Study of Cost Accounting and Analysis

SUGGESTED ANSWERS TO QUESTIONS_SYL2016_DEC2019_PAPER-8
INTERMEDIATE EXAMINATION
GROUP -II
(SYLLABUS 2016)
SUGGESTED ANSWERS TO QUESTIONS

DECEMBER- 2019
Paper-8 : COST ACCOUNTING
Time Allowed : 3 Hours Full Marks : 100
The figures in the margin on the right side indicate full marks.
All Sections are compulsory. Each section contains instructions
regarding the number of questions to be answered within the section.
All working notes must form part of the answer.
Wherever necessary, candidates may make appropriate
assumptions and clearly state them.
No present value factor table or other statistical table will be
provided in addition to this question paper.
Section - A
Section A contains Question Number 1. All parts of this question are compulsory.
1. Answer the following questions:
(a) Choose the correct answer from the given alternatives (You may write only the
Romannumeral and the alphabet chosen for your answer): 1×10=10
(i) Costs which are ascertained after they have been incurred are known as
(A) Sunk Costs
(B) Imputed Costs
(C) Historical Costs
(D) Opportunity Costs
(ii) Prime cost plus variable overheads is known as

(A) Factory Cost
(B) Marginal Cost
(C) Cost of Production
(D) Total Cost
(iii) In which of thefollowing methods, issue of materials are priced atpre-determined

rate?
(A) Specific price method
(B) Standard price method
(C) Inflated price method
(D) Replacement price method
DoS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
(iv) For reducing the labour cost per unit, which of the following factors is the most
important?
(A) Low wage rates
(B) Longer hours of work
(C) Higher input-output ratio
(D) Strict control and supervision
(v) Maximum possible productive capacity of a plant when no operating time is lost
is its
(A) Normal capacity
(B) Practical capacity
(C) Theoretical capacity
(D) Capacity based on sales expectancy
(vi) In job costing, which of the following documents is used to record the issue of
direct materials to a job?
(A) Goods Receipt Note
(B) Purchase Order
(C) Purchase Requisition Note
(D) Material Requisition Note
(vii) The main purpose of accounting of joint products and by-products is to

(A) determine the profit/loss on each product line.
(B) determine the selling price.
(C) comply with the statutory requirements.
(D) identify the cost and load it on the main product.
(viii) During a period 2560 labour hours were worked at a standard rate of Rs. 7.50 per
hour. The direct labour efficiency variance was Rs. 825 (A). How many standard
hours were produced?
(A) 2400
(B) 2450
(C) 2500
(D) 2550
(ix) PQR Ltd. manufactures a single product which it sells forRs.40per unit. Fixed cost
is Rs. 60,000 per year. The contribution to sales ratio is 40%. PQR Ltd.’s Break Even
Point in units is
(A) 3500
(B) 3700
(C) 3750
(D) 4000
(x) The fixed-variable cost classification has a special significance in the

preparation of
(A) Cash budget
(B) Master budget
(C) Flexible budget
(D) Capital budget
(b) Match the statement in Column I with the most appropriate statement in Column II(You
may opt to write only the Roman numeral and the matched alphabet instead of
copying contents into the answer books): 1x5=5
Column I Column II
(i) Notional cost A Replacement method
(ii) Labour turnover B Cost of utilities
(iii) CAS-10 C Production strategy
(iv) Contract costing D Direct expenses
(v) JIT E Costing department
F Imputed cost
G Escalation clause
H Decision package
(c) State whether the following are 'True' or 'False':(You may write only theRoman numeral
and whether 'True' or 'False' without copying the statements into theanswer books):
1x5=5
(i) Profit is the result of two varying factors sales and variable cost.
(ii) Bin card is a record of both quantities and value.
(iii) Overtime premium is directly assigned to cost object.
(iv) In Reconciliation statements, expenses shown only in financial accounts areadded
to financial profit.
(v) P/V ratio remains constant at all levels of activity.
(d) Fill in the blanks: (You may write only the Roman numeral and the content filling the
blanks) 1x5=5
(i) __________ costs are historical costs which are incurred in the past.
(ii) In Absorption costing, _____________ cost is added to inventory.
(iii) CAS-2 deals with Cost Accounting Standard on __________ determination.
(iv) __________is the summary of all functional budgets.
(v) Standard costing is one of the _________________ techniques.
Answer:
1. (a) (i) (C)

(ii) (B)
(iii) (B)
(iv) (C)
(v) (C)
(vi) (D)
(vii) (A)
(viii) (B)
(ix) (C)
(x) (C)
(b)
Column I Column II
(i) Notional cost F Imputed cost
(ii) Labour turnover A Replacement method
(iii) CAS-10 D Direct expenses
(iv) Contract costing G Escalation clause
(v) JIT C Production strategy
(c) (i) False

(ii) False
(iii) True
(iv) True
(v) True
(d) (i) Sunk

(ii) Fixed
(iii) Capacity
(iv) Master budget
(v) Cost Control
Section - B
Answer any five questions from question numbers 2 to 8.

Each question carries 15 marks.
15 × 5 = 75
2. (a) ZION LTD uses three types of materials A, B and C for production of Product-P for which
the following data apply:
Raw Usage per Reorder Price Delivery period Reorder Minimum
Material unit quantity per (in weeks) level level
of Product (kgs) Kg (kgs) (kgs)
(kgs) (Re.) Minimum Average Maximum
A 10 10000 0.10 1 2 3 8000 ?
B 4 5000 0.30 3 4 5 4750 1550
C 6 10000 0.15 2 3 4 ? 2000
Weekly production varies from 175 to 225 units, averaging 200 units of the said
product.
What would be the following quantities? 9

(i) Minimum stock of A,
(ii) Maximum stock of B,
(iii) Re-order level of C,
(iv) Average stock level of A.
(b) In a manufacturing unit of EXOTICA LTD overhead was recovered at a predetermined

rate of Rs. 30 per man-day. The total factory overhead incurred and the man-days
actually worked were Rs. 5,20,000 and 12,500 respectively.
Out of the 40000 units produced during a period, 30000 units were sold. There were
also 30000 uncompleted units which may be reckoned at 60% complete.
On analysing the reasons, it was found that 50% of the unabsorbed overheads were
due to defective planning and the rest were attributable to increased overhead costs.
How would unabsorbed overhead be treated in Cost Accounts? 6
Answer:
2. (a) (i) Minimum stock of A

Re-order level - (Average rate of consumption x Average time required to obtain
fresh delivery)
= 8,000kgs. - (200 x 10 x 2) kgs = 4,000 kgs.
(ii) Maximum stock of B

Re-order level - (Minimum consumption x Minimum delivery period) + Re-order
quantity
= 4,750kgs. - (175 x 4 x 3)kgs. + 5,000kgs.
= 9,750 - 2,100 = 7,650 kgs.
(iii) Re-order level of C

Maximum delivery period x Maximum usage
= 4 x 225 x 6 = 5,400 kgs.
OR
Re-order level of C
= Minimum stock of C + [Average rate of consumption x Average time required to
obtain fresh delivery]
= 2,000kgs. + [(200 x 6) x 3] kgs. = 5,600 kgs.
(iv) Average stock level of A

= Minimum stock level of A + ½ Re-order quantity of A
= 4,000kgs.+ ½ x 10,000kgs. = 4,000kgs. + 5,000kgs. = 9,000 kgs.
OR
Average Stock Level of A
Minimum Stock level of A + Maximum Stock Level of A
2 = (Refer to working note)
4, 000 + 16, 250
2 = 10,125 Kgs.
Working note:
Maximum stock level of A = ROL+ ROQ - (Minimum consumption x Minimum
re-order period)
= 8,000kgs. + 10,000kgs.- [(175 x 10) x 1] kgs.
= 16,250 kgs.
(b)
Amount (Rs.)
Overheads incurred 5,20,000
Less: Overheads absorbed (12,500 man-days * Rs.30) 3,75,000
Under absorption 1,45,000
The under absorption of Rs. 1,45,000 being considerable whether due to

defectiveplanning or due to increase in prices, would be disposed off by
applyingSupplementary Overhead Rate in the following manner:
Supplementary Overhead Rate = Rs. 1,45,000/[{30,000+10,000+(30,000*60%)}Units]

= Rs. 1,45,000/58,000 units = Rs. 2.50 per Unit
To be absorbed on cost of goods sold = 30,000 Units×Rs. 2.50 = Rs.75,000
To be absorbed on closing stock = 10,000 Units ×Rs. 2.50 = Rs. 25,000
To be absorbed on work-in-progress = 30,000Units ×Rs.2.50×60% =Rs. 45,000
ALTERNATIVE ANSWER 2(b):
Amount (Rs.)
Overheads incurred 5,20,000
Less: Overheads absorbed (12,500 man days × Rs.30) 3,75,000
Under absorption 1,45,000
Students may treat 50% of under-absorption (Rs. 72,500) due to defective Planning
as Abnormal Loss to be debited to Costing Profit & Loss Account and balance
Rs. 72,500 to be disposed off by applying Supplementary Overhead Rate in the following manner:
72,500
Supplementary Overhead Rate = Rs. [30,000
+10,000+(30,000 ×60%)]units
= Rs. 72,500 /58,000 units = Rs. 1.25 per unit.
To be absorbed on Cost of Goods Sold = 30,000 units × Rs.1.25 = Rs.37,500
To be absorbed on Closing Stock = 10,000 units × Rs. 1.25 = Rs 12,500
To be absorbed on Work-in-progress = 30,000 units × Rs.1.25× 60% = Rs. 22,500
3. (a) What are the objectives and scope of Cost Accounting Standard (CAS-4) (Revised 2018)
on "Cost of Production/Acquisition/Supply of Goods/Provision of Services"? 6
(b) Pass the Journal entries for the following transactions in a double entry cost accounting
system: 9
Particulars Amount (Rs.)

(i) Issue of material:
Direct 6,50,000
Indirect 2,50,000
(ii) Allocation of wages and salaries:
Direct 2,60,000
Indirect 40,000
(iii) Overheads absorbed in jobs:
Factory 1,50,000
Administration 30,000
Selling 50,000
(iv) Under/over absorbed overheads:
Factory (over) 25,000
Administration (under) 12,500
(Narration is not required)
Answer:
3. (a) CAS-4 (REVISED 2018) on "Cost of Production/Acquisition/Supply of Goods/Provision of

Services"
Objectives: The objective of this Standard is to bring uniformity and consistency in the
principles and methods of determining the cost of production or acquisition or supply
of Goods or provision of servicesas required under the provisions of GST Act/Rules.
The cost statements prepared based on this Standard will be used for determinationof
value of supply of Goods or services or both. This Standard and its
disclosurerequirement will provide transparency in the valuation of Goods and
services.
This Standard shall further ensure adequate accuracy in computing TransactionValue

of supply for Goods orservices or both, where the open market value of supply of
Goods and services or value of supply of Goods orservices of like kind and quality are
not available or same is not verifiable.
Scope: This Standard should be applied to cost statements which requireclassification,

measurement, assignment, presentation, and disclosure of related costs for
determination of the following under the relevant provisions of GST Act/Rules:
(i) Determination of cost of production of Goods;
(ii) Determination of cost of acquisition of Goods;
(iii) Determination of cost of supply of Goods;
(iv) Determination of cost of provision/supply of services; and
(v) Determination of value of supply of goods or services as per open market value
oras per Goods orservices of like kind and quality.
(b)
JournalDr.Cr.
S.No. Particulars Amount (Rs.) Amount (Rs.)
1 Work in Progress Control A/C Dr. 6,50,000

Factory Overheads Control A/C Dr. 2,50,000
To Material Control A/C 9,00,000
Factory Overheads Control A/C Dr. 40,000
To Wages Control A/C 3,00,000
Finished Goods Control A/C Dr. 30,000
Cost of Sales A/C Dr. 50,000
To Factory Overheads Control A/C 1,50,000
To Administrative Overhead Control A/C 30,000
To Selling Overhead Control A/C 50,000
4 Factory Overheads Control A/C Dr. 25,000
To Costing Profit & Loss A/C 25,000
5 Costing Profit & Loss A/C Dr. 12,500
To Administrative Overheads Control A/C 12,500
4. (a) SARATHI & CO is manufacturing building bricks and fire bricks. Both the products
require two processes: Brick forming and Heat treatment. The requirements for the two
bricks are:
Building Bricks Fire Bricks
Forming per 100 bricks 6 hours 4 hours
Heat treatment per 100 bricks 4 hours 10 hours
Total costs of the two departments in one month were:
Forming Rs. 42,400

Heat treatment Rs. 97,600
Production during the month was:
Building Bricks 130000 numbers
Fire Bricks 70000 numbers
Required:
Prepare statement of manufacturing cost for the two varieties of bricks. 7
(b) REACON LTD is engaged in process Engineering Industry. During a month 4000 units of
input were introduced in Process B at a cost of Rs. 20,000. The normal loss was
estimated at 10% of input. The process costs were direct materials Rs. 10,425, direct
wages Rs. 20,400 and factory overhead 50% of direct wages. At the end of the month
3200 units were produced and transferred to Process C, 500 units were scrapped and
realised @ Rs. 5 per unit. Scrapped units were 50% processed. 300 units
wereincomplete and the stage of completion was material 75%, wages and overhead
50%.
Required:
(i) Find out equivalent production, cost per completed unit, value of work-
in-progress and
(ii) Prepare Process B account. 8
Answer:
4. (a)
Statement showing number of hours
Particulars Building Bricks Fire Bricks Total
Forming:
1,30,000
( × 6) 7,800
100
70,000 2,800
( × 4) 10,600
100
Heat Treatment
1,30,000 5,200
( × 4)
100
70,000 7,000
( × 10) 12,200
100
Total 13,000 9,800 22,800
Rs .42,400
Cost of Forming per hour = = Rs.4
10,600
Rs .97,600
Cost of Heat Treatment per hour = = Rs.8
12,200
Statement showing manufacturing cost of two varieties of bricks:

Rs. Rs. Rs.
Forming:
(7,800 Hrs. × Rs. 4) 31,200
(2,800 Hrs. × Rs. 4) 11,200
42,400
Heat Treatment
(5,200 Hrs. × Rs. 8) 41,600
(7,000 Hrs. × Rs. 8) 56,000
97,600
Total 72,800 67,200 1,40,000
ALTERNATIVE PRESENTATION OF SECOND PART AS UNDER:

Where students consider Cost of Production per 100 Bricks:
Statement showing manufacturing cost of two varieties of bricks:

Rs. Rs. Rs.
Forming:
(6 Hrs. × Rs. 4) 24
(4 Hrs. × Rs. 4) 16
40
Heat Treatment
(4 Hrs. × Rs. 8) 32
(10 Hrs. × Rs. 8) 80
112
Total 56 96 152
(b) (i) Statement of Equivalent Production:

Input Particulars of output Units Equivalent Production
Material I Material II Labour&
(Input) (Added) Overhead
% Units % Units % Units
4,000 Fully completedand 3,200 100 3,200 100 3,200 100 3,200
transferred to process C
Normal Wastage 400 --- --- --- --- --- ---
Abnormal Wastage 100 100 100 50 50 50 50
_____ WIP at end 300 100 300 75 225 50 150
4,000 Total 4,000 3,600 3,475 3,400
Statement of Cost
Elements of Cost Amount Equivalent Unit Cost
(Rs.) Production (Nos.) (Rs.)
Material I (Input)(Rs. 20,000–Rs. 2,000) 18,000 3,600 5.00
Material II (Added) 10,425 3,475 3.00
Wages 20,400 3,400 6.00
Overheads 10,200 3,400 3.00
Total 59,025 - 17.00
Statement of Evaluation
Elements of Unit Cost Work in Progress Abnormal Loss
Cost (`) E.P. Cost (Rs.) E.P. Cost (Rs.)
Material I 5.00 300 1,500 100 500
Material II 3.00 225 675 50 150
Wages 6.00 150 900 50 300
Overheads 3.00 150 450 50 150
Total 17.00 3,525 1,100
(ii)
Dr. Process B Account Cr.
Particulars Units ` Particulars Units Rs.
To Input 4,000 20,000 By Normal Wastage 400 2,000
To Materials Added 10,425 By Abnormal Wastage 100 1,100
To Wages 20,400 By Work-in-Progress 300 3,525
To Overheads _____ 10,200 By Process C (3,200×Rs. 17) 3,200 54,400
4,000 61,025 4,000 61,025
5. (a) HOTEL IREVNA INN, has a capacity of 200 single rooms and 40 double rooms. The
average occupancy of both single and double rooms is expected to be 80%
throughout the year of 365 days. The rent for double room has been fixed at 125% of
the rent of a single room. The costs are as under:
Variable Costs : Single Rooms Rs. 110 each per day
Double Rooms Rs. 175 each per day
Fixed Costs: Single Rooms Rs. 60 each per day
Double Rooms Rs. 125 each per day
Required:
Calculate the rent chargeable for each single room and double room per day in such
a way that the hotel earns a margin of safety of 20% on rent of rooms. 7
(b) OMEGA LTD undertook a contract for the construction of a building at a contract price
of Rs. 45,00,000. During the first year, the following amounts were spent against which
a sum of Rs. 16,87,500 (representing 90% of the work certified) was received by the
contractor:
Rs.
Materials used 7,87,500
Wages paid to the workers 4,50,000
Overhead expenses 1,12,500
During the second year, the contractor spent the following amounts:
Rs.
Materials used 11,25,000
Wages paid to the workers 9,00,000
Overhead expenses 2,25,000
In the second year, the contract was completed and a sum of Rs.26,25,000 was
received by the contractor.
You are required to prepare the Contract Account and the Contractee Account for
both the years and determine the profits. 8
Answer:
5. (a)
Occupancy (Number of room days in a year):
Nature of Room Occupancy
Single Rooms 200 × 365 × 80% = 58,400 Room days
Double Rooms 40 × 365 × 80% = 11,680 Room days
Computation of Total Cost:
Variable Costs: Amount (Rs.) Amount (Rs.)
Single Rooms (58,400 Room days × Rs. 110) 64,24,000
Double Rooms (11,680 Room days × Rs. 175) 20,44,000 84,68,000

Fixed Costs:
Single Rooms (58,400 Room days × Rs. 60) 35,04,000
Double Rooms (11,680 Room days × Rs. 125) 14,60,000 49,64,000
Total Costs 1,34,32,000
Computation of Total Revenue:
Margin of safety 20%, Break Even Point 80%
Sales at BEP = Total Cost = Rs. 1,34,32,000
Total Revenue = Rs. 1,34,32,000 / 0.80 = Rs. 1,67,90,000
Computation of Notional Single Rooms Day:

Single Rooms (58,400 × 1) 58,400
Double Rooms (11,680 × 1.25) 14,600
Total: 73,000
Computation of Room Rent:
Rent per day per Single Room = Rs. 1,67,90,000 / 73,000 =Rs. 230
Rent per day per Double Room = Rs. 230 × 1.25 = Rs.287.50
(b): Contract Account

st
(At the end of 1 Year)
Particulars Rs. Particulars Rs.
To Materials Used 7,87,500 By Work-in-Progress
(16,87,500 / 0.90) 18,75,000
To Wages Paid 4,50,000
To Overhead Expenses 1,12,500
To Notional Profit c/d 5,25,000 -
18,75,000 18,75,000
To Profit & Loss A/c By Notional Profit b/d 5,25,000
1
(Rs. 5,25,000× × 90%) 1,57,500
3
To Work-in- Progress (Reserve) 3,67,500
5,25,000 5,25,000
Contractee Account
To Balance c/d 16,87,500 By Bank A/c 16,87,500
16,87,500 16,87,500
Contract Account
nd
(On completion of Contract in the 2 Year)

To Work-in-Progress By Contractee Account 45,00,000
(Rs. 18,75,000 – Rs. 15,07,500
3,67,500)
To Materials Used 11,25,000
To Wages Paid 9,00,000
To Overhead Expenses 2,25,000
To Profit & Loss A/c (Transfer) 7,42,500 -
45,00,000 45,00,000
Contractee Account
To Contract A/c 45,00,000 By Balance b/d 16,87,500
By Bank A/c 26,25,000
By Balance c/d 1,87,500
45,00,000 45,00,000
6. (a) PANCHAL LTD, a toy manufacturer earns an average net profit of Rs. 1.80 per piece on
a selling price of Rs. 16.50 by producing and selling 12000 pieces or 60% of the
capacity. His cost of sales per toy is as under:
Amount (Rs.)
Direct material 4.25
Direct wages 1.60
Works Overheads (40% fixed) 7.15
Sales Overheads (30% fixed) 0.90
During the current year, he intends to produce the same number of toys but
anticipates that fixed cost will go up by 10%. Direct wages and material will increase
by 6% and 4% respectively but he has no option of increasing the selling price. Under
this situation, he obtains an offer for further sale of 20% of the capacity.
Required:
What minimum price you will recommend for acceptance of the offer to ensure the
manufacturer an overall profit of Rs. 30,100? 8
(Show your calculations upto 3 decimal points.)
(b) The following data pertaining to sales and profit are extracted from the records of
READYAAH LTD. for two years:
Sales Profit
Year 2017 Rs. 12,00,000 Rs. 80,000
Year 2018 Rs.14,00,000 Rs. 1,30,000
Required:
Calculate the following:
(i) P/V Ratio
(ii) Break Even Point
(iii) Profit when sales are Rs. 18,00,000
(iv) Sales required to earn a profit of Rs. 1,20,000
(v) Margin of safety in the year 2018. 7
Answer:
6. (a)
Computation of Profit at present after increase in Cost
Particulars Amount (Rs.) Amount
(Rs.)
I. Selling Price 16.500
II Variable Cost:
Direct Material (4.25 × 104) / 100 4.420
Direct Wages (1.60 × 106) / 100 1.696
Works Overheads (60% of Rs. 7.15) 4.290
Sales Overheads (70% of Re. 0.90) 0.630
Other Variable Cost:
(S.P Rs. 16.50) – (Profit Rs. 1.80) - Cost of Sales
Rs.(DM 4.25 + DW 1.60 + WO 7.15 + SO 0.90) 0.800 11.836
III Contribution per Unit/ Piece (I – II) 4.664
IV Total Contribution (12,000 Units/Pieces × Rs. 4.664) 55,968
V Fixed Cost:
Works Overheads 2.860
Sales Overheads 0.270

3.130
(Rs. 3.13 × 12,000 Units = Rs. 37,560 × 110) / 100 41,316
VI Profit (IV – V) 14,652
Computation of Selling Price of the Offer:

Variable Cost of order (4,000 Units/Pieces × Rs. 11.836 47,344
Add: Required Profit (Rs. 30,100 – Rs. 14,652) 15,448
∴ Sales required (in Rs.) 62,792
∴ Selling Price per Unit/Piece of the order = Rs. 62,792 / 4,000 Units/ Pieces 15.698 say
Rs. 15.70
ALTERNATIVE ANSWER :6 (a)

Computation of Profit at present after increase in Cost
I Net Profit per Piece 1.80
II Total Pieces 12,000
III Total Net Profit (I × II) 21,600
IV Increased Direct Material Cost ( Rs.4.25 × 4%) × 12,000 2,040
V Increased Direct Wages Cost ( Rs.1.60 × 6%) × 12,000 1,152
VI Increased Works Overhead [{ ( Rs.7.15 × 40%) × 12,000} × 10%] 3,432
VII Increased Sales Overhead [{( Rs.0.90 × 30%) × 12,000} × 10%] 324
VIII Net Profit after increase in Cost {III – (IV +V v + VI + VII)} 14,652
IX Expected Net Profit 30,100
X Net Profit required to be earned (IX – VIII) 15,448
Computation of Selling Price of the Offer:

Particulars Amount (Rs.) Amount (Rs.)
I Variable Cost:
Material (4.25 × 104) / 100 4.420
Wages (1.60 × 106) / 100 1.696
Works Overheads (60% of Rs. 7.15) 4.290
Sales Overheads (70% of Re. 0.90) 0.630
Other Variable Cost 0.800 11.836
II Profit Per Piece (Rs. 15,448 / 4,000 Pieces) 3.862
III Selling Price per Piece of the order ( I + II) 15.698
Say Rs. 15.70
(b):
Sales (Rs.) Profit (Rs.)

Year 2017 12,00,000 80,000
Year 2018 14,00,000 1,30,000
Difference 2,00,000 50,000
(i) P/V Ratio = (Difference in Profit / Difference in Sales) × 100

∴ P/V Ratio = (Rs. 50,000/ 2,00,000)× 100 = 25%
Contribution in 2017 (Rs. 12,00,000× 25% Rs. 3,00,000

Less: Profit Rs. 80,000
= Fixed Cost Rs. 2,20,000
ALTERNATIVELY
Contributioin in 2018 (Rs. 14,00,000× 25%) Rs. 3,50,000
Less: Profit Rs. 1,30,000
= Fixed Cost Rs. 2,20,000
s
(ii) Break Even Point = Fixed Cost / PV Ratio = Rs. 2,20,000 /25% = Rs. 8,80,000
(iii) Profit when sales are Rs. 18,00,000

Contribution (Rs. 18,00,000× 25% Rs. 4,50,000
Less: Fixed Cost Rs. 2,20,000
Profit Rs. 2,30,000
(iv) Sales to earn a profit of Rs. 1,20,000

= (Fixed Cost + desired Profit) / PV Ratio
= (Rs. 2,20,000 + Rs. 1,20,000) / 25% Rs. 13,60,000
(v) Margin of Safety in 2018

=Actual Sales – Break Even Point
= Rs. 14,00,000 – Rs. 8,80,000 Rs. 5,20,000
7. (a) SUNRISE LTD, a manufacturing Company using Standard costing furnishes thefollowing
information:
The standard mix to produce one unit of product A is as under:
Material P 2 kg @ Rs. 20 per kg
Material Q 3 kg @ Rs. 25 per kg
Material R 4 kg @ Rs.15 per kg
During the month of March 2019, 20 units of product A were actually produced and
consumption of material was as under:
Material P 35 kg @ Rs.22 per kg
Material Q 60 kg @ Rs. 24 per kg
Material R 90 kg @ Rs.16 per kg
Required:
Calculate the following Material Variances: 8
(i) Material Cost Variance
(ii) Material Price Variance
(iii) Material Quantity Variance
(iv) Material Mix Variance
(v) Material Yield Variance
(Calculate upto 2 decimal points.)
(b) The monthly (September 2019) budgets for Production overhead Costs of TANISHA LTD
for two levels of Activity were as follows:
Particulars Capacity Level
60% 100%
Budgeted Production (Units) 15000 25000
Rs. Rs.
Wages 60,000 1,00,000
Consumable Stores 45,000 75,000
Maintenance 55,000 75,000

Power and Fuel 80,000 1,00,000
Depreciation 2,00,000 2,00,000
Insurance 50,000 50,000
4,90,000 6,00,000
Required:
(i) Prepare Production overhead Costs Budget of 80% and 90% Capacity level for
September, 2019 and
(ii) Compute the total Cost, both fixed and variable overheads per unit of output at
80% and 90% Capacity level. 7
Answer:
7 (a):
Statement showing Standard and Actual Material Cost:
Standard for 20 Units Actual for 20 Units

Material Qty. (Units) Rate (Rs.) Amount (Rs.) Qty. (Units) Rate (Rs.) Amount (Rs.)
P 40 20 800 35 22 770
Q 60 25 1,500 60 24 1,440
R 80 15 1,200 90 16 1,440
Total 180 3,500 185 3,650

= Standard Cost (SC) – Actual Cost (AC)
= Rs. 3,500 – Rs. 3,650 = Rs. 150 (A)

= Actual Quantity [Standard Price (SP) – Actual Price (AP)]
Material P = 35 (Rs.20 – Rs. 22) = Rs. 70 (A)
Material Q = 60 (Rs. 25 – Rs.24) = Rs. 60 (F)
Material R = 90 ( Rs.15 – Rs.16) =Rs. 90 (A)
= Rs. 100 (A)
(iii) Material Quantity (Usage) Variance
= SP (SQ – AQ) where Q = Quantity
Material P = 20 (Rs.40 – Rs. 35) = Rs. 100 (F)
Material Q = 25 (Rs. 60 – Rs.60) = Nil
Material R = 15 ( Rs.80 – Rs.90) =Rs. 150 (A)
= Rs. 50 (A) 1
= SP (Revised SQ- AQ)
Material P = 20 (kgs.41.11 – Rs. 35) = Rs. 122.20 (F)
Material Q = 25 (kgs. 61.67 – Rs.60) = Rs. 41.75 (F)
Material R = 15 (kgs.82.22 – Rs.90) =Rs. 116.70 (A)
= Rs. 47.25 (F) 1
Note: Revised Standard Quantity (RSQ) is calculated as follows:

Material P = (185/180) ×40 = 41.11 kgs.
Material Q = (185/180) ×60 = 61.67 kgs.
Material R = (185/180) × 80 = 82.22 kgs.
(v) Material Yield Variance

= Standard Cost (Yield Price)per Unit (Actual Yield – Standard Yield)
= Rs. 175 (20 Units– 20.56 Units) = Rs.98 (A)
Note:
(a) Standard Material Cost (Yield Price) per Unit of output
= Rs. 3,500 /20 = Rs. 175
(b) Standard Yield = Actual Usage of Material / Standard Usage per Unit of output
= 185 /9 = 20.56 Units
(b):
Production Overhead Costs Budget:

(For September 2019)
Capacity level
Particulars 80% 90%
Production (Units) ’ 20,000 22,500
Rs. Per Unit Rs. Rs. Per Unit Rs.
Variable Overhead Costs: [A]
Wages @ Rs. 4 80,000 90,000
Consumable Stores @ Rs. 3 60,000 67,500
Maintenance @ Rs. 2 40,000 45,000
Power and Fuel @ Rs. 2 40,000 45,000
Total [A] 2,20,000 11.00 2,47,500 11.00
Fixed Overhead Costs: [B]
Maintenance 25,000 25,000
Power and Fuel 50,000 50,000
Depreciation 2,00,000 2,00,000
Insurance 50,000 50,000
Total [B] 3,25,000 16.25 3,25,000 14.44
Grand Total [A + B] 5,45,000 27.25 5,72,500 25.44
Working Notes:
(i) Maintenance Costs:
Variable = (Rs. 75,000 – Rs. 55,000) / (25,000 Units – 15,000 Units) = Rs. 2
Fixed = (Rs. 55,000) – ( 15,000 Units × Rs. 2) = Rs.25,000
(ii) Power and Fuel:
Variable = (Rs. 1,00,000 – Rs. 80,000) / (25,000 Units – 15,000 Units) = Rs.2
Fixed = (Rs. 80,000) – (15,000 Units × Rs. 2) = Rs. 50,000
8. Answer any three out of the following four questions: 5×3=15
(a) Explain the concept of Opportunity Cost and Imputed Cost with suitable examples.
(b) State the limitations of Cost Accounting System.
(c) Describe the main objectives of Material Control System.
(d) Write a brief note on Principal Budget Factor.
Answer:
8. (a) Opportunity Cost :

Opportunity cost is the value of alternatives foregone by adopting a particularstrategy
or employingresources in specific manner. It is the return expected from an investment
other than the present one. These refer tocosts which result from the use or application
of material, labour or other facilities in a particular manner which hasbeen foregone
due to not using the facilities in the manner originally planned.Resources (or input) like
men,materials, plant and machinery, finance etc., when utilized in one particular way,
yield a particular return (or output).If the same input is utilized in another way, yielding
the same or a different return, the original return ontheforsaken alternative that is no
longer obtainable is the opportunity cost. Forexample, if fixed deposits in the bankare
proposed to be withdrawn for financing project, the opportunity cost would be the
loss of interest on thedeposits. Similarly, when a building leased out on rent to a party is
got vacated for own purpose or avacant space isnot leased out but used internally,
say, for expansion of theproduction programme, the rent so foregone is
theopportunity cost.
Imputed Cost:
Imputed cost is hypothetical or notional cost, not involving cash outlay and
computedonly for the purpose ofdecision-making. In this respect, imputed cost is
similar to opportunity cost. Interest on funds generated internally,payment for which is
not actually made is an example of imputed cost. When alternative capital
investment projectsare being considered out of which one or more are to be
financed from internal funds, it is necessary to take intoaccount the imputed interest
on own funds before a decision is arrived at.
(b) Limitations of Cost Accounting System:
(i) Like any other system of accounting, Cost Accountancy is not an exact
science but an art which has been developed through theories and
accounting practices based on reasoning and commonsense. Many of the
theories cannot be proved nor can they be disproved. They grownup in
course of time to become conventions and accepted principles of Cost
Accounting.
(ii) These principles are by no means static, they are changing from day to day
and what is correct today may not hold true in the circumstances tomorrow.
(iii) In cost accounting, no cost can be said to be exact as they incorporate a
large number of conventions, estimations and flexible factors such as :-
(iiia) Classification of costs into its elements.
(iiib) Materials issue pricing based on average or standard costs.
(iiic) Apportionment of overhead expenses and their allocation to cost units/centres.
(iiid) Arbitrary allocation of joint costs.
(iiie)Division of overheads into fixed and variable.
(iv) Cost Accounting lacks the uniform procedures and formats in preparing the
cost information of a product/ service.
(v) Keeping in view above limitations, all Cost Accounting results can be taken as
mere estimates.
s
(c) Objectives of Material Control System:
(i) To make continuous availability of materials so that there may be uninterrupted
flow of materials for production. Production may not be held up for want of
materials.
(ii) To purchase requisite quantity of materials to avoid locking up of working capital
and to minimise risk of surplus and obsolete stores.
(iii) To make purchase competitively and wisely at the most economical prices so that
there may be reduction in cost of materials.
(iv) To purchase proper quantity of materials to have minimum possible wastage of
materials.
(v) To serve as an information centre on the knowledge in respect of materials for
prices, sources of supply, lead time, quality and specification.
(d) Principal Budget Factor:
Budgets cover all the functional areas of the organisation. For the
effectiveimplementation of the budgetary system, all the functional areas are to
beconsidered which are interlinked. Because of these interlinks, certain factors have
the ability to affect all other budgets. Such factor is known as principal budget factor.
Principal Budget Factor is the factor the extent of influence of which must first be
assessed in order to ensurethat the functional budgets are reasonably capable of
fulfillment. A principal budget factor may be lack ofdemand, scarcity of raw material,
non-availability of skilled labour, inadequate working capital etc. If forexample, the
organisation has the capacity to produce 2,000 units per annum; but the
productiondepartment isable to produce only 1,600 units due to non-availability of
rawmaterials. In this case, non-availability of rawmaterials is the principal budget
factor (limiting factor). If the sales manager estimates that he can sell only1,400 units
due to lack of demand, then lack of demand is the principal budget factor. This
concept isalsoknown as key factor or governing factor. This factor highlights the
constraints within which the organization functions.
Suggested Answer_Syl16_June2019_Paper 8
GROUP - I
(SYLLABUS 2016)

JUNE - 2019
Paper - 8 : COST ACCOUNTING
Section - A
Roman numeral and the alphabet chosen for your answer): 1×10=10
(i) The main purpose of Cost Accounting is

(A) to maximise profit.
(B) to help in inventory valuation.
(C) to help in the fixation of selling price.
(D) to provide information to management for decision making.
(ii) Which of the following is considered to be a normal loss of material?

(A) Loss due to accident
(B) Pilferage
(C) Loss due to breaking the bulk
(D) Loss due to careless handling of material
(iii) In Reconciliation Statement expenses shown only in financial accounts are

(A) added to financial profit.
(B) added to costing profit.
(C) ignored.
(D) deducted from financial profit.
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
(iv) Which of the following is a service department?
(A) Refining department
(B) Machining department
(C) Receiving department
(D) Finishing department
(v) Which of the following items is not included in preparation of cost sheet?
(A) Purchase returns
(B) Carriage inwards
(C) Sales commission
(D) Interest paid
(vi) In job costing to record the issue of direct materials to a job which of the following
document is used?
(A) Purchase order
(B) Goods receipt note
(C) Material requisition
(D) Purchase requisition
(vii) In a process 4000 units are introduced during a period. 5% of input is normal loss.
Closing work-in-progress 60% complete is 500 units. 3300 completed units are
transferred to next process. Equivalent production for the period is
(A) 3550 units
(B) 3600 units
(C) 3800 units
(D) 3950 units
(viii)Product A generates a contribution to sales ratio of 40%. Fixed cost directly

attributable to A amount Rs. 60,000. The sales revenue required to achieve a profit
of Rs.15,000 is
(A) Rs 2,00,000
(B) Rs 1,85,000
(C) Rs 1,87,500
(D) Rs 2,10,000
(ix) During a period 13600 labour hours were worked at a standard rate of Rs. 8 per
hour. The direct labour efficiency variance was Rs. 8,800 (Adv). How many
standard hours were produced?
(A) 12000 hours
(B) 12500 hours
(C) 13000 hours
(D) 13500 hours
(x) Cash Budget of ABC Ltd. forewarns of a short-term surplus. Which of the following
would be appropriate action to be taken in such a situation?
(A) Purchase new fixed assets
(B) Repay long-term loans
(C) Write off preliminary expenses
(D) Pay creditors early to obtain a cash discount
(b) Match the statement in Column I with the most appropriate statement in Column II
(You may opt to write only the Roman numeral and the matched alphabet instead of
copying contents into the answer books): 1x5=5
Column I Column II
(i) Pharma Industry A Opportunity Cost
(ii) Management by exception B Direct Allocation
(iii) Assessment of employee with respect to a job C Joint Cost
(iv) Royalties D Batch Costing
(v) CAS-19 E Merit Rating
F Variance Analysis
G Job Evaluation
H Notional Cost
(c) State whether the following statements are 'True' or 'False': (You may write only the
Roman numeral and whether 'True' or 'False' without copying the statements into the
answer books): 1x5=5
(i) Bin card is maintained by the costing department.

(ii) CAS-8 deal with the principles and methods of determining the direct expenses.
(iii) FIFO method is followed for evaluation of equivalent production when prices are
fluctuating.
(iv) Profit Volume ratio remains constant at all levels of activity.
(v) The principal factor is the starting point for the preparation of various budgets.
blanks) 1x5=5
(i) Differential cost is the change in the cost due to change in _________________ from
one level to another.
(ii) CAS _______________________ stands for cost of service cost centre.
(iii) In contract costing, the cost unit is ________________.
(iv) Marginal cost is the ___________ of sales over contribution.
(v) When actual cost is less than the standard cost, it is known as __________ variance.
Answer:
1. (a) (i) (D)

(ii) (B)
(iii) (A)
(iv) (C)
(v) (D)
(vi) (C)
(vii) (B)
(viii) (C)
(ix) (B)
(x) (D)
(b)
Column I Column II
(i) Pharma Industry D Batch Costing
(ii) Management by exception F Variance Analysis
(iii) Assessment of employee with respect to a job E Merit Rating
(iv) Royalties B Direct Allocation
(v) CAS-19 C Joint Cost
(c) (i) False

(ii) False
(iii) False
(iv) True
(v) True
(d) (i) Activity

(ii) CAS - 13
(iii) Per Contract
(iv) Excess
(v) Favourable
Section - B
15 × 5 = 75
2. (a) ZINTES LTD. a manufacturing company has its factories at two locations.
Rowan plan is in use at location A and Halsey plan at location B. Standard time
and basic rate of wages are same for a job which is similar and is carried out on
similar machinery. Time allowed is 60 hours.
Job at location A is completed in 36 hours while at B, it has taken 48 hours.

Conversion costs at respective places are Rs.1224 and Rs.1500. Overheads amount
to Rs.20 per hour.
Required:
(i) Find out the normal wage rate, and
(ii) Compare conversion costs. 7
(b) ALPHA LTD. has three Production Departments and two Service Departments.
The overhead distribution sheet of the company showed the following totals:
Production Department: Amount (Rs.)

P 75,500
Q 72,000
R 96,500
Service Department:
X 46,250
Y 15,750
Other information is as follows:
(a) Working hours of production departments are P-6226 hours, Q-4028 hours and R-
4066 hours.
(b) Services rendered by service departments are as under:
P Q R X Y
Department X 20% 30% 40% — 10%
Department Y 40% 20% 30% 10% —
Required:
(i) Calculate the total overhead of production departments distributing the cost
of service departments by Simultaneous Equation Method.
(ii) Calculate the overhead rate per hour of production departments. 8
Answer:
2(a):
Let Rs. X per hour be the normal wage rate. Wage rate at location A will
be Rs. 36x and at location B - it will be Rs. 48x, on the basis of actual time
taken, as against 60 hours permitted. For time saved, bonus will be payable
as under:
1
Location A:

Bonus under Rowan system =
× Hrs. worked × Rate per hour

= × Rs. 36 × x = Rs. 14.4x

Total wages =Rs. 36x + Rs.14.4x = 50.4x
Overheads @Rs. 20 per hour worked = 36 hrs. × Rs. 20 = Rs. 720
Therefore, total conversion cost is (50.4x+ Rs. 720) = Rs. 1,224 or 50.4x =Rs. 504
Or x = Rs.504/50.4 = Rs. 10
So, Bonus = 14.4x =14.4 × Rs. 10 = Rs. 144
Location B:
Bonus under Halsey plan = 50% of time saved × rate per hour
= 50% of Rs. 12x = Rs.6x
Total wages = Rs. 48x + Rs. 6x = Rs. 54x
Overheads @ Rs. 20 per hour = 48 hrs. × Rs. 20 = Rs. 960
Total conversion cost is (54x + Rs. 960) = Rs.1,500 or 54x = Rs. 540
Hence, x= Rs. 540/54 = Rs. 10
Bonus= 6x = 6 × Rs.10 =Rs. 60
(i) Comparative conversion cost:

Location→ A (Rowan) B (Halsey)
Amount→ Rs. Rs.
Wages @ Rs.10 per hour worked 360 480
Bonus 144 60
Overheads 720 960
Total 1,224 1,500
(b):
(i) Simultaneous Equation Method:
Let Total Cost of Service Department X be Rs. “x” and
Let Total Cost of Service Department Y be Rs “y”
X = Rs. 46,250 + 10% Y
Y = Rs. 15,750 + 10%x
By multiplying both Equations by 100, we get
100x = Rs. 46,25,000 + 10y or 100x- 10y = Rs. 46,25,000 (1)
100y = Rs. 15,75,000 + 10x or -10x +100y =Rs. 15,75,000 (2)
By Multiplying Equation (2) by 10, we get
Equation (1) 100x – 10y = Rs. 46,25,000
Equation (2) -100x +1,000y = Rs. 1,57,50,000
By adding we get 990y =Rs. 2,03,75,000 ∴ y = Rs. 20,581
Substituting the value of “y” in Equation (1), we get
100x – (10 × Rs. 20,581) = Rs. 46,25,000 or
100x = Rs. 46,25,000 + Rs.2,05,810 or 100x = Rs. 48,30,810
∴ x= Rs. 48,308
Calculation of Total Overheads of Production Departments:
Particulars P Q R X Y
Overheads (Rs.) 75,500 72,000 96,500 46,250 15,750
Costs of X (Rs. 48,308) 9,662 14,492 19,323 (48,308) 4,831
[2:3:4:1]
Costs of Y (Rs. 20,581)[4:2:3:1] 8,233 4,116 6,174 2,058 (20,581)
Total 93,395 90,608 1,21,997 - -
(ii) Calculation of Overhead Rate per Hour:

P Q R
(aa) Total Overheads (Rs.) 93,395 90,608 1,21,997
(bb) Working Hours 6,226 4,028 4,066
(cc) Overhead Rate per Hour [(aa)/(bb)] (in 15.00 22.49 30.00
Rs.)
3. (a) What is the Employee Cost as defined in CAS-7 (Limited Revision 2017)? Also discuss
the general principles of its measurement as per CAS-7. (any five only) 6
(b) The following information has been extracted from the financial books of ABC Ltd. for
the year ended 31st March, 2019:
Direct materials consumption 10,00,000
Direct wages 6,00,000
Factory Overhead 3,20,000
Administrative Overhead 1,40,000
Selling and Distribution Overhead 1,92,000
Bad debts 16,000
Preliminary expenses written-off 8,000
Legal expenses 2,000
Dividend received 20,000
Interest on deposits received 4,000
Sales(24000 units) 24,00,000
Closing stock of finished goods (800 units) 64,000
Closing stock of work-in-progress 48,000
The cost accounts for the same period reveal that the direct materials consumption
was Rs. 11,20,000. Factory overheads recovered at 20% of prime cost; Administration
overheads recovered @ Rs. 6 per unit of production; and selling and distribution
overheads recovered at Rs. 8 per unit sold.
Required:
(i) Find out the profit as per financial books.
(ii) Prepare the cost sheet and ascertain the profit per cost accounts.
(iii) Prepare a statement reconciling profit shown by financial and cost accounts. 9
Answer:
3. (a) Employee Cost - CAS-7 [Limited Revision 2017):
As per CAS-7 [Limited Revision 2017] Employee Cost is the benefits paid or payable in
all forms of consideration given for the service rendered by employee (including
temporary, part time and contract employee/s) of an entity.
General Principles of Measurement:

The guidelines for ascertaining the Labour Cost/Employee Cost are as follows:
(i) Employee Cost shall be ascertained taking into account the gross pay including
all allowances payable along with the cost to the employer of all the benefits.
(ii) Bonus whether payable as a statutory minimum or on a sharing of surplus shall
be treated as part of Employee Cost. Ex-gratia payable in lieu of or in addition
to bonus shall also be treated as part of the Employee Cost.
(iii) Remuneration payable to managerial personnel including executive directors
on board and other officers of a corporate body under a statute will be
considered as part of the Employee Cost of the year under reference, whether
the whole or part of the remuneration is considered as a percentage of profits.
(iv) Separation costs related to voluntary retirement, retrenchment, termination etc.
shall be amortized over the period of benefitting from such costs.
(v) Employee Cost shall not be included any imputed costs.
(vi) Any subsidy, grant, incentive or any such amount received or receivable with
respect to any Employee Cost shall be reduced from ascertainment of cost of
the project to which such amounts are related.
(vii) Any abnormal cost where it is material and quantifiable shall not form part of
the Employee Cost.
(viii) Penalties, damages paid to statutory authorities or other third parties shall not
form part of the Employee Cost.
(ix) The cost of free housing, free conveyance and any other similar benefits
provided to an employee shall be determined at the total cost of all resources
consumed in providing such benefits.
(x) Any recovery from employees towards the facilities provided shall be reduced
from the Employee Cost.
(xi) Cost of idle time is ascertained by the idle hours multiplied by the hourly rate
applicable to idle employee or a group of employees.
(xii) Where Employee Cost is accounted at standard cost, variances due to normal
reasons related to employee cost shall be treated as part of Employee Cost.
Variances due to abnormal reasons shall be treated as part of abnormal cost.
(xiii) Any change in the cost accounting principles applied for the determination of
the Employee Cost should be made only if it is required by law or for
compliance with Cost Accounting Standard or change would result in a more
appropriate way of presentation of Cost Statement.
(b) (i)
Financial trading and Profit & Loss Account
for the Year ended 31st Mach, 2019
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Direct Materials 10,00,000 By Sales 24,00,000
To Direct Wages 6,00,000 By Dividend received 20,000
To Factory Overheads 3,20,000 By Interest received 4,000
To Administration Overheads 1,40,000 By Closing Stock:
To Selling & Distribution 1,92,000 Finished Goods 64,000
Overheads
To Bad Debts 16,000
To Preliminary Expenses 8,000 Work-in-process 48,000
To Legal Expenses 2,000
To Net Profit 2,58,000
25,36,000 25,36,000
(ii)
Cost Sheet

Direct Materials 11,20,000
Direct Wages 6,00,000
Prime Cost 17,20,000
Factory Overheads (20% of Prime Cost) 3,44,000
20,64,000
Less: Closing Stock of WIP 48,000
Factory Cost 20,16,000
Administration Overheads (24,800 ×Rs. 6) 1,48,800
Cost of Production 21,64,800
Less: Closing stock of Finished Goods {(21,64,800 × 800)/24800} 69,832
Cost of Goods Sold 20,94,968
Selling & Distribution Overheads (24,000 ×Rs. 8) 1,92,000
Cost of Sales (Total Cost) 22,86,968
Sales 24,00,000
Profit (Sales – Total Cost) 1,13,032
(iii)
Reconciliation Statement
Particulars Amount Amount

(Rs.) (Rs.)
Profit as per Cost Accounts 1,13,032
Add:
Over recovery of Direct Materials 1,20,000
Over recovery of Factory Overheads 24,000
Over recovery of Administration Overheads 8,800
Financial incomes not considered in Cost Accounts :
Dividend received 20,000
Interest on deposits received 4,000 24,000
2,89,832
Less:
Over valuation of Closing Stock of Finished Goods in 5,832
Cost Accounts
Pure Financial Expenses not considered in Cost
Accounts :
Bad debts 16,000
Preliminary Expenses 8,000
Legal Expenses 2,000 26,000
Profit as per Financial Accounts 2,58,000
4. (a) VIPUL LTD. submits the following information on 31st March, 2019:
Sales for the year 55,00,000
Purchases of material for the year 22,00,000
Direct labour 13,00,000
Inventories at the beginning of the year—
Finished goods 1,40,000
Work-in-progress 80,000
Materials inventory—
At the beginning of the year 60,000
At the end of the year 80,000
Inventories at the end of the year—
Work-in-progress 1,20,000
Finished goods 1,60,000
Factory overheads were 60% of the direct labour cost.

Administration expenses were 5% of sales.
Selling & distribution expenses were 10% of sales.
You are required to prepare a Cost Sheet with all elements 8
(b) WEST LAND LTD. in the course of refining crude oil obtains four joint products P, Q, R
and S. The total cost till the split-off point was Rs. 9,76,640. The output and sales in the
year 2018 were as follows:
Product Output Sales Separate Costs
(Gallon) Amount (Rs.) Amount (Rs.)
P 50,000 12,50,000 2,60,000
Q 10,000 30,000 20,000
R 5,000 50,000 —
S 8,000 80,000 10,000
Required:
(i) Calculate the net income for each of the products if the joint costs are apportioned
on the basis of Net realisable values (NRV) of the different products.
(ii) Calculate the net income of each of the products if the company decides
to sell the products at the split-off point itself as – P @ Rs. 18, Q @ Rs. 1.50,
R @ Rs. 10 and S @ Rs. 7.80 per gallon. 7
Answer:
4. (a)
Cost Sheet on 31st March, 2019
Particulars Amount
(Rs.)
Materials consumed:
Opening Stock + Purchase – Closing Stock
Rs.( 60,000 + 22,00,000 – 80,000) 21,80,000
Direct Labour 13,00,000
Factory Overheads (60% of Direct Labour Cost) 7,80,000
42,60,000
Add: Opening Work-in-progress 80,000
Less: Closing Work-in-progress 1,20,000
Administration Expenses (5% of Sales) 2,75,000
Add: Opening Stock of Finished Goods 1,40,000
Less: Closing Stock of Finished Goods 1,60,000
Selling & Distribution Expenses (10% of Sales) 5,50,000
Cost of Sales 50,25,000
Sales 55,00,000
Profit (Sales-Cost of Sales) 4,75,000
(b) (i) Statement showing Profit after Further Processing:

Amount (Rs.)
Particulars P Q R S Total
(a)Sales after further processing 12,50,000 30,000 50,000 80,000 14,10,000
(b)Separate Costs 2,60,000 20,000 --- 10,000 2,90,000
(c)Sales after split off (a-b) 9,90,000 10,000 50,000 70,000 11,20,000
(d)Joint Costs (on the basis of 8,63,280 8,720 43,600 61,040 9,76,640
NRV)
(e)Profit (c-d) 1,26,720 1,280 6,400 8,960 1,43,360
(ii) Statement showing Profit at Split off Point:

Amount (Rs.)
Particulars P Q R S Total
(a) Sales at Split off in Units 50,000 10,000 5,000 8,000
(b) Sale Price in Rs. 18 1.50 10 7.80
(c) Sales at Split off in Rs. 9,00,000 15,000 50,000 62,400 10,27,400
(d) Joint costs 8,63,280 8,720 43,600 61,040 9,76,640
(e) Profit (c - d) 36,720 6,280 6,400 1,360 50,760
5. (a) CARLHAMS LTD. runs a lodging home in a hill station. For this purpose, it has hired a
building at a rent of Rs. 1,20,000 per month along with 5% of total takings. The lodging
home has three types of suites for its customers, viz., single room, double rooms and
triple rooms.
Following information is given:
Type of Suite Number Occupancy%
Single Room 100 80%
Double Rooms 40 60%
Triple Rooms 20 50%
The rent of double rooms suite is to be fixed at 1.5 times of the single room suite and
that of triple rooms suite as twice of the double rooms suite.
The expenses for the year 2018 are as follows:
Staff salaries 32,50,000
Room attendants' wages 12,00,000
Lighting, heating and power 9,75,000
Repairs & renovation 4,80,000
Laundry charges 1,65,000
Interior decoration 1,80,000
Sundry expenses 1,94,000
Provide profit @ 20% on total takings and assume 360 days in a year.
You are required to work out the room rent chargeable per day for each type of suite.
8
(b) NIRVANA LTD. undertook a contract for Rs. 50,00,000 on 1st April, 2018. On 31st March,
2019 when the accounts of the company were closed, the following details about the
contract were gathered:
Materials purchased 10,00,000
Wages paid 4,50,000
General expenses 1,00,000
Plant purchased 5,00,000
Materials on hand on 31.03.2019 2,50,000
Wages accrued on 31.03.2019 50,000
Work certified 20,00,000
Cash received 15,00,000
Work uncertified 1,50,000
Depreciation of plant 50,000
The above contract contained an escalation clause which read as follows:

"In the event of prices of materials and rates of wages increase by more than 5%, the
contract price would be increased accordingly by 25% of the rise in the cost of
materials and wages beyond 5% in each case."
It was found that since the date of signing the agreement, the price of materials and
wage rates increased by 25%. The value of work certified does not take into account
the effect of the above clause.
Required:
Prepare Contract Account of the company as on 31st March, 2019. 7
Answer:
5.(a) Computation of Total Equivalent Single Room Suites

Nature of Occupancy Total Equivalent Single Room Suites
Suites Calculation Occupancy
Occupancy Equivalent
Rate Number
A B C B×C=D
Single Rooms 100 × 360 × 80% 28,800 1 28,800
Double 40 × 360 × 60% 8,640 1.5 12,960
Rooms
Triple Rooms 20 × 360 × 50% 3,600 3 10,800
Total 52,560
Statement of Total Cost

Staff salaries 32,50,000
Room attendants’ wages 12,00,000
Lighting, Heating and Power 9,75,000
Repairs and Renovation 4,80,000
Laundry charges 1,65,000
Interior decoration 1,80,000
Sundry Expenses 1,94,000
Sub-total 64,44,000
Add: Building rent (1,20,000 ×12 Months ×5% of 14,40,000 + 5% of total takings
total takings)
Total Cost 78,84,000 + 5% of total takings
Profit is 20% of total takings.
Therefore, Total takings = Rs. 78,84,000 + 25% of Total Takings

Now, let 'x' be the rent for single room suite,
Then, 52,560x = Rs. 78,84,000 + 25% of 52,560x

52,560x = Rs. 78,84,000 + 13,140x or 39,420x = Rs. 78,84,000
∴ x = Rs. 78,84,000/39,420 = Rs. 200
Therefore,
Rent chargeable for Single Room Suite = Rs. 200× 1 = Rs. 200
Rent chargeable for Double Room Suite = Rs. 200 × 1.5 = Rs. 300
Rent chargeable for Triple Room Suite = Rs. 200 × 3 = Rs. 600
(b)
Contract Account of Nirvana Ltd
(for the Year ending on 31st March, 2019)
Dr Cr
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Materials 10,00,000 By Materials on
hand 2,50,000
To Wages paid 4,50,000 By Work-in-progress
Add: Accrued 50,000 5,00,000 Work certified 20,00,000
Work uncertified 1,50,000 21,50,000
To General expenses 1,00,000 By Contract
escalation (W. N. 1) 50,000
To Depreciation on 50,000
Plant
To Notional Profit c/d 8,00,000
24,50,000 24,50,000
To P & L A/c [W. N. 2] 1,95,122 By Notional Profit 8,00,000
b/d
To Reserve A/c 6,04,878 -
8,00,000 8,00,000
Working Notes:
(i) Calculation of Escalation Amount:
Cost of Materials and Wages incurred = Rs. 10,00,000 + 4,50,000 + 50,000 – 2,50,000
= Rs. 12,50,000
Cost of Materials and Wages before increase in prices = (Rs. 12,50,000× 100)/125
= Rs.10,00,000
Therefore, increase in Contract Price = (25/100 )[`Rs.12,50,000 – {(10,00,000 ×
105)/100}]
= Rs. 50,000
(ii) Profit to be credited to P&L A/c:

Profit = Notional Profit ×{(1/3) ×(cash received/work certified)}
The contract escalation is added to work certified:
Profit = Rs. 8,00,000 ×{(1/3) ×(15,00,000/20,50,000)} = Rs. 1,95,122
6. (a) MODERN LTD. has three departments X, Y and Z, each of which makes a different
product. The budgeted data for the coming year are as follows:
Amount (Rs.)
Particulars X Y z
Sales 22,40,000 11,20,000 16,80,000
Direct materials 2,80,000 1,40,000 2,80,000
Direct labour 1,12,000 1,40,000 4,48,000
Direct expenses 2,80,000 1,40,000 5,60,000
Fixed cost 5,60,000 2,80,000 5,60,000
The management of the company is considering to close down department 'Z'. There
is a possibility of reducing fixed cost by Rs. 1,50,000 if department 'Z' is closed down.
Advise the management whether or not department 'Z' should be closed down. 8
(b) SRIJAN LTD. had incurred fixed expenses of Rs. 9,00,000 with sales of Rs. 20,00,000 and
earned a profit of Rs. 3,00,000 during the first half-year. In the second-half, it suffered
a loss of Rs. 1,50,000.
Required:
(i) The P/V Ratio, Break Even Point and Margin of Safety for the first half-year.
(ii) The expected sales amount for the second half-year assuming that the selling
price and fixed expenses remained unchanged during the second half-year.
(iii) The Break Even point and Margin of Safety for the whole year. 7
Answer:
6. (a)
Statement of Profit before closing Department ‘Z’
Amount (Rs.)
Particulars X Y Z Total
(i) Sales 22,40,000 11,20,000 16,80,000 50,40,000
(ii) Variable Cost:
Direct Materials 2,80,000 1,40,000 2,80,000 7,00,000
Direct Labour 1,12,000 1,40,000 4,48,000 7,00,000
Direct Expenses 2,80,000 1,40,000 5,60,000 9,80,000
(iii) Total Variable Cost 6,72,000 4,20,000 12,88,000 23,80,000
(iv) Contribution (i-iii) 15,68,000 7,00,000 3,92,000 26,60,000
(v) Fixed Cost (As given in Question) 5,60,000 2,80,000 5,60,000 14,00,000
(vi) Profit (iv-v) 10,08,000 4,20,000 (1,68,000) 12,60,000
Statement of profit after closing Department 'Z’

Amount (Rs.)
Particulars X Y Total
(i) Sales 22,40,000 11,20,000 33,60,000
(ii)Variable cost:
Direct Materials 2,80,000 1,40,000 4,20,000
Direct Labour 1,12,000 1,40,000 2,52,000
Direct Expenses 2,80,000 1,40,000 4,20,000
(iii) Total Variable Cost 6,72,000 4,20,000 10,92,000
(iv) Contribution (i-iii) 15,68,000 7,00,000 22,68,000
(v) Fixed cost 12,50,000
(vi) Profit (iv-v) 10,18,000
Advice: From the comparative profitability statements stated supra, it is clear that
profit is decreased by Rs. 2,42,000 that is (Rs. 12,60,000 –Rs.10,18,000) by closing
down Department 'Z'. Therefore, it should not be closed down.
(i) (b) P/V Ratio = (Contribution/ Sales) × 100

Where, Contribution = Fixed Cost + Profit = Rs. 9,00,000 + Rs. 3,00,000 = Rs.
12,00,000
P/V Ratio = (Rs. 12,00,000 / 20,00,000) × 100 = 60%
Break Even Point = (Fixed Cost)/ (P/V Rtio)
= Rs. 9,00,000/ 60% = Rs. 15,00,000
Margin of Safety = Sales- Break Even Point
= Rs. 20,00,000 – Rs. 15,00,000 = Rs.5,00,000
Or Margin of Safety = (Profit)/ (P/V Ratio) = Rs. 3,00,000/60% = Rs.5,00,000
(ii) Contribution during the second half-year = Fixed Cost + Profit

= Rs. 9,00,000 + (- Rs. 1,50,000) = Rs. 7,50,000
Expected Sales = (Contribution) / (P/V Ratio)
= Rs. 7,50,000/60% = Rs.12,50,000
(iii) Break Even Point for the whole year = Fixed Cost for the whole year/(P/V Ratio)
= Rs. 18,00,000/60% = Rs. 30,00,000
Margin of Safety = Sales- Break Even Point
= Rs. 32,50,000 – Rs. 30,00,000 = Rs.2,50,000
Or Margin of Safety = (Profit)/ (P/V Ratio) = Rs. 1,50,000/60% = Rs.2,50,000
7. (a) BENCO LTD. a manufacturing concern which has adopted standard costing furnishes
the following information for the month ending March 31, 2019:
The standard mix to produce one unit of product Z is as under—

Material A 30kg @ Rs. 30 per kg
Material B 40kg @ Rs. 50 per kg
Material C 50kg @ Rs. 40 per kg
During the month of December 2018, 10 units of product Z were actually produced
and consumption was as under—
Material A 320kg @ Rs. 35 per kg
Material B 475kg @ Rs. 55 per kg
Material C 435kg @ Rs. 36 per kg
Required:
Calculate the following Material Variances:
(iii) Material Usage Variance
(v) Material Yield Variance 8
(b) ANKRITI LTD. manufactures product X and product Y during the year ending on 31st
March, 2019. It is expected to sell 7500 kg of product X and 37500 kg of product Y @
Rs. 60 and Rs. 32 per kg respectively.
The direct materials A, B and C are mixed in the proportion of 4:4:2 in the manufacture
of Product X and in the proportion of 3:5:2 in the manufacture of product Y. The actual
and budget inventories for the year are as follows:
Particulars Opening Stock (kg) Expected Closing Stock Anticipated Cost per
(kg) kg (Rs.)
Material A 3000 2400 10
Material B 2500 5800 8
Material C 16000 17300 6
Product X 1500 2000 —
Product Y 3000 3500 —
Required:
Prepare the Production Budget and Materials Budget showing the purchase cost
of materials for the year ending 31st March, 2019. 7
Answer:
7. (a) Statement showing Standard and Actual Material Cost
Standard for 10 Units Actual for 10 Units
Material Quantity Rate Amount Quantity Rate Amount
(Units) (Rs.) (Rs.) (Units) (Rs.) (Rs.)
A 300 30 9,000 320 35 11,200
B 400 50 20,000 475 55 26,125
C 500 40 20,000 435 36 15,660
Total 1,200 49,000 1,230 52,985
(i) Material Cost Variance = Standard Cost – Actual Cost

= Rs.49,000 – Rs.52,985 = Rs.3,985 (A)
(ii) Material Price Variance = Actual Quantity (Standard Price – Actual Price)
Material A = 320 (Rs. 30 – 35) = Rs. 1,600 (A)
Material B = 475 (Rs. 50 – 55)=Rs. 2,375 (A)
Material C= 435 (Rs. 40 – 36) = Rs. 1,740 (F)
= Rs.2,235 (A)
(iii) Material Usage Variance = Standard Price ( Standard Quantity – Actual Quantity)
Material A = 30 (Rs. 300 – 320) = Rs. 600 (A)
Material B = 50 (Rs. 400 – 475)=Rs. 3,750 (A)
Material C= 40 (Rs. 500 – 435) = Rs. 2,600 (F)
= Rs.1,750 (A)
(iv) Material Mix Variance = Standard Price (Revised Std. Quantity – Actual Quantity)
Material A = 30 (Rs. 307.50 – 320) = Rs. 375 (A)
Material B = 50 (Rs. 410 – 475) = Rs. 3,250 (A)
Material C= 40 (Rs. 512.50 – 435) = Rs. 3,100 (F)
= Rs.525 (A)
Note: Revised Standard Quantity (RSQ) is calculated as under:

,
Material A =, × (300) = 307.50kg
,
Material B =, × (400) = 410 kg
,
Material C =, × (500) = 512.50kg
(v) Material Yield Variance = Standard Cost per Unit ( Actual Yield – Standard Yield)
Rs. 4,900 (10 – 10.25) = Rs. 1,225 (A)
Note:
(a) Standard Material Cost per Unit of output = Rs. 49,000/10 = Rs. 4,900
(b) Standard Yield = Actual usage of material/ Standard usage per Unit of output
= 1,230/120 = 10.25 Units
(b)
Production Budget for the Year ending 31st March 2019
Particulars Product – X ((kgs.) Product – Y
(kgs.)
Sales 7,500 37,500
Add: Closing Stock 2,000 3,500
Sub-total 9,500 41,000
Less: Opening tock 1,500 3,000
Production 8,000 38,000
(c)
Materials Purchase Budget
(for the year ending 31st March 2019)
Particulars A B C Total
Materials required for product-X in the ratio 3,200 3,200 1,600 8,000
of 4:4:2
Materials required for product-Y in the ratio 11,400 19,000 7,600 38,000
of 3:5:2
Total requirement 14,600 22,200 9,200
Add: Closing Stock 2,400 5,800 17,300
17,000 28,000 26,500
Less: Opening Stock 3,000 2,500 16,000
Purchases (Kgs) 14,000 25,500 10,500
Cost per Kg (Rs.) 10 8 6
Total Purchase Cost (Rs.) 1,40,000 2,04,000 63,000 Rs. 4,07,000
(a) Distinguish between Cost Allocation and Cost Apportionment.

(b) State the main objectives of Cost Accounting,
(c) List out the various measures to reduce the Labour Turnover (any five).
(d) Write a brief note on Master Budget.
Answer:
8. (a) Difference between Cost Allocation and Cost Apportionment:
Cost Allocation: When items of cost are identifiable directly with some products or
departments such costs are charged to such cost centres. This process is known as
cost allocation. Wages paid to workers of service department can be allocated to
the particular department. Indirect materials used by a particular department can
also be allocated to that department. Cost allocation calls for two basic factors - (i)
Concerned department/product should have caused the cost to be incurred, and
(ii) exact amount of cost should be computable.
Cost Apportionment: When items of cost cannot directly be charged to or be

accurately identifiable with any cost centres, they are prorated or distributed
amongst the cost centres on some pre-determined basis. This method is known as
cost apportionment. Thus, items of indirect costs residual to the process of cost
allocation are covered by cost apportionment. The pre-determination of suitable
basis of apportionment is very important and usually following principles are adopted
- (i) Service or use, (ii) Survey method, or (iii) Ability to bear. The basis ultimately
adopted should ensure an equitable share of common expenses for the cost centres
and the basis once adopted should be reviewed at periodic intervals to improve
upon the accuracy of apportionment.
OR ( Alternative)
Cost Allocation: CIMA defines Cost Allocation as, “ the charging of discrete, identifiable
items of cost to cost centres or cost units.” In simple words complete distribution of an item of
overhead to the departments or products on logical or equitable basis is called allocation.
Where a cost can clearly be identified with a Cost Centre or Cost unit, then it can be
allocated to that particular Cost Centre or
Cost Unit. In other words, allocation is the process by which cost items are charged directly
to a Cost Unit or Cost Centre. For example, electricity charges can be allocated to various
departments if separate meters are installed, depreciation of machinery can be allocated
to various departments as the machines can be identified, salary of stores clerk can be
allocated to stores department, cost of coal used in boiler can directly be allocated to boiler
house division. Thus allocation is a direct process of identifying overheads to cost units or cost
centres. So the term allocation means allotment of whole item of cost to a particular cost
centre or cost object without any division.
Cost Apportionment:
Cost Apportionment is the allotment of proportions of items to Cost Centres. Wherever

possible, the overheads are to be allocated. However, if it is not possible to charge the
overheads to a particular Cost Centre or Cost Unit, they are to be apportioned to various
departments on some suitable basis.
This process is called “Apportionment” of overheads. The basis for apportionment is normally
predetermined and is decided after a careful study of relationship between the base and
the other variables within the organisation. The Cost Accountant must ensure that the
selected basis is the most logical. A lot of quantitative information has to be collected and
constantly updated for the purpose of apportionment. The basis selected should be applied
consistently to avoid vitiation.
However, there should be a periodical review of the same to revise the basis if needed.In
simple words, distribution of various items of overheads in portions to the departments or
products on logical or equitable basis is called apportionment.A general example of various
bases that may be used for the purpose of apportionment is shown below:
Overhead item Basis

Rent and Building Floor space occupied by each department
General Lighting No. of light points in each department
Telephones No. of extensions in a department
Depreciation of factory building Floor space
Material handling No. of material requisitions or Value of material
used
The above list is not exhaustive and depending upon peculiarities of the organisation, it
could be extended. This allocation and/or apportionment is called primary distribution of
overheads.
OR (Alternative)
Note: The question asks: Distinguish between Cost Allocation and Cost Apportionment.
Distinction between Cost Allocation and Cost Apportionment:
Although the purpose of both allocation and apportionment is identical, that is to identify or
allot the costs to the Cost Centres or Cost Units, both are not the same.
Allocation deals with the whole items of cost and apportionment deals with proportion of
items of cost.
Allocation is direct process of departmentalisation of overheads, whereas apportionment

needs a suitable basis for sub-division of the cost.
Whether a particular item of expense can be allocated or apportioned does not depend on
the nature of expense, but depends on the relation with the Cost Centre or Cost Unit to
which it is to be charged.
(b) Main Objectives of Cost Accounting:
The main objectives of cost accounting are as under:

(i) To ascertain the costs under different situations using different techniques and
systems of costing.
(ii) To determine the selling prices under different circumstances.
(iii) To determine and control efficiency by setting standards for Materials, Labour and
Overheads.
(iv) To determine the value of closing inventory for preparing financial statements of
the concern.
(v) To provide a basis for operating policies of the concern
(c) Measures to Reduce Labour Turnover:
Labour Turnover may be reduced by removing its avoidable causes and taking
preventive remedial measures.
The various measures may be as under:

(i) Efficient, sympathetic and impartial personnel administration.
(ii) Effective communication system to keep the workers informed on matters that
affect them.
(iii) Improving working conditions and placing the right man on the right job.
(iv) Job enrichment to reduce boredom and monotony and to provide job
satisfaction.
(v) Introducing fair rates of pay and allowance/s and incentives, pension, gratuity
etc.
(vi) Strengthening welfare measures.
(vii) Augmenting recreational activities and schemes.
(d) Master Budget:
Master Budget is the budget prepared to cover all the functions of the business organization.
It can be taken as the integrated budget of business concern, that means, it shows the profit
or loss and financial position of the business concern such as Budgeted Profit and Loss
Account, Budgeted Balance Sheet etc. Master budget, also known as summary budget or
finalized profit plan, combines all the budgets for a period into one harmonious unit and thus,
it shows the overall budget plan.
The master budget incorporates all the subsidiary functional budgets and the Budgeted
Profit and Loss Account and Budgeted Balance Sheet. Before the budget plan is put
into operation, the master budget is considered by the management and revised if the
position of profit disclosed therein is not found to be satisfactory. After suitable revision made,
the Master Budget is finally approved and put into action.
Suggested Answer_Syl16_Dec2018_Paper 8
GROUP I
(SYLLABUS 2016)

DECEMBER 2018
Paper-8: COST ACCOUNTING
All sections are compulsory. Each section contains instructions regarding
the number of questions to be answered within the section.
All working notes must form part of the answers.
Wherever necessary, candidates may make appropriate assumptions and clearly state them.
No present value factor table or other statistical table will be provided in
addition to this question paper.
Section A

(a) Choose the correct answer from the given alternatives (you may write only the Roman
numeral and the alphabet chosen for your answer): 1×10=10
(i) Joint Cost is suitable for
(a) Oil Industry
(b) Fertilizer Industry
(c) Ornament Industry
(d) Infrastructure Industry
(ii) Cost of idle time arising due to non-availability of raw materials is
(a) recovered by inflating the raw materials cost.
(b) recovered by inflating the wage rate.
(c) charged to factory overheads.
(d) charged to costing profit and loss account.
(iii) Charging to a cost center those overheads that result solely for the existence of that
cost center is known as
(a) Allotment
(b) Allocation
(c) Absorption
(d) Apportionment
(iv) Standard deals with the cost of service cost center is
(a) CAS-9
(b) CAS-13
(c) CAS-16
(d) CAS-22
(v) In Reconciliation Statement income shown only in financial accounts is
(a) added to financial profit.
(b) deducted from financial profit.
(c) ignored.
(d) deducted from costing profit.
(vi) The most suitable cost system where the products differ in type of material and work
performed is
(a) Process Costing
(b) Batch Costing
(c) Job Costing
(d) Operating Costing
(vii) In a process 10000 units are introduced during a period. 10% of input is normal loss.
Closing work-in-process 70% complete is 1500 units. 7500 completed units are
(a) 9550 units
(b) 9000 units
(c) 8550 units
(d) 8500 units
(viii) The sales and profit of a firm for the year 2016 are Rs.1,50,000 and Rs.20,000 and
for the year 2017 are Rs.1,70,000 and Rs.25,000 respectively. The P/V Ratio of the
firm is
(a) 15%
(b) 20%
(c) 25%
(d) 30%
(ix) Standard quantity of material for one unit output is 10 kg @ Rs.8 per kg. Actual
output during a given period is 600 units. The standard quantity of material for
actual output is
(a) 1200 kg
(b) 6000 kg
(c) 4800 kg
(d) 48000 kg
(x) Which of the following is a long-term Budget?
(a) Master Budget
(b) Production Budget
(c) Flexible Budget
(d) Capital Budget
(b) Match the statement in Column I with the most appropriate statement in Column II
copying contents into the Answer Books): 1×5=5
Column I Column II
(i) Cash discount allowed (A) Joint Cost
(ii) Escalation Clause (B) Imputed Cost
(iii) CAS-19 (C) Direct Expenses
(iv) Notional Cost (D) Not shown is cost sheet but debited to
profit and loss account
(v) Zero base budgeting (E) Sunk Cost
(F) Contract Costing
(G) Decision Package
(H) Variable Cost
(c) State whether the following statements are „True‟ or „False‟ (You may write only the
Roman numeral and whether „True‟or „False‟ without copying the statements into the
Answer Book): 1×5=5
(i) Multiple costing is suitable for banking industry.
(ii) Slow moving materials have a high turnover ratio.
(iii) Cost ledger control account makes the cost ledger self-balancing.
(iv) There is inverse relationship between batch size and carrying costs.
(v) Marginal costing follows the identifiability wise classification of costs.
(d) Fill in the blanks (you may write only the Roman numeral and the content filling the blanks):
1×5=5
(i) ________ is discount allowed to the bulk purchaser.
(ii) CAS _______ stands for cost of utilities.
(iii) Under integrated accounting system, the accounting entry for payment of wages is
to debit ________ and to credit cash account.
(iv) If the actual loss in a process is less than the normal loss, the difference is known as
_________
(v) The principal budget factor for consumer goods manufacturer is normally
__________.
Answer: 1 (a)
(i) (a)
(ii) (d)
(iii) (b)
(iv) (b)
(v) (b)
(vi) (c)
(vii) (c)
(viii) (c)
(ix) (b)
(x) (d)
Answer: 1 (b)
Column I Column II
(i) Cash discount allowed (D) Not shown in cost sheet but debited to
profit and loss account
(ii) Escalation Clause (F) Contract Costing
(iii) CAS-19 (A) Joint Cost
(iv) Notional Cost (B) Imputed Cost
(v) Zero base budgeting (G) Decision Package
Answer: 1 (c)
(i) False
(ii) False
(iii) True
(iv) False
(v) False
Answer: 1 (d)
(i) Quantity Discount/ Trade Discount/ Cash Discount
(ii) CAS – 8
(iii) Wages Control Account
(iv) Abnormal gain/Abnormal Profit
(v) Sales Demand/Market Demand / Lack of Demand
Section - B
Each question carries 15 marks. 15×5=75
2. (a) ZEDYAAH TUBES LTD. manufactures a special product, which requires ZEDY. The
following particulars were collected for the year 2017-18:
(i) Monthly demand of Zedy : 7500 units
(ii) Cost of placing an order : Rs.500
(iii) Re-order period : 5 to 8 weeks
(iv) Cost per unit : Rs.60
(v) Carrying cost % p.a. : 10%
(vi) Normal usage : 500 units per week
(vii) Minimum usage : 250 units per week
(viii) Maximum usage : 750 units per week
Required:
(i) Re-order quantity
(ii) Re-order level
(iii) Minimum stock level
(iv) Maximum stock level
(v) Average stock level 7
(b) SONAX LTD. has three Production Departments and two Service Departments. The
overhead distribution sheet showed the following totals:
`
Production Departments:
A 25,000
B 31,000
C 28,000
Service Departments:
S 8,000
T 13,900
Required:
Using the following bases of apportionment, distribute the cost of service departments
under Simultaneous Equation Method:
A B C S T
Department S 30% 20% 40% - 10%
Department T 40% 15%, 25% 20% -
8
Answer: 2 (a)
(i) Re-order Quantity 2AO 2 × 7,500 ×12 × 500
= = = 3,873 units.
C 60 ×10%
(ii) Re-order Level = Maximum Re-order Period x Maximum Usage
= 8 weeks × 750 unite per week = 6,000 units
(iii) Minimum Stock Level = Re-order Level - {Normal Usage × Normal Re-
order Period}
= 6,000 - (500 × 6.5) = 2,750 units
(iv) Maximum Stock Level = Re-order Level + Re-order Quantity -
(Minimum Usage × Minimum Re-order Period)
= 6,000 + 3,873 - (250 × 5) = 8,623 units.
(v) Average Stock Level 1
= (Minimum Stock Level + Maximum Stock
2
Level)
= 1
(2,750 + 8,623) = 5,687 units.
2
OR
1
Minimum Level + Re-order Quantity =
2
2,750 +1,937 = 4,687 units
Answer: 2 (b)
Let x be the expense of Department S
and y be the expense of Department T
1
Then x = Rs. 8,000 + th of y (20% of y)
5
1
Y = Rs.3,900 + th of x
10
Putting the value of x, we get:
1 1
y = Rs.13,900 + of (8,000 + of y)
10 5
1
Or, y = Rs.13,900 + Rs.800 + y
50
1
Or, y = Rs.14,700 + y , or 50 y = 7,35,000 + y
50
7,35,000
Or, 50y - y = Rs. 7,35,000 or, y =Rs. = Rs.15,000
49
Putting the value of y we get
1 1
x = Rs 8,000 + th of y, or, x = Rs. 8,000 + of Rs.15,000
5 5
or, x = Rs.8,000 + Rs.3,000, or x = Rs.11,000
Total expenses of Dept. S = Rs.11,000
Total expenses of Dept. T = Rs.15,000
Overhead Distribution Summary
Particulars A B C S T
Rs. Rs. Rs. Rs. Rs.
Total as per
Primary Distribution 25,000 31,000 28,000 8,000 13,900
Distribution of Expenses of Dept. S in the
ratio 3:2:4:1 3,300 2,200 4,400 -11,000 1,100
Distribution of Expenses of
Dept. T in the ratio 8:3:5:4 6,000 2,250 3,750 3,000 -15,000
34,300 35,450 36,150 - -
3. (a) What are the various types of materials included in the Material Cost as dealt with by
CAS-6 relating to Cost Accounting Standard on Material Cost?
State the objective and scope of the Standard. 6
(b) The following information is available from the financial books of PQR Ltd. having a
normal production capacity of 60000 units for the year ended 31st March, 2018:
(i) Sales Rs.10,00,000 (50000 units)
(ii) There was no opening and closing stock of finished units.
(iii) Direct material and direct wages costs were Rs.5,00,000 and Rs.2,50,000
respectively.
(iv) Actual factory expenses were Rs.1,50,000 of which 60% are fixed.
(v) Actual administrative expenses were `Rs.45,000 which are completely fixed.
(vi) Actual selling and distribution expenses were Rs.30,000 of which 40% are fixed.
(vii) Interest and dividends received Rs.15,000
You are required to
(A) find out profit as per financial books for the year ended 31st March, 2018.
(B) prepare the cost sheet and ascertain the profit as per cost accounts for the year
ended 31st March, 2018 assuming that the indirect expenses are absorbed on the
basis of normal production capacity.
(C) prepare a statement reconciling profits shown by financial and cost books. 9
Answer: 3 (a)
CAS-6: Cost Accounting Standard on Material Cost [Limited Revision 2017]
This standard deals with principles and methods of determining the Material Cost. Material for
the purpose of this standard includes Raw Materials, Process Materials, Additives,
manufactured / bought out Components, Sub-assemblies, Accessories, Semi-finished Goods,
Consumable Stores, Spares and other indirect Materials.
This standard deals with the principles and methods of classification, measurement and
assignment of Material Cost, for determination of the Cost of Product or Service, and the
presentation and disclosure in Cost Statements.
Objective
The objective of this standard is to bring uniformity and consistency in the principles and
methods of determining the Material Cost with reasonable accuracy.
Scope
This standard should be applied to Cost Statements which require classification,
measurement, assignment, presentation and disclosure of Material Costs including those
requiring attestation.
Answer: 3 (b)
(a) Profit and Loss Account for the year ended 31st March, 2018
To Direct Materials 5,00,000 By Sales (50,000 units) 10,00,000
To Direct Wages 2,50,000 By Interest and Dividends 15,000
To Factory Expenses 1,50,000
To Administration Expenses 45,000
To Selling & Distribution Expenses 30,000
To Profit 40,000
10,15,000 10,15,000
(b) Cost Sheet for the year ended 31st March, 2018
Rs. Rs.
Direct Material 5,00,000
Prime Cost 7,50,000
Factory Expenses:
Variable 60,000
Fixed (Rs.90,000 × 5/6) 75,000 1,35,000
Works Cost 8,85,000
Administration Expenses (Rs.45,000 × 5/6) 37,500
Selling & Distribution Expenses:
Variable 18,000
Fixed (Rs.12,000 × 5/6) 10,000 28,000
Profit 49,500
Sales 10,00,000
(c) Reconciliation Statement

Rs. Rs.
Profit as per Cost Accounts 49,500
Add : Interest and Dividends received only credited in Financial 15,000
Accounts
64,500
Less :
Factory expenses under-charged in Cost Accounts
(Rs.1,50,000 – Rs.1,35,000) 15,000
Administrative expenses under-charged in Cost
Accounts (Rs.45,000 – Rs.37,500) 7,500
Selling and Distribution Expenses under-charged in Cost
Accounts (Rs. 30,000 – Rs. 28,000) 2,000 24,500
Profit as per Financial Accounts 40,000
4. (a) Z Ltd., manufactured and sold 200 typewriters in the year 2017. Its summarised Trading
and Profit & Loss Account for the year 2017 is as follows:
Total Output (in units) 200
To Cost of Material consumed 1,20,000 By Sales 6,00,000
To Direct Wages 1,80,000
To Manufacturing Charges 75,000
To Gross Profit c/d 2,25,000
6,00,000 6,00,000
To Management Expenses 90,000 By Gross Profit b/d 2,25,000
To General Expenses 30,000
To Rent, Rates & Taxes 15,000
To Selling Expenses 45,000
To Net Profit 45,000
2,25,000 2,25,000
For the year 2018, it is estimated that

(i) The output and sales will be 300 typewriters.
(ii) Price of material will rise by 25% compared to previous year level.
(iii) Wages per unit will rise by 10%.
(iv) Manufacturing charges will increase in proportion to the combined cost of
material and wages
(v) Selling expenses per unit will remain unchanged.
Other expenses will remain unaffected by the rise in output.
Required:
Prepare a Cost Sheet showing the cost at which typewriters will be manufactured in
2018 and give price at which it should by marketed so as to show profit of 10% on
selling price. 8
(b) The following details are extracted from the costing records of EVINIE LTD., an oil mill for
the year ended 31st March, 2018. Purchased 2000 tons of copra for Rs.1,00,000 and
other expenses were as under:
Crushing( Rs.) Refining (Rs.) Finishing (Rs.)
Cost of Labour 10,000 6,000 4,000
Sundry Material 4,000 3,000 2,000
Electric Power 3,000 2,000 1,600
Steam 2,000 2,000 1,500
Repair of Machine 2,000 1,000 500
Cost of Casks — — 7,500
Factory Expenses were Rs.10,000 to be apportioned on the basis of wages. 1700 tons of
crude oil was produced; 1540 tons of oil was refined and finally 1500 tons of oil was
finished for delivery. Realised Rs.2,000 from sale of sacks; Rs.5,000 by sale of 250 tons of
copra residue and Rs.5,100 by sale of 120 tons of by-products in refining process.
Prepare Process Accounts for the year ending on 31st March, 2018. 7
Answer: 4 (a)
Cost Sheet of Z Ltd. For the year 2017
Particulars Total Cost Rs. Cost per unit Rs.
Direct Material 1,20,000 600
Direct Labour 1,80,000 900
Prime Cost 3,00,000 1,500
Add : Factory Overhead (Manufacturing exp.) 75,000 375
Factory Cost 3,75,000 1,875
Add : Office Overhead :
Management Expenses 90,000
General Expenses 30,000
Rent, Rates & Taxes 15,000 1,35,000 675
Cost of Production 5,10,000 2,550
Add: Selling & Distribution Expenses 45,000 225
Total Cost 5,55,000 2,775
Profit 45,000 225
Selling Price 6,00,000 3,000
Estimate for the year 2018 : Rs.

1. Material Cost per Unit: 600
Add : Expected increase in Price of Material in 2018
(It is 25% compared to year 2017) 150
Expected price of material per unit 750
2. Wages per unit 900
Add : Expected increase @ 10% 90
Expected Wages per Unit 990
3. Manufacturing charges are Rs.375 per Unit and total of Material and
Labour cost is Rs.1,500 per Unit so percentage of manufacturing
expenses to combined Cost of Material and Wages is as follows :
Manufacturing Expenses
= ×100
Material Cost + Labour Cost
375
= ×100 = 25%
1, 500
Manufacturing expenses are 25% of combined Cost of Material and Wages:
25% of Rs.1,740 435
To ascertain the Selling Price to be quoted in the year 2018 the estimated cost sheet for
the year 2018 will be prepared as follows:
Estimated Cost Sheet
for the year 2018
Production = 300 Units
Particulars Total Cost Cost per unit
Rs. Rs.
Direct Material 2,25,000 750.00
Direct Labour 2,97,000 990.00
Prime Cost 5,22,000 1,740.00
Factory Overhead
(25% of Cost of Material & Wages) 1,30,500 435.00
Factory Cost 6,52,000 2,175.00
Office Overhead 1,35,000 450.00
Cost of Production 7,87,500 2,625.00
Selling & Distribution Overhead (300 × Rs.225) 67,500 225.00
Total Cost 8,55,000 2,850.00
Profit (10% of Selling Price or 1/9 of Total Cost) 95,000 316.67
Selling Price 9,50,000 3,166.67
ALETRNATIVE
An alternative answer with volume multiplier can simplify the solution as follows
PARTICULARS Amount in Rs. Cost Per Unit Rs.

