Management Accounting-I (MB161): July 2006

Management Accounting-I (MB161): July 2006

· Answer all questions.
· Marks are indicated against each question.
1. Which of the following costs is a semi variable cost?
(a) Depreciation on machinery (b) Factory rent
(c) Supplies and other indirect materials (d) Maintenance of machinery
(e) Advertising.
(1 mark)
< Answer >
2. The principal disadvantage of using the physical quantity method of allocating joint costs is that
(a) Costs assigned to inventories may have no relationship to their value
(b) Physical quantities may be difficult to measure
(c) Additional processing costs affect the allocation base
(d) Joint cost, by definition, should not be separated on a unit basis
(e) By-products affect the allocation base.
(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. The total of costs incurred in the operation of a business undertaking other than the cost of
manufacturing and production is
(a) Out-of-pocket cost (b) Programmed cost
(c) Conversion cost (d) Commercial cost (e) Imputed cost.
(1 mark)
< Answer >
5. A manager of a company wants to control and reduce, if possible, the company's production costs. He
must determine how production costs are related to and affected by various business activities. The
manager needs to understand
(a) Cost behaviors (b) Relevant ranges
(c) Fixed costs (d) Variable costs (e) Total costs.
(1 mark)
< Answer >
2
6. XYZ 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 6,00,000
Machine maintenance 8,00,000
Quality control 4,00,000
Material handling during set-ups 18,50,000
Product engineering 30,00,000
Rent of manufacturing space 20,00,000
Security 9,50,000
Miscellaneous production expense 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. When manufacturing expenses are recovered on a proper basis, the journal entry to be passed is
(a) Debit Work-in -process account and credit General ledger adjustment account
(b) Debit Manufacturing overhead control account and credit stores ledger control account, wages
control account and general ledger adjustment account
(c) Debit Manufacturing overhead control account and credit work-in-process account
(d) Debit General ledger adjustment account and credit Work-in-process account
(e) Debit Work-in -process account and credit Manufacturing overhead control account.
(1 mark)
< Answer >
8. PQR Company’s budgeted overhead amounts to Rs.2,40,000 based on an output of 250 units of A, 300
units of B and 600 units of C. Direct labor costs of A, B and C per unit amount to Rs.60, Rs.50 and Rs.30
respectively. Overhead is applied based on budgeted overhead rates using labor cost as cost driver. If
actual overhead amounts to Rs.2,55,000 for the production of 300, 400 and 550 units of A, B and C
respectively, the under or over applied overhead amounts to
(a) Rs.15,000 under applied (b) Rs.15,000 over applied
(c) Rs.17,500 under applied (d) Rs.17,500 over applied
(e) Rs.32,500 over applied.
(2 marks)
< Answer >
9. Which of the following is a cost-behavior oriented approach to product costing?
(a) Absorption costing (b) Marginal costing
(c) Process costing (d) Uniform costing
(e) Job order costing.
(1 mark)
< Answer >
10.Which of the following assumptions in respect of practical capacity as plant capacity concept is true?
(a) It assumes all personnel and equipment will operate at the maximum efficiency and the total plant
capacity will be used
(b) It does not consider idle time caused by inadequate sales demand
(c) It includes consideration of idle time caused by both limited sales orders and human & equipment
inefficiencies
(d) It is the production volume that is always less than the actual use of capacity
(e) It is the production volume that is necessary to meet sales demand for the next year.
(1 mark)
< Answer >
3
11.Which of the following is/are false regarding historical costs?
I. Historical costs are costs incurred in the dis tant past and hence cannot be verified.
II. They are mostly objective as they relate to happenings already occurred.
III. These costs are incurred and then the validity of costs incurred are ascertained.
(a) Only (I) above (b) Only (II) above
(c) Both (II) and (III) above (d) Both (I) and (II) above
(e) Both (I) and (III) above.
(1 mark)
< Answer >
12.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 >
13.At 60% capacity utilization, the overhead recovery rate is Rs.15 per unit. At 75% capacity level, the rate
gets reduced to Rs.13 per unit. If the production attains 90% of the capacity utilization, the recovery rate
would be
(a) Rs.12.60 (b) Rs.12.46 (c) Rs.14.16 (d) Rs.11.67 (e) Rs.14.00.
(2 marks)
< Answer >
14.Ashok Ltd. had the following inventories at the beginning and end of the month of June 2006.
Particulars June 1, 2006 (Rs.) June 30, 2006 (Rs.)
Finished goods 1,25,000 1,17,000
Work-in-process 2,35,000 2,51,000
Direct materials 1,41,000 1,35,000
The following additional manufacturing data were available for the month of June 2006:
Particulars (Rs.)
Direct materials purchased 2,07,000
Purchase returns and allowances 2,000
Transportation 4,000
Direct labor 3,50,000
Actual factory overhead 2,10,000
The company applies factory overhead at a rate of 70% of direct labor cost, and any over applied or
under applied factory overhead is deferred until the end of the year 2006-07. The manufacturing cost of
the company for the month of June 2006 was
(a) Rs.7,75,000 (b) Rs.8,10,000 (c) Rs.6,65,000
(d) Rs.2,45,000 (e) Rs.6,83,000.
(2 marks)
< Answer >
15.Rose Ltd. has three jobs outstanding. The company uses normal costing and the overhead rate which is
based on machine hours amounts to Rs.70 per machine hour based on a forecast of 5,000 hours. Job 1
with a direct cost of Rs.85,500 has used 1,580 machine hours. Job 2 with a direct cost of Rs.74,700 has
used 2,100 machine hours. Job 3 with a direct cost of Rs.81,000 has used 875 hours. Actual overhead
amounted to Rs.3,75,000. 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.18,876 (b) Credited by Rs.18,876
(c) Debited by Rs.22,227 (d) Credited by Rs.11,854
(e) Debited by Rs.11,854.
(2 marks)
< Answer >
4
16.Operation costing is appropriate for products that are
(a) Homogenous and a result of continuous process
(b) Heterogeneous and a result of discontinuous process
(c) Produced in batches or production runs
(d) Related to automobile repair shop
(e) Related to food and beverage industries.
(1 mark)
< Answer >
17.The cost data pertaining to product “PK” of Siraj Ltd. are as follows:
Maximum capacity 20,000 units
Normal capacity 18,000 units
Decrease in inventory 1,880 units
Variable cost per unit Rs.15
Selling price per unit Rs.40
Fixed manufacturing overhead costs Rs.3,06,000
If the profit under Absorption costing method is Rs.1,01,000, the profit under Marginal Costing Method
would be
(a) Rs.1,32,960 (b) Rs.72,236 (c) Rs.1,29,764
(d) Rs.69,040 (e) Rs.73,340.
(1 mark)
< Answer >
18.Swati 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.65,000; Heat and light – Rs.40,000; Supervision – Rs.1,50,000
v. Depreciation area – 70,000 square metres; Machine area – 2,500 square metres
vi. Number of machines – 25
vii. Annual cost of reserve equipment for the machine – Rs.3,000
viii. Hours runs on production – 2,000
ix. Hours for setting and adjusting – 150
x. Power cost – Re.0.50 per hour of running time
xi. Labor :
* When setting and adjusting – full time attention
* When machine is producing – one worker can look after 2 machines
xii. Labor rate is Rs.7 per hour.
The comprehensive machine hour rate of the company is
(a) Rs.24.46 (b) Rs.22.25 (c) Rs.20.80 (d) Rs.22.00 (e) Rs.24.39.
(2 marks)
< Answer >
19.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 >
20.Which of the following statements is false?
(a) In process costing, cost is accumulated according to processes or departments
(b) In job costing, the basis of cost accumulation is job order or batch size
(c) In process costing, cost is accumulated on time basis
(d) In job costing, cost is computed at the end of the cost period
(e) In process costing, items of prime cost cannot be traced with a particular order due to continuous
production.
(1 mark)
< Answer >
5
21.Which of the following points is not to be considered for preparation of statement of equivalent
production?
(a) Equivalent units are calculated for normal loss because it is treated as good production in the
process
(b) Work-in-progress should be stated in equivalent units by applying the percentage of work required
to complete the unfinished work of the previous period
(c) An estimate is made of the percentage of completion of work-in-progress
(d) Unfinished units representing opening stock do not bear the cost transferred to the process with
newly introduced units
(e) Units representing abnormal loss and abnormal gain should be treated like units completed and
transferred to next process.
