Answer to PTP_Intermediate_Syllabus 2012_Jun2014_Set 1

Paper – 10: Cost & Management Accountancy

Time Allowed: 3 Hours Full Marks: 100

QUESTION 1, which is compulsory. Attempt all of them.

Section-A has three questions. Attempt any two of them.
Section-B has two questions. Attempt any one of them.
Section-C has three questions. Attempt any two of them.
(Working Notes should form part of the answer.)

Question.1
(a) Selling price of a product is `5 per unit, variable cost is `3 per unit and fixed cost is
`12,000. Then what will be the break-even point in unit? [2]
Answer:
Contribution = Sales - Variable Cost
=5-3
=2

Break-even point = Fixed cost/Contribution per unit

= 12,000/2
= 6,000 units

(b) A factory operates a standard cost system, where 2,000 kgs of raw materials @ `12 per kg
were used for a product, resulting in price variance of `6,000(F) and usage variance of
`3,000(A). Then what will be the standard material cost of actual production? [2]
Answer:
Total material cost variance = Material price variance +Material usage variance
=6,000(F) + 3,000(A)
=3,000(F)
Actual material cost = 2,000x12
= ` 24,000
Hence, the standard material cost of actual production = 24,000 + 3,000(F) = ` 27,000

(c) State the two objective of Cost Accounting? [2]

Answer:
The main two objective of Cost accounting are as follows:
(i) To ascertain the costs under different situations using different techniques and system
of costing.
(ii) To determine the value of closing inventory for preparing financial statements of the
concern.

(d) State out-of-pocket cost. [2]

Answer:
Out-of-Pocket Cost: This is the portion of the cost associated with an activity that involves
cash payment to other parties, as opposed to costs which do not require any cash
outlay, such as depreciation and certain allocated costs. Out-of-Pocket costs are very
much relevant in the consideration of price fixation during trade recession or when a
make-or-buy decision is to be made.

(e) The budgeted annual sale of a firm is `80 lakh and 25% of the same is 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]

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Answer:
Credit sale = `80 - `20 = `60 lakhs
Hence,
Avg. collection period = Debtors/Credit sales per month
= 5/(60/12)
= 5/5 = 1 month

(f) A Company has been in existence since 1990 and is covered under cost audit for the first
time in 2011-12. Whether it is mandatory to indicate previous year figure while submitting
the report. [2]
Answer:
A company coming under the purview of the Cost audit for the first time, the cost auditor
shall mention figures for the previous year(s) certifying by means of a note that the figure
so stated are on the basis of information furnished by the management, for which he has
obtained a certificate from them.

(g) Are the units located in SEZs/FTZs/EPZs or 100% EOU required to maintain Cost Accounting
Records? [2]
Answer:
There is no exemption to units located in SEZs/FTZs/EPZs or 100% EOU from maintenance of
cost accounting records and filling of compliance report with the ministry of corporate
affairs in compliance with the applicable cost accounting records rules.

(h) The following are the annual profits in thousands in a certain business:
Year 2007 2008 2009 2010 2011 2012 2013
Profit(thousands) 60 72 75 65 80 85 95
By the method of least squares fit a straight line using the estimate profit for 2017. [3]
Answer:
Fitting straight line trend by least squares
Year (t) Profit(000)Y Time deviation (X) XY X2
2007 60 -3 -180 9
2008 72 -2 -144 4
2009 75 -1 -75 1
2010 65 0 0 0
2011 80 +1 +80 1
2012 85 +2 +170 4
2013 95 +3 +285 9
N=7 ∑Y=532 ∑X=0 ∑XY=136 ∑X2=28

The equation of straight line Trend is Yc=a+ bX

Y XY
Since X=0, a= and b= Therefore a=532/7=76 and b=136/28=4.857
N X2
The equation would be Yc=76+4.857X
For 2017 the value would be b+7. Then Y2016=76+(4.867x7)=76+33.99-109.99

(i) The cost function of a firm is given by c=x3-4x2+9x, find at what level of output Average
Cost is minimum and The Minimum Cost. [3]
Answer:
Total cost = x3 - 4x2 + 9x
Average cost = x2 - 4x + 9

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dy dy 2
In order that average cost is minimum =0 and the value of should be positive
dx dx 2
dy
i.e. = 2x-4 = 0
dx
or, x-2 = 0
x=2

dy 2
= 2 which is positive so the function will have minimum values.
dx 2
Minimum Average cost
= x2-4x+9
= 4-(4x2)+ 9
= 13 – 8 = 5

SECTION A
Answer any two questions from this section.

