Suggested Answer_Syl12_June 2016_Paper_10

INTERMEDIATEEXAMINATION
GROUP II
(SYLLABUS 2012)

SUGGESTED ANSWERS TO QUESTIONS

JUNE 2016

Paper-10: COST AND MANAGEMENT ACCOUNTANCY

Time Allowed: 3 Hours Full Marks:100

The figures in the margin on the right side indicate full marks.
All workings must form part of your answer. Assumptions, if any, must be clearly indicated.
Please: (1) Write answers to all parts of a question together.
(2) Open a new page for answer to a new question.
(3) Attempt the required number of questions only.

SECTION – A
(25 marks)

All questions are compulsory.

1. (a) Materials cost and factory cost are ` 2,38,000 and ` 4,30,000 respectively. If the
factory overhead is absorbed at 60% of direct labour cost, then find the direct
labour cost and factory overhead separately. 2
(b) If BEP is ` 39,00,000 at 65% level of sales and profit is ` 8,40,000 at 100% level of
sales, find out the P/V ratio. 2
(c) If the fixed cost per unit is ` 40 at 40% level of capacity what should be fixed cost
per unit at 80% level of capacity? 2
(d) Standard cost of material for output of 2,600 units is ` 71,500 and actual output is
2,550 units. If material mix variance is ` 1,095 adverse, find out material usage
variance. 2
(e) The budgeted annual sales of a firm are `80 lakhs and 25% of the sales are cash
sales. If the average amount of debtors of the firm is ` 5 lakhs, what will be the
average collection period of credit sales? 2
(f) Sheena Ltd. is committed to supply 25,000 instruments per annum to Karishma Ltd.
on regular basis. It is estimated that inventory holding cost per instrument per month
amounts to 20 paise and that set up cost per run of instrument manufacturing is
` 330. What should be the optimum run size for instrument manufacturing? 2
(g) A company has 1,000 units of obsolete items which are carried in inventory at the
original purchase price of ` 36,000, although their market value as scrap is only `
4,000. If the items are re-worked for ` 12,000,they can be sold for ` 22,000. Find the
relevant cost for selling the items. 2
2. (a) State whether there is any sequence of filing compliance report and cost audit
report for a company which is required to file both. 1

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 Suggested Answer_Syl12_June 2016_Paper_10
(b) A company is covered under the Companies (Cost Accounting Records) Rules,
2014. But some of its products are not covered under cost audit. Dose the company
need to file compliance report? 2
(c) A person is making internal audit in one of the factories manufacturing “Washing
Powder” in a company. He is proposed for appointment as cost auditor for the
same period in another factory manufacturing “Washing Powder” under the same
company. Is the appointment as cost auditor in order? 2
4 16
3. Cost function is: C= x+ , where x is output in units and C is cost in rupees.
5 5
Calculate:

(a) Cost when output is 5 units 2

(b) Average cost of 15 units 2
(c) Marginal cost 2

Answers:

1. (a)
(Amount in rupees)
Material cost 2,38,000
Direct Labour cost ?
Factory overhead: 60% of Direct Labour Cost ?
Factory cost 4,30,000
Direct Labour cost + factory Overhead =4,30,000-2,38,000=1,92,000
Direct Labour cost + 60% of Direct labour cost =1,92,000
Direct Labour cost = 192000×100/160 =1,20,000
Factory Overhead=60% of Direct Labour cost =1,20,000×60%=72,000

(b)MOS (100-65) = 35% × 39,00,000 / 65% = 21,00,000.

P/V = Profit/ MOS = 8,40,000/21,00,000 = 40%
(c) Fixed cost per unit = (40 × 40)/80 = ` 20
(d) Material Usage Variance = Material Yield variance + Material Mix variance.
Material Yield variance = Std. Mat. Cost per unit × (Actual Output - Std. Output)
= (71,500/2,600) × (2,550-2,600) = 27.5 × 50 = 1,375 (adv)
Material Usage Variance = 1,375 (adv)+ 1,095 (Adv) = ` 2,470(Adv)
(e) Credit Sales = 80-25% = 60(Rs. lakhs). Monthly Credit Sales = 60/12 = 5 (` Lakhs). Debt
collection period in months = Average Debtors/ Monthly Credit Sales = 5/5 = 1
month.
2 × A× S
(f) EBQ =
C
A = 25,000
S = 330
C = 0.2 × 12 = 2.40
2 ×25000 × 330
EBQ = = 2622 units.
2.4
(g)Opportunity cost = scrap value = ` 4,000
Future cost of re-working = ` 12,000
Relevant cost for sale = 4,000+12,000 = ` 16000

