PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
All Question are compulsory.
Working notes should form part of the answer.

Question 1

a. Explain the concept of "ABC Analysis" as a technique of Inventory control.
b. Distinguish between Job costing and Batch costing
c. A Company manufactures radios, which are sold at Rs.1,600 p.u. The total cost is composed of 30% for direct material, 40% for direct wages and 30% for OH. An increase in material price by 30% and in wage rates by 10% is expected in the forthcoming year, as a result of which the profit at current selling price may decrease by 40% of the present profit p.u. You are required to prepare a statement showing current and future profit at present selling.
How much selling price should be increased to maintain the present rate of profit?

 (3+3+6=12 Marks) 
Question 2
(a) Akash Ltd. Gives you the following information.

Emergency stock is 32000 units.
Usually it takes atleast 4 weeks to obtain fresh supply
A cushion of 75% is added to minimum usage rate to determine average stock usage rate.
Materials consignments have always been received within 8 weeks from the date of the purchase order.
EOQ 50,000 units.

Compute the stock levels. State your assumptions clearly.

( b )  The standard labour time required for the production of a certain component has been fixed as 4 hours.  An incentive scheme was introduced recently to raise labour productivity.  The relevant details of the scheme are ;

Efficiency 				Incentive as a % of basic wages

Below 100%				No incentive
100%					10%
Above 100% 				1% additional incentive for every 1% 
					Increase in efficiency above 100%.
Four workers A,B,C and D produced 16,12,14 and 10 units respectively in a particular week of 48 hours.  The basic wages of all the workers is Rs.15 p.h
Calculate the efficiency, incentive bonus, total earnings and labour cost p.u in respect of each of the above four workers.

(c ) If labour turnover under Flux Method, Replacement Method  and Separation Method are 10%, 5% and 3% respectively and the number of workers replaced is 30.
      find:
i. Number of workers recruited and joined
ii. Number of workers left and discharged.

(d ) In a factory department there are three machines to which the following expenses have been allocated : A- Rs.639: B-Rs.607 and C-Rs.951.

In addition there is an OH crane to bring materials to the machines as necessary.  The expenses allocated to this crane are Rs.570.
During the period of this expenditure, the machines were used as follows:
Particulars	Machine A (in Hrs.)	Machine B (in Hrs.)	Machine C (in Hrs.)	
With use of crane	160	130	480	
Without use of crane	428	577	--	
Total	588	707	480	
Calculate a machine rate for each machine, distinguishing between the hours in which the crane is used and those in which it is not.

									 (4+4+3+4=15 marks)
Question 3

 (a) ABC Ltd. Manufactures a single product and absorbs the production OH at a predetermined rate of Rs.10 per machine hour.  At the end of a financial year, it has been found that actual production OH incurred were Rs.6,00,000.  It included Rs.45000 on account of ‘written off’ obsolete stores and Rs.30,000 being the wages paid for the strike period under an award.  The production and sales data for the year is as under:

Production: Finished goods-20,000Units; WIP (50% complete in all respects) – 8000 Units.  Sales: Finished goods-18000 Units.

The actual machine hours worked during the period were 48,000.  It has been found that 1/3 of the under absorption of production OH was due to lack of production planning and the rest was attributable to normal increase in costs.

1	Calculate the amount of under absorption of production OH during the year; and
2	Show the accounting treatment of under-absorption of POH.
(b) Show the journal entries for the following transactions in the integrated books of accounts.								  Rs.
i.	Credit purchase				245,000
ii.	Materials issued to production		325,000
iii.	Wages paid to workers			139,612
iv.	Finished goods transferred from production 629,775
v.	Administrative OH allocable to production	 78,900
vi.	Works expenses outstanding		225,000
vii.	Good sold during the month		765,000
.

(c ) Explain the methods of costing.
(6+5+4=15 marks)

Question 4

i). A contractor undertook a building contract on 1.1.2004.  Data relating to the contract for the year ended 31.3.2005 are as under:
Rs. lacs
As on 1.4.2004
	Work not certified					10
	Materials at site					2
1.4.2004 to 31.3.2005
	Materials issued					60
	Wages paid						36
	Materials returned					5
	Work certified 					165
	Plant hire						7
	Direct expenses					9
	Plant issued on 1.4.2004				50
	Payment received					150
As on 31.3.2005
	Materials at site					5
	Work not certified					16
The plant is expected to have a scrap value of Rs.10 lacs at the end of its life of 10 years.  The contract price is Rs.200 lacs.
Required:
1	Prepare contract account for the year ended 31st march, 2005.
2	Show the calculation of profit to be taken to profit and loss accounts.  &                 Show the relevant balance sheet entries as at 31st march, 2005.
(ii) The company sales its product at Rs.60 p.u. ; Margin of Safety 40% Fixed Cost Rs.36,000; VC ratio to sale 80%.  It is estimated that VC will go up by 10% and FC will go up by 5%.
Find the Selling Price required to fix in 2005 to earn P/V ratio in 2004.  Assume the Selling Price of Rs.60p.u in 2005.  Find out number of units required to be produced & sold to earn a same profit in 2004.
(iii) From the following particulars, compute sales variances.
Product	Budgeted 	Actual	
A	500 units at Rs.6	600 units at Rs.4	
B	800 units at Rs.5	750 units at Rs.8	
 (4+3+2=9 marks) 

