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com SOLUTIONS TO PROBLEMS IPCE/PCE

PAPER: COST ACCOUNTING AND FINANCIAL MANAGEMENT By : CMA RAVEENDRANATH KAUSHIK,

MA, M.Phil. , MBA , PG Tax Law, ACMA

Raveendranath Kaushik & Associates COST ACCOUNTANT Rk.rkaushik@gmail.com , mobile 9845010834 Blog: www.cmakaushik.blogspot.com

1 a.
CALCULATION OF DEGREE OF OPERATING LEVERAGE (DOL) Given Sales = Rs 14/unit Variable Cost Rs 9/unit BEP = 20,000 units

To find Fixed Cost use formula BEP = Fixed Cost / Contribution 20000 = Fixed Cost / (Rs 14-Rs9) So, Fixed Cost = Rs 1,00,000. Operating Leverage at sales lever for 25000 units and 30000units Particulars Sales at Rs 14/unit Less: Variable Cost at Rs 9/unit Contribution Less: Fixed Cost EBIT At 25000 units 3,50,000 2,25,000 1,25,000 1,00,000 25,000 At 30000 units 4,20,000 2,70,000 1,50,000 1,00,000 50,000 Contribution = Sales Variable Cost

DOL = Contribution/ EBIT

1,25,000/25000 = 5 times

1,50,000/50000 = 3 times

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1b
Calculation of Number of workers recruited and joined
Labour Turnover rate (Replacement) = Number of replacements / Average workers 8% = 36 / Average workers Average workers = 36*100/8 = 450 workers Labour Turnover rate (Separation) = Number of Separation / Average workers 6%= Number of Separations / 450 Number of Separations = 450*6% = 27 workers Labour Turnover (flux ) = (No of Separation + No. of Joining)/ Average workers 14% = (27 + No. of Joining) / 450 No. of Joining = 450*14% - 27 = 36 workers Number of workers recruited and joined = 36 Number of workers left and discharged = 27

1C
Amount after 3 years, if compounded Annually Future Value = Principal ( 1 + I )n (where I = interest rate and n = number of years) Given, Principal = 2,40,000, I = 10% and n = 3 years So, Amount (FV) = 2,40,000 (1+ 10%)3

www.cmakaushik.blogspot.com Amount = 2,40,000*1.331 = Rs 3,19,440

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Amount after 3 years, if compounded Semi Annually Amount(FV) = 2,40,000 (1+i/2)3*2 Amount (FV) = 2,40,000 (1+.10/2)6 Amount = 2,40,000 * 1.3401 = Rs 3,21,624

1 (d)
Calculation of Economic Ordering Quantity (EOQ) EOQ =

2 (Annual Usage * Ordering Cost) / Carry cost/unit 2(96000x 1000) / 20*15%

Annual Usage = 8000 unitsX 4 orders in a year X 3 kgs every finished goods = 96000 Kgs EOQ =

EOQ = 8000 kgs Decisions to accept or not Particulars Alternate Under EOQ 1 Alternate 2 Under offer of 2% discount and supply in 4 equal installments 96000/4 = 24000 kgs 96000/24000 = 4 times (Rs 20 2%*20) = Rs19.60 Rs 18,81,600 (96000*19.60) Rs 4,000 ( Rs 1000 * 4) Rs 35,280 (Rs 24000/2)*15%*19.6

Order Quantity No of order to be placed Purchase Cost (per Kg) A.Total Purchase Cost B. Order Cost C. Carrying Cost

8000 kgs 96000/8000 = 12 times Rs 20 Rs 19,20,000 (96000*20) Rs 12,000 (Rs 1000 * 12) Rs 12,000 (Rs 8000/2)*15%*20

www.cmakaushik.blogspot.com Total Cost (A+B+C) Rs 19,44,000

rk.rkaushik@gmail.com Rs 19,20,880

It is found that total cost of Alternate 2 is less than Alternate 1 and hence, the company should accept an offer of 2% discount by supplier and the supply in 4 equal installments.

