Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management

Guideline Answers to Nov 2014 Exam Questions CA IPCC

COST ACCOUNTING AND FINANCIAL MANAGEMENT
Question 1 is compulsory (4 5 = 20 Marks)
Answer any five questions from the remaining six questions (16 5 = 80 Marks). [Answer any 4 out of 5 in Q.7]

Question 1 (a): Materials Stock Levels Reverse Working

Following details are related to a manufacturing concern:
Reorder Level
Economic Order Quantity
Minimum Stock Level
Maximum Stock Level
Average Lead Time
Difference between Minimum Lead Time and Maximum Lead Time
Calculate (a) Maximum Consumption per day, (b) Minimum Consumption per day.
Solution:

5 Marks
1,60,000 units
90,000 units
1,00,000 units
1,90,000 units
6 days
4 days

Refer Q.No.15, Page 2.38 of Students Handbook on Cost A/cing & Fin. Management
Refer Q.No.2427, Page 2.14 of Cost Accounting & Fin. Management A Practical Guide

Let Maximum Lead time = X, Minimum Lead time = Y.

X+Y
= 6,
Average Lead Time =
2

So, X Y = 4
So, X + Y = 12

On addition (to cancel Y), 2X = 16,

So, X = 8,

Y=84=4

Hence, Maximum Lead Time = 8 days, Minimum Lead Time = 4 days

Reorder Level = Maximum Usage Maximum Lead Time
1,60,000 units = Maximum Usage 8 days
Maximum Level

So, Maximum Usage = 20,000 units per day.

= ROL + EOQ (ROQ assumed as EOQ) (Minimum Usage Minimum Lead Time)

1,90,000 = 1,60,000 + 90,000 (Minimum Usage 4 days)

So, Minimum Usage = 15,000 units per day

Question 1 (b): Marginal Costing BEP and related Computations

5 Marks
Zed Limited sells its product at ` 30 per unit. During the quarter ending on 31st March, it produced and sold 16,000 units and
suffered a loss of ` 10 per unit. If the volume of sales is raised to 40,000 units, it can earn a profit of ` 8 per unit.
You are required to calculate:
(a) Break Even Point in Rupees.
(b) Profit if the sale volume is 50,000 units.
(c) Minimum Level of Production where the Company need not to close the production if unavoidable Fixed Cost is ` 1,50,000.
Solution: Similar to Q.No.9, Page 11.17 of Students Handbook on Cost A/cing & Fin. Management [M 10 Qn]
Similar to Q.No.6, Page 11.4 of Cost Accounting & Fin. Management A Practical Guide [N 96 Qn]
1. Marginal Cost Statement (filled up after computing PVR as per Note below)
Particulars
Situation I (16,000 units)
Situation II (40,000 units)

Less:
Less:

p.u.

p.u.

Sales

30

Variable Cost (bal. fig.) (Sales Contrib.)

10

16,000` 30=4,80,000

30

40,000` 30=12,00,000

1,60,000

10

4,00,000

Contribution at 66.67% (see Note below)

20

3,20,000

20

Fixed Cost (bal. fig.) (Contrib. Profit)

Profit/ (Loss)

8,00,000

4,80,000

4,80,000

16,000` 10=(1,60,000)

40,000 ` 8= 3,20,000

Nov 2014.1

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management
Note: PV Ratio =
2.

Change in Pr ofit
3,20,000 (1,60,000)
2
4 ,80,000
100 =
=
= 66.67% =
Change in Sales
12,00,000 4,80,000
7,20,000
3

Fixed Costs
PV Ratio
(b) Profit when Sales = 50,000 units

(a) Break Even Point (in ` )=

4,80,000
= ` 7,20,000.
66.67%

Profit = Contribution () Fixed Cost = (50,000 units ` 30 66.67%) less ` 4,80,000 = ` 5,20,000
3.

Shut Down Point (Quantity) =

Avoidable Fixed Cost

4 ,80,000 1,50,000
= 16,500 units.
=
Contribution p.u.
20

Question 1 (c): Capital Structure Theories Indifference Point

5 Marks
Alpha Ltd requires funds amounting to ` 80 Lakhs for its new project. To raise funds, the Company has following two alternatives:
(a) To issue Equity Shares (at par) amounting to ` 60 Lakhs and borrow the balance amount at the interest of 12% p.a. or
(b) To issue Equity Shares (at par) and 12% Debentures in equal proportion.
The IncomeTax Rate is 30%.
Find out the point of indifference between the available two modes of financing and state which option will be beneficial in
different situations.
Solution: Similar to Q.30, Page 18.32 of Students Handbook on Cost A/cing & Fin. Management [M 03 Qn]

Let the EBIT at the Indifference Point level be ` E

Particulars
Alternative 1
Description
Less:
Less:

EBIT
Interest

Alternative 2

ESC = ` 60 Lakhs, Debt=` 20 Lakhs

E
` 20 Lakhs 12% = 1,20,000

ESC = ` 40 Lakhs, Debt=` 40 Lakhs

E
` 40 Lakhs 12% = 4,80,000

E 1,20,000
0.3E 36,000
0.7E 84,000
60,000 Shares

E 4,80,000
0.3E 1,44,000
0.7E 3,36,000
40,000 Shares

0.7E 84,000
60,000

0.7E 3,36,000
40,000

EBT
Tax at 30%
EAT = Residual Earnings for ESH

No. of Equity Shares (assuming FV ` 100)

EPS =

(amounts in ` )

Re sidual Earnings
No. of Equity Shares

0.7E 84,000
0.7E 3,36,000
=
60,000
40,000
So, for same EPS, required EBIT = ` 12,00,000
EPS = ` 12.6 per Share.

For indifference between the above alternatives, EPS should be equal. So,
Solving, E = 12,00,000

Beneficial Method in different situations:

Situation
Option to be chosen
EBIT below Indifference
Option 1 with lower
debt (Interest Burden)
Point ` 12,00,000
EBIT equal to Indifference
Any alternative can be
chosen.
Point ` 12,00,000

EBIT above Indifference

Point` 12,00,000

Option 2 with higher

debt (Interest Burden)

Reason

When ROCE and EBIT are low, a high DOL should be properly
managed with low DFL, lower borrowings and interest burden.
Same EPS under both alternatives.
When ROCE and EBIT are high, use of Debt funds is justified, and
maximizes gain to Equity Shareholders by way of higher ROE and
EPS. (This is called Leverage Effect or Gearing Effect).

Question 1 (d): Capital Structure Theories M&M Approach

5 Marks
A Ltd and B Ltd are identical in every respect except Capital Structure. A Ltd does not employ Debt in its capital structure
whereas B Ltd employs 12% Debentures amounting to ` 10 Lakhs. Assuming that
(a) All assumptions of MM model are met.
(c) EBIT is ` 2,50,000 and
(b) The IncomeTax Rate is 30%.
(d) The Equity Capitalization Rate of A Ltd is 20%.
Calculate the Average Value of both the Companies and also find the Weighted Average Cost of Capital for both the Companies.

Nov 2014.2

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management
Solution: Similar to Illus. in Page 18.14 of Students Handbook on Cost A/cing & Fin. Management [N 09 Qn]

1.

EAT of A Ltd (Pure Equity Firm) = EBIT (100% Tax Rate) = ` 2,50,000 (100% 30%) = ` 1,75,000.

2.

Value of A Ltd (Pure Equity, i.e. Unlevered Firm) =

3.

Value of B Ltd (Levered Firm) = Value of Levered Firm + (Debt Tax Rate)

EAT
1,75,000
= ` 8,75,000
=
Equity Capitalisation Rate
20%

= ` 8,75,000 + (` 10,00,000 30%)

4.

= ` 11,75,000

Weighted Average Cost of Capital is as under

A Ltd (Pure Equity Firm) = Equity Capitalisation Rate given = 20%.

B Ltd (Levered Firm) = 20% (Since, M&M Approach is applicable, WACC is constant irrespective of D/E Mix.)

Question 2 (a): Contract Costing Contract A/c, and Contractees A/c

8 Marks
Z Limited obtained a contract No. 999 for ` 50 Lakhs. The following details are available in respect of this contract for the year
ended 31st March 2014:
Particulars
`
Materials Purchased
1,60,000
Materials issued from Stores
5,00,000
Wages and Salaries Paid
7,00,000
Drawing and Maps
60,000
Sundry Expenses
15,000
Electricity Charges
25,000
Plant Hire Expenses
60,000
SubContract Cost
20,000
Materials returned to Stores
30,000
Materials returned to Suppliers
20,000
The following balances relating to the Contract No.999 for the year ended on 31st March 2013 and 31st March 2014 are available:
As on 31st March 2013
As on 31st March 2014
Work Certified
` 12,00,000
` 35,00,000
Work Uncertified
` 20,000
` 40,000
Materials at Site
` 15,000
` 30,000
Wages Outstanding
` 10,000
` 20,000
The Contractor receives 75% of Work Certified in cash. Prepare Contract Account and Contractees Account.
Solution: Similar to Q.No.3, Page 6.17 of Students Handbook on Cost A/cing & Fin. Management [M 08 Qn]
1. Contract No.999 Account for the year ended 31st March 2014
Particulars
Particulars
`

To balance b/d Work Certified

Work Uncertified
To Material at Site b/d
To Material issued
To Materials directly purchased
To Wages (7,00,000 + 20,000 10,000)
To Drawings and Maps
To Sundry Expenses
To Electricity Charges
To Plant Hire Charges
To SubContract Cost
To Notional Profit balancing figure
Total

12,00,000
20,000
15,000
5,00,000
1,60,000
7,10,000
60,000
15,000
25,000
60,000
20,000
8,35,000
36,20,000

By Work in Progress Work Certified

Work Uncertified
By Materials Returns Stores
Supplier

`
35,00,000
40,000
30,000
20,000

Note: It is assumed that Materials are returned

to Supplier, directly from the Site itself.