(1 mark)
< Answer >
22.If the proration approach to under or over absorbed overhead is not used, which of the following
accounts in which the under or over absorbed overhead will be allocated?
(a) Direct material inventory account
(b) Cost of goods sold account
(c) Finished goods inventory account
(d) Work-in-process inventory account
(e) Spoilage account.
(1 mark)
< Answer >
23.Multiple or departmental overhead rates are considered preferable to a single or plant-wide overhead rate
when
(a) Various products are manufactured that do not pass through the same departments or use the same
manufacturing techniques
(b) Individual cost drivers cannot accurately be determined with respect to cause and effect
relationships
(c) Manufacturing is limited to a single product flowing through identical departments in a fixed
sequence
(d) Cost drivers, such as direct labor, are the same over all processes
(e) The single or plant-wide rate is related to several identified cost drivers.
(1 mark)
< Answer >
24.Saheeb 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 10 (10) 20,000 20,000 200 13,50,000
B 14 (8) 18,000 4,000 400 9,50,000
C 20 (6) 22,000 6,000 1,000 7,50,000
D 30(4) 15,000 10,000 3,000 3,75,000
Total 74 75,000 40,000 4,600 34,25,000
* The number of full time employees are 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 you were the manager of Department A, which cost driver is likely to be used to allocate the
Rs.2,00,100 of supplies used?
(a) Number of employees (b) Number of units sold
(c) Sales rupees (d) Number of departments
(e) Number of part time employees.
(1 mark)
< Answer >
6
25.In producing toy car, ST Ltd. uses 2 hours of direct labor per unit. The labour rate is Rs.22.50 per hour.
The material cost per unit is Rs.117. The company incurs the following overhead costs:
Material Handling Rs.38,000
Assembly Supervisor Rs.44,000
Purchasing Rs.26,000
The company produces 6,000 units per year. If it is sold only 4,500 units, what is the value of ending
inventory?
(a) Rs.1,90,000 (b) Rs.2,25,000 (c) Rs.3,00,000
(d) Rs.2,85,000 (e) Rs.2,70,000.
(2 marks)
< Answer >
26.The costs which reflect the policies of the top management and result in periodic appropriation are
known as
(a) Notional costs (b) Relevant costs
(c) Programmed costs (d) Committed costs
(e) Discretionary costs.
(1 mark)
< Answer >
27.Because of shortage of labor and materials, a department in a factory is working at 60% 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, which 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) 67.5% (b) 90.8% (c) 74.0% (d) 72.0% (e) 63.5%.
(1 mark)
< Answer >
28.Which of the following costs is likely to be controllable by the head of the production department?
(a) Price paid for material (b) Rent for floor space
(c) Raw materials used (d) Insurance on machinery
(e) Share of cost of Industrial Relations department.
(1 mark)
< Answer >
29.A company has three factories situated in North, East and South with its head office in Hyderabad. The
management has received the following summary report on the operations of each factory for a period:
Region
Actual sales
(Rs.)
Over/(under)
budgeted
sales
(Rs.)
Actual
profit
(Rs.)
Over/(under)
budgeted profit
(Rs.)
North 1,200 (400) 135 (200)
East 1,540 150 210 60
South 1,100 (200) 330 (110)
If the variable cost ratio, fixed costs and sales mixes are as per budget, the break-even sales in rupees of
the company as a whole is
(a) Rs.2,418 (b) Rs.1,500 (c) Rs.2,586 (d) Rs.1,750 (e) Rs.1,600.
(2 marks)
< Answer >
7
30.Cleft Ltd. had 8,000 units of work-in -process inventory in department A on June 1, 2006. These units
were 60% complete as to conversion costs. Direct materials are added at the beginning of the process.
During the month of June 2006, 45,000 units were started and 42,000 units completed. The company had
11,000 units of work-in-process inventory on 30th June 2006. These units were 50% complete as to
conversion costs.
The equivalent production unit of conversion (under weighted average method) exceeds the equivalent
production of conversion (under FIFO method) by
(a) 8,000 units (b) 5,600 units (c) 3,200 units
(d) 4,800 units (e) 5,000 units.
(2 marks)
< Answer >
31.A certain chemical process yields 80% of material introduced as main product, 15% as by-product and
5% being lost. In the process one unit of main product requires double the material required for one unit
of by-product. Further one unit of main product needs 1.5 times the time needed for one unit of byproduct.
Overheads are absorbed in the ratio of 3:2.
During a week, 1,000 units of raw material at a cost of Rs.14,000 were introduced. Total labor cost was
Rs.5,400. Overheads came to Rs.3,000.
The cost of main product per unit is
(a) Rs.35.50 (b) Rs.28.40 (c) Rs.24.25 (d) Rs.17.00 (e) Rs.20.00.
(2 marks)
< Answer >
32.Which of the following statements is false?
(a) The most important criterion for distinguishing between scrap, by-product and joint products is
relative sales value of the products
(b) By-products may be sold in their original form i.e., without further processing
(c) The stage of production at which separate products are identified is known as split off point
(d) The allocation of joint costs to joint product and by-products affects the overall profit or loss
account
(e) Under the other income method of accounting of by-products, the sale value of the by-product is
credited to profit and loss account.
(1 mark)
< Answer >
33.J.B.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:
Production for the period:
Joint
Product
Number of
units
Selling
price
A 800 Rs.16
B 500 Rs.7
C 450 Rs.6
D 250 Rs.12
The company has estimated a profit of 10% of sales value for a period. The other estimated costs 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.16,000 (b) Rs.13,200 (c) Rs.11,600
(d) Rs.15,000 (e) Rs.14,000.
(2 marks)
< Answer >
8
34.Vishnu Chemicals Ltd. has two factories – X and Y with similar plant and machinery for 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:
Factory X Y
Capacity in operation 70% 100%
Turnover 210 lakh 300 lakh
Variable cost 105 lakh 220 lakh
Fixed cost 25 lakh 40 lakh
If the merged company wants to earn a profit of Rs.65 lakh, the turnover should be
(a) Rs.480.77 lakh (b) Rs.525.00 lakh
(c) Rs.339.16 lakh (d) Rs.250.00 lakh (e) Rs.500.00 lakh.
(2 marks)
< Answer >
35.The following statements are true except
(a) Managers of all companies analyze costs to control material, labor and overhead
(b) Managers of all companies analyze cost to properly value inventory
(c) Managers of all companies need to improve quality
(d) Managers of all companies need to improve productivity
(e) Managers of all companies need to improve efficiency.
(1 mark)
< Answer >
36.For absorption of manufacturing overhead costs, which of the following statements is false regarding
disadvantages under direct material cost method?
(a) This method is unstable and inaccurate as there exists no logical relationship between items of
manufacturing overhead and material cost
(b) Time factor is completely ignored in this method
(c) No distinction is made between fixed and variable expenses
(d) This method distinguishes the production of workers and that of machine
(e) This method is equitable, as a raw material used in production may not pass through all processes.
(1 mark)
< Answer >
37.Vijay Ltd. has furnished the following information pertaining to its 2 products – A and B:
Product A has a contribution to sales ratio of 0.50 and Product B has a contribution to sales ratio of 0.40.
At present 100 units of each product are sold. If the total sales units remain at the present level but an
extra 20 units of B are substituted for 20 units of A, which of the following is true of the overall
position?
(a) Contribution to sales ratio remains unchanged
(b) Contribution to sales ratio rises form 0.45 to 0.46
(c) Contribution to sales ratio rises from 0.45 to 0.48
(d) Contribution to sales ratio falls from 0.45 to 0.44
(e) Contribution to sales ratio rises from 0.45 to 0.50.
(2 marks)
< Answer >
38.Which of the following expenses is related to the selling and distribution function?
(a) Rent of corporate office
(b) Depreciation on office furniture
(c) Electricity expenses in factory
(d) Depreciation on goods delivery van
(e) Charitable and political donations.
(1 mark)
< Answer >
39.Which of the following is considered as committed cost?
(a) Insurance premium (b) Development expenses
(c) Research costs (d) Marketing expenses
(e) Direct expenses.
(1 mark)
< Answer >
9
40.In job costing, the basic document to accumulate and ascertain the cost of each order is the
(a) Purchase order (b) Requisition sheet (c) Job cost sheet
(d) Invoice (e) Standing order number.
