PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT

PART-I: COST ACCOUNTING

QUESTIONS
Material
1. Ananya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of
Exe, 2 kg of Dee is required. As per the sales forecast conducted by the company, it will
able to sale 10,000 units of Exe in the coming year. The following is the information
regarding the raw material Dee:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
There is an opening stock of 900 units of the finished product Exe.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur ` 720 on paper and documentation work.
From the above information find out the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]
Labour
2. A Company is undecided as to what kind of wage scheme should be introduced. The
following particulars have been compiled in respect of three workers. Which are under
consideration of the management.
I II III
Actual hours worked 380 100 540
Hourly rate of wages (in `) 40 50 60
Productions in units:
- Product A 210 - 600
- Product B 360 - 1350

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 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

- Product C 460 250 -

Standard time allowed per unit of each product is:
A B C
Minutes 15 20 30
For the purpose of piece rate, each minute is valued at ` 1/-
You are required to calculate the wages of each worker under:
(i) Guaranteed hourly rate basis
(ii) Piece work earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly
rate if his earnings are less than 50% of basic pay.)
(iii) Premium bonus basis where the worker received bonus based on Rowan scheme.
Overheads
3. The Unibion Ltd. has the following account balances and distribution of direct charges on
31st March, 2019.
Production Depts. Service Depts.
Total
Machine Shop Packing General Plant Stores
Allocated Overheads: (`) (`) (`) (`) (`)
Indirect labour 29,000 8,000 6,000 4,000 11,000
Maintenance Material 9,900 3,400 1,600 2,100 2,800
Misc. supplies 5,900 1,500 2,900 900 600
Supervisor’s salary 16,000 -- -- 16,000 --
Cost & payroll salary 80,000 -- -- 80,000 --
Overheads to be apportioned:
Power 78,000
Rent 72,000
Fuel and Heat 60,000
Insurance 12,000
Taxes 8,400
Depreciation 1,20,000
The following data were compiled by means of the factory survey made in the previous
year:
Floor Space Radiator No. of Investment H.P.
Section employees hours
Machine Shop 2,000 Sq. ft. 45 20 8,00,000 3,500

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 3

Packing 800 Sq. ft. 90 12 2,40,000 500

General Plant 400 Sq. ft. 30 4 80,000 -
Stores & 1,600 Sq. ft. 60 8 1,60,000 1,000
maintenance
Expenses charged to the stores departments are to be distributed to the other departments
by the following percentages:
Machine shop 50%; Packing 20%; General Plant 30%;
General Plant overheads is distributed on the basis of number of employees.
(a) Prepare an overhead distribution statement with supporting schedules to show
computations and basis of distribution.
(b) Determine the service department distribution by simultaneous equation method.
Non-integrated Accounting
4. The following is the summarised Trading and Profit and Loss Account of XYZ Ltd. for the
year ended 31 st March 2019:
Particulars Amount (`) Particulars Amount
(`)
Direct Material 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000 Finished stock (2,000 units) 1,67,500
Works overheads 4,26,000 Work-in-progress:
Administration overheads 1,50,000 - Materials 34,000
Selling and distribution 1,65,000 - Wages 16,000
overheads
Net profit for the year 3,22,500 - Works overhead 4,000 54,000
32,21,500 32,21,500
The company’s cost records show that in course of manufacturing a standard unit (i) works
overheads have been charged @ 20% on prime cost, (ii) administration overheads are
related with production activities and are recovered at `5 per finished unit, and (iii) selling
and distribution overheads are recovered at `6 per unit sold.
You are required to prepare:
(i) Costing Profit and Loss Account indicating the net profits,
(ii) A Statement showing reconciliation between profit as disclosed by the Cost Accounts
and Financial Accounts.

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 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Contract Costing
5. Dream house (P) Ltd. is engaged in building two residential housing projects in the city.
Particulars related to two housing projects are as below:
HP-1 (`) HP-2 (`)
Work in Progress on 1 st April 2018 7,80,000 2,80,000
Materials Purchased 6,20,000 8,10,000
Land purchased near to the site to open an office - 12,00,000
Brokerage and registration fee paid on the above purchase - 60,000
Wages paid 85,000 62,000
Wages outstanding as on 31 st March, 2019 12,000 8,400
Donation paid to local clubs 5,000 2,500
Plant hire charges paid for three years effecting from 72,000 57,000
1st April 2018
Value of materials at site as on 31st March, 2019 47,000 52,000
Contract price of the projects 48,00,000 36,00,000
Value of work certified 20,50,000 16,10,000
Work not certified 1,90,000 1,40,000
A concrete mixture machine was bought on 1st April 2018 for `8,20,000 and used for 180
days in HP-1 and for 100 days in HP-2. Depreciation is provided @ 15% p.a. (this machine
can be used for any other projects)
As per the contract agreement contractee shall retain 20% of work certified as retention
money.
Prepare contract account for the two housing projects showing the profit or loss on each
project for the year ended 31st March, 2019.
Operating Costing
6. P Ltd. distributes its goods to dealers using a delivery van. The dealers’ premises are 40
kilometre away from the company’s office. The van has a capacity of 10 tonnes and makes
the journey twice a day fully loaded on the outward journeys and empty on return journey.
The following information is available for a four weekly period during the year 20X9:
Diesel consumption 10 kilometre per litre
Diesel cost `48 per litre
Lubricant oil `600 per week
Drivers salary `12,000 per month

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 5

Repairs & Maintenance `1,800 per month

Garage rent `4,800 per months
Cost of van (excluding tyres) `16,00,000
Life of van 3,80,000 kilometres
Insurance `5,400 per annum
Cost of tyres `22,000
Life of tyres 80,000 kilometres
Estimated sale value of van at end of its life `2,40,000
Vehicle permit fee `3,600 per annum
Other overhead cost `66,000 per annum
The van operates five-day a week.
Required:
(i) A statement to show the total monthly cost of operating the vehicle.
(ii) Calculate the operating cost per kilometre and per tonne kilometre
Process Costing
7. Following information is available regarding process A for the month of February, 20X9:
Production Record:
Units in process as on 01.02.20X9 4,000
(All materials used, 25% complete for labour and overhead)
New units introduced 16,000
Units completed 14,000
Units in process as on 28.02.20X9 6,000
(All materials used, 33-1/3% complete for labour and overhead)
Cost Records:
Work-in-process as on 01.02.20X9 (`)
Materials 6,00,000
Labour 1,00,000
Overhead 1,00,000
8,00,000
Cost during the month
Materials 25,60,000

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 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Labour 15,00,000
Overhead 15,00,000
55,60,000
Presuming that average method of inventory is used, prepare:
(i) Statement of Equivalent Production.
(ii) Statement showing Cost for each element.
(iii) Statement of Apportionment of cost.
(iv) Process Cost Account for Process A.
Joint Product and By Product
8. A company processes a raw material in its Department 1 to produce three products, viz.
A, B and X at the same split-off stage. During a period 1,80,000 kgs of raw materials were
processed in Department 1 at a total cost of ` 12,88,000 and the resultant output of A, B
and X were 18,000 kgs, 10,000 kgs and 54,000 kgs respectively. A and B were further
processed in Department 2 at a cost of `1,80,000 and `1,50,000 respectively.
X was further processed in Department 3 at a cost of `1,08,000. There is no waste in
further processing. The details of sales affected during the period were as under:
A B X
Quantity Sold (kgs.) 17,000 5,000 44,000
Sales Value (`) 12,24,000 2,50,000 7,92,000
There were no opening stocks. If these products were sold at split-off stage, the selling
prices of A, B and X would have been ` 50, ` 40 and ` 10 per kg respectively.
Required:
(i) Prepare a statement showing the apportionment of joint costs to A, B and X.
(ii) Present a statement showing the cost per kg of each product indicating joint cost and
further processing cost and total cost separately.
(iii) Prepare a statement showing the product wise and total profit for the period.
(iv) State with supporting calculations as to whether any or all the products should be
further processed or not
Standard Costing
9. XYZ Ltd. produces a product X by using two raw materials A and B. The following standards
have been set for the production:
Material Standard Mix Standard Price (`)
A 40% 40 per kg.
B 60% 30 per kg.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 7

The standard loss in processing is 15%.

