PRACTICE TEST PAPER - 1
INTERMEDIATE (IPC): GROUP – I
PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT
Question No. 1 is compulsory.
Attempt any five questions from the remaining six questions.
Working notes should form part of the answer.
Time Allowed – 3 Hours
Maximum Marks – 100
Question 1(a):Aditya Brothers supplies surgical gloves to nursing homes and polyclinics in the city. These surgical gloves are
sold in pack of 10 pairs at price of `250 per pack. For the month of November 2015, it has been anticipated that a demand
for 60,000 packs of surgical gloves will arise. Aditya Brothers purchases these gloves from the manufacturer at `228 per
pack within a 4 to 6 days lead time. The ordering and related cost is `240 per order. The storage cost is 10% p.a. of average
inventory investment.
Required:
(i) Calculated the Economic Order Quantity (EOQ)
(ii) Calculate the number of orders needed every year
(iii) Calculate the total cost of ordering and storage of the surgical gloves.
(iv) Determine when the next should order to be placed. (Assuming that the company does maintain a safety stock and that
the present inventory level is 10,000 packs with a year of 360 working days).
(5 Marks)
st
Question 1(b): Zed Limited sells its product at `30 per unit. During the quarter ending on 31 March, 2014, it produced and
sold 16000 units and suffered a loss of `10 per unit. If the volume of sales is raised to 40000 units, it can earn a profit of `8
per unit.
You are required to calculate:
(i) Break Even Point in Rupees.
(ii) Profit if the sale volume is 50000 units.
(iii) Minimum level of production where the company needs not to close the production if unavoidable fixed cost is `1,50,000.
(5 Marks)
Question 1(c): Gamma Limited has the following capital structure, which it considers to be optimal:
Capital Structure
Weightage (in %)
Debt
25
Preference Shares
15
Equity Shares
60
100
Gamma Limited’s expected net income this year is `26,16,000, its established dividend payout ratio is 30%, its tax rate is
40%, and investors expect earnings and dividends to grow at a constant rate of 9% in the future. It paid a dividend of `3.60
per share last year, and its shares currently sell at a price of `54 per share.
Gamma Limited requires additional funds which it can obtain in the following ways:
 Preference Shares: New preference shares with a dividend of `11 can be sold to the public at a price of `95 per share.
 Debt: Debt can be sold at an interest rate of 12%.
You are required to:
(i) Determine the cost of each capital structure component; and
(ii) Compute the weighted average cost of capital (WACC) of Gamma Limited.
(5 Marks)
Question 1(d): XYZ Ltd. sells 2000 units @`10 per unit. The variable cost of production is `7 and fixed cost is `1,000. The
company raised the required funds by issue of 100, 10% debentures @`100 each and 2000 equity shares @ `10 per share. The
sales of XYZ Ltd. is expected to increase by 20%. Assume tax rate of company is 50%. You are required to calculate the
impact of increase in sales on earning per share.
(5 Marks)
Question 2(a): The following information is furnished by ABC Company for Process II of its manufacturing activity for
the month of April 2015:
(i) Opening Work-in-Progress
Nil
(ii) Units transferred from Process I
55,000 units at `3,27,800
(iii) Expenditure debited to Process II:
Consumables
`1,57,200
Labour
`1,04,000
Overheads
`52,000
(iv) Units transferred to Process III
51,000 units
(v) Closing WIP – 2,000 units (Degree of completion):
Consumables
80%
Labour
60%
Overheads
60%
(vi) Units scrapped
2000 units, scrapped units were sold at `5 per unit
(viii) Normal loss
4% of units introduced
You are required to:
(i) Prepare a Statement of Equivalent Production.
(ii) Determine the cost per unit.
(iii) Determine the value of Work-in-Process and units transferred to Process III.