(1 mark)
< Answer >
41.If the production of a company reaches break-even point, operating income will increase by the
(a) Fixed costs per unit for each additional unit sold
(b) Variable costs per unit for each additional unit sold
(c) Net margin per unit for each additional unit sold
(d) Gross margin per unit for each additional unit sold
(e) Contribution margin per unit for each additional unit sold.
(1 mark)
< Answer >
42.
Profits under absorption costing system and marginal costing system will be same for a period, if
(a) Production is greater than sales
(b) Production is less than sales
(c) Opening inventory is greater than closing inventory
(d) Opening inventory is less than closing inventory
(e) There is no opening and closing inventory.
(1 mark)
< Answer >
43.XY Ltd., manufacturers of engineering components, has provided the following budgeted information
for the year 2006-07:
Department Machine
hours
Overhead
Rs.
Machine hours
required for Job A
Fabrication 12,500 1,50,000 30
Machining 12,000 1,80,000 40
Assembly 15,000 1,35,000 70
Finishing 12,000 90,000 10
The overheads to be charged to Job A under blanket overhead rate and the departmental overhead rate
are
(a) Rs.2,017 and Rs.1,909 respectively
(b) Rs.1,665 and Rs.2,056 respectively
(c) Rs.1,617 and Rs.2,056 respectively
(d) Rs.1,617 and Rs.1,665 respectively
(e) Rs.2,056 and Rs.1,665 respectively.
(2 marks)
< Answer >
44.Sheera Ltd. is manufacturing a single product having a manufacturing capacity of 6,000 units per week
of 48 hours. The output data vis -à-vis different elements of cost for three consecutive weeks are given
below:
Units
Produced
Direct
Material
Direct
Labour
Total factory
overheads
(variable & Fixed )
Rs. Rs. Rs.
2,400 4,800 6,000 37,000
2,800 5,600 7,000 39,000
3,600 7,200 9,000 43,000
Assuming a profit of 25% on selling price, the selling price per unit for the activity level of 4,000 units,
is
(a) Rs.18.25 (b) Rs.21.00 (c) Rs.18.75 (d) Rs.19.25 (e) Rs.17.18.
(2 marks)
< Answer >
10
45.Beta Chemicals Ltd. manufactures chemical ‘Beta’ and in the course of its manufacture, by-product
‘Gamma’ is produced, which after further processing has a commercial value. The company has
furnished the following summarized cost data pertaining to main product ‘Beta’ and by-product
‘Gamma’ for the month of June 2006:
Particulars Pre-separation Post-separation costs
costs Beta Gamma
Materials (Rs.) 92,000 8,000 3,500
Labor (Rs.) 66,000 4,500 2,000
Overheads (Rs.) 42,000 2,800 1,500
Selling price per kg. (Rs.) 120 24
Estimated profit per unit of Gamma (Rs.) 6
No. of units produced 2,200 950
The company uses reverse cost method of accounting for by-products whereby the sales value of byproducts
after deduction of the estimated profit, post-separation costs and selling & distribution expenses
relating to by-product is credited to the pre-separation cost account.
The profit of main product was
(a) Rs.74,000 (b) Rs.38,200 (c) Rs.26,700
(d) Rs.58,800 (e) Rs.10,700.
(2 marks)
< Answer >
46.General Chemicals Ltd. runs its boiler on furnace oil obtained from Indian Oil and Bharat Petroleum,
whose depots are situated at a distance of 15 km and 10 km from the factory site of the company.
Transportation of furnace oil is made by the company’s own tank lorries of 5 tons 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.2.50 and fixed charges per
hour of operation is Rs.15.
The cost per ton-km from Indian Oil Petroleum is
(a) Rs.1.63 (b) Rs.1.47 (c) Rs.1.51 (d) Rs.1.30 (e) Rs.1.71.
(2 marks)
< Answer >
47.Krishna Ltd. manufactures a product, which involves two processes, viz., pressing and polishing. For the
month of June 2006, the following information is available:
Particulars Pressing Polishing
Units introduced 1,200 1,000
Units completed 1,000 500
Material costs (Rs.) 96,000 8,800
Conversion costs (Rs.) 2,88,000 52,000
For incomplete units in processes, charge material costs in both the processes at 100% but conversion
costs at 75% in the pressing process and 60% in the polishing process. If the company desires to earn
20% profit on sales price, the selling price per unit of finished product was
(a) Rs.330.43 (b) Rs.404.23 (c) Rs.505.28
(d) Rs.553.69 (e) Rs.250.43.
(2 marks)
< Answer >
48.The cost-volume-profit relationship of a company is described by the equation y = Rs.5,60,000 + 0.65x, in
which x represents sales revenue and y is the total cost at the sales volume represented by x. If the company
desires to earn a profit of 15% on sales, the required sales will be
(a) Rs.16,00,000 (b) Rs.28,00,000 (c) Rs.37,33,334
(d) Rs.22,40,000 (e) Rs.11,20,000.
(2 marks)
< Answer >
11
49.Rock-a-Way Gravel Ltd. purchases raw gravel in 20-ton lots from which it manufactures 4 grades of
gravel, which consists of its sales mix: 6 ton of Decorative Stone, 9 ton of Road Stone, 3 ton of Pea
Gravel and 2 ton of Construction Gravel. The contribution margin ratio on each product is, respectively,
50%, 40%, 60% and 75%. What is the overall contribution margin ratio for every 20 ton of gravel sold?
(a) 58.50% (b) 51.75% (c) 75.00% (d) Greater than 75% (e) 49.5%.
(2 marks)
< Answer >
50.Which of the following is true regarding contract costing?
(a) Both work certified and work uncertified are valued at cost price
(b) Both work certified and work uncertified are valued at market price
(c) Both work certified and work uncertified are valued at contract price
(d) Work certified is valued at contract price whereas work uncertified is valued at cost price
(e) Work certified is valued at cost price whereas work uncertified is valued at market price.
(1 mark)
< Answer >
51.A company sells its product at Rs.20 per unit. In a period, if it produces and sells 8,000 units, it incurs a
loss of Rs.8 per unit. If the volume is raised to 24,000 units, it earns a profit of Rs.5 per unit. The breakeven
of the company in terms of rupees as well as units are
(a) Rs.1,62,000 and 9,000 units respectively
(b) Rs.1,72,800 and 9,600 units respectively
(c) Rs.2,71,320 and 13,566 units respectively
(d) Rs.2,59,200 and 28,800 units respectively
(e) Rs.2,59,200 and 14,400 units respectively.
(2 marks)
< Answer >
52.Consider the following data of a company
Particulars Budgeted Actual
Fixed overhead costs Rs.1,10,000 Rs.1,15,000
Production 10,000 units 11,000 units
The under or over absorption of fixed overhead of the company is
(a) Rs.11,000 (over) (b) Rs.6,000 (under)
(c) Rs .6,000 (over) (d) Rs.5,000 (under)
(e) Rs.5,000 (over).
(1 mark)
< Answer >
53.Kappa Ltd. manufactures and sells three products – X, Y and Z. All the products are passed through a
machining process, the capacity of which is limited to 20,000 hours per annum, both by equipment
design and government regulation. The following information pertaining to the three products is
available:
Particulars Product X Product Y Product Z
Selling price per unit (Rs.) 3,400 3,000 4,000
Variable cost per unit (Rs.) 2,200 1,350 2,200
Machine hours per unit 4 3 2
Maximum possible sales unit 10,000 2,000 1,000
The fixed cost of the company for the year is Rs.52,25,000. The maximum profit of the company from
the best mix of the three products is
(a) Rs.1,08,00,000 (b) Rs.1,60,25,500
(c) Rs.55,74,500 (d) Rs.34,75,000 (e) Rs.2,20,00,000.
(2 marks)
< Answer >
12
54.Which of the following statements is/are true?
I. Activity-based costing (ABC) entails developing cost pools and determining the most appropriate
cost driver with which to apply the costs to production.
II. ABC may lead to adjustments in the selling prices of products.
III. Under ABC, the Manufacturing Overhead account will usually have an under applied balance at the
end of the accounting period.
(a) Both (I) and (III) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
(1 mark)
< Answer >
55.Which of the following functions can be related to the treasurer of an organization?