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2. (a) No. There is no sequence of filing as compliance report and cost audit report are
mutually exclusive to each other.
(b) Every company covered under companies (Cost accounting Record) Rules, 2014 is
required to file a Compliance Report, irrespective of whether all or any of its
products are covered under cost audit. Thus the compliance report shall include
product groups covered under cost audit as well as product groups not covered
under cost audit.
(c) A cost Auditor can be appointed separately for each factory, if a person is working
asInternal Auditor of one factory, there is no objection if the same person is working
as Cost Auditor of another factory of the same company, even though both
factories are manufacturing the same product.
4 16
3. C= x +
5 5
(a) Cost when output is 5 units
4 16
= ×5+
5 5
= ` 7.20
(b) Average cost of 15 units
Average cost = C/x
4 16
= +
5 5x
4 16
= +
5 5 ×15
= ` 1.01
dc
(c) Marginal cost =
dx
4
= = ` 0.80
5

SECTION – B

(15×5 =75 marks)

Answer Question no 4,5 and 6 and anytwo from the rest.

4. (a) A radio manufacturer produces x sets per week at total cost of x2 + 78x + 2500. He is
a monopolist and demand function for the product is x= (618 - P)/8, when price in
rupees is P per set. Find the optimal (profit maximizing) production per week. Also
find monopoly price per set, total revenue, total cost and total profit at the optimal
production. 10
(b) Total revenue in rupees (R) from sale of x units is given by the equation R = 90x - 3x2.
Calculate the point price elasticity of demand, when marginal revenue is `12. 5

Answers:
(a) C = x2+ 78X + 2500
dc
Marginal cost = MC = = 2x + 78
dx
x = (618 - P)/8
P = 618 – 8x
Total Revenue = R = x × P = 618X- 8x2

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 Suggested Answer_Syl12_June 2016_Paper_10
dR
MR = = 618 – 16x
dx
At optimal production MC = MR
2x + 78 = 618 – 16x
18x = 540
X = 540/18 = 30
P = 618 - 8 × 30 = 378
R = 30 × 378 = 11340
C = 302 + 78 × 30 +2500 = 900 + 2340 + 2500 = 5740
Total Profit = R - C = 5600
(b) R = 90 x– 3x2
MR = 90 – 6x = 12
X= 13
P = R/x = 90 - 3X
P/x = 90/x - 3
dP/dx = 3 (-ve sign ignored)
dx/dP = 1/3
Ep = (dx/dP) × P/x = 1/3 × (90/x - 3)
= 1/3 × (90/13 - 3)
=17/13

5. (a) What are the disqualifications for appointment as a Cost Auditor? State the duties of
Cost Auditor. 5+4

(b) Answer any two of the following sub-parts: 3×2=6

(i) Under what circumstances a company can apply for exemption from
application of the Companies (Cost Audit Report) Rules,2014?
(ii) What do you understand by Performance Appraisal Report (Form III)?
(iii) State whether overall annual turnover/individual turnover definition will include
other operational income like job work income, scrap sale, trading turnover,
export benefits, sales of services etc.
(iv) State whether maintenance of cost accounting records and cost audit thereof,
subject to threshold limits prescribed, are applicable to products which are for
100% captive.

Answers:(a)

Disqualifications of the Cost Auditor:

The following persons cannot be appointed or reappointed as cost auditor of a company-

(i) A body corporate

(ii) An officer or employee of the company
(iii) A person who is a partner, or who is in the employment, of an officer or employee of the
company;
(iv) A person who is indebted to the company for an amount exceeding one thousand
rupees or who has given any guarantee or provided any security in connection with the
indebtedness of any third person to the company for an amount exceeding one
thousand rupees;
(v) A person holding any security of that company after a period of one year from the date

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of commencement of the Companies (Amendment) Act,2000.(Explanation: “security”
means an instrument which carries voting rights);

The duties of the cost auditor:

(i) To ensure that the proper books of accounts as required by Cost Accounting Records
Rules have been kept by the company so far as it appears from the examination of
those books and proper returns for the purpose of his audit have been received from
branches not visited by him;
(ii) To ensure that the Cost Audit Report and the detailed cost statements are in the form
prescribed by the Cost Audit Report Rules by following sound professional practices i.e,
the report should be based on verified data and observations may be framed after the
company has been afforded an opportunity to comment on them;
(iii) The underline assumption and basis for allocation and absorption of indirect expenses
are reasonable and are as per the established accounting principles;
(iv) If the auditor is not satisfied in any of the aforesaid matters, he may give a qualified
report along with the reasons for the same;

Alternative answer of disqualification of a Cost Auditor:

As per Companies Act 2013
(i) A body corporate;
(ii) An officer or employee of the company;
(iii) A person who is a partner, or who is in the employment, of an officer or employee of the
company;
(iv) A person who, or his relative, or his partner is indebted, in excess of such amount as may
be prescribed (the sum prescribed is Rs. 5 lakh) to the company, or its subsidiary
company, or its holding company, or associate company, or a subsidiary of such holding
company.
(v) A person who, or his relative, or his partner has given a guarantee or provided any
security in connection with the indebtedness of third person, in excess of such amount as
may be prescribed (the sum prescribed is Rs. 1 lakh), to the company, or its subsidiary
company, or its holding company, or associate company, or a subsidiary of such holding
company.

(b)

(i) Under no circumstances a company can apply for exemption from application of the
Companies(Cost Audit Report) rules 2014.
(ii) Performance Appraisal Report (Form iii therein)
It is mandatory to submit Performance Appraisal Report to company management which
cannot be a NIL report.
Vide sub-rule 5 of Rule 4 of the Companies (Cost Audit Report) Rules, 2011, every cost
auditor, who submits a cost audit report shall also furnish Performance Appraisal Report,
duly authenticated by the cost auditor, to the Board/Audit Committee of the company
in the prescribed format (Form III). There cannot be NIL report since list of the areas to be
covered in the report as per report as per (Form III) are relating to company’s operations
being audited by the cost auditor. However, the frequency of this report viz. half
yearly/annual (or even quarterly) is to be decided by the Company Management.
The contents of the Performance Appraisal Report as given in Form III are
“indicative”,depending on the nature of business and activity of the company, the
management and the cost auditor in consultation with each other can add or delete the

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indicative areas to be covered under the performance Appraisal Report. The intention of
the law appears to assign a role to the cost auditor to provide an independent view of
the performance of the company to enable the management to take corrective steps
wherever necessary. The institute is also going to bring out a Guidance note on the
subject.
(iii) The turnover shall include other operational income like Job work income, scrap sale,
trading turnover, export benefits, sales of services etc.,
(iv) The Companies (Cost Records and Audit) Rules,2014 has specified different products and
services for which maintenance of cost accounting records and cost audit thereof,
subject to threshold limits prescribed, is mandatory.
In case a Product is manufactured and 100% captively consumed for production of same
other product, which is also covered under these Rules and is subject to cost audit, then
the cost of such captively consumed product would form part of the final product which
is also under cost audit and as such a separate cost audit report for the captively
consumed product will not be necessary.
However, if the product is partly for captive consumption and partly sold, or if the
product is 100% captive consumed for production of some other product, which is not
covered under these Rules, then Cost Audit would be applicable for such captive
consumed product(s).

6. (a) What do you understand by transfer pricing? State the objectives of inter-division
transfer pricing. 2+4

(b) Answer any one of the following sub-parts: 4×1= 4

(i) Find primal from the Dual
Min. W: =7Y1 + 9Y2 + 14Y3
Subject to
2Y1 + 3Y2 ≥ 4
3Y1 + 2Y2 + 5Y3 ≥ 5
3Y2 + 4Y3 ≥ 7
And Y1, Y2, Y3 ≥ 0
(ii) State the four-fold classification of government‟s intervention in Indian
Economy.
(c) Answer any one of the following sub-parts: 5 × 1= 5

(i) Graphically explain the equilibrium of a firm under perfect competition in the
short run.
(ii) Draw an expansion path through an isoquant map and explain.