Direct materials (1,20,000*1.5*1.25) 2,25,000 750
Direct Labour (1,80,000*1.5*1.1) 2,97,000 990
Prime Cost 5,22,000 1,740
Manufacturing Charges (75,000/3,00,000)*5,22,000 1,30,500 435
Factory Cost 6,52,500 2,175
Office Overheads:
Management Expenses 90,000
Rent , Rates & Taxes 15,000 1,35,000 450
Cost of Production 7,87,500 2,625
Selling Expenses (45,000*1.5) 67,500 225
Total Cost 8,55,000 2,850
Profit (1/9 of 8,55,000) 95,000 317
Sales 9,50,000 3,167
Selling price per typewriter (9,50,000/300) 3,166.67 r/o 3,167
Note: Volume multiple is 300/200 =1.5 times
Answer: 4 (b)
Crushing Process Account
Particulars Tons Amount Particulars Tons Amount
Rs. Rs.
To Copra 2,000 1,00,000 By Copra Sacks - 2,000
To Labour 10,000 By Copra Residue 250 5,000
4,000 By Loss in Crushing 50 -
To Sundry Materials
(Balancing Figure)
By Transfer to Refining @ 1,700 1,19,000
To Electric Power
3,000 Rs.70 per ton
To Steam 2,000
To Repairs of Machines 2,000
To Factory Expenses* 5,000
2,000 1,26,000 2,000 1,26,000
Refining Process Account

` Rs.
To Crushing Process a/c 1,700 1,19,000 By Sale of By Products 120 5,100
To Labour 6,000 By Loss in Refining Process 40 -

Balancing Figure)
To Sundry Materials 3,000 -
To Electric Power 2,000 By Transfer to Finishing
Process @ Rs. 85 per ton 1,540 1,30,900
To Steam 2,000
To Repairs of Machines 1,000
To Factory Expenses* 3,000

1,700 1,36,000 1,700 1,36,000
Finishing Process Account

Rs. Rs.
1,540 1,30,900 By Loss in Finishing 40 -
To Refining Process a/c
Balancing Figure)
To Labour 4,000 By Cost of Production
Transferred to Finished Oil
a/c @ Rs.95 per ton 1,500 1,42,500
To Sundry Materials 2,000
To Electric Power 1,600
To Steam 1,500
To Repairs of Machines 500
To Factory Expenses 2,000
1,540 1,42,500 1,540 1,42,500
To Cost of Production of 1,500 1,42,500 By Total Cost @ Rs. 100 1,500 1,50,000
Finished Oil per Ton
To Cost of Casks 7,500
1,500 1,50,000 1,500 1,50,000
Working Note:
*Factory overhead of Rs. 10,000 is apportioned in the ratio of labour cost, i.e. 5:3:2.
5. (a) GOLDEN TRANSPORT CO. has been given a route 20km. long for running buses. The
company has a fleet of 10 buses each costing Rs.60,000 and having a life of 5 years
without any scrap value.
The following are estimated expenditure and other details:
(i) Insurance charges 3% p. a.
(ii) Annual tax for each bus Rs.3,000
(iii) Total garage charges Rs.4,000 p.m.
(iv) Driver‟s salary for each bus Rs.10,000 p. m.
(v) Conductor‟s salary for each bus Rs.7,000 p. m.
(vi) Annual repairs to each bus Rs.6,000
(vii) Commission to be shared by the driver and conductor
equally: 10% of the takings
(viii) Cost of stationary Rs.1,500 p. m.
(ix) Manager‟s salary Rs.12,000p.m
(x) Accountant‟s salary Rs.9,000 p.m.
(xi) Petrol and oil Rs.400 per 100 km
Each bus will make 3 round trips carrying on an average 40 passengers on each trip.
The bus will run on an average for 25 days in a month.
Assuming 15% profit on takings, Calculate the bus fare to be charged from each
passenger. 8
(b) OMEGA LTD. undertook a contract for Rs.5,00,000 on 1st January, 2017. The company
furnishes the following details for the year ended 31st December, 2017:
Rs.
Materials consumed 1,65,000
Direct Expenses 5,000
Wages 30,000
Materials returned to stores 5,000
Materials stolen from site 10,000
Insurance claim admitted 6,000
Works expenses @ 20% on wages
Office expenses @ 10% on works cost
Materials in hand on 31.12.2017 15,000
Cash received to the extent of 90% of works certified 2,70,000
Cost of work uncertified 11,000
Plant sent to site costing Rs.60,000 with a scrap value of Rs.10,000 and its useful life is 5
years. The plant was used on the contract for 146 days.
Required:
Prepare Contract Account showing therein the cost of materials issued to site and the
amount of profit or loss to be transferred to the Profit & Loss Account. 7
Answer: 5 (a)
Particulars Amount
Rs.
1. Insurance (Rs.60,000 × 3% × 10/12) 1,500
2. Tax (Rs.3,000 × 10/12) 2,500
3. Total Garage charges 4,000
4. Drivers’ salary (Rs.10,000 × 10) 1,00,000
5. Conductors’ salary (Rs.7,000 × 10) 70,000
6. Repairs (Rs.6,000 × 10/12) 5,000
7. Cost of stationary 1,500
8. Manager’s salary 12,000
9. Accountant’s salary 9,000
10. Depreciation (Rs.60,000 × 10/5 × 1/12) 10,000
11. Petrol * (30,000/100) × 400 1,20,000
12. Commission of conductor & driver 4,47,333 × (10/100) 44,733
13. Total Cost 3,80,233
14. (+) Profit @ 15% on takings (4,47,333 × 15/100) 67.100
15. Takings ** 4,47,333
* 1 0 × 2 0 × 3 × 2 × 2 5 = 30,000
**Let ‘X’ be the takings
X = Rs.3,35,500 + (10/100 X) + (15/100 X)
100 X = Rs. 3,35,50,000 + 25X
X = Rs. 4,47,333
Fare per passenger Km = Rs.4,47,333 / (30,000 × 40) = Re. 0.3727 say Re.0.37
Answer: 5 (b)
Calculation of Cost of Materials issued to site
Rs.
Add: Materials stolen 10,000
Materials in hand (31.12.2017) 15,000
1,95,000
Contract Account
for the year ended 31st Dec. 2017
Dr. Cr.
Rs. Rs.
To Materials issued to site 1,95,000 By Materials returned to 5,000
stores
To Direct Expenses 5,000 By Insurance claim A/c 6,000
(Loss of Stock )
To Wages 30,000 By Profit and Loss A/c 4,000
(Stolen Rs. 10,000 – Rs.6,000)
To Works Expenses 20% of wages 6,000 By Materials in hand 15,000
To Office Expenses 10% of Works Cost 21,000 By Cost of Contract 2,31,000
(Note 1) Balancing Figure)
To Depreciation on Plant (Note 2) 4,000
2,61, 000 2,61,000
To Cost of Contract b/d 2,31,000 By Work in Progress :
To Notional Profit 80,000 Work certified 3,00,000
Work uncertified 11,000
3,11,000 3,11,000
To Profit & Loss A/c (Note 3) 48,000 By Notional Profit 80,000
To Profit Reserve 32,000
80,000 80,000
Working Notes:
1. Calculation of works cost
Rs.
Add: Direct Wages 30,000
Prime Cost 2,00,000
Add: Works expenses 6,000
Deprecation 4,000
2,10,000
2. Calculation of Depreciation on Plant
60,000 - 10,000 146
Rs. = × = Rs.4,000
5 365
3. Profit to be credited to profit & Loss A/c

2 Cash received
×National Profit ×
3 Work certified
2 2,70, 000
= × 80, 000 × = Rs.48,000
3 3, 00, 000
6. (a) A company budgets for a production of 5 lakh units at a variable cost of Rs.20 each.
The fixed costs are Rs.20 lakh. The selling price is fixed to yield a profit of 25% on cost.
You are required to calculate
(i) P/V Ratio and Break- even point.
(ii) If the selling price is reduced by 20%,
Ascertain:
(A) The effect of price reduction on the P/V Ratio and BEP.
(B) The number of units required to be sold at the reduced selling price to obtain an
increase of 20% over the budgeted profit. 8
(b) AVONA LTD., a toy factory presents the following information for the year ended 31st
March, 2018:
Rs.
Material cost 1,20,000
Labour cost 2,40,000
Fixed overheads 1,20,000
Variable overheads 60,000
Units produced 12,000
Selling Price per Unit 50
The available capacity is a production of 20000 units per year. The firm has an offer for
the purchase of 5000 additional units at a price of Rs.40 per unit. It is expected that by
accepting this offer there will be a saving of rupee one per unit in material cost on all
units manufactured, the fixed overhead will increase by Rs.35,000 and the overall
efficiency will drop by 2% on all production.
State whether offer is acceptable or not. 7
Answer: 6 (a)
Workings:
Statement Showing Unit Sales Price
Particulars Rs.
Budgeted Variable Cost per Unit 20.00
Budgeted Fixed Cost per Unit (Rs.20,00,000 / 5,00,000) 4.00
Total Budgeted Cost per Unit 24.00
Add : Profit (25% on Total Cost) 6.00
Per unit selling price 30.00
Statement of Budgeted Profit
Particulars Rs.
Budgeted Sales (5,00,000 × Rs.30) 1,50,00,000
Less : Variable Cost (5,00,000 × Rs.20) 1,00,00,000
Contribution 50,00,000
Less : Budgeted Fixed Cost 20,00,000
Budgeted Profit 30,00,000
OR
Budgeted Profit = Contribution (C)per Unit X Total Production Units – Fixed Cost
= {(Rs. 30 – Rs. 20) X 5,00,000} – Rs. 20,00,000 = Rs. 30,00,000
I P/V Ratio = (Contribution/ Sales) X 100 = (50,00,000/1,50,00,000) X 100 =(100/3)%
10 1
Or , P/V ratio = ×100= 33 % (Or 100/3%)
30 3
F 20,00,000
BEP (in units) = = = 2,00,000 units
C per unit 10
F ` 20,00,000
Or , BEP (in Rs.) = = = ` 60,00,000
P/V Ratio 1
33 %
3
NewC ` 24- 20 2
II (a) New P/V ratio = ×100 = ×100 =16 % (or 50/3%)
New SP ` 30 - 6 3
Fixed cost ` 20,00,000

New BEP (in Units) = = = 5,00,000 units
New SP - VC ` 24 - 20
Or , New BEP (in Rs.) = (F/ New P/V ratio) = (20,00,000/50/3%)= 1,20,00,000
(b) Sales units needed to attain 20% more than Budgeted Profit at reduced Selling
Price.
Desired profit = Budgeted Profit + 20% of Budgeted Profit
= 30,00,000 + 6,00,000 = Rs.36,00,000
Fixed costs + Desired profit

Sales (units) required =
Contribution per unit
20,00,000 + 36,00,000
= =14,00,000 units
` 4 per unit
Answer: 6 (b)
Profitability Statement for the year ended31st March, 2018
Particulars Total Rs. Per unit Rs.
Sales (A) 6,00,000 50
Variable Cost:
Materials 1,20,000 10
Labour 2,40,000 20
Variable overhead 60,000 5
Total (B) 4,20,000 35
Contribution (A) – (B) 1,80,000 15
Less: Fixed overheads 1,20,000 10
Profit 60,000 5
Profitability Statement (17000 units at 85% capacity) → (including 5,000 units special offer)
Rs. Mark/s
Sales
Existing: (12000x Rs.50) 6,00,000
Additional: (5000x Rs.40) 2,00,000
17,000 Units Total (A) 8,00,000 0.5 +0.5
Variable Cost :
Material (17,000 (Rs. 10 – Re. 1) or (17000 x Rs.9) 1,53,000 0.5
Labour (17,000 (Rs. 20 – 2% Drop) or (17000 x 20.40) 3,46,800 0.5
Variable Overhead (17000 xRs. 5) 85,000
Total (B) 5,84,800 0.5
Contribution (A) – (B) 2,15,200 0.5
Less: Fixed Costs (Rs. 1,20,000 + Rs.35,000 increase) 1,55,000 0.5
Profit 60,200 0.5
Analysis: With the acceptance of special offer of 5,000 Units, the Profit is increased by Rs. 200 (i.e.
Rs. 60,200 – Rs. 60,000). Hence, the firm can accept the special offer.
[ Working Notes as under may be shown separately or as shown in above table “Profitability
Statement”]
Rs.
1. Material cost per unit 10
Less : 10% decrease 1
Total 9
2. Labour Cost per unit 20.00
Add : 2% drop in efficiency 0.40
Total 20.40
3. Present Production units 12,000
Add : Addl. Production units 5,000
Total 17,000
4. Present Fixed Cost 1,20,000
Add: Increase 35,000
Total 1,55,000
Alternative
Labour Cost if taken at Rs.20.41 in the working. An alternative answer with an incremental
approach lead to the same analysis.
PARTICULARS Amount in
Rs.
Sales (5000*40) 2,00,000
Less: Variable Cost:
Direct Materials (DM)(5000*9) 45,000
Direct Labour (DL)(5000*20)/0.98 1,02,041
Variable Overheads (VO/Hs)(5000*5) 25,000
Contribution 27,959
Add :Savings in Materials (12000*1) 12,000
Less: Additional Labour Cost (ADLC) (12000*0.41) 4,920
Less: Increase in Fixed cost 35,000
Net Surplus 39
Decision : It is better to Accept the offer
7. (a) The details regarding the composition and the weekly wage rates of labour force of PB
LTD engaged on a job scheduled to be completed in 30 weeks are as follows:
Category of Workers Standard Actual

No. of Weekly Wage Rate per No. of Weekly Wage
Workers worker (Rs.) Workers Rate per worker
(Rs.)
Skilled 75 60 70 70
Semi-Skilled 45 40 30 50
Unskilled 60 30 80 20
The work is actually completed in 32 weeks.

Calculate the following Labour Variances: 8
(i) Labour Cost Variance (LCV)

(ii) Labour Rate Variance (LRV)
(iii) Labour Efficiency Variance (LEV)
(iv) Labour Revised Efficiency Variance (LREV)
(v) Labour Mix Variance (LMV)
(b) NP LTD produces a standard product. The estimated costs are given below:
Rs.
Raw Materials 10
Direct Wages 8
Direct Expenses 2
Variable Overheads 3
23
Semi-variable overheads at 100% capacity level (10,000 units) are expected to be

Rs.40,000 and these overheads vary in steps of Rs.2,000 for each change in output of 1,000
units. Fixed overheads are estimated at Rs.50,000. Selling price per unit is expected to be
Rs.40.
Required:
Prepare a Flexible Budget at 50%, 70% and 90% level of activity on marginal cost basis. 7
Answer: 7 (a)
In the question no information is given regarding standard time and actual time, so it is
computed as follows :
(In Weeks)
Category Standard time (ST) Actual Time (AT)
Skilled 75 × 30 = 2,250 70 × 32 = 2,240
Semiskilled 45 × 30=1,350 30 × 32 = 960
Unskilled 60 × 30=1,800 80 × 32 = 2,560
Now all information can be arranged as follows :
Category Standard Actual Revised
Time Rate Cost Time Rate Cost Time
ST SR (Rs.) SC(Rs.) AT AR(Rs.) AC(Rs.) RST
Skilled 2,250 60 1,35,000 2,240 70 1,56,800 2,400
Semiskilled 1,350 40 54,000 960 50 48,000 1,440
Unskilled 1,800 30 54,000 2,560 20 51,200 1,920
Total 5,400 - 2,43,000 5,760 - 2,56,000 5,760
Revised standard time is computed as follows:

2,250
Skilled worker : × 5,760 = 2,400 hrs .
5,400
1, 350
Semiskilled worker : × 5,760 = 1, 440 hrs.
5, 400
1, 800
Unskilled worker : × 5,760 = 1,920 hrs.
5, 400
Variances are computed as follows:

LCV = TSC – TAC = 2,43,000-2,56,000 = Rs. 13,000 (A)
(i) LRV = AT (SR – AR)
Skilled : 2,240 (60 – 70) = Rs. 22,400 (A)
Semiskilled : 960 (40 – 50) = Rs. 9,600 (A)
Unskilled : 2,560 (30 – 20) = Rs. 25,600 (F) Rs. 6,400 (A)
(ii) LEV = SR (ST-AT)

Skilled : 60 (2,250 – 2,240) = Rs. 600 (F)
Semiskilled : 40 (1,350 – 960) = Rs. 15,600 (F)
Unskilled : 30 (1,800 – 2,560) = Rs. 22,800 (A) Rs. 6,600 (A)
(iii) LREV = SR (ST – RST)
Skilled : 60 (2,250 – 2,400) = Rs. 9,000 (A)
Semiskilled : 40 (1,350 – 1,440) = Rs. 3,600 (A)
Unskilled : 30 (1,800 – 1,920) = Rs. 3,600 (A) Rs. 16,200 (A)
(iv) LMV = SR (RST – AT)

Skilled : 60 (2,400 – 2,240) S = Rs. 9,600 (F)
Semiskilled : 40 (1,440 – 960) = Rs. 19,200 (F)
Unskilled : 30 (1,920 – 2,560) = Rs. 19,200 (A) Rs. 9,600 (F)
Answer to Question No. 7 (b):
Flexible Budget
Particulars Capacity Levels

50% 70% 90%
Output in Units 5,000 7,000 9,000
Prime Cost: Rs. Rs. Rs.
Materials 50,000 70,000 90,000
Direct Wages 40,000 56,000 72,000
Direct Expenses 10,000 14,000 18,000
1,00,000 1,40,000 1,80,000
Variable Overheads 25,000 35,000 45,000
Marginal Cost (1 + 2) 1,25,000 1,75,000 2,25,000
Sales 2,00,000 2,80,000 3,60,000
Contribution ( 4 – 3) 75,000 1,05,000 1,35,000
Fixed Costs 70,000 70,000 70,000
Profit ( 5 – 6) 5,000 35,000 65,000
Working Note:
Semi – variable Expenses have been classified into Fixed and Variable elements as under :
Per Unit Variable Cost = Rs.2000 1,000 = Rs. 2
Fixed Costs = Rs.40,000 – Rs.(10,000 x 2) = Rs. 20,000
Total Variable Overheads per Unit = Rs 3+ Rs. 2 = Rs. 5
Total Fixed Overhead = Rs.50,000 + Rs. 20,000 = Rs. 70,000
8. Answer any three out of the following four questions: 5×3= 15

(a) State the advantages of cost control (any five).
(b) Describe briefly the main scope of cost accountancy.
(c) What is just-in-time (JIT) system? List out its main benefits.
(d) Write a brief note on Performance Budgeting describing its main concepts.
Answer to Question No. 8 (a):
Advantages of Cost Control
The advantages of cost control are mainly as follows:
(i) Achieving the expected return on capital employed by maximising or optimizing profit.
(ii) Increase in productivity of the available resources.
(iii) Reasonable price of the customers.
(iv) Continued employment and job opportunity for the workers.
(v) Economic use of limited resources of production.
(vi) Increased credit worthiness.
(vii) Prosperity and economic stability of the industry.
Answer to Question No. 8 (b):
Scope of Cost Accountancy
The scope of cost accountancy is very wide and includes the following:
(a) Cost Ascertainment: The main objective of cost accounting is to find out the cost of
product/service rendered with reasonable degree of accuracy.
(b) Cost Accounting: It is the process of accounting for cost which begins with recording of
expenditure and ends with preparation of statistical data.
(c) Cost Control: It is the process of regulating the action so as to keep the element of cost within
the set parameters.
(d) Cost Reports: This is the ultimate function of Cost Accounting. These reports are primarily
prepared for use by the management at different levels. Cost Reports help in planning and
control, performance appraisal and managerial decision making.
(e) Cost Audit: Cost Audit is the verification of correctness of Cost Accounts and check on the
adherence to the Cost Accounting Plan, its purpose is not only to ensure the arithmetic accuracy
of cost records but also to see the principles and rules have been applied correctly.
Answer to Question No. 8 (c):
Just –in –Time (JIT)
Just in Time is a production strategy that strives to improve a business return on investment by reducing
in-process inventory and associated carrying costs. Inventory is seen as incurring costs, or waste, instead
of adding and storing value, contrary to traditional accounting. In short, the just-in-time inventory
system focuses on “the right material, at the right time, at the right place, and in the exact amount”
without the safety net of inventory.
The benefits of Just-in-Time system are as follows:
(a) Increased emphasis on supplier relationships. A company without inventory does not want a
supply system problem that creates a part shortage. This makes supplier relationships extremely
important.
(b) Supplies come in at regular intervals throughout the production day. Supply is synchronized with
production demand and the optimal amount of inventory is on hand at any time. When parts
move directly from the truck to the point of assembly, the need for storage facilities is reduced.
(c) Reduces the working capital requirements, as very little inventory is maintained.
(d) Minimizes storage space.
(e) Reduces the chance of inventory obsolescence or damage.
Answer to Question No. 8 (d):
Performance Budgeting
Performance Budgeting is synonymous with Responsibility Accounting which means the responsibility
of various levels of Management is predetermined in terms of output or result keeping
in view the authority vested with them.
The main concepts of such a system are enumerated below:
(a) It is based on a classification of managerial level for the purpose of establishing a budget for
each level. The individual in-charge of that level should be made responsible and held
accountable for its performance over a given period of time.
(b) The starting point of the performance budgeting system rests with the organisation chart in
which the spheres of jurisdiction have been determined. Authority leads to the responsibility
for certain costs and expenses which are forecasted or present in the budget with the
knowledge of the manager concerned.
(c) The cost in each individual`s or department`s budget should be limited to the cost controllable
by him.
(d) The person concerned should have the authority to bear the responsibility.
-------------------------------------------------------------------------------------------------------------------------
SUGGESTED ANSWERS TO QUESTIONS_SYL2016_JUNE2018_PAPER-8
GROUP -II
(SYLLABUS 2016)

JUNE- 2018
Paper-8 : COST ACCOUNTING
Section - A
(i) Batch costing is suitable for

(a) Oil Industry
(b) Sugar Industry
(c) Chemical Industry
(d) Pharmaceutical Industry
(ii) Idle time is

(a) Time spent by workers in office
(b) Time spent by workers in factory
(c) Time spent by workers off their work
(d) Time spent by workers on their job
(iii) Warehouse expense is an example of

(a) Production overhead
(b) Administration overhead
(c) Selling overhead
(d) Distribution overhead
(iv) Standard deals with the principles and methods of determining depreciation
and amortization cost is
(a) CAS-8
(b) CAS -11
(c) CAS-16
(d) CAS-20
(v) In Reconciliation Statement expenses shown only in cost accounts are

(a) Added to financial profit
(b) Deducted from financial profit
(c) Ignored
(d) Deducted from costing profit
(vi) In a job cost system, costs are accumulated

(a) On a monthly basis
(b) By specific job
(c) By department or process
(d) By kind of material used
(vii) In a process 6,000 units are introduced during a period. 5% of input is normal loss.
Closing work-in-process 60% complete is 800 units. 4,900 completed units are
(a) 6,800 units
(b) 5,700 units
(c) 5,680 units
(d) 5,380 units
(viii) Which of the following best describes a fixed cost?

(a) It may change in total where such change is unrelated to changes in
production.
(b) It may change in total where such change is related to changes in production.
(c) It is constant per unit of change in production.
(d) It may change in total where such change depends on production within
the relevant range.
(ix) Z Ltd. is planning to sell 1,00,000 units of product A for Rs. 12.00 per unit. The
fixed costs are Rs.2,80,000. In order to realize a profit of Rs. 2,00,000, what would
the variable costs be?
(a) Rs. 4,80,000
(b) Rs. 7,20,000
(c) Rs. 9,00,000
(d) Rs. 9,20,000
(x) Sales budget is an example of

(a) Expenditure budget
(b) Functional budget
(c) Capital budget
(d) Master budget
(b) Match the statement in Column I with the most appropriate statement in Column II:
copying contents into the answer Books) 1x5=5
Column I Column II
(i) Imputed costs A Cost control technique
(ii) FSN analysis B Treated as part of factory expenses
(iii) Captive power plant expenses C Costing profit and loss account
(iv) Abnormal loss is transferred to D Process of classifying material
(v) Variance analysis E Direct allocation
F Not involving cash outlay
G Management by exception
H Decision package
(c) State whether the following statements are 'True' or 'False':(You may write only the
Roman numeral and whether 'True' or 'False' without copying the statements into the
answer books): 1x5=5
(i) Factory overhead cost applied to a job is usually based on a pre-determined rate.
(ii) CAS-19 deals with the principles and methods of determining the manufacturing
cost of excisable goods.
(iii) Cost ledger control account makes the cost ledger self-balancing.
(iv) FIFO method is followed for evaluation of equivalent production when prices are
fluctuating.
(v) Standard costs and budgeted costs are inter-related and inter-dependent.
blanks) 1x5=5
(i) ____________is the process of regulating the action so as to keep the element of
costwithin the set parameters.
(ii) In absorption costing ___________________ is added to inventory.
(iii) CAS _____________ stands for cost of service cost Centre.
(iv) At _______________ contribution available is equal to total fixed cost.
(v) The document which describes the budgeting organisation, budgeting procedure
etc.isknown as ___________.
Answer:
1. (a) (i) (d)

(ii) (c)
(iii) (d)
(iv) (c)
(v) (b)
(vi) (b)
(vii) (d)
(viii) (a)
(ix) (b)
(x) (b)
(b)
Column I Column II
(i) Imputed costs F Not involving cash outlay
(ii) FSN analysis D Process of classifying material
(iii) Captive power plant expenses B Treated as part of factory expenses
(iv) Abnormal loss is transferred to C Costing profit and loss account
(v) Variance analysis G Management by exception
(c) (i) True

(ii) False
(iii) True
(iv) False
(v) False
(d) (i) Cost Control

(ii) Fixed Cost
(iii) CAS - 13
(iv) Break even point
(v) Budget Manual
Section - B
15 × 5 = 75
2. (a) The existing Incentive system of SHRISTI LTD is as under:
Normal working week : 5 days of 8 hours each plus 3 late shifts of 3 hours each
Rate of Payment : Day work :Rs.160 per hour
Late shift:Rs. 225 per hour
Average output per operatorfor 49-hours week i.e. including

3 late shifts : 120 articles.
In order to increase output and eliminate overtime, it was decided to switch on to a

system of payment by results. The following information is obtained:
Time-rate (as usual) :Rs. 160 per hour
Basic time allowed for 15 articles : 5 hours
Piece-work rate : Add 20% to basic piece-rate
Premium Bonus : Add 50% to time.
Required:
Prepare a Statement showing hours worked, weekly earnings, number of articles
produced and labour cost per article for one operator under the following systems:
(i) Existing time-rate
(ii) Straight piece-work
(iii) Rowan system
(iv) Halsey premium system
Assume that 135 articles are produced in a 40-hour week under straight piece work,
Rowan Premium System, the Halsey Premium System above and worker earns half the
time saved under Halsey Premium System. 9
(b) The following figures are taken from the accounts of BALEN LTD a manufacturing concern
for the month of October, 2017:
Indirect Materials : Production Departments : X Rs. 19,000; Y Rs. 24,000; Z Rs. 4,000;
Service Departments : Maintenance Rs. 30,000; Stores Rs. 8,000.
Indirect Wages : Production Departments : X Rs. 18,000; YRs. 22,000; Z Rs. 6,000;
Service Departments : Maintenance Rs. 20,000; Stores Rs.13,000.
Other Expenses: Power and Light: Rs. 1,20,000; Rent and Rates Rs. 56,000; Insurance of
Assets Rs. 20,000; Meal Charges Rs. 60,000; Depreciation @ 6% p.a. on capital value of
assets.
Departmental Data
Items Production Departments Service Department
X Y Z Maintenance Stores
Area (Sq. Ft.) 4,000 4,000 3,000 2,000 1,000
Capital Value of Assets (Rs.) 20,00,000 24,00,000 16,00,000 12,00,000 8,00,000
Kilowatt Hours 2,000 2,200 800 750 250
Number of Employees 180 240 60 80 40
Service rendered by Maintenance Department to Production Departments:

X 50%; Y 30%; Z 20%.
Service rendered by Stores Department to Production Departments:
X 40%; Y 40%; Z 20%.
From the above data, prepare a Departmental Distribution Summary showing apportion
of costs ofService Departments to the Production Departments and the Total Overheads
of the ProductionDepartments. 6
Answer:
2. (a)
Table Showing Labour Cost Per Article
Method of Payment Hourswor Weeklyearnings Number Labour costper
ked produced (Rs.) ofarticles article (Rs.)
Existing time rate 49 8,425.00 120 70.21
Straight piece rate system 40 8,640.00 135 64.00
Rowan Premium System 40 9,007.41 135 66.72
Halsey Premium System 40 8,600.00 135 63.70
Working Notes:
(i) Existing Time Rate

Weekly wages 40 hours @ Rs.160 per hr. = Rs. 6,400
9 hours @ Rs.225 per hr. = Rs. 2,025
Rs. 8,425
(ii) Piece Rate System
Basic Time 5 hours for 15 articles
Cost of 15 articles at hourly rate of Rs.160/hr = Rs. 800
Add: 20% = Rs. 160
= Rs. 960
 Rate per article = Rs. 960 ÷ 15 = Rs. 64.
Earning for the week = 135 articles × Rs. 64 = Rs. 8,640.
(iii) Rowan Premium System

Basic Time 5 hours for 15 articles
50% to time
7.5 hours for 15 articles or 30 minutes per article
Time allowed for 135 articles = 67.50 hours
Actual time taken for 135 articles = 40 hours
TA −HW
Earnings = (HW × RH) +( × HW × RH)
TA
67.50−40
= (40 hours × Rs.160) +( × 40 × Rs.160) = Rs. 9,007.41
67.50
(i) Halsey Premium System:
50
Earnings = (HW × RH) +{ (TA – HW ) × RH}
100
1
= (40 × Rs.160) + { (67.50 -40) × Rs.160} = Rs. 8,600
2
(b) Departmental Distribution Summary
Items Basis of Total Production Departments Service Departments

Apportionment
X Y Z Maintenance Stores
Rs. Rs. Rs. Rs. Rs.
Indirect Allocation
Materials 85,000 19,000 24,000 4,000 30,000 8,000
Indirect Allocation
Wages 79,000 18,000 22,000 6,000 20,000 13,000
Power &Light Kilowatt Hours
(200:220:80:75:25) 1,20,000 40,000 44,000 16,000 15,000 5,000
Depreciation Value of Assets
(1 Month) (5:6:4:3:2) 40,000 10,000 12,000 8,000 6,000 4,000
Insurance Value of Assets 20,000 5,000 6,000 4,000 3,000 2,000
Rent & Rates Area
56,000 16,000 16,000 12,000 8,000 4,000
Meal No. of Employees
Charges 60,000 18,000 24,000 6,000 8,000 4,000
4,60,000 1,26,000 1,48,000 56,000 90,000 40,000
Maintenance
Department - 45,000 27,000 18,000 Nil
Stores
Department - 16,000 16,000 8,000 Nil
Total
Overheads 4,60,000 1,87,000 1,91,000 82,000
3. (a) What are the Direct Expenses as defined in CAS-10 (Limited Revision 2017)? Also
discuss the general principles of its measurement as per CAS-10. (any five only) 6
(b) The net profit of X Ltd., appeared at Rs. 41,800 as per financial records for the year
ending 31st March, 2018. A scrutiny of the figures from both the sets of accounts
revealed thefollowing facts:
Rs.
Works overhead under-recovered in costs 1,500
Administrative overheads over-recovered in costs 850
Depreciation charged in financial accounts 5,600
Depreciation recovered in costs 6,250
Interest on investments not included in costs 3,000
Loss due to obsolescence charged in financial accounts 2,850
Income tax reserve made in financial accounts 20,150
Bank interest and transfer fee credited in financial books 370
Stores adjustment (credit) in financial books 230
Value of opening stock in : Cost accounts 24,800
: Financial accounts 26,300
Value of closing stock in : Cost accounts 25,000
: Financial accounts 23,000
Interest charged in cost accounts 2,000
Imputed rent charged in cost accounts 1,000
Goodwill written off 5,000
Loss on sale of furniture 600
Selling and distribution expenses not charged in cost accounts 10,000
Donations to Prime Minister's Relief Fund 5,100
Transfer to Debenture Redemption Fund 9,000
Transfer to Dividend Equalisation Fund 20,500
Required:
Prepare a statement showing the reconciliation statement and find out the profit as
per costAccounts. 9
Answer:
3. (a) Direct Expenses : As per CAS - 10 ( Limited Revision 2017), Direct Expenses are the
“Expenses relating tomanufacture of a product or rendering a service, which can be
identified or linked with the cost object other thandirect material cost and direct
employee cost.”
General Principles of Measurement: (Any five points)

(i) Identification of direct expense shall be based on traceability in an economically
feasible manner.
(ii) Direct expenses incurred for bought out resources shall be determined at invoice
price including all taxes and duties and any other expenditure directly attributable
thereto net of trade discounts, taxes and duties refundable or to be credited.
(iii) Direct expenses paid/incurred in lump-sum or which are in the nature of onetime
payment shall beamortized on the basis of estimated output or benefit to be
derived from such expenses.
(iv) Finance cost incurred in connection with selfgenerated or procured resources shall
not form part of thedirect expenses.
(v) Any subsidy/grant/incentive or any amount received or receivable with respect

to any direct expensesshall be reduced for ascertainment of the cost of the cost
object.
(vi) Penalties/damages paid to statutory authorities or other third parties shall not form
part of the directexpenses.
(vii) Any change in the cost accounting principles applied for measurement of the
direct expenses should bemade only if it is required by law or for compliance with
the requirements of a CAS or a change wouldresult in a more
appropriatepreparation or presentation of cost statement of the organization.
(viii)Credit/recoveries relating to direct expenses if material and quantifiable shall be
deducted to arrive at thenet direct expenses.
(ix) Any abnormal portion of direct expenses which is material and quantifiable shall
not form part of thedirect expenses.
(b)
Particulars Rs. Rs.

Profit as per Financial Accounts 41,800
Add:
Works Overhead under-recovered in Cost Accounts 1,500
Expenses and losses debited in Financial Accounts but excluded from Cost
Accounts:
Income Tax Reserve 20,150
Loss on sale of Furniture 600
Loss due to obsolescence 2,850
Goodwill written off 5,000
Selling and Distribution expenses not charged in Cost Accounts 10,000
Donation to Prime Minister’s Relief Fund 5,100
Transfer to Debenture Redemption Fund 9,000
Transfer to Dividend Equalisation Fund 20,500
Under valuation of Opening Stock in Cost Accounts 1,500
Over valuation of Closing Stock in Cost Accounts 2,000 78,200
1,20,000
Less:
Administrative Overheads over-recovered in Cost Accounts 850
Depreciation over-charged in Cost Accounts 650
Incomes and gains credited in Financial books but not shown in Cost
Accounts:
Interest on Investments 3,000
Bank interest and transfer fees 370
Stores adjustments 230
Imputed rent charged in Cost Accounts 1,000
Interest charged in Cost Accounts 2,000 8,100
4. (a) The following data are available from the books and records of VEEMYES Ltd. for the
month of November 2017.
Direct Labour cost : Rs. 20,000 (125 % of factory overheads)
Inventory accounts show the following figures:

November 1 November 30
Rs. Rs.
Raw materials 10,000 20,000
Work in progress 8,000 4,000
Finished goods 10,000 5,000
Selling expenses 15,000
Office expenses 10,000
Sales 1,25,000
The company maintains a profit of 25% on cost.
You are required to prepare a cost sheet for the month of November 2017 with all
elements. 8
(b) CBA Ltd., manufactures certain grades of products known as M, B1 and B2. In course of
manufacture of product M (main product), by-products- B1 and B2 emerge. The joint
expenses of manufacture amount to Rs. 2,37,600.
All the three products are processed further after separation and sold as per details
given below:
Product – M
(By Products)
Product – B1 Product – B2
Sales (Rs.) 2,00,000 1,20,000 80,000
Cost incurred after separation (Rs.) 20,000 15,000 10,000
Profit as percentage on sales 25 20 15
Total fixed selling expenses are 10% of total cost of sales which are apportioned to
the three products in the ratio of 20:40:40.
Required:
(i) Prepare a statement showing the apportionment of joint costs to the products (M,
B1 and B2)
(ii) If the product B1 (by product) is not subject to further processing and is sold at the
point of separation, for which there is a market at Rs.1,00,440 without incurring
any selling expenses, would you advise its disposal at this stage? Show the workings.
7
Answer:
4. (a)
Statement of Cost and Profit
Particulars Amount in Rs.

Opening Stock of Raw Materials 10,000
Purchase of Raw Materials 40,000
50,000
Less: Closing Stock of Raw Materials 20,000
Cost of Materials consumed 30,000
Add: Direct Labour Cost 20,000
Prime Cost 50,000
Add: Factory Overheads 16,000
66,000
Add: Opening Stock of Work-in –Progress 8,000
74,000
Less: Closing Stock of Work-in-Progress 4,000
Factory Cost 70,000
Add: Office Expenses 10,000
Cost of Production 80,000
Add: Opening Stock of Finished Goods 10,000
90,000
Less: Closing Stock of Finished Goods 5,000
Cost of Goods sold 85,000
Add: Selling Expenses 15,000
Total Cost 1,00,000
Add: Profit 25,000
Sales 1,25,000
Workings: Calculation of purchase of raw materials

Details Amount in Rs.
Sales 1,25,000
Less: Profit 25,000
Total Cost 1,00,000
Less: Selling Expenses 15,000
Cost of Goods Sold 85,000
Add: Closing Stock of Finished Goods 5,000
90,000
Less: Opening Stock of Finished Goods 10,000
Cost of Production 80,000
Less: Office Expenses 10,000
Factory Cost 70,000
Add: Closing Stock of Work-in-Progress 4,000
74,000
Less: Opening Stock of Wok-in-Progress 8,000
66,000
Less: Factory Overheads 16,000
Prime Cost 50,000
Less: Direct Labour Cost 20,000
Cost of Raw Materials consumed 30,000
Less: Opening Stock of Raw Materials 10,000
20,000
Add: Closing Stock of Raw Materials 20,000
Purchase of Raw Materials 40,000
(b) (i) Statement of Apportionment of Joint Cost
Particulars Total Product By-Products

M B1 B2
Rs. Rs. Rs. Rs.
Sales 4,00,000 2,00,000 1,20,000 80,000
Less: Profit 86,000 50,000 24,000 12,000
Cost of Sales 3,14,000 1,50,000 96,000 68,000
Less: Selling & Distribution Expenses
(10% of Rs. 3,14,000 in the Ratio 20:40:40) 31,400 6,280 12,560 12,560
Cost of Production 2,82,600 1,43,720 83,440 55,440
Less: After separation Cost 45,000 20,000 15,000 10,000
Joint Cost 2,37,600 1,23,720 68,440 45,440
(ii) By product B1 earns Rs. 24,000 as profit after separation

Profit before separation = Rs.1,00,440–Rs. 68,440 = Rs. 32,000
If By product B1 is sold before further processing, then the profit of the by product
may be increased by Rs. (32,000 - 24,000) = Rs. 8,000.
Hence it is advisable to sell the product B1 at the point of separation.
5. (a) JANATA TRANSPORT LTD. a Transport Company is running 4 buses between two towns
which are 50 kms. away. Seating capacity of each bus is 40 passengers. The following
information is obtained from its books for November, 2017:
Particulars Rs.
Wages of drivers, conductors and cleaners 24,000
Salaries of office and supervisory staff 10,000
Diesel, oil and other lubricants 40,000
Repairs and maintenance 8,000
Taxes, insurance etc. 16,000
Depreciation of buses 26,000
Interest and other charges 20,000

Actual passengers carried were 75% of the seating capacity. All the 4 buses ran on all
the days of the month. Each bus made one to and fro round trip per day.
Prepare the Operating Cost Statement and determine the cost per passenger km. for
each bus. 8
(b) A contractor, who prepares his accounts on 31st March each year, commenced a
Contract No. 220 on 1st July, 2016. The following information is revealed from his costing
records on 31st March, 2017:
Particulars (Rs.)
Materials sent to site 2,51,000
Labour 5,65,600
Foreman's salary 81,300
A machine costing Rs.2,60,000 remained in use on site for 146 days. Its working life is
estimated at 7 years and final scrap value at Rs. 15,000. A supervisor is paid Rs. 8,000
per monthand has devoted one half of his time on the contract. All other expenses
amount to Rs. 1,36,500. Materials at site on 31st March, 2017 cost Rs. 35,400. The
contract price is Rs. 20,00,000. On 31st March, 2017 two-third of the contract was
completed, however, the architect gave certificate only for 50% of the contract price
and Rs. 7,50,000 had so far been paid on account.
Prepare Contract Account and state how much profit or loss should be included on
31stMarch, 2017 in financial accounts. 7
Answer:
5. (a) Operating Cost Statement

(A) Fixed Costs or Fixed Charges:
Wages of Drivers, Conductors and Cleaners 24,000
Salary of Office and Supervisory Staff 10,000
Taxes, Insurance etc. 16,000
Interest and other charges 20,000
Depreciation of buses 26,000
Total Fixed Costs 96,000
(B) Variable Costs or Running Charges:
Diesel, Oil and other Lubricants 40,000
Repairs and Maintenance 8,000
Total Variable Costs or Running Charges 48,000
(C) Total Operating Charges or Cost (A + B) 1,44,000
(D) Effective Passenger kms. 3,60,000
(E) Cost per Passenger km. (C/D) 0.40
Note: Depreciation can also be shown as Variable Cost or Running Charges as per study
module.
Working Note:
Calculation of Effective Passenger kms.:
kms. in one round trip = 50 x 2 = 100 kms
Passenger kms.= Buses x Trip kms. x Trips x Days x Passengers x Capacity
= 4 x 100 x 1 x30 x 40 x75%
= 3,60,000 Passenger kms.
(b)
Working Notes:
(i) Calculation of Depreciation on Machine:
Cost of Machine Rs. 2,60,000
Less: Scrap Value Rs. 15,000
Cost of Machine to be written off Rs. 2,45,000
Depreciation of 1 Year = Rs. 2,45,000/7 = Rs. 35,000

Depreciation for 146 days = Rs. 35,000 (146/365) = Rs.14,000
(ii) Calculation of Cost of Work Uncertified:
rd
Cost of 2/3 completed work = Rs. 10,49,000
Total Cost of completed Contract = Rs. 10,49,000× 3/2 = Rs. 15,73,500
Part of uncertified work = 2/3 – ½ = 1/6
Therefore, Cost of uncertified work = Rs. 15,73,500× 1/6 = Rs. 2,62,250
(iii) Profit Transferred to Profit and Loss Account:
7,50,000
Notional Profit × 2/3 × = Rs. 1,06,625
10,00,000
Contract Account
st
Dr. (for the year ended 31 March, 2017) Cr.
To Materials 2,51,000 By Materials at site 35,400
To Labour 5,65,600 By Balance c/d (Total Cost) 10,49,000
To Foreman’s Salary 81,300
To Supervisor’s Salary
1
(Rs. 8,000 × × 9) 36,000
2
To Depreciation on Machine 14,000
To other Expenses 1,36,500
10,84,400 10,84,400
To Balance b/d 10,49,000 By Work-in-Progress:
To Notional Profit c/d 2,13,250 Certified Rs.
10,00,000
Uncertified Rs. 12,62,250
2,62,250
12,62,250 12,62,250
To profit & Loss Account 1,06,625 By Notional Profit b/d 2,13,250
To Work-in-Progress A/c
(Reserve) 1,06,625
2,13,250 2,13,250
6. (a) ANKIT LTD. a manufacturing Company which produces three products furnishes the
following information for the year 2016-17:
Particulars Products
A B C
Selling Price (per unit) Rs. 200 Rs. 150 Rs. 100
Profit Volume Ratio 10% 20% 40%
Raw Material content as a % of Variable Cost 50% 50% 50%
Maximum Sales Potential (units) 40,000 25,000 10,000
Fixed costs are estimated at Rs. 12 lakhs. The firm uses same raw material in all the
three products. Raw material is in 'Short Supply'. The firm has a quota for the supply of
raw materials of the value of Rs. 36 lakhs for the year 2016-17 for the production of
three products to meet sales demand.
Required:
Determine the optimal product mix and ascertain the maximum profit therefrom. 8
(b) The following figures are obtained from the records of P. Ltd.:
2015-16 (Rs.) 2016-17
(Rs.)
Sales 80,000 1,00,000

Net Profit 10,000 16,000
Required:
(i) Profit Volume Ratio
(ii) Break Even Point
(iii) Profit or loss at sales of Rs. 40,000
(iv) Sales required to earn a profit of Rs. 22,000
(v) Margin of Safety if sales isRs. 55,000 7
Answer:
6. (a) Marginal Cost Statement
Particulars Product
A (Rs.) B (Rs.) C (Rs.)
Selling Price (SP) 200 150 100
Less: Variable Cost (VC) = SP -(SP × P/V Ratio) 180 120 60
Contribution per Unit (SP –VC) 20 30 40
Contribution per Key-Factor {C/KF(50% of VC)} 0.22 0.50 1.33
Ranking III II I
Units Produced 20,000 25,000 10,000
(18,00,000/90) (Maximum) (Maximum)
Raw Material used (Rs.) 18,00,000 15,00,000 3,00,000
(Rs.36,00,000 – (25,000 × (10,000 ×
Rs.18,00,000) Rs.60) Rs.30)
Optimal Product Mix:

Product A 20,000 units (From remaining raw material)
Product B 25,000 units (Maximum)
Product C 10,000 units (Maximum)
Calculation of Profit
Particulars (Rs.)
Product A 20,000 units x Rs. 20 (C per unit) 4,00,000
Product B 25,000 units x Rs. 30 7,50,000
Product C 10,000 units xRs. 40 4,00,000
Total Contribution 15,50,000
Less : Fixed Cost 12,00,000
Maximum Profit 3,50,000
(b) (i) Profit Volume Ratio:

P/V Ratio = (Change in Profit / Change in Sales) x 100
= (Rs. 6,000 / 20,000)* x 100 = 30%
Sales (Rs.) Profit (Rs.)
* 2016-17 1,00,000 16,000
2015 -16 80,000 10,000
20,000 6,000
(i) Break Even Point (BEP):

BEP = Sales× P/V Ratio (Contribution) = Fixed Cost (FC) + Profit or,
Rs. 80,000 × 30% = Fixed Cost + Rs. 10,000 or,
Rs. 24,000 = Fixed Cost + Rs. 10,000 Or Fixed Cost =Rs. 14,000
Or
Rs. 1,00,000× 30% =FC + Rs. 16,000 or,
Rs. 30,000 =FC + Rs.16,000 Or FC = Rs.14,000
Now, BEP = Sales × P/V Ratio = FC or, Sales× 30% = Rs. 14,000 or BEP = Rs. 46,667
Or, BEP Sales = Fixed Cost/ (P/V Ratio) = Rs.14,000/0.30 =Rs.46,667

(ii) Profit or Loss at Sales of Rs. 40,000:
We know that : Sales × P/V Ratio = Fixed Cost + Profit
∴ Rs. 40,000 × 30% = Rs. 14,000 + Profit or,
Rs. 12,000 = Rs. 14,000 + Profit or Profit = ( - ) Rs. 2,000
When Sales are Rs. 40,000, loss is Rs. 2,000.
(iii) Sales required to earn a Profit of Rs. 22,000:
We know that: Sales × P/V Ratio = Fixed Cost + Profit or,
Sales × 30% =Rs.14,000 + Rs. 22,000 or Sales = Rs. 1,20,000
(iv) Margin of Safety if Sales is Rs.55,000:
Margin of Safety (MS) = Sales at Activity Level – Break Even Sales
= Rs. 55,000 – Rs. 46,667 orRs. = Rs.8,333
7. (a) The standard cost card of A & Co. shows the following costs:
Material cost - 2 kg @ Rs. 2.50 each Rs. 5.00 per unit
Wages - 2 hours @ 50 paise each Re.1.00 per unit
The actual data from business operations are as follows:

Production 8,000 units
Actual total cost of production:

Material cost - 16,500 kg @ Rs. 2.40 each Rs. 39,600
Wages -18,000 hours @ 40 paise each Rs. 7,200
Calculate the following variances:

(i) Material Cost Variance (MCV);
(ii) Material Price Variance (MPV);
(iii) Material Usage Variance (MUV);
(iv) Labour Cost Variance (LCV);
(v) Labour Rate Variance (LRV);
(vi) Labour Efficiency Variance (LEV). 8
(b) Summarised below are the revenue and expenditure figures of AB Ltd. for the month
of March to August,2017:
Month Sales (Rs.) Purchases (Rs.) Wages (Rs.) Expenses (Rs.)
March 6,50,000 4,00,000 1,20,000 50,000
April 7,00,000 4,80,000 1,50,000 50,000
May 7,50,000 4,50,000 1,50,000 60,000
June 8,00,000 4,80,000 1,80,000 60,000
July 8,20,000 4,00,000 1,80,000 80,000
August 8,90,000 5,00,000 2,00,000 80,000
The following further information is available:

(i) 10% Purchases and sales are on cash basis.
(ii) Advance payment of income tax in August, 2017 Rs. 50,000.
(iii) Plant purchased and price to be paid in June, 2017 Rs. 1,00,000.
(iv) Time lag-
Credit sales 2 months
Credit purchases 1 month
Wages ½month
Expenses ½month
Required:
Prepare a Cash Budget for 3 months starting on 1st June, 2017 when cash balance is
Rs. 2,00,000. 7
Answer:
7. (a)
Working Notes:
Standard Quantity for actual output = 8,000 Units × 2 kg. = 16,000 kg.
Standard Hours for actual output = 8,000 Units × 2 hours = 16,000 hours
Standard Cost of Material = SQ × SP = 16,000 kg.× Rs.2.50 = Rs. 40,000
Actual Cost of Material AQ × AP = 16,500 kg. × Rs.2.40 = Rs. 39,600
Standard Cost of Wages = SH × SR = 16,000 hours × Re.0.50 = Rs. 8,000
Actual Cost of Wages = AH × AR = 18,000 hours × Re. 0.40 = Rs. 7,200
Material Variances:
(i) MCV = TSC – TAC = Rs. 40,000 – Rs.39,600 = Rs. 400(F)
(ii) MPV = AQ(SP – AP) =16,500 kg. (Rs.2.50 – Rs.2.40) = Rs. 1,650 (F)
(iii) MUV = SP(SQ – AQ) = Rs. 2.50(16,000kg. – 16,500 kg.) = Rs. 1,250(A)
Labour Variances:
(iv) LCV = SC – AC = Rs. 8,000 – Rs.7,200 = Rs. 800(F)
(v) LRV = AH (SR –AR)= 18,000hours ( Re.0.50 – Re. 0.40) = Rs. 1,800(F)
(vi) LEV = SR(SH –AH) = Re.0.50 (16,000 hours – 18,000 hours)= Rs. 1,000 (A)
(b)
Working Notes:
(i) Collection from Debtors:
June (Rs.) July (Rs.) August (Rs.)
Sales for April, May and June respectively 7,00,000 7,50,000 8,00,000
Less: 10% for Cash Sales 70,000 75,000 80,000
Credit Sales (Collection from Debtors) 6,30,000 6,75,000 7,20,000
(ii) Payment to Creditors:

June (Rs.) July (Rs.) August (Rs.)
Purchases for the preceding month 4,50,000 4,80,000 4,00,000
Less: 10% for Cash Purchases 45,000 48,000 40,000
Credit Purchases (Payment to Creditors) 4,05,000 4,32,000 3,60,000
Cash Budget
(for June to August, 2017)
Particulars June (Rs.) July (Rs.) August (Rs.)
Cash Balance 2,00,000 1,32,000 1,67,000
Receipts:
Cash Sales 80,000 82,000 89,000
Collection from Debtors 6,30,000 6,75,000 7,20,000
Total Receipts (A) 9,10,000 8,89,000 9,76,000
Payments:
Cash Purchases 48,000 40,000 50,000
Payment to Creditors 4,05,000 4,32,000 3,60,000
Wages 1,65,000 1,80,000 1,90,000
Expenses 60,000 70,000 80,000
Plant 1,00,000
Advance Income Tax 50,000
Total Payments (B) 7,78,000 7,22,000 7,30,000
Cash Balance (A – B) 1,32,000 1,67,000 2,46,000
Answer:
8. (a) Cost Control vs.Cost Reduction : Both cost control and cost reduction are efficient tools
for management buttheir concepts and procedure are widely different. The main
differences are as follows:
Cost Control Cost Reduction
(i) Cost control Costreduction represents the achievement
representseffortsmadetowards in reduction of cost.
achieving target or goal.
(ii) The Process of cost control is to Cost reduction is not concerned with
setup a target, ascertain the maintenance of performance according to
actual performance and standards.
compare it with the target,
investigate the variances, and take
remedial measures.
(iii) Cost control assumes the existence Cost reduction assumes the existence of
of standards or norms which are concealed potential savings in standards or
not challenged. norms which are therefore subjected to a
constant challenge with a view to
improvement by bringing out savings.
(iv) Cost control is a preventive Cost reduction is a corrective function. It
function. Costs are optimized operates even when an efficient cost
before they are incurred. control system exists. There is room for
reduction in the achieved costs under
controlled conditions.
(v) Cost control lacks dynamic Cost reduction is a continuous process of
approach. 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 to have
continual economy in costs.
(b) The main factors attributable for emerging cost accounting as a specialized discipline
are as under:(Any Five Factors)
(i) Limitations placed on financial accounting.
(ii) Improved cost consciousness.
(iii) Rapid industrial development after industrial revolution and World wars.
(iv) Growing competition among the manufacturers.
(v) To control galloping price rise, the cost of computing the precise cost of product /
service.
(vi) To control cost, several legislations passed throughout the World and in India too,
such as EssentialCommodities Act, Industrial Development and Regulation Act
(IDRA), etc.
(c) Economic Order Quantity (EOQ): EOQ is the size of the order for which both ordering
and carrying costsare minimum.
Assumptions underlying EOQ:

(i) Ordering cost per order and carrying cost per unit per annum are known and they
are fixed.
(ii) Anticipated usage of material in units in known.
(iii) Cost per unit of the material is constant and is known as well.
(iv) The quantity of material ordered is received immediately i.e. lead time is zero.
(d) Principal Budget Factor:

Budgets cover all the functional areas of the organisation. For the
effectiveimplementation of the budgetarysystem, all the functional areas are to be
considered which are interlinked. Because of these interlinks, certainfactors have the
ability to affect all other budgets. Such factor is known as principal budget factor.
Principal budget factor is the factor the extent of influence of which must first be
assessed in order to ensurethat the functional budgets are reasonably capable of
fulfillment. A principal budget factor may be lack ofdemand, scarcity of raw material,
non-availability of skilled labour, inadequate working capital etc. Forexample, an
organisation has the capacity to produce 2,500 units per annum. But the production
department isable to produce only 1,800 units due to non-availability of raw materials.
In this case, non-availability of rawmaterials is the principal budget factor (limiting
factor). If the sales manager estimates that he can sell only1,500 units due to lack of
demand, then lack of demand is the principal budget factor. This concept is also
known as key factor, or governing factor. This factor highlights the constraints
withinwhich the organization functions.
GROUP -I
(SYLLABUS 2016)
DECEMBER- 2017
Paper-8: COST ACCOUNTING
The figures on the right margin indicate full marks.
Section - A
Roman numeral and the alphabet chosen for your answer): 1×10=10
(i) Cost of idle time arising due to non-availability of raw material is

(A) recovered by inflating the raw material rate.
(B) recovered by inflating the wage rate.
(C) charged to factory overheads.
(D) charged to costing profit and loss account.
(ii) Selling and distribution overheads are absorbed on the basis of

(A) rate per unit.
(B) percentage on works cost.
(C) percentage on selling price of each unit.
(D) Any of the above
(iii) What entry will be passed under integrated system for purchase of stores on
credit?
(A) Dr. Stores
Cr. Creditors
(B) Dr. Purchases
Cr. Creditors
(C) Dr. Stores Ledger Control A/c
Cr. Creditors
(D) Dr. Stores Ledger Control A/c
Cr. General Ledger Adjustment A/c
(iv) In a process 800 units are introduced during 2016-17. 5% of input is normal loss.
Closing work-in-progress 60% complete is 100 units. 660 completed units are
(A) 760 units
(B) 744 units
(C) 540 units
(D) 720 units
(v) _________ deals with the principles and methods of determining the production or
operation overheads.
(A) CAS-3
(B) CAS-5
(C) CAS-9
(D) CAS-16
(vi) There is a loss as per financial accounts Rs.10,600, donations not shown in cost
accounts Rs. 6,000. What would be the profit or loss as per cost accounts?
(A) Loss Rs. 16,600
(B) Profit Rs. 16,600
(C) Loss Rs. 4,600
(D) Profit Rs. 4,600
(vii)A hotel having 100 rooms of which 80% are normally occupied in summer and
25% in winter. Period of summer and winter be taken as 6 months each and
normal days in a month be assumed to be 30. The total occupied room days will
be
(A) 1525 Room days
(B) 18900 Room days
(C) 36000 Room days
(D) None of the above
(viii)A firm has fixed expenses Rs. 90,000, sales Rs. 3,00,000 and profit Rs. 60,000. The
P/V ratio of the firm is
(A) 10%
(B) 20%
(C) 30%
(D) 50%
(ix) Marginal costing technique follows the following basis of classification:

(A) Element-wise
(B) Function-wise
(C) Behaviour-wise
(D) Identifiability-wise
(x) Which of the following is not a potential benefits of using a budget?

(A) More motivated managers
(B) Enhanced co-ordination of firm activities
(C) Improved inter-departmental communication
(D) More accurate external financial statements
(b) Match the statement in Column I with the most appropriate statement in Column II:
(You may opt to write only the Roman numeral and the matched the alphabet
instead of copying contents into the answer Books) 1x5=5
Column I Column II
(i) Component of Cost Sheet (A) High initial costs
(ii) Objective of Cost Accounting (B) Classification of cost
(iii) CAS1 (C) In terms of completed units
(iv) Equivalent Production (D) Reference to the job
(v) De-merit of a centralized purchase (E) To determine the value of closing
organization inventory
(c) State whether the following statements are 'True' or 'False':(You may write only the
Roman numeral and whether True or False without copying the statements into the
answer Books) 1x5=5
(i) By-products may undergo further processing before sale.

(ii) Materials which can be identified with the given product unit of cost centre is
called as indirect materials.
(iii) Increasing Labour Turnover increases the productivity of labour resulting in low
costs.
(iv) In case of materials that suffers loss in weight due to evaporation etc. the issue
price of the materials is inflated to cover up the losses
(v) Penalties and fines are included in cost accounts to determine the cost of
production.
(d) Fill in the blanks suitably: (You may write only the Roman numeral and content filling
the blanks) 1x5=5
(i) In standard costs, __________ norm is applied as a scale of reference for assessing
actual cost to serve as a basis of cost control.
(ii) Material Transfer Note is a __________ for transferring the materials from one job to
other job.
(iii) One of the disadvantages of overtime working is incurring _________ labour cost.
(iv) CAS-2 deals with Cost Accounting Standard on ___________ determination.
(v) Where the cost and financial accounts are maintained independently of each
other, it is indispensable to ______ them, as there are differences in the profits of
two sets of books.
Answer:
1. (a) (i) (D)

(ii) (D)
(iii) (C)
(iv) (D)
(v) (A)
(vi) (C)
(vii) (B)
(viii) (D)
(ix) (C)
(x) (D)
(b)
Column I Column II
(i) Component of Cost Sheet (D) Reference to the job
(ii) Objective of Cost Accounting (E) To determine the value of closing inventory
(iii) CAS1 (B) Classification of cost
(iv) Equivalent Production (C) In terms of completed units
(v) De-merit of a centralized (A) High initial costs
purchase organization
(c) (i) True

(ii) False
(iii) False
(iv) True
(v) False
(d) (i) predetermined

(ii) document
(iii) excess (or additional or more or higher)
(iv) capacity
(v) reconcile
Section - B
Each question carries 15 marks. 15 x 5=75
2. (a) From the following particulars with respect to a particular item of materials of a
manufacturing company, calculate the best quantity to order:
Ordering quantities (tonne) Price per ton (Rs.)
Less than 250 6.00
250 but less than 800 5.90
800 but less than 2,000 5.80
2,000 but less than 4,000 5.70
4,000 and above 5.60
The annual demand for the material is 4,000 tonnes. Stock holding costs are 25% of
material cost p.a. The delivery cost per order is Rs. 6.00. 8
(b) The summary as per primary distribution is as follows:
Production departments A- Rs. 2,500; B- Rs. 2,300 & C- Rs. 1,700

Service departments X–Rs. 700; Y–Rs. 900
Expenses of service departments are distributed in the ratios of:
X department: A- 20%, B- 40%, C- 30% and Y- 10%
Y department: A- 40%, B- 20%, C- 20% and X- 20%
Show the distribution of service costs among A, B and C under repeated distribution
method. 7
Answer:
2. (a)
Statement showing computation of total inventory cost at different order size
Ordering Quantities
Particulars 200 250 800 2,000 4,000
(i) Purchasing cost 24,000 23,600 23,200 22,800 22,400
(ii) No. of orders 20 16 5 2 1
(iii) Ordering Cost 120 96 30 12 6
(iv) Average size of orders 100 125 400 1,000 2,000
(v) Inventory carrying cost per unit 1.5 1.475 1.45 1.425 1.4
(6x25%) (5.9x25%) (5.8x25%) (5.7x25%) (5.6x25%)
(vi) Inventory carrying cost (iv)x (v) 150 184.375 580 1,425 2,800
(vii) Total inventory cost (i)+(iii)+(vi) 24,270 23,880 23,810 24,237 25,206
For the above computations the best quantity to order is 800 units.
Note: Minimum ordering quantity assumed to be 200 tons; it may be any quantity
below 250 tons, but the decision will remain same.
(b)
Particulars Production departments Service departments
A B C X Y
Rs. Rs. Rs. Rs. Rs.
1 As per primary distribution 2,500 2,300 1,700 700 900
2 Service Dept. X 140 280 210 (700) 70
3 Service Dept. Y 388 194 194 194 (970)
4 Service Dept. X 38.8 77.6 58.2 (194) 19.4
5 Service Dept. Y 7.76 3.88 3.88 3.88 (19.4)
6 Service Dept. X 0.776 1.552 1.164 (3.88) 0.388
7 Total 3,075.336 2,857.032 2,167.244 0 0.388
It can be noticed that the undistributed balance in service department is very
negligible and thus can be ignored for further distribution.
3. (a) How would you treat overtime in cost records as per CAS-7? 5
(b) The following is the Trading & Profit and Loss Account of Ram & Co.:

To Materials consumed 23,01,000 By Sales (30000 units) 48,75,000
To Direct wages 12,05,750 By Stock of Finished goods 1,30,000
(1000 units)
To Production overheads 6,92,250 By W.I.P: `
Material 55,250
Wages 26,000
Prod. O. H. 16,250 97,500
To Administration Overheads 3,10,375 By Interest on Bank deposit 65,000
To Selling & Distribution Overheads 3,68,875 By Dividends 3,90,000
To Preliminary expenses written off 22,790
To Goodwill written off 45,000
To Fines 3,250
To Interest of mortgage 13,000
To Loss on sale of machine 16,250
To Taxation 1,95,000
To Net Profit 3,83,960
55,57,500 55,57,500
Ram & Co. manufactures a standard unit. The cost accounting records of the firm
shows the following information:
(i) Production overheads have been charged at 20% on prime cost.
(ii) Administration overheads have been recovered at Rs. 9.75 per finished unit.
(iii) Selling and distribution overheads have been recovered at Rs. 13 per unit sold.
Required:
(i) Prepare a statement showing cost and profit as per cost records.
(ii) Prepare a statement reconciling the profit disclosed by cost accounts with that
shown in financial accounts. 10
Answer:
3. (a) 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.
If overtime is spent at the request of the customer, then the entire amount (including
over time premium) is treated as direct wages and should be charged to the job.
When the overtime is worked due to lack of capacity as general policy of the
company thenthe total amount paid is treated as direct wages which is computed at
the estimated rate based on the figures of the previous years.
Overtime worked on account of the abnormal conditions such as flood, earthquake,

etc., should not be charged to cost, but to Costing Profit and Loss Account if
integrated accounts are maintained.
It will thus be seen that overtime involves payment of increased wages and should be
resorted to only when extremely essential.
(b) (i) Statement Showing Cost and Profit in Cost Records

Production 31,000 units
Total W.I.P. Production
Material Consumed 23,01,000 55,250 22,45,750
Wages 12,05,750 26,000 11,79,750
Prime Cost 35,06,750 81,250 34,25,500
Add: Production Overhead (20% on prime cost) 7,01,350 16,250 6,85,100
Works Cost 42,08,100 97,500 41,10,600
Add: Administration Overhead @ Rs. 9.75 per unit 3,02,250
44,12, 850 ×1, 000 1,42,350
Less: Closing Stock = 31, 000

Production Cost of Goods Sold 42,70,500
Add: Selling and Distribution Overhead (30,000×13) 3,90,000
Profit 2,14,500
Sales 48,75,000
(ii) Reconciliation Statement

Particulars Rs. Rs.
Net Profit as per Cost Accounts 2,14,500
Add:(i) Excess Production Overhead in Cost Records 9,100
[6,85,100 - (6,92,250 - 16,250 WIP)]
(ii) Excess selling overhead in Cost Records 21,125
[3,90,000-3,68,875]
(iii) Interest on bank deposits not included in Cost Books 65,000
(iv) Dividend not shown in Cost Books 3,90,000 4,85,225
6,99,725
Less:(i)Administration Overhead under-recovered in 8,125
CostBooks (3,10,375 - 3,02,250)
(ii)Closing stock overvalued in Financial 12,350
Books(1,42,350-1,30,000)
(iii) Preliminary expenses written off in Financial Books only 22,790
(iv) Goodwill written off in Financial Books only 45,000
(v) Fines shown in Financial Books only 3,250
(vi) Interest charged in Financial Books only 13,000
(vii)Loss on sale of machine shown in Financial Books only 16,250
(viii)Income tax provided in financial books only; 1,95,000 3,15,765
Profit as per Financial Books 3,83,960
4. (a) Component 'Citipride' is made entirely in cost centre 200. Material cost is 6 paise per
component and each component takes 10 minutes to produce. The machine
operator is paid 72 paise per hour, and machine hour rate is Rs. 1.50. The setting up of
the machine to produce the component 'Citipride' takes 2 hours 30 minutes. On the
basis of this information, prepare a cost sheet showing the production and setting up
cost, both in total and per component, assuming that a batch of:
(i) 10 components,
(ii) 100 components, and
(iii) 1000 components is produced. 9
(b) SG Ltd. manufactures product A which yields two by-products B and C. The actual
joint expenses of manufacturing for a period were Rs. 9,000.
The profits on each product as a percentage of sales are 33-1/3%, 25% and 15%
respectively.
Subsequent expenses are as follows:

Products (Rs.)
Particulars 'A' 'B' 'C’
Material 100 75 25
Direct 200 125 50
Overheads 150 125 75
Total 450 325 150
Sales 6,300 4,800 2,500
Apportion the joint expenses. 6
Answer:
4. (a)
Cost Sheet Component 'Citipride'
Particulars Batch Size
10 components 100 components 1000 components
Total Per Total Per Total Per
Rs. component Rs. component Rs. component
Rs. Rs. Rs.
A. Setting up Cost:
Machine Operators wages 1.80 0.180 1.80 0.0180 1.80 0.00180
(2.5 hours @ Re. 0.72 p.h)
Overheads 2.5 hours @ 3.75 0.375 3.75 0.0375 3.75 0.00375
Rs. 1.50 p.h)
Total of (A) 5.55 0.555 5.55 0.0555 5.55 0.00555
B. Production Cost:
Material Cost @ Re. 0.06 0.60 0.060 6.00 0.0600 60.00 0.06000
per component
MachineOperators Wages 1.20 0.120 12.00 0.1200 120.00 0.12000
[(Refer to Working Note (1)]
Overheads
[(Refer to Working Note (2)] 2.50 0.250 25.00 0.2500 250.00 0.25000
Total of (B) 4.30 0.430 43.00 0.4300 430.00 0.43000
C. Total Cost: (A +B) 9.85 0.985 48.55 0.4855 435.55 0.43555
Working Notes:
10 Components 100 Components 1000 Components
(1) Operators Wages 1.20 12.00 120.00
Time taken in minutes by [(100/60)x0.72] [(1000/60)x0.72] [(10000/60)x0.72]
machine operators
@10 minutes per component
Operators Wages @ Re. 0.72
per hour (Rs.)
(2) Overhead expenses 2.50 25.00 250.00
Total overhead expenses @ [(100/60)xRs.1.50][(1000/60)xRs.1.50] [(10000/60)xRs. 1.50]
Rs.1.50 per Machine hour
(Rs.)
(b) Statement Showing Apportionment of Joint Expenses

Particulars A B C Total
Sales 6,300 4,800 2,500 13,600
(-) Profit 2,100 1,200 375 3,675
Total Cost (Joint & Separate Cost) 4,200 3,600 2,125 9,925
Separate Expenses 450 325 150 925
Share of Joint Expenses 3,750 3,275 1,975 9,000
5. (a) Shri Rajesh Agarwal has started transport business with a fleet of 10 taxies. The various
expenses incurred by him are given below:
(i) Cost of each taxi Rs. 3,00,000.
(ii) Salary of Office Staff Rs. 5,000 p.m.
(iii) Salary of Garage's Supervisor Rs. 10,000 p.m.
(iv) Rent of Garage Rs. 5,000 p.m.
(v) Drivers Salary (per taxi) Rs. 10,000 p.m.
(vi) Road Tax and Repairs per taxi Rs. 6,000 p.a.
(vii)Insurance premium @ 6% of cost p.a.
The life of a taxi is 300000 Km. and at the end of which it is estimated to be sold at Rs.
25,000. A taxi runs on an average 6000 Km. per month of which 10% it runs empty,
petrol consumption 11 Km. per litre of petrol costing Rs. 72 per litre. Oil and other
sundry expenses amount to Rs. 50 per 100 Km.
Calculate the effective cost of running a taxi per kilometre. If the hire charge is Rs. 13
per kilometre on average, find out the profit that Shri Agarwal may expect to make in
the firstyear of operation. 8
(b) A contractor has undertaken a construction work at a price of Rs. 5,00,000 and begun
the execution of work on 1st January, 2016. The following are the particulars of the
contract up to 31st December, 2016.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Machinery 30,000 Overheads 8,252
Materials 1,70,698 Materials returned 3,098
Wages 1,48,750 Work certified 3,90,000
Direct expenses 6,334 Cash received 3,60,000
Uncertified work 9,000 Materials on 31.12.2016 3,766
Wages outstanding 5,380
Value of plant on 31.12.2016 23,000
It was decided that the profit made on the contract in the year should be arrived at
by deducting the cost of work certified from the total value of the architect's
certificate, that1/3 of the profit so arrived at should be regarded as a provision
against contingencies and that such provision should be increased by taking to the
credit of Profit and Loss Account only such portion of the 2/3rd profit, as the cash
received to the work certified. Prepare the Contract Account showing the profit on the
Contract. 7
Answer:
5. (a) Statement showing computation of effective cost and profit for the year:
(Rs.) (Rs.)
Fixed expenses:
Salary of staff 5,000
Salary of garage supervisor 10,000
Rent of garage 5,000
Driver Salary (10 x 10,000) 1,00,000
Road tax and repairs (6,000 x 10/12) 5,000
Insurance premium (3,00,000 x 6% x 10/12) 15,000 1,40,000
Fixed cost of 10 taxis per month
Cost per taxi = Rs. 1,40,000/10 = Rs. 14,000
Cost per km = 14,000/6,000 = 2.33 2.33
(Alternatively, Fixed Cost per Taxi may be worked out directly)
Running Costs:
Depreciation [(3,00,000-25,000) / 3,00,000] 0.92
Petrol (72/11) 6.55
Oil & sundry expenses (50/100) 0.50
Cost 10.30
Effective cost per Km = 10.30 x (100/90) 11.44
Profit for year = (13.00 - 1 1.44) x 10 x 5,400 x 12 = Rs.10,10,880
(b)
Contract Account
Dr. Cr.
(Rs.) (Rs.)
To, Machinery A/c 30,000 By, Plant & Machinery A/c 23,000
To, Materials A/c 1,70,698 By, Materials returned A/c 3,098
To,Wages incl.outstandingA/c 1,54,130 By, Materials on hand A/c 3,766
To, Direct Expenses A/c 6,334 By, W.I.P A/c 3,99,000
To, Overheads A/c 8,252 Work certified 3,90,000
To, P&L A/c 36,585* Work uncertified 9,000
To, Reserve c/d 22,865*
4,28,864 4,28,864
* Total Cost = Expenses before Profit and Reserve = Rs. 3,69,414 – Rs. 29,864 credits
∴ Total Expenses= Rs. 3,39,550 .
Hence, Total Cost = Rs. 3,99,000 WIP – Rs. 3,39,550 =Rs. 59,450
or
Alternatively, Total including WIP = Rs. 4,28,864 – Rs. 3,69,414 = Rs. 59,450
Cash Received 3,60,000

= = 0.92308
Work Certified 3,90,000
2 rd
∴ Rs. 59,450 × 0.92308 = Rs. 54,877 ∴ of Rs. 54,877 = Rs.36,585 Profit
3
Hence, Balance (Rs. 59,450 – Rs. 36,585)= Rs. 22,865 is Reserve
6. (a) Following particulars relate to a manufacturing factory for the month of March, 2017
Variable cost per unit Rs. 14
Fixed factory overhead Rs. 5,40,000
Fixed selling overhead Rs. 2,52,000
Sales price per unit Rs. 20
(i) What is the break-even point expressed in rupee sales?
(ii) How many units be sold to earn a target net income of Rs. 60,000 per month?
(iii) How many units must be sold to earn a net income of 25% on cost?
(iv) What should be the selling price per unit if break-even point is to be brought down
to 120000 units? 8
(b) There are three similar plants under one Corporate Management who wants them to
be merged for better operation. The following are the details relating to these plants.
Plant A Plant B Plant C
Capacity in Operation 100% 70% 50%
(Rs. in lakhs)
Turnover 300 280 150
Variable Cost 200 210 75
Fixed Cost 70 50 62
You are required to calculate:
(i) Capacity of merged plant to be operated to break-even;
(ii) Profitability of working at 75% capacity;
(iii) The turnover from the merged plant to give a profit of Rs. 28 lakhs. 7
Answer:
6. (a) (i) Calculation of BEP in rupee sales:

S - V 20 -14
P/V Ratio = = × 100 = 30%
S 20
F 5, 40, 000 + 2, 52, 000
BEP = = = Rs. 26,40,000
P / V Ratio 30%
(ii) Sales to earn a target net income of Rs. 60,000 per month:
Contribution per unit = Rs. 20 – Rs. 14 = Rs. 6.
F + Desired Profit 7,92, 000 + 60, 000
Sales in units = = = 1,42,000 units.
Contribution per unit 6
(Sales in Rupees = 1,42,000 × Rs. 20 = Rs. 28,40,000.)→ This is optional
(iii) No. of units to be sold to earn a net income of 25% on cost:

Profit @ 25% on cost means a profit @ 20% on Sales. Let sales be assumed as Rs. x;
the desired profit will be 20% of x or .20x.
F + Desired Profit
Now, x =
P / V Ratio
7,92, 000 + 0.20x 100
Or x= ×
1 30
or 30x = 7,92,00,000 + 20x
or 10x = Rs. 7,92,00,000
or x = Rs. 79,20,000
79, 20, 000
No. of units to be sold = = 3,96,000 units
20 (S.P. per unit)
(iv) Selling Price per unit if BEP is brought down to 1,20,000 units :
Fixed Cost 7,92, 000
Contribution per unit = = = 6.60 per unit.
BEP in units 1, 20, 000
Now, S.P. per unit = V + C = Rs.14 + Rs. 6.60 = Rs. 20.60.
(b) Computation of Sales and Variable Costs for Plants B and C at 100 per cent capacity
of working. (Rs. in lakhs)
Capacity Plant A Plant B Plant C Merged Plant
100% 100% 100% 100%
Sales 300 400 300 1,000
Less: Variable Cost at 100% Capacity 200 300 150 650
Contribution 100 100 150 350
Less: Fixed Cost 70 50 62 182
Profit 30 50 88 168
Contribution 350
(i) P/V Ratio = × 100 = × 100 = 35%
Sales 1, 000
Fixed Cost 182
BEP (in Rs.) = = = Rs. 520 lakh
P / V ratio 35%
520
Capacity of Rs. 520 lakhs to total sales Rs. 1,000 lakhs = × 100 = 52%.
1, 000
(ii) Sales at 75% capacity = Rs. 750 lakhs

P = (Sales × P/V ratio) – Fixed Cost
35
= 750 × - 182 or 262.5 – 182 = Rs. 80.5 lakhs.
100
(iii) Sales to earn a profit of Rs. 28 lakhs.

Fixed Cost + Desired Profit 182 + 28 210
Sales = = = = 600 lakhs.
P / V Ratio 35% 35%
7. (a) The details regarding the composition and the weekly wage rates of labour force
engaged on a job scheduled to be completed in 30 weeks are as follows:
Category of Standard Actual
Workers No. of Weekly Wage Rate No. of Weekly Wage Rate
Workers per worker Workers per worker
Skilled 75 60 70 70
Semi-skilled 45 40 30 50
Unskilled 60 30 80 20
The work is actually completed in 32 weeks.
Calculate the following Labour Variances:

(i) Labour Cost Variance;
(ii) Labour Rate variance;
(iv) Labour Efficiency Variance;
(v) Labour Revised Efficiency Variance;
(v) Labour Mix Variance. 8
(b) Three Articles X, Y and Z are produced in a factory. They pass through two cost
centers A and B. From the data furnished, compile a statement for budgeted machine
utilization in both the centers.
(i) Sales budget for the year:
Product Annual Budgeted Opening stock of Closing stock
Sales (units) finished products (units)
X 4800 600 Equivalent to 2 months sales
Y 2400 300 - Do --
Z 2400 800 - Do --
(ii) Machine hours per unit of product:
Product Cost centers
A B
X 30 70
Y 200 100
Z 30 20
(iii) Total number of machines:
Cost Centre: A 338
B 305
Total 643
(iv) Total working hours during the year: Estimated 2100 hours per machine 7
Answer:
7. (a) Computation of Standard and Actual Time

Category Standard Time (ST) Actual Time (AT)
Skilled 75x30 = 2,250 70 x 32 = 2,240
Semiskilled 45 x30= 1,350 30x32 = 960
Unskilled 60x30 = 1,800 80x32 = 2,560
Computation of Standard Cost and Actual Cost

Category Standard Actual Revised
of Worker Time Rate Cost Time Rate Cost Time
ST SR (Rs.) SC(Rs.) AT AR(Rs.) AC(Rs.) RST
Skilled 2,250 60 1,35,000 2,240 70 1,56,800 2,400

Semiskilled 1,350 40 54,000 960 50 48,000 1,440
Unskilled 1800 30 54,000 2,560 20 51,200 1,920
Total 5,400 - 2,43,000 5,760 - 2,56,000 5,760
Computation of Revised Standard Time (RST)

2, 250
Skilled worker : × 5,760 = 2,400 Hours
5, 400
1, 350
Semi-skilled worker : × 5,760 = 1,440 Hours
5, 400
1, 800
Unskilled worker : × 5,760 = 1,920 Hours
5, 400
Computation of Variances
(i) LCV (Labour Cost Variance) = TSC - TAC = 2,43,000 - 2,56,000 = Rs. 13,000 (A)
(ii) LRV (Labour Rate Variance)= AT(SR-AR)

Skilled Worker : 2,240 (60 – 70) = Rs. 22,400 (A)
Semiskilled Worker :960 (40 – 50) = Rs. 9,600 (A)
Unskilled Worker : 2,560 (30 – 20) = Rs. 25,600 (F) = Rs. 6,400 (A)
(iii) LEV (Labour Efficiency Variance) = SR(ST-AT)

Skilled Worker : 60 (2,250 – 2,240) = Rs.600 (F)
Semiskilled Worker : 40(1,350 – 960) = Rs. 15,600 (F)
Unskilled Worker : 30(1,800 – 2,560) = Rs. 22,800 (A) = Rs. 6,600 (A)
(iv) LREV (Labour Revised Efficiency Variance) = SR (ST – RST)

Skilled Worker : 60(2,250 – 2,400) = Rs. 9,000 (A)
Semiskilled Worker : 40(1,350 – 1,440) = Rs. 3,600 (A)
Unskilled Worker : 30(1,800 – 1,920) = Rs. 3,600 (A) = Rs. 16,200 (A)
(v) LMV (Labour Mix Variance)= SR (RST – AT)

Skilled Worker : 60(2,400 – 2,240) = Rs. 9,600 (F)
Semiskilled Worker : 40(1,440 – 960) = Rs. 19,200 (F)
Unskilled Worker : 30(1,920 – 2,560) = Rs. 19,200 (A) = Rs. 9,600 (F)
(b) Calculation of Units of Production of Different Products

Particulars Product X Product Y Product Z
Sales 4800 2400 2400
Add: Closing Stock 800 400 400
5600 2800 2800
Less: Opening Stock 600 300 800
Production 5000 2500 2000
Machine Utilisation Budget

Cost Centres→ A B
Product → X Y Z TOTAL X Y Z TOTAL
Particulars ↓
(i) Production 5000 2500 2000 5000 2500 2000
(units)
(ii) Hours per unit 30 200 30 70 100 20
(iii) Total Machine 1,50,000 5,00,000 60,000 7,10,000 3,50,000 2,50,000 40000 6,40,000
Hours
(iv) Utilisation of 71 238 29 338 167 119 19 305
Number of
Machines

(a) "Cost Accounting and Management Accounting are inter-dependent." Do you agree,
discuss.
(b) Differentiate between Operation Cost and Operating Cost.
(c) Enumerate the need for predetermined overhead rate.
(d) What is Responsibility Accounting? Also state the Principles of Responsibility
Accounting.
Answer:
8. (a) Cost Accounting: In cost accounting, primary emphasis is on cost and it deals with its
collection, analysis, relevance, interpretation and presentation for various problems of
management.
Management Accounting: It utilizes the principles and practices of financial
accounting and cost accounting in addition to other management techniques for
efficient operations of a concern. It widely uses different techniques from various
branches of knowledge like Statistics, Mathematics, Economics, Law and Psychology
to assist the management in its task of maximizing profits or minimizing losses. The main
thrust in management accounting is towards determining policy and formulating
plans to achieve desired objectives of management.
From the above discussion it may be concluded that cost accounting and
management accounting are inter-dependent, greatly related and inseparable.
(b) Operation Cost:
Operation cost is the cost of a specific operation involved in a production process or
business activity. The cost unit in this method is the operation, instead of process.
When the manufacturing method of a concern consists of a number of distinct
operations, operating costing is suitable.
Operating Cost:
Operating cost is the cost incurred in conducting a business activity. It refers to the
cost of concerns which do not manufacture any product but which provide services.
Industries and establishments like power house, transport and travel agencies,
hospitals, schools etc. which undertake services rather than the manufacture of
products, ascertain operating costs. The cost units used are Kilo Watt Hour (KWH),
Passenger Kilometre and Bed in the Hospital etc.
Operation costing method constitutes a distinct type of costing but it may also be
classed as a variant of process cost since costs in this method are usually compiled
for a specified period.
(c) Need for predetermined Overhead Rate:

Predetermined Overhead Rate is needed for the following reasons:
i) actual Rate can be determined only after the overheads have been
incurred
ii) to avoid delay in computing cost
iii) to prepare Quotations in time and quickly
iv) actual Overhead Rate may fluctuate from period to period. But in case of
predetermined rate, it is not so.
v) to ensure cost control.
OR
As per study material as under:
Advantages of Predetermined Overhead Rate:
i) Enables prompt preparation of cost estimates, quotations and fixation of
selling prices.
ii) Cost data is available to management along with financial data.

iii) In case of Cost-plus contracts prompt billing is possible through pre-
determined recovery rate/s.
iv) In concerns having budgetary control system, no extra clerical efforts are
required in computing the pre-determined overhead rate.
(d) Responsibility Accounting:

It is a system of accounting that recognizes various responsibility centres throughout
the organisation and reflects the plans and actions of each of these centres by
assigning particular revenues and costs of the one having the pertinent responsibility.
It is a system in which the person holding the supervisory posts as president, function
head, foreman, etc. are given a report showing the performance of the company or
department or section as the case may be. The report will show the data relating to
operational results of the area and the items of which he is responsible for control.
Responsibility accounting follows the basic principles of any system of cost control
and standard costing. It differs only in the sense that it lays emphasis on human
beings and fixes responsibilities for individuals. It is based on the belief that control can
be exercised by human beings, so responsibilities should be fixed for individuals.
Principles of Responsibility Accounting:

(i) A target is fixed for each department or responsibility centre.
(ii) Actual performance is compared with the target.
(iii) The variances from plan are analysed so as to fix the responsibility.
(iv) Corrective action is taken by higher management and is communicated.
Suggested Answer_Syllabus 2016_Jun2017_Paper 8
GROUP -II
(SYLLABUS 2016)

JUNE- 2017
Paper- 8 : COST ACCOUNTING
Section - A
(i) In process, conversion cost means

(A) Cost of direct materials, direct labour, direct expenses
(B) Direct labour, direct expenses, indirect material, indirect
labour,indirectexpenses
(C) Prime cost plus factory overheads
(D) All costs up to the product reaching the consumer, less direct material costs
(ii) At the economic ordering quantity level, the following is true:
(A) The ordering cost is minimum
(B) The carrying cost is minimum
(C) The ordering cost is equal to the carrying cost
(D) The purchase price is minimum
(iii) When a direct worker is paid on a monthly fixed salary basis, the following is true:
(A) There is no idle time lost.
(B) There is no idle time cost.
(C) Idle time cost is separated and treated as overhead.
(D) The salary is fully treated as factory overhead cost.
(iv) The following is an example of direct expenses as per CAS-10:
(A) Special raw material which is a substantial part of the prime cost.
(B) Travelling expenses to site.
(C) Overtime charges paid to direct worker to complete work before time.
(D) Catalogue of prices of finished products.
(v) The following is not treated as a manufacturing overhead:
(A) Lubricants
(B) Cotton waste
(C) Apportioned administration overheads
(D) Night shift allowance paid to a factory worker due to general work pressure.
(vi) When you attempt a reconciliation of profits as per Financial Accounts and Cost
Accounts, the following is done:
(A) Add the under absorption of overheads in Cost Accounts if you start from the
profits as per Financial Accounts.
(B) Add the under absorption of overheads in Cost Accounts if you start from the
profits as per Cost Accounts.
(C) Add the over absorption of overheads in Cost Accounts if you start from the
profits as per Financial Accounts.
(D) Add the over absorption of overheads in Cost Accounts if you start from the
profits as per Cost Accounts.
(vii)Batch Costing is applied effectively in the following situation:
(A) paper manufacturing
(B) drug manufacturing
(C) designer clothes manufacturing
(D) oil refining
(viii)In the context of Contract a/c, work completed and not yet certified will beshown
(A) at cost plus + 2/3rd of the notional profit under 'Completed Work'.
(B) at cost plus notional profit less retention money under 'Completed Work'.
(C) at cost under 'Completed Work'.
(D) at cost under WIP a/c.
(ix) A certain process needed standard labour of 24 skilled labour hours and 30
unskilled labour hours at ` 60 and 40 respectively as the standard labour rates.
Actually, 20 and 25 labour hours were used at ` 50 and 50 respectively. Then, the
labour mix variance will be
(A) Adverse
(B) Favourable
(C) Zero
(D) Favourable for skilled and unfavourable for unskilled
(x) If an organization has all the resources it needs for production, then the principal
budget factor is most likely to be
(A) non-existing
(B) sales demand
(C) raw materials
(D) labour supply
(b) Match the following (You may opt write only the Roman numeral and the matched
alphabet instead of copying contents into the answer books): 1×5=5
Column I Column II
xi High inventory turnover ratio A Works Overhead
xii Job evaluation B Opportunity Cost
xiii Salary of product designers C Co-product
xiv By product value D Sales and Production Budget
xv Master Budget E Administrative Overhead
F P & L Budget
G Rationality in wage structure
H Efficient use of stock
I Purchase cost/average inventory
J Evaluation of employee performance
(c) State whether the following are 'True' or 'False' (You may write only the Roman
numeral and whether 'True' or 'False' without copying the statements into the answer
books): 1×5=5
(xvi) Uniform Costing is a unique method of costing to determine costs accurately.
(xvii) When overtime wages are incurred due to the general policy of the company
arising due to lack of capacity, normal wages are treated as direct labour cost
and the premium on overtime wages is treated as factory overheads.
(xviii) In marginal and absorption costing, variable factory overhead is treated as
direct cost.
(xix) Operation Costing and Operating Costing are interchangeably used for the
same technique of costing.
(xx) Standard Costs are costs that are estimated costs that are likely in the future
production period.
(d) Fill in the blanks (You may write only the Roman numeral and the content filling the
blank): 1×5=5
(xxi) Profit volume ratio ________________ with increase in fixed cost (indicate the
nature ofchange).
(xxii) In the graph showing the angle of incidence, when the quantity is zero, the total
costline cuts the costs axis (y axis) at ___________. (indicate the value)
(xxiii) A process account is credited with value for ________________ loss when scrap
value is zero(indicate the type of loss).
(xxiv) When special material is purchased for direct use in a job, ____________________
account isdebited in the Integral Accounts System.
(xxv) VED analysis is primarily used for control of __________(indicate type of material).
Answer:
1. (a) (i) (B)

(ii) (C)
(iii) (B)
(iv) (B)
(v) (D)
(vi) (A)
(vii) (B)
(viii) (D)
(ix) (C)
(x) (B)
(b) (xi) (H)

(xii) (G)
(xiii) (A)
(xiv) (B)
(xv) (F)
(c) (xvi) False

(xvii) False
(xviii) False
(xix) False
(xx) False
(d) (xxi) is constant

(xxii) Fixed Cost value
(xxiii) abnormal
(xxiv) WIP Control A/c
(xxv) Components or spare parts
Section - B
Each question carries fifteen marks.
2. (a) The following summarized information is available from the records of Oil Ltd. for the
month of March, 2017:
Sales for the month: ` 19,25,000
Opening stock as on 1 March, 2017 : 1,25,000 litres @ ` 6.50 per litre
Purchases (including freight and insurance):
March 5 1,50,000 litres @ ` 7.10 per litre
March 27 1,00,000 litres @ ` 7.00 per litre
Closing stock as on 31st March, 2017 1,30,000 litres
Expenses for the month is ` 45,000. Pricing of material issues is being done at the end
of the month after all receipts during the month.
On the basis of above information, calculate the following using FIFO and LIFO
methods of pricing:
(i) Value of closing stock as on 31 March, 2017.
(ii) Cost of goods sold during March, 2017.
(iii) Profit or loss for March, 2017.
(A detailed stores ledger account is not required. Only relevant figures need to be
calculated). 8
(b) A factory has 3 production departments (P1,P2, P3) and 2 service departments (S1&S2).
The following overheads and other information are extracted from the books for the
month of May 2017:
Expenses Amount (`)
Rent 7,200
Plant Repair 3,600
Depreciation 2,700
Lighting 600
Supervision 9,000
Fire Insurance for stock 3,000
Cost of Idle Time 900
Power 5,400
Particulars P1 P2 P3 S1 S2
Area sq ft 400 300 270 150 80
No. of workers 54 48 36 24 18
Wages Rs. 18,000 15,000 12,000 9,000 6,000
Value of plant Rs. 72,000 54,000 48,000 6,000
Stock value Rs. 45,000 27,000 18,000
Horse power of plant 600 400 300 150 50
(i) Allocate the overheads among the various departments on the most appropriate
basis (primary distribution only).
(ii) If S1and S2use 10% of each other's facilities, find the total cost ofS1by the
simultaneous equation method. 7
Answer:
2. (a) (i) Valuation of closing stock as on 31-03-2017:

(a) FIFO Method: (the closing stock will comprise the items purchased in the end)
`
1,00,000 litres purchased on 27-03-2017 @ ` 7.00 7,00,000
30,000 litres from purchases made on 05-03-2017 @ ` 7.10 2,13,000
1,30,000 value of closing stock under FIFO method 9,13,000
(b) LIFO Method: (the closing stock will comprise the items lying in opening stock
and purchased in the beginning)
`
1,25,000 litres from opening stock @ ` 6.50 8,12,500
5,000 litres from purchases made on 05-03-2017 @ ` 7.10 35,500
1,30,000 value of closing stock under LIFO method 8,48,000
(ii) Cost of Goods Sold:

FIFO Method (`) LIFO Method (`)
Opening stock as on 01.03.2017 8,12,500 8,12,500
Purchases made on 05.03.2017 10,65,000 10,65,000
Purchases made on 27.03.2017 7,00,000 7,00,000
Total 25,77,500 25,77,500
Less: Closing stock as per (i) 9,13,000 8,48,000
Cost of material consumed 16,64,500 17,29,500
Add: Expenses 45,000 45,000
Cost of goods sold 17,09,500 17,74,500
(iii) Profit for March, 2017:

FIFO Method (`) LIFO Method (`)
Sales 19,25,000 19,25,000
Cost of goods sold 17,09,500 17,74,500
Profit 2,15,500 1,50,500
(b) The primary distribution of overheads is as follows:

Expenses Total ` Basis P1 P2 P3 S1 S2
` ` ` ` `
Rent 7,200 Area sq. ft. 2,400 1,800 1,620 900 480
Plant Repair 3,600 Plant value 1,440 1,080 960 120 --
Depreciation 2,700 Plant Value 1,080 810 720 90 --
Lighting 600 Area sq. ft. 200 150 135 75 40
Supervision 9,000 No. of Workers 2,700 2,400 1,800 1,200 900
Fire Insurance for stock 3,000 Stock Value 1,500 900 600 -- --
Cost of Idle Time 900 Wages 270 225 180 135 90
Power 5,400 Horse Power 2,160 1,440 1,080 540 180
Total 32,400 11,750 8,805 7,095 3,060 1,690
S1 = 3,060 + 0.1 S2
S2 = 1,690 + 0.1 S1
S2 = 1,690 + 0.1(3,060 + 0.1 S2 ) = 1,690 + 306 + 0.01 S2 = 0.99 S2 = 1,996
∴ S2 = 1,996 /0.99 = 2,016.16
∴ S1 = 3,060 + 201.62 = 3,261.62
O𝑟
S1 = 3,060 + 0.1 S2
S2 = 1,690 + 0.1 S1
S1 = 3,060 + 0.1 (1690 + 0.1 S1 ) = 3,060 + 169 + 0.01 S1
∴ 0.99 S1 = 3,229 ∴ S1 = 3,229 / 0.99 = 3,261.62
∴ S2 = 1,690 + 326.16 = 2,016.16
3. (a) From the following particulars calculate the profit as per cost records and also
prepare a reconciliation statement, if the profit as per financial accounts for the year
ending 31st March, 2017 was `1,35,525:
Particulars ` `
Opening stock of raw materials 50,000
Opening stock of finished goods 1,50,000
Purchase of raw materials 3,50,000
Direct wages 1,50,000
Factory lighting 3,000
Factory rent 24,000
Power and fuel 30,000
Indirect wages 2,500
Depreciation on plant & machinery 50,000
Oil waste etc. 2,000
Work manager's salary 23,000
Miscellaneous factory expenses 1,250 1,35,750
Office rent 18,000
Office lighting 600
Depreciation on office appliances 2,000
Office staff salaries 20,000 40,600
Closing stock of finished goods 50,000
Closing stock of raw materials 75,000
Donations 10,000
Factory overhead is charged at 20% on prime cost and office and administrative
expenses at50% of factory overhead. The selling price is fixed by adding 25% on the
total cost ofmanufactured and finished articles sold. Assume no WIP. 9
(b) Fill up the following table in accordance with the principles of Cost Accounting
Standards applicable:
SI. Items of expenses Employee Cost as Disclosure Element
No. per CAS of Cost
Included/Excluded/ Yes/No/
Not applicable (NA) NA
I II III IV V
i Basic Wages to Direct Worker
ii Normal Idle time Cost of Direct Worker
iii Perquisite paid by company to
administration staff
iv Late payment fee to PF authorities for
delayed remittance of Employer's
contribution to Provident Fund
(You may write only columns I, II, IV and V in your answer books). 6
Answer:
3. (a)
Statement of Cost and Profit
Particulars `
Opening Stock of Raw Material 50,000
Add: Purchases of Raw Material 3,50,000
Less: Closing Stock of Raw Material 75,000
Raw Material consumed 3,25,000
Prime Cost 4,75,000
Factory overheads (20% of Prime Cost) 95,000
Works Cost 5,70,000
Office and Administrative Overheads (50% of Factory Overhead) 47,500
Add: Opening Stock of Finished Goods 1,50,000
Less: Closing Stock of Finished Goods 50,000
Cost of Goods Sold/ Total Cost 7,17,500
Profit (25% of Total Cost) 1,79,375
Sales 8,96,875
Particulars `
Profit as per Financial Accounts 1,35,525
Add: Factory Overheads under recovered in Cost Accounts (` 1,35,750 –
` 95,000) 40,750
Donation not charged in Cost Accounts 10,000
1,86,275
Less: Office Overhead over recovered in Cost Accounts (` 47,500 – ` 6,900
40,600)
(b) Fill up the following table in accordance with the principles of Cost Accounting
Standards applicable.
SI.N Items of expenses Employee Cost Disclosure Element of
o. as per CAS Required Cost
under CAS 7
Included/Exclu Yes/No/NA
ded/ Not
applicable(NA)
(i) Basic Wages to Direct Worker Included Yes Direct Labour
(ii) Normal Idle time Cost of Direct Excluded No Factory
Worker Overhead
(iii) Perquisite paid by company to Included Yes Administration
administration staff Overhead
(iv) Late payment fee to PF authorities for Excluded NA Not an
delayed remittance of Employer's element of
contribution to Provident Fund Cost
4. (a) A factory has to produce and supply 48000 units of a component annually to a
customer. The carrying cost per unit is ` 2 per component per month. The production
run set up cost is ` 3,600 per production run.
(i) Find out the economic batch size that must be produced to minimize total cost
based on the above information.
(ii) If it is found that the dye and hydraulic mechanism get heated up and
consequently the dye has to be replaced by a new one at a cost of ` 1,200 for
each run that has a batch quantity exceeding 1000 units, what batch size would
you recommend to minimize overall costs? Substantiate your recommendations
with appropriate calculations.
(iii) Between the quantities suggested in (i) and (ii) above, how much would be the
amount of savings or incremental expenses in (ii) over (i) with cost of dye
replacement? 8
(b) A company produces a product 'M' by three distinct processes before it is ready for
sale. From the information given below, work out the selling price of the product if the
Management decides to earn a profit of 20% over its works cost. Present the process
a/c for each process.
Particulars Processes
A B C
1 Input of raw materials @ ` 40 per kg. (kg) 10,000 - -
2 Normal loss of input 5% 5% 5%
3 Delivered to next process (kg) 9,000 8,000 -
4 Total direct labour cost (`) 15,000 15,750 13,000
5 Variable overhead (%of direct labour) 150% 120% 100%
6 Fixed overhead (% of direct labour) 250% 180% 200%
7 Finished stock held back (kg) 400 400 -
7
Answer:
4. (a) (i)
2 𝑋 48,000 𝑋 3600
Economic Batch Quantity = = 3,795 units approximately /
2 𝑋 12
batch
(ii)
Hence, number of Set- ups = 48,000 ÷ 3,795 = 12.65 say 13 (Set up can not
be in Fraction). However, lenient view to be taken and marks to be
awarded accordingly)
Then, batch size = 48,000/13 = 3693 units per batch
Carrying cost = 2 X (3693 /2) X 12 = 44,316
Set up cost = 13 X 3600 = 46,800
Total relevant cost = 91,116
Overall Cost as per (ii) of Question
Carrying cost = 1,200/2 X 12 X 2 = 14,400
Set up cost = 4,800* X 13 = 62,400
Total relevant cost = 76,800
Saving in (ii) over (i) = 14,316
 3,600 + 1,200 =4,800 Set up Cost as batch size is more than 1000 Units per batch.
(Candidates do not have to show the following, however, they may consider this
approach, but the analysis should lead to the above result)
If the dye cost is built in to the setup cost, revised setup = 4800 per run
2 𝑋 48,000 𝑋 4800
EBQ = = 1,92,00,000 = 4,382 units / batch in this case,
2 𝑋 12
No. of set ups = 48,000/ 4,382 = 10.95 say 11
Set up cost = 11 X 4800 = 52,800
Carrying cost = 2 X 12 X 4,382 / 2 = 52,584
Total relevant cost = 1,05,384
(b)
Process A Account
Particulars Kg. ` Particulars Kg. `
To Input of Raw 10,000 4,00,000 By Normal loss 500 ---
Material
To Direct Labour 15,000 By Abnormal loss 100 5,000
To Variable 22,500 By Transfer to Process B 9,000 4,50,000
Overheads
To Fixed Overheads 37,500 By Closing Stock 400 20,000
10,000 4,75,000 10,000 4,75,000
Cost per kg = `4,75,000/9,500kg = `50
Process B Account
To Transfer From 9,000 4,50,000 By Normal loss 450 ---
Process A
To Direct Labour 15,750 By Abnormal loss 150 9,000
To Variable Overheads 18,900 By Transfer To Process C 8,000 4,80,000
To Fixed Overheads 28,350 By Closing Stock 400 24,000
9,000 5,13,000 9,000 5,13,000
Cost per kg = `5,13,000/8,550 kg = `60
Process C Account
To Transfer From 8,000 4,80,000 By Normal loss 400 ---
Process B
To Direct Labour 13,000 By Transfer to Finished 7,600 5,32,000
Stock A/c
To Variable Overheads 13,000
To Fixed Overheads 26,000
8,000 5,32,000 8,000 5,32,000
Cost per kg. = ` 5,32,000/7,600 kg = `70
Selling Price = ` 70 × 120/100 = ` 84 per kg. (20% above Works Cost)
5. (a) The following information relating to two vehicles is given. Prepare the Operating Cost
Statement and determine the cost per running kilometre for each vehicle.
Vehicle A (`) Vehicle B (`)

Cost of vehicle 25,000 15,000
Road licence fee per year 750 750
Supervision yearly Salary 1,800 1,200
Driver's wages per hour 4.00 4.00
Cost of fuel per litre 1.50 1.50
Repairs and maintenance per km 1.50 2.00
Tyre cost per km 1.00 0.80
Garage rent per year 1,600 550
Insurance yearly 850 500
Kilometres run per litre 6 5
Kilometres run during the year 15,000 6,000
Estimated life of vehicle (km) 1,00,000 75,000
Charge interest at 10% on the cost of vehicle. Each vehicle runs 20 km. per hour on
an average. 8
(b) A company undertook a contract for construction of a large building complex.

