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					        COST ACCOUNTING
                 (FOR CA – IPCC/PCC)


        CA.K.HARIHARAN B.Com., ACA

        Basic concepts – Cost Sheet ……….2
        Material cost ………………………………..5
        Labour cost ………………………………….9
        Overheads …………………………………..14
        ICAI Model exam question paper..20

CA.K.HARIHARAN   98416 61405           SIRC OF ICAI
                 BASIC CONCEPTS
                   COST SHEET
  1. A factory uses a job costing system. The following cost data are
     available from the books for the year ended 31st March, 2009.
     Direct Material                          9,00,000
     Direct Wages                              7,50,000
     Profit                                    6,09,000
     Selling and Distribution OH               5,25,000
     Administrative OH                         4,20,000
     Factory OH                                4,50,000


          Prepare a Cost Sheet indicating the prime cost, work cost,
           production cost, cost of sales and sales value.

          In 2009-10, the factory has received an order for a
           number of jobs. It is estimated that the direct materials is
           would be Rs. 12,00,000 and direct labour would cost
           Rs.7,50,000. What would be the price for these jobs if the
           factory intends to earn the same rate of profit on sales,
           assuming that the selling and distribution overhead has
           gone up by 15%. The factory recovers factory OH as a
           percentage of direct wages and administrative and selling
           and distribution OH as a percentage of work cost, based on
           the cost rates prevalent in the previous year.

  2. The books of Adarsh Manufacturing company present the
     following data for the month of April, 2006.
     Direct labour cost Rs.17,500 being 175% of works OH.
     Raw material purchased Rs.36,500
     Inventory accounts showed the following opening and closing
                        April 1           April 30
                          Rs.         Rs.
     RM                 8,000      10,600
     WIP                  10,500          14,500
     FG                 17,600            19,000

CA.K.HARIHARAN         98416 61405                SIRC OF ICAI
       Other data are:                 Rs.
       Selling expenses             3,500
       Administration expenses      2,500
       Sales for the month          75,000
       You are required to prepare a cost statement showing the
       various elements of cost and also the profit earned.

  3.   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

       How much selling price should be increased to maintain the
       present rate of profit?

  4. A Ltd. co. has capacity to produce 1,00,000 units of a product
     every month. Its works cost at varying levels of production is as
             Level        work cost p.u
             10%          400
             20%          390
             30%          380
             40%          370
             50%          360
             60%          350
             70%          340
             80%          330
             90%          320
             100%         310
       Its fixed administration expenses amounts to Rs.1,50,000 and
       fixed marketing expenses amounts to Rs.2,50,000 per month
       respectively. The variable distribution cost amounts to Rs.30 per

       It can be market 100% of its output at Rs.500 per unit provided
       it incurs the following further expenditure:

       (i) It gives gift items costing, Rs.30 per unit of sale;

CA.K.HARIHARAN            98416 61405                  SIRC OF ICAI
     (ii) It has lucky draws every month giving the first prize of
     Rs.50,000; 2nd prize of Rs.25,000, 3rd prize of Rs.10,000 and
     three consolation prize of Rs.5,000each to customers buying the

     (iii) It spends Rs.1,00,000 on refreshments served every month
     to its customers;

     (iv) It sponsors a television programme every week at a cost of
     Rs.20,00,000 p.m.
     It can market 30% of its output at Rs.550 p.u without incurring
     any of the expenses referred to in (i) to (iv) above.

     Advise the company on its course of action. Show the supporting
     cost sheets.

  5. A company manufactures a product and markets them at
     Rs.27,000/- each. The elements of cost in % is as
           Material    50%
           Labour            20%
           OH          30%.
     The company anticipates 20% and 17% increase in Labour and
     cost of material respectively. Due to increased costs, in relation
     to the present selling price, there would be a 25% decrease in
     the amount of profit p.u.

     You are required to:

     (a) Prepare a statement of profit/loss
      (b) Arrive at the new selling price so as to produce the same %
                         of profit to cost as before.

