Management Accounting – I (MB161): April 2006

Management Accounting – I (MB161): April 2006

· Answer all questions.
· Marks are indicated against each question.
1. A major difference between Financial Accounting and Management Accounting relates to differences in
the users. Related to Sikha Ltd., which of the following best describes a user of Management
Accounting Information?
(a) Credit Manager of a vendor for Sikha Ltd.
(b) Purchasing Manager for Sikha Ltd.
(c) Bank Manager reviewing a loan application from Sikha Ltd.
(d) Income Tax Commissioner reviewing the tax return of Sikha Ltd.
(e) Shareholders of Sikha Ltd.
(1 mark)
< Answer >
2. Which of the following statements are false?
I. Management accounting statements are prepared in accordance with Generally Accepted
Accounting Principles.
II. Management accounting is mandatory for business organizations because it should be maintained
as per various legal statutes.
III. The application of Management accounting cannot be extended beyond the traditional accounting
system.
IV. Management accounting focuses more on a company as a whole and less on the parts or segments
of a company.
(a) Both (I) and (II) above (b) Both (I) and (IV) above
(c) Both (II) and (IV) above (d) (I), (II) and (IV) above
(e) All (I), ( II), (III) and (IV) above.
(1 mark)
< Answer >
3. Which of the following statements is false?
(a) Management Accounting provides data for internal uses whereas Financial Accounting provides
data for external users
(b) Management Accounting is concerned with a strong orientation towards future while Financial
Accounting is concerned with a record of financial data of the past
(c) Management Accounting relies on the concept of responsibility whereas Financial Accounting
does not rely on the concept of responsibility
(d) Financial Accounting is mandatory for business organizations whereas Management Accounting is
not mandatory
(e) Financial Accounting statements have to be prepared in accordance with the GAAP whereas
managers set their own rules in the form and content of Management Accounting statements.
(1 mark)
< Answer >
4. Research and development costs for new products are
(a) Sunk costs (b) Conversion costs (c) Joint costs
(d) Relevant costs (e) Avoidable costs.
(1 mark)
< Answer >
2
5. Which of the following statements about costs is not correct?
I. Costs are measured in terms of monetary units paid for merchandise or services.
II. Once recorded in the accounting system, costs can then be traced and allocated to one or more cost
objectives.
III. Costs are first recorded in a basic form, using accounts such as salaries, rent, or taxes.
IV. Costs are resources it is received from customers doing business in an organization.
(a) Both (II) and (III) above (b) Only (II) above
(c) Both (III) and (IV) above (d) Only (IV) above
(e) Both (I) and (II) above.
(1 mark)
< Answer >
6. Pankaj Ltd. has furnished the following data:
Particulars Jeans Shorts Total (Rs.)
Units 10,00,000 2,00,000
Selling price per unit Rs.30 Rs.26
Direct labor hours (Rs.10 per hour) Rs.3,60,000 Rs.80,000
Direct material Rs.88,50,000 Rs.9,00,000
Machine set-ups 1,600 900
Machine utility Rs.6,00,000
Machine maintenance Rs.8,00,000
Quality control Rs.4,00,000
Material handling during set-ups Rs.18,50,000
Product engineering Rs.30.00.000
Rent of manufacturing space Rs.20,00,000
Security Rs.9,50,000
Miscellaneous production expense Rs.20,00,000
Which of the following is considered to be a product -level cost?
(a) Machine maintenance (b) Rent of manufacturing facility
(c) Material handling (d) Product engineering
(e) Quality control.
(1 mark)
< Answer >
7. The term ‘variable cost’ refers to
(a) All costs which are likely to respond to the amount of attention devoted to them by a specified
manager
(b) All costs which are associated with marketing, shipping, warehousing and billing activities
(c) All costs which do not change in total for a given period of time and relevant range but become
progressively smaller on a per unit basis as volume increases
(d) All manufacturing costs incurred to produce units of output
(e) All costs which fluctuate in total in response to small change in the rate of utilization of capacity.
(1 mark)
< Answer >
8. Normal wastage is classified as
(a) Product cost (b) Period cost
(c) Standard cost (d) Extraordinary item
(e) Deferred charge.
(1 mark)
< Answer >
9. Which of the following statements is false?
(a) Notional costs are not included while ascertaining costs
(b) Administrative expenses is mostly fixed
(c) Historical costs are useful solely for estimating costs that lie ahead
(d) Abnormal cost is controllable
(e) Direct cost is one that can be conveniently identified with and charged to a particular unit of cost.
(1 mark)
< Answer >
3
10. Which of the following is not true?
(a) Product cost for merchandise is the cost of purchases plus transportation
(b) Cost of merchandise sold is called the cost of goods sold
(c) Retailers and wholesalers treat period costs as expenses
(d) Period costs are treated as product costs with service industry firms
(e) At the end of the year, inventory on hand is an asset.
(1 mark)
< Answer >
11. Which of the following costs is based on the distinction between fixed and variable costs?
(a) Marginal cost (b) Relevant cost (c) Sunk cost
(d) Opportunity cost (e) Replacement cost.
(1 mark)
< Answer >
12. Cost drivers are
I. Activities that causes costs to increase as the activity increases.
II. Accounting techniques used to control costs.
III. Accounting measurements used to evaluate whether or not performance is proceeding according to
plan.
IV. Mechanical basis, such as machine hours, computer time, size of equipment etc. used to assign
costs to activities.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (III) and (IV) above.
(1 mark)
< Answer >
13. Costs are allocated to cost objects in many ways and for many reasons. Which of the following is a
purpose of cost allocation?
(a) Implementing activity-based costing
(b) Evaluating revenue center performance
(c) Budgeting cash and controlling expenditures
(d) Aiding in variable costing for internal reporting
(e) Measuring income and assets for external reporting.
(1 mark)
< Answer >
14. Due to changes that are occurring in the basic operations of many firms, all of the following represent
trends of allocation of indirect cost except
(a) Treating direct labor as an indirect manufacturing cost in an automated factory
(b) Using throughput time as an application base to increase awareness of the costs associated with
lengthened throughput time
(c) Preferring plant-wide application rates that are applied to machine hours rather than incurring the
cost of detailed allocations
(d) Using several machine cost pools to measure product costs on the basis of time in a machine center
(e) Using cost drivers as application to increase the accuracy of reported product costs.
(1 mark)
< Answer >
4
15. Pawan Ltd. had the following inventories at the beginning and end of the month of March 2006:
Particulars March 1, 2006 (Rs.) March 31, 2006 (Rs.)
Finished goods 1,25,000 1,17,000
Work-in-process 2,35,000 2,51,000
Direct materials 1,34,000 1,25,000
The following additional manufacturing data were available for the month of March 2006:
Particulars (Rs.)
Direct materials purchased 1,89,000
Purchase returns and allowances 1,000
Transportation 3,000
Direct labor 3,00,000
Actual factory overhead 1,75,000
The company applies factory overhead at a rate of 60% of direct labor cost, and any over applied or
under applied factory overhead is deferred until the end of the year 2005-06.
The manufacturing cost of the company for the month of March 2006 was
(a) Rs.6,81,000 (b) Rs.6,65,000 (c) Rs.4,89,000
(d) Rs.6,80,000 (e) Rs.6,73,000.
(2 marks)
< Answer >
16. Sumit Ltd. has three jobs outstanding. The company uses normal costing and the overhead rate, which
is based on machine hour amounts to Rs.85 per machine hour based on a forecast of 4,000 hours. Job 1
with a direct cost of Rs.85,500 has used 1,290 machine hours. Job 2 with a direct cost of Rs.74,700 has
used 1,760 machine hours. Job 3 with a direct cost of Rs.87,470 has used 789 hours. Actual overhead
amounted to Rs.3,50,000. Job 1 is completed and sold for Rs.2,76,500. Job 2 is completed and not yet
delivered. Job 3 is still in process. If over or under applied overhead is prorated to cost of sales and
inventory accounts based on total costs in each job, finished goods inventory will be
(a) Debited by Rs.8,053 (b) Credited by Rs.8,053
(c) Debited by Rs.9,256 (d) Credited by Rs.9,256
(e) Debited by Rs.6,377.
(2 marks)
< Answer >
17. Which of the following is not considered to be a Product-Level cost?
(a) Cost of the engineer to maintain the product's design specifications
(b) Cost of the attorney to obtain the product's patent
(c) Cost of holding inventory for the product
(d) Cost of the supervisor to assure assembly of all products on the assembly line
(e) Cost of power for manufacturing product.
(1 mark)
< Answer >
18. Because of shortage of labor and materials, a department in a factory is working at 55% of its normal
capacity. In its cost records, it charges manufacturing overhead to work -in-progress as a percentage of
direct labor.
For the current year, budgeted direct labor cost is Rs.2,50,000, budgeted manufacturing fixed overhead
is Rs.1,00,000 and budgeted manufacturing variable overhead is Rs.1,25,000. A dispute has arisen as to
the percentage of direct labor that should be charged to work-in-progress. One officer claims that it
should be 90%, another claim that it should be less than that.
The appropriate recovery rate should be
(a) 100% (b) 90% (c) 88% (d) 72% (e) 63%.
(2 marks)
< Answer >
5
19. Apurba Ltd. has furnished the following information pertaining to its machine:
i. Total cost of machine to be depreciated Rs.3,00,000.
ii. Life of machine – 10 years.
iii. Depreciation on straight line.
iv. Departmental overheads (annual).
