Paper10 Solution
Paper10 Solution
This paper contains 4 questions. All questions are compulsory, subject to instruction
provided against each question. All workings must form part of your answer.
Assumptions, if any, must be clearly indicated.
(b) In a factory of XYZ LTD., where Standard Costing is followed, the budgeted fixed overheads
for a budgeted production of 4,800 units is `24,000. For a certain period actual (FOH)
expenditure was `22,000 resulting in a fixed overhead volume variance of ` 3,000 (Adv.)
Answer:
Fixed Overhead volume variance = `3,000 (Adv):
Budgeted Fixed overhead – Actual Production × Std. rate
= 24,000 –Actual Production × (24,000 ÷ 4,800)
Hence, 3,000 (A) = 24,000 – Actual Production × 5
Actual Production for the period: (24,000 – 3,000) ÷ 5 = 4,200 units.
(d) SAMPARK LTD. operates a throughput accounting system. The details of product B-1 per unit
are as under:
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
(f) Whether Separate Form 23C is required to be filed by a Company having two or more
different types of products covered under Cost Audit?
Answer:
The company would be required to file individual form 23C for each product under
reference even if the same auditor is appointed for all the products.
(g) A Company has been in existence since 1990 and is covered under cost audit for the first
time in 2011-12. Whether it is mandatory to indicate previous year figure while submitting the
report.
Answer:
A company coming under the purview of the Cost audit for the first time, the cost auditor
shall mention figures for the previous year(s) certifying by means of a note that the figure so
stated are the on the basis of information furnished by the management, for which he has
obtained a certificate from them.
3 2 2
(h) Given C = x – 10x +5x; R = 8x + 11x – 4. Find the total profit and hence marginal profit.
Answer:
C = x3 -10x2 + 5x
R = 8x2 + 11x -4
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
Total Profit = R – C
= 8x2 + 11x – 4 – x3 + 10x2 – 5x
= - x3 + 18x2 + 6x -4
= -(x3 – 18x2 – 6x + 4) (Say P)
dp
Marginal Profit = (3x2 -36x – 6)
dx
(j) What are the essential conditions to obtain the equilibrium position of the industry under
perfect competition?
Answer:
In order to obtain the equilibrium position of the industry under perfect competition the
following conditions are essential.
The industry gets an equilibrium position where MC=MR.
All firms in the industry get only normal profits.
At equilibrium point the Mc, AC, MR and AR are equal.
Number of the firms is constant.
Possible only in long period.
(a)
(i) What do you understand by Operating Costs? Describe its essential features and state where
it can be usefully implemented. [5]
Answer.
Operating Costs are the costs incurred by undertakings which do not manufacture any
product but provide a service. Such undertakings for example are — Transport concerns,
Gas agencies; Electricity Undertakings; Hospitals; Theatres etc. Because of the varied nature
of activities carried out by the service undertakings, the cost system used is obviously
different from that followed in manufacturing concerns.
The operating costs can be classified under three categories. For example in the case of
transport undertaking these three categories are as follows:
Operating and running charges. It includes expenses of variable nature. For example
expenses on petrol, diesel, lubricating oil, and grease etc.
Maintenance charges. These expenses are of semi-variable nature and includes the cost
of tyres and tubes, repairs and maintenance, spares and accessories, overhaul, etc.
Fixed or standing charges. These includes garage rent, insurance, road licence,
depreciation, interest on capital, salary of operating manager, etc.
The cost unit used is a double unit like passenger-mile; Kilowatt-hour, etc.
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
It can be implemented in all firms of transport, airlines, bus-service, etc., and by all firms of
Distribution Undertakings.
(ii) A group of workers consisting of 30 men above 30 years of age, 15 females above 30 years
of age, and 10 youth of age between 20-30 are paid standard hourly rates as follows:
Males ......................... `80/- per hour
Females ...................... `60/- per hour
Youth ........................... `40/-per hour
In a normal working week of 40 hours, the group is expected to produce 2,000 units of output.