Question.2
(a) The share of production and the cost-based fair price computed separately for a
common product for each of the four companies in the same industry are as follows:
A B C D
Share of Production (%) 40 25 20 15
Costs:
Direct materials (` /Unit) 75 90 85 95
Direct Labour (` /Unit) 50 60 70 80
Depreciation (` /Unit) 150 100 80 50
Other Overheads(` /Unit) 150 150 140 120
Total (` / Unit) 425 400 375 345
Fair Price (` /Unit) 740 615 550 460
Capital employed per Unit:
(i) Net Fixed Assets(` /Unit) 1,500 1,000 800 500
(ii) Working Capital (` /Unit) 70 75 75 75
Total (` /Unit) 1,570 1,075 875 575
Required:
What should be the uniform price that should be fixed for the common product? [10]
Answer:
Assume Total Production = 100
A B C D Total
Price 740 615 550 460
(-)Cost 425 400 375 345
Profit per unit 315 215 175 115
Share of production 40 25 20 15
Total Return 12,600 5,375 3,500 1,725 23,200
Capital Employed 1,570 x 40 1,075 x 25 875 x 20 575 x 15 1,15,800
= 62,800 = 26,875 = 17,500 = 8,625

23, 200
Average Return on Capital Employed = = 20% (approx)
1,15, 800

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Calculation of Uniform Price

A [425 + (20% of 1,570)] x 40 29,560
B [400 + (20% of 1,075)] x 25 15,375
C [375 + (20% of 875)] x 20 11,000
D [345+ (20% of 575)] x 15 6,900
Total Cost + Profit 62,835
No. of Units 100
62, 835
Uniform Price Per Unit = 628.35
100

(b) The following facts are extracted from the books of Alpha Radio Manufacturing
Company for the year 2013.
(i) It produces two types of radio - Type A and Type B and sells these in two market -
Kolkata and Siliguri.
(ii) The budgeted and actual sales for the year 2013 are as follows:
Kolkata Siliguri
Type A – Budgeted 1000 units at ` 200 each 800 units at ` 200 each
Actual 900 units at ` 200 each 750 units at ` 200 each
Type B – Budgeted 800 units at ` 300 each 600 units at ` 300 each
Actual 1000 units at ` 300 each 750 units at ` 300 each

Analysis of variance discloses that Type A is overpriced and Type B is under-priced. If the
price of A Type radio set is reduced by 10% and price of B Type radio set is increased by
20% and if a modern and extensive advertisement campaign is introduced, then the
following volume of sales could be made in the next year as expected by the Marketing
Manager.

Expected increase/decrease over the current Kolkata Market Siliguri Market

budget
Product A: Due to change in pricing policy +20% +20%
Due to introduction of modern +5% +5%
advertisement campaign
Product B: Due to change in pricing policy +10% (-)2%
Due to introduction of modern +5% +5%
advertisement campaign
On the basis of above you are required to prepare sales budget for the year 2014.
[10]
Answer:

Calculation of Budgeted Sales in 2014

Type - A Kolkata Siliguri
Budgeted of last year (2013) 1,000 800
Add: Increment for change in Pricing Policy (+20% /+20%) 200 160
Add. Increment for Advertisement Campaign (+5% / +5%) 50 40
Total Budgeted Sales for 2014 (units) 1,250 1,000
Type - B
Budgeted for last year (2013) 800 600
Add: Increment / Decrement for change in pricing policy 80 (12)
[+10% / - (2)%]
Add: Increment for Advertising Campaign (+5% / + 5%) 40 30
Total Budgeted Sales for 2014 (units) 920 618

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Sales value for

Type A - Price 200 200
Less: Reduction in price (20) (20)
180 180
Type B
Price 300 300
Add: Increase in price 60 60
360 360
Sales Budget for 2014
Type - A
Units 1,250 1,000
Price 180 180
Total Sales (A) 2,25,000 1,80,000
Type B
Units 920 618
Price 360 360
Total Sates (B) 3,31,200 2,22,480
Total Sales (A+B) 5,56,200 4,02,480