During July, 2018 the company produced 2,000 kg. of finished output.
The positions of stock and purchases for the month of July, 2018 are as under:
Material Stock on 1 st July 2018 Stock on 31st July 2018 Purchases during July 2018
Quantity Amount (`)
A 40 kg. 10 kg. 900 kg. 42.50
B 50 kg. 60 kg. 1,400 kg. 25.00
Calculate the following variances:
(i) Material Price Variance; (ii) Material Usage Variance;
(iii) Material Mix Variance; (iv) Material Yield Variance;
(v) Total Material Cost Variance.
The company follows FIFO method of stock valuation.
Marginal Costing
10. MNP Ltd sold 2,75,000 units of its product at ` 375 per unit. Variable costs are ` 175 per
unit (manufacturing costs of `140 and selling cost ` 35 per unit). Fixed costs are incurred
uniformly throughout the year and amount to ` 3,50,00,000 (including depreciation of
` 1,50,00,000). there are no beginning or ending inventories.
Required:
(i) Compute breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Compute the P/V ratio.
(iii) Compute the number of units that must be sold to earn an income (EBIT) of
` 25,00,000.
(iv) Compute the sales level achieve an after-tax income (PAT) of ` 25,00,000. Assume
40% corporate Income Tax rate.
Budget and Budgetary Control
11. Aditya Ltd. manufactures two products K and H. The sales director has anticipated to sale
8,000 units of Product K and 4,200 units of Product H. The Standard cost data for the
products for next year are as follows:
Product- K Product- H
Per unit Per unit
Direct materials:
- Material X @ ` 15 per kg. 12 kg. 15 kg.
- Material Y@ ` 16 per kg. 15 kg. 6 kg.

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 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

- Material Z @ ` 5 per ltr. 8 ltr. 14 ltr.

Direct wages:
- Unskilled @ ` 40 per hour 12 hour 10 hour
- Skilled @ ` 75 per hour 8 hour 5 hour
Budgeted stocks for next year are as follows:
Product- K Product- H
(Units) (Units)
1st April, 2018 800 1,600
31st March, 2019 1,000 2,100
Material-X Material-Y Material-Z
(kg) (kg) (ltr)
1st April, 2018 25,000 30,000 14,000
31st March, 2019 30,000 18,000 7,500
Prepare the following budgets for next year:
(a) Production budget, in units;
(b) Material purchase budget, in quantity and in value;
(c) Direct labour budget, in hours and in value.
Miscellaneous
12. (a) Distinguish between Cost Control and Cost Reduction.
(b) Discuss the accounting treatment of Idle time and overtime wages.
(c) Discuss cost classification based on variability and controllability.

SUGGESTED HINTS/ANSWERS

1. Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:
Sales forecast of the product ‘Exe’ 10,000 units
Less: Opening stock of ‘Exe’ 900 units
Fresh units of ‘Exe’ to be produced 9,100 units
Raw material required to produce 9,100 units of ‘Exe’ 18,200 kg.
(9,100 units × 2 kg.)
Less: Opening Stock of ‘Dee’ 1,000 kg.
Annual demand for raw material ‘Dee’ 17,200 kg.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 9

(ii) Computation of Economic Order Quantity (EOQ):

2  Annualdemandof 'Dee '  Orderingcos t
EOQ =
Carryingcos t per unit per annum

2 17,200kg. ` 720 2 17,200kg. ` 720

= = = 1,200 kg.
` 125 13.76% ` 17.2
(iii) Re- Order level:
= (Maximum consumption per day × Maximum lead time)
 AnnualConsumptionof 'Dee '  
=   20kg.   8 days 
 364 days  
 18,200kg.  
=   20kg.   8 days  = 560 kg.
 364 days  
(iv) Minimum consumption per day of raw material ‘Dee’:
Average Consumption per day = 50 Kg.
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg.
So Minimum consumption per day will be
Min.consumption  Max.consumption
Average Consumption =
2
Min.consumption  70kg.
Or, 50 kg. =
2
Or, Min. consumption = 100 kg – 70 kg. = 30 kg.
(a) Re-order Quantity :
EOQ – 200 kg. = 1,200 kg. – 200 kg. = 1,000 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead
time)
= 560 kg. + 1,000 kg. – (30 kg. × 4 days)
= 1,560 kg. – 120 kg. = 1,440 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 560 kg. – (50 kg. × 6 days) = 260 kg.

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 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order quantity 1,000 kg. 1,200 kg.
II No. of orders a 17,200kg. 17,200kg.
year 17.2or18orders 14.33or15orders
1,000kg. 1,200kg.
III Ordering Cost 18 orders × ` 720 = 15 orders × ` 720 = `10,800
`12,960
IV Average Inventory 1,000kg. 1,200kg.
 500kg.  600kg.
2 2
V Carrying Cost 500 kg. × ` 17.2 = ` 8,600 600 kg. × ` 17.2 = ` 10,320
VI Total Cost ` 21,560 ` 21,120
Extra Cost incurred due to not ordering EOQ = ` 21,560 - ` 21,120 = `440
2. (i) Computation of wages of each worker under guaranteed hourly rate basis
Worker Actual hours Hourly wage rate Wages (`)
worked (Hours) (`)
I 380 40 15,200
II 100 50 5,000
III 540 60 32,400

(ii) Computation of Wages of each worker under piece work earning basis
Product Piece rate Worker-I Worker-II Worker-III
per unit
(`) Units Wages Units Wages Units Wages
(`) (`) (`)
A 15 210 3,150 - - 600 9,000
B 20 360 7,200 - - 1,350 27,000
C 30 460 13,800 250 7,500 - -
Total 24,150 7,500 36,000

Since each worker’s earnings are more than 50% of basic pay. Therefore, worker -I,
II and III will be paid the wages as computed i.e. ` 24,150, ` 7,500 and ` 36,000
respectively.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 11

Working Notes:
1. Piece rate per unit
Product Standard time per Piece rate each Piece rate per unit
unit in minute minute (`) (`)
A 15 1 15
B 20 1 20
C 30 1 30

2. Time allowed to each worker

Worker Product-A Product-B Product-C Total Time
(H ours)
I 210 units × 15 360 units × 20 460 units × 30 24,150/60
= 3,150 = 7,200 = 13,800 = 402.50
II - - 250 units × 30 7,500/60
= 7,500 = 125
III 600 units × 15 1, 350 units × 20 - 36,000/60
= 9,000 = 27,000 = 600

(iii) Computation of wages of each worker under Premium bonus basis (where each
worker receives bonus based on Rowan Scheme)
Worker Time Time Time Wage Earnings Bonus Total
Allowed Taken saved Rate per (`) (`)* Earning
(Hr.) (Hr.) (Hr.) hour (`) (`)
I 402.5 380 22.5 40 15,200 850 16,050
II 125 100 25 50 5,000 1,000 6,000
III 600 540 60 60 32,400 3,240 35,640

Time Taken
*  TimeSaved  WageRate
Time Allowed

380
Worker-I =  22.5  40  850
402.5
100
Worker-II =  25  50  1,000
125

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 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

540
Worker-III =  60  60  3,240
600
3. (a) Overhead Distribution Statement
Production Service Departments
Departments
Machine Packing General Stores
Shops Plant
Allocated Overheads: (`) (`) (`) (`)
Indirect labour 8,000 6,000 4,000 11,000
Maintenance Material 3,400 1,600 2,100 2,800
Misc. supplies 1,500 2,900 900 600
Supervisor’s salary -- -- 16,000 --
Cost & payroll salary -- -- 80,000 --
Total allocated overheads 12,900 10,500 1,03,000 14,400
Add: Apportioned Overheads 1,84,350 70,125 22,775 73,150
(As per Schedule below)
1,97,250 80,625 1,25,775 87,550
Schedule of Apportionment of Overheads
Production Service Departments
Departments
Item of Cost Basis
Machine Packing General Stores
Shops (`) (`) Plant (`) (`)
Power HP hours 54,600 7,800 -- 15,600
(7 : 1 : - : 2)
Rent Floor space 30,000 12,000 6,000 24,000
(5 : 2 : 1 : 4)
Fuel & Heat Radiator sec. 12,000 24,000 8,000 16,000
(3 : 6 : 2 : 4)
Insurance Investment 7,500 2,250 750 1,500
(10 : 3 : 1 : 2)
Taxes Investment 5,250 1,575 525 1,050
(10 : 3 : 1 : 2)
Depreciation Investment 75,000 22,500 7,500 15,000
(10 : 3 : 1 : 2)
1,84,350 70,125 22,775 73,150

