CA PE II Question Papers Group II

 Cost Accounting and Financial Management Nov 2003

 

This Paper has 23 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 Question numbers 7, 8 and 9.
Working notes should form part of the answer.
Marks
1. (a) Discuss two types of Costs which are associated with labour turnover. 3 (0)
(b) Discuss the purpose of Cost Audit, and circumstances under which a Cost Audit is desirable. 3 (0)
(c) Alpha Limited has decided to analyse the profitability of its five new customers. It buys bottled water at Rs. 90 per case and sells to retail customers at a list price of Rs. 108 per case. The data pertaining to five customers are :
Customers
A B C D E
Cases sold
List Selling Price
Actual Selling Price
Number of Purchase orders
Number of customer visits
Number of Deliveries
Kilometres traveled
Per delivery
Number of expedited 4,680
Rs. 108
Rs. 108
15

2
10

20 19,688
Rs. 108
Rs. 106.20
25

3
30

6
1,36,800
Rs.108
Rs. 99
30

6
60

5
71,550
Rs. 108
Rs. 104.40
25

2
40

10 8,775
Rs. 108
Rs. 97.20

3
20

30
deliveries 0 0 0 0 1
Its five activities and their cost drivers are :
Activity Cost Driver Rate
Order taking
Customer visits
Deliveries
Product handling Rs. 750 per purchase order
Rs. 600 per customer visit
Rs. 5.75 per delivery Km traveled
Rs. 3.75 per case sold
Expedited deliveries Rs. 2,250 per expedited delivery
Required :
(i) Compute the customer–level operating income of each of five retail customers now being examined (A, B, C, D and E). Comment on the results.
(ii) What insights are gained by reporting both the list selling price and the actual selling price for each customer?
(iii) What factors Alpha Limited should consider in deciding whether to drop one or more of five customers?
12 (0)
2. (a) Write short notes on any three of the following : 6
(i) Re–order quantity (0)
(ii) Re–order level (0)
(iii) Maximum stock level (0)
(iv) Minimum stock level. (0)
(b) A fire occurred in the factory premises on October 31, 2003. The accounting records have been destroyed. Certain accounting records were kept in another building. They reveal the following for the period September 1, 2003 to October 31, 2003 :
(i)
(ii)
(iii) Direct materials purchased
Work in process inventory, 1.9.2003
Direct materials inventory, 1.9.2003 Rs. 2,50,000
Rs. 40,000
Rs. 20,000
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x) Finished goods inventory, 1.9.2003
Indirect manufacturing costs
Sales revenues
Direct manufacturing labour
Prime costs
Gross margin percentage based on revenues
Cost of Goods available for sale Rs. 37,750
40% of conversion cost
Rs. 7,50,000
Rs. 2,22,250
3,97,750
30%
Rs. 5,55,775
The loss is fully covered by insurance. The insurance company wants to know the historical cost of the inventories as basis for negotiating a settlement, although the settlement is actually to e based on replacement cost, not historical cost. Required :
(i) Finished goods inventory, 31.10.2003
(ii) Work–in–process inventory, 31.10.2003
(iii) Direct materials inventory, 31.10.2003
8 (0)
3. (a) e–books is an online book retailer. The Company has four departments. The two sales departments ae Corporate Sales and Consumer Sales. The two support–departments are Administrative (Human resources, Accounting), and Information systems. Each of the sales departments conducts merchandising and marketing operations independently.
The following data are available for October, 2003 :
Departments Revenues Number of
Employees Processing
Time used
(in minutes)
Corporate Sales
Consumer Sales
Administrative
Information systems Rs. 16,67,750
Rs. 8,33,875
—
— 42
28
14
21 2,400
2,000
400
1,400
Cost incurred in each of four departments for October, 2003 are as follows :

Corporate sales
Consumers sales
Administrative
Information systems Rs.
Rs.
Rs.
Rs. 12,97,751
6,36,818
94,510
3,04,720
The company uses number of employees as a basis to allocate Administrative costs and processing time as a basis to allocate Information systems costs.

Required :
(i) Allocate the support department costs to the sales departments using the direct method.
(ii) Rank the support departments based on percentage of their services rendered to other support departments. Use this ranking to allocate support costs based on the step–down allocation method.
(iii) How could you have ranked the support departments differently?
(iv) Allocate the support department costs to two sales departments using the reciprocal allocation method.
10 (0)
(b) Dsicuss the accounting treatment of spoilage and defectives in Cost Accounting. 4 (0)
4. (a) Discuss the process of estimating profit/loss on incomplete contracts. 4 (0)
(b) BPR Limited keeps books on integrated accounting system. The following balances appear in the books as on April 1, 2002 :
Dr. (Rs.) Cr. (Rs.)
Stores Control A/c
Work-in-progress A/c
Finished Goods A/c
Bank A/c
Creditors A/c 40,950
38,675
52,325
—
— —
—
—
22,750
18,200
Dr. (Rs.) Cr. (Rs.)
Fixed Assets A/c
Debtors A/c
Share Capital A/c
Provision for Depreciation A/c
Provision for Doubtful Debts A/c
Factory Overheads Outstanding A/c
Pre-paid Administration overheads A/c
Profit and Loss A/c 1,47,875
27,300
—
—
—
—
9,975
— —
—
1,82,000
11,375
3,725
6,250
—
72,800
3,17,100 3,17,100

The transactions for the year ended March 31, 2003 were as given below :
Rs. Rs.
Direct Wages
Indirect Wages 1,97,925
11,375 —
2,09,300
Purchase of materials (on credit)
Materials issued to production
Materials issued for repairs
Goods finished during the year (at cost)
Credit Sales
Cost of Goods sold
Production overheads absorbed
Production overheads paid during the year
Administration overheads paid during the year
Selling overheads incurred
Payment to Creditors
Payment received from Debtors
Depreciation of Machinery
Administration overheads outstanding at the end of year
Provision for doubtful debts at the end of the year 2,27,500
2,50,250
4,550
4,89,125
6,82,500
5,00,500
1,09,200
91,000
7,775
27,300
31,850
2,29,775
6,59,750
14,789
2,225
Required :
Write up accounts in the integrated ledger of BPR Limited and prepare a Trial Balance.