Question.3
(a) Gupta Enterprise is operating at 60% capacity level producing and selling 60,000 units @ `
50 per unit. Other relevant particulars are as follows:
Cost per unit
Material ` 20
Conversion Cost (variable) ` 10
Dealer's margin (10% of sales) `5
Fixed cost for the period is ` 6,00,000
As there is a stiff competition, it is not possible to sell all the products at the existing cost
price structure. The following alternative proposals are considered:
(i) Decrease selling price by 20%
(ii) Increase dealer's margin from 10% to 20%
Select the better alternative. Also calculate the sales volume required to maintain the
same amount of profit under the alternative which is considered better assuming that
volume of sales will not be a limiting factor under such alternative. Also assume that fixed
cost will remain constant. [3+3=6]
Answer:

Evaluation of Both the Option

Selling Price Decreased by 20% Increase dealer's Margin to
20%
Selling Price 50 - (50 x 20%)= 40 50
Less: Material (20) (20)
Less: Conversion Cost (10) (10)
Less: Dealers Margin (4) (10)
Contribution per unit 6 10

We must increase the dealer's commission from 10% to 20% as the contribution is higher
in this alternative by (10 - 6) = ` 4.

Profit Required in the New Alternative = [(50 – 20 – 10 – 5) x 60,000 – 6,00,000] = ` 3,00,000

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Contribution - Fixed Cost = ` 3,00,000

Contribution = ` 3,00,000 + ` 6,00,000 = ` 9,00,000
Total Contribution ` 9,00,000
Required Sales units = = = 90,000 units
Contribution per unit 10
Gupta Enterprises will have to sell 90,000 units to earn the same profits as earlier.

(b) From the following particulars furnished by M/s. Starlight Co. Ltd. find out (i) Material cost
variance; (ii) Material usage variance and (iii) Material price variance.

Value of Material purchased ` 9,000 units

Quantity of Material purchased 3,000 units
Standard quantity of materials required per tonne of Finished
product 25 units
Standard rate of material ` 2 per units
Opening Stock Nil
Closing stock of material 500 units
Finished production during the period 80 tonnes
[4+3+3]
Answer:
Material consumed = Quantity of material purchased - Closing stock of materials
= 3000 units - 500 units
= 2500 units
Value of material purchased
Actual rate of material =
Quantity of material purchased

`9, 000
=
3, 000
= ` 3 per unit
Standard Quantity for actual output = 25 units x 80 tonnes
= 2000 units

(i) Material Cost Variance

= Standard Cost - Actual Cost
= Standard Price x Standard Quantity - Actual Price x Actual Quantity
= (` 2 x 2000 units) - (` 3 x 2500 units)
= ` 4,000 – ` 7,500
= ` 3,500 (A)

(ii) Material Price Variance

= Actual Quantity x (Standard Price - Actual Price)
= 2500 x (` 2 – ` 3)
= 2500 x (- ` 1)
= ` 2,500 (A)

(iii) Material Usage Variance

= Standard Price (Standard Quantity - Actual Quantity)

= ` 2 (2000 units - 2500 units)

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= ` 2 (-500 units)
= ` 1,000 (A)

(c) Pass the journal entries for the following transactions in a double entry cost accounting
system:
Particulars `
(a) Issued of material:
Direct 55,000
Indirect 15,000
(b) Allocation of wages and salaries:
Direct 20,000
Indirect 4,000
(c) Overheads absorbed in jobs:
Factory 15,000
Administration 5,000
Selling 3,000
(d) Under/ over absorbed overheads:
Factory (over) 2,000
Admn. (under) 1,000
[4]
Answer:
Journal entries
Dr. Cr.
Particulars ` `
Work in Progress Control A/c Dr. 55,000
Factory Overheads Control A/c Dr. 15,000
To Material Control A/c 70,000
Work in Progress Control A/c Dr. 20,000
Factory Overheads Control A/c Dr. 40,000
To Wages Control A/c 24,000
Work in Progress Control A/c Dr. 15,000
Finished goods Control A/c Dr. 5,000
Cost of Sales A/c Dr. 3,000
To Factory Overhead Control A/c 15,000
To Administrative Overhead Control A/c 5,000
To Selling Overhead Control A/c 3,000
Costing Profit & Loss A/c Dr. 1,000
To Administrative Overhead Control A/c 1,000
Factory Overhead Control A/c Dr. 2,000
To Costing Profit & Loss A/c 2,000

Question.4
(a) Explain briefly benefits of Integrated Accounting System. [5]

Answer:
Integrated accounting system is that system of accounting in which Cost and Financial
Accounts are kept in the same set of books. On one hand it provides useful information for the
ascertainment of the cost of each product, job, process or operation. On the other hand it
provides information for preparing the Profit and Loss Account and the Balance Sheet. All the
accounting entries are similar to that of integrated accounts except the fact that the General

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Ledger Adjustment Account is not opened. Thus the expenses and sales are categorized into
cash or credit and accordingly Cash (Bank) Account, Creditor's Account and Debtor's Account
are opened. Benefits of Integrated Accounting System:

(i) Since only one set of books is maintained there is only one profit figure. Thus the question
of reconciling costing and financial profits does not arise.
(ii) Due to maintenance of one set of books, a lot of time and efforts are saved.
(iii) It is more economical as it is based on the concept of 'Centralisation of Accounting
function.
(iv) No delay is caused in obtaining information as it is provided from the books of original
entry.
(v) Since financial books are strictly checked for accuracy, the costing accounts will also
undergo similar checks because of the integrated accounting system.
(vi) Use of mechanized accounting has further facilitated the operation of the system.

(b) ABC Ltd. is following Activity Based Costing. Budgeted Overhead and cost driver volumes
are as follows:
Cost Pool Budgeted Overheads Cost Driver Budgeted Volume
Material 11.60 lakhs No. of orders 2,200
Procurement
Material handling 5.00 lakhs No. of movement 1,300
Maintenance 19.40 lakhs Maintenance hours 16,800
Set-up 8.30 lakhs No. of set-ups 1,040
Quality Control 3.52 lakhs No. of inspection 1,800
Machinery 14.40 lakhs No. of machine hours 48,000
The company has produced a batch of 5,200 components, its material cost was `2.60 lakhs
and labour cost `4.90 lakhs. Usage activities of the said batch are as follows:
Material order - 52, Material movements - 36, Maintenance hours - 1,380, Set ups - 50,
Quality Control Inspection - 56 and Machine hours - 3,600.
Calculate:
(i) Cost driver rates that are used for tracing appropriate amount of over heads to the said
batch.
(ii) The cost of batch of component. [3 + 4=7]

Answer:
Cost driver data
Particulars Details Rate of Cost Drivers
Materials procurements 11,60, 000 `527
2, 200
Materials handling 50, 00, 000 `368
1, 360
Maintenance 19,
50, 40,
00, 000 `115
16, 800
1, 360
Setup 8, 30,
19, 40,000
000 `798
1, 040
16, 800
8, 30, 000
1, 040
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Quality Control 3, 52, 000 `195

1, 800
Machinery 14, 40,000
3, 52, 000 `30
48, 000
1, 800
14, 40, 000
Calculation of Batch of 5,200 Components
48, 000
Direct materials 2,60,000
Direct labour 4,90,000
Prime cost 7,50,000
Add: Overheads
Material procurements (52 x `527) 27,404
Material handling (36 x `368) 13,248
Maintenance (1,380 x `115) 1,58,700
Set up (50 x `798) 39,900
Quality Control (56 x `195) 10,920
Machinery (3600 x `30) 1,08,000 3,58,172
11,08,172

(c) XYZ Co. Ltd. has two divisions A and B. A sells half of its output on the open market and
transfers the rest to Division B. Costs and revenue during 2013 are:
A (`) B (`) Total (`)
Sales 18,000 50,000 68,000
Cost of production in the division 26,000 22,000 48,000
Profit during the period 20,000
There are no opening and closing stocks.
You are required to find out the profit of each division and profit of the company using
transfer prices:
(i) At cost
(ii) At cost plus 20%
(iii) At cost plus 20% but there is over spending in Division A `4,000. [2+3+3=8]

Answer:
Calculation of profit when Transfer price is at cost
Particulars A B Company
Sales 18,000 50,000 68,000
Less: Cost of production 13,000 35,000 48,000
(22,000+13,000)
Profit 5,000 15,000 20,000

Calculation of profit when Transfer price is at Cost Plus 20%.

Particulars A B Company
Sales 33,600 50,000 83,600
[18,000 + (13,000 +
20% of 13,000)]
Less: Cost of production 26,000 37,600 63,600
[22,000+(13,000 +
20% of 13,000)]
Profit 7,600 12,400 20,000

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Calculation of profit when Transfer price is cost plus 20% and over spending in Division A
by `4,000:
Particulars A B Company
Sales 33,600 50,000 83,600
(18,000 +15,600)
Less: Cost of production 30,000 37,600 67,600
(26,000+4,000) (22,000+15,600)
Profit 3,600 12,400 16,000

Section-B
Answer any one question from this section.