By balance c/d Material at site

Nov 2014.3

Total

30,000

36,20,000

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management
Particulars

Particulars

To Profit & Loss A/c transfer (Note b)

4,17,500 By Notional Profit b/d
8,35,000
To Reserve Profit c/d balancing figure
4,17,500
Total
8,35,000
Total
8,35,000
To WIP b/d
35,40,000 By Reserve Profit b/d
4,17,500
To Material at Site b/d
30,000
Note:
Work Certified
35,00,000
(a) Percentage of Completion =
=
= 70%
Contract Pr ice
50,00,000
Cash Re ceived
2
2
(b) So, Profit transferred to P&L A/c=
Notional Profit
=
` 8,35,000 75% = ` 4,17,500
Work Certified
3
3
2. Contractees A/c
Particulars

To balance c/d (bal. figure)

Total

26,25,000

By balance b/d (80% of Work Certified on Opening Date)

By Bank [75% of (` 35,00,000 ` 12,00,000)]

26,25,000

Total

Question 2 (b): Cash Flow Statement

Balance Sheets of Star Ltd are as under
Liabilities
Share Capital
Reserves
Profit & Loss A/C.
Debentures
Provision for Taxation
Proposed Dividend
Sundry Creditors
Total

Particulars

9,00,000
17,25,000
26,25,000

8 Marks
Balance Sheets (in ` Lakhs)

31.03.13
24.00
4.50
1.80

2.10
3.00
24.60
60.00

31.03.14
30.00
6.00
3.00
6.00
3.00
6.00
21.00
75.00

Assets
Plant & Machinery
Buildings
Investments
Sundry Debtors
Stock
Cash in Hand/Bank

31.03.13
15.00
12.00

21.00
6.00
6.00

31.03.14
21.00
18.00
3.00
15.00
12.00
6.00

60.00

75.00

Total

With the help of following additional information, prepare Cash Flow Statement:
(a) Depreciation on Plant and Machinery was charged @ 25% on its Opening Balances and on Building @ 10% on its
Opening Balances.
(b) During the year, an Old Machine costing ` 1,50,000 (Written Down Value ` 60,000) was sold for ` 1,05,000.
(c) ` 1,50,000 was paid towards IncomeTax, during the year.
Solution: Similar to Q.No.3, Page 15.20 of Students Handbook on Cost A/cing & Fin. Management [M 12 Qn]

Particulars

To Bank A/c (Tax paid) (given)

To balance c/d (given)
Total

Particulars

1. Provision for Tax Account

`
Particulars

1,50,000
3,00,000

By balance b/d
By P&L A/c (Provn. for the year) (bal. fig.)

2,10,000
2,40,000

4,50,000

Total

4,50,000

2. Plant & Machinery Account

`
Particulars

To balance b/d
To P&L A/c (Gain on Sale) (10500060,000)
To Bank A/c (New M/c Bought) (bal.fig)

15,00,000
45,000
10,35,000

Total

25,80,000

By Depreciation A/c (25% of 15,00,000)

By Cash A/c Sale Proceeds of Machinery
By balance c/d (given)

Nov 2014.4

Total

3,75,000
1,05,000
21,00,000
25,80,000

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management
3. Building Account
`

Particulars

To balance b/d
To Bank A/c Purchase (bal. fig.)
Total

12,00,000
7,20,000
19,20,000

Particulars
By Depreciation A/c (10% of 12,00,000)
By balance c/d (given)
Total

1,20,000
18,00,000
19,20,000

4.Cash Flow Statement of Star Ltd for the year ended 31st March 2014 (using Indirect Method)
Particulars
`
A. CASH FLOWS FROM OPERATING ACTIVITIES
Profit for the year after all adjustments and transfers (3,00,000 1,80,000)
Adjustments for:
Transfer to Reserve (6,00,000 4,50,000)
Proposed Dividend of this year (assumed entire Dividend of last year paid)
Provision for Taxation (WN 1)
Depreciation (3,75,000+1,20,000)
Profit on Sale of Plant & Machinery (WN 2)

Less:

1,20,000
1,50,000
6,00,000
2,40,000
4,95,000
(45,000)

Operating Profit Before Working Capital Changes

Adjustments for Working Capital Changes
Increase in Stock
(12,00,000 6,00,000)
Decrease in Debtors
(21,00,000 15,00,000)
Decrease in Creditors
(24,60,000 21,00,000)

(6,00,000)
6,00,000
(3,60,000)

Cash Generated from Operations Before Income Tax

Income Taxes Paid

12,00,000
(1,50,000)

15,60,000

Net Cash Flow from / (used in) Operating Activities (A)

B. CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Plant & Machinery
(WN 2)
Purchase of Building
(WN 3)
Purchase of Investments
(3,00,000 Nil)
Sale of Plant & Machinery

10,50,000

(10,35,000)
(7,20,000)
(3,00,000)
1,05,000

Net Cash Flow from / (used in) Investing Activities (B)

C. CASH FLOWS FROM FINANCING ACTIVITIES
Dividend Paid (Previous Year Dividend, now paid)
Issue of Debentures
(6,00,000 Nil)
Issue of Share Capital
(30,00,000 24,00,000)
Net Cash Flow from / (used in) Financing Activities (C)

(19,50,000)

(3,00,000)
6,00,000
6,00,000
9,00,000

D.
E.

Net Increase / (Decrease) in Cash & Cash Equivalents (A) + (B) + (C)
Cash & Cash Equivalents at the beginning of the period

NIL
6,00,000

F.

Cash & Cash Equivalents at the end of the period (D + E)

Note:

Interest Rate on Debentures not given, hence not adjusted. Alternatively, it can be assumed that Debentures are
issued on the last day of the Financial Year, and hence no adjustment as to interest is required.

6,00,000

Question 3 (a): Flexible Budget

8 Marks
RST Limited is presently operating at 50% capacity and producing 30,000 units. The entire output is sold at a price of ` 200 per
unit. The cost structure at the 50% level of activity is as under:
Particulars
Particulars
`
`
Direct Material
75 per unit Factory Expenses (25% fixed)
20 per unit
Direct Wages
25 per unit Selling and Distribution Expenses (80% of Variable)
10 per unit
Variable Overheads
25 per unit Office and Administrative Expenses (100% fixed)
5 per unit
Direct Expenses
15 per unit
Nov 2014.5

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management

The Company anticipates that the Variable Costs will go up by 10% and Fixed Costs will go up by 15%.
You are required to prepare an Expense Budget, on the basis of marginal cost for the Company at 50% and 60% level of activity
and find out the profits at respective levels.
Solution: Similar to Q.No.6, Page 12.20 of Students Handbook on Cost A/cing & Fin. Management [M 13 Qn]
Expense Budget for RST Ltd
50% Activity Level

Particulars

60% Activity Level

30,000 units

30,000
60% = 36,000 units
50%

` 200

`200

` 75
` 25
` 15
` 25
[75% of ` 20] = ` 15
[80% of ` 10] = ` 08
` 163
` 37
[30,000 37] = ` 11,10,000

[` 75 + 10%] = ` 82.50

[36000 20.70] = ` 7,45,200

[25% 20 30,000] = 1,50,000

[1,50,000 + 15%] = 1,72,500

[20% 10 30,000] = 60,000

[60,000 + 15%] = 69,000

Sales Quantity
Sales Price
Variable Overhead

(a) Direct Material

(b) Direct Wages
(c) Direct Expense
(d) Variable Overheads
(e) Factory Expenses
(f) Selling and Distribution
Sub Total

Contribution p.u.
Total Contribution

[` 25 +10%] = ` 27.50
[` 15 + 10%] = ` 16.50
[` 25 + 10%] = ` 27.50
[` 15 + 10%] = ` 16.50
[` 08 + 10%] = ` 08.80

` 179.30
` 20.70

Fixed Overhead

(a) Factory Expenses

(b) Selling and Distribution Expenses
(c) Office and Administration Expenses

[5 30,000] = 1,50,000

[1,50,000 + 15%] = 1,72,500

Sub Total

3,60,000

4,14,000

Profit

7,50,000

3,31,200

Question 3 (b): Ratio Analysis Preparation of Balance Sheet

From the following information, prepare Balance Sheet of a Firm:
Stock Turnover Ratio (based on Cost of Goods Sold)
7 times
Rate of Gross Profit to Sales
25%
Sales to Fixed Assets
2 times
Average Debt Collection Period
1.5 months
Current Ratio
2
All sales are on credit basis.

8 Marks
Liquidity Ratio
Net Working Capital
Net Worth to Fixed Assets
Reserves and Surplus
Long Term Debts

1.25
`.8,00,000
0.9 times
0.25 times
Nil

Solution: Similar to Q.No.12, Page 14.17 of Students Handbook on Cost A/cing & Fin. Management
Similar to Q.No.12, Page 14.11 of Cost Accounting & Fin. Management A Practical Guide
Balance Sheet of .
Liabilities

Capital
Reserves & Surplus
Current Liabilities
Total

Assets

`
(WN 8)
(WN 8)
(WN 1)

28,80,000
7,20,000
8,00,000

Fixed Assets
Current Assets
Stock
Debtors
Bank

44,00,000

Nov 2014.6

`
28,00,000

(WN 5)
(WN 2)
(WN 6)
(WN 7)
Total

6,00,000
7,00,000
3,00,000

16,00,000
44,00,000

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management
Working Notes and Calculations

Current Assets
1. Current Ratio =
Current Liabilities

= 2 times.