Rent – Rs.40,000; Heat and light – Rs.30,000; Supervision – Rs.1,50,000.
v. Department area – 70,000 square meters; Machine area – 2,500 square meters.
vi. Number of machines – 25.
vii. Annual cost of reserve equipment for the machine – Rs.2,000.
viii. Hours runs on production – 2,000.
ix. Hours for setting and adjusting – 150.
x. Power cost – Rs.1.50 per hour of running time.
xii. Labor:
* When setting and adjusting – full time attention.
* When machine is producing – one worker can look after 2 machines.
xiii. Labor rate is Rs.8 per hour.
The comprehensive machine hour rate of the company is
(a) Rs.25.25 (b) Rs.25.39 (c) Rs.20.80
(d) Rs.22.00 (e) Rs.24.39.
(2 marks)
< Answer >
20. The allocation of costs to a particular cost object allows a firm to analyze all of the following except
(a) Whether a particular manager earns a bonus
(b) Whether a particular department should be expanded
(c) Whether a product line should be discontinued
(d) The causes of increase in the sales of a particular product
(e) The decision with regard to a particular product that should be purchased or manufactured in-house.
(1 mark)
< Answer >
21. Vam Ltd. manufactures and sells two products – M and N. The following data are estimated for the
year 2003-04.
Particulars Product M Product N
Sales (Units) 80,000 1,20,000
Sales price per unit (Rs.) 20 16
Variable cost per unit (Rs.) 12 10
The annual fixed costs are estimated at Rs.8,16,000. The break-even point in sales value with the
current sales mix is
(a) Rs.24,00,000 (b) Rs.21,12,000 (c) Rs.19,20,000
(d) Rs.14,40,000 (e) Rs.9,60,000.
(2 marks)
< Answer >
22. The process of charging factory overhead to work-in-process based on a predetermined application rate
multiplied by actual input is known as
(a) Direct costing (b) Product costing (c) Normal costing
(d) Marginal costing (e) Actual costing.
(1 mark)
< Answer >
23. In activity based costing, the overhead costs are charged to production on the basis of
(a) Blanket rate (b) Cost driving activities
(c) Non-value added items (d) Direct labor hours
(e) Machine hours.
(1 mark)
< Answer >
6
24. Consider the following facts for AB Ltd. which produces product A and B:
Activity Cost driver A’s share B’s share Unused Rs.
Set ups No. of set ups 10 40 5 5,500
Ordering No. of orders 5 10 5 3,200
Receiving No. of receipts 22 12 6 2,400
Product dev. No. of parts 180 120 100 2,800
Gen. Mgmt. No. of labor hrs 2,900 4,100 1,000 7,200
Security Area covered 3,200 5,400 400 9,000
Materials No. of units produced 400 800 1,20,000
Labor No. of Direct labor hours 1,700 3,100 1,200 56,000
The ordering cost chargeable per unit of A, accounting for unused capacity, amounts to
(a) Rs.2.50 (b) Rs.2.00 (c) Rs.5.00 (d) Rs.5.50 (e) Rs.2.67.
(1 mark)
< Answer >
25. Amway Ltd. has furnished the following data pertaining to products:
Department
Number of
employees*
Number of
hours
Square
feet
Number of
Units sold
Sales
(Rs.)
A 20 (20) 20,000 20,000 160 8,40,000
B 15 (9) 18,000 4,000 340 9,70,000
C 18 (10) 22,000 6,000 600 8,20,000
D 27 (15) 15,000 10,000 400 5,70,000
Total 80 75,000 40,000 1,500 32,00,000
* The number of full time employees is listed in the parenthesis. Full time employees work on
average 4 years with the company, part-time employees work on average 5 months with the
company.
If the salary of the President is Rs.1,60,000, which cost driver is most appropriate?
(a) Number of Employees (b) Number of Hours
(c) Number of Departments (d) Sales Rupees
(e) Number of part time employees.
(1 mark)
< Answer >
26. The company has some costs that now have not been allocated. These include, electricity for heat,
cleaning, and telephones. Of the following allocation methods which is/are the better method(s) of
allocating these unallocated costs?
I. Establishing one cost pool and allocating the cost based upon square feet.
II. Establishing one cost pool and allocating the cost based upon number of employees.
III. Establishing two cost pools, one pool for telephones and allocate the cost based upon number of
employees, and the other pool for heat and cleaning and allocate the cost based upon square feet.
IV. Establishing two cost pools, one pool for telephones and allocate the cost based upon number of
employees, and the other pool for heat and cleaning and allocate based upon sales rupees.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (II) and (IV) above
(e) Both (I) and (IV) above.
(1 mark)
< Answer >
7
27. Mukherjee Ltd. has furnished the following information for its product:
Direct material Rs.10 per unit
Direct labor - Rs.6 per unit
Variable overhead Rs.3 per unit
Fixed overhead Rs.4 per unit
Budgeted production 12,000 units
Actual production 10,000 units
There is no overhead spending variance
Sales - 9,000 units
Sales price - Rs.28 per unit
Using Absorption costing system, what is the cost per unit based upon actual costs?
(a) Rs.27.60 (b) Rs.24.40 (c) Rs.23.80
(d) Rs.23.00 (e) Rs.25.20.
(2 marks)
< Answer >
28. DKM Ltd. uses job costing system, has furnished the following cost data for Job No.386:
Particulars Rs.
Direct material 9,00,000
Direct wages 7,50,000
Profit 6,09,000
Selling & distribution overhead 5,25,000
Administrative overhead 4,20,000
Factory overhead 4,50,000
The cost of sales and works cost for job no.386 are
(a) Rs.16,50,000 and Rs.21,00,000 respectively
(b) Rs.21,00,000 and Rs.36,54,000 respectively
(c) Rs.30,45,000 and Rs.21,00,000 respectively
(d) Rs.30,45,000 and Rs.25,20,000 respectively
(e) Rs.30,35,000 and Rs.16,50,000 respectively.
(2 marks)
< Answer >
8
29. A factory has three production departments – P1, P2 and P3 and 2 service departments – S1 and S2.
Budgeted overheads for the next year have been allocated or apportioned by the cost department among
the 5 departments. The secondary distribution of service department overheads is pending and the
following details are given:
Department Overheads apportioned/
Allocated (Rs.) Estimated level of activity
P1 48,000 5,000 labor hours
P2 1,12,000 12,000 machine hours
P3 52,000 6,000 labor hours
Department
Overheads apportioned /
allocated (Rs.)
Apportionment of service
department costs
S1 16,000 P1(20%),P2(40%), P3(20%) & S2(20%)
S2 24,000 P1(10%), P2(60%), P3(20%) & S1(10%)
The overhead rates of P1 and P2 departments after completing the distribution of service department
costs are
(a) Rs.10.91 and Rs.10.22 respectively
(b) Rs.10.91 and Rs.11.35 respectively
(c) Rs.11.35 and Rs.10.22 respectively
(d) Rs.10.91 and Rs.11.00 respectively
(e) Rs.11.00 and Rs.11.35 respectively.
(2 marks)
< Answer >
30. Which of the following is most likely to use a process costing system?
(a) Custom cabinet-maker (b) Ship builder (c) Print shop
(d) Petroleum refinery (e) Auto repairing shop.
(1 mark)
< Answer >
31. Consider the following data pertaining to the production of Simanti Ltd. for the month of March 2006:
Particulars Rs.
Opening stock of raw material 18,350
Closing stock of raw material 17,210
Purchase of raw material during the month 1,21,210
Total manufacturing cost of product 5,28,055
If the factory overheads are applied by the company at the rate of 72% of direct labor cost, the amount
of factory overheads applied to production is
(a) Rs.1,15,115 (b) Rs.1,69,830 (c) Rs.1,42,380
(d) Rs.1,41,525 (e) Rs.2,35,875.
(2 marks)
< Answer >
9
32. Souvik Ltd. is a manufacturing company, where one of the production departments in its main factory
uses machine hour rate for absorption of production overheads. The company has fixed up the
predetermined rate of Rs.15 per machine hour on the basis of normal activity level. The company has
estimated the following overhead expenditure at different activity levels:
Activity level
(Machine hour)
Overhead expenditure
(Rs.)
1,500 25,650
1,650 26,325
2,000 27,900
If the actual machine hours are 1,900, the under or over absorption of overhead is
(a) Rs.1,050 (under) (b) Rs.1,050 (over)
(c) Rs.1,575 (under) (d) Rs.1,575 (over) (e) Rs.3,675 (under).
(2 marks)
< Answer >
33. Under the proration approach to under absorbed or over absorbed overhead costs, the accounts that
would not receive any of the overhead being allocated would be
I. Direct material inventory.
II. Cost of goods sold.
III. Work-in-process inventory.
IV. Finished goods inventory.
(a) Only (I) above (b) Both (II) and (III) above
(c) Only (III) above (d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
34. Jayasree Ltd. manufactures product A to the extent of 70% of total sales revenue and product B to the
extent of 30% of the total sales revenue. The variable cost of product A is 60% of its selling price and
product B is 80% of its selling price. If the total fixed cost of the company is Rs.3,06,000, the break -
even sales of the company is
(a) Rs.15,30,000 (b) Rs.12,24,000 (c) Rs.10,00,000
(d) Rs.9,00,000 (e) Rs.7,50,000.
