overhead) (500- (Production (Administration
(100-75) ×8 hrs/day 300)/day × 2 Overhead) Overhead)
× 2 days/m × 12 m days/m × 12 m × 4 (1,000-800)/day × 2
× 35 DW = 1,68,000 PA = 19,200 days/m×12 m×7SS=
(Production (Production 33,600 (Production
Overhead) Overhead) Overhead)
Attendance 2,000 × 12 m ×80% 1,500 × 12 m × 4 3,000 × 12m × 7 SS 4,000 × 12 m × 2 OS
Bonus of 35 DW =6,72,000 PA = 72,000 = 2,52,000 = 96,000
Amount in ` (Production (Production (Production (Administration
Overhead) Overhead) Overhead) Overhead)

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Particulars Direct Labour ` Production Overhead ` Administration Overhead `
Basic Pay
DW 65,52,000
PA 3,74,400
SS 17,47,200
OS 8,40,000
LTA
DW 3,50,000
PA 32,000
SS 1,40,000
OS 50,000
Holiday Premium
DW 5,04,000 1,68,000
PA (28,800+19,200) i.e. 48,000
SS (1,34,400+33,600) i.e. 1,68,000
OS 96,000
Attendance bonus
DW 6,72,000
PA 72,000
SS 2,52,000
OS 96,000
Total 74,06,000 36,73,600 10,82,000

Explanation for treatment of above expenses is as per CAS 7. Students are not required to give
reasons. However, for information, following is stated.

Note: As per CAS - 7

A. Indirect Labour Cost is the cost, which cannot be identified with a product unit. It represents
the amount of wages which is paid to the workers who are not directly engaged on the
production but it includes wages paid to the workers and assistants working in departments
like purchasing, store keeping, time office, maintenance, and other service and production
departments. Hence, payment to PA should be treated as Production Overhead.
B. Holiday/Overtime premium: This is defined as 'Overtime is the time spent beyond the normal
working hours' which is usually paid at a higher rate than the normal time rate. The extra
amount beyond the normal wages & salaries paid is called Overtime Premium'.
C. Treatment of Overtime in Cost Records As per CAS-7, Overtime Premium shall be assigned
directly to the cost object or treated as overheads depending on the economic feasibility
and specific circumstances requiring such overtime. When overtime is worked due to
exigencies or urgencies of the work, the basic/normal payment is treated as Direct Labour
Cost and charged to Production or cost unit on which the worker is employed. Whereas the
amount of premium (extra amount) is treated as overhead.
D. Leave Travel Assistance Leave Travel Assistance is paid to practically all the employees
presently and therefore can be considered as a regular element of labour or staff cost as

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the case may be. This expenditure is of a fixed nature and can be easily predetermined.
Depending whether the assistance is payable to direct labour, indirect labour or staff the
expenditure should be treated as Direct Labour Cost, Production Overhead Cost or
Administrative Selling Overhead Cost and should be appropriately charged.
E. Attendance Bonus is paid to workers based on satisfactory attendance over a stated period
and is a fringe benefit. The cost is to be collected under a standing order number and
charged as a departmental overhead as the expenses cannot be allocated to cost units
directly.
When the cost is of a regular nature it may be booked as direct wages and charged by an
inflated rate over the Direct Labour Cost. But this is however, not a sound policy.

(c) (1) Kovid Ltd. has three production departments viz. A, B and C and two service departments
viz. X and Y. Allocated overheads are follows:

A B C X Y
Allocated overheads (`) 2,50,000 85,000 1,75,000 1,35,000 1,65,000
Direct Labour Hours (Hours) 25,000 18,000 13,000 - -

The expenses of the service departments are charged as follows:

A B C X Y
Service Department: X 20% 40% 30% - 10%
Y 30% 25% 25% 20% -

(i) Determine the total overheads of the service departments after loading the inter-
departmental exchange of services, by the simultaneous equation method.
(ii) Calculate the overhead to be charged to Job 211 which uses 25 hours in Production
Department A. 4+3=7

(2) A medicinal herb is collected by tribal people from the forest regions. The Purchase
Department staff of X Ltd. visit the tribals in the villages, purchase the herbs and transport the
herbs to the factory. The herbs are cleaned, dried, powdered and machine-packed in
100 gm sachets and sold as a certain curative medicine.