CA.K.HARIHARAN         98416 61405                SIRC OF ICAI
                    MATERIALS COST
  1) From the details given below, calculate;

           Re-ordering level
           Maximum level
           Minimum level
           Danger level

Re-ordering quantity is 200 units.
Details of lead time : Average 10 days, maximum 15 days, minimum
6 days. For emergency purchases 4 days.
Rate of consumption: Average 15 units per day, maximum 20 units
per day.

  2) ‘HAI’ is product manufactured out of 3 raw materials ‘X’, ‘Y’ and
     ‘Z’. Each unit of HAI requires 10 Kgs, 8 Kgs and 6 Kgs, of X, Y
     and Z respectively. The re-order levels of ‘X’ and ‘Y’ are 15000
     Kgs. and 10,000 kgs. respectively while the minimum level of
     ‘Z’ is 2500 kgs. The weekly production of HAI varies from 300
     to 500 units, while the weekly average production is 400 units.
     You are required to compute:-
     the minimum stock level of X
     the maximum stock level of Y, and
     the reorder level of Z.

     The following additional data are given:
                               X               Y         Z
       Reorder quantity (kg)    20,000      15,000   20,000
       Delivery (weeks)
                                2           4        3
       Average                  3           5        4
                                4           6        5

  3) The particulars relating to material H2O         are   as   under.
     Determine the stock levels for the material.
         Maximum usage 250 units per day;
         Minimum usage 120 units per day;

CA.K.HARIHARAN          98416 61405              SIRC OF ICAI
          Average usage 200 units per day;
          Reorder period 5 to 15 days
          Reorder quantity 2000 units.

  4) 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.

  5) Calculate the three missing stock control levels using the
     information shown below;
  Component usage (last six months)
           March     April     May        June       July       August
           2800      3000      2400       1800       1600       1750

  Component delivery pattern;
        Order                 Due                  Received
                   2.2.2003             2.5.2003          17.4.2003
                   7.6.2003             7.9.2003          6.10.2003
                18.10.2003             18.1.2004         19.12.2003
                   7.2.2004             7.5.2004          26.4.2004
                  31.5.2004            31.8.2004            4.9.2004
  Component control levels;
  Maximum stock : 17000
  Minimum stock :--------?
  Reorder level:------------?
  Reorder quantity :--------?

  6) In a company weekly minimum and maximum consumption of
  material ‘A’ are 25 and 75 units respectively. The reorder quantity
  as fixed by the company is 300 units. The material is received
  within 4 to 6 weeks from issue of supply order. Calculate minimum
  level and maximum level of material ‘A’.

CA.K.HARIHARAN         98416 61405               SIRC OF ICAI
  7) If the minimum stock level and average stock level of raw-
  material ‘X’ are 4000 and 9000 units respectively, find out its re-
  order quantity.

  8) The annual demand of a certain component bought from the
  market is 1000 Units. The cost of placing an order is Rs.60 and the
  carrying cost per unit is Rs.3p.a. Find EOQ.

  9) Annual demand for material 401 is 1,00,000 Units. One unit of
  item 401 costs Rs.4 p.a. to hold in stock. Ordering costs of the
  item are Rs.20 per order. What should the reorder quantity be in
  order to minimize the total costs associated with the stock?

  10) Material: HSLM              Code No. 91163
    Monthly usage: 250 pcs
    Cost of placing and receiving one order Rs.60.
      Cost of material p.u Rs.10
    Carrying cost=10% of inventory value.
    Find out EOQ by
           (i) Tabular method
          (ii) Equation Method.

11) A company is deciding whether to place orders for a component
monthly, quarterly or half-yearly. Using the information below prepare
a schedule to show the associated cost of each option, and thereby
determine the optimum policy.
         Annual usage of component              720 Units
        Unit cost of component                  Rs.3.50
        Cost of placing an order                Rs.7
        Stock holding cost as % of average stock value 25%.