(2 marks)
< Answer >
35. Arpit Ltd. has furnished the following information pertaining to its 3 products:
Department Allocation
Base
Product
A
Product
B
Product
C
Overhead
Costs
Production Machine Hours 1,200 2,200 600 Rs.7,10,000
Purchasing Purchase Order 100 300 150 Rs. 2,40,000
Inspection Labor Hours 200 200 200 Rs. 2,00,000
If the total overheads were allocated based on machine hours, how much would be allocated to product
B?
(a) Rs.6,32,500 (b) Rs.3,14,357 (c) Rs.4,00,000
(d) Rs.6,28,714 (e) Rs.3,45,000.
(1 mark)
< Answer >
36. Which of the following are the instances of recovering overheads on the basis of direct labour cost
method?
I. Where direct labour constitutes a major proportion of the total cost of production.
II. Where labour employed and types of work performed are uniform.
III. Where the ratio of skilled and unskilled labour is constant.
IV. Where machines dominate the production activities.
(a) Both (I) and (IV) above (b) Both (II) and (IV) above
(c) Only (IV) above (d) Both (II) and (III) above
(e) (I), (II) and (III) above.
(1 mark)
< Answer >
10
37. Abnormal spoilage is considered as
(a) Period cost (b) Product cost (c) Fixed cost
(d) Opportunity cost (e) Discretionary cost.
(1 mark)
< Answer >
38. Mahavir Ltd. uses process cost system to manufacture Dust Density Sensors for the mining industry.
The following pertains to operations for the month of March 2006:
Particulars Units
Opening work-in-process (March 01, 2006) 450
Introduced in production during March 2006 4,100
Closing work -in-process (March 31,2006) 500
There is no loss in the manufacturing process. The opening inventory was 80% complete for materials
and 60% complete for conversion costs. The closing inventory was 70% complete for material and 60%
complete for conversion costs. The costs pertaining to the month of March 2006 are as follows:
Opening work in process:
Materials Rs. 6,850
Conversion Rs. 4,350
During the month:
Materials Rs.70,700
Conversion Rs.61,200
The total cost of closing work-in-process on March 31, 2006, using FIFO method, is
(a) Rs.10,708.62 (b) Rs.10,625.00 (c) Rs.12,573.78
(d) Rs.11,557.00 (e) Rs.12,450.00.
(2 marks)
< Answer >
39. Bahadur Chemicals Ltd. runs its boiler on furnace oil obtained from Indian Oil and Bharat Petroleum,
whose depots are situated at a distance of 10 km and 8 km from the factory site of the company.
Transportation of furnace oil is made by the company’s own tank lorries of 6 ton capacity each.
Onward trips are made only on full load and the lorries return empty. The filling-in time takes an
average of 50 minutes for Indian Oil and 45 minutes for Bharat Petroleum. The emptying time in the
factory is only 45 minutes for both. From the records available, it is seen that the average speed of the
company’s lorries works out to 40 km per hour. The variable operating charges per km is Rs.2.20 and
fixed charges per hour of operation is Rs.13.20.
The cost per ton -km from Bharat Petroleum is
(a) Rs.1.36 (b) Rs.1.43 (c) Rs.1.51 (d) Re.1.19 (e) Rs.1.25.
(2 marks)
< Answer >
11
40. Brand Manufacturing Ltd. makes one model of a product known as ‘Brand M’. The company has
provided the following balances as on October 01, 2005:
Finished goods – 500 units
Work-in-process – Rs.5,740
Raw materials – Rs.9,620
The following data are available as on March 31, 2006:
Indirect labor – Rs. 12,160
Freight in – Rs. 5,570
Direct labor – Rs. 32,640
Raw material – Rs. 11,640
Factory overhead expenses – Rs. 31,730
Work-in-process – Rs. 7,820
Sales (15,000 units) – Rs.3,60,000
Indirect material – Rs. 21,390
Total manufacturing costs incurred – Rs.1,94,080
There were 1,500 units of finished goods of ‘Brand M’ as on March 31, 2006.
The amount of raw materials purchased during the half-year ended March 31,2006 is
(a) Rs.92,570 (b) Rs.88,610 (c) Rs.94,180
(d) Rs.92,610 (e) Rs.1,21,250.
(2 marks)
< Answer >
41. Basz Plastics Ltd. has a beginning work in process inventory of 250 yards, 100% complete with regard
to material and 80% complete with regard to conversion. 9,250 yards were added during the period.
7,200 yards were completed. Normal loss amounted to 5% of completed units. Abnormal loss
amounted to 490 yards. Ending work-in-process of the period was 80% complete with regard to
materials and 60% complete with regard to conversion costs. The cost of beginning work-in-process
was Rs.3,500, Rs.1000 of which was for conversion costs. From the total cost of Rs.1,32,280 of added
costs, Rs.37,410 was for conversion costs. The cost of completed goods, using FIFO method, is
(a) Rs.1,07,933.50 (b) Rs.1,08,158.50
(c) Rs.1,11,658.50 (d) Rs.1,11,448.50
(e) Rs.1,11,958.50.
(2 marks)
< Answer >
42. HCL Chemicals produces three products, HC, HL & CL. The raw materials cost Rs.30,000 and
processing costs Rs.24,000. At this point 1,500 liter of HC is produced and can sell for Rs.20,000.
Additional processing cost of Rs.9,000 produces 4,000 liter of HL and 500 liter of CL. The HL can be
sold for Rs.60,000, and the CL can be sold for Rs.5,000 after further processing that costs Rs.1,000.
Product CL costs Rs.11 per liter prior to further pro cessing costs of Rs.1,000 or Rs.2 per liter. Then the
product can only be sold for Rs.10.00 per liter. What should HCL do with Product CL.
(a) Drop the product line because they are losing Rs.1,500
(b) Drop the product line because they don't need 3 products
(c) Continue the product but charge more than Rs.10 per liter
(d) Continue the product line because overall profitability will decrease without Product CL
(e) Continue the product line because there is no change of profitability of product CL.
(1 mark)
< Answer >
12
43. The Cutting department is the first stage of Parker Ltd.’s production cycle. Conversion costs for this
department were 80% complete as to the opening work-in-process and 50% complete as to the closing
work-in-process. The company has furnished the following information pertaining to conversion costs
in the Cutting department for the last month:
Particulars Units Conversion cost
(Rs.)
Opening work-in-process 25,000 22,000
Units started and cost incurred 1,35,000 1,43,000
Units completed and transferred to next department 1,00,000
The company uses FIFO method. The conversion cost of the work-in-process inventory in the Cutting
department for the month was
(a) Rs.33,000 (b) Rs.38,100 (c) Rs.39,000
(d) Rs.45,000 (e) Rs.47,500.
(2 marks)
< Answer >
44. Hyderabad Transport Ltd. has been given a route of 20 km. long to run a bus. The cost of a bus is
Rs.5,00,000. It has been insured at 3% per annum and the annual tax will amount to Rs.10,000. Garage
rent is Rs.1,000 per month. Actual repairs will be Rs.10,000 per annum and the bus is likely to last for
5 years.
The driver’s salary will be Rs.1,500 per month and the conductor’s salary will be Rs.1,000 per month
in addition to 10% of the tickets selling as commission ( to be shared by the driver and the conductor
equally). Cost of stationery will be Rs.500 per month. The salary of Manager-cum- accountant is
Rs.3,500 per month.
Petrol and oil will be Rs.250 per 100 km. The bus will make 3 round trips carrying on average 40
passengers on each trip. The expected profit is 15% of total ticket selling. The bus will run on an
average of 25 days in a month. The bus fare to be charged to each passenger per km is
(a) Re.0.25 (b) Re.0.30 (c) Re.0.35 (d) Re.0.40 (e) Re.0.50.
(2 marks)
< Answer >
45. In which of the following situations does the break-even point (in units) increase?
(a) When unit variable costs increase and sales price remains unchanged
(b) When unit variable costs decrease and sales price remains unchanged
(c) When unit variable costs remain unchanged and sales price increases
(d) When unit variable costs decrease and sales price increases
(e) When unit variable costs and unit sales price increase by the same amount in rupees.
(1 mark)
< Answer >
13
46. Jyothi Constructions undertook a contract for construction of a large complex. The construction work
commenced on April 01, 2005 and the following data are available for the year ended March 31, 2006:
Particulars Rs.
Total contract price 80,00,000
Work certified 60,60,000
Progress payment received 50,00,000
Material issued to site 30,80,000
Planning and estimating costs 4,80,000
Direct wages paid 12,30,000
Materials returned from site 42,500
Site office cost 26,400
Plant hire charges 1,82,000
Wage related costs 92,600
Head office expenses apportioned 80,500
Direct expenses incurred 85,300
Work not certified 4,25,000
Materials at site 60,000
Accrued wages 55,500
The contractors own a plant which originally cost Rs.18,00,000 and has been continuously in use in this
contract throughout the year. The salvage value of the plant after 10 years is expected to be Rs.50,000.
The company uses the straight-line method of depreciation. The total of work-in-process and plant at
site to be shown in the balance sheet as on March 31, 2006 is
(a) Rs.26,14,970 (b) Rs.27,89,970 (c) Rs.31,10,000
(d) Rs.32,85,000 (e) Rs.27,96,970.
