| 1. | (a) | Discuss the essential requisites for the installation of uniform costing system. | 3 | (0) |
| | (b) | Distinguish between cost control and cost reduction. | 3 | (0) |
| | (c) | Family Store wants information about the profitability of individual product lines: Soft drinks, Fresh produce and Packaged food. Family store provides the following data for the year 2002–03 for each product line : | | Soft drinks | Fresh produce | Packaged food | Revenues
Cost of goods sold
Cost of bottles returned
Number of purchase
orders placed
Number of deliveries
received
Hours of shelf–stocking time
Items sold | Rs. 7,93,500
Rs. 6,00,000
Rs. 10,000
360
300
540
1,26,000 | Rs. 21,00,600
Rs. 15,00,000
Rs. 0
840
2,190
5,400
11,04,000 | Rs. 12,09,900
Rs. 9,00,000
Rs.0
360
660
2,700
3,06,000 |
Family Store also provides the following information for the year 2002–03: | Activity | Description of Activity | Total Cost | Cost allocation Base | Bottles returns
Ordering
Delivery
Shelf stocking
Customer Support | Returning of empty bottles to store
Placing of orders for purchases
Physical delivery and receipt of goods
Stocking of goods on store shelves and on–going restocking
Assistance provided to customers including check–out | Rs. 12,000
Rs. 1,56,000
Rs. 2,52,000
Rs. 1,72,800
Rs. 3,07,200
| Direct tracing to soft drink line
1,560 purchase
orders
3,150 deliveries
8,640 hours of shelf–stocking time
15,36,000 items sold |
Required:| (i) | Family Store currently allocates support cost (all costs other than cost of goods sold) to product lines on the basis of cost of goods sold of each product line. Calculate the operating income and operating income as a % of revenues for each product line. | | (ii) | If Family Store allocates support costs (all costs other than cost of goods sold) to product lines using an activity–based costing system, calculate the operating income and operating income as a % of revenues for each product line. | | (iii) | Comment on your answers in requirements (i) and (ii). |
| (i) | Family Store currently allocates support cost (all costs other than cost of goods sold) to product lines on the basis of cost of goods sold of each product line. Calculate the operating income and operating income as a % of revenues for each product line. |
| (ii) | If Family Store allocates support costs (all costs other than cost of goods sold) to product lines using an activity–based costing system, calculate the operating income and operating income as a % of revenues for each product line. |
| (iii) | Comment on your answers in requirements (i) and (ii). |
| 3+7+2=12 | (0) |
| 2. | (a) | ABC Ltd. operates a simple chemical process to convert a single material into three separate items, referred to here as X, Y and Z. All three end products are separated simultaneously at a single split–off point. Distinguish between Cost reduction and Cost Control.
Product X and Y are ready for sale immediately upon splitoff without further processing or any other additional costs. Product Z, however, is processed further before being sold. There is no available market price for Z at the split–off point.
The selling prices quoted here are expected to remain the same in the coming year. During 2002’03, the selling prices of the items and the total amounts sold were :
X’186 tons sold for Rs. 1,500 per ton
Y’527 tons sold for Rs. 1,125 per ton
Z’736 tons sold for Rs. 750 per ton
The total joints manufacturing costs for the year were Rs. 6,25,000. An additional Rs. 3,10,000 was spent to finish product Z.
There were no opening inventories of X, Y or Z. At the end of the year, the following inventories of complete units were on hand :
X 180 tons
Y 60 tons
Z 25 tons There was no opening or closing work‘in’progress.
Required | (i) | Compute the cost of inventories of X, Y and Z for Balance Sheet purposes and cost of goods sold for income statement purpose as of March 31, 2003, using : |
| (a) | Net realizable value (NRV) method of joint cost allocation. |
| (b) | Constant gross–margin percentage NRV method of joint–cost allocation. |
| (ii) | Compare the gross–margin percentages for X, Y and Z using two methods given in requirement (i). |
| 4+4+2=10 | (0) |
| | (b) | Write short notes on any two of the following: | 2+2=4 | |
| | | (i) | Conversion cost | | (0) |
| | | (ii) | Sunk cost | | (0) |
| | | (iii) | Opportunity cost. | | (0) |
| 3. | (a) | PQR Ltd. has its own power plant, which has two users, Cutting Department and Welding Department. When the plans were prepared for the power plant, top management decided that its practical capacity should be 1,50,000 machine–hours. Annual budgeted practical capacity fixed costs are Rs. 9,00,000 and budgeted variable costs are Rs. 4 per machine–hour. The following data are available : | | Cutting
Department | Welding Department | Total | Actual Usage in 2002-03
(machine hours)
Practical capacity
for each department
(machine hours) | 60,000
90,000 | 40,000
60,000 | 1,00,000
1,50,000 |
Required: | (i) | Allocate the power plant‘s cost to the cutting and the welding department using a single rate method in which the budgeted rate is calculated using practical capacity and costs are allocated based on actual usage. |
| (ii) | Allocate the power plant’s cost to the cutting and welding departments, using the dual–rate method in which fixed costs are allocated based on practical capacity and variable costs are allocated based on actual usage. |
| (iii) | Allocate the power plant’s cost to the cutting and welding departments using the dual–rate method in which the fixed–cost rate is calculated using practical capacity, but fixed costs are allocated to the cutting and welding department based on actual usage. Variable costs are allocated based on actual usage. |
| (iv) | Comment on your results in requirements (i), (ii) and (iii). |
| 2+2+2+2=8 | (0) |
| | (b) | Discuss the accounting treatment of the following in cost–accounts : | (i) | Spoilage and defectives |
| (ii) | Idle time and Over–time wages |
| 3+3=6 | (0) |
| 4. | (a) | RST Ltd. manufactures plastic moulded chairs. There models of moulded chairs, all variation of the same design are Standard. Deluxe and Executive. The company uses an operation–costing system.