Answers:

(a) A “Transfer Price” is that notional value at which goods and services are transferred
between divisions in a decentralized organization. Transfer prices are normally set for
intermediate products, which are goods, and services that are supplied by the selling
division to the buying division. In large organizations, each division is treated as a “profit
center” as a part and parcel of decentralization. Their profitability is measured by
fixation of “transfer price” for inter divisional transfers.

Objectives of Inter Company Transfer Pricing:

The following are the main objectives of intercompany transfer pricing scheme:

1. To evaluate the current performance and profitability of each individual unit: This is

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necessary in order to determine whether a particular unit is competitive and can stand
on its working. When the goods are transferred from one department to another, the
revenue of one department becomes the cost of another and such inter transfer price
affects the reported profits.
2. To improve the profit position: Intercompany transfer price will make the unit competitive
so that it may maximize its profits and contribute to the overall profits of the organization.
3. To assist in decision making: Correct intercompany transfer price will make the costs of
both the units realistic in order to take decisions relating to such problems as make or
buy, sell or process further, choice between alternative methods of production.
4. For accurate estimation of earnings on proposed investment decisions: When finance is
scarce and it is required to determine the allocation of scarce resources between various
divisions of the concern taking into consideration their competing claims, then this
technique is useful.

(b) (i) Max Z = 4X1 +5X2 +7X3

Subject to
2X1 +3X2 ≤ 7
3X1 + 2X2 + 3X3 ≤9
5X2 + 4X3 ≤ 14
And X1, X2, X3 ≥ 0
(ii) The four- fold classification of government’s intervention in Indian economy can be
stated as follows:

1) Government as regulator:The government regulates the economy through

legal framework. Various legislations have been passed(such as Industrial
Development and Regulation Act, Income Tax Act, Factories Act, Companies
Act, etc.) to achieve the various objectives of the economy.
2) Government as entrepreneur: Public sector enterprises are set up where
government acts as promoter. In heavy engineering, steel, electricity,
transport, insurance, banking we find public sector enterprises and
government organizations.
3) Government as promoter of business:Basically government sees that
appropriate financial institutions are set up to meet the requirements of the
enterprises. IFCI, IDBI, ICICI etc. are set up.
4) Government as economic planner:Government plans at various levels and
dimensions to accelerate economic growth.

(c)
(i) Equilibrium of the firm under perfect competition: In the short period the firm can
get abnormal profit. The following diagram explains how the firm can get abnormal
profits and reaches the equilibrium condition.
In the diagram on X-axis output and on Y- axis cost, revenue and price are shown.
At point Q. SMC and MR are equal and therefore Q is an equilibrium point. At this
equilibrium point SAC is more than AR. In this diagram the output determined asOM
and the price as OP. OPQM is total revenue and OSRM is the total cost. Here the
total cost more than the total revenue. So the firms incur the loss. PQRS are the
losses.

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(ii) Where the slope of an isoquant is equal to that of an isocost is the place of the
lowest point of cost of production. This can be observed by superimposing the
isocosts on isoquant curves. It is evident that the producer can, with a total outlay
of `1.5 lakh, reach the highest isoquant curve IQ2 . If he wants to reach IQ3 , he has
to bring in additional resources, which is let us assume not possible. He cannot
compromise with IQ1, as it means lower output. There is no input combination on
IQ2 other than point Q, which is cheaper than ` 1.5 lakh. So the obvious choice for
the producer is the Q combination of inputs only on IQ2 .
The points of tangency P,Q and R on each of the isoquant curves represent the
least cost combination of inputs, yielding the maximum level of output. Any output
lower or higher than this will result in a higher cost of production.
The substitution of one input for another continues until the producer reaches the
point of P, Q or R where the MRTS between the inputs is equal to the ratio between
the prices of the inputs. Expansion path refers to the line representing the least cost
combination of inputs P, Q, R for different levels of output. Expansion path indicates
how production can be expanded along this path if the factor prices are given. The
expansion path is also called “scale line” as it indicates how to adjust the scale of
operations as the firm changes its output. The scale line is a ready reckoner to
decide on the issues relating to expansion or contraction of output, given the
relative prices of inputs.