Question.5
(a) Discuss is Compliance Report? [3]
Answer:
Industries which are not covered under compulsory Cost Audit need to get compliance
from the Cost Accountant. Such a compliance report shall certify compliance of all
statutory requirements relating to maintence of cost Record / Cost statements related to
the industry. Such a compliance report should be branged by a cost Accountant
(holding a certificate of parched or permanent employee of the company having valid
membership / certificate of parched).
Companies engaged in activities or products to which the cost accounting records rules
listed under Rule 3(a) to 3(h) apply will not be required to file a Compliance Report until
these Rules are amended. However, if the concerned company is also engaged in other
activities covered under the Companies (Cost Accounting Records) Rules 2011, in that
case the company would be required to file a Compliance Report.

(b) What are the requirements for compliance report? [7]

Answer:
Rule 5 of the 2011 Records Rules provides that every company to which these rules apply
shall submit a compliance report, in respect of each of its financial year commencing on
or after the 1st day of April, 2011, duly certified by a "cost accountant", along with the
Annexure to the Central Government, in the prescribed form (i.e. Form B). “Form B”
means the form of the compliance report and include Annexure to the compliance
report. According to Rule 2(c) of the 2011 Records Rules, "cost accountant" means a cost
accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost
Accountants Act, 2011 (i.e. a member of the ICAI) and who is either a permanent
employee of the company or holds a valid certificate of practice under sub-section (1)
of section 6 and who is deemed to be in practice under sub-section (2) of section 2 of
that Act and includes a firm of cost accountants.
A question arises whether the term "a firm of cost accountants" above shall include a
Limited Liability Partnership (LLP) of cost accountants? - This question arises as a firm is
different from a LLP. The latter is a body corporate which a firm is not. While the Central
Government has vide Circular No. 30A/201 1, dated 26-52011 clarified that LLP will not be
regarded as a "body corporate" for the "limited purpose of section 226(3)(a)"
(disqualification of statutory auditors appointed under section 224 /disqualification of
cost auditors appointed under section 233B). Thus, from the said circular it appears that
while LLP of cost accountants can be appointed cost auditors under section 233B, LLP of

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cost accountants cannot be appointed as "cost accountant" for compliance reporting.

MCA/ICWAI needs to clarify this.
The compliance report does not (and indeed cannot supplant) the cost audit. It is in
addition to the cost audit. In fact, it will be required even in those cases where cost audit
of the company is not ordered under section 233B of the Companies Act, 1956. The
differences between "compliance report" and "cost audit" is explained subsequently.
Authentication of compliance report by cost accountant who is permanent employee of
the company.
ICAI has clarified that a cost accountant working as permanent employee can
authenticate the Compliance Report of the company where he is employed provided
his membership dues are not in arrears. [FAQ No. 8 of lCWAI's FAQs on Companies (Cost
Accounting Records) Rules, 2011]
Authentication of compliance report by a cost accountant who is permanent employee
of another company within the same group
A Cost Accountant working as permanent employee can authenticate the Compliance
Report of only the company where he is employed provided his membership dues are
not in arrears He cannot authenticate Compliance Report of any other company even
under the same group. [FAQ No. 8 of ICWAI's FAQs on Companies (Cost Accounting
Records) Rules, 2011]

(c) List the duties of cost Auditor? [6]

Answer:
The duties of cost auditor are also similar to those of the (financial) auditor of the
company has under sub-Section(1) of the section 227 (Section 223B(4). The duties of the
cost auditor inter-alia include:
(a) To ensure that the proper books of accounts as required by cost accounting record
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.
(b) To ensure that the cost audit report and the detailed cost statements are in the form
prescribed by the Cost Audit Report Rules by the 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.
(c) The underline assumptions and basis for allocation and absorption of indirect
expenses are reasonable and are as per the established accounting principles.
(d) If the auditor is not satisfied in any of the afore said matters, he may give a qualified
report along with the reasons for the same
(e) Sending the report to the Cost Audit Branch within 180 days from the end of the
financial year with the copy to the Company.
(f) He is required to send his replies to any clarification, that may be sought by the Cost
Audit Branch on his report. Sending such replies within 30 days from the date of
receipt of communication calling for clarification.
Question.6