(2 marks)
< Answer >
47. Presidency Club is involved in providing staying facilities and Gym facilities to its members. It has a
capacity of 25 single rooms and 15 double rooms and the gym facility is provided for residents in the
club and also outsiders. The club has furnished the following cost structure:
Service Variable cost per day
Single Room Rs.65
Double Room Rs.45
Gym facility Rs.50
The fixed cost per day is:
For single room – Rs.25
For double room – Rs.35
For Gym – Rs.10
The average occupancy rate in the club is 80% for 365 days of the year. The club deserves a margin of
25% on hire of room and that the rent of double room should be fixed at 150% of a single room. The
rent of a double room per day is
(a) Rs.100 (b) Rs.150 (c) Rs.145 (d) Rs.97 (e) Rs.109.
(2 marks)
< Answer >
14
48. Simul Petroleum is a small company that acquires crude oil and manufactures three intermediate
products - A, B & C, differing only in grade. There is no opening inventory of finished goods but workin-
process existed on March 01, 2006. The production costs for March 2006 were as follows (assume
separable costs were negligible):
Particulars Rs.
Crude oil acquired and used in production 4,00,000
Direct labor and related costs 2,00,000
Factory overhead 3,00,000
The output and sales for the month of March 2006 were as follows:
Particulars A B C
Number of Barrels produced 300 240 120
Number of Barrels sold 80 150 120
Prices per Barrel sold (Rs.) 3,000 4,000 5,000
If joint costs are apportioned on the basis of relative sales value of output, the cost of closing inventory
of product B is
(a) Rs.1,75,610 (b) Rs.1,23,476 (c) Rs.2,19,512
(d) Rs.3,51,220 (e) Rs.1,31,707.
(2 marks)
< Answer >
49. A, B and C are the main products and M is the by -product of a company, where A is a liquid and B is a gas
and C is a solid. If product A and product B are further processed before being in a saleable state and product
C is sold without further processing, then which of the following is the most appropriate basis for
apportionment of costs of M to joint products A, B and C?
(a) Physical units
(b) Sales value at separation point
(c) Notional sales value at separation point
(d) Standard sales value at separation point
(e) Sales value after further processing cost.
(1 mark)
< Answer >
50. Beta Ltd. has concluded a contract with the Defense Department for Rs.4,95,000 with a forecasted cost
of Rs.3,75,000. It is estimated at this time that 60% of the job is completed with a cost-t o-date amount
of Rs.2,76,000 and a draw of Rs.2,76,000 as well. At this rate, the job’s final profit will amount to
(a) Nil (b) Rs.1,00,000 (c) Rs.1,10,000
(d) Rs.1,20,000 (e) Rs.35,000.
(1 mark)
< Answer >
51. Alpha Ltd. has a beginning work in process inventory of 400 yards, 100% complete with regard to
material and 80% complete with regard to conversion. 9,000 yards were added during the period. 7,200
yards were completed. Normal loss amounted to 5% of completed units. Abnormal loss amounted to
500 yards. Ending work-in-process of the period was 80% complete with regard to materials and 60%
complete with regard to conversion costs. The cost of beginning work -in-process was Rs.3,500, Rs.1000
of which was for conversion costs. From the total cost of Rs.132,280 of added costs, Rs.94,370 was for
material costs.
Cost of conversion in ending work-in-process, using weighted average price method, is
(a) Rs.3,286 (b) Rs.5,356 (c) Rs.5,194
(d) Rs.3,409 (e) Rs.3,634.
(1 mark)
< Answer >
52. Which of the following can be said about job-order system, process costing system and hybrid system?
(a) The type of product manufactured by a company does not influence the type of accounting system
used
(b) The manufacturing process does not influence the type of accounting system used by a company
(c) That cost systems require the use of some form of cost averaging
(d) That managers rely upon the cost system to provide information based only upon actual costs
(e) That managers rely upon the cost system to provide information based only upon standard costs.
(1 mark)
< Answer >
15
53. Mixing Department began 50,000 units at a cost of Rs.96,000, and transferred 45,000 units to the
Finishing Department. The Mixing Department ending inventory is 60% complete. The Finishing
Department added Rs.1,68,000 of material and transferred 40,000 units to Finished Goods. The
Finishing Department ending inventory is 60% complete. There was no beginning inventory in either
department. The material cost per equivalent unit in the Finishing Department is
(a) Rs.2.00 (b) Rs.5.73 (c) Rs.6.00 (d) Rs.6.45 (e) Rs.4.50.
(1 mark)
< Answer >
54. MPQ Ltd. in the course of refining crude oil obtains 4 joint products – M, N, P and Q. The total cost till
the split off point was Rs.97,600. The output and sales in the year 2005-06 were as follows:
Product Output
(Gallons)
Sales (Rs.) Separate
Costs (Rs.)
M 5,00,000 1,15,000 30,000
N 10,000 10,000 6,000
P 5,000 4,000 -
Q 9,000 30,000 1,000
If the company decides to sell the products at the split off point at the rate of 15 paise per gallon of M,
50 paise per gallon of N, 80 paise per gallon of P and Rs.3 per gallon of Q, the net incomes of products
M and Q are
(a) Rs.9,054 and Rs.3,260 respectively (b) Rs.9,054 and Rs.800 respectively
(c) Rs.603 and Rs.800 respectively (d) Rs.603 and Rs.483 respectively
(e) Rs.603 and Rs.3,260 respectively.
(2 marks)
< Answer >
55. BC Ltd. produces four joint products A, B, C and D, all of which emerge from the processing of one
raw material. The following are the relevant data for production for a period:
Joint Product Number of units Selling price
A 500 Rs.18.00
B 900 Rs. 8.00
C 400 Rs. 4.00
D 200 Rs.11.00
The company budgets a profit of 10% of sales value for a period. In other estimated cost are:
Carriage inwards Rs.1,000
Direct wages Rs.3,000
Manufacturing overhead Rs.2,000
Administration overhead 10% of sales value
The maximum price that may be paid for the raw material is
(a) Rs.20,000 (b) Rs.18,000 (c) Rs.10,000
(d) Rs.15,000 (e) Rs.14,000.
(2 marks)
< Answer >
56. In which of the following situations, is job costing ideal?
(a) Where two or more products are produced from the same process
(b) Where the products are dissimilar and non-repetitive in nature
(c) Where the products are homogeneous
(d) Where the production is in continuous flow
(e) Where the production is carried on in batches.
(1 mark)
< Answer >
57. Pre-separation costs of joint products when considered in relation to a further processing decision may
be classified as
(a) Incremental costs (b) Avoidable costs (c) Opportunity costs
(d) Irrelevant costs (e) Sunk costs.
(1 mark)
< Answer >
16
58. The capacity usage ratio and the capacity utilization ratio in respect of a machine for a particular month
is 72 % and 65 % respectively. The total available working hours in the month are 250 hours. The idletime
card reveals the following:
Waiting for material 10 hours
Waiting for tools 6 hours
Breakdown 10 hours
The actual number of hours worked is
(a) 128 hours (b) 117 hours (c) 110 hours
(d) 91 hours (e) 154 hours.
(1 mark)
< Answer >
59. Sachin Ltd. has furnished the following information pertaining to a new product:
i. The fixed costs will be Rs.80,000 for production of 7,500 units or less. If the production is more
than 7,500 units, the fixed costs will be Rs.1,20,000.
ii. The variable cost ratio is 60% of the sales for the first 7,500 units and it will be reduced to 50% of
sales for units in excess of 7,500 units.
iii. The sale price of the product per unit is Rs.25.
If the company manufactures more than 7,500 units, the break-even units of the new product is
(a) 12,000 (b) 11,100 (c) 12,500 (d) 9,600 (e) 8,500.
(2 marks)
< Answer >
60. Sai Apna Ltd. manufactures a product, currently utilizing 80% capacity with a turnover of Rs.8,00,000
at Rs.25 per unit. The company has furnished the following cost data:
Material cost - Rs.7.50 per unit; Labor cost - Rs.6.25 per unit; Semi-variable cost (including variable
cost of Rs.3.75 per unit) – Rs.1,80,000; Fixed cost Rs.90,000 up to 80% level of output and beyond
this, an additional Rs.20,000 will be incurred.
The activity level at break-even point is
(a) 60% (b) 50% (c) 40% (d) 31% (e) 25%.
(2 marks)
< Answer >
61. Priyanka Chemicals Ltd. has two factories - X and Y, with similar plant and machinery fo r manufacture
of soda ash. The board of directors of the company has expressed the desire to merge them and to run
them as one integrated unit. The following data are available in respect of these two factories:
Particulars X Y
Capacity in operation 60% 100%
Turnover 120 lakh 300 lakh
Variable cost 90 lakh 220 lakh
Fixed cost 25 lakh 40 lakh
If the company runs at 80% of the integrated capacity, the profit as a percentage of turnover will be
(a) 20.00% (b) 18.25% (c) 12.45% (d) 9.75% (e) 7.80%.
(2 marks)
< Answer >
62. Likhitha Ltd. manufactures a single product. The total cost per unit of the product is budgeted as Rs.24,
which includes fixed cost of Rs.8 per unit based on a volume of 40,000 units per year. During the year
2005-06, sales volume was 38,000 units and production volume was 40,500 units. The actual profit for
the same period under absorption costing was Rs.50,000. The profit under marginal costing method is
(a) Rs.70,000 (b) Rs.50,000 (c) Rs.40,000
(d) Rs.30,000 (e) Rs.25,000.