During a week, the group consisting of 40 males, 10 females and 5 youth produced 1,600
units. They were paid wages @ `70/- for males, `65/- for females and `30/- for youth per hour. 4
hours were lost due to abnormal idle time. The Actual and Standard Hrs are as follows:
Standard Hrs Actual Hrs
Male 1200 1600
Female 600 400
Youth 400 200
2200 2200
Calculate;
I. Wage variance
II. Wages rate variance;
III. Labour efficiency variance;
IV. Labour mix variance;
V. Labour idle time variance. [2+3+3+4+3=15]
Answer:
Working for variance analysis from given data:
II. Labour (Wages) Rate variance = Difference in rates (Std – Act) x Act Hrs
For male ` (80 – 70) x 1,600 = `16,000 (Fav)
For Female `(60 – 65) x 400 = `2,000 (Adv)
For Youth `(40 – 30) x 200 = `2,000 (Fav)
Total = `16,000 (Fav)
III. Labour efficiency variance = (Std hrs for Act output – Act hours) x std rate
1,200
For Male 1,600 - 1,600 ` 80 = `51,200 (Adv)
2,000
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
600
For Female x 1,600 400 x `60 = `4,800 (Fav)
2,000
400
For Youth x 1,600 200 x `40 = `4,800 (Fav)
2,000
Total `41,600 (Adv)
IV. Labour mix variance = Effective hrs = Hrs paid – Idle time (hrs)
Male 1600 – 4 x 40 1440 hrs
Female 400 – 4 x 10 360 hrs
Youth 200 – 4 x 5 180 hrs
Total 1980 hrs
Total effective hours in std mix:
Male 1200 1080 hrs
x 1980
2,200
Female 600 540 hrs
x 1980
2,200
Youth 400 360 hrs
x 1980
2,200
Total 1980 hrs
The required variance = (Effective hrs in Std. mix – Actual effective hrs.) x Std. rate
For Male (1080 – 1440) x `80 `28,800 (Adv)
For Female (540 – 360) x `60 `10,800 (Fav)
For Youth (360 – 180) x `40 `7,200 (Fav)
Total `10,800 (Adv)
(b)
(i) Enumerate the factors which are to be considered before installing a System of Cost
Accounting. [7]
Answer:
The following points should be considered before installing a cost system are:
The nature, method and stages of production, the number of varieties and the quantity
of each product and such other technical aspects should be examined. It is to be seen
how complex or how simple the production methods are and what is the degree of
control exercised over them.
The designer should consider the objectives of costing system, i.e the expectations of the
management
The size, layout and organization of the factory should be studied.
Organization structure should be studied to determine the manner in which costing
system could be introduced, without altering or extending the organization
The methods of purchase, receipt, storage and issue of materials should be examined
and modified wherever considered necessary.
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
(ii) The following are the figures relating to a factory for two successive years:
Year I (`) Year II (`)
Sales 10,00,000 16,80,000
Marginal Cost of Sales 6,00,000 8,00,000
Contribution 4,00,000 8,80,000
During Year II, the selling price increased by 20% and the company implemented a cost
reduction programme very aggressively. You are required to analyse the increase in
contribution due to:
I. Increase in selling price
II. Increase in sales volume
III. Reduction in cost [3+3+3]
Answer:
Increase in Contribution = `8,80,000 – `4,00,000 = `4,80,000
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
In the given situation, the increase in the sales volume (from I year to II year) resulted in
increase in the contribution to some extent. The amount of sales is increased as the no. of
units sold has been increased. By this, the amount of contribution is also increased. The
increase in the sales volume was directly related to the increase in the contribution. There
is no relation between the sales volume and production run.
(iii) State the treatment of By-product Cost in Cost Accounting, when they are of small total
value. [4]
Answer:
Treatment of By-product cost in Cost Accounting:
When the by-products are of small total value:
Miscellaneous Income or Other Income Method
This method is adopted when the sales value of the products is very small as compared
to the sales value of the main product and is sold off without further processing. Here the
sales value of the by-product is credited to the Costing Profit & Loss A/c as miscellaneous
income. The entire joint costs (or common processing costs) are apportioned among the
main products and nothing is apportioned to the by-product.
Total cost less sales value of by-product
The sales value of the by-products is deducted from the total common costs of the main
products. The common costs, so reduced will then be apportioned among the main
products. If the by-product requires further processing or certain selling and distribution
expenses are required to be incurred, then these costs will have to be first subtracted
from the sales value of the by-products. The balance amount, if any is to be deducted
from the common costs.
(c)
(i) From the following forecast of income and expenditure prepare a Cash Budget for three
months ending on June, 2014:
Month Sales (`) Purchase (`) Wages (`) Misc. (`)
2014 February 1,20,000 84,000 10,000 7,000
March 1,30,000 1,00,000 12,000 8,000
April 80,000 1,04,000 8,000 6,000
May 1,16,000 1,06,000 10,000 12,000
June 88,000 80,000 8,000 6,000
Additional Information:
Sales: 20% realised in the month of sales, discount allowed 2%, balance realised equally
in two subsequent months.
Purchases: These are paid in the month following the month of supply.
Wages: 25% paid in arrears in the following month.
Misc. Expenses: Paid a month in arrears.
Rent: ` 1,000 per month paid quarterly in advance due in April.
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
Income Tax: First installment of advance tax ` 25,000 due on or before 15th June to be
paid within the month.