Which of the following items of cost will be treated as a direct expense under CAS – 10?
If a certain item is not classified as a direct expense, under what element will it get
classified?
(i) Amount paid to the tribals.
(ii) The product is patented. The cost of the patents.
(iii) For every sachet sold, the tribal chief gets 5% as royalty. The amount of royalty.
(iv) A pharmaceutical consultant is paid to test the effectiveness of each batch of
medicine processed. The fees so paid.
(v) Travel expenses of the Purchase Department personnel to the villages.
(vi) Transport cost from the villages to the factory.
(vii) Cost of the packing sachets.
(viii) Cost of the personnel working in the cleaning and drying processes. 4

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(3) Milk is produced in a factory and packed in half liter sachets. 100 sachets are packed in
each metallic reusable container and the containers are transported to milk depots in
airconditioned trucks, refrigerated in the depots and sold in retail. State the element of
cost under which the factory has to classify the following items as per Cost Accountancy
Standards.
(i) Cost of the sachets
(ii) Cost of the containers
(iii) Transportation costs
(iv) Refrigeration costs
(v) Depot’s expenses – like rent, salary of staff etc.
(vi) Cost of advertising for the milk 3

(4) `3,000/- and `60,000/- are written off raw materials and finished goods respectively for
obsolescence. How should these be treated in Cost Accounts? 2

Answer:

II. (c) (1)

(i) Let total overhead of department X be ‘a’ and department Y be ‘b’

Then, a = 1,35,000 + 0.2b
Or
10a – 2b = 13,50,000……………(i)
b = 1,65,000 + 0.1a
or – a+ 10b = 16,50,000 …….. (ii)
After solving equation (i) & (ii)
-a + 10b = 16,50,000 ………(ii)
50a – 10b = 67,50,000 …..(iii)
49a = 84,00,000
Or a = 1,71,428.6
10 × 1,71,428.6 – 2b = 13,50,000
Or – 2b = 13,50,000 – 17,14,286
3, 64, 286
Or b =
2
Or b = 1,82,143

Departmental overhead after apportionment of service Dept. Overheads.

Particulars Production Departments Service Departments
A B C X Y
` ` ` ` `
Allocated Overheads 2,50,000 85,000 1,75,000 1,35,000 1,65,000
Distribution of Service Dept.
overheads:
X (a) `1,71,428.6 (20: 40: 30: - : 10) 34,286 68,572 51,429 - 1,17,428.60 17,143

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Y (b) `1,82,143 (30 : 25 : 25 : 20 : -) 54,643 45,536 45,536 36,428.6 - 1,82,143
Total Departmental Overhead 3,38,929 1,99,108 2,71,965 Nil Nil

(ii) Calculation of Direct Labour Hour rate

Production Department A
Total Departmental Overheads (`) `3,38,928
Direct Labour Hours (Hours) 25,000
 Dept. Overhead 
Direct Labour Hour rate  
 Direct Labour Hours  `13.557

Calculation of overhead charged to job No. 211

Dept. A: `13.557 × 25 hours = `338.925

II. (c) (2)

(i) Payment Cost

(ii) Royalty
(iii) Fees of pharmaceutical Consultant
(iv) Cost of personnel in cleaning and drying – Direct Labour
(v) Amount paid to tribal – Raw Materials
(vi) Travel expenses of Purchase Department personnel for Raw Materials purchase – Raw
Material or Administrative Overhead.
(vii) Transport from village to factory – Raw Material
(viii) Cost of the packing sachets - Production Overhead

II. (c) (3)

A B C
(i) Cost of sachets Primary Packing Material Production Overhead
(ii) Cost of containers Secondary Packing Material Selling and Distribution
Overhead
(iii) Transportation costs Relates to Finished Goods Distribution Overhead
(iv) Refrigeration costs Storage of Finished Goods Distribution Overhead
(v) Depot’s expenses Marketing Cost Selling & Distribution
Overhead
(vi) Advertisement Cost Selling Expense Selling & Distribution
Overhead

II. (c) (4)

Obsolete inventory- Cost of Raw Mmaterial and Finished goods should be directly written of in
the Profit & Loss A/c. No charge is made to cost of production.
`63,000 (`63,000 + `60,000) should be written off to Profit & Loss A/c.