The construction work commenced on 1st April 2016 and the following data are
available for the year ended 31st March 2017:
Particulars (` ‘000)
Contract price 35,000
Work certified 20,000
Progress payments received 15,000
Materials issued to site 7,500
Planning and estimating costs 1,000
Direct wages paid 4,000
Materials returned from site 250
Equipment hire charges 1,750
Wage related costs 500
Site office costs 678
Head office expenses apportioned 375
Direct expenses incurred 902
Work not certified 149
The contractor owns a plant which originally cost ` 20 lakhs and has been
continuously in use only in this contract throughout the year. The residual value of the
plant after 5 years of life is expected to be ` 5 lakhs. Straight line method of
depreciation is in use. As on 31st March 2017, the direct wages due and payable
amounted to ` 2,70,000 and the materials at site were estimated at ` 2,00,000
(i) Prepare the contract account for the year ended 31st March 2017. Present figures
in(` '000)
(ii) Compute the amount of profit/loss to be taken to the profit and loss account of
the year ending 31-3-2017. 7
Answer:
5. (a)
Operating Cost Statement
Vehicle Vehicle
A (`) B (`)
Operating and maintenance cost per km. 3.20 3.50
Fixed charges per km. 0.50 0.75
Operating cost per km. 3.70 4.25
Workings:
Calculation of Operating and maintenance cost per km.
Driver’s wages 4/20 0.20 0.20
Cost of fuel (1.50/6) (1.50/5) 0.25 0.30
Repairs and maintenance per km 1.50 2.00
Tyre cost per km 1.00 0.80
Depreciation 0.25 0.20
Operating and maintenance cost per km. 3.20 3.50
Calculation of fixed charges per km.
Fixed changes per annum:
Road licence 750 750
Supervisor’s salary 1,800 1,200
Garage rent 1,600 550
Insurance 850 500
Interest 2,500 1,500
7,500 4,500
Km. run during the year 15,000 6,000
Fixed charges per km. A-(7,500/15,000) B-(4,500/6,000) 0.50 0.75
(b)
Contract Account for the year ended 31st March 2016
Particulars ` ‘000 Particulars ` ‘000
To Materials issued 7,500 By Materials returned to stores 250
To Direct wages paid and accrued 4,270 By Material at site 200
To Wages related costs 500 By Working-in-progress:
To Direct Expenses 902 Work certified 20,000
To Equipment hire changes 1,750 Work uncertified 149
To Planning & Estimation cost 1,000
To Site office costs 678
To H.O. expenses (apportioned) 375
To Plant depreciation (2000 – 300
500)/5 years
To National Profit c/d 3,324
20,599 20,599
To Profit & Loss A/c (Transfer) 1,662* By National Profit b/d 3,324
To WIP A/c (Reserve) 1,662
3,324 3,324
* % 0f Work completed:
(20,000 / 35,000) × 100 = 57.14%
∴ 2/3rd Profit (Notional)
3,324 × (2/3) × (15,000 Cash received)/ 20,000 Work certified)
= 3,324/2 = ` 1,662
6. (a) ABC Ltd. has furnished the following data for the two years:
Particulars 2015-16 2016-17

Sales (`) 10,00,000 ?
Profit/Volume Ratio 50% 37.5%
Margin of safety sales as a % of total sales 40% 21.875%
There has been substantial savings in the fixed cost in the year 2016-17 due to the
restructuring process. The company could maintain its sales quantity level of 2015-16
in 2016-2017 by reducing the selling price.
You are required to calculate the following values (in `):
(i) Sales for 2016-17
(ii) Break-even sales for 2016-17
(iii) Fixed cost for 2016-17 8
(b) A firm can produce three different products from the same raw material using the
same production facilities. The requisite labour is available in plenty at ` 8 per hour for
all products. The supply of raw material, which is imported at `8 per Kg is limited to
10,400 kg. for the budget period. The variable overheads are ` 5.60 per hour. The fixed
overheads are ` 50,000. The selling commission is 10% on sales.
From the following information, you are required to suggest the sales mix which will
maximize the firm's profits. Also determine the profit that will be earned at the level:
Product Market Demand Selling Price Per Labour (Hours Raw Material (Kg
(units) unit (`) Required per unit) Required per unit)
X 8,000 30 1 0.7
Y 6,000 40 2 0.4
Z 5,000 50 1.5 1.5
7
Answer:
6. (a) In 2015, P/V ratio = 50%

Variable cost ratio = 100%-50% = 50%
Variable cost in 2015 – 2016 = ` 10,00,000 ×50% = ` 5,00,000
In 2016 - 2017, sales quantity has not changed. Thus Variable Cost in 2016 – 2017
is ` 5,00,000.
In 2016 - 2017, P/V ratio = 37.50%
Thus, Variable Cost ratio = 100%-37.5% = 62.5%
(i) Thus sales in 2016 - 2017 = 5,00,000/62.5% = ` 8,00,000
At break-even point, Fixed Cost is equal to contribution.
In 2016 - 2017 Break-even Sales = 100%-21.875% = 78.125%
(ii) Break-even sales = 8,00,000 ×78.125% = `6,25,000
(iii) Fixed Cost of 2016 - 2017= B.E. sales × P/V ratio
= 6,25,000 ×37.50% = `2,34,375
(b)
Marginal Profitability Statement
Particulars Production
X(`) Y(`) Z(`)
Direct Materials 5.60 3.20 12.00
Direct Labour 8.00 16.00 12.00
Variable Production Overheads 5.60 11.20 8.40
Variable Selling Overheads 3.00 4.00 5.00
(A) Total Variable Cost 22.20 34.40 37.40
(B) Selling Price 30.00 40.00 50.00
(C) Contribution per unit (B-A) 7.80 5.60 12.60
(D) Contribution per kg of raw material (Rs.) 11.14 14.00 8.40
(E) Ranking II I III
Product Demand Suggested Raw Materials Balance of Raw Contribution (`)

Max. Units Production Max. Consumed (Kgs.) Materials (Kgs.)
Units
Y 6,000 6,000 (6,000 × 0.4) = 8,000 (6,000 × 5.60) =
2,400 33,600
X 8,000 8,000 (8,000 × 0.7) = 2,400 (8,000 × 7.80) =
5,600 62,400
Z 5,000 2,400/1.50 = 2,400 NIL (1,600 × 12.60) =
1,600 20,160
Total Contribution 1,16,160
Less: Fixed Cost 50,000
Profit 60,160
7. (a) The standard material inputs required for 1,000 kgs. of a finished product are given
below:
Material Quantity (in kgs.) Standard rate per kg (in `)
A 450 20
B 400 40
C 250 60
1,100
Less: Standard loss 100
Standard output 1,000
Actual production in a period was 40,000 kgs. of the finished product for which the
actual quantities of material used and the prices paid thereof are as under:
Material Quantity (in Kg) Purchase price per kg. (in `)
A 20,000 19
B 17,000 42
C 9,000 65
Compute the following variances giving materialwise break up and indicate whether
Favourable(F) or Adverse (A):
(i) Material cost variance (ii) Material price variance
(iii) Material usages variance (iv) Material Mix variance
(v) Material yield variance 8
(b) A glass manufacturing company requires you to calculate and present the Master
Budget for the year 2017-18 from the following information:
Annual Sales : Toughened glasses A ` 30,00,000

Toughened glasses B ` 50,00,000
Direct material cost 60% of sales
Direct wages 20 workers @ ` 1,500 p.m.
Factory overheads & indirect labour:
Works manager ` 5,000 p.m.
Foreman ` 4,000 p.m.
Stores and spares 2.50% of sales
Depreciation on machinery ` 1,26,000
Light and power ` 50,000
Repairs and maintenance ` 80,000
Other sundries 10% of direct wages
Administration, selling &distribution expenses ` 1,40,000 p.a. 7
(Present the fixed and variable overheads separately showing itemwise breakup)
Answer: 7. (a):
Material cost variance = (16,00,000 – 16,79,000) = ` 79,000 (A)

Material price variance = (16,20,000 – 16,79,000) = ` 59,000 (A)
Material usage variance = (16,00,000 – 16,20,000) = ` 20,000 (A)
Material mix variance = (16,72,727 – 16,20,000) = ` 52,727 (F)
Material yield variance = (16,00,000 – 16,72,727) = ` 72,727 (A)
Workings:
(1) Actual Cost of Materials used =(AQ X AR)
A 20,000 X 19 = `3,80,000
B 17,000 X 42 = `7,14,000
C 9,000 X 65 = `5,85,000
= `16,79,000
(2) Standard Cost of Material used :
A 20,000 X 20 = ` 4,00,000
B 17,000 X 40 = ` 6,80,000
C 9,000 X 60 = ` 5,40,000
= Rs.16,20,000
(3) Standard Cost of Material if it had been used in standard proportion
A 450/ 1,100 X 46,000 X 20 = `3,76,363
B 400/ 1,100 X 46,000 X 40 = `6,69,091
C 250/ 1,100 X 46,000 X 60 = `6,27,273
= `16,72,727* OR
(4) standard Cost of output
A 450X 40 X 20 = ` 3,60,000
B 400 X 40 X 40 = ` 6,40,000
C 250 X 40 X 60 = ` 6,00,000
= `16,00,00** OR
*
Std. data
Q P V
A 18818.18 20 376363.6
B 16727.27 40 669090.8
C 10454.55 60 627273.0
46000 1672727
Less: Loss 4181.82 -
41818.18 1672727
**
1
SQSP
A 18000 x 20
B 16000 x 40
C 10000 x 60
A 360000
B 640000
C 600000
1600000
18818 .18
SQ for A = x 40000=18000
41818 .18
16727 .27
SQ for B = x 40000=16000
41818 .18
10454 .55
SQ for C = x 40000=10000
4181 8.18
(b)
Master Budget for the year 2017-2018

Particulars ` ` `
Sales:
Toughened glasses 30,00,000
Bent Toughened glasses 50,00,000
Total Sales (A) 80,00,000
Less: Cost of Sales:
Direct Material (60% of Sales) 48,00,000
Direct Wages (20 * ` 1,500 * 12) 3,60,000
Factory Overheads (Variable)
Store and Spares (2.5% on Sales) 2,00,000
Light and Power 50,000
Repairs and Maintenance 80,000 3,30,000
Fixed: Works Manager’s salary 60,000
Fore men’s Salary 48,000
Depreciation of Machinery 1,26,000
Sundries 36,000 2,70,000
Work Cost (B) 57,60,000
Gross Profit (A-B) 22,40,000
Less: Administration, Selling and Distribution 1,40,000
Overheads
Net Profit 21,00,000

(a) List three items included and two items excluded under the Cost Accounting
Standards for Direct Expenses.
(b) State why and under what conditions will profits under absorption costing be
(i) higher than
(ii) equal to and
(iii) lower than the profits under marginal costing.
(c) Differentiate between Financial Accounting and Management Accounting.
(d) How would you classify costs based on behaviour? Give an example to explain each
class.
Answer:
8. (a) Items included under CAS 10:
Any expense directly related to a cost centre or cost object, not being material or
labour.
Cost of patents, royalty payments
Hire charges of special machinery or plant
Cost of special patterns, designs or tools.
Experimental costs and expenditure in connection with models and pilot schemes
Architects, surveyors and other consultants' fees
Travelling expenses to sites
Inward charges and freight charges on special material.
Exclusions:
A direct expense which cannot be economically traced to the cost object or cost
unit.
Portion unamortised out of a lumpsum, to be amortised later over its utility period.
Finance cost incurredin connection with any self generated or procured resources
shall not form part ofthe direct expenses
Any subsidy, grant or incentive or any amount received or receivable with respect to
any direct expense shall be reduced
Penalties/damages paid to statutory authorities shall not form part of the direct
expenses.
(b) Profits as per absorption costing will be:

(i) higher than in marginal costing when closing stock is more than opening stock,
since some overheads will be included in the inventory value under absorption
costing while MarginalCosting considers the full overheads as cost of production,
(ii) equal when the opening and closing stocks are equal,
(iii) lower when opening stock is more than closing stock.
Since under Marginal Costing, only the current period's overheads are charged to
production, while underabsorption costing, a portion of the earlier period's
overheads will be included in the opening stockvalue.
(c) Differences between Financial Accounting and Management Accounting:
SI. Financial Accounting Management Accounting

No.
(i) Provides general business information Specific information relating to specific
like P&L account, Balance Sheet problems and decision making.
(ii) Information for owners and outside Information is for management for
parties optimizing decisions.
(iii) Importance is on recording rather than Emphasis is on control like using details
control of materials, labour, etc for standard
costing, budgetary control.
(iv) All commercial transactions between Concerned with Internal transaction not
the business and external parties are involving payment or receipt
recorded.
(v) Only those transactions that can be Other parameters like cost units,
measured in monetary terms are apportioning bases are also recorded.
recorded.
(vi) Efficiency of resource utilization - Available for corrective action.
men/materials or machine is not
available
(vii) Stocks are valued at cost or market Always valued at cost.
value, whichever is lower.
(viii) Records are maintained as per Records are maintained as per
Companies Act and as per Income Tax Companies Act only in certain cases,
Act that too as per Cost Accounting
requirements, but mainly to suit the
management for efficiency and control
(d) Classification of costs based on behaviour:

Fixed Costs:
Costs that do not vary with the change in the volume of activity in the short run.
They are not affected by temporary fluctuation in activity of an enterprise.
Example: rent, depreciation, etc.
Variable Costs:
These costs vary directly with the volume of activity,
Variable costs may be direct (like Direct Material, Direct Labour and Direct Expenses),
when they are part of prime costor they could be indirect, like selling expenses,
variable factory overheads, etc. when they are calledvariable overheads.
Semi-Variable costs:
These contain both fixed and variable elements. The variable elements behave like
the Variable Cost andthe fixed element behaves like the Fixed Cost. The sum total
therefore varies with change in activity, butnot in the same proportion as variable
costs.
Example: Factory supervision, maintenance, etc
GROUP I
(SYLLABUS 2012)

DECEMBER 2017
Paper-8: COST ACCOUNTING AND FINANCIAL MANAGEMENT
Time Allowed: 3 Hours Full Marks: 100
Section-A
Question 1 is compulsory. Answer all questions under each sub-division.
I. (I) Answer the following questions. Each question carries two marks.2×5= 10
(i) 10000 units of material 'X' are consumed per year having per unit cost of Rs. 20. Cost
of processing an order is Rs. 50 while annual interest rate is 5%. If annual carrying
cost per unit of material 'X' is 15% (other than interest), Calculate the EOQ and
number of orders per year.
(ii) Following information is furnished by the Dhoora Ltd:
Production and Sales are 50000 units and 42000 units respectively. Royalty paid on
units produced @ Rs. 5 per unit and @ Rs. 7.50 per unit sold. Hire charges of
equipment used for production on Rs. 1,80,000 and Design charges 48,000. Compute
the direct expenses according to CAS-10.
(iii) A work measurement study was carried out in a firm for 10 hours. The information
generated was: Units produced 350; Idle time 15%; Performance rating 120%; and
Relaxation Allowance 10% of standard time. What is the standard time for each unit
produced?
(iv) Axis Ltd. follows Walter's view of dividend policy. Its earnings per share isRs. 40 and
face value of equity share is Rs. 100. It has a rate of return of 20% and capitalization rate
is 8%. What should be the market price per share if payout ratio is zero?
(v) If current ratio is 2.4 : 1 and net working capital is Rs. 42,000, find out the value of
current assets and current liabilities.
(II) State whether the following statements are True or False (Write only the question Roman
numeral and whether True or False). 1× 5=5
(i) The sum of direct material, direct wages, direct expenses and manufacturing
overheads is known as conversion cost.
(ii) If the Profitability Index is more than one, the project should be accepted otherwise
rejected.
(iii) The permissible bank borrowings are calculated under Method- I = 0.75 (Current Assets) -
Current Liabilities.
(iv) CAS -13 is related to "Pollution Control Cost".
1
(v) Under Halsey - Weir Plan, bonus equals to 33 % of wages of the time saved.
3
(III) Fill in the blanks (Legibly write only the Roman numeral and the Content filling the blank):
1 ×5= 5
(i) Maximum Level = (__________+Re-order Quantity) - (Minimum Consumption Rate ×
Minimum Re-order Period).
(ii) Generally cost of retained earnings is equal to / same as cost of _____________.
(iii) According to AS-3 (Revised), interest received on investment is an element of cash
flow from_________ activities.
(iv) CAS-8 deals with the principles and methods of determining the________.
(v) The ratio of % change in one variable to the % change in some other variable is
defined as _________ in the context of capital structure and finance.
(IV) Match the following (You may opt to write the Roman numeral and the matched
alphabet instead of copying the contents into the answer book): 1×5=5
Column A Column B
(i) Uniform Costing (A) Technique of Costing
(ii) CAS-9 (B) Letter of Credit
(iii) Supplementary Rate (C) Valuation of shares
(iv) Capital Assets Pricing Model (D) Over/Under Absorption of overheads
(v) Working Capital Finance (E) Packing Material Cost
(F) System of Costing
(G) Market Price Per Share
Answer: 1
2𝐴𝐴𝐴𝐴
(i) EOQ = �
𝐶𝐶
Where, A = Annual Demand (10,000 units)
O = Ordering Cost (Rs. 50)
C = Carrying Cost (Rs. 20 × 20% = Rs.4)
(2×10,000×𝑅𝑅𝑅𝑅.50
=� = 500 units
𝑅𝑅𝑅𝑅.4
No. of Orders = Annual Consumption/ EOQ = 10,000/500 = 20 Orders
(ii) Computation of Direct Expenses (as per CAS 10):
Rs.
Royalty on production: 50,000 units @ Rs. 5 per unit 2,50,000
Royalty on Sales: 42,000 units @ Rs. 7.50 per unit 3,15,000
Hire Charges 1,80,000
Design Charges 48,000
Direct Expenses 7,93,000
(iii) Calculation of Standard Time for each unit:

Minutes
Total Time = 10 × 60 600
Less: Idle Time @ 15% 90
Actual Time 510
Normal Time = 510 × 120% 612
Add: Relaxation Allowance (10% or 1/10 on Standard Time =
1/9 on Normal Time 68
Standard Time for the job 680
Therefore, Standard Time for each unit 680/350 1.943
OR
Alternative Presentation:
Minutes
Time = 10 × 60 10.000
Less: Idle Time @ 15% 1.500
Actual Time 8.500
Normal Time = 8.500× 120% 10.000
Add: Relaxation Allowance (10% or 1/10 on Standard Time = 11.333
1/9 on Normal Time
Standard Time for the job (11.333 × 60) 680
Therefore, Standard Time for each unit 680/350 1.943
(iv) Walter’s Model:

D r(E−D)/Ke
P = + ,Where
Ke Ke
P = Market Price per Share,
D = Dividend per Share (Re. 0)
E = Earnings per Share (Rs. 40)
R = Internal Rate of Return (20%)
Ke = Cost of Capital (8%)
∴P = [(0/0.08)+[{ 0.20 (40 – 0)/0.08}]/0.08

= 0 + (8/0.08)/0.08
= 0 + 1,250 = Rs. 1,250
(v) Suppose Current Liabilities are x, then Current Assets will be 2.4x.
Current Assets – Current Liabilities = Working Capital
2.4x – x = Rs. 42,000 or 1.4x = Rs. 42,000 ∴ x = Rs. 30,000
So, Current Liabilities = Rs. 30,000
And Current Assets = Rs. 30,000 × 2.4 = Rs. 72,000
(II) (i) False
(ii) True
(iii) False
(iv) False
(v) True
(III) (i)Re – order Level

(ii) Equity/Equity Capital / Capital
(iii) Investing
(iv) Cost of Utilities
(v) Leverage
(IV)
Column A Column B
(i) Uniform Costing (A) Technique of Costing
(ii) CAS-9 (E) Packing Material Cost
(iii) Supplementary Rate (D) Over/Under Absorption of overheads
(iv) Capital Assets Pricing Model (C) Valuation of Shares
(v) Working Capital Finance (B) Letter of Credit
[ Section B
Answer any three questions from question numbers 2, 3, 4 and 5.
2. (a) The following are the details of receipts and issues of a material of stores in Pooja Ltd. for
the month of October, 2017:
Date of Receipt Units Rate per unit (Rs.) Date of issue Units
October, 2017 October, 2017
4 1800 52 3 1900
8 2500 53 11 2100
16 1600 53.50 17 1700
19 1000 54 21 1600
22 900 55 24 1300
26 2000 56 28 1500
There was 2500 units in stock at 01.10.2017 which was valued at Rs. 51 per unit. Issues are
to be priced on the basis weighted average method. The stock verifier of the company
reported a shortage of 70 units on 15.10.2017 and 80 units on 31.10.2017. The shortage is
treated as inflating the price of remaining material on account of shortage.
You are required to prepare a Stores Ledger Account. 10
(b) What are the basic rules for classification of costs and basis of classification as per CAS –
1? 5
Answer: 2
(a) Store ledger Account

For the month ending 31st Oct,2017
(Weighted average Method)
Date Receipts Issues Balance
2017 Units Rate Amount Units Rate Amount Units Rate Rate for further issue
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Oct. 1 - - - - - - 2500 127500 51
Oct. 3 - - - 1900 51 96900 600 30600 51
Oct. 4 1800 52 93600 - - - 2400 124200 124200/2400=51.75
Oct. 8 2500 53 132500 - - - 4900 256700 256700/4900=52.39
Oct. 11 - - - 2100 52.39 110019 2800 146681 52.39
Oct. 15 - - - 70 - - 2730 146681 146681/2730=53.73
Short.
Oct. 16 1600 53.50 85600 - - - 4330 232281 232281/4330=53.64
Oct. 17 - - - 1700 53.64 91188 2630 141093 53.64
Oct. 19 1000 54 54000 - - - 3630 195093 195093/3630=53.74
Oct. 21 - - - 1600 53.74 85984 2030 109109 53.74
Oct. 22 900 55 49500 - - - 2930 158609 158609/2930=54.13
Oct. 24 - - - 1300 54.13 70369 1630 88240 54.13
Oct. 26 2000 56 112000 - - - 3630 200240 200240/3630=55.16
Oct. 28 - - - 1500 55.16 82740 2130 117500 55.16
Oct. 31 - - - 80 - - 2050 117500 117500/2050 = 57.32
Short.
(b) Basic Rules for Classification of Costs

(i) Classification of cost is the arrangement of items of costs in logical groups having
regard to their nature (subjective classification) or purpose (objective classification).
(ii) Items should be classified by one characteristic for a specific purpose without
ambiguity.
(iii) Scheme of classification should be such that every item of cost can be classified.
Basis of classification
(a) Nature of expense
(b) Relation to object - traceability
(c) Functions / activities
(d) Behaviour - Fixed, Semi-variable or Variable
(e) Management decision making
(f) Production Process
(g) Time period
3. (a) PARASH LTD. Manufactures 5,000 units of a product per month. The cost of placing an
order is Rs.100. The purchase price of the raw material is Rs.10 per kg. The re-order
period is 4 to 8 weeks. The consumption of raw materials varies from 100 kg to 450 kg
per week, the average consumption being 275 kg. per week. The carrying cost of
inventory is 20% per annum. (Assume 52 weeks to a year.)
(i) Re-order quantity
(ii) Re-order level
(iii) Maximum level
(iv) Minimum level
(v) Average stock level (2+2+2+2+1) = 9
(b) The standard hours of Job X is 100 hours. The job has been completed by Amar in 60
hours, Abir in 70 hours and Binu in 95 hours. The bonus system applicable to the job is as
follows:
Percentage of time saved to time allowed Bonus
Saving upto 10% 10% of time saved
From 11% to 20% 15% of time saved
The rate of pay is Re.1 per hour
Required:Calculate the total earnings of each worker and also the rate of earnings per
hour. 2+2+2=6
Answer: 3
(a)
(i) Re-order Quantity (ROQ):
2𝐴𝐴𝐴𝐴
EOQ (Economic Order Quantity) = EOQ =� ,
𝐶𝐶
Where, A= Annual consumption of raw material = (275 kgs×52 weeks) = 14,300 kgs.
O = Cost of placing an order = Rs. 100
20
C = Carrying cost per kg. per annum = × Rs. 10 = Rs. 2
100
2 ×14,300 kgs .×Rs .100

=� = 1,196 kgs.
Rs .2
(ii) Re-order level (ROL) = Maximum usage × Maximum re-order period
= 450 kgs× 8 weeks = 3,600 kgs
(iii) Maximum level= ROL + ROQ – (Minimum usage x Minimum re-order period)
= 3,600 kgs. + 1,196kgs. – (100Kgs × 4 weeks) = 4,396kgs.
(iv) Minimum Level = ROL – (Average Rate of usage x Average re-order period)
= 3,600 kgs. - (275 kgs. × 6 weeks) = 1,950 kgs.
(v) Average stock level = ½ (Maximum level + Minimum Level)
= ½ ( 4,396kgs. + 1,950 Kgs.) = 3,173 kgs.
OR
1
= (Minimum Level + × ROQ)
2
1
= (1,950 𝐾𝐾𝐾𝐾𝐾𝐾 + × 1,196 𝑘𝑘𝑘𝑘𝑘𝑘) = 2,548 kgs.
2
(b) Statement showing Total Earnings and rate of Earning per hour
Particulars Amar Abir Binu
A Standard hours of Job (SH) 100 hours 100 hours 1oo hours
B Actual Time taken on the Jobs (AH) 60 hours 70 hours 95 hours
C. Time Saved [A - B] 40 hours 30 hours 5 hours
D Percentage of time saved to time 40% 30% 5%
allowed [C× 100/A]
E Bonus hours (Refer to Working Note) 6.5 hours 4.5 hours 0.5 hours
F Total hours to be paid [B + E] 66.5 hours 74.5 hours 95.5 hours
G Total earning @ `1 Per Hour Rs.66.5 Rs. 74.5 Rs. 95.5
H. Rate of earning per hour [Total Rs. 1.1083 Rs. 1.0642 Rs. 1.0053
Earning/AH]
Working Note: Calculation of Bonus hours as percentage of time saved:
Amar : (10 hours × 10%) + (10 hours × 15%) + (20 hours × 20%) = 6.5 hours
Abir : (10 hours × 10%) + (10 hours × 15%) + (10 hours × 20%) = 4.5
Binu: (5 hours × 10%) = 0.5 hours
OR
Alternative Solution:
Statement showing Total Earnings and Rate of Earning per hour:
Particulars Amar Abir Binu
A Standard hour of Job (SH) 100 hours 100 Hours 100 Hours
B Actual Time taken on Jobs (AH) 60 hours 70 hours 95 hours
C Time Saved [A-B] 40 hours 30 hours 5 hours
D Percentage of time saved to time allowed 40% 30% 5%
[C × 100/A]
E Bonus Hours (Refer to Working Note) 8.0 hours 6.0hours 0.5 hours
F Total hours to be paid [B+E] 68.0 hours 76.0 hours 95.5 hours
G Total Earning @ Re. 1 per Hour Rs. 68.00 Rs. 76.00 Rs. 95.50
H Rate of earning per hour [Total Earning / AH] Rs. 1.1333 Rs. 1.0857 Rs. 1.0053
i.e. G/B
Working Note: Calculation of Bonus hours as per percentage of time saved:
(If slab wise not considered)
Amar: 20% of 40 hours = 8.0 hours
Abir : 20% of 30 hours = 6.0 hours
Binu:(5 hours × 10%) = 0.5 Hour
4. (a) Enumerate the disadvantages of a centralized stores system. 5

(b) List three items to be included and two items to be excluded under the CAS -10 for Direct
Expenses. 5
(c) Gamma (India) Ltd. has a unit which manufactures jute bags and export in the European
market. It submits the following items of cost and request you to classify these according
to function and under the appropriate element of cost:
(i) Product catalogue
(ii) Nuts and Bolts
(iii) Commission on sales
(iv) Printing and stationary
(v) Secondary packing material used for export delivery. 5
Answer: 4
(a) Disadvantages of Centralized Stores System:
(i) The transportation costs of the materials may increase because the movements of
the stores may be for a greater distance since the storing is centralized.
(ii) If the user departments are far away from the stores there may be delay in receipt of
the stores by those departments.
(iii) Break down of inter-departmental transport system may hold up the entire process,
and similarly labor problem in the centralized stores may bring the entire concern to
standstill.
(iv) There is greater chance of losses through fire, burglary or some other unhappy
incidents.
(v) It may not be safe to have some hazardous elements bunched together in the
centralized stores.
(b) Item to be included/excluded under CAS – 10 for direct expenses:
Items to be included:
(i) Costs which are directly traceable/ identifiable with the cost object.
(ii) Expenses incurred for the use of bought in resources.
(iii)Price variance if such expenses are accounted for at standard cost.
Items to be excluded: (Write Any Two)
(i) If not traceable/identifiable should be considered as overheads.
(ii) Finance cost is not a direct expense.
(iii) Imputed cost
(iv) Recoveries, credits, subsidy, grant, incentive or any other which reduces the cost.
(v) Penalty, damages paid to statutory authorities.
(c)
Item of Cost Functional Classification Element of Cost
(i) Product catalogue Selling Overhead Material Cost
(ii) Nuts and Bolts Production Overhead Material Cost
(iii) Commission on Sales Selling Overhead Labour Cost
(iv) Printing and Stationary Administration Overhead Material Cost
(v) Secondary Packing Material used Distribution Overhead Material Cost
for export delivery
5. (a) There are three production departments and two service departments in a company. The
overheads of service departments are charged on percentage basis as under:
Department Production Departments Service Departments
A B C P Q
Total Overhead (Rs.) 9,000 6,000 3,000 702 900
Services provided by P 20% 40% 30% — 10%
Services Provided by Q 40% 20% 20% 20% —
Required: Apportion the overhead of service departments to the production departments

using Simultaneous Equation method. 7
(b) Your company is an export-oriented organization manufacturing internal
communication equipment of a standard size. The company is to send tender price to
foreign buyers of your product. As the Cost Accountant, you are required to help the
management in the matter of submission and preparation of the tender. Prepare a Cost
Estimate based on the following figures relating to year 2017:
Output: 20,000 units
Expenses Incurred Rs. Rs.
Local Raw Material Consumed 10,00,000 Excise Duty 2,00,000
Imports of Raw Material (Actual 1,00,000 Administrative Office 2,00,000
Consumption) Expenses
Direct Labour in Works 10,00,000 Salary of the Managing 60,000
Director
Indirect Labour in Works 2,00,000 Salary of the joint 40,000
Managing Director
Storage of Raw Material and 50,000 Fees of Directors 20,000
Spares
Fuel 1,50,000 Expenses on Advertising 1,60,000
Tools Consumed 20,000 Selling Expenses 1,80,000
Depreciation on Plant 1,00,000 Seles Depot Expenses 1,20,000
Salaries of Works Personnel 1,00,000 Packing and distribution 1,20,000
(i) Local raw material now cost 10% more

(ii) A profit margin of 20% on sales is kept
(iii) The Government Grants subsidy of Rs.100 Per unit on export. 8
Answer: 5
(a)
Let 'x' be the total overhead of Service Department P and 'y' be the total overhead of
Service Department Q. Then we have:
x = 702 + 0.2 y
y = 900 + 0.1x
To solve the equations, rearrange it and multiply by 10 to eliminate decimals, we get:
10x - 2y = 7,020 ...(i)
-x + 10y = 9,000 ...(ii)
Multiplying equation (ii) by 10 and equation (i) by 1; and adding it in equation (i), we get:
10x - 2y= 7,020
- 10 x + 100y = 90,000
or 98y = 97,020 or y = 990
By substituting value of y in equation (i), we get:
10x - 2(990) = 7,020 or 10x = (2 × 990) + 7,020 or x = 900
Apportionment of Overhead by Simultaneous Equation Method
Departments A B C P Q
Rs. Rs. Rs. Rs. Rs.
Overhead (Given) 9,000 6,000 3,000 702 900
Overhead of P 180 360 270 (-) 900 90
Overhead of Q 396 198 198 198 (-) 990
Total 9,576 6,558 3,468 Nil Nil
(b) Statement of Cost (Tender Price ) for the year 2017

Output: 20,000 Units
Particular Rs. Rs.

Raw Materials Consumed (10,00,000 + 10%) 11,00,000
Import of Raw Materials 1,00,000
Add: Factory Overhead:
Indirect Labour 2,00,000
Storage of Raw Material and Spares 50,000
Fuel 1,50,000
Tools Consumed 20,000
Depreciation on Plant 1,00,000
Excise Duty 2,00,000
Salary of Works Personnel Works Cost 1,00,000 8,20,000
Works Cost 30,20,000
Add: Office Overhead:
Administrative Office Expenses 2,00,000
Salary of Managing Director 60,000
Salary of Joint Managing Director 40,000
Fees of Directors 20,000 3,20,000
Add: Selling & Distribution Overhead
Expenses on Advertising 1,60,000
Selling Expenses 1,80,000
Sales Depot Expenses 1,20,000
Packaging and Distribution 1,20,000 5,80,000
Cost of Sales or Total Cost 39,20,000
Profit (20% on Sales or 25% of Cost) 9,80,000
Total Selling Price 49,00,000
Selling Price Before Subsidy per unit
(Rs. 49,00,000 ÷ 20,000 Units) 245
Less: Subsidy 100
Tender Price (Per unit) 145
Section C
Answer any two questions from question numbers 6,7 and 8.
Each question carries 15 marks
6. (a) From the information given below you are required to prepare a cash Flow Statement for
the year ended 31st March, 2017:
Balance Sheets
As at 31st march, 2016 and 2017
Particulars 2017 2016
Rs. Rs.
I. Equity And Liabilities
(1) Shareholders' Fund
(a) Paid up Share Capital 90,000 70,000
(b) Reserves and Surplus:
Profit & Loss A/c 10,000 7,000
(2) Non-Current Liabilities
Secured Loan 40,000 —
(3) Current Liabilities
(a) Trade Payables 37,000 14,000
(b) Short-term Provision : Tax Provision 3,000 1,000
Total 1,80,000 92,000
II. Assets
(1) Non-Current Assets
(a) Fixed Assets
Tangible: Plant & Machinery 92,000 50,000
(2) Current Assets
(a) Inventory 40,000 15,000
(b) Trade Receivables 20,000 5,000
(c) Cash and Cash Equivalents 24,000 20,000
(d) Other Current Assets: Prepaid Expenses 4,000 2,000
Total 1,80,000 92,000
Profit & Loss Account
For the year ended 31st March, 2017
To Opening Inventory 15,000 By Closing Inventory 40,000
To Purchase 98,000 By Sales 1,00,000
To Gross Profit c/d 27,000
1,40,000 1,40,000
To General Expenses 10,000 By Gross Profit b/d 27,000
To Dep. On plant & Machinery 8,000
To Provision for Tax 5,000
To Net Profit c/d 4,000
27,000 27,000
To Dividend 1,000 By Balance b/f 7,000
To Balance c/f 10,000 By Net Profit b/d 4,000
11,000 11,000
(b) The details of income and financial position of Morarka Ltd. are as follows:
Particulars Amount
Rs.
Sales (Net) 1,50,000
Less: Cost of Sales 1,00,000
50,000
Less: Operating Expenses (including Rs.6,000 p.a. for
Depreciation) 40,000
Net Profit
Assets: 10,000
Cash in hand
Debtors 12,000
Stock at cost 60,000
Fixed Assets (net) 24,000
Total Assets 1,04,000
Liabilities 2,00,000
Creditors
Debentures 38,000
Share Capital 40,000
Surplus 1,00,000
22,000
Total Liabilities
2,00,000
The Company makes all sales on credit.

Compute the following ratios:
(i) Current ratio
(ii) Liquidity ratio
(iii) Inventory Turnover
(iv) Average Collection period
(v) Operating ratio 5
Answer: 6 (a)
Cash Flow Statement
For the year ending 31st March, 2017
(A) Cash Flows from Operating Activities : Rs. Rs.
Net Profit after appropriation (Rs. 10,000 – Rs. 7,000) 3,000
Adjustment for :
Depreciation 8,000
Provision for Tax 5,000
Dividend 1,000 14,000
Operating Profit before working capital changes 17,000
Adjustment for :
Increase in Debtors (15,000)
Increase in Inventory (25,000)
Increase in Prepaid Expenses (2,000)
Increase in Creditors 23,000 (19,000)
Cash Generated from Operations (2,000)
Taxes Paid (3,000)
Net Cash used in Operating Activities (A) (5,000)
(B) Cash Flows from Investing Activities :
Purchase of Fixed Assets (50,000)
Interest/Dividend Received NIL
Net Cash used in Investing Activities : (B) (50,000)
(C) Cash Flows from Financing Activities :
Issue of Share Capital 20,000
Raising Secured Loans 40,000
Dividend Paid (1,000)
Net Cash Flow from Financing Activities (C) 59,000
Net Increase in Cash (A + B + C) 4,000
Cash and Cash Equivalent at the beginning of the year 20,000
Cash and Cash equivalents at the end of the year 24,000
Note: the figures in brackets show cash outflows.
Working Notes: Provision for Taxation Account

Particulars Amount in Rs. Particulars Amount in Rs.
To Cash (Payment of Tax) 3,000 By balance b/d 1,000
To Balance c/d 3,000 By P & L A/c 5,000
6,000 6,000
Plant & Machinery Account

Particulars Amount in Rs. Particulars Amount in Rs.
To Balance b/d 50,000 By Depreciation a/c 8,000
To Bank (Purchase of Plant 50,000 By Balance c/d 92,000
being balancing fig.)
1,00,000 1,00,000
Answer: 6 (b)
Current Assets 96,000
(i) Current Ratio = = = 2.53 : 1 or 2.53
Current Liabilities 38,000
Liquid Assets 72,000
(ii) Liquidity ratio = = = 1.89 : 1 or 1.89
Current Liabilities 38,000
(iii) Inventory Turnover Ratio = = = 4.17 Times
AverageInventory ∗ 24,000
Total Receivable
(iv) Average Collection Period = × No.of Days inthe year
Net Credit Sales
60,000
= × 365 = 146 days
1,50,000
Cost of Goods Sold + Operating Expenses
(v) Operating Ratio = ×100
Net Sales
1,00,000+ 40,000 1,40,000
= ×100 = ×100 =93.33% or .9333
1,50,000 1,50,000
𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀 𝐃𝐃𝐃𝐃𝐃𝐃𝐃𝐃𝐃𝐃𝐃𝐃𝐃𝐃
[Note: Average Collection Period = is the formula. Here, two years’
𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀 𝐒𝐒𝐒𝐒𝐒𝐒𝐒𝐒𝐒𝐒 𝐩𝐩𝐩𝐩𝐩𝐩 𝐝𝐝𝐝𝐝𝐝𝐝
figures not given. Hence, Debtors treated as average Debtors.)
*Any assumption may be made.
7. (a) The following information is available for SORTEX LTD.
Installed capacity 4,000 units

Actual production and sales 75% of the capacity
Selling price Rs.30 per unit
Variable Cost Rs. 15 per unit
Fixed Cost:
Under situation I Rs. 15,000
Under situation II Rs. 20,000
Tax rate 40%
Capital Structure:
Financial plan
A B
Rs. Rs.
Equity 10,000 15,000
Debt (rate of interest at 20%) 10,000 5,000
20,000 20,000
Required: Calculate the degree of operating leverage (DOL), Degree of Financial

Leverage (DFL) and Degree of Combined Leverage (DCL) Under situation I and situation II
and Financial Plans A and B. 8
(b) Royal Industries Ltd. currently makes all sales on credit and offers no cash discount. It is
considering a 2 per cent discount for payment within 10 days (terms offered are '2/10
net 30'). The firm's current average collection period is 30 days, sales are 10000 units,
selling price is Rs. 100 per unit and variable cost per unit is Rs. 50; its existing total fixed
costs are Rs. 2,00,000 which are likely to remain unchanged with production/sales
volume of 12000 units.
It is expected that the offer of cash discount will result in an increase in sales to 11,000
units and the average collection period will be 20 days as a result. However, due to
increased sales, increased working capital required will be for Rs.20,000 (without taking
into account the effect of debtors).
The total sales on cash discount will be 50% and 20% is the required return on
investment.
Required: Advise the Company on whether the proposed cash discount should be
offered to its customers.
(Assume 360 days to a year.) 7
Answer: 7 (a)
The calculation of the degree of operating leverage, financial leverage, and combined
leverage under Situations I and II and Financial Plans A and B is shown below:
Situation I Situation II
Financial Financial Financial Financial
Plan A Plan B Plan A Plan B
A. Sales (3,000 × Rs. 30) 90,000 90,000 90,000 90,000
B. Variable costs 45,000 45,000 45,000 45,000
C. Contribution 45,000 45,000 45,000 45,000
D. Fixed costs 15,000 15,000 20,000 20,000
E. Profit before interest and 30,000 30,000 25,000 25,000
tax
F. Interest 2,000 1,000 2,000 1,000
G. Profit before tax 28,000 29,000 23,000 24,000
H. DOL =Contribution/Earning 1.5 1.5 1.8 1.8
before Interest and Taxes(EBIT)
(C ÷ E)
I. DFL =EBIT/Earning after 1.07 1.03 1.09 1.04
Interest but before Taxes(EBT)
(E ÷ G)
J. DCL =Contribution/EBT 1.61 1.55 1.96 1.87
(H × I) or (C ÷ G)
Answer: 7 (b)
Incremental analysis whether cash discount should be offered
Incremental sales revenue (1,000 units ×Rs. 100) 1,00,000
Less:Variable Costs (1,000 units ×Rs. 50) 50,000
Incremental contribution 50,000
Add : Savings in cost due to decrease in investment in debtors
(see working note 1) 3,333
Less:Cost of additional working capital required (Rs. 20,000 × 0.20) (4,000)
Less: Cash discount (0.02 × 11,000 units × 0.5 × Rs. 100) (11,000)
Incremental Profit 38,333
Recommendation: It is advised that the firm should offer cash discount.

Working Notes-
1. Savings due to decrease in collection period:
Present investment in debtors (without cash discount)
= [(10,000 × Rs. 50) + Rs. 2,00,000]/12 (360 days/30) = Rs. 58,333.
Expected investment in debtors (with cash discount)
= (11,000 × Rs. 50) + Rs. 2,00,000]/18 (360 days/20) = Rs. 41,667
Decrease in investment in debtors = Rs. 58,333 – Rs. 41,667 = Rs. 16,666
Savings in interest cost (Rs 16,666 × 0.20) = Rs. 3,333.
8. (a) ABC Limited wishes to raise additional finance of Rs.10 lakhs for meeting its investment
plans. It has Rs. 2,10,000 in the form of retained earnings available for investment
purposes.
The following are the further details:
(1) Debt/equity Mix 30% / 70%
(2) Cost of debt uptoRs.1,80,000 10% (Before tax)
Cost of debt beyond Rs. 1,80,000 16% (Before tax)
(3) Earnings per share Rs. 4
(4) Dividend payout 50% of earnings
(5) Expected growth rate in dividend 10%
(6) Current market price Rs.44
(7) Tax rate 35%
You are required:
(a) To determine the pattern for raising the additional finance.
(b) To determine the post-tax average cost of additional debt.
(c) To determine the cost of retained earnings and cost of equity.
(d) Compute the overall weighted average after tax cost of additional finance. 8
(b) Amul Ltd. is considering two mutually exclusive proposals, X and Y.
Proposal X will require the initial cost of Rs.1,40,000 with no salvage value, and will also
require an increase in the level of inventories and receivables of Rs. 60,000 over its life.
The project will generate additional sales of Rs. 1,30,000 and will require cash expenses
of Rs. 40,000 in each of its 5 year life. It will be depreciated on straight line method and
the same is accepted for tax purposes.
Proposal Y will required an initial capital of Rs. 2,00,000 with no salvage value, and will
be depreciated on straight line basis. The earnings before depreciation and taxes during
its 5 year life are:
Year 1 Year 2 Year 3 Year 4 Year 5
Rs. 70,000 Rs.76,000 Rs.80,000 Rs.90,000 Rs.92,000
The Company has to pay corporate income tax at the rate of 35 per cent, and is
evaluating projects with 10 per cent as the cost of capital.
Required:Which project is acceptable under the NPV method?
Table showing present values of Re.1 discount rate -10% are as follows:
End of year
1 2 3 4 5
PVIF (at 10%) 0.909 0.826 0.751 0.683 0.621
PVIFA (at 10%) 3.170 3.791
7
Answer: 8 (a)
(a) Pattern for raising the additional finance:

Debts 30% of Rs. 10,00,000 Rs. 3,00,000
Equity 70% of Rs.10,00,000 Rs. 7,00,000
Total Rs.10,00,000
Financing pattern with costs:
Source Amount in Rs. Cost
Debts 1,80,000 10%
Debts 1,20,000 16%
Retained Earnings 2,10,000
Equity (7,00,000 – 2,10,000) 4,90,000
10,00,000
(b) Post-tax average cost of additional debt
Formula = 𝐾𝐾𝑑𝑑 (1 − 𝑡𝑡), where
𝐾𝐾𝑑𝑑 = 1,80,000 @ 10% = 18,000 or 10% × 0.65 = (6.5 × 1,80,000)/ 3,00,000 = 3.90%
𝐾𝐾𝑑𝑑 = 1,20,000 @ 16% = 19,200 or 16% × 0.65 = (10.4 × 1,20,000)/3,00,000 = 4.16%
3,00,000 37,200 8.06%
OR
Cost = [ (18,000+19,200)/3,00,000] X 100 = 12.4%
Post-tax average cost of debt = 12.4(1 – 0.35) = 12.4 × 0.65 = 8.06%
(c) Cost of Retained Earnings and Cost of Equity

𝐾𝐾𝑟𝑟 = 𝐾𝐾𝑒𝑒
𝐷𝐷
𝐾𝐾𝑒𝑒 = 1 + 𝑔𝑔
𝑃𝑃0
Here, D1 = Dividend to be paid at the end of year
and 𝑃𝑃0 = Current market price per share
Dividend pay -out ratio = 50% of Rs. 4 = Rs. 2.00 per Share. Growth rate is 10%. Hence, at
the end of the year, dividend will be = Rs. 2 + 10% = Rs. 2.20.
2.20
𝐾𝐾𝑒𝑒 = + 0.10= 0.05 + 0.10 = 0.15 = 15%
44
(d) Weighted average after tax cost of additional finance

Source of Amount Proportion After tax Weighted Average
Finance in Rs. (Weight) cost Cost Weighted Cost
0.30 × 8.06 2.418

Debts 3,00,000 30% 8.06%
Retained 3.15
2,10,000 21% 15.00% 0.21 × 15
Earnings
0.49 × 15 7.35
Equity 4,90,000 49% 15.00%
12.918
Total 10,00,000 100%
Thus, weighted average cost is 12.918%
Answer: 8 (b)
Proposal X: cash outflow at t = 0
Amount in Rs.
Cost of new project 1,40,000
Working capital required for an increase in the level of inventories
and receivables 60,000
Total 2,00,000
Cash inflow, years 1 – 4

Sales 1,30,000
Less: Cash Expenses 40,000
Earnings before taxes 90,000
Less: Depreciation (Rs. 1,40,000 ÷ 5) 28,000
Taxable income 62,000
Less: Tax @ 35% 21,700
Earnings after Taxes 40,300
Add : Depreciation 28,000
CFAT t = (1 - 4) 68,300
t = 5 (Rs.68,300 + Rs.60,000, working capital release) 1,28,300
Determination of NPV
Years CFAT PV factor Total PV : Rs.
1-4 Rs. 68,300 3.170 2,16,511
5 Rs. 1,28,300 0.621 79,674
Total PV 2,96,185
Less: Cash Outflows 2,00,000
NPV 96,185
Proposal Y: Determination of NPV (Rupees in thousands)

year Gross Depreciation Taxable Tax EAT CFAT PV Total PV
earnings income @35%
(200 ÷ 5) (Col 2 – 3) (Col 4 – 5) (Col 6 + 3) factor (Col 7 × 8)
1 2 3 4 5 6 7 8 9
1 70 40 30 10.50 19.50 59.50 0.909 54.09
2 76 40 36 12.60 23.40 63.40 0.826 52.37
3 80 40 40 14.00 26.00 66.00 0.751 49.57
4 90 40 50 17.50 32.50 72.50 0.683 49.52
5 92 40 52 18.20 33.80 73.80 0.621 45.83
Total PV 251.38
Less: Cash Outflows 200.00
NPV 51.38
Recommendation: Proposal X is acceptable under the NPV method.
GROUP I
(SYLLABUS 2012)
JUNE 2017

Section A
Question 1 is compulsory. Answer all questions under each sub division.
1. (I) Answer the following questions. Each question carries two marks. 2×5= 10
(i) Daily consumption of a material is 64 to 80 units. It takes 30 to 40 days for receipt of
material after initiating the order and re-order quantity is 4000 units. Calculate the
maximum stock level if the re-order level is 3200 units.
(ii) P Ltd. issues 1000000,12% debentures of ` 100 each at a premium of 20 per cent. The
debentures are redeemable after the expiry of a fixed period of 10 years at 40 per
cent premium. Calculate the cost of debt after tax if corporate tax rate is 30%.
(iii) A worker has produced 144 units in place of 120 units in 10 hours and normal wage
rate is ` 75 per hour. Find his total earnings under Rowan Plan.
(iv) The risk free rate of return is 10%, market rate of return is 12.25 % and beta (β) = 1.25.
Find the cost of equity using CAPM method.
(v) There were 5000 workers in a factory on 1st April, 2016. New entrants in service during
the year 2016-17 were 250 and separations were 130. Calculate Labour Turnover Rate
using Flux method.
(II) State whether the following are True or False (Write only the question Roman numeral and
whether True or False). 1×5=5
(vi) Danger Level of inventory should be fixed below the minimum level.
(vii) When the output level is more than the estimated level in a given production
period, there is an over absorption of overheads.
(viii) A firm's WIP inventory will not have any element of allocated administration
overhead.
(ix) As per Walter's Model of Dividend Policy the firm should retain its earnings if the rate
on internal retention is higher than the capitalisation rate.
(x) If a project's annual cash flows have positive and negative signs, there will certainly
be multiple internal rates of return.
(III) Fill in the blanks (Legibly write only the Roman numeral and the content filling the blank):
1×5= 5
(xi) When raw material is accounted at standard cost, variances due to normal reasons
will be treated as ___________cost (give the element of cost).
(xii) Cost of idle time (idle hours × hourly rate) incurred by a worker directly working on
a product is treated as ________________ (give the element of cost).
(xiii) Royalty payable based on the right to sell is treated as________ (give the element of
cost).
(xiv) The discount rate used for determining NPV of a project under capital budgeting is
at least the_________.
(xv) Modigliani-Miller theory states that ____________is independent of the firm’s dividend
policy.
(IV)Match the following (You may opt to write the Roman numeral and the matched
alphabet instead of copying the contents into the answer books): 1×5=5
(xvi) EOQ A Direct Labour
(xvii) Sunk Cost B Inventory management
(xviii) Direct worker’s contribution to PF C Ignores value of money
(xix) Profitability Index D Measures the profitability of an investment
proposal
(xx) Market price per share at the E Excluded from Cost
end of year 1 is
F Cost of alternative resources
G Minimum ordering cost
H Managerial decision making
I Ignores project life
J Dividend at year 2 end / (Ke – g)
K Dividend at year 1 end /(Ke- g)
Answer:
1. (I) (i) Maximum Stock level = (Re-order level + Re-order quantity) – (Minimum rate of
consumption × minimum Re – order period)
= (3,200 + 4,000) – (64 × 30)
= 7,200 – 1,920
= 5,280 units
(RV -NP)  140 -120 

I (1- t) + 12(1- 0.3) +  
(ii) Kd = N =  10 
 RV +NP  140 +120
  2
 2 
= (8.4+2) /130 = 0.08 OR 8%
(iii) Time Allowed = 10/120 × 144 = 12 hours

Time Saved = 12 – 10 = 2 hours
Under Rowan Plan: `
Normal wages = 10 hours × `75 750
2 ×10 125
Add: Bonus = × 75
12
Total Earnings 875
Total Earnings = H × R + [({(S – H)}/S) ×10 × 75]
= ` (10 ×75) + [({12 – 10}/12) × 10 × 75
= ` 750 + ` 125 = `875
(iv) ke = Rf + β (Rm – Rf) = 10% +1.25 × 2.25% = 10 + 2.813 = 12.813%
(v) Labour Turnover rate (Flux method)

1 No. of new entrants + No. of leavers
= × ×100
2 Average No. of workers during the year
1 250 + 130
= × ×100
2 5060
1 380
= × ×100
2 5060
= 3.75%
5000 + (5000 + 250 - 130) 5000 + 5120
Note: - Average No. of Workers = = = 5060
2 2
(II) (vi) False
(vii) True
(viii) True
(ix) True
(x) True
(III) (xi) Direct Material Cost

(xii) Factory Overheads or Works Overheads
(xiii) Selling Overheads or Selling and Distribution Overheads
(xiv) Cost of Capital
(xv) Value of the firm
(IV)
(xvi) EOQ B Inventory Management
(xvii) Sunk Cost H Managerial Decision Making
(xviii) Direct worker‟s contribution to PF E Excluded from Cost
(xix) Profitability Index I Ignores Project Life.
(xx) Market price per share at the end of year 1 is J Dividend at year 2 end/(Ke-g)
[Section B]
2. (a) The following information is provided by GA Ltd. for the year ended 31st March, 2017:
Production and Sales: 20,000 units
`
Factory Overhead 20,62,500
Office and Administration Overheads 8,50,000
Selling and Distribution Overheads 2,50,000
Sales 1,00,95,000
The following estimates have been made for the year 2017 – 18:
(i) Production and sales will be 30,000 units.
(ii) Material prices per unit will increase by 25% but due to economy in consumption
there will be a saving of 12% on the revised value.
(iii) The wage rate per unit will increase by 20%.
(iv) Factory overheads of ` 7,50,000 are fixed. The remaining factory overheads will be in
the same proportion to materials consumed plus wages as in last year.
(v) The Office and Administrative overheads will increase by 20%.
(vi) Selling and Distribution overheads per unit will be reduced by 20%.
(vii)Percentage of profit on cost desired = 5% plus rate of profit on cost in the last year.
You are required to prepare a statement showing total cost and profit both in value (to
the nearest rupee) and on per unit basis for the year 2017-18. Present costs element wise
and with sub totals usually exhibited in a cost sheet 10
(b) P. Ltd. products P – I and P – II. The following information is furnished:

Particulars Product P-I Product P-II
Opening Stock (Tonnes) 25,000 21,000
Sales (Tonnes) 4,15,000 3,10,000
Closing Stock (Tonnes) 32,000 28,000
Machine Hours Utilised (Hours) 10,000 6,000
Design Charges (`) 10,80,000 6,50,000
Software development charges (`) 16,50,000 9,00,000
Royalty is paid on units produced @ ` 20 per tonne for both the products. Wages are paid
to machine operators @ ` 75 per machine hour. Hire charges of equipment used in
manufacturing process of only product P-II ` 6,15,000.
You are required to calculate the direct expenses of PI and PII as per CAS. 5
Answer:
2. (a) Statement of Cost and Profit for the year ended 31st March, 2018
Output and Sales: 30,000 units
Particulars Total (`) Per unit(`)
Direct Materials 49,50,000 1651
Direct Wages 40,50,000 1352
Prime Cost 90,00,000 300
Factory Overheads(7,50,000+22,50,000 ) 3 30,00,000 100
Works Cost 1,20,00,000 400
Office and Administrative Overheads 10,20,0004 34
Cost of Production 1,30,20,000 434
Selling and Distribution Overheads 3,00,000 105
Cost of Sales 1,33,20,000 444
Profit 33,30,000 111
Sales 1,66,50,000 555
Working Notes: Calculations for the year 2017-18:

1. Direct Materials Cost per unit= 150 + 25% of 150 = 187.5 - 12% of 187.50 = `165
2. Direct Wages per unit = 112.50 + 20% of 112.50= ` 135
3. Factory Overheads: Fixed ` 7,50,000 and Variable 20,62,500 - 7,50,000 =
(13,12,500/52,50,000) × 90,00,000 = ` 22,50,000
4. Office and Administrative Overheads = 8,50,000 +20% of 8,50,000 = `10,20,000
5. Selling and Distribution Overhead per unit = 12.50 - 20% of 12.50 = `10
6. Profit percentage on cost for the year 2016-17 = (16,82,500/ 84,12,500) ×100 = 20%
Desired Profit % for 2017-18 = 20 +5 = 25% on Cost.
(b) Computation of Units produced

Particulars PI PII
Sales (Tonnes) 4,15,000 3,10,000
Add Closing Stock (Tonnes) 32,000 28,000
Less Opening Stock (Tonnes) 25,000 21,000
Units produced (Tonnes) 4,22,000 3,17,000
Computation of Direct Expenses as per CAS 10

Particulars P I (`) PII (`)
Royalty paid on Units produced 84,40,000 63,40,000
Add, Hire charges of Equipment used in PII 0 6,15,000
Add, Design Charges 10,80,000 6,50,000
Add, Software development charges 16,50,000 9,00,000
Direct Expenses 1,11,70,000 85,05,000
Note: Machine Operators Wages will be included in Direct Wages.
3. (a) The following information given:

Workers engaged : WX and WY
Standard time allowed for Job : 40 hours to each
Actual time taken : 32 hours by WX and 30 hours by WY
Wages rate : Same for both
Wages payment system : Halsey 50% plan for WX and Rowan plan for WY
Factory overhead recovered : @ `180 per hour for time taken in both cases.
Factory cost for each of the worker : ` 62,400
Calculate the hourly wages rate and cost of material used.

Assume zero direct expenses. 7
(b) A company having three production cost centres A, B and C and two service cost
centres X and Y reports the following data on overhead allocation costs for a certain
period:
Cost Overhead Estimates of benefits received from Service cost centres (%)
Centres Costs (`) X Y
A 80,000 20 20
B 40,000 30 25
C 20,000 40 50
X 20,000 - 5
Y 10,000 10 -
Determine the total overhead costs of C after apportioning the service centre costs
using (i) Simultaneous Equations Method and (ii) Repeated Distribution method.
Comment on your findings. Explain the concept. (Present your calculations to the
nearest rupee). 8
Answer:
3. (a) Factory Cost = Direct Material Cost + Direct Labour Cost + Factory Overhead
Let the Material Cost be „x‟ and Labour Rate per hour be „y‟
Thus, the material cost for each of WX & WY = x
Labour cost for WX (under Halsey 50% plan) =

50
Normal wages + Bonus = 32y + (40 - 32) × y × = 32y+4y = 36y
100
Labour Cost for WY (under Rowan plan) =

 30 ×(40 - 30)
Normal wages : 30y + bonus = 30y +   × y = 30y + 7.5y = 37.5y
 40
Factory Overhead for WX = 32 × 180 = 5,760

Factory Overhead for WY= 30 × 180 = 5,400
Factory Cost:
For WX = x + 36y + 5,760 = 62,400 or x + 36y = 56,640
For WY = x + 37.5y + 5,400 = 62,400 or x + 37.5y = 57,000
On Subtracting equation (ii) from (i), we get - 1.5y = - 360
Or y =240
X + 36 × 240 = 56,640 Or x = ` 56,640-8,640 = ` 48,000
Therefore, Material Cost (x) = ` 48,000 and

Wages Rate per hour (y) = ` 240 per hour.
(b) (i) Simultaneous Equation Method
Equations : X = ` [20,000 + 0.05y]

Y = ` [10,000 + 0.1x ]
Solving, we get : Y = ` 12,060

X = ` [20,000+.05(12,060)]
= ` [20,000+603] = ` 20,603
Total overhead cost of C = ` [20,000+ 40%X +50% Y]

= ` [20,000+0.4×20603+0.5×12,060]
= ` [20,000 + 8,241+ 6,030]
= ` 34,271.
Repeated Distribution Method:

A B
C X Y
Overheads→ 80,000 40,000
20,000 20,000 10,000
Service X 8,000 -20,000 2,000
Service Y 6,000 600 -12,000
Service X 240 -600 60
Service Y 30 3 -60
Service X 1 -3 0
Total Cost of Overhead 34,271
Value of overhead of C under repeated distribution method is ` 34,271
Note: The repeated distribution method and the simultaneous equation method result
in the same value of overhead apportionment only subject to round off difference.
By the simultaneous equation method, we avoid the repeated iterations. We get the
overhead amount directly by solving the equations. They are not essentially two
different methods, but are rather two ways of calculating the apportionment on the
same basis.
4. (a) Two quotations have been shortlisted in a material procurement process. Supplier A
charges ` 2.3 per unit and Supplier B charges ` 2.10 per unit plus ` 4,000 fixed charges
irrespective of the order quantity.
(i) Compute the order quantity at which the purchase value will be the same for both
the suppliers.
(ii) If the order quantity is 15,000 units, which supplier should be chosen? 4
(b) State three characteristics of “imputed cost”. Give an example. 4
(c) What are the adjustments made to the installed capacity to arrive at the practical
capacity? 4
(d) State the uses of CAS 5 in determining the average cost of transportation of materials. 3
Answer:
4. (a) Supplier A = ` 2.30 per unit

Supplier B = ` 2.10 per unit + `4000/- fixed charge
Difference in price = ` 0.20 per unit
Let the quantity be “X”, where purchase value is same for both suppliers:
2.30 „x‟ = 2.10x+4,000
Solving the equation, we get „x‟ = 20,000 Units
Or
In order to recover the fixed charges of supplier B, the order quantity should be 20.000
units (i.e., ` 4000/0.20). At the quantity of 20,000 units, purchase cost will be the same in
both the cases as detailed below:
A ` 2.30 per unit (2.30 x 20,000 = ` 46,000)
B ` 2.10 per unit (20,000 × 2.10) + (` 4,000 fixed charges) = ` 46,000
As seen from the above, at the quantity of 20,000 units, purchase cost will be the same in
both the cases. If it is for less than 20,000 units, supplier A should be selected.
(ii) For an order of 15,000 units

A 15,000 × 2.30 = ` 34,500
B (15,000 × 2.10+ ` 4,000) = ` 35,500 that is ` (31,500 + 4,000)
Hence, A should be selected in order to place an order for 15,000 units
Note: If the order is for more than 20,000 units, supplier B should be selected, as the
fixed charges of ` 4,000 are same irrespective of the units ordered.
(b) Imputed costs are:

(i) Notional costs - they do not involve cash outlay
(ii) Used only for decision making process, similar to opportunity cost.
(iii) They are a classification of costs for managerial decision making.
Example: Interest on funds generated internally, payment for which is not actually made.
(c) (i) Available production hours after considering normal idle time, normal shut down and
holidays
(ii) Normal time loss in batch change over, break downs, repairs, etc
(iii) Loss in efficiency due to ageing of machinery/equipment
(iv) Number of shifts
(d) CAS 5 should be applied for calculation of cost of transportation required under any
statute or regulations or for any other purpose. For example, this standard can be used
for:
(i) Determination of average transportation cost for claiming the deduction for arriving
at the assessable value of excisable Goods
(ii) Insurance Claim Valuation
(iii) Working out Claim for Freight Subsidy (under Fertilizer Industry Coordination
Committee)
(iv) Administered price mechanism of Freight Cost element
(v) Determination of Inward Freight Costs included or to be included in the cost of
purchases attributable to the acquisition
(vi) Computation of Freight included in the Value of Inventory for Accounting on
Inventory or Valuation of Stock hypothecated with Banks/ Financial Institution/s….etc.
5. (a) The following information relates to the activity of a production department of M Limited
for the month of April, 2017:
(i) Material Costs `15,00,000
(ii) Employee Costs ` 6,72,000
(iii) Direct Expenses ` 42,000
(iv) Other Fixed Costs ` 8,40,000
(v) Direct Labour hours 21,000 hours
(vi) Hours of machinery operation 4,000 hours
You are required to prepare a statement showing the break-up of element wise cost (as
per CAS) of the items given above for the entire department and for the order detailed
below based on the following additional information:
(iv) above consists of 80% as machine related expenses and 10% as administration and
10% as marketing expenses.
On one order carried out in the department during April, 2017 the relevant data were:
Material used: 10% of total material; labour hours worked 163 hours; Machine hours: 51
hours.
Use (A) machine hour rate of overhead absorption (B) Direct labour hour rate of
overhead absorption for factory overheads and prime cost basis for other overheads and
determine the cost of the order under A and B. 6
(b) Group the following items as per the CAS applicable under the most appropriate element
of cost or as specific exclusions. Find the total cost of direct materials. The information
pertains to a company manufacturing processed foods.
SI. Item Description Amount
No. (`)
(i) Material purchased: Flour at invoice price 50,000
(ii) Transport Cost of flour to the factory 2,000
(iii) Penalty paid to Transport Authority 700
(iv) Free Samples 950
(v) Materials used for self-made primary packing material 5,000
(vi) Direct Labour used on the above packing material 3,000
(vii) Factory Overheads on the above packing material 1,000
(viii) Invoice price of dyes purchased for the production shop 1,100
(ix) Inward Transport cost of Dye 200
(x) Salary paid to machine worker 2,100
(xi) Salary paid to billing officer who raises invoices 2,200
(xii) Wages paid to a machine worker during idle time 300
(xiii) Price List/Catalogue cost 5,400
(xiv) Cost of cartons used to pack the packets to dispatch to retail outlets 3,300
(xv) Direct worker’s contribution of Employees’ Provident Fund 225
(xvi) Taste stimulant and preservative added during the process (approximate 900
value; quantity not measurable during each process)
(You need not copy the item description into the answer book. You may indicate under
each element, the Roman numeral and the corresponding amount) 9
Answer:
5. (a) Element wise Cost Statement for entire Department
Particulars `
Production Overheads 6,72,000
Administration Overheads 84,000
Selling and Distribution Overheads 84,000
For the order:

Absorption of Overheads Machine Hour Basis (`) Labour Hour Basis (`)
Direct Material 1,50,000 1,50,000
Direct Labour (163/21000) × 6,72,000 5,216 5,216
Direct Expense (10%) 4,200 4,200
Prime Cost 1,59,416 1,59,416
Production Overheads:
(6,72,000/4,000) × 51 8,568
(6,72,000/21000) × 163 5,216
Factory Cost 1,67,984 1,64,632
Administration Overheads 1,071* 652**
Cost of Production 1,69,055 1,65,284
Selling and Distribution Overheads 1,071* 652**
Cost of Sales 1,70,126 1,65,936
* (84,000/4,000) 51 = ` 1,071
** (84,000/21,000) 163 = ` 652
Alternative:
Question states: “use (A) Machine Hour Rate of Overhead absorption (B) Direct Labour
Rate for Overhead absorption for Factory Overhead and Prime Cost basis for other
Overheads and determine the Cost of Order under A and B.”
Other Overheads pertain to Administrative Overheads and Selling & Distribution

Overheads.
The Prime Cost in both the cases is ` 1,59,416 and respective Overheads are also same `
84,000.
The Percentage of this Overhead to Prime Cost is approximately 3.794.
Therefore, in both the cases, both above said Overheads would amount to ` 6,048
approximately and Cost of Sales would be ` 1,80,080 and ` 1,76,728 respectively.
(b)
Amount in `
Details Direct Direct Direct Production Administration Selling and
Material Labour Expenses Overheads Overheads Distribution
(CAS 6) (CAS 7) (CAS 10) (CAS 3) (CAS 11) Overheads
(CAS 15)
(i) Flour at Invoice 50,000
Price-Material
(ii) Inward Transport 2,000
Cost of Flour
(v)Primary Packing 5,000
Material
(vi)Direct Labour for 3,000
Packing Material
(vii)Factory O/Hs on 1,000
packing material
(viii)Dyes for 1,100
Production Shop
(ix)Inward Transport 200
Cost- Dyes
(x)Salary to Machine 2,100
Worker
(xii)Idle Time 300
(xi)Salary to Billing 2,200
Officer
(xiii)Price Catalogue 5,400
(xiv)Cost of cartons 3,300
for distribution
(xvi)Taste Stimulant 900*
and Preservative
(iv)Free Samples 950
Total cost of Direct 61,000
Material
 If measurable, it is Direct Expense. Since not measurable and exactly valued, treated
as Factory/Production overhead. (Cost of some direct expense not economically/
feasibly traced is an Overhead.)
 (xv)Direct Worker‟s Contribution to P.F. is not cost to Company.
 (iii)Penalty paid to Transport Authority is not part of a Product Cost.
Section C
Answer any two questions from question numbers 6, 7 and 8.
6. (a) Using the following data, find as many items as possible to prepare the balance Sheet as
at the end of the year:
Gross profits ` 5,40,000
Shareholders Funds ` 40,00,000
Gross Profit Margin 30%
Credit Sales to Total Sales 80%
Total Assets Turnover Ratio (based on Sales Value) 0.3 times
Inventory Turnover Ratio (Based on cost) 4 times
Average collection period (360 days in a year) 20 days
Current ratio 1.8
Long-term Debt to Equity 40%
10
(b) Identify whether the following items are inflows or outflows and place them under
appropriate categories in the cash flow statement under AS-3: 5
Item Description Inflow Outflow Category
Normal income tax refund
Proceeds of a share issue
Interest received by a financial enterprise
Decrease in debtors
Dividend received by a manufacturing company
Answer:
6. (a) Working notes:

1. Total Sales:
GP Margin = 30%
GP = ` 5,40,000
Sales = 5,40,000/30% = `18,00,000
2. Credit Sales:
Credit sales = 80% of total sales
= 18,00,000 X 80%
= `14,40,000
3. Total Assets:
Total Assets Turnover = Sales/ Total Assets =0.3times
Total Assets = 18,00,000/0.3
= `60,00,000
4. Inventory:
Inventory Turnover = Cost of Goods Sold / Inventory X 100
= 18,00,000 – 5,40,000 / Inventory
inventory = 12,60,000 / 4 = `3,15,000
5. Debtors:
Debtors = Credit Sales X 20 days / 360 days
= 14,40,000 X 20/360 days
= ` 80,000
6. Long Term Debt
Total Assets = 60,00,000
Total of Balance Sheet = 60,00,000
Now, Long Term Debt = Long Term Debt / Equity = 40%
Long Term Debt = 40% of Equity
= 40,00,000 X 40%
= ` 16,00,000
Current Liabilities = 60,00,000 (Total Assets) – 40,00,000
(Equity) – 16,00,000 (Long Term Debt)
= ` 4,00,000
7. Cash and Bank:
Current ratio = Current Assets / Current Liabilities
1.8 = Debtors + Inventory + Cash and Bank
1.8 = 80,000 + 3,15,000 + Cash and Bank / 4,00,000
7,20,000 = 3,95,000 + Cash and Bank
Cash and Bank = ` 3,25,000
8. Fixed Assets
Total Assets – Current Assets = ` 60,00,000 – (3,15,000 + 80,000 + 3,25,000)
= ` 52,80,000
Balance Sheet as at the end of Year ending -----
` `
Schedule No. Current Year Previous Year
Capital and Liabilities
Share holders funds 40,00,000
Long term liabilities 16,00,000
Current liabilities 4,00,000
Total 60,00,000
Assets
Cash 3,25,000
Debtors 80,000
Fixed Assets 52,80,000
Inventory 3,15,000
Total 60,00,000
(b)
Item Description Inflow Outflow Category
Normal income tax refund  Operating activity
Proceeds of a share issue  Financing activity
Interest received by a financial enterprise  Operating activity
Decrease in debtors  Operating activity
Dividend received by a manufacturing company  Financing activity
7. (a) The following data is provided by S Limited.

Sales ` 40,00,000; Variable Cost is 60% of Sales; Fixed Cost `10,00,000; Interest on
Borrowings ` 1,50,000 in addition to the fixed costs.
Using the concept of leverage, answer the following:
(i) By what percentage will the taxable income increase if EBIT increases by 6%?
(ii) By what percentage will EBIT increase if there is 10% increase in sales?
(iii) By what percentage will the taxable income increase if the sales increase by 6%?
Verify your results. 8
(b) A firm is considering pushing up its sales by extending credit facilities to any one of the
following categories of customers: (i) Customers with a 10% risk of non-payment, and (ii)
Customers with a 25% risk of non-payment. The incremental sales expected in category
(i) is ` 2,40,000 and in category (ii) is ` 6,50,000. The cost of production and selling costs
are 60% of sales while the collection costs amount to 5% of sales in case of category (i)
and 10% of sales in case of category (ii).
You are required to advise the firm about extending credit facilities to each of the above
categories of customers. (Use sale value for bad debts). 7
Answer:
7. (a) Income statement of the company

`
Sales 40,00,000
Less : Variable Cost @ 60% 24,00,000
Less: Fixed Cost 10,00,000
EBIT 6,00,000
Less : Interest 1,50,000
Profit before tax 4,50,000
(i) Degree of Financial Leverage :

DFL = EBIT / Profit before Tax = 6,00,000 / 4,50,000 = 1.3333
If EBIT increase by 6%, the taxable income will increase by 1.3333x6 = 7.9998% or 8%
and it may be verified as follows:
Amount in `
EBIT (after 6% increase) 6,36,000
Less: Interest 1,50,000
Profit before Tax 4,86,000
Increase in taxable income is ` 36,000 i.e., 8% of ` 4,50,000
(ii) Degree of Operating Leverage:
DOL = Contribution/EBIT = 16,00,000 / 6,00,000 = 2.6667
If Sales increase by 10%, the EBIT will increase by 2.6667X10 = 26.667% and it may be
verified as follows:
Amount in `
Sales (after 10% increase) 44,00,000
Less : Variable Expenses @ 60% 26,40,000
Contribution 17,,60000
EBIT 7,60,000
Increase in EBIT is ` 1,60,000 i.e., 26.667% of ` 6,00,000.
(iii) Degree of Combined Leverage :
DCL = Contribution/Profit before Tax = 16,00,000/4,50,000 = 3.556
Alternatively,
DCL = DFL DOL or, 1.3333 2.6667 = 3.5555 say 3.556
If sales increase by 6%, the Profit before tax will increase by 3.556 X 6 = 21.336 and it
may be verified as follows:
Amount in `
Sales (after 6% increase) 42,40,000
Less: Variable Expenses @ 60% 25,44,000
Less : Fixed Cost 10,00,000
EBIT 6,96,000
Profit before tax 5,46,000 1
Increase in Profit before tax is ` 96,000 i.e. 21.336% of ` 4, 50,000
(b) Evaluation of Credit Policies

Category (i) 10% risk of non-payment
Particulars ` `
Incremental sales 2,40,000
Less: Bad debts @ 10% 24,000
Sales realized 2,16,000
Less: Cost of production and selling cost (2,40,000 × 60%) 1,44,000
Less: Collection cost (2,40,000 × 5%) 12,000 1,56,000
Category (ii) 25% risk of non - payment

Particulars ` `
Incremental Sales 6,50,000
Less: Bad Debts @ 25% 1,62,500
Sales realized 4,87,500
Less: Cost of production and selling cost (650000 × 60%) 3,90,000
Less: Collection cost (650000 × 10%) 65,000 4,55,000
Advice: Incremental profit in case of category (i) is more than as same in case of
category (ii). Hence, advised to extend credit facility to category (i).
8. (a) R Ltd. Has the following book-value capital structure as on 31st March, 2017:
(` In Crores)
12% Debentures of ` 100 each 20
10% Preference shares of ` 100 each 5
Equity shares of ` 10 each 25
Total 50
Recent market prices of the securities are:

Debentures: ` 115 per debenture;
Preference shares: ` 140 per share; and
Equity shares: ` 48 per share
External financing opportunities are:
(i) 12% Debentures are redeemable at par after 10 years, its flotation cost is 4% and sale
price is ` 100.
(ii) 10% Preference shares are redeemable at par after 10 years, its flotation cost is 5%
and sale price is ` 100.
(iii) Equity shares: ` 4 per share is flotation cost, sale price is ` 44.
The dividend expected on the equity share at the end of the year is ` 4 per share; the
anticipated growth rate in dividends is 7% p.a. and the company has the practice of
paying all its earnings in the form of dividend. The corporate tax rate is 30%.
You are required to calculate the weighted average cost of capital using (i) Book value
weights and (ii) Market Value weights 10
(b) The following data relating to a project are provided by the Management of G Ltd:
Annual saving ` 4,20,000
Useful life 4 years
Profitability Index 1.04291
Internal rate of Return 14%
Salvage Value Nil
Assume that the only outflow is at the beginning of year 1.

Find (i) Net Present Value (to the nearest rupee) and (ii) Cost of Capital (as a % up to one
decimal point) 5
Table Showing Present Value of Re.1 at different discount rates: (You are required to use
PV factors only up to three decimals as shown below)
Rate
14% 13% 12% 11%
End of Year
1 0.877 0.885 0.893 0.901
2 0.769 0.783 0.797 0.812
3 0.675 0.693 0.712 0.731
4 0.592 0.613 0.636 0.659
Total 2.913 2.974 3.038 3.103
Answer:
8. (a) Working Notes:

Calculation of specific Cost of Capital
(1) Cost of Debt

Kd = {l (1-t) + (RV - NS)/ N} / (RV + NS) / 2
= {12 (1-0.3) + (100-96)/10} / (100+96) / 2
= (8.4 + 0.4) / 98
= 0.0898 or 8.98%
(2) Cost of Preference Capital
Kp = {PD + (RV -NS) / N} / (RV + NS) / 2
= {10 + (100 - 95) / 10} / (100 + 95) / 2
= {10 + 0.5} / 97.5
= 10.5 / 97.5
= 0.107692 or 10.77%
(3) Cost of Equity
Ke = D / NP + G
= 4 / 40 + 7%
= 0.10 + 0.07
= 0.17 or 17%
Computation of Weighted Average Cost of Capital (WACC)
(i) Based on Book Value Weights

Source ` (in Crores) Weight Cost of Capital (%) WACC (Ko)
12% Debentures 20 0.40 8.98 3.592
10% Preference Shares 5 0.10 10.77 1.077
Equity Shares 25 0.500 17 8.5000
Total 50 1.000 13.169
(ii) Based on Market Value Weight

Source ` (in Crores) Weight Cost of Capital (%) WACC (Ko)
12% Debentures 23 0.1533 8.98 1.3766
10% Preference Shares 7 0.0467 10.77 0.5030
Equity Shares 120 0.8000 17 13.6000
Total 150 1.000 15.4796
(b) PV of cash inflows at 14% = Cost of Project

Cost of Project = PV of ` 4,20,000 for 4 years at 14% = 4,20,000 x 2.913 = `12,23,460
(i) NPV:
PI = PV of Cash Inflows/ PV of Initial Cash Outflow = 1.04291
Hence, PV of Cash Inflows = Initial Cash Outflow (Cost of Project) ` 12, 23,460
1.04291
= ` 12,75,959
NPV = PVCIF – Cash Outflow = 12, 75,959 – 12, 23,460 = ` 52,499
(ii) Cost of Capital:

PV of Cash Inflows at cost of Capital(r) for 4 years = ` 12, 75,959
PV Factor for 4 years = 12, 75,959 / 4, 20,000 = 3.038 which is at 12%.
Hence, Cost of Capital = 12%.
Suggested Answer_Syl12_Dec2016_Paper_8
GROUP I
(SYLLABUS 2012)

DECEMBER 2016
Paper- 8: COST ACCOUNTING AND FINANCIAL MANAGEMENT
All sections are compulsory. Each section contains instructions regarding the number
of questions to be answered within the section.
All working notes must form part of your answers.
No Present value factor table or other table will be provided along with this question paper.
Section – A
Question No. 1 is compulsory. Answer all questions under each sub division.
1. (I) Answer the following questions. Each question carries two marks. 2×5=10
(i) The average quarterly consumption of a material is 5200 units. Unit cost is ` 65.
Storage cost is 15% p.a. and the ordering cost is `150 per order. Find the
Economic Order Quantity (EOQ).
(ii) At the level of 60,000 units of output, factory overheads were ` 3,75,000 out of
which 40% was fixed. Find the amount of factory overheads at 78,000 units of
output.
(iii) Standard Time allowed = 3 minutes per unit. Normal time rate = ` 30 per hour;
Taylor's differential piece rate basis: 80% and 120% for below and above standard
respectively. Worker W produces 225 units in an eight hour day. Calculate his
earnings for the day.
(iv) Classify the following items under the appropriate heading as per AS 3 in the cash
flow statement:
(a) Repayment of long term borrowings
(b) Dividend paid
(c) Dividend received
(d) Income-tax paid on trading profits
(v) Total Current Assets = ` 700 lacs of which core is ` 180 lacs; Current Liabilities
excluding bank borrowings = `300 lacs.
What would be the maximum permissible bank borrowing as per Methods II and
III of the Tandon Committee Norms?
(II) State whether the following are True or False (Write only the question Roman Numeral
and whether True or False): 1×5=5
(vi) While working out the EOQ, carrying cost has the element of interest cost. Hence it
can be stated that interest cost is treated as part of material cost under CAS—6.
(vii)Normal bad debt is considered as a selling overhead and included in the cost.
(viii)Carriage and Cartage expenses (inward freight) of fuel for a furnace in a factory
is treated as direct material cost.
(ix) If dividends grow at 'g'% p.a. and cost of equity is ke, the current market price of
a share is determined by a geometric progression with common ratio (1 + g)/(1 +
ke).
(x) The MM Hypothesis assumes that the overall cost of capital is independent of the
capital structure.
(III) Fill in the blanks (Write only the Roman Numeral and the content filling the blank): 1×5=5
(xi) Variable overheads are absorbed by products based on _______level of capacity

utilization.
(xii)In a textile factory, yarn is starched before it is made into textile. The cost of starch
is ____________ (give the element of cost).
(xiii)The actual capacity of a manufacturing unit based on temporary sales
expectancy is 10,000 units due to lack of orders. The practical capacity is 11,500
units. Then, 1500 units is________ capacity.
(xiv) The ratio of % change in one variable to the % change in some other variable is
defined as ____________ in the context of capital structure and finance.
(xv) E is an exporter who relinquishes his right to a receivable due at a future date in
exchange for immediate cash payment at an agreed discount, passing on all the
risks and responsibilities for collecting the debt to B. This arrangement is
called__________ .
(IV)Match the following (You may opt to write the Roman Numbers and the
corresponding matched alphabet instead of copying contents into the answer books):
1×5=5
(xvi) Cash inventory (a) Baumol Model
(xvii) Halsey Plan (b) Dividend Discount Model
(xviii) John Burr Williams (c) Waste Reduction Incentive
(xix) Group Bonus Plan (d) 1
Based on 33 % of time saved
3
(xx) Rowan Plan (e) Indirect Labour Cost
(f) Based on time saved
(g) Based on proportion of time saved to time allowed
Answer:
1. (I) (i) Average annual consumption - 5200 × 4 = 20,800 units.

2AO
EOQ =
C
2 ×20800 ×150
=
65 ×.15
= 800 units.
(ii) 3,75,000 × 60% = 2,25,000 is variable for 60,000 units.

Unit Variable cost = `3.75; Fixed Cost = 1,50,000.
At 78,000 units, OH cost = {(3.75 × 78,000) + 1,50,000} = 442500.
(iii) Standard units per day = 20 × 8 = 160.