(2 marks)
< Answer >
63. High break even point and small angle of incidence indicate
(a) The fixed costs are high and margin of safety is low
(b) Fixed costs are low and margin of safety is high
(c) Strong financial stability
(d) Profits are earned over a wide range, their extent is not high
(e) Indication of monopolistic conditions.
(1 mark)
< Answer >
17
64. The profit and sales of a company for two consecutive years were as follows:
Period Profits (Rs.) Sales (Rs.)
Year 1 20,000 1,20,000
Year 2 25,000 1,40,000
The break-even sales of the company is
(a) Rs.60,000 (b) Rs.50,000 (c) Rs.40,000
(d) Rs.30,000 (e) Rs.20,000.
(1 mark)
< Answer >
65. A factory is running at a capacity of 50% and produces 5,000 units at a cost of Rs.90 per unit as detailed
below:
Material – Rs.50
Labour – Rs.15
Factory overheads – Rs.15 (Rs.6 fixed)
Administrative overheads – Rs.10 (Rs.5 fixed)
The current selling price is Rs.100 per unit. At 60% capacity level, material cost will be increased by
2% and selling price per unit will be reduced by 2%. The profit of the factory at 60% capacity level is
(a) Rs.50,000 (b) Rs.53,000 (c) Rs.48,000
(d) Rs.55,000 (e) Rs.60,000.
(2 marks)
< Answer >
66. Which of the following would cause the greatest increase in the unit contribution margin?
(a) 20% decrease in fixed costs (b) 20% increase in fixed costs
(c) 20% decrease in variable costs (d) 20% increase in semi-variable cost
(e) 20% increase in selling price.
(1 mark)
< Answer >
67. Which of the following is true with respect to break-even analysis?
(a) As output increases, fixed costs per unit will fall
(b) As output falls total variable costs will stay the same
(c) As output increases, the selling price per unit will increase
(d) As output increases, outside the relevant range, total fixed costs will stay the same
(e) As output falls, variable cost per unit will fall.
(1 mark)
< Answer >
68. Which of the following statements is/are true ?
I. Profit planning is possible with the technique of marginal costing.
II. Marginal costing helps in price fixation more in periods of depression.
III. Key factor is taken into consideration to judge the profitability of different products whenever there
is any shortage.
IV. Make or buy decisions are made by comparing variable cost with outsourced price.
(a) Only (I) above (b) Both (II) and (III) above
(c) Only (III) above (d) Both (I) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
69. Sengupta Ltd. sells a single product at a price of Rs.3 per unit. The total fixed cost and variable cost per
unit are Rs.5 crore and Re.1 respectively. Due to inflation, the variable costs are expected to increase by
10% whereas fixed costs will increase by only 5%. If the company increases its selling price by 4%, the
break-even point in units will approximately
(a) Increase by 11% (b) Increase by 4% (c) Decrease by 4%
(d) Decrease by 8% (e) Decrease by 11%.
(2 marks)
< Answer >
18
70. Consider the following information pertaining to product –M:
Cost elem ents
Variable cost
(% of sales)
Fixed cost
(Rs.)
Direct materials 32.8 -
Direct labor 28.4 -
Factory overheads 12.6 1,89,900
Distribution expenses 4.1 58,400
General and administrative expenses 1.1 66,700
Budgeted sales for the next year are Rs.18,50,000. If actual sales are dropped by 10%, the profit of the
company will be
(a) Rs.50,000 (b) Rs.42,500 (c) Rs.34,650 (d) Rs.32,570 (e) Rs.38,770.
(2 marks)
< Answer >
71. Which of the following assumptions is false with respect to Cost-Volume-Profit analysis?
(a) This analysis assumes that production and sales will be synchronized at all points of time
(b) This analysis assumes that prices of input factors will remain constant
(c) This analysis does not assume that efficiency and productivity remain unchanged
(d) This analysis assumes that selling prices are constant at all levels of sales
(e) This analysis assumes that efficiency of men, material and machine will remain constant.
(1 mark)
< Answer >
19
Suggested Answers
Management Accounting – I (MB161): April 2006
1. Answer : (b)
Reason : The Purchasing Manager of Sikha Ltd. would be an internal user of information that is
concerned with production reports and estimates, where as the other individuals are all
external to the company and would expect Financial Accounting information prepared in
accordance with GAAP. Therefore, (b) is correct.
< TOP >
2. Answer : (e)
Reason : Management accounting is not mandatory. The applications of management accounting can
be extended beyond the traditional accounting system. It focuses more on the
parts/segments of a company and less on the company as a whole. It is not governed by
GAAP. It prepares reports to fulfill the needs of management. Therefore, all the options are
false and so the correct answer is (e).
< TOP >
3. Answer : (c)
Reason : Both Financial and Management Accounting rely heavily on the concept of responsibility.
Financial Accounting is concerned with the concept of responsibility or stewardship over
the company as a whole; while Management Accounting is concerned with stewardship
over its parts. Hence (c) is false. Management Accounting provides data for internal uses by
managers whereas Financial Accounting provides data for external users like shareholders,
creditors, etc. Since a large part of the overall responsibilities of a manager have to do with
planning, a manager’s information need has a strong orientation towards future. On the
other hand, Financial Accounting is concerned with a record of financial data of the past.
Financial Accounting is mandatory for business organizations. They should compulsorily
maintain financial records as per various legal statutes like Companies Act, Income Tax
Act, etc. By contrast, Management Accounting is not mandatory. Financial Accounting
statements have to be prepared in accordance with the GAAP whereas managers set their
own rules in the form and content of Management Accounting stat ements.
< TOP >
4. Answer : (a)
Reason : The research and development costs have already been incurred. Thus, they are costs
resulting from a past irrevocable decision. These sunk costs are irrelevant to the new
product because they are unavoidable. Therefore (a) is correct
< TOP >
5. Answer : (d)
Reason : Costs are resources, it is received from customers doing business in an organization. After
they are initially recorded in the accounting system, the cost allocation process studies the
costs and assigns them to different cost objectives based on cost drivers. Therefore, (d) is
not correct.
< TOP >
6. Answer : (d)
Reason : Product engineering is related to development of the product line. Therefore, product
engineering is considered to be as product -level cost.
< TOP >
7. Answer : (e)
Reason : Variable costs refer to all costs which fluctuate in total in response to small change in the
rate of utilization of capacity. Other statements given in (a), (b), (c) and (d) are not correct
in respect of meaning of variable cost. Therefore, (e) is correct.
< TOP >
8. Answer : (a)
Reason : Normal wastage is classified as product cost an d therefore this cost is borne by the good
units. It is not classified as period cost, standard cost, extraordinary item or deferred charge.
< TOP >
9. Answer : (a)
Reason : Notional costs should be included while ascertaining costs. This statement (a) is false.
Other options given (b), (c), (d) and (e) are all correct.
< TOP >
10. Answer : (c)
Reason : Option (c) is not true because wholesaler’s and manufacturers treat period costs as a
deferred revenue expenditure and they amortize this expenditure over a few years.
< TOP >
20
11. Answer : (a)
Reason : Marginal costs are based on the distinction between fixed and variable costs. Therefore
option (a) is correct.
< TOP >
12. Answer : (a)
Reason : It is a measure of activity such as direct labor hour, machine hours, computer time used etc.
If these activities are increased, costs will be increased. Therefore, (a) is correct.
< TOP >
13. Answer : (e)
Reason : The purpose of cost allocation is to measure income and assets for external reporting. The
other options given (a), (b), (c) and (d) are not the purposes of cost allocation.
Cost allocation is a process of assigning and reassigning costs to cost objects. It is used for
these costs that cannot be directly associated with a specific cost object. It is often used for
purposes of measuring income and assets for external reporting purposes. It is less
meaningful for internal purposes because responsibility accounting systems emphasize
controllability, a process often ignored in cost allocation.
< TOP >
14. Answer : (c)
Reason : With the recent automation of factories and the corresponding emphasis on activity-based
costing(ABC),companies are finding new ways of allocating indirect factory overhead. One
change is that plant -wide application rates are being used less often because a closer
matching of costs with cost drivers provides better information to management. ABC
results in a more accurate application of indirect costs because it provides more refined
data. Instead of a single cost goal for a process, a department, or even an entire plant, an
indirect cost pool is established for each identified activity. The related cost driver, the
factor that changes the cost of the activity, is also identified.
Option (a) is incorrect because one effect of computerization is that the amount of direct
labor relative to other costs has been decreasing. For this reason some companies have
found that it is no longer expedient to track direct costs as closely as was once done. Thus,
some companies are treating direct labor as an indirect factory overhead cost.
Option (b) is incorrect because through put time is one of the cost drivers that is beginning
to be used more often as an overhead application base. Throughput is the rate of production
over a stated time. This rate clearly drives (influences) costs.
Option (d) is incorrect because multiple cost pools are preferable. They permit a better
matching of indirect costs with cost drivers.
Option (e) is incorrect because ABC uses cost drivers (causes) as application bases to
provide more refined data.