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(d) (1) What are the differences between Cost Control and Cost Reduction? 4
(2) What is meant by the following terms? Given an example of each in a situation where
a factory makes use of the same production facility to make products A, B, C and D
using the same raw material R.

(i) Opportunity cost

(ii) Relevant cost
(iii) Replacement cost 2×3=6

(3) Product B, with selling price of `600 per unit is the main product being produced by a
factory. The factory uses component ‘A’ in the manufacture of B. ‘A’ is produced in-
house. The cost producing one unit of A is as follows: Direct Material—`120; Direct
labour—`80; Direct expense—`20; Factory overheads: fixed—`20; variable—`15;
Administrative expenses:—relating to production—`12; - relating to others—`5;

What is the amount relating to ‘A’ to be considered as material cost of B as per CAS
—6? 3

(4) In a certain melting process, a material called 'coke' is put into the furnace along with
other materials. Coke is also used as fuel to heat the furnace. How will you treat the
cost of coke in the final product according to Cost Accounting Standards? 3

Answer:

II. (d) (1)

Cost Control Cost Reduction
(a) Cost Control represents efforts made (a) Cost Reduction represents the
towards achieving target or goal. achievement in reduction of cost.
(b) The process of Cost Control is to set up a (b) Cost Reduction is not concerned with
target, ascertain the actual performance maintenance of performance according
and compare it with the target, to standard.
investigate the variances, and take
remedial measures.
(c) Cost Control assumes the existence of (c) Cost Reduction assumes the existence of
standards or norms which are not concealed potential savings in standards
challenged. or norms which are therefore subjected to
a constant challenge with a view to
improvement by bringing out savings.
(d) Cost Control is a preventive function. (d) Cost Reduction is a corrective function. It
Costs are optimized before they are operates even when an efficient cost
incurred. control system exists. There is room for
reduction in the achieved costs under
controlled conditions.
(e) Cost Control lacks dynamic approach. (e) Cost Reduction is a continuous process of
analysis by various methods of all the
factors affecting costs, efforts and
functions in an organization. The main stress
is upon the why of a thing and the aim is it
have continual economy in costs

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II. (d) (2)

(i) Opportunity Cost is the value of the befit forgone by not doing the next best option.
e.g. Opportunity Cost of product A = Value of contribution (or profit) foregone by not
making B, or C, or D, whichever has the highest contribution per unit.
Since resources are normally limited, there is some benefit foregone. If there is no
constraint then, the opportunity cost is zero.

(ii) Relevant Cost: ‘relevance’ of cost arises only with respect to a specific purpose in the
context of a decision. A cost has to change if the decision is one way or other. A cost,
even if variable with respect to the cost object and is out of pocket and to be incurred in
future, can be irrelevant if it is the same across the alternatives concerned.
e.g. If the raw material cost removes the same for each unit of A, B, C, or D, then, it is not
relevant to decide whether to produce A or B or C or D. However, if the raw material is in
short supply or is consumed in different quantities across A, B, C, & D, then Raw Material
cost becomes relevant in choosing the alternative A or B or C or D to be produced.

(iii) Replacement Cost: This is also a cost concept used in decision making. The item to be
casted is valued at the current market price at the landed cost, if it were to be
purchased.
e.g. If product A is manufactured out of existing raw material stock and product D
requires purchase of material R we need to substitute replacement cost of R for A’s
consumption so that products A and D are compared appropriately for their profits.

II. (d) (3)

As per CAS – 6, Self manufactured item shall valued at DM + DL + DE + F.OH + Ad.OH

(production)
= 120 + 80 + 20 + 20 + 15 + 12 = `267
For an item to be called material cost under CAS – 6. It has to be significant and
economically traceable to the cost object, otherwise it is an indirect material and classified as
an overhead of production.
Component A is significant, bring 267/600 = 44.5% of the sale value of B. Hence it is DM under
CAS – 6.

II. (d) (4)

Cost of Coke to the extent it is put into the furnace, subject to if being significant in value
compared to other raw materials and measurable, should be taken as raw material cost
under CAS. If it is insignificant in quantity or value, it should be taken as production overhead.