(8 Marks)
Question 2(b): The following figures of Theta Limited are presented as under:
Particulars
Amount in (`)
Earnings before Interest and Tax
23,00,000
Less: Debenture Interest @ 8%
(80,000)
Less: Long Term Loan Interest @ 11% (2,20,000)
(3,00,000)
20,00,000
Less: Income Tax
(10,00,000)
Earnings after tax
10,00,000
No. of Equity Shares of `10 each
5,00,000
EPS
2
Market Price of Share
20
P/E Ratio
10 times
The company has undistributed reserves and surplus of `20 lakhs. It is in need of `30 lakhs to pay off debentures and
modernise its plants. It seeks your advice on the following alternative modes of raising finance:
Alternative 1: Raising entire amount as term loan from banks @ 12%.
Alternative 2: Raising part of the funds by issue of 1,00,000 shares of `20 each and the rest by term loan at 12%.
The company expects to improve its rate of return by 2% as a result of modernisation, but P/E ratio is likely to go
down to 8 times if the entire amount is raised as term loan.
(i) Advise the company on the financial plan to be selected.
(ii) If it is assumed that there will be no change in the P/E ratio if ei ther of the two alternatives is adopted, would
your advice still hold good?
(8 Marks)
Question 3(a): A fruit juice manufacturer is in the process of preparing budgets for the next few months, and the following
draft figures are available:
Sales forecast
June
6,000 Litres
July
7,500 Litres
August
8,500 Litres
September
7,000 Litres
October
6,500 Litres
A litre of fruit juice has a standard cost of `75 and a standard selling price of `105.
Each litre of juice uses 3.5 kg of fruits and it is policy to have stocks of fruits at the end of each month to cover 50% of
next month’s production. There are 5,800 kg in stock on 1st June.
There are 750 litres of finished fruit juice in stock on 1 st June and it is policy to have stocks at the end of each month to
cover 10% of the next month’s sales.
Requirements: (i) Prepare a production budget (in litres) for June, July, August and September.
(ii) Prepare a fruits purchase budget (in Kg) for the months of June, July and August.
(iii) Calculate the budgeted gross profit for the quarter June to August.
(8 Marks)
Question 3 (b): BT Pathology Lab Ltd. is using a X-ray machines which reached at the end of their useful lives. Following
new X-ray machines of two different brands with same features are available for the purchase.
Maintenance Cost
Cost of
Life of
Rate of Depreciation
Brand
Machine
Machine
(SLM)
Year 1-5
Year 6-10
Year 11- 15
XYZ
ABC
`6,00,000
`4,50,000
15 years
10 years
`20,000
`31,000
`28,000
`53,000
`39,000
--
4%
6%
Residual Value of both of above machines shall be dropped by 1/3 of Purchase price in the first year and thereafter shall be
depreciated at the rate mentioned above.
Alternatively, the machine of Brand ABC can also be taken on rent to be returned back to the owner after use on the following
terms and conditions:
(i) Annual Rent shall be paid in the beginning of each year and for first year it shall be `1,02,000.
(ii) Annual Rent for the subsequent 4 years shall be `1,02,500.
(iii) Annual Rent for the final 5 years shall be `1,09,950.
(iv) The Rent Agreement can be terminated by BT Labs by making a payment of `1,00,000 as penalty. This penalty would be
reduced by `10,000 each year of the period of rental agreement.
You are required to:
(a) Advise which brand of X-ray machine should be acquired.
(b) Which of the option is most economical if machine is likely to be used for a period of 5 years?
The cost of capital of BT Labs is 12%.