2 (a)
STATEMENT OF DISTRIBUTION OF OVERHEADS (PRIMARY)

Item Indirect Materials Indirect Labour Superintendent Salary Fuel and Heat Power Rent and Raes

Insurance Meal Charges

Depreciation Total Overheads

Basis Actuals Actuals Acutals Radiator Kilowat hrs Area Capital Value of Assets No. of Employees Capital Value of Assets

Total Amount 1,25,000 2,60,000 96,000 15,000 1,80,000 1,50,000

Production Departments X (Rs.) Y (Rs.) Z (Rs.) 20,000 30,000 45,000 45,000 50,000 70,000 96,000 1,500 3,000 4,500 52,500 60,000 45,000 44,000 40,000 30,000

Service Department A (Rs.) B (Rs.) 25,000 5,000 60,000 35,000 3,750 22,500 24,000 2,250 12,000

18,000 60000

4,000 12,000

6,000 14,000

5,000 24,000

1,000 6,000

2,000 4,000

2,70,000 1174000

60,000 239,000

90,000 293,000

75,000 394,500

15,000 157,250

30,000 90,250

RE-DISTRIBUTION OF OVERHEADS (SERVICE DEPT. A AND B) Since, percentage of re-distribution is given, it is better to solve the problem using simultaneous equation method So, let x be total over head of Service Dept A Let y be total over head of Service Dept B Putting the equation, . x = 1,57,250 + 10% y -------- 1 Y = 90,250 + 20%x --------- 2 Solving 1 and 2 and substituting for x and y we get x = Rs 1,69,668 and y = Rs 1,24,184 Final Re-distribution to Production Department
Basis Total Overheads (primary) Total Amount 926,500 Production Departments X (Rs.) Y (Rs.) Z (Rs.)

www.cmakaushik.blogspot.com
1,35,734 (1,69,668*80%) 1,11,766 (1,24,184*90%)

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239,000 293,000 50,900 49,674 393,574 394,500 33,934 31,046 459,480

Service Department A Service Department B

30:30:20 25:40:25 Total Cost

50,900 31,046 320,946

2 (b)
Calculation of Ratios 1. Average Inventory Inventory turnover = Cost of goods sold / Average Inventory Cost of goods sold = Sales Gross Profit = 30,00,000 7,50,000 = Rs 22,50,000 It is given inventory turnover is 6, substitute in the above ratios 6 = 22,50,000/Average Inventory Or Average Inventory = 22,50,000/6 = Rs 3,75,000 2. Purchases Purchases = Cost of goods sold Opening Inventory+ Closing Inventory = 22,50,000-3,35,000*+4,15,000** = Rs 23,30,000 *Average Inventory = (Opening + Closing)/2 3,75,000 = [a +(a+80000)]/2 where a = opening inventory Solving for a (Opening Inventory) = Rs 3,35,000 **So, closing Inventory = a+80000 = Rs. 3,35,000+ Rs 80,000= Rs 4,15,000 2. Average Debtors Debtors Turnover = Net Credit Sales / Average Debtors Net Credit sales = Total Sales 20% of total sales ( on Cash Sales 25% credit sales means it is 20% on total sales) Net Credit Sales = Rs 6,00,000 20%*600000 = Rs 24,00,000 Substituting in above formula,

www.cmakaushik.blogspot.com 8 = 2400000/Average Debtors Average Debtors = 2400000/8 = Rs. 3,00,000

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3. Average Creditors Creditors Turnover = Net Credit Purchases/Average Creditors Net Credit Purchase = Total Purchases Cash Purchases = Rs 23,30,000 Rs 2,30,000 = Rs 21,00,000 Substituting in the above formula, 10 = Rs 21,00,000/Average Creditors Average Creditors = Rs 21,00,000/10 = Rs 2,10,000 4. Average Payment Period Average creditors/ Net Credit purchases * 365 = (Rs 2,10,000/21,00,000) * 365 = 36.5 days 5. Average Collection Period Average Debtors/Net Credit Sales * 365 = (Rs 3,00,000/Rs 24,00,000)* 365 = 45.63 days