(a) State the power of cost auditor? [5]

Answer:
Powers of Cost Auditor
Section 233B (4) of the Companies Act, 1956 gives the cost auditor same powers as the
financial auditor has under Section 227(1). In addition, Rule 6 of the Cost Audit Report

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Rules also requires the company and every officer thereof, including the persons referred
to in sub-Section (6) of Section 209 of the Act to make available to the cost auditor,
within 135 days from the close of the financial year of the company, such cost
accounting records, cost statements, other books and documents, Annexure and
Proforma to the Report, duly completed as would be required for conducting the cost
audit, and shall render necessary assistance to the Cost Auditor so as to enable him to
complete the cost audit and submit his report within the time limit specified in rule 5.
Section 233B(6) further provides that it shall be the duty of the company to give all
facilities and assistance to the cost auditor so as to enable him to complete the audit
and send the report within the prescribed time limit.

The powers of the cost auditor under sub-Section (1) of Section 227 are as under:

Right to access at all times to the books and accounts and vouchers of the company,
whether kept at the head office of the company or elsewhere.

Entitled to require from the officers of the company such information and explanations as
he may think necessary for the performance of his duties as an auditor.

(b) How total number of companies for which a cost auditor can accept appointment is to
be computed keeping in mind restrictions imposed under Section 224(1B) of the
Companies Act 1956. [5]

Answer:
The specified number of companies for the purpose of section 233B (2) read with section
224 (1B) of the Companies Act, 1956 for a given financial year would be the total of:
a. Companies wherein he has been appointed as the cost auditor,
b. Companies wherein he is proposed to be appointed for which he has given his
consent.
c. Companies in respect of which cost audit reports have not been submitted and
have become overdue. [MCA Master Circular No. 2/2011 dated 11th November
2011]
A cost auditor would be deemed to have concluded his appointment as cost auditor
and eligible to accept appointment of another company within the limits of Section 224
(1B) as soon as he renders his report to the Central Government in accordance with the
Cost Audit Report Rules, as applicable, with a copy to the Company. His obligation to
answer queries from the Ministry of Corporate Affairs arising out of review of cost audit
reports would not debar him from accepting another appointment as cost auditor of a
company provided the specified number of companies contemplated in section 224
(1B) is not exceeded.

(c) Write the Period of holding of office as a Cost Auditor of a company [2]

Answer:
A cost auditor shall be deemed to be holding office as cost auditor from the time he
accepts the appointment and files Form 23D with the Central Government and shall be
deemed to have concluded his appointment for the relevant financial year as soon as
he renders a report to the Central Government in accordance with the Cost Audit

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Report Rules, as applicable, with a copy to the Company. [MCA Master Circular No.
2/2011 dated 11th November 2011]

(d) A company was covered under Chemical Industries Rules which listed about 44 types of
chemicals under its coverage. The company was covered under cost audit also, which
was being conducted for the chemicals listed in the schedule and other chemicals not
listed were kept under the purview of cost audit. What would be the status of the cost
audit coverage after introduction of Companies (Cost Accounting Records) Rules 2011?
[2]
Answer:
In the erstwhile Cost Accounting Records (Chemical Industries) Rules as amended,
contained list of chemicals. With the introduction of Companies (Cost Accounting
Records) Rules 2011, all the chemicals produced by a company would be covered in its
entirety. If the company was under cost audit then all chemical products of the
company would now be covered under cost audit.

(e) The maximum period prescribed for presenting Compliance Report and / or Cost Audit
Report is 180 days from date of close of the financial year. If Financial Accounts of a
Company is not ready before the stipulated time period, how cost audit report will be
completed reconciled with the financial books of the company? [2]
Answer:
Maintenance of cost accounting records is a continuous process. No time limit has been
prescribed in the Rules for “submission” of records to cost auditor. The time limit of 180
days as prescribed in the Rules is for submission of Compliance report regarding
maintenance of cost accounting records and cost audit report in case cost audit is also
applicable to the company.
In case financial accounts are not ready or are yet to be adopted in the AGM, the same
was clarified by the Cost Audit Branch earlier. In such cases the cost auditor can submit
the report based on provisional accounts and submit a supplementary report of
reconciliation in case there are materials differences in the final adopted accounts.

SECTION C
Answer any two questions from this section.