Question 5
Answer any three of the following:
(i)	What is Modified Internal Rate of Return?
(ii)	Explain the types of ADRs.
(iii)	Differentiate between Deep Discount Bonds and Zero Coupon Bonds.
(iv)	Discuss the major considerations in capital structure planning
(3*3=9 marks)
Question 6
a. Following particulars relating to Benford Ltd, you are required to: (a) compute Turnover ratios for each component of working capital and (b) Determine the Operating cycle.(year = 360 days)
						       
( Rs. in‘000)						

PARTICULARS	
YEAR 1	
YEAR 2	
 Stock of Raw Materials 	18	22	
Stock of finished goods	20	23	
Purchases	90	100	
Cost of goods sold	160	175	
Sales	150	190	
Debtors	28	45	
Creditors	15	18	

b. 
Particulars	JJ Ltd	KD Ltd	
Equity share capital of Rs.10/- each	16,00,000	6,00,000	
12% Debentures	1,00,000	11,00,000	
Net Capital employed 	17,00,000	17,00,000	
Return on investment	30%	30%	
Tax Rate	35%	35%	

Find out which company is the best one.

c. Calculate the operating leverage, financial leverage and combined leverage from the following data under situations I and II and Financial Plan A and B:
   Installed capacity                                               4,000 units	
  Actual Production and sales                               75% of the capacity	
  Selling Price                                                       Rs.30 per unit	
 Variable cost                                                       Rs.15 per unit	
Fixed cost:	
       ---- Under situation I                                                Rs. 15,000	
       ---- Under situation II                                               Rs. 20,000	
                                                                                                   Financial Plan    
                                                                                      A                                      B
                                                                                    Rs.                                     Rs.
Equity                                                                    10,000                                 15,000
Debt (Rate of Interest at 20%)                              10,000                                   5,000
                                                                              20,000                                 20,000

(3+3+4=10 marks)
Question 7

a. Find 
Earnings per share 			     80
Dividend payout ratio			     35%			
Expected growth on dividend		     3%	
Face Value per share			Rs.100

Market price 				   290
Cost of equity				   ?
b. Calculate the level of Earnings Before Interest and Tax (EBIT) at which the EPS
indifference point between the following financing alternatives will occur.

	(a) Equity share capital of Rs.6,00,000 and 12% debenture of Rs.4,00,000
					or
(b) Equity share capital of Rs.4,00,000, 14% preference share capital of  Rs.200,000 and 12% debenture of Rs.400,000.

Assume the corporate tax rate is 35% and par value of equity share is Rs.10 in each case.

(2+5=7 marks)
Question 8

(a) Initial investment 					    = 490,000
    Salvage value 					    =  nil
    Life                                                                              = 7 years
    CFAT p.a.     
                     Year 1					    =   88,000
	         Year 2					    = 1,25,000
                     Year 3   				                =  1,89,000
                     Year 4				                = 2,43,000
                     Year 5			                            = 1,20,500
                     Year 6				                = 95,000
	          Year 7					    = 75000		
Calculate Average rate of return
.
(b) The cash flow of two mutually exclusive projects are as under:-

Year	Project X	Project Y	
0	(40,000)	(20,000)	
1	13,000	7,000	
2	8,000	13,000	
3	14,000	12,000	
4	12,000	-	
5	11,000	-	
6	15,000	-	

•	Estimate the net present value (NPV) of the projects X & J using 15% as the hurdle rate.
•	Estimate the IRR of the projects.
•	Why is there a conflict in the project choice by using NPV and IRR criteria?
•	Make a Project choice.

PV factors are as under
Discount rate	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	
15%	1	0.8696	0.7561	0.6575	0.5718	0.4972	0.4323	
18%	1	0.8475	0.7182	0.6086	0.5158	0.4371	0.3904	
20%	1	0.8333	0.6944	0.5787	0.4823	0.4019	0.3349	
24%	1	0.8065	0.6504	0.5245	0.4230	0.3411	0.2751	
26%	1	0.7937	0.6299	0.4999	0.3968	0.3149	0.2499	
(5+9 = 14)

Question 9
a.        You are given the following figures relating to M/s Well Ltd. for the year ended 31.12.2004:
	Current  ratio						2.5
	Liquidity ratio						1.5
	Net working capital					Rs.300,000
	Stock turnover ratio (cost of sales/closing stock)	6 times
	Gross profit ratio					20%
	Average debt collection period			2 months
	Fixed assets/shareholders net worth			0.80
	Reserves and surplus/capital				0.50
You are required to draw up the balance sheet of the company as on 31.12.2004 based on the above information
b. What is capital rationing? Describe various ways of implementing it.
										(6+3=9 marks)
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