12) A manufacturer requires 9600 units of a certain component
annually. This is      currently purchased from a regular supplier at
Rs.50 p.u The cost of placing an order is Rs.60 per order and the
annual carrying cost is Rs.5 per piece. What is the EOQ for placing

Recently the supplier has expressed his willingness to reduce the price
to Rs.48, if the total requirements are obtained from him in two equal
orders and to Rs. 47, if the entire quantity required is purchased in
one lot. Analyse the cost of the three options and recommend the best

CA.K.HARIHARAN          98416 61405               SIRC OF ICAI
What other factors should also be considered before the decision is

13)    Shree Mithai Pvt. Ltd gives following information
              Annual requirement of sugar for making sweets 50 tons
              Cost of purchase order Rs.10
              Stock holding cost Re.1 per container per annum.
       Supplier of sugar offer quantity discounts as laid out below –
No. of tons     1-9            10-49          50-99          100 & above
Discount per Nil               0.50           1.00           1.20
unit ( Rs.)
       Compute EOQ in the above situation.

14) . Pooja Ltd’s invoice particulars are as follows
      Chemical A 3,000 kgs at Rs.4.20 p/kg        Rs.12,600
      Chemical B 5,000 kgs at Rs.3.80 p/kg        Rs.19,000
      Chemical C 2,000 kgs at Rs.4.75 p/kg        Rs. 9,500
      Sales tax                            Rs. 2,055
      Railway Freight                      Rs. 1,000
            Total                          Rs.44,155
other particulars are as under
Chemical            A                   B                    C
1. Transit loss     200                 280                  100
2. Cartage paid     270                 650                  325
3.Entry tax         10 paise per kg     10 paise per kg      10 paise per kg
A provision for deterioration is to be made at 5 % for all chemicals.
Calculate the rate of pricing of the chemicals

15. A company has the option to procure a particular material from two
Source – I assures that defective will not be more than 2% of supplied
quantity. Sources – II does not give any assurance, but on the basis of past
experience of supplies received from it, it observed that defective percentage
is 2.8%

The material is supplied in lots of 1000 units. Source II supplies the lot at a
price, which is lower by Rs.100 as compared to source I. The defective units
of material can be rectified for use at a cost of Rs.5 per units.

You are required to find out which of the two sources is more economical.

CA.K.HARIHARAN            98416 61405                     SIRC OF ICAI
                       LABOUR COST

  1) 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

     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.

  2) During one week a workman manufactured 200 articles. He
     receives wage for a guaranteed 44 hour week at the rate of
     Rs.15/- per hour. The estimated time to produce one article is
     15 minutes and under incentive scheme the time allowed is
     increased by 20%. Calculate his gross wages under each of the
     following methods.
          Time rate
          Piece-work with a guaranteed weekly wage
          Rowan system
          Halsey system

  3) A company has its factories at two locations. Rowan plan is in
     use at location A and Halsey plan at location B. Standard time
     and basic rat of wages are same for a job which is similar and is
     carried out on similar machinery. Time allowed is 60 hours.

     Job at location A is completed in 36 hours while at B it has
     taken 48 hours. Conversion costs at respective places are
     Rs.1,224 and Rs.1,500. Overheads account for Rs.20 p.h.

CA.K.HARIHARAN         98416 61405                  SIRC OF ICAI
     Required:    a) To find out the normal wage rate and
                 b) To compare respective conversion costs.

  4) Arthy Ltd. employs its workers for a single shift of 8 hours for
     25 days in a month. The company has recently fixed the
     standard output for a mass production item and introduced an
     incentive scheme to boost output. Details of wages payable to
     the workers are as follow;

                 1) Basic wages/piece work wages @ Rs.2 p.u. subject
                    to a guaranteed minimum wages of Rs.60 per day.
                 2) Dearness allowance at Rs.40 per day.

                3) Incentive bonus:
                        Standard output per day per worker
                              40 Units
                        Incentive bonus up to 80% efficiency     Nil
                        Incentive bonus for efficiency above 80% Rs.50
     The details of performance of four workers for the monts of April
     2005 are ;-

                    Worker              No. of days   Output (units)
                      A                     25             820
                      B                     18             500
                      C                     25             910
                      D                     24             780
     Calculate the total earnings of each of the workers.

  5) Two workers, Ravi and Radhi , produce the same product using
     the same material. Their normal wage rate is also the same.
     Ravi is paid bonus according to the Rowan system, while Radhi is
     paid bonus according to the Halsey system. The time allowed to
     make the product is 100 hours. Ravi takes 60 hours while Radhi
     takes 80 hours to complete the product. The factory overhead
     rate is Rs.10 per man-hour actually worked. The factory cost for
     the product of Ravi is Rs.7280 and for Radhi it is Rs.7600.

