Test Series: September, 2014

MOCK TEST PAPER 1

INTERMEDIATE (IPC): GROUP I
PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT
PART I : COST ACCOUNTING
Suggested Answers/ Hints
1.

(a)

Statement of Profit/ loss as per Financial Accounts

Amount
(Rs.)
Profit as per cost accounts

Amount
(Rs.)
3,65,200

Add: Dividend received

3,800

- Notional rent

7,200

- Other overheads (Rs.1,30,400 - Rs.1,28,000)

2,400

Less: Opening stock of Raw Materials (Rs. 55,600 - Rs.52,800)

2,800

- Opening stock of WIP (Rs.22,300 - Rs. 21,200)

1,100

- Closing stock of Raw Material (Rs. 56,000 - Rs. 54,200)

1,800

- Closing stock of WIP (Rs.18,600 - Rs. 17,500)

1,100

- Closing stock of finished goods (Rs. 18,000 - Rs. 16,000)

2,000

- Directors fees

13,400

52,000

- Interest expenses

9,600

- Prov. For doubtful debts

1,300

- Research expenses written off

13,600

Profit as per financial accounts

(85,300)
2,93,300

(b) Workings
(a) Contribution per unit

= Selling price per unit Total variable cost

= Rs.3,400 Rs.2,890 = Rs.510

(b) Profit

= Total Contribution Total Fixed Cost

= 55,000 units Rs.510 Rs.1,80,00,000
= Rs.2,80,50,000 Rs.1,80,00,000 = Rs.1,00,50,000

The Institute of Chartered Accountants of India

(i)

Break-even Sales in units

=

(ii)

Total Fixed cost

Rs.1,80,00,000
=
= 35,294.12 or 35,294 units.
Contribution per unit
Rs.510

Margin of Safety in units

= Sales units Break even sales in units = 55,000 35,294 = 19,706 units.
OR
=

Rs. 1,00,50,000
Pr ofit
=
Rs. 510
Contributionper unit

= 19,705.88 or 19,706 units.

(iii) To maintain the same amount of profit, total contribution should be equal
to Present profit + Total fixed Cost = Rs.1,00,50,000 + (Rs.1,80,00,000 +
Rs.20,00,000) = Rs. 3,00,50,000.
Revised contribution per unit = Rs.510 10% of Rs. 2,890 = Rs. 221
No. of units to be sold
=

Rs. 3,00,50,000
Rs. 221

Re quiredcontribution
Re visedcontributionper unit

= 1,35,972.85 or 1,35,973 units

Therefore, to maintain profit amount of Rs.1,00,50,000, Kevin Ltd. has to sell

80,973 (1,35,973 55,000) additional units of C123.
2.

Statement of Equivalent Production

Process III
Input
Details

Units

Output Particulars

Opening
1,600 Work on Op. WIP
WIP
Process-II 55,400 Introduced
&
Transfer
completed during
the month
Normal loss (5% of
52,800 units)
Closing WIP
Abnormal Gain
57,000

The Institute of Chartered Accountants of India

Units
1,600

Equivalent Production
Labour &
Material-A
Material-B
Overhead
% Units %
Units
%
Units
- 20
320 40
640

50,600 100
2,640

4,200 100
(2,040) 100
57,000

50,600 100

50,600 100

4,200 70
(2,040) 100
52,760

2,940
50
(2,040) 100
51,820

50,600
2,100
(2,040)
51,300

Working note:
Production units = Opening units + Units transferred from Process-II Closing Units
= 1,600 units + 55,400 units 4,200 units
= 52,800 units
Statement of Cost
Cost
(Rs.)

Material A (Transferred from previous process)

6,23,250
Less: Scrap value of normal loss (2,640 units Rs. 5) (13,200)
6,10,050
Material B
2,12,400
Labour
96,420
Overheads
56,400
9,75,270

Equivalent Cost per

units
equivalent
units (Rs.)

52,760
51,820
51,300
51,300

11.5627
4.0988
1.8795
1.0994
18.6404

Statement of apportionment of Process Cost

Amount
(Rs.)
Opening WIP

Material A

Completed opening WIP Material B (320 units Rs. 4.0988)

units-1600
Wages (640 units Rs. 1.8795)
Overheads (640 units Rs. 1.0994)

Amount
(Rs.)
24,000

1311.62
1202.88
703.62

3,218.12

Introduced & Completed- 50,600 units Rs. 18.6404

50,600 units

9,43,204.24

Total cost of 52,200

finished goods units

9,70,422.36

Closing WIP units- 4,200

Material A (4,200 units Rs. 11.5627)

48,563.34

Material B (2,940 units Rs. 4.0988)

12,050.47

Wages (2,100 units Rs. 1.8795)

3,946.95

Overheads (2,100 units Rs. 1.0994)

2,308.74
66,869.50

Abnormal gain units- 2,040

(2,040 units Rs. 18.6404)

The Institute of Chartered Accountants of India

38,026.42

Process III A/c

Particulars

Units

To Balance b/d
To Process II A/c
To Direct
material
To Direct wages
To Production
overheads
To Abnormal
gain

Amount (Rs.)