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 13

(b) Re-distribution of Overheads of Service Departments to Production

Departments:
Let, the total overheads of General Plant = ‘a’ and the total overheads of Stores = ‘b’
a = 1,25,775 + 0.3b ..........................................(i)
b = 87,550 + 0.2a ..........................................(ii)
Putting the value of ‘b’ in equation no. (i)
a = 1,25,775 + 0.3 (87,550 + 0.2a)
Or a = 1,25,775 + 26,265 + 0.06a
Or 0.94a = 1,52,040 Or a = 1,61,745 (appx.)
Putting the value of a = 1,61,745 in equation no. (ii) to get the value of ‘b’
b = 87,550 + 0.2 × 1,61,745 = 1,19,899
Secondary Distribution Summary
Particulars Total (`) Machine Shops (`) Packing (`)
Allocated and Apportioned 2,77,875 1,97,250.00 80,625.00
overheads as per Primary
distribution
- General Plant 1,61,745 80,872.50 48,523.50
5 3
(1,61,745 × ) (1,61,745 × )
10 10
- Stores 1,19,899 59,949.50 23,979.80
(1,19,899 × 50%) (1,19,899 × 20%)
3,38,072.00 1,53,128.30
4. (i) Costing Profit and Loss Account for the year ended 31 st March 2019:
Particulars Amount (`) Particulars Amount (`)
Material consumed 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000
Prime Cost 21,58,000
Works overheads 4,31,600
(20% of Prime cost)
25,89,600
Less: Work in progress (54,000)
Factory cost 25,35,600

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 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Administration overheads 1,60,000

(`5 × 32,000 units)
Cost of production 26,95,600
Less: Finished stock (1,68,475)
Cost of goods sold 25,27,125
Selling and distribution 1,80,000
overheads
(`6 × 30,000 unit)
Cost of sales 27,07,125
Profit (balancing figure) 2,92,875
30,00,000 30,00,000
(ii) Statement reconciling the profit as per costing profit and loss account with the profit
as per financial accounts
Particulars Amount (`) Amount (`)
Profit as per cost records 2,92,875
Add: Overheads over-absorbed:
- Works overheads (` 4,31,600 – ` 4,26,000) 5,600
- Administration OH (` 1,60,000 – ` 1,50,000) 10,000
- Selling and Distribution (` 1,80,000 – ` 1,65,000) 15,000 30,600
Less: Closing stock overvalued (` 1,68,475 – ` 1,67,500) (975)
Profit as per financial accounts 3,22,500
*It is assumed that the number of units Produced
= Number of units sold + Finished stock = 30,000 + 2,000 = 32,000 units.
5. Dr. Contract Account for the year ended 31 st March, 2019 Cr.
Particulars HP-1 (`) HP-2 (`) Particulars HP-1 (`) HP-2 (`)
To Balance b/d: W-I-P 7,80,000 2,80,000 By Closing 47,000 52,000
material at site
To Material purchased 6,20,000 8,10,000 By W-I-P:
To Wages: Value of work 20,50,000 16,10,000
(`85,000+`12,000) 97,000 certified
(`62,000+`8,400) 70,400 Cost of work not
certified 1,90,000 1,40,000
To Donation to local club* 5,000 2,500

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 15

To Plant hire charges:

(`72,000x1/3) 24,000
(`57,000x1/3) 19,000
To Depreciation on
concrete mixture**:
(`8,20,000x15%x180/365) 60,658
(`8,20,000x15%x100/365) 33,699
To Notional profit 7,00,342 5,86,401
(balance c/d)
22,87,000 18,02,000 22,87,000 18,02,000
To Costing P & L A/c 1,86,758 1,56,374 By Notional profit 7,00,342 5,86,401
(WN-2) (balance b/d)
To Costing P& L Reserve 5,13,584 4,30,027
A/c.
7,00,342 5,86,401 7,00,342 5,86,401

* Assuming donation paid to local club was exclusively for the above projects, hence
included in the contract account.
** Depreciation on concrete mixture machine is charged on the basis of number of days
used for the projects, as it is clearly mentioned in the question that this machine can be
used for other projects also.
Working Notes:
1 Computation of Stage of completion of the projects:
Value of work certified
 100
Value of contract
` 20,50,000
HP  1   100  42.71%
` 48,00,000
` 16,10,000
HP  2   100  44.72%
` 36,00,000
2 Computation of profit to be recognized in the Costing profit & loss A/c.
1 Cash Received
 Notional profit 
3 Value of work certified
1
HP  1   ` 7,00,342  80%  `1,86,758
3

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 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

1
HP  2   ` 5,86,401 80%  `1,56,374
3
(Land purchased and brokerage and registration fee paid for this purpose cannot be
charged to contract account, hence not included in the contract account)
6. (i) Workings:
(a) Distance travelled in a month = 40 k.m. × 2 × 2 trips × 5 days × 4 weeks
= 3,200 k.m.
(b) Total Tonne-km. = 10 tonnes × 40 k.m. × 2 trips × 5 days × 4 weeks
= 16,000 tonne-k.m.
(c) Consumption of diesel = 3,200 k.m. ÷ 10 k.m = 320 litre.
(d) Tyre cost = `22,000 ÷ 80,000 k.m. × 3,200 k.m = `880
`16,00,000  `2,40,000
(e) Depreciation of van =  3,200k.m. = `11,453
3,80,000k.m.
Monthly Operating Cost Statement
Particulars Amount (`)
Running costs:
- Cost of diesel (320 ltr × `48) 15,360
- Lubricant oil (`600 × 4 weeks) 2,400
- Repairs & Maintenance 1,800
- Cost of tyres 880
- Depreciation 11,453
Total Running cost (A) 31,893
Fixed Costs:
- Driver’s salary 12,000
- Garage rent 4,800
- Insurance (`5,400 ÷ 12) 450
- Permit fee (`3,600 ÷ 12) 300
- Other overheads (`66,000 ÷ 12) 5,500
Total fixed cost (B) 23,050
Total cost {(A) + (B)} 54,943
`54,943
(ii) Operating Cost per kilometre = = `17.17
3,200km.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 17

`54,943
Cost per tonne-km = = `3.43
16,000tonne  km.
7. (i) Statement of Equivalent Production (Average cost method)
Input Particulars Output Equivalent Production
(Units) Units Materials Labour Overheads
(%*) Units** (%)* Units** (%)* Units**
20,000 Completed 14,000 100 14,000 100 14,000 100 14,000
WIP 6,000 100 6,000 33-1/3 2,000 33-1/3 2,000
20,000 20,000 20,000 16,000 16,000
*Percentage of completion ** Equivalent units
(ii) Statement showing Cost for each element
Particulars Materials Labour Overhead Total
Cost of opening work-in- 6,00,000 1,00,000 1,00,000 8,00,000
progress (`)
Cost incurred during the 25,60,000 15,00,000 15,00,000 55,60,000
month (`)
Total cost (`) : (A) 31,60,000 16,00,000 16,00,000 63,60,000
Equivalent units : (B) 20,000 16,000 16,000
Cost per equivalent unit (`) : 158 100 100 358
C = (A ÷ B)
(iii) Statement of Apportionment of cost
(`) (`)
Value of output transferred: (A) (14,000 units × ` 358) 50,12,000
Value of closing work-in-progress: (B)
Material (6,000 units × `158) 9,48,000
Labour (2,000 units × ` 100) 2,00,000
Overhead (2,000 units × ` 100) 2,00,000 13,48,000
Total cost : (A + B) 63,60,000
(iv) Process- A Account
Particulars Units (`) Particulars Units (`)
To Opening WIP 4,000 8,00,000 By Completed 14,000 50,12,000
units

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 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

To Materials 16,000 25,60,000 By Closing WIP 6,000 13,48,000

To Labour 15,00,000
To Overhead 15,00,000
20,000 63,60,000 20,000 63,60,000
8. (i) Statement showing the apportionment of joint costs to A, B and X
Products A B X Total
Output (kg) 18,000 10,000 54,000
Sales value at 9,00,000 4,00,000 5,40,000 18,40,000
the point of split (` 50 x 18,000) (` 40 x 10,000) (` 10 x 54,000)
off (`)
Joint cost 6,30,000 2,80,000 3,78,000 12,88,000
apportionment  ` 12,88,000   ` 12,88,000   ` 12,88,000 
on the basis of  ` 18,40,000 x ` 9,00,000   x ` 4,00,000   ` 18,40,000 x ` 5,40,000 
   ` 18,40,000   
sales value at
the point of split
off (`)