(a) Planning and control (b) Tax administration
(c) Protection of assets (d) Credits and collections
(e) Economic appraisal.
(1 mark)
< Answer >
56.Golden Engineering Ltd. manufactures motor engine parts. The factory normally operates 6 days a week
on a single eight-hour shift. During the year 2005-06, it was closed on 15 working days for holidays.
Equipments are idle for 175 hours for cleaning, oiling, etc. If the overhead amounts to Rs.11,350 and is
to be absorbed at a rate per machine hour, what was the overhead absorption rate in the year 2005-06?
(a) Rs.6.74 per hour (b) Rs.6.25 per hour
(c) Rs.5.76 per hour (d) Rs.5.14 per hour (e) Rs.7.00 per hour.
(2 marks)
< Answer >
57.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 1,48,000 15,000 labor hours
P2 1,12,000 10,000 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.11.00 and Rs.13.62 respectively
(b) Rs.11.35 and Rs.10.30 respectively
(c) Rs.11.35 and Rs.10.22 respectively
(d) Rs.10.30 and Rs.11.00 respectively
(e) Rs.10.30 and Rs.13.62 respectively.
(2 marks)
< Answer >
58.Which of the following methods of Costing considers both the variable and fixed costs as part of product
costs?
(a) Direct costing (b) Marginal costing
(c) Absorption costing (d) Standard costing
(e) Uniform costing.
(1 mark)
< Answer >
13
59.Consider the following data of AB Ltd. for the month of June 2006:
Predetermined overhead rate per machine hour Rs.25
Actual overheads Rs.5,65,000
Actual machine hours 22,000 hours
Standard machine hours 20,000 hours
The overhead costs applied by the company were
(a) Rs.5,65,000 (b) Rs.5,50,000 (c) Rs.5,25,000
(d) Rs.5,10,000 (e) Rs.5,00,000.
(1 mark)
< Answer >
60.The current sales price of a company is Rs.90 per unit. Variable costs are expected to increase from
Rs.72 to Rs.75 per unit. Fixed costs of Rs.3,00,000 will not change. How many additional sales units are
required in order to maintain an operating income of Rs.3,60,000?
(a) 8,000 units (b) 8,800 units (c) 10,800 units
(d) 7,333 units (e) 2,800 units.
(1 mark)
< Answer >
61.Asparanzo runs a beverages club. He buys 5 different drinks of 10 cases each and sells the drink in cases
of 5, each case containing one bottle of each type.
Purchase cost per 10 cases Rs.
Cabernet 280.00
Chardonnay 280.00
Merlot 275.00
Bordeaux 325.00
Burgundy 315.00
Selling price per case of 5 200.00
Variable distribution cost per case 7.50
Annual Fixed Expenses
Storage 30,000.00
Wages 15,000.00
What is the break-even point in sales revenue?
(a) Rs.2,50,000 (b) Rs.2,84,210 (c) Rs.1,08,000 (d) Rs.2,00,000 (e) Rs.2,13,500.
(2 marks)
< Answer >
62.Sun Flower Ltd. has furnished the following data of its process account for the month of June 2006:
Particulars Completion of materials Units
Materials introduced - 13,000
Opening WIP 60% 3,000
Closing WIP 50% 4,000
The equivalent completed units of material in the process, under average method, was
(a) 20,000 units (b) 16,000 units (c) 14,000 units
(d) 12,200 units (e) 10,000 units.
(1 mark)
< Answer >
63.When the objectives of the decisions are in conflict, one objective may be specified as the decision
criterion and the other objectives are established as
(a) Secondary criteria (b) Differential criteria
(c) Irrelevant criteria (d) Constraints (e) Opportunity costs.
(1 mark)
< Answer >
14
64.XYZ Ltd. makes 2 products - Dolly and Molly from the same raw material. The selling price and the cost
details of these products are shown below:
Particulars Dolly (Rs.) Molly ( Rs.)
Selling price 20.00 18.00
Direct material (Rs.2 per kg) 6.00 6.00
Direct labour 4.00 3.00
Variable overhead unit 2.00 1.50
12.00 10.50
Contribution per unit 8.00 7.50
The maximum demand for these products are:
Dolly 500 units
Molly Unlimited number of units per week
If materials were limited to 2,000 kg per week, the shadow price (opportunity cost) of these materials
would be
(a) Nil (b) Rs.2.00 per kg (c) Rs.2.67 per kg
(d) Rs.3.40 per kg (e) Rs.2.50 per kg.
(2 marks)
< Answer >
65.A company manufactures a single product with a capacity of 1,50,000 units per annum. The summarised
income statement for the year is as under:
Particulars Rs. Rs.
Sales (1,00,000 units @ Rs.15 per unit) 15,00,000
Cost of sales:
Direct materials 3,50,000
Direct labor 2,20,000
Variable production overhead 80,000
Fixed production overhead 3,00,000
Fixed administrative overhead 1,50,000
Variable selling & distribution overhead 1,00,000
Fixed selling & distribution overhead 1,50,000
Total costs 13,50,000
Profit 1,50,000
The company desires to increase the present level of sales from 1,00,000 units to 1,20,000 units at a price
of Rs.18 per unit. If an expenditure of Rs.2,50,000 is made on advertising, the profit of the company will
be
(a) Rs.2,00,000 (b) Rs.2,60,000 (c) Rs.3,00,000
(d) Rs.4,10,000 (e) Rs.4,80,000.
(2 marks)
< Answer >
15
66.Mathur Ltd. has furnished the following cost data pertaining to various jobs for the year ended March 31,
2006:
Particulars Rs.
Direct material 8,90,000
Direct wages 6,25,000
Profit 5,12,500
Selling & distribution overhead 1,64,000
Administrative overhead 2,46,000
Factory overhead 1,25,000
The company absorbs factory overhead on the basis of direct wages and recovers administrative and
selling & distribution overheads on factory cost. The company received an order for Job No. A-26 and
furnished the following cost data of the job:
Direct material – Rs.32,500
Direct Wages – Rs.23,500
If the s elling & distribution overhead is increased by 4%, the total sales value of Job No. A-26 is
(a) Rs.92,525 (b) Rs.91,275 (c) Rs.95,148 (d) Rs.99,815 (e) Rs.97,879.
(2 marks)
< Answer >
67.Gopi Constructions undertook a contract for construction of a large building. 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 52,00,000
Work certified 38,00,000
Progress payment received 30,00,000
Material issued to site 13,50,000
Planning and estimating costs 1,20,000
Direct wages paid 6,30,000
Plant hire charges 75,800
Head office expenses apportioned 62,700
Direct expenses incurred 23,500
Work not certified 4,21,000
Materials at site 70,000
Accrued wages 48,000
The total of work-in-process to be shown in the balance sheet as on March 31, 2006 was
(a) Rs.2,82,632 (b) Rs.2,79,126 (c) Rs.12,21,000 (d) Rs.7,00,126 (e) Rs.9,41,874.
(2 marks)
< Answer >
68.In allocating factory service department costs to producing departments, which of the following items
would most likely be used as an activity?
(a) Units of product sold
(b) Direct materials usage
(c) Units of electric power consumed
(d) Salary of service department employees
(e) Rent of production departments.
(1 mark)
< Answer >
16
69.Sindhu Ltd. plans to purchase one automatic machine. There are two suppliers of this machine – Mahesh
Ltd. and Mukesh Ltd.
The company has furnished the following data relating to the two machines:
Particulars Machine from Mahesh Machine from Mukesh
Fixed cost (Rs.) 4,50,000 3,80,000
Profit (Rs.) 3,00,000 2,50,000
Capacity of production (Units) 3,000 3,000
The sale price of the product per unit is Rs.400. The sales volume at which the two machines produce
same profit is
(a) 1,100 units (b) 1,250 units (c) 1,364 units
(d) 1,500 units (e) 1,750 units.
(2 marks)
< Answer >
70.Which of the following items would be treated as an indirect cost?
(a) Wood used to make a chair
(b) Metal used for the legs of a chair
(c) Fabric to cover the seat of a chair
(d) Staples to fix the fabric to the seat of a chair
(e) Leather used for making handles of a chair.
(1 mark)
< Answer >
71.Which of the following statements is true?
(a) Opportunity cost is the cost which has already been incurred
(b) Imputed cost is the difference between the total costs of any two alternatives
(c) Product costs are those costs which are identified with the products and included in inventory
values
(d) Sunk costs are costs which are not incurred but are relevant to the decision
(e) Period costs are those costs which are identified with the product or job.
(1 mark)
< Answer >
17
Suggested Answers
Management Accounting-I (MB161): July 2006
1. Answer : (d)
Reason : Depreciation on a machinery and factory rent are fixed costs. Suppliers and other indirect
materials are variable costs and advertising is a discretionary fixed costs. Maintenance of
machinery is a semi -variable costs consisting of planned maintenance that is undertaken
whatever the level of the activity and a variable component that is directly related to the level
of activity. So (d) is correct.
< TOP >
2. Answer : (a)
Reason : Joint costs are most often assigned on the basis of relative sales value or net realizable value.
Basing allocation on physical quantities, such as Kg. Liter, etc. is usually not desirable because
the cost assigned may have no relationship to value. When large items have low selling prices
and small items have high selling prices, the large items might always sell at a loss when
physical quantities are used to allocate joint costs. Therefore, the correct answer is (a).
< 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 statements.
< TOP >
4. Answer : (d)
Reason : The total of costs incurred in the operation of a business undertaking other than the cost of
manufacturing and production is commercial cost
< TOP >
5. Answer : (a)
Reason : The manager wants to control, and reduces if possible, the company's production costs. He
must determine how production costs are related to and affected by various business activities.
The manager needs to understand cost behaviors. A knowledge of cost behavior is useful
because it helps managers forecast (plan) results under different activity levels
< 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 : When manufacturing expenses are recovered on a proper basis, the journal entry is as debit
working process account, credit manufacturing overhead control account. Other options given
on (a), (b), (c), (d) are not correct
Therefore (e) is the answer.
< TOP >
18
8. Answer : (d)
Reason : Overhead absorption rate per rupee labor cost =
Rs.2,40,000 / [(250 x Rs.60) + (300 x Rs.50) + (600 x Rs.30)
= Rs.2,40,000 ¸ Rs. 48,000 = Rs. 5.
Overhead applied:
[(300 x Rs.60) + (400 x 50) + (550 x 30)] x 5
= (Rs.18,000 + Rs. 20,000 + Rs.16,500) x 5
= Rs.54,500 x Rs.5 = Rs.2,72,500
Over applied overhead: Rs.2,72,500 – Rs.2,55,000 = Rs.17,500.
< TOP >
9. Answer : (b)
Reason : Marginal costing or direct costing is a cost behavior oriented approach to product costing. In
this method costs are separated into fixed and variable cost. If volume of production increases,
the total contribution increases and profit is also increased after covering fixed costs. This
approach is not available in other types of costing like absorption costing, process costing, job
order costing and uniform costing. Therefore (b) is correct.
< TOP >
10. Answer : (b)
Reason : Practical capacity is the maximum level at which output is produced efficiently. It includes
consideration of idle time caused by human and equipment inefficiencies. Practical capacity
always exceeds the actual use of capacity. It is not necessary to meet sales demand for the next
year. It does not consider idle time caused by inadequate sales demand. Therefore, option (b) is
correct.
< TOP >
11. Answer : (e)
Reason : Option (a) is false because historical costs can be verified as they are supported by evidence of
their occurrence. Option (c) is also false because these costs are ascertained after being
incurred and not that it is first ascertained how much to be incurred. So, the correct answer is
(e).
< TOP >
12. 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 >
13. Answer : (d)
Reason : Let, at 100% capacity level, units produced = 100
At 60% capacity, the overhead recovery rate = Rs.15 per unit
Therefore, total overhead at 60% = 60 ´ Rs.15 = Rs.900
At 75% capacity, the recovery rate = Rs.13 per unit
Therefore, total overhead at 75% = Rs.13 ´ 75 = Rs.975
Therefore, variable cost =
Rs.975 Rs.900
15
-
=
Rs.75
15 = Rs.5 per unit
Fixed cost = Rs.900 – 60 ´ Rs.5 = Rs.600
At, 90% capacity = Rs.600 + 90 ´ Rs.5
= Rs.600 + Rs.450 = Rs.1,050
Rate = Rs. 1,050 ¸ 90 = Rs. 11.67.
< TOP >
19
14. Answer : (b)
Reason :
Beginning direct materials inventory 1,41,000
Add: Purchases 2,07,000
Less: Purchase returns (2,000)
Add: Transportation 4,000
Total direct materials available 3,50,000
Less: Ending direct materials inventory (1,35,000)
Direct material used 2,15,000
Direct labor 3,50,000
Total prime costs 5,65,000
Manufacturing cost = Rs.5,65,000 + 70% of Rs.3,50,000 (Direct labor)
= Rs.8,10,000.
< TOP >
15. Answer : (c)
Reason : Actual cost – Applied cost
= Rs.3,75,000 - [(1,580 + 2,100 + 875) x Rs.70]
=Rs.3,75,000 – Rs.3,18,850
=Rs.56,150 under applied as compared to actual overhead.
Based on overhead rate of Rs.70 and given the hours consumed by each job, costs will be
(J1: Rs.85,500 +Rs.1,10,600) + (J2: Rs.74,700 + Rs.1,47,000) +
(J3: Rs.81,000 + Rs.61,250) = Rs.1,96,100+ Rs.2,21,700 + Rs.1,42,250
= Rs.5,60,050.
Amount chargeable to J2: (Rs.2,21,700 / Rs.5,60,050) x Rs.56,150 = Rs.22,227 debited to
finished goods.
< TOP >
16. Answer : (a)
Reason : Operation costing is a refined method of process costing. Operation costing is applied where
continuous operations or processes produce identical units of output.
Batch costing is appropriate for products produced in batches, hence option (c) is incorrect.
Where products are heterogeneous and in automobile repair shop, job costing is appropriate,
hence option (b) and (d) are incorrect. If products are related to food and beverage industries
job costing is appropriate. Therefore (a) is correct
< TOP >
17. Answer : (a)
Reason : Fixed cost per unit = Rs.3,06,000 ÷ 18,000 units = Rs.17.
Profit under absorption costing = Rs.1,01,000
Adjustment of fixed manufacturing overhead costs of decreased inventory = 1,880units x
Rs.17 = Rs.31,960
Profit under marginal costing = Rs.1,01,000 + Rs.31,960 = Rs.1,32,960.
< TOP >
20
18. Answer : (a)
Reason : Computation of comprehensive machine hour rate:
Expenses Workings Rs. Rs.
Standing charges:
Rent, heat and light (Rs.1,05,000 / 70,000)
x 2,500
3,750
Supervision Rs.1,50,000 / 25 6,000
Depreciation 10% of Rs.3,00,000 30,000
Reserve equipment cost Rs.3,000 / 25 120
Labor cost during setting
and adjustment
150 hours x Rs.7 1,050
Hourly standing charges Rs.40,920 / 2,000 40,920 20.46
Machine expenses:
Power 0.50
Labor cost Rs.7 / 2 3.50
Comprehensive machine
hour rate
24.46
< TOP >
19. 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.
< TOP >
20. Answer : (d)
Reason : In process costing, cost is accumulated on time basis and according to process or departments.
In this method, prime cost cannot be traced with a particular order due to continuous
production. In job costing, cost is accumulated according to job order or batch size. Job cost is
computed when the job is completed. It does not consider the period of cost. Therefore (d) is
false.
< TOP >
21. Answer : (a)
Reason : Equivalent completed units are not calculated for normal loss because it is shared by good
production in the process. It is not considered as good units. Therefore, option (a) is not the
correct approach in the preparation of statement of equivalent production.
< TOP >
22. Answer : (b)
Reason : If the proration approach to under or over absorbed of overhead is not used, the account to
which the under or over absorbed overhead will be allocated is cost of goods sold. Therefore,
(b) is correct.
< TOP >
23. Answer : (a)
Reason : Multiple rates are appropriate when a process differs substantially among departments or when
products do not go through all departments or all processes. The trend in cost accounting is
towards activity based costing, which divides production into numerous activities and
identifies the cost driver(s) most relevant to each. The result is a more accurate tracing of costs.
Other options are not correct.
< TOP >
24. Answer: (b)
Reason: Department A represents 4.3% of units sold. This would result in the smallest allocation of cost
to this department. Therefore, cost driver would be the number of units sold. Hence (b) is the
correct answer. Other options are not correct.