1,600
55,400

2,040

Particulars

24,000 By Normal loss

6,23,250 By Finished
goods
2,12,400 By Closing
WIP
96,420
56,400

Units

Amount (Rs.)

2,640
52,200

13,200
9,70,422.36

4,200

66,874.06*

38,026.42

59,040 10,50,496.42

59,040 10,50,496.42

* Difference in figure due to rounding off has been adjusted with closing WIP
3.

Calculation of Price of the Delhi-Jaipur-Agra-Delhi tour package

Amount
(Rs.)

Particulars

Diesel Cost (Working Note-2)

Servicing Cost

Rs. 30,000

50,000kms 754kms.

Rs.12,00,000
24,00,000kms

Rs. 2,400
30days

Rs. 12,000

Chauffeurs salary

30days

3days

3days

Total Cost
Add: Profit (25% of net takings or 1/3rd of total cost)
Add: Service Tax @12.36%
Price of the package (inclusive of service tax)

The Institute of Chartered Accountants of India

150.00
377.00

754kms.

Other set-up and office cost

2,635.00
452.40

Chauffeurs meal cost (three 200 km. completed journey Rs. 50)
Other Allocable costs:
Depreciation

Amount
(Rs.)

240.00
1,200.00

1,817.00
5,054.40
1,684.80
6,739.20
832.97
7,572.17

Working Notes
(1) Total distance of journey
To

From

Delhi
Jaipur
Agra

Distance (in Km.)

274
238
242
754

Jaipur
Agra
Delhi
Total Distance

(2) Cost of Diesel

From

To

Distance (in Km.)

II

III

Delhi
Jaipur
Agra
4.

Jaipur
Agra
Delhi

274
238
242

Total diesel Cost

(Rs.)
V= (III 16 km) IV

Price of diesel per

litre (Rs.)
IV

924.75
833.00
877.25
2,635.00

54
56
58

Total cost

Total labour hours required to make 7 revolving chairs

= 5 skilled hours + 10 semi-skilled hours + 20 unskilled hours = 35 labour hours.
Standard labour hours per unit =

35
= 5 labour hours
7

Standard labour hours for actual output = 400 units 5 = 2,000 hours
Standard cost for actual output = 2,000 hours Rs. 24 = Rs.48,000
Actual hours paid and Idle hours
Worker

hours

Idle
time
(hours)

Actual hours
worked

Rate per
hour (Rs.)

Amount
Paid
(Rs.)

Skilled

5 56 = 280

280 2% =
5.6

280 - 5.6 =
274.4

30

8,400

Semiskilled

10 56 = 560

560 2% =
11.2

560 -11.2 =
548.8

24

13,440

20 56 = 1,120

1,120 2% =
22.4

1,120-22.4 =
1,097.6

18

20,160

1,960

39.2

1,920.8

Unskilled
Total

Actual
paid

The Institute of Chartered Accountants of India

42,000

Calculation of Variances
(i)

Labour Cost Variance

= Standard Cost for actual output Actual cost

= Rs.48,000 - Rs.42,000

(ii) Labour Rate Variance

Skilled worker

= Rs.6,000 (F)

= Actual hours paid ( Standard rate Actual rate)

= 280 (24 30)

= Rs.1,680 (A)

Semi-skilled worker = 560 (24 24)

= Nil

Unskilled worker

= Rs.6,720 (F)
Rs.5,040 (F)

= 1,120 (24 18)

(iii) Labour Efficiency Variance = Std. Rate (Standard hours Actual hours worked)
Skilled worker

= 24 (5/7 400 274.4)

= 24 (2,000/7 274.4)

= Rs.271.54 (F)

Semi-skilled worker = 24 (10/7 400 548.8)

= 24 (4,000/7 548.8)
Unskilled Worker

= 24 (20/7 400 1,097.6)

= 24 [8,000/7 1,097.6]

(iv) Idle time Variance

(a) (i)

= Rs.1,086.17(F)
Rs.1,900.80 (F)

= Idle Time x Standard rate

= 39.2 hours Rs.24

5.

