Syllabus12 - Dec2014 - P8 Cost
Syllabus12 - Dec2014 - P8 Cost
Syllabus12 - Dec2014 - P8 Cost
INTERMEDIATE EXAMINATION
GROUP I
(SYLLABUS 2012)
The figures in the margin on the right side indicate full marks.
This paper contains three questions. All questions are compulsory, subject to
internal choice as per instruction provided against each question.
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
Suggested Answer_Syl12_Dec2014_Paper_8
(f) The variable and semi variable costs of producing 50,000 units are ` 6 per unit and
`12 per unit respectively. If at 20,000 units, these total costs add up to ` 4,80,000, what
is the amount of fixed cost component of the semi variable cost?
(g) M. Ltd. does not use any debt in its capital structure. The company has earnings
before interest and tax of ` 2,00,000 per annum and the capitalization rate is 12%.
Assume corporate tax of 30%. Calculate the value of the firm according to MM
Hypothesis.
(h) Ascertain the discounted value at 10% p.a. at the end of year 1 of an investment of
`2,00,000 to be made at the end of year 2 and ` 3,00,00 made immediately.
(i) The proprietor’s fund is `45,00,000 and ratio of fixed assets to proprietor’s funds is 0.75.
Find the amount of net working capital.
(j) What is the acceptance rule for a project under the internal rate of return parameter?
Answer: 1.
As per CAS, material cost includes purchase cost, transport inwards and excludes any
damages or penalty paid to any authority.
(b) Salary to foreman is production overheads. Bonus paid to foreman is part of this
employee cost and is taken as production overhead and charged to the production
shop based on his time spent in supervising that shop.
(c) Cost of power is a utility and hence a direct expense. Direct expense includes the cost
of standby utilities. Hence 1,25,000 should be charged to the products in the ratio of
units of power per unit of product x no. of products produced. Since units per product
are not given, if we assume same rate of power consumption, 125000 in the ratio 1:2:2:3
i.e. 15625, 31250, 31250, 46875 for A, B, C, D.
(d) Special permit charges are direct expenses for X, amortised at 3,00,000 per annum,
assuming annual production period. Permit charges are treated as direct expenses.
(f) Total Cost at 50,000 units = 18 x 50,000 = 9,00,000; Cost at 20,000 = 4,80,000. Difference in
costs/ diff. in qty = 4,20,000/30,000 = ` 14 per unit. At 20,000 level, Variable cost = 14 x
20,000 = 280,000. Hence fixed cost component = 480,000-280,000 = 2,00,000
(j) If IRR of the project ‘r’ is > K, the cost of capital, accept the project. If r < K, reject the
project; If r = K, indifference point, I.e. accept or reject.
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 2
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2. Answer any three questions: 16x3=48
(a) (i) The standard time per unit is 10 minutes. Time available in a day is 8 hours. Hourly
rate of labour is fixed on a piece rate of ` 5. X produces 60 units a day and Y
produces 72 units a day. What will be each of their daily earnings under Piece-
rate and Rowan Scheme? 4
(ii) How will you treat the different types of idle time cost? 4
(iii) The following details are available relating to a consignment of 1,200 kgs of
material X despatched by the supplier on an order:
(a) Basic Invoice price = ` 20 per kg (without considering trade discount)
(b) Sales Tax = 8% of invoice price
(c) Trade Discount 10% on invoice price
(d) Insurance = ` 1,000
(e) Delivery charges = ` 250
(f) Cost of containers: `600 per container; Each container holds 50 kg of
material. When containers are returned within 6 weeks, rebate allowed is
`400 per container. Containers are normally returned on time. There is no
sales tax, discount, insurance or delivery charge applicable to the
containers. Material X is supplied in containers. Container Costs are paid
separately.
(g) Two containers were lost in transit. This is considered abnormal.
(h) One container of material was rejected after receipt, on inspection and
discarded along with the material, (considered normal).
(i) Three containers were damaged in transit/loading/unloading before they
reached the stores. No material was useable from these. This is a normal loss
in every consignment of 24 containers.
Present a statement showing the itemwise treatment of the above, stating your
remarks for each, in accordance with CAS for material cost and arrive at the final
cost (`/kg) of the material to be used to record the value of receipts in the stores
ledger. 8
(b) (i) PQ Ltd. has two production shops P and R manufacturing products ‘PDT’ and ‘RS’
respectively. Staff X, Y and Z work in shop P, staff R and S work in shop R and
foreman F supervises shops P and R. ‘A’ is the accounts assistant in the Accounts
Department who does the accounting and the payment.