Question.7
(a) Write short note on “Regression Analysis”. [5]

Answer:
Regression Analysis: Regression equation establishes the relationship between
dependent variable and independent variable, assuming the relationship to be linear.
For some commodities independent variable may be only one. But for some products
independent variables may more than two. In such a case, multiple regression analysis
can be used.
Hence, demand for any product can be estimated at a given value of price.

Simple Regression Equation:

This equation will be form of Y = a + bx, for
Independent variable : x

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Dependent variable : y

Multiple-Regression Model:
The equation in the case of multiple regression
Y = a + b1x1 + b2x2 + …………….+ bnxn
Independent variables: x1, x2 ,……xn
Dependent variable : y

Limitations:
(i) It is difficult to find out inter-dependence relationship between the variables.
(ii) Sometimes it may be difficult to identify dependent and independent variable.
(iii) Indicators are based on historical data. But the relationship cannot be established for
the future.

(b) Demonstrate that the elasticity of demand for the following is constant x = 3(p-2), Where P
and X are the price & quantity demanded respectively.
[5]
Answer:
dx p
Ep = –
dp x
Differentiate w.r.to „x‟
dp
1 = 3 (–2 . p–3)
dx
dp
1 = – 6p–3 .
dx
dp p 3
=
dx 6
dx 6
– Equation (1)
dp p3
x 3
Now =
p p3
p p3
= – Equation (2)
x 3
From equations (1) & (2)
dx p
Ep =
dp x
6 p3
=
p3 6
= 2 (proved)

(c) A Ltd. is operating in a perfectly competitive market. The price elasticity of demand and
supply of the product estimated to be 3 and 2 respectively. The equilibrium price of the
product is `100. If the government imposes a specific tax of `10 per unit, what will be the
new equilibrium price? [2]

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Answer:
Distribution of tax burden between buyers and sellers is in the ratio of elasticity of
demand.
Thus tax burden borne by the buyer=`10x1/5=`4.
If the tax burden borne by buyer is `4, new equilibrium price will be 100+4=`104

Question.8
1
(a) Cost = 400x –10x² + 3 x3, Calculate
(i) Output at which Marginal Cost is minimum
(ii) Output at which Average Cost is minimum
(iii) Output at which Marginal Cost = Average Cost. [2+2+2=6]

Answer:
dc
(i) Marginal Cost = = 400 – 20x + x2 (say, y)
dx
In order that MC is minimum first derivate must be equal to zero and 2 nd derivate must be
positive.
. dy
.. = 2x – 20 => 2x = 20
dx
x = 10
dy 2
= 2, which is positive. It is minimum at x = 10.
dx 2
1
(ii) Average Cost = 400 – 10x + 3 x2 (y say)
dy 2
= –10 + 3 x = 0
dx
=> x = 30/2 = 15
d2 y 2
= 3 > 0,
dx 2
.
. . Average Cost is minimum of output at x = 15

(iii) Output at which Marginal Cost = Average Cost

1
–20x + 10x + x2 – 3 x2 = 0
2
–10x + 3 x2 = 0
30x 2x 2
=0
3
2x2 – 30x = 0
2x (x – 30) = 0
X – 30 = 0
.
. . x = 15

(b) A manufacturer can sell „x‟ items per month, at price P = 200 – 2x. Manufacturer‟s cost of
production ` Y of „x‟ items is given by Y = 2x + 2000. Find no. of items to be produced to
yield maximum profit p.m. [3]

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 Answer to PTP_Intermediate_Syllabus 2012_Jun2014_Set 1

Answer:
Units = x
Price = 200 – 2x
Revenue (R) = Px = 200x – 2x2
Cost (C) = 2x + 2000
Profit (z) = 200x – 2x2 – 2x – 2000
–2x2 + 198x – 2000
2z
= – 4x + 198 = 0
2x
–4x = –198
x = 198/4= 49.5
d2 z
= – 4 which is Positive
dx 2
d2 z
= <0
dx 2
Profit is maximum at x = 49.5 units

(c) What are the exceptions of Law of Demand? [3]