Actual = 225
Taylor's differential rate earnings = 120% × 30/20 × 225 = 405 ` for the day.
Alternative Presentation for last line:
`30 / `20 = `1.50 per Unit. 120% of `1.50 = 1.80 Χ 225 = ` 405
for the day.
(iv)
Cash Flows From:
Operating Activities Investment Financing

Activities Activities
d) c) a); b)
(v) WC gap = `400 i.e `(700 – 300) in lacs

Method II:
Maximum permissible borrowings = `400 – (25% × `700) = `(400 – 175)
= 225 lacs
Method III:
Maximum Permissible borrowings =`400 –`{180+25% (700-180)} = 400-310 = 90
lacs.
(II) (vi) False (Only to determine EOQ, interest is taken. Interest is not part of material
cost under CAS).
(vii) True
(viii) False (Fuel is indirect material. Inward freight is part of material cost for the
material being transported. Since it is transport inward of indirect
material, such inward freight is part of fuel cost and therefore indirect
material cost. Fuel does not form part of the output and therefore is
indirect)
(ix) True
(x) True
(III) (xi) Actual

(x) Direct Material
(xi) Idle
(xii) Leverage
(xiii) Forfeiting
(IV)
xvi a
xvii f
xviii b
xix C
xx g
Section – B

2. (a) The following information is available relating to raw material movement in the month
of November, 2016:
Date (November 2016) Details of quantities in number of units

1 Opening stock 500 at ` 200 per unit
3rd to 5th Issue of 250 units
13th Received 200 units @ ` 190
14th Returned to Stores 15 units issued earlier to November at
opening stock rate
16th Issue of 250 units
20th Receipt of 240 units @ ` 195
24th Issue of 290 units
You are required to compute the inventory turnover ratio for the month of November,
2016 using
(i) FIFO and (ii) LIFO methods of pricing and comment on your findings. (A detailed
stores ledger account is not required. Only relevant figures for the ratio need to be
computed). 10
(b) A factory has three production departments - P-1, P-2 and P-3 and two service
departments - S-l and S-2. Overheads are allocated in rupees as follows:
P-1 1,50,000; P-2 75,000; P-3 60,000
S-1 1,05,300; S-2 1,35,000
The expenses of the service departments are charged as follows:
P-1 P-2 P-3 S-1 S-2

S-1 20% 40% 30% — 10%
S-2 40% 20% 20% 20% —
Find out the total overheads of Departments S-1 and S-2 including their charges on
each other by the simultaneous equation method. Calculate the total overheads of P-2.
5
Answer:
2. (a)
Date Receipts Issue (FIFO) Closing Stock (FIFO) Issue (LIFO) Closing Stock
Nov (LIFO)
Qty Rate Qty Rate Qty Rate ` Qty Rate Qty Rate `
1 500 200 100000 500 200 100000
3-5 250 200 250 200 250 200 250 200
13 200 190
14 15 200 250 200 250 200
200 190 200 190
15 200 15 200
16 250 200 200 190 15 200 215 200
15 200 200 190
35 200
20 240 195 200 190 215 200
15 200 240 195
240 195
24 200 190 240 195
15 200 50 200
75 195 165 195 32175 165 200 33000
Total opening plus closing stock value 132175 133000
Average stock 66087.5 rft 66500
Consumption Value 155625 (350 × 200 + 200 × 190 + 154800
(515 × 200 + 200 × 190 + 75 × 195) 240 × 195)
Inventory Turnover ratio = Consumption/Avg. Invy. 2.35 2.33
Comment: Declining prices imply lower consumption cost under LIFO together with higher
inventory value which reduces the numerator and increases the denominator and hence
the marginal reduction in the Inventory turnover ratio.
(b) Let the total overheads of S-1 be x and of S-2 be y.

x = 105300 + .2 y
i.e.. x-.2 y = `105300 A
y= `1,35,000+ .1x
i.e. -x + 10 y = `13,50,000 B
Adding A+B, we get 9.8 y = `14,55,300

i.e. y = `1,48,500
Substituting value of y in Equation A, We get x = `105300 + .2 x 148500
x = `1,35,000
Overheads of P - 2 = .4 x 1,35,000 + .2 x 148500 + 75,000 = `1,58,700.
3. (a) APH, A Publishing House publishes Cost Accounting text books. The following are
some expenses in a certain period:
SI. Details Amount

No. `
(i) Amount paid to employees for proofing and editing 50,000
(ii) Amount paid to professional consultants for proofing 20,000
(iii) Hire charges for special binding equipment 40,000
(iv) Salary paid to the press machinery workmen 1,00,000
(v) Subsidy received from an Accounting Body to encourage such work 15,000
(vi) Inward freight of paper for publishing 10,000
(vii) Penalty paid to a Business School, a major customer, for not releasing 25,000
the books on time when the academic year started.
(viii) Cost of ink used in publishing 30,000
(ix) Royalty on sales 70,000
(x) Payment made in foreign currency for purchase of special paper for
cover page: (100 US $ @ ` 68 per US $)
You are required to present the items that would be considered under the element
"Direct Expenses" for publishing and also list the items that would require disclosure
according to CAS—10.
You are also required to state why and under which element of cost you would
account for items that you have not shown under Direct Expenses.
(You may present the SI. No. and amount columns without copying "Details" column
content into your answer book) 10
(b) Classify the following costs according to function and under the appropriate element
of cost in the context of a jute bag manufacturing unit:
(i) Nuts and Bolts
(ii) Commission on sales
(iii) Printing and Stationery
(iv) Product Catalogue
(v) Secondary packing material used in the delivery van. 5
Answer:
3. (a) Direct Expenses
SI. No. Amount Remarks

`
Direct Expenses under CAS-10
(ii) 20,000
(iii) 40,000
(v) -15,000
ix) 70,000
Other Items, their classification and reason
(i) 50,000 Salaries. Hence Direct Labour
(iv) 1,00,000 Salaries, Hence Direct Labour
(vi) 10,000 Direct Material (Paper is direct material; Inward freight of paper is
part of direct material)
(vii) 25,000 (Penalties to be excluded from total cost according to generally
accepted Cost Accounting Principles )
(viii) 30,000 Direct Material (Ink is part of the output)
(x) 6800 Direct Material
Disclosure under CAS 10
V
vii
(b)
Element Function Material Labour Expense
Production Overheads Nuts and Bolts (i)
Administration Overheads Printing & Stationery (iii)
Selling Overheads Product Catalogue (iv) Commission on Sales
(ii)
Distribution Overheads Secondary Packing
material item in delivery
van (v)
4. (a) The following information is available in respect of some employees of Good Pay Ltd.
for the production period consisting of 12 months:
Worker X is a direct labourer in the shop floor. Z is his supervisor, AO is the
Administrative Officer and MO is the Marketing Officer.
LTA (`) for X, Z, AO, MO are : 15,000; 20,000; 30,000; 40,000 respectively.
Night Shift Allowances (`) paid to X and Z due to general pressure: 1,60,000 and
1,80,000 respectively.
Night Shift Allowance (`) (excluding the above) due to special customer demand for
rush delivery (paid to X and Z): 50,000 each.
Special exhibition arrangements entailing extra work: amount paid to MO: ` 1,20,000.
Fringe Benefits paid to each of X, M, AO and MO: ` 40,000.
Attendance Bonus: ` 25,000 each.
Employer's contribution to PF: same as amounts under LTA.
Lost time due to scheduled maintenance—amount paid to X ` 15,500.
Amount paid to X when he did not work due to severe and unexpected machine
break down ` 25,000.
Prepare a statement showing the amounts that would come under Direct Labour,
Production Overhead, Administrative Overheads and Selling Overheads according to
the principles of Cost Accounting Standards. 10
(b) How will you treat the following in Cost Accounts?

(i) Spoiled Work
(ii) Insurance Charges on Plant and Machinery used for production, on finished
goods in transit and on vehicles used by the Accounts Office? 5
Answer:
4. (a)
Items Direct Production Administrative Selling
Labour Overhead Overheads Overheads
` ` ` `
LTA X: Z: 20,000 AO: 30,000 MO: 40,000
15,000
Night Shift (X)1,60,000
Allowance (general pressure) (Z)1,80,000
Night Shift
Allowance (rush delivery) 50,000 50,000
Special Exhibition Arrangements 1,20,000
Fringe Benefits 40,000 40,000 40,000 40,000
Attendance Bonus (X)25,000
(Z)25,000
(AO)25,000
(MO)25,000
Employer's contribution to PF 15,000 20,000 30,000 40,000
Lost Time due to scheduled (x)15,500
maintenance
Severe Break down (Charge
directly to Costing P and La/c)
(b) (i) Spoiled Work:

If it is inherent to the nature of job or production and is normal, it is charged to the
specific job or as an overhead for the entire production if there is no specific job.
Abnormal spoilage should be charged to the Costing Profit and Loss Account.
Any proceeds or recoveries should be credited to the account where the
spoilage was debited.
(ii) Insurance Charges

Plant and machinery for production Production or factory overhead
Finished goods in transit Distribution overhead
Vehicles for Accounts Dept. Administration overheads
5. (a) A machine shop has 6 identical machines manned by 6 operators. The machines
cannot be worked without an operator being wholly engaged on it. The original cost
of all these six machines is totally ` 8 lakhs. The following particulars are furnished for
a six month period:
Normal available hours per month per operator 208

Absenteeism (without pay)-hours per operator 18
Leave with pay-hours per operator 20
Normal idle time unavoidable-hours per operator 10
Average rate of wages per day of 8 hours per operator ` 24
Production Bonus estimated 15% on wages
Value of power consumed ` 8,050
Supervision and indirect labour ` 3,300
Lighting and Electricity ` 1,200
The following particulars are for a year:

Repairs and maintenance including consumable are 3% on value of machines.
Insurance ` 40,000.
Depreciation is 10% on original cost. Assume no salvage value.
Other sundry works expenses `12,000.
General management expenses allocated ` 54,530.
You are required to work out a comprehensive machine hour rate for the machine
shop.
(Present items of expenses for six months and arrive at the machine hour rate at the
final step). 10
(b) Two components A and B are used as follows:
Normal usage 600 units per week each

Maximum usage 900 units per week each
Minimum usage 300 units per week each
Reorder quantity A 4,800 units B 7,200 units
Reorder period A 4 to 6 weeks B 2 to 4 weeks
Calculate for each component:

(i) Re-order level,
(ii) Minimum level,
(iii) Maximum level,
(iv) Average stock (Based on Re-order quantity) 5
Answer:
5. (a) Computation of comprehensive machine hour rate
`
Operators' wages 20,520
Production bonus (15% of wages) 3,078
Power consumed 8,050
Supervision and indirect labour 3,300
Lightning and electricity 1,200
Repairs and maintenance (3% of ` .8 lakhs) / 2 12,000
Insurance (6/12 × 40,000) 20,000
Other sundry works expenses for 6 months 6,000
Depreciation for 6 months 40,000
General management expenses for 6 months 27,265
Total overheads for 6 months 1,41,413
Comprehensive machine hour rate = 1,41,413 / 5760 = ` 24.55.
Workings:
Calculation of total machine hours utilised:
Normal available hours per month per operator 208 hours

Less: Unutilised hours due to:
Absenteeism 18 hours
Leave 20 hours
Idle time 10 hours 48 hours
Total hours utilised per month per operator 160 hours
Total hours utilised for 6 months for 6 operators (160 × 6 × 6) 5,760
Calculation of total wages for 6 months for 6 operators:

Average rate of wages per hour = 24 /8 = ` 3.
Normal hours for which wages are to be paid = 208 -18 = 190 hours.
Total wages for 6 months for 6 operators = 1 9 0 × 6 × 6 × 3 = ` 20,520.
(b)
Component A Component B
(i) Re-order level 6×900= 5400 units 4 × 900 = 3600 units
(ii) Minimum Level 5400 - (600 × 5) = 2400 units 3600 - (600 × 3) = 1800 units
(iii) Maximum Level 5400 + 4800 - 1200 = 9000 3600+7200 - 600 =10200
units units
(iv) Average stock level = 2400 + 2400 = 4800 1800+3600 = 5400 units
Minimum level + ROQ/2
Section C

6. (a) Companies X, Y and Z Ltd. have the following information with a common
expectation of 15% return on investment.
Details X Ltd. Y Ltd. Z Ltd.

EBIT (`) 20,00,000 20,00,000 20,00,000
No. of equity shares 3,00,000 2,50,000 2,50,000
12% Debentures — 15,00,000 18,00,000
Find the value of each firm and the value per equity share for each firm under the
Modigliani-Miller Approach for each of the following situations: 10
(i) Assuming there are no taxes.
(ii) Assuming 50% tax rate.
(b) The following parameters are furnished relating to a firm as on a certain date:
Stock Turnover Ratio 6 times

Debtors 2 months (Sales value)
Gross Profit to Sales ratio 20%
Capital 1,00,000
Reserves and Surplus 20,000
Creditors Turnover ratio 5 times
Fixed Assets Turnover ratio 5 times
Closing Stock is ` 5,000 more in value than the opening stock and closing creditors
were equal to the opening value.
The Gross Profit during the period was ` 60,000 and there were no cash sales or
purchases.
Prepare the Balance Sheet as at that date giving the break-up of as many items as
possible. 5
Answer:
6. (a) (i) Assuming no taxes:
X Y Z
EBIT(`) 20,00,000 20,00,000 20,00,000
Value of the Firm (EBIT/15 %) 1,33,33,333 1,33,33,333 1,33,33,333
Less: Value of Debt - 15,00,000 18,00,000
Value of Equity 1,33,33,333 1,18,33,333 1,15,33,333
No. of Equity Shares 3,00,000 2,50,000 2,50,000
Value per Equity Share 44.44 47.33 46.13
(ii) Assuming 50 % tax rate:
X Y Z
EBIT (`) 20,00,000 20,00,000 20,00,000
Less : Interest - 1,80,000 2,16,000
EAT= PBT 20,00,000 18,20,000 17,84,000
Taxes (50%) 10,00,000 9,10,000 8,92,000
PAT 10,00,000 9,10,000 8,92,000
Equity Capitalisation @ rate 15 % 66,66,667
= value of unlevered firm
Value of the firm = Value of 66,66,667 + 66,66,667
unlevered firm + Debt (Tax rate) 15,00,000 × .5 +18,00,000 × .5
= 74,16,667 =75,66,667
Value per equity share = (Value 66,66,667 59,16,667/2,50,000 57,66,667/2,50,000
of the firm –value of Debt)/no. of /3,00,000 = 23.67 =23.07
shares =22.22
According to MM Hypothesis, this difference in share value will give rise to

arbitrage and equilibrium will be reached where all the three firms will have the
same market value proving their hypothesis that value of the firm is independent
of leverage.
(Note: Candidates need not write the conclusion since it is not asked for)
(b) Statement of Proprietary fund
` `
Capital 1,00,000
Add : Reserves and surplus 20,000 1,20,000
Alternative Method:
Fixed Assets 60,000
Current Assets :
Cash 16,500
Stock 42,500
Debtors 50,000
1,09,000
Less : Current Liabilities
Creditors 49,000 60,000
Proprietor's Fund 1,20,000
Note: Balance Sheet may also be prepared whereby total of Share Capital
and Reserves and Surplus may be shown as Proprietary Fund.
Workings:
Rate of Gross Profit = 20%
Amount of Gross Profit ` 60,000
60,000
Sales = ×100 = ` 3,00,000
20
Cost of goods sold 3,00,000 - 60,000 = ` 2,40,000
Cost of Goods Sold
Stock velocity =
Average Stock
2,40,000 2,40,000
6= ; Average stock =
Average Stock 6
Average stock = ` 40,000
Opening Stock + Closing Stock = 40,000 × 2 = ` 80,000
80,000 + 5,000
Closing Stock = = ` 42,500
2
Opening stock = 80,000 - 42,500 – ` 37, 500
3,00,000
Fixed assets turnover ratio (5) =
Fixed Assets
3,00,000
Fixed assets = ; Fixed assets = ` 60,000
5
12
Debtor's turnover ratio = = 6 times
2
3,00,000
Average Debtors = = ` 50,000
6
Here average Debtors is assumed to be debtors.
Therefore, debtors = ` 50,000
Credit Purchase
Creditor's turnover ratio =
Average Creditors
2,45,000
5= ; Creditors = ` 49,000
Average Creditors
Purchases = Cost of goods sold + Closing Stock - Opening stock
= 2,40,000 + 42,500 - 37,500 = ` 2,45,000
Cash in hand = Total Liabilities - Assets
= (1,00,000 + 20,000 + 49,000) - (60,000 +50,000 + 42,500)
= `16,500.
7. (a) A company is considering the purchase of a stapler manufacturing machine. Two

mutually exclusive machines, A and B are being evaluated. Relevant information is
given below:
Particulars Machine A Machine B

Cost of the machine (`) 10,00,000 15,00,000
Life in years 5 5
Salvage value (`) 20,000 40,000
Cost of production per stapler (excluding depreciation) 30 28
Other Information:
The staplers can be sold at ` 40 each. Depreciation is based on cost net of residual
value over the life of the machines on a straight line basis. Assume that taxes and
operating cash flows occur at the end of the year and that salvage value is also
taxed at the end of the 5th year. Assume 50% tax rate. Use 12% discount rate and P.V.
factors with decimal places as given. Present your calculations up to the nearest
rupee.
Production volume = 1,00,000 units annually.
You are required to evaluate the proposals using NPV method, showing the
discounted cash flows for each of the machines and advise from a financial
perspective on the choice of a suitable alternative.
Do you feel that NPV would be the ideal measure in this case to take the decision? 10
End of year 1 2 3 4 5 6 7 8 9
P.V. factor @ 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361
(b) What is a Financial Lease? What are its characteristic features? 5
Answer:
7. (a)
Details Machine A Machine B Working Notes
Revenue `/unit 40 40
Cost excluding Depn 30 28
Cash Profit 10 12
Tax (50 %) 5 6
Cash profit per unit after tax 5 6
Cash profit for 1,00,000 units p.a. 5,00,000 6,00,000
Depreciation Shield 98,000 50%(10,00,000-20,000)/5
1,46,000 50%(15,00,000-40,000)/5
(Cost less salvage value
over 5 years)
Annual Cash Inflows 5,98,000 7,46,000
P.V. factor yr 1 to 5 annuity 3.605 3.605
P.V. of annual cash inflows 21,55,790 26,89,330
Discounted Salvage value after 5670 20,000 × .5 × .567
tax at the end of year 5 11,340 40,000 × .5 × .567
P.V. of inflows 21,61,460 27,00,670
P.V. of Outflows = Initial outlay 10,00,000 15,00,000
Net Present Value (NPV) +11,61,460 + 12,00,670
Conclusion: As per NPV method, B is preferable.
NPV is not the best method in this case since B's NPV are only marginally higher than
A's, whereas initial outlay is 1.5 times that of A.
Note: The question is specific that nearest rupee is used, discount factors only as given
be taken and each proposal is to be presented. Hence alternative solutions where
figures vary due to being in ` lacs or p.v. factors being different or incremental
approach are not acceptable.
Even if a student works out cash flows showing profit after adding back depreciation
instead of cash profits + shield on depreciation, he will have to arrive at the annual
cash inflows.
(b) Financial Lease (FL) and its characteristics
A lease is classified as a financial lease if it ensures the amortaisation of the entire cost
of investment plus the expected return on capital outlay during the term of the lease.
It is usually for a longer period and covers the life of the asset.
Financial Lease is commonly used for land, building, machinery and fixed
equipments.
The present value of the total lease rentals payable during the period of the lease
exceeds or is equal substantially to the whole of the fair value of the leased asset, i.e.
the lessor recovers the investment and an acceptable rate of return within the lease
period.
The lease period is longer compared to an operating lease.
It is usually non cancellable prior to its expiration date.
In a financial lease the lessor is mostly responsible for the maintenance and service of
the asset.
Financial Lease usually provides the lessee an option of renewing the lease for a
further period at normal rent.
8. (a) The following information is given:
Details
Annual production 72,000 units
Raw Materials Inventory 2 months' consumption
Finished Goods Stock 3 months
Work-in-Progress (Raw Materials 100%; Conversion Costs 1 month;
50% complete)
Debtors 3 months (sales value)
Creditors 2 months
Cash balance required 1,00,000
Assume: Sales, production, costs are uniform throughout the cycle.
Other information:
Selling Price `/unit 120
Raw Material 60% of selling price
Direct Wages 20% of selling price
Overheads (assume no depreciation) 10% of selling price
You are required to estimate the working capital requirement with a detailed break
up of its constituents. 10
(b) The following information is available from the records of A Ltd.:
Profit after Tax ` 7,91,000

10% Debentures at par ` 25,00,000
Operating Leverage 1.80 times
Variable cost ratio 60%
Corporate Tax rate 30%
(i) Prepare an Income Statement for A Ltd.

(ii) Calculate the combined leverage for A Ltd. 5
Answer
8. (a) Working Notes:
1. Production for the year 72,000 units

Production for the month - 6000 units.
2.
`
Selling price per unit 120
Raw material - 60% of 120 72
Direct Wages 20% of 120 24
Overhead 10% of 120 12
Total Cost 108
Working capital Requirements:
Particulars Basis Amount (`)

Current Assets :
Raw material in store 6000 × 2 × 72 = 8,64,000
Work-in-process R.M. 6000 × 1 × 72 = 4,32,000
Work-in-process Wages 6000 × 1 × 24 × 50% = 72,000
Work-in-process Overhead 60 00 × 1 × 1 2 × 50 % = 36,000
Finished Goods 6000 × 3 × 108 = 19,44,000
Total Inventory 33,48,000
Debtors (at sales price) 6000 × 3 × 120 = 21,60,000
Cash 1,00,000
Total current assets 56,08,000
Current Liabilities :
Creditor 6000 × 2 × 72 = 8,64,000
Total CL 8,64,000
Working capital:
CA-CL = `56,08,000 – `8,64,000
= ` 47,44,000
Question is silent on time lag period of Wages and Overheads. If this is to be considered,
then Alternative solution would be as under (assuming Creditors include same –for one
month; there may be assumption of even two months- answer will change )
(Alternative)
Working Notes :
1. Production for the year 72,000 units
Production for the month - 6000 units.
2.
`
Raw material - 60% of 120 72
Direct wages 20% of 120 24
overhead 10% of 120 12
Total cost 108
Working capital Requirements:
PARTICLARS BASIS AMOUNT (`)
Current Assets:
Raw material in store 6000×2×72= 8,64,000
Work-in-process - R.M. 6000×1×72= 4,32,000
Work-in-process - Wages 6000×1×24×50%= 72,000

Work-in-process - Overhead 6000×1×12×50%= 36,000
Finished Goods 6000×3×108= 19,44,000
Total inventory 33,48,000
Debtors (at sales price) 6000 x 3 x 120 21,60,000
Cash 1,00,000
Total Current Assets→ 56,08,000
Current Liabilities:
Creditors 6000×2×72= 8,64,000
Wages outstanding 6000×1×24= 1,44,000
Overheads outstanding 6000×1×12= 72,000
Total Current Liabilities→ 10,80,000
Working capital = Current Assets – Current Liabilities

∴Working capital = `56,08,000 – ` 10,80,000
∴ Working capital = ` 45,28,000
(b) Income Statement
Details Amount Working Note

Sales 62,10,000 Contribution/40 %
Cost of Sale( Variable Cost) 37,26,000 60% of Sales
Contribution (40 %) 24,84,000 (Operating Leverage 1.8 × PBIT 13,80,000)
Less: Fixed Cost 11,04,000 Difference between PBIT and Contribution
Profit Before Interest and 13,80,000 (PAT/70%) + Interest
Taxes
Less: Interest 2,50,000 10 % of 25,00,000
PBT 11,30,000 (PAT + Taxes)
Less: Taxes 30 % 3,39,000 (PAT/70x30%)
PAT 7,91,000 (given; starting point)
Combined Leverage 24,84,000/11 Combined Leverage = Contribution/PBT
,30,000 =
2.198 say 2.2
INCOME STATEMENT
Details Amount Working Note

PAT 7,91,000 (given; starting point)
Add: Taxes 30% 3,39,000 {(PAT/70%) Χ 30%}
PBT 11,30,000 (PAT + Taxes)
Add: Interest 2,50,000 10 % of 25,00,000
Profit Before Interest 13,80,000 (PAT/70%) + Interest
and Taxes
Add: Fixed Cost 11,04,000 Difference between PBIT

and Contribution
Contribution (40 %) 24,84,000 (Operating Leverage 1.8 x PBIT
13,80,000)
Add: Cost of Sale 37,26,000 60 % of Sales
(Variable Cost)
Sales 62,10,000 Contribution/40 %
Combined Leverage 24,84,000/11,30,000 Combined Leverage =
= 2.198 say 2.2 Contribution / PBT
Suggested Answer_Syl12_June 2016_Paper_8
GROUP I
(SYLLABUS 2012)

JUNE 2016
The figures on the right-hand margin indicate full marks.

All Sections are compulsory. Each section contains instructions regarding the
number of questions to be attempted within the section.
Wherever necessary, candidates may make suitable assumptions
and clearly state them in the answer.
provided along with this question paper.
SECTION – A
Question No.1 is compulsory. Answer all questions under each subdivision.
1. I. Answer the following questions. Each question carries 2 marks. 2×5 = 10
(i) Calculate the reorder level from the following date:

Lead time: 3weeks; Safety stock: 100 units; Annual uniform usage: 2,600 units.
(ii) Standard time for a job = 20 hours. Rate per hour = Rs. 2. The actual time taken by a
worker is 15 hours. Calculate his earning under Barth Variable Sharing Plan.
(iii) A Ltd. uses pre-determined overhead absorption rates. In a certain period, actual
overheads incurred were Rs. 5 lacs and not mostly related to time. Overheads
absorbed were Rs. 1.5 lacs, 50% of unabsorbed overheads was due to faulty planning.
How will such under absorption due to defective planning be treated in Cost Accounts?
(iv) B’s cash flows are Rs. 1,000 on 01.07.2014; RS. 1,100 on 01.07.2016; Rs. 1,000 on
01.07.2018; Considering annual rests, interest rate of 10% and using P.V. factor only up
to one decimal, calculate the present value of his cash flows as on 01.07.2016.
(v) The current market price and expected year-end dividend of an equity share are Rs. 90
and Rs. 4.50 respectively. The dividend growth rate is expected at 7% annually.
Compute the cost of capital under the dividend growth model.
II. State whether the following are true or false: (Legibly write only the question Roman
numeral and whether true or false). 1×5 = 5
(vi) When under absorption of overheads is corrected by applying supplementary rates,

there is no impact in the current period profits due to under absorption as it is corrected
and all overheads are charged in the current period.
(vii)Marginal cost per unit remains constant irrespective of the number of units produced
within the normal output level.
(viii) Companies P and Q are competitors for product PQ. P has a higher degree of operating
leverage than Q. if demand for PQ decreases, profits of Q will decrease at a slower rate
than P.
(ix) The internal rate of return (IRR) assumes that cash flows are reinvested at the firm’s cost
of capital.
(x) M Ltd. provides free service for its cars for the first year of purchase. The cost of this
service for M. Ltd. is treated as selling and distribution overhead.
III. Fill in the blanks (Legibly write only the question Roman numeral and the content filling
the blanks): 1×5 = 5
(xi) In a certain factory, normal capacity was 50000 units. Actual capacity utilization was
52000 units. Fixed production overheads should be absorbed based on ___________
capacity.
(xii)X factory outsources the manufacture of a major component to a contractor. The

transportation of the component of X factory’s premises is borne by X. This
transportation cost will be treated as ________________ cost (give the element of cost).
(xiii) In the ______________ method of pricing material issues, where the prices are falling,
profits will rise.
(xiv) In India, commercial papers can be issued in multiples of Rs._________________.
(xv) ____________________ are the rules applied by a country to domestic regulations to

promote foreign investment.
IV. Match the following (You may opt to write the Roman numeral and the matched
alphabet instead of copying contents into the answer books): 1×5 = 5
(xvi) Normal Waste a) Credit facility is up to 80% of bill

value
(xvii) Salaries of directors b) Credit facility is higher than 80% of
bill value
(xviii) Cost of new spare net of cost of c) Absorbed in cost of production
reconditioning old spare
(xix) Factoring d) CAS-11
(xx) Forfaiting e) CAS-12
Answers:
I.
(i) Re-order Level = Safety Stock + lead time consumption
= Units (2600/52) x 3 + 100
= Units 150 + 100 = 250 units
(ii) Total Earnings under Barth Variable Sharing Plan
=Rate per Hour
= Rs. 2 = Rs. 2 17.321 = Rs. 34.64
(iii) Overheads under absorbed, whether due to faulty planning or otherwise, if

considerable, have to be adjusted to cost of sale, WIP and Finished Goods by using a
supplementary rate.
(Candidates need not show the correct amount of overheads due to faulty planning.
Figures are given with adequate information to understand that the amount under
absorbed is considerable.)
(iv) P.V. on 1.7.2016 =Rs. [(1.2 x 1,000)+ (0.8 x 1,000) +(1x 1,100)] = Rs. 3,100 or
Simply, Rs. (1,000 +1,000+1,100) = Rs. 3,100
(Since the Cash Flows are equidistant and equal from the date of P.V., the undiscounted
Cash Flows may be added. Alternatively, a student can do the above usual working.)
Note: If students take more than one decimal point (though
Question States one decimal), the figures would be Rs.(1,210 + 826
+1,100 = 3,136). The concept being correct one mark may be
awarded.
(v) Cost of equity = k e =[( D1/Po ) + g ]= [(4.5/90)+.07 = .12 = 12%.

Or- Alternative Presentation:
Po =[D1 /(ke –g)] or 90 = [4.5/ (ke -0.07)] or 90 ke -6.3 = 4.5
or, 90 ke =4.5 +6.3 =10.8 ke = 0.12 or 12%
II.
(vi) False. (By using supplementary rates, some portion of the under absorption gets
loaded onto the finished goods and WIP inventory –c/f to the next year.)
(vii) True. (Marginal Cost increases with output, but is constant per unit of output.)
(viii) True. (A higher leverage means faster increase in both profits and losses. Hence P's
losses will increase faster, or profits will decrease faster.)
(ix) False. (The IRR assumes that Cash Flows are reinvested at the IRR)
(x) True. (This is part of after sales service.)
III.
(xi) Actual capacity (whichever is higher should be the base)
(xii) Material Cost. (the component is a material element; landed cost of the material as
per CAS for material cost)
(xiii) LIFO (Last prices will be lower; issues priced at lower cost will result in lower
consumption value and hence increased profits)
(xiv) 5 lacs
(xv)TRIMS (Trade Related Investment Measures)
IV.
(xvi) Normal Waste c) Absorbed in cost of production
(xvii) Salaries of directors d) CAS-11
(xviii) Cost of new spare net of cost of e) CAS-12
reconditioning old spare
(xix) Factoring a) Credit facility is up to 80% of bill
value
(xx) Forfaiting b) Credit facility is higher than 80% of
bill value
SECTION – B
2. (a) The following information is available to Z Ltd. for the Financial Year ending 31st March,
2016:
Particulars Rs.
Production Overheads (75% variable) 2,40,000
Administration Overheads (75% fixed) 1,20,000
Selling and Distribution Overheads (50% fixed) 1,60,000
Sales - 10000 units 15,50,000
Opening Stock - Nil
Closing Stock - Finished Goods - 5000 Units
No WIP (Opening/ Closing)
For the year 2016-17, it is estimated that:

(i) Output will increase by one-third; Sales quantity will increase by 50% by incurring
additional advertisement expenses of Rs.1,45,200.
Assume that opening stock is first sold before using the current year’s output.
(ii) Material prices will increase by 5%.
(iii) Wage rate will increase by 5% while overall direct labour efficiency will decrease by
4%.
(iv) The variable overheads will be at the same unit rates as last year.
(v) Fixed production overheads will increase by 25%.
(vi) Assume that production and sales units were achieved as per budget last year and will
be achieved as per estimate this year also.
(vii)The company will revise its selling price in 2016-17 to Rs.125 per unit. This same selling
price will hold for the units sold from the opening stock also.
You are required to prepare a statement showing cost of sales and sales and profit giving
effect to the above for the financial year 2016-17. 10
(b) The following items appear in the records of Care Ltd. Compute the amount you would
consider under material cost as per CAS-6.
Import Duty 20,000
Insurance 15,000
Labour on self-manufactured primary packing containers 20,000
Factory overheads on self-manufactured packing containers 25,000
Trade discount on purchase of raw material ( Purchase was recorded 45,000
excluding the discount)
CENVAT credit refundable 20,000
Subsidy received from the Govt. for using pollution-free material 8,000
Subsidy received for generating wind energy 12,000
Purchase Price 8,00,000
5
Answers:
(a) Statement of Cost of Sales, Sales and Profit as under:
2015-16 2016-17
Unit Per unit Amount Unit Per Unit Amount
(Rs.) (Rs.)
Direct Material 15,000 23 3,45,000 20,000 24.15* 4,83,000
Direct Wages 15,000 26 3,90,000 28.4375** 5,68,750
Prime Cost 49 7,35,000 52.5875 10,51,750
Add: Production OH
75% Variable 12 1,80,000 12 2,40,000
25% Fixed 4 60,000 5 75,000
Factory/Work Cost 65 9,75,000 68.3375 13,66,750
Add: Administration
OH
25% Variable 2 30,000 2 40,000
75% Fixed 6 90,000 90,000
Cost of production 73 10,95,000 74.8375 14,96,750
Add: Opening stock
Less: Closing stock 5,000 73 3,65,000
5,000 73 3,65,000 10,000 74.8375 7,48,375

Cost of goods sold 10,000 7,30,000 15,000 74.225 11,13,375
Add: Selling &
Distribution OH
50% Variable 8@ 80,000 8 1,20,000
50% Fixed 8 80,000 80,000
Adv. Exp 1,45,200
Total Cost 8,90,000 14,58,575
Sales (125/u×15,000) 125 18,75,000
Profit 4,16,425
* Direct Material Rs. 23.00 1.05 =Rs.24.15
** Direct Labour (Rs.26.00 1.05)/ 0.96 (1.00-0.04) =Rs.27.30/.96 =Rs.28.4375
@ Rs. 80,000/ 10,000 =Rs.8.00 (Variable)
(b) Computation of Material Cost as per CAS-6

Purchase price of material (exclusive trade discount) 8,00,000
Trade Discount (already excluded)
Import duty 20,000
Insurance 15,000
Labour on self-manufactured primary packing containers 20,000
Factory overheads on self-manufactured packing containers 25,000
Sub Total 8,80,000
Less:
Cenvat credit refundable 20,000
Subsidy received from the Govt. for using pollution-free material 8,000
Subsidy for generating wind energy ( Does not form part of Material
cost as subsidy does not relate to Raw Material)
Net Material Value under CAS-6 8,52,000
3. (a) XYZ Ltd. has three production departments, X Y and Z and two service departments, S1
and S2. The following figures are available for a certain production period:
Items of Overheads Amount (Rs.)
Indirect Wages 16,000
Indirect Materials 12,000
Depreciation - Machinery 30,000
Depreciation - Building 10,000
Rent, Rates and Taxes 10,000
Electric Power for Lighting 1,000
Electric Power for Machinery 15,000
Total X Y Z S1 S2
Direct Material (Rs.) 60,000 20,000 10,000 20,000 6,000 4,000
Direct Wages (Rs.) 40,000 15,000 15,000 5,000 3,000 2,000

Floor Area (Sft) 50,000 15,000 10,000 10,000 5,000 10,000
Value of Machinery 3,00,000 80,000 1,00,000 60,000 30,000 30,000
(Rs.)
Horse Power (HP) of 150 60 50 30 5 5
Machinery
Number of lights points 50 15 10 510 10
Labour Hours 15,000 5,000 5,000 2,000
2,000 1,000
10
Prepare a statement showing the distribution of overheads among the production and
service departments on the most equitable basis.
(b) How should the following items be treated as per CAS 7?

(i) Unavoidable idle time
(ii) Normal idle time
(iii) Abnormal idle time. 5
Answers:
(a) Departmental Overhead Distribution Summary
Particular Basis of Total Production Depts.
apportionment (Rs.) X (Rs.) Y (Rs.) Z (Rs.) S1 (Rs.) S2 (Rs.)
Indirect Direct Wages 16,000 6,000 6,000 2,000 1,200 800
Wages
Indirect Direct material 12,000 4,000 2,000 4,000 1,200 800
Material
Depreciation Value of 30,000 8,000 10,000 6,000 3,000 3,000
on Machinery Machine
Depreciation Floor Area 10,000 3,000 2,000 2,000 1,000 2,000
on Buildings
Rent, Rates & Floor Area 10,000 3,000 2,000 2,000 1,000 2,000
Taxes
Electric Power No. of light 1,000 300 200 200 200 100
for lighting Points
Electric Power H. P. of 15,000 6,000 5,000 3,000 500 500
for machinery machinery
General Labour Hours 15,000 5,000 5,000 2,000 1,000 2,000
Expenses
Total 1,09,000 35,300 32,200 21,200 9,100 11,200
(b) As per CAS-7, Idle Time cost shall be assigned directly to the cost object or treated as
overheads depending on the economic feasibility and specific circumstances causing
such idle time.
Treatments of different categories of idle time are as follows:-
(i) Unavoidable Idle Time would be booked for insignificant periods, in Cost Accounts,
this is allowed to remain merged in the Production Order or Standing Order Number
on which the worker was otherwise employed.
(ii) Normal Idle Time is booked to Factory or Works Overhead. For the purpose of
effective control, each type of idle time, i.e. idle time classified according to the
causes is allocated to a separate Standing Order Number.
(iii) Abnormal Idle Time would usually be heavy in amount involving longer periods and
would mostly be beyond the control of the management. Payment for such idle
time is not included in Cost and is adjusted through the Costing Profit and Loss
Account or included in Profit & Loss Account, when the accounts are integrated.
4. (a) The following information is given:

Standard time allowed = 1 hour for 1 unit.
Actual time taken by a worker = 32 hours for 40 units
Standard Wage rate: Rs. 20 per unit or Rs. 20 per hour
Calculate the earnings of the worker under –
(i) Taylor’s Differential Piece Rate System

(ii) Merrick Differential Piece Rate System
(iii) Gantt Task Bonus Plan (High piece rate = Rs.35/unit)
(iv) Halsey Premium Plan
(v) Rowan Plan 10
(b) From the following information, compute the value of direct expenses per 100 bottles
according to Cost Accounting Standards:
K Ltd. is a company making special ointments for pain relief. The following data is
given:
(i) In order that the ointment does not get sticky on patients’ fingers, there is an
additive with attractive fragrance, which is mixed with the medicine towards the
end of the process before it is sent for packing. The company pays @ Rs. 5,000 per
packet for the paste supplied by a contractor. This quantity is sufficient for 50 bottles
of ointment. K Ltd. further pays a royalty of Rs. 25 per bottle that uses this paste.
(ii) The special sealing of the bottles is done with manual intervention and the worker is
paid at the rate of Rs. 5 per bottle specially sealed.
(iii) The manufacture of the ointment has to ensure precise quantity of various inputs.
Computer aided manufacture is used. The software development charges relating
to such production is Re. 0.40 per bottle.
(iv) The Government pays an incentive of Rs.22 per bottle produced. 5
Answers:
(a) Standard hours= 40; Actual Hours taken= 32; Savings= 8 Hours.
Taylor’s Merrick Gantt Halsey Rowan Total
Differential Differential Task Premium Plan
Piece Piece rate Bonus Plan
Rate System Plan
System
Earnings 120% 120% 40 35 (32 20) (32
in Rs. 40 20 40 20 = 1,400 + ( 0.5 20) +
=960 =960 8 20) = [(8/40)
640 + 80 (32
= 720 20) =
640
+128 =
768
Computation of Value of Direct Expenses per 100 Bottles as per CAS:
Sr. Item Direct Direct

No. Expense Expenses per
100 Bottles
(i) Cost of special No

additive paste
Royalty Payment Yes ; Rs. 25/ Rs. 2,500
per bottle
(ii) Sealing of bottle No
(iii) Software Development Yes ; Re. 0.40 Rs. 40
Charges per bottle
Less: Government Incentive Yes ; Rs. 22 -Rs. 2,200
per bottle( to
be netted)
Total Rs.340
5. (a) A company requires 1,00,000 units of an item annually. The cost per unit is Rs.10.
Ordering cost is Rs. 500 per order and inventory carrying cost is 50% per unit per annum.
(i) Find the Economic Order Quantity (EOQ).
(ii) The supplier offers a discount of 3% for order quantity 4500-5999 and 3.5% for order
quantity 6000 and above. Work out a statement comparing the total inventory
management costs for the EOQ, 4500 and 6000 units of order and comment on your
findings. Advise the company on how much to order. 10
(b) Write a short note on: (i) Profit Centre (ii) Responsibility Centre. How do they differ? 5
Answers:
(i) Calculation of Economic Order Quantity:
EOQ = ,
Where A =Amount , O = Ordering Cost and C =Carrying Cost
EOQ = =
= 4,472.14 say 4,472 Units
Order Quantity- 4,472 4,500 6,000
Rs. Rs. Rs.
Purchase Cost:
1,00,000 × 10 = 10,00,000
1,00,000 × 9.70 = 9,70,000
1,00,000 × 9.65 = 9,65,000
Ordering Cost @Rs. 500 per order 11,500

1,00,000 /4,472 =22.36 =23 Orders
1,00,000/4,500 = 22.22 =23 Orders 11,500
1,00,000/6,000= 16.67 =17 Orders 8,500
Carrying Cost = 50% × Price × q/2

0.5 × 10 × 4,472/2 = 11,180
0.5 × 9.70 × 4,500/2 = 10,913
0.5 × 9.65 × 6,000/2 = 14,475
Total Inventory Management Cost 10,22,680 9,92,413 9,87,975
Comparison as above shows that at 6,000 order quantity, the total inventory cost is the least.
At a purchase price of Rs. 9.65, carrying cost per unit will be Rs. 4.825, which is slightly lower than Rs. 5.00
taken for EOQ. [10]
Alternative Solution (Students may compute Ordering Cost with decimal points:)
Calculation of Economic Order Quantity:

EOQ = ,
Where A =Amount , O = Ordering Cost and C =Carrying Cost
EOQ = =
= 4,472.14 say 4,472 Units
Order Quantity- 4,472 4,500 6,000

Rs. Rs. Rs.
Purchase Cost:
1,00,000 10 = 10,00,000
1,00,000 9.70 = 9,70,000
1,00,000 9.65 = 9,65,000
Ordering Cost @Rs. 500 per order
1,00,000 /4,472 =22.36 Orders 11,181
1,00,000/4,500 = 22.22 Orders 11,111
1,00,000/6,000= 16.67 Orders 8,333
Carrying Cost = 50% Price q/2
0.5 10 4,472/2 = 11,180
0.5 9.70 4,500/2 = 10,913
0.5 9.65 6,000/2 = 14,475
Total Inventory Management Cost 10,22,361 9,92,024 9,87,808
Comparison as above shows that at 6,000 order quantity, the total inventory cost is the least.
At a purchase price of Rs. 9.65, carrying cost per unit will be Rs. 4.825, which is slightly lower than Rs. 5.00
taken for EOQ.
Ans. To Q. No. 5(b):
Profit Centre:
Profit centre is a segment of a business that is responsible for all the activities involved in the
production and sales of products, systems and services. Thus, a profit centre encompasses both
costs that it incurs and revenue that it generates. Profit centres are created to delegate
responsibility to individuals and measure their performance. In the concept of responsibility
accounting, profit centres are sometimes also responsible for the investment made for the centre.
The profit is related to the invested capital. Such a profit centre may also be termed as investment
centre.
Responsibility Centre:
A responsibility centre in cost accounting denotes a segment of a business organization for the
activities of which responsibility is assigned to a specific person. Thus, a factory may be split into
a number of centres and a supervisor is assigned with the responsibility of each centre. All costs
relating to centre are collected and the Manager responsible for such a cost centre is judged by
reference to the activity levels achieved in relation to costs. Even an individual machine may be
treated as responsibility centre for cost control and cost reduction.
They differ in the following aspects:

i) Profit Centre relates to a business segment responsible for costs and revenue. It
may be extended to be responsible even for the investment made for the centre.
ii) Responsibility centre relates to activity levels achieved in relation to costs. It is

meant for cost control and cost reduction.
SECTION – C

6. (a) The following information is given to you as on 31-03-2016 for a company:

Current Ratio 2.5
Liquid Ratio 1.5
Fixed Assets (net) 1,80,000
Working Capital 60,000
Reserves and Surplus 40,000
Bank Overdraft (Short term) 10,000
Assume that there is no long term loan or fictitious assets.
Make a statement of proprietary fund and match it with fixed assets and as many details of
current assets net of current liabilities. 8
(b) A company plans to sell 48000 units next year. The following information is given:
Raw Materials = Rs.100(per unit)
Manufacturing expense = Rs.30(per unit)
Selling cost = Rs.20(per unit)
Selling Price = Rs.180 (per unit)
Average Cash balance = Rs.1,20,000
The duration at various stages is expected to be as follows:

Raw materials stage 2 months
Work in progress 1 month (Row Materials 100% complete; Manufacturing 25%
complete)
Finished goods 1 month
Debtors 1 month
Assume uniform sales of 4000 units per month.
Estimate the gross working capital requirement taking
(i) Debtors at Cost;
(ii) Debtors at Sales Value. 7
Answers:
Ans. To Q. No. 6(a):
Current Assets/ Current Liabilities = 2.5 ; Current Assets – Current Liabilities = Rs. 60,000
1.5 Current liabilities = Rs.60,000
Current liabilities = Rs.60,000/1.5 = Rs.40,000
Current Assets = Rs. 60,000 + Current Liabilities or, Rs.(60,000 + 40,000) =Rs.1,00,000
Bank Overdraft is not excluded from Current Liabilities as it is stated to be “short term”
Liquid Ratio (Quick Ratio) = (Current Assets – Stock) / Current Liabilities = 1.5 or,
Rs. 1,00,000 – Stock = Rs. 1.5 40,000 (= Rs. 60,000)
Stock = Rs. 40,000
Current Assets Rs. 1,00,000 – Stock Rs. 40,000 =Debtors and Cash Rs. 60,000
Share Capital = Rs. 2,00,000
Liabilities Amount Assets Amount

(Rs.) (Rs.)
Share Capital 2,00,000 Fixed Assets 1,80,000
Reserves 40,000 Current Assets:
Stock 40,000
Current Liabilities 40,000 Cash and Debtors 60,000
Total 2,80,000 Total 2,80,000
Ans. To Q. No. 6(b):
Statement of Gross Working Capital

Item Workings Amount (Rs.)
Current Assets
Raw Materials 4000 × 2 × 100 8,00,000
WIP:
Materials 4000 × 100 × 100% × 1 month 4,00,000
Manufacturing Expenses 4000 × 30 × 25% × 1 month 30,000
Finished Goods 4000 × 130 × 1 month 5,20,000
Debtors (at cost) 4000 × 150 × 1 month 6,00,000
Cash 1,20,000
Total Gross WC Requirement 24,70,000
If Debtors are at Sales, add profit of Rs.30 per unit. Debtors will be 30 × 4,000 = Rs.1,20,000
more than the above figure. i.e. 7,20,000
Then, Gross WC= 25,90,000
RM WIP FG Debtors Total Working Amount
Rs.
RM 2m 1m 1m 1m 5m 5 × 100 × 20,00,000
4000
Mfg. expenses .25 1 1 2.25m 2.25 × 30 × 2,70,000
4000
Selling exp 1 1 1×20 80,000
4000
Profit 1 1 1×30 1,20,000
4000
Cash 1,20,000
Total Gross WC(Debtors 25,90,000
at sales)
Less : Profit 1,20,000
Gross WC (Debtors at 24,70,000
Cost)
7. (a) MN Ltd. wishes to evaluate two mutually exclusive proposals to acquire a machine.
Machines M and N are being considered, each costing Rs. 2,00,000 and having an
estimated life of 5 years and 4 years respectively. Both have nil salvage value. The
anticipated cash inflows after adjustment of taxes for M and N are given below:
End of Year Machine M Machine N

1 70,000 1,00,000
2 60,000 90.000
3 60,000 80,000
4 50,000 40,000
5 90,000 Nil
Find the accounting rate of return and net present value for both the machines and
advise MN Ltd. which machine should be bought. The required rate of return is 10% p.a.
Present Value factor for 10%

End of Year 1 2 3 4 5
.909 .826 .751 .683 .621
8
(b) ABC Ltd. has the following book value capital structure as on 31st March, 2016:
Particulars Amount Rs.

Equity share capital 40,00,000
11.5% Preference shares 10,00,000
10% Debentures 30,00,000
80,00,000
The equity share of the company sells for Rs. 20. It is expected that next year the
company will pay a dividend of Rs. 2 per equity share, which is expected to grow at 5%
p.a. forever. Assume a 35% corporate tax rate.
Using book value weight:
(i) Compute weighted average cost of capital (WACC) of the company based on the
existing capital structure.
(ii) Compute the new WACC, if the company raises an additional Rs. 20 lakhs debt by
issuing 12% debentures, at par Rs. 100 which would result in increasing the expected
equity dividend to Rs. 2.40 and leave the growth rate unchanged, but the price of
equity share will fall to Rs. 16 per share.
7
Answers:
(a) Ranking of Proposals
Year Cash Inflow P.V. Factor Total P.V.

M (Rs.) N (Rs.) (10% pa) M (Rs.) N (Rs.)
1 70,000 1,00,000 0.909 63,630 90,900
2 60,000 90,000 0.826 49,560 74,340
3 60,000 80,000 0.751 45,060 60,080
4 50,000 40,000 0.683 34,150 27,320
5 90,000 - 0.621 55,890 -
2,48,290 2,52,640
Less: 2,00,000 2,00,000
Cash
Outflow
Net P. V. 48,290 52,640
Average Rate of Return:

AverageProfit
× 100
AverageInvestment
Note: [For evaluation of ARR the average investment has been taken at half of the initial
cost for all the two machines]
M = 70,000 + 60,000 + 60,000 + 50,000 + 90,000 = 3,30,000 ÷ 5 = Rs.66,000
N= 1,00,000 + 90,000 + 80,000 + 40,000 = 3,10,000 ÷ 4 = Rs.77,500
AVProfit
M ARR = × 100
AVInvestment
= Average Cash-in-flow-Depreciation
66,000-40,000
= ×100 = 26%
1,00,000
77,500 - 50,000
N = × 100 = 27.5%
1,00,000
Rank: Machine ‘N’ to be selected under both the methods.
(b) WACC based on existing capital structure:

(i) Cost of equity capital = 2/20 + 0.05 = 0.15 or 15%
(ii) Cost of preference share capital = 11.5/100 = 0.115 or 11.5%
(iii) Cost of debentures = 10% (1- 0.35) = 6.5%
WACC (based on book values):

Source of Capital Book Values Weight Post-tax Cost Weighted
Rs. Cost %
Equity Share Capital 40,00,000 0.500 15 7.50
Preference Share 10,00,000 0.125 11.5 1.44 or
Capital 1.4375
10% Debentures 30,00,000 0.375 6.50 2.44 or
2.4375
Total 80,00,000 1.000 11.38 or
11.375
WACC (based revised capital structure)

(i) Cost of equity capital = 2.40/16 + 0.05 = 0.20 or 20%
(ii) Cost of preference share capital =11.5/100 =0.115 or 11.5%
(iii)Cost of 10% debentures = 10% (1-0.35) =6.5%
(iv) Cost of 12% debentures = 12% (1-0.35) = 7.8%
WACC (based on book values, after raising additional finance by issue of 12%
debentures):
Source of Capital Book Values Weight Post-tax Cost Weighted
Rs. Cost %
Equity Share Capital 40,00,000 0.400 20 8.00
Preference Share 10,00,000 0.100 11.5 1.15
Capital
10% Debentures 30,00,000 0.300 6.50 1.95
12% Debentures 20,00,000 0.200 7.80 1.56
Total 1,00,00,000 1.000 12.66
8. (a) Calculate the degree of Operating Leverage, degree of Financial Leverage and the
degree of Combined Leverage for the following firms and also interpret the result obtained:
Firm X Firm Y Firm Z

(i) Output (units) 80000 22500 1,50,000
(ii) Variable Cost per unit (Rs.) 1.50 1.10 1.20
(ii) Fixed Cost (Rs.) 10,000 20,000 8,000
(iv)Interest on Loan Fund (Rs.) 6,000 10,000 -
(v) Selling price per unit (Rs.) 2.50 5.00 1.50
10
(b) What is a Global Depository Receipt (GDR)? List three of its characteristics. 2+3=5
Ans. To Q. No. 8(a):

Calculation of Degree of Operating Leverage, Financial Leverage and Combined Leverage:
FIRM X FIRM Y FIRM Z
Output (Units) 80,000 22,500 1,50,000
Selling Price per Unit (Rs.) 2.50 5.00 1.50
Less: Variable Cost per Unit (Rs.) 1.50 1.10 1.20
Contribution per Unit (Rs.) 1.00 3.90 0.30
Total Contribution (Rs.) 80,000 87,750 45,000
Less: Fixed Cost (Rs.) 10,000 20,000 8,000
EBIT (Rs.) 70,000 67,750 37,000
Less: Interest (Rs.) 6,000 10,000 -
PBT or EBT (Rs.) 64,000 57,750 37,000
Degree of Operating Leverage = 80,000/70,000= 87,750/67,750= 45,000/37,000
Contribution/ EBIT 1.143 1.295 = 1.216
Degree of Financial Leverage = 70,000/64,000 = 67,750/57,750 37,000/37,000
EBIT/PBT Or EBT 1.094 = 1.173 = 1.00
Degree of Combined Leverage= 80,000/64,000 = 87,750/57,750 45,000/37,000
Contribution /PBT or EBT 1.250 = 1.519 = 1.216
Or
Degree of Combined Leverage 1.143 1.094 1.295 1.173 1.216 1.00 =
= (D.O.L.) (D.F.L.) = 1.250 = 1.519 1.216
Interpretation: Firm Z is less risky because it has low fixed cost and no interest and consequently low
combined leverage
Ans. To Q No. 8(b):

Global Depository Receipt: (GDR)
A Depository Receipt means any instrument in the form of a depository receipt or certificate created
by the Overseas Bank outside India and issued to the non-resident investors against the issue of
ordinary shares.
A GDR is a negotiable instrument, basically a bearer instrument, which is traded freely in the
international market either through the stock exchange or over the counter or among Qualified
Institutional Buyers(QIB).
It is denominated in US$ and represents shares issued in the local currency.
Characteristics: (Any three Points )

i) The shares underlying the GDR do not carry voting rights
ii) The instruments are freely traded in the international market
iii) The investors can earn fixed income by way of dividend
iv) GDRs can be converted into the underlying shares, depository/ custodian Banks
reducing the issue.
GROUP I
(SYLLABUS 2012)

DECEMBER 2015
Time Allowed: 3 Hours Full Marks : 100
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%.
(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
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.
(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:
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.
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.
(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)
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
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 `
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 =
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
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
ALTERNATIVELY:
C. Assuming that Production Assistants as not direct workers and Rates of pay for holidays is
inclusive of basic wages:
(ii)
Amounts in `
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
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
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

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 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 `
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
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
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
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
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
(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
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.
(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)

(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
(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
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.
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.
(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
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:
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%
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
Investment Account
Dr. Cr.
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
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
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.
GROUP I
(SYLLABUS 2012)
DECEMBER 2015
Paper-8 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
This paper contains three questions.
All questions are compulsory, subject to internal choice as per
instruction provided against each question.
All workings must from part of your answer.

Assumptions if any, must be clearly indicated.
I. Answer all sub-divisions: 2×10=20

(a) Under Rowan Plan, calculate the total earnings and effective rate of earnings per hour of
three operators X, Y and Z from the following particulars:
The actual time taken by three operators are as follows:
X 90 hours
Y 80 hours
Z 60 hours
The standard time fixed for producing 1 dozon articles is 100 hours. The rate of wages is `2
per hour.
(b) The average annual consumption of a spare part is 18250 units at a price of ` 36.50 per
unit. The storage cost is 20% on an average inventory and the cost of placing an order is `
50. Find out the quantity required to be purchased at a time.
(c) List out the objectives of CAS-4.
(d) What are the advantages of Cost-Control?
(e) M/S Sky Ltd. furnished you the following details:
Number of employees at the beginning of 2013 250
Number of employees at the end of 2013 400
Employees resigned 40
Employees discharged 10
Employees replaced due to resignation and discharges 40
From the above calculate Labour Turnover Rate for the factory by Separation Method and
Replacement Method.
(f) List out the items to be included for the purpose of measuring employee cost.
(g) The following particulars are furnished to you by M/S Limelight & Co. Ltd in respect of a
current machine:
Cost of Machine `30,000
Estimated scrap value `3,000
Working life of the machine is 5 years
The machine is treated as obsolete after three years of service and sold for `6,000. How
would you treat the loss of the transaction in cost Account?
(h) The following particulars are furnished to you relating to a company:

(`) (in lakhs)
Sales 1,000
Variable cost 400
Fixed cost 300
Contribution 600
Interst 100
Profit before tax 200
You are required to calculate Operating leverage and Financial Leverage from the above.
(i) What are the advantages of computation of overhead absorption rate before incurrence
of overhead?
(j) A co. pays a dividend of 20% on the equity shares of face value of `100 each. Find out
the value of the equity share given that the dividend rate is expected to remain same and
the required rate of return is 15%.
Answer:
I. (a) Computation of Earning under Rowan Plan
Time saved
Hours worked×RatePer Hour + × Hours worked × RatePer Hour
Time Allowed
EARNINGS EFFECTIVE RATE

X (90 × 2) + [100 - 90/100] 90 × 2 = 180 + 18 = 198 198/90 = 2.20
Y (80 × 2) + [100 - 80/50] 80 × 1 = 160 + 32 = 192 192/80 = 2.40
Z (60 × 2) + [100 - 60/50] 60 × 1 = 120 + 48 = 168 168/60 = 2.80
(b)
2 × 18, 250 units × 50
EOQ=
36.50 × 20 / 100
18,25,000
= = 500units
7.3
(c) Objectives of CAS - 4: Cost Accounting standard on cost of production for captive
consumption are:
(i) The purpose of this standard is to bring uniformity in the principles and methods used
for determining the cost of production of excisable goods used for captive
consumption.
(ii) The cost statement prepared based on standard will be used for determination of
assessable value of excisable goods used for captive consumption.
(iii) The standard and its disclosure requirement will provide better transparency in the
valuation of excisable goods used for captive consumption.
(d) The advantage of cost control are mainly as follows: -

(i) Achieving the expected return on capital employed by maximising or optimising
profit.
(ii) Increase in productivity of available resources.
(iii) Reasonable price.
(iv) Continued employment and job opportunity for workers.
(v) Economic use of limited resources of production.
(vi) Increased credit worthiness.
(vii) Prosperity and economic stability of the industry.
(e) (i) Separation method:

50
= x 100
250 + 400
2
50
= x 100 = 15.38%
325
(ii) Replacement method:

40
= x 100
250 + 400
2
40
= x 100 = 12.31%
325
(f) Items to be included for the purpose of measuring employee cost.

(i) Any payment made to an employee either in cash or kind.
(ii) Gross payments including allowances payable and includes all benefits.
(iii) Bonus, ex-gratia, sharing of surplus, remuneration payable to managerial personnel
including Executive Directors and other officers.
(iv) Any amount of amortization arising out of voluntary retirement, retrenchment, termination
etc.
(v) Variance in employee payments / costs due to normal reasons (if standard Costing
System is followed).
(vi) Any perquisites provided to an employee by the employer.
(g) Cost of machine 30,000
Less: Scrap value 3,000
27,000
Depreciation per year = 27,000 ÷ 5 = 5,400
Computation of loss:
Cost of machine 30,000
Less: Dep for 3 yrs 16,200
WDV at the end of 3 yrs. 13,800
Less: Sale value 6,000
Loss 7,800
Entire loss may be charged to costing profit and loss a/c in the year of sale or may be
spread over the balance period of life of the machine.
(h) Calculation of Leverages:

Operating Leverage =
600
Contribution /EBIT = =2
300
300
Finance Leverage = = 1.5
200
(i) Advantages:
Production cost can be worked out as soon as production is finished.
It enables prompt preparation of cost sheets and cost estimates which help
managements submit tenders and quotations and fix selling price of product well in
advance.
Product costs are not affected by calender or seasonal fluctuations.
Cost control is facilitated by comparing actual overheads with overheads
recovered.
Where cost plus contract formula is applied, price quotations can be fixed readily.
It provides data for cost control and decision making.
Losses due to idle capacity and real cost of production are highlighted while
determining rate by using normal capacity as base.
D
(j) Po =
Ke
Where Po = Value of equity share.

D = Annual Dividend
Ke = Required rate of return.
So, Ke = 15% D = 20 (i. e. 20% of 100)
D 20
Po = = = `133.33
Ke 0.15
(a) (i) From the following particulars furnished by M/S Bright & Co. Ltd, prepare a statement
indicating the pricing of issues on the basis of Simple Average Method.
2014, April
April 1 - Purchased 200 units @ `20 each.
April 2 - Purchased 100 units @ `18 each.
April 5 - Issued 250 units to job P vide M/R No. 10
April 7 - Purchased 200 units @ ` 16 each
April 10 - Purchased 300 units @ ` 14 each.
April 13 - Issued 200 units to job Q vide M/R No. 16
April 18 - Issued 200 units to job R vide M/R No. 18
April 20 - Purchased 100 units @ ` 13 each
April 24 - Issued 150 units to job X vide M/R No. 20.
8
(ii) Compute the employee cost from the following particulars:
Basic pay `3,00,000. Accommodation provided to employees free of cost (this
accommodation is owned by the employer, depreciation of the accommodation is
`50,000. Maintenance charges `40,000 and municipal tax of the accommodation
`2,000.
Employer's contribution to PF `60,000. Due to delay in making payment, a penalty
was imposed for `3,000, which was paid by the employer.
Reimbursement of medical expenses `40,000.
Employees contribution to PF `60,000.
Bonus paid to employees `1,00,000.
Hospitalisation expenses of Employee's family `1,00,000 paid by employer. 8
Answer:
II. (a)
(i) STORES LEDGER ACCOUNT
Receipts Issue Balance
Date Qty. Price Value Qty. Price Value Qty. Value
(`) (`) (`) (`) (`)
2014
April - 1 200 20 4,000 - - - 200 4,000
April - 2 100 18 1,800 - - - 300 5,800
April - 5 - - - 250 19 4,750 50 1,050
April- 7 200 16 3,200 - - - 250 4,250
April-10 300 14 4,200 - - - 550 8,450
April-13 - - - 200 16 3,200 350 5,250
April-18 - - - 200 15 3,000 150 2,250
April- 20 100 13 1,300 - - - 250 3,550
April- 24 - - - 150 13.5 2025 100 1,525
Working Notes:
1. Calculation of price for issue on 5th April, 2014
= 20 + 18/2 = 19
2. Price for issue on 13th April
18 + 16 + 14/3 = 16
16 + 14/2 = 15
14 + 13/2 = 13.5
(ii) Computation of Employee Cost:
Particulars Amount (`)
Basic pay 3,00,000
Add: Cost of accommodation provided by employer =
Depreciation + Maintenance Charges & Municipal Tax =
50,000 + 40,000 + 20,000 = 92,000 92,000
Add: Employer’s contribution to PF 60,000
Add: Reimbursement of medical expenses 40,000
Add: Hospitalization expenses 1,00,000
Add: Bonus paid to employee 1,00,000
Total Employee Cost 6,92,000
(b) (i) Following particulars are revealed from the costing records of M/S Jupiter & Co. Ltd. in
the year 2014:
Production - 15,000 units
(`)
Raw material cost 3,00,000
Labour cost 1,80,000
Factory overheads 1,20,000
Office overheads 60,000
Selling expenses 15,000
Rate of profit 25% on selling price.

Now the management decided to produce 20,000 units in 2015. As per Co's estimate,
cost of raw materials will be increased by 25% and labour cost will also increase by
15%. 50% of overhead charges are fixed and the rest is variable. The selling expenses
per unit will also be reduced by 25%.
There will be no change in rate of profit.
Prepare Cost Statements for both the years 2014 and 2015. 3+5=8
(ii) Under a scheme of payment by result, a worker takes 8 hours to complete a job. The
wages is `24 per hour. Material Cost of the job is `150 and overheads are recovered at
25% of the total direct wages. Standard time allowed for the job 12 hours. You are
required to calculate the factory cost of the job under Rowan system and Halsey
system of incentive plan. 2+2+4=8
Answer:
II. (b)
(i) Statement of cost & profit (cost sheet)
Output 15,000 units for 2014
Particulars Amount (`) Amount (`)
Raw materials 20 3,00,000
Labour 12 1,80,000
Prime Cost 32 4,80,000
Add: Factory Overhead 8 1,20,000
Works cost 40 6,00,000
Add: Office overhead 4 60,000
Cost of Production 44 6,60,000
Add: Selling Exp. 1 15,000
Cost of Sales 45 6,75,000
Add: Profit 25% on Sales or 33/1/3 % on cost of sales 15 2,25,000
Sales 60 9,00,000
Statement of Cost & Profit (cost sheet)

Output 20,000 units for 2015
Particulars Cost Total Cost
per Unit (`) (`)
Raw materials (`20 × 125% × 20,000) 25 5,00,000
Add: Labour (`12 × 115% × 20,000) 13.80 2,76,000
Prime Cost 38.80 7,76,000
` 1, 20,000 7.00 1,40,000
Add: Factory Overheads [ i.e. `60,000
2
` 60,000
+ × 20,000 i.e.`80,000]
15,000
Works Cost 45.80 9,16,000
` 60,000 3.50 70,000
Add: Office Overheads [ i.e. `30,000
2
` 30,000
+ × 20,000 i.e.`40,000]
15,000
Cost of Production 49.30 9,86,000
Add: Selling Expenses [{`1 × (100 – 25 )%} × 20,000] 0.75 15,000
Cost of Sales 50.05 10,01,000
Add: Profit 25% on Sales or 33.33% on Cost of Sales 16.68 3,33,600
Sales 66.73 13,34,600
(ii) A: Rowan Plan:

= Hours worked × Rate per hour + (Time Saved/Time allowed) × Hours worked × Rate
per hour
= 8 × 24 + [12 - 8/12] × 8 × 24
= 192 + 1/3 × 192
= 192 + 64
= `256
B: Halsey Plan:
= Hours worked × Rate per hour + 50% of Time Saved × Rate per hour
= 8 × 24 + 50% [12 - 8] × 24
= 192 + 48 = `240
C: Factory Cost:
Particulars Rowan Halsey Plan
(`) (`)
I. Material cost 150 150
II. Labour cost 256 240
III. Overhead at 25% labour cost 64 60
Total 470 450
(c) (i) What are the main objectives of group bonus system? 4
(ii) Write short notes on: 4×3=12

(a) Responsibility Centre
(b) Profit Centre
(c) Basis of cost classification as per CAS - 1.
Answer:
II. (c)
(i) Group Bonus system:
Following are the main objects or Group
Bonus System:
1) Creation of team Spirit
2) Elimination of excessive waste materials and time.
3) Recognition of group efforts.
4) Improving productivity.
(ii) (a) Responsibility centre:

A responsibility centre in Cost Accounting denotes a segment of a business organisation for
the activities of which responsibility is assigned to a specific person. So, a factory may be
split into a number of centres and an official is assigned with the responsibility of each
centre. All costs relating to the centre are collected and the manager responsible for
such a cost centre judged by reference to the activity levels achieved in relation to costs.
Even an individual machine may be treated as responsibility centre for cost control and
cost reduction.
(b) Profit Centre:

Profit centre is a segment of a business that is responsible for all activities involved in
the production and sales of products, systems and services. Thus a profit centre
encompasses both costs that it incurs and revenue that it generates. Profit centres
are created to delegate responsibility to individuals and measure their performance. In
the concept of responsibility accounting, profit centres are sometimes also responsible
for investment made for the centre. The profit is related to the invested capital. Such
a profit centre may also be termed as investment centre.
(c) The basis of Cost Classification as per CAS – 1, is as follows:

Nature of Expenses
Nature of traceability to a cost object
Function
Nature of Behavior
Nature of production or operation process
(d) (i) M/S Sunlight & Co. Ltd. has three production departments X, Y, Z and two service
departments P & Q.
The following particulars extracted from the books of the company:
(`)
Indirect Wages 2,000
Rent & Rates 5,000
Depreciation on Machinery 10,000
General lighting 500
Power 1,000
Sundries 12,000
The following further details are available:

Total X Y Z P Q
Floor Space (sq .ft) 10,000 2,000 2,500 3,000 2,000 500
Light points 50 10 15 15 5 5
Direct wages (`) 10,000 3,000 2,000 3,000 1,500 500
HP of Machinery 100 50 10 30 5 5
Value of Machinery (`) 2,50,000 60,000 80,000 1,00,000 5,000 5,000
Apportion the overhead costs to various departments on the most equitable basis. 8
(ii) Distinguish between chargeable expenses and overhead expenses. 5

(iii) In order to boosting the moral of the employees, certain non-monetory incentives are
given by the management. List out some of these incentives. 3
Answer:
II. (d) (i) Primary Departmental Distribution Summary

Particulars Basis of Total (`) Production Depts. Service Depts.
apportionment
X Y Z P Q
Indirect Direct 2,000 600 400 600 300 100
wages wages
Rent & Rates Floor space 5,000 1,000 1,250 1,500 1,000 250
General Light points 500 100 150 150 50 50
Lighting
Power H.P of 1,000 500 100 300 50 50
Machines
Sundries Direct wages 12,000 3,600 2,400 3,600 1,800 600
Depreciation Value of 10,000 2,400 3,200 4,000 200 200

of Machinery Machine
Total 30,500 8,200 7,500 10,150 3,400 1,250
(ii) Differences between chargeable expenses and overheads:
Chargeable expenses are those expenses which can be directly charged to cost units
or cost centres. Overhead expenses are those expenses which cannot be directly
charged to any cost units or costs centres and are apportioned or allocated.
The dividing line between chargeable expenses and overhead expense is very thin.
Same item of expenses can be treated either as chargeable item of overhead
depending upon the situation. Rent for a service department is chargeable to that
department cost. To the production units such rent is treated as an indirect rent is
treated as an indirect cost because the total service department cost is apportioned to
cost units as indirect cost.
Where a factory is more decentralised more and more expenditure is found as direct.
Basically, we can conclude that chargeable expenses are directly chargeable to the
production units whereas overhead expenses include expenses which either cannot be
chargeable to any production units or can be charged as direct only upto the
department cost.
(iii) Some of the non- monetory incentives are as follows: -
(a) Free Education and Training.
(b) Medical benefits.
(c) Subsidized canteen.
(d) Sports and Recreational facilities.
(e) Housing facilities and long service awards.
(f) Job security.
(g) Benevolent Fund and Welfare fund.
(h) Contribution to superannuation benefits.
III. Answer any two sub-divisions from (a) to (c):
(a) (i) Zed plus Co. Ltd. has made a plan for the coming year. It is estimated that the
company will employ total assets of `10,00,000,50% of the assets will be financed by
taking loans from outside as borrowed capital for which the rate of interest will be 10%
per annum.
The direct cost for the year is estimated at `5,00,000 and `1,00,000 is estimated
towards other operating expenses. The sale price of goods will be 140% of the direct
costs. Income Tax rate is estimated to be 50%.
You are required to find out the following:

(a) Return on assets,
(b) Net profit margin,
(c) Return on owner's equity,
(d) Asset Turnover. 4+4=8
(ii) Write short notes on:

(a) Inter- Corporate Deposits
(b) Venture Capital 4+4=8
Answer:
III. (a) (i) Income Statement of Zed Plus Co. Ltd.
Sales: (140% of 5,00,000) 7,00,000
Less: Direct Costs 5,00,000
Gross Profit 2,00,000
Less: Operating Exp. 1,00,000
Earning before Int. & Tax (EBIT) 1,00,000
Less: Interest (10% of 5,00,000) 50,000
Profit before Tax (PBT) 50,000
Less: Tax @50% 25,000
Profit after Tax (PAT) 25,000
PAT
(a) Return on assets = ×100
Total Assets
25, 000
= ×100 = 2.5%
10, 00, 000
PAT
(b) Net Profit margin = ×100
Sales
25, 000
= ×100 = 3.57%
7, 00,000
PAT
(c) Return on owner’s equity = ×100
Equity
25, 000
= ×100 = 5%
5, 00, 000
Sales
(d) Asset Turnover =
Total Assets
7, 00, 000
= = 0.7 times
10, 00, 000
(ii) (a) Inter corporate Deposits (ICDs)

Sometimes the Commercial organisations borrow funds for a short term period, from other
companies which have surplus liquidity for the time being. The ICDs are generally
unsecured and are arranged by a financier. The ICDs are very common and popular in
practice as these are not marred by the legal hassles. The convenience is the basic virtue
of the method of financing. There is no regulation at present in India to regulate those
ICDs. Moreover, these are not covered by the Sec. 58 of the companies Act. 1956 as the
ICDs are not for long term. The transactions in the ICDs are generally not disclosed as the
borrowing under the ICDs implies a liquidity shortage of the borrower. The rate of interest on
ICDs varies depending upon the amount involved and the time period. The entire working of
ICDs market is based on the personal corrections of the lenders, borrowers and the
financiers.
(b) Venture Capital
Venture Capital is a form of equity financing especially designed for funding high risk and
high reward projects. There is a common perception that venture capital is a means of
financing high technology projects. However, venture capital is investment of long term
financial mode in:
1. Ventures promoted by technically or professionally qualified but unproven
entrepreneurs or
2. Ventures seeking to harness commercially unproven technology or
3. High risk ventures.
The term venture capital represents financial investment in a highly risky project with the
objective of earning a high rate of return.
Modes of finance by venture capitalists are Equity, Conditional loan and convertible
loans.
(b) (i) XYZ Co. Ltd. desires to produce a new product at a price of `1,200 per unit, with the
expectation of annual sales of 5,000 units. Variable costs amounts to `800 per unit and
two months credit facility is to be granted.
It is estimated that 10% of customers will be defaulters. Others will pay on due date.
Interest rate is 15% p.a. A credit agency has offered the Company a suggestion which
it claims can help to identify possible bad debts. The agency for such job will demand
`3,00,000 p.a. and will be able to identify 20% of customers as being potential bad
debts. If these customers are rejected no actual bad debts will result. Should the
Company accept the suggestion of credit agency? 3+5=8
(ii) M/S Light & Sound Co. Ltd. has sales of ` 12,00,000, variable cost `9,00,000 and fixed
cost is `2,00,000 and debt of `5,00,000 of 10% rate of interest.
From the above details find out the operating, financial and combined leverages. If
the Co. wants to double its earnings before interest and tax (EBIT). how much of a rise in
sales would be needed on a percentage basis? 6+2=8
Answer:
III. (b) (i) The annual return from the new product if the agency is not engaged.
(`)
Sales (` 1,200 × 5,000) ------- 60,00,000
Less: Bad debts (10%) ------ 6,00,000
54,00,000
Variable cost (`800 × 5,000) 40,00,000
Interest on investment in debtors (40,00,000 × 15/100 × 2/12) 1,00,000 41,00,000
Net profit ----- 13,00,000
Annual return from new products if the credit agency is engaged:

(`)
Sales (80% of 60,00,000) ------- 48,00,000
Bad debts ------ -
48,00,000
Variable Cost : (800 × 4,000) 32,00,000
Interest on investment in debtors (32,00,000 × 15/100 × 2/12) 80,000 32,80,000
15,20,000
Less: Cost of credit agency 3,00,000
Net profit - 12,20,000
Since the net profits is reduced under the new agency’s suggestion, (`13,00,000 -
`12,20,0000) the proposal should not be accepted.
(ii) Statement of Existing Profit:

(`)
Sales - 12,00,000
V. Cost 9,00,000
EBIT 1,00,000
Less: Interest @ 10% on `5,00,000 50,000
Profit before Tax (PBT) 50,000
Contribution 3, 00, 000

Operating leverage = = =3
EBIT 1, 00, 000
EBIT 1, 00, 000
Financial leverage = = =2
PBT 50, 000
Combined leverage 3 × 2 = 6
Statement of sales needed to double the EBIT.
Operating leverage is 3 times i.e. 33/1/3% increase in sales volume causes a 100%
increase in operating profit or EBIT. So, at the sales ` 16,00,000, operating profit EBIT will
become `2,00,000 i.e. double the existing one.
(c) (i) M/S Bright Ltd. provides you with the following details:
Cost per unit
(`)
Raw material 60
Direct labour 20
Overhead 30
Total cost 110
Profit 30
Selling price 140
Average raw material remain in stock for one month. Average material in work-in-
process is for half month. Credit allowed to customers - one month and credit allowed
by suppliers - one month.
Average time lag in payment of wages: 10days; average time lag in payment of
overheads 30 days. 25% of sales are on cash basis. Cash balance expected to be
`50,000. Finished goods lie in the warehouse for one month.
You are advised to prepare a statement of working capital to finance a level of activity
of 54,000 unit of output p.a. Production is carried on evenly throughout the year and
wages and overheads accrue sirmilarly.
State your assumptions, if any. 5+5=10
(ii) M/S Sun & Moon Co. Ltd. is considering to select one project out of two alternative
projects both with life of 5 (Five) years and following particulars are given:
Project X Project Y
(`) (`)
Capital Investment Year 0 2,00,000 1,00,000
Income Year I 60,000 50,000
Year II 40,000 45,000
Year III 40,000 30,000
Year IV 35,000 30,000
Year V 40,000 20,000
The expected rate of return is 14% p.a. The present value of ` 1 at 14% p.a. from year
1 to 5 is as under:
Year 1 2 3 4 5
Present value factor 0.88 0.77 0.68 0.59 0.52
You are required to calculate the comparative profitability of the two projects by
using net present value method and advise the management suitably. 6
Answer:
III. (c) (i) Statement of Working capital:
I. Current Assets
Amount Amount
(`) (`)
Minimum cash balance 50,000
Inventories:
Raw materials (4500 × 60) 2,70,000
Work-in-progress
Material- 4500 × 60/2 1,35,000
Wages 50% of (4,500 × 20) / 2 22,500
Overheads 50% of (4,500 × 30)/2 33,750
Finished goods (4,500 × 110 4,95,000
Debtors (4500 ×110 × 75%) 3,71,250
Gross Working capital 13,77,500 13,77,500
II. Current Liabilities:

Amount Amount
(`) (`)
Creditors for materials (4,500 × 60) 2,70,000
Creditors in wages (4,500 × 20) / 3 30,000
Creditors for Overheads (4,500 × 30) 1,35,000
4,35,000 4,35,000
Net working capital - 9,42,500
Working Notes:
(1) In valuation of work-in-progress, raw materials have been taken at full

requirements for 15 days but wages and overhead have been taken at 50% on the
assumption that on an average all units in work-in-progress are 50% complete.
(2) Annual level of activity is 54,000 units. So, monthly units 54,000 ÷ 12 = 4,500
(ii) Comparative Profitability’s:
Year Investment-X Investment-Y

P/V Factor Annual P/V Annual P/V
@14% Income (`) (`) Income (`)
1 0.88 60,000 52,800 50,000 44,000
2 0.77 40,000 30,800 45,000 34,650
3 0.68 40,000 27,200 30,000 20,400
4 0.59 35,000 20,650 30,000 17,700
5 0.52 40,000 20,800 20,000 10,400
1,52,250 1,27,150
Less: Investment 2,00,000 1,00,000
-Ve 47,750 +Ve 27,150
As the NPV is positive in case of Investment ‘Y’ the project Y may be selected.
Suggested Answer_Syl12_June2015_Paper_8
GROUP I
(SYLLABUS 2012)

JUNE 2015
All questions are compulsory, subject to internal choice as per
instruction provided against each question.
All working must form part of the answer.
Wherever necessary, candidates may make assumptions and clearly state them in the answer.
I. Answer all sub-divisions. 2×10=20

(a) Calculate the variable overhead per hour and the amount of fixed overheads from
the following information:
Activity level (Hours) Total Budgeted overhead (`)
21,000 1,25,000
28,000 1,53,000
(b) Direct materials and direct labour cost of job No. 111 are `760 and `550 respectively.
Overheads are charged @ 60% of direct labour. If the profit is included @ 20% of the
price charged to customer, then calculate the price of job No. 111.
(c) Ascertain the future value of annuity of `25,000 at the end of 6 years at 9% p.a.
compounded annually. Assume that the amount is deposited at the beginning of
every year.
(d) Average collection period is 2 months, Cash sales and average receivables are
`5,00,000 and `6,50,000 respectively. Find the amount of total sales.
(e) Toli Ltd. earned a contribution of `50 per unit on 65,000 units sold. Company’s debt is
`30,00,000 at 12% rate of interest and Fixed Costs are `7,50,000. Calculate the
Financial Leverage.
(f) Determine which company is more profitable
A. Ltd. B. Ltd.
Net Profit ratio 5% 8%
Turnover ratio 6 times 3 times
(g) Cost of a machine is `30,000. Estimated scrap value at the end of 10 years `6,000.
Running hours of the machine 24,000 p.a. Find out the depreciation per hour.
(h) Mr. X expects to receive `2,00,000 at the end of three years. What would be the
present value if the rate of discount is 10%?
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 1 Page 1
(i) In a factory, a worker produced 14 units in a day of 8 hours. Wage rate per hour is `40.
Standard output per hour is 2 units. Under differential piece rate system, a worker is
paid at 83% when his performance is below standard and 125% of piece rate when his
performance is at or above standard. Find out the labour cost of the worker for the
day.
(j) The number of employees at the beginning and end of year 2014 was 380 and 420.
During the year,18 employees resigned, 6 were terminated and there were 16
replacements. Find the Labour Turnover ratio under the Flux Method.
Answer: I.
(a) Variable overhead per hour
(1,53,000 -1,25,000) 28, 000

= = = `4 per hour
(28,000 - 21,000) 7, 000
Fixed overhead = 1,25,000 – (21,000 × 4) = `41,000
(b)
`
Direct Material 760
Direct labour 550
Overhead @ 60% of Labour 330
Cost of job 1,640
Add: Profit @ 20% on Selling Price or 25% on cost 410
Price Charged to Customer 2,050
(c) Calculation of Future value of annuity

Year Annuity Amount Future value of `1 Future value
` ` `
1 25,000 1,677 41,925
2 25,000 1,539 38,475
3 25,000 1,412 35,300
4 25,000 1,295 32,375
5 25,000 1,188 29,700
6 25,000 1,090 27,250
Future value of annuity at the end of 6th year 2,05,025
Or
Amount of annuity × Cumulative future value of `1 for six years.
`25,000 × 8,201 = `2,05,025
Avg.Receivables ` 6,50,000
 2
(d) Avg. Collection Period = Net credit sales NetCredit sales
12 12
(6,50,000 × 12)
Or Net credit sales = = `39,00,000
2
Total Sales = Cash + Credit = 5,00,000 + 39,00,000 = `44,00,000
Page 2 Page 2
(e)
`
Contribution (65,000 × 50) 32,50,000
EBIT 25,00,000
Less: Interest (30,00,000 ×12%) 3,60,000
EBT 21,40,000
EBIT 25,00,000
Financial Leverage = = = 1.1682
EBT 21,40,000
(f) Company A is more profitable as it has higher return on capital (30%). Company B has
lower- return on capital (24%).
(g) Depreciation per year = 30,000 - 6,000/10=24,000/10 = `2,400.
Depreciation per hour = 2,400 / 24,000 = ` 0.10.
(h) Present value factor for 3 years at 10% is 0.751

Present value = 2,00,000 × 0.751 = `1,50,200.
(i) Standard production per day = 8 × 2 = 16 units.

Efficiency of the worker = 87.5%. It is less than 100%. Hence he is paid at low piece rate.
Earnings = 14 × 20 × 83% = ` 232.4.
(j) Addition = 420 – (380 – 18 – 6) = 64, replacement = 16;

LTR (Flux) = 0.5 *(64+16)/400 = 10%
(a) (i) Naitik Limited produces a product which has a weekly demand of 2,500 units. The
product requires 5 kg. material for every finished unit of product. Material is
purchased at `104 per unit. The ordering cost is `200 per order and the carrying
cost is 10% per annum.
(1) Calculate Economic order Quantity.
(2) Should the company accept an offer of 3% discount by the supplier who
wants to supply the annual requirement of the material in five equal
installments? 3+5=8
(ii) Two workmen, Gyani and Jeetu, produce the same product using the same
material. Their normal wage rate is also the same. Gyani is paid bonus according
to the Halsey System, while Jeetu is paid bonus according to the Rowan System.
The time allowed to make the product is 40 hours. Gyani takes 25 hours while
Jeetu takes 32 hours to complete the product. The factory overheads are charged
@ 125% of direct labour cost. The factory cost for the product for Gyani is `8,925
and for Jeetu it is `9,456. You are required to:
You are required to:
(1) find the normal rate of wages;

(2) find the cost of materials;
(3) Prepare a statement comparing the elementwise factory cost of the products
as made by the two workmen. 2+2+4=8
Page 3 Page 3
Answer II :
(a) (i) Annual demand of material = 2,500 units × 52 weeks × 5 kgs.

= 6,50,000 kgs.
2 × Annual Demand ×Ordering Cost
Calculation of EOQ for a material: EOQ =
CaryingCost per unit per annum
2  6, 50, 000  200

EOQ =
104 10%
= 5,000 kgs.
Evaluation of discount offer:
If lot size is at EOQ 5,000 kgs.
`
6, 50, 000 26,000
Ordering Cost = = 130 × 200 = 26,000
5, 000
5, 000
Carrying Cost = = 2,500 units × 10.4 = 26,000
2 26,000
Material Cost = 6,50,000 kgs @ `104 6,76,00,000
Total Cost 6,76,52,000
6, 50, 000
If lot size is at discount offer = 1,30,000 kgs.
5
Offer price = `100.88
`
Ordering Cost = 5 orders × 200 = 1,000 1,000
1, 30, 000
Carrying Cost = × (100.88 × 10%) = 65,000 × 10.088 =
2 6,55,720
Material Cost = 6,50,000 kgs × `100.88 6,55,72,000
Total Cost 6,62,28,720
Advice:- Total cost is less in case of 3% discount offer Net Sharing = 6,76,52,000 –
6,62,28,720 = `14,23,280
Hence, the company should accept the offer.
(a) (ii) Let ‘x’ be the material cost and ‘y’ be the wages rate.
Earnings of Gyani under Halsey Plan:
`
Normal wages = 25 × `y 25y
Bonus = 40 – 25 = 15 × `y × 50% 7.5y
Total Earnings 32.5y
Earrings of Jeetu under Rowan Plan:

`
Normal wages = 32 × y 32y
32  8 6.4y
Bonus = y
40
Total Earnings 38.4y
Factory Cost = Material + Wages + Factory overheads

In case Gyani: 8,925 = x + 32.5y + 125% of 32.5y
Or, x + 32.5 y + 40.625y = 8,925
Or, x + 73.125 y = 8,925 ……………………….(1)
Page 4 Page 4
In case of Jeetu:- x + 38.4y + 125% of 38.4y = 9,456

Or, x + 38.4y + 48y = 9,456
Or, x + 86.4y = 9,456 …………………………..(2)
Solving equation (1) & (2)
x + 86.4y = 9,456 ………………………(2)
_ x + _ 73.125y =_ 8,925 ………………………(1)
13.275y = 531
Or, y = 40
x + 86.4 × 40 = 9,456
Or, x = 9,456 – 3,456
Or, x = 6,000
Hence,
(a) Normal rate of wages (y) = `40 per hour
(b) Cost of material (x) = `6,000
(c) Statement of factory Cost
Particulars Gyani Jeetu
` `
Material Cost 6,000 6,000
Wages :
Gyani (25 × 40) + [(40 – 25) × 40 × 50%] 1,300 -
 32 (40  32) 
Jeetu: (32 × 40) +   40  - 1,536
 40 
Factory overhead @ 125% of wages 1,625 1,920
Factory Cost 8,925 9,456
(b) (i) The total available working hours in a month in respect of a machine is 200 hours.
The idle-time card reveals follows:
Tea break 20 hours
Waiting for job 10 hours
Waiting for tools 6 hours
Break down (major) 10 hours
Report the idle-time cost to the management under the appropriate category if
hourly fixed costs of the machine amount to `4.25 and the operator is paid `0.75
per hour. 6
(ii) Compute total direct expenses of product X from the following information, giving
appropriate explanatory notes:
Particulars Figures
Production (Units) 20,000
Sales (Units) 16,000
Labour hours 10,000
Labour rate per hour ` 8
Royalty per unit of sale ` 2
Royalty per unit of production ` 1
Design Charges ` 12,000
Interest on loan for purchase of machine ` 5,000
Hire charges of equipment used for manufacturing 6,000
product Y `
Penalty for violating Patent ` 4,000
5
Page 5 Page 5
(iii) Compute the Employee Cost as per CAS – 7 with appropriate reasoning:
Extract of Trial Balance as on 31-03-2015
Particulars (Debit) Amount Particulars (Credit) Amount
(`) (`)
Materials consumed 30,00,000 Special subsidy received 3,50,000
from Government
towards employee salary
Salaries 18,00,000 Recoverable amount 80,000
from employees out of
perquisites extended
Employee training cost 3,00,000
Perquisites to employees 4,80,000
Contribution to gratuity
fund 4,20,000
Lease rent for
accommodation provided
to employees 5,60,000
Festival bonus 1,00,000
5
Answer II.
(b) (i)
Total available working hours 200
Capacity usage ratio 90%
Standard capacity expected = 90% of 200 180 hours
Unavoidable idle time 20 hrs
Capacity utilization ratio 80%
180  80
Actual hours worked 144 hours
100
Idle time card reveals:
Waiting for material (a) 10 hours
Waiting for tools (b) 6 hours
Break down (c) 10 hours
Total (a+b+c) 26 hours
Avoidable idle time is 36 – 26 = 10 hours
Hourly idle time cost:
Fixed expenses for machine `4.25
Operator’s hourly wages `0.75
`5.00
Idle Time Report

Unavoidable Avoidable Cost @ `5
Idle time W.T W,M B.D Idle Time Unavoidable Avoidable
20 hours 6 10 10 10 (Hrs.) `100 `180
(36 × 15)
(b) (ii) Computation of Direct Expenses

Particulars Product X (`)
Royalty paid on sales 32,000
Royalty paid on units produced 20,000
Design Charges 12,000
Page 6 Page 6
Hire charges of equipment used for manufacturing Product Y 6,000
(b) (ii) Computation of Employee Cost as per CAS – 7

Particulars Amount
`
Salaries 18,00,000
Add Net cost of Perquisites to employees (4,80,000 – 80,000) 4,00,000
Add Contribution to gratuity fund 4,20,000
Add Lease rent for accommodation provided to employees 5,60,000
Add Festival Bonus 1,00,000
32,80,000
Less Special subsidy received from Government towards
Employee Salary 3,50,000
Employee Cost as per CAS – 7 29,30,000
(c) (i) The Cost structure of an article, the selling price of which is `60,000 is as follows:
Direct Materials 50%

Direct Labour 20%
overhead 30%
An increase of 15% in the cost of materials and of 25% in the cost of labour is
anticipated. Assume no change in overhead.
This increased cost in relation to the present selling price would cause a 25%
decrease in the amount of present profit per article.
(1) Prepare a statement of profit per article at present.
(2) Find the revised selling price to produce the same percentage of profit to
sales as before.
5+3=8
(ii) A company has three manufacturing departments A, B and C and one service
department S. The following figures are available for one month of 25 working
days of 8 hours each day. All these departments work on all the days.
Description Total Departments

S A B C
Power and Lighting (`) 1,100 240 200 300 360
Supervisor's Salary (`) 2,000 - - - -
Rent (`) 500 - - - -
Welfare (`) 600 - - - -
Other Expenses (`) 1,200 200 200 400 400
Total (`) 5,400
Supervisor's Salary 20% 30% 30% 20%
Number of Workers 10 30 40 20
Floor area (in sq. ft) 500 600 800 600
Service rendered by
Service Department 50% 30% 20%
Calculate labour hour rate for each of A, B and C. 8
Page 7 Page 7
Answer II.
(c) (i) Let ‘x’ be the total cost and ‘y’ be the profit for an article whose selling price is
`60,000
x + y = `60,000
Elements Present Cost Increase Anticipated cost

Direct material 0.5x 15 % 0.075x 0.575x
Direct labour 0.2x 25% 0.050x 0.250x
Overheads 0.3x - 0.300x
Total x 0.125x 1.125x
1.125x + 0.75y = 60,000
By solving the above two equations.

x = `40,000; y = `20,000
Statement of Profit per article `
Direct Material 0.5 of `40,000 20,000
Direct labour 0.2 of `40,000 8,000
Overhead 0.3 of `40,000 12,000
Total Cost 40,000
Add: Profit 20,000
Selling Price 60,000
Statement of required selling price:

Direct Material ( 0.575 of 40,000) 23,000
Direct Labour ( 0.250 of 40,000) 10,000
Overhead (0.300 of 40,000) 12,000
Total cost 45,000
Add: Anticipated profit 22,500
Selling price 67,500
(c) (ii) Calculation of labour Hour rate

Particulars Basis Total A B C S
` ` ` ` `
Power and Lightning (Given) 1,100 200 300 360 240
Supervisor’s salary (Given) 2,000 600 600 400 400
Rent (Area) 500 120 160 120 100
Welfare (No. of workers) 600 180 240 120 60
Other Expenses (Given) 1,200 200 400 400 200
Total 5,400 1,300 1,700 1,400 1,000
Add: Reapportionment of S 500 300 200 -1,000
Total Expenses 5,400 1,800 2,000 1,600 -
No. of. Direct labour hours 6,000 8,000 4,000
Rate per hour `0.30 `0.25 `0.40
No. of. Working days = 25
No. of working hours per month: A = 25 × 8 × 30 = 6,000
B = 25 × 8 × 40 = 8,000
C = 25 × 8 × 20 = 4,000
Page 8 Page 8
The computation of the total cost for each dept. will remain unaltered. Thereafter,
depending on the students' assumption, any of the following situations could arise.
Alternative I:
(Where students assume Question paper is rightly printed and consider A: 30%, B: 20% and
C: Nil and 50% of service Dept. cost is not apportioned among the production depts. for
some reason and directly charged to the Profit and Loss a/c)
TOTAL A B C D
Total 5,400 1,300 1,700 1,400 1,000
Allocated OH of Service Dept 300 200 0 -500
Total Expenses 5,400 1,600 1,900 1,400 500
No. of direct labour house 18,000 6,000 8,000 4,000
Rate /hr (`) 0.3 0.266667 0.2375 0.35

Rounded off to 0.3 0.27 0.24 0.35
Alternative II:
(where students assume misalignment in the Question paper and considered :- A: 50%, B:
30% and C: 20%)
TOTAL A B C S
Total 5,400 1,300 1,700 1,400 1,000
Allocated OH of Service Dept 500 300 200 -1,000
Total Expenses 5,400 1,800 2,000 1,600 0
Rate /hr (`) 0.3 0.3 0.25 0.4

Rounded off to 0.3 0.3 0.25 0.4
Alternative III:
Where students assume misalignment in the Question paper and considered (A: 30%, B:
20% and C: 50%)
TOTAL A B C D
Total 5,400 1,300 1,700 1,400 1,000
Allocated OH of Service Dept 300 200 500 -1,000
Total Expenses 5,400 1,600 1,900 1,900 0
Rate/Hr (`) 0.3 0.266667 0.2375 0.475

Round off to 0.3 0.27 0.24 0.48
(d) (i) Mahi Transport Company operates a Luxury bus, which runs between Delhi to
Jaipur and back for 10 days in a month. The distance from Delhi to Jaipur is 270
Page 9 Page 9
kms. The bus completes the trip from Delhi to Jaipur and comes back on the same
day. The bus goes on a Delhi- Agra trip for 10 days in a month. The distance from
Delhi to Agra is 180 kms. This trip is also completed on the same day. For 4 days of
its operation in a month it runs in the local city. Daily distance covered in the city is
65 kms. The other information is given below:
Cost of Bus `15,00,000
Depreciation 15% per annum
Salary of Driver `9,000 per month
Salary of Conductor `8,000 per month
Salary of Part time Accountant `4,500 per month
Insurance `10,800 per quarter
Diesel `49 per litre
Distance covered per litre 5 kms.
Token Tax `8,100 per quarter
Lubricant oil `300 per 100 kms.
Repairs and Maintenance `8,000 per month
Permit Fee `13,050 per quarter
Normal capacity 50 persons
The bus is generally occupied 90% of the capacity when it goes to jaipur and 80%
when it goes to Agra. It is always full when it runs within the city. Passenger tax is
25% of the fare.
Calculate the rate the company should charge a passenger when it wants to earn
1
a profit of 33 % on its revenue. 12
3
(ii) A trading company starts its operation on 01-01-2014. Its stock register reveals the
following data regarding the purchase of goods in 2014:
January to March - 10,000 units @ `10 each
April to June - 12,500 units @ `14 each
July to September - 7,500 units @ `16 each
October to December - 15,000 units @ `17 each
The company sells 27,500 units by 31st December 2014. Value the closing stock by
FIFO and LIFO methods and also find the cost of goods sold under each method. 4
Answer II:
(d) (i) Calculation of Passenger Kms.
Pass-Kms
Jaipur Trip 10 × 540 × 50 × 90% 2,43,000
Agra Trip 10 × 360 × 50 × 80% 1,44,000
Local City 4 × 65 × 50 13,000
Total Passenger kms. 4,00,000
Total distance covered in the Month:

Pass-Kms
Jaipur 10 × 270 × 2 5,400
Agra 10 × 180 × 2 3,600
Local 4 × 65 260
Total 9,260
Page 10 Page 10
Operating Cost Sheet

Total Passenger kms: 4,00,000
Fixed Expenses: ` `
Salary of Driver 9,000
Salary of Conductor 8,000
Salary of Accountant 4,500
Depreciation (15,00,000 × 15% × 1/12) 18,750
Insurance (10,800/3) 3,600
Token Tax (8,100/3) 2,700
Permit Fees (13,050/3) 4,350
Total Fixed expenses 50,900
Variable Expenses:
9, 260
Diesel  49
5 90,748
 300 
Lubricant Oil 9, 260 
 100  27,780
Repairs & Maintenance 8,000
Gross taking 1,77,428

Profit on Net takings 33 1/3 % or 50% on Total Cost 88,714
Total net Takings 2,66,142
Add:- Net Takings 66,536
Total Takings 3,32,678
3, 32, 678
Rate per Passenger km = = `0.832
4, 00, 000
Charges for Jaipur per Passenger : 0.832 × 270 = `224.64 or `225
Charges for Agra per Passenger: 0.832 × 180 = `149.76 or `150
Charges for Local city passenger = 0.832 × 65 = `54.08
(d) (ii) Calculation of closing stock

FIFO ` LIFO `
2,500 × 16 40,000 7,500 × 14 1,05,000
15,000 × 17 2,55,000 10,000 × 10 1,00,000
Total 2,95,000 2,05,000
Calculation of cost of goods sold:

FIFO method: 10,000 × 10 = 1,00,000 +12,500 × 14 = 1,75,000 +5,000 × 16 = `3,55,000
LIFO method: 15,000 ×17 + 7,500 ×16 + 5,000 ×14 = 2,55,000 +1,20,000 +70,000 =
`4,45,000
III. Answer any two Sub-divisions from (a) to (c) 16×2=32

(a) (i) The following information is available as on 31.03.2015:
Current Ratio 2.7 : 1

Current Liabilities to Net worth 20%
Total Debts to Net worth 39%
Fixed Assets to Net worth 85%
Page 11 Page 11
Sales to Net worth 2.4 times
Inventory to Current Assts 1:3
Average Collection Period 1 month
Working capital `5,10,000
Calculate the following as on 31.03.2015:

(A) Fixed assets
(B) Inventory
(C) Debtors
(D) Cash and Bank Balance (combined figure)
(E) Net worth
(F) Long term Debts
(G) Current Liabilities
(H) Total Assets 8
(ii) List the usual forms of bank credit available in India for a business. 4
(iii) What is Marginal Cost of capital? How is it used in decision making? 4
Answer III:
Current Assets
(a) (i) Current Ratio = = 2.7: 1
Current Liabilities
Hence, working capital = CA– CL= 2.7-1= 1.7
Working Capital 5,10,000

Current Assets = × 2.7 = ×2.7 = `8,10,000
1.7 1.7
Working Capital 5,10,000

Current Liabilities = × 1= × 1 = `3,00,000
1.7 1.7
100 100
1. Net Worth = Current Liabilities × = `3,00,000 × = 15,00,000
20 20
2. Total Debts = 39% of Net Worth of `15,00,000 = `5,85,000

Hence, Long term Debts = Total Debts – Current Liabilities
= 5,85,000 – 3,00,000 = `2,85,000
3. Fixed Assets = Net Worth `15,00,000 × 85% = `12,75,000
4. Sales = Net Worth × 24 = 15,00,000 × 24 = `36,00,000
5. Debtors :
Debtors
Avg. Collection Period = × 12 months
Net Credit Sales
36, 00, 000 1

Debtors = = `3,00,000
12
6. Inventory to Current Assets = 13
8,10,000
Hence, Inventory = CA = `2,70,000
3
Page 12 Page 12
7. Cash and Bank = CA – Inventory – Debtors

= `8,10,000 – `2,70,000 – `3,00,000 = `2,40,000
Balance Sheet
Liabilities Amount Assets Amount
` `
Net worth 15,00,000 Fixed Assets 12,75,000
Long term Debts 2,85,000 Inventory 2,70,000
Current Liabilities 3,00,000 Debtors 3,00,000
Cash & bank 2,40,000
20,85,000 20,85,000
(a) (ii) In India banks may give financial assistance in different shapes and forms. The
usual form of bank credit is as follows:
1. Overdraft
2. Cash Credit
3. Bills Purchased and Bills Discounting
4. Letter of Credit
5. Working Capital term Loan
6. Funded interest term Loan
(a) (iii) Marginal cost of Capital
The weighted average cost of capital can be worked out on the basis of
marginal cost of capital than the historical costs. The weighted average cost of
new or incremental capital is known as the marginal cost of capital. This concept
is used in capital budgeting decisions. The marginal cost of capital is derived,
when we calculate the weighted average cost of capital using the marginal
weights. The marginal cost of capital would rise whenever any component cost
increases. The marginal cost of capital should be used as the cut off rate. The
average cost of capital should be used to evaluate the impact of the
acceptance or rejection of the entire capital expenditure on the value of the
firm.
(b) (i) Annu Ltd. is examining two mutually exclusive investment proposals. The
management uses Net Present Value Method to evaluate new investment proposals.
Depreciation is charged using Straight-line Method. Other details relating to these
proposals are:
Particulars Proposal X Proposal Y
Annual Profit before tax (`) 13,00,000 24,50,000
Cost of the Project (`) 90,00,000 180,00,000
Salvage Value (`) 1,20,000 1,50,000
Working Life 4 years 5 Years
Cost of capital 10% 10%
Corporate Tax Rate 30% 30%
The present value of `1 at 10% discount rates at the end of first, second, third,
fourth and fifth year are 0.9091; 0.8264; 0.7513; and 0.6209 respectively.
You are required to advise the company on which proposal should be taken up
by it. 8
Page 13 Page 13
(ii) Write short notes on: 4+4=8
(A) Letter of credit
(B) Issue of commercial papers in India
Answer III:
(b) (i) Calculation of Annual Cash Inflow and Present Values:
Particulars Proposal X Proposal Y
` `
Annual Profit Before Tax 13,00,000 24,50,000
Less: tax @ 30% 3,90,000 7,35,000
Annual Profit After Tax 9,10,000 17,15,000
Add: Depreciation (Annual)
90, 00, 000 120
, , 000
Proposal X : 22,20,000 -
4
, , 00, 000 150
180 , , 000 - 35,70,000
Proposal Y:
5
Annual Cash inflow 31,30,000 52,85,000
P. V. of `1 for 1 to 4 year 3.1698 -
P. V. of `1 for 1 to 5 year - 3.7907
Present value of Annual Cash Inflows 99,21,474 2,00,33,850
Add: Present value of salvage value:
Proposal X: 1,20,000 × 0.683 81,960 -
Proposal Y: 1,50,000 × 0.6209 - 93,135
Total Present value 1,00,03,434 2,01,26,985
Less: Initial outflow 90,00,000 1,80,00,000
Net Present Value 10,03,434 21,26,985
Advice: Proposal Y should be accepted as it gives higher net present value.
(b) (ii) (A) Letter of Credit: A letter of credit is an arrangement whereby a bank helps its
customer to obtain credit from it (customer’s) suppliers. When a bank opens a
letter of credit in favour of its customer for some specific purchases, the bank
undertakes the responsibility to honour the obligation of its customer, when
the customer fails to do so.
(B) Issue of Commercial Papers in India
CP was introduced as a money market instruments in India in January, 1990
with a view to enable the companies to borrow for short term. Since the CP
represents an unsecured borrowing in the money market, the regulation of CP
comes under the purview of the Reserve Bank of India:
(a) Cp can be issued in multiples of `5 lakhs.
(b) CP can be issued for a minimum duration of 15 days and maximum period
of 12 months.
(c) For issuing CP the company’s net worth should be more than `4 crores.
(d) CP can neither be redeemed before maturity nor can be extended the
beyond the maturity period.
(e) CP issue requires a credit rating of P2 from CRISIL or A2 from ICRA.
(c) (i) Calculate the operating leverage and financial leverage under situations A, B
and C and financial plans I, II and III respectively from the following information
Page 14 Page 14
relating to the operating and capital structure of ABC Co. Also find out the
combination of leverages which give the highest value and the least value.
Installed capacity 1,200 units

Actual production and sales 800 units
Selling price per unit `15
Variable cost per unit `10
Fixed cost: Situation A `1,000
Situation B `2,000
Situation C `3,000
Capital Structure Financial Plan

I II III
Equity `5,000 `7,500 `2,500
Debt `5,000 `2,500 `7,500
Cost of debt 12% 12% 12%
8
(ii) A company manufactures a small computer component. The component is sold
for `1,000 and its variable cost is `700. The company sold on an average, 300
units every month in 2014-15. At present the company grants one month credit to
its customers. The company plans to extend the credit to 2 months on account of
which the following is expected:
Increase in sales is 25%
Increase in stock is `1,50,000
Increase in creditors `60,000
Should the company extend the credit terms if
(A) All customers avail of the extended period of 2 months.
(B) Only new customers avail of 2 months credit, assuming that the increase in
sales in due to new customers.
The company expects a minimum rate of return of 30% on its investment.
(Consider debtors at sales value) 5+3=8
Answer III:
(c) (i) Determination of operating leverage
Particulars Situation A Situation B Situation C

` ` `
Sales 12,000 12,000 12,000
Less:-Variable cost 8,000 8,000 8,000
Contribution 4,000 4,000 4,000
Less:-Fixed cost 1,000 2,000 3,000
Operating profit 3,000 2,000 1,000
Operating Leverage 1.33 2 4
Determination of Financial Leverage:

Particulars Financial plan I Financial Plan II Financial Plan III
` ` `
Situation A:
Operation profit 3,000 3,000 3,000
Interest 600 300 900
Page 15 Page 15
Profit Before Tax 2,400 2,700 2,100
Financial leverage 1.25 1.11 1.43
Situation B:
Profit Before Tax 1,400 1,700 1,100
Financial leverage 1.43 1.18 1.82
Situation C:
Profit Before Tax 400 700 100
Financial leverage 2.5 1.43 10
Combined operating leverage and financial leverage
Highest value Situation C and Financial Plan III 4 × 10 = 40
Lowest Value Situation A and Financial Plan II 1.33 × 1.11 = 1.476
(c) (ii) (A) Incremental Profit – all customers:

Increment sales revenue 75 × 12 × 1,000 9,00,000
Less:- increased variable costs 9,00,000 × 0.70 6,30,000
Incremental contribution 2,70,000
Less:- cost of additional working capital 1,21,500
Incremental Profit 1,48,500
Workings:
(i) Present investment in debtors 300 ×12 × 700/12 `2,10,000
(ii) Proposed investment in debtors 375 × 12 × 700/6 `5,25,000
(iii)Additional investment in debtors (ii) - (i) 3,15,000
Add:- increase in stock 1,50,000
Less increase in creditors 60,000
(iv)Additional working capital required 4,05,000
(v)Minimum return expected 4,05,000 × 0.30 1,21,500
(B) Incremental Profit: New customers

Incremental sales revenue 75 × 12 × 1,000 9,00,000
Less:- increased variable costs 9,00,000 × 0.70 6,30,000
Incremental contribution 2,70,000
Less:- cost of addition working capital 58,500
Incremental Profit 2,11,500
Workings:
Additional investment in debtors 75 ×12 ×700/6 `1,05,000
Add increase in stock 1,50,000
2,55,000
Less increase in creditors 60,000
Additional working capital required 1,95,000
Minimum return expected 1,95,000 × 0.30 58,500
Page 16 Page 16
GROUP I
(SYLLABUS 2012)

DECEMBER 2014
This paper contains three questions. All questions are compulsory, subject to
internal choice as per instruction provided against each question.
All working must form part of your answer.

Wherever necessary, candidates may make assumptions and clearly state them.
No Present Value factor table or other table will be provided along with this question paper.
1. Answer all questions. 2x10=20

State with reason, your answers to questions 1.(a) to 1.(d) under the Generally Accepted
Cost Accounting Principles & Cost Accounting Standards:
(a) Material with invoice value ` 10,000 was received in the Stores Dept. The transport
cost was ` 200. Since the material leaked in transit, damage to other goods of ` 350
had to be paid to the transporter. What would be the material cost?
(b) Bonus at 10% of salary is paid to the foreman who supervises five different production
shops producing five different products. How will the bonus be treated in the Cost
Accounts?
(c) A, B, C and D are products produced by a company. Power is supplied to these
production units from the in-house power generator. Cost of power generated for a
certain period was ` 1,00,000. Additionally, the committed cost of standby power
shop utilities was ` 25,000. The sales value of A, B, C and D were equal and the units
produced were in the ratio 1:2:2:3. What amount of power cost will be part of cost of
production for each of A, B, C and D? One unit of power is consumed per unit of
production of A, B, C & D.
(d) Products X, Y and Z are manufactured by XYZ Company. Special permit charges of
`12,00,000 are paid for X and renewable every 4 years. How will the permit charges
be treated in Cost Accounts?
(e) Prime Cost = ` 12,50,000; Works Cost = ` 20,00,000 and office overheads are 30% of
factory overheads. What is the Cost of Production?
(f) The variable and semi variable costs of producing 50,000 units are ` 6 per unit and
`12 per unit respectively. If at 20,000 units, these total costs add up to ` 4,80,000, what
is the amount of fixed cost component of the semi variable cost?
(g) M. Ltd. does not use any debt in its capital structure. The company has earnings
before interest and tax of ` 2,00,000 per annum and the capitalization rate is 12%.
Assume corporate tax of 30%. Calculate the value of the firm according to MM
Hypothesis.
(h) Ascertain the discounted value at 10% p.a. at the end of year 1 of an investment of
`2,00,000 to be made at the end of year 2 and ` 3,00,00 made immediately.
(i) The proprietor’s fund is `45,00,000 and ratio of fixed assets to proprietor’s funds is 0.75.
Find the amount of net working capital.
(j) What is the acceptance rule for a project under the internal rate of return parameter?
Answer: 1.
(a) Material Cost = 10,000 + 200 = 10,200.
As per CAS, material cost includes purchase cost, transport inwards and excludes any
damages or penalty paid to any authority.
(b) Salary to foreman is production overheads. Bonus paid to foreman is part of this
employee cost and is taken as production overhead and charged to the production
shop based on his time spent in supervising that shop.
(c) Cost of power is a utility and hence a direct expense. Direct expense includes the cost
of standby utilities. Hence 1,25,000 should be charged to the products in the ratio of
units of power per unit of product x no. of products produced. Since units per product
are not given, if we assume same rate of power consumption, 125000 in the ratio 1:2:2:3
i.e. 15625, 31250, 31250, 46875 for A, B, C, D.
(d) Special permit charges are direct expenses for X, amortised at 3,00,000 per annum,
assuming annual production period. Permit charges are treated as direct expenses.
(e) Factory overheads = 7,50,000; Office OH = 30 % = 2,25,000; COP = 22,25,000
(f) Total Cost at 50,000 units = 18 x 50,000 = 9,00,000; Cost at 20,000 = 4,80,000. Difference in
costs/ diff. in qty = 4,20,000/30,000 = ` 14 per unit. At 20,000 level, Variable cost = 14 x
20,000 = 280,000. Hence fixed cost component = 480,000-280,000 = 2,00,000
(g) Vu = EBIT (1-t)/K0 = 2,00,000 (0.7)/0.12 = 11,66,667
(h) P.V. = 3,00,000 (1.1) + 2,00,000/1.1 = 3,30,000 + 1,81,818 = 5,11,818.
(i) Fixed Assets = 0.75 × 45,00,000; FA 33,75,000.

Net Current Assets = Proprietors Funds – Fixed Assets
= 45,00,000 – 33,75,000 = 11,25,000
Net working capital = Net current assets.
(j) If IRR of the project ‘r’ is > K, the cost of capital, accept the project. If r < K, reject the
project; If r = K, indifference point, I.e. accept or reject.
2. Answer any three questions: 16x3=48
(a) (i) The standard time per unit is 10 minutes. Time available in a day is 8 hours. Hourly
rate of labour is fixed on a piece rate of ` 5. X produces 60 units a day and Y
produces 72 units a day. What will be each of their daily earnings under Piece-
rate and Rowan Scheme? 4
(ii) How will you treat the different types of idle time cost? 4
(iii) The following details are available relating to a consignment of 1,200 kgs of
material X despatched by the supplier on an order:
(a) Basic Invoice price = ` 20 per kg (without considering trade discount)
(b) Sales Tax = 8% of invoice price
(c) Trade Discount 10% on invoice price
(d) Insurance = ` 1,000
(e) Delivery charges = ` 250
(f) Cost of containers: `600 per container; Each container holds 50 kg of
material. When containers are returned within 6 weeks, rebate allowed is
`400 per container. Containers are normally returned on time. There is no
sales tax, discount, insurance or delivery charge applicable to the
containers. Material X is supplied in containers. Container Costs are paid
separately.
(g) Two containers were lost in transit. This is considered abnormal.
(h) One container of material was rejected after receipt, on inspection and
discarded along with the material, (considered normal).
(i) Three containers were damaged in transit/loading/unloading before they
reached the stores. No material was useable from these. This is a normal loss
in every consignment of 24 containers.
Present a statement showing the itemwise treatment of the above, stating your
remarks for each, in accordance with CAS for material cost and arrive at the final
cost (`/kg) of the material to be used to record the value of receipts in the stores
ledger. 8
(b) (i) PQ Ltd. has two production shops P and R manufacturing products ‘PDT’ and ‘RS’
respectively. Staff X, Y and Z work in shop P, staff R and S work in shop R and
foreman F supervises shops P and R. ‘A’ is the accounts assistant in the Accounts
Department who does the accounting and the payment.
Salesmen M and N market products PDT and RS respectively. The company pays
the staff at certain specified rates for the hours worked. The following information
is given:
SI. Details X Y Z R S F A M N
No.
I Total hours worked as 1440 1440 1340 1640 1640 1600 1000 600 600
per time sheet
II Overtime hours 50 50 50
included in I
III Night Shift hours 20 20 20 150 150 170
(included in I above,
in addition to II)
IV Normal wage rate per 40 40 40 40 40 100 80 65 75
hour (`/hr)
V Overtime allowance 20 20 30
`/hr (in addition to IV)
VI Night Shift Allowance 30 30 30 30 30 45
`/hr (in addition to IV)
VII Idle time during the 70 70 70 70 70 70
day due to sudden
unexpected overhaul
(hours included in I
above)
Additional Information:
All the night shift and overtime done by X, Y, Z, R, S and F were done only in shop P
due to power failure during the normal hours.
Salary of A will be in the ratio 5:3 for products PDT and RS respectively.
Present a statement showing the item-wise amounts that you would include under
Direct Labour and appropriate overhead for each type of product. Comment on the
treatment of the overhaul cost as per item VII above. 13
(ii) What are defectives? How would you treat them in Cost Accounts? 3
(c) (i) A manufacturing company buys its monthly requirement of 7500 units of material
in 10 equal instalments every year. Purchase cost per unit is 15 and ordering cost
is ` 450 per order. Inventory carrying cost is 15% p.a.
At what quantity of purchase will the ordering costs equal the inventory carrying
costs? What is the total annual cost under the prevailing inventory policy?
If the supplier is willing to offer a discount of 3% on supplies more than 22,500 per
order, what would you recommend as the revised order quantity? Evaluate by
comparison with the option of ordering at economic order quantity. 3+2+3=8
(ii) The following information relates to the activities of production Dept. M of MTH Ltd.
for Nov 2014:
Materials Consumed: `3,83,000; Direct labour: `5,74,000; Factory overhead
chargeable to Dept. M: ` 2,75,760; Labour hours worked: 18,384 hours; Machine
hours: 3064 hours;
One job order carried out in Dept. M has the following details:
Material Consumed: ` 11,000; Direct Labour Cost = ` 19,000; Direct labour hours:
540 hours;
Machine hours worked: 85 hours. Find the amount of factory overheads for the
job under the following methods of overhead absorption: % of direct material
cost, % of direct labour cost, % of prime cost, direct labour hour rate and
machine hour rate. 8
(d) (i) A product passes through two processes, machining and finishing. Each is a cost
centre. 1000 kgs of raw material (i.e. 100 pieces) are machined in a production
period. 5% of the input in kgs is the normal machining loss in the form of
machining waste, but 100 pieces come out of the process. There is a further loss
of 4% in the Finishing process from the weight of each piece that was sent in. 10%
of the number of pieces were finally scrapped and sold at ` 25 piece. Some of
the expenses incurred are listed below:
(a) For every 100 pieces of input, the machining dept. uses a special cleaning
material pack which is purchased at a base price of `10,000; VAT 14.5%. The
additional cost of transporting it to the shop floor is ` 1,200 per pack.
(b) There are two special computers used for designing specifications in the machine
shop. A computer professional who is on a monthly salary of ` 30,000 attends to
the repairs and maintenance of this machine and 19 other machines in the
company. The company feels it is not economical to establish a procedure to
time his work on various machines since log of computer down-time is not
maintained.
(c) The Finishing Department hires special equipment at `25,000 per production
period.
(d) Since the Finishing Dept. did not finish on time, 15,000 was payable to the
customer as penalty.
Present a statement showing the direct expenses of each department—
Machining and Finishing. What will be the components of direct expenses per
piece and per kg of the final product relating to the given information? Present
your answer in line with the disclosure requirement as per CAS 10. 8
(ii) What is imputed cost? Give an example of imputed cost. Explain its position in a
product cost sheet and in the decision making evaluation process. 4
(d) (iii) A firm has purchased a plant to manufacture a new product. The cost data are
given below:
Estimated annual sales 36,000 units
Material ` 4 per unit
Direct labour ` 0.6 per unit
Overheads - Manufacturing ` 24,000 p.a.
Administrative expenses ` 28,800 p.a.
Selling Expenses 15% of sales
Calculate the selling price if profit per unit is ` 1.50. Assume whatever is produced
is sold. 4
Answer: 2. (a)
(i) Standard time = 10 minutes per piece = 6 units per hour.
X: Std time for 60 units = 10 hrs. Hrs saved = 2. Rowan’s premium = 8hrs x 2 hrs/10 hrs x 30
`/hr = `48
Wages = 8 x 30 + 48 = `288
Y: Std time = 12 hrs. Rowan’s premium = 8 hrs x 4/12 x 30 = `80
Wages = 8 x 30 + 80 =` 320
Piece rate X: 60 x 5 = `300; Y: 72 x 5 = ` 360.
(ii) Idle time cost:
Unavoidable idle time is usually for an insignificant period and is charged to the
production order or standing order.
Normal idle time is booked to factory overhead.
Abnormal idle time is for a significant period and is not charged to cost. It is adjusted
through the Costing P and L A/c.
(iii)
Details Kg Containers(nos) Value (`)

Invoice Price `20/kg 1,200 24 1,200×20= 24,000
Less: Trade discount 10% on 2,400
invoice price
Net Invoice Price 21,600
ADD: Sales Tax 8% 1,920
Insurance 1,000
Delivery Charges 250
Sub Total 1,200 24 24,770
Less: Normal Loss 150 3 ------
After Normal Loss 1,050 21 24,770
Abnormal Loss* 100 2 2,359
Net after abnormal loss 950 19 22,411
Normal Loss- Rejection 50 1 -----
Value absorbed by good 900 18 22,411
quantity
Container Cost 6,000
200 ×18+ 600 × 4
Cost of material in stores 900 18 28,411
ledger as per CAS
Cost per Kg (22,411 /900) 24.90
Cost per container (28,411 /18) 1,578.39
*Abnormal loss to be charged to P & L A/c:

Material = `2,359
Container 2 × 600= `1,200
Total = `3,559
Calculation of Abnormal Cost:

2
Abnormal Cost = 24,770  2,359
21
(b) (i)
Cost Component Product PDT Product RS

Direct Labour
X 1370 X 40 54,800
Y 1370 X 40 54,800
Z 1270 x 40 50,800
R 200 x 40 8,000 1370 x 40 54,800
S 200 x 40 8,000 1370 x 40 54,800
Sub total - worker hrs 4410 2740
Sub total - Direct Labour Cost 176400 109600
Production Overhead
Overtime Premium
R 50x20 1000
S 50x20 1000
F 50x30 1500
Sub total - worker hours 100
Sub total - overtime premium 3500
Night Shift allowance
X 20x30 600
Y 20 x 30 600
Z 20x30 600
R 150x30 4500
S 150 x 30 4500
F 170x45 7650
Sub total - worker hours 360
Sub Total- Night Shift Allowance 18,450
Foreman’s Salary 153000/(4870+2 97912 153000/(4870+ 55088
1530 x100 = 153000 740) x 4870 2740)x 2740
Total Worker hours supervised by F 4410 + 100+360 = 2740
4870
Sub total - Production Overheads 119862 55088
Abnormal Idle Time
70 hours x 5 persons x 40 ` = 14000;70 hours of F x 100 `/hr = 7000;
Charged to Costing P and L A/c to eliminate distortion
Administration Overheads
A:1000 x 80 5/8 x 8000 5000 3/8 x 8000 3000
Selling Overheads
M 600 x 65 39,000
N 600 x 75 45,000
(ii) Defectives are items produced in a manufacturing process, but are not up to the
specifications of good output. They can be reworked or sold as seconds.
Rectification costs of normal defectives are treated as part of product or process cost if
identifiable with a specific product or process. If not identifiable, they are treated as
manufacturing overhead.
Abnormal defectives’ rectification costs are charged to the profit and loss account.
(c)
(i) Ordering costs = 450 x 7500 x 12 / q; Carrying cost = q/2 x 15 x 15%
When ordering cost = carrying cost, we have EOQ;
Q 2 = 450 x 7500 x 12 x 2 / (15 x 0.15) = 6000 units.
For EOQ = 6000, ordering cost = carrying cost per annum.
Current Policy:
Purchase cost = 7500x12x15= 13,50,000
Ordering cost = 10 x 450 = 4,500

Carrying Cost = 0.15 x 7500 x 12 / (2x10) x 15 = 10,125 = 13,64,625.
At EOQ, ordering cost = 7500 x 12/6000 x 450 = 6750; Carrying cost = 6750; Purchase cost
= 13,50,000
Total cost = 13, 63, 500
At 22,500 order qty,
Carrying cost = 22500/2 x 0.97 x 15 x 15 % = 24553; Ordering cost = 7500 x 12 / 22500 x 450
= 1800
Purchase cost = 7500 x 12 x 0.97 x 15 = 13,09,500.
Total Cost = 13,35,853.
It is better to take the discount.
(ii)
Parameters for Total Cost Departmental Job order Overhea

overhead absorption for Dept overhead as % of cost Cost d to Job
element order at
Dept %
Material 3,83,000 275760/383000 = 72% 11000 7920
Direct Labour 5,74,000 2,75,760/ 574500 = 48% 19000 9120
Prime Cost 9,57,500 275760/957500 = 28.82% 30,000 8646
Machine Hours = 3064;
Deptal m/c hr rate = 275760/3064 = 90 `/hr
M/c hour rate for job x m/c hrs for job = 85 x 90 = 7650
Direct labour hour rate for dept = 275760/18384 = 15 `/hr
Direct labour hour rate for job = 540 x 15 = 8100
(d) (i)
Calculation of Machining
Input Kg. Value (`)
1,000 kg 10,000
Add: VAT ----- 1,450
Add: Transport Cost ----- 1,200
Less Normal loss 5% 50
Total cost for 950 kg. 950 12,650
Cost per kg (12,650 /950) 13.32
Calculation of Finishing
Input kg. Value (`)
950 12,650
Add: Repair and ----- 1,500
maintenance Cost
Add: Special Equipment ------ 25,000
Less: Normal loss 4% 38
Total Cost for 912 kg. 912 39,150
Lees: 10% scrapped 91.2 228
Total Cost for 820.8 kg. 820.8 38,922
Cost per unit (38,992 /820.8) 47.42
Penalty- Financial Charges; Not a direct expenses; Not to be taken as any cost.
Direct expenses includes material or labour traceable into the cost unit, but not part of the
output.
Cost of material includes purchase cost, taxes and transport inwards.
2. (d)
(ii) Imputed costs are hypothetical or notional costs, not involving cash outlay, computed
only for the purpose of decision making. CAS specifically provide for exclusion of
imputed cost from the cost sheet in every form- material, labour and overhead. Imputed
costs are like opportunity costs. E.g. interest on funds generated internally. When
alternative capital investment proposals are evaluated, imputed cost of capital from
internal funds is used for decision making.
2. (d)
(iii) Variable cost p.u. = 4+0.6 = 4.6
Profit = 15
Total = 6.1
6.1 x 36,000 + 24000 + 28800 = 0.85 x s x 36000.
Selling price per unit = s = 8.9019 = 8.90
3. Answer any two questions: 16x2=32

(a) (i) From the following details, find out the working capital requirements of G. Ltd. on
cash cost basis:
Sales (at 3 months’ credit) ` 60,00,000
Material Consumed (Suppliers extend 2 months’ credit) ` 18,00,000
Wages paid (one month in arrear) ` 11,40,000
Cash Manufacturing expenses outstanding at the year end ` 90,000
(cash expenses are paid one month in arrear)
Total Administrative expenses (paid as above) ` 4,20,000
Sales Promotion expenses (paid one month in advance) ` 2,70,000
It keeps two months’ stock of raw materials, one month’s stock of finished goods
and a cash balance of ` 2,00,000. There is no work-in-progress. 8
(ii) The following is the capital structure of P Ltd. as on 31st March, 2014:
6,00,000 equity shares at ` 10 each fully paid
10,000 9% preference shares of ` 100 each fully paid
30,000 12% debentures of ` 100 each
The equity share sells at ` 20 per share. The dividend expected next year is ` 2.5
per share, which is expected to grow at 5% per annum forever. Corporate tax
rate is 30%.
(a) Compute the weighted average cost of capital based on the existing capital
structure.
(b) If the company raises an additional debt of `25,00,000 by issuing 14% debentures,
resulting in increasing the expectation on equity dividend to ` 2.70 per share and
leaving the growth rate unchanged and the fall in equity share price to ` 18 per
share, find the revised weighted average cost of capital. 8
(b) (i) Lokesh Ltd. is considering buying a machine costing `15,00,000 which yields the
following annual income:
End of year 1 2 3 4 5
Annual Income after 3,50,000 3,72,000 3,10,000 1,75,000 1,10,000
Depreciation but before tax
P.V. factor at 12% of `1 0.893 0.797 0.712 0.636 0.567
Corporate tax rate applicable is 30%. Depreciation is on straight line basis for 5
years. There is no scrap value. Normal rate of return is 12%. Round off calculations
to the nearest rupee and calculate:
(a) Pay-back period
(b) Discounted pay back period
(c) Net Present Value
(d) Profitability Index. 8
(ii) What are the assumptions of the Modigliani-Miller theory on capital structure and
the overall cost of capital? 8
(c) (i) The following information is given to you:
Gross Profit ` 1,08,000
Shareholders’ funds ` 6,00,000
Gross Profit Margin 25%
Ratio - Credit Sales to total sales 80%
Ratio - Total Turnover to Total Assets 0.3 times
Ratio-Closing Inventory to Total Sales 1/5 times
Average debtors 20 days
Current ratio 1.5
Ratio-Long Term Debt to equity 80%
(Use 360 days per year for calculations)
Find the following:

(a) Fixed Assets turnover ratio
(b) Cash/Bank Balances
(c) Current Liabilities
(d) Closing Inventory
(e) Debtors
(f) Cash Sales 8
(c) (ii) Explain the concepts of operating and financial leverage and the EBIT-EPS
indifference point. What financial plan would you opt for when EBIT is (i) above,
(ii) at and (iii) below the indifference point? 8
Answer: 3. (a)
(i) Computation of annual manufacturing cost and cash cost of sales

Material Consumed 18,00,000
Wages 11,40,000
Manufacturing Expenses (90,000 x 12) 10,80,000
Total Cash Cost of Manufacture 40,20,000
Administrative expenses 4,20,000
Sales Promotion Expenses 2,70,000
Total Cash Cost of Sales 47,10,000
Statement of Working Capital Requirement:

A. Current Assets:
Stock of Raw Materials (18,00,000) x 2 / 12 3,00,000
Stock of Finished Goods (40,20,000)/12 3,35,000
Debtors (47,10,000) x 3/12 11,77,500
Prepaid Sales Promotion Expenses 2,70,000/12 22,500
Cash Balance 2,00,000
Sub total Current Assets: 20,35,000
B. Current Liabilities
Creditors for materials (18,00,000)/6 3,00,000
Outstanding Wages (11,40,000)/12 95,000
Outstanding Manufacturing Expenses 90,000
Outstanding Administrative Expenses 35,000
(4,20,000)/12
Sub Total 5,20,000
Working Capital required = CA-CL = 15,15,000
(ii) Computation of WACC
Source of funds Amount (`) Weight Cost of capital WACC

(after tax)
Equity Shares 60,00,000 0.6 0.175 0.105
9% Preference Shares 10,00,000 0.1 0.09 0.009
12% Debentures 30,00,000 0.3 0.084 0.0252
Total 1,00,00,000 1.00 0.1392 or 13.92%
Working Notes:
D 2.5
(i) Cost of Equity Capital (Ke) = mp  g  20  .05
= 0.125+ 0.05 = 0.175 or 17.5%
(ii) Cost of Preference Capital (Kp) = 9% or 0.09
(iii) Cost of 12% Debentures (Kd) = r(1 - T)
= 0.12(1 - 0.3) = 0.084 or 8.4%
(ii) Revised WACC
Source of Funds Amount Weight Cost of capital WACC

(`) (after tax)
Equity Shares 60,00,000 0.48 0.20 0.09600
12% Debentures 30,00,000 0.24 0.084 0.02016
14% Debentures 25,00,000 0.20 0.098 0.01980
Total 1,25,00,000 1.00 0.14296 or 14.296%
Working Notes:
D 2.70
(i) Revised cost of equity (Ke) = mp  g  18  .05
= 0.15 + 0.05 = 0.20 or 20%
(ii) (Kp) = 0.09 or 9%
(iii) Cost of 12% Debentures = 0.084 or 8.4%
(iv) Cost of new 14% Debentures = r(1 - T) = 0.14(1 - 0.3)
= 0.098
3. (b) (i)
Annual Depreciation = 15,00,000/5 = ` 3,00,000
Calculation of Annual Cash Inflows:
Year Annual Tax EAT Cash Inflows Cumulative

Income @ 30% [EAT + Depreciation cash
Before tax (` 300000)] inflows
(`) (`) (`) (`) (`)
1 3,50,000 1,05,000 2,45,000 545000 545000
2 3,72,000 1,11,600 2,60,400 560400 1105400
3 3,10,000 93,000 2,17,000 517000 1622400
4 1,75,000 52,500 1,22,500 422500 2044900
5 1,10,000 33,000 77,000 377000 2421900
(i) Pay-back Period = 2 + (1500000 - 1105400)/517000

= 2.763 year or 2 years and 9.16 months
(ii) Discounted Pay-back Period :
Calculation of Present Values:
Year Cash Inflows P.V. factor P.V. of Cash Cumulative Present

@ 12% Inflows Value
(`) (`) (`) (`)
1 5,45,000 0.893 4,86,685 4,86,685
2 5,60,400 0.797 4,46,639 9,33,324
3 5,17,000 0.712 3,68,104 13,01,428
4 4,22,500 0.636 2,68,710 15,70,138
5 3,77,000 0.567 2,13,759 17,83,897
Discounted pay-back period = 3 + (1500000 – 1301428)/268710

= 3.739 Years or 3 Years and 8.87 months
(iii) Net Present Value (NPV) = Total Present Value of Cash Inflows - Initial Investment
= 17,83,897 – 15,00,000 = `2,83,897
(iv) Profitability Index = Total Present Value of Cash Inflows/Initial Investment
= 1783897/ 1500000 = 1.18926
3. (b) (i)
The MM Hypothesis on capital structure is:
The overall cost of capital Ko and the value of the firm are independent of the capital
structure. The total market value of the firm is given by capitalizing the net operating income
by the rate appropriate for the risk class, i.e. as the debt increases, the advantage is exactly
off set by the increase in cost of equity, thereby maintaining the same overall cost of capital.
Assumptions:
1. The market is a perfect capital market, i.e.
Investors are free to buy and sell securities
Individuals can borrow funds without restriction at the same terms as firms do.
Investors behave rationally and are well informed.
There are no transaction costs
2. Firms can be classified into homogeneous risk classes. All firms in the same risk class will
have the same degree of financial risk.
3. All firms have the same expectation of a firm’s net operating income.
4. The dividend pay out ratio is 100 %, which means there is no retained earnings.
5. There is no corporate taxation. - This assumption has been removed later.
3. (c) (i)
Sales = 1,08,000 / 25 % = 4,32,000;
Credit sales = 80 % = 3,45,600
Cash Sales = 86,400
Debtors = 20 days = 20/360 x 3,45,600 = 19,200

Closing Inventory = 1/5 x sales = 1/ 5 x 4,32,000 = 86,400
Total Assets = sales/0.3 = 4,32,000/0.3 = 14,40,000.
Long term debt = 80 % of equity = 0.8 x 6,00,000 = 4,80,000
Total Assets = 14,40,000.
Less: Equity + Long term debt: 10,80,000
Balance = Current Liabilities 3,60,000
Current ratio = 1.5. Hence Current assets = 1.5 x current liabilities = 1.5 x 3,60,000
Current assets = 5,40,000
Less: Debtors 19,200
Less: Inventory 86,400
Balance = Cash/Bank 4.34,400
Fixed Assets = total assets - current assets = 14,40,000 - 5,40,000 = 9,00,000

Turnover to fixed assets = 4,32,000/9,00,000 = 0.48
3. (c) (ii)
Operating Leverage:
Operating leverage refers to the impact of change in sales on the level of operating profits
of the firm. Other things remaining the same, higher the Degree of operating leverage (DOL),
higher will be the change in EBIT (Earnings before interest and taxes) for the same change in
the number of units sold. If firm A has higher DOL than firm B, then for the same increase in
market demand, A will make a higher profit than B and vice versa. DOL is high when
contribution is high.
DOL = Contribution / EBIT
Financial Leverage (FL) is the % increase in EPS for a given % level of increase in EBIT. The
degree of financial leverage (DFL) = EBIT/ EBT. DFL measures the fixed financial charge
against the operating profit of the firm. Other things remaining the same, higher the DFL,
higher will be the change in EPS for the same level of change in EBIT.
Indifference point is the level at which the EPS remains the same irrespective of the debt-
equity mix.
For EBIT below indifference point, option with lower debt should be preferred.
For EBIT above indifference point, option with higher debt is preferred.
For EBIT = indifference point, any option is the same since EPS is the same.
Suggested Answer_Syl12_Jun2014_Paper_8
GROUP I
(SYLLABUS 2012)

JUNE 2014
Paper- 8 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

SECTION A
Cost Accounting (60 marks)
In section A, Question No. 1 is compulsory. Answer any three out of the remaining four.
(Working notes should form part of the answers. Wherever necessary suitable assumptions
may be made and disclosed by way of note)
1. Answer the following:

(a) The annual demand for an item is 3200 units. The unit cost is `6 and the inventory carrying
cost is 25% per annum. If the cost of one procurement is `150, determine the time between two
consecutive orders, assuming procurement is at EOQ. 2
(b) Calculate the direct expenses as per CAS-10 from the following information:
Royalty paid on sales: `1,25,000; Royalty paid on production: ` 1,00,000; Design charges `
26,000; Machine shop expenses `45,000; Software development charges related to
production: `55,000; 2
(c) In a certain week, the time allowed to a worker for Job X was 48 hours. He took 30 hours for
the job. If the hourly effective rate of earnings of the worker under Rowan Plan is ` 55, find the
normal hourly rate of wages. 2
(d) The following information is given:
The total number of operators working in a Department = 300.
The number of working days per year = 300 and the number of hours per day = 8.
The total Departmental overhead is `3,42,000. 5% of the total number of days is normal idle
time.
Find the overhead rate per direct labour hour. 2
(e) How should packing costs be treated in Cost Accounts? 2
(f) The opening stock, closing stock and purchases of materials were respectively 10,000,
16,000 and 84,000 during a production period. Compute the inventory turnover ratio. 2
Answer:
2 AO 2 x 150 x 3200
1. (a) EOQ =   800 units
C 6 x 25%
No. of orders per year = 3200 /800 = 4.
Time between 2 orders = 12/4 = 3 months.
Alternative method:
At EOQ, ordering cost = carrying cost.
Hence, 6 x 0.25 x q/2 = 3200/q x 150.
q2 = 3200 x 150 x 2 / (6 x 0.25).
q = 800
Time between orders = 12 x 800 / 3200 = 3 months
(b) As per CAS – 10, the direct expenses will be the sum of all the items mentioned.
Total direct expenses = 1,25,000 + 1,00,000 + 26,000 + 45,000 + 55,000 = ` 3,51,000.
(c) Let the normal wage rate be R.

Total wages under Rowan plan = (30 x R) + [(48 – 30) x 30 / 48] x R
41.25 R = 55 x 30 hours.
R = 1650 / 41.25
= 40.
Normal wage rate = ` 40/hr.
(d) No. of working hours per annum = 300 x 8 x 0.95 x 300 = 6,84,000 hours.
Overhead Cost = ` 3,42,000.
Direct labour hour rate = 3,42,000 / 6,84,000 = ` 0.5/hr.
(e) Treatment of packing cost in Cost Accounts:

Primary packing material, which is essential to put the product in a saleable condition is
charged as production overhead. (e.g., ink in a bottle, jam in a jar, etc.).
Primary packing material that is made decorative for attracting customers should be
partly charged as manufacturing overhead and partly as a selling overhead (e.g., fancy
bottles and covers for cosmetics/perfumes).
Secondary packing material which is used for easier transportation – like crates for cold
drink bottles, etc. should be charged as a selling and distribution overhead.
(f) O/S + Purchases – C/S = Cost of Goods Sold.

Cost of Goods Sold = 10,000 + 84,000 – 16,000 = ` 78,000.
O / S  C / S 10,000  16,000
Average Inventory = =  ` 13,000
2 2
Cost of Goods Sold
Inventory Turnover Ratio =
Average Inventory
78,000
=  6 times.
13,000
2. (a) The machine shop of a factory offers the following information about a particular machine:
Cost of the machine: `20,00,000; Salvage value: ` 80,000; Life of the machine: 10 years.
Assume straight-line depreciation on net value over the life of the machine.
Cost of repairs and maintenance- `28,000 per annum.
Electric power used by the machine is 15 units per hour at `8.5 per unit. No power is
consumed during maintenance and set-up time. A chemical costing `8,250 per packet is
used for operating the machine every month. The wages of the operator are `1,32,000 per
annum. The operator devotes one third of his time to this machine. Annual insurance charges
are 1% of the cost of the machine. Cost of lighting the department is `15,000 per month.
There are 72 points of which only 12 lighting points are used by this machine. Other indirect
charges chargeable to this machine are `13,000 per month. Annual working hour are 3000. The
machine requires a set-up time of 156 hours per annum which are to be considered
productive time. The machine requires 400 hours per annum for repairs and maintenance.
You are required to calculate the machine hour rate. 8
(b) A plant that manufactures tiffin boxes has an installed capacity of 1,20,000 units per year
distributed evenly over each calendar month. The following is the cost structure of the
product:
Raw Material `20 per unit
Direct Labour `12 per unit
Direct Expenses `2 per unit
Variable overheads `16 per unit
Fixed overhead `3,00,000 per annum (i.e. `1,50,000 per half year)
Semi-variable overheads: ` 7500 per month up to 50% capacity and an additional `2500 per
month for every additional 25% capacity utilization or part thereof.
The plant will operate at 50% capacity during the first 6 months of the calendar year 2014 and
at 100% capacity in the remaining months.
The selling price for the period from 1st January to 30th June was fixed at ` 70 per unit. The
firm wishes to revise the selling price for the next half year, which should be fixed effective 1st
July to achieve a total profit of ` 9,00,000 during 2014.
You may assume that whatever is produced is sold and that the market is likely to absorb the
production after the revision in price.
You are required to prepare a statement showing the element wise total cost and profit for each
half year and the revised selling price in the second half of the year to achieve the overall
annual profit of ` 9,00,000 in 2014. Compute the semi-variable and fixed cost per unit for each
of the half yearly periods. 8
Answer:
2. (a) Computation of Machine hour rate

Running hours = 3000 – 400 = 2600
Items of Cost Total Amount (`) `/hour

Fixed charges:
Operator’s wages: 1,32,000 / 3 44,000
Insurance = 1% x 20,00,000 20,000
Lighting `15,000 p.m. x 12 months x 12 points/72 total points 30,000
Other indirect expenses = 13,000 p.m. x 12 months 1,56,000
Total Standing Charges 2,50,000 96.15
Indirect Expenses (Machine expenses)
Depreciation = (20,00,000 – 80,000) / 10 1,92,000 73.85
Repairs and Maintenance 28,000 10.77
Power15 units per hour x (3000–156–400) hours x `8.5 per unit 3,11,610 119.85
Chemical ` 8250 p.m. x 12 months 99,000 38.08
Subtotal – machine expenses 6,30,610 242.55
Total machine hour rate = Fixed + Direct Expenses 338.70
(b) Variable Cost per unit = 20 + 12 + 2 + 16 = 50

Selling Price 1st half year = 70
Contribution p.u. (January to June) = 20
Particulars Jan to Jan to Jun Jul to Dec Jul to Dec

Jun `/Unit ` `/Unit
`
Contribution 20 p.u. x 5000 units p.m. x 6 months 6,00,000 20
Balancing figure (4,95,000 + 1,50,000 + 75,000)= 7,20,000
Contribution per unit (7,20,000 / 60,000 units) = 12
Semi Variable Overheads: 45,000
7500 p.m. x 6 months (50% capacity)
` Per unit (Jan – Jun) (45,000/30,000) = 1.5
(7500+2500+2500) p.m. x 6 months = 12,500x6 = 75,000
` / unit 75,000 / 60,000 1.25
Fixed overheads 1,50,000 5 1,50,000 2.5
Profit 4,05,000
Profit required to make total profit 9,00,000 4,95,000
Contribution per unit required in July – December = 12.

Hence, selling price = 12 + 50 = 62 ` per unit should be fixed in the second half of the
year.
3. (a) The standard overhead rate for a department is `3.60 per hour and the overhead
allowances are as follows:
Activity level (hours) Budgeted overhead allowances (`)
3000 14,000
7000 22,000
11000 30,000
Calculate the standard activity level at which the standard overhead rate has been work
out. 4
(b) P. Ltd., a manufacturing company, made the following purchases of raw materials from
different suppliers. Information pertaining to each material is given below:
Material Quantity as Rate ** Other information

per invoice per unit
A 2000 kg `12 VAT 4%; Quantity discounts 2%;
Cash discount for payment within 30 days = 5%
Delivered to store at supplier's cost.
B 3000 kg `20 No VAT; Normal loss = 6% of the quantity during transport.
Insurance `6000; Freight ` 2 per kg.
C 1000 nos 45 US$ Imported from US. Import duty 24% of invoice value.
Insurance and freight at supplier's cost.
Exchange rate at purchase date = ` 60 per US $
Exchange rate at payment date = ` 63 per US $
D 4000 kg `30 No VAT; No insurance.
Normal loss 3% of the quantity accepted.
Abnormal loss 2% reimbursed by transporter to the extent of
` 1500
** rate means rate as per supplier's price list before any discount or taxes.
Applying the cost Accounting Standards for material cost, calculate the value and
quantity at which each material receipt will be recorded. 9
(c) Name 3 factors that should be disclosed in the cost statements as per CAS-3. 3
Answer:
3. (a) Difference in activity levels = 4000 hours.

Difference in overhead amounts = ` 8000
Variable overhead = 8000 / 4000 =` 2 per unit.
Fixed overheads = 14000 – 3000 x 2 = ` 8000
Or 22000 – 7000 x 2 = ` 8000
Or 30000 – 11000 x 2 = ` 8000
Standard rate = 3.6.
Fixed part = 3.6 – 2 = 1.6 per hour.
1.6 x No. of hours = ` 8000.
No. of hours = ` 8000 / 1.6 per hour = 5000 hours. = Standard activity level
(b)
Material Quantity to be Value Remarks
Recorded as receipt `
A 2000 Kgs. 24,460.80 12 x 0.98 x 2000 = 23,520
Add: VAT 4% = 940.80
Cash discount is not reflected in material
cost. It is taken to the credit of P & L A/c.
B 2820 Kgs. 72,000.00 3000 x 20 = 60,000
Insurance = 6000
Freight = 2 x 3000 = 6000
C 1000 Nos. 33,48,000.00 45 x 1000 x 60 = 27,00,000
Import duty 24% = 6,48,000
Exchange fluctuation due to different
payment date not reflected in material cost.
D 3800 Kgs. 1,17,600.00 4000 x 30 = 1,20,000
Normal Loss 3% (120)
Value of 3880 Kg = 1,20,000.
Abnormal loss 80 Kg. (2400 – 1500 recovered
from transporter taken to P & L A/c)
(c) CAS – 3 relates to principles and methods of determining overheads.

The following factors are to be disclosed:
(i) The basis of assignment of overheads to cost objects.
(ii) Overhead incurred in foreign exchange.
(iii) Overheads relating to resources received from or supplied to related parties.
(iv) Any subsidy / grant / incentive or any amount of similar nature received / receivable
reduced from overhead.
(v) Credits / recoveries relating to overheads.
(vi) Any abnormal Cost not forming part of the overheads.
(vii) Any unabsorbed overheads.
(Students can write any three points).
4. (a) The standard capacity usage and the actual capacity utilization in respect of a machine for
a particular month are 90% of total available hours and 80% of standard capacity usage
respectively. The total available working time in the month is 200 hours. The following data is
obtained from the idle time card:
Time in waiting for material (normal) = 10 hours
Time in waiting for tools (normal) = 6 hours
Sudden break down = 10 hours
The hourly fixed cost of the machine is `43 and the operator is paid at `70 per hour.
You are required to report the idle time cost to the management. 8
(b) Briefly explain the following: 8

(i) Practical capacity
(ii) Normal Capacity
(iii) Idle Capacity
(iv) Excess Capacity
Answer:
4. (a) Total available hours = 200

Standard capacity usage = 90% = 200 x 90% = 180 hours.
Unavoidable idle time = 20 hours
Actual capacity utilization = 80% of standard = 0.80 x 180 = 144 hours.
Avoidable idle time = 180 – 144 = 36.
Hourly idle time cost = 43 + 70 = 113
Idle Time Report to Management

Unavoidable idle time 20 hours Cost = 20 x 113 = ` 2,260 Merged in the standing order
number or production order of the
worker, i.e., treated direct labour
cost.
Avoidable Idle time
Normal idle time:
Waiting time for materials 10 hours 10 x 113 = ` 1,130 Booked under factory overheads
Waiting time for tools 6 hours 6 x 113 = ` 678 Booked under factory overheads
Abnormal idle time:
Sudden break-down 10 hours 10 x 113 = ` 1,130 Adjusted through the costing P &
L A/c; Not charged to production
Concealed idle time 10 hours 10 x 113 = ` 1,130 Treated as overhead costs
Total Avoidable idle time ` 4,068
(b) (i) Practical capacity:

The maximum plant capacity at which the plant is designed less the allowance given for
unavoidable interruptions like time lost for repairs, inefficiencies, breakdown, shortages in
raw materials, labour supplies, Sundays, holidays, vacation, etc. These unavoidable
influences are mostly on internal causes and do not consider main external causes like
lack of customers. Practical capacity is determined with reference to the nature of the
industry and the circumstances in which the particular factory is situated. Usually practical
capacity ranges between 75 to 85% of the maximum capacity.
(ii) Normal Capacity:

Idle capacity due to long term sales trend, evened out for cyclical fluctuations is reduced
from the practical capacity to arrive at the normal capacity. It is determined for the
business as a whole and then broken down by plants and departments. Normal capacity
is used for preparation of flexible budgets, establishing overhead rates, fixing standards for
standard costing, pricing, scheduling production, BEP, Cost control and controlling
inventory cost.
(iii) Idle Capacity:

Idle capacity is normal capacity less allowances for temporary lack of orders, bottlenecks,
machine break-down, etc. This represents productive potential not utilized due to
avoidable, regular interruptions. Idle capacity represents the difference between the
practical capacity and the actual capacity and represents the unused productive
potential.
(iv) Excess Capacity:

Excess capacity refers to that portion of the practical capacity that is available, but no
attempt is made to utilize it due to strategic or other reasons. It either results from a
managerial decision to retain larger production capacity or from unbalanced equipment
or machinery within departments. Excess capacity is excluded from overhead rate
consideration.
5. (a) The following information pertains to a production department of a manufacturing

company:
Particulars ` ` Per hour
Indirect wages 40
Repairs: up to 2000 hours 10,000
For each additional 500 hours up to a total of 4000 hours 3,500
Additional amount for 4001 to 5000 hours 6,000
Additional amount beyond 5000 hours 7,000
Rent and Rates 35,000
Power: up to 3,600 hours 25
Above 3600 hours 30
Consumable supplies 24
Depreciation up to 100% of budgeted activity. Beyond this level, 10% 65,000
increase for every 10% increase in activity or part thereof.
Cleaning and Lighting
Up to 4000 hours 18,000
Above 4000 hours 23,000
The budgeted level of activity is 5,000 hours in a production period.
Prepare the overhead budget with the break-up of each item of cost given above for activity
levels at 70% and 110% of the budgeted volume. Compare the budgeted overhead rate per
hour and the overhead rates per hour at the above levels. Comment on these rates. 8
(b) 200 kg of a certain material valued at ` 50 per kg were issued from the Stores Department to
the Production Department, During transit, 2 kg physically disappeared due to shrinkage (1%
shrinkage is considered normal). In the production process, the yield of good output was 80%
of the input. 8% of the input had a slightly sub standard dimension and this can be sold as
seconds in the market at a discount of 25% of the selling price of good output, which is ` 300
per kg. 12% of the input emerged as trimmings in the process. This was collected and can be
sold in the market at a net price of `20 per kg, which is credited to the manufacturing
overhead as per the company's practice.
Explain with reasons, the quantities that you will classify as (i) waste, (ii) scrap and (iii)
spoilage.
What will be the material cost per unit of the good output? (A simply computed value will
suffice. A detailed statement is not required) 8
Answer:
5. (a) Fixed and Flexible Budget showing overhead cost per hour
Item of overhead Budgeted Level 70% level 110% level
5000 hours 3500 hours 5500 hours
Indirect Wages 2,00,000 1,40,000 2,20,000
Repairs 30,000 20,500 37,000
Rent and Rates 35,000 35,000 35,000
Power 1,32,000 87,500 1,47,000
Consumable supplies 1,20,000 84,000 1,32,000
Depreciation 65,000 65,000 71,500
Cleaning and Lighting 23,000 18,000 23,000
Total 6,05,000 4,50,000 6,65,500
Overhead rate per hour 121.00 128.57 121.00
The overhead rates are fixed at a reasonable level. There is not likely to be any significant
under or over absorption to have a supplementary rate.
(b)
Quantity Classification Reason
2 Kgs. Waste Material disappears due to shrinkage or evaporation
resulting in lower output quantity. This is invisible waste. Cost
of normal waste is absorbed by the quantity of output.
23.76 Kgs. Scrap Incidental material residue coming out of a production
process. Scrap is physically available and has low
measurable utility or market value.
E.g. trimmings, shavings, saw dust, etc. The net realizable
value is credited to manufacturing overhead or to the job
or directly to the P & L A/c.
15.84 Kgs. Spoilage When production does not come up to the standard of the
specification and cannot be made good by rectification
or reconditioning, they are sold as seconds at a slightly or
significantly low price. This is called spoilage. Spoilage
involves material, labour and overhead cost.
Material cost per unit of good output = 10,000 /(200-2-23.76-15.84) = 10,000 / 158.4 = 63.13
per unit.
SECTION B - Financial Management (40 marks)
In Section B, Question No. 6 is compulsory. Answer any two out of the remaining three.
6. Answer the following, showing the workings for each. (No credit will be given for answers
without the reasoning)
(a) X deposits `1,00,000 at the beginning of each of years 1 and 3, and ` 1,00,000 at the end of
each of the years 2, 4 and 5. Find the discounted value of the investments at the end of year
3 with a discount rate of 10%.
(P.V. factor of 10% at the year end 0, 1, 2, 3, 4, 5 and 6 are respectively: 1, 0.909, 0.826, 0.751,
0.683, 0.621, 0.564) 2
(b) Cost of debt is 9% after tax. Cost of equity is 12% at zero leverage and it keeps increasing as
leverage grows. Find the weighted average cost of capital at 60% debt proportion under the
Net Operating Income Approach. 2
(c) The earnings of a company = `5,00,000. Dividend payout ratio is 60%. The number of
shares outstanding = 1,50,000. Equity capitalization rate =11% and rate of return on investment
=16%. Calculate the market value of the share as per Walter's model. 2
(d) Will the following items feature in the cash flow statements as per AS-3? If so, state the
category under which the item will be shown.
(i) Cash paid to develop self constructed fixed asset.
(ii) Acquisition of another entity by issue of shares.
(iii) Conversion of debt to equity. 2
Answer:
6. (a)
End of year Amount invested Factor at end of year 3
0 1,00,000 (1.1)3 = 1.331
1
2 2,00,000 (1.1)1 = 1.1
3
4 1,00,000 1/(1.1) = 0.909
5 1,00,000 1/(1.1)2 = 0.826
= 1,00,000 (1.331+0.909+0.826) + 2,00,000 (1.1)
= 5,26,600
(b) According to NOI approach, the WACC does not get affected by the financing mix. The
Cost of equity at zero leverage will be the WACC = 12% always, however, much the
leverage changes.
(c) At per Walter’s model,

P = [D + (E – D) (r/ke)/ke
= [2+(3.33-2) (0.16/0.11)/0.11) = [2 + 1.33 x 1.45] /0.11 = 3.9285 / 0.11 = 35.71 `
(d) (i) Cash paid to develop self constructed asset - Included as ‘cash from investing
activity’ under AS – 3.
(ii) Acquisition of another entity by issue of shares – Non cash transaction. Hence, does
not feature in the Cash flow statement as per AS – 3.
(iii) Conversion of debt to equity – Non cash transaction. Hence, does not feature in the
Cash flow statement as per AS – 3.
7. (a) The following details relating to a company are given:

Sales per annum 1,00,000 units
Variable Cost ` 90 per unit
Fixed Cost including interest per annum `18,00,000
P/V ratio 25%
10% Debentures ` 30,00,000
Equity Share capital (shares of ` 10 each) ` 40,00,000
Corporate Tax Rate 30%
Calculate:
(i) Operating Leverage
(ii) Financial Leverage
(iii) Combined Leverage
(iv) Earnings per share 8
(b) Write short note on Global Depository Receipts. 4

(c) A chemical company has a net sales of `50 crores, cash expenses (including taxes) of `35
crores, and depreciation of `5 crores. If debtors decrease over the period by ` 6 crores, what
will be the cash from operations? 2
(d) The balances of the Plant and M/c of A Ltd., on 31.03.2014 and 31.03.2013 were respectively
`1,00,000 and ` 40,000. A machine with opening w. d. v. `6000 was sold for `5000 during the
year 2013-14. Depreciation of ` 5,000 was charged during the year. Find the amount that will
feature as 'application of funds' in the Fund Flow Statement. 2
Answer:
V.C. per unit

7. (a) Selling Price =
1- P / V ratio
= ` 90/(1 – 0.25)
= 90 / 0.75
= ` 120 per unit
Fixed cost other than interest:

= ` 18,00,000 – 10% of ` 30,00,000
= 18,00,000 – 3,00,000
= ` 15,00,000
Income Statement
Sales: 1,00,000 @ ` 120 per unit 1,20,00,000
Less: Variable cost @ ` 90 per unit 90,00,000
Less: Fixed Cost other than interest 15,00,000
EBIT 15,00,000
EBT 12,00,000
Less: Tax @ 30% 3,60,000
EAT 8,40,000
(i) Operating Leverage = Contribution / EBIT

= ` 30,00,000 / ` 15,00,000
=2
(ii) Financial Leverage = EBIT / EBT

= ` 15,00,000 / ` 12,00,000
= 1.25
(iii) Combined Leverage = Contribution / EBT
= ` 30,00,000 / ` 12,00,000
= 2.5
Or
Combined Leverage = OL x FL
= 2 x 1.25
= 2.5
(iv) Earning Per Share (EPS) = EAT / No. of Shares

= ` 8,40,000 / ` 4,00,000
= ` 2.10 per share
(b) A GDR is a negotiable instrument, basically a bearer instrument which is traded freely in
the international market either through the stock exchange or over the counter or
among qualified international buyers.
It is denominated in US dollars and represents shares issued in local currency.
Characteristics:
(i) The shares underlying the GDR do not carry voting rights.
(ii) The instruments are freely traded in the international market
(iii) Investors can earn fixed income by way of dividend.
(iv) GDRs can be converted into underlying shares, depository / custodian banks
reducing the issue.
(c) Cash from operation = operating profit + noncash charges + decrease in debtors = `
[(50-35-5) + 5 + 6] crores = ` 21 crores.
(d)
Plant and Machinery A/c as on 31st March 2014
To Balance b/d 40,000 By Bank – Sale proceeds 5,000
To bank – Purchases (Bal. fig.) 71,000 By P&L – Loss 1,000
By Depreciation 5,000
By Balance C/F 1,00,000
Total 1,11,000 Total 1,11,000
Amount shown as Application of Funds is ` 71,000/-
8. (a) The following information relates to N Ltd. for the year ending 31.03.2014:
Fixed Assets to sales ratio 2:1
Current ratio 2.5:1
Liquidity ratio 1.4:1
Debtors’ turnover 12 times
Debt (long-term) – equity ratio 1:2
Current assets to fixed assets ratio 1:3
Working capital `15,00,000
Assume all sales are on credit.

(i) Current Assets
(ii) Total Assets
(iii) Sales
(iv) Debtors
(v) Inventory
(vi) Networth
(vii) Long-term debt
(viii) Cash and Bank balance 8
(b) Information on two projects is given below:

Project A B
Cash Inflows (` '000) year-end
1 50 282
2 300 250
3 360 180
4 208 Nil
Initial Investment - beginning of year 1 535 540
Evaluate which project is better under each of the following criteria taking discount rate as
10% p.a.
(i) NPV
(ii) Discounted Pay Back period
(iii) Profitability Index
(Discount factors given in question 6) 8
Answer:
8. (a) (i) Current Assets:

Current ratio = Current Assets / Current Liabilities = 2.5 : 1
Current Liabilities = Working Capital / (2.5 – 1) = 15,00,000 / 1.5 = ` 10,00,000.
Current Assets = Current Liabilities x 2.5 = ` 25,00,000.
(ii) Total Assets:

Fixed Assets = current assets x 3 = 25,00,000 x 3 = ` 75,00,000
Total Assets = Fixed Assets + Current Assets = 75,00,000 + 25,00,000 = ` 1,00,00,000.
(iii) Sales = Fixed Assets x 2 = 75,00,000 x 2 = ` 1,50,00,000
(iv) Debtors = Credit sales / Debtors turnover = 1,50,00,000 / 12 = ` 12,50,000
(v) Inventory:
Liquidity ratio: Liquid Assets i.e. (Debtors + Cash and Bank)/Current Liabilities = 1.4:1
Liquid assets = C.L x 1.4 = ` 14,00,000
Inventory = Current assets – Liquid assets = 25,00,000 – 14,00,000 = ` 11,00,000.
(vi) Net Worth or Shareholders Fund:

Debt + Net worth = Total Assets – Current Liabilities = 1,00,00,000 – 10,00,000 = ` 90,00,000
Debt Equity ratio = 1 : 2
Net worth (Equity) = (Debt + Net worth) x 2/3 = 90,00,000 x 2/3 = ` 60,00,000
(vii)Long term Debt = Net worth/2 = 60,00,000 / 2 = ` 30,00,000
(viii)Cash and Bank Balance = Liquid Assets – Debtors = 14,00,000 – 12,50,000 = ` 1,50,000.
(b)
Project A Project B
Cash inflows
End of year Inflows ` ‘000 Inflows ` ‘000
0 Absolute Discounted Cumulative Absolute Discounted Cumulative Discount Decision
factor
1 50 45.45 45.45 282 256.34 256.34 0.909
2 300 247.80 293.25 250 206.50 462.84 0.826
3 360 270.36 563.61 180 135.18 598.02 0.751
4 208 142.06 705.67 Nil 598.02 0.683
Total Discounted 705.67 598.02

inflows ` ‘000
Total Discounted 535 540
inflows ` ‘000
NPV 170.67 58.02 A is better
Fraction of 3rd year 241.75 X 12 = 10.73 77.162 X 12 = 6.85

270.36 135.18
Pay back 2 years and 10.73 months 2 years and 6.85 months B is better
Profitability index 705.674 =1.32 598.018 =1.11 A is better

535 540
9. (a) Z Ltd’s cost sheet gives you the following information:

Items of Cost/Revenue `/unit
Raw Material Cost 117
Direct Labour 49
Factory Overheads (includes depreciation at ` 18 per unit at budgeted
level of activity) 98
Total Cost per unit 264
Profit 36
Selling Price per unit 300
The following information is also available:

Average raw material in stock 4 weeks
Average Work-in-progress stock (Material 80% complete, Labour and overheads 2 weeks
- 60% complete)
Credit period allowed to debtors 6 weeks
Credit availed from suppliers 8 weeks
Time lag in payment of wages 1 week
Time lag in payment of overheads 2 weeks
The company sells one-fifth of its output against cash and the remaining is credit sale. Cash
balance is maintained at ` 2,50,000. Budgeted level of activity is 78,000 units. Production,
wages and overheads may be taken as being carried out evenly throughout the year.
Debtors may be valued at sales value.
Prepare a statement showing the item wise breakup of the total working capital requirement
needed to finance the budgeted level of activity. 8
(b) Answer any two of the following:

(i) Write a short note on the theory of net income approach relating to capital structure.4
(ii) What are the distinctive features of a financial lease and an operating lease? 4
(iii) What is debt-service coverage ratio? Explain its significance. 4
Answer:
9. (a)
Budget production 78000 units p.a.
No. of weeks 52 p.a.
Budgeted production 1500 units per week
Stock WIP Finished Goods Debtors Cash balance Total Creditors Net WC
Raw Material 702000 280800 526500 842400 2351700 1404000 947700
Direct Labour 88200 220500 352800 661500 73500 588000
Overheads (Cash) 144000 360000 576000 1080000 240000 840000
Non Cash Exp/profit 388800 388800 388800
Cash Balance 250000 250000 250000
Total 702000 513000 1107000 2160000 250000 4732000 1717500 3014500
Statement of Working Capital Requirement

Current Assets:
Raw Material Inventory 702000
WIP Inventory 513000
Finished Goods Inventory 1107000
Sub total-Inventory 2322000
Sundry debtors 2160000
Cash 250000
Current Assets total 4732000
Less:
Creditors for purchases 1404000
Wages payable 73500
Overhead payable 240000
Sub total-current liability 1717500
Working Capital = CA - CL 3014500
Note : In the absence of information it is assumed that Finished Goods was in stock for 3 weeks.
(b) (i) Net Income Approach on Capital Structure:

The capital structure has relevance, i.e., a firm can increase its value and minimize
the overall cost of capital by employing debt capital in its capital structure. The
greater the debt, the lower shall be the overall cost of capital and therefore the
greater shall be the value of the firm.
This theory assumes that:

(i) Cost of debt is less than cost of equity.
(ii) The risk perception of investors is not affected by use of debt. Therefore, the
equity capitalisation rate ke and debt capitalization rate kd don’t change with
leverage.
(iii) There are no corporate taxes.
V = S + D.
S = market value of equity = NI / Ke
Ko = overall cost of capital = EBIT / V
(ii) Leasing is an arrangement that provides a firm with the use and control over assets
without buying and owning them.
Operating Lease Financial Lease

Short term. The lease period is usually Usually long term. Lease period almost
less than the life of the asset. coincides with the useful life of the asset.
The Present value may not match the The Present value of the lease rentals
cost of the asset. The lessor may have usually exceeds or atleast is substantially
to again lease it out to the same or equal to the whole of the cost of the
another party. asset.
Usually cancellable at short notice. Not normally cancellable at short notice.
Lessee generally has the option of Usually provides the lessee the option of
renewal. Otherwise another party takes renewal.
the asset on a fresh lease since the
useful life is normally not over.
Lessor is generally responsible for Lessee is generally responsible for
insurance, maintenance and taxes. insurance, taxes and maintenance.
Common to equipments requiring Common to assets like land, building,
expert technical staff. The lessors machinery, fixed equipments. Lessor has
normally limit their purchases to many a wider variety of assets since he does
equipments of the same type to ensure not use technical experts to maintain.
cost effective maintenance.
(iii) Debt service coverage ratio indicates whether the business profits are sufficient to
pay up the interest and the principal due to be paid.
It helps the lender to assess the borrower’s ability to pay on time the installment,
consisting of interest and principal.
A ratio of 2 is considered satisfactory. The greater this ratio, the better the repayment
ability.
PAT +Depreciation +Interest on Loan
Debt Service Coverage ratio =
Interest on Loan +Loan repayment in a year
GROUP – I
SYLLABUS – 2012
SUGGESTED ANSWERS TO QUESTION
DECEMBER 2013
Paper – 8: COST ACCOUNTING AND FINANCIAL MANAGEMENT

SECTION A – Cost Accounting (60 marks)
In Section A, Question No. 1 is compulsory. Answer any three out of the remaining four.
1. Answer the following:
(a) For a department, the standard Overhead rate is `2.50 per hour and the overhead
allowances are as follows: 2
Activity Levels (hours) Budgeted overhead allowances
(`)
6,000 20,000
14,000 36,000
22,000 52,000
Calculate the fixed cost.
(b) The following data relating to a machine is available:

Cost of the machine is `20,000; Estimated scrap value is `2,000. Working life = 6 years. The
machine had to be discarded at the end of 4 years due to obsolescence and was sold for `
4,000. What is the resultant loss? (Use straight line depreciation on net value). 2
(c) In a workshop the normal working hours is 8 hours for which `450 is paid as wages. However,
calculation of wages payable is made on piece rate basis that 30 pieces will be produced
per hour. When a worker produces below standard, 90% of the piece rate is paid but when he
produces above standard, 110% of piece rate is paid. On a particular day, a worker produces
260 pieces in the allotted time of 8 hours. What will be his earning? 2
(d) Draw a specimen bin card and appropriately record the following transactions.
01-12-2013 Received from Supplier SW, 80 kg material A, Purchase Price `20 per kg.
04-12-2013 Issued to assembly 50 kg. of A at `15 per kg vide requisition No. 313. 2
(e) A concern producing a single product estimates the following expenses for a production
period.
Figures `
Direct Material 50,000
Direct Labour 50,000
Overhead Expenses 2,10,000
What will be the overhead recovery rate based on prime cost? 2
Board of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
(f) State the cost units applicable to the following industries:
Cement, Goods Transport, Education, BPO 2
Answer:
(a) Change in activity level = difference in hours = 14,000 – 6,000 or 22,000 -14,000 = 8,000
hours.
Change in budget allowance = 36,000 – 20,000 or 52,000 – 36,000 = 16,000.
16,000
Variable portion = = 2 `/hour.
8,000
For any level, overhead allowance - 2 x hours = fixed cost.
= 20,000 – 2 x 6,000 = 8,000 or
= 36,000 - 2 x 14,000 = 8,000 or
= 52,000 - 2 x 22,000 = 8,000.
Fixed Cost = 8,000.
8,000
Standard level of activity = = 16,000
(2.5 2)
Overhead = (16,000 x 2 + 8,000) = 40,000
Standard rate = 40,000/16,000 = 2.5. (This is not asked in the question)
(b) Cost of Machine = 20,000

Less: Scrap value = 2,000
Net cost = 18,000
Life = 6 years. Depreciation per annum straight line = 3,000 p.a.
Depreciation up to year end 4 = 12,000.
Wdv at end of year 4 = 20,000 – 12,000 = 8,000.
Less: Sale value = 4,000
Loss = 4,000
(c) Normal price rate = 450/240 = 1.875.

Standard Production= 8hrs x 30 pieces = 240 pieces
260 pieces in 8 hours is above standard of 240 pieces.
Hence, wages = 110 % x 1.875 x 260 = 536.25 or 536.
(d)
BIN CARD
Bin No. : Maximum Level :
Material Code No. : A Minimum Level:
Material Description : Re- order Level:
Stores Ledger Folio No :
Unit : Kg.
Receipts Issues Balance Remarks
Date G.R.N. Quantity Date S.R. No. Quantity Quantity
No.
01.12.2013 - 80 80
04.12.2013 313 50 30
Note:
Full form of G.R.N. No. = Goods Received Note Number.
Full form of S.R.N No. = Store Received Note Number.
(e) Prime cost = DM+DL+ DE = 1,05,000. OH = 2,10,000. Overhead recovery rate based on
prime cost = 2,10,000/1,05,000 = 2 times or 200 % of prime cost.
(f) Cost units for the following industries:
Industry Cost Unit

Cement Tonnes Any unit of weight is acceptable (like quintals, kg, etc)
Goods Transport Tonne - kilometer Any unit that is a product of weight and
length(distance) (like ton-miles, quintal-miles, etc)
Education Student years Any unit that is a product of no. of students and the
duration - days/months or years.
BPO Accounts Any unit in terms of number of transactions, or a product
handled of number and value of transactions
2.
(a) The following is an extract of stores ledger of a particular item of stock with incomplete
information for October 2013. You are required to fill in the rate column of issues correct to
two decimal places. Also fill in the values under the 'Balance column' wherever indicated
with a "?". Identify the method of stock issue followed by the company. How would you
treat the value of the shortages on 30th October in Cost Accounts? 8

October Quantity Rate Quantity Rate Quantity Value
2013 (Kg) (`/Kg) (Kg) (`/Kg) (Kg) (`)
1 50,000 1,25,000
7 5,000 2.4
10 30,000 62,000
15 20,000
20 15,000 2.6
25 10,000 2.5
29 20,000
30 200 ?
shortage-
abnormal
loss
30 400 ?
shortage-
abnormal
loss
31 9,400 ?
(b) In a tailoring shop the standard output of a tailor making collars of a shirt is 20 units per hour
for an 8 hour shift. The output of Tailor X for one week is as under:
Day Units
Monday 150
Tuesday 160
Wednesday 180
Thursday 180
Friday 190
Saturday 200
You are required to calculate the earnings of Tailor X for the week under:
(i) Halsey Premium Plan with a guaranteed wage rate of `10 per hour and a premium of
60% of the time saved over standard. And 4
(ii) Taylor Differential Rate system with the following rates of payment: ` 0.50 per unit at
standard and up to 20% over standard, ` 0.40 per unit at production below standard
and `0.60 per unit when daily output exceeds standard by 20%. 4
Answer:
(a) Statement showing the value of closing stock
October 13 Quantity Rate Quantity Rate Quantity Value
(kg) (`/kg) (kg) (`/kg) (kg) `
1 50,000 1,25,000
7 5,000 2.4 55,000 1,37,000
10 30,000 2.50 25,000 62,000
15 20,000 2.50 5,000 12,000
20 15,000 2.6 20,000 51,000
25 10,000 2.5 30,000 76,000
29 20,000 2.55 10,000 25,000
30 200 2.50 9,800 24,500

(Shortage-
Normal loss)
30 400 2.50 9,400 23,500
(shortage -
abnormal loss)
31 9,400 23,500
Working Note:
(i) The store ledger shows the value of the stock on 10.10.13 is ` 62,000 which shows that
the store ledger is maintained in FIFO method.
(ii) On 29.10.13 the issue price is :
Quantity Rate Value (`)

5,000 2.40 12,000
Therefore, rate of the issue : 51,000/20,000 = 2.552.60[1 mark]
15,000 39,000
20,000 - 51,000
(iii) Normal Shortage is charged to production as a % of direct material consumed.

The value of normal loss to be included in material cost = 200 x 2.5 = `500
(iv) Abnormal Loss is to be written off to costing P& L A/c

Value of Abnormal Loss = 400 x 2.5 = ` 1,000
(b)
Day Units Extra units over Time saved (hours) Taylor's rate
standard 160 units/8 applicable (.5 for units
hours ≥160 and ≤ 192)
Monday 150 0.4
Tuesday 160 0.5
Wednesday 180 20 1 0.5
Thursday 180 20 1 0.5
Friday 190 30 1.5 0.5
Saturday 200 40 2 0.6
Premium 5.5 Taylor's plan
payment for = .4 x 150 + .5 x
710 +.6 x 200
= 535 `
Halsey’s plan=8x6x10+5.5x6= `513
3.
(a) From the following information, calculate the machine hour rate for recovery of
overhead for a drilling machine installed in a machine shop. 8
(i) The machine operates for 8 hours a day and 300 days a year.
(ii) 400 hours of machine time in a year is used for repairs and maintenance.
(iii) Setting up time of the machine is 200 hours per annum and is to be treated as
production time.
(iv) Annual cost of repairs and maintenance of the machine is `40,000.
(v) Power used is 10 units per hour at a cost of ` 8 per unit. No power is consumed during
repair and setting up time.
(vi) A coolant is used to operate the machine at `12,000 per annum.
(vii)An operator, whose monthly wages is `8,000, devotes 75% of his time exclusively to
operate the machine.
(viii) Depreciation is `2,40,000 per annum and insurance is ` 25,000 per annum.
(ix) Other indirect expenses chargeable to the machine are `12,000 per month.
(b) PC Company purchases a specialized item and the quantity to be purchased is 2,500 pieces
at a price of ` 200 per piece. Ordering cost per order is ` 200 and carrying cost is 2% per
year of the inventory cost. Normal lead time is 20 days and safety stock is nil. Assume
yearly working days as 250. 8
(i) Calculate the Economic Ordering Quantity.
(ii) Re-order Inventory Level.
(iii) If a 2% discount on price is given for order quantity 1,250 pieces or more in a lot, should
the company accept the offer of discount?
Answer:
(a) Operating hours for the machine = 8 x 300 = 2,400.
Less: Repairs and maintenance = 400
Normal Production Time = 2,000 hours.
Set up time = 200 hours, considered as production time. Hence no adjustment.
Item of expense Total amount p.a. (`) `/ machine hour = total
amount/2,000 hours
Repairs and Maintenance 40,000 or 20
Power 10 units/ hour x ` 8 / unit x 1,800 1,44,000 or 72
hours
Coolant 12,000 or 6
Share of operator's wages ` 8,000 per 72,000 or 36
month x 12 months/ year x 75 %
Depreciation and Insurance 2,40,000 or 120
25,000 or 12.5
Other indirect expenses ` 12,000 p.m. x 1,44,000 or 72
12
Total 6,77,000 338.5
The student may work out the machine hour rate at the end instead of dividing each item
by 2000. Hence the figures in bold font either in the second or the fourth are sufficient.
However, for the last figure, the 338.5 is required, since machine hour rate is required.
(b)
2 x 2,500 x 200
(i) EOQ =
2 % x 200
10,00,000
= = 500
4
2,500
(ii) Reorder level = Normal lead time x normal usage = 20 x = 200
250
(iii) Evaluation of offer for quantity discount
Since EOQ is 500 units, the minimum quantity to get a discount is 1,250 is used for
evaluation. Moreover, in this analysis, if the ordering cost is reduced to one order of
2,500 units, carrying cost will be much more and hence evaluation of this order size is
not useful.
Based on EOQ Discount offer
Annual Demand = d 2,500 2,500
Order size ( q units) 500 1,250
No. of orders 5 2
Ordering cost at 200 `/order 1,000 400
Purchase price `/unit = p 200 196
Purchase cost = d x p 5,00,000 4,90,000
q 1,000 2,450
Carrying Cost = 2 % x x p
2
Total cost = Purchase cost + 5,02,000 4,92,850
ordering cost +carrying costs
The discount offer is more profitable.
4.
(a) The manufacture of each unit of Product X requires 2 kgs. each of raw materials A, B and
C. There was no opening stock of any material. The following transactions took place in the
production period relating to purchase of raw materials:
A's supplier charged `10,000 for 100 kgs. of A. Additionally, insurance was `600 and the
freight to get A to the store was ` 800.
B's invoice price showed `12,000 charged by the supplier for 100 kgs. Freight was `800,
which was included in the `12,000. There was no insurance. B had a normal evaporation loss
of 10% in transit. A further abnormal loss of 20 kg of B was reported due to a small accident
in transit. ? 200 was recovered from the transporter.
C's supplier charged `15,000 for 120 kgs of C. C absorbs moisture on exposure to the
outside air and by the time it came to the store, it weighed 150 kgs. This is a normal
feature of C.
Materials were issued to production as per requirement. Compute the material cost per unit
of X corrected to two decimal places, using the Generally Accepted Cost Accounting
Principles for material cost and giving the break- up of each raw material. 8
(b) An engineering company produces a standard metallic product. There are three processes
- Foundry, Machining and Assembly. 130 tonnes of raw material at `500 per tonne were
issued to Foundry. The yield at the Foundry is 90% (both standard and actual). The normal
and actual yield at the Machining Process is 95%. There is no loss in the Assembly Process.
You may consider the losses as occurring at the end of the respective processes. The other
details are as follows: 8
Process Direct Labour Overheads

Foundry 200 hours at `100 per hour `150 per labour hour
Machining 100 hours at `50 per hour ` 200 per labour hour
Assembly 100 hours at `150 per hour `100 per labour hour
Prepare a Cost Sheet showing the element wise cost of output and cost per tonne of
output.
Answer:
(a)
Quantity Value
Material A:
Invoice price 100 10,000
Insurance 600
Freight 800
Total Cost 100 11,400 `/kg of A = 114
Material B 100 12,000

Normal loss 10 % 10
90 12,000 `/ kg of B = 133.3333
Abnormal loss 20 2,666.667
Material C 120 15,000

Normal gain 30
Total 150 15,000 `/kg of C = 100
Material Cost of X
A: 2 kgs 2 X 114 = 228
B: 2 kgs 2 X 133.3333 = 266.67
C: 2 kgs 2 X 100 = 200
Total material cost per unit of X 694.67
It can be writes that freight till the shop floor and insurance are part of material cost or
shows the addition of these items in material A,
B: Normal loss is charged to material cost as per GACP. It should either write this or show
the working for normal loss of B
B: Abnormal loss is not charged to production. It is written off to the Costing P & L A/c.
Either this has to be written or the workings shown in B to state how much abnormal loss is
excluded as above.
(b)
Raw material input 130 117 111.15
Loss 13 5.85 0
Output 117 111.15 111.15
Material Cost 500/tonne of input to foundry
Elements of Cost Cost of total output Cost/tone of output
Raw Material 65,000 584.80
130 x 500
Labour 20,000 179.94
Foundry: 200 hrs x 100 `/hr
M/cng: 100 hrs @ 50/hr 5,000 44.98
Assembly: 100 hrs @ 150/hr 15,000 134.95
Subtotal - Labour 40,000 359.87
Overheads:
Foundry 200 hrs @ 150/hr 30,000 269.91
M/ cng: 100 hrs @ 200/hr 20,000 179.94
Assembly : 100 hrs @100/hr 10,000 89.97
Subtotal – Overheads 60,000 539.81
Total Cost 1,65,000 1,484.48
Alternative answer:
Foundry Machining Assembly
Cost/tone Cost/Tonne Cost/tonne Cost/Tonne Cost/tonne Cost/Tonne
Of input Of output Of input Of output Of input Of output
Material 500 555.56 555.56 584.80 584.80 584.80
Labour 153.85 170.94 170.94 179.94 179.94 179.94
Overhead 230.77 256.41 256.41 269.91 269.91 269.91
Labour 42.74 44.98 44.98 44.98
Overhead 170.94 179.94 179.94 179.94
Labour 134.95 134.95
Overhead 89.97 89.97
Total 1,484.48
Alternative answer:
Cost Foundry Machining Assembly
Element Cost/tonne Cost/Tonne Cost/tonne Cost/Tonne Cost/tonne Cost/Tonne
Of input Of output Of input Of output Of input Of output
Material 500 555.56 555.56 584.80 584.80 584.80
Labour 153.85 170.94 213.68 224.92 359.87 359.87
Overheads 427.35 449.84 539.81 539.81
1,484.48 1,484.48
5.
(a) State the treatment of the following items in Cost Accounts:
(i) Market Research
(ii) Obsolete inventory
(iii) Royalty on production of goods. 6
(b) In a manufacturing company, factory overhead was recovered at a pre-determined rate of

`28 per labour hour. The total factory overhead incurred and the actual labour hours
worked for October 2013 were `3,61,000 and 11,200 hours. Out of the `3,61,000, `22,400
became payable due to a one time award of a labour court. Out of the 75,000 units
produced during the month, 60,000 were sold. 40% of the unrecovered overheads were due
to defective planning and the rest was due to increase in overhead cost. Explain with figures
how the under absorbed overhead would be treated in cost accounts. 6
(c) During a month, the following information is obtained from the Personnel Department of a
manufacturing company:
(i) Labour force at the beginning of the month was 1900 and at the end of the month was
2100.
(ii) 25 people left while 40 were discharged. 280 workers were engaged out of which only 30
were appointed in the vacancy created by the number of workers separated and the rest
on account of an expansion scheme.
Calculate the labour turnover rate by the Replacement and Flux methods. 4
Answer:
(a)
(i) Treatment of Market Research expenses in Cost Records:
Many times organizations appoint professional bodies or conduct by themselves a
study of potential market for their products. This study is aimed at finding the
customer's needs, their habits, changing market for the products, technological
changes in the product, competition etc., Such expenses are to be treated as a part
of Sales and Distributive Costs.
(ii) Treatment of Obsolete Inventory in Cost Records:
Obsolete Inventory may consist of raw materials or stores of finished goods. In either
case, a write-off is made direct to Profit and Loss a/c and no charge is made to the
cost of production.
(iii) Treatment of Royalties in Cost Records:
'Royalties are prices paid to acquire the right to manufacture and / or sell some goods
generally belonging to the Government like Mines, Sand mining etc, When the Royalty
is paid to acquire the right to manufacture or to produce the cost of the Royalty should
be charged as a production cost and included in Production Overhead.
(b) Amount of under – absorbed factory overhead:

Total factory overheads incurred `3,61,000
Less: amount paid according to Labour Court award
(Assumed to be non- recurring) `22,400
Net overhead incurred `3,38,600
Less: Overhead recovered for 11,200 hours @ `28 ph `3,13,600
Under absorbed factory overheads `25,000
Treatment
(i) Due to defective planning, 40% of 25,000 = `10,000 treated as abnormal and should be
debited to P/L A/c
(ii) Remaining 60% of 25,000 = ` 15,000 should be distributed over finished goods stock and
cost of sales by using supplementary rate - ` 15,000/75,000 = ` 0.20 per unit.
Charged to finished goods stock 75,000- 60,000 = 15,000 units @ `0.20 per unit = ` 3,000
Charged to cost of sales = 60,000 x 0.20 per unit = ` 12,000
(c)
(i) Replacement method= No. of Replacement/No. of Avg. worker during the period
= 30 /2,000 X 100 = 1.5 %
(ii) Flux method = 1/2[No. of additions +No. of Separation]/No. of Avg. worker during the
period
=1/2 (280 + 65) / 2,000 X 100 = 8.625 %
SECTION B - Financial Management (40 marks)
In Section B, Question No. 6 is compulsory. Answer any two out of the remaining three.
6. Answer the following, showing the workings for each:
(i) `25,000 is being invested at the beginning of every year. We are now at the end of year II.
Considering a 10% interest rate, what is today's value of the annual investments from
year I till and including that of year V? (Take 10% discount factors as:
1,0.909,0.826,0.751,0.683,0.621,0.564 for year-end 0,1,2,3,4,5,6) 2
(ii) Perpetual 15% debentures of `1,000 are sold at a premium of 10% with no floatation costs.
Taking corporate tax rate at 35%, the after-tax cost of capital will be
(A) 6.88%
(B) 7.88%
(C) 8.86%
(D) 10.73% 2
(iii) In 2011-12, XYZ Pharma Ltd. had a profit margin of 20% and asset turnover of 3 times. At the
end of year 2012-13, the profit margin decreases by 5% and asset turnover increased to 4
times. The return on investment for 2012-13 will be
(A) 80%
(B) 60%
(C) 50%
(D) 70% 2
(iv) Given that Sales = `50,000, Variable Cost = 60%, Fixed Cost = `12,000, the operating
leverage will be
(A) 2.2
(B) 2.0
(C) 5.2
(D) 2.5 2
Answer:
(i)
End of year 0 1 2 3 4 5
25,000 25,000 25,000 25,000 25,000 -
Now at end (1.1)2 (1.1)1 1 1 1
of Year 2 -
(1.1) (1.1)2
1.21 1.1 1 0.909 0.826 -
= 25,000 x 5 = 1,25,000
Alternative answer:
For equal past and future cash flow Pv do not matter.
Hence, Pv of Investment = 25,000 x 5 = 1,25,000
(ii) (C) = 8.86%

After – tax cost of capital (Kd) = [Interest payment / Sale price of Debenture] x [1 -t];
[150 x (1 - 0.35)/(1,000 + 100)] x 100 = 8.86%.
(iii) (B) = 60%

Revised Net Profit Ratio = 20 -5 =15%.; and Revised asset turnover Ratio = 4 times.
Hence, ROI = 15% x 4 =60%.
(iv) (D) = 2.50

Contribution = Sales - Variable cost = 50,000 - 30,000 =20,000; So, Operating profit = `
8,000.
Hence, Operating leverage = Contribution / operating profit = 20,000 / 8,000 = 2.50.
7.
(a) The Balance – Sheet of XYZ Ltd. for the year ended 31.03.2013 is given below: 8
Balance Sheet as at 31.03.2013
Liabilities ` Assets `
Equity Share Capital 5,00,000 Land & Building 1,00,000
Preference Share Capital 2,00,000 Machinery 4,00,000
General Reserve 1,00,000 Furniture 50,000
Secured Loans 3,00,000 Inventory 3,00,000
Sundry Creditors 1,00,000 Sundry Debtors 3,00,000
Cash/Bank Balances 50,000
Total 12,00,000 12,00,000
Calculate the following ratios from the given Balance Sheet

(i) Current Ratio
(ii) Proprietory Ratio
(iii) Debt-Equity Ratio
(iv) Capital Gearing Ratio
(b) The capital structure of J Ltd. is as under: 8
`
Equity shares @ ` 10 each 100,00,000
9% Preference Shares @ `100 each 30,00,000
14% Debentures @ `100 each 70,00,000
The market price of these securities are:
Equity Shares 35 per share
Preference Share 120 per share
Debentures 110 per debenture
Other information are:
(i) Equity shares have a floatation cost of ` 5 per share. The next year's expected
dividend is `3 with annual growth of 5%. The company pays all earnings in the form of
dividends.
(ii) Preference Shares are redeemable at a premium of 10%, have 2% floatation cost and 10
year maturity.
(iii) Debentures are redeemable at par, have 4% floatation and 10 per year maturity.
(iv) Corporate tax rate is 30%.
You are required to calculate the weighted average cost of capital using (i) book value
weights and (ii) market value weights.
Answer:
Current Assets 6,50,000
(a) Current Ratio = =
Current Liabilitie s 1,00,000
= 6.5 : 1 or simply 6.5
Shareholde rs' funds 8,00,000

Propriety ratio = =
Total Tangible Assets 12,00,000
=2:3
Total Long Term Debt 3,00,000

Debt Equity ratio =
Shareholde rs' funds 8,00,000
=3:8
Or,
Total Long Term Debt 3,00,000

Debt Equity ratio =
Debt Equity 11,00,000
= 3 : 11
Long term Debt(incl.Pr ef.capital) 5,00,000
Capital gearing ratio =
Equity Shareholde rs' funds 6,00,000
=5:6
(For Capital gearing, it may consider an alternative solution also)
(b) Cost of capital (Ke) = D/P + G

= 3/(35 – 5) + 0.05
= 3/30 + 0.05
= 0.10 + 0.05
= 0.15 or 15%
9 (110 98)/10
Cost of preference capital (kp) =
(110 98)/2
= (9+1.2)/104
= 10.2/104
= 0.098
Or 9.8%
(100 96)
14(1 0.3)
Cost of Debt (kd) = 10
(100 96)/2
14 x 0.7 0.4
=
98
9.8 0.4
=
98
10.2
=
98
= 0.1041 or 10.41%
Calculation of WACC using book value weights:
Source of Capital Book Value Weight Specification WACC

(`) (w) (k)
Equity Shares 100,00,000 0.5 0.15 0.075
14% Debentures 70,00,000 0.35 0.1041 0.0364
200,00,000 1.00 0.1261
WACC = 0.1261 or 12.61%
Calculation of WACC using market value weights:

Source of Capital Book Value Weight Specification WACC
(`) (w) (k)
Equity Shares 350,00,000 0.756 0.15 0.1134
14% Debentures 77,00,000 0.166 0.1041 0.0173
463,00,000 1.00 0.1383
WACC = 0.1383 or 13.83%
8.
(a) A company has received an offer to purchase a new machinery in replacement of the
existing one. The cost of the new machine will be ` 30 lacs. The supplier has offered to
take the existing machine at `4 lacs.
The new machine will have an expected life of 5 years after which it will fetch a salvage
value of ` 3 lacs. Currently, the company generates sales revenue of ` 40 lacs per annum
and earns a contribution of 40% of sales. The new machine will reduce the unit variable cost
by 20% and increase the output by 20%. The extra output can be sold. The revenue cash
flows may be considered at the end of each year. The company's after tax cost of capital
is 14% per annum. The present value factors at 14% at each year end are as follows:
Year 1 2 3 4 5
P. V. factor 0.877 0.769 0.675 0.592 0.519
Based on the Net Present Value criterion, advise whether the proposal is acceptable. Ignore
taxation.
8
(b) Write a short note on Commercial Paper in India 4
(c) What a factoring? Explain the concept of full service factoring. 4
Answer:
(a)
Current New
Sales Revenue 40,00,000 48,00,000
Cost 60 % existing 24,00,000 23,04,000
Contribution 40 % of sales 16,00,000 24,96,000
(existing)
Increase in contribution 8,96,000

Alternative 1
Existing situation (Cash Flows)
End of year 0 1 2 3 4 5
Investment 0
Contribution 0 16,00,000 16,00,000 16,00,000 16,00,000 16,00,000
P.V. factor 1 0.877 0.769 0.675 0.592 0.519
P.V. of cash inflows 14,03,200 12,30,400 10,80,000 9,47,200 8,30,400
Total P.V. of net inflows 54,91,200
(It is assumed that there is no salvage value for the existing machine after 5 years and that its
useful life in 5 more years)
Proposed machine
End of year 0 1 2 3 4 5
Cost of new machine -30,00,000

Salvage Value of Old 4,00,000
Machine
Contribution 0 24,96,000 24,96,000 24,96,000 24,96,000 24,96,000
Net Inflow/ (Outflow) -26,00,000 24,96,000 24,96,000 24,96,000 24,96,000 24,96,000
P. V. factors 1 0.877 0.769 0.675 0.592 0.519
P.V. of cash flows -26,00,000 21,88,992 19,19,424 16,84,800 14,77,632 12,95,424
Net Present Value 59,66,272
Increase in NPV with new 4,75,072

machine
Decision: Based on NPV criterion, purchase

the new machine.
Alternative II
Incremental Approach
End of year 0 1 2 3 4 5
Cost of new machine -30,00,000

Salvage Value of Old 4,00,000
Machine
Incremental Contribution 0 8,96,000 8,96,000 8,96,000 8,96,000 8,96,000
Net Inflow/ (Outflow) -26,00,000 8,96,000 8,96,000 8,96,000 8,96,000 8,96,000
P.V. factors 1 0.877 0.769 0.675 0.592 0.519
P.V. of cash flows -26,00,000 7,85,792 6,89,024 6,04,800 5,30,432 4,65,024
Net Present Value 4,75,072
Increase in NPV with new 4,75,072

machine
Conclusion: Incremental NPV is positive when the new machine is purchased. Hence,
purchase the new machine
Alternative III
Alternatively, students may take the 3.432 and multiply it by the contribution per year
annuity factor (year 1 to 5) =
Then, PV of outflows = -26,00,000
P.V. of inflows = 8,96,000 x 30,75,072
3.432 =
Net Present Value = + 4,75,072
Based on the positive NPV, the machine may be replaced with a new one
(b) Issue of Commercial Papers in India

CP was introduced as a money market instruments in India in January, 1990 with a view
to enable the companies to borrow for short term. Since the CP represents an
unsecured borrowing in the money market, the regulation of CP comes under the
purview of the Reserve Bank of India:
(a) CP can be issued in multiples of `5 Lakhs.
(b) CP can be issued for a minimum duration of 15 days and maximum period of 12
months.
(c) For issuing CP the company's net worth should be more than ` 4 crores.
(d) CP can neither be redeemed before maturity nor can be extended beyond the
maturity period.
(e) CP issue requires a credit rating of P2 from CRISIL or A2 from ICRA.
(c) Factoring
Factoring may be defined as the relationship between the seller of goods and a
financial firm, called the factor, whereby the latter purchases the receivables of the
former and also administer the receivable of the former. Factoring involves sale of
receivable of a firm to another firm under an already existing agreement between the
firm and the factor.
OR
Modus Operandi
A factor provides finance to his client up to a certain percentage of the unpaid invoices
which represent the sale of goods or services to approved customers. The modus
operandi of the factor as follows.
(a) There should be a factoring arrangement (invoice purchasing arrangement)
between the client (which sells goods and services to trade customers on credit)
and the factor, which is the financing organization.
(b) Whenever the client sells goods to trade customers on credit, he prepares invoices
in the usual way
(c) The goods are sent to the buyers without raising a bill of exchange but
accompanied by an invoice.
(d) The debt due by the purchaser to the client is assigned to the factor by advising the
trade customers, to pay the amount due to the client, to the factor.
(e) The client hands over the invoices to the factor under cover of a schedule of offer
along with the copies of invoices and receipted delivery challans or copies of R/R
or L/R.
(f) The factor makes an immediate payment up to 80% of the assigned invoices and
the balance 20% will be paid on realization of the debt.
Full Service Factoring
Under this type, a factor provides all kinds of services discussed above. Thus, a factor
provides finance, administers the sales ledger, collects the debts at his risk and renders
consultancy service. This type of factoring is a standard one. If the debtors fail to repay
the debts, the entire responsibility falls on the shoulders of the factors since he assumes
the credit risk also. He cannot pass on this responsibility to his client and, hence, this
type of Factoring is also called ‘Without recourse’ factoring.
9.
(a) From the following information, work out the average amount of working capital
requirement:
Average period of credit Estimate for the year (52 weeks)
(in weeks) (in `)
Purchase of material 6 26,00,000
Wages 1
1 20,80,000
2
Rent 26 1,00,000
Other overheads 8 10,40,000
Salaries 4 13,00,000
Credit sales 8 52,00,000
Average amount of holding of stocks and WIP is `4,00,000 and there should be cash
balance of `50,000. Assume that all expenses and income are made evenly throughout the
year. 8
(b) Answer any two of the following:
(i) Classify the following independent items of cash flows under AS-3 4
1. Cash receipts from future contracts held for trading purpose.
2. Cash receipts from repayment of advances to third parties other than a financial
enterprise.
3. Cash interest received from by a financial enterprise.
4. Cash received from disposal of fixed assets.
5. Cash receipts from interests in joint venture.
6. Dividends paid by a non-financial enterprise.
7. Cash payments on account of acquisition of a subsidiary.
8. Cash flows arising from taxes on income, not specifically identifiable.
(ii) Write a short note on Foreign Currency Convertible Bonds (FCCBs) 4
(iii) Explain the procedure involved in the 'Forfeiting' Financial Service. 4
Answer:
(a)
Working
Estimate p. a Estimate p. Avg. Credit capital
week period requirement
weeks `
Purchase of material 26,00,000 50,000 6 30,00,00
Wages 20,80,000 40,000 1.5 60,000
Rent 1,00,000 1,923.08 26 50,000
Other overheads 10,40,000 20,000 8 1,60,000
Salaries 13,00,000 25,000 4 1,00,000
Total Current Liabilities 6,70,000
Current Assets
Credit Sales (Debtors) 52,00,000 1,00,000 8 8,00,000
Inventory including WIP 4,00,000
Cash balance 50,000
Total Current Assets 12,50,000
Net Working Capital Requirement (Average) = Current Assets - 5,80,000

Current Liabilities =
(b)
(i) Classification of the following independent items of cash flows under AS – 3:
1. Cash receipts from future contracts held for trading purpose – Operating Activities
2. Cash receipts from repayment of advances to third parties other than a financial
enterprise – Investing Activities
3. Cash interest received from by a financial enterprise - Operating Activities
4. Cash received from disposal of fixed assets - Investing Activities
5. Cash receipts from interests in joint venture - Investing Activities
6. Dividends paid by a non-financial enterprise – Financing Activities
7. Cash payments on account of acquisition of a subsidiary - Investing Activities
8. Cash flows arising from taxes on income, not specifically identifiable - Operating
Activities
(ii) Foreign Currency Convertible Bonds (FCCBs)

The FCCB means bonds issued in accordance with the relevant scheme and
subscribed by a non-resident in foreign currency and convertible into ordinary shares of
the issuing company in any manner, either in whole or in part, on the basis of any
equity related warrants attached to debt instruments. The FCCBs are unsecured; carry
a fixed rate of interest and an option for conversion into a fixed number of equity,
shares of the issuer company. Interest and redemption price (if conversion option is not
exercised) is payable in dollars. Interest rates are very low by Indian domestic
standards. FCCBs are denominated in any freely convertible foreign currency.
FCCBs have been popular with issuers. Local debt markets can be restrictive in nature
with comparatively I short maturities and high interest rates. On the other hand, straight
equity-issue may cause a dilution in earnings, and certainly a dilution in control, which
many shareholders, especially major family shareholders, would find unacceptable.
Thus, the low coupon security which defers shareholders dilution for several years can
be alternative to an issuer. Foreign investors also prefer FCCBs because of the Dollar
denominated servicing, the conversion option and the arbitrage opportunities
presented by conversion of the FCCBs into equity at a discount on prevailing India
market price.
(iii) Forfeiting Financial Service

The term "a forfait" in French means, "relinquish a right". It refers to the exporter
relinquishing his right to a receivable due at a future date in exchange for immediate
cash payment, at an agreed discount, passing all risks and responsibilities for collecting
the debt to the forfeiter.
It is the discounting of international trade receivable on a 100% "Without recourse"
basis. "Without recourse" means the client gets full credit protection and all the
components of service, i.e., short-term finance, administration of sales ledger are
available to the client.
Forfeiting transforms the supplier's credit granted to the importer into cash transaction
for the exporter protecting him completely from all the risks associated with selling
overseas on credit. It effectively transforms a credit sale into a cash sale.
Procedure
(a) The exporter sells the goods to the importer on a deferred payment basis spread over
3-5 years.
(b) The importer draws a series of promissory notes in favour of the exporter for the
payments to be made inclusive of interest charges.
(c) Such promissory notes are availed or guaranteed by a reputed international bank
which can also be the importer's banker, (it is endorsed on the promissory note by the
guaranteeing bank that it covers any default of payment of the buyer).
(d) The exporter now sells the availed notes to a forfeiter (which may be the exporter's
banker) at a discount without recourse.
(e) The forfeiter may hold these notes till maturity or sell them to group of investors
interested in taking up such high-yielding unsecured paper.
Graphical
representation of
Forfeiting
1 = Promissory notes sent for availing to the importer's banker
2 = Availed notes returned to the importer
3 = Availed notes sent to exporter
4 = Availed notes sold at a discount to a forfeiter on a non - recourse basis
5 = Exporter obtains finance
6 = Forfeiter holds the notes till maturity or sells the short-term paper either to a group of
investors or to investors in the secondary market.
GROUP II
(SYLLABUS 2008)

JUNE 2015
Paper- 8: COST AND MANAGEMENT ACCOUNTING

Question No. 1 is compulsory and Answer any five from the rest.
Working notes should form part of your answer.
1. (a) Match the statement in Column I with the appropriate statement in Column II: 1×5=5
Column I Column II
(i) VED Analysis (A) Contract Costing
(ii) Reverse cost Method (B) Inventory Control
(iii) Key Factor (C) Group Bonus Plan
(iv) Escalation clause (D) Cost Method for by- product Accounting
(v) Pristman system (E) By – Product Cost Accounting
(F) Absorption Costing
(G) Process Costing
(H) Budgeting
(b) State whether the following statements are ‘True' or 'False': 1×5=5
(i) The allocation of joint cost on by-products affects the total profit or loss.
(ii) For decision making, absorption costing is more suitable than marginal costing.
(iii) Overhead and conversion cost are inter-changeable terms.
(iv) Only one set of accounting records is kept in integrated accounting system of
financial and Cost Accounts.
(v) Profit Planning and control is not a part of budgetary control mechanism.
(c) Fill in the blanks suitably: 1×5=5

(i) ____________ Cost is the difference in total cost that results from two alternative
courses of action.
(ii) _______ is must for meaningful inter-firm comparison.
(iii) Idle time variance is always _________.
(iv) Generally an item of expense, when identified with a specific cost unit is treated
as __________.
(v) In ‘make or buy’ decisions, it is profitable to buy from outside only when the
suppliers price is below the firm’s own ____________.
Page 1 Page 1
(d) In the following cases, one out of the four answers is correct. You are required to
indicate the correct answer (= 1 mark) and give brief workings (= 1 mark): 2×5=10
(i) A JBC machine was used on a contract site for the period of 7 months and
depreciation on it was charged to the contract `78,750. If the working life of the
machine is 5(five) years and salvage value is `25,000, then the cost of JBC
machine will be:
(a) `7,00,000
(b) `4,18,750
(c) `6,75,000
(d) `3,93,750
(ii) In a factory the monthly requirement for a material is 20,000 units, ordering cost
`225 per order, purchase price `20 per unit and annual carrying cost is 15%, then
economic order quantity will be:
(a) 3,000 units
(b) 2,683 units
(c) 6,000 units
(d) 1,732 units
(iii) In a company, opening stock of material was 14,000 units, closing stock required
to be maintained. 14,000 units and sale is expected to be maintained at 28,000
units, what would be the production units during the period?
(a) 56,000
(b) 14,000
(c) 28,000
(d) 30,000
(iv) When in a company, sale price per unit is `69.50, Variable cost `35.50 and Fixed
cost is 18,02,000, the break-even volume would be:
(a) 58,500 units
(b) 53,000 units
(c) 63,250 units
(d) 28,750 units
(v) The actual machine hours worked in June’ 2014, is for 35,000 units and the
predetermined overhead recovery is @ `3 per unit, when actual overhead is
`1,57,500, the outcome will be:
(a) ` 52,500 under absorbed
(b) ` 53,500 over absorbed
(c) `1,57,500 over absorbed
(d) `1,05,000 under absorbed
Answer:
1. (a) Matching:
Column I Column II
(i) VED Analysis (B) Inventory Control
(ii) Reverse cost Method (E) By – Product Cost Accounting
(iii) Key Factor (H) Budgeting
(iv) Escalation clause (A) Contract Costing
(v) Pristman system (C) Group Bonus Plan
Page 2 Page 2
(b) (i) False
(ii) False
(iii) False
(iv) True
(v) False
(c) (i) Differential

(ii) Uniform Costing
(iii) Adverse
(iv) Direct expenses
(v) Variable cost
(d) (i) (a) ` 7,00,000;

Depreciation for one year 78,750 × 12/7 = `1,35,000
Depreciation for 5 years 1,35,000 × 5 = `6,75,000
Cost of Machine = Total Depreciation plus salvage value
`6,75,000 + 25,000 = `7,00,000
(ii) (c) 6000 units;

2uc
EOQ = = (2 × 20,000 ×12 × 225)/ 15% of 20
IC
10,80,00,000
= = 3, 60, 00, 000 = 6000 Units
3
(iii) (c) 28,000

Expected sale during the period = 28,000 Units
Closing stock to be maintained 14,000 Units
Less: Opening Stock 14,000 Units
Production to be carried out 28,000 Units
(iv) (b) 53,000 units

Contribution = SP VC
`69.50 - `35.50 = `34
FC `18, 02, 000
So, Breakable volume = 
C `34
= 53,000 units.
(v) (a) `52,500
35,000 × 3 = `1,05,000
Actual Overhead – Pre-determined overhead
= under absorbed overhead
So, `1,57,500 – `1,05,000 = `52,500
Page 3 Page 3
2. (a) M/s. Sun & Moon Company Ltd. is experiencing high labour turnover in recent years.
Management of the company would like you to submit a statement on the loss
suffered by the company due to such labour turnover. Following facts are available
from the records:
Sales `800 lakhs, Direct Materials `200 lakhs, Direct Labour `48 lakhs on 4,80,000
labour hours,. other variable expenses ` 80 lakhs, Fixed Cost `90 lakhs.
Direct Labour hours include 10,000 Labour hours spent on trainees and replacement,
only 50% of which were productive.
Further during the year 15,000 Labour hours of potential work could not be availed of,
because of delayed replacement. Cost incurred due to separation and replacement
amounted to `2 lakhs.
With these information, you are required to prepare a statement showing actual profit
against profit which would have been realised had there been no labour turnover.
2+3+1+1+3 =10
(b) Write a note on ‘Just-in-Time’ Inventory 5
Answer:
2. (a) (I) Calculation of direct labour cost if there was no labour turnover:
Actual direct labour cost per hour: = 48,00,000 ÷ 4,80,000
= `10 per direct labour hour.
Cost of man hours of potential work Lost due to delayed replacement
= 15,000 × 10 = -1,50,000.
Direct labour cost of there was no labour turnover = 48,00,000 + 1,50,000
= `49,50,000
(II) Calculation of potential total sales if there was no labour turnover

Particulars Hours
Hours lost for delayed replacement 15,000
Unproductive hours (50% of 10,000) 5,000
Total hours lost 20,000
Actual Labour hours spent: 4,80,000
Less: Unproductive hours 5,000
Productive hours worked 4,75,000
Sales related to 4,75,000 productive hours = 800 Lakhs.
(III) Potential Sales lost due to loss of 20,000

Direct labour hours: 8,00,00,000/4,75,000 (DLH) × 20,000 DLH. = `33,68,421
Total sales if there was no labour turnover.
`8,00,00,000 + `33,68,421 = `8,33,68,421.
(IV)Variable expenses if there was no labour turnover:`2,80,000/8,00,000 × 8,33,68,421

= `2,91,78,947.
Page 4 Page 4
Comparative statements showing actual profit vis – a- vis profit, which would
have been realised if there was no labour turnover:
Particulars Actual (`) If no labour turnover (`)
Sales 8,00,00,000 8,33,68,421
Cost:
Variable Cost 2,80,00,000 2,91,78,947
Direct Labour cost 48,00,000 49,50,000
Fixed Cost 90,00,000 90,00,000
Separation cost 2,00,000 -
4,20,00,000 4,31,28,947
Profit (Sales – Cost) 3,80,00,000 4,02,39,474
Thus loss of profit due to labour turnover:

`4,02,39,474 – `3,80,00,000 = `22,39,474
(b) Just in Time Inventory: This is the latest trend in inventory management. This principle
envisages that there should not be any intermediate stage like storekeeping. Material
purchased from supplier should directly go to the assembly line, i.e. to the production
department. There should not be any need of storing the material. The storing cost
can be saved to a great extent by using this technique. However, the practicality of
this technique in Indian conditions should be verified before practicing the same.
The benefits of just in time system are as follows,
 Right quantities are purchased or porduced at right time.
 Cost effective production or operation of correct services is possible.
 Inventory carrying costs are eliminated totally.
 The stores function is eliminated and hence there is a considerable saving in the
stores cost.
 Losses due to breakage, wastage, pilferage etc. are avoided.
3. (a) M/s Starlight Co. Ltd. specialises in the manufacturing of small components. Cost
structure is given below:
Material `60 (per unit)
Labour `100 (per unit)
Variable cost 75% of Labour Cost
Fixed over head of the Co, `3 lakhs per annum. Unit price of small component is `
260.
(i) Determine the number of components that have to be manufactured and sold in
a year in order to break-even.
(ii) How many components have to be manufactured and sold to make a profit of `1
lakh (one lakh) per year?
(iii) If the sale price is reduced by `20 per unit, how many components have to be
sold to break even? 3+3+4=10
(b) What are the limitations of a zero-based budgeting? 5
Answer:
3. (a) (i)
Page 5 Page 5
Sales Price per unit `260
Less variable cost per unit: -
Material `60
Labour `100
V. of Head (75% labour) 75 `235
Contribution per unit `25
Fixed cost `3,00,000
FC 3, 00, 000
Break even (unit) =
C 25
12,000 Unit
(ii) Fixed overhead = `3,00,000

Required Profit = `1,00,000
Revised total contribution required = `4,00,000
4, 00, 000
Breakeven(units) = 16,000 units
25
(iii) If sale price is reduced by `20 per unit:

Revised contribution –
S. P. = `240
Less V. C. = `235
Contribution = `5 (per unit)
FC 3, 00, 000
BE (Volume) = = = 60,000 Units
C 5
(b) The following are the limitation of Zero Based Budgeting:

(i) It is a very detailed procedure and naturally it is time consuming and lot of paper
work is involved.
(ii) Cost involved in preparation and implementation of this system is very high.
(iii) Morale of staff may be very low as they might feel threatened if a particular activity
is discontinued.
(iv) Ranking of activities and decision - making may become subjective at times.
(v) It may not be advisable to apply this method when there are non financial
considerations, such as ethical and social responsibility because this will dictate
rejecting a budget claim on low ranking projects.
Page 6 Page 6
4. (a) The net profit of Dhura Ltd. shown by cost accounts for the year ended 31st March
2015 was ` 10,35,000 and by financial accounts for the same period was ` 5,00,200.
A scrutiny of the figures of the financial accounts and the cost accounts revealed the
following facts:
Particulars (`)
(i) Administrative overhead under recovered in cost accounts 14,800
(ii) Factory overhead-over-recovered in cost accounts 20,000
(iii) Depreciation-over charged in financial accounts 40,000
(iv) Interest on Investment 20,000
(v) Loss due to obsolescence charged in financial accounts 24,000
(vi) Abnormal Labour wastage charged in financial accounts 2,00,000
(vii) Income Tax provided in financial accounts 2,80,000
(viii) Bank Interest credited in financial accounts 4,000
(ix) Stocks adjustment credited in financial accounts 28,000
(x) Loss due to depreciation in stock values charged in financial
accounts 48,000
10
(b) State the essentials of a good costing system? 5
Answer:
4. (a) Memorandum Reconciliation Account

As on 31st March, 2015
` `
To Administrative overhead under By Profit as per cost accounts 10,35,000
recovered in cost accounts 14,800
To Depreciation over-charge in By Factory overhead over-
financial accounts 40,000 recovered in cost accounts 20,000
To Loss due to obsolescence 24,000 By Interest on Investment 20,000
To Abnormal labour wastage By Bank interest credited in fin.
charged in fin. accounts 2,00,000 account 4,000
To Income tax provided in financial By Stores adjust credit in fin
accounts 2,80,000 account 28,000
To Loss due to depreciation in stock
values in fin accounts 48,000
To Profit as per financial accounts 5,00,200
11,07,000 11,07,000
Alternative
Reconciliation Statement as on 31.03.2015

Particulars ` `
Profit as per financial accounts 5,00,200
Add:
(i) Administration overhead under recovered 14,800
(ii) Over recovery of depreciation 40,000
(iii) Loss due to obsolescence considered 24,000
(iv) Abnormal labour wastage 2,00,000
(v) Income Tax 2,80,000
(vi) Loss due to depreciation in stock 48,000 6,06,800
11,07,000
Page 7 Page 7
Less:
(i) Factory overhead over recovery 20,000
(ii) Interest on investment 20,000
(iii) Bank Interest 4,000
(iv) Stock adjustment 28,000 72,000
(b) Essentials of a good costing system: - For availing of maximum benefits, a good costing
system should possess the following characteristics:-
(a) Costing system adopted in any organization should be suitable to its nature and
size of the business and its information needs.
(b) A costing system should be such that it is economical and the benefits derived
from the same should be more than the cost of operating of the same.
(c) Costing system should be simple to operate and understand. Unnecessary
complications should be avoided.
(d) Costing system should ensure proper system of accounting for material, labour and
overheads and there should be proper classification made at the time of recording
of the transaction itself.
(e) Before designing a costing system, need and objectives of the system should be
identified.
(f) The costing system should ensure that the final aim of ascertaining of cost as
accurately as possible should be achieved.
5. (a) Prince Hotel has three types of rooms viz. super deluxe, deluxe and semi-deluxe.
Detail information are given below:
(i) There are 20 super deluxe rooms, 80 deluxe rooms and 180 semi-deluxe rooms.
(ii) The rent/tariff of super deluxe rooms is to be fixed as twice the deluxe rooms and
that of semi-deluxe rooms as 2/3rd of the deluxe rooms.
(iii) Normally 80% of super deluxe; 75% of deluxe and 70% of semi-deluxe rooms are
occupied in summer of 7(seven) months. In winter of 5(five) months 40% of super
deluxe, 50% of deluxe and 60% of semi-deluxe rooms are occupied.
Normal days in a month may be taken as 30 days.
(iv) Total actual expenses for the year ended 31st March 2015 are ` 4,73,85,000.
Your are required to suggest what rent should be charged for each type of room if
profit is 25% on gross receipts/room rent. 6+4=10
(b) What is inter- process profit? Explain it clearly. 5
Answer:
5. (a)
(i) Calculation of room days - Equivalent to Deluxe

Supper Deluxe Summer 20 ×30 × 7×80/100 = 3360
1, 200
Winter 20×30×5×40/100 = = 9,120
4, 560  2
Deluxe Summer 80×30×7×75/100 = 12,600
Page 8 Page 8
6, 000
Deluxe Winter 80×30×5×50/100 = = 18,600
18, 600 1
Semi- Deluxe Summer 180 ×30 ×7 ×70/100 = 26,460
16, 200
Semi- Deluxe Winter 180 ×30 × 5 × 60/100 = = 28,440
2
42, 660 
3
Total room days equivalent to deluxe rooms ………………. 56,160
(ii) Total amount to be recovered as rent `4,73,85,000 + Profit 25% on rent or 33/1/3% in
cost = 4,73,85,000 + 1,57,95,000 = 6,31,80,000
Room rent per Deluxe Room – 6,31,80,000/56,160 = `1,125
Room rent per Super Deluxe Room – 1,125 × 2 = `2,250
Room rent per semi Deluxe room = (1,125 × 2/3) = `750
(b) Inter Process Profits:

The output of one process is transferred to next process at cost price. However,
sometimes, the transfer is made at cost + certain percentage of profit. This is done
when each process is treated as a profit center. In such cases, the difference between
the debit and credit side of the process account represents profit or loss and is transferred
to the Profit and Loss Account. The stocks at the end and at the beginning contain an
element of unrealized profits, which have to be written back in this method. If the profit
element contained in the closing inventory is more than the profit element in the
opening inventory, profit will be overstated and vice versa. Profit is realized only on the
goods sold, thus to obtain the actual profit the main task would be to calculate the profit
element contained in the inventories.
6. (a) M/s Zenith Co. Ltd. operating at normal capacity produces 1,00,000 units of a product
which supplies the following particulars:
Particulars (`) Per unit
Direct Materials 32
Direct labour 12
Variable overhead 16
Fixed overhead 15
75
Sale Price per unit `100.

In addition, selling and distribution cost of ` 5 per unit is incurred for selling each unit
of product.
As the company faces recession in the market, the Marketing Department desires to
produce only 5000 units.
But, management is of the opinion to shut down the plant.
If the plant is shutdown the loss due to fixed cost could be avoided for ` 4,00,000, but
the committed unavoidable cost would be estimated at ` 2,95,000.
Required: Advise whether the plant should be shut down or not. 4+4+2=10
(b) What is Integrated Accounting System? What are its advantages? 2+3=5
Answer:
Page 9 Page 9
6. (a) Marginal cost statement during recession
Sales 5,000 units @ `100 `5,00,000
Less: Marginal cost (per unit)
Direct materials `32
Direct labour `12
Variable overhead `16
AddI. Variable OH `5
`65 `3,25,000
Contribution `1,75,000
Less: Fixed Cost `15,00,000
Operating Loss `13,25,000
Computation of Shutdown cost

`
Fixed cost 15,00,000
Less: avoidable fixed cost 4,00,000
11,00,000
Add: Addl. Fixed cost 2,95,000
Shutdown cost 13,95,000
Advice: It is apparent that the shutdown costs is higher

(`13,95,000 – `13,25,000) = 70,000. So, it is not justified to Shutdown.
(b) Advantages of Integrated Accounting:

Integrated Accounting is the name given to a system of accounting whereby cost and
financial accounts are kept in the same set of books. Such a system will have to afford full
information required for costing as well as for Financial Accounts. In other words, information
and data should be recorded in such a way so as to enable the firm to ascertain the cost
(together with the necessary analysis) of each product, job, process, operation or any
other identifiable activity. For instance, purchases are analysed by nature of material and
its end-use. Purchases account is eliminated and direct postings are made to stores
control account, work-in-progress accounts, or overhead account. Payroll is straightway
analysed into direct labour and overheads. It also ensures the ascertainment of marginal
cost, variances, abnormal losses and gains. In fact all information that management requires
from a system of costing for doing its work properly is made available. The integrated
accounts give full information in such a manner so that the profit and loss account and the
balance sheet can be prepared according to the requirements of law and the
management maintains full control over the liabilities and assets of its business.
The main advantages of integrated accounting are as follows:-

(i) Since there is one set of accounts, thus there is one figure of profit. Hence the
question of reconciliation of costing profit and financial profit does not arise.
(ii) There is no duplication of recording of entries and efforts to maintain separate set of
books.
(iii) Costing data are available from books of original entry and hence no delay is caused
in obtaining information.
(iv) The operation of the system is facilitated with the use of mechanized accounting.
(v) Centralization of accounting function results in economy.
Page 10 Page 10
7. (a) Draw-up a Flexible Budget for over head expenses of M/s Black & White Co. Ltd, on
the basis of the following data and determine the over head rate at 70%, 80% and
90% of plant capacity level (based on direct labour hours).
Variable overhead At 80% capacity
(`)
Indirect labour 12,000
Indirect Material 4,000
Semi- variable overheads
Power (30% fixed, 70% variable) 20,000
Repairs & Maintenance
(60% Fixed, 40% variable) 2,000
Fixed Overhead
Depreciation 11,000
Insurance 3,000
Others 10,000
Total overheads expenses 62,000
Estimated direct labour hours 1,24,000 hrs. 3+3+4=10
(b) State the accounting treatment of abnormal process loss and abnormal process gain.
3+2=5
Answer:
7. (a)
FLEXIBLE BUDGET FOR OVERHEAD
CAPACITY LEVEL
70% 80% 90%
` ` `
Variable overhead
1. Indirect Labour 10,500 12,000 13,500
2. Indirect Martial 3,500 4,000 4,500
Variable portion of semi variable overhead
1. Power 12,250 14,000 15,750
2. Repair & Maintenance 700 800 900
(A) Total variable O/H 26,950 30,800 34,650
Fixed portion of semi variable overhead -
1. Power 6,000 6,000 6,000
2. Repair & Maintenance 1,200 1,200 1,200
Fixed overhead -
1. Depreciation 11,000 11,000 11,000
2. Insurance 3,000 3,000 3,000
3. Others 10,000 10,000 10,000
(B) Total Fixed Overhead 31,200 31,200 31,200
Total Overhead 58,150 62,000 65,850
Estimated direct labour hours 1,08,500 1,24,000 1,39,500
Overhead recovery rate per direct labour
charges 0.5359 0.5000 0.4720
Page 11 Page 11
Working Variable Overhead `
12,000  70
1. Indirect Labour = `10,500
80
12,000  90
= `13,500
80
4, 000  70
2. Indirect materials = `3,500
70
4, 000  90
= `4,500
80
Semi-variable overhead
Power (70% variable 30% fixed)
20, 000  70
Variable overhead = `14,000
100
14, 000  90
= `12,250
80
14, 000  90
= ` 15,750
80
Repair & maintenance (40% variable 60% fixed)

20, 000  40
Variable overhead = `800
100
800  70
= `700
80
800  90
= `900
80
Estimated direct labour from at 80% capacity = 1,24,000
1, 24, 000  70
For 70% = = `1,08,500
80
1, 24, 000  90
For 90% = `1,39,500
80
(b) Treatment of abnormal loss & abnormal gain:

Abnormal Loss: If the units lost in the production process are more than the normal loss,
the difference between the two is the abnormal loss. The relevant process account is
credited and abnormal loss account is debited with the abnormal loss valued at full cost
of finished output. The amount realized from sale of scrap of abnormal loss units is
credited to the abnormal loss account and the balance in the abnormal loss account is
transferred to costing profit and loss account.
Abnormal Gain: If the actual production units are more than the anticipated units after
deducting the normal, loss, the difference between the two is known as abnormal gain.
The valuation of abnormal gain is done in the same manner like that of the abnormal loss.
The units and the amount is debited to the relevant process account and credited to the
Abnormal Gain Account.
Page 12 Page 12
8. Write short notes on any three of the following: 5×3=15
(a) VED Analysis.
(b) Material handling cost.
(c) Cost Reduction.
(d) Opportunity Cost.
(e) Cost-volume-Profit Analysis.
Answer:
8. (a) VED Analysis: This analysis divides items into three categories in the descending order
of their criticality as follows: -
o ‘V’ stands for vital items and their stock analysis requires more attention. The
reason is that if these items are not available, the resulting stock outs will cause heavy
losses due to stoppage of production. Thus these items are required to be stored
adequately to ensure smooth operation of the plant.
o 'E' means essential items. Such items are considered essential for efficient running but
without these items, the system will not fail. Care must be taken to see that they are
always in stock.
o 'D' stands for desirable items, which do not affect production immediately but
availability of these items will lead to more efficiency and less fatigue.
o Thus VED analysis can be very useful to capital intensive process industries. As it analysis
items based on their importance and it can be used for those special raw materials
which are difficult to procure.
(b) Material handling cost refers to the expenses involved in receiving, storing, issuing and
handling materials to deal with this cost in cost accounts. There are two prevalent
approaches to deal with this cost as under:
First one suggests the inclusion of these costs as part of the cost of materials by
establishing a separate material handling rate, e.g., at the rate of percentage of the
cost of material issued or by using a separate material handling rate which may be
established on the basis of weight of material issued.
Under another approach, these costs may be included along with those of
manufacturing overhead and be charged over the products on the basis of direct
labour or machine hours.
(c) Cost reduction: -

Cost reduction: The goal of cost reduction can be achieved in two ways, first is
reducing the cost per unit and the second one is increasing productivity. Reducing
wastages, improving efficiency, searching for alternative materials, and a constant
drive to reduce costs, can effect cost reduction. The following tools and techniques
are normal used for cost reduction.
(A) Value analysis or value engineering.
(B) Setting standards for all elements of costs and constant comparison of actual with
standard and analysis of variances.
(C) Work study.
(D) Job evaluation and merit rating.
(E) Quality control.
Page 13 Page 13
(F) Use of techniques like Economic Order Quantity.
(G) Classification and codification
(H) Standardization and simplification.
(I) Inventory Management.
(J) Benchmarking
(K) Standardization
(L) Business Process Re-engineering.
(d) Opportunity cost is the value of a benefit sacrificed in favour of an alternative course
of action. It is the maximum amount that could be obtained at any given point of
time if a resource was sold or put to the most valuable alternative use that would be
practicable. Opportunity cost of good or service is measured in terms of revenue
which could have been earned by employing that good or service in some other
alternative uses. Opportunity cost can be defined as the revenue foregone by not
making the best alternative use.
Opportunity costs represent income foregone by rejecting alternatives. They are,
therefore not incorporated into formal accounting systems because they do not
incorporate cash receipts or outflows. Opportunity costs are, however, very relevant
when examining alternative proposals or projects. When deciding whether or not to
allocate capital to a project it is highly desirable to consider if the money could
produce a better or worse return if invested elsewhere.
(e) Cost-volume-profit analysis. Profit of an undertaking depends upon a large number

of factors, the most importance of which are cost of manufacture, volume, of sales
and selling prices of product sold. The three factors of cost, volume and profit are
inter-connected and dependent on one another. For example, profit depends upon
sales, selling price to a large extent depends upon cost, and volume of sales
depends upon volume of production which in turn is related to cost. In cost-volume
profit analysis an attempt is made to measure variations in cost with variations in
volume. Of all these factors, which influence cost, often, outside factors, over which
management usually has no control, necessitate changes in volume and costs do not
always vary in proportion to the volume of output. This type of situations poses special
problems for management.
The cost-volume-profit relationship may be shown in statement form as shown below:
- Statement of Marginal cost and Profit
Product X (`)
Sales X
Less: Marginal cost:
Direct Materials X
Direct Labour X
Variable Overhead X
Contribution: X
Less: Fixed cost X
Profit X
Sales les marginal cost = Contribution
Contribution less Fixed Cost = Profit.
Page 14 Page 14
GROUP II
(SYLLABUS 2008)

DECEMBER 2014
Paper- 8 : COST AND MANAGEMENT ACCOUNTING

Question No. 1 is compulsory and answer any five from the rest.
1. (a) Match the statement in Column I with the appropriate statement in Column II: 1x5=5
Column I Column II
(i) HIFO (A) Direct Material Cost
(ii) Cost Object (B) Labour Incentive Scheme
(iii) Standard Costing (C) Activity Based Costing
(iv) Primary Packing Material (D) Issue of Material
(v) Time & Motion Study (E) Predetermined Cost
(b) State whether the following statements are True' or 'False': 1x5=5
(i) Idle time variance is always favourable.
(ii) Under-absorption of overhead results in higher amount of profit.
(iii) An increase in variable cost increases contribution.
(iv) What was once a by-product of an industry may become main product at a later
date.
(v) Replacement cost is the cost of replacing existing assets at present or at a future
date.
(c) Fill in the blanks suitably: 1x5=5

(i) If the actual output in more than the normal output, the difference between the
two is ________________.
(ii) Under ______________ _________________, employees receive a constant
proportion of value added.
(iii) For identifying slow moving stocks, it is necessary to compute the _______________
___________________ ratio.
(iv) Material usage variance is the sum of _________________ and _______________ .
(v) Where production is as per requirement of customer, the costing method used in
such industries is __________________.
indicate the correct answer (= 1 mark) and give brief workings (= 1 mark): 2x5=10
(i) A hospital is open for 365 days, but bed occupancy is 25 patients per day for 120
days and 20 beds occupied for another 80 days. Extra beds occupied during the
year is 400. The patient-days of the hospital is
(a) 4,000 (c) 3,500
(b) 5,000 (d) 4,600
(ii) A company manufactures two products using common handling facility. The total
budgeted material handling cost is ` 60,000. Other details are:
Particulars Product A Product B
Number of units produced 30 30
Material moves per product line 5 15
Under Activity Based Costing System, material handling cost to be allocated to
Product A per unit is
(a) ` 1,000 (c) ` 1,500
(b) ` 500 (d) ` 2,500
(iii) A Ltd. has fixed costs of ` 6,00,000 per annum. It manufactures a single product
which sells for ` 200/unit. Its contribution is to Sales ratio is 40%. A Ltd.’s break-
even in units is
(a) 7,500 (c) 3,000
(b) 8,000 (d) 1,500
(iv) The following data are given for an industry using batch costing.
Annual consumption of components – 2400 units
Setting up cost per batch – ` 100
Manufacturing cost/unit – ` 200
Carrying cost/unit – 6% per annum
Economic Batch Quantity would be
(a) 300 units (c) 200 units
(b) 400 units (d) 250 units
(v) A worker has a time rate of ` 15/hour. He has taken 48 hours to finish a job where
Standard time is 60 hours. His total wages including Rowan Bonus for the week is
(a) ` 792 (c) ` 840
(b) ` 820 (d) ` 864
Answer:
1. (a) Matching:
Column I Column II
(i) HIFO (D) Issue of Material
(ii) Cost Object (C) Activity Based Costing
(iii) Standard Costing (E) Predetermined Cost
(iv) Primary Packing Material (A) Direct Material Cost
(v) Time & Motion Study (B) Labour Incentive Scheme
(b) (i) False

(ii) True
(iii) False
(iv) True
(v) True
(c) (i) Abnormal gain,

(ii) Rucker Plan
(iii) Inventory Turnover / Stock Turnover
(iv) Mix variance, yield variance
(v) Job costing / Job Order Costing
(d) (i) (b) 5,000

Patient-days in a year
(25 beds x 120 days) + (20 beds x 80 days) + 400 beds
= 3,000 + 1,600 + 400
= 5,000 patient-days
(ii) (b) ` 500

Total move in material handling = 5 + 15 = 20
Percentage move for Product A = 5/20 = 25%
Material handling cost to be allocated to
Product A = ` 60,000 x 25% = ` 15,000
Therefore, per unit = ` 15,000 ÷ 30 units = ` 500.
(iii) (a) 7,500

Break even unit = Fixed Cost / Contribution per unit
` 6,00,000 ÷ 40% of ` 200
` 6,00,000 ÷ ` 80 = 7500 units
(iv) (c) 200 units

2AS
Econ Batch Quantity =
C
where
A = Annual Demand
S = Setting up cost per batch
C = Carrying cost per unit
2  2,400  100
=
6% of 200
= 40,000
= 200 units
(v) (d) ` 864

Standard Time = 60 hours
Time taken = 48 hours
Total earnings of a worker under Rowan Scheme
= (48 hours x ` 15) + (12 hours ÷ 60 hours x 48 hours x ` 15)
= ` 720 + ` 144 = ` 864.
2. (a) State briefly the usefulness of Break-even analysis. 5

(b) A product of XYZ Ltd. Co. passes through two processes A and B 10,000 units at a cost
of ` 1.10 were issued to process A. Other direct expenses were as follows:
Particulars Process A Process B

Sundry Materials (`) 2,000 2,000
Direct Labour (`) 4,500 8,000
Direct Expenses (`) 1,500 1,500
Wastage of process A was 5% and in process B 4%.
Wastage of process A was sold at ` 0.25 per unit and that of process B at ` 0.50 per
unit. Overhead charges were 160% of direct labour.
Prepare Process A/c ‘A’ and Process A/c ‘B’. 5+5=10
Answer:
2. (a) Break even analysis used to determine:

(i) The amount of profit / loss at various volume of operations.
(ii) The volume of operations required to earn a target profit.
(iii) The effect of change in variable cost on profit.
(iv) The effect of change in fixed cost on profit.
(v) The effect of change in selling price on profit.
(vi) The effect of change in sales volume on profit.
(b)
Process A - Account
Particulars Units ` Particulars Units `
Raw materials 10,000 11,000 By Normal Loss (5% of 500
introduced 10,000)
Add: materials 2,000 Sales of Scrap 500 x 125
0.25
Direct Labour 4,500 Transfer to Process B 9,500 26,075
Overheads 7,200
10,000 26,200 10,000 26,200
Process B - Account
Particulars Units ` Particulars Units `
Transferred from Process 9,500 26,075 By Normal Loss (9500x4%) 380
-A
Direct materials 2,000 Sales of Scrap 190
Direct Labour 8,000 Transfer to Finished Stock 9,120 50,185
A/c
Overheads 12,800
9,500 50,375 9,500 50,375
3. (a) Z Ltd. has two autonomous divisions: A and B with objective to maximize divisional
profits. Divn. A produces X and transfer to Divn. B. B sells X in the external market after
incurring processing cost (variable) of ` 8 per unit.
The demand of X in the external market varies with the selling price as given below:
Demand in units in a month Selling price per unit (`)
2000 50
3000 45
4000 40
A incurs variable cost of ` 20 per unit of X and fixes Transfer Price at ` 30 per unit.
(i) Find divisional contributions and contribution of Z Ltd. at the Transfer Price of ` 30
per unit.
(ii) Examine how the company’s profits would change if the Transfer price is changed
to ` 25 per unit. 4+6=10
(b) What is scrap? How do you treat scrap in Cost Accounts? 5
Answer:
3. (a) At transfer price of ` 30: Cost to B is (` 30 + 8 = 38)

Units SP (`) Cost (`) Contribution pu (`) Total contribution (`)
2000 50 38 12 24000 (Max)
3000 45 38 7 21000
4000 40 38 2 8000
B will sell 2000 units and makes total contribution (`) 24000
A makes total contribution on transfer of 2000 units = 2000* (30 – 20) 20000
Z Ltd. makes total contribution (`) = 24000 + 20000 44000
At transfer price of ` 25: Cost to B is (` 25 + 8 = 33)

Units SP (`) Cost (`) Contribution pu (`) Total contribution (`)
2000 50 33 17 34,000
3000 45 33 12 36,000 (Max)
4000 40 33 7 28,000
B will sell 3000 units and makes total contribution (`) = 36,000
A makes total contribution on transfer of 3000 units = 3000* (25 – 20) = 15000
Z Ltd. makes total contribution (`) = 36000 + 15000 = 51,000
The company’s total profit will increase by ` 7000 (=51000 – 44000) for change of
transfer price from ` 30 to ` 25.
(b) Scrap: Scrap is a residual material resulting from a manufacturing progress. It has a
recovery value and is measurable. The treatment of scrap in cost accounts is
normally as per the following details.
 If the value of scrap is negligible, the good units should bear the cost of scrap and
any income collected will be treated as other income.
 If the value of scrap is considerable and identifiable with the process or job, the
cost of job will be transferred to scrap account and any realization from sale of
such scrap will be credited to the job or process account and any unrecovered
balance in the scrap account will be transferred to the Costing Profit and Loss
Account.
 If scrap value is quite substantial and it is not identifiable with a particular job or
process, the amount will be transferred to factory overhead account after
deducting the selling cost. This will reduce the cost of production to the extent of
the scrap value.
4. (a) Gupta Enterprises is operating at 60% capacity level producing and selling 60,000
units @ ` 100 per unit. Other relevant particulars are given below:
Cost per units (`)

Material 40
Conversion Cost (variable) 20
Dealer’s margin (10% of sales) 10
Fixed cost for the period is ` 12,00,000.

As there is a stiff competition, it is not possible to sell all the products at the existing
cost price structure. The following alternative proposals are considered:
First proposal (i) Decrease selling price by 20%.
Second Proposal (ii) Increase dealers’ margin from 10% to 20%.
Select the better alternative.
Also calculate the sales volume required to maintain the same amount of profit under
the alternative, which is considered better assuming that volume of sales will not be a
limiting factor under such an alternative.
Also assume that fixed cost will remain constant. 3+3+2+2=10
(b) Write short notes on application of marginal costing in fixing selling price in the short
run. 5
Answer:
4. (a)
Computations under existing conditions
Contribution per unit = Unit selling price – Unit variable cost

= ` 100 – (` 40 + 20 + 10) = ` 30
Contribution for sale of 60,000 x ` 30 = ` 18,00,000
Profit = Contribution – Fixed cost = 18,00,000 – 12,00,000 = ` 6,00,000
Computation under 1st alternative
(i.e., when selling price is decreased by 20%)

Revised selling price per unit (` 100 – 20% of ` 100) = ` 80
Variable cost per unit = ` 70
Revised contribution per unit = ` 10
Contribution 10
P/V Ratio = x 100 = x 100 = 12.5%
Sales 80
Fixed Cost `12,00,000
BEP Sales (in `) = = = ` 96,00,000
P / V Ratio 12.5%
Computation under 2nd alternative

(i.e., when dealer’s margin is increased to 20%)
`
Revised variable cost per unit (` 40+20+20) 80
Revised contribution 20
Contribution 20
P/V Ratio = x 100 = x 100 = 20%
Sales 100
Fixed Cost `12,00,000
BEP Sales (in `) = = = ` 60,00,000
P / V Ratio 20%
From the above result it appears that P/V Ratio under the second alternative is higher
than that under the first alternative. Also breakeven point under the second
alternative sets at a lower level than under the first alternative. Therefore, second
alternative i.e., increasing dealer’s margin to 20% is better both in terms of profitability
(as reflected from P/V ratio) and risk (as reflected from BEP).
If the second alternative is selected, the required volume of sales to maintain the
same profit i.e., 6,00,000
Fixed Cost + Desired Profit 12,00,000 + 6,00,000 18,00,000

= = = = ` 90,00,000.
P / V Ratio 20% 20%
TotalContribution
Required Sales units =
Contribution per unit
18,00,000
=
20
= 90,000 units
Gupta Enterprises will have to sell 90,000 units to earn the same profit as earlier.
(b) Marginal costing is helpful in determining selling price in the short run in different
situations line -
(i) In times of trade depression
(ii) In times of cut throat competition
(iii) In accepting additional orders utilizing idle capacity
(iv) In introducing a new product in the market
(v) In driving out a weak competition from the market
(vi) Expanding export market.
In the short run, the management even may fix selling price below the marginal cost
in times of heavy fall in demand temporarily to keep the permanent labour force
intact, to keep the plants in operation and to sell the perishable goods produced etc.
5. (a) Zed manufacturing Co. Ltd. submits the following information:

(i) The units to be sold during six months ended December, 2012:
July 5,600
August 8,300
September 10,200
October 9,500
November 9,200
December 9,800
(ii) Expected sales for January, 2013 – 6,400 units,
(iii) Stock of finished goods at the beginning of July, 2012-3,800 units.
(iv) Stock of finished goods (units) at the end of each month will be equal to 25% of
the sales units of that month plus 25% of the sales units of the next month.
(v) There will be no opening or closing work in progress.
(vi) Direct material cost per unit ` 15. Direct labour cost per unit ` 10 and overhead
150% of direct labour.
Based on the above information prepare monthly production budget for each of the
months ended December, 2012.
Also prepare production cost budget for the said six months period. 4+4+2=10
(b) Mention the prerequisites for implementation of Budgetary Control System. 5
Answer:
5. (a) Production Budget (monthly) for 6 month ended December, 2012:
Months Opening Stock (Units) Sales (Units) Closing Stock (Units) Production (Units)
(1) (2) (3) (4) (5) = 3+4-2
2012 3800 5600 3475 5275
July 3475 8300 4625 9450
August 4625 10200 4925 10500
September 4925 9500 4675 9250
October 4675 9200 4750 9275
November 4750 9800 4050 9100
December 52850
Production Cost Budget for six month ended December, 2012

Direct materials (52850 x ` 15) 7,92,750.00
Direct Labour (52850 x ` 10) 5,28,500.00
Over head (150% of ` 5,28,500) 7,92,750.00
Budgeted Production Cost 21,14,000.00
Working Notes:
Closing stock for a month = 25% of Sales unit for that month + 25% of Sales unit for the
next month.
Therefore, closing stock for July, 2012 = 25% of 5600 + 25% of 8300 = 1400 + 2075 = 3475
units.
(b) Following are the pre-requisite of Budgetary Control System:

(i) Fixation of objective and goal in clear terms.
(ii) Sound organization structure.
(iii) Full co-operation from all employees.
(iv) Proper education of employees.
(v) Efficient accounting system.
(vi) Formation of a budget committee.
(vii) Positive attitude of all employees to accept changes whenever necessary.
(viii) Setting Standard Cost.
(ix) Top Management support
(x) Proper organizational structure
(xi) Clear and realistic goals
(xii) Flexibility
(xiii) Participative process
(xiv) Conducive environment
6. (a) Nanu Bank operated for years under the assumption that profitability can be
increased by increasing rupee volumes. But that has not been the case. Cost analysis
has revealed the following:
Activity Activity Cost/Activity Activity Capacity Used

Cost (`) Driver Checking Personal Gold Visa
Accounts Loans
(i) Providing ATM 5,50,000 No. of transactions 2,80,000 Nil 1,60,000
Services
(ii) Computer Processing 55,00,000 No. of transactions 35,00,000 5,00,000 10,00,000
(iii) Issuing Statements 44,00,000 No. of transactions 14,00,000 2,00,000 6,00,000
(iv) Customer Inquires 19,80,000 Telephone Calls 8,50,000 2,34,000 5,00,000
Units of product 1,50,000 25,000 40,000
You are required to
(i) Calculate cost driver rates for each activity.
(ii) Calculate the cost of per unit for each product-checking Accounts, Personal
Loans and Gold Visa, by using the cost driver rates computed in above (i).
4+6=10
(b) What are the objectives of Standard Costing technique? 5
Answer:
6. (a) (i) Computation of Cost Driver Rates:
Activities Activity cost Cost Driver No. of Units of Cost Driver

(`) Cost Driver Rate (`)
(i) Providing ATM 550000 No. of 440000 1.25
Service transactions
(ii) Computer 5500000 No. of 5000000 1.10
Processing transactions
(iii) Issuing Statements 4400000 No. of 2200000 2.00
Statements
(iv) Customer inquires 1980000 Telephone 1584000 1.25
Calls
(ii) Computation of per unit cost for each product
Products Checking Personal Goldvisa

Activity Accounts (`) Loans (`) (`)
(i) Providing ATM 280000 x 1.25 = --- 16000 x 1.25
350000 = 200000
(ii) Computer Processing 3500000 x 1.1 = 500000 x 1.1 1000000 x1.1
3850000 = 550000 = 1100000
(iii) Issuing Statements 1400000 x 2 = 200000 x 2 = 600000 x 2 =
2800000 400000 1200000
(iv) Customer Inquires 850000 x 1.25 = 234000 x 500000 x
1062500 1.25 = 1.25 =
292500 625000
Total Cost (A) 8062500 1242500 3125000
Units of Product (B) 150000 25000 40000
Cost per unit of each product (A ÷ B) ` 53.75 ` 49.70 ` 78.125
(b) Objectives of Standard costing technique:

(i) To provide a formal basis for assessing performance and efficiency.
(ii) To control costs by establishing standards and analysis of variances.
(iii) To enable the principle of “Management by exception” to be practiced at the
detailed, operational level.
(iv) To assist in setting budgets.
(v) The standard costs are readily available substitutes for actual average unit costs
and can be used for stock and work-in-progress valuations, profit planning and
decision making and as a basis of pricing where “costplus” systems are used.
(vi) To assist in assigning responsibility for non-standard performance in order to
correct deficiencies or to capitalize on benefits.
(vii) To motivate staff and management.
(viii) To provide a basis for estimating.
(ix) To provide guidance on possible ways of improving performance.
7. (a) A company manufactures an Engineering product utilizing 90% capacity and

produces 10800 units at a selling price of ` 500 per unit.
The following per unit Cost data are given:
`
Raw Material 200
Direct Labour cost 60
Variable Overhead 40
Variable Factory Overhead 40
Dealers commission 20% on selling price
Fixed Cost 5,50,000 per annum
The company was able to sell the entire products in the market to meet the demand
of Local customers. Local market demand was for 10,800 units only.
Now, one of the dealers is willing to purchase additional 1200 units provided selling
price is reduced to ` 400 per unit and he is also wiling to sacrifice 50% of his normal
commission. Since the company has balance capacity of 10%, Management has
expressed willingness to consider the proposal. Fixed costs will remain unaltered.
Management wants your views about the proposals. 4+4+2=10
(b) State the tools and techniques which are normally used for cost reduction. 5
Answer:
7. (a)
Statement of Profitability
Particulars Present Additional Total (`)
Production (`) Production (`)
Production & Sales Units 10,800 1,200 12,000
Sales 54,00,000 4,80,000 58,80,000
Direct material @ ` 200 21,60,000 2,40,000 24,00,000
Direct Labour Cost @ ` 60 6,48,000 72,000 7,20,000
Variable O/H @ ` 40 4,32,000 48,000 4,80,000
Variable factory O/H @ ` 40 4,32,000 48,000 4,80,000
Commission @ 20% on selling price 10,80,000 48,000 11,28,000
(10% of SP)
Total variable cost 47,52,000 4,56,000 52,08,000
Contribution (S – V) 6,48,000 24,000 6,72,000
Less: Fixed Cost 5,50,000 --- 5,50,000
Profit 98,000 24,000 1,22,000
Recommendation: The variable cost per unit of additional product will be (4,56,000 ÷
1200) = ` 380. Since the proposal gives additional profit ` 24,000 the same should be
accepted.
(b) The following tools and techniques are normally used for cost reduction:
(i) Value analysis or value engineering.
(ii) Setting standards for all elements of cost and constant comparison of actual with
standard and analysis of variances.
(iii) Work study.
(iv) Job evaluation and merit rating.
(v) Quality control.
(vi) Use of techniques like Economic Order Quantity.
(vii) Classification and codification.
(viii) Standardization and simplification.
(ix) Inventory management.
(x) Benchmarking.
(xi) Standardization.
(xii) Business Process Re-engineering.
8. Write short notes on any three of the following: 5x3=15

(a) Group Bonus Plan
(b) Cost Plus Contract
(c) Operating Costing
(d) Material Control
(e) Supply Chain Analysis
Answer:
8. (a) Group Bonus Plan:

Many times output of individuals cannot be measured. Similarly, the output of
individuals is dependent on the performance of the group. In such cases, rather than
implementing individual bonus plan, group bonus plan is implemented. The total
amount of bonus which is determined according to productivity can then be shared
equally or in agreed proportion between the group members. The main objects of
group bonus plans are as follows:
(i) Creation of team spirit
(ii) Elimination of excessive waste of materials and time
(iii) Recognition of group effort
(iv) Improving productivity
(b) Cost-Plus Contract:

This type of contract is generally adopted when the probable cost of contract
cannot be ascertained in advance with reasonable accuracy. In this type of
contract, the contractor receives his total cost plus a percentage of cost. These types
of contract give protection to the contractor against fluctuations in profit as he is
guaranteed about his Profit irrespective of actual cost. However, in order to avoid
any dispute in future, it is always advisable to specify the admissible cost in advance.
Similarly, the customer may also reserve the right of demanding “cost audit” in order
to check the reliability of claim of the contactor regarding increase in costs.
(c) Operating Costing:

Operating costs are the costs incurred by undertaking which do not manufacture any
product but provide a service. Such undertakings for example are – Transport
concerns, Gas agencies, Electricity Undertakings; Hospitals, Theaters etc. Because of
the varied nature of activities carried out by the service undertakings, the cost system
used in obviously different from that followed in manufacturing concerns.
The essentials features of operating costs are as follows :
(1) The operating costs can be classified under three categories. For example in the
case of transport undertaking these three categories are as follows:
(i) Operating and running charges - It includes expenses of variable nature. For
example expenses on petrol, diesel, lubricating oil, and grease etc.
(ii) Maintenance Charges – These expenses are of semi-variable nature and
includes the cost of tyres and tubes, repairs and maintenance, spares and
accessories, overhaul etc.
(iii) Fixed or standing charges: These includes garage rent, insurance, road
licence, depreciation, interest on capital, salary of operating manager etc.
(2) The cost unit used is a double unit like passenger – mile, Kilowatt – hour etc. it can
be implemented in all firms of transport, airlines, bus-service, etc. and by all firms
of Distribution Undertakings.
(d) Material Control:

Is defined as systematic control and regulation of purchase storage and usage of
materials in such a way as to maintain an even-flow of production and at the same
time avoiding excessive investment in inventories. Efficient material control minimizes
losses and wastage of materials which is not possible otherwise.
In other words, it is a system which ensures provision of right quantity of materials, right
quality at the right time with the minimum investment in inventory.
(e) Supply Chain Analysis:

It means flow of goods and services and information from the initial sources of
materials and sources to the delivery of products to customers regardless of whether
their activities occur in the same organization or in other organization. Customers
expect improved performance from companies through the supply chain. They
expect that the companies should perform all these activities in an efficient manner
so as to reduce costs and also maintain quality of the product and the products
available easily for them.
Suggested Answer_Syl2008_Dec2014_Paper 8_Set 2
GROUP II
(SYLLABUS 2008)

DECEMBER 2014

Column I Column II
(i) Job Ticket (A) A Technique of Inventory Control
(ii) Escalation Clause (B) BEP Chart
(iii) VED Analysis (C) Contract Costing
(iv) Angle of Incidence (D) Labour Cost Plus Factory Overhead
(v) Conversion Cost (E) A Method of Time Booking
(F) No Matching Statement Found
(i) Activity Based Costing is a traditional method of charging overhead.
(ii) Stores Ledger shows quantity and value of stores/materials.
(iii) Abnormal Costs are uncontrollable.
(iv) Royalty based on units produced is considered as direct expenses.
(v) Ideal standards are achievable in normal course.

(i) Contribution earned on Break-even sales equals to ____________ of the firm.
(ii) A series of fixed budgets prepared for different levels of activity is known as
_______ budget.
(iii) Sum of material price variance and material usage variance is equal to _________
variance.
(iv) The amount realized from sale of the abnormal wastage is credited to __________
account.
(v) When time saved is equal to time taken then earnings of a worker under Halsey
Plan and Rowan Plan are the ____________.
(i) Fixed cost is ` 2,25,000; Profit is ` 1,85,000; BEP is ` 9,00,000 then margin of safety
will be
(a) ` 7,15,000 (c) ` 4,90,000
(b) ` 6,75,000 (d) ` 7,40,000
(ii) A JBC machine was used on a contract site for the period of 7 months and
depreciation on it was charged to the contract ` 78,750. If the working life of JBC
Machine is 5 years and salvage value is ` 25,000 then cost of JBC Machine will be
(a) ` 7,00,000 (c) ` 6,75,000
(b) ` 4,18,750 (d) ` 3,93,750
(iii) In a factory the monthly requirement for a material is 20000 units; Ordering cost `
225 per order, Purchase price ` 20 per unit and annual carrying cot is 15%, then
economic order quantity will be
(a) 3,000 units (c) 6,000 units
(b) 2,683 units (d) 1,732 units
(iv) A worker has completed his job within 35 hours instead of 40 standard hours. The
earnings under rowan bonus plan of the worker will be, if the wages rate per hour
is ` 36:
(a) ` 1,350 (c) ` 1,417.50
(b) ` 1,440 (d) ` 1,260
(v) The standard wage rate is ` 40 per hour, Actual wage rate is ` 45 per hour,
standard time is 500 hours and actual hours worked is 480 hours. If wages paid for
505 hours then labour idle time variance will be
(a) ` 200 (A) (c) ` 1,125 (A)
(b) ` 1,000 (A) (d) ` 225 (F)
Answer:
1. (a) Matching:
Column I Column II
(i) Job Ticket (E) A method of Time Booking
(ii) Escalation Clause (C) Contract Costing
(iii) VED Analysis (A) A Technique of Inventory Control
(iv) Angle of Incidence (B) BEP Chart
(v) Conversion Cost (D) Labour cost plus Factory Overhead
(b) (i) False

(ii) True
(iii) False
(iv) True
(v) False
(c) (i) Fixed Costs

(ii) Flexible
(iii) Material Cost
(iv) Abnormal Wastage A/c
(v) Same
(d) (i) (d) ` 7,40,000;

 Fixed Cost   ` 2,25,000 
P/V Ratio =   x 100 =   x 100 = 25%
 BEP   ` 9,00,000 
Profit 185000
Margin of safety = =` = ` 7,40,000
P 25%
Ratio
V
(ii) (a) `7,00,000;

12
Depreciation for one year = 78,750 x
= ` 1,35,000
7
Total Depreciation for 5 years = ` 1,35,000 x 5 = 6,75,000
Cost of Machine = Total depreciation ` 6,75,000 + Salvage Value ` 25,000 = ` 7,00,000.
(iii) (c) 6000 units;
200
EOQ = = (2 x 20000 x 12 x 225)/ 15% of 20
1
108000000
= = 6000 Units
3
(iv) (c) `1,417.50;

Normal wages = 35 x ` 36 ` 1260.00
Bonus under Rowan Plan ` 157.50
35
(40 – 35) x x ` 36 ` 1417.50
40
(v) (b) ` 1000 (A);

Idle Time Variance = Idle Hours x standard Hourly wage Rate
= (505 – 480) x ` 40
= ` 1000 (A)
2. (a) M/s. Zenith Co. Ltd., engaged in manufacturing Computer spare parts utilizing 50%
capacity and produces 15,000 units per month. The present cost break-up per unit is
given below:
Material ` 12
Labour `4
Overhead ` 6 (50% Fixed)
Sale price ` 25 per unit
If it is decided to work at 60% capacity, the selling price falls by 5%. At 80% capacity,
the selling price falls by 10% where as material price falls by 5% in both the cases.
You are required to prepare a statement showing the profits/losses at 50%, 60% and
80% capacity utilization. 3+3+4
(b) Outline the steps involved in Activity Based Costing. 5
Answer:
2. (a)
FLEXIBLE BUDGET
At 50%, 60% and 80% capacity utilization
Particulars 50% Capacity 60% Capacity 80% Capacity
utilization utilization utilization
Production Unit 15,000 18,000 24,000
Selling price Per Unit (`) 25 23.75 22.50
Sales value (units x SP) 3,75,000 4,27,500 5,40,000
Variable Cost:
*Material ` 12 P.U. 1,80,000 2,05,200 2,73,600
Labour – ` 4 P.U. 60,000 72,000 96,000
O/H ` 3 P.U. 45,000 54,000 72,000
Total Variable Cost 2,85,000 3,31,200 4,41,600
Fixed Cost 45,000 45,000 45,000
Total Cost 3,30,000 3,76,200 4,86,600
Profit / Loss (Sales – Total Cost) 45,000 51,300 53,400
*Note: Material – 18,000 x 11.40
24,000 x 11.40
(b) Outline of the steps involved in ABC System:
(i) To study the manufacturing process and various stages involved in the product or
service to identify the activities involved.
(ii) To ascertain the resources and cost of each activity.
(iii) Tracing each cost with the cost objects.
(iv) Ascertaining the cost driver rate of each activity considering the cost of such
activity and the related cost driver.
(v) Applying the cost driver rates to the product.
3. (a) Zupiter Transport Service Company is running four (4) buses between two cities, which
are 40 kilometers apart. Seating capacity of each bus is 40 passengers. The following
particulars are furnished by the company for April 2014:
Salaries of Office Staff 1,50,000
Wages of drivers, conductors and cleaners 3,60,000
Diesel oil & other Lubricants 3,50,000
Repairs & Maintenance 1,00,000
Insurance, Taxation etc. 2,60,000
Depreciation 2,50,000
Interest & Other Expenses 2,00,000
Total 16,70,000
Passengers carried were 80% of seating capacity. All buses run on all days of the
month. Each bus made one round trip per day.
Find out the cost per passenger – Kilometer. 3+1+4+2=10
(b) What are the essentials of a good costing system? 5
Answer:
3. (a)
Operating Cost Statement
April 2014
Particulars Amount (`) Amount (`)
(A) Operating & Running Cost:
Diesel Oil & Other Lubricants 3,50,000 3,50,000
(B) Maintenance Charges:
Repair & Maintenance 1,00,000 1,00,000
(C) Fixed Charges:
Wages of Drivers, Conductors, and Cleaner 3,60,000
Investment & Taxation 2,60,000
Interest & Other exp. 2,00,000
Salaries & Office Staff 1,50,000 12,20,000
Total (A+B+C) 16,70,000
*Cost per passenger kilometer:
= ` 16,70,000 ÷ 3,07,200
= ` 5.44
* Passengers kilometers are computed as below:

Number of buses x distance in one round trip x seating capacity available x
percentage of seating capacity actually used x number of days in a month.
= 4 x 40 x 2 x 40 x 80% x 30 days = 3,07,200
(b) Essentials of a good costing system: - For availing of maximum benefits, a good
costing system should possess the following characteristics.
(i) Costing system adopted in any organization should be suitable to its nature and
size of the business and its information needs.
(ii) A costing system should be such that it is economical and the benefits derived
from the same should be more than the cost of operating of the same.
(iii) Costing system should be simple to operate and understand. Unnecessary
complications should be avoided.
(iv) Costing system should ensure proper system of accounting for material, labour
and overheads and there should be proper classification made at the time of
recording of the transaction itself.
(v) Before designing a costing system, need and objectives of the system should be
identified.
(vi) The costing system should ensure that the final aim of ascertaining of cost as
accurately as possible should be achieved.
4. (a) M/s Northern Industries specialises in the manufacture of small capacity motors. The
cost structure of a motor is given below:
Material ` 100
Labour ` 160
Variable overheads 50% of labour cost
Fixed overheads of the company ` 3,00,000 per annum. The sale price of the motor is
` 400 each.
(i) Determine the number of motors that have to be manufactured and sold in a year
in order to break-even.
(ii) How many motors have to be made and sold to make a profit of ` 1,20,000 per
year.
(iii) If the sale price is reduced by ` 20 each, how many motors have to be sold to
break-even? 3+3+4=10
(b) Write short notes on treatment of abnormal loss & abnormal gain in process costing. 5
Answer:
4. Calculation of contribution per motor:
(`)
Selling Price 400
Variable Cost:
Material 100
Labour 160
V Overhead (50% of Labour) 80
Total 340
Contribution 60
(a) Calculation of break even quantity

Fixedover head 3,00,000
= = 5000 Motors
(b) Calculation of Motor to be sold to make a desired profit of ` 1,20,000:

Fixedover head + desired profit 3,00,000 + 1,20,000
Desired Sales = =
4,20,000
= = 7000 Motors
60
(c) Calculation of Break-even point of selling price is reduced by ` 20 each.

Contribution per motor = (400 – 20) – 340
= 380 – 340 = 40
3, 00, 000
Break-even (R) = = 7,500 motors
40
(b) Treatment of abnormal loss & abnormal gain:

Abnormal Loss: If the units lost in the production process are more than the normal
loss, the difference between the two is the abnormal loss. The relevant process
account is credited and abnormal loss account is debited with the abnormal loss
valued at full cost of finished output. The amount realized from sale of scrap of
abnormal loss unit is credited to the abnormal loss account and the balance in the
abnormal loss account is transferred to costing profit and loss account.
Abnormal Gain: If the actual production units are more than the anticipated units
after deducting the normal loss, the difference between the two is known as
abnormal gain. The valuation of abnormal gain is done in the same manner like that
of the abnormal loss. The units and the amount is debited to the relevant process
account and credited to the Abnormal Gain Account.
5. (a) A work order of M/s Sky Ltd. has to pass through four different machines (work order
for 300 units) of which the machine hour rates are:
Machine A – ` 1.50, Machine B – ` 2.50, Machine C – ` 3 and Machine D – ` 3.50.
The following expenses have been incurred on the work order:
Materials – ` 9,000 and wages ` 2,600.
Machine A has been engaged for 250 hours. Machine B for 150 hours. Machine C for
240 hours and Machine D for 140 hours.
After the work order has been completed, material for ` 1,000 was found to be surplus
and returned to stores.
Office-overheads used to be 40% of works cost but due to increase in cost of
administration, there has been a 50% rise in the office overhead expenditure.
Further, it is known that 10% of the production will have to be scrapped as not being
upto the specification and the sale proceeds of the scrapped out put will be only 5%
of the cost of sales.
If the Company wants make a profit of 25% on the total cost, find out selling price of
an unit of the product. 2+4+3+1=10
(b) Define the concept of Integrated Accounting System with its advantages. 5
Answer:
5. (a) Calculation of selling price per unit:

(`) (`)
Materials used (9000 - 1000) 8,000
Direct wages 2,600
Prime cost 10,600
Work over head at machine hour rate
Machine A for 250 hr. @ ` 1.50 375
Machine B for 150 hr. @ ` 2.50 375
Machine C for 240 hr. @ ` 3.00 720
Machine D for 140 hr. @ ` 3.50 490 1,960
12,560
Works cost:
Office overhead (40% of work cost + 50% thereof) 7,536
20,096
Less: Processing scrap (5% of 10% of 20,096) 100
Total cost of work order 19,996
Add: Profit 25% of total cost 4,999
Selling price of 300 units 24,995
Selling price per unit = 24,995 ÷ 300 = ` 83
(b) Integrated Accounting System:

It is such system of accounting whereby cost and financial accounting are kept in the
same set of books. Obviously, then there will be no separate set of books for costing
and financial records. Integrated accounts provide all the information required for
costing as well as financial accounts.
The main advantages of Integrated Accounting System as follows:
(i) The question of reconciling of costing and financial profits does not arise, as such
there is one figure of profit only.
(ii) Due to use of one set of books, there is significant extent of saving in efforts made.
(iii) No delay is caused in obtaining information as it is provided from books of original
entry.
(iv) There is a cross-checking of various figure in cost as well as financial accounts. This
ensures accuracy of figure of cost and financial data.
6. (a) M/s Goodworth Works, engaged 120 employees in the manufacture of product ‘A’ at
standard rate of ` 1 per hour. A 45 hours working week is in operation. During the 4
(four) weeks in February 2013, 13500 units were produced. The standard performance
is set at 90 units per hour. Abnormal idle time due to power failure in each week
amounted to 5 (five) hours per employee.
During the month 100 employees were paid at the standard rate but 20 employees
were paid @ ` 1.20 per hour.
Calculate: (i) wage rate variance;

(ii) labour efficiency variance;
(iii) idle-time variance. 2+3+3+2=10
(b) Both cost reduction and cost control are efficient tools of management, but their
concepts and procedures are widely different, Explain in short. 5
Answer:
6. (a) Actual hours worked:

4 x (45 – 5) x 120 = 19,200 hours.
Quantity Produced
Standard hours = No. of employees x
Std. quantity per hour
13, 500
= 120 x = 18,000 hrs.
90
Wages Rate variance = Actual hours paid x (Standard rate – Actual rate)
= 4 x 45 x 100 (` 1 – ` 1) = Nil
720A
4 x 45 x 20 (` 1 – ` 1.20) =
720A
Labour efficiency variance = Standard rate x (Standard hours – Actual Hours. Paid)
= ` 1 (18000 – 19200) = 1200 A
Idle Time variance = Standard rate x idle hours
= ` 1 x 5 x 4 x 120 = 2400A.
(b) Cost Control vs. Cost Reduction: Both Cost Reduction and Cost Control are efficient
tools of management but their concepts and procedure are widely different. The
differences are summarized below:
(a) cost Control represents efforts (a) Cost Reduction represents the
made towards achieving target or achievement in reduction of cost.
goal.
(b) The process of Cost control is to set (b) Cost Reduction is not concerned with
up a target, ascertain the actual maintenance of performance according
performance and compare it with to standard.
the target, investigate the
variances, and take remedial
measures.
(c) Cost Control assumes the (c) Cost Reduction assumes the existence of
existence of standards of norms concealed potential savings in standards
which are not challenged. or norms which are therefore subjected to
an improvement by bringing out savings.
(d) Cost Control is preventive function. (d) Cost Reduction is a corrective function. It
Costs are optimized before they operates even when an efficient cost
are incurred. control system exists. There is room for
(e) Cost Control lacks dynamic (e) Cost Reduction is a continuous process of
approach 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 to have continual economy in costs.
7. (a) M/s Shram Engineering Ltd. has just received an export order for its product which will
require use of 50% of the factory’s total capacity, which is estimated at 5,00,000 units.
The condition of export order is that it has to be accepted in full only.
The factory is currently operating at 60% level to meet the demand of domestic
market where sale price per unit is ` 6. The export offer is at ` 4.70 per unit, which is
less than the total cost of current production per unit as follows:
`
Direct Material 2.00
Direct Labour 1.50
Variable Expenses 0.50
Fixed overhead 1.00
Total cost 5.00
The company has the following options:

(i) Accept the export order and cut back domestic sales as necessary.
(ii) Remove the capacity constraint by installing necessary balancing equipment
and also by working overtime to meet both domestic and export demand. This
decision will increase fixed overhead by ` 20,000 and additional cost for overtime
work will be for ` 35,000.
You are required to prepare a statement of costs & profits under each of above two
options and advise the management suitably. 2+3+4+1=10
(b) The profit shown by financial accounts and cost accounts differ on account of certain
reasons. State these clearly. 5
Answer:
7. (a) Fixed overhead @ ` 1 per unit

So, Fixed overhead : 60% of 5,00,000 x 1 = ` 3,00,000
Option – I
`
Sales: Export 2,50,000 @ ` 4.70 11,75,000
Domestic 2,50,000 @ ` 6.00 15,00,000
Total Sales Value 26,75,000
Less: Variable cost of sales 5,00,000 x 4 20,00,000

Contribution (S – VC) 6,75,000
Less: Fixed overhead cost 3,00,000
Profit 3,75,000
Option – II
`
Sales: Export 2,50,000 @ ` 4.70 11,75,000
Domestic 3,00,000 @ ` 6.00 18,00,000
Total Sales Value 29,75,000
Less: Variable cost of sales 5,50,000 x 4 22,00,000

Add: Overtime 35,000
22,35,000
Contribution (S – VC) 7,40,000
Less: Fixed overhead 3,00,000
Add: Incremental cost 20,000 3,20,000
Profit 4,20,000
Option – II may be accepted since profit is more. But if the export order is not
repeated in future it may create under utilization of capacity.
(b) Reasons for difference in profits of cost and financial accounts:
1. Items shown in Financial Accounts:

There are a number of items which are included in financial accounts but do not find place
in cost accounts. They may be items of income or expenses, the former increases the profit
and latter reduces the profit.
(i) Purely Financial Charges

 Loss arising from the sale of fixed assets.
 Loss on sale of investments, discount on debentures, etc.
 Interest on bank loan, mortgage and debentures.
 Expenses of companies ‘Share Transfer Office’.
(ii) Appropriation of Profits

 Donations and Charities
 Income Tax
 Dividend Paid
 Transfer to Reserves
(iii) Writing off Intangible and Fictitious Assets

 Goodwill
 Patents & Copyrights
 Advertisement
 Preliminary Expenses
(iv) Pure Financial Incomes

 Rent received or Profit on Sale of Fixed Assets
 Share transfer fee received
 Interest received on Bank Deposits
 Dividend received etc.
2. Items shown only in Cost Accounts:

There are certain items which are included in cost accounts and not in financial accounts.
Such items are very few.
E.g. Interest on capital employed, rent for own premises etc.
3. Over or Under Absorption of Overheads.

Overheads are absorbed in Cost Accounts on a certain predetermined estimated basis and
in Financial Accounts, actual amounts incurred are recorded. If there is any over or under
absorption it leads to difference in the profits of both sets of books.
4. Differences due to different basis of stock valuation and depreciation methods.

(i) VED Analysis
(ii) Non-monetary incentives
(iii) Advantages of job costing.
(iv) Profit planning.
(i) Budget Manual.
Answer:
8. (i) VED Analysis

It is one of the techniques of selective stores control and used suitably in case of
controlling spare parts. Here items are classified into three categories.
‘V’ is the vital items, greatest degree of control is required for these items of materials.
Lack of control of these items may cause heavy loss due to stoppage of production.
‘E’ means essential items. Such items are considered essential for smooth running but
without these the system will not fail.
‘D’ stands for desirable items which do not affect production immediately but
availability of these items will lead to more efficiency and less fatigue.
(ii) Non-monetary Incentive:
These incentive are given in addition to monetary incentive for boosting the moral of
the employees though these incentives do not result in additional remuneration, but
help to improve productivity by boosting the moral of the employees. Some of the
non-monetary incentives are given hereunder:
(a) Free education and training.

(b) Medical benefits.
(c) Superannuation benefits like, pension, gratuity, life assurance scheme.
(d) Sports and recreational facilities, housing facilities, long service awards.
(e) Job security and promotion schemes.
(f) Benevolent fund and welfare fund.
(iii) Advantages of Job costing:

The following are the advantage of job costing:
(a) Accurate information is available regarding the cost of the job completed and
profit generated from the same.
(b) Proper records are maintained regarding the material labour and overhead so
that the costing system is builtup.
(c) Useful cost data is generated from the point of view of management for proper
control and analysis.
(d) Performance analysis with other jobs is possible by comparing the data of various
jobs. But, each job completed may be different from the other.
(e) If standard costing system is in use, the actual cost of job can be compared with
the standard to find out any deviation between the two.
(f) Some jobs are priced on the basis of cost – plus basis. In such cases a profit
margin is added in the cost of the job.
In such situation, a customer will be willing to pay the price, if the cost-data is reliable
job costing helps in maintaining this reliability and the data made available becomes
credible.
(iv) Profit Planning:

Profit planning generally known as budget or plan of operation and may be defined
as the planning of future operations to achieve a defined profit goal. The marginal
costing technique helps to generate data required for profit planning and decision
making. e.g. computation of profit, if there is a change in product mix, impact of
profit if there is a change in the selling price, change in profit if use of the products is
discountinued or if there is an introduction of new product, decision regarding
change in the sale mix are some of the areas of profit planning in which necessary
information can be generated by marginal costing for decision making. The
segregation of costs between fixed and variable is very much useful in profit planning.
(v) Budget Manual

A budget manual as defined by I.C.M.A., ‘a document which sets out the
responsibilities of the person engaged in the routine of and the forms and records
required for budgetary control’.
(a) Objectives and organizational policies.

(b) Internal lines and authorities and responsibilities.
(c) Functions of the budget committee and role of budget officer.
(d) Budget period.
(e) Principal budget factor.
(f) Detailed program of budget preparation
(g) Accounting code and numbering.
(h) Follow-up procedures.
GROUP II
(SYLLABUS 2008)

JUNE 2014


Where necessary, suitable assumptions may be made and disclosed by way of a
Note.
Column I Column II
(i) ABC Analysis (A) Management by Exception
(ii) Split-off Point (B) Supervisor’s Salary
(iii) Flex Method (C) Selective Control of Inventory
(iv) Variance Analysis (D) Measurement of Labour Turn-over
(v) Stepped Cost (E) Tool in Finance Management
(F) Joint Products
(G) Decision Making
(H) Evaluation of a job
(i) Uniform Costing is not a distinct method of Costing.
(ii) Under the Integrated System, records are maintained separately for Cost and
Financial accounts.
(iii) The year-end inventory of Finished Goods under Absorption Costing is valued at
Total Cost.
(iv) Budgeting is one such technique that helps in Planning as well as in Controlling.
(v) Standard Costing is determined even before the commencement of Production.

(i) The Objective of Wage Incentives is to improve ____.
(ii) Equivalent Production represents the Production of a process in terms of_____units.
(iii) In order to protect the contractor from the risk of the rise in the price, an ___clause
may be inserted in the contract.
(iv) The term 'By-Products' is sometimes used synonymously with the term ‘_________’.
(v) In 'make or buy' decisions, it is profitable to buy from outside only when the
Supplier's price is below the firm's own _________ .
(i) The P/V ratio of Delta Ltd., is 50% and the MOS is 40%. The company sold 500 units
for ` 5,00,000. Calculate BEP.
(a) 500 units (c) 400 units
(b) 300 units (d) None of these
(ii) When material used in production being 1,000 units @ ` 5 per unit of which 100
units scraped is sold @ ` 0.50 per unit after incurring additional cost of ` 200, the
effective cost per unit will be
(a) ` 6.00 (c) ` 5.72
(b) ` 5.60 (d) ` 5.90
(iii) A company buys in lots of 6,250 units, which is a 3 months supply. The cost/unit is `
2.40. Each order costs ` 45 and the inventory carrying cost is 15% of the average
inventory value. Calculate the EOQ.
(a) 3,000 units (c) 2,500 units
(b) 2,000 units (d) None of these
(iv) Product Z has a P/V ratio of 28%. Fixed operating costs directly attributable to
Product Z during the Quarter II of the financial year will be ` 2,80,000. Calculate
the Sales Revenue required to achieve a quarterly profit of ` 70,000.
(a) ` 10 Lakhs (c) ` 15 Lakhs
(b) ` 12.50 Lakhs (d) None of these
(v) X executes a piece of work in 120 hrs. as against 150 hrs. allowed to him. His
hourly rate is ` 10 and he gets a Dearness Allowance of ` 30 per day of 8 hrs.
worked in addition to his wages. You are required to calculate the Total Wages
Payable under the Rowan Premium Plan.
(a) ` 1,890 (c) ` 1,900
(b) ` 2,000 (d) None of these
Answer:
1. (a) Matching:
Column I Column II
(i) ABC Analysis (C) Selective Control of Inventory
(ii) Split-off Point (F) Joint Products
(iii) Flux Method (D) Measurement of Labour Turn-over
(iv) Variance Analysis (A) Management by Exception
(v) Stepped Cost (B) Supervisor’s Salary
(b) i. True. It implies the use of same basic costing methods, principles and techniques.
ii. False. Under this system, both financial and costing transactions are recorded in
one integrated set of books.
iii. True. They are absorbed in the product units.
iv. True. It is a technique of cost accounting with the twin objectives of facilitating
planning and ensuring controlling.
v. True. Standard cost is a predetermined and preplanned cost.
(c) i. Productivity
ii. Complete
iii. Escalation
iv. Minor Products
v. Variable cost
(d) i. (b). 300 units

Average sales price = 5,00,000/500 = `1,000/unit
Given MOS = 40%
BES = 100% - 40% = 60% of Sales of `5,00,000 = `3,00,000
BEQ = 3,00,000/1,000 = 300 units
ii. (c) `5.72

Particulars ` Units
Material 1,000 × 5= 5,000 1,000
Less Sales as scrap 0.50 × 100 50 100
4,950 900
Add: rectification cost 200 -
5,150 900
5,150
Cost per Unit = `5.72
900
iii. (c) 2,500 units
A = Annual consumption = 6,250 ×12/3 = 25,000 units, B= ordering cost = `45
C= Inventory carrying cost = `2.40 ×15% = `0.36 per unit per annum.
EOQ = 2AB  2  25,000  45  2,500 units
C 0.36
iv. (b) 12.5 lakhs

Required sales= Desired contribution/p/v ratio
= Fixed Cost + Desired Profit /P/V
= 2,80,000 + 70,000/28% = `12,50,000.
v. (a) ` 1,890
No. of days worked = 120 Hrs 8 Hrs./day = 15 days.
 DA = 15 days × `30 = `450
Rowan Premium Plan Wages=
(Time Taken × Rate/ Hr) +  Time Saved ×Time Taken×Rate Per hour  + DA
 
 Time Allowed 
= (120 Hrs. × `10) + (30/150 ×120 ×`10) + `450
= `1,200 + `240 + `450 = `1,890.
2. (a) M/s. J Stone & Co. Ltd. prepares budgets for a production and sales for 3,00,000 units.
The variable cost is ` 28 per unit and fixed costs are ` 12,00,000. The company fixes its
selling price to fetch a profit of 20% on sales.
You are required to find out the following:
(i) Ascertain Break-even point in units.
(ii) Ascertain P/V ratio.
(iii) If the selling price is reduced by 10%, how will it effect the BEP?
(iv) If the company wants to earn a profit of 10% more than the budgeted profit, what
should be the sales at reduced price? 3+2+2+3=10
(b) What are the limitations of zero-based budgeting? 5
Answer:
2. (a) Variable cost per unit = ` 28 , Fixed Cost per Unit = 12,00,000 ` 4
3,00,000
Total Cost = `(28+4) = ` 32
SP= `28 +`4+ 25% Profit of 32 = 32+8 = `40
(i) BEP = FC/Cont. per unit = 12,00,000/(40-28) = 12,00,000/12 = 1,00,000 units
(ii) P/V Ratio = C/S 12/40 = 30%
(iii) BEP at reduced price 40 – 10% of 40 = 40-4= `36
New cont. per unit = 36 – 28= 8
New BEP = FC/New Cont. per unit = `12,00,000/8 = 1,50,000 units or `54,00,000
Hence BEP will be increased from 1,00,000 units to 1,50,000 units.
(iv) Budgeted profit at reduced price
Required to earn profit = 10% more than budgeted profit = 8 ×3,00,000Units
= 24,00,000 × 110% = 26,40,000
Required Sales = Fixed Cost + Desired Profit / New Contribution per unit
= (12,00,000 + 26,40,000) / `8
= 38,40,000/`8 = 4,80,000 units.
(b) Limitations of Zero based Budgeting. The following are the limitations of Zero Budgeting.
(i) It is a very detailed procedure and naturally time consuming and lot of paper
work is involved in the same.
(ii) Cost involved in preparation and implementation of this system is very high.
(iii) Moral of staff may be very low as they might feel threatened if a particular
activity is discontinued.
(iv) Ranking of activities and decision - making may become subjective at times.
(v) It may not advisable to apply this method when there are non financial
considerations, such as ethical and social responsibility because this will dictate
rejecting a budget claim low ranking projects.
3. (a) Dynamic division of Star Co. Ltd. is a profit centre producing product X, Y and Z which
have external market for sale. The following data are available in the year 2012.
Particulars X Y Z
Market price ` 200 ` 150 ` 130
Variable cost per unit ` 150 ` 130 ` 120
Machine hour per unit required 5 5 5
Product X may be transferred to smart division of the concern and the maximum
quantity is 1,000 units. Expected maximum demand in the external market is:
X 2,000 units
Y 1,500 units
Z 900 units
A total hour available in Dynamic division is 21,000. Product X is also available from
outside market at ` 150. Compute the transfer price of product X and advice.
3+3+3+1=10
(b) State the objectives of Transfer Pricing. 5
Answer:
3. (a) Statements showing ranking of Product on the basis of times being the key factor.
Particulars X Y Z
(`) (`) (`)
Market price 200 150 130
Less: Variable cost 150 130 120
Contribution 50 20 10
Machines Hrs. 5 5 5
Contribution/Mach in Hr. 10 4 2
Ranking I II III
Maximum Demand in units 2,000 1,500 900
Total number of Hour required 10,000 Hr. 7,500 Hr. 4,500 Hr.
Maximum Hr. allotted on the basis of
Ranking (Note – 1) 10,000Hr. 7,500 Hr. 3,500 Hr.
Working No. 1
Particulars Unit Hrs.
X 2,000 10,000
Y 1,500 7,500
Z 700 3,500
(Bal. Fig)
21,000 Hr.
Therefore with the maximum 21,000 available hours. Above units of the product can
be produced.
Here in order to produce 1,000 units of X the sacrifice of product. Y and Z will be
made which are shown below: - Since to produce 1,000 units of X the hour required =
5 × 1,000 = 5,000 Hrs. by sacrifing product of 700 unit of Z which require 700 hr. × 5 =
3,500 Hr. i.e. 5,000 Hr. – 3,500 Hr. = 1,500 Hr. the balance hour may be obtained by
way of sacrifice by product Y for 1,500 300 unit
Thus transfer price of X will be
Variable cost + Opportunity cost
(700 (Z)  2  300(Y) 4)
Or 150 +
1,000
1,400  1,200
= 150 +
1,000
= 150+2.60
= 152.60
Decision: Since the transfer price is `152.60 of product but outside market rate is 1
`150 it is advisable to purchase from outside.
(b) Objectives of Transfer Pricing: -

(i) To evaluate the current performance and profitability of each individual unit. This
is necessary in order to determine whether a particular unit is competitive and
can stand on its working.
(ii) To improve the profit position of the company. Inter company transfer price will
make the units competitive so that it may maximize profit and contribute to the
overall profit of the organization.
(iii) Correct inter-company transfer price will make the cost both units realistic in order
to take decision relating to such problem as make or buy, sell or process further.
Choice between alternative methods of production.
(iv) For accurate estimation of earnings on proposed investment decisions. When
finance is scarce and it is required to determine the allocation of scarce resources

between various divisions of the concern taking into consideration their competing
claims, then this technique is useful.
4. (a) X Co. is currently selling three products A, B and C. Due to recession, the
management is forced to lower selling price of all the three products. In a particular
year, product B is sold below its total cost and the management wants not to
manufacture product B. The following data are available for the year:
Product A Product B Product C
Production and sale 20,000 16,000 12,000
units units units
Selling price per unit ` 25 ` 22 ` 18
Total cost per units ( ` ):
Direct materials 10 9 6
Direct labours 8 7 5
Variable overhead 5 5 3
Fixed overhead (total ` 53,400 apportioned on
the basis of the total sales value) 1.25 1.10 0.9
24.25 22.10 14.90
Advise: The management taking into account the following further information:
(a) Discontinuance of the manufacture of product B will not affect the total fixed cost
i.e. total fixed cost will remain the same.
(b) The capacity released from discontinuance of product B cannot be used for any
other purpose. 4+2+2+2=10
(b) State the uses of Marginal Costing technique in decision making process. 5
Answer:
4. (a)
It appears that total cost of production per unit of product B is `22.10 while its selling
price per unit is `22, thereby incurring a loss `0.10 per unit. On the basis of such results
the management wants to close down the manufacture of product B.
The marginal cost of production per unit of product B is `21 while the selling price per
unit is `22. Thus it contributes `1 per unit towards fixed cost. As fixed cost will not
change on discontinuance of product B, its production should not be discontinued,
A portion of the fixed cost can be recovered by selling product B which in turn will
reduce loss or increase the profit as is evident from the following results:-
Particulars Product Total
A B C
Sales(in units) 20,000 16,000 12000 48000
(`) (`) (`) (`)
Variable Cost :
Direct Materials 2,00,000 1,44,000 72,000 4,16,000
Direct Labours 1,60,000 1,12,000 60,000 3,32,000
variable overhead 1,00,000 80,000 36,000 2,16,000
Total variable cost 4,60,000 3,36,000 1,68,000 9,64,000
Sales 5,00,000 3,52,000 2,16,000 10,68,000
Total Contribution 40,000 16,000 48,000 1,04,000
Less: Fixed Cost 53,400
Total profit 50,600
Total profit if product B is discontinued: -

Particulars (`)
Contribution from product A 40,000
Contribution from Product C 48,000
88,000
Less: Fixed cost 53,400
Total Profit 34,600
It is clear from the above that the total profit will be reduced if product B is
discontinued. Therefore continuance of manufacture of product B is suggested.
(b) Uses of marginal costing in decision making: -

Marginal costing is an important technique of costing. Cost - Volume — Profit helps to
determine the effect of change of volume on profit under the assumption of a linear
cost process relationship . Marginal costing technique helps in forecasting short term
decision e.g.
(i) Fixation of selling price.
(ii) Diversification of products .
(iii) Problems on limiting factors.
(iv) Selection of profitable mix;
(v) Make or buy ;
(vi) Alternative method of manufacture ;
(vii) Exploring new market
(viii) Shutting down or suspending activities.
5. (a) The unit X of P. Co. Ltd. having a strength of 20 workers, planned for 290 working days
per year of 8 hours per day with half an hour break. Based on the earlier year's trend,
it is forecasted that average absenteeism per worker would be 10 days, in addition to
the eligibility of 30 days annual leave. The budgeted overhead related to the unit for
the year amounted of `75,000 and the units follows a system of recovering overhead
on the basis of direct labour hours.
The actual overhead during the year amounted to ` 71,200 and the following details
regarding actual working of the unit are available:
(i) The factory worked 3 extra days to meet the production target but one additional
paid holiday had to be declared.
(ii) There was a severe break down of a major equipment leading to a loss of 350
man-hours.
(iii) The total overtime hours (in addition to 3 extra working days) amounted to 680
hours.
(iv) The actual average absenteeism per worker was 12 days.
From the above data relating to production unit X, work out the under or over
recovery of overhead during the period under review. 2+2+4+2= 10
(b) State the circumstances when direct or chargeable expenses are treated as
overhead. 5
Answer:
5. (a) Computation of predetermined overhead Recovery rate -
A.
Particulars Hrs.
(a) Normal working hours per day = 8 hr. – 1/2hr. break 7.5hrs.
Normal labour hour per year = (290 days ×20 workers × 7.5 hours) 43,500hrs.
Less: Normal idle time:

Leave hours (30 days × 20 ×7.5) 4,500hrs.
Absenteeism hours (10 days ×20 × 7.5) 1,500hrs. 6,000hrs.
Effective labour hour per annum (Budgeted) 37,500hrs.
(b) Budgeted overhead for the year `75,000

Pre determined (Budgeted) Labour hour rate `2 per hr.
(Budgeted overhead/Effective labour hr. i.e. 75,000 ÷ 37,500)
B. computation of actual labour hour for the year
Particulars Hours Hours

Normal labour Hours per year (as above) - 43,500
Add: Hours for 3 extra days (3 days × 20 × 7.5) 450
Overtime hours (given) 680 1,130
44,630
Less: Annual level hours (30 days ×20 × 7.5) 4,500
Less: Absenteeism hours (12 days ×20 ×7.5) 1,800
Less: Loss of hours due to breakdown of equipment. 350
Less: Extra holiday hours (1 days ×20 ×7.5) 150 6,800
Actual Labour Hours worked 37,830
Statement showing over – absorption of overhead:

Actual overhead 71,200
Overhead absorbed (Actual Hours × Predetermined labour hours rate
i.e. 37,830 × `2 75,660
Over – absorbed overhead `4,460
(b) When direct expenses treated as overhead:
If an item of Direct Expenses does not meet the test of materiality, it can be treated
as part of overheads.
Whether an item of expense is to be treated as Direct expense or indirect expense, is
to be determined in terms of materiality of an item. Materiality has not been defined
in the standard. Materiality depends on the size and nature of item judged in
particular circumstances. An item of expense is considered material if its omission
could influence the economic decisions of users of the cost statement. For example
Royalty is a material item of cost. It is to be indicated in the cost statement as a
separate item under the Companies (Cost Audit Report) Rules, 2011 and not
aggregated with production overhead even though it may not be significant in term
of the total cost of the product. In another case, job charges can be identified with
the cost object but not being material and significant in value, it may be treated as
Production overhead.
6. (a) A transport service operated by M/s. Sky Transport Limited with four buses between
two towns which are 50 kilometers apart. Seating capacity of each bus is for 50
passengers. The following details are obtained from their books for March 2014:
Drivers Wages 1,50,000
Wages of Conductors and Cleaners 1,10,000
Diesel Oil Expenses 3,50,000
Lubricant and Other Oil 40,000
Repairs and maintenance 1,00,000
Taxes and Insurance etc. 1,60,000
Interest and Other Expenses 1,50,000
Passengers carried were 75% of seating capacity. All four buses ran on all days of the
month. Each bus made one trip per day.
Find out the cost per passenger kilometer. 3+3+2+2=10
(b) Classify the following overhead items according to function:

(i) Drawing office salaries, (ii) Rent of warehouse, (iii) Remuneration of legal advice,
(iv) Depreciation of delivery van, (v) Salary of Production Manager, (vi) Uniforms of
sanitary workers, (vii) Secondary packing with the name of the company, (viii)
Establishment expenses, (ix) Depreciation of patterns and dies, (x) Wages of normal
idle time. 5
Answer:
6. (a) Computation of Cost per Passengers Kilometer
(`) (`)
(A) Standing Charges:
Drivers Wages 1,50,000
Wages of Conductors & cleaners 1,10,000
Taxes & Insurance etc. 1,60,000
Interest & Other expenses 1,50,000
6,70,000
(B) Running and Maintenance Charges: 1,00,000

Repair & Maintenance 3,50,000
Diesel Oil Expenses 40,000
Lubricant and other oil 2,00,000
(C) Total Cost (A+B) 13,60,000
(D) Cost per passenger Kilometer `3.02

(13,60,000 ÷ 4,50,000 )
Workings:
Passenger Km. is calculated as below
Number of buses × distance in one round Trip × seating capacity available ×
percentage of seating capacity actually used × number of days in a month.
4 business × 50 Km. × 2 ×50 passenger ×75% ×30 days =4,50,000 Passengers km.
(b) (i) Office and administration overhead (ii) Selling & Distribution overhead
(iii) Office and administration overhead, (iv) Selling & Distribution overhead,
(v) Factory overhead, (vi) Factory overhead,
(vii) Selling & distribution overhead (viii) Office and administration overhead
(ix) Factory overhead, (x) Factory overhead.
7. (a) From the following particulars furnished by M/s. Young & Co. Ltd., find out the (i)
Material Cost Variance, (ii) Material Usage Variance, and (iii) Material Price Variance.
Quantity of Material Purchased 3000 units
Value of Materials Purchased ` 12,000
Standard quantity of materials required per tonne of finished product 25 units
Standard Rate of Material ` 2 per unit
Opening Stock of Material Nil
Closing Stock of Material 500 units
Finished products during the period 80 tonnes
4+4+2=10
(b) What are the advantages of cost plus contract? 5
Answer:
7. (a) standard quantity of materials required = 80 ×25 = 2,000 units
Actual Quantity of –
Actual quantity material used = material purchased + Op. Stock – Cl. Stock
= 3,000 + Nil – 500 = 2,500 units.
Standard price = `2 per unit.
`12,000
Actual Price = = `4 per unit
3,000
Cost Variance = Total Standard cost – Total Actual Cost
= (Std. price × Std. Quantity) – (Actual Price × Actual Quantity)
= `2 ×2,000 – `4 ×2,500
= `4,000 – `10,000 = `6,000 (Adverse)
Usage Variance = Standard Price × (Std. Quantity – Actual Quantity)
= `2 × (2,000 – 2,500)
= `2 × (-500) = `1,000 (Adverse)
Price Variance = Actual Quantity × (Std. Price – Actual Price)
= 2,500 × (`2 – `4) = `5,000 (Adverse)
(b) Advantages of Cost Plus contract: -

The advantages of cost plus contract are discussed below: -
(a) It protects the contractor from the risk of fluctuation of price of factor of
production.
(b) Reasonable profit of the contractor is ensured as such profit is added to the actual
cost incurred by him to determine the price of the contract.
(c) The contractor pay a fair price for the work as price is based on actual cost which
can be verified by the contractee from the books and documents of the
contractor.
(d) At the time of unstable conditions this type of contract is most advantageous both
to the contractor and the contractee.
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page
10

(i) Just-in-Time Inventory.
(ii) Retention money in contract costing.
(iii) Limitations of Inter-firm comparison.
(iv) Objectives of uniform costing.
(v) Benefits of Time and Motion study.
Answer:
8. (i) Just – in Time Inventory:
This is the latest trend in Inventory management. This principle envisage that there
should not be any intermediate stage like store-keeping. Material purchased from
supplier should directly go to the assembly line, i.e. to the production department.
There should not be any need of storing the material. The storing cost can be saved to
a great extent by using this technique.
The benefits of just-in time system are as follows :-
(a) Right quantities are purchased at right time.
(b) Cost effective production or operation of correct services is possible.
(c) Inventory carrying costs are eliminated totally.
(d) The stores function is eliminated and hence there is considerable saving in the
stores cost.
(e) Lossess due to breaking, wastage, pilferage etc. are avoided.
(ii) Retention Money in contract costing:
Usually the contractee stipulates in the contract deed that he would withhold a part of
the contract price to be paid at a later stage after completion of the contract. This is to
make sure that the contractor has performed all work relating to contract on the most
satisfactory manner and that no repair work arises within a prescribed time limit. The
amount so withheld by the contractee is known as retention money. It safeguards the
interest of the contractee against the contractor, who may at time perform sub-
standard work and gain there from. This is done on the value of contract completed
and certified by the architect/surveyor appointed by the contractee.The retention
money will be paid once the contract is completed to the customer’s satisfaction.
The main advantage of Retention Money is safe-guarding the contractee against the
default risk of contract.
(iii) The important limitations of Inter- firm comparison can be listed below:
1) Any misuse of the collected information by any influential firm may be
possible.
2) Participant members donot provide timely and accurate data.
3) It is difficult to find out basis of comparison as there are differences in the size
of the firms, their productivity, financial conditions etc. so, many times it
renders meaningless comparison.
4) Lack of uniform costing renders difficulty in comparison.
5) The top management feels secrecy of absolute date as the top preference
and may not render full co- operation.
11
(iv) Objective of uniform costing:

The important objectives of the uniform costing are:
1) To help for meaningful and valid cost comparison among the members.
2) To locate and eliminate in efficiencies in the firm by measuring own efficiency
in terms of industry in general and in terms of close rivals in particular.
3) To stop cut-throat competition and create healthy competition.
4) To improve the productivity of men, machine, production technology and
methodology.
5) To provide uniform data and information to government for different purposes
like tax policy, subsidies, concessions, restrictions etc.
(v) The following are the benefits of Time and Motion study:
(i) Effective utilisation of resources like men, materials, machine and time.
(ii) Helps in assessment of labour.
(iii) Helps in designing incentive system as many of the incentive systems are
based on standard time.
(iv) Preparation of labour budget.
(v) Proper planning of production for preparation of production budget.
(vi) Helps in improving labour productivity by designing best method for
performing a job or process.
(vii) Improvement of work methods.
12
GROUP – II
(SYLLABUS 2008)
SUGGESTED ANSWERS TO QUESTION

DECEMBER 2013
Paper – 8: COST & MANAGEMENT ACCOUNTING
1. (a) Match the statement in Column I with appropriate statement in Column II: 1x5=5
Column I Column II
(i) Machine Hour Rate (A) Control of Inventory

(ii) DISC method (B) Investment Planning
(iii) Batch Costing (C) Time keeping
(iv) Capital Expenditure Budgeting (D) Absorption of factory overhead
(v) FSND Analysis (E) Toy Industry
(b) State whether the following statements are TRUE or FALSE: 1x5 = 5
(i) Cost Accounting is defined as technique and process of ascertaining costs.
(ii) An efficient worker always gets more bonus under Rowan Plan in comparison to Halsey
50% plan.
(iii) Marginal cost includes prime cost plus variable overhead.
(iv) Master budget is prepared generally for long-term.
(v) Average stock level = Average consumption x Average re-order period.
(c) Fill in the blanks: 1x5= 5

(i) Difference between Sales and BEP is known as……………
(ii) ………………is the value of benefit sacrificed in favour of an alternative course of action.
(iii) Cost of abnormal idle time is charged to…………..
(iv)Aggregate of indirect material, indirect Labour and indirect expenses is known

as………..
(v) WIP appears on the credit side of the contract account when the contract is
……………… at end of the accounting period.
(d) In the following cases, one out of four answers is correct. You are required to indicate
the correct answer (= 1 mark) and give workings (= 1 mark): 2x5=10
(i) Total cost of 2000 units is ` 32000 and for 3200 units is `38,000. Fixed cost will be
(a) `32,000
(b) `22,000
(c) `20,000
(d) `6,000
(ii) The BEP is 15,000 units, Fixed Cost is `22,500, variable cost per units `45 the P/V ratio will
be
1
(a) 33 %
3
(b) 55%
(c) 15%
(d) 25%
(iii) The standard and actual data for product 'MNP' are given as under:
Standard 40 hours @ `20 per hour. Actual 45 hours @ `22 per hour, so labour efficiency
variance is
(a) `90 Adverse
(b) ` 100 Favourable
(c) `90 Favourable
(d) ` 100 Adverse
(iv) If the capacity usage ratio of a production department is 90% and activity ratio is 99%,
then efficiency ratio is
(a) 120%
(b) 110%
(c) 90%
(d) 100%
(v) Monthly demand of a product is 500 units. Set up cost per batch is `60 cost of
manufacturing per unit is `20 Rate of Interest is 10% p .a. Based on these parameter, the
Economic Batch Quantity would be
(a) 600 units
(b) 500 units
(c) 1500 units
(d) 1000 units
Answer :
1. (a)
i) Machine Hour Rate (D) Absorption of Factory Overhead
ii) Disc Method (C) Time Keeping
iii) Batch costing (E) Toy Industry
iv) Capital Expenditure Budgeting (B) Investment Planning
v) FSND Analysis (A) Control of Inventory
(b)
i) FALSE. Cost accounting defined as, the technique and process of ascertaining costs.
ii) FALSE. An efficient worker always gets more bonus under Rowan Plan in comparison to
Halsey 50% Plan.
iii) TRUE .Marginal cost includes prime cost plus variable overhead
iv) FALSE. Master budget is prepared generally for long term.
v) FALSE. Average stock level = Average consumption x Average re- order period
(c)
i) Difference between sales and BEP is known as P/V Ratio
ii) Opportunity Cost is the value of benefit sacrificed in favour of an alternative course of
action.
iii) Cost of abnormal idle time is charged to Costing P & L Account.
iv) Aggregate of indirect material, indirect labour and indirect expenses is known as
Overheads.
v) WIP appears on the credit side of the contract account when the contract is
Incomplete at end of the accounting period.
(d) (i) (B) `22,000 :

variable cost per unit = (38,000 – 32,000)/(3200 – 2000)= `5 per unit.
Fixed cost = 32,000 – (2,000 x 5) = `22,000/-
(ii) correct option not given

Contribution per unit = Fixed Cost/ BEP = 22,500/ 15,000 = `1.5
Selling price = Variable cost + Contribution per unit = (45 + 1.5) = `46.50/-
P/V ratio = (Contribution/ Sales) x 100 = (1.5/46.50) x 100 = 3.23%
(iii) (D) `100 Adverse

Labour Efficiency variance = (SH – AH) X SR
= (40 – 45) Hrs. x `20
= (-) 5 Hrs. x `20 = `100 Adverse.
(iv) (B) 110%

Efficiency ratio = Activity ratio/ Capacity
Usage ratio = 99% / 90% = 110%
2DS 2 x 500 x 12 x 60
(v) (A) 600 units EBQ =
1C 0.1 x 20
2. (a) Chandu Ltd. is currently working at its 60% capacity and produces 24,000 units. The unit cost
and selling price for the same level are as follows:
Particulars Per unit (`)
Material 120
Labour 90
Factory overhead (80% variable) 60
Administrative overhead (75% fixed) 40
Selling and distribution overhead (50% variable) 30
Total Cost per unit 340
You are required to prepare a flexible budget and estimate the profit of the company when it
works at 80% and 100% capacities. It is believed that at 80% capacity raw material cost
increases by 3% and selling price falls by 3% whereas at 100% capacity raw material cost
increases by 5% and selling price falls by 10%. 5+5=10
(b) List out ten functional budgets. 5
Answer:
(a)
Flexible Budget
Particulars
Capacity Levels 60% 80% 100%
Output sales (units) 24,000 32,000 40,000
` ` `
Selling price per unit 500 485 450
Sales 1,20,00,000 1,55,20,000 1,80,00,000
Material 28,80,000 39,55,200 50,40,000
Labour 21,60,000 28,80,000 36,00,000
Factory Overheads 14,40,000 18,24,000 22,08,000
Administrative Overheads 9,60,000 10,40,000 11,20,000
Selling and Distribution Overhead 7,20,000 8,40,000 9,60,000
Total Cost 81,60,000 1,05,39,200 1,29,28,000
Profit (Sales - Cost) 38,40,000 49,80,800 50,72,000
Working Notes:
60% 80% 100%

1. Selling Price `500 `500 – `15 ` 500 - `50
= `485 = `450
2. Material per unit `120 `120 + `3.6 `120 + `6
= `123.6 = `126
3. Factory Overheads `11,52,000 `15,36,000 `19,20,000
Variable (per unit) (60 x 80% = `48 p.u.)
Fixed (60 x 20% = 12 x 24,000) 2,88,000 2,88,000 2,88,000
Total 14,40,000 18,24,000 22,08,000
4. Administrative overheads 2,40,000 3,20,000 4,00,000

Variable (per unit) (40 x 25% = `10 p.u.)
Fixed (40 x 75% = 30 x 24,000) 7,20,000 7,20,000 7,20,000
Total 9,60,000 10,40,000 11,20,000
5. Selling and Distribution Overhead 3,60,000 4,80,000 6,00,000

Variable (per unit) (30 x 50% = `15p.u.)
Fixed (30 x 50% = 15 x 24,000) 3,60,000 3,60,000 3,60,000
Total 7,20,000 8,40,000 9,60,000
(b) Following are the some functional budgets:

i) Sales budget
ii) Production Budget,
iii) Raw Material Consumption Budget,
iv) Direct Labour cost Budget,
v) Direct Material Cost Budget,
vi) Factory Overheads Budget,
vii) Office and Administrative Overheads Budget,
viii) Selling and Distribution Overheads Budget,
ix) Production Cost Budget,
x) R&D Budget,
xi) Cash Budget,
xii) Man Power Planning Budget,
xiii) Capital Expenditure Budget.
3. (a) State the differences between Differential costing and Marginal costing. 5
(b) While preparing the estimate of profitability for the coming year, the Sales Manager of a
company indicated sale of the single product manufactures at a sale price of `60 per
unit.
At that price the expected profit will be ` 25,00,000. The variable cost of the product is `20
per unit and the total fixed expenses for the year was estimated at `15,00,000.
The Sales Manager further indicated that if there is a reduction in price, the quantity of
sale will rise in the following manner:
When selling price Quantity of sale
reduced by to increase by
(i) 10% 20%
(ii) 5% 15%
(iii) 2.5% 8%
As a Cost Accountant, you have been asked to evaluate the effect of alternative sale prices
as above and suggest the best alternative to be adopted in the coming year: 10
Answer:
a) The basic differences between Differential Costing and Marginal Costing are :-
i) Differential costing can be used in the case of both absorption costing as well as
marginal costing.
ii) While marginal costing excludes the entire fixed cost, in case of differential cost analysis
some of the relevant fixed costs may be taken into account.
iii) Differential costs are worked out separately for the purpose of analysis but marginal
costing can be built in the account system.
iv) In Marginal costing, margin of contribution and contribution ratios are the main
yardstick for the performance evaluation and for decision making. In Differential Cost
Analysis, Differential costs are compared with the incremental or decremental
revenues as the case may be.
b) Calculation of quantity of sales envisaged in the original proposal: -
`
Expected Profit 25,00,000
Fixed Cost 15,00,000
(`60 – 20 = `40)
No. of units to be sold 1,00,000
Evaluation of the three proposals :-

Selling price Selling price Selling price
reduced by 10% reduced by 5% reduced by 2.5%
qty. of sale qty. of sale qty. of sale
increased by 20% increased by Increased by 8%
15%
Selling price per unit (`) 54 57 58.50
Revised Contribution per unit (`) 34 37 38.50
Revised Quantity (Unit) 1,20,000 1,15,000 1,08,000
Total Contribution (`) 40,80,000 42,55,000 41,58,000
The best option is to reduce selling price by 5% which will result increase in sales by 15%.
4. (a) Discuss the accounting treatment for spoilage and defectives in Cost Accounting. 5
(b) A Company produces two products A & B using similar inputs and facilities.
The availability of Labour hours in a year is 2,35,000 hours and this is considered as the
limiting factor. The following details are available for the two products:
Product A Product B
Selling price per unit (`) 100 50
Direct material per unit (`) 50 11
Direct Labour (`5 per hour) 25 20
Estimated sale demand (Nos.) 10,000 50,000
Other variable costs common to both products are:
(i) Variable production overhead `2 per hour of direct labour.
(ii) Variable selling overhead 10% of sale price.
In the context of the above limiting factor, you are required to calculate a production
plan that will maximize contribution to the company and also workout total contribution
at the level. 10
Answer:
(a) Spoilage is that production which is not technically approved and can not be rectified. It
has a minor value for recovery as scrap. It is generally planned that in a production process
a certain percentage of production will be spoiled due to normal reasons. The loss on
account of spoilage to the extent planned is borne by good units of production.
When the spoilage is more than the planned percentage, it is considered abnormal loss. After
considering value realised as scrap, the amount of such abnormal loss is transferred to
Costing Profit and Loss account.
On the other hand, defective is that production which can be reworked and rectified. In the case
of Defective, like spoilage a certain percentage of production can be predetermined as to
be likely defective. Loss of production due to defectives to the extent it is already planned
is to be borne by good units of production. The loss of production in excess of planned
defectives is to be treated as abnormal loss and transferred to Costing Profit and Loss
Account.
(b) Production plan based on Limiting Factor – 2,35,000 labour hours-
Product A Product B
` per unit ` per unit
Selling Price 100 50
Less: Direct material 50 11
Direct Labour (5hr.) 25 (4 hr.) 20
Variable Production Overhead (5hr.@ `2ph. 10 (4hr.) 8
V. Selling overheads 10% SP 10 5

Total variable cost 95 44
Contribution 5 6
Units * (nos.) 7,000 50,000
Contribution Total ` 35,000 3,00,000 `3,35,000
*Working note :- Ranking (based on contribution per unit of Labour hour)

Contribution `5 `6
Labour hour consumed 5 4
Contribution per unit of labour hr. `1 `1.50
Ranking 2 1
Allocation (units) 7,000 50,000
(Balance) (Max. demand)
Hr. consumed 35,000 2,00,000 2,35,000hr.
5. (a)
The following details relating to the product 'X' during the month of March, 2013 are
available: Standard Cost per unit
Materials 50 kg @ `40 per kg.
Labour 400 hours @ ` 1.00 (one) per hour.
Actual Cost for the month
Material 4,900 kgs @ `42 per kg.
Labour 39,600 hours @ `1.10 per hour.
Actual Production - 100 units
You are required to compute:
(i) Material Price Variance (MPV)
(ii) Material Usage Variance (MUV)
(iii) Material Cost Variance (MCV)
(iv) Labour Rate Variance (LRV)
(v)Labour Efficiency Variance (LEV)
(vi) Labour Cost Variance (LCV)
You are also required to reconcile the standard and the actual cost with the help of such
variances. 6+4=10
(b) Define uniform costing. What are the essential requirements to install a uniform costing
system? 5
Answer:
5. (a) Standard cost (SC)
`
Material 100 x 50kgs = 5,000 kgs. at `40/- 2,00,000
Labour 100 x 400 = 40,000 hours at `1.00 40,000
2,40,000
Actual Cost (AC)

`
Material 4,900kgs @ `42 2,05,800
Labour 39,600hrs. @ `1.10 43,560
2,49,360
Material Variances :
Material Price Variance (MPV) = AQ(SR - AR) = 4900(40 - 42) = 9,800 A

Material Usage Variance (MUV) = SR(SQ - AQ)= 40(5000 - 4900)= 4,000 F
Material Cost Variance(MCV) = SC- AC = 2,00,000 - 2,05,800 = 5,800 A
Labour Variance :
Labour Rate Variance(LRV)= AHP(SR-AR)-39,600(1.00 -1.10)= 3,960 A

Labour Efficiency Variance (LEV) = SR(SH - AHP) =1.00 (40,000 -39,600) = 400 F
Labour Cost Variance(LCV) = SC - AC = 40,000 - 43,560 = 3,560 A
Reconciliation between Standard Cost and Actual Cost :
`
Standard Cost 2,40,000
Add : MPV 9,800 A
MUV 4,000 F
MCV 5,800 A 5,800 A
LRV 3,960 A
LEV 400 F
LCV 3,560 A 3,560 A
Actual Cost 2,49,360
b) Uniform costing simply denotes that a number of undertakings in a same industry may
use same costing principles and procedures to arrive to cost, so that mutual
comparison may be possible among them.
ICMA London defines Uniform Costing as,
“the use by several undertakings of the same costing systems, i.e. the same basic
costing methods and superimposed principles and techniques.”
As per Prof. Glover –
“A system of uniform application of the principles of a costing method agreed upon
and adopted by the whole or majority of the manufacturer or executives, in any
specific industry.”
The success of the uniform costing is based on the following requisites -

1. Mutual belief and understanding –The success or failure of the uniform costing is
entirely depends on mutual trust and confidence among the all participants
members in the system. It is primarily need for this system.
2. Accounting policies and principles –The details of the method of the costing, various
treatments of the cost items, the terminologies to be accepted, principles to be
implemented, etc. are to be agreed and accepted by all members in the system.
3. Classification and codification –The bases of classification of accounts to be used for
recording and reporting, the codification of the accounts used should have to be as
per the need of the object of the uniform costing. It should be acceptable for large
and small units also. It should take care of operational difficulties of all members
accounting traditions and customs.
4. Bases of allocation and apportionment –The difference in cost calculation among
different concerns is basically due to two things – classification of the cost items into
direct and indirect costs and thereafter application of the different bases for
allocation and apportionment of the overheads. The uniform costing is the good
answer for such problem. So carefully equitable bases should be selected and be
applied in cost treatment of the members.
5. Absorption of overheads –The selection of the absorption method for the
departmental overheads and its uniform application is prerequisite of the uniform
costing. It is only capable to give correct comparable cost among the members.
6. Areas to be covered –The areas to be covered under uniform costing depend on the
object and depth of the system. All these areas to report must be ascertained in clear
terms by the all members to avoid further misunderstanding and disputes. Actually
the success of mutual confidence is depending on this factor.
6. (a) In a concern engaged in process industry, four products emerge from a particular process
of operation.
The total cost of input for the period ended 30.9.2013 is `2,53,500. The details of output,
additional costs after split-off point and the sales value of the products are as under:
Products Output (kgs.) Addl. Cost after Sales value

Split- off point (`)
(`)
A 8,000 60,000 1,68,000
B 5,000 10,000 1,10,000
C 3,000 - 60,000
D 4,000 20,000 90,000
If the products are sold at split- off point, without further processing, the sales value
would have been:
Products (`)
A 1,15,000
B 90,000
C 55,000
D 80,000
You are required to prepare a statement of profitability based on the products being sold.
(i) after further processing
(ii) at the split-off point. 5+5=10
(b) Define the terms: Capacity costs and Relevant cost. 2 +3 =5
Answer:
a) (i) Statement showing profitability after further processing :
Products Sales Addl. Equivalent Joint Cost Profit

Value Processing Sales value
At Split – off point
(`) (`) (`) (`) (`)
A 1,68,000 60,000 1,08,000 81,000 27,000
B 1,10,000 10,000 1,00,000 75,000 25,000
C 60,000 - 60,000 45,000 15,000
D 90,000 20,000 70,000 52,500 17,500
4,28,000 90,000 3,38,000 2,53,500 84,500
Joint cost has been apportioned on the basis of equivalent sales value at the split-off point.
(ii) Statement of profitability if sold at split-off point.
Products Sales Value (`) Joint Cost (`) Profit (`)

A 1,15,000 85,743 29,257
B 90,000 67,103 22,897
C 55,000 41,007 13,993
D 80,000 59,647 20,353
3,40,000 2,53,500* 86,500
* Joint cost has been apportioned on the basis of sales value
6. (b)
(i) Capacity Costs: These costs are normally fixed costs. The cost incurred by a company for
providing production, administration and selling and distribution capabilities in order to
perform various functions. Capacity cost includes the cost of plant, machinery and
building for production, warehouses and vehicles for distribution key personnel for
administration. These costs are in the nature long-term costs and are incurred as a
result of planning decisions.
(ii) Relevant cost: It is a cost which is relevant in various decisions of management.
Decision making involves consideration of several alternative courses of action. In this
process, whatever costs are relevant are to be taken into consideration. In other
words, costs which are going to be affected matter the most and these costs are
called relevant costs. Relevant cost is a future cost which is different for different
alternatives. It can also be defined as any cost which is affected by the decision on
hand.
7. (a) Bright Engineering Co. Ltd. manufactures two products X & Y in its factory, similar raw
material and similar production processes are involved in their production.
The following particulars are given for the year 2012.
X Y
No. of units produced 10,000 15,000
No. of orders (total) 30 120
No. of Labour Hours per unit 2 4
Set ups in the year 20 80
Machine hour per unit 6 2
The Co. incurred total over heads of `11,60,000 during the year. These overheads have been
related to Machine activity, set-ups activity and Handling orders activity to the extent of `
9,00,000, `80,000 and `1,80,000 respectively.
You are required to calculate the overhead absorption rate for both the products using
Traditional Costing method and the Activity Based Costing method. 3+3+4=10
7. (b) Discuss the accounting treatment of idle time wages and overtime wages in cost accounts.
2 +3 =5
Answer:
a) Traditional Costing method:
The overheads absorption rate may be calculated on the basis of labour hours used:
Total Labour Hours used X = (10,000 x 2) = 20,000 hrs.

Y= 15,000 x 4 = 60,000 hrs.
80,000 hrs.
Total Overheads = `11,60,000
Overheads absorption rate = (11,60,000 ÷ 80,000) Per hr. `14.50
Overhead absorption rate:
For X = (`14.50 x 2) = `29
Y = (`14.50 x4) = `58
Activity Based Costing Method:
Calculation of overheads absorption rate:
Activities
Machine Set- up Handling Orders
Total overhead `9,00,000 `80,000 `1,80,000
Cost driver Machine. Hrs. No. of Set up No. of Orders
Units of cost Drive X: 60,000 20 30
Y: 30,000 80 120
Total 90,000 100 150
Cost per unit of cost driver `10 `800 `1200
Calculation of overhead Absorption rate (per unit of product):
X Y
Machine Cost 60,000 x 10 `6,00,000 30,000 x 10 = `3,00,000
Set up cost 800 x 20 `16,000 800 x 80 = `64,000
Order cost 1200 x 30 `36,000 1200 x 120 = `1,44,000
Total Overheads `6,52,000 `5,08,000
No. of Units 10,000 15,000
Cost per unit `65.2% `33.87%
b) Accounting treatment of idle time 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.
Abnormal idle time. It is defined as the idle time which arises on account of abnormal
causes ; e.g. strikes, lockouts, floods, major breakdown of machinery, fire etc. such an idle
time is uncontrollable.
The cost of abnormal idle time due to any reason should be charged to Costing Profit & Loss
Account.
Accounting treatment of overtime wages in cost accounts:
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 programme 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.
8. Answer any three of the following: 5x3=15

(a) Inter-process Profits.
(b) Cost Ledger (maintained in a Costing Department).
(c) Benefits of Integrated Accounting system.
(d) Business performance measurement systems.
(e) Budget Manual.
Answer:
a) Inter-process Profits:
The output of one process is transferred to the subsequent process at cost price. However,
sometimes the transfer is made at cost plus certain percentage of profit. This is done when
each process is treated as a profit centre. In such case, the difference between the debit and
credit side of the process account represents profit or loss and is transferred to the P & L
Account. The stocks at the end and at the beginning contain an element of unrealized profits,
which have to be written back in this method. If the profit element contained in the closing
inventory is more than the profit element in the opening inventory, profit will be overstated and
vice versa. Profit is realized only on the goods sold, thus to obtain the actual profit the main
task would be to calculate the profit element contained in the inventories. In order to
compute the profit element, in closing inventory and to obtain the net realized profits for a
period, three columns have to be shown in the Ledger for showing the cost, unrealized profit
and the transfer price.
b)
Cost Ledger maintains the accounts relating to Income and Expenditure. The following
accounts are maintained in this ledger.
(i) Cost Control Accounts -

These accounts are maintained to exercise control over the three subsidiary ledgers
maintained, such as Stores ledger, work-in-progress ledger, finished goods / stock ledger and also
to complete the double entry in cost accounts. The important cost control accounts are as
follows:-
(1) Stores Ledger control account, (2) Work-in-progress ledger control account, (3) Finished
goods ledger control account and (4) General Leger adjustment account.
(ii) Other Accounts -

They include all other impersonal accounts [real as well as nominal] which effect costs,
e.g. wages control account, factory overhead accounts, administration overhead account,
selling & distribution overhead account, cost of sales account, etc. Depending upon the
requirement, the following additional accounts may also be maintained: Overhead
suspense account, Capital orders account, Service orders account.
c)
Integrated accounting system has the following benefits:-
 As only one set of accounting records are kept, the need for reconciliation between the
profits shown by the two records are eliminated.
 The duplication is eliminated, thus the cost is reduced.
 Simple to understand and easy to operate, unnecessary complications are
eliminated.
 Cost data can be available promptly and regularly.
 There is cross - checking of various figures in cost as well as in financial accounts and this
ensures accuracy of cost and financial data.
 Use of mechanized accounting methods can be made.
d) Business performance measurement systems :

Business Performance Measurement (BPM) systems have grown in use and popularity over
the past twenty years. Firms adopt BPM systems for a variety of reasons, but chiefly to improve
control over the firm in ways that traditional accounting systems have not allowed. Several
approaches, or frameworks, for building and managing BPM systems have evolved with the
balanced scorecard as the dominant framework in use today. Despite the growing use of BPM
systems in organizations of all kinds, significant problems cause firms to experience difficulty in
implementing BPM systems. The problems range across a variety of topics : excessive diversity
in the field of study, data quality and information system integration problems, lack of
linkage to strategy, fundamental differences in how a strategy is formulated and executed in
the firm, ill-defined metrics identification processes, high levels of change in BPM systems,
analytical skills challenges, knowledge as a social and non-deterministic phenomenon,
judgment and decision biases (from prospect theory literature) and organizational
defenses that can undermine successful BPM systems use.
Why Measure Business Performance?

Business performance measurement has a variety of uses.
Companies measure business performance as follows:-
To monitor and control

To drive improvement
To maximize the effectiveness of the improvement effort
To achieve alignment with organizational goals and objectives.
To reward and to discipline.
e) Budget Manual: A budget manual is defined by ICMA as „a document which sets out
the responsibilities of the person engaged in, the routine of and the forms and records
required for budgetary control‟.
The budget manual thus is a schedule, document or booklet, which contains different
forms to be used, procedures to be followed, budgeting organization details, and set of
instructions to be followed in the budgeting system. It also lists out details of the
responsibilities of different persons and the managers involved in the process.
A typical budget manual contains the following:
 Objectives and managerial policies of the business concern.
 Internal lines of authorities and responsibilities.
 Functions of the budget committee including the role of budget officer.
 Budget period
 Principal budget factor
 Detailed program of budget preparation
 Accounting codes and numbering
 Follow up procedures.
Advantages of Budget Manual:
 The methods and procedures of budgetary control are standardized.

 It is a formal record defining the functions and responsibilities of each executive.
 There is synchronization of the efforts of all which result in maximization of the profits of
the organization.
 Ambiguity is avoided.
Suggested Answers to Question — CMA
GROUP II
(SYLLABUS 2008)

JUNE 2013
PAPER- 8 : COST AND MANAGEMENT ACCOUNTING

Question No.1 is compulsory. Answer any five from the rest.
Column I Column II
(i) Apportionment of Overheads (A) Job Evaluation
(ii) Equivalent Production (B) Reciprocal Method
(iii) Point Ranking Method (C) Cost Ledger Accounts
(iv) Output Costing (D) Process Costing
(v) Non Integrated Accounts (E) Coal Industry
(b) State whether the following statements are 'True' or 'False': 1x5=5
(i) Fixed cost per unit remains constant irrespective of the number of units of
output.
(ii) An efficient worker always gets more bonus under Rowan Plan than under 50%
Halsey Plan.
(iii) A bin card shows the quantity and value of a stores item.
(iv) Cost Ledger Control Account is maintained in the costing books while General
Ledger Adjustment Account is maintained in the financial books.
(v) In LIFO method of valuing inventory, the company has to suffer loss due to
accumulation of old stocks and consequent spoilage and obsolescence.

(i) _____________centre is defined as a business entity's segment by which both
revenues are earned and costs are incurred.
(ii) __________ Level of stores inventory is maximum usage multiplied by maximum
lead time.
(iii) The most appropriate cost unit for pricing and costing goods transport is
________.
(iv) Where the production is as per the requirements of the customers, ___________is
the method of costing used.
(v) Where there are two raw materials A and B, and the total material mix
variance is favourable and if A has a favourable mix variance, then B will have
a mix variance that is ____________.
(d) In the following cases, one of the four given answers is correct. You are required to
indicate the correct answer (=1 mark) and give brief workings (=1 mark): 2x5=10
(i) T Ltd. uses pre-determined overhead rate of ` 15 per labour hour. The actual
INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 1
labour hours are 5750 and the actual overhead cost is ` 85,000. There is
(a) ` 1,250 over absorption (c) ` 1,000 over absorption
(b) ` 1,250 under absorption (d) ` 1,000 under absorption
(ii) A chemical process has a normal yield of 90%. In a period, 5000 kgs of material
were introduced and there was an abnormal loss of 150 kgs. The quantity of
good production is
(a) 4850 kgs (c) 4500 kgs
(b) 4650 kgs (d) 4350 kgs
(iii) If break-even sales is 60% of current sales and profit is ` 60,000, then the amount
of contribution will be
(a) ` 1,00,000 (c) ` 1,50,000
(b) ` 36,000 (d) ` 1,86,000
(iv) The following information is given for the next year:

Budgeted Sales = 5,00,000 units
Finished Goods: Closing Stock = 1,50,000 units; Opening Stock = 80,000 units.
Equivalent units of WIP: Closing Stock= 60,000 units; Opening Stock = 50,000units.
The number of equivalent units produced would be
(a) 5,80,000 units (c) 5,00,000 units
(b) 5,50,000 units (d) 5,75,000 units
(v) A production process has the capacity to produce either 4,000 units of A or
3,500 units of B or 5,000 units of C. Only one product can be made in a
production period. The contributions per unit of A, B and C are Rs. 10, Rs. 11 and
Rs. 8 respectively. The opportunity cost of A would be
(a) ` 44,000 (c) ` 50,000
(b) ` 38,500 (d) ` 40,000
Answer1.
(a)
Column I Column II
i) (B)
ii) (D)
iii) (A)
iv) (E)
v) (C)
(b)
i) False Fixed costs per unit varies with the change in the volume of
production i.e., fixed cost per unit decreases as the production
increases and vice versa.
Example: Say Fixed Cost Rs. 1,00,000, units produced = 10,000
Fixed Cost / Units Produced = 10.00
Now, If production is increased to 12,000
1,00,000
Fixed Cost / Units Produced = = 8.33
12,000
If Production is decreased = 8,000
1,00,000
Fixed Cost / Units Produced = = 12.50
8,000
ii) False If we have time taken = 140, time allowed = 200, time saved = 60
& Rate = Re. 1
Bonus in,
Halsey Plan = 50% x 60 x 1 = ` 30

Rowan Plan = (60/200) x 140 x 1 = ` 42
Here, Bonus is more in case of Rowan Plan
Again, if we have time taken = 80, time allowed = 200, time

saved = 120, which is more than 50% of time allowed.
Bonus in,
Halsey Plan = 50% x 120 = 60 x Re 1 = ` 60
Rowan Plan = 80/200 x 120 = 48x Re 1 = ` 48
So, Here, Bonus is more in case of Halsey Plan than Rowan Plan.
Hence, an efficient worker always does not gets more bonus

under Rowan Plan than under 50% Halsey Plan.
iii) False A bin card is a quantitative record of receipts issues and closing
balances of each item of stores.
iv) False General ledger Adjustment Account is also known as cost ledger
control account. All transaction of income and expenditure,
which originate in financial accounts, are entered in this account
for eventual transfer to some control account. In Financial A/c
under Self-balancing Ledger we also maintain General Ledger
Adjustment A/c.
v) False LIFO is the method that is applied to value the inventory, it does
not segregate the physical stock with reference to their time of
procurement i.e., the old stock and the new stock. So the given
statement is not true.
(c)
i) Profit
ii) Reorder
iii) Tonne-Kilometer
iv) Job Costing
v) Adverse
Note: For (iii), any measure that represents weight x distance may be considered
right, e.g. pound-mile/ton-km, ton-mile, etc.
(d)
Sl. No. Answer Workings:
i) (a) Absorbed OH = 15 x 5750 = 86250
Actual OH = 85000
Over Absorption = `1250
ii) (d) Normal Loss = 10% of input = 500 kgs.
Abnormal Loss = 150 kgs.
Total Loss = 650 kgs.
Good Production = 5000 – 650 = 4350 kgs.
iii) (c) BEP = 60%
Hence, Margin of Safety = 100 – 60 = 40%
Profit = 60,000 = Contribution on MOS.
Hence, Total Contribution = 60,000 ÷ 40% = ` 1,50,000
iv) (a) Sales + Cl. Stk – Op. Stk = Production
FG: 500000 + 150000 – 80000 = 5,70,000 Units
WIP: + 60,000 – 50,000 = 10,000 Units
Number of equivalent units produced = 5,80,000 Units
v) (d) Opportunity Cost = Cost of next best alternative.
Contribution B: 3500 x 11 = ` 38,500
Contribution C: 5000 x 8 = ` 40,000
Opportunity Cost: ` 40,000
2. (a) The following are figures relating to a factory for two successive years:
Particulars Year I (`) Year II (`)

Sales 10,00,000 16,80,000
Marginal Cost of Sales 6,00,000 8,00,000
Contribution 4,00,000 8,80,000
During Year II, the selling price increased by 20% and the company implemented a
cost reduction programme very aggressively. You are required to analyse the
increase in contribution due to
(i) Increase in selling price
(ii) Increase in sales volume
(iii) Reduction in cost 3+4+3=10
(b) How would you deal with the following in Cost Accounts?
(i) Fringe Benefits;
(ii) Bad Debts. 3+2=5
Answer 2.
(a)
Year I Year II SP Year II Workings Year II Before
increased Actual SP Increase
by 20%
` ` `
Sales 10,00,000 12,00,000 16,80,00 Increase in Sales 14,00,000
0 = ` 4,80,000 (10,00,000+40%)
Loss: Marginal 6,00,000 6,00,000 (16,80,000–12,00,000) 8,40,000
Cost of Sales 8,00,000 Increase in Volume (at year I cost)
` 4,80,000 (6,00,000 + 40%)
= x 100
`12,00,000
Contribution 4,00,000 6,00,000 8,80,000 = 40% 5,60,000
(i) Increase in contribution due to increase in Selling Price=16,80,000–14,00,000=2,80,000

Increase in Volume = 40%
If only volume increased,
Sales value should have been = 14,00,000
Variable cost should have been = 8,40,000
Contribution should have been = 5,60,000
(ii) Increase in Contribution due to volume increase = 5,60,000 – 4,00,000 = ` 1,60,000

Variable cost for the increased volume should have been = 8,40,000
It is actually = 8,00,000
(iii) Increase in Contribution due to Cost Reduction = ` 40,000
Reconciliation `
Contribution in Yr. 1 4,00,000
Increase due to selling price increase 2,80,000
Increase due to increase in volume 1,60,000
Increase due to cost reduction 40,000
Contribution in Yr. II 8,80,000
(b) (i) Fringe Benefits: These benefits are given in the form of overtime, extra-shift duty
allowance, holiday pay, pension facilities etc. there are some non-cash fringe
benefits also like canteen facility etc.
Expenditure incurred on fringe benefits in respect of factory workers should be

treated as factory overheads and apportioned among all the production and
service departments on the basis of number of workers in each department.
Fringe benefits of office and selling & distributing staff should be treated as
administration overheads and selling and distribution overheads respectively
and recovered accordingly.
(ii) Bad Debts: One view is that ‘Bad Debts’ should be excluded from cost
accounts as they are financial losses. Another view is that they should be
treated as part of selling and distribution overheads, especially when they arise
in the normal course of trading. Therefore, bad debts should be treated in cost
accounting as any other selling and distribution expenses.
3. (a) The following information is available in respect of fixed overheads for a production
period:
Overheads Cost Variance ` 1,400 (Adverse)
Overheads Volume Variance ` 1,000 (Adverse)
Budgeted Hours 1200 hours
Budgeted Overheads ` 6,000
Actual rate of recovery of Overhead ` 8 per hour
You are required to compute the following for the given production period:
(i) Actual Overheads Incurred
(ii) Overhead Expenditure Variance
(iii) Overheads Capacity Variance
(iv) Actual Hours for Actual Production 2+2+3+3=10
(b) What do you mean by a joint product and a by-product? How are they different? 5
Answer 3.
(a)
Overheads Cost Variance = ` 1400 (A) (given)
Overheads Volume Variance = ` 1000 (A) (given)
Overheads Expenditure Variance = ` 400 (A) [1400 – 1000]
Budgeted OH = ` 6000 (given)
Actual OH = ` 6400 [400 + 6000]
Actual Hours = Actual OH/Actual Recovery Rate = 6400/8 = 800 Hours

Budgeted OH recovery rate = 6000/1200 = ` 5 Per Hours
Actual Hours – Budgeted Hours = 800 – 1200 = 400 Hours
Overheads Capacity Variance = 400 x 5 = ` 2000(A)
(b)
Joint Products are the result of utilization of the same raw materials and same
processing operations. The processing of a particular raw material may result in the
output of two or more products, e.g. in oil refining, fuel oil, petrol, diesel, kerosene,
lubricating oil are joint products.
A by-product also arises from the same process, but it is a secondary product or a
minor product. Its production is an incidental outcome of the main operation, e.g. in oil
refining, camphor, grease, etc are by-products.
When the degree of economic importance is changed, what was earlier a joint
product can become a by-product and vice versa. When a by-product gains
economic significance, its costs and revenue are treated on par with those of the joint
products, e.g. gas produced in the oil refining process.
Difference Between Joint Products and by-products
Joint Products By-Products

They have almost equal They are not so important as the joint products.
economic importance.
There is an intention to There is no intention. The output is incidental to main
produce each of the joint production.
products.
Joint Costs are By-product inventory is not maintained. Costs/Revenues
apportioned to each of are either written off to P&L A/c or accounted for like
the joint products on a scrap. If they are significant to be consumed captively,
suitable basis. inventory is opportunity cost method is used or they are valued as
maintained standard cost.
4. (a) The following information is given to you from the records of P Ltd. for the year 2013:
Budgeted Sales Value in 2013:
April ` 4,00,000
May ` 4,50,000
June ` 5,20,000
July ` 4,20,000
August ` 4,80,000
Contribution to Sales ratio 40%
Fixed Costs ` 12,00,000 for the whole year 2013, includes
depreciation ` 3,00,000 per annum
Other Information:
40% of each month's sales is produced in the month prior to the sale and 60% in the
month of sale. 50% of the direct materials required for production is purchased in the
month prior to their use in production. The remaining 50% is purchased in the month
of production. Labour costs are paid in the month in which they are incurred and
constitute 30% of the variable costs. 60% of the variable costs are direct material
costs. Suppliers of direct materials are paid in the month after purchase. The
remaining variable costs are variable overhead costs, of which 40% are paid in the
month they are incurred and the balance paid in the next month. Fixed costs are
incurred at a constant rate per month and paid in the month they are incurred. The
expected capital expenditure in June 2013 is ` 1,90,000. The sales receipts budgeted
are as follows:
May 20I3 ` 4,01,700
June 2013 ` 4,50,280
July 20I3 ` 4,25,880
The bank balance on 1.5.2013 is expected to be ` 40,000.
Prepare a month-wise cash budget for P Ltd. for the period May to July 2013. 10
(b) Explain the treatment of profits on incomplete work in contract accounts. 5
Answer4.
(a)
Cash Budget
(Amount in `)
Description May 2013 June 2013 July 2013
Opening Balance 40,000 92,428 (9,860)
Receipts 4,01,700 4,50,280 4,25,880
Total Inflows 4,41,700 5,42,708 4,16,020
Payments of Suppliers 1,61,640 1,72,440 1,66,320
Labour Payments 86,040 86,400 79,920
Variable OH paid 26,592 28,728 27,936
Fixed OH Paid 75,000 75,000 75,000
Capital Expenditure 1,90,000
Total Outflows 3,49,272 5,52,568 3,49,176
Closing Balance 92,428 (9,860) 66,844
Particulars April May June July August

Budgeted Sales 4,00,000 4,50,000 5,20,000 4,20,000 4,80,000
60% of Sales – Current 2,40,000 2,70,000 3,12,000 2,52,000 2,88,000
40% Sales prior month 1,80,000 2,08,000 1,68,000 1,92,000
Sales value of Production 4,20,000 4,78,000 4,80,000 4,44,000
Variable cost of pdn = 60% 2,52,000 2,86,800 2,88,000 2,66,400
Materials required for pdn 60% 1,51,200 1,72,080 1,72,800 1,59,840
50% materials purchased 86,040 86,400 79,920
prior month
50% materials purchased this 75,600 86,040 86,400 79,920
month
Material Purchases 1,61,640 1,72,440 1,66,320 79,920
Payment to suppliers 1,61,640 1,72,440 1,66,320
Labour paid = 30% of V.C. 75,600 86,040 86,400 79,920
Var. OH = 10% of variable cost 25,200 28,680 28,800 26,640
40% of var OH paid this month 10,080 11,472 11,520 10,656
60% var OH paid next month 15,120 17,208 17,280 15,984
Total Variable OH paid 26,592 28,728 27,936
Cash Fixed OH = 9 lacs/12 75,000 75,000 75,000 75,000 75,000
(b) Treatment of profits on incomplete work in contract accounts
(i) In case of contracts which are less than 25% complete, on profits should be taken
into consideration and consequently no credit should be taken to Profit and Loss
Account.
(ii) In case of contracts which are more than 25% complete, but less than 50%
complete, the following method should be used for computing the profit to be
credited to the Profit and Loss Account:-
1
x Notional Profit x Cash Received / Work Certified.
3
Notional Profit is the difference between the value of work certified and cost of
work certified. It is computed in the following manner.
Notional Profit = Value of work certified – [cost of work to date – cost of work
completed but not certified]
(iii) In case of contracts complete between 50% and 90% [more than 50% but less
than 90%] the following method is used for computing the profit to be credited to
the Profit and Loss Account:-
2/3 x Notional Profit x Cash Received / Work Certified
(iv) In case of contracts completed 90% or more than that, it is considered to be

almost complete. In such cases, the estimated total profit is first determined by
deducting the total costs to date and additional expenditure necessary to
complete the contract from the contract price. The portion of profit so arrived is
credited to the Profit and Loss Account by suing any of the following formula:-
Method I – Estimated Profit x Work Certified / Contract Price

Method II – Estimated Profit x Work Certified / Contract Price x Cash Received /
Work Certified or Estimated profit x Cash Received / Contract Price.
5. (a) A company manufactures a product currently utilizing 80% capacity with a turnover
of 32,000 units at a selling price of ` 25 per unit. The variable cost of the product is `
17.5 per unit. Fixed cost amounts to ` 1,50,000 up to 80% of level of output and there
will be an additional cost of a supervisor amounting to ` 20,000 beyond that level.
Calculate:
(i) Activity level (%) at break-even point
(ii) Number of units to be sold to earn a net income of IO% of sales
(iii) Activity level (%) to earn a profit of `1,00,000 10
(b) The product of a manufacturing concern passes through two processes, A and B and
then to finished stock. It is ascertained that in each process, normally 5% of the total
weight is lost and I0% is scrap from which processes A and B realize ` 80 per tonne
and ` 200 per tonne respectively. The following are the figures relating to the
processes:
Particulars Process A Process B

Materials (tones) 1,000 70
Cost of Materials `/tone 125 200
Wages (`) 28,000 10,000
Manufacturing Expenses (`) 8,000 5,250
Output (tones) 830 780
There was no stock or WIP in any process.
Prepare the Process Cost A/c of Process B assuming no inter-process profit

mark-up on transfers to Process B. 5
Answer5.
(a) Selling Price = 25
Variable Cost = 17.5
Contribution = 7.5
(i) BEP (units) = Fixed Cost / Contribution per unit = 1,50,000/7.5 = 20,000 units
80% activity = 32000 units. Hence, 100% level = 32,000/.8 = 40,000 units
Activity Level at BEP = 20,000/40,000 = 50%
(ii) Let x be the number of units to get 10% of sales as profit.

10% * 25 * x = 7.5x – 1,50,000
2.5x = 7.5x – 1,50,000.
5x = 1,50,000
X = 30,000, which is <32,000. Hence no additional supervision.
In the next range,
2.5x = 7.5x – 1,70,000

5x = 1,70,000
X = 1,70,000/5 = 34,000.
At 30,000 units and 34,000 units, there will be 10% of sales as profit.
At 30,000 units, sales = 7,50,000. Profits = 75,000.
At 34,000 units, sales = 8,50,000. Profits = 85,000.
(iii) No. of units to earn a profit of ` 1,00,000

7.5x – 1,50,000 = 1,00,000
X = 2,50,000/7.5 = 33,333 which exceeds 32,000 units.
Hence fixed costs = 1,70,000.
X = 2,70,000/7.5 = 36,000 units.
Activity Level = 36,000/40,000 = 90%
(b) Process B A/c.

Description Quantity Value Description Quantity Value
(Tonnes) (`) (Tonnes) (`)
To Process A A/c 830 1,49,400
To Material 70 14,000 By Normal Loss 45
To Wages 10,000 By Sale of Scrap 90 18,000
To Expenses 5,250 By Finished Stock 780 1,63,800
To Abnormal Gain 15 3,150
915 1,81,800 915 1,81,800
Working Notes:
(1,25,000
28,000 8,000 8,000)
Cost transferred from Process A= X 830 = ` 1,49,400.
850
Input = 830 from Process A and input of 70 = 900 (Tonnes)
Normal loss = 5% of input = 45 (Tonnes)
Scrap = 10% of input = 90 (Tonnes)
Output (given) = 780 (Tonnes)
Hence, Abnormal gain (915 – 900) = 15 (Tonnes)
6. (a) From the following figures, do the reconciliation process to arrive at the net profit or
loss as per financial accounts: 10
Particulars Figures (`)

Net loss as per Costing Records 1,72,400
Works overhead under recovered in Costing 3,120
Administrative overhead recovered in excess in Costing 1,700
Depreciation charged in Financial Records 11,200
Depreciation recovered in Costing 12,500
Interest received not included in Costing 8,000
Obsolescence charged (loss) in Financial Records 5,700
Income Tax provided in Financial Books 40,300
Bank Interest credited in Financial Books 750
Stores Adjustment (credit) in Financial Books 475
Value of Opening Stock in Cost A/cs 52,600
Value of Opening Stock in Financial A/cs 54,000
Value of Closing Stock in Cost A/cs 52,000
Value of Closing Stock in Financial A/cs 49,600

Interest charged in Cost A/cs but not in Financial A/cs 6,000
Preliminary expenses written off in Financial A/cs 800
Provision for Doubtful Debts in Financial A/cs 150
(b) The Production Department of a factory furnishes the following data for the month of
May 2013:
Materials used ` 54,000
Direct Wages ` 45,000
Overheads ` 36,000
Labour hours worked 36000
Machine hours 30000
For a certain job executed by the Department during the period, the following data
is given:
Materials used ` 6,000
Direct Wages ` 5,000
Labour hours worked 4000
Machine hours used 2400
Calculate the cost of the job when the overheads are charged using
(i) Direct Material Cost Rate
(ii) Labour Hour Rate
(iii) Machine Hour Rate 5
Answer 6.
(a) Reconciliation Statement
(Figures in `)
Net loss as per Costing records 1,72,400
Add: (+)
Subtract (-)
Works overhead under recovered in costing 3,120
Administrative overhead recovered in excess 1,700
Depreciation charged in Financial Records 11,200
Depreciation recovered in Costing 12,500
Interest received not included in costing 8,000
Obsolescence charged (loss) in financial records 5,700
Income tax provided in financial books 40,300
Bank Interest credited in Financial books 750
Stores Adjustment (credit) in Financial books 475
Value of opening stock in Cost A/cs 52,600*
Value of opening stock in Financial A/cs 54,000*
Value of closing stock in Cost A/cs 52,000
Value of closing stock in Financial A/cs 49,600*
Interest charged in Cost A/cs but not in Financial A/cs 6,000
Preliminary expenses written off in Financial A/cs 800
Provision for doubtful debts in Financial A/cs 150
Loss as per Financial Accounts 2,08,045
* These figures may ideally be shown as Undervalued Opening Stock 1,400#
Undervalued Closing Stock 2,400#
Alternative Answer
(Figures in `)
Net loss as per costing records (-) 1,72,400
Add:
Administrative overhead recovered in excess 1,700
Depreciation over-recovered in costing (12500-11200) 1,300
Interest received not included in costing 8,000
Bank interest credited in financial books 750
Stores adjustment (credit) in financial books 475
Interest charged in cost A/cs but not in financial A/cs 6,000 (+) 18,225
Less: (-) 1,54,175

Works overhead under-recovered in costing 3,120
Obsolescence charged (loss) in financial records 5,700
Income tax provided in financial books 40,300
Opening stock under-valued in cost A/cs 1,400
(54,000 - 52,600)
Closing stock over-valued in cost A/cs 2,400
(52,000 – 49,600)
Preliminary expenses written off in financial A/cs 800
Provision for doubtful debts in financial A/cs 150 (-) 53,870
Net Loss as per Financial Accounts (-) 2,08,045
Alternative Answer 2
Memorandum Reconciliation Account
(Figures in `)
To Net loss as per costing records 1,72,400 By Administrative overhead 1,700
recovered in excess
To worked overhead under 3,120 By Depreciation over 1,300
recovered in costing recovered in costing (12500
– 11200)
To obsolescence charged (loss) 5,700 By Interest received not 8,000
in financial records included in costing
To income tax provided in 40,300 By Bank interest credited in 750
financial books financial books
To opening stock under valued 1,400 By stores adjustment 475
in cost accounts (54,000 – (credit) in financial books
52,600)
To closing stock over valued in 2,400 By Interest charged in cost 6,000
cost accounts (52,000 – 49,600) A/cs but not in financial
A/cs
To Preliminary expenses written 800
off in financial A/cs
To Provision for doubtful debts in 150 By Net loss as per Financial 2,08,045
financial A/cs Accounts
2,26,270 2,26,270
(b)
Cost Elements Workings (i) DMC Rate (ii) LH Rate (iii) MH Rate
Material Cost 6000 6000 6000
Labour 5000 5000 5000
Overheads 36000/54000x6000 4000
Overheads 36000/36000x4000 4000
Overheads 36000/30000x2400 2880

Cost of the Job 15000 15000
Cost of the Job 13880
7. (a) The following is the summary of receipts and issues of material in a factory for May
2013. Prepare the Stores Ledger (only the quantity and rate columns of the Receipts
and Issues are required) according to
(i) First In First Out Method;
(ii) Last In First Out Method;
(iii) Compute the Inventory Turnover Ratio under both (i) and (ii). Which method
shows a more favourable situation? (For the purpose of this ratio, do not include
shortage value in production cost.) 10
Date: May 2013 Transaction

1 Opening Balance 500 units @ ` 25 per unit
3 Issue 70 units
4 Issue I 00 units
8 Issue 80 units
13 Received from supplier 200 units @ ` 24.5 per unit
14 Returned to Stores 15 units @ ` 24 per unit
16 Issue 180 units
20 Received from supplier 240 units @ ` 24.75 per unit
24 Issue 304 units
25 Received from supplier 320 units @ ` 24·5 per unit
26 Issue 112 units
27 Returned to Stores 12 units @ ` 24.5 per unit
28 Received from supplier 100 units @ ` 25 per unit
There was a shortage of 5 units on the 15th and 8 units on the 27th.
(b) What are the methods of fixing 'Transfer Price' for transfer of a product from one profit
centre to another? 5
Mention one demerit of each method.
Answer7.
(a)
Date Receipts Qty Rate FIFO Method LIFO Method

(units) (`) Issue Qty Rate Issue Qty Rate
(Units) (`) (units) (`)
May 2013
1 Opening 500 25 - - - - -
Balance
3 - - - To Production 70 25 To Production 70 25
13 From Supplier 200 24.5 - - - - - -
14 Returned to stores 15 24 - - - - - -
15 - - - (Shortage) 5 25 (Shortage) 5 24
(180) 170 24.5
20 From Supplier 240 24.75 - - - - - -
24 - - - To Production 65 25 To Production 240 24.75
(304) 200 24.5 (304) 30 24.5
15 24 34 25
24 24.75
25 From supplier 320 24.5
26 - - - To Production 112 24.75 To Production 112 24.5

27 - - - (Shortage) 8 24.75 (Shortage) 8 24.5
27 Returned Stores 12 24.5 - - - - - -
28 From Supplier 100 25 - - - - - -
FIFO Method LIFO Method

Units ` Units `
Total Issued to production 846 21,001 846 20,924
Less: Returns 27 654 27 654
Net Cost of Consumption 819 20,347 819 20,270
Closing inventory value 13,010 13,094
Opening inventory value 12,500 12,500
Total 25,510 25,594
Average inventory at cost = ` 25,510/2 = 12,755 = ` 25,594/2 = 12,797
Material Cost of Sales
Average Inventory
Inventory Turnover Ratio = ` 20,347 ` 20,270
= =
` 12,755 ` 12,797
= 1.595 or 1.6 = 1.584 or 1.6
Working Notes:
(i) Calculation of closing inventory value
96 @ 24.75 = ` 2,376 316 @ 25 = ` 7,900
320 @ 24.5 = 7,840 212 @ 24.5 = 5,194
12 @ 24.5 = 294
100 @ 25 = 2,500
528 ` 13,010 528 ` 13,094
(ii) Calculation of value issued to production

495 @ 25 = ` 12,375 ,284 @ 25 = ` 7,100
200 @ 24.5 = 4,900 10 @ 24 = 240
15 @ 24 = 360 312 @ 24.5 = 7,644
136 @ 24.75 = 3,366 240 @ 24.75 = 5,940
846 ` 21,001 846 ` 20,924
Conclusion: Inventory turnover ratio (1.595) under FIFO method shows a more favourable
situation.
(b)
Transfer Pricing Demerit
Method
A. Cost Based Pricing
(i) Actual Cost (Full Cost Inefficiency of transferor borne by receiving centre
or Variable cost) of
Production Or Actual
Cost Plus Profit
(ii) Standard Cost Standards may be unrealistic or out dated creating
an unfair price for any of the divisions.
(iii) Marginal Cost While fixed costs have to be incurred by
transferring division, the receiving division does not
pay for it.
B.(iv) Market Based Pricing Market price may not be available if product is
made to the specification of the receiving division.
Market prices may be fluctuating.
(v) Negotiated pricing If the negotiating range is not mutually beneficial
to both the divisions, there is clash of interest and

management intervention may become
necessary.
The more powerful division may have its way.
Goal congruence may be sacrificed, adversely
affecting the overall Company profits.
(vi) Opportunity Cost Since this method sets the minimum price for the
Pricing selling division and the minimum price for the
buying division, clash of interest may arise. The
more powerful division may exercise heavier
bargaining power. Company’s overall interest may
be sacrificed or the divisional managers may be
demotivated.
8. Answer any three of the following: 5 X 3=15

(a) What is a principal budget factor? How is it important? List four such factors.
(b) Write a short note on the Activity based Costing System.
(c) Write a short note on 'flexible budget'.
(d) How are normal and abnormal idle time dealt with in Standard Costing in computing
idle time variance?
(e) State the appropriate costing method and cost units for each of the following
industries:
(i) Textiles; (ii) Canteen; (iii) Medicines; (iv) Paper; (v) Oil Refinery.
Answer 8.
(a) A principal budget factor or key factor is also called a constraint, which restricts the other
functions of the business. This factor has to be carefully assessed before any functional budget
is prepared. The factor may vary from business to business or even from year to year for the
same business. For example, if a company can sell 8000 units, but can produce 4000 units, then
production becomes the constraint. If this key factor is given more resources to lessen the
extent of constraint, there will be a relaxation in the other budgets as well.
Examples of some such factors are:

(i) Sales: Consumer demand, shortage of sales staff, inadequate advertising.
(ii) Material: Availability of supply, restrictions on import.
(iii) Labour: Shortage of labour.
(iv) Plant: Availability of capacity, bottlenecks in key resources.
(v) Management: Lack of capital, pricing policy, shortage of efficient executives,
lack of know-how, faulty design of product, etc.
(b) Activity Based Costing (ABC) System: Activities in a process are identified and analysed. It
may be a production or a service. The process of making the product or rendering the service
is broken down into smaller activities for analysis and elimination of wasteful and non-value
added activities. The point of focus for the costs relating to an activity is called an activity pool.
It may consist of different cost elements. All cost elements assigned to an activity is called an
activity pool. Factors that determine the cost of an activity or the resources consumed, varying
which the level of activity itself varies are called activity cost drivers. The cost pool is analysed
according to the cost drivers and the cost of the activity is done as per the resources
consumed. The more detailed the break-up, the greater the accuracy of the cost of the
activity. But depending on the cost and benefit arising out of such detailed analysis, the level
of detail required is determined.
(c) Flexible Budget: If the actual level of activity (e.g. production is 12000 units) varies from the
budgeted level of activity (e.g., 15,000 units), then it would be meaningless to compare various
elements of cost and report the differences. Hence, we redo the figures in the budget,
assuming that the actual level of output was indeed budgeted. Then, the comparison
becomes more meaningful. In other words, we are eliminating the variance arising out of the
difference in the levels of activity. This recomputed meaningful budget is called the flexible
budget. It may also be considered as a series of static budget (fixed budgets) for different
levels of activity. The most important pre-requisite for a flexible budget is the study of the
behaviour of costs and accurate classification into fixed and variable. Sometimes, there is a
semi-fixed cost which has to be broken down into fixed and variable components. The
relevant range over which fixed costs remain fixed is also to be reckoned carefully. Sometimes,
there is a jump in the fixed costs beyond a certain volume or level of activity. A flexible budget,
drawn up after considering these factors to match the actual level of activity will give a
meaningful analysis of the variances which would be realistic and therefore lead to correct
decisions.
(d) In standard costing, standard labour time is fixed after taking into account the normal
idle time. However, if the actual idle time is more than this normal level, it is considered as
abnormal idle time and is therefore shown as variance which is always adverse. It indicates
the loss caused due to abnormal idle time. Since we need to exclude the influence of the
actual rate, we have idle time variance = Abnormal idle time x standard rate.
(e)
Industry Costing Method Cost Unit
(i) Textile Process Costing Per metre (or any unit of length)
(ii) Canteen Operating Costing Per meal/per item
(iii) Medicines Batch Costing Per batch
(iv) Paper Unit Costing/Process Costing Per ream (or any unit of numbers)
(v) Oil Refinery Process Costing Per tonne/per litre (or any unit of
volume or weight)
 Suggested Answers to Question — CMA
GROUP II
(SYLLABUS 2008)

December
2012
Paper- 8 : COST & MANAGEMENT ACCOUNTING
1. (a) Match the statement in Column I with the appropriate statement in Column II: [1×5=5]
Column I Column II
(i) Angle of Incidence (A) Management by exception
(ii) JIT System (B) Profitability Rate
(iii) Pareto Distribution (C) Reverse cost method
(iv) Variance Analysis (D) ABC Analysis
(v) By-Product Cost Accounting (E) Control of Inventory
(b) State whether the following statements are TRUE or FALSE: [1×5=5]
(i) FIFO method of pricing issues of materials is useful during inflationary period.
(ii) Future costs are not relevant in making management decisions.
(iii) Sales Budget is prepared before Production Budget.
(iv) In process costing, a meaningful distinction is made between direct and indirect materials.
(v) Value analysis promotes innovation and creativity.
(c) Fill in the blanks suitably: [1×5=5]

(i) When P/V ratio is 20% and margin of safety ratio is 30%, profit is ____________ % of sales.
(ii) __________ costing is a must for meaningful inter-firm comparison.
(iii) __________ costs are the future costs affected by decision taken.
(iv) In activity based costing, costs are accumulated by ___________.
(v) A ___________ is the notional value at which goods and services are transferred between
divisions in a decentralised organization.
(d) In the following cases, one out of four answers is correct. You are required to indicate the correct
answer (= 1 mark) and give brief workings (= 1mark): [2×5=10]
1
(i) If the ordering cost per order is ` 40, carrying cost is 10% of average inventory value, purchase cost is
` 10 per unit and Economic Order Quantity (EOQ) for the product is 800 units; what is the expected
annual demand for the product?
(a) 8,000 units
(b) 10,000 units
(c) 20,000 units
(d) None of the above
(ii) Depreciation charged in cost accounts is ` 12,500 and in financial books is ` 11,200. What will be the
financial profit/loss, when profit as per cost accounts is ` 5,000?
(a) Profit ` 3,700
(b) Loss ` 3,700
(c) Profit ` 6,300
(d) Loss ` 6,300
(iii) Standard time is 60 hours and guaranteed time rate is ` 50 per hour. Under Rowan Plan, what is the
amount of wages, if job is completed in 48 hours?
(a) ` 2,480
(b) ` 2,680
(c) ` 2,880
(iv) A truck capable of carrying 5 tonnes of goods normally carries 80% of the load on the outward journey
and 40% of the load on inward journey. The journey is 300 kms for one side. It takes two days to
complete the return trip. In a year of 300 days compute the tonnes-km.
(a) 2,70,000
(b) 3,00,000
(c) 3,30,000
(d) 3,50,000
(v) Selling price of a product is ` 5 per unit, variable cost is ` 3 per unit and fixed cost is ` 10,000. Then
B.E. point in units will be:
(a) 10,000
(b) 5,000
(c) 7,500
Answer 1.
(a) (i) (B)
(ii) (E)
(iii) (D)
(iv) (A)
(v) (C)
(b) (i) False.

Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the period,
3
while the cost of inventory is based upon the cost of material bought later in the year. This results in
inventory being valued close to current replacement cost. During periods of inflation, the use of FIFO
will result in the lowest estimate of cost of goods sold among the three approaches, and the highest
net income. As a result, income tax liability is increased. So, FIFO method of pricing issues of materials
is not useful during inflationary period.
(ii) False.
Future costs are relevant for making management decisions because they are subject to management
control. These costs are relevant in cost control, profit projections, appraisal of capital expenditure,
introduction of new products, expansion programmes and pricing etc.
(iii) True.
After having established Sales Budget, Production Budget is attempted to show the quantity to be
produced for achieving sales targets and keeping sufficient inventories. Budgeted production is equal
to projected sales plus closing inventory of finished goods minus opening stock of finished goods. Thus
Production Budget is based on Sales Budget.
(iv) False
The objective of process costing is to find out the cost of each process by identifying the direct costs
with the particular process and apportioning the indirect costs, i.e. overheads to each process on
some suitable basis.
(v) True
One of the objectives of value analysis or function analysis is to improve value by reducing the cost
function relationship of a product which is achieved by eliminating or combining as many secondary
functions as possible.
(c) (i) 6%
(ii) Uniform
(iii) Relevant
(iv) Cost Pool
(v) Transfer Price
(d) (i) (a) 8,000 units

Reason: 800 = (2 × A × 40)/ 10% of 10
Or, A = 8,000
(ii) (c) Profit ` 6,300

Reason: ` 5,000 + (12,500 – 11,200) = ` 6,300
(iii) (c) ` 2,880

Reason: (48 x 50) + (60-48) / 60 x 48 x 50 = ` 2,880
(iv) (a) 2,70,000

Reason: (4 ton x 300km + 2ton x 300km) x 300/2 = 2,70,000 tonnes-km.
(v) (b) 5,000
4
FC 10,000
Reason: BEP (in units) = = = 5,000
CONT PER UNIT 2
Here, FC = Fixed cost;
CONT PER UNIT = Contribution per unit = ` (5 – 3) = ` 2.
2 (a) A Sales Manager of a large Retail chain has to travel extensively to visit the various sales outlets.
Currently he is hiring an airconditioned car to make the trip at a cost of ` 20 per kilometer. The office
is considering the following two alternatives:
(i) to buy a new small car at a cost ` 4.50 lakhs, which will be disposed of at a price of ` 1 lakh after 5
years;
(ii) to buy a second hand car at a cost of ` 4.50 lakhs, which will be disposed of at a price of ` 50,000 after
5 years.
The following further particulars are provided:
For New Car For Old Car
Repairs & Servicing per annum ` 15,000 ` 25,000
Taxes and Insurance per annum ` 6,000 ` 3,500
Petrol consumption per litre 15 km 12 km
Petrol/Diesel price per litre ` 75 ` 48
Currently the Sales Manager has to Travel 12,000 km annually, which is likely to increase to 18,000 km
annually.
You are required to work out which of the three alternative transport will be most economical if the
Sales Manager travels 12,000 km and 18,000 km respectively. [3+3+2+2=10]
(b) List out at least five types of managerial decisions for which “Differential Cost Analysis” is useful. [5]
Answer 2.
(a) Comparative Cost Statement
New Small Car Second Hand Car

` `
Fixed cost per annum
(` 4.50 - ` 1) Lakh 70,000
Depreciation (i)
5 years
80,000
(` 4.50 - ` 0.50) Lakh
(ii)
5 years
15,000 25,000
Repairs & Servicing
6,000 3,500
Taxes & Insurance
91,000 1,08,500
Variable Cost
Petrol/Diesel Cost
` 75
(i) = ` 5 per Km
15
5
` 48
(ii) = ` 4 per Km
12 60,000 48,000
For 12000 km 90,000 72,000
For 18,000 km
Total cost (i) for 12,000 km 1,51,000 1,56,500
(ii) for 18,000 km 1,81,000 1,80,500
For Hired Car (i) for 12,000 km 2,40,000
(ii) for 18,000 km 3,60,000
Hired car is costlier in both cases
For 18,000 km – Second hand car is cheaper
For 12,000 km – New small Car cheaper
(b) Managerial decision of the following type for which differential cost analysis is useful are:
i. Accept or reject an offer at lower than existing price.
ii. Submission of a tender.
iii. Reduce or maintain price.
iv. Retain or replace a machine.
v. Processing a product further or not.
vi. Lease or buy.
vii. Optimizing investment plan out of several plans.
viii. Export sales vs. local sales.
ix. Shut down or continue.
3. (a) XYZ Ltd. manufactures a particular product for which it has the existing capacity to produce 10,000
numbers each month. Currently it produces and sell 7,500 numbers per month at a price of ` 150 each.
The following cost information are provided for the month just concluded for 7500 numbers:
`
Variable Costs –set ups, material handling, quality control 75,000
(150 batches of 50 nos. each x ` 500 per batch)
6,00,000
Fixed manufacturing costs 2,75,000
Fixed marketing costs 1,25,000
10,00,000
The company has received a special one-time order for 2,500 numbers of the product at a special price
of ` 100 each. The company can manufacture the additional quantity of 2,500 numbers in 25 batches of
100 nos. each. You are required to evaluate whether it will be worthwhile for XYZ. Ltd. to accept the
6
special offer to sell additional 2,500 numbers.

If the capacity of the plant was restricted to 9,000 numbers, will it be advisable to accept the special
one-time order for 2,500 number given that the special order must be executed either in full or
rejected totally? [4+3+2+1=10]
(b) Discuss the advantages of standard costing system. [5]
Answer 3.
(a) Working Note
Current Revised Contribution Margin at 9,000
Contribution capacity for 6,500 Nos.
Margin (2,500 Special offer + 6,500 = 9,000 nos.)
for 7,500 Nos. `
`
Sales Revenue @ `150/- 11,25,000 9,75,000
each
Variable costs :
Direct material @ `30 2,25,000 1,95,000
Direct labour @ `40 3,00,000 2,60,000
Setup, Handling, Quality

150 x ` 500 75,000
130 x ` 500 65,000
6,00,000 5,20,000
Contribution Margin 5,25,000 4,55,000
(i) Acceptance of special order (when capacity is 10000)

Additional Revenue ` 2,50,000
(2,500 nos x ` 100 each)
Variable Cost – Material @ ` 30 75,000
- Labour @ ` 40 1,00,000
- Set up etc 25 x ` 500 12,500 ` 1,87,500
Additional Contribution ` 62,500
As there is additional contribution the company may accept the order
(ii) Acceptance of special order (when capacity is restricted to 9,000)
Gain in contribution margin because of order ` 62,500

Loss of contribution margin for reduction in
Sale by 1,000 units (` 5,25,000 – ` 4,55,000) 70,000
Loss 7,500
The special order should not be accepted.
(b) The various advantages of standard costing system are as under:-

(i) It acts as an yardstick to measure operating performance by comparing the variances and also
7
assists in controlling cost by taking corrective steps.

(ii) Prices can be fixed based on standard costs provided there is no wide variation.
(iii) When standard costing is in operation, estimation of product cost for tendering purpose becomes
easy.
(iv) It aids business planning, budgeting and managerial decision making.
(v) Standard costing like product pricing can also be used for inventory valuation, estimation of
profit.
(vi) Standard costing helps in achieving standardization of products, operations and processes.
(vii) Standard Costing facilitates the formulation of production policies for various products by
providing predetermined costs of each element of cost on the basis of engineering specifications.
(viii) It through variance analysis provides a ready means of interpretation of information for the
management for the purpose of control and decision making. Ready reporting enhances the value
of reports.
(ix) It facilitates the use of management by Exception principle since the management need to
concentrate only on the areas and problems which require its attention through study of variance
analysis.
(x) It facilitates co-ordination between different functions such as purchasing, production, selling,
accounting together while fixing standards.
4. (a) Discuss the treatment of overtime wages in Cost Accounts. [5]

(b) New Construction Ltd. is engaged in a contract during the year. Following information is available at
the year end.
Particulars Amount Contract (`)
Contract price 6,00,000
Material delivered direct to site 1,20,000
Material issued from stores 40,000
Materials at site at the end of year 22,000
Direct labour payments 1,40,000
Direct expenses 60,000
Architect’s fees 2,500
Establishment charges 24,500
Plant installed at cost 80,000
Value of plant at the end of year 65,000
Accrued wages at the end of year 10,000
Accrued expenses at the end of year 6,000
Cost of contract not certified by architect 23,000
Value of contract certified by architect 4,20,000
Cash received from contractor 3,78,000
During the period, materials amounting to ` 9,000 have been transferred to another contract to another
place.
You are required to show the Contract A/c and Contractee A/c. [7+3=10]
Answer 4.
8
(a) The following are the accounting treatment of overtime premium in Cost Accounts:
(i) If overtime is resorted to at the desire of the customer, then the overtime premium may be charged
to the job directly.
(ii) If overtime is required to cope with general production programme or for meeting urgent orders,
the overtime premium should be treated as overhead cost of particular department which works
overtime.
(iii) If overtime worked for account of abnormal conditions should be charged to Costing Profit & Loss
Account.
(iv) If overtime is worked in a department to the fault of another department, the overtime premium
should be charged to that other department.
(v) If overtime is required regularly as a policy due to the labour shortage, then it should be treated as
part of costs and hence charged to job at an inflated wage rate.
(vi) If overtime is required to increase the output to meet the additional market demand, then it should
be treated as production overhead.
(b) Contract Account

Dr. Cr.
` `
To Direct Materials delivered 1,20,000 By Material Returned to store 4,000
to site By Material transferred to another Contract 9,000
To, Materials issued from 40,000 By Stock of Material (closing) 22,000
store By, Work certified by architect 4,20,000
To, Wages paid 1,40,000 By, Work not certified by architect 23,000
To, Direct Expense 60,000
To, Depreciation of plant 15,000
(80,000 - 65,000)
To, Architect’s Fees 2,500
To, Establishment charges 24,500
To, Wages accrued 10,000
To, Direct Expenses accrued 6,000
To, Notional Profit c/d 60,000
TOTAL 4,78,000 4,78,000
To , Profit/Loss A/c 36,000 By, Notional Profit b/d 60,000
To, Transfer to Reserve 24,000
Total 60,000 60,000
Work Certified 4,20,000

Degree of completion of contract = x 100 = x 100 = 70%
Contract Pr ice 6,00,000
Amount of profit to be taken to Profit/Loss A/c
⅔ x Notional Profit x Cash Received / work certified
= ⅔ x 60,000 x 3,78,000 / 4,20,000 = ` 36,000
As the Contract is 70% Completed ⅔ of notional profit is taken into consideration.
Contractee Account
` `
9
To value of Work Certified 4,20,000 By Cash Received 3,78,000

By Balance c/d 42,000
4,20,000 4,20,000
5. (a) The share of production and the cost-based fair price computed separately for a common product for
each of the four companies in the same industry are as follows:
Company
A B C D
Share of Production (%) 40 25 20 15
Costs:
Direct materials (`/Unit) 75 90 85 95
Direct Labour (`/Unit) 50 60 70 80
Depreciation (`/Unit) 150 100 80 50
Other Overheads (`/Unit) 150 150 140 120
Total (`/Unit) 425 400 375 345
Fair Price (`/Unit) 740 615 550 460
Capital employed per Unit:

(i) Net Fixed Assets (`/Unit) 1,500 1,000 800 500
(ii) Working Capital (`/Unit) 70 75 75 75
Total (`/Unit) 1,570 1,075 875 575
Required: What should be the uniform price that should be fixed for the common product? [10]
(b) Distinguish between Indifference Point and Break-Even Point with regard to their (i) Formula, (ii)
Definition, and (iii) Purpose. [2+2+1=5]
Answer 5.
(a) Let us assume total production in the industry is 100 units.
Total cost computation Return on Capital Sales Value

(`) (`) (`)
A) 425 x 40 = 17,000 315 x 40 = 12,600 29,600
B) 400 x 25 = 10,000 215 x 25 = 5,375 15,375
C) 375 x 20 = 7,500 175 x 20 = 3,500 11,000
D) 345 x 15 = 5,175 115 x 15 = 1,725 6,900
39,675 23,200 62,875
Return = (Fair price – Cost)

So, for A = (740 – 425) = ` 315, B = ` 215, C = ` 175 & D = ` 115.
These returns are equivalent to 20% on capital.

