Success-Gurus

PAPER - 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

SECTION - A : COST ACCOUNTING

QUESTIONS

Basic Concepts and Product Cost Sheet

When bought in quantities, the valves cost Rs. 1.50 per unit and the carrying cost is estimated at 20% of average inventory investment on the annual basis. The cost to place an order and process the delivery is Rs. 18.

It takes 45 days to receive delivery from the date of and order and a safety stock of 3,250 valves is desired.

You are required to determine:

(a) the most economic order quantity and frequency of orders in a year ; (b) the

order point ; and (c) the most economic order quantity, if the valves cost Rs. 4.50 each instead of Rs. 1.50 each.

Materials

3. Mehrotra Ltd. distributes wide range of Water purifier systems. One of its best selling

items is a standard water purifier. The management of Mehrotra Ltd. uses the EOQ decision model to determine optimal number of standard water purifiers to order. Management now wants to determine how much safety stock to hold. Mehrotra Ltd. estimates annual demand (360 working days) to be 36,000 standard water purifiers. Using the EOQ decision model, the company orders 3,600 standard water purifiers at a time. The lead-time for an order is 6 days. The annual carrying cost of one standard purifier is Rs. 450. Management has also estimated the additional stock out costs would be Rs. 900 for shortage of each standard water purifier.

200

Mehrotra Ltd. has analysed the demand during 200 past re-order periods. The records indicate the following patterns:

(i) Determine the level of safety stock for standard water purifier that the Mehrotra Ltd.

should maintain in order to minimize expected stock out costs and carrying 'costs. When computing carrying costs, assume that the safety stock is on hand at all times and that there is no overstocking caused by decrease in expected demand (consider safety stock levels of 0, 20, 40 and 60 units).

Overheads

Power requirement at normal

Actual power consumption

The power requirement of these departments are met by a power generation plant. The said plant incurred an expenditure, which is not included above, of Rs. 1,21,875 out of which a sum of Rs. 84,375 was variable and the rest fixed,. After apportionment of power generation plant costs to the four departments, the service department overheads are to be redistributed on the following basis:

(iii) Calculate the overhead rates per direct labour hour of production departments,

given that the direct wage rates of PD1 and PD2 are Rs. 5 and Rs. 4 per hour respectively.

Non-Integrated Accounting

6. Rohan Ltd operates a historical job costing system, which is not integrated with financial

accounts. The company manufactures engines, the technology of which is frequently bought from inventors to whom royalty is needed to be paid. The following are details of the opening balances in the Cost Ledger for the month of May 2009 , Rs

The following transactions took place during the month:

Rs

Material:

Factory wages

Rs 75,750 of the above wages are direct wages while Rs 12,500 has been expended on the construction of manufacturing equipment; the balance being the amount paid as indirect wages.

The actual amount of production overhead incurred excluding the items shown above amounted to Rs 1,52,350 out of which Rs 30,000 was absorbed by the manufacturing equipment under construction and Rs 7,550 was under absorbed. As per the policy of Rohan Ltd, the under absorbed overhead needed to be written off at the month end. The company shall also pay Rs 2,150 as royalty for the relevant months production to an inventor from whom technology had been bought.

The company’s gross profit margin is 25% on factory cost.

At the end of the month stocks of work in progress had increased by Rs 12,000. The manufacturing equipment under construction was completed within the month , and transferred out of the cost ledger at the end of the month.

You are required to prepare the relevant control accounts, costing profit and loss account and any other accounts you consider necessary to record the above transactions in the cost ledger for the concerned month.

Joint Products and By- Products

In case these products wee disposed off at the split off point that is before further processing, the selling price would have been:

Units completed and transferred to the next process 7,900. Normal process loss is 8% of the total input (opening stock plus units put in). Scrap value is Rs. 4 per unit.

You are required to:

(a) compute equivalent production ;

(b) calculate the cost per equivalent units for each element ;

(c) calculate the cost of abnormal loss (or gain), closing work -in-progress and the units

transferred to the next process using the FIFO method ;

(d) Prepare the process and other accounts.

Operating Costing

9. The Unique Transport Company has been given a twenty kilometer long route to play a

bus. The bus costs the company Rs. 1,00,000. It has been insured at 3% per annum. The annual road tax amounts to Rs. 2,000. Garage rent is Rs. 400 per month. Annual repair is estimated to cost Rs. 2,360 and the bus is likely to last for five years. The salary of the driver and the conductor is Rs.600 and Rs. 200 per month respectively in addition to 10% of takings as commission to be shared equally by them. The

manager's salary is Rs.1,400 per month and stationery will cost Rs. 100 per month. Petrol and oil cost Rs. 50 per 100 kilometers. The bus will make three round trips per day carrying on an average 40 passengers in each trip. Assuming 15% profit on takings and that the bus will ply on an average 25 days in a month, prepare operating cost statement on a full year basis and also calculate the bus fare to be charged from each passenger per kilometer.

Contract Costing

10. Girish Construction Company with a paid-up share capital of Rs. 25 lakhs undertook a contract to construct STC houses. The contract work commenced on 1.1.09 and the contract price was Rs. 25 lakhs. Cash received on account of contract on 31.12.09 was Rs. 9 lakhs (90% of the work certified). Work completed but not certified was estimated

Prepare the Contract Account to ascertain the profit from the contract and show the WIP in the Balance sheet .

Cost Audit & Cost Accounting (Records) Rules

11. State the areas of activity for which accounting records are to be maintained under Cost

Accounting Record Rules.

Activity Based Costing

12. Ranbaxy Limited specializes in the distribution of pharmaceutical products. It buys from

the pharmaceutical companies and resells to each of the three different markets.

In the past, Ranbaxy Limited has used gross margin percentage to evaluate the relative profitability of its distribution channels.

The company plans to use activity -based costing for analysing the profitability of its distribution channels.

The activity analysis of Ranbaxy Limited is as under:

The April, 2009 operating costs (other than cost of goods sold) of Ranbaxy Limited are Rs. 8,27,970. These operating costs are assigned to five activity areas. The cost in each area and the quantity of the cost allocation basis used in that area for April, 2009 are as follows:

store delivery

per store delivery Required:

(i) Compute for April, 2009 gross-margin percentage for each of its three distribution

channels and compute RST Limited’s operating income.

(iii) Compute the operating income of each distribution channel in April, 2009 using the

activity-based costing information. Comment on the results. What new insights are available with the activity-based cost information?

(iv) Describe four challenges one would face in assigning the total April,2009 operating

costs of Rs. 8,27,970 to five activity areas.

Product Cost Sheet

13. B Electronics Ltd. furnishes the following information for 10,000 TV valves manufactured

during the year, 2009.

The net selling price was Rs. 31.60 per unit and all the units were sold. As from 1st January, 2010 the selling price was reduced to Rs. 31.00 per unit. It was estimated mar production could be increased in 2010 by 50% utilising spare capacity. Rates for materials and direct wages will increase by 10%.

You are required to prepare:

(a) Cost sheet for the year, 2009, showing various elements of cost per unit, and (b) Estimated cost profit for 2010 assuming that 15,000 units will be produced and sold

during the year. Factory overheads are recovered as a percentage of direct wages and office and selling expenses as a percentage of works cost. (Apply the same respective percentages as in the previous year.)

Uniform Costing and Inter-Firm Comparison

14. What is meant by ‘Inter-firm comparison’? Describe the requisites to be considered while

installing a system of inter-firm comparison.

15. Explain the following:

(a) Sunk Costs

(b) Pre-production Costs (c) Perpetual Inventory System (d) continuous stock taking.