6. Current Assets Working Capital = Current Assets Current Liabilities = Rs 2,80,000 Current Ratio = 2.4:1, which means Current Assets = 2.4 times Current Liabilities So, Current Assets = (2,80,000/2.4-1)*1 = Rs 4,80,000

7. Current Liabilites Current Assets Current Liabilities = Rs 2,80,000 Rs 4,80,000 Current Liabilities = Rs 2,80,000 Current Liabilities = Rs 2,00,000

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3 (a)
Calculation of Funds from Operations
Rs. In lakhs Net Profit for 2012 Depreciation on Plant and Machinery Depreciation on Land & Buildings Loss on Sale - Machinery Goodwill written off Interim Dividend Proposed Dividend Transfer to General Reserve Share issue writtenoff 6.70 3.00 0.50 0.20 0.80 2.50 11.00 2.00 0.20 26.90 Rs. In lakhs

Less:
Net Profit for 2011 Dividend on Investments 5.30 0.25 (5.55)

Funds from Operations

21.35

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Statement of Changes in Working Capital

Change in WC (Amount in Rs Lakhs) Increase Decrease

Particulars A CURRENT ASSETS Stock Sundry Debtors Bills Receivable Cash in Hand Total Current Assets B CURRENT LIABILITIES Sundry Creditors Bills Payable Tax Provision Total Current Liabilities

31/03/2011

31/03/2012

8.60 10.20 1.00 7.20 27.00

12.70 13.00 0.70 8.90 35.30

4.10 2.80 0.30 1.70

3.50 2.00 4.00 9.50

4.60 1.80 5.00 11.40 0.20

1.10

1.00

Working Capital Increase in Working Capital

17.50 6.40 23.90

23.90 6.40 23.90 8.80 8.80

FUND FLOW STATEMENT AS AT 31ST MARCH 2012

Sources of Fund Funds from Operation Dividend on Investment Sale of Machinery Issue of Shares Sale of Land Rs (in lakhs) 21.35 0.40 1.50 5.00 4.00 Application of Fund Increase in Working Capital Purchase of Plant Dividend Purchase of Investments Interim Dividend Rs (in lakhs) 6.40 13.70 8.00 1.65 2.50

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32.25

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32.25

3 (b)
Estimate of Profit by 4 methods Note1 Students can use any of the 4 methods out 7 methods given under Contract Accounts. I am using only 4 methods which I think is good 1st Method Notional Profit * 2 / 3 * Cash Received / Work Certified Notional Profit can be calculated by, NP= (WC+WNC) Total expenditure up to date = (10,00,000+85,000) 850000 = Rs 2,35,000 Substitute NP in the above formula Estimate of Profit = 2,35,000*2/3*Rs 816000/1000000 Conservative Estimate of Profit = Rs 1,27, 840 2nd Method Conservative Estimate of Profit = Estimated Profit * Cash Received /Contact Price Estimated Profit is worked out by, Estimated Profit = Contact Price (Expenditure to date + further expenditure to be incurred) = Rs 15,30,000 (8,50,000+1,70,000) = Rs 5,10,000 So, Conservative Estimate Profit = Rs 5,10,000* 816000 / 1530000 = Rs 2,72,000 3rd Method Conservative Estimate of Profit = Estimated profit * Work Certified / Contract Price = 5,10,000 * 10,00,000 / 15,30,000 = Rs 3,33,333

www.cmakaushik.blogspot.com 4th Method Conservative Estimate of Profit =

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Notional Profit * (Work Certified/Contract Price) * (Cash Received/Work Certifed) = 2,35,000 * (10,00,000/ 15,30,000) * (8,16,000/10,0000) = Rs 1,25,333

4 (b)
Selection among 2 Projects (NM A1 and NM A2) Calculation of Cash Inflows from two alternatives
Particulars Machine NM - A1 (Rs) 700000 60000 760000 30000 40000 45000 115000 645000 400000 245000 73500 171500 400000 571500 Machine NM - A2 (Rs) 900000 100000 1000000 90000 50000 85000 225000 775000 500000 275000 82500 192500 500000 692500