< TOP >
15. Answer : (d)
Reason :
Beginning direct materials inventory 1,34,000
Add: Purchases 1,89,000
Less: Purchase returns (1,000)
Add: Transportation 3,000
Total direct materials available 3,25,000
Less: Ending direct materials inventory (1,25,000)
Direct material used 2,00,000
Direct labor 3,00,000
Total prime costs 5,00,000
Manufacturing cost = Rs.5,00,000 + 60% of Rs.3,00,000 (Direct labor)
= Rs.6,80,000
< TOP >
21
16. Answer : (c)
Reason : Actual cost – Applied cost
= Rs.3,50,000 - [(1,290 + 1,760 + 789) × Rs.85] = Rs.3,50,000 – Rs.3,26,315
=Rs.23,685 under applied as compared to actual overhead.
Based on overhead rate of Rs.85 and given the hours consumed by each job, costs will be
(J1: Rs.1,09,650 +Rs.85,500) + (J2: Rs.1,49,600 + Rs.74,700) +
(J3: Rs.67,065 + Rs.87,470) = Rs.1,95,150 + Rs.2,24,300 + Rs.1,54,535 = Rs.5,73,985.
Amount chargeable to J2: (Rs.2,24,300 ÷ Rs. 5,73,985) × Rs.23,685 = Rs.9,256 debited to
finished goods.
< TOP >
17. Answer : (d)
Reason: The supervisor is associated with all products and therefore, the cost would be a batch level
cost. Other options are related to the products. Therefore, (d) is correct.
< TOP >
18. Answer : (d)
Reason : A department is working at 55% of its normal capacity. 45% is treated as idle capacity.
Fixed cost is obviously incurred for the normal capacity work. This 45% of fixed cost
should be excluded from the calculation of overhead recovery rate. Thus the appropriate
recovery rate is to be found by dividing the 55% of fixed cost plus 100% variable
manufacturing overhead by the budgeted direct labor cost.
Appropriate recovery rate = (55% of Rs.1,00,000 + 100% of Rs.1,25,000) ÷ Rs.2,50,000 =
Rs.1,80,000 ÷ Rs.2,50,000 = 72%
< TOP >
19. Answer : (b)
Reason : Computation of comprehensive machine hour rate:
Expenses Workings Rs. Rs.
Standing charges:
Rent, heat and light (Rs.70,000 ÷ 70,000) × 2,500 2,500
Supervision Rs.1,50,000 ÷ 25 6,000
Depreciation 10% of Rs.3,00,000 30,000
Reserve equipment cost Rs.2,000 ÷ 25 80
Labor cost during setting and adjustment 150 hours × Rs.8 1,200
Hourly standing charges Rs.39,780 ÷ 2,000 39,780 19.89
Machine expenses:
Power 1.50
Labor cost Rs. 8 ÷ 2 4.00
Comprehensive machine hour rate 25.39
< TOP >
20. Answer : (d)
Reason : Allocation of costs is a distribution of costs that cannot be directly assigned to the cost
objects that are assumed to have caused them. An allocation of costs does not enable a
company to determine why the sales of a particular product have increased. Many factors
affect consumer demand such as advertising, consumer confidence, availability of
substitutes and changes in tastes. Cost allocation is an internal matter that does not affect
demand except to the extent it results in a change in price.
< TOP >
21. Answer : (b)
Reason :
Particulars Product M Product N Total
Budgeted sales volume 80,000 1,20,000 2,00,000
Budgeted total contribution Rs.8 Rs.6
Budgeted total contribution Rs. 6,40,000 Rs. 7,20,000 Rs.13,60,000
Budgeted sales revenue Rs.16,00,000 Rs.19,20,000 Rs.35,20,000
Average contribution per unit = Rs.13,60,000 ¸ 2,00,000 = Rs.6.80.
Break-even point =
Rs.8,16,000
Rs.6.80 = 1,20,000 units
Average selling price per unit = Rs.35,20,000 ¸ 2,00,000 = Rs.17.60
Break-even point in sales value = 1,20,000 ´ Rs.17.60 = Rs.21,12,000.
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22
22. Answer : (c)
Reason : The process of charging factory overhead to work-in-process based on a predetermined
application rate multiplied by actual input is known as normal costing. Other options are
not correct.
< TOP >
23. Answer : (b)
Reason : In activity based costing, the overhead costs are charged to production on the basis of cost
driving activities. Other options are not correct.
< TOP >
24. Answer : (b)
Reason: Per set up cost = Rs.3,200 ÷ (5 + 10 + 5 ) = Rs.160;
Set up cost charged to A = Rs.160 × 5 = Rs.800;
Rs.800 ÷ 400 = Rs.2 per unit.
< TOP >
25. Answer : (c)
Reason: Without any other information as to the President's work requirements, each department
needs equal effort. Therefore, (c) is correct.
< TOP >
26. Answer : (c)
Reason: The goal of using cost pools is to minimize the allocation effort. However, it is also
desirable to have the pools reflect the incurrence of the costs. The heat and cleaning cost
are probably more related to square feet than they are to number of employee and sales
rupees. Therefore (c) is correct.
< TOP >
27. Answer : (c)
Reason : Total fixed overhead = 12,000 units × Rs.4 = Rs.48,000.
Fixed overhead per unit = Rs.48,000 actual overhead ÷ 10,000 units actual production
= Rs.4.80.
Total cost per unit = Material Rs.10 + Labor Rs.6 + Variable overhead Rs.3 + Fixed
overhead Rs.4.80 = Rs.23.80.
< TOP >
28. Answer : (c)
Reason :
Particulars Rs.
Direct material 9,00,000
Direct wages 7,50,000
Prime cost 16,50,000
Factory overhead cost (60% on direct wages) 4,50,000
Works cost 21,00,000
Administrative overhead cost (20% on works cost) 4,20,000
Cost of production 25,20,000
Selling & distribution overhead (25% on works cost) 5,25,000
Cost of sales 30,45,000
Profit (16.67% on sales or 20% on cost of sales) 6,09,000
Sales value 36,54,000
< TOP >
23
29. Answer : (b)
Reason : It is given in the question that the secondary distribution of service departments’ overhead
is pending. The same is thus attempted by use of simultaneous equation method.
Let , total overheads of department S1 = x; and total overheads of S2 = y;
According to problem, we get x = 16,000 + 0.1y and y = 24,000 + 0.2x;
Therefore, x = 16,000 + 0.1(24,000 + 0.2x) = 16,000 + 2,400 + 0.02x
Or, x (1 – 0.02) = 18,400, or, x = 18,400 ÷ 0.98 = 18,775, then y = 27,755
Statement of secondary distribution:
Particulars P1 (Rs.) P2 (Rs.) P3 (Rs.) Total (Rs.)
Direct allocation 48,000 1,12,000 52,000 2,12,000
S1 (80% of 18,775) 3,755 7,510 3,755 15,020
S2 (90% of Rs.27,755) 2,776 16,653 5,551 24,980
Total 54,531 1,36,163 61,306 2,52,000
Budgeted machine hours 5,000 12,000 6,000
Overhead rate per machine hour 10.91 11.35 10.22
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30. Answer : (d)
Reason : Petroleum refinery is most likely to use a process costing system because process costing
involves a series of processes by which the crude oil is refined to bring it to the saleable
condition. Others are used job costing system.
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31. Answer : (b)
Reason : Raw material used = Op. stock + Purchases – Cl. stock
= Rs.18,350 + Rs.1,21,210 – Rs.17,210 = Rs.1,22,350
Manufacturing cost = Raw material used + Direct labor + Factory overhead
Rs.5,28,055 = Rs.1,22,350 + Direct labor + 72% of Direct labor
1.72 Direct labor = Rs.4,05,705; Direct labor= Rs.2,35,875
The amount of factory overhead = 72% of Rs.2,35,875 = Rs.1,69,830.
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32. Answer : (b)
Reason : Variable overheads =
Rs.26,325 Rs.25,650
1650hrs 1500hrs
-
- =
Rs.675
150hrs = Rs.4.50
Fixed overhead rate = Rs.25,650 – Rs.4.50 ´ 1500 hrs
= Rs.25,650 – Rs.6,750 = Rs.18,900
Predetermined rate Rs. 15 – Variable cost 4.50 = Rs. 10.50
Normal activity = Rs.18,900 ¸ Rs.10.50 = 1,800 hours
Over absorption = (1,800 hrs – 1,900 hrs) ´ Rs.10.50 = Rs.1,050.
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33. Answer : (a)
Reason : Under the proration approach to under absorbed or over absorbed overhead costs, the
account that would not receive any of the overhead being allocated would be direct material
inventory. Direct material inventory is not an account that has overhead in the information.
It is only the storage of material not yet started into production. Other options like cost of
goods sold, work-in-process and finis hed goods absorb the under or over absorption of
overhead costs. Therefore (a) is correct.
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34. Answer : (d)
Reason : Sales = variable cost + Fixed cost
Let, the total sales = S.
Where there is no profit no loss.
S = Rs.3,06,000 + 0.70 S (.6) + 0.30 S (.8)
S = Rs.3,06,000 + .42 S + .24 S or, S (1– 0.42 – 0.24) = Rs.3,06,000
S = Rs.3,06,000 ¸ 0.34 = Rs.9,00,000
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24
35. Answer : (a)
Reason : Total overhead costs ÷ Total machine hours
= Rs.11,50,000 ÷ 4,000 hours = Rs.287.50 per hour;
Overhead allocated to product B = Rs.287.50 × 2,200 = Rs.6,32,500.
