CA PE II Question Papers Group II
Cost Accounting and Financial Management May 2008
This Paper has 25 answerable questions with 0 answered.
Total No. of Questions— 9]
Time Allowed : 3 Hours
Maximum Marks : 100
Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers in Hindi, his answers in Hindi will not be valued.
Question Nos.1 and 6 are compulsory.
Attempt three questions out of the remaining question numbers 2, 3, 4 and 5 and attempt two questions from the remaining Questions Nos. 7, 8 and 9.
Working notes should form part of the answer.
1. (a) XYZ Ltd. produces and sells sophisticated glass items – ‘A’ and ‘B’. In connection with both the products the following informations are revealed from the cost records for the month February, 2008:
Product A B
Output (in units)
Sales (Rs.) 60,000
Direct material (Rs. per unit)
Direct Wages (Rs. per unit)
Direct labour hours
No. of quantity produced per batch
Setup time per batch 18.75
2 hours 45.00
The Indirect costs for the month are as under:
Cleaning and maintenance wages
Set up costs
Manufacturing operation’s costs
Factory administration costs 2,70,000
At present the company adopts the policy to absorb indirect costs applying direct labour hour basis and enjoying a good position in the market with regard to Product B, but facing a stiff price competition with regard to Product A. The cost Accountant of the company, after making a rigorous analysis of the data, decided to shift from the absorption technique based on direct labour hours to activity cost driver basis and also to treat cleaning and maintenance wages as direct cost.
The cost accountant identified Rs. 1,20,000 for product A and the balance of cleaning and maintenance wages for Product B.
The data relevant to activities and products are as follows:
Setup of moulding
Factory administration: Cost driver
Moulding machine hours
Number of Shipments
Direct labour hours A
30 sq. ft.
45,000 cu. ft. B
70 sq. ft.
22,500 cu. ft.
You are required:
(i) to compute the total manufacturing cost and profits of both the products by applying direct labour basis of absorption, assuming cleaning and maintenance cost as indirect,
(ii) to compute the total manufacturing cost and profits of both the products by applying activity based costing, assuming cleaning and maintenance cost as indirect
(iii) to compare the results obtained from (i) and (ii) and give your opinion on the decision of cost accountant.
(b) State ‘Essentials of good cost accounting system’. 3 (0)
(c) Explain the limitations of Uniform costing. 3 (0)
(d) Calculate the total wages earned by a workman for a working day of 8 hours under Halsey and Rowan Plans:
• Standard production per hour
Actual production of the day
Wages rate per hour 20 units
2. (a) A factory incurred the following expenditure during the year 2007:
Direct material consumed
Manufacturing Wages 12,00,000
In the year 2008, following changes are expected in production and cost of production.
(i) Production will increase due to recruitment of 60% more workers in the factory.
(ii) Overall efficiency will decline by 10% on account of recruitment of new workers.
(iii) There will be an increase of 20% in Fixed overhead and 60% in Variable overhead.
(iv) The cost of direct material will be decreased by 6%.
(v) The company desire to earn a profit of 10% on selling price.
Ascertain the cost of production and selling price.
(b) Explain the term cost audit and discuss the purpose served by it. 4 (0)
(c) Explain implicit costs and explicit costs. 2 (0)
3. (a) PQR manufacturers – a small scale enterprise produces a single product and has adopted a policy to recover the production overheads of the factory by adopting a single blanket rate based on machine hours. The budgeted production overheads of the factory are Rs. 10,08,000 and budgeted machine hours are 96,000.
For a period of first six months of the financial year 2007–2008, following information were extracted from the books:
Actual production overheads
Amount included in the production overheads:
Paid as per court’s order
Expenses of previous year booked in current year
Paid to workers for strike period under an award
Obsolete stores written off Rs. 6,79,000
Production and sales data of the concern for the first six months are as under:
(50% complete in every respect)
Finished goods 22,000 units
The actual machine hours worked during the period were 48,000 hours. It is revealed from the analysis of information that ¼ of the under–absorption was due to defective production policies and the balance was attributable to increase in costs.
You are required:
(i) to determine the amount of under absorption of production overheads for the period,
(ii) to show the accounting treatment of under–absorption of production overheads, and
(iii) to apportion the unabsorbed overheads over the items.
(b) Discuss the A.B.C. analysis of material control. 4 (0)
4. (a) The following figures have been extracted from the cost records of a manufacturing company:
Transfer from Work–in–progress
Issues to Work–in–progress
Issues to Repairs and Maintenance
Deficiencies found in Stock taking 63,000
Direct Wages applied
Closing Balance 1,26,000
Entire output is sold at a Profit of 10% on actual cost from work–in–progress.
Others: Wages incurred Rs. 1,47,000; Overhead incurred Rs. 5,25,000.
Income from investment Rs. 21,000; Loss on sale of Fixed Assets Rs. 42,000.
Draw the stores control account, work–in–progress control account, costing profit and loss account, profit and loss account and reconciliation statement.
(b) Explain ‘Controllable and Uncontrollable Costs’. 4 (0)
5. (a) Modern Construction Ltd. obtained a contract No. B–37 for Rs. 40 lakhs. The following balances and information relate to the contract for the year ended 31st March, 2008:
Materials at site
Additional information relating to the year 2007–2008 are:
• Materials issued from store
Materials directly purchased
Plant hire charges
Share of general overheads for B–37
Materials returned to store
Materials returned to supplier
Fines and penalties paid 4,00,000
The contractee pays 80% of work certified in cash. You are required to prepare:
(i) Contract Account showing clearly the amount of profits transferred to Profit and Loss Account.
(ii) Contractee’s Account.
(iii) Balance Sheet.
(b) Explain any two of the following: 6
(i) Efficiency audit and Propriety audit (0)
(ii) Differential cost and Opportunity cost (0)
(iii) Cost centre and Cost unit. (0)
6. (a) A new project is under consideration in Zip Ltd., which requires a capital investment of Rs. 4.50 crore. Interest on term loan is 12% and Corporate Tax rate is 50%. If the Debt Equity ratio insisted by the financing agencies is 2 : 1, calculate the point of indifference for the project. 4 (0)
(b) X Ltd. has the following balances as on 1st April 2007:
Stocks and Debtors
Capital (Shares of Rs. 100 each) 11,40,000
The Company made the following estimates for financial year 2007–08:
(i) The company will pay a free of tax dividend of 10% the rate of tax being 25%.
(ii) The company will acquire fixed assets costing Rs.1,90,000 after selling one machine for Rs. 38,000 costing Rs. 95,000 and on which depreciation provided amounted to Rs. 66,500.
(iii) Stocks and Debtors, Creditors and Bills payables at the end of financial year are expected to be Rs. 5,60,500, Rs. 1,48,200 and Rs. 98,800 respectively.
(iv) The profit would be Rs. 1,04,500 after depreciation of Rs. 1,14,000.
Prepare the projected cash flow statement and ascertain the bank balance of X Ltd. at the end of Financial year 2007–08
(c) Explain Baumol’s Model of Cash Management. 4 (0)
7. (a) A firm can make investment in either of the following two projects. The firm anticipates its cost of capital to be 10% and the net (after tax) cash flows of the projects for five years are as follows:
(Figures in Rs. ’000)
The discount factors are as under:
PVF (20%) 0
(i) Calculate the NPV and IRR of each project.
(ii) State with reasons which project you would recommend.
(iii) Explain the inconsistency in ranking of two projects.
(b) Write short notes on: 4
(i) Finance function (0)
(ii) Factoring. (0)
8. (a) MNO Ltd. has furnished the following cost data relating to the year ending of 31st March, 2008.
Rs. (in Lakhs)
Factory overheads (100% variable)
Office and Administrative overheads (100% variable)
Selling overheads 450
The company wants to make a forecast of working capital needed for the next year and anticipates that:
• Sales will go up by 100%,
• Selling expenses will be Rs. 150 lakhs,
• Stock holdings for the next year will be–Raw material for two and half months, Workin–progress for one month, Finished goods for half month and Book debts for one and half months,
• Lags in payment will be of 3 months for creditors, 1 month for wages and half month for Factory, Office and Administrative and Selling overheads.
You are required to:
(i) Prepare statement showing working capital requirements for next year, and
(ii) Calculate maximum permissible bank finance as per Tandon Committee guidelines assuming that core current assets of the firm are estimated to be Rs. 30 lakhs.
(b) Explain ‘Global Depository Receipts’ and ‘American Depository Receipts’. 4 (0)
9. (a) Delta Ltd. currently has an equity share capital of Rs. 10,00,000 consisting of 1,00,000 Equity share of Rs. 10 each. The company is going through a major expansion plan requiring to raise funds to the tune of Rs. 6,00,000. To finance the expansion the management has following plans:
Plan–I : Issue 60,000 Equity shares of Rs. 10 each.
Plan–II : Issue 40,000 Equity shares of Rs. 10 each and the balance through long term borrowing at 12% interest p.a.
Plan–III : Issue 30,000 Equity shares of Rs.10 each and 3,000 Rs.100, 9% Debentures.
Plan–IV : Issue 30,000 Equity shares of Rs. 10 each and the balance through 6% preference shares.
The EBIT of the company is expected to be Rs. 4,00,000 p.a. assume corporate tax rate of 40%.
(i) Calculate EPS in each of the above plans.
(ii) Ascertain the degree of financial leverage in each plan.
(b) Discuss the meaning and features of ‘Commercial paper’. 4 (0)