Salesmen M and N market products PDT and RS respectively. The company pays
the staff at certain specified rates for the hours worked. The following information
is given:
SI. Details X Y Z R S F A M N
No.
I Total hours worked as 1440 1440 1340 1640 1640 1600 1000 600 600
per time sheet
II Overtime hours 50 50 50
included in I
III Night Shift hours 20 20 20 150 150 170
(included in I above,
in addition to II)
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 3
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IV Normal wage rate per 40 40 40 40 40 100 80 65 75
hour (`/hr)
V Overtime allowance 20 20 30
`/hr (in addition to IV)
VI Night Shift Allowance 30 30 30 30 30 45
`/hr (in addition to IV)
VII Idle time during the 70 70 70 70 70 70
day due to sudden
unexpected overhaul
(hours included in I
above)
Additional Information:
All the night shift and overtime done by X, Y, Z, R, S and F were done only in shop P
due to power failure during the normal hours.
Salary of A will be in the ratio 5:3 for products PDT and RS respectively.
Present a statement showing the item-wise amounts that you would include under
Direct Labour and appropriate overhead for each type of product. Comment on the
treatment of the overhaul cost as per item VII above. 13
(ii) What are defectives? How would you treat them in Cost Accounts? 3
(c) (i) A manufacturing company buys its monthly requirement of 7500 units of material
in 10 equal instalments every year. Purchase cost per unit is 15 and ordering cost
is ` 450 per order. Inventory carrying cost is 15% p.a.
At what quantity of purchase will the ordering costs equal the inventory carrying
costs? What is the total annual cost under the prevailing inventory policy?
If the supplier is willing to offer a discount of 3% on supplies more than 22,500 per
order, what would you recommend as the revised order quantity? Evaluate by
comparison with the option of ordering at economic order quantity. 3+2+3=8
(ii) The following information relates to the activities of production Dept. M of MTH Ltd.
for Nov 2014:
Materials Consumed: `3,83,000; Direct labour: `5,74,000; Factory overhead
chargeable to Dept. M: ` 2,75,760; Labour hours worked: 18,384 hours; Machine
hours: 3064 hours;
One job order carried out in Dept. M has the following details:
Material Consumed: ` 11,000; Direct Labour Cost = ` 19,000; Direct labour hours:
540 hours;
Machine hours worked: 85 hours. Find the amount of factory overheads for the
job under the following methods of overhead absorption: % of direct material
cost, % of direct labour cost, % of prime cost, direct labour hour rate and
machine hour rate. 8
(d) (i) A product passes through two processes, machining and finishing. Each is a cost
centre. 1000 kgs of raw material (i.e. 100 pieces) are machined in a production
period. 5% of the input in kgs is the normal machining loss in the form of
machining waste, but 100 pieces come out of the process. There is a further loss
of 4% in the Finishing process from the weight of each piece that was sent in. 10%
of the number of pieces were finally scrapped and sold at ` 25 piece. Some of
the expenses incurred are listed below:
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 4
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(a) For every 100 pieces of input, the machining dept. uses a special cleaning
material pack which is purchased at a base price of `10,000; VAT 14.5%. The
additional cost of transporting it to the shop floor is ` 1,200 per pack.
(b) There are two special computers used for designing specifications in the machine
shop. A computer professional who is on a monthly salary of ` 30,000 attends to
the repairs and maintenance of this machine and 19 other machines in the
company. The company feels it is not economical to establish a procedure to
time his work on various machines since log of computer down-time is not
maintained.
(c) The Finishing Department hires special equipment at `25,000 per production
period.
(d) Since the Finishing Dept. did not finish on time, 15,000 was payable to the
customer as penalty.
Present a statement showing the direct expenses of each department—
Machining and Finishing. What will be the components of direct expenses per
piece and per kg of the final product relating to the given information? Present
your answer in line with the disclosure requirement as per CAS 10. 8
(ii) What is imputed cost? Give an example of imputed cost. Explain its position in a
product cost sheet and in the decision making evaluation process. 4
(d) (iii) A firm has purchased a plant to manufacture a new product. The cost data are
given below:
Estimated annual sales 36,000 units
Material ` 4 per unit
Direct labour ` 0.6 per unit
Overheads - Manufacturing ` 24,000 p.a.
Administrative expenses ` 28,800 p.a.
Selling Expenses 15% of sales
Calculate the selling price if profit per unit is ` 1.50. Assume whatever is produced
is sold. 4
Answer: 2. (a)
(i) Standard time = 10 minutes per piece = 6 units per hour.
X: Std time for 60 units = 10 hrs. Hrs saved = 2. Rowan’s premium = 8hrs x 2 hrs/10 hrs x 30
`/hr = `48
Wages = 8 x 30 + 48 = `288
Y: Std time = 12 hrs. Rowan’s premium = 8 hrs x 4/12 x 30 = `80
Wages = 8 x 30 + 80 =` 320
Piece rate X: 60 x 5 = `300; Y: 72 x 5 = ` 360.
(ii) Idle time cost:
Unavoidable idle time is usually for an insignificant period and is charged to the
production order or standing order.
Normal idle time is booked to factory overhead.
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 5
Suggested Answer_Syl12_Dec2014_Paper_8
Abnormal idle time is for a significant period and is not charged to cost. It is adjusted
through the Costing P and L A/c.
(iii)
(b) (i)
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 6
Suggested Answer_Syl12_Dec2014_Paper_8
F 50x30 1500
Sub total - worker hours 100
Sub total - overtime premium 3500
Night Shift allowance
X 20x30 600
Y 20 x 30 600
Z 20x30 600
R 150x30 4500
S 150 x 30 4500
F 170x45 7650
Sub total - worker hours 360
Sub Total- Night Shift Allowance 18,450
Foreman’s Salary 153000/(4870+2 97912 153000/(4870+ 55088
1530 x100 = 153000 740) x 4870 2740)x 2740
Total Worker hours supervised by F 4410 + 100+360 = 2740
4870
Sub total - Production Overheads 119862 55088
Abnormal Idle Time
70 hours x 5 persons x 40 ` = 14000;70 hours of F x 100 `/hr = 7000;
Charged to Costing P and L A/c to eliminate distortion
Administration Overheads
A:1000 x 80 5/8 x 8000 5000 3/8 x 8000 3000
Selling Overheads
M 600 x 65 39,000
N 600 x 75 45,000
(ii) Defectives are items produced in a manufacturing process, but are not up to the
specifications of good output. They can be reworked or sold as seconds.
Rectification costs of normal defectives are treated as part of product or process cost if
identifiable with a specific product or process. If not identifiable, they are treated as
manufacturing overhead.
Abnormal defectives’ rectification costs are charged to the profit and loss account.
(c)
(i) Ordering costs = 450 x 7500 x 12 / q; Carrying cost = q/2 x 15 x 15%
When ordering cost = carrying cost, we have EOQ;
Q 2 = 450 x 7500 x 12 x 2 / (15 x 0.15) = 6000 units.
For EOQ = 6000, ordering cost = carrying cost per annum.
Current Policy:
Purchase cost = 7500x12x15= 13,50,000
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 7
Suggested Answer_Syl12_Dec2014_Paper_8
At EOQ, ordering cost = 7500 x 12/6000 x 450 = 6750; Carrying cost = 6750; Purchase cost
= 13,50,000
Total cost = 13, 63, 500
At 22,500 order qty,
Carrying cost = 22500/2 x 0.97 x 15 x 15 % = 24553; Ordering cost = 7500 x 12 / 22500 x 450
= 1800
Purchase cost = 7500 x 12 x 0.97 x 15 = 13,09,500.
Total Cost = 13,35,853.
It is better to take the discount.
(ii)
(d) (i)
Calculation of Machining
Input Kg. Value (`)
1,000 kg 10,000
Add: VAT ----- 1,450
Add: Transport Cost ----- 1,200
Less Normal loss 5% 50
Total cost for 950 kg. 950 12,650
Cost per kg (12,650 /950) 13.32
Calculation of Finishing
Input kg. Value (`)
950 12,650
Add: Repair and ----- 1,500
maintenance Cost
Add: Special Equipment ------ 25,000
Less: Normal loss 4% 38
Total Cost for 912 kg. 912 39,150
Lees: 10% scrapped 91.2 228
Total Cost for 820.8 kg. 820.8 38,922
Cost per unit (38,992 /820.8) 47.42
Penalty- Financial Charges; Not a direct expenses; Not to be taken as any cost.
Direct expenses includes material or labour traceable into the cost unit, but not part of the
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 8
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output.
Cost of material includes purchase cost, taxes and transport inwards.
2. (d)
(ii) Imputed costs are hypothetical or notional costs, not involving cash outlay, computed
only for the purpose of decision making. CAS specifically provide for exclusion of
imputed cost from the cost sheet in every form- material, labour and overhead. Imputed
costs are like opportunity costs. E.g. interest on funds generated internally. When
alternative capital investment proposals are evaluated, imputed cost of capital from
internal funds is used for decision making.
2. (d)
Profit = 15
Total = 6.1
It keeps two months’ stock of raw materials, one month’s stock of finished goods
and a cash balance of ` 2,00,000. There is no work-in-progress. 8
(ii) The following is the capital structure of P Ltd. as on 31st March, 2014:
6,00,000 equity shares at ` 10 each fully paid
10,000 9% preference shares of ` 100 each fully paid
30,000 12% debentures of ` 100 each
The equity share sells at ` 20 per share. The dividend expected next year is ` 2.5
per share, which is expected to grow at 5% per annum forever. Corporate tax
rate is 30%.
(a) Compute the weighted average cost of capital based on the existing capital
structure.
(b) If the company raises an additional debt of `25,00,000 by issuing 14% debentures,
resulting in increasing the expectation on equity dividend to ` 2.70 per share and
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 9
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leaving the growth rate unchanged and the fall in equity share price to ` 18 per
share, find the revised weighted average cost of capital. 8
(b) (i) Lokesh Ltd. is considering buying a machine costing `15,00,000 which yields the
following annual income:
End of year 1 2 3 4 5
Annual Income after 3,50,000 3,72,000 3,10,000 1,75,000 1,10,000
Depreciation but before tax
P.V. factor at 12% of `1 0.893 0.797 0.712 0.636 0.567
Corporate tax rate applicable is 30%. Depreciation is on straight line basis for 5
years. There is no scrap value. Normal rate of return is 12%. Round off calculations
to the nearest rupee and calculate:
(a) Pay-back period
(b) Discounted pay back period
(c) Net Present Value
(d) Profitability Index. 8
(ii) What are the assumptions of the Modigliani-Miller theory on capital structure and
the overall cost of capital? 8
(c) (i) The following information is given to you:
Gross Profit ` 1,08,000
Shareholders’ funds ` 6,00,000
Gross Profit Margin 25%
Ratio - Credit Sales to total sales 80%
Ratio - Total Turnover to Total Assets 0.3 times
Ratio-Closing Inventory to Total Sales 1/5 times
Average debtors 20 days
Current ratio 1.5
Ratio-Long Term Debt to equity 80%
(Use 360 days per year for calculations)
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Answer: 3. (a)
(i) Computation of annual manufacturing cost and cash cost of sales
Working Notes:
D 2.5
(i) Cost of Equity Capital (Ke) = mp g 20 .05
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(iii) Cost of 12% Debentures (Kd) = r(1 - T)
Working Notes:
D 2.70
(i) Revised cost of equity (Ke) = mp g 18 .05
= 0.098
3. (b) (i)
Annual Depreciation = 15,00,000/5 = ` 3,00,000
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 12
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3 5,17,000 0.712 3,68,104 13,01,428
4 4,22,500 0.636 2,68,710 15,70,138
5 3,77,000 0.567 2,13,759 17,83,897
3. (c) (i)
Sales = 1,08,000 / 25 % = 4,32,000;
Credit sales = 80 % = 3,45,600
Cash Sales = 86,400
Current ratio = 1.5. Hence Current assets = 1.5 x current liabilities = 1.5 x 3,60,000
Current assets = 5,40,000
Less: Debtors 19,200
Less: Inventory 86,400
Balance = Cash/Bank 4.34,400
3. (c) (ii)
Operating Leverage:
Operating leverage refers to the impact of change in sales on the level of operating profits
of the firm. Other things remaining the same, higher the Degree of operating leverage (DOL),
higher will be the change in EBIT (Earnings before interest and taxes) for the same change in
the number of units sold. If firm A has higher DOL than firm B, then for the same increase in
market demand, A will make a higher profit than B and vice versa. DOL is high when
contribution is high.
DOL = Contribution / EBIT
Financial Leverage (FL) is the % increase in EPS for a given % level of increase in EBIT. The
degree of financial leverage (DFL) = EBIT/ EBT. DFL measures the fixed financial charge
against the operating profit of the firm. Other things remaining the same, higher the DFL,
higher will be the change in EPS for the same level of change in EBIT.
Indifference point is the level at which the EPS remains the same irrespective of the debt-
equity mix.
For EBIT below indifference point, option with lower debt should be preferred.
For EBIT above indifference point, option with higher debt is preferred.
For EBIT = indifference point, any option is the same since EPS is the same.
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