So, Current Assets = 2 Current Liabilities.

Net Working Capital = Current Assets Current Liabilities = ` 8,00,000.

2 Current Liabilities Current Liabilities = ` 8,00,000.
Hence, Current Assets = 2 8,00,000 = ` 16,00,000
2. Quick Ratio =

Quick Assets
= 1.25 times.
Current Liabilities

So,

So, Current Liabilities = ` 8,00,000.

Current Assets()Stock
16,00,000()Stock
=
= 1.25
Current Liabilities
8,00,000

On solving the above, Stock = ` 6,00,000

3. Stock T/O =

COGS
Inventory

COGS
= 7 times. So, Cost of Goods Sold = ` 6,00,000 7 = ` 42,00,000
6,00,000

4. Since GP = 25% on Sales, Cost of Goods Sold = 75% of Sales. Hence, Sales =

5.

Sales
= 2.
Net Fixed Assets

6. Debtors = Sales
7.

So,

56,00,000
= 2.
Net Fixed Assets

COGS 42,00,000
=
= ` 56,00,000
75%
75%

Hence, Net Fixed Assets =

56,00,000
= ` 28,00,000
2

1.5
1.5
= ` 56,00,000
=` 7,00,000
12
12
Total Current Assets = ` 16,00,000 (WN 1)
Inventory
(WN 2) = ` 6,00,000

Debtors
(WN 6) = ` 7,00,000

Cash and Bank

(bal. fig) ` 3,00,000

8. From the Balance Sheet, after updating Items in WN 1 to 7, Net Worth = Capital + R&S = ` 36,00,000
Capital
1
` 28,80,000

Reserves & Surplus

0.25
` 7,20,000

Important Note: In the question, there is one another ratio, viz. Net Worth to Fixed Assets = 0.9 times, which is not used in the above
computation. Had it been considered, it will lead to multiple assumptions and alternative possibilities as under
(a) Net Worth = 0.9 Fixed Assets = 0.9 ` 28,00,000 = ` 25,20,000, with the breakup of Capital and Reserves & Surplus as
`20,16,000 and ` 5,04,000 respectively. This would lead to a difference in the Balance Sheet, in the Liabilities Side, of an
unexplained amount of ` 10,80,000.
(b) This difference of ` 10,80,000 cannot be considered as Long Term Debt, since Question specifically states Long Term Debts = Nil,
and cannot be considered as Current Liability / Cash Credit, since Current Ratio and Quick Ratio would get affected in such case.
(c) To overcome the anomaly, the difference ` 10,80,000 may be considered as Preference Share Capital, and the Net Worth to be
considered as Equity Shareholders Net Worth. This again is an assumption since the Question does not specify anywhere that it
is a Limited Company form of organisation.
Question 4 (a): NonIntegrated System Ledger Accounts
Following information have been extracted from the Cost Records of XYZ Pvt. Ltd:
Stores:
WorkInProgress:
`
Opening Balance
54,000 Opening Balance
Purchases
2,88,000 Direct Wages Applied
Transfer from WorkInProgress
1,44,000 Overheads Applied
Issues to WorkInProgress
2,88,000 Closing Balance of WIP
Issues to Repairs
36,000
Deficiencies found in Stock Taking
10,800
Nov 2014.7

8 Marks
`
1,08,000
1,08,000
4,32,000
72,000

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management

Finished Production:

Entire production is sold at a profit of 15% on Cost at WIP

`
1,26,000
4,50,000

Wages paid
Overheads incurred

Draw the Stores Ledger Control Account, WorkinProgress Control Account, Overheads Control Account and Costing Profit
and Loss Account.
Solution: Similar to Q.4, Pg 5.13 of Students Handbook on Cost A/cing & Fin. Management [M 05, M 08 Qn]
Similar to Q.No.4 & 5, Page 5.9 of Cost Accounting & Fin. Management A Practical Guide [M 11, N 11 Qn]
1. Stores Ledger Control Account
Particulars

Particulars

To balance b/d Opening Balance

54,000

To General Ledger Adjustment Purchases

2,88,000

To WIP Control Transfer from WIP

1,44,000

By WIP Control Materials Issued

By POH Control (Repairs)
By Stock Deficiency A/c transfer
By balance c/d (balancing figure)

Total

4,86,000

Total

`
2,88,000
36,000
10,800
1,51,200
4,86,000

2. Stock Deficiency Account

Particulars

To Stores Ledger Control Material Shortage

Note:

Particulars

10,800

By POH Control A/c transfer

10,800

Total
10,800
Total
10,800
Here, the deficiency is assumed as Normal, and transferred to POH Control A/c. Alternatively, the Deficiency can
be assumed as Abnormal, and transferred to Costing P&L A/c also.
3. Wages Control Account
Particulars

Particulars

To General Ledger Adjustment Wages paid

1,26,000

By WIP Control Direct Wages applied

By POH Control Indirect Wages transfer

Total

1,26,000

Total

`
1,08,000
18,000
1,26,000

4. Production OH Control Account

Particulars

To Stores Ledger Control Repairs &Maint.