The quantity and value of coke used as fuel should be treated as indirect material and
classified as production overhead.

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III. Answer any two sub-divisions from (a) to (c): 16×2= 32

(a) (1) The following accounting information and financial ratios of Bhalu Ltd. relate to the
year ended 31st March, 2015:
Inventory Turnover Ratio (considering cost of goods sold) 6 times
Creditors Turnover Ratio 10 times
Debtors Turnover Ratio 12 times
Current Ratio 2.4
Gross Profit Ratio 25%

Total sales `60 lakhs; cash sales 25% of credit sales; cash purchases ` 4,60,000;
working capital `7,14,000; closing inventory is `1,60,000 more than opening inventory.
You are required to calculate:
(i) Average Inventory
(ii) Purchases
(iii) Average Debtors
(iv) Average Creditors
(v) Average Payment Period
(vi) Average Collection Period
(vii)Current Assets
(viii) Current Liabilities 8

(2) A company has earnings of `5,00,000. The capital structure of the company has debt
and equity in which debt of `8,00,000 is borrowed at 10%. The cost of equity capital is
currently 12.5%. Calculate the value of the firm and overall cost of capital by the net
income approach. Ignore taxes. Take market value of debt at par. 4

(3) Explain the concepts of operating leverage and financial leverage. 4

Answer:

III. (a) (1)

(i) Computation of Average Inventory:
Gross Profit =25% of `60,00,000 = `15,00,000
Cost of goods sold (COGS) =`60,00,000 - `15,00,000= `45,00,000
Inventory Turnover Ratio =COGS/Average Inventory
`45,00,000/Average Inventory = 6
Average Inventory = `7,50,000

(ii) Computation of Purchases:

Purchases = COGS + Increase in Inventory = `45,00,000 + `1,60,000 = `46,60,000

(iii) Computation of Average Debtors:

Let credit sales be `100 then cash sales = 25% of 100 = `25, and total sales = `125

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When total sales is `60 lakhs then credit sales = `60,00,000 × 100/125 = `48,00,000 and cash
sales = `12,00,000
Debtors Turnover = Net Credit Sales/Average Debtors = 12
Average Debtors = `48,00,000 /12 = `4,00,000

(iv) Computation of Average Creditors:

Credit Purchase = Purchases `46,60,000 – Cash purchase `4,60,000 = `42,00,000
Creditors Turnover = Credit Purchases/Average Creditors
Average Creditors = `42,00,000/10 = `4,20,000

(v) Computation of Average Payment Period:

Average Payment Period = Average Creditors × 365/Credit Purchase
=`4,20,000 × 365/ `42,00,000 = 36.5 days
Or 365/Creditors Turnover = 365/10 = 36.5 days

(vi) Computation of Average Collection Period:

Average Collection Period = Average Debtors × 365/Net Credit Sales
=`4,00,000 × 365/ `48,00,000 = 30.417 days
Or 365/Debtors Turnover = 365/12 = 30.417

(vii + viii) Computation of Current Assets and Current Liabilities:

Current Ratio = Current Assets / Current Liabilities =2.4
Let Current Liabilities be 'a' then Current Assets will be '2.4a' and Working Capital = 2.4a -a
= 1.4a
If working capital is `7,14,000
Then Current Liabilities = `7,14,000 /1.4 = `5,10,000
Current Assets = `5,10,000 × 2.4 = `12,24,000

III. (a) (2)

Computation of Value of the firm:

`
EBIT 5,00,000
Less: Interest on `8,00,000 @ 10% 80,000
Earnings for shareholders 4,20,000
Ke = Cost of Equity Capital 12.5%
Market value of equity 33,60,000
Market value of debt 8,00,000
Value of the firm 41,60,000

` 5, 00, 000
Overall cost of capital = 12.02% or 12.019% %
` 41, 60, 000

III. (a) (3)

Operating Leverage:

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It is a measure that reflects the impact of change in sales on the level of operating profits of
the firm.
Contribution
Degree of Operating Leverage (DOL)=
EarningebeforeInterestandTaxes
There is a DOL for each level of output.

Financial Leverage:
Financial Leverage is the percentage increase in Earning Per Share (EPS) associated with a
given percentage increase in the level of EBIT.