Answer:
The exceptions of Law of Demand are:
(i) Giffen Paradox: According to the law of demand when the price rises demand decreases
and vice-versa. But, according to Sir Robert Giffen even though the price, for necessary
goods rise, the demand for them will not decrease. These goods are called Giffen goods.
(ii) Prestigious goods: The law of demand will not operate in case of prestige goods like
diamonds, cars etc. The demand for these goods does not decrease with the rise in the
price as these goods are attached with prestige.
(iii) Speculative Business: The laws of demand do not operate in case of the speculative
business. If people think the price of goods increase in the future, now they will buy more
units of that commodity. This is against to the law of demand. This is another limitation to the
law of demand.
(iv) Trade Cycles: The laws of demand do not operate in periods of trade cycles. During the
prosperity period people may buy more goods at higher prices. In periods of depression,
people buy fewer goods even though the prices are less.
(v) Ignorance of the consumers: The law of demand is not applicable in case of the ignorant
consumers. By ignorance people think that high priced goods are qualitative goods.
Therefore the consumers may buy the goods even at high prices.

Question.9
(a) Define Elasticity of Demand? Explain the different types of elasticity of demand? [2+4]

Answer:
“The elasticity of demand in a market is great or small according to the amount
demanded increases much or little for a given fall in the price and diminishes with much
or little for a given rise in price”. – Marshall. “Elasticity is the degree of change in demand
as a result of change in price”. – Samuelson.
The elasticity of demand explains the relationship between proportionate change in
demand to a proportionate change in price.

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 Answer to PTP_Intermediate_Syllabus 2012_Jun2014_Set 1

Proportionate change in Demand

Elasticity of demand
Pr oportionate change in Price

Types of Elasticity of demand: Elasticity of demand is of 3 types:

(i) Price elasticity of demand
(ii) Income elasticity of Demand.
(iii) Cross elasticity of demand

(i) Price Elasticity of demand:

Price Elasticity of Demand (Ed) explains the proportionate or percentage change in
demand to a proportionate or percentage change in price.
Proportionate change in Demand
Ed
Pr oportionate change in Price
(or)
Percentage change in Demand
Ed
Percentage change in Price
Change in Quantity Demanded
E d=
Quantity demanded at original price
Change in price
Original Price
x p p x
E d= =
x p x p

(ii) INCOME ELASTICITY OF DEMAND:

The income elasticity of demand explains the proportionate change in income and
proportionate change in demand. The rate of change in the demand due to the
change in the income is called income elasticity of demand.
Proportionate change in demand
Income elasticity of demand
Proportionate change in income

(iii) CROSS ELASTICITY OF DEMAND:

The rate of change in the demand for one commodity due to the change in the price of
its substitutes and complementary goods is called cross elasticity of demand.

Percentage change in the demand for commodity X

Cross Elasticity of Demand
Percentage change in the price of Y
If the percentage change in the demand for commodity X is more than the percentage
change in the price of Y, then the cross elasticity of demand is greater than one (Ed>1). If
the percentage change in the demand for commodity X is less then percentage
change in the price of commodity Y, then the cross elasticity of demand is less than one
(Ed<1). If the percentage change in the demand for commodity X is equal to
percentage change in the price of commodity Y, then the cross elasticity of demand is
equal to one (Ed=1).

(b) Show the relationship between AR, MR and Elasticity? [6]

Answer:
Relationship between AR, MR and Elasticity
AR, MR and Elasticity*

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However, the true relationship between the AR, MR and elasticity

* The mathematical relationship between AR, MR and
elasticity can be worked out as follows. As know that R =
PQ.

dR 1
MR = MR = AR 1-
dQ E
dR d 1 MR
MR = = (PQ) 1- =
dQ dQ E AR
dR dP 1 MR
=P +Q - = -1
dQ dQ E AR
dp 1 MR
=p+Q = 1-
dQ E AR
Q dF 1 AR - MR
MR = P 1 . =
D dQ E AR
P dQ AR
Elasticity of demand E = - . E=
Q dP AR - MR
1 Q dP
Or - =- .
E P dQ
Therefore, (i) can be written as
1 Q dP 1
MR = P 1- Q . =-
E P dQ E
But P = AR

AR
E= (Where E is elasticity, AR average revenue and MR marginal revenue.)
AR - MR
By solving, we have, EA – EM = A [Considering AR = A, MR = M]
EA – A = EM
A (E – 1) = EM
EM
A=
E -1
E
A= M
E -1

Similarly, marginal revenue can be known

By solving E(A – M) = A
EA – EM = A
EA – A = A
EA – A = EM
or EM = EA – A
EA - A
M=
E
A(E -1)
M=
E

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 Answer to PTP_Intermediate_Syllabus 2012_Jun2014_Set 1

(E -1)
M=A
E

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