CA.K.HARIHARAN            98416 61405                 SIRC OF ICAI
     You are required to –
                    a) find the normal rate of wages
                    b) compute the cost of materials

  6) In a unit, 10 men work as a group. When the production for the
     group exceeds the standard output of 200 pieces per hour, each
     man is paid an incentive for the excess production in addition to
     his wages at hourly rates.        The incentive is at half the
     percentage, the excess production over the standard bears to
     the standard production. Each man is paid an incentive at the
     rate of this percentage of a wage rate of Rs.20 per hour. There
     is no relation between the individual workman’s hourly rate and
     bonus rate.

     In a week, the hours worked are 500 hours and the total
     production was 1,20,000 pieces.
         Compute the total amount of the bonus for the week.
         Calculate the total earnings of two workers A and B of the
              - A worked 44 hours and his basic rate p.h was Rs.22
              - B worked 48 hours and his basic rate p.h was Rs.19

  7) The present output details of a manufacturing department are:-
     Average output per week            48,000 units from 160
     Saleable value of output           Rs.6,00,000
     Contribution made towards
     Fixed expenses and profit          Rs.2,40,000

     The company plans to introduce more mechanization into the
     department at a capital cost of Rs.160,000. The effect of this
     will be to reduce the number of employees to 120, and
     increasing the output per individual employee by 60%. To
     provide the necessary incentive to achieve the increased output,
     it intends to offer a 1% increase on the piecework rate of Re.1
     p.u for every 2% increase in average individual output achieved.

     To sell the increased output, it will be necessary to decrease the
     selling price by 4%. Calculate the extra weekly contribution
     resulting from the proposal and evaluate the desirability of
     introducing it.

CA.K.HARIHARAN         98416 61405                SIRC OF ICAI
  8) A company is in the process of introduction of wage incentive
     system. It has taken up the study of the output of three
     workers A,B and C. Each worker produces an identical product,
     but the output varies. They respectively produce 44,36 and 24
     units in a shift of 8 hours. The daily wages are guaranteed at
     Rs.5 p.h and the piece rate is based on a standard output of 4
     units p.h

     The company is considering the wage calculations under:-
     1) Time rate system
     2) Piece rate system
     3) Halsey system and
     4) Rowan system

     Calculate under each of the aforesaid four systems for each
        o The total earnings per shift of 8 hours.
        o The effective earnings per hour worked
        o The wage cost per unit of output

  9) Calculate labour turnover
         No. of workers at the beginning of the month 1800
         No. of workers at the end of the month 2200
         During the month, 20 workers were left & 80 workers were
           discharged and 500 workers were recruited. Of these, 60
           workers were recruited in the vacancies of those
           separated, while the rest were engaged due to expansion.

  10)       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.
                 1) Number of workers recruited and joined
                 2) Number of workers left and discharged.

  11)     An article passes through 5 hand operations as follows:

    Operation    Time per article    Grade of worker   Wage rate per
    no.                                                hour

CA.K.HARIHARAN         98416 61405                SIRC OF ICAI
          1         15   minutes            A         Re.0.65
          2         25   minutes            B         Re.0.50
          3         10   minutes            C         Re.0.40
          4         30   minutes            D         Re.0.35
          5         20   minutes            E         Re.0.30

      The factory works 40 hours a week and the production target is
      600 dozens per week. Prepare a statement showing for each
      operation and in total the number of operators required, the
      labour cost per dozen and the total labour cost per week to
      produce the total targeted output.

12)            Normal rate                 :Rs.60 / hr
              Standard time                :1 minutes / p.u
              Out put in a 8 hours day     :Worker A- 300 Unites
                                             B- 480 Unites
                                             C- 600 Unites
      Calculate earning of workers A,B&C under
                Straight piece rate system
                Taylor’s differential piece rate system
                Merrick’s multiple piece rate system

CA.K.HARIHARAN             98416 61405             SIRC OF ICAI
  1)   SARADHA LTD has three production departments and four
service departments. The expenses for these departments as per
Primary Distribution Summary are as follows.