(8 Marks)
Question No.4(a): Dream house (P) Ltd. is engaged in building two residential housing projects in the city. Particulars
related to two housing projects are as below:
Particulars
HP – 1 (`) HP – 2 (`)
st
Work in Progress on 1 April 2013
7,80,000
2,80,000
Materials Purchased
6,20,000
8,10,000
Land purchased near to the site to open an office
- 12,00,000
Brokerage and registration fee paid on the above purchase
60,000
Wages paid
85,000
62,000
Wages outstanding as on 31st March, 2014
12,000
8,400
Donation paid to local clubs
5,000
2,500
st
Plant hire charges paid for three years effecting from 1 April 2013
72,000
57,000
Value of materials at site as on 31st March, 2014
47,000
52,000
Contract price of the projects
48,00,000 36,00,000
Value of work certified
20,50,000
16,10,000
Work not certified
1,90,000
1,40,000
A concrete mixture machine was bought on 1st April 2013 for `8,20,000 and used for 180 days in HP-1 and for 100 days in HP2. Depreciation is provided @ 15% p.a. (this machine can be used for any other projects)
As per the contract agreement contracted shall retain 20% of work certified as retention money.
Prepare contract account for the two housing projects showing the profit or loss on each project for the year ended 31 st
Mach, 2014.
(8 Marks)
Question 4 (b): The following are the ratios relating to the activities of Technopak Limited:
Debtors Velocity
3 Months
Stock Velocity
8 Months
Creditors Velocity
2 Months
Gross Profit Ratio
25%
Gross profit for the current year ended December 31 amounts to `4,00,000. Closing stock of the year is `10,000 above
the opening stock. Bills receivables amount to `25,000 and bills payable to `10,000. Calculate:
(a) Sales
(b) Sundry Debtors
(c) Closing Stock
(d) Sundry Creditors
(8 Marks)
Question No.5: Answer any four of the following:
(a) Define ‘Cost Centre’ and state its types
(b) State benefits of Integrated Accounting.
(c) Differentiate between ‘Factoring’ and ‘Bill discounting’?
(d) Discuss the conflicts in Profit versus Wealth maximisation principal of the firm.
(e) Define ‘Present Value’ and ‘Perpetuity’.
(4 x 4 = 16 Marks)
Question 6(a): The standard material cost for a normal mix of one tonne of Product “X” based on:
Raw Material
Usage (in tons)
Price per tonne
A
0.740
`12,000
B
0.400
`23,500
C
0.640
`18,000
During the month of July, 2014, 18 tonnes of Product “X” were produced from:
Raw Material
Consumption (tons)
Cost (`)
A
13.12
1,62,000
B
7.10
1,65,200
C
11.50
2,07,000
Required to Calculate:
(i) Material Cost Variance
(ii) Material Price Variance
(iii) Material Usage Variance
(iv) Material Mix Variance
(v) Material Yield Variance
(8 Marks)
Question 6 (b): The following information relates to Zeta Limited, a publishing company:
The selling price of a book is `15, and sales are made on credit through a book club and invoiced on the last day of the month.
Variable costs of production per book are materials (`5), labour (`4), and overheads (`2). The sales manager has forecasted
the following volumes:
Particulars
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
No. of Books 1,000 1,000 1,000 1,250 1,500 2,000 1,900 2,200 2,200 2,300
Customers are expected to pay as follows:
One month after the sale
40%
Two months after the sale
60%
The company produces the books two months before they are sold and the creditors for materials are paid two months after
production.
Variable overheads are paid in the month following production and are expected to increase by 25% in April; 75% of wages
are paid in the month of production and 25% in the following month. A wage increase of 12.5% will take place on 1st March.
The company is going through a restructuring and will sell one of its freehold properties in May for `25,000, but it is also
planning to buy a new printing press in May for `10,000. Depreciation is currently `1,000 per month, and will rise to `1,500
after the purchase of the new machine.
The company’s corporation tax (of `10,000) is due for payment in March.
The company presently has a cash balance at bank on 31 December 2012, of `1,500.
You are required to prepare a cash budget for the six months from January to June.
(8 Marks)
Question 7: (a) Identify the methods of costing for the following:
(i) Where all costs are directly charged to a specific job.
(ii) Where all costs are directly charged to a group of products.
(iii) Where cost is ascertained for a single product.
(iv) Where the nature of the product is complex and method can not be ascertained.
(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 x 4 = 16 Marks)