Management Accounