PRAVEEN MAHAJAN CLASSES

CLASSES FOR CA FINAL SFM/ IPCC- Cost & FM

BG3-3E, PASCHIM VIHAR, NEW DELHI

9871255244, 8800684854
IPCC- COST ACCUNTING AND FINANCIAL MANAGEMENT- NOV 2011 (SOLUTION)
MARKS

The P/V ratio of Delta Ltd. is 50% and Margin of safety is 40%. The Company sold 500
units for Rs 5,00,000. Calculate
a)
BEP
b)
Sales in units to earn a profit of 10% on sales

SOLUTION
PV ratio 50%
Variable cost ratio 50%
M/S ratio 40%
BEP
60%
Sales Rs 5,00,000 @ 500 units
SP per unit-Rs 1,000
a)

BEP

BEP

Rs 3,00,000

Fixed cost

total sales x Break even ratio

5,00,000 x 0.6 = Rs 3,00,000
i.e 300 units
Fixed cost
P/V ratio
Fixed cost
0.50
3,00,000 x 0.50 = Rs 1,50,000

b)

Sales to earn a profit of 10% on sales

P/V ratio

Fixed cost + Profit

Sales
Let sales be x, so desired profit is 10% of x
0.50
= 1,50,000 + 0.10x
x
.50x 0.10x
=
1,50,000
0.40 x =
1,50,000
X
=
1,50,000
0.40
=
Rs 3,75,000

Contd.

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

Or (alternative solution)
Sales

Statement of marginal cost (500 units)

Rs/unit
Rs
Sales
1,000
5,00000
Variable cost (50%)
500
2,50000
Contribution
500
2,50,000
Fixed cost
1,50,000
Profit
1,00,000

= Fixed cost + profit

PV ratio

(If information is desired in quantity terms

contribution per unit is used instead of P/V ratio)

Sales
X

= Fixed cost + profit

Contribution/unit
=
1,50,000 + (0.10) (1000)x
500

500x

1,50,000 + 100x

400x

1,50,000

1,50,000 = 375 units

400

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 1

b.

X executes a piece of work in 120 hours as against 150 hours allowed to him. His hourly
rate is Rs 10 and he gets a Dearness allowance of Rs 30 per day of 8 hours worked, in
addition to his wages. You are required to calculate total wages received by X under the
following incentive schemes
a
Rowan premium plan
b
Emerson efficiency plan

Solution

Dearness Allowance
No. of days worked
Dearness Allowance received
Time allowed
Actual time taken
Time saved
Basic wage rate per hour

Rs 30/day of 8 hours
120 hours
=
15 days
8hrs/day
15 days x Rs 30 per day = Rs 450
150 hours
120 hours
30 hours
Rs 10

Rowan Plan = Basic wages + Dearness allowance + (Time saved x basic wage rate)x Time taken
Time allowed
120x10
+
450
+
30 x 10 x 120
150
1200 +
450
+240
= Rs 1,890
Emerson Plan = wages under Emerson plan depends on efficiency ratio
Efficiency Ratio = Time Allowed x 100 = 150 x 100 = 125%
Time Taken
120
According to Emerson efficiency plan if efiiency is above 100%, Bonus is 20 % of
basic wage rate + 1% increase for every 1% increase in efficiency
Total wages = Basic wage + Dearness Allowance + 0.20 x Basic wage + 0.25 x Basic Wage
120 x 10 + 450 + 0.20 x 120 x 10 + 0.25 x 120 x 10
= Rs 2190

A new customer with a 10% risk of nonpayment desires to establish business connections with
you. He would require 1.5 months credit, and is likely to increase your sales by Rs 1,20,000 p.a.
Cost of sales amounts to 85% of sales. Tax Rate is 30%. Should you accept the offer, if the
required rate of return is 40% (after Tax)?
Solution on next page
page

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 2

Statement of profit
Rs
1,20,000
12,000_
1,08,000

Sales
Less Bad debts
Less Cost of sales
(0.85 x 1,20,000)
Profit before tax
Less Income tax (30%)
Profit after tax
Average collection period
Debtors turnover ratio

1,02,000
6,000
1,800
4,200
12months
Debtors turnover ratio
12months = 8 times
1.5 months

Debtors turnover ratio

Cost of sales
Average Debtors
Average Debtors
1,02,000 = Rs 12,750
8
Required tate of return
40%
Opportunity cost
Average debtors x Required rate
12,750 x 0.40
= 5,100
Net Profit (Loss)
4,200 - 5,100
= Rs (900)
Since, sale to new customer yields a loss of Rs 900, so offer of new customer should not be
accepted.

Beta Ltd has furnished following information

Earning per share
Dividend payout Ratio
Market price per share

Rs 4
25%
Rs 40

Rate of tax
Growth rate of dividend

30%
8%

The company wants t raise additional capital of Rs 10 Lakhs including Debt to Rs 4Lakhs.
The cost of debt (before tax) is 10% upto Rs 2 Lakhs, and 15% beyond that. Compute the
after tax cost of capital
Solution on next page

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 3

SOLUTION

EPS
DPS
Market Price
Tax
g
Ke

Rs 4
0.25 x 4 = 1
Rs 40
30%
8%

d1 + g
P0

1(1.08) + 0.08 = .107 or 10.7%

40
Kd ( upto Rs 2 lacs)
=
Interest (1- Tax rate)
Net proceeds
2,00,000 x 0.10 + 2,00,000 x 0.15 = 8.75%
4,00,000
Statement of overall cost of capital
Source
weight
Cost of capital
Product
Equity
6,00,000
0.107
64,200
Debt
4,00,000
0.0875
35,000
99,200
Ko = Product =
99,200
= 0.0992 or 9.92%
Weight
10,00,000

Solution

X Ltd recovers Overhead at a predetermined rate of Rs 50 per man day. The total .
8
Factory overhead incurred and the man - days actually worked were Rs 79 lakhs
and 1.5 lakh days respectively. During this period 30,000 units were sold. At the end
of the period . 5,000 units were held in stock but there was no opening stock of Finished
goods. Similarly, though there was no stock of uncompleted units at the beginning of the
period, at the end of the period there were 10,000 uncompleted units, which may be
reckoned at 50% complete.
On analyzing the reasons, it was found that 60% of the Unabsorbed OH were due to
defective planning and the rest were attributable to increase in OH costs. How would
Unabsorbed OH be treated in cost accounts
Recovered OH =
=
Actual OH
=
Under recovery =

No. of man days x Rate per Man Day

1,50,000 x 50 = Rs 75,00,000
=Rs 79,00,000
Actual OH Recovered OH
79,00,000 75,00,000 = Rs 4,00,000

Under recovery of OH due to abnormal reasons (Defective Planning) is transferred (Debited) to Costing P & LA/C
Under recovery of OH due to normal reasons ( Increase in costs) is charged to production using supplementary
rate
contd.

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 4

Under recovery due to defective planning

Debited to costing Profit and loss A/c)
Under recovery due to increase in cost

= 60% = 60% of Rs 4,00,000 = Rs 2,40,000

= 40% = 40% of Rs 4,00,000 = Rs 1,60,000

Supplementary Rate

= Under recovered OH =
Rs 4,00,000 x 0.40______
Equivalent Production
(30,000 + 5,000+ 10,000x0.5) units
= Rs 1,60,000 = Rs 4 / unit
40,000 units
Statement of under recovery charged to production
Increase in cost of Units Sold
= 30,000 x 4
= Rs 1,20,000
Increase in cost of closing stock
= 5,000 x 4 = Rs 20,000
Increase in cost of work-in progress
= 10,000x0.5x4 = Rs 20,000

The Financial statements of a company contain the following information for the year
ending 31st marchParticulars
Cash
Sundry debtors
Short term investments
Stock
Prepaid Expenses
Total current assets
Current liabilities
10% Debentues
Equity share capital
Retained earnings

Rs
1,60,000
4,00,000
3,20,000
21,60,000
10,000
30,50,000
10,00,000
16,00,000
20,00,000
8,00,000

Statement of Profit for year ended 31st March

Particulars
Rs
Sales (20% cash sales)
40,00,000
Less Cost of goods sold
28,00,000
Profit before interest and tax
12,00,000
Less Interest
1,60,000
Profit before tax
10,40,000
Less tax at 30%
3,12,000
Profit after tax
7,28,000
Calculate
a.
Quick ratio
b.
Debt equity ratio
c.
Return on capital employed raio
d.
Average collection period (assuming 360 day year)

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 5

Solution
Quick ratio

Current Assets Stock Prepaid expenses

Current Liabilities
30,50,000 - 21,60,000 - 10,000 = 0.88 times
10,00,000

Debt- equity ratio

_____________Debt______________
Equity share capital + Retained earnings
___________16,00,000_________
20,00,000 + 8,00,000

Return on capital
Employed

EBIT__________
Equity + Retained earnings + Debt
12,00,000________
20,00,000 + 8,00,000 + 16,00,000
27.27%

=
=
Average collection period =
=
=

a.

360 days____ x average debtors

Net credit sales
360_____ x 4,00,000
40,00,000 x 0.8
45 days

The following details are available of process X for August

Opening Work-in-progress
8,000 units
Degree of Completion & cost
Materials (100%)
Rs 63,900
Labour ( 60%)
Rs 10,800
Overheads (60%)
Rs 5,400
Input 1,82,000 units at
Rs 7,56,900
Labour paid
Rs 3,28,000
Overheads Incurred
Rs 1,64,000
Units Completed and transferred to next process
1,58,000 units
Units Scrapped
14,000 units
Degree of Completion
Materials
100 %
Labour and overhead
70 %
Scrap value to be adjusted in Direct material cost Rs 8 per unit
Normal loss is 8% of Total input including opening work in process.
Assuming Average Method of Inventory is used, you are required to compute
Equivalent production and cost per unit.

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 6

32 Solution
Input

Op WIP
Units
Introduced

Statement of Equivalent production

units
Output
Units
Equivalent production
Materials
Labour &
overheads
8,000 Normal Loss
15,200
Transfer to
1,82,000 Next Process
1,58,000 1,58,000 100%
1,58000
Cl. WIP
18,000 18,000
100%
12,600
Total
1,91,200
Abnormal gain
(1,200)
1,90,000

b.

1,76,000
(1,200)
100%
1,74,800

Statement of cost per unit

Cost
Eq. Production

1,70,600
(1,200)
1,69,400

Intput
Materials
Op WIP
Units Intro
Less Realizable
value of NL

1,21,600

6,99,200

1,74,800

Labour
Op. WIP
Current period

10,800
3,28,000

3,38,800

1,69,400

Overhead
Op. WIP
Current period

5,400
1,64,000

1,69,400

1,6,400

100%
70%
100%

Cost per unit

63,900
7,56,900

Alpha Ltd. has furnished the following Balance sheet as on 31 st March Liabilities
Amount
Assets
Amount
Equity Share Capital
Fixed Assets
30,00,000
(1,00,000 Equity shares of Rs 10 each) 10,00,000
General Reserve
2,00,000
Current Assets
18,00,000
15% Debentures
28,00,000
Current liabilities
8,00,000
Total
48,00,000
Total
48,00,000
Additional Information
Annual Fixed cost other than
Tax rate
30%
Interest
28,00,000
Variable Cost ratio
60%
Total Asset turnover ratio 2.5
You are required to calculatea. EPS
b. Combined Leverage

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 7

Solution

Asset turnover ratio

2.5

Sales

Sales___
Total assets
Sales ______
48,00,000
48,00,000 x 2.5 = Rs 120,00,000

Statement of Profit
Sales
120,00,000
Variable cost
72,00,000
Contribution
48,00,000
Fixed cost
28,00,000
Profit before Interest Tax
20,00,000
Interest 15% of 28,00,000
4,20,000
Profit before tax
15,80,000
Tax (30%)
4,74,000
Profit after tax
11,06,000
EPS
=
PAT_____
=
11,06,000 = 11.06
No. of equity shares
1,00,00098]lgfq
Combined Leverage
=
Operating leverage x Financial leverage
Contribution x EBIT
EBIT
EBT
=
48,00,000 x 20,00,000
= 3.038 times
20,00,000
15,80,000

a
.

The trading and profit & loss A/c of Beta Ltd for the year ended 31st March 2011 is given
below:
Particulars
Amount Particulars
Amount
To Opening stock
By Sales (Credit)
20,00,000
Raw materials 1,80,000
By Closing Stock:
Work in progress 60,000
Raw materials 2,00,000
Finished goods 2,60,000 5,00,000
Work in progress 1,00,000
To Purchases (Credit)
11,00,000
Finished Goods 3,00,000 6,00,000
To Wages
3,00,000
To Production Expenses
2,00,000
To Gross Profit c/d
5,00,000
Total
26,00,000
Total
26,00,000
To administration Expenses
1,75,000 By Gross Profit
5,00,000
To Selling Expenses
75,000
To Net Profit
2,50,000
Total
5,00,000
Total
5,00,000
The Opening and Closing Balances of Debtors were Rs 1,50,000 and Rs 2,00,000
respectively, whereas Opening and Closing Creditors were Rs 2,00,000 and Rs 2,40,000
respectively. Compute Working Capital Requirement by Operating Cycle Method

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 8

Solution

Computation of Operating Cycle

Raw material conversion period

365 x Average Stock of Raw material

Raw material consumed

=
=

WIP conversion Period

Finished Goods Conversion Period

=
=
=

=
=

Debt Conversion Period

Creditors Payment Period

=
=
=

=
Operating Cycle

=
Working capital

=
=

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

365 x 1,80,000 + 2,00,000

2___________
1,80,000 + 11,00,000 2,00,000
64 days
365 x Average Stock of WIP
Factory Cost
365 x 60,000 + 1,00,000
2_________
10,80,000 + 3,00,000 + 2,00,000
+ 60,000 1,00,000
19 days
365 x Average stock of Finished Goods
Cost of Production
365 x 2,60,000 + 3,00,000
2__________
15,40,000 + 2,60,000 3,00,000
68 days
365 x Average Debtors
Net Credit Sales
365 x 1,50,000 + 2,00,000
2_______
20,00,000
32 days
365 x Average Creditors
Net Credit Purchases
365 x 2,00,000 + 2,40,000
2
___
3,00,000
73 days

Raw material conversion period + WIP conversion Period

+ Finished Goods Conversion Period + Debt Conversion
Period - Creditors Payment Period
64 + 19 + 68 + 32 + - 73
= 110 days
Sales x operating Cycle
365
20,00,000 x 110
=
365

Rs 6,02,740

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 9

b.

The following figures have been extracted from the cost records of a
manufacturing company

Stores
Amount
WIP
Amount
Opening Balance
9,000
Opening Balance
18,000
Purchase of Material
48,000
Direct Wages Applied 18,000
Transfer from WIP
24,000
Overheads Applied
72,000
Issues to WIP
48,000
Closing balance of
Issues to Repairs and
WIP
12,000
Maintenance
6,000
Deficiencies found in Stock
taking
1,800
Finished Products
Entire Output is sold at a Profit of 10% on actual cost from
Work-in-progress
Others
Wages incurred Rs 21,000, Overhead Incurred Rs 75,000
Draw a.
Stores Ledger Control A/c
b.
Work-in-progress Control A/c
c.
Overheads Control A/c
d.
Costing Profit & Loss A/c
______STORES LEDGER CONTROL A/c
Bal b/d
9,000 Wip LC
48,000
GLA
Fac OH
(Purch)
48,000 Control A/c
(Repairs)
6,000
WIP LC
Cost P&L A/C
(Tr. Frm WIP) 24,000 (Abnormal
Loss) (B/F) 1,800
Cl. Bal
25,200
81,000
81000

Factory overhead control A/c______

SLC
WIP
(Repairs)
6,000 (Rec OH)
72,000
GLA
(OH incurred) 75,000

Wage

Cost.P/L A/c

Control A/c

3,000 (B/F)
84,000

12,000
84,000

Wage Control A/c____

GLA 21,000 WIP.LC 18,000
(Wages

Fac OH

Paid)

Control A/c 3,000

21,000

Work in progres Ledger Control A/C

Bal b/d 18,000 Tr. To SLC 24,000
Wages
Cost.P/L A/c 1,20,000
Control A/c 18,000 (B/F)
Fac.OH
Cont A/c 72,000
(Rec OH)
SLC
48,000 Bal c/d
12,000
(Receipts
From Stores___________________________
1,56,000
1,56,000

Costing Profit & Loss A/c________

WIP LC
1,20,000 Sales
1,32,000
Gross Profit 12,000
(10% of sales)
___
_______
1,32,000
1,32,000
SLC A/C
Gross Pr.
12,000
(Ab Loss)
1,800
WIP. LC
12,000
(Under recovery)
GLA (Loss Tr)
(b/f)
1,800
13,800
13,800

21,000

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 10

Distinguish between
a.
Cost Reduction and Cost Control
b.
Fixed Budget and Flexible Budget
c.
Operating Lease and Financial Lease
d.
Net present value Method and Internal Rate of return

A Ltd is considering the purchase of a machine which will perform some .

operations which are at present performed by workers. Machines X and Y
are the alternative . models. The following details are available:
Particulars
Machine X
Machine Y
Cost of Machine
1,50,000
2,40,000
Estimated Life of Machine
5 years
6 years
Estimated cost of Maintenance p.a
7,000
11,000
Estimated cost of Indirect material p.a
6,000
8,000
Estimated Savings in Scrap p.a.
10,000
15,000
Estimated cost of supervision p.a.
12,000
16,000
Estimated savings in Wages p.a
90,000
1,20,000
Depriciation will be charged on Straight Line basis. Tax rate is 30%.
Evaluate the alternatives according to(a) Averag rate of return method
(b) Present value Index Method assuming Cost of capital being 10%

Solution next page

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 11

Solution
Statement of Cash outflows and Cash inflows Of Machine X_______________________________
Amount Period Factor@5% Present value
Cash outflows
Purchase price