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36. Answer : (e)
Reason : Options (I), (II) and (III) are true. Option (IV) is not a circumstance where direct labour
cost is used to recover factory overhead. So, the correct answer is (e).
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37. Answer : (a)
Reason : Abnormal spoilage is considered as period cost. Therefore, (a) is the answer.
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38. Answer : (b)
Reason : Statement of equivalent Production Unit (FIFO)
Input Output
Completed
Material Conversion
Opening 450 Opening 450 20% 90 40% 180
Introduced 4,100 Introduced 3,600 100% 3,600 100% 3,600
Closing 500 70% 350 60% 300
4,550 4,550 4,040 4,080
Costs
during
the month Rs.70,700 Rs.61,200
Cost
per unit Rs.17.50 Rs.15.00
The total cost of closing work-in-process
Material – 350 ´ Rs.17.50 = Rs.6,125
Conversion – 300 ´ Rs.15.00 = Rs.4,500
Rs.10,625
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39. Answer : (e)
Reason :
Particulars Indian Oil Bharat
Petroleum
Distance (Depots to factory – full load) 10 km 8 km
Distance covered per trip 20 km 16 km
Running time @ 40 km p.h. 30 minutes 24 minutes
Filling-in time 50 minutes 45 minutes
Emptying time 45 minutes 45 minutes
Total time per trip 125 minutes 114 minutes
Details of costs:
Variable operating charges @ Rs.2.20
Indian Oil (20 km × Rs.2.20)
Bharat Petr. (16 km × Rs.2.20)
Rs.44.00 Rs.35.20
Fixed charges @ Rs.13.20 per hour
Indian Oil (125mint.× Rs.13.20 ÷ 60mint)
Bharat Petroleum
(114 mint. × Rs.13.20 ÷ 60 mint.)
Rs.27.50 Rs.25.08
Total cost per trip Rs.71.50 Rs.60.28
Ton-km (full load)
Indian Oil (6 ton × 10 km)
Bharat Petroleum (6 ton × 8 km)
60 ton-km 48 ton-km
Cost per ton-km (Total cost per trip ÷ Ton-km) Rs.1.19 Rs.1.25
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25
40. Answer : (d)
Reason : Rs. Rs.
Total manufacturing Costs 1,94,080
Less: Overhead costs:
Indirect labor 12,160
Factory overhead 31,730
Indirect material 21,390
65,280
Freight in 5,570 70,850
1,23,230
Less: Direct labor 32,640
Material consumed 90,590
Add: Closing material 11,640
1,02,230
Less: Opening material 9,620
Material purchased 92,610
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41. Answer : (d)
Reason : Material cost per equivalent unit = Rs.94,870 ÷ (6,950 + 490 + 1,160)
= Rs. 94,870 ¸ 8,600 = Rs.11.03.
Conversion = Rs.37,410 ÷ (50 + 6,950 + 490 + 870) = Rs.4.47
Total cost = 6,950 (Rs.11.03 + Rs.4.47) + 50 × Rs.4.47 + Rs.3,500
= Rs. 1,07,725 + Rs. 223.50 + Rs. 3,500 = Rs.1,11,448.50
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42. Answer: (d)
Reason: By processing CL further at a cost of Rs.1,000 HCL earns an additional Rs.5,000 in
revenue which means a net increase in profitability of Rs.4,000 by processing CL further.
Therefore, (d) is correct.
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43. Answer : (c)
Reason : Input = 25,000 units + 1,35,000 units = 1,60,000 units;
Out put = 25,000 units + 75,000 units + 60,000 units = 1,60,000 units;
Equivalent units = 20% of 25,000 units + 100% of 75,000 units + 50% of 60,000 = 5,000 +
75,000 + 30,000 = 1,10,000 units
Conversion cost per equivalent unit in this process = Rs.1,43,000 ÷ 1,10,000 = Rs.1.30
Conversion cost of closing WIP = 30,000 × Rs.1.30 = Rs.39,000.
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26
44. Answer : (b)
Reason : Statement showing the fare to be charged from a passenger for one km.
Particulars Per annum
(Rs.)
Per month
(Rs.)
A. Standing charges:
Insurance charges 15,000
Taxes 10,000
Driver’s salary 18,000
Conductor’s salary 12,000
Cost of stationery 6,000
Manager-cum-accountant salary 42,000
Garage Rent 12,000
Total 1,15,000 9,583.33
B. Maintenance charges:
Repairs (Rs.10,000 ÷ 12) 833.33
C. Running charges:
Depreciation 1,00,000 8,333.33
Petrol (25 days × 3 trip × 2 × Rs.2.50 × 20) 7,500.00
Commission 3,500.00
Profit 15% of tickets selling 5,250.00
Total tickets selling 35,000.00
Total effective passenger km. per month
3 × 2 × 20 × 25 × 40 = 1,20,000 )
Bus fare per passenger Rs.35,000 ÷ 1,20,000 0.30
* In order to calculate the amount of commission payable to the driver and the conductor,
total tickets selling will have to be calculated.
Let, total tickets selling = x; Commission = 0.1x; profit = 0.15x;
Total cost per month without including commission = Rs.26,250
x = Rs.26,250 + 0.1x + 0.15x
x =Rs.26,250 ÷ 0.75 = Rs.35,000
Commission = 10% of Rs.35,000 = Rs.3,500;
Profit = 15% of Rs.35,000 = Rs.5,250.
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45. Answer : (a)
Reason : The break-even point in units is calculated by dividing the fixed costs by contribution per
unit. If selling price is constant and variable costs increase, the unit contribution margin
will decline. It results in an increase in the break-even point. Other options given in (b), (c),
(d) and (e) are not true.
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27
46. Answer : (a)
Reason : Work-in-Process = Work certified + Work uncertified – Profit in reserve – Progress
payment received
= Rs.60,60,000 + Rs.4,25,000 – *Rs.4,95,030 – Rs.50,00,000
= Rs.9,89,970
Plant= Rs.18,00,000 – Rs.1,75,000 = Rs.16,25,000
Total = Rs.9,89,970 + Rs.16,25,000 = Rs.26,14,970.
Working:
Particulars Rs. Particulars Rs.
To Material issued 30,80,000 By Work-in-Progress:
To Wages –Direct 12,30,000 Work certified 60,60,000
–Accrued 55,500 Work not certified 4,25,000
To Wages related cost 92,600 By Material
To Plant hire charges 1,82,000 Returned from site 42,500
To Site office cost 26,400 At site 60,000
To Planning & estimating cost 4,80,000
To Head office expenses appr. 80,500
To Direct expenses 85,300
To Depreciation 1,75,000
To Notional profit 11,00,200
65,87,500 65,87,500
To Profit & loss A/c:
2 11,00,200 50,00,000
3 60,60,000
´ ´
6,05,170 By Notional Profit 11,00,200
To Reserve *4,95,030
11,00,200 11,00,200
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47. Answer : (c)
Reason : Occupancy days in a year
For single room = 25 ´ 365 ´ 80% = 7300
For double room = 15 ´ 365 ´ 80% = 4380
Total room occupancy = 7300 + 1.5 (4380) = 7300 + 6570 = 13,870
Total cost:
Single room = 7300 (Rs.65 + Rs.25) = Rs. 6,57,000
Double room = 4380 (Rs.45 + Rs.35) = Rs. 3,50,400
Total cost = Rs. 10,07 400
Margin (25% hire charge) = Rs. 3,35,800
Total = Rs. 13,43,200
Rent per day of single room = Rs.13,43,200 ÷ 13,870 = Rs.96.84 or Rs.97.
Rent of a double room per day = Rs.96.84 (1.5) = Rs.145.26 or Rs.145.
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48. Answer : (e)
Reason : Joint cost = Rs.4,00,000 + Rs.2,00,000 + Rs.3,00,000 = Rs.9,00,000
Total sales value = 300 × Rs.3,000 + 240 × 4,000 + 120 × 5,000 = Rs.9,00,000 +
Rs.9,60,000 + Rs.6,00,000 = Rs.24,60,000.
Share of joint costs of Product B = (Rs.9,00,000 ÷ Rs24,60,000) × Rs.9,60,000
= Rs.3,51,219.45
The cost of closing inventory of Product B = (Rs.3,51,219.45 ÷ 240) × 90
= Rs.1,31,707
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49. Answer : (c)
Reason : If the cost of the by-product is apportioned to joint products, it is made at notional sales
value at separation point. Other options are not appropriate for apportionment of by-product
to joint products.
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28
50. Answer: (e)
Reason: Final profit of the job = Rs.4,95,000 - (2,76,000 ÷ 0.60)
= Rs. 4,95,000 – Rs. 4,60,000 = Rs.35,000.
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51. Answer: (e)
Reason: Opening WIP + Added =
Completed units + Normal loss + Abnormal loss + Closing WIP
400 + 9,000 = 9,400 = 7,200 + 360 + 500 + 1,340
Cost of conversion = Rs.1,000 + Rs.37,410 = Rs.38,410
Equivalent units = 100% of 7,200 + 100% of 500 + 60% of 1,340
= 7,200 + 500 + 804 = 8,504
Cost per unit = Rs.38,410 ÷ 8,504 = Rs.4.52
Cost of conversion in WIP ending = 60% of 1,340 × Rs.4.52 =Rs.3,634.
