CA PE II Question Papers Group II
Cost Accounting and Financial Management Nov 2004
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 Question numbers 7, 8 and 9.
Working notes should form part of the answer.
Marks
1. (a) Discuss the limitations of Uniform costing. 2 (0)
(b) Discuss the three methods of Calculating labour turnover. 3 (0)
(c) Pokemon Chocolates manufactures and distributes chocolate products. It purchasesCocoa beans and processes them into two intermediate products:
• Chocolate powder liquor base
• Milk–chocolate liquor base.
These two intermediate products become separately indentifiable at a single split off point, Every 500 pounds of cocoa beans yields 20 gallons of chocolate–powder liquor base and 30 gallons of milk–chocolate liquor base.
The chocolate powder liquor base is further processed into chocolate powder. Every 20 gallons of chocolate–powder liquor base yields 200 pounds of chocolate powder. The milk–chocolate liquor base is further processed into milk–chocolate. Every 30 gallons of milk–chocolate liquor base yields 340 pounds of milk chocolate.
Production and sales data for October, 2004 are :
•
• Cocoa beans processed
Costs of processing Cocoa beans to split off point (including purchase of beans) 7,500 pounds
Rs. 7,12,500
Production Sales Selling Price
Chocolate powder
Milk Chocolate 3,000 pounds
5,100 pounds 3,000 pounds
5,100 pounds Rs. 190 per pound
Rs. 237.50 per pound
The October, 2004 separable costs of processing chocolate–powder liquor into chocolate powder are Rs. 3,02,812.50. The October, 2004 separable costs of processing milk–chocolate liquor base into milk–chocolate are RS. 6,23,437.50.
Pokemon fully processes both of is intermediate products into chocolate powder or milk–chocolate. There is an active market for these intermediate products. In October, 2004, Pokemon could have sold the chocolate powder liquor base for Rs. 997.50 a gallon and the milk–chocolate liquor base for Rs. 1,235 a gallon.
Required :
(i) Calculate how the joint cost of Rs. 7,12,500 would be allocated between the chocolate powder and milk–chocolate liquor bases under the following methods :
(a) Sales value at split off point
(b) Physical measure (gallons)
(c) Estimated net realisable value, (NRV) and
(d) constant gross–margin percentage NRV.
(ii) What is the gross–margin percentage of the chocolate powder and milk–chocolate liquor bases under each of the methods in requirement (i)?
(iii) Could Pokemon have increased its operating income by a change in its decision to fully process both of its intermediate products? Show your computations.
8+2+3=13 (0)
2. (a) Discuss cost classification based on variability and controllability. 4 (0)
(b) Discuss ABC analysis as a system of Inventory control. 4 (0)
(c) RST Limited has received an offer of quantity discount on its order of materials as under :
Price per tonne Tonnes number
Rs. 9,600 Less than 50
Rs. 9,360 50 and less than 100
Rs. 9,120 100 and less than 200
Rs. 8,880 200 and less than 300
Rs. 8,640 300 and above
The annual requirement for the material is 500 tonnes. The ordering cost per order is Rs. 12,500 and the stock holding cost is estimated at 25% of the material cost per annum.
Required :
(i) Compute the most economical purchase level.
(ii) Compute EOQ if there are no quantity discounts and the price per tonne is Rs. 10,500. 4+2=6 (0)
3. (a) Discuss the treatment of overtime premium in Cost accounting 3 (0)
(b) Discuss the Gantt task and bonus system as a system of wage payment and incentives 3 (0)
(c) Popeye Company is a metal and wood cutting manufacturer, selling products to the home construction market. Consider the following data for the month of October, 2004 :
Rs.
Sandpaper
Material–handling costs
Lubricants and Coolants
Miscellaneous indirect manufacturing labour
Direct manufacturing labour
Direct materials, October 31, 2004
Finished goods, October 1, 2004
Finished goods, October 31, 2004
Work–in–process, October 1, 2004
Work–in–process, October 31, 2004
Plant–leasing costs
Depreciation–plant equipment
Property taxes on plant equipment
Fire Insurance on plant equipment
Direct materials purchased
Sales revenues
Marketing promotions
Marketing salaries
Distribution costs
Customer–service costs 5,000
1,75,000
12,500
1,00,000
7,50,000
1,00,000
1,25,000
2,50,000
3,75,000
25,000
35,000
1,35,000
90,000
10,000
7,500
11,50,000
34,00,000
1,50,000
2,50,000
1,75,000
2,50,000
Required :
(i) Prepare an income statement with a separate supporting schedule of cost of goods manufactured.
(ii) For all manufacturing items, indicate by V or F whether each is basically a variable cost or a fixed cost (where the cost object is a product unit).
6+2=8 (0)
4. (a) MNP suits is a ready–to–wear suit manufacturer. It has four customer : two wholesale–channel customers and two retail–channel customers.
MNP suits has developed the following activity–based costing system :
Activity Cost driver Rate in 2004
Order processing
Sales visits
Delivery–regular
Delivery–rushed Number of purchase orders
Number of customer visits
Number of regular deliveries
Number of rushed deliveries Rs. 1,225 per order
Rs. 7,150 per visit
Rs. 1,500 per delivery
Rs. 4,250 per delivery
List selling price per suit is Rs. 1,000 and average cost per suit is Rs. 550. The CEO of MNP suits wants to evaluate the profitability of each of the four customers in 2003 to explore opportunities for increasing profitability of his company in 2004. The following data are available for 2003 :
Item Wholesale Retail
Customers Customers
W H R T
Total number of orders
Total number of sales visits
Regular deliveries
Rush deliveries
Average number of suits per order
Average selling price per suit 44
8
41
3
400
Rs. 700 62
12
48
14
200
Rs. 800 212
22
166
46
30
Rs. 850 250
20
190
60
25
Rs. 900
Required :
(i) Calculate the customer–level operating income in 2003.
(ii) What do you recommend to CEO of MNP suits to do to increase the Company‘s operating income in 2004?
(iii) Assume MNP suits distribution channel costs are Rs.l 17,50,000 for its wholesale customers and Rs. 10,50,000 for the retail customers. Also, assume that its Corporate sustaining costs are Rs. 12,50,000. Prepare Income statement of MNP suits for 2003.
6+2+2=10 (0)
(b) Discuss the step method and reciprocal service method of secondary distribution of overheads. 4 (0)
5. (a) Distinguish between any three of the following : 2+2+2=6
(i) Cost control and cost reduction (0)
(ii) Bin card and stores ledger (0)
(iii) Job costing and batch costing (0)
(iv) Cost audit and statutory audit. (0)
(b) Brock Construction Ltd. Commenced a contract on November 1, 2003. The total contract was for Rs. 39,37,500. It was decided to estimate the total profit on the contract and to take to the credit of P/L A/C that proportion of estimated profit on cash basis, which work completed bore to the total contract. Actual expenditure for the period November 1, 2003 to October 31, 2004 and estimated expenditure for November 1, 2004 to March 31, 2005 are given below :
November 1, 2003 to
October 31, 2004
(Actuals)
Rs. November 1, 2004 to
March 31, 2005
(Estimated)
Rs.
Materials issued
Labour: Paid
Prepaid
Outstanding
Plant purchased
Expenses: Paid
Outstanding
Plant returns to store 6,75,000
4,50,000
25,000
—
3,75,000
2,00,000
50,000
75,000 12,37,500
5,62,500
—
2,500
—
3,50,000
25,000
3,00,000
(historical cost) (On March 31, 2004) (On March 31, 2005)
Work certified
Work uncertified
Cash received
Material at site 20,00,000
75,000
17,50,000
75,000 Full
37,500
The plant is subject to annual depreciation @33% on written down value method. The contract is likely to be completed on March 31, 2005.
Required :
(i) Prepare the contract A/c. Determine the profit on the contract for the year November, 2003 to October, 2004 on prudent basis, which has to be credited to P/L A/C.