(ii) Statement showing the cost per kg. of each product

(indicating joint cost; further processing cost and total cost separately)
Products A B X
Joint costs apportioned (`) : (I) 6,30,000 2,80,000 3,78,000
Production (kg) : (II) 18,000 10,000 54,000
Joint cost per kg (`): (I ÷ II) 35 28 7
Further processing Cost per kg. 10 15 2
(`)  ` 1,80,000   ` 1,50,000   ` 1,08,000 
     
 18,000kg   10,000kg   54,000kg 
Total cost per kg (`) 45 43 9
(iii) Statement showing the product wise and total profit for the period
Products A B X Total
Sales value (`) 12,24,000 2,50,000 7,92,000
Add: Closing stock value (`)
(Refer to Working note 2) 45,000 2,15,000 90,000
Value of production (`) 12,69,000 4,65,000 8,82,000 26,16,000
Apportionment of joint cost (`) 6,30,000 2,80,000 3,78,000

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 19

Add: Further processing cost (`) 1,80,000 1,50,000 1,08,000

Total cost (`) 8,10,000 4,30,000 4,86,000 17,26,000
Profit (`) 4,59,000 35,000 3,96,000 8,90,000
Working Notes
1.
Products A B X
Sales value (`) 12,24,000 2,50,000 7,92,000
Quantity sold (Kgs.) 17,000 5,000 44,000
Selling price `/kg 72 50 18
 ` 12,24,000   ` 2,50,000   ` 7,92,000 
     
 17,000kg   5,000kg   44,000kg 

2. Valuation of closing stock:

Since the selling price per kg of products A, B and X is more than their total
costs, therefore closing stock will be valued at cost.
Products A B X Total
Closing stock 1,000 5,000 10,000
(kgs.)
Cost per kg 45 43 9
(`)
Closing stock 45,000 2,15,000 90,000 3,50,000
value (`) (` 45 x 1,000 kg) (` 43 x 5,000 kg) (`9x10,000 kg)

(iv) Calculations for processing decision

Products A B X
Selling price per kg at the point of split off (`) 50 40 10
Selling price per kg after further processing (`) 72 50 18
(Refer to working Note 1)
Incremental selling price per kg (`) 22 10 8
Less: Further processing cost per kg (`) (10) (15) (2)
Incremental profit (loss) per kg (`) 12 (5) 6
Product A and X has an incremental profit per unit after further processing, hence,
these two products may be further processed. However, further processing of product
B is not profitable hence, product B shall be sold at split off point.

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 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

9. Workings:
1. Calculation of Actual Materials Consumed:
Particulars Material A (kg.) Material B (kg.)
Opening stock 40 50
Add: Purchases 900 1,400
Less: Closing Stock (10) (60)
Material Consumed 930 1,390
(i) Material Price Variance:
Actual Quantity (Std. Price – Actual Price) = AQ × SP – AQ × AP
Material A = (930 kg × `40) - {(40 kg × `40) + (890 kg × `42.50)}
= `37,200 – (`1,600 + `37,825) = `2,225 (A)
Material B = (1,390 kg × `30) - {(50 kg × `30) + (1,340 kg × `25)}
= `41,700 – (`1,500 + `33,500) = `6,700 (F)
(ii) Material Usage Variance = Std. Price (Std. Quantity - Actual Quantity)
40% of 2,000
Material A = `40 {( ) - 930 kg}
0.85
= `40 (941.18 kg. – 930 kg) = `447 (F)
60% of 2,000
Material B = `30 {( ) - 1,390 kg}
0.85
= `30 (1,411.76 kg. – 1,390 kg) = `653 (F)
(iii) Material Mix Variance = Std. Price (Revised Std. Quantity – Actual Quantity)
Material A = `40 {(40% of 2,320) - 930 kg} = `80 (A)
Material B = `30 { (60% of 2,320) - 1,390 kg} = `60 (F)
(iv) Material Yield Variance = Std. Price (Std. Quantity – Revised Std. Quantity)
40% of 2,000
Material A = `40 {( ) - (40% of 2,320)}
0.85
= `40 { 941.18 kg. – 928 kg.} = 527 (F)
60% of 2,000
Material B = `30 {( ) - (60% of 2,320)}
0.85

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 21

= `30 {1,411.76 kg. – 1,392 kg.} = 593 (F)

(v) Total Material Cost Variance = Std. Price × Std Qty. – Actual Price × Actual Qty.
40% of 2,000
Material A = [{`40 × ( )} – {(40 kg × `40) + (890 kg × `42.50)}]
0.85
= {`40 × 941.18 kg.} – {`1,600 + `37,825}
= `37,647 – `39,425 = `1,778 (A)
60% of 2,000
Material B = [{`30 × ( )} - {(50 kg × `30) + (1,340 kg × `25)}]
0.85
= {`30 × 1,411.76 kg.} – {`1,500 + `33,500}
= `42,353 – `35,000 = `7,353 (F)
10. (i) Contribution = `375 - `175 = `200 per unit.
Fixed cost
Break even Sales Quantity = = ` 3,50,00,000 = 1,75,000 units
Contribution margin per unit ` 200

Cash Fixed Cost

Cash Break even Sales Qty= = `2,00,00,000 = 1,00,000 units.
Contribution margin per unit `200

Contribution/ unit ` 200

(ii) P/V ratio = 100 =  100 = 53.33%
Selling Pr ice / unit ` 375
(iii) No. of units that must be sold to earn an Income (EBIT) of ` 25,00,000
Fixed cost  Desired EBIT level 3,50,00,000  25,00,000
= = 1,87,500 units
Contribution margin per unit 200
(iv) After Tax Income (PAT) = `25,00,000
Tax rate = 40%
`25,00,000
Desired level of Profit before tax = 100 = `41,66,667
60
FixedCost  DesiredPr ofit
Estimate Sales Level =
P / Vratio

 FixedCost  DesiredPr ofit 

Or,   SellingPr ice per unit 
 Contributionper unit 
`3,50,00,000  ` 41,66,667
= = `7,34,42,091
53.33%

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 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

11. (a) Production Budget (in units)

Product- K Product- H
(units) (units)
Expected sales 8,000 4,200
Add: Closing stock 1,000 2,100
Less: Opening stock (800) (1,600)
Units to be produced 8,200 4,700
(b) Material Purchase Budget
Material-X Material-Y Material-Z
(kg.) (kg.) (ltr.)
Materials required:
- Product-K 98,400 1,23,000 65,600
(8,200 units ×12 kg.) (8,200 units×15 kg.) (8,200 units× 8 ltr.)
- Product- H 70,500 28,200 65,800
(4,700 units ×15 kg.) (4,700 units × 6 kg.) (4,700 units×14ltr.)
Total 1,68,900 1,51,200 1,31,400
Add: Closing stock 30,000 18,000 7,500
Less: Opening stock (25,000) (30,000) (14,000)
Quantity to be 1,73,900 1,39,200 1,24,900
purchased
Rate `15 per kg. `16 per kg. `5 per ltr.
Purchase cost ` 26,08,500 ` 22,27,200 ` 6,24,500
(c) Direct Labour Budget
Unskilled Skilled
(hours) (hours)
For Product K 98,400 65,600
(8,200 units × 12 hours) (8,200 units × 8 hours)
For Product H 47,000 23,500
(4,700 units × 10 hours) (4,700 units × 5 hours)
Labour hours required 1,45,400 89,100
Rate ` 40 per hour ` 75 per hour
Wages to be paid ` 58,16,000 ` 66,82,500

