CA PE II Question Papers Group II

Cost Accounting and Financial Management May 2006

 

This Paper has 22 answerable questions with 0 answered.

Total No. of Questions— 9]
Time Allowed : 3 Hours

Maximum Marks : 100
Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers in Hindi, his answers in Hindi will not be valued.
Question Nos.1 and 6 are compulsory.
Attempt three questions out of the remaining question numbers 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.
Marks
1. (a) ABC Bank is examining the profitability of its Premier Account, a combined Savings & Cheque account. Depositors receive a 7% annual interest on their average deposit. ABCBank earns an interest rate spread of 3% (the difference between the rate at which it lends money and rate it pays to depositors) by lending money for home loan purpose at 10%
The Premier Account allows depositors unlimited use of services such as deposits, withdrawals, cheque facility, and foreign currency drafts. Depositors with Premier Account balances of Rs. 50,000 or more receive unlimited free use of services. Depositors with minimum balance of less than Rs. 50,000 pay Rs. 1,000–a–month service fee for their Premier Account.

ABC Bank recently conducted an activity–based costing study of its services. The use of these services in 2005–06 by three customers is as follows:

Activity– Account Usage
Based Cost
Per “Transaction Customer
X Customer
Y Customer
Z
Deposits/withdrawal
with teller
Deposits/withdrawal
with automatic teller
machine (ATM)
Deposits/withdrawal
on prearranged
monthly basis
Bank cheques
written
Foreign Currency
drafts
Inquiries about
Account balance
Average Premier Account
Balance for 2005–06
Rs. 125

Rs. 40

Rs. 25

Rs. 400

Rs. 600

Rs. 75
40

10

0

9

4

10

Rs. 55,000
50

20

12

3

1

18

Rs. 40,000
5

16

60

2

6

9

Rs. 12,50,000
Assume Customer X and Z always maintain a balance above Rs. 50,000, whereas Customer Y always has a balance below Rs. 50,000.

Required:

(i) Compute the 2005–06 profitability of the Customers X, Y and Z Premier Account at ABCBank.
(ii) What evidence is there of cross–subsidization among the three Premier Accounts? Why might ABC bank worry about this Cross–subsidization, if the Premier Account product offering is Profitable as a whole?
(iii) What changes would you recommend for ABC Bank’s Premier Account?
6+3+2=11 (0)
(b) Discuss the treatment of Idle time and Overtime premium in Cost Accounting. 4 (0)
(c) Discuss the essential requisites for the installation of Uniform costing system. 3 (0)
2. (a) PQR Limited produces a product which has a monthly demand of 52,000 units. The product requires a component X which is purchased at Rs. 15 per unit. For every finished product, 2 units of Component X are required. The Ordering cost is Rs. 350 per order and the Carrying cost is 12% p.a.
Required:

(i) Calculate for the year 2005–06:
(a) Inventory turnover ratio
(b) Financial Leverage
(c) Return on Investment (ROI)
(d) Return on Equity (ROE)
(e) Average Collection period.
(ii) If the minimum lot size to be supplied is 52,000 units, what is the extra cost, the company has to incur?
(iii) What is the minimum carrying cost, the Company has to incur?
3+3+2=8 (0)
(b) Discuss the treatment of Under–absorbed and Over–absorbed overheads in CostAccounting. 6 (0)
3. (a) RST Construction Ltd. commenced a contract on April 1, 2005. The total contract was for Rs. 49,21,875. It was decided to estimate the total Profit on the contract and to take to the Credit of P/L A/c that proportion of estimated profit on cash basis, which work completed bore to total Contract. Actual expenditure for the period April 1, 2005 to March 31, 2006 and estimated expenditure for April 1, 2006 to September 30, 2006 are given below:
April 1, 2005
to March 31, 2006
(Actuals)
Rs. April 1, 2006
to September 30, 2006
(Estimated)
Rs.
Materials Issued
Labour : Paid
Prepaid
Outstanding
Plant Purchased
Expenses : Paid
Outstanding
Prepaid
Plant returns to Store (historical cost) 7,76,250
5,17,500
37,500
12,500
4,00,000
2,25,000
25,000
15,000
1,00,000 12,99,375
6,18,750
–
5,750
–
3,75,000
10,000
–
3,00,000
(On September 30, 2005) (On September 30 2006)
Work certified
Work uncertified
Cash received
Materials at site 22,50,000
25,000
18,75,000
82,500 Full
–
–
42,500
The plant is subject to annual depreciation @ 25% on written down value method. The contract is likely to be completed on September 30, 2006.

Required:

(i) Prepare the contract A/c. Determine the profit on the contract for the year 2005&ndsh;06 on prudent basis, which has to be credited to P/L A/c.
10 (0)
(b) Distinguish between any two of the following: 2+2=4
(i) Profit Centres and Investment Centres (0)
(ii) Product Cost and Period Cost (0)
(iii) Job Costing and Batch Costing. (0)
4. (a) Discuss the reconciliation of Profits as per Cost Accounts and Financial Accounts. 6 (0)
(b) XYZ Auto Ltd. is in the business of selling cars. It also sells insurance and finance as part of its overall business strategy. The following information is available for the company.
Physical
units Sales
value
Sales of Cars
Sales of Insurance
Sales of Finance 10,000 Cars
6,000 Policies
8,000 Loans Rs. 30,000 lacs
Rs. 1,500 lacs
Rs. 19,200 lacs
The Revenue earnings from each line of business before expenses are as follows:

Sales of Cars
Sales of Insurance
Sales of Finance 3% of Sales value
20% of Sales value
2% of Sales value
The expenses of the company are as follows:

Salesman salaries
Rent
Electricity
Advertising
Documentation cost per insurance policy
Documentation cost for each loan
Direct sales expenses per car Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs. 200
100
100
200
100
200
5,000 lacs
lacs
lacs
lacs
Indirect costs have to be allocated in the ratio of physical units sold.

Required:

(i) Make a cost sheet for each product allocating the direct and indirect costs and also showing the product wise profit and total profit.
(ii) Calculate the percentage of profit to revenue earned from each line of business.
6+2=8 (0)
5. (a) A company produces a component, which passes through two processes. During the month of April, 2006, materials for 40,000 components were put into Process I of which 30,000 were completed and transferred to Process II. Those not transferred to Process II were 100% complete as to materials cost and 50% complete as to labour and overheads cost. The Process I costs incurred were as follows:
Direct Materials
Direct Wages
Factory Overheads Rs. 15,000
Rs. 18,000
Rs. 12,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished goods stores. There was a normal loss with no salvage value of 200 units in process II. There were 1,800 units, remained unfinished in the process with 100% complete as to materials and 25% complete as regard to wages and overheads.

No further process material costs occur after introduction at the first process untill the end of the second process, when protective packing is applied to the completed components. The process and packing costs incurred at the end of the Process II were:

Packing Materials
Direct Wages
Factory Overheads Rs. 4,000
Rs. 3,500
Rs. 4,500
Required:

(i) Prepare Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) Prepare statement of Equivalent Production, Cost per unit and Process II A/c.
4+6=10 (0)
(b) Discuss the accounting of Selling and Distribution overheads. 4 (0)
6. (a) A company is considering a proposal of installing a drying equipment. The equipment would involve a Cash outlay of Rs. 6,00,000 and net Working Capital of Rs. 80,000. The expected life of the project is 5 years without any salvage value. Assume that the company is allowed to charge depreciation on straight–tax–purpose. The estimated before–tax cashinflows are given below:
Before–tax Cashinflows (Rs. ‘000)
Year 1
240 2
275 3
210 4
180 5
160
The applicable Income–tax rate to the Company is 35%. If the Company’s opportunity Cost of Capital is 12%, calculate the equipment’s discounted payback period, net present value and internal rate of return.

The PV factors at 12%, 14% and 15% are:

Year
PV factor at 12%
PV factor at 14%
PV factor at 15% 1
0.8929
0.8772
0.8696 2
0.7972
0.7695
0.7561 3
0.7118
0.6750
0.6575 4
0.6355
0.5921
0.5718 5
0.5674
0.5194
0.4972
10 (0)
(b) Discuss the changing scenario of Financial Management in India. 6 (0)
7. JKL Limited has the following Balance Sheets as on March 31, 2006 and March 31, 2005:
Balance Sheet
Rs. in Lakhs
March 31, 2006 March 31, 2005
Sources of Funds
Shareholders Funds
Loan Funds 2,377
3,570
5,947 1,472
3,083
4,555
Application of Funds
Fixed Assets
Cash and bank
Debtors
Stock
Other Current Assets
Less: Current Liabilities
3,466
489
1,495
2,867
1,567
(3,937)
5,947
2,900
470
1,168
2,407
1,404
(3,794)
4,555
The Income Statement of the JKL Ltd. for the year ended is as follows:

Rs. in Lakhs
March 31, 2006 March 31, 2005
Sales
Less: Cost of Goods sold
Gross Profit
Less: Selling, General and
Administrative expenses
Earnings before Interest and Tax (EBIT)
Interest Expense
Profits before Tax
Tax
Profits after Tax (PAT) 22,165
20,860
1,305

1,135
170
113
57
23
34 13,882
12,544
1,338

752
586
105
481
192
289
Application of Funds
Fixed Assets
Cash and bank
Debtors
Stock
Other Current Assets
Less: Current Liabilities
3,466
489
1,495
2,867
1,567
(3,937)
5,947
2,900
470
1,168
2,407
1,404
(3,794)
4,555
Required:

(i) Calculate for the year 2005–06:
(a) Inventory turnover ratio
(b) Financial Leverage
(c) Return on Investment (ROI)
(d) Return on Equity (ROE)
(e) Average Collection period.
(ii) Give a brief comment on the Financial Position of JKL Limited.
10+2 (0)
8. (a) Discuss the major considerations in Capital Structure Planning. 6 (0)
(b) A Company issues Rs. 10,00,000 12% debentures of Rs. 100 each. The debentures are redeemable after the expiry of fixed period of 7 years. The Company is in 35% tax bracket.
Required:

(i) Calculate the cost of debt after tax, if debentures are issued at
(a) Par
(b) 10% Discount
(c) 10% Premium
(ii) If brokerage is paid at 2%, what will be the cost of debentures, if issue is at par?
5+1=6 (0)
9. (a) A Company has sales of Rs. 25,00,000. Average collection period is 50 days, bad debt losses are 5% of sales and collection expenses are Rs. 25,000. The cost of funds is 15%. The Company has two alternative Collection Programmes:
Programme I Programme II
Average Collection Period reduced to
Bad debt losses reduced to
Collection Expenses 40 days
4% of sales
Rs. 50,000 30 days
3% of sales
Rs. 80,000
Evaluate which Programme is viable.

6 (0)
(b) Write short notes on any two of the following: 3+3=6
(i) Debt Securitisation (0)
(ii) American Depository Receipts (0)
(iii) Bridge Finance. (0)