RST Ltd. has extrusion, form, trim and finish operations. Plastic sheets are produced by the extrusion operation. During the forming operation, the plastic
sheets are moulded into chair seats and the legs are added. The standard model is sold after this operation. During the trim operation, the arms are added to the Deluxe and Executive models and the chair edges are smoothed. Only the executive model enters the finish operation, in which padding is added. All of the units produced receive the same steps within each operation. In April, 2003 units of production and direct material cost incurred are as follows : | | Units Produced | Extrusion
Materials
(Rs.) | Form
Materials
(Rs.) | Trim
Materials
(Rs.) | Finish
Materials
(Rs.) | Standard Model
Deluxe Model
Executive Model | 10,500
5,250
3,500 | 1,26,000
63,000
42,000 | 42,000
21,000
14,000 | 0
15,750
10,500 | 0
0
21,000 | | | 19,250 | 2,31,000 | 77,000 | 26,250 | 21,000 |
The total conversion costs for the month of April, 2003 are : | | Extrusion
Operation | Form
Operation | Trim
Operation | Finish
Operation | | Total Concession Costs | Rs. 6,06,375 | Rs. 2,97,000 | Rs. 1,55,250 | Rs. 94,500 |
Required: | (i) | For each product produced by RST Ltd. during April, 2003, determine the unit cost and the total cost. |
| (ii) | Now consider the following information for May. All unit costs in May are identical to the April unit costs calculated as above in(i). At the end of May, 1,500 units of the Deluxe model remain in work–in–progress. These units are 100% complete as to materials and 65% complete in the trim operation. Determine the cost of the Deluxe model work–in–process inventory at the end of May. |
| 6+3=9 | (0) |
| | (b) | What do you understand by labour turnover? How is it measured? | 1+4=5 | (0) |
|
| 5. | (a) | Distinguish between any three of the following: | 2+2+2=6 | |
| | | (i) | Efficiency audit and proprietary audit | | (0) |
| | | (ii) | Re–order level and Re-order quantity. | | (0) |
| | | (iii) | Bin card and Stores ledger. | | (0) |
| | | (iv) | Controllable cost and Uncontrollable costs. | | (0) |
| | (b) | A manufacturing company disclosed a net loss of Rs. 3,47,000 as per their cost accounts for the year ended March 31, 2003. The financial accounts however disclosed a net loss of Rs. 5,10,000 for the same period. The following information was revealed as a result of scrutiny of the figures of both the sets of accounts: | Rs. | (i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x) | Factory Overheads under absorbed
Administration Overheads over–absorbed
Depreciation charged in Financial Accounts
Depreciation charged in Cost Accounts
Interest on investments not included in Cost Accounts
Income–tax provided
Interest on loan funds in Financial Accounts
Transfer fees (credit in financial books)
Stores adjustment (credit in financial books)
Dividend received | 40,000
60,000
3,25,000
2,75,000
96,000
54,000
2,45,000
24,000
14,000
32,000 |
Prepare a Memorandum Reconciliation Account. | 8 | (0) |
| 6. | (a) | The cash flows of projects C and D are reproduced below : | | Cash Flow | | | | Project | C0 | C1 | C2 | C3 | NPC
at 10% | IRR | C
D | – Rs. 10,000
– Rs. 10,000 | +2,000
+10,000 | +4,000
+3,000 | +12,000
+3,000 | +Rs. 4,139
+Rs. 3,823 | 26.5%
37.6% |
| 4+4=8 | |
| | | (i) | Why there is a conflict of rankings? | | (0) |
| | | (ii) | Why should you recommend project C inspite of lower internal rate of return? | Time | 1
Period | 2 | 3 | PVIF0.10.t
PVIF0.14.t
PVIF0.15.t
PVIF0.30.t
PVIF0.40.t | 0.909
0.8772
0.8696
0.7692
0.7143 | 0.8264
0.7695
0.7561
0.5917
0.5102 | 0.7513
0.6750
0.6575
0.4552
0.3644 |
| | (0) |
| | (b) | Calculate the level of earnings before interest and tax (EBIT) at which the EPS indifference point between the following financing alternatives will occur. | 3 | |
| | | (i) | Equity share capital of Rs. 6,00,000 and 12% debentures of Rs. 4,00,000 | | (0) |
| | | | OR | | |
| | | | Equity share capital of Rs. 4,00,000. 14% preference share capital of Rs. 2,00,000 and 12% debentures of Rs. 4,00,000. | | (0) |
| | (c) | Discuss the impact of financial leverage on shareholders wealth by using return–on–assets (ROA) and return–on–equity (ROE) analytic frame work. | 3 | (0) |
| | (d) | Explain the importance of trade credit and accruals as source of working capital. What is the cost of these sources? | 2 | (0) |
| 7. | (a) | XYZ Ltd. Company’s Comparative Balance Sheet for 2002 and the Company’s Income Statement for the year follow : XYZ Lrs.