< TOP >
25. Answer : (e)
Reason : Overhead costs = Rs. 38,000 + Rs. 44,000 + Rs.26,000 = Rs.1,08,000
Cost to be allocated / Allocation base Allocation Rate
Rs.1,08,000 / 12,000 hours Rs.9.00 per hour
Material Cost Rs. 117.00
Labor Cost: 2 hours ´ Rs.22.50 per hour Rs. 45.00
Overhead Cost: 2 hours ´ 9 per hour Rs. 18.00
Total Rs.180.00
Each toy costs Rs.180 x 1500 units = Rs.2,70,000 in ending Inventory.
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21
26. Answer : (c)
Reason : Certain decisions reflect the policies of the top management which results in periodic
appropriation and these costs are referred to as programmed cost.
Imputed costs are costs not actually incurred in some transactions but which are relevant to the
decisions as they pertain to a particular situation.
Relevant costs are those future costs which differ between alternatives. It is defined as the
costs which are affected and changed by a decision.
Committed costs are incurred to maintain the company’s facilities and physical existence, and
over which management has little or no discretion.
Discretionary costs are these costs which are not essential for the decision under consideration
or the accomplishment of management objectives but it is related to management programs,
new researches etc.
< TOP >
27. Answer : (c)
Reason : A department is working at 60% of its normal capacity. 40% is treated as idle capacity. Fixed
cost is obviously incurred for the normal capacity work. This 40% 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 60% of fixed cost plus 100% variable manufacturing overhead by
the budgeted direct labor cost.
Appropriate recovery rate = (60% of Rs.1,00,000 + 100% of Rs.1,25,000) ÷ Rs.2,50,000 =
Rs.1,85,000 ÷ Rs.2,50,000 = 74%
< TOP >
28. Answer : (c)
Reason : If the cost are influenced by the action of a specified member of an undertaking, that is to say,
costs which are partly within the control of manager are called controllable costs. In this case,
the head of the production department will control the raw materials used in production. Cost
of raw-materials used in production is a controllable costs. It is controlled by the production
manager. All other costs are uncontrollable by the production manager.
< TOP >
29. Answer : (a)
Reason : Contribution to sales ratio = Change in profit ¸ Change in sales
North = Rs.200 ¸ Rs.400 = 50%; East = Rs.60 ¸ Rs.150 = 40%;
South = Rs.110 ¸ Rs.200 = 55%;
Fixed cost: North = Rs.1,200 × 50% – Rs.135 = Rs.465;
East = Rs.1,540 × 40% – Rs.210 = Rs.406; South = Rs.1,100 × 55% – Rs.330 = Rs.275;
Total fixed cost = Rs.465 + Rs.406 + Rs.275 = Rs.1,146.
Total sales of 3 region = Rs.3,840; Total profit of 3 region = Rs.675
Therefore, Sales × Contribution to sales ratio = fixed cost + profit
Rs.3,840 × Contribution to sales ratio = Rs.1,146 + Rs.675
Contribution to sales ratio = Rs.1,821 ¸ Rs.3,840 = 0.474 or 47.4%
Break-even sales = Rs.1,146 ¸ 47.4% = Rs.2,418.
< TOP >
30. Answer : (d)
Reason : Weighted Average Method:
Input = 8,000 units + 45,000 units = 53,000 units;
Output = 42,000 units + 11,000 units = 53,000 units;
Equivalent production units of conversion =
100% of 42,000 + 50% of 11,000 = 42,000 + 5,500 = 47,500 units;
FIFO Method:
Input = 8,000 units + 45,000 units = 53,000 units;
Out put = 8,000 units + 34,000 units + 11,000 units = 53,000 units;
Equivalent production units of conversion =
40% of 8,000 units + 100% of 34,000 units + 50% of 11,000 =
= 3,200 + 34,000 + 5,500 = 42,700 units.
Excess equivalent units of production of conversion =
47,500 units – 42,700 units = 4,800 units.
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22
31. Answer : (c)
Reason : Break up of the total units is
Main product 80% of 1,000 = 800; By-product 15% of 1,000 = 150; Loss = 5% of 1,000 = 50 ;
Statement showing the ascertainment of cost
STATEMENT SHOWING THE ASCERTAINMENT OF COST
Main Product By product
Total
cost
Cost
per unit
Total cost Cost
Particulars Ratio per unit
Total
Cost
Rs. Rs. Rs. Rs. Rs.
Materials 32:3 14,000 12,800 16.00 1200 8.00
Labour 8:1 5,400 4,800 6.00 600 4.00
Overheads 3:2 3,000 1,800 2.25 1,200 8.00
22,400 19,400 24.25 3,000 20.00
Material ratio between the main product and by-product
800 × 2 = 1,600 ; 150 × 1 = 150; Ratio is 1600:150 = 32:3
Labor ratio between the main product and by-product
800 × 3 = 2,400 ; 150 × 2 = 300; Ratio is 2400:300 = 8:1
< TOP >
32. Answer : (d)
Reason : There is no affect in the total profit and loss account if joint costs are allocated to joint
products as well as by-product. It affects the individual profits or loss of joint or by-products
but not to the overall profit of the firm.
< TOP >
33. Answer : (c)
Reason :
Joint products No. of
units
S.P.
per unit
Rs.
Sales
value
Rs.
A 800 16 12,800
B 500 7 3,500
C 450 6 2,700
D 250 12 3,000
Total sales value 22,000
Less: Budgeted profit (10%) 2,200
Total joint costs 19,800
Less: Other costs: Carriage inwards 1,000
Manufacturing overhead 2,000
Administration o verhead 2,200
Direct wages 3,000 8,200
Maximum price to be paid for R.M. 11,600
< TOP >
34. Answer : (c)
Reason : Statement Showing the Cost and Profit Situation of Factories X and Y
(Individually and Integrated)
Particulars
Factory X
@70%
capacity
Factor X
@100%
capacity
Factory Y
@100%
capacity
Combined
@100%
capacity
Turnover 210 300 300 600
Variable cost 105 150 220 370
Contribution 105 150 80 230
Fixed cost 25 25 40 65
Profit 80 125 40 165
P/V ratio 50% 50% 26.67% 38.33%
Total contribution required = Profit desired + Fixed cost
= Rs.65 + Rs.65 = Rs.130 lakh
Total turnover required = Rs.130 ÷ 0.38 = Rs.339.16 lakh.
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35. Answer : (b)
Reason : Service companies do not have Inventory. So Managers of service companies do not analyze
cost to properly value inventory. Therefore, option (b) is not correct.
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23
36. Answer : (d)
Reason : This method does not differentiate between the production of workers and that of machine.
Therefore, (d) is false with respect to the disadvantages under direct material cost method for
absorption of manufacturing overhead. Other options are correct regarding the disadvantages
under direct material cost method for overhead absorption.
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37. Answer : (b)
Reason : Let the sale price of both the products is Re.1.
Total contribution of both the products =
100 units ´ 0.50 ´ Re.1 + 100 units ´ 0.40 ´ Re.1 = Rs.90.
Contribution to sales ratio = Rs.90 ÷ (Rs.100 + Rs.100) = 0.45
If 20 units of B are substituted for 20 units of A, total contribution =
120 units ´ 0.50 ´ Re.1 + 80 units ´ 0.40 ´ Re.1 = Rs.92.
Contribution to sales ratio = Rs.92 ÷ Rs.200 = 0.46.
Contribution to sales ratio rises from 0.45 to 0.46.
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38. Answer : (d)
Reason : Rent of corporate office, depreciation on office furniture, charitable and political donations are
related to administrative function. Electricity expenses in factory is related to manufacturing
function. Depreciation on goods delivery van is related to selling and distribution function.
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39. Answer : (a)
Reason : Committed cost is the cost which results from the decisions of the management in the prior
period and is not subject to the management control in the present on a short-run basis, but
discretionary costs are not essential for the decision under consideration or accomplishment of
management objectives. Research costs, development expenses and marketing costs are the
examples of discretionary cost. Insurance premium is an example of committed cost.
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40. Answer : (c)
Reason : Job cost sheet is a basic document from which cost of job can be ascertained and calculated.
Purchase order is a document giving purchase order to supplier. Requisition sheet is used for
requirement of materials, stationery etc. Invoice document is required at the time of purchase
or sale of goods. Standing order number is used for collection and classification of overhead
costs.