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7. (a) Vishakha Ltd. commences a business of manufacturing Mobile Sets on 1st April 2015
and asked you to prepare a statement showing profit per mobile sold (charging
labour and material at actual cost, works overheads at 100% of labour cost and
office overheads at 25% of works cost) and a statement showing the reconciliation
between profits as per cost accounts and profits as per profit and loss Accounts for
the year ended on 31st March, 2016.
Two types of mobiles are manufactured by the company with nofinished or semi-
finished stock on 31st march, 2016. The relevant particulars are as under:

Mobile types M K
Produced and sold in 2015-16(„000 units) 160 95
Average cost of material per mobile ` 280 320
Average cost of labour per mobile ` 480 580
Selling price per mobile ` 1800 2400
The works expenses were (`00000) 1680 and office expenses were (`00000) 622.11
(b) Narrate the accounting treatment of scrap. 4

Answers:(a) Statement of cost and profit(as per cost books)

For the year ending 31st March,2016

M: output and sale 160000 K: output and sale 95000 Total

units units `00000
Cost per unit Total Cost per unit Total
` `00000 ` `00000
Prime cost 760 1216 900 855 2071
Works OH 100% 480 768 580 551 1319
on labour
Works cost 1240 1984 1480 1406 3390
Office OH 25% of 310 496 370 351.50 847.50
works cost
Total cost 1550 2480 1850 1757.50 4237.50
Profit 250 400 550 522.50 922.50
Selling price 1800 2880 2400 2280 5160

Total profit as per cost books = (`00000) 922.50

Profit and Loss Account(as per financial books)

For the year ending 31st March, 2016
(`00000) (`00000)
Material used: Sale
M: 448 M: 2880
K: 304 752 K: 2280 5160
Labour:
M: 768
K: 551 1319
Works expenses 1680
Office expenses 622
Net Profit 787
5160 5160

Reconciliation Statement
(`00000) (`00000)
Profit as per Cost Books 922.50

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Add: Office OH overcharged in cost accounts
Office Overhead (Cost Books) 847.50
Office Expenses (Financial Books) 622 225.50
1148
Less: works OH undercharged in cost accounts:
Works Expenses (Financial Books) 1680
Works OH (Cost Books) 1319 361
Profit as per Financial Accounts 787

(b) Accounting treatment of Scrap is as follows:

1. Credited to the costing Profit & loss:
In this method the scrap is not cost, and its value does not, therefore appear separately
in cost account. Only a quantitative record of the scrap is maintained and sales value
realized from time to time is credited to costing profit & loss account.
2. Credited to Overhead:
In this method the scrap is assigned a cost the cost is usually the sale value of the scrap
less selling and distribution cost. The value of scrap is credited to manufacturing
overhead which reduce the overhead recovery rate.
3. Credit to jobs:
The scrap is assigned a cost and is traced to the jobs which yield the scrap. This affords a
reasonable amount of credit to the job and widely differs.
4. Transfer to other job:
Scrap arising in one job may be issued for utilization in another job.

8. Garur Ltd. manufactures several products and it uses a single overhead rate based on
direct labour cost. The overheads incurred by the company for the year ending on 31 st
March 2016:
`
Machine operation expenses 20,25,000
Machine maintenance expenses 3,75,000
Salaries of technical staff 12,75,000
Wages and salaries of stores staff 5,25,000

During the period Garur Ltd. introduced activity based costing system and the following
activities were identified:
 Stores activity-receiving materials
 Production activity-set up of machines for production run
 Quality inspection
It is determined that:
 The machine operation and machine maintenance expenses should be
apportioned between stroes and production activity in 3:7 ratios.
 The technical staff salaries should be apportioned between stores activity,
production activity and quality inspection in 6:64:30 ratios.
The consumption of activities during the year is as under:
 Direct labour hours worked 40,000
 Direct wages rate ` 60 per hour
 Production set-up 4,992
 Material and component consignments received from suppliers 1,500
 Number of quality inspection carried out 2,500
The data relating to two products manufactured by Garur Ltd. during the year are as
under:
Product P-1 P-2
Direct material costs ` 45,000 3,200

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 Suggested Answer_Syl12_June 2016_Paper_10
Direct labour hours 960 100
Direct material consignments received 48 52
Production runs 36 24
Number of quality inspections done 30 10
Quantity produced (units) 12,000 4,000

You are required:

(i) Calculate the cost of product P-1 and P-2 based on the existing system of single
overhead recovery rate.
(ii) Determine the cost of product P-1 and P-2 using activity based costing. 5+10

Answers:

(i)
Computation of cost of Product P-1 and P-2
(Based on the Existing System of “Single Overhead Recovery Rate”)
Product P-1 Product P-2
Units 12000 4000
` `
Direct Material Cost 45,000 3,200
Direct Labour Cost 57,600 6,000
(960 hours × ` 60) (100 hours × ` 60)
Overheads @ 175% of Direct Labour Cost 1,00,800 10,500
Total Cost of Products 2,03,400 19,700
Cost per unit 16.95 4.925

(ii)
Statement Showing Computation of Cost of Products P-1 and P-2
(Using “Activity Based Costing System”)
Product P-1 Product P-2
Units 12000 4000
Direct Materials Cost (`) 45,000 3,200
Direct Labour Cost (`) 57,600 6,000
Receiving Cost 42,288 45,812
(Refer to W.N.3) (48 × 881) (52 × 881)
Setup Cost 18,000 12,000
(Refer to W.N.3) (36 × 500) (24 × 500)
Inspection Cost 4,590 1,530
(Refer to W.N.3) (30 × 153) (10 × 153)
Total Cost of Products (`) 1,67,478 68,542
Cost per unit (`) 13.9565 17.1355

Working Notes

1. Overhead Rate basis on Direct Labour Cost

Total Overhead Incurred by the Company
= × 100
Total Direct Labour Cost
` 4200000
= × 100 = 175% on direct labour cost.
(40000hrs  `60)

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2. Apportionment of overheads to activities
Overheads Total expenses Stores Production Quality
inspection
Machine operation
expenses(3:7:0) 20,25,000 6,07,500 14,17,500
Machine maintenance
expenses(3:7:0) 3,75,000 1,12,500 2,62,500
Salaries of technical staff
(6:64:30) 12,75,000 76,500 8,16,000 3,82,500
Wages and salaries of stores 5,25,000 5,25,000
staff
42,00,000 13,21,500 24,96,000 3,82,500

3. Calculation of activity based cost driver rates

Stores Production Quality inspection

Total overheads 13,21,500 24,96,000 3,82,500
Units of activities 1,500 4992 2,500
Rate per activity cost
driver 881 500 153

9. in a factory, following the job Costing Method, an abstract from the work-in-process, as at
30th September, 2015 were prepared as under:
Job. No Materials ` Direct labour hours ` Factory overheads applied
`
115 1,325 400 800 640
118 810 300 500 400
120 765 250 475 380
2,900 1,775 1,420

Materials used in October were as follows:

Materials requisition no. Job no. Cost
`
54 118 300
55 118 425
56 118 515
57 120 665
58 121 910
59 124 720
3,535

A summary of labour hours deployed during October is as under:

Job no. No. of hours Shop-A No. of hours Shop-B
115 25 25
118 90 30
120 75 10
121 65 -
124 20 10
275 75
Indirect labour:
Waiting for material 20 10
Machine breakdown 10 5

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Idle time 5 6
Overtime Premium 6 5
316 101
A shop credit slip was issued in October that the Material issued under Requisition No. 54
is returned to Stores for being unsuitable. A Material Transfer Note was issued in October
indicating that the material issued under Requisition No. 55 for Job 118 was directed to
Job 124. The hourly rate in shop-A per labour hour is ` 3 while at Shop-B it is ` 2 per hour.
The factory overhead is applied at the same rate on direct labour as in September.
In October, Jobs 115, 118 and 120 were completed. It is practice of the management to
put 10% on the factory cost to cover administration and selling overheads and invoicing
the job to the customer on a total cost plus 20% basis. You are asked to compute the
factory cost of the completed jobs and their invoice prices. 10+5

Answers:

Calculation of selling price of the job

Job No. 115 118 120
` ` `
Costs in September:
Material 1325 810 765
Labour 800 500 475
Overheads 640 400 380
Total(A) 2,765 1,710 1,620
Cost in October:
Material - 515 665
Labour
(25×3)+(25×2) 125
(90×3)+(30×2) 330
(75×3)+(10×2) 245
Overheads (80%) 100 264 196
Total(B) 225 1,109 1,106
Total Factory Cost(A+B) 2,990 2819 2726
Add: Admn. Overheads 10% 299 281.9 272.6
3,289 3,100.9 2,998.6
Profit 20% 657.80 620.18 599.72
Selling Price 3,946.80 3,721.08 3,598.32

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