Production        Cost in Rs.         Service Dept.      Cost in Rs.
       A          30,000              Stores             4,000
       B          26,000              Time keeping       3,000
                                      and Accounts
       C          24,000              Power              1,600
                                      Canteen            1,000

The following information is also available in respect of the production
Particulars/Dept.         A                   B                  C
HP of Machines                  300                300                200
Number of                        20                 15                 15
workers                        2500               1500              1000
Value of Stores
Apportion the costs of service departments over the production

2) KETTU LTD has three departments X,Y and Z that are regarded as
production departments. Service departments’ (P, Q, R, S) costs are
distributed to these production departments using the “Step Ladder
Method” of distribution. Estimates of factory overhead costs to be
incurred by each department in the following year are as follows. Data
required for distribution is also shown against each department.
      Dept.    Factory OH       Direct       No. of        Area in sq.m
               in Rs.           Labour       employees
         X          1,93,000           4,000          100         3,000
         Y            64,000           3,000          125         1,500
         Z            83,000           4,000           85         1,500
         P            45,000           1,000           10           500
         Q            75,000           5,000           50         1,500
         R          1,05,000           6,000           40         1,000
         S            30,000           3,000           50         1,000

CA.K.HARIHARAN          98416 61405                   SIRC OF ICAI
The OH costs of the four service dept. are distributed in the same
order, viz. P,Q,R and S respectively on the following basis:
Dept.                P               Q              R             S
Basis          No. of          Direct         Area in sq.m Direct
               employees       labour hours                  labour hours
You are required to-
                1) Prepare a schedule showing the distribution of OH
                   costs of the service dept. to production dept.
                2) Calculate OH recovery rate per direct labour hour for
                   each of the three production depts.

 3) Rajaram Ltd has three Production Department P-1, P-2 & P-3 and
two Service Departments S-1 and S-2, the details pertaining to which
are as under.

Particulars                  P-1    P-2    P-3      S-1    S-2
Direct wages Rs.               3000   2000     3000   1500   195
Working Hours                  3070   4475     2419      -     -
Value of machine Rs          60,000 80,000 1,00,000  5,000 5,000
H.P. Rating of Machines          60     30       50     10     -
Light Points                     10     15       20     10     5
Floor Space in Square          2000   2500     3000   2000   500

The following cost figures are extracted from the accounting records.
Particulars        Rs.               Particulars       Rs.
Rent and Rates               50,000 Power                        15,000
General Lighting              6,000 Depreciation on            1,00,000
Indirect Wages               19,390 m/c                          96,950

The expenses of the Service Departments are allocated as under
Dept.       P-1         P-2          P-3         S-1        S-2
S-1         20%         30%          40%         -          10%
S-2         40%         20%          30%         10%        -
Find out the total cost of product “HI-FI”, which is processed for
manufacture in Dept.       P-1, P-2 and P-3 for 4,5 and 3 hours
respectively, given that its Direct Material Cost is Rs.500 and Direct
Labour cost Rs.300.

CA.K.HARIHARAN            98416 61405               SIRC OF ICAI
4)SARAZ LTD gives you the following information to        compute the
production hour rate of recovery of OH in X, Y and Z.
                            Production dept.              Service dept.
Particulars            X        Y        Z        P       Q      Total
Rent                      2400    4800     2000 2000        800 12000
Electricity                800    2000       500    400     300   4000
Indirect labour           1200    2000     1000     800   1000    6000
Mach. Depreciation        2500    1600       200    500     200   5000
Sundries                   910    2143       847    300     300   4500
Working hours             1000    2500     1400

Expenses of service Dept. P and Q are to be apportioned as under;
Particulars X          Y            Z          P            Q
P           30         40           20         -            10
Q           10         20           50         20           -

5) Gowri Ltd has two production departments P-1 and P-2 and two
service dept. S-1 and S-2. The data relating to a period are as