10 (0)
5. (a) From the following information for the month of October 2003, prepare Process III Cost accounts :
Opening WIP in Process III
Transfer from process II
Transferred to Warehouse
Closing WIP of process III
Units scrapped
Direct material added in process III
Direct wages
Production overheads : 1,800 units at Rs. 27,000
: 47,700 units at Rs. 5,36,625
: 43,200 units
: 4,500 units
: 1,800 units
: Rs. 1,77,840
: Rs. 87,840
: Rs. 43,920
Degree of completion :
Opening Stock closing Stock Scrap
Material
Labour
Overheads 80%
60%
60% 70%
50%
50% 100%
70%
70%
The normal loss in the process was 5% of the production and scrap was sold @ Rs. 6.75 per unit. 10 (0)
(b) Discuss the different stages in the Activity–based Costing. 4 (0)
6. The Financial statements of Excel AMP Graphics Limited are as under the sheet :
Balance SheetAs at 31 December, 2001

2001 2000
(Rs. in crores)
Sources of Funds :
shareholder’s Funds
Share Capital
Reserves & Surplus

Loan Funds
Secured Loans
Finance lease obligations
Unsecured loans

1,121
8,950

–
74
171

10,071

245

931
7,999
8,930

259
–
115
374
10,316 9,304
Applications of Funds :
Fixed Assets
Gross Block
Less : Depreciation
Net Block
Capital Work–in–progress

Investments
Current Assets, Loans & Advances :
Inventories
Sundry debtors
Cash & Bank Balances
Loans & Advances

6,667
3,150
3,517
27

2,709
9,468
3,206
2,043

3,544

288

5,747
2,561
3,186
28
3,214
222

2,540
9,428
662
1,712
17,426 14,342
2001 2000
(Rs. in crores)
Less : current liabilities & Provisions
Current liabilities
Provisions
10,109
513
7,902
572
10,622 8,474
Net Current Assets
Net Deferred Tax Liability 6,804
(320) 5,868
–
10,316 9,304

Profit and Loss Account
For the year ended 31 December, 2001

2001 2000
(Rs. in crores)
Income :
Sales & Services
Other Income

Expenditure :
Cost of Materials
Personnel Expenses
Other Expenses
Depreciation
Less : Transfer from
revaluation reserve

Interest

Profit Before Tax
Provision for Tax
Current Tax
Deferred Tax

419

7

15,179
2,543
3,546

412

164
23,436
320
23,756

21,844
1,192

450
(6)
17,849
306
18,155

10,996
2,293
2,815
383

6
377
88
16,569
1,586

371
–
Profit after Tax 1,468 1,215
Required :

(a) Compute and analyse the return on capital employed (ROCE) in a Du–Pont control chart framework
(b) Compute and analyse the average inventory holding period and average collection period.
(c) Compute and analyse the return on equity (ROE) by bringing out clearly the impact of financial leverage.
16 (0)
7.
Beta Company Limited is considering replacement of its existing machine by anew machine, which is expected to cost Rs. 2,64,000. The new machine will have a life of years and will yield annual cash revenues of Rs. 5,68,750 and incur annual cash expenses of Rs. 2,95,750. The estimated salvage value of the new machine is Rs. 18,200. The existing machine has a book value of Rs. 91,000 and can be sold for Rs. 45,500 today.
The existing machine has a remaining useful life of five years. The cash revenues will be Rs. 4,55,000 and associated cash expenses will be 3,18,500. the existing machine will have a salvage value of Rs. 4,550, at the end of five years.
The Beta Company is in 35% tax–bracket, and write off depreciation at 25% on written–down value method.
The Beta Company has a target debt to value ratio of 15%. The Company in the past has raised debt at 11% and it can raise fresh debt at 10.5%.
Beta Company plans to follow dividend discount model to estimate the cost of equity capital. The Company plans to pay a dividend of Rs. 2 per share in the next year. The current market price of Company’s equity share is Rs. 20 per equity share. The dividend per equity share of the Company is expected to grow at 8% p.a.

Required :

(i) Compute the incremental cash flows of the replacement decision.
(ii) Compute the weighted average cost of Capital of the Company.
(iii) Find out the net present value of the replacement decision.
(iv) Estimate the discounted payback period of the replacement decision.
(v) Should the Company replace the existing machine? Advise.
12 (0)
8. (a) A firm has a current sales of Rs. 2,56,48,750. The firm has unutilized capacity. In order to boost its sales, it is considering the relaxation in its credit policy. The proposed terms of credit will be 60 days credit against the present policy of 45 days. As a result, the bad debts will increase from 1.5% to 2% of sales. The firm’s sales are expected to increase by 10%. The variable operating costs are 72% of the sales. The firm’s Corporate tax rate is 35%, and it requires an after–tax return of 15% on its investment. Should the firm change its credit period? 6 (0)
(b) Discuss the ‘Profit maximisation’ and ‘Wealth maximisation’ objective of a firm. 6 (0)
9. (a) Write short notes on any two of the following : (0)
(i) Factoring (0)
(ii) Commercial paper (0)
(iii) Recent changes in Maximum permissible Bank Finance (MPBF). (0)
(b) Discuss the major consideration in Capital structure planning. 6 (0)