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 23

12. (a) Difference between Cost Control and Cost Reduction

Cost Control Cost Reduction
1. Cost control aims at 1. Cost reduction is concerned with
maintaining the costs in reducing costs. It challenges all
accordance with the standards and endeavours to better
established standards. them continuously
2. Cost control seeks to attain 2. Cost reduction recognises no
lowest possible cost under condition as permanent, since a
existing conditions. change will result in lower cost.
3. In case of cost control, 3. In case of cost reduction, it is on
emphasis is on past and present and future.
present
4. Cost control is a preventive 4. Cost reduction is a corrective
function function. It operates even when an
efficient cost control system exists.
5. Cost control ends when targets 5. Cost reduction has no visible end.
are achieved.
(b) Accounting treatment of idle time wages & overtime wages in cost accounts:
Normal idle time is treated as a part of the cost of production. Thus, in the case of
direct workers, an allowance for normal idle time is built into the labour cost rates. 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.
Under Cost Accounting, the overtime premium is treated as follows:
➢ If overtime is resorted to at the desire of the customer, then the overtime
premium may be charged to the job directly.
➢ If overtime is required to cope with general production program or for meeting
urgent orders, the overtime premium should be treated as overhead cost of
particular department or cost center which works overtime.
➢ Overtime worked on account of abnormal conditions should be charged to
costing Profit & Loss Account.
➢ If overtime is worked in a department due to the fault of another department the
overtime premium should be charged to the latter department.
(c) Cost classification based on variability
(a) Fixed Costs – These are the costs which are incurred for a period, and which,
within certain output and turnover limits, tend to be unaffected by fluctuations in
the levels of activity (output or turnover). They do not tend to increase or de -
crease with the changes in output. For example, rent, insurance of factory
building etc., remain the same for different levels of production.

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 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(b) Variable Costs – These costs tend to vary with the volume of activity. Any
increase in the activity results in an increase in the variable cost and vice-versa.
For example, cost of direct labour, etc.
(c) Semi-variable Costs – These costs contain both fixed and variable components
and are thus partly affected by fluctuations in the level of activity. Examples of
semi variable costs are telephone bills, gas and electricity etc.
Cost classification based on controllability
(a) Controllable Costs - Cost that can be controlled, typically by a cost, profit or
investment centre manager is called controllable cost. Controllable costs
incurred in a particular responsibility centre can be influenced by the action of
the executive heading that responsibility centre. For example, direct costs
comprising direct labour, direct material, direct expenses and some of the
overheads are generally controllable by the shop level management.
(b) Uncontrollable Costs - Costs which cannot be influenced by the action of a
specified member of an undertaking are known as uncontrollable costs. For
example, expenditure incurred by, say, the tool room is controllable by the
foreman in-charge of that section but the share of the tool-room expenditure
which is apportioned to a machine shop is not to be controlled by the machine
shop foreman.

© The Institute of Chartered Accountants of India

 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 25

PART-II: FINANCIAL MANAGEMENT

QUESTIONS

Time Value of Money

1. Calculate if `10,00,000 is invested at interest rate of 12% per annum, what is the amount
after 3 years if the compounding of interest is done?
(i) Annually
(ii) Semi-annually
(iii) Quarterly
Ratio Analysis
2. From the following table of financial ratios of R. Textiles Limited, comment on various ratios
given at the end:
Ratios 2017 2018 Average of Textile
Industry
Liquidity Ratios
Current ratio 2.2 2.5 2.5
Quick ratio 1.5 2 1.5
Receivable turnover ratio 6 6 6
Inventory turnover 9 10 6
Receivables collection period 87 days 86 days 85 days
Operating profitability
Operating income –ROI 25% 22% 15%
Operating profit margin 19% 19% 10%
Financing decisions
Debt ratio 49.00% 48.00% 57%
Return
Return on equity 24% 25% 15%
Comment on the following aspect of R. Textiles Limited
(i) Liquidity
(ii) Operating profits
(iii) Financing
(iv) Return to the shareholders

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 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Fund Flow Analysis

3. The following are the Balance Sheets of Gama Limited for the year ending March 31, 20X 8
and March 31, 20X9:
Balance Sheet as at March, 31
20X9 (`) 20X8 (`)
Capital and Liabilities
Share Capital 7,87,500 6,75,000
General Reserves 2,81,250 2,25,000
Capital Reserve (Profit on Sale of investment) 11,250 -
Profit & Loss Account 2,25,000 1,12,500
15% Debentures 2,25,000 3,37,500
Accrued Expenses 13,500 11,250
Creditors 2,81,250 1,80,000
Provision for Dividends 38,250 33,750
Provision for Taxation 85,500 78,750
Total 19,48,500 16,53,750
Assets
Fixed Assets 13,50,000 11,25,000
Less: Accumulated depreciation 2,81,250 2,25,000
Net Fixed Assets 10,68,750 9,00,000
Long-term Investments (at cost) 2,02,500 2,02,500
Stock (at cost) 3,03,750 2,25,000
Debtors (net of provision for doubtful debts of ` 2,75,625 2,53,125
45,000 and ` 56,250 respectively for 20X8 and 20X9
respectively)
Bills receivables 73,125 45,000
Prepaid Expenses 13,500 11,250
Miscellaneous Expenditure 11,250 16,875
19,48,500 16,53,750
Additional Information:
(i) During the year 20X8-X9, fixed assets with a net book value of ` 11,250 (accumulated
depreciation, ` 33,750) was sold for ` 9,000.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 27

(ii) During the year 20X8-X9, Investments costing ` 90,000 were sold, and also
Investments costing ` 90,000 were purchased.
(iii) Debentures were retired at a Premium of 10%.
(iv) Tax of ` 61,875 was paid for 20X7-X8.
(v) During the year 20X8-X9, bad debts of ` 15,750 were written off against the provision
for Doubtful Debt account.
(vi) The proposed dividend for 20X7-X8 was paid in 20X8-X9.
Required:
Prepare a Funds Flow Statement (Statement of changes in Financial Position on working
capital basis) for the year ended March 31, 20X9.
Cost of Capital
4. As a financial analyst of a large electronics company, you are required to determine the
weighted average cost of capital of the company using (a) book value weights and (b)
market value weights. The following information is available for your perusal.
The Company’s present book value capital structure is:
(`)
Debentures (`100 per debenture) 8,00,000
Preference shares (`100 per share) 2,00,000
Equity shares (`10 per share) 10,00,000
20,00,000
All these securities are traded in the capital markets. Recent prices are:
Debentures, `110 per debenture, Preference shares, `120 per share, and Equity shares,
` 22 per share
Anticipated external financing opportunities are:
(i) ` 100 per debenture redeemable at par; 10 year maturity, 11 per cent coupon rate, 4
per cent flotation costs, sale price, ` 100
(ii) ` 100 preference share redeemable at par; 10 year maturity, 12 per cent dividend
rate, 5 per cent flotation costs, sale price, `100.
(iii) Equity shares: ` 2 per share flotation costs, sale price = ` 22.
In addition, the dividend expected on the equity share at the end of the year is ` 2 per
share, the anticipated growth rate in dividends is 7 per cent and the firm has the practice
of paying all its earnings in the form of dividends. The corporate tax rate is 35 per cent.

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 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Capital Structure
5. Akash Limited provides you the following information:
(`)
Profit (EBIT) 2,80,000
Less: Interest on Debenture @ 10% (40,000)
EBT 2,40,000
Less Income Tax @ 50% (1,20,000)
1,20,000
No. of Equity Shares (` 10 each) 30,000
Earnings per share (EPS) 4
Price /EPS (PE) Ratio 10
The company has reserves and surplus of ` 7,00,000 and required ` 4,00,000 further for
modernisation. Return on Capital Employed (ROCE) is constant. Debt (Debt/ Debt +
Equity) Ratio higher than 40% will bring the P/E Ratio down to 8 and increase the interest
rate on additional debts to 12%. You are required to ascertain the probable price of the
share.
(i) If the additional capital are raised as debt; and
(ii) If the amount is raised by issuing equity shares at ruling market price.
Leverage
6. A Company had the following Balance Sheet as on March 31, 2019:
Equity and Liabilities (` in crore) Assets (` in crore)
Equity Share Capital Fixed Assets (Net) 250
(10 crore shares of ` 10 each) 100
Reserves and Surplus 20 Current Assets 150
15% Debentures 200
Current Liabilities 80
400 400
The additional information given is as under:
Fixed Costs per annum (excluding interest) ` 80 crores
Variable operating costs ratio 65%
Total Assets turnover ratio 2.5
Income-tax rate 40%