Particulars                     P-1      P-2       S-1           S-2
Direct materials                80,000   40,000    10,000        20,000
Direct wages                    95,000   50,000    20,000        10,000
OH                              80,000   50,000    30,000        20,000
Power required at normal        20,000   25,000    12,500        17,500
capacity operations (kwh)
Actual power consumption        13,000   23,000    10,250        10,000
during the period (kwh)

A power generation plant meets the power requirement of these
departments. 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 dept.
the service dept. OH are to be redistributed on the following basis:
Dept.          P-1           P-2            S-1             S-2
S-1            50%           40%            --              10%
S-2            60%           20%            20%             --

You are required to:

CA.K.HARIHARAN         98416 61405                SIRC OF ICAI
     apportion the power generation plant costs to the four dept.
     Re-apportion service dept. costs to production dept.
     Calculate the OH rates per direct labour hour of production dept.
      given that the direct wage rates of P1 and P2 are Rs.5 and Rs.4
      per hour respectively.

6) Annand Ltd. budges the following amounts for its two service
departments (Legal and Personnel) is supporting each other and the
two production divisions the Micro Computer Division (MCD) and the
Peripheral Equipment Division (PED)

            Budgeted Capacity
To be supplied by      MCD       PED       Legal    Personnel     Total
Legal (hours)          3000      1500      --       500           5000
Legal (%)              60%       30%       --       10%           100%
Personnel (hours)      45000     50000     5000     --            100000
Personnel(%)           45%       50%       5%       --            100%
Details on actual usage are as follows:
            Actual usage by
To be supplied by     MCD        PED      Legal      Personnel    Total
Legal (hours)         800        2400     --         800          4000
Legal (%)             20%        60%      --         20%          100%
Personnel (hours)     53200      22800    4000       --           80000
Personnel (%)         66.5%      28.5%    5%         --           100%

The actual expenses were:
                 Fixed        variable
Legal          Rs.7,20,000 Rs.4,00,000
Personnel      Rs.9,50,000 Rs.12,00,000
Fixed expenses are allocated on the basis of budgeted capacity.
Variable expenses are allocated on the basis of actual usage.
Prepare a statement showing apportionment of expenses of service
departments (Legal and Personnel) to production division MCD and
PED by using simultaneous equation method.

7) A machine shop has 8 identical Drilling machines manned by 6
operators. The machines cannot be operated without an operator
wholly engaged on it. The original cost of these 8 machines is Rs.8
lakhs. These particulars are furnished for a 6 months period .
    Nominal available hours p.m                       208
    Absenteeism (without pay) hours p.m               18

CA.K.HARIHARAN          98416 61405                SIRC OF ICAI
   Leave (with pay) hours per month               20
   Normal idle time unavoidable –hours p.m        10
   Avg rate of wages per day of 8 hours           Rs.20
   Production bonus estimated at                  15% of wages
   Value of power consumed                        Rs.8050
   Supervision and indirect labour                Rs.3300
   Lighting and electricity                       Rs.1200
These particulars are for a year:
   Repairs & maintenance and consumables-3% on the value of
     machines; Insurance Rs.40,000
   Depreciation -10% on original cost; Sundry expenses-Rs.12000;
     Allocated Expenses- Rs.54,530
  You are required to work out a comprehensive machine hour rate
  for the Machine shop.

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

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
Particulars        Machine A (in     Machine B (in      Machine C (in
                   Hrs.)             Hrs.)              Hrs.)
With use of        160               130                480
Without use of     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.

9)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:

CA.K.HARIHARAN         98416 61405                SIRC OF ICAI
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.

     Calculate the amount of under absorption of production OH
      during the year; and
     Show the accounting treatment of under-absorption of POH.

10) X Ltd manufactures product X at the rate of 80 pieces per hour.
The company has been producing and selling 1,60,000 units annually
during the previous 6 years. However, during this year the company
was able to produce 146,000 units only. The company annual fixed
OH for this year amounted to Rs. 5,84,000.

The company works on single shift only at 8 hours per day and 6 days
a week. The company has declared 13 holidays during this year. The
quarterly preventive maintenance and repairs work involved 77 hours.
Your are required to calculate:
    Maximum capacity,
    Practical capacity,
    Normal capacity,
    Actual capacity, and
    Idle capacity in term of hours. AND
    Hourly rate of recovery of OH for maximum, practical, normal,
      and actual capacities.