EBIT
Degree of Financial Leverage (DFL) =
EBT

(b) (1) The following balances are provided by M Ltd. for the years ended 31st March, 2014
and 2015:
Particulars 31.03.2014 31.03.2015
General Reserve 2,40,000 2,90,000
Profit & Loss A/c 4,20,000 6,00,000
11 % Debentures 10,00,000 6,00,000
Goodwill 2,00,000 1,60,000
Land & Building 14,00,000 13,00,000
Plant & Machinery 12,00,000 13,20,000
Investment (Non trading) 4,80,000 4,40,000
Creditors 3,70,000 4,30,000
Provision for tax 1,60,000, 2,10,000
Proposed Dividend ' 2,72,000 2,88,000
Stock 8,00,000 7,70,000
Debtors 5,76,000 8,30,000
Cash at Bank 1,76,000 1,86,000
Prepaid Expenses 30,000 22,000

Additional Information:
1. Investment were sold during the year for `70,000.
2. During the year an old machine costing `1,60,000 was sold for `72,000. Its written
down value was `90,000.
3. Depreciation was charged on plant and machinery @ 20% on the opening
balance.
4. There was no purchase or sale of land and building during the year.
5. Provision for tax made during the year was `1,92,000.
6. During the year premium on redemption of debentures written-off was `40,000.
You are required to prepare a statement showing the net cash flow from
operating activities. 8

(2) (i) Following are the details regarding two companies A Ltd. and B Ltd.:
Details A.Ltd. B.Ltd.
Internal Rate of Return 15% 5%

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 Suggested Answer_Syl12_Dec2015_Paper 8
Cost of equity capital 10% 10%
Earnings per share `8 `8

Calculate the value of an equity share of each of these companies according to

Walter's model when dividend payout ratio is 75%
What should be each company’s strategy to maximize the market value of its share? 4

(3) Write a short note on the Dividend Irrelevance Theory of Modigliani and Miller. 4

Answer:

III. (b) (1)

Statement Showing Net cash flow from Operating Activities for the year ended
31st March, 2015 of M Ltd.

Particulars ` `
Profit & Loss A/c as on 31.03.2015 6,00,000
Less: Profit &Loss A/c as on 31.03.2014 4,20,000
1,80,000
Add: Transfer to General Reserve (` 2,90,000 – 2,40,000) 50,000
Provision for tax 1,92,000
Proposed Dividend 2,88,000 5,30,000
Profit before tax 7,10,000
Adjustment for Depreciation:
Land & Building 1,00,000
Plant & Machinery 2,40,000 3,40,000
Profit on sale of Investment (`70,000 - `40,000) WN-2 (30,000)
Loss on sale of Plant & Machinery 18,000
Goodwill written-off (` 2,00,000 – 1,60,000) 40,000
Premium on redemption of debentures written-off 40,000
Operating Profit before Working Capital Changes 11,18,000
W. C. Changes: Decrease in Prepaid Expenses 8,000
Decrease in Stock 30,000
Increase in Debtors (2,54,000)
Increase in Creditors 60,000
Cash generated from Operations 9,62,000
Income Tax paid WN-1 (1,42,000)
Net Cash Inflow from Operating Activities 8,20,000

Working Notes:
Dr. Provision for Tax Account Cr.
Particulars ` Particulars `
To Bank A/c (Balancing figure) 1,42,000 By Balance b/d 1,60,000
To Balance c/d 2,10,000 By Profit & Loss A/c 1,92,000
3,52,000 3,52,000

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Investment Account
Dr. Cr.
Particulars ` Particulars `
To Balance b/d 4,80,000 By Bank A/c (sale) 70,000
To Profit & Loss A/c (profit) 30,000 By Balance c/d 4,40,000
5,10,000 5,10,000

III. (b) (2)

When DP ratio is 75%, Dividend per share is 75% of ` 8 = `6 per share
D +(r / k)×(E -D)
Value of an equity share =
k
Computation of value per share:
Particulars A Ltd. B Ltd.
When D/P ratio 75% = [6 + 0.15 / 0.10 × 2]/ 0.10 [6 + 0.05 / 0.10 × 2]/ 0.10
`90 `70

Inference:

A Ltd: A Ltd. is treated as Growth firm. IRR exceeds cost of capital. When (r) retained earnings
exceeds capitalisation rate (k) the market value per share increases and D/P ratio decreases.
The market value per share will be maximum when it retains all its earnings without distributing
any dividend. The optimum payment ratio is 0

B Ltd: B Ltd; is treated as a decline firm. IRR is less than cost of capital. In case of declining firms,
where r is less than k, the market value per share increases as D/P ratio increases. It is beneficial
to the company if it distributes the earnings to its shareholders.
The market value per share will be maximum when it declares 100% dividend without retaining
its earnings optimum D/P ratio is 100% .