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 29

Required:
Calculate the following and comment:
(i) Earnings per share
(ii) Operating Leverage
(iii) Financial Leverage
(iv) Combined Leverage.
Capital Budgeting
7. BT Pathology Lab Ltd. is using an X-ray machines which reached at the end of their useful
lives. Following new X-ray machines are of two different brands with same features are
available for the purchase.
Maintenance Cost
Cost of Life of Rate of
Brand Year Year Year
Machine Machine Depreciation
1-5 6-10 11-15
XYZ `6,00,000 15 years ` 20,000 ` 28,000 ` 39,000 4%
ABC `4,50,000 10 years ` 31,000 ` 53,000 -- 6%
Residual Value of both of above machines shall be dropped by 1/3 of Purchase price in
the first year and thereafter shall be depreciated at the rate mentioned above.
Alternatively, the machine of Brand ABC can also be taken on rent to be returned back to
the owner after use on the following terms and conditions:
• Annual Rent shall be paid in the beginning of each year and for first year it shall be
` 1,02,000.
• Annual Rent for the subsequent 4 years shall be ` 1,02,500.
• Annual Rent for the final 5 years shall be ` 1,09,950.
• The Rent Agreement can be terminated by BT Labs by making a payment of
` 1,00,000 as penalty. This penalty would be reduced by ` 10,000 each year of the
period of rental agreement.
You are required to:
(a) Advise which brand of X-ray machine should be acquired assuming that the use of
machine shall be continued for a period of 20 years.
(b) State which of the option is most economical if machine is likely to be used for a
period of 5 years?
The cost of capital of BT Labs is 12%.

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 30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Working Capital Management

8. A company is considering its working capital investment and financial policies for the next
year. Estimated fixed assets and current liabilities for the next year are ` 2.60 crores and
` 2.34 crores respectively. Estimated Sales and EBIT depend on current assets
investment, particularly inventories and book-debts. The Financial Controller of the
company is examining the following alternative Working Capital Policies:
(` in crore)
Working Capital Policy Investment in Current Assets Estimated Sales EBIT
Conservative 4.50 12.30 1.23
Moderate 3.90 11.50 1.15
Aggressive 2.60 10.00 1.00
After evaluating the working capital policy, the Financial Controller has advised the
adoption of the moderate working capital policy. The company is now examining the use
of long-term and short-term borrowings for financing its assets. The company will use
` 2.50 crores of the equity funds. The corporate tax rate is 35%. The company is
considering the following debt alternatives.
(` in crore)
Financing Policy Short-term Debt Long-term Debt
Conservative 0.54 1.12
Moderate 1.00 0.66
Aggressive 1.50 0.16
Interest rate-Average 12% 16%

You are required to calculate the following:

(i) Working Capital Investment for each policy:
(a) Net Working Capital position
(b) Rate of Return
(c) Current ratio
(ii) Financing for each policy:
(a) Net Working Capital position.
(b) Rate of Return on Shareholders’ equity.
(c) Current ratio.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 31

Management of Working Capital

9. A proforma cost sheet of a company provides the following particulars:
Amount per unit (`)
Raw materials cost 100.00
Direct labour cost 37.50
Overheads cost 75.00
Total cost 212.50
Profit 37.50
Selling Price 250.00
The Company keeps raw material in stock, on an average for one month; work-in-progress,
on an average for one week; and finished goods in stock, on an average for two weeks.
The credit allowed by suppliers is three weeks and company allows four weeks credit to its
debtors. The lag in payment of wages is one week and lag in payment of overhead
expenses is two weeks.
The Company sells one-fifth of the output against cash and maintains cash-in-hand and at
bank put together at `37,500.
Required:
Prepare a statement showing estimate of Working Capital needed to finance an activity
level of 1,30,000 units of production. Assume that production is carried on evenly
throughout the year, and wages and overheads accrue similarly. Work-in-progress stock
is 80% complete in all respects.
Miscellaneous
10. Write short notes on the following:
(a) Functions of Finance Manager.
(b) Inter relationship between investment, financing and dividend decisions.
(c) Debt securitisation

SUGGESTED HINTS/ANSWERS

1. Computation of future value

Principal (P0) = ` 10,00,000
Rate of interest (i) = 12% p.a.
Time period (n) = 3 years

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 32 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Amount if compounding is done:

(i) Annually
Future Value = P(1+i)n
= `10,00,000 (1 + 0.12) 3
= `10,00,000 × 1.404928
= ` 14,04,928
(ii) Semi Annually
32
 12 
Future Value = `10,00,000  1  
 100  2 
= `10,00,000 (1 + 0.06) 6
= `10,00,000 × 1.418519
= ` 14,18,519
(iii) Quarterly
34
 12 
Future Value = `10,00,000  1  
 100  2 
= `10,00,000 (1 + 0.03) 12
= `10,00,000 × 1.425761
= `14,25,761
2.
Ratios Comment
Liquidity Current ratio has improved from last year and matching the
industry average.
Quick ratio also improved than last year and above the
industry average. This may happen due to reduction in
receivable collection period and quick inventory turnover.
However, this also indicates idleness of funds.
Overall it is reasonably good. All the liquidity ratios are
either better or same in both the year compare to the
Industry Average.
Operating Profits Operating Income-ROI reduced from last year but
Operating Profit Margin has been maintained. This may
happen due to variability of cost on turnover. However,
both the ratio are still higher than the industry average.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 33

Financing The company has reduced its debt capital by 1% and

saved operating profit for equity shareholders. It also
signifies that dependency on debt compared to other
industry players (57%) is low.
Return to the R’s ROE is 24 per cent in 2017 and 25 per cent in 2018
shareholders compared to an industry average of 15 per cent. The ROE
is stable and improved over the last year.

3. Fund Flow Statement as at 31st March 20X9

(`)
A. Sources of Funds:
(i) Fund from Business Operations (W.N. 1) 3,16,125
(ii) Sale of Fixed Assets 9,000
(iii) Sale of Investments (` 90,000 + ` 11,250) 1,01,250
(iv) Issue of Shares (` 7,87,500 - ` 6,75,000) 1,12,500
Total sources 5,38,875
B. Application of Funds:
(i) Purchase of Fixed Assets 2,70,000
(ii) Purchase of Investments 90,000
(iii) Payment to Debenture holders {(` 3,37,500 – ` 2,25,000) × 110%} 1,23,750
(iv) Payment of Dividends 33,750
Total uses 5,17,500
Increase in Working Capital (A - B) 21,375
Working Notes (W.N.):
1. Computation of Funds from Business Operation
(`)
Profit and loss as on March 31, 20X9 2,25,000
Add: Depreciation 90,000
Loss on Sale of Asset 2,250
Misc. Expenditure written off 5,625
Transfer to Reserves 56,250
Premium on Redemption of debentures 11,250
Provision for Dividend 38,250

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 34 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

4,28,625
Less: Profit and loss as on March 31, 20X7 1,12,500
Fund from Operations 3,16,125
2. Accumulated Depreciation A/c
To Fixed Asset A/c 33,750 By Balance b/d 2,25,000
To Balance c/d 2,81,250 By P/L A/c (Prov. for 90,000
depreciation) (Bal. Fig.)
3,15,000 3,15,000
3. Fixed Assets A/c
To Balance b/d 11,25,000 By Acc. Depreciation A/c 33,750
To Bank (Purchase of Fixed Asset) (Bal. 2,70,000 By Cash 9,000
fig.)
By P/L (Loss on sale) 2,250
By Balance c/d 13,50,000
13,95,000 13,95,000
4. Statement of Changes in Working Capital
Change in Working
March 31, March 31, Capital
20X8 20X9
Increase Decrease
Current Assets
Stock 2,25,000 3,03,750 78,750 --
Debtors 2,53,125 2,75,625 22,500 --
Bills Receivables 45,000 73,125 28,125 --
Prepaid Expenses 11,250 13,500 2,250 --
5,34,375 6,66,000 -- --
Current Liabilities
Accrued Expenses 11,250 13,500 -- 2,250
Creditors 1,80,000 2,81,250 -- 1,01,250
Provision for Taxation 78,750 85,500 -- 6,750
2,70,000 3,80,250 -- --
Working Capital 2,64,375 2,85,750 -- --
Increase in Working Capital 21,375 - - 21,375
2,85,750 2,85,750 1,31,625 1,31,625