To General Ledger Adjustment POH incurred

36,000
4,50,000

To Wages Control Indirect Wages

18,000

To Stock Deficiency A/c Normal Loss

10,800

Total

Particulars

By WIP ControlOH applied/absorbed

`
4,32,000

By Costing P & L A/c absorption

difference transferred

5,14,800

Total

82,800
5,14,800

5. WIP Control Account

Particulars

To balance b/d Opening Balance

Particulars

`
1,08,000

By Stores Control Material return/transfer

To Stores Ledger Control Materials issued

2,88,000

By Finished Goods Control prodn at

To Wages Control Direct Wages

1,08,000

Factory Cost (bal. figure)

To POH Control POH absorbed

Total
Note:

4,32,000

By balance c/d Closing Balance (given)

9,36,000

Total

Sales Value = at 15% Profit on Factory Cost = 7,20,000 + 15% thereon = `8,28,000
Stock Deficiency A/c and Wages Control A/c are given for information value.

Nov 2014.8

`
1,44,000
7,20,000

72,000
9,36,000

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management
6. Costing P & L Account
Particulars

Particulars

To Finished Goods Control Factory Cost tfr

To Costing Profit c/d
Total
To POH Control Absorption Diff. w/off
To Profit transferred to General Ledger Adjt.
Total

7,20,000
1,08,000
8,28,000
82,800
25,200
1,08,000

By Sales

8,28,000
Total

8,28,000
1,08,000

Total

1,08,000

By Costing Profit b/d

Question 4 (b):
The Capital Structure of RST Ltd is as follows
Particulars
Equity Shares of ` 10 each
10% Preference Shares of ` 100 each
12% Debentures of ` 100 each
Total
Additional Information:
(a) Profit after Tax (Tax Rate 30%) are ` 2,80,000
(b) Operating Expenses (including Depreciation ` 96,800) are 1.5 times of EBIT
(c) Equity Dividend paid is 15%
(d) Market Price of Equity Share is ` 23

8 Marks
`
8,00,000
5,00,000
7,00,000
20,00,000

Calculate:
(a) Operating and Financial Leverage
(b) Cover for Preference & Equity Dividends
(c) The Earning Yield and Price Earning Ratio
(d) The Net Fund Flow
Note: All operating expenses (excluding depreciation) are variable.
Solution: Similar to Q.No.15, Page 17.16 of Students Handbook on Cost A/cing & Fin. Management [M 12 Qn]
Profit Statement
Computation

Particulars

Sales
Less:
Less:
Less:

Variable Operating Costs

Contribution
Fixed Costs = Depreciation
EBIT
Interest

excl. Deprn

EBT
Less:
Less:
Less:

EBITD + Operating Cost =

(EBIT 1.50 times) Deprn.
= (4,84,000 1.50) 96,800
EBIT + Deprn = 4,84,000 + 96,000
(given)
EBT + Interest = 4,00,000 + 84,000
12% on 7,00,000
100%

Tax at 30%
EAT
Preference Dividend
Residual Earnings

30%
100% 30% = 70%
10% on 5,00,000

12,10,000
(6,29,200)
5,80,800
(96,800)
4,84,000
(84,000)
2,80,000
= 4,00,000
70%
(1,20,000)

(given) 2,80,000
(50,000)
2,30,000

Equity Dividend

(1,20,000)

Retained Earnings

1,10,000

No. of Shares

Earnings Per Share (EPS)

8,00,000
10

80,000 Nos.

2,30,000
Residual Earnings
=
No. of Equity Shares
80,000

2.875

Nov 2014.9

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management
Particulars

Computation

Operating Leverage

1.2 times

4,84,000
EBIT
=
4 ,00,000
EBT

1.21 times

Financial Leverage
PE Ratio
Earnings Yield Ratio (EPS Yield)
Preference Dividend Cover

5,80,800
Contributi on
=
4 ,84 ,000
EBIT

Market Pr ice per Share

23
=
Earnings per Share
2.875
2.875
EPS
=
=
MPS
23
2,80,000
EAT
=
Pref. Dividend
50,000
2,30,000
Residual Earnings
=
Eq. Dividend
1,20,000

Equity Dividend Cover

8
12.5%
5.6 times
1.916 times

Gross Funds Flow

EBIT + Depreciation
5,80,800
Retained Earnings + Depreciation =
Net Funds Flow (Note)
2,06,800
1,10,000+96,800
Note: Net Funds Flow may also be computed as Gross Funds Flow 5,80,800 less Payments (Interest 84,000, Tax 1,20,000
and Dvds 50,000 & 1,20,000) = ` 2,06,800

Question 5 (a): Costing Basics

Identify the methods of costing for the following:

4 Marks

Question

(a)
(b)
(c)
(d)

Answer [See Note]

Where all costs are directly charged to a specific job.