Income from Investment: `5,000 received quarterly in April, July etc.
Cash in Hand: `5,000 in April 1, 2014. [12]
Answer:
Cash Budget April – June 2014
Particulars April (`) May (`) June (`)
A) Opening Balance 5,000 6,000 (6,300)
B) Debtors Realised 1,16,000 1,07,200 96,000
C) Income from Investment 5,000
(1) 1,26,000 1,13,200 89,700
D) Creditor Paid (1,00,000) (1,04,000) (1,06,000)
E) Wages Paid
March (3,000) —
April (6,000) (2,000) —
May — (7500) (2,500)
June - - (6,000)
F) Rent (1000 x 3) (3,000) - -
G) Income Tax - - (25,000)
H) Miscellaneous Expenses (8,000) (6,000) (12,000)
(2) 1,20,000 1,19,500 1,51,500
Closing Balance (1 – 2) 6,000 (6,300) (61,800)
Working Notes:
Calculation of collection from debtors
February March April May June
Sales (`) 1,20,000 1,30,000 80,000 1,16,000 88,000
20% realised 24,000 26,000 16,000 23,200 17,600
Balance 96,000 1,04,000 64,000 92,800 70,400
Balance equally 48,000 48,000
realized in two
subsequent month
52,000 52,000
32,000 32,000
46,400
Collection from (26,000+48,00) (16,00+48,000 (23,200+52,000 (17,600+
debtor =74,000 +52,000) + 32,000) 32,000+
=1,16,000 =1,07,200 46,400)
=96,000
(iii) A shop floor supervisor of a small factory presented the following cost for Job no.421 to
determine selling price.
Per unit
Material `70
Direct Wages 18 hrs. @ ` 2.50 (Deptt. X 8 hours; Dept. Y6 hours; Deptt. Z 4 hours) 45
Chargeable Expenses (Special stores items)
5
120
Add: 33 1/3% for Overheads 40
Total Cost 160
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
It is also noted that average hourly rates for the three departments X, Y, Z are similar.
Required:
Draw up a job cost sheet.
Calculate the entire revised cost using 2014 actual figures as basis.
Add 20% to total cost to determine selling price. [8]
Answer:
In order to prepare the job cost sheet, the overhead rates of different departments will have
to be first determined on the basis of previous year's figures. The rates are as follows:
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
(a)
(i) How is “Manufacturing Activity” defined under the Companies (Cost Accounting Record
Rules), 2011? [4]
Answer.
―Manufacturing Activity‖ includes any act, process or method employed in relation to-
transformation of raw materials, components, sub-assemblies, or parts into semi-finished
or finished products; or
making, altering, repairing, fabricating, generating, composing, ornamenting, furnishing,
finishing, packing, re-packing, oiling, washing, cleaning, breaking-up, demolishing, or
otherwise treating or adapting any product with a view to its use, sale, transport, delivery
or disposal; or
Constructing, reconstructing, reconditioning, servicing, refitting, repairing, finishing or
breaking up of any products.
The above definition of ― manufacturing ― is couched in the widest possible terms and
extends the scope of cost record maintenance obligations under section 209(1)(d) of the
Act to all except those companies which qualify as SMEs under the 2011 Record Rules.
(ii) Distinguish between “Notes” and “Qualifications” in Cost Audit Report. Give suitable
examples. [4]
Answer.
Section 227(2) of the Company’s Act, 1956, requires the auditor to make report to the
shareholders on the accounts examined by him. When in any of the matters as required to
be stated, the Auditor feels that satisfactory compliance was not done by the company, the
auditor shall state the fact of none-compliances and suitably qualify the point with reason.
The same principle also holds well for the Cost Auditor, though the report is to be submitted
to the Central Government. Wherever a particular statement or basis of costing needs some
explanation or clarification, the auditor shall add suitable ―Notes‖ at appropriate places by
way of explanation. For example, if a company has added a new activity, on account of
which a portion of overhead charges to a product gets reduced during a year, this may be
explained by way of ―Notes‖.
On other hand if a company has deviated from the accepted Cost Accounting principles, in
order to inflate costs, the auditor shall make a qualified report to the Government.
For example, if a company has spent a huge amount on evaluation of new product ideas
and has charged the entire amount to the Administrative Overhead, the Cost Auditor should
qualify the excess amount and the impact on each unit of Cost of Production of the
products under audit. Such report will be a ―qualified report‖.
(b)
(i) A company has produced all accounting records within the stipulated time for your audit. It
however is unable to produce audited financial accounts, as financial audit is not yet
completed. As a cost Auditor, how would you deal with? [2]
Answer:
Cost Audit Report is finalized with provisional figures a forwarding letter should be attached
by the Cost Auditor to the aforesaid report stating clearly that the company has been
unable to produce audited financial accounts since the financial audit is not yet complete.