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 35

4. Determination of specific costs:

(RV  NP) (`100  `96)
Interest (1  t)  `11(1  0.35) 
N 10 years
(i) Cost Debt (Kd) = =
(RV  NP) (`100  `96)
2 2
` 7.15  ` 0.4
= = 0.077 or 7.70%
` 98

(RV  NP) (`100  `95)

PD  `12 
N 10 years
(ii) Cost of Preference Shares (K ) = =
p (RV  NP) (`100  `95)
2 2
` 12  ` 0.5
= = 0.1282 or 12.82%
` 97.5
D1 `2
(iii) Cost of Equity shares (K ) = G =  0.07 = 0.17 or 17%
e P0 ` 22  ` 2

I – Interest, t – Tax, RV- Redeemable value, NP- Net proceeds, N- No. of years, PD-
Preference dividend, D 1- Expected Dividend, P0- Price of share (net)

Using these specific costs, we can calculate WACC on the basis of book value and
market value weights as follows:
(a) Weighted Average Cost of Capital (K0) based on Book value weights

Source of capital Book value Weights Specific WACC (%)

(`) cost (%)
Debentures 8,00,000 0.40 7.70 3.08
Preferences 2,00,000 0.10 12.82 1.28
shares
Equity shares 10,00,000 0.50 17.00 8.50
20,00,000 1.00 12.86
(b) Weighted Average Cost of Capital (K0) based on market value weights:

Source of capital Market Weights Specific WACC

value (`) cost (%) (%)
Debentures 8,80,000 0.265 7.70 2.04

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 36 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

 `8,00,000 
  `110 
 `100 
Preferences shares 2,40,000 0.072 12.82 0.92
 `2,00,000 
  `120 
 `100 
Equity shares 22,00,000 0.663 17.00 11.27
 `10,00,000 
  `22 
 `10 
33,20,000 1.000 14.23
5. Ascertainment of probable price of shares of Akash limited
Plan-I Plan-II
If ` 4,00,000 If ` 4,00,000
Particulars is raised as is raised by
debt (`) issuing
equity shares
(`)
Earnings Before Interest and Tax (EBIT)
{20% of new capital i.e. 20% of (`14,00,000 + `4,00,000)} 3,60,000 3,60,000
(Refer working note1)
Less: Interest on old debentures
(40,000) (40,000)
(10% of `4,00,000)
Less: Interest on new debt
(48,000) --
(12% of `4,00,000)
Earnings Before Tax (EBT) 2,72,000 3,20,000
Less: Tax @ 50% (1,36,000) (1,60,000)
Earnings for equity shareholders (EAT) 1,36,000 1,60,000
No. of Equity Shares (refer working note 2) 30,000 40,000
Earnings per Share (EPS) ` 4.53 ` 4.00
Price/ Earnings (P/E) Ratio (refer working note 3) 8 10
Probable Price Per Share (PE Ratio × EPS) ` 36.24 ` 40
Working Notes:
1. Calculation of existing Return of Capital Employed (ROCE):
(`)

Equity Share capital (30,000 shares × `10) 3,00,000

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 37

 100 
10% Debentures  `40,000   4,00,000
 10 
Reserves and Surplus 7,00,000
Total Capital Employed 14,00,000
Earnings before interest and tax (EBIT) (given) 2,80,000
`2,80,000
ROCE =  100 20%
`14,00,000

2. Number of Equity Shares to be issued in Plan-II:

` 4,00,000
=  10,000shares
` 40
Thus, after the issue total number of shares = 30,000+ 10,000 = 40,000 shares
3. Debt/Equity Ratio if ` 4,00,000 is raised as debt:
`8,00,000
=  100 = 44.44%
`18,00,000
As the debt equity ratio is more than 40% the P/E ratio will be brought down to
8 in Plan-I
6. Total Assets = ` 400 crores
Asset Turnover Ratio = 2.5
Hence, Total Sales = 400  2.5 = ` 1,000 crores
Computation of Profits after Tax (PAT)
(` in crore)
Sales 1,000
Less: Variable operating cost (65% of `1,000 crore) (650)
Contribution 350
Less: Fixed cost (other than Interest) (80)
EBIT 270
Less: Interest on debentures (15%  `200 crore) (30)
EBT 240
Less: Tax 40% (96)
EAT (earnings available to equity share holders) 144

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 38 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(i) Earnings per share (EPS)

` 144 crores
 EPS  = ` 14.40
10 crore equity shares
(ii) Operating Leverage
Contribution 350
Operating leverage =  = 1.296
EBIT 270
It indicates sensitivity of earnings before interest and tax (EBIT) to change in sales at
a particular level.
(iii) Financial Leverage
EBIT 270
Financial Leverage = = = 1.125
EBT 240
The financial leverage is very comfortable since the debt service obligation is small
vis-à-vis EBIT.
(iv) Combined Leverage
Contribution EBIT
Combined Leverage = 
EBIT EBT
Or, Operating Leverage × Financial Leverage = 1.296  1.125 = 1.458
The combined leverage studies the choice of fixed cost in cost structure and choice
of debt in capital structure. It studies how sensitive the change in EPS is vis -à-vis
change in sales.
7. Since the life span of each machine is different and time span exceeds the useful lives of
each model, we shall use Equivalent Annual Cost method to decide which brand should
be chosen.
(i) If machine is used for 20 years
Present Value (PV) of cost if machine of Brand XYZ is purchased
Period Cash Outflow (`) PVF@12% Present Value
0 6,00,000 1.000 6,00,000
1-5 20,000 3.605 72,100
6-10 28,000 2.045 57,260
11-15 39,000 1.161 45,279
15 (64,000) 0.183 (11,712)
7,62,927

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 39

PVAF for 1-15 years 6.811

`7,62,927
Equivalent Annual Cost = = ` 1,12,014
6.811
Present Value (PV) of cost if machine of Brand ABC is purchased
Period Cash Outflow (`) PVF@12% Present Value
0 4,50,000 1.000 4,50,000
1-5 31,000 3.605 1,11,755
6 -10 53,000 2.045 1,08,385
10 (57,000) 0.322 (18,354)
6,51,786
PVAF for 1-10 years 5.65
`6,51,786
Equivalent Annual Cost = = ` 1,15,360
5.65
Present Value (PV) of cost if machine of Brand ABC is taken on Rent
Period Cash Outflow (`) PVF@12% Present Value
0 1,02,000 1.000 1,02,000
1-4 1,02,500 3.037 3,11,293
5-9 1,09,950 2.291 2,51,895
6,65,188
PVAF for 1-10 years 5.65
`6,65,188
Equivalent Annual Cost = = ` 1,17,732
5.65
Decision: Since Equivalent Annual Cash Outflow is least in case of purchase of
Machine of brand XYZ the same should be purchased.
(ii) If machine is used for 5 years
(a) Scrap Value of Machine of Brand XYZ
= ` 6,00,000 – ` 2,00,000 – ` 6,00,000 × 0.04 × 4 = ` 3,04,000
(b) Scrap Value of Machine of Brand ABC
= ` 4,50,000 – ` 1,50,000 – ` 4,50,000 × 0.06 × 4 = ` 1,92,000

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 40 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Present Value (PV) of cost if machine of Brand XYZ is purchased

Period Cash Outflow (`) PVF@12% Present Value
0 6,00,000 1.000 6,00,000
1-5 20,000 3.605 72,100
5 (3,04,000) 0.567 (1,72,368)
4,99,732
Present Value (PV) of cost if machine of Brand ABC is purchased
Period Cash Outflow (`) PVF@12% Present Value
0 4,50,000 1.000 4,50,000
1-5 31,000 3.605 1,11,755
5 (1,92,000) 0.567 (1,08,864)
4,52,891
Present Value (PV) of cost if machine of Brand ABC is taken on Rent
Period Cash Outflow (`) PVF@12% Present Value
0 1,02,000 1.000 1,02,000
1-4 1,02,500 3.037 3,11,293
5 50,000 0.567 28,350
4,41,643
Decision: Since Cash Outflow is least in case of lease of Machine of brand ABC the
same should be taken on rent.
8. (i) Statement showing Working Capital Investment for each policy
(` in crore)
Working Capital Policy
Conservative Moderate Aggressive
Current Assets: (i) 4.50 3.90 2.60
Fixed Assets: (ii) 2.60 2.60 2.60
Total Assets: (iii) 7.10 6.50 5.20
Current liabilities: (iv) 2.34 2.34 2.34
Net Worth: (v) = (iii) - (iv) 4.76 4.16 2.86
Total liabilities: (iv) + (v) 7.10 6.50 5.20
Estimated Sales: (vi) 12.30 11.50 10.00