CA.K.HARIHARAN         98416 61405              SIRC OF ICAI
                                  All Question are compulsory.
                        Working notes should form part of the answer.
                            ICAI MODEL EXAM – JUNE ‘09

Question 1

a. Find out the cost unit of following industries;

   o Automobile

   o Cement

   o Chemicals

   o Power

   o Steel

   o Nursing home

   o Bridge construction

   o Advertising

b. Discuss the process of estimating profit or loss on incomplete contracts

c. Distinguish between Perpetual inventory system & continuous stock taking

d. The total cost for producing 10 items are Rs.15 and that for producing 15 items are
Rs.20. Find out the fixed cost?
                                                                        (2+4+4+2=12 Marks)
Question 2

(a) The following data pertains to process I for march 2009 of DISA Ltd;
Opening WIP 1500 units at Rs.15,000.
Degree of completion - Material 100%; Labour and Overhead 33 1/3 %.
Input of materials 18500 units at Rs.52000.
Direct labour Rs.14,000.

CA.K.HARIHARAN                  98416 61405                       SIRC OF ICAI
Overhead Rs.28,000
Closing WIP 5000 units - Degree of completion – Material 90%; Labour & OH 30%
Normal process loss is 10% of total input.
Scrap value Rs.2 per unit
Unit transferred to the next process 15000 units.
You are required to compute Statement of equivalent production, Prepare the process.

b) ICAI Ltd produces two joint products, PCC & IPCC. In a year, further processing
   costs beyond split-off point spent were Rs.8000 and Rs.12000 for 800 units of PCC
   and 400 units of IPCC respectively. PCC sells at Rs.25 and IPCC sells at Rs.50 per
   units. A sum of Rs.9000 of joint costs was allocated to product PCC based on the net
   realization method. What were the total joint costs in the year?

c) ‘HAI’ is product manufactured out of 3 raw materials ‘X’, ‘Y’ and ‘Z’. Each unit of
   HAI requires 10 Kgs, 8 Kgs and 6 Kgs, of X, Y and Z respectively. The re-order
   levels of ‘X’ and ‘Y’ are 15000 Kgs. and 10,000 kgs. respectively while the
   minimum level of ‘Z’ is 2500 kgs. The weekly production of HAI varies from 300 to
   500 units, while the weekly average production is 400 units. You are required to
        the minimum stock level of X
        the maximum stock level of Y, and
        the reorder level of Z.
The following additional data are given:
                                           X            Y           Z
         Reorder quantity (kg)           20,000     15,000        20,000
         Delivery (weeks) minimum 2                 4             3
                           Average       3          5             4
                           Maximum 4                6             5

                                                                     (8+3+4=15 marks)
Question 3
 (a)    Two workers, Ravi and Radhi , produce the same product using the same
material. Their normal wage rate is also the same. Ravi is paid bonus according to the
Rowan system, while Radhi is paid bonus according to the Halsey system. The time
allowed to make the product is 100 hours. Ravi takes 60 hours while Radhi takes 80
hours to complete the product. The factory overhead rate is Rs.10 per man-hour actually
worked. The factory cost for the product of Ravi is Rs.7280 and for Radhi it is Rs.7600.
       You are required to –
                         a) find the normal rate of wages
                         b) compute the cost of materials

CA.K.HARIHARAN                 98416 61405                     SIRC OF ICAI
(b) NANO has been promised a contract to run a tourist car on a 20 km long route for the
chief executive of a multinational firm. He buys a car costing Rs.1,50,000. The annual
cost of insurance and taxes are Rs.4500 and Rs.900 respectively. He has to pay Rs.500
per month for a garage where he keeps the car when it is not in use. The annual repair
costs are estimated at Rs.4,000. The car is estimated to have a life of 10 years at the end
of which the scrap value is likely to be Rs.50,000.