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41. Answer : (e)
Reason : At the breakeven point, total revenue equals the fixed cost plus the variable cost. Beyond the
BEP each unit sale will increase operating income by the unit contribution margin because
fixed costs have been recovered already.
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42. Answer : (e)
Reason : The net profits under the marginal costing system and absorption costing system are equal if
there is no opening stock and closing stock, or there is no change in opening stock and closing
stock, i.e. when production is equal to sales.
If production is not equal to sales i.e. changes occur in opening stock and closing stock, the net
profits under the two systems will differ.
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24
43. Answer: (d)
Reason: Statement showing computation of departmental overhead rate:
Department Overhead
Rs.
Machine
hours
Machine hour
Rate (2)/(3)
(1) (2) (3) (4)
Fabrication 1,50,000 12,500 12
Machining 1,80,000 12,000 15
Assembly 1,35,000 15,000 9
Finishing 90,000 12,000 7.50
Total 5,55,000 51,500
Blanket overhead absorption rate = Rs.5,55,000 ÷51,500 machine hours = Rs.10.78.
Computation of overhead to be charged to Job A (basing on blanket overhead rate)
Total machine hours to be used = 30+40+70+10 = 150 machine hours
Overhead to be absorbed to Job A = 150 M.H × Rs.10.78 = Rs.1,617..
Computation of overhead to be charged to Job A (basing on departmental overhead rate)
Department Machine hour
Required
Departmental
overhead
absorption
rates (Rs.)
Overhead to be
Absorbed
Rs.
Fabrication 30 12.00 360.00
Machining 40 15.00 600.00
Assembly 70 9.00 630.00
Finishing 10 7.50 75.00
Overhead to be charged to Job A 1,665.00
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44. Answer: (b)
Reason: Variable Overheads =
Changeinfactoryoverheads
Changeinproductionlevel
=
39,000 37,000
Rs.5perunit
2,800 2,400
-
=
-
Overheads at 2,400 level = 2,400 ´ Variable OH + Fixed OH = 37,000
2,400 ´ 5 + Fixed OH = 37,000
Fixed Overhead = 37,000 – 12,000 = 25,000
Computation of selling price at 4,000 units level
Direct Materials x (Rs.4,800 / 2,400 = Rs.2 / unit) 8,000
Direct Labor = Rs.6,000 / 2,400 = Rs. 2.50 / unit 10,000
Variable overheads Rs. 5/units Rs. 20,000
Fixed factory cost Rs. 25,000
Total Rs. 63,000
Profit (25% of S.P = 33
1
3 % of cost)
Rs. 21,000
Total selling price Rs84,000
Selling price per unit 84,000 / 4,000 Rs.21.00
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25
45. Answer : (d)
Reason :
Joint Cost to by-product ‘Gamma’ Rs.
Sales revenue (950 ´ Rs.24) 22,800
Less: Profit (950 ´ Rs.6) 5,700
17,100
Less: Post Separation Cost (Rs.3,500 + Rs.2,000 + Rs.1,500) 7,000
Selling & distribution cost Nil
Cost of Production at split-off point 10,100
Particulars Rs.
Total Joint Cost : (Rs.92,000 + Rs.66,000 + Rs.42,000) 2,00,000
Less: Joint Cost to Gamma credited 10,100
Joint Cost to Beta 1,89,900
Sale value of Gamma (2,200 ´ Rs.120) 2,64,000
Less: Pre -separation cost 1,89,900
74,100
Less: Post separation cost (Rs.8,000 + Rs.4,500 + Rs.2,800) 15,300
Profit 58,800
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46. Answer: (b)
Particulars Indian Oil Bharat
Petroleum
Distance (Depots to factory – full load) 15 km 10 km
Distance covered per trip 30 km 20 km
Running time @ 40 km p.h. 45 minutes 30 minutes
Filling-in time 50 minutes 45 minutes
Emptying time 45 minutes 45 minutes
Total time per trip 140 minutes 120 minutes
Details of costs:
Variable operating charges @ Rs.2.50
Indian Oil(30 km x Rs.2.50)
Bharat Petr. (20 km x Rs.2.50)
Rs.75.00 Rs.50.00
Fixed charges @ Rs.15 per hour
Indian Oil (140mint.x Rs.15/ 60mint)
Bharat Petroleum
(120 mint. x Rs.15 / 60 mint.)
Rs.35.00 Rs.30.00
Total cost per trip Rs. 110.00 Rs.80.00
Ton-km (full load)
Indian Oil (5 tons x 15 km)
Bharat Petroleum (5 tons x 10 km)
75 ton-km 50 ton-km
Cost per ton-km (Total cost per trip / Ton-km) Rs.1.47 Rs.1.60
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26
47. Answer : (c)
Reason :
Statement of equivalent production
Output Units Materials
Qty.
% Conversion
Qty.
%
Pressing:
Units completed
Work-in-progress
1,000
200 1,000
200
100
100
1,000
150
100
75
Total 1,200 1,200 1,150
Polishing:
Units completed
Work-in-progress
500
500
500
500
100
100
500
300
100
60
Total 1,000 1,000 800
Statement of cost:
Particulars
Total cost
(Rs.)
Eq.
Units
Cost
per units
(Rs.)
Pressing:
Material cost
Conversion cost
96,000
2,88,000
1,200
1,150
80.00
250.43
Total 330.43
Polishing:
Cost tranf. From
pressing
(1,000 x Rs.330.43)
Material cost
Conversion cost
3,30,430
8,800
52,000
1,000
1,000
800
330.43
8.80
65.00
Total 404.23
Profit = 20% on selling price = 25% on cost
Selling price = Rs.404.23 x 1.25 = Rs.505.28.
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48. Answer : (b)
Reason : Variable cost = 65%, therefore, contribution to sales ratio = 35%
Company’s target profit 15% in sales, therefore, revised contribution which covers only fixed
cost = 35% - 15% = 20%.
Required sales = Fixed cost / Revised contribution = Rs.5,60,000 / 20% = Rs.28,00,000
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49. Answer : (e)
Reason : The average contribution margin per mix=
Total of each product’s contribution margin ration × its relative
percentage of sales to the total sales of the mix
= (50% × 30%) + (40% × 45%) + (60% × 15%) + (75% ×
10%)
= 15% + 18% + 9% + 7.5%
= 49.5%.
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50. Answer : (d)
Reason : In contract costing, work certified is valued at contract price and work uncertified is valued at
cost price. Both are not valued at cost price, market price or contract price. Therefore (d) is
true.
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27
51. Answer : (c)
Reason : Sale – Variable cost – Fixed cost = Profit
Let, Variable cost = x and Fixed cost = y
Therefore,
Rs.20 ´ 8,000 – 8,000x – y = –64,000
Rs.20 ´ 24,000 – 24,000x – y = 1,20,000
1,60,000 – 8,000x – y = –64,000
4,80,000 – 24,000x – y = 1,20,000
or, 2,24,000 = 8,000x + y
3,60,000 24,000x y
1,36,000 16,000x
= +
=
x = 8.50
y = 2,24,000 – 8,000(8.50)
= 2,24,000 – 68,000
= 1,56,000
P/V =
20 8.50
20
-
=
11.50
20 = 57.5%
BEP =
Rs.1,56,000
11.50 = 13,566 units
Sales = 13,566 ´ Rs.20= Rs.2,71,320
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52. Answer : (c)
Reason : Standard fixed overhead cost per unit = Budgeted units
Budgetedfixed overheadcosts
= 10,000 units
Rs.1,10,000
= Rs.11.
Applied overhead cost = Actual production ´ Standard rate
= 11,000 units ´ Rs.11 = Rs.1,21,000
Actual overhead cost = Rs.1,15,000
Over absorption of fixed overheads Rs. 6,000
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53. Answer : (d)
Reason :
Particulars Product
X
Product
Y
Product
Z
Contribution per unit (Rs.) 1,200 1,650 1,800
Machine hours per unit 4 3 2
Contribution per machine hour (Rs.) 300 550 900
Ranking III II I
Total sales units 10,000 2,000 1,000
Machine hours required as per Ranking 12,000 6,000 2,000
Best product mix in unit 3,000 2,000 1,000
Contribution (Rs.) 36,00,000 33,00,000 18,00,000
Total contribution = Rs.36,00,000 + Rs.33,00,000 + Rs.18,00,000
= Rs.87,00,000
Profit = Contribution – Fixed cost
= Rs.87,00,000 – Rs.52,25,000
= Rs.34,75,000.