8 (0)
6. PQR Ltd. is evaluating a proposal to acquire new equipment would cost Rs. 3.5 million and was expected to generate cash inflows of Rs. 4,70,000 a year for nine years. After that point, the equipment would be obsolete and have no significant salvage value. The company’s weighted average cost of capital is 16%. The management of the PQR Ltd. seemed to be convinced with the merits of the investment but was not sure about the best way to finance it. PQR Ltd. could raise the money by issuing a secured eight–year note at an interest rate of 12%. However, PQR Ltd. had huge tax–loss carry forwards from a disastrous foray into foreign exchange options. As a result, the company was unlikely to be in a position of tax-paying for many years. The CEO of PQR Ltd. thought it better to lease the equipment than to buy it. The proposals for lease have been obtained from MGM Leasing Ltd. and Zeta Leasing Ltd. The terms of the lease are as under :
MGM Leasing Ltd. Zeta Leasing Ltd.
Lease period offered
Number of lease rental payments with initial lease payment due on entering the lease contract
Annual lease rental
Lease terms equivalent to borrowing cost (Claim of lessor)
Leasing Proposal coverage
Tax rate 9 years
10
Rs. 5,44,300
11.5% p.a.
Entire Rs. 3.5 million
cost of equipment
35% 7 years
8
Rs. 6,19,140
11.41% p.a.
Entire Rs. 3.5 million
cost of equipment
35%
Both the Leasing companies were in a tax – paying and write off their investment in new equipment using following rate :
Year 1 2 3 4 5 6
Depreciation rate 20% 32% 19.20% 11.52% 11.52% 5.76%
Required :
(i) Calculate the NPV to PQR Ltd. of the two lease proposals.
(ii) Does the new equipment have a positive NPV with (i) ordinary financing (ii)lease financing?
(iii) Calculate te NPVs of the leases from the lessors view points. Is there a chance that they could offer more attractive terms?
(iv) Evaluate the terms presented by each of the lessors.
5+3+3+5=16 (0)
7. (a) You are analysing the beta for ABC Computers Ltd. and have divided the Company into four broad business groups, with market values and betas for each group.
Business group Market value
of equity Unleveraged
beta
Main frames
Personal Computers
Software
Printers Rs. 100 billion
Rs. 100 billion
Rs. 50 billion
Rs. 150 billion 1.10
1.50
2.00
1.00
ABC Computers Ltd. had Rs. 50 billion in debt outstanding.
Required :
(i) Estimate the beta for ABC Computers Ltd. as a Company. Is this beta going to be equal to the beta estimated by regressing past returns on ABC Computers stock against a market index. Why or Why not?
(ii) If the treasury bond rate is 7.5%, estimate the cost of equity for ABC Computers Ltd. Estimate the cost of equity for each division. Which cost of equity would you use to value the printer division ? The average market risk premium is 8.5%.
2+4=6 (0)
(b) Explain the ‘Ageing Schedule’ in the context of monitoring of receivables. 3 (0)
(c) Discuss any three ratios computed for investment analysis. 3 (0)
8. (a) The following summarizes the percentage changes in operating income, percentage changes in revenues, and betas for four pharmaceutical firms.
Firm Change in Change in Beta
revenue operating income
PQR Ltd.
RST Ltd.
TUV Ltd.
WXY Ltd. 27%
25%
23%
21% 25%
32%
36%
40% 1.00
1.15
1.30
1.40
Required :
(i) Calculate the degree of operating leverage for each of these firms Comment also.
(ii) Use the operating leverage to explain why these firms have different beta.
3+3=6 (0)
(b) What is debt Securitisation? Explain the basic debt securitisation process. 6 (0)
9. (a) Consider a firm that has existing assets in which it has capital invested of Rs. 100 crores. The after – tax operating income on assets – in – place is Rs. 15 crores. The return on capital employed of 15% is expected to be sustained in perpetuity, and company has a cost of capital of 10%. Estimate the present value of economic value added (EVA) of the firm from its assets in place. 4 (0)
(b) A firm is considering offering 30 – day credit to its customers. The firm like to charge them an annualized rate of 24%. The firm wants to structure the credit in terms of a cash discount for immediate payment. How much would the discount rate have to be? 4 (0)
(c) Discuss the risk – considerations in financing of current assets. 4 (0)