Where all costs are directly charged to a group of products.
Where cost is ascertainable for a single product.
Where the nature of the product is complex and method cannot
be ascertained.

Job Costing
Batch Costing
Single or Unit or Output Costing
Multiple Costing

Note: Refer Para 1.4.1, Page 1.15 of Students Handbook on Cost A/cing & Fin. Management

Question 5 (b) (c) (d): Theory Various Topics

Question

(b) Explain the treatment of Over and Under

Absorption of Overheads in Cost Accounts.
(c) Explain four kinds of Float with reference to
Management of Cash.
(d) Distinguish between Operating Lease and
Financial Lease.

4 Marks
Theory Discussion in
Students Handbook on Cost
A/cing & Fin. Management
Para 4.3.12, Page 4.12

Question Reference in Cost

A/cing & Fin. Management A
Practical Guide
Q.No.32, Page No.4.38 (Similar
to M 86, M 89, M 94, M 04, M
06, M 10 Qn)

Para 16.2.15, Page 16.13

Q.No.29, Page No.16.49

Para 21.3.5, Page 21.5

Q.No.13, Page No.21.2 (Similar

N 11 Qn)

Question 6 (a): Working Capital Debtors Management Credit Period Decision

8 Marks
PQR Ltd having an Annual Sales of ` 30 Lakhs, is reconsidering its present collection policy. At present, the Average
Collection Period is 50 days and the Bad Debts Losses are 5% of Sales, The Company is incurring an expenditure of ` 30,000
on account of collection of receivables.
The alternative policies are as under:
Particulars
Average Collection Period
Bad Debt Losses
Collection Expenses

Alternative I
40 days
4% of Sales
` 60,000
Nov 2014.10

Alternative II
30 days
3% of Sales
` 95,000

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management

Evaluate the alternatives on the basis of incremental approach and state which alternative is more beneficial.
Solution:

1.
2.
3.
4.

Particulars
Sales
Collection Expenses
Bad Debts [on Sales] (5%, 4%, 3%)
Collection Period [in days]

5.

Average Debtors [Sales

Days in (4)
]
365

Present
30,00,000
30,000
1,50,000
50

Alternative 1
30,00,000
60,000
1,20,000
40

Alternative 2
30,00,000
95,000
90,000
30

4,10,959

3,28,767

2,46,575

6. Interest on Average Debtors (assumed at 10%)

41,096
32,877
24,658
7. Total Costs [2+3+6]
2,21,096
2,12,877
2,09,658
Note: Since the Rate of Return on Investment has not been specified in the question, it is assumed at 10% in the above.
Conclusion: From the above Table, by comparing Costs, Alternative 2 is more beneficial.
Alternative Approach: Instead of assuming Interest Rate of 10%, the following evaluations are also possible (basic
computations upto Point 4 as per the above Table)

Total Cost of (Collection + Bad Debts) = 1,80,000 in both Present and Alternative 1.
Alternative 1 results in lower Collection Period of 10 days.

Present vs
Alternative 1

Whatever be the Interest Rate on Debtors, Alternative 1 is better than Present Situation, since
there is a reduction in the Collection Period, resulting in Interest Benefit.

Present vs
Alternative 2

Alternative 1
vs
Alternative 2

Total Cost of (Collection + Bad Debts) = 1,80,000 in Present and 1,85,000 in Alternative 2.
There is an additional Cost of 5,000 under Alternative 2, which has to be offset by Interest Benefit, to
obtain Indifference Point between Present and Alternative 2.
The relevant Rate of Interest may be computed as under
50 30
= 5,000. Solving, R = 56%
(4,10,959 2,46,575) R%
365
Hence, Alternative 2 is better than Present Situation, only if Rate of Interest 56% on the
Incremental Investment, for the incremental period of 20 days.
Total Cost of (Collection + Bad Debts) = 1,80,000 in Present and 1,85,000 in Alternative 2.
There is an additional Cost of 5,000 under Alternative 2, which has to be offset by Interest Benefit, to
obtain Indifference Point between Alternative 1 and Alternative 2.
The relevant Rate of Interest may be computed as under
40 30
(3,28,767 2,46,575) R%
= 5,000. Solving, R = 222%
365
Hence, Alternative 2 is better than Alternative 1, only if Rate of Interest 222% on the
Incremental Investment, for the incremental period of 20 days.