He hires a driver who is to be paid Rs.300 p.m plus 10% of the taking as commission.
Other incidental expenses are estimated at Rs.200p.m.Petrol and oil will cost Rs.100 per
100 kms. The car will make 4 round trips each day. Assuming that a profit of 15% on
takings is desired and that the car will be on the road for 25 days on an average p.m, what
should he charge per round-trip? .

(c ) What are the advantages and limitations of zero based budgeting?
                                                                    (6+5+4=15 marks)

Question 4
Answer any three of the following:
(i)                  Sales         Profit

       Period I        Rs.14,433      Rs.385

       Period II     Rs.18,203        Rs.1,139
Find   -P/V Ratio & -Fixed Cost

(ii) The information relating to the direct material cost of a company is as under;
Standard price per unit                         Rs.3.60
Actual quantity purchased in units              1600
Standard quantity allowed for actual 1450
production in units
Material price variance on purchase             Rs.240 (Favourable)
Actual price per unit                           ?

(iii) Discuss the two types of costs associated with labour tournover.

(iv) Distinguish between Job costing and batch costing.
                                                                      (3*3=9 marks)

Question 5
Answer any three of the following:
   (i)   Discuss the eligibility criteria for issue of commercial paper
   (ii)  Short note on venture capital financing
   (iii) Short note on factoring
   (iv)  Discuss the major considerations in capital structure planning
                                                                    (3*3=9 marks)

CA.K.HARIHARAN                 98416 61405                        SIRC OF ICAI
Question 6
a. The bank balance of a business firm has increased during the last financial year by
Rs.150,000. During the same period it issued shares of Rs.200,000 and redeemed
debentures of Rs.150,000. It purchased fixed assets for Rs.40,000 and charged
depreciation of Rs.20,000. The working capital of the firm, other than bank balance
increased by Rs.115,000 during the period.
Find out the profit of the firm for the year?

b. Find out the IRR of an investment of Rs.3.2 lakhs which yields Cash Inflows after Tax
(CFAT) of Rs.58,000 per annum for 10 years?

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

WOW Ltd. has a present annual sale of 10,000 units at Rs.300 per unit. The variable cost
is Rs.200 per unit and the fixed costs amount to Rs.3,00,000 per annum. The present
credit period allowed by the company is 1 month. The company is considering a proposal
to increase the credit period to 2 months and 3 months and has made the following estimates:
                            Existing                   Proposed
     Credit policy              1 month    2 months      3 months
     Increase in sales          ---        15%         30%
   %of Bad Debts                1%         3%           5%

There will be increase in fixed cost by Rs.50,000 on account of increase of sales beyond 25% of
present level.
     The company plans on a pre-tax return of 20% on investment in receivables.
     You are required to calculate the most paying credit policy for WOW Ltd.
                                                                                 (7 marks)
Question 8
(a) Calculatethe 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
        (b) Equity share capital of Rs.4,00,000, 14% preference share capital of Rs.200,000 and
        12% debenture of Rs.400,000.

CA.K.HARIHARAN                   98416 61405                         SIRC OF ICAI
Assume the corporate tax rate is 35% and par value of equity share is Rs.10 in each case.

(b) A firm maintains a separate account for cash disbursement. Total disbursements are
Rs.1,05,000 per month or Rs.12,60,000 per year. Administrative and transaction cost of
transferring cash to disbursement account is Rs.20 per transfer. Marketable securities yield is 8%
per annum.
(i) Determine the optimum cash balance according to J.Baumal model.
            Also find out –
(ii) Avg. cash balance;(iii) No. of transfers per year;(iv) Time interval between 2 transfers;(v)
Total Transaction cost;(vi) Total carrying cost ;(vii) Total associated cost
                                                                             (7+7 = 14)
Question 9

a.     Stock velocity                     6

         Fixed Asset Turnover Ratio       4

         Capital Turnover Ratio    2

         Gross profit ratio        20%

         Debt collection period    2 months

         Creditors pay. Period            73 days

         Gross profit                     Rs.60,000

         Closing stock                    Rs.5000 in excess of Opening stock
         Prepare Balance Sheet.

b. What is optimum capital structure?

                                                                                 (5+4=9 marks)
                                         = = = = **** = = = =

CA.K.HARIHARAN                      98416 61405                         SIRC OF ICAI

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