As such the report submitted is based on unaudited/provisional figures only as has been
given to him by the company. Subsequently a supplementary report should be submitted by
the Cost Auditor to the Government as soon as the audited financial accounts are made
available.
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
(ii) Answer the following questions with respect to the Companies (Cost Accounting Records)
Rules, 2011:
I. Whether product manufactured for 100% captive/ self –consumption shall be covered
under these Rules?
II. What does turnover mean under these Rules? Is gross turnover inclusive of excise duty?
III. Whether film industry like film producing companies/ studios registered under Indian
Companies Act shall be covered under these Rules? [2x3=6]
Answer.
I. The test of inclusion under the Rules is whether it is a production, processing,
manufacturing or mining activity resulting in a product intended for use, consumption,
sale, transport, store, delivery or disposal and whether the company carrying out the
activity falls within the criteria mentioned under Rule 3(1). If the company meets
requirement of Rule 3(1), the activity – whether or not for captive / self-consumption – will
come under the ambit of these Rules. (CARR-2011).
II. As per Rule 2(p), ―Turnover‖ means gross turnover made by the company from the sale
or supply of all products or services during the financial year. It includes any turnover
from job work or loan license operations but does not include any non-operational
income. From a reading of the Rules, it appears that the word ―Gross‖ denotes ―total‖.
Hence, the ―Turnover‖ under these Rules would exclude duties and taxes. (CARR-2011)
III. The companies (Cost Accounting Records) Rules 2011 is applicable to developing, fixing,
and washing exposed photographic or cinematographic film or paper to produce either
a negative image or a positive image. In case a film producing company is also
engaged in these activities, the same would be covered.
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
(a)
(i) What are the components of time series? [4]
Answer.
A typical time services has the following four major components:
A Secular trend: representing the long-term direction, or average movement in the time
series.
Cyclical fluctuations: which usually follow variations in the growth of the economy in
general, around a long-term, secular trend
Seasonal variations: caused by changes in weather conditions and social habits, such as
the need to buy X-mas cards in December and dresses during the festival season (Dewali
or Durga Puja).
Random or unsystematic variations: such as wars, revolutions, crop failures, natural
calamities, and changes in tastes and preferences of buyers.
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
(c)
(i) Explain the concept of Penetration pricing policy of a new product. [4]
Answer:
Penetration Price Policy:
Instead of setting a high price, the firm may set a low price for a new product by adding a
low mark-up to the full cost. This is done to penetrate the market as quickly as possible. The
assumptions behind the low penetration price policy are:
The new product is being introduced in a market which is already served by well-known
brands. A low price is necessary to attract gradually consumers who are already
accustomed to other brands.
The low price will help to maximize the sales of the product even in the short period.
The low price is set in the market to prevent the entry of new products.
(ii) What are the assumptions of COURNOT’S SOLUTION to Duopoly pricing? [4]
Answer:
A. A. Cournot, a French economist was found solution to duopoly pricing in 1838. His model is
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
(d)
(i) A firm has revenue function given by R=10Q where R=Gross Revenue and Q=Number of Units
Sold, Production Cost function is given by C = 20000+ 50(Q / 800)2
Find: the total Profit function, and the number of Units (Q) to be sold to get the maximum
Profit. [2+2]
Answer:
R = 10Q
2
Q
C 20000 50
800
Q2
Profit (P) = 10Q - 20000- 50 (Profit function)
640000
To find number of units to get the maximum profit,
2
dP d P
0 and should be - ve
dQ 2
dQ
dP 50 2Q
10 - 0
dQ 640000
100Q
10 - 0
640000
640000 10
Therefore, Q 64000
100
2
d P 100 1
- Which is negative(-ve)
2 640000 6400
dQ
P (Profit) is maximum at Q = 64000 units
640002
Maximum Profit 10 64000- 20000- 50
640000
= 6,40,000 – 20,000 – 3,20,000 = `3,00,000
(ii) The demand function is x = 80 + 2P + 5P2 where 'x' is the demand for the commodity at Price
'P'. Find the elasticity of demand at P = 5 [4]
Answer:
Determination of Elasticity of Demand
X = 80 + 2P + 5P2
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Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2
dy
Marginal Quantity demanded = 2 + 10P
dx
2
X 80 2p 5 p 80
Average Quantity demanded = 5p 2
p p p
dx x 2 10p p (2 10p)
Ep /
dp p 80 80 5p2 2p
5p 2
p
At, P = 5
5(2 50) 260 52
Ep
80 125 10 215 43
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