Return on Capital employed computation:
(Fair Price - Cost) per unit 740 − 425 315
A: = = = 0.2006 i.e., 20.06%
Total Fixed Cost per unit 1570 1570
10
615 − 400 215

B: = = = 0.20 i.e., 20.00%
1075 1075
550 − 375 175
C: = = = 0.20 i.e., 20.00%
875 875
460 − 345 115
D: = = = 0.20 i.e., 20.00%
575 575
∴ Uniform price for the common product for each of the four companies in industry
` 62,875
= = ` 628.75
100
(b) (i) With Regard to Formula:
Difference in Fixed Cost
Indifference point =
Difference in P/V Ratio
Fixed Cost
Break - even Point =
P/V Ratio
(ii) With regard to definition:

Indifference point is the level of sales at which Total Costs and profits of two points are equal.
Break-even Point is the level of sales at which total sales revenue is equal to total costs and there
is neither profit nor loss to the firm. At BEP, total contribution equals fixed cost.
(iii) Purpose:
Indifference point is used to choose between two alternative options of achieving the same
objective – Break-even point is used for profit planning.
6. (a) XYZ Co. Ltd. has two divisions A and B. A sells half of its output on the open market and transfers the rest
to Division B. Costs and revenue during 2011 are:
A B Total
(`) (`) (`)
Sales 18,000 50,000 68,000
Cost of production in the division 26,000 22,000 48,000
Profit during the period 20,000
There are no opening or closing stocks.
You are required to find out the profit of each division and profit of the company using transfer prices:
(i) at cost
(ii) at cost plus 20%
(iii) at cost plus 20% but there is over spending in Division A by ` 4,000. [4+3+3=10]
(b) Job Order Costing method is a Specific Order Costing method.- Explain. [5]
Answer 6.
1
(a) Here x ` 26,000 = ` 13,000 (at cost) will be the transfer sale of Division A and transfer cost of
2
11
Division B.
(i) Transfer sale at cost:
Division A Division B Total

` ` `
Outside Sale 18,000 50,000 68,000
Transfer sale (at cost) 13,000
31,000
Transfer Cost ------- 13,000

Own Cost 26,000 22,000 48,000
Total Cost 26,000 35,000

Profit 5,000 15,000 20,000
The transfer sales of A ` 13,000 and transfer cost of B ` 13,000 cancel each other. The transfer price just
spreads the profit of ` 20,000 between A and B.
(ii) At actual cost plus a martin of 20%

` ` `
Outside Sale 18,000 50,000 68,000
Transfer sale (at cost 20%) 15,600 --- ---
33,600 50,000 68,000
Transfer Cost ------- 15,600 --- ---

Own Cost 26,000 22,000 48,000
Total Cost 26,000 37,600
7,600 12,400 20,000
The effect of this transfer is that profit of Division A has increased by ` 2,600 and that of Division B has
been decreased by ` 2,600.
(iii) At actual cost plus 20% over spending in Division A by ` 4,000

` ` `
Outside Sale 18,000 50,000 68,000
Transfer sale (1.2 x 15,000) 18,000
36,000 50,000 68,000
Transfer Cost 18,000

Own Cost 30,000 22,000 52,000
Total Cost 30,000 40,000

6,000 10,000 16,000
The actual cost of DIV A is ` 30,000 transfer price of
12
1
I. Division A = x ` 30,000 = ` (15,000 + 3,000) = ` 18,000
2
II. Over spending in Division A reduces the profit by ` 4,000 (` 1,600 in Division A and ` 2,400 in
Division B)
(b) Job order costing is defined as the form of specific order costing which applies where work is
undertaken on the basis of customer’s specific requirement and each order is of comparatively short
duration. The work is usually carried out within a factory and moves through processes and operations
as a continuously identifiable unit. The term may be applied to work.
The main features of job costing method can be summarized as follows:-
i. Product is not meant for a mass market.
ii. Production is undertaken after obtaining customers order.
iii. Each order is different and suited to the requirement of the customer.
iv. Job can be identified at each stage of production from start to finish.
v. Production cycle is usually short but a large order may extend beyond one year.
vi. Cost information is collected by job order.
7. (a) A Primary School has a total of 150 students consisting of 5 sections with 30 students per section. The
school plans for outing around the city during the weekend. A private transport operator has come
forward to hire the buses for taking the students. Each bus will have a maximum capacity of 50
(excluding 2 seats reserved for teachers accompanying the students). The school will employ two
teachers for each bus, paying them an allowances of ` 100 per teacher. The operator will hire out the
required number of buses. The following are the other cost estimates:
Breakfast ` 10 per student
Lunch ` 20 per student
Tea ` 6 per student
Entrance fee at zoo ` 4 per student
Rent per bus ` 1,300
Special permit fees ` 100 per bus
Block entrance fees at planetarium ` 500
Prizes to students for games ` 500
No costs are incurred in respect of accompanying teachers (except allowance of ` 100 per teacher).
You are required to prepare a statement showing total cost and also average cost per student for the
levels of 30, 60, 90, 120 and 150 students. [3+3+3+1=10]
(b) Explain what is meant by Cost Apportionment and Cost Absorption. [5]
Answer 7.
(a) Statement showing cost per Student at Various Level
(Amount in `)
1) Particulars variable Cost 30 Students 60 Students 90 Students 120 Students 150 Students
Breakfast (`10 per student) 300 600 900 1,200 1,500
13
Lunch (` 20 per student) 600 1,200 1,800 2,400 3,000

Tea (` 6 per student) 180 360 540 720 900
Entrance Fee (` 4 per 120 240 360 480 600
student)
Total 1,200 2,400 3,600 4,800 6,000
(Amount in `)
2) Semi-variable Cost 30 Students 60 Students 90 Students 120 Students 150 Students
Rent of bus 1,300 2,600 2,600 3,900 3,900
Permit fees 100 200 200 300 300
Allowance to teachers 200 400 400 600 600
Total 1,600 3,200 3,200 4,800 4,800
(Amount in `)
3) Fixed Cost 30 Students 60 Students 90 Students 120 Students 150 Students
Block entrance fees at 500 500 500 500 500
planetarium
Prizes to student for games 500 500 500 500 500

Total 1,000 1,000 1,000 1,000 1,000
4) Total Cost (1+2+3) 3,800 6,600 7,800 10,600 11,800
Average Cost Per Student 126.67 110.00 86.67 88.33 78.67
Average cost per student is minimum at 150 student level, i.e. ` 78.67
(b) Cost Apportionment is the process of charging cost in an equitable proportion to the various cost centers
or departments. This describes the allotment of proportions of overhead to cost center, it is carried out
in respect of those items of cost which cannot be allocated to any specific cost centre. For example,
salary of general manager cannot be allocated wholly to the production departments as he attends in
general to all departments. Therefore, some logical basis is selected for the appointment of such types
of cost over various cost centers departments.
Cost Absorption is the process of absorbing all overhead expenses allocated to or apportioned over
particular cost centre by the units produced. For example, the manufacturing cost of lathe centre is
absorbed by a rate per lathe hour. The purpose behind the absorption is that expenses should be
absorbed in the cost of the output of the given period. For overhead absorption some suitable basis has
to be adopted. The formula used for deciding the rate is as follows :
Overhead Absorption Rate = Overhead Expenses/ Units of the base selected
8. Write short notes on (any three) of the following: [5x3=15]

(a) Benefits of Budgeting;
(b) Difference between marginal costing and absorption costing;
(c) Features of process costing;
(d) Advantages of job costing;
(e) Difference between merit rating and job evaluation.
Answer 8.
(a) Benefits of Budgeting:
(i) Budgeting facilitates planning of various activities and ensures that the working of the organization is
14
systematic and smooth.

(ii) Budgeting helps planning and controlling income and expenditure so as to achieve higher profitability
and also act as a guide for various management decisions.
(iii) Budgeting is a coordinated exercise and hence combines the ideas of different levels of management
in preparation of the same.
(iv) It is an effective means for planning and thus ensures sufficient availability of working capital and
other resources.
(v) As resources are directed to the most productive use, budgeting helps in reducing the wastages and
losses.
(vi) It is extremely necessary to evaluate the actual performance with predetermined parameters.
Budgeting ensures that there are well-defined parameters and thus the performance is evaluated
against these parameters.
(vii) Budget cannot be prepared in isolation and therefore co-ordination among various departments is
facilitated automatically.
(viii) It helps management in planning, co-ordination and control. It also helps to check and evaluate the
performance of each department.
(b) Difference between Marginal Costing and Absorption Costing :
Marginal Costing Absorption Costing
i) This is a technique of costing, which advocates i) Here costs are classified as Direct and
that only variable costs should be taken into Indirect. Direct costs are identifiable with a
consideration while working out the total cost particular product and hence are charged
of production. directly. Indirectly costs are first identified,
apportioned to the cost Centers and then
finally absorbed in the product units on
some suitable basis.
ii) The year-end inventory is valued at variable
ii) The year-end inventory is valued at total
cost only.
cost.
iii) Fixed overheads are not absorbed in the
iii) The Fixed overhead absorption may create
product units and hence there is no question
some problems like under/over absorption.
of under/over absorption.
iv) Due to inventory valuation, which is done
iv) Fixed costs are not taken into consideration
at the full cost, the cost relating to the
while valuing the inventory and hence there is
current period are carried forward to the
no distortion of profits.
subsequent period. This will distort the
cost of production.
v) Only variable costs are charged to the cost of v) The total cost of production is charged to
production and therefore the selling price is the product without distinguishing
also based on any variable costs. This will between the fixed and variable
result in fixation of selling price below the components. The selling price is thus fixed
total costs. There is a possibility of starting a on the basis of total costs.
price war in such situations, which will be
harmful to all the companies in the industry.
(c) Features of Process Costing:

Process Costing is one of the methods of Costing, which is used in those industries where the production
is in continuous process, i.e., the output of one process becomes the input of the subsequent process
and so on. The objective of Process Costing is to find out the cost of each process by identifying the
direct costs with the particulars process and apportioning the indirect cost on some suitable basis. In this
process, all the units coming out as finished products are uniform with each other in all respects. The
individual units lose their identity.
Process Costing is applicable where standardized goods are produced. Industries in which Process
Costing is used are Chemical works, textile, food and Canning factories etc.
15
The features of process costing are as follows :

(i) The production is in continuous flow and is uniform. All units coming out as finished products
are uniform with each other in all respects.
(ii) The unit cost is obtained by dividing the total costs for a particular period by the total output.
This is the average cost of the product units.
(iii) The product is manufactured in a continuous flow and hence individual units lose their identity.
(iv) Cost per process is ascertained and cost of each process is transferred to the subsequent
process until the finished product emerges.
(v) Sometimes each process may be treated as profit centre and so while transferring the costs
from one process to another, a percentage of profit is added in the cost of that process. This is
known as inter process profit and needs to be accounted for in the process cost accounts.
(d) Advantage of Job Costing:

Job Costing is used when single units are produced. The aim of Job Costing is to determine the cost of a
specific job. Jobs are undertaken according to customer’s specifications. The most common use of Job
Costing is by small factories in the Engineering Industry, Printing, Machine-tool manufacturing,
foundries, repair shops, garages and several such other industries where jobs are undertaken according
to the requirements of customers. Job Costing is also suitable for cost plus contracts.
Accurate information is available regarding the cost of job completed and the profits generated from the
same. In this system, Proper records are maintained regarding the material, labour and overheads so
that a costing system is build up. Useful cost data is generated from the point of view of management
for proper control and analysis. In Conclusion, it can be said that Job Costing is an extremely useful
method for computation of the cost of a job. The limitation of time consuming can be removed by
computerization and this can also reduce the complexity of the record keeping.
(e) Difference between Merit Rating and Job Evaluation

(i) Job Evaluation is the assessment of the relative worth of jobs within a business enterprise whereas
Merit Rating is the assessment of the employers with respect of a job.
(ii) Job Evaluation helps in establishing a rational wage and salary structure. On the other hand. Merit
Rating helps in fixing fair wages for each worker in terms of his competence and performance.
(iii) Job Evaluation brings uniformity in wages and salaries while Merit Rating aims at providing a fair
rate of pay for different workers on the basis of their performance.
16
GROUP II
(SYLLABUS 2008)

JUNE 2012

Answer Question No. 1 which is compulsory and any five from the rest.
Q. 1.(a) Match the statement in Column I with the appropriate statement in Column II : [1×5]
Column - I Column - II
(i) Bad Debt is (A) not a distinct method of Cost Accounting
(ii) Flexible Budget is (B) a method used in Construction Industry
(iii) Transfer Price (C) allows goal congruence
(iv) Uniform Costing is (D) a selling overhead
(v) Contract Costing is (E) prepared for different levels of capacity utilization
(b) State whether the following statements are True or False : [1×5]
(i) Standard Costing may not be suitable for small concerns.
(ii) Cost Accounting is a branch of Financial Accounting.
(iii) Labour Turnover is the movement of people out of the organisation.
(iv) Transfer Pricing has significance for the purpose of measurement of divisional performance.
(v) Bincard shows the value of a material at any movement of time.
(c) Fill up the blanks suitably : [1×5]

(i) ABC analysis is made on the basis .
(ii) The success of the costing is based on mutual belief and understanding.
(iii) A Budget is a statement that is always prepared to a defined period of time.
(iv) is the difference between the actual sales and the break-even sales.
(v) Activity Based Costing is based on the identification of .
2  Suggested Answers to Question — CMA
(d) In the following cases one out of four answers is correct. You are required to indicate the correct
answer (1 mark) and give brief workings (1 mark) : [2×5]
(i) After inviting tenders for supply of raw materials, two quotations are received as follows—
Supplier A ` 2·20 per unit, Supplier B ` 2·10 per unit plus ` 2,000 fixed charges irrespective of
the units ordered. The order quantity for which the purchase price per unit will be the same—
(a) 22,000 units (c) 20,000 units
(b) 21,000 units (d) None of the above.
(ii) Normal rate per hour for worker A in a factory is ` 5.40. Standard time per unit for the worker
is one minute. Normal piece rate per unit for the worker is
(a) ` 0·90 (c) ` 0·11
(b) ` 0·09 (d) None of the above
(iii) In case of joint products, the main objective of accounting of the cost is to apportion the joint
costs incurred up to the split off point. For cost apportionment one company has chosen
Physical Quantity Method. Three joint products ‘A’, ‘B’ and ‘C’ are produced in the same process.
Up to the point of split off the total production of A, B and C is 60,000 kg, out of which ‘A’
produces 30,000 kg and joint costs are ` 3,60,000. Joint costs allocated to product A is
(a) ` 1,20,000 (c) ` 60,000
(b) ` 1,80,000 (d) None of the these
(iv) A transport company is running five buses between two towns, which are 50 kms apart. Seating
capacity of each bus is 50 passengers. Actually passengers carried by each bus were 75% of
seating capacity. All buses ran on all days of the month. Each bus made one round trip per day.
Passenger kms are
(a) 2,81,250 (c) 1,87,500
(b) 5,62,500 (d) None of the above
(v) The cost per unit of a product manufactured in a factory amounts to ` 160 (75% variable)
when the production is 10,000 units. When production increases by 25%, the cost of production
will be ` per unit.
(a) ` 145 (c) ` 150
(b) ` 152 (d) ` 140
Answer 1. (a)
(i) — (D) a selling overhead
(ii) — (E) prepared for different levels of capacity utilization
(iii) — (C) allows goal congruence

(iv) — (A) not a distinct method of Cost Accounting
(v) — (B) a method used in construction industry.
Suggested Answers to Question — CMA  3
Answer 1. (b)
(i) True. The process of setting standard is a difficult task, as it requires technical skills. The time and
motion study is required to be undertaken for this purpose. These studies require a lot of
time and money. Small concerns may not be able to afford.
(ii) False. Financial Accounting aims at finding the results of an accounting year in terms of profits or
losses and assets and liabilities. Cost Accounting primarily deals with collection, analysis of
relevant cost data for interpretation and presentation for various problems of management.
(iii) False. Labour turnover is the rate at which an employer gains and losses employees. It is the ratio
of the number of employees that leave a company through attrition, dismissal, or resignation
during a period to the number of employees on payroll during the same period.
(iv) True. ‘Transfer Price’ is that notional value at which goods and services are transferred between
divisions in a decentralized organization. Divisional profitability is measured by fixation of
‘transfer price’ for inter divisional transfers.
(v) False. Bin card is a record of receipt and issue of materials in quantity terms. It shows the balance
of the stock at any moment of time.
Answer 1. (c)
(i) consumption value / value of usage.
(ii) uniform
(iii) prior
(iv) Margin of Safety
(v) activities.
Answer 1. (d)
(i) (c) — 20,000 units.
The difference between the prices quoted by suppliers (` 0.10) while the fixed cost is ` 2000.
So the desired order quantity will be – ` 2,000 ÷ ` 0.10 = 20,000 units
(ii) (b) — ` 0.09
Rate per hour – ` 5.40
Standard Time Per Unit – 1 minute
Standard Units Per Hour – 60
So, Normal piece rate per unit = ` 5.40 ÷ 60 = ` 0.09
(iii) (b) — ` 1,80,000
Product A produces 50% of total production (60000 kg ÷ 30000 kg.).
So according to physical quantity method, 50% of joint costs (` 1,80,000) to be allowed to
product- A.
(iv) (b) — 5,62,500
Passenger – kms. are computed as :
Number of buses × Distance in one round trip × seating capacity × capacity used × number of
75
days in a month × No. of trips = 5 × 100 × 50 × × 30 × 1= 562500 passenger kms.
100
(v) (b) — ` 152

Variable Cost per unit = ` 160 × 75/100 = ` 120
Fixed Cost per unit = (160 – 120) = ` 40
Total fixed cost ` 4,00,000
Cost per unit when production is 12500 unit = ` 120 + 4,00,000 = 120+32 = 152
12,500
` 152 per unit
Q. 2. (a) Gupta Enterprise is operating at 60% capacity level producing and selling 60,000 units @ ` 50 per
unit. Other relevant particulars are as follows :
Cost per unit
Material ` 20
Conversion Cost (variable) ` 10
Dealer’s margin (10% of sales) ` 5
Fixed cost for the period is ` 6,00,000
As there is a stiff competition it is not possible to sell all the products at the existing cost price
structure. The following alternative proposals are considered :
(i) Decrease selling price by 20%
(ii) Increase dealer’s margin from 10% to 20%
Select the better alternative. Also calculate the sales volume required to maintain the same amount
of profit under the alternative which is considered better assuming that volume of sales will not
be a limiting factor under such alternative. Also assume that fixed cost will remain constant.
[3+2+3+2]
(b) State briefly the methods of segregating semi-valiable cost into fixed and variable. [5]
Answer 2. (a)
Computation under existing condition
Contribution per unit = unit selling price – unit variable cost = ` 50 – (` 20 + ` 10 + ` 5 ) = ` 15
Contribution from sale of 60000 units = 60000 × ` 15 = ` 900,000
Profit = Contribution – Fixed Cost = ` 900000 – ` 600000 = ` 300000
Computation under the first alternative
(i.e. when selling price is decreased by 20%)
Revised Selling price per unit. ` 40

(` 50 – 20% of ` 50)
Variable Cost per Unit :
Material ` 20
Conversion Cost ` 10
Dealer Margin (10% of Sales) ` 4 ` 34
Revised Contribution per unit : ` 6
Contribution `6
P/V Ratio = × 100 = ` 40  100 = 15%
Sales
Fixed cost ` 6 ,00 ,000
BEP Sales (in ` ) = P/V Ratio  15 % = ` 40,00,000
Computation under the second alternative

(i.e. when dealer’s margin is increased to 20%)
Selling price per unit ` 50

Material ` 20
Conversion Cost ` 10
Dealer Margin (20% of Sales) ` 10 ` 40
Revised Contribution per unit : ` 10
Contribution  100  ` 10  100

P/V Ratio = = 20%
Sales ` 50
Fixed Cost ` 6,00,000

BEP Sales (in ` ) = P/V Ratio  20% = ` 30,00,000
From the above results, it appears that P/V Ratio under the second alternative is higher than that under the
first alternative. Also break even point under the second alternative sets at a lower level than the level
under the first alternative. Therefore, second alternative i.e. increasing dealer’s margin to 20% is better
both in terms of profitability (as reflected from P/V Ratio) and risk (as reflected from BEP).
If the second alternative is selected, the required volume of sales to maintain the same profit.
(i.e. ` 3,00,000)
Fixed Cost  Profit
= P/V Ratio
6,00,000  3,00,000
=
20%
= ` 45,00,000
Answer 2. (b)
To segregate semi variable cost into fixed cost and variable cost is necessary because with this, we can add
fixed cost proportion in total fixed cost and variable cost proportion in total variable cost. So, with following
method, we can carry out this.
1. Scattergraph Method
With graphical method, we draw the graphic line of semi variable cost by taking output on x axis and total
semi variable cost at y axis and then applying statistical analysis to fit the best line through these points.
This line shows the fixed cost which will not be changed after changing output.
2. High Points and Low Points Method

Under this method, we calculate total sales and total costs at highest level of production. Then we calculate
total sales and total costs at lowest level of production. Because, semi variable cost have both variable and
fixed cost. We first calculate variable rate with following formula:
= Excess of total cost / Excess Sale × 100
This rate shows variable cost of sale value. By using this rate, we also calculate variable cost of sale at
highest level. Now, same variable cost will be deducted from total cost at the highest level of production.
Remainder will be fixed cost.
For example :
Sale at highest level of production 1,40,000
Sale at lowest level of production 80,000
Excess sale = 60,000
Total cost at highest level of production 72,000
Total cost at lowest level of production 60,000
Excess cost = 12,000
Variable cost rate = 12000/60000 × 100 = 20% of sales

Variable cost at highest level of production = 140000 × 20% = 28000
Fixed cost = ` 72000 – ` 28000 = ` 44000
3. Level of Activity Method

In this method, we compare two level of production with the amount of expenses in these levels.
Variable cost will be calculated with following method :
Change in semi variable cost / Change in production volume
4. Least Square Method
This is statistical method in which we use the method for calculating a line of best fit. This method is based
on the linear equation y = mx + c, y is total cost, x is volume of output and c is total fixed cost. By solving this
equation mathematically, we can calculate variable cost(M) at different level of production.
Q. 3. (a) The budgeted overheads and cost driver volumes of Neptune Ltd. are as follows :
Cost Pool Budgeted Cost Driver Budgeted
Overheads Volume
(`)
Material Procurement 2,90,000 No. of Orders 550
Material Handling 1,25,000 No. of Movements 340
Set-up 2,07,500 No. of Set-ups 260
Maintenance 4,85,000 Maintenance Hours 4,200
Quality Control 88,000 No. of Inspection 450
Machinery 3,60,000 No. of M/c hours 12,000
The firm has produced a batch of 2,600 components of AXL-5, its Material cost was ` 1,30,000,
and Labour cost ` 2,45,000.
The usage activities of the said batch are as follows :
Material Orders — 26 Maintainance hours — 690
Material Movements — 18 Inspection — 28
Set-ups — 25 M/c hours — 1,800
Required :
(i) Calculate Cost driver rates that are used for tracing appropriate amount of overheads to the
said batch; and
(ii) Ascertain the cost of batch of components using Activity Based Costing. [5+5]
(b) What are the advantages of Target Costing? [5]
Answer 3. (a)
Budgeted Overheads
(i) Cost driver rates = Budgeted Volume Cost Driver Rate (`)
` 2,90,000
Material Procurement = = 527
550
` 1,25,000
Material handling = = 368
340
` 2,07,500
Set up = = 798
260
` 4,85,000
Maintenance = = 115
4200
` 88,000
Quality Control = = 195
450
` 3,60,000
Machinery = 12,000 = 30
(ii) Cost of Batch of Components : Amount (`)

Particulars
1. Direct Materials (given) 1,30,000
2. Direct Labour (given) 2,45,000
3. Overheads :
`
Material Procurement = 26×` 527 = 13,702
Material handling = 18×` 368 = 6,624
Set up = 25×` 798 = 19,950
Maintanance = 690×` 115 = 79,350
Quality Control = 28 × ` 195 = 5,460
Machinery = 1800×` 30 = 54,000 1,79,086
Total Cost (1+2+3) 5,54,086

Of Batch of 2600 components.
Answer 3. (b)
Advantages of Target Costing are :
• Target costing will provide management methods and analytical techniques for developing products
and services whose costs support strategic objectives for market position and profit.
• Product costs will be defined from the customer’s viewpoint; they will include functionality, cost of
ownership and manner of delivery.
• Target costing is a critical component of product development teams and concurrent engineering.
• Target costing will incorporate as wide a range of costs and life cycle phases for the product or service
as can be logically assigned and organizationally managed.
• Target costing will provide analytical techniques to indicate where cost reduction efforts on parts and
processes will have most impact, and where commonality and simplification can be increased.
• The quality of cost data will be consistent with the responsiveness and level of detail required at various
development phases: The system will use the logic and benefits of activity-based costing.
• The achievement of market-driven product attributes will be protected from cost reduction ambitions.
• Targets for product cost will be set for various life cycle phases in development and production.
• Target costing will aim for appropriate simplicity, relevance and ease of use byproduct development
teams; it avoids unnecessary complexity of language and time consumption in cost assessments.
Q. 4. (a) A company produces three joint products in one common process. The three products can either
be sold at split off point or can be separately processed further after split off point and sold
separately. The estimated data for a particular month are as under :
Product
X Y Z
Selling price at split off point ( `/kg) 100 90 150
Selling price after further processing ( `/kg) 200 190 260
Cost incurred on further processing (`) 3,50,000 4,00,000 2,00,000
Output in kg 3,500 2,500 2,000
Joint costs incurred up to split off point are ` 2,40,000.

Such costs are apportioned to the three products according to quantity of production.
You are required to
(i) Prepare a statement of estimated profit or loss for each product individually and in total for
the company for the month if all three products are (I) sold off at split off point and (2)
further processed.
(ii) Also advice how profit could be maximised by selectively selling the products individually
either at split off point or after further processing. [4+4+2]
(b) What are the problems associated with apportionment of joint cost? [5]
Answer 4. (a)
Profitability after Processing
Product
X Y Z
` ` `
Sales Revenue 7,00,000 4,75,000 5,20,000
Costs :
Pre separation 1,05,000 75,000 60,000
Post separation 3,50,000 4,00,000 2,00,000
Total 4,55,000 4,75,000 2,60,000
Profit / Loss 2,45,000 nil 2,60,000
` 2,40,000
Total Pre separation costs = 8,000 = ` 30 per kg.
Profitability without further processing

Product
X Y Z
` ` `
Sales Revenue 3,50,000 2,25,000 3,00,000
Pre separation cost 1,05,000 75,000 60,000
Profit / Loss 2,45,000 1,50,000 2,40,000
Total ` 6,35,000
Whether to further process or not (product wise position)
Product Incremental Incremental Incremental
Revenue (`) Cost (`) Profit (`)
X 100 × ` 3500 3,50,000 3,50,000 nil
Y 100 × ` 2500 2,50,000 4,00,000 (1,50,000)
Z 110 × ` 2000 2,20,000 2,00,000 20,000
Only product Z should be further processed and sold.

Profit = ` 2,45,000 (X) + ` 1,50,000 (Y) + ` 2,60,000 (Z) = ` 6,55,000.
Answer 4. (b)
(i) Apportionment of joint costs are made on the basis of some assumed parameters. Therefore, the
same need not necessarily be accurate.
(ii) As the apportioned costs do not necessarily relate to activities and use of resources, reliable
decisions can not be made from them.
(iii) Product profitability will vary according to the basis chosen for apportioning joint costs.
Q. 5. (a) Richa Industries engaged in manufacturing Lunch Boxes is working to 50% capacity and produces
15,000 Lunch Boxes per annum. The present cost break up for one Lunch Box is as under :
Material ` 25; Labour ` 20 and Overhead ` 15 (60% variable).
The selling price is ` 75 per Lunch Box.
If it is decided to work at 60% capacity, the selling price falls by 2%. At 80% capacity, the selling
price falls by 10% accompanied by a similar fall in the price of material but labour rate increases
by 10%.
You are required to find out the most profitable capacity level amongst 50%, 60% and 80% capacity
levels and also calculate the Break-even Point (in units) at above said levels. [3+2+5]
(b) Explain briefly to classification of overheads according to behavior. [5]
Answer 5. (a)
Working Notes :
(i) Fixed overheads per unit = 100 – 60 variable = 40% of ` 15= ` 6.

Total fixed overhead = ` 6 ×15,000 units = ` 90,000
(ii) Variable cost per unit:

At 50 % capacity - ` (25 + 20 + 60% of 15) = ` (25 + 20 + 9) = ` 54
At 60% capacity = Same at 50% capacity = ` 54
At 80% capacity = ` (90% of 25 + 110% of 20 + 60% of 15) = ` (22.50 + 22 + 9) = ` 53.50
(iii) Selling price :

At 50% capacity = ` 75
At 60% capacity = ` (98% of 75) = ` 73.50
At 80% capacity = ` (90% of 75) = ` 67.50
Statement showing profit at 50%, 60% & 80% capacity levels
50% 60% 80%

Output and sales (units) 15000 18000 24000
` ` `
Selling price per unit 75 73.50 67.50
Less: variable cost 54 54.00 53.50
Contribution per unit 21 19.50 14.00
Total contribution (units × cost per unit) 315000 351000 336000
Less: Fixed Cost 90000 90000 90000
Profit 225000 261000 246000
Hence, on the basis of above calculations the 60% capacity is most profitable capacity level.
50% capacity 60% capacity 80% capacity
Fixed cost ` 90,000 ` 90,000 ` 90,000

BEP (in units) = Contributi on per unit ` 21 ` 19.50 ` 14
4286 units 4615 units 6429 units
(approx) (approx) (approx)
Answer 5. (b)
Classification of Overheads Based on Behaviour :

This classification is based on the behavior or variability of overheads. Such a classification of overheads is
based on change in the amount of overheads with the change in output. According to this classification,
there are three types of overheads
1. Fixed Overheads
Fixed overheads are also called period costs or capacity costs. Fixed overheads are incurred for creating an
output capacity of the concern for a fixed period of time. They are the costs which remain fixed or constant
in total despite changes in the volume of production or sales. Fixed overheads remain fixed in total up to a
certain level of activity which is known as relevant range of activity but fixed overheads per unit always
vary with the production or sales volume in an opposite direction. For example per unit fixed overheads
decrease with an increase in the production or sales volume and vice verse. Examples of fixed overheads
are rent, salaries, depreciation, interest and legal expenses.
2. Variable Overheads
Variable overheads are those type of overheads which vary positively with the production and sales volume.
Hence they vary directly in proportion to the volume. Variable overheads increase in total with the increase
in volume and vice versa. They, however, remain constant in per unit. Examples of variable overheads are
indirect materials, indirect wages and power expenses.
3. Semi-variable overheads
Semi-variable overheads are neither completely fixed nor variable. Therefore, they are also called semi-
fixed costs. Semi-variable overheads comprise the quantity of both the fixed and variable costs. They vary
disproportionately with the change in the volume of output. They do not vary directly proportion to the
volume. They are the mixed type of overheads. The semi-variable overheads increase with the increase in
output units but not at the same rate. Telephone, electricity, repair and maintenance, heating, lighting,
supervision and inspection, salesmen remuneration are some of the examples of semi-variable or semi-
fixed overheads.
Q. 6. (a) The following information is available from the financial accounts of Madhu Limited for the year
ended 31 st March, 2012 :
`
Direct Material Consumption .. 5,00,000
Direct Wages .. 2,00,000
Factory Expenses .. 7,60,000
Administration Expenses .. 5,00,000
Selling and Distribution Expenses .. 9,60,000
Bad Debts .. 40,000
Preliminary Expenses (Written off) .. 20,000
Legal Charges .. 10,000
Dividend Received .. 1,00,000
Interest on Deposit Received .. 20,000
Sales — 1,20,000 Units . . 14,00,000
Valuation of Closing Stock in financial accounts :
Finished Stock 40,000 Units .. 4,40,000
Work-in-Progress (Valued at factory cost) .. 1,60,000
both in cost and financial accounts
The Cost Accounts reveal :

Direct Material Consumption ` 5,60,000;
Factory overhead recovered at 20% on prime cost;
Administrative overhead at ` 6 per unit of production;
Selling and Distribution overhead at ` 8 per unit sold.

You are required to prepare :
(i) A statement showing costing profit or loss.
(ii) Profit & Loss Account showing profit or loss in Financial Books.
(iii) A statement reconciling the profits disclosed as per cost accounts and as per financial accounts.
[3+3+4]
(b) Explain briefly benefits of Integrated Accounting System. [5]

Answer 6. (a)
(i) Statement showing Costing Profit or Loss.
For the year ending 31st March, 2012
`
Direct Material consumed 5,60,000
Prime Cost 7,60,000
Add: Factory overhead : @ 20% of prime cost 1,52,000
9,12,000
Less: Work – in – progress 1,60,000
Add: Administrative overhead: @ ` 6 per unit of production
(Sales 120000 + Finished Stock 40000 = Production 160000 units) 9,60,000
Cost of production 17,12,000
Less: Closing Stock of finished goods.
1712000  40000
units 4,28,000
160000
Cost of goods sold 12,84,000
Add: Selling & Distribution overhead

@ ` 8 per unit sold: 120000 × 8 9,60,000
Cost of sales 22,44,000
Sales: 120000 units 14,00,000
Loss 8,44,000
(ii) Profit and Loss Account for the year ending 31st March, 2012
(Financial Accounts)
Dr. Cr.
To Direct Material consumption 500000 By Sales : 120000 units 1400000
To Direct Wages 200000 By Dividend Received 100000
To Factory Expenses 760000 By Interest Received 20000
To Administrative Expenses 500000
To Selling & Distribution Exp. 960000 By Work-in-progress 160000
To Bad debts 40000 By Closing stock:
To Preliminary Exp (written off) 20000 40000 units 440000
To Legal charges 10000 By Net loss 870000
2990000 2990000
(iii) Reconciliation Statement as on 31st March, 2012

` `
Profit as per Cost Accounts (-) 8,44,000
Add: Direct Material charged in excess in costs 60,000
- Administrative overhead over-recovered in
Cost Accounts 4,60,000
- Dividend received included in financial books 1,00,000
- Interest received included in financial books 20,000
- Under valuation of closing stock in cost Accounts 12,000 (+) 6,52,000
(-) 1,92,000
Less: Factory overhead under recovered in cost 6,08,000

- Bad debts included only in Financial Books 40,000
- Preliminary exp. included only in Financial Books 20,000
- Legal charges included only in Financial Books 10,000 (-) 6,78,000
Profit as per Financial Accounts (-) 8,70,000
Answer 6. (b)
Benefits from Integrated Accounting System
(i) As only one set of accounting records is kept, the need for reconciliation between the profits shown
by the two records is eliminated.
(ii) The duplication of work is eliminated, thus the operating cost is reduced.
(iii) This system is simple to understand and easy to operate. Unnecessary complications are eliminated.
(iv) Cost data can be available promptly and regularly.
(v) There is a cross checking of various figures in cost as well as financial accounts. This ensures accuracy
of figures of cost and financial data.
(vi) Use of mechanized accounting methods can be made.
Q. 7. (a) From the following particulars furnished by M/s. Starlight Co. Ltd. find out (i) Material cost variance;
(ii) Material usage variance and (iii) Material price variance.
Value of Material purchased .. ` 9,000

Quantity of Material purchased .. 3,000 units
Standard quantity of materials required per tonne of finished product .. 25 units
Standard rate of material .. ` 2 per unit
Opening Stock .. Nil
Closing Stock of material .. 500 units
Finished production during the period .. 80 tonnes.
[4+3+3]
(b) How is profit on incomplete contract considered? [5]

Answer 7. (a)
Standard quantity of materials required = 80 × 25 = 2000 units
Standard Price = ` 2 per Unit
` 9000
Actual Price = = ` 3 per unit
3000
Actual quantity of materials used = (3,000 – 500) units = 2,500 units
Cost variance = Total Standard cost – Total Actual cost.

= (Std Price × Std Qty) – (Actual price × Actual quantity)
= (` 2 × 2000) – (` 3 × 2500)
= ` 4000 – ` 7500
= ` 3500 (Adv)
Usage variance = Std price × (Std Qty – Actual Qty)
= ` 2 × (2000 – 2500)
= ` 2 × (500)
= ` 1000 (Adv)
Price variance = Actual Qty × (Std Price – Actual Price)

= 2500 × (` 2 – ` 3)
= ` 2500 (Adv)
Answer 7. (b)
Profit on incomplete contract :
Notional profit is computed on partly completed contract duly certified and a portion of that profit is
included in the Profit & Loss Account at the year end. The extent of profit to be taken will depend upon the
stage of completion of the contract in the following manner : -
(i) When the contract is not completed beyond 25 % - no profit is considered.
(ii) For contracts completed beyond 50% to 70%
- the following formula is used to compute the profit
Work Certified
(a) Notional profit ×
Total value of Contract
Or
Cash Received
(b) Notional profit ×
Work Certicified
Or
Cash Received
(c) Notional profit ×
Value of the Contract
1 2
Out of the computed profit only rd or rd amount is credited to Profit and Loss Account depending upon
3 3
stage of completion.
(iii) When the contract is nearing completion, an estimated profit is computed by deducting from the
contract price, the cost of work to date and the estimated cost to complete the contract. The
amount so derived to be adjusted for ratio of cash received by the value of the contract.
Q. 8. Write short notes on any three of the following : [5×3]

(a) Absorption Costing;
(b) Cost Control and Cost Reduction;
(c) Zero-Base Budgeting;
(d) Uniform Costing;
(e) Activity Based Costing.
Answer 8. (a)
Absorption Costing : It is defined as the practice of charging all costs, both, variable and fixed, to
operations, processes or products. Under absorption costing, cost of finished goods and work in progress
include both fixed and variable costs. In absorption costing costs are classified as direct and indirect, direct
costs are identifiable with a particular product and hence charged directly. Current year costs to some
extent are carried forward to the subsequent period through closing inventory. In absorption costing,
selling price is fixed on the basis of total costs.
Limitations of Absorption Costing :
(i) A portion of fixed cost is carried over to the subsequent accounting period as part of closing stock.
This is an unsound practice because costs pertaining to a period should not be allowed to be vitiated
by the inclusion of costs pertaining to the previous and vice versa.
(ii) Absorption costing is dependent on the levels of output which may vary from period to period, and
consequently cost per unit changes due to the existence of fixed overhead. Unless fixed overhead
rate is based on normal capaicity, such changed costs are not helpful for the purposes of comparison
and control.
Answer 8. (b)
(i) It is regulation of costs of operating a (i) It is a planned and positive approach to reducing
business and is concerned with keeping expenditure. It starts with an assumption that current
costs within acceptable limits. or planned costs levels are too high and looks ways of
reducing them without reducing effectiveness.
(ii) It is preventive function (ii) It is corrective function.
(iii) Emphasis is on present and past (iii) Emphasis is on present and future cost.
behaviour of cost.
(iv) Involves setting standards, analyzing (iv) Challenges the cost standards itself and tries to
variances and taking corrective actions. reduce cost on continuous basis.
(v) Limited to areas where standards can be (v) Can be applied to each and every area of business.
set.
(vi) Aims at lowest possible cost under given (vi) Calls for change in conditions if that leads to lowering
conditions. in cost.
(vii) It is on going or never ending process (vii) The programme can be finished.
Answer 8. (c)
Zero Base Budgeting : Zero-based budgeting is an approach to planning and decision-making which
reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental
managers justify only variances versus past years, based on the assumption that the “baseline” is
automatically approved. By contrast, in zero-based budgeting, every line item of the budget must be
approved, rather than only changes. During the review process, no reference is made to the previous level
of expenditure. Zero-based budgeting requires the budget request be re-evaluated thoroughly, starting
from the zero-base. This process is independent on whether the total budget or specific line items are
increasing or decreasing.
Zero-based budgeting starts from a “zero base” and every function within an organization is analyzed for
its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of
whether the budget is higher or lower than the previous one.
ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific
functional areas of the organization, where costs can be first grouped, then measured against previous
results and current expectations.
Zero-based budgeting can lower costs by avoiding blanket increases or decreases to a prior period’s budget.
It is, however, a time-consuming process that takes much longer than traditional, cost-based budgeting.
The practice also favours areas that achieve direct revenues or production; their contributions are more
easily justified than in departments such as client service and research and development.
Answer 8. (d)
Uniform Costing : It has been defined by the Institute of Cost and Works Accountants of England as “The
use by several undertaking of the same costing principles and/or practices”. Thus when a number of
undertaking, whether under the same management or not, decide to adhere to one set of accepted
costing principles especially in matters where there can be two opinions — they are said to be following
uniform costing. It makes inter firm comparison easy and, of course, one of the aims of uniform costing is
to introduce inter-firm comparison. Use of uniform costing is comparatively easy among concerns
manufacturing the same type of products.
A great deal of spade work is required to be done before the introduction of uniform costing in an industry.
Its introduction helps the firms to submit reliable cost data to price fixing bodies to determine the average
cost and fixing the fair selling prices of various products. It serves as a pre-requisite to cost audit.
The essential requisites for the installation of uniform costing system
A successful system of uniform costing requires the following essential requisites for its installation :
1. The firms in the industry should be willing to share /furnish relevant data /information.
2. A spirit of co-operation and mutual trust should prevail among the participating firms.
3. Mutual exchange of ideas, methods used, special achievements made, research and know-how etc.
should be frequent.
4. Bigger firms should take the lead towards sharing their experience and know-how with the smaller
firms to enable the latter to improve their performance.
5. Uniformity must be established with regard to several points before the introduction of uniform
costing in an industry. In fact, uniformity should be with regard to following points :
(a) Size of the various units covered by uniform costing.
(b) Production methods.

(c) Accounting methods, principles and procedures used.
Answer 8. (e)
Activity Based Costing :
CIMA defines Activity Based Costing as, ‘cost attribution to cost units on the basis of benefit received from
indirect activities e.g. ordering, setting up, assuring quality.’ Activity Based Costing is, thus ‘the collection of
financial and operational performance information tracing the significant activities of the firm to product
costs.’
The following are the objectives of Activities Based Costing.
• To remove the distortions in computation of total costs as seen in the traditional costing system and
bring more accuracy in the computation of costs of products and servies.
• To help in decision making by accurately computing the costs of products and services.
• To identify various activities in the production process and further identify the value adding activities.
• To distribute overheads on the basis of activities.
• To focus on high cost activities.
• To identify the opportunities for improvement and reduction of costs.
• To eliminate non value adding activities.
The following steps are required to implement Activity Based costing.

(i) Understanding and analyzing manufacturing process.
(ii) Study of activities involved.
(iii) To assign total costs to an activity in Activity cost pool.
(iv) To ascertain Cost Driver to ascertain which activity generates what cost.
(v) To identify costs to products.
As noted from above, Activity Based costing is a complex system and requires lot of records and
calculation.
GROUP II
(SYLLABUS 2008)

DECEMBER 2011
Paper-8 : COST AND MANAGEMENT ACCOUNTING

Answer Question No. 1 which is compulsory and any five questions from the rest.
Q. 1.(a) Match the statement in Column I with the appropriate statement in Column II : [1×5]
Column - I Column - II
(i) Performance of Public Enterprises (A) Measures Divisional Performance
(ii) Residual Income (B) Purchase Order Processed
(iii) Cost Driver (C) Future Costs affected by decision making
(iv) Point Rating (D) Shows profitability and capacity utilisation
(v) Relevant Cost (E) Job Evaluation
(b) State whether the following statements are True or False : [1×5]
(i) Incentive systems benefit only workers.
(ii) Service departments do not render services to each other.
(iii) Contract costing is only a variant of Job.costing.
(iv) Differential costing and Marginal costing mean the same thing.
(v) Standards are arrived at based on past performance.
(c) Fill up the blanks suitably : [1×5]

(i) In absorption costing cost is added to inventory.
(ii) becomes more effective in a firm with the use of standard costing.
(iii) In ‘make or buy’ decision, it is profitable to buy from outside only when the supplier’s price is
below the firm’s own .
(iv) A cost which does not involve any cash outflow is called .
(v) costing reduces the possibility of under pricing.
2 Suggested Answers to Question — CMA
(d) In the following cases, one out of four answers is correct. You are required to indicate the correct
answer and give brief workings : [2×5]
(i) XYZ Co. Ltd. is having 400 workers at the beginning of the year and 500 workers at the end of
the year. During the year 20 workers were discharged and 15 workers left the company. The
Labour Turnover rate under ‘separation method’ is:
A. 22.20%
B. 7.78%
C. 4.00%
D. 14.40%
(ii) A factory operates a standard cost system, where 2000 kgs of raw materials @ ` 12 per kg
were used for a product, resulting in price variance of ` 6000 (F) and usage variance of ` 3000
(A). Then standard material cost of actual production was
A. ` 20,000
B. ` 30,000
C. ` 25,000
D. ` 27,000
(iii) A company maintains a margin of safety of 25% on its current sales and earns a profit of ` 30
lakhs per annum. If the company has a p/v ratio of 40%, its current sales amount to
A. ` 200 lakhs
B. ` 300 lakhs
C. ` 325 lakhs
D. None of the above
(iv) The annual demand of a certain product is 8000 units, ordering cost per order is ` 40, carrying
cost is 10% of average inventory value and purchase cost is ` 10 per unit. The EOQ for the
product is
A. 1200
B. 1000
C. 900
D. 800
(v) Sales for two consequtive months of a company are ` 3,80,000 and ` 4,20,000. The company’s
net profits for these months amounted to ` 24,000 and ` 40,000 respectively. There is no
change in P/V ratio or fixed costs. The P/V ratio of the company is
A. 33 13 %
B. 40%
C. 25%
D. None of the above
Suggested Answers to Question — CMA 3
Answer 1. (a)
(i) — D
(ii) — A
(iii) — B
(iv) — E
(v) — C
Answer 1. (b)
(i) False
(ii) False
(iii) True
(iv) False
(v) False
Answer 1. (c)
(i) Fixed
(ii) Budgetary Control
(iii) Variable Cost
(iv) Imputed Cost
(v) Absorption
Answer 1. (d)
(i) ‘B’ — 7.78%
Average No. of workers (400 + 500) / 2 = 450 Labour Turnover rate (Separation Method)
× 100 = (20 + 15) × 100 = 35 × 100 = 7.78%

No. of separation during the year
= Average No. of Workers 450 450
(ii) ‘D’ – ` 27,000
= Material price variance + material usage variance
= 6000 (F) + 3000 (A) = 3000 (F)
Actual Material cost 2000 × 12 = ` 24000
Standard Material Cost of actual production = ` 24,000 + ` 3,000 = ` 27,000.
(iii) ‘B’ — ` 300 Lakhs
Marging of Safety = Profit / PV ratio.
= 30 ÷ 40 = 75 Lakhs
75
∴ Total Sales = ` 200 Lakhs
.25
(iv) ‘D’ — 800
2AO
EOQ =
C.i
2 × 8000 × 40 = 800
= 10 × 10
100
(v) ‘B’ — 40%
Change in Profit 16000
PV Ratio = Change in sales × 100 = 40000 × 100 = 40%
Q. 2. (a) A company prepares a budget for a production of 200000 units. Variable cost per unit is` 15 and
the fixed cost is ` 2 per unit. The company fixes its selling price to fetch a profit of 10% on cost.
(i) What is the break-even point? (both in units and in `)
(ii) What is profit volume ratio?
(iii) If it reduces its selling price by 5%, how does the revised selling price affect the break-even
point and the profit volume ratio?
(iv) If a profit increase of 10% is desired more than the budget, what should be the sales at the
reduced price? [3+2+3+2]
(b) State briefly the effect on profitability under marginal costing and absorption costing. [5]
Answer 2. (a)
Budgeted Cost Price Structure
Per Unit `
Variable Cost 15.00
Fixed Cost 2.00
Total Cost 17.00
Profit (10% of cost) 1.70
Sale Price 18.70
Total Fixed Cost Rs. 2 × 200000 = ` 4,00,000
Contribution per unit ` 18.70 – 15.00 = ` 3.70
Total profit = Total Contribution – Total Fixed cost
= (3.70 × 2,00,000) – 4,00,000
= ` 3,40,000.
Total Fixed Cost

(i) Break Even Point (in unit) =
Contribution Per Unit
4,00,000
= = 1,08,108 (approximately)
3.70
Break Even Point (in Rupees) = 1,08,108 × selling price per unit (` 18.70)
= ` 20,21,622
3.70 × 100 = 19.79%
(ii) P/V Ratio :
18.70
(iii) If the selling price is reduced by 5%, the revised
selling price will be ` 17.765 [18.70 – (5% of 18.70)]
Under the revised selling price :
4,00,000
Break Even (in unit) = (17.765 − 15)
= 144665 Units
Break Even price (in `) = 144665 × Selling price/unit (` 17.765)
= 2569982
17.765 − 15 × 100
P/V Rated = = 15.56%
17.765
(iv) Desired profit
= Budgeted profit + 10% of the Budgeted profit
= 3,40,000 + 10% of 3,40,000
= Rs. 3,74,000
Sales to achieve the desired profit (at the reduced selling price)
Fixed Cost + desired Profit
= P/V Ratio
4,00,000 + 3,74,000
=
15.56%
= ` 49,74,293
Answer 2. (b)
Effect of profitability under marginal costing & absorption costing :
(a) When unit of production and sales unit are equal, profit under marginal costing will be same as
profit under the absorption cosing.
(b) When unit production is more than sales, profit under absorption costing will be greater then the
profit under marginal costing.
(c) When unit of production is less than sales, profit under absorption costing will be lower than the
profit under marginal costing.
Q. 3. (a) The following facts are extracted from the books of Alpha Radio Manufacturing Company for the
year 2010.
(i) It produces two types of radio-Type A and Type B and sells these in two markets-Kolkata and
Siliguri.
(ii) The budgeted and actual sales for the year 2010 are as follows:
Kolkata Siliguri
Type A — Budgeted 1000 units at ` 200 each 800 units at ` 200 each
Actual 900 units at ` 200 each 750 units at ` 200 each
Type B — Budgeted 800 units at ` 300 each 600 units at ` 300 each
Actual 1000 units at ` 300 each 750 units at ` 300 each
Analysis of variance discloses that Type A is overpriced and Type B is underpriced. If the price of A
Type radio set is reduced by 10% and price of B Type radio set is increased by 20% and if a modem and
extensive advertisement campaign is introduced, then the following volume of sales could be made in
the next year as expected by the Marketing Manager.
Expected increase/decrease Kolkata Siliguri
over the current budget Market Market
Product A: Due to change in pricing policy +20% +15%
Due to introduction of modern advertisement campaign +5% +3%
Product B: Due to change in pricing policy +10% (–)2%
Due to introduction of modem advertisement campaign .+5% +5%
On the basis of above you are required to prepare sales budget for the year 2011. [10]
(b) State the difference between Forecast and Budget. [5]
Answer 3. (a)
Budget for 2010 Actual for 2010 Budget for 2011
Product Type
Price Unit (`)

Market Area
Price per
Price per
Value (`)
Value (`)
unit (`)
unit (`)
Value
Unit
Unit
Unit
A Kolkata 1000 200 2,00,000 900 200 1,80,000 1250 180 2,25,000
Siliguri 800 200 1,60,000 750 200 1,50,000 944 180 1,69,920
Total 1800 3,60,000 1650 3,30,000 2194 3,94,920
B Kolkata 800 300 2,40,000 1000 300 3,00,00 920 360 3,31,200
Siliguri 600 300 1,80,000 750 300 2,25,000 618 360 2,22480
Total 1400 4,20,000 1750 5,25,000 1538 5,53,680
Working Note : (1) Calculation of Budgeted sales for 2011
Type A Type B
(a) Market : Kolkata
Budgeted Sale for 2010 1000 800
For expected change in pricing policy 200 80
For introduction of modern advertisement campaign 50 40
Budgeted sale for 2011 1250 920
Type A Type B
(b) Market : Siliguri
Budgeted Sale for 2010 800 600
Add : Expected increase/decrease
For change in pricing policy 120 (–) 12
For introduction of modern advertisement campaign 24 30
944 618
(2) Calculation of selling price for 2011
Type A Type B
Price per unit Price per unit
Price in 2010 200 300
Add increase/decrease (–) 20 (+) 60
Budgeted selling price 180 360
Answer 3. (b)
Forecast VS Budget
Forecast Budget
1. It is merely an estimate which is likely to A budget is a detailed plan of operation for
happen. It is a statement of profitable event some specific period.
which are likely to happen under anticipated
condition during a specified period of time.
2. It being statements of future events, do not It is on the other hand a tool of control since it
connote any sense of control. represents action which can be shaped
according to will so that it can be suited to the
condition which may or may not happen.
Q. 4. (a) Distinguish between “Incentives to indirect workers” and “Indirect incentives to direct workers”.
[5]
(b) Both direct and indirect employees of a department in a factory are entitled to production bonus
in accordance with a Group Incentive Scheme, the outlines of which are as follows:
(i) For any production in excess of standard rate fixed at 10,000 tonnes per month of 25 days, a
general incentive of ` 10 per tonne is paid in aggregate. The total amount payable to each
separate group is determined on the basis of an assumed percentage of such excess production
being contributed by it, namely @70% by direct labour, @10% by inspection staff, @12% by
maintenance staff and @ 8% by supervisory staff.
(ii) Moreover, if the excess production is more than 20% above the standard, direct labour also
get a special bonus @ ` 7 per tonne for all production in excess of 120% of standard.
(iii) Inspection staff are penalised @ ` 20 per tonne for rejection by customers in excess of 1% of
production (Actual).
(iv) Maintenance staff are penalised @ ` 20 per hour of breakdown.From the following particulars
for a month, workout the production bonus by each group :
A. Production 13,000 tonnes (Actual)
B. Rejection by customers—200 tonnes
C. Machine breakdown—50 hours [4+2+2+2]
Answer 4. (a)
Main condition of incentive system is that the actual output or time taken in relation to standard set is
determinable. In case of indirect works, their performance cannot be directly measurable. Still it is essential
to provide for incentive to them. The following are such incentive to indirect workers —
(i) Bonus to foremen and supervisors.
(ii) Bonus to repairs and maintenance staff.
(iii) Bonus to stores staff
The following are the indirect incentives to direct workers.
(i) Profit sharing
(ii) Co-partnership
(iii) Education for employees and their children
(iv) Health and safety
(v) General Welfare, recreation facilities
(vi) Subsidized meals.
Answer 4. (b)
No. of working days p.m. = 25
Standard production = 10,000 tonnes.
Actual production = 13,000 tonnes.
Excess production = 3,000 tonnes.
20% of standard production = 2,000 tonnes.
Excess production above 20% = 1000 tonnes
Statement showing Bonus earned by each.
Category General Incentive Special Incentive Penalty Bonus
% Tonnes Amount Tonnes ` ` `
Direct Labour 70 2,100 21,000 1000 7,000 28000
Inspection Staff 10 300 3000 1,400 1,600
Maintenance Staff 12 360 3600 1000 2,600
Supervisory Staff 8 240 2400 2400
Total 100 3000 30000 1000 7000 2400 34,600
Workings :
Penalty for rejection :
Rejections = 200 tones
Rejections allowed 1% of 13,000 = 130 tones
Penalised = 70 tones
70 × ` 20 = ` 1400
Break down 50 hours × ` 20 = ` 1000
Q. 5. (a) Budgets are classified according to Time. State how they are classified. [5]
(b) XYZ Ltd. manufactures four products A, B, C and D. Whose data are given below :
A B C D
Direct Materials (`) 3,000 6,000 9,000 18,000
Direct Labour (`) 1,500 3,000 4,500 9,000
Direct Labour Hours 50 100 150 300
Machine Hours 30 15 10 5
You are required to prepare a statement showing the allocation of factory overheads (which
amounted to ` 1,08,000) using the basis of allocation as under :
(i) Direct Material Cost
(ii) Direct Labour Cost
(iii) Direct Labour Hours
(iv) Machine Hours
Out of these four bases of allocation, which you prefer and why? [2+2+2+2+2]
Answer 5. (a)
Budget are divided in the following categories according to time :
(i) Short term Budgets - Any budget that is prepared for a period upto one year generally is known as
Short Term Budget. Functional budgets are normally prepared for a period of one year.
(ii) Medium Term Budget : Budget prepared for a period of 1-3 years is Medium Term Budget. Budget
like manpower planning are prepared for Medium Term.
(iii) Long Term Budget : Any Budget exceeding 3 years is known as Long Term Budgets. Master Budget is
normally prepared for Long Term. In the modern days due to uncertainty, very few budgets are
prepared for Long Term.
Answer 5. (b)
Workings : Calculation of overhead rate using different basis —
(i) Direct Material Cost :
Total Factory O/H ` 1,08,000
Rate = = = ` 3 per ` Material Cost
Total Material Cost 36,000
(ii) Direct Labour Cost :

Total Factory O/H ` 1,08,000
Rate = = = ` 6 per ` Labour Cost
Total Labour Cost 18,000
` 1,08,000
(iii) Direct Labour Hours = = ` 180 per hour
600
` 1,08,000
(iv) Machine Hour = 60 = ` 1,800 per M/C. hour
Statement showing allocation of overheads

Basis Rate A B C D Total
` ` ` ` ` `
Direct Material Cost 3 9,000 18,000 27,000 54,000 1,08,000
Direct Labour Cost 6 9,000 18,000 27,000 54,000 1,08,000
Direct Labour Hour 180 9,000 18,000 27,000 54,000 1,08,000
Machine Hour 1,800 54,000 27,000 18,000 9,000 1,08,000
Out of these basis of allocation, Machine Hour Rate is most preferable. Overheads are to be allocated on
the basis of time taken by each product in the shop, i.e. on the basis of machine hours required by each
product.
Q. 6. (a) Following are the particulars given by the owner of a hotel. You, as a Cost & Management
Accountant, are requested to advise him that what rent should he charge from his customers per
day so that he is able to earn 25% on cost other than interest:
(i) Staff salaries ` 80,000 per annum.
(ii) Room attendants salary ` 2 per day. The salary is paid on daily basis and services of room
attendant are needed only when the room is occupied. There is one room attendant for one
room.
(iii) Lighting, heating and power. The normal lighting expenses for a room if it is occupied for the
whole month is ` 50. Power is used only in winter and normal charge per month if occupied
for a room is ` 20.
(iv) Repairs to Building— ` 10,000 per annum
(v) Linen, etc.— ` 4,800 per annum
(vi) Sundries— ` 6,600 per annum
(vii) Interior decoration, etc.— 10,000 per annum
(viii) Cost of Building at ` 4,00,000 and its depreciation rate is 5%
(ix) Other equipment at ` 1,00,000 and its depreciation rate is 10%
(x) Interest @ 5% may be charged on its investment in the buildings and equipment.
(xi) There are 100 rooms in the Hotel and 80% of the rooms are normally occupied in summer
and 30 rooms are busy in winter.
[You may assume that period of summer and winter is six months each. Normal days in a month
may be assumed to be 30.] [10]
(b) Explain the concept of ‘Joint Costs’ in joint products and by products. [5]
Answer 6. (a)
Room Rent fixation of Hotel :
Calculation of Room Rent per day
Particulars ` `
(i) Staff Salaries 80,000
(ii) Room attendants Salaries :
80
Summer : 2 × 100 × × 30 × 6 28,800
100
30
Winter : 2 × 100 × × 30 × 6 10,800 39,600
100
(iii) Lighting/Heating/Power :
80
Summer : 50 × 6 × 100 × 24,000
100
30
Winter light : 50 × 6 × 100 × 9,000
100
30
Power : 20 × 6 × 100 × 3,600 36,600
100
(iv) Repairs to Buildings 10,000
(v) Linen, etc. 4,800
(vi) Sundries 6,600
(vii) Interior decoration, etc. 10,000
(viii) Depreciation : Buildings @ 5% of ` 4,00,000 20,000
Other Equipments 10% of ` 1,00,000 10,000 30,000
(ix) Interest on Investment = 5,00,000 × 5% 25,000
Total cost including interest 2,42,600
Add : 25% Profit on Cost other than ‘Interest’.
25
Or, (2,42,600 – 25,000) × = 54,400
100
Total revenue required 2,97,000
∴ Room Rent per day = 2,97,000 / 19,800 15 Per day
Workings :
‘Room days’ Computation :
No. of Rooms × % occupied × Days in a month × No. of month
Summer : 100 × 80 × 30 × 6 = 14,400 Days
100
Winter : 100 × 30 × 30 × 6 = 5,400 Days
100
Total Room Days = 19,800 Days
Answer 6. (b)
Joint Costs :
Joint cost is the pre-separation cost of commonly used input factors for the production of multiple products.
That is, all costs incurred before or upto the split-off point are termed as joint costs of pre-separation costs
and the apportionment of these costs is the main objective of joint product accounting. Costs incurred
after split-off point are post - separation costs and can be easily identified with the products.
Here, split-off point is a point up to which, input factors are commonly used for production of multiple
products, which can be either joint-products or by products, after this point, joint products and/or by
products gain individual identity.
Q. 7. (a) M/s. Jupiter & Co. Ltd. manufactures a product in its factory which presently utilises 60% of its
capacity. The cost details including selling price are given below:
`
Sales 6000 units 5,40,000
Direct Materials 96,000
Factory Overheads 2,00,000
Administration Overheads 21,000
Selling and Distribution Overheads 25,000
Out of fixed overheads, 12.5% and 20% of selling and distribution overheads variable with
production and sales. Administration overheads are wholly fixed.
Now, it is revealed that existing product could not achieve budgeted level for two consecutive
years, the management decides to introduce a new product with marginal investment but largely
using present plant and machinery.
The cost data of the new product is given below :
`
Direct Materials 16 per unit
Direct Labour 15 per unit
Direct Expenses 2 per unit
Variable Factory Overheads 2 per unit
Variable Selling & Distribution Overheads 1.5 per unit
Marketing Manager of the company is expecting to sell 2000 units of new product at a price of
` 60 per unit.
The fixed factory overheads are expected to increase by 10% and fixed selling and distribution
expense will go up by ` 13,500 annually. Administration overheads will remain unchanged.
You are advised to give your opinion. Should the new product be introduced? [3+3+3+1]
(b) Distinguish between Job costing and Process costing. [5]
Answer 7. (a)
Analysis of over heads :
Particulars Total Fixed Variable

` ` `
Factory Over head (Note 1) 2,00,000 1,75,000 25,000
Administration Over Head 21,000 21,000 -
Selling & Distribution Over Head 25,000 20,000 5,000
Total 2,46,000 2,16,000 30,000
Incremental Factory Fixed over head 17,500
(10% of 1,75,000)
Selling & distribution over head 13,500
31,000
Note-1 : Out of the total factory overhead 12.5% is assumed as variable cost.
Statement of Profits : Existing & New Products
Particulars Existing Product New Product Total Amount

Sales Quantity (Units) 6000 2000 8000
` ` `
Sales Value 5,40,000 1,20,000 6,60,000
Less : Direct Materials 96,000 32,000 -
Direct Labour 1,20,000 30,000 -
Direct Expenses 20,000 4,000 -
Other Variable Overheads 30,000 7,000 -
Total variable cost 2,66,000 73,000 3,39,000
Contribution 2,74,000 47,000 3,21,000
Less Fixed over head 2,16,000 31,000
Profit 58,000 16,000 74,000
The profit of the firm is expected to increase by ` 16,000 if the product is introduced. So, the company
should introduce the new product.
Answer 7. (b)
The main points of difference between job costing and process costing are as follows :
Job Costing Process Costing

1. Each job is carried out against specific orders. Process costing has continuous flow.
2. Each job may be different. Each product is homogenous and standardised.
3. The cost centre is a job. The cost centre is a process.
4. Costs are collected and ascertained for each Costs are collected and ascertained for each
job separately. process separately.
5. Costs are calculated only on completion of Process costs are calculated at the end of each
job. period.
6. There may or may not be any work in There is always some WIP because of continuous
progress. nature of production.
7. Higher degree of control is required because Lower degree of control is required because of
of heterogenous nature of jobs. homogenous and standardised jobs.
8. There is usually no tranfers between jobs. The output of one process is transferred to next as
input.
Q. 8. Write short notes on any three of the following : [5×3]

(a) Limitations of market-based transfer pricing;
(b) Inter-Locking Accounts;
(c) Cost-plus Contract;
(d) Principal Budget Factor;
(e) Perpetual Inventory System.
Answer 8. (a)
Limitations of Market based Transfer Pricing :
1. There may be resistance from the buying division. They may question buying from the selling division
if in any way they have to pay the market price.
2. Market prices may be fluctuating; and hence there may be difficulties in fixation of these prices.
3. Market price is rather a vague term as such prices may be ex-factory price, wholesale price, retail
price, etc.
4. Market prices may not be available for intermediate products, as these products may not have any
market.
5. The method may be difficult to operate if the intermediate product is for captive consumption.
Answer 8. (b)
Inter-locking Accounts :
Cost and Financial Accounts are said to be interlocked, when independent set of books are maintained for
each of them. These accounts are interlocked through control accounts maintained in the two sets of
books. Cost Ledger Control Account is maintained in the financial books and a General Ledger Adjustment
Account is maintained in costing books. In this manner, connection between the two sets of books is
maintained. In costing books, all entries relating to fixed assets, cash, etc. are posted in General Ledger
Adjustment Account. In case it is desired to integrate the two trial balances into one, the Cost Ledger
Control Account and General Ledger Adjustment Account can be omitted because they are maintained on
‘Contra’ principle. The ‘integration’ as above aims at maintenance of only one set of books in which the
transactions are recorded; thereby reconciliation is eliminated. However, due to some difficulties like
implementation problem of ‘integration’, sometimes ‘interlocking’ of accounts is preferred. For example, a
separate cost of accounting department because of its importance, ‘interlocking’ accounting system may
have to be operated.
Answer 8. (c)
Cost plus Contract :
In this type of contracts the contractor is usually entitled to a stipulated amount of profit in addition to
actual cost of the service. The amount of profit to be added to the actual cost of contract may be in the
form of fixed amount on a percentage on actual cost.
This type of contract is generally entered into for executing special type of work which is not usually
undertaken by the contractor. Examples of this type of contracts are construction work during war,
production of newly designed ship, etc. This type of contract is advantageous both to the contractor and
the contractee. Contractor generally receives a reasonable profit. He is protected from any loss or unusual
risk. Contractee can ensure a fair price of the contract because the contractee is entitled to verify the books
of contractor.
Answer 8. (d)
Principal Budget Factor :
A Principal Budget Factor, also known as key factor is that factor the extent of whose influence must first be
assessed in order to prepare the functional budgets. Normally sales is the PBF but other factors like skilled
labour, production, purchase, raw materials may also be PBF. For example, a company has production
capacity to produce 30,000 tonnes p.a. but the sales forecast tells that the market can absorb only 20,000
units, there is no point in producing 30,000 units. Thus sales is the PBF in this case. The PBF puts restrictions
on the other functions and hence it must be considered carefully in advance.
A typical list of some of the PBF is given below -
(i) Sales - consumer demand,
(ii) Materials - Availabilities of supply, restrictions on import.
(iii) Labour - Shortage of labour.
(iv) Plant - Lack of capital, bottlenecks in key processes.
(v) Management - Shortage of efficient executives, lack of knowhow, faulty design, pricing policy etc.
Answer 8. (e)
Perpetual Inventory System :
Perpetual Inventory System means continuous stock taking. CIMA defines Perpetual Inventory System as
‘the recording as they occur of receipts, issues and resulting balances of individual items of stock in either
quantity or quantity and value’.
Under this system a continuous record of receipt and issue of materials is maintained by the stores dept &
the information about the stock of materials is always available. Entries in the Bin card and stores ledger
are made after every receipt and issue and the balance is reconciled on regular basis with the physical
stock. The main advantage of this system is that it avoids disruptions in the production caused by periodic
stock taking. It’s a very reliable check on the stocks.
GROUP I
(SYLLABUS 2012)

DECEMBER 2016
All sections are compulsory. Each section contains instructions regarding the number
of questions to be answered within the section.
All working notes must form part of your answers.
Section – A
Question No. 1 is compulsory. Answer all questions under each sub division.
1. (A) Answer the following questions. Each question carries two marks. 2×5=10
(i) In a factory, number of employees at the beginning of 2015 was 380 and at the
end 420. During the year 18 employees resigned, 6 were discharged and out of
them 16 were replaced. Find the Labour Turnover Ratio of the factory under Flux
Method.
(ii) At EOQ total ordering cost per annum is ` 4,000. Find EOQ in units if carrying cost
per unit per annum is ` 2.
(iii) Find the actual overhead for the month of October 2016, when actual machine
hours worked is 10000 and there is under-recovery of overhead of ` 30,000 by using
machine hour rate of `30.
(iv) If Discounted Pay Back period is 5 years and cost of capital is 12%, find IRR when the
life of the project is also 5 years.
(v) You find that a firm has margin of safety = 25% of sales. Find the Degree of
Operating Leverage.
(B) State whether the following are true or false (Legibly write only the Roman numeral and
whether true or false): 1×5=5
(i) Blanket overhead absorption rate is also known as single factory wide overhead
absorption rate.
(ii) The cost of in-warranty after sale service is treated as selling and distribution
overhead.
(iii) JIT reduces the working capital requirement.
(iv) The shares underlying the GDR carry voting rights.
(v) Cost of capital is required for calculating IRR.
(C) Fill in the blanks (Legibly write only the Roman numeral and the content filling the blank):
1×5=5
(i) According to Net Income approach, greater the proportion of debt capital,
_________ shall be the overall cost of capital.
(ii) Most of the venture capital funds provide financial support to entrepreneurs in the
form of _____________.
(iii) The charging of discrete, identifiable items of cost to cost centers is called ______.
(iv) A _______ is a record which contains the relevant details pertaining to the plants
and equipments.
(v) CAS-2 deals with the principles and methods of determining the ___________of a
manufacturing facility of an entity.
(D) Match the following (You may opt to write the Roman numeral and the matched
alphabet instead of copying contents into the answer books): 1×5=5
(i) Bin Card (a) Dividend Yield

(ii) Opportunity cost (b) CAS 16
(iii)Joint costs (c) Cost of alternative resources
(iv) Present value of cash inflows/ (d) Labour turnover
Present value of cash outflows
(v) Dividend/Stock price (e) Profitability Index
(f) Value of alternatives forgone by employing
resources in a specific manner
(g) Perpetual inventory system
(h) CAS 19
Answer:
1. (A) (i) Addition = 420 – (380 – 18 – 6) = 64; replacement = 16;

LTR (Flux) = [0.5 * (64 + 16)]/[380 + 420)/2] = 10%.
(ii) At EOQ, total carrying cost = total ordering cost = ` 4000

Total carrying cost = (carrying cost per unit pa) x (EOQ/2)
Or, ` 2×EOQ/2 = ` 4000
Or, EOQ= 4000 units.
(iii)
Overhead absorbed = machine hour rate * actual machine ` 3,00,000
hours = 30×10000
Under-recovery ` 30,000
Actual overhead for the month ` 3,30,000
(iv) IRR = 12%; When Discounted Pay Back period = Life of the project, NPV = 0.
When NPV = 0, Cost of Capital (k) = IRR = 12%.
(v) Margin of Safety = 25% of sales implies that 100% reduction in profits (EBIT) for
25% reduction in sales;
DOL = % Change in EBIT/%Change in Sales; Thus DOL = 100/25 = 4.
(B) (i) True

(ii) True
(iii) True
(iv) False
(v) False
(C) (i) Lower,
(ii) Equity
(iii) Cost Allocation
(iv) Plant Register
(v) Capacity
(D)
i g
ii f
iii h
iv e
v a
Section – B

2. The Modern Ltd. has three production departments and two service departments. The
following are the extracts from the records of the company for the year 2016:
` Production Service
X Y Z P Q
Rent and Rates 26,400
Lighting 5,000
Direct Wages ` 40,000 50,000 25,000 3,000 2,000
Indirect Wages (allocated) ` 7,136 8,359 3,455 400 250
Power 12,000
Direct Materials ` 80,000 40,000 50,000
Machine Hours 3000 8000 4000
Light Points 25 35 25 5 10
Floor Area sq. mts 2400 1200 3000 1800 4800
Machine Value ` 1,00,000 2,00,000 80,000
Service Departments are providing services to others as follows:
P(%) 20 30 50
Q(%) 20 50 10 20
Depreciation is 10% of Machine Value.

(a) Calculate Machine Hour Rate for each production department. 9
(b) Calculate Factory Cost of articles A and B using the following additional information: 6
Article A B
Prime Costs ` 12,000 3,000
Machine hours consumed in Production Departments
X 400
Y 240 300
Z 100
Answer:
2. (a)
(amount in `)
Total Production Service
` X Y Z P Q
Rent and rates (Floor Area) 26400 4800 2400 6000 3600 9600
Lighting (Light Points) 5000 1250 1750 1250 250 500
Direct wages (For Service Depts only) 5000 3000 2000
Indirect wages (Allocated) 19600 7136 8359 3455 400 250
Power (Machine Hours) 12000 2400 6400 3200
Depreciation (Asset Value) 38000 10000 20000 8000
Primary Distribution of Production 106000 25586 38909 21905 7250 12350
Overheads
Secondary Distribution Q (in ratio 2:5:1:2) 12350 2470 6175 1235 2470 (12350)
28056 45084 23140 9720 NIL
Secondary Distribution P (in ratio 2:3:5) 9720 1944 2916 4860 (9720)
Production Overheads 30000 48000 28000 NIL
Machine Hours 3000 8000 4000
Machine Hour Rate 10 6 7
(b)
Articles Depts. MHR ` Machine Hours Consumed A B
A B
Prime Costs 12000 3000
Overheads absorbed X 10 400 4000
Y 6 240 300 1440 1800
Z 7 100 700
Factory Costs ` 17440 5500
3. (a) From the following details you are required to value the closing inventory at the end
of Day 5 under (i) FIFO method, (ii) LIFO method and (iii) Weighted Average method of
pricing issues.
Opening Balance: Nil.
Day 1 Received 2000 units @ 12 per unit;
Day 2 Received 3000 units @ 13 per unit:
Day 3 Issued 1000 units;
Day 4 Received 1000 units @ 14 per unit;
Day 5 Issued 3000 units. 3×3=9
(b) Your factory holds 600kg of raw materials in store at the beginning of the month of
December 2016. You are provided with the following further information:
Per day consumption of material is constant at 50kg and the time span between
placing orders and receiving materials varies within 6-10 days, ordering cost per order is
` 4,000 and carrying cost per kg per day is ` 0.064.
(i) At what level of stock you should place your next order?
(ii) What quantity you should order each time? and
(iii) At what time interval you would continue placing orders for materials? 2+2+2=6
Answer:
3. (a) (i) FIFO

Day Receipts Issues Balance
Units Rate Amount ` Units Rate Amount ` Units Amount `
` `
1 2000 12 24000 2000 24000
2 3000 13 39000 5000 63000
3 1000 12 12000 4000 51000
4 1000 14 14000 5000 65000
5 1000 12 12000 4000 53000
5 2000 13 26000 2000 27000
Closing inventory value ` 27000
(ii) LIFO
Day Receipts Issues Balance
` `
1 2000 12 24000 2000 24000
2 3000 13 39000 5000 63000
3 1000 1000 13 13000 4000 50000
4 1000 14 14000 5000 64000
5 3000 1000 14 14000 4000 50000
5 2000 13 26000 2000 24000
(iii) Weighted Average

Day Receipts Issues Balances
` `
1 2000 12 24000 2000 24000
2 3000 13 39000 5000 63000
3 1000 1000 12.6 12600 4000 50400
4 1000 14 14000 5000 64400
5 3000 3000 12.88 38640 2000 25760
(b) (i) ROL = 50×10 = 500 kg.
(ii) EOQ =
 2 ×50 ×4000  ) =2500 kg
0.064
(iii) Time interval = ordering quantity/daily consumption = 2500/50 = 50 days.
4. (a) Four men work as a group. When weekly production of the group exceeds standard
production of 250 units per hour, bonus is payable to each member of the group as
computed below:
Bonus for the week = hours worked in the week x half the percentage by which group
production exceeds the standard x weighted average hourly wage rate of the group.
Bonus rate per hour for each member = half the percentage by which group
production exceeds the standard x hourly wage rate.
Following is the record of the group for a week:

Members of the group Hourly wage rate (`) Hours worked
A 48 40
B 40 48
C 52 50
D 56 46
Actual Production for the week: 55,200 units

(i) Compute the weighted average hourly wage rate for the week.
(ii) Compute the hourly bonus rate for the group and for each employee.
(iii) Compute the total bonus for the group for the week.
(iv) Compute the total pay for the week for each of the members of the group.
1+(2+2)+1+4=10
(b) You have been provided with the following information on costs related to a machine:
(i) Annual standing charges: ` 1,40,000.
(ii) Wages of operator is ` 240 for 8 hours' day. The operator attends one machine
when it is under set up and three machines while under operation.
(iii) Estimated production hours 3600 pa.
(iv) Estimated set up time: 400 hours pa.
(v) Power consumption: ` 5 per hour of operation
Compute machine hour rates for production and for set up and find the costs of the
following Jobs:
Job 1103 Job 1043
Set up time Hours 50 20
Operation time Hours 150 180
Total Hours 200 200
[2+3]
Answer:
4. (a)
Members of Hourly Hours Total Hourly bonus (ii) Weekly Total Pay
the group wage rate worked wages (10% of wage) Bonus (iii) (iv)
Name ` ` ` ` `
A 48 40 1920 4.8 192 2112

B 40 48 1920 4 192 2112
C 52 50 2600 5.2 260 2860
D 56 46 2576 5.6 257.6 2833.6
Total 184 9016 4.90 901.6 9917.6
(i) Weighted Avg. Hourly Wage Rate = 9016/184 = `49

Std Production for the week = 184×250 = 46000 units
Actual Production 55200 units
Group production in excess of standard = 55200 - 46000 = 9200
Percentage in excess of Standard = 9200×100/46000 = 20
(ii) Bonus rate per hour for the group half of 20%× 49 = 10%×49 = `4.90
(iii) Total bonus for the group = 4.90×184 = `901.60.
(b)
Machine Hour Rate Setup Production
` `
Standing Charges per hour ` 140000/4000 35 35
Operator's Wages per hour ` 30 10
Power ` 0 5
Machine Hour Rate ` 65 50
Machine Hour Job 1103 Job 1043 Job 1103 Job 1043
Rate ` Hours Hours Amount ` Amount `
Setup 65 50 20 3250 1300
Production 50 150 180 7500 9000
Cost of the Jobs 10750 10300
5. (a) Your advertising firm has got an offer for an advertisement job. You are required to
submit a quotation for the job for which relevant data are provided below:
Material requirements for the job: (Amount in `)
Paper 12 reams at a price of ` 1,500 per ream
Paints, ink and other printing materials 12,000
Binding materials and other consumables 8,000
Primary packing materials 6,000
Labour requirements:
Services of following employees will be required for the job:
Required hours [Monthly Pay (`)]
Artist 80 18,000
Painter 96 10,000
Copywriter 60 12,000
Client servicing 120 8,000
Further, you need to hire service of a photographer for 7 days at a charge of ` 1,500 per
day. Besides, overhead costs are to be considered as follows:
Production overheads are 40% of Direct Cost and Selling & Distribution Overheads are
25% of Production Cost. You keep 12.5% margin on quoted price. Your firm works 20
days a month and 8 hours a day. 12
(b) How do you treat normal idle time in Cost Accounting as per CAS-7? 3
Answer:
5. (a)
Cost items Amount Amount
` `
Material Costs:
Paper =12×1500 18000
Paints 12000
Binding 8000
Packing 6000
Total Material Cost (A) 44000
Labor Costs:
Artist=80× 18000/(20×8) 9000
Painter=96× 10000/(20×8) 6000
Copywriter=60× 12000/(20×8) 4500
Client servicing=120×8000/(20×8) 6000
Photographer=7× 1500 10500
Total Labour Cost (B) 36000
Direct Cost (A+B) 80000
Production Overhead = 40% of Direct Cost (C) 32000
Production Cost (A+B+C) 112000
Selling &Distribution Overhead 25% of 28000
Production Cost(D)
Cost of Sales 140000
Profit 12.5% on Quoted Price 20000
Quoted Price 160000
(b) As per CAS-7,

Normal Idle Time is booked to factory or works overhead. For the purpose of effective
control, each type of idle time, i.e., idle time classified according to the causes is
allocated to a separate Standing Order Number.
Section - C
6. From the financial statements for the year ended on 31-03-2016 of Mountain Ltd. you
collected the following information:
Particulars Amount in `
Profits before tax 2,60,000
Depreciation, Amortization and Impairment 60,000
Loss on sale of machine debited to Profit and Loss A/C 22,000
Provision for Tax 1,60,000
Preliminary expenses written off 8,000
Interest on Debenture 12,000
Tax paid 1,10,000
Dividend paid (last year) 15,000
Purchase of Fixed Assets 2,50,000
Purchase of Investments 75,000
Sale proceeds of Fixed Assets 1,50,000
Loan taken 3,00,000
Increase in Receivables 30,000
Decrease in Creditors 16,000
Cash and cash equivalents at the beginning of the Financial Year 60,000
Increase in Bills Payable 30,000
Decrease in Stocks 64,000
(a) Prepare cash flow statement for the year ended on 31-03-2016. 11
(b) Cash and cash equivalents of ` 50,000 are considered comfortable for the similar firms in
the industry. Do you think the financing activity of the firm is managed with prudence?
4
Answer:
6. (a)
Cash flow Statement
Amount Amount
` `
Profits before tax 260000
Add:
Depreciation, amortization and impairment 60000
Loss on sale of machine 22000
Preliminary expenses written off 8000
Interest on Debenture 12000
Decrease in Working Capital (30000+16000-30000-64000) 48000
Cash from Operating activities before tax 410000
Tax paid (110000)
Cash from Operating activities after tax 300000
Purchase of fixed assets (250000)
Purchase of investments (75000)
Sale proceeds of fixed assets 150000
Cash used in Investing activities (175000)
Loan taken 300000
Dividend paid (15000)
Interest on Debenture (12000)
Cash from Financing activities 273000
Total Cash Flows 398000
Cash and cash equivalents at the beginning of the financial year 60000
Cash and cash equivalents at the end of the financial year 458000
(b) Closing cash and cash equivalents are far in excess of the comfortable balance in
the industry. The firm should not have taken any loan, rather it could repay existing
loan, if any. The financial activity of the firm appears not to be managed with
prudence.
7. (a) Examine the relevance of dividend decision for a normal firm (r = k) under Walter's
model. 3
(b) Land Company Ltd. has randomly fluctuating cash balance managed under Miller-Orr
model. You are required to calculate (a) the Return Point and (b) the Upper Limit of the
cash balance and (c) to state their relevance to cash management actions. The size
of sale of marketable securities in each transaction is ` 44,814 as per Miller-Orr model.
The lower Limit fixed by management is ` 40,000. Transaction cost per transaction is `
1,600. The standard deviation of the change in daily cash balance is ` 5,000. Annual
yield available on marketable securities is 12% for 360 days a year.
2+2+2=6
(c) At zero per cent debt, the overall cost of capital of a company is 12%. Using NI and NOI
approaches find cost of equity and overall cost of capital of the company, if cost of
debt capital is 9% and debt to total capital ratio is 60%. 6
Answer:
7. (a) (1) Let value of a share is V, dividend per share is D, earning per share is E. As per
Walter
V = {D + r/k (E-D)}/k
= {D + k/k (E-D)}/k since, r = k
= {D + E - D}/k
= E/k.
As V is independent of D, Dividend decision is irrelevant for maximizing share value.
(b)
(i) RP = `(40000+ 44814) = ` 84814
(ii) UL = `(84814 + 2×44814 = `174442
(iii) Whenever cash balance reaches LL (UL), marketable securities would be sold
(purchased) of the fixed amount ` 44,814 (89628) so as to bring the cash balance
to Return Point.
[The size of sale of marketable securities in each transaction under Miller-Orr model =
3√(3*1600*5000*5000)/(4*.00033) = ` 44814 is given in the problem, hence it is
unnecessary to work out using formula.]
(c)
Approaches Net Income (Nl) Net Operating
Income (NOI)
No Debt 60% Debt No Debt 60% Debt
Ko = Overall Cost of Capital 0.12 0.1022 0.12 0.123
Kd = Cost of Debt 0.09 0.09
D/(E+D) = Debt proportion 0.6 0.6
Ke = Cost of Equity 0.12* 0.121 0.1654
*At zero leverage Ko = Ke = 0.12

1Under Nl, Ke remains unchanged with leverage. Ke = 0.12
2Under Nl, Ko = {E/(E+D)}×Ke + { D/(E+D)}×Kd = 0.4×0.12 + 0.6×0.09 = 0.102
3Under NOI, Ko remains unchanged with leverage. Ko = 0.12
4Under NOI, {E/(E+D)}×Ke = Ko - { D/(E+D)}×Kd
0.4×Ke = 0.12-0.6×0.09
Ke = 0.066/0.4 = 0.165.
8. (a) Star Brothers currently sells at a cash discount on terms of '1/10, net 30' (Credit period
30 days, 1% discount if paid within 10 days), where 20% of the customers avail discount.
The firm is considering to increase the rate of discount to 2%. It expects rise in sales by
10%, fall in bad debt from 2% to 1% of sales and 80% of the customers to avail discount.
Provided that existing annual sales are ` 6,00.000 (all sales are on credit), proportion of
variable cost to sales is 0.8 and opportunity cost of funds is 12% pa. [Assume 360 days a
year]
Find: (i) Average collection period before and after the change in discount policy.
(ii) Saving in expected bad debt and additional discount costs.
(iii) Saving in opportunity cost of investment in receivables.
(iv) Advise whether discount rate should be increased as proposed. 2+2+3+2=9
(b) Information about two projects are given below:

(` '000)
Project A B
Cash Flows:
Yr. 1 50 116
Yr. 2 300 50
Yr. 3 360 20
Yr. 4 208 -
Initial Investment 535 135
Additional information:
PV of project A Cash Flows at 22% rate of discounting 535
PV of project B Cash Flows at 25% rate of discounting 135
Cost of capital is 10% pa. Decide which project is more desirable based on NPV and IRR.
6
Answer
8. (a) (i)
At 1% Discount Days Prob. Weighted Days
Discount availed Payment in 10 days 10 0.2 2.00
Discount not availed Payment in 30 days 30 0.8 24.00
Average collection period 26.00
At 2% Discount Days Prob. Weighted Days

Discount availed Payment in 10 days 10 0.8 8.00
Discount not availed Payment in 30 days 30 0.2 6.00
Average collection period 14.00
(ii) [amount in `]
Sales Bad Debt
1% Disc. : 2% on Sales 600000 12000
2% Disc. : 1% on Sales 660000 6600
Saving in Bad debt (12000 - 6600) 5400
Sales Proportion Discount

1% Disc. 600000 0.2 1200
2% Disc. 660000 0.8 10560 2
[660000 × 0.8 ×
100
Additional Discount cost 9360
(iii) Change in Investment in Receivables = Change in Investment in Receivables for
Existing Sales + Change in Investment in Receivables for Additional Sales
[amount in `]
Collection Existing Additional Total
Period (days) Sales sales
600000 60000
1% Disc. Receivables 26 43333.331
2% Disc. Receivables 14 23333.331 2333.331
Change in investment -20000.00 1866.672 -18133.33
Saving in Opportunity 21763
Cost
1Receivable =annual sales ×collection period in days/360 [assuming 360 days a year].
2Additional Investment in Receivables for Additional Sales = Receivable for
Additional Sales ×Variable Cost proportion = 2333.33×0.8 = 1866.67.
3Saving in Opportunity Costs = Reduction in Investment in Receivables×
Opportunity Cost rate = 18133.33×0.12 = 2176.
(iv)
`
Saving in Bad debt 5400
Saving in Opp. Cost 2176
Additional Discount (9360)
Additional Contribution (60000*.2) 12000
Net Gain 10216
Since discount rate increase results in Net Gain of `10216 it should be done.
(b)
(` ‘000)
Project A B Discounting DCFA DCFB
factor at 10%
Cash Flows:
Yr1 50 116 0.909091 45.45 105.45
Yr2 300 50 0.826446 247.93 41.32
Yr3 360 20 0.751315 270.47 15.03
Yr4 208 - 0.683013 142.07
Present Value 705.93 161.80
Initial Investment 535 135 535.00 135.00
NPV 170.93 26.80
PV of project A Cash Flows at 22% 535
rate of discounting
PV of project B Cash Flows at 25% 135
rate of discounting
IRR is the discounting rate at which PV = Cost of Investment 22% 25%
Based NPV more desirable project is A
Based on IRR more desirable project is B

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What is the average collection period before and after the change in discount policy?

What is the average collection period before and after the change in discount policy?

What are the savings in expected bad debt, additional discount costs and opportunity cost of investment in receivables?

What are the savings in expected bad debt, additional discount costs and opportunity cost of investment in receivables?

SUGGESTED ANSWERS TO QUESTIONS_SYL2016_DEC2019_PAPER-8

SUGGESTED ANSWERS TO QUESTIONS

Time Allowed : 3 Hours Full Marks : 100

1. Answer the following questions:

(ii) Prime cost plus variable overheads is known as

(iii) In which of thefollowing methods, issue of materials are priced atpre-determined

(vii) The main purpose of accounting of joint products and by-products is to

(x) The fixed-variable cost classification has a special significance in the

1. (a) (i) (C)

(c) (i) False

(d) (i) Sunk

Answer any five questions from question numbers 2 to 8.

What would be the following quantities? 9

(b) In a manufacturing unit of EXOTICA LTD overhead was recovered at a predetermined

2. (a) (i) Minimum stock of A

(ii) Maximum stock of B

(iii) Re-order level of C

(iv) Average stock level of A

The under absorption of Rs. 1,45,000 being considerable whether due to

Supplementary Overhead Rate = Rs. 1,45,000/[{30,000+10,000+(30,000*60%)}Units]

ALTERNATIVE ANSWER 2(b):

Particulars Amount (Rs.)

3. (a) CAS-4 (REVISED 2018) on "Cost of Production/Acquisition/Supply of Goods/Provision of

This Standard shall further ensure adequate accuracy in computing TransactionValue

Scope: This Standard should be applied to cost statements which requireclassification,

1 Work in Progress Control A/C Dr. 6,50,000

Total costs of the two departments in one month were:

Forming Rs. 42,400

Total 13,000 9,800 22,800

Statement showing manufacturing cost of two varieties of bricks:

Total 72,800 67,200 1,40,000

ALTERNATIVE PRESENTATION OF SECOND PART AS UNDER:

Statement showing manufacturing cost of two varieties of bricks:

(b) (i) Statement of Equivalent Production:

Double Rooms (11,680 Room days × Rs. 175) 20,44,000 84,68,000

Computation of Notional Single Rooms Day:

(b): Contract Account

Particulars Rs. Particulars Rs.

Sales Overheads 0.270

Computation of Selling Price of the Offer:

ALTERNATIVE ANSWER :6 (a)

Computation of Selling Price of the Offer:

Sales (Rs.) Profit (Rs.)

(i) P/V Ratio = (Difference in Profit / Difference in Sales) × 100

Contribution in 2017 (Rs. 12,00,000× 25% Rs. 3,00,000

(iii) Profit when sales are Rs. 18,00,000

(iv) Sales to earn a profit of Rs. 1,20,000

(v) Margin of Safety in 2018

(ii) Material Price Variance

(iii) Material Quantity Variance

(iv) Material Mix Variance

(v) Material Yield Variance

(Calculate upto 2 decimal points.)

Maintenance 55,000 75,000

Standard for 20 Units Actual for 20 Units