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28
54. Answer: (d)
Reason: ABC helps managers understand what activities drive overhead costs, which may lead to
operating procedures that will reduce costs.
Using a single cost driver for all overhead costs can distort (understate or overstate) the
overhead cost applied to a particular process and eventually to different products.
Consequently, under ABC products can be more fairly priced and competitive.
One advantage of ABC is that all of the overhead costs are allocated to cost pools, which are in
turn allocated to processes then to products.
Since, only statements (I) and (II) are true, the correct answer is (d).
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55. Answer: (d)
Reason: Credits and collections are the functions of the treasurer. Planning and control, Tax
administration, Protection of assets and Economic appraisal are the functions of the controller.
So, the correct answer is (d).
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56. Answer: (d)
Reason:
Maximum capacity = Total days in 2005-06
X Single eight-hour shift
= 365x 8
2,920 hrs
Less: Idle capacity
Sundays = 52 x 8 = 416 hrs
Holidays = 15 x 8 = 120 hrs
Stoppage due
to cleaning, oiling, etc
= 175 hrs 711 hrs
Normal capacity 2,209 hrs
Overhead absorption rate = Overhead amount /
Normal capacity
Rs. 11,350 /
2,209
Rs. 5.14 per hr
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57. Answer : (e)
Reason : It is given in the question that the secondary distribution of service departrments’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 1,48,000 1,12,000 52,000 3,12,000
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 1,54,531 1,36,163 61,306 3,52,000
Budgeted machine/labor hours 15,000 10,000 6,000
Overhead rate per machine/labor hour 10.30 13.62 10.22
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58. Answer : (c)
Reason : Direct costing and marginal costing are same. It is mainly concerned with the variable costs.
Absorption costing uses both variable cost and fixed cost (i.e. total costs) in product costs.
Standard costing is a technique to control cost. Uniform costing is followed by several business
enterprises using the same costing principles. It is not a separate method of cost accounting.
Therefore, absorption costing uses the total cost approach in the production.
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59. Answer : (b)
Reason : Overhead costs applied = Predetermined overhead rate ´ Actual machine hours
= Rs.25 ´ 22,000 hours
= Rs.5,50,000.
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29
60. Answer : (d)
Reason : Projected unit sales = (Fixed costs + Target operating income) ÷ Unit contribution margin.
Projected unit sales = (Rs.3,00,000 + Rs.3,60,000) ÷ Rs.15.00 = 44,000 units. Current sales
units = (Rs.3,00,000 + Rs.3,60,000) ÷ Rs.18 = 36,667 units. Increase in units: 44,000 – 36,667
= 7,333.
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61. Answer : (d)
Reason :
Rs. Rs.
Selling price per case 200.00
Variable costs per case sold:
Purchase cost:
Cabernet (280/10) 28.00
Chardonnay (280/10) 28.00
Merlot (275/10) 27.50
Bordeaux (325/10) 32.50
Burgundy (315/10) 31.50
Total 147.50
Distribution Costs 7.50
Total Variable costs 155.00
Contribution per case 45.00
Break even sales:
Fixed Costs ÷ Contribution
per case x unit selling price
Rs.45000 ÷ 45.00 x 200 2,00,000.00
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62. Answer : (c)
Reason :
Opening WIP 3,000 units
Materials introduced 13,000 units
16,000 units
Less: Closing WIP 4,000 units
Completed units 12,000 units
Equivalent completed units (under average method) of materials in the process
= 12,000 units + 50% of 4,000 units (closing stock)
= 12,000 units + 2000 units = 14,000 units.
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63. Answer : (d)
Reason : When the objectives of the decisions are in conflict, one objective may be specified as the
decision criterion and the other objectives are established as constraints
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64. Answer : (c)
Reason : The shadow price is the opportunity cost or contribution per unit of a scarse resource
Dolly (Rs.) Molly (Rs.)
Contribution per Unit 8 7.5
Kg per unit (Rs.6/2) 3 (Rs.6/2) 3
Contribution per kg 2.67 2.50
Scarce materials will be used to make Dolly and will yield a contribution of Rs.2.67 per kg. So,
the opportunity cost is Rs.2.67 per kg.
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30
65. Answer : (d)
Reason : Total fixed cost = Rs.3,00,000 + Rs.1,50,000 + Rs.1,50,000
= Rs.6,00,000;
Revised fixed cost = Rs.6,00,000 + Rs .2,50,000
= Rs.8,50,000 and selling price per unit = Rs.18
Variable cost per unit = Rs.3.50 + Rs.2.20 + Re.0.80 + Re.1.00
= Rs.7.50;
Total contribution = 1,20,000 x (Rs.18-Rs.7.50) = Rs.12,60,000;
Profit = Rs.12,60,000 – Rs.8,50,000 = Rs.4,10,000
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66. Answer : (c)
Reason :
Particulars Rs.
Direct Material 8,90,000
Direct wages 6,25,000
Prime cost 15,15,000
Factory overhead: (20% on Direct wages) 1,25,000
Factory cost 16,40,000
Administrative Cost (15% on Factory Cost) 2,46,000
18,86,000
Selling & distribution cost (10% on Factory cost) 1,64,000
20,50,000
Profit (25% on cost) 5,12,500
Sales Value 25,62,500
Job : A-26 Rs.
Direct Material 32,500
Direct Wages 23,500
Prime Cost 56,000
Factory overhead (20% on Rs.23,500) 4,700
Factory cost 60,700
Administrative overhead (15% in factory cost) 9,105
69,805
Selling & Distribution (10% on factory cost + 4%) 6,313
Total Cost 76,118
Profit (25% on cost) 19,030
Sale value 95,148
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31
67. Answer : (a)
Reason : Contract A/c
Particulars Rs. Particulars Rs.
To Material issued 13,50,000
By Work-in-
Progress:
To Wages –Direct 6,30,000 Work certified 38,00,000
–Accrued 48,000 Work not certified 4,21,000
To Plant hire charges 75,800 By Material at site 70,000
To Planning & estimating cost 1,20,000
To Head office expenses appr. 62,700
To Direct expenses 23,500
To Notional profit 19,81,000
42,91,000 42,91,000
To Profit & loss A/c:
2 30,00,000
19,81,000
3 38,00,000
´ ´
10,42,632 By Notional Profit 19,81,000
To Reserve 9,38,368
19,81,000 19,81,000
Work-in-Process = Work certified + Work uncertified – Profit in reserve – Progress
payment received
= Rs.38,00,000 + Rs.4,21,000 – Rs.9,38,368 – Rs.30,00,000
= Rs.2,82,632.
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68. Answer : (c)
Reason : Service department costs are considered part of factory overhead and should be allocated to the
production departments that use the services. A basis reflecting cause and effect should be
used to allocate service department costs. For example, the number of kilowatt-hours used by
each production department is probably the best allocation base for electricity costs. Other
options are not correct, because units of product sold, salary of service department employees,
direct materials usage and rent of production departments are not the basis of allocating the
overhead costs. These are not to meet the cause and effect criterion.
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69. Answer : (e)
Reason :
Particulars Mahesh Mukesh
Sale value (Rs.) 12,00,000 12,00,000
Fixed cost (Rs.) 4,50,000 3,80,000
Profit (Rs.) 3,00,000 2,50,000
Variable cost (Rs.) 4,50,000 5,70,000
Variable cost per unit (Rs.) 150 190
Contribution per unit (Rs.) 250 210
Let, the number of units = x
Therefore, 250x –4,50,000 = 210x –3,80,000
40x = Rs.70,000
x = 1,750 units
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70. Answer : (d)
Reason : Wood, Metal, Fabric and Leather used in the chair would be treated as direct cost but the
staples used to fix the fabric will be treated as indirect cost.
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32
71. Answer : (c)
Reason : Product costs are those costs which are identified with the products and included in inventory
values. This statement is true. Opportunity cost is the maximum possible alternative earning
that might have been earned if the productive capacity or services had been put to some
alternative use. It is not the past cost. Imputed cost is the notional cost. It is not the difference
of costs of two alternatives. Sunk cost is a past cost, it is not relevant to decision making.
Period costs are related to time, which are not identified with the product or job.
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