Cash Inflows
Savings in Scrap
Savings in Wages
Cost of maintenance
Cost of Indirect Material
Cost of supervision
PBDT p.a.
Depreciation 1,50,000/5
PBT
PAT 70%
Depriciation
Operating Cash profits

1,50,000

10,000
90,000
(7,000)
(6,000)
(12,000)
75,000
(30,000)
45,000
31,500
30,000
61,500
61,500
Net Present Value

Profitability Index

Accounting Rate of Return

1-5

3.79

1,50,000

2,33,085
83,085

PV of Cash inflows =
2,33,085 = 1.5539
PVof Cash outflows
1,50,000
Average Accounting profits( PAT) p.a. = 31,500_ x 100 = 21%
Net Investment
1,50,000
Contd. Next page

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 12

Statement of Cash outflows and Cash inflows Of Machine Y___________________________

Amount Period Factor@5% Present value
Cash outflows
Purchase price

Cash Inflows
Savings in Scrap
Savings in Wages
Cost of maintenance
Cost of Indirect Material
Cost of supervision
PBDT p.a.
Depreciation 2,40,000/6
PBT
PAT 70%
Depriciation
Operating Cash profits

2,40,000

15,000
1,20,000
(11,000)
(8,000)
(16,000)
1,00,000
(40,000)
60,000
42,000
40,000
82,000
82,000
Net Present Value

Profitability Index

Accounting Rate of Return

1-6

4.354

2,40,000

3,57,028
1,17,028

PV of Cash inflows =
3,57,028 = 1.4876
PVof Cash outflows
2,40,000
Average Accounting profits( PAT) p.a. = 42,000_ x 100 = 17.5%
Net Investment
2,40,000

Conclusion
Since Profitability Index of Machine X is higher so machine X should be purchased
However, Incase of Mutually exclusive proposals with unequal lives decision is be taken on the basis of Equal
annual NPV
EANPV
=
NPV___________________
Present value annuity factor for life of project
EANPV of machine X
=
83,085 =
21,922
3.79
EANPV of machine Y
=
1,17,028 =
26,878
2,40,000
Since, EANPV of Machine Y is higher so Machine Y should be purchased

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 13

b.

Gama Ltd has furnished the following information

Standard cost data per unit of Production
Materials:
10 kgs@ Rs 10per Kg
Labour:
6 hours @ 5.50 per hour
Variable OH: 6 hours @ 10 per hour
Fixed OH:
Rs 4,50,000 per month
(based on Normal volume of 30,000 hrs)

Compute

a.
b.
c.
d.

8
Actual cost data for August month
Material used: 50,000 Kg @ Rs 5,25,000
Labour paid : Rs 1,55,000 for 31000 hrs worked
Variable OH: Rs 2,93,000
Fixed OH:
Rs 4,70,000
Actual Production: 4,800 units

Material cost variance

Labour cost Variance
Fixed OH cost variance
Variable OH cost variance

SOLUTION

Materials
Labour
Variable OH
Fixed OH
Hrs

Standard (5,000 units)

(30,000 hrs/6 hrs per unit)
Units per unit
Total
50,000 10
5,00,000
30,000 5.5
1,65,000
30,000 10
3,00,000
Budgeted
per hr Total

30,000 15

Actual (4,800 units)

Units per unit Total
50,000 10.5 5,25,000
31,000
5
1,55,000
31,000
2,93,000

Recovered
Std hrs per hr Total
For actual
production
4,800x6
15

4,50,000

Material Cost Variance

Labour Cost Variance

=
=

Variable OH Cost Variance

=
=

Fixed OH Cost Variance

=
=
=

4,32,000

Actual
Hrs
per hr Total

31,000

4,70,000

Std. Cost for actual production Actual Cost

5,00,000 x 4800
5,25,000
5000
45,000 Adverse
Std. Cost for actual production Actual Cost
1,65,000 x 4800
5000
3400 Favourable
Std. Cost for actual production 3,00,000 x 4800
5000
5,000 Adverse
Recovered OH - Actual OH
4,32,000
- 4,70,000
38,000 Adverse

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

1,55,000

Actual Cost
2,93,000

CLASSES FOR CA FINAL SFM/IPCC COST FM

Page 14

Attempt any four out of five questions

a.
Elucidate the responsibilities of chief financial officer
b.
Explain the relevance of Time value of Money
c.
Discuss ABC analysis as a system of Inventory control
d.
Explain the terms Notional Profit and Retention money in contract cosing
e.
Explain
a.
Bridge Finance
b.
Essentials of Budget

PRAVEEN MAHAJAN CLASSES 9871255244, 8800684854

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Page 15