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 41

EBIT: (vii) 1.23 1.15 1.00

(a) Net working capital position: (i) - (iv) 2.16 1.56 0.26
(b) Rate of return: (vii) /(iii) 17.32% 17.69% 19.23%
(c) Current ratio: (i)/ (iv) 1.92 1.67 1.11
(ii) Statement Showing Effect of Alternative Financing Policy
(` in crore)
Financing Policy Conservative Moderate Aggressive
Current Assets (i) 3.90 3.90 3.90
Fixed Assets (ii) 2.60 2.60 2.60
Total Assets (iii) 6.50 6.50 6.50
Current Liabilities (iv) 2.34 2.34 2.34
Short term Debt (v) 0.54 1.00 1.50
Total current liabilities
2.88 3.34 3.84
(vi) = (iv) + (v)
Long term Debt (vii) 1.12 0.66 0.16
Equity Capital (viii) 2.50 2.50 2.50
Total liabilities (ix) = (vi)+(vii)+(viii) 6.50 6.50 6.50
Forecasted Sales 11.50 11.50 11.50
EBIT (x) 1.15 1.15 1.15
Less: Interest on short-term debt 0.06 0.12 0.18
(12% of `0.54) (12% of ` 1) (12% of ` 1.5)
Interest on long term debt 0.18 0.11 0.03
(16% of `1.12) (16% of `0.66) (16% of `0.16)
Earnings before tax (EBT) (xi) 0.91 0.92 0.94
Taxes @ 35% (xii) 0.32 0.32 0.33
Earnings after tax: (xiii) = (xi) – (xii) 0.59 0.60 0.61
(a) Net Working Capital
Position: (i) - [(iv) + (v)] 1.02 0.56 0.06
(b) Rate of return on
shareholders Equity capital: 23.6% 24.0% 24.4%
(xiii)/ (viii)
(c) Current Ratio (i) / (vi) 1.35 1.17 1.02

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 42 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

9. Statement showing Estimate of Working Capital Needs

(Amount in `) (Amount in `)
A. Current Assets
(i) Inventories:
Raw material (1 month or 4 weeks)
 1,30,000units  `100 
  4 weeks 
 52 weeks  10,00,000
WIP Inventory (1 week)
 1,30,000units  `212.50 
  1week  × 0.8 4,25,000
 52 weeks 
Finished goods inventory (2 weeks)
 1,30,000units  `212.50  24,87,500
  2 weeks  10,62,500
 52 weeks 
(ii) Receivables (Debtors) (4 weeks)
 1,30,000units  `212.50  4
  4 weeks   17,00,000
 52 weeks  5th
(iii) Cash and bank balance 37,500
Total Current Assets 42,25,000
B. Current Liabilities:
(i) Payables (Creditors) for materials (3 weeks)
 1,30,000units  `100  7,50,000
  3 weeks 
 52 weeks 
(ii) Outstanding wages (1 week)
 1,30,000units  `37.50  93,750
  1week 
 52 weeks 
(iii) Outstanding overheads (2 weeks)
 1,30,000units  `75 
  2 weeks 
 52 weeks  3,75,000

Total Current Liabilities 12,18,750

Net Working Capital Needs (A – B) 30,06,250

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 43

10. (a) Functions of Finance Manager

The Finance Manager’s main objective is to manage funds in such a way so as to
ensure their optimum utilisation and their procurement in a manner that the risk, cost
and control considerations are properly balanced in a given situation. To achieve
these objectives the Finance Manager performs the following functions:
(i) Estimating the requirement of Funds: Both for long-term purposes i.e.
investment in fixed assets and for short-term i.e. for working capital. Forecasting
the requirements of funds involves the use of techniques of budgetary control
and long-range planning.
(ii) Decision regarding Capital Structure: Once the requirement of funds has been
estimated, a decision regarding various sources from which these funds would
be raised has to be taken. A proper balance has to be made between the loan
funds and own funds. He has to ensure that he raises sufficient long term funds
to finance fixed assets and other long term investments and to provide for the
needs of working capital.
(iii) Investment Decision: The investment of funds, in a project has to be made after
careful assessment of various projects through capital budgeting. Assets
management policies are to be laid down regarding various items of current
assets. For e.g. receivable in coordination with sales manager, inventory in
coordination with production manager.
(iv) Dividend decision: The finance manager is concerned with the decision as to
how much to retain and what portion to pay as dividend depending on the
company’s policy. Trend of earnings, trend of share market prices, requirement
of funds for future growth, cash flow situation etc., are to be considered.
(v) Evaluating financial performance: A finance manager has to constantly review
the financial performance of the various units of organisation generally in terms
of ROI Such a review helps the management in seeing how the funds have been
utilised in various divisions and what can be done to improve it.
(vi) Financial negotiation: The finance manager plays a very important role in
carrying out negotiations with the financial institutions, banks and public
depositors for raising of funds on favourable terms.
(vii) Cash management: The finance manager lays down the cash management and
cash disbursement policies with a view to supply adequate funds to all units of
organisation and to ensure that there is no excessive cash.
(viii) Keeping touch with stock exchange: Finance manager is required to analyse
major trends in stock market and their impact on the price of the company share.

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 44 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(b) Inter-relationship between Investment, Financing and Dividend Decisions

The finance functions are divided into three major decisions, viz., investment,
financing and dividend decisions. It is correct to say that these decisions are inter -
related because the underlying objective of these three decisions is the same, i.e.
maximisation of shareholders’ wealth. Since investment, financing and dividend
decisions are all interrelated, one has to consider the joint impact of these decisions
on the market price of the company’s shares and these decisions should also be
solved jointly. The decision to invest in a new project needs the finance for the
investment. The financing decision, in turn, is influenced by and influences dividend
decision because retained earnings used in internal financing deprive shareholders
of their dividends. An efficient financial management can ensure optimal joint
decisions. This is possible by evaluating each decision in relation to its effect on the
shareholders’ wealth.
The above three decisions are briefly examined below in the light of their inter -
relationship and to see how they can help in maximising the shareholders’ wealth i.e.
market price of the company’s shares.
Investment decision: The investment of long term funds is made after a careful
assessment of the various projects through capital budgeting and uncertainty
analysis. However, only that investment proposal is to be accepted which is expected
to yield at least so much return as is adequate to meet its cost of financing. This have
an influence on the profitability of the company and ultimately on its wealth.
Financing decision: Funds can be raised from various sources. Each source of funds
involves different issues. The finance manager has to maintain a proper balance
between long-term and short-term funds. With the total volume of long-term funds, he
has to ensure a proper mix of loan funds and owner’s funds. The optimum financing
mix will increase return to equity shareholders and thus maximise their wealth.
Dividend decision: The finance manager is also concerned with the decision to pay
or declare dividend. He assists the top management in deciding as to what portion of
the profit should be paid to the shareholders by way of dividends and what portion
should be retained in the business. An optimal dividend pay-out ratio maximises
shareholders’ wealth.
The above discussion makes it clear that investment, financing and dividend
decisions are interrelated and are to be taken jointly keeping in view their joint effect
on the shareholders’ wealth.
(c) Debt Securitisation: It is a method of recycling of funds. It is especially beneficial to
financial intermediaries to support the lending volumes. Assets generating steady
cash flows are packaged together and against this asset pool, market securities can
be issued, e.g. housing finance, auto loans, and credit card receivables.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 45

Process of Debt Securitisation

(i) The origination function – A borrower seeks a loan from a finance company,
bank. The credit worthiness of borrower is evaluated and contract is entered into
with repayment schedule structured over the life of the loan.
(ii) The pooling function – Similar loans on receivables are clubbed together to
create an underlying pool of assets. The pool is transferred in favour of Special
purpose Vehicle (SPV), which acts as a trustee for investors.
(iii) The securitisation function – SPV will structure and issue securities on the basis
of asset pool. The securities carry a coupon and expected maturity which can
be asset-based/mortgage based. These are generally sold to investors through
merchant bankers. Investors are – pension funds, mutual funds, insurance
funds.

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