Yearly Savings Direct Wages Scraps Total Savings Annual Estimated Cash Cost Indirect Material Labour Repairs and Maintenance Annual Total Cost Net savings Less Depreciation* Net Savings before Tax Tax @ 30% Savings after Tax Add : Depreciation (Non Cash item) Annual Cash Inflows

B (A - B)

Depreciation is worked out As follows =2000000/5

2500000/5

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Evaluation
Machine NM - A1 (Rs) Pay Back Period Total Initial Capital Investment Cash Flows after Tax 2000000 / 571500 3.50 years ARR Annual Net Savings Average Investment 1,71,500 / 10,00,000 17.15% Profitability Index Present Value of Cash Inflow Investment 571500*3.805 / 2000000 1.03 1,92,500 / 12,50,000 15.40% 692500*3.605 / 2500000 .9 Accpet NM A1 Accept NM A1 Machine NM - A2 (Rs) Decision

2500000 / 692500 3.61 years Accept NM A1

So, Machine NM A1 should be accepted.

6 (a)
1. Fixed Cost for the Year BEP = Fixed Cost / PV ratio 50% x (24000x200) = Fixed Cost / 25% Fixed Cost = 25% [ 50%x(24000x200)] Fixed Cost for the year = Rs 6,00,000

2. Profit Earned for the year Contribution Fixed Cost = EBIT (i.e Profit before tax)

www.cmakaushik.blogspot.com PV ratio = Contribution/Sales or

rk.rkaushik@gmail.com PV ratio x Sales = Contribution

25% x (24000 x 200) = Rs 1200000 Profit earned for the year = Rs 1200000- Rs600000 = Rs 6,00000

3. Units to be sold to earn a target net profit of Rs 11,00000 for a year So, Contribution should be Target Profit + Fixed Cost which is Rs 11,00000+600000 = Rs 17,00,000 Contribution per unit is 25% of selling price per unit (already given in problem) So, Contribution per unit = Rs 200*.25 = Rs 50 per unit Hence, number of units to be sold in order to achieve target net profit of Rs 1100000 = 1700000/50 = 34000 units 4. Number of units to be sold to earn a net income of 25% on Cost Net income of 25% on cost means on Sales it will be 20% ((25/125)x 100) Expected Sales = (Fixed Cost + expected Income)/ P V ratio X = (600000 + 20% on X)/25% X = Expected Sales By solving for X, we get Rs 1,20,00,000 and to find out number of units sold , divide Rs 1,20,00,000 by Rs 200/units which is 60000 units 5. Selling Price per unit if Break Even point is to be brought down by 4000 units So, new break even point after brining it down is 8000 units (12000 4000) units BEP = Fixed Cost/ Contribution per unit Or Contribution per unit = Fixed Cost / BEP = 6,00,000 / 8000 = Rs 75 /unit PV Ratio = Contribution / Sales Else Sales (Selling Price) = 75/.25 = Rs 300 per unit Selling price should be increased to Rs 300 per unit in order to bring down BEP by 4000 units

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6 (b)
Statement of Reconciliation between Cost Records and Financial Accounts taking Costing Net loss as base.
Particulars Net loss as per Cost Records Add : Items not considered in Cost Accounts but, taken in Financial Accounts Dividend Received Factor OH recovered Opening Stock valuation difference Closing Stock valuation difference Notion Rent (own premises) Bank Interest Received 20,000.00 135,000.00 20,000.00 6,500.00 60,000.00 13,600.00 255,100.00 Amount (Rs.) Amount (Rs.) (35,400.00)

219,700.00 Deductions Obsolecense loss Income tax Under recovery of Admin OH Depreciation charged less Good will Doubtful Debts provision Net Profit as per Financial Accounts 16,800.00 43,600.00 25,500.00 26,000.00 25,000.00 15,000.00 (151,900.00)

67,800.00