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52. Answer: (c )
Reason: All cost systems utilize some form of cost averaging and estimation. Therefore, (c) is
correct.
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53. Answer: (c)
Reason: The number of equivalent units in mixing department =
45,000 transferred out + 3,000 (5,000 × 60%) in ending inventory = 48,000 units.
The number of equivalent units in finishing department =
40,000 transferred out + 3,000 (5,000 × 60%) in ending inventory = 43,000 units.
Transferred in cost Rs.90,000 (Rs.96,000 ÷ 48,000 = Rs.2 per unit × 45,000 units) +
Rs.168,000 added = Rs.2,58,000 ÷ 43,000 equivalent units = Rs.6 per equivalent unit.
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54. Answer : (a)
Reason: Sales are made at split off point:
Product Sales value at split off
point (Rs.)
Allocation of joint
costs (Rs.)
Net profit
(Rs.)
M 5,00,000 × 0.15 = 75,000 (75 × 97,600) ÷ 111 = 65,946 9,054
N 10,000 × 0.50 = 5,000 (5 × 97,600) ÷ 111 = 4,397 603
P 5,000 × 0.80 = 4,000 (4 × 97,600) ÷ 111 = 3,517 483
Q 9,000 × 3 = 27,000 (27× 97,600) ÷ 111 = 23,740 3,260
Total 1,11,000 97,600 13,400
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55. Answer : (c)
Reason :
Joint products
No. of
units
S.P.
per unit
Rs.
Sales
value
Rs.
A 500 18 9,000
B 900 8 7,200
C 400 4 1,600
D 200 11 2,200
Total sales value 20,000
Less: Budgeted profit (10%) 2,000
Total joint costs 18,000
Less: Other costs: Carriage inwards 1,000
Manufacturing overhead 2,000
Administration overhead 2,000
Direct wages 3,000 8,000
Maximum price to be paid for R.M. 10,000
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29
56. Answer : (b)
Reason : Job costing is a type of specific order costing which applies where work is undertaken as an
identifiable unit. Under job costing method, cost of an individual job or work order is
ascertained separately. Hence it is ideal where the products are dissimilar and nonrepetitive
in nature.
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57. Answer : (d)
Reason : The pre-separation costs of joint product when considered in relation to a further processing
decision are irrelevant costs. These are not incremental costs, avoidable costs, and
opportunity coasts and sunk costs.
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58. Answer : (b)
Reason : Standard capacity expected = 250 × 72 ÷100 = 180 hours
So, unavoidable idle time = 250 hours – 180 hours = 70 hours
Capacity utilization ratio = 65%
So, actual hours worked = 180 × 65 ÷100 = 117 hours.
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59. Answer : (b)
Reason : BEP =
Fixedcost
Contributionperunit
Up to the product of 7,500 units
BEP =
Rs.80,000
Rs.25- 60%of Rs.25 =
Rs.80,000
Rs.10 = 8,000 units.
At any production level greater than 7,500 units, total fixed costs are Rs.1,20,000 but there
are two contribution margin. The first 7,500 units sold will produce a contribution margin
of Rs.75,000 (i.e.7,500 ´ Rs.10). Hence, the other Rs.45,000 (i.e. Rs.1,20,000 – Rs.75,000)
must be contributed. The contribution per unit is Rs.12.50 (i.e. Rs.25 – 50% of Rs.25)
Therefore, BEP = Rs.45,000 ¸ Rs.12.50 = 3,600 units.
Therefore, Total BEP = 7,500 units + 3,600 units = 11,100 units.
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60. Answer : (b)
Reason : P/V ratio = (Rs.7.50 ÷ Rs.25) × 100 = 30%;
Contribution per unit = Rs.25.00 – (Rs.7.50 + Rs.6.25 + Rs.3.75) = Rs.7.50
Number of units sold at 80% level = Rs.8,00,000 ÷ Rs.25 = 32,000 units;
Maximum capacity = 32,000 ÷ 80% = 40,000 units.
Fixed cost element in semi-variable cost = Rs.1,80,000 – 32,000 × Rs.3.75 = Rs.60,000.
Total fixed cost up to 80% = Rs.90,000 + Rs.60,000 = Rs.1,50,000;
Activity level at break-even point = Fixed cost ÷ contribution per unit
= Rs.1,50,000 ÷ 7.50 = 20,000
Activity level = 20,000 ÷ 40,000 = 0.5 or 50%.
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30
61. Answer : (d)
Reason :
Statement showing the cost and profit situation of two factories - X and Y
(Individually and Integrated)
Particulars
Factory X
@60%
capacity
Factory
X
@100%
capacity
Factory Y
@100%
capacity
Combined
@100%
capacity
Turnover 120 200 300 500
Variable cost 90 150 220 370
Contribution 30 50 80 130
Fixed cost 25 25 40 65
Profit 5 25 40 65
P/V ratio 25% 25% 26.67% 26%
Break–even point Rs.100 Rs.100 Rs.150 Rs.250
BEP as % of turnover 83.3% 50% 50% 50%
Profit at 80% utilization of integrated capacity:
Turnover Rs.500 ´ 80% Rs.400 lakhs
Contribution (Rs.130 ÷ Rs.500) ´ 400 Rs.104 lakhs
Fixed costs Rs. 65 lakhs
Profit Rs. 39 lakhs
Profit as % of turnover 9.75%
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62. Answer : (d)
Reason :
Profit under absorption costing Rs.50,000
Less: Fixed overhead cost of
closing stock Rs.8 ´ (40,500 – 38,000)
Rs.20,000
Profit under marginal costing Rs.30,000
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63. Answer : (a)
Reason : If the break-even point is high and angle of incidence is small, it indicates the high fixed
costs and low margin of safety. Therefore, (a) is correct.
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64. Answer : (c)
Reason :
Profit (Rs.) Sales (Rs.) Costs (Rs.)
Year I 20,000 1,20,000 1,00,000
Year II 25,000 1,40,000 1,15,000
Contribution to sales ratio = Change of Sales
Change of Profit
= Rs.1,40,000 Rs.1,20,000
Rs.25,000 Rs.20,000
-
-
= Rs.20,000
Rs.5,000
= 25%
Fixed cost (Year I) = 25% on Rs.1,20,000 – Profit = Rs.30,000 – Rs.20,000 = Rs.10,000.
Break even point =
Fixedcost
C/Sratio = 25%
Rs.10,000
= Rs.40,000
Other answers mentioned in (a), (b), (d) and (e) are not correct.
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31
65. Answer : (b)
Reason :
Capacity 50% 60%
Units 5,000 6,000
Selling price per unit (Rs.) 100 98
Sales value (Rs.) 5,00,000 5,88,000
Material per unit (Rs.) 50 51
Labour & variable factory overheads(Rs.) 24 24
Variable admn. Overheads (Rs.) 5 5
Variable cost per unit (Rs.) 79 80
Total variable cost (Rs.) 3,95,000 4,80,000
Fixed overhead (Rs.) 55,000 55,000
Total cost (Rs.) 4,50,000 5,35,000
Profit (Rs.) 50,000 53,000
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66. Answer: (e)
Reason: Contribution = Sales – Variable cost. If sales price increase or variable cost decreases,
contribution per unit will be increased. Since, sales price is greater than variable cost, 20%
increase in sales price will help to increase contribution more than 20% decrease in variable
costs (which also helps to increase in contribution).
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67. Answer: (a)
Reason: Total variable costs will change in direct proportion to output. Per unit variable cost is
constant irrespective of volume. If output increases, fixed cost per unit will fall but selling
price will not be increased. Therefore, (a) is correct.
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68. Answer : (e)
Reason : All the statements given in (I), (II), (III) and (IV) are true. Hence, the correct answer is (e)
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69. Answer : (b)
Reason : Breakeven point = Fixed cost ÷ (Selling price – Unit variable cost)
= Rs.5 crore ÷ (Rs.3 – Re.1) = Rs.5 crore ÷ Rs.2 = 2.5 crore units
After inflation, breakeven point = Rs.5 (1.05) ÷ [Rs.3 (1.04) – Re.1 (1.10)]
= Rs.5.25 ÷ (Rs.3.12 – Rs.1.10) = Rs.5.25 ÷ Rs.2.02 = 2.599 or 2.6 crore units
So the breakeven point will increase by 2.6 – 2.5 = 0.1 crore units or 10 lakh units
Percentage increase = 10 lakh ÷ 2.5 crore = 4%.
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70. Answer : (c)
Reason : Total percentage of variable cost = 32.8 + 28.4 + 12.6 + 4.1 + 1.1 = 79%
Contribution to sales ratio = 21%
After reducing 10%, the budgeted sales = Rs.18,50,000 × 90% = Rs.16,65,000
Total fixed cost = Rs.1,89,900 + Rs.58,400 + Rs.66,700 = Rs.3,15,000
Profit of the company = 21% of Rs.16,65,000 – Rs.3,15,000
= Rs.3,49,650 – Rs.3,15,000 = Rs.34,650.
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71. Answer : (c)
Reason : Cost-volume-profit analysis presumes that efficiency and productivity remain unchanged.
In other words, this analysis presents a static picture of a dynamic situation. Therefore,
option (c) is not correct. Other options given in (a), (b), (d) and (e) are correct.
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