III. (b) (3)

Dividend Irrelevance Theory of Modigliani and Miller: This model explains the irrelevance of
the dividend policy. When profits are used to declare dividends, the market price increases.
At the same time there is a fall in the reserves for reinvestment. Hence for expansion, the
company raises additional capital by issuing new shares; increase in the overall number of
shares will lead to a fall in the market price per share. Hence the shareholders will be
indifferent towards the dividend policy.
Modigliani and Miller stated the reason: The value of the Firm is determined by its basic
earnings power and its risk class, and therefore, the Firm’s value depend on its asset
investment policy rather than on how earnings are split between dividends and retained
earnings.

(c) (1) S. Ltd. produces a product with the following revenue-cost structure:
` per unit
Raw Material 115
Direct labour 80
Overheads 37
Total cost 232
Profit 58
Selling Price 290

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The following additional information is available:
(i) Average raw materials in stock: one month
(ii) Average work in-process: half-a-month—Raw Materials 100%, Direct labour 50%,
Overheads 50% complete
(iii) Average finished goods in stock: one month
(iv) Credit allowed by suppliers: one month
(v) Credit allowed to debtors: two months
(vi) Time lag in payment of wages: half-a-month
(vii) Overheads: one month
(viii) One-fourth of sales are on cash basis
(ix) Cash balance is expected to be ` 1,65,000

You are required to prepare a statement showing the Working Capital requirement of
the company to finance a level of activity of 60,000 units of annual output. Assume
uniform production throughout the year. Wages and overheads accrue uniformly.
Debtors are to be taken at cost. 12

(2) M/s. Progressive Co. Ltd. is considering an investment in Machine X. The cash flows
expected are as under:
Initial Outflow (in lakhs `) Cash in flows (in lakhs `)
Cost of Machine At the end of
1 year
st 2 year
nd 3rd year 4th year 5th year
30 - 10 15 12 16

The cost of capital is 10% p. a. PV of `1 at 10% from year one to five:

End of year 1 2 3 4 5
P/V factor: .91 .83 .75 .68 .62

Advise the Management whether the machine may be bought using the Net Present
Value Method. 4

Answer:

III. (c) (1)

Statement showing estimate of Working capital
Particulars ` `
Current Assets:
Stock of Raw material (60,000 units × 115 × 1/12) 5,75,000
Work-in-progress:
Raw materials (60,000 units × 115 × 1/12 × ½ ) 2,87,500
Direct labour (60,000 units x 80 x 1/12 × 1/2 × 1/2) 1,00,000
Overheads (60,000 units × 37 × 1/12 × /2 × /2)
1 1 46,250 4,33,750
Stock of finished goods (60,000 units × 232 × 1/12) 11,60,000
Debtors (60,000 units × ¾ × 232 × 2/12) 17,40,000
Cash balance 1,65,000
(a) 40,73,750

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Current Liabilities:
Creditors for raw material (60,000 units × 115 × 1/12) 5,75,000
Creditors for wages (60,000 units × 80 × 1/12 × 1/2) 2,00,000
Creditors for overheads (60,000 units × 37 × 1/12) 1,85,000
(b) 9,60,000
Net Working Capital (a) – (b) 31,13,750
Total Working Capital Requirement 31,13,750

III. (c) (2)

MACHINE ‘X’ (` in Lakhs)

Year Cash in Flow P/V factor P/V (`)

1 - 0.91 -
2 10 0.83 8.30
3 15 0.75 11.25
4 12 0.68 8.16
5 16 0.62 9.92
37.63
Less: Investment - 30.00
+Ve 7.63

NPV is +Ve, hence machine X can be bought.

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