Question 6 (b): Process Costing Equivalent Production FIFO Method

The following information relate to Process A:
(i) Opening WorkinProgress
Degree of Completion:
(ii) Input 1,82,000 units at
(iii) Wages paid
(iv) Overheads
(v) Units scrapped
Degree of Completion:
(vi) Closing WorkinProgress
Degree of Completion:
(vii) Units completed and transferred to next process
(viii) Normal Loss
(ix) Scrap Value to be adjusted out of Direct Material Cost

Nov 2014.11

8 Marks
8,000 units at ` 75,000
Material 100%, Labour and Overhead 60%
` 7,37,500
` 3,40,600
` 1,70,300
14,000
Material 100%, Labour and Overhead 80%
18,000 units
Material 100%, Labour and Overhead 70%
1,58,000 units
5% of Total Input including Opening WIP
` 5 per unit

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management

You are required to compute on the basis of FIFO basis:

(a) Equivalent Production
(b) Cost Per Unit
(c) Value of Units transferred to next Process.
Solution:
Similar to Q.No.12, 13, 14 Page 8.22 to 8.24 of
Students Handbook on Cost A/cing & Fin. Management [M 87, M 98, N 09 Qn]
Similar to Q.No.12, Page 8.14 of Cost Accounting & Fin. Management A Practical Guide [M 90 Qn]

Particulars

1. Statement of Equivalent Production

Particulars
Output
Materials

Input

Transfer from:
Opg. WIP

8,000

Fresh units

1,82,000

E.U

E.U

8,000

40%

3,200

1,50,000

100%

1,50,000

100%

1,50,000

Opg WIP
fresh units(b/f)
Total tfr to Process B

1,58,000

Normal Loss (5% of 190000)

Total

Labour & OH

1,50,000

1,53,200

9,500

Abnormal Loss (b/f.)

4,500

100%

4,500

80%

3,600

Closing WIP

18,000

100%

18,000

70%

12,600

1,90,000

Total

1,90,000

1,72,500

1,69,400

Note: Transfer out of Fresh Units = Total Transfer Less Transfer out of Opening WIP = 1,58,000 8,000 = 1,50,000 units.
2. Statement of Cost per Equivalent Unit
Total Costs Equivalent Units

Cost Element
Less:

Material

7,37,500

Scrap Value of Normal Loss

(47,500)

Labour
Overhead
Total

Cost per Equivalent Unit

` 6,90,000

1,72,500

`4

` 3,40,600

1,69,400

` 2.01 (approx.)

` 1,70,300

1,69,400

` 1.01 (approx.)

` 12,00,900
3. Statement of Cost Apportionment

Item

Transfer to B

Material at ` 4/eu

Labour at ` 2.01/eu

OH at ` 1.01/eu

Total

1,50,000 4 = 6,00,000

1,53,200 2.01 = 3,08,028

1,53,200 1.01 = 1,54,014

10,62,042

Abnormal Loss
Closing WIP

4,500 4 =

18,000

18,000 4 =

72,000

6,90,000

Total

3,600 2.01 =

7,238

3,600 1.01 =

3,619

28,857

12,600 2.01 = 25,334

12,600 1.01 = 12,667

1,10,001

3,40,600

1,70,300

12,00,900

Note: Total Cost of Transfer= Opening WIP Cost ` 75,000 + Current Value Addition ` 10,62,042 = Total ` 11,37,042.
4. Process A Account (not required in Question, prepared as WN Purposes only)
Particulars
Qtty
Particulars
Qtty
`

To Opening WIP b/d

8,000

75,000

1,82,000

7,37,500

To Direct Labour
To Production Overheads

To Direct Materials

Total

1,90,000

By Process B Transfer (Note 3)

1,58,000

11,37,042

By Normal Loss (Scrap Rate ` 5 pu)

9,500

47,500

3,40,600

By Abnormal Loss

4,500

28,857

1,70,300

By Closing WIP c/d

18,000

1,10,001

1,90,000

13,23,400

13,23,400

Nov 2014.12

Total

Gurukripas Guideline Answers for Nov 2014 CA IPCC Cost Accounting and Financial Management

Question 7: Answer any four of the following:

4 X 4 = 16 Marks
Theory Discussion in
Students Handbook on Cost
A/cing & Fin. Management

Question Reference in Cost

A/cing & Fin. Management A
Practical Guide

Para 19.1.1, Page 19.1

Q.No.2, Page No.19.6 (Similar

to M 05, M 08, N 11 Qn)

Para 17.1.1, Page 17.1

Q.No.1, Page No.17.14 (Similar

to M 07, N 09, N 12 Qn)

(c) What is Internal Rate of Return? Explain.

Para 20.2.10, Page 20.8

Q.No.14, Page No.20.30

(Similar to N 08 Qn)

(d) State the different types of Packing Credit.

Para 21.3.19, Page 21.13

Q.No.27, Page No.21.2

Para 3.3.1 & 3.3.2, Page 3.8

Q.No.21,22, Page No.3.22

(Similar to N 85,94,04,07,10
and M 96, 03 Qn)

Question

(a) Why money in the future is worth less than

similar today? Give the reasons and explain.
(b) Distinguish between Business Risk and
Financial Risk.

(e) Define Labour Turnover. How is it measured?

Explain.

Nov 2014.13