= Rs.543.09 (F)

= Rs.940.80 (A)

Treatment of Idle Capacity Cost

(1) If idle capacity is due to unavoidable reasons such as repairs & maintenance,
changeover of job etc., a supplementary overhead rate may be used to
recover the idle capacity cost. In this case, the costs are charged to
production capacity utilized.
(2) If idle capacity cost is due to avoidable reasons such as faulty planning,
power failure etc, the cost should be charged to Costing P&L A/c.
(3) If idle capacity is due to seasonal factors, then the cost should be charged to
cost of production by inflating overhead rates.

(ii) The various commonly used Functional budgets are:

Sales Budget

Production Budget

Direct Material Purchase Budget

Direct Labour (Personnel) Budget

The Institute of Chartered Accountants of India

(b)

The main points which distinguish Job Costing and Process Costing are as below:
Job Costing

Process Costing

(i)

A Job is carried out or a product The process of producing the product has
is produced by specific orders.
a continuous flow and the product
produced is homogeneous.

(ii)

Costs are determined for each Costs are compiled on time basis i.e., for
job.
production of a given accounting period
for each process or department.

(iii) Each job is separate

independent of other jobs.

and Products lose their individual identity as

they are manufactured in a continuous
flow.

(iv) Each job or order has a number The unit cost of process is an average
and costs are collected against cost for the period.
the same job number.

6.

Dr.

(v) Costs are computed when a job

is completed. The cost of a job
may be determined by adding all
costs against the job.

Costs are calculated at the end of the cost

period. The unit cost of a process may be
computed by dividing the total cost for the
period by the output of the process during
that period.

(vi) As production is not continuous

and each job may be different, so
more managerial attention is
required for effective control.

Process of production is usually

standardized and is therefore, quite
stable. Hence control here is
comparatively easier.

Panchal Group
Contract account for the year ended 31st March 2014
(Rs.)

To Materials purchased
To Wages paid
Add: Wages accrued
To General expenses

45,000
15,000

To Depreciation of plant
To Notional profit c/d

(Rs.)
1,25,000

60,000
12,000
12,500
86,900
2,96,400

The Institute of Chartered Accountants of India

By Work-inprogress c/d
Work certified
Work uncertified
Effect of
escalation clause
(Working note- 1)
By Materials in
hand c/d

Cr.

(Rs.)

(Rs.)

2,50,000
15,000
6,400

2,71,400

25,000
2,96,400

To Profit and loss A/c

(Working note- 2)
To Work-in-progress c/d
(Profit in reserve)

46,347

86,900

40,553
86,900

1.4.2014
To Work-in-progress b/d
Work certified
Work uncertified
Effect of escalation
clause
To materials in hand b/d

By Notional profit
b/d

86,900
1.4.2014
By Work-inprogress b/d
(profit in reserve)

2,50,000
15,000
6,400

40,553

2,71,400
25,000

Working notes
(i)

Ascertainment of effect of escalation clause:

Materials:
Effect of increased price
(Rs. 1,25,000 Rs. 25,000)

25
125

Wages:
Effect of increased wage rates:
25
Rs. 60,000
125
Total increase

Total increase
25%
(Rs.)

Increase up
to 5%
(Rs.)

Increase
beyond 5%
(Rs.)

20,000

4,000

16,000

12,000

2,400

9,600

32,000

6,400

25,600

Increase in value of work done (certified & uncertified) to date: 25% of Rs. 25,600 =
Rs. 6,400
(ii) Profit to be transferred to the profit and loss account:
Since the contract is 50% complete, two-third of the notional profit, reduced by the
proportion of cash received to work certified, is to be transferred as below:
=

2
Cash received
Notional profit
3
Work certified

The Institute of Chartered Accountants of India

=
7.

2
3

Rs. 86,900

Rs.2,00,000
Rs. 2,50,000

= Rs. 46,347

(a) Treatment of over and under absorption of overheads are:(i)

Writing off to costing P&L A/c: Small difference between the actual and
absorbed amount should simply be transferred to costing P&L A/c, if difference
is large then investigate the causes and after that abnormal loss shall be
transferred to costing P&L A/c.

(ii) Use of supplementary Rate: Under this method the balance of under and
over absorbed overheads may be charged to cost of W.I.P., finished stock and
cost of sales proportionately with the help of supplementary rate of overhead.
(iii) Carry Forward to Subsequent Year: Difference should be carried forward in the
expectation that next year the position will be automatically corrected. This
would really mean that costing data of two years would be wrong.
(b) Difference between Fixed and Flexible Budgets
1.
2.
3.

4.

Fixed Budget
It does not change with actual
volume of activity achieved. Thus it
is rigid
It operates on one level of activity
and under one set of conditions
If the budgeted and actual activity
levels differ significantly, then cost
ascertainment and price fixation do
not give a correct picture.
Comparisons of actual and budgeted
targets are meaningless particularly
when there is difference between
two levels.

The Institute of Chartered Accountants of India

Flexible Budget
It can be re-casted on the basis of
activity level to be achieved. Thus it
is not rigid.
It consists of various budgets for
different level of activity.
It facilitates the cost ascertainment
and price fixation at different levels
of activity.
It provided meaningful basis of
comparison of actual and budgeted
targets.

Test Series: September, 2014

MOCK TEST I
INTERMEDIATE (IPC) GROUP I
PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT
PART II : FINANCIAL MANAGEMENT
SUGGESTED ANSWERS/HINTS
1.

2.

(a) PVA = 4,000 (PVIF at 8% for 20 years)

= 4,000 9.818 = Rs. 39,272.
(b) False. EOQ is the order quantity that minimizes total carrying costs over our
planning horizon.
(c) Zero.
(d) False. A firms degree of operating leverage (DOL) depends primarily upon its
closeness to its operating break-even point.
(a) Alpha Limiteds average sales per day was Rs. 100/365 = Rs. 0.274 crore. Its DSO
was 40.55, so A/R = 40.55 (Rs. 0.274 crore) = Rs. 11.11 crores. Its new DSO of
30.4 would cause A/R = 30.4 (Rs. 0.274 crore) = Rs. 8.33 crores. The reduction in
receivables would be Rs. 11.11 Rs. 8.33 crores= Rs. 2.78 crores, which would
equal the amount of cash generated.
(i) New equity = Old equity Shares bought back
= Rs. 41.67 Rs. 2.78
= Rs. 38.89 crores.
Thus,
Net income
New ROE =
New equity
Rs. 5
Rs. 38.89
= 12.86% (versus old ROE of 12.0%).
Net income
(ii) New ROA =
Total assets Reduction in A/R
Rs. 5
=
Rs. 60 Rs. 2.78
= 8.74% (versus old ROA of 8.33%).
(iii) The old debt is the same as the new debt:
Debt = Total claims Equity
Rs. 60 Rs. 41.67 = Rs. 18.33 crores.
=

The Institute of Chartered Accountants of India

(b) (i)

Old total assets = Rs. 60 crores.

New total assets = Old total assets Reduction in A/R
= Rs. 60 Rs. 2.78
= Rs. 57.22 crores.
Therefore,
Debt
Rs. 18.33
=
= 30.6%,
Old total assets
Rs. 60
While,
New debt
Rs. 18.33
=
= 32.0%.
New total assets Rs. 57.22
Payback Period Method
The cumulative cash flows for each project are as follows:
Year

Cumulative Cash Flows

Project X

Project Y

Rs.

Rs.

(10,000)

(10,000)

(3,500)

(6,500)

(500)

(3,000)

2,500

500

3,500

4,000

Rs. 500
Payback = 2 +
= 2.17 years.
x
Rs. 3,000

Rs. 3,000
Payback = 2 +
= 2.86 years.
y
Rs. 3,500

Net Present Value (NPV):

Rs. 6,500 Rs. 3,000 Rs. 3,000 Rs. 1,000
NPV = Rs. 10,000 +
+
+
+
x
(1.12)1
(1.12)2
(1.12)3
(1.12) 4
= Rs. 966.01.
Rs. 3,500 Rs. 3,500 Rs. 3,500 Rs. 3,500
NPV = Rs. 10,000 +
+
+
+
y
(1.12) 2
(1.12) 3
(1.12) 4
(1.12)1
= Rs. 630.72.

The Institute of Chartered Accountants of India

Internal Rate of Return (IRR)

To solve for each projects IRR, find the discount rates that equate each NPV
to zero:
IRRx = 18.0%.
IRRy = 15.0%.
Modified Internal Rate of Return (MIRR)
To obtain each projects MIRR, begin by finding each projects terminal value
(TV) of cash inflows:
TVx = Rs. 6,500(1.12)3 + Rs. 3,000 (1.12)2 + Rs. 3,000 (1.12)1 + Rs. 1,000 =
Rs. 17,255.23.
TVy = Rs. 3,500(1.12)3 + Rs. 3,500 (1.12)2 + Rs. 3,500 (1.12)1 + Rs. 3,500 =
Rs. 16,727.65.
Now, each projects MIRR is that discount rate that equates the PV of the TV
to each projects cost, Rs. 10,000:
MIRRx = 14.61%.
MIRRy = 13.73%.
(ii) The following table summarizes the project rankings by each method:
Project that ranks higher

3.

Payback

NPV

IRR

MIRR

Analysis: All methods rank Project X over Project Y. In addition, both projects
are acceptable under the NPV, IRR, and MIRR criteria. Thus, both projects
should be accepted if they are independent.
(iii) If the projects are mutually exclusive, then the project with the higher NPV at k
= 12%, or Project X would be accepted.
(a) (i) Statement of Calculation of Earnings Available to Equity holders and Debt
holders
Company
Net operating income
Less: Interest on Debt (11% of Rs. 7,00,000)
Profit before taxes

The Institute of Chartered Accountants of India

15,00,000

15,00,000

77,000

15,00,000

14,23,000

Less: Tax @ 25%

3,75,000

3,55,750

Profit after tax/Earnings available to Equity

holders

11,25,000

10,67,250

Total Earnings Available to Equity holders +

Debt holders

11,25,000

10,67,250 +
77,000
= 11,44,250

(ii) As we can see that the earnings in case of Company B is more than the
earnings of Company A because of tax shield available to shareholders of
Company B due to the presence of Debt structure in Company B. The interest
is deducted from EBIT without tax deduction at the corporate level; equity
holders also get their income after tax deduction. Due to which income of both
the investors increase to the extent of tax saving on the interest paid i.e. tax
shield i.e. 25% 77,000 = 19,250 i.e. difference in the income of two
Companies earnings i.e. 11,44,250 11,25,000 = Rs. 19,250.
(b) Activity level: 1,30,000 units
Statement showing Estimate of Working Capital Needs
A.

Investment in Inventory:
Raw material inventory: 1 month
4

1,30,000 Rs. 100

52

10,00,000

WIP Inventory : 1 week 1,30,000 0.80 212.50

52

4,25,000

Finished goods inventory: 2 weeks

2

1,30,000 212.50
52

10,62,500

B.

Investment in Debtors: 4 weeks at cost

4 4

1,30,000 212.50
5
52

17,00,000

C.

Cash balance

D.

Investment in Current Assets (A + B + C)

E.

Current Liabilities:
Creditors : 3 weeks
3

1,30,000 100
52

The Institute of Chartered Accountants of India

37,500
42,25,000

7,50,000

Deferred wages : 1 week

1

1,30,000 37.50
52

93,750

Deferred overheads : 2 weeks

2

1,30,000 75
52

3,75,000 12,18,750

Net Working Capital Needs

4.

(a)

30,06,250

(i) Deep Discount Bonds and Zero Coupon Bonds : Deep Discount Bonds (DDBs)
are in the form of zero interest bonds. These bonds are sold at a discounted value
and on maturity face value is paid to the investors. In such bonds, there is no
interest payout during lock-in period.
IDBI was first to issue a Deep Discount Bonds (DDBs) in India in January 1992.
The bond of a face value of Rs.1 lakh was sold for Rs. 2,700 with a maturity period
of 25 years.
A zero coupon bond (ZCB) does not carry any interest but it is sold by the issuing
company at a discount. The difference between discounted value and maturing or
face value represents the interest to be earned by the investor on such bonds.
(ii) Investment Decision and Financing Decision: The investment of long term
funds is made after a careful assessment of the various projects through
capital budgeting and uncertainty analysis. However, only that investment
proposal is to be accepted which is expected to yield at least so much return
as is adequate to meet its cost of financing. This has an influence on the
profitability of the company and ultimately on its wealth. Such types of
decisions are known as investment decisions.
On the other hand, Financing Decisions relate to raising of funds from various
sources. Each source of funds involves different issues. The finance manager
has to maintain a proper balance between long-term and short-term funds.
With the total volume of long-term funds, he has to ensure a proper mix of loan
funds and owners funds. The optimum financing mix will increase return to
equity shareholders and thus maximise their wealth.

(b) Seed Capital Assistance: The seed capital assistance has been designed by IDBI
for professionally or technically qualified entrepreneurs. All the projects eligible for
financial assistance from IDBI, directly or indirectly through refinance are eligible
under the scheme. The project cost should not exceed Rs. 2 crores and the
maximum assistance under the project will be restricted to 50% of the required
promoters contribution or Rs. 15 lacs whichever is lower.
The seed capital assistance is interest free but carries a security charge of one
percent per annum for the first five years and an increasing rate thereafter.

The Institute of Chartered Accountants of India