Comparative Balance Sheet
December 31, 2002 and 2001 | (Rs. in crores) | | | | 2002 | | 2001 | Sources of funds:
Shareholder’s funds
Share Capital
Retained earnings
Loan funds
Bonds payable |
140
110 |
250
135
385 |
140
92
|
232
40
272 |
| | | | 2002 | | | 2001 | Application of funds:
Fixed Assets
Plant and Equipment
Less accumulated depreciation
Investments
Current Assets
Inventory
Accounts receivable
Pre–paid expenses
Cash
Less current liabilities and provisions
Accounts payable
Accrued liabilities
Differed income–tax provision
|
430
(218)
205
180
17
26
230
70
15
|
428
315
|
212
60
113
385 |
309
(194)
160
170
20
10
310
60
8
|
460
378
|
115
75
82
272 |
XYZ Ltd.
Income Statement
For the year ended December 31, 2002 | (Rs. in crores) | Sales
Less cost of goods sold
Gross margin
Less operating expenses
Net operating income
Non–operating items :
Loss on sale of equipment
Income before taxes
Less income–taxes
Net income | | Rs. 1,000
530
470
352
118
(4)
114
48
66 |
Additional Information: | (i) | Dividends of Rs. 48 crores were paid in 2002. | | (ii) | The loss on sale of equipment of Rs. 4 crore reflects a transaction in which equipment with an original cost of Rs. 12 crore and accumulated depreciation of Rs. 5 crore were sold for Rs. 3 crore in cash. | | Required | | (i) | Using the indirect method, determine the net cash provided by operating activities for 2002 and construct a statement of cash flows. |
| 9 | (0) |
| | (b) | In what ways is the “Firm value” maximisation objective superior to “Profit maximisation” objective? Explain. | 3 | (0) |
| 8. | (a) | Discuss the need for social cost benefit analysis. | 3 | (0) |
| | (b) | Discuss the relationship between the financial leverage and firm’s required rate of return to equity shareholders as per Modigliani and Miller Proposition II. | 3 | (0) |
| | (c) | An engineering company is considering its working capital investment for the year 2003–04. The estimated fixed assets and current liabilities for the next year are Rs. 6.63 crore and Rs. 5,967 crore respectively. The sales and earnings before interest and taxes (EBIT) depend on investment in its current assets– particularly inventory and receivables. The company is examining the following alternative working capital policies : Working Capital
Policy | Investment in
Current Assets
(Rs. Crore) | Estimated
Sales
(Rs. Crore) | EBIT
(Rs. Crore) | Conservative
Moderate
Aggressive | 11.475
9.945
6.63 | 31.365
29.325
25.50 | 3.1365
2.9325
2.55 |
You are required to claculate the following for each policy : | (i) | Rate of return on total assets. |
| (ii) | Net working capital position. |
| (iii) | Current assets to fixed assets ratio. |
| (iv) | Discuss the risk–return trade off of each working capital policy. |
| 1+1+1+3 | (0) |
| 9. | (a) | JKL Ltd. has the following book value capital structure as on March 31, 2003. Equity share capital (2,00,000 shares)
11.5% preference shares
10% debentures
| Rs. 40,00,000
10,00,000
30,00,000
80,00,000 |
The equity share of the company sells for Rs. 20. It is expected that the company will pay next year a dividend of Rs. 2 per equity share, which is expected to grow at 5% p.a. forever. Assume a 35% corporate tax rate.
Required: | (i) | Compute weighted average cost of capital (WACC) of the company based on the existing capital structure. |
| (ii) | Compute the new WACC, if the company raises an additional Rs. 20 lakhs debt by issuing 12% debentures. This would result in increasing the expected equity dividend to Rs. 2.40 and leave the growth rate unchanged, but the price of equity share will fall to Rs. 16 per share. |
| (iii) | Comment on the use of weights in the computation of weighted average cost of capital. |
| 3+3+2 | (0) |
| | (b) | Distinguish between the following : | (i) | Global Depository Receipts and American Depository Receipts. |
| (ii) | Debt Securitisation and Bridge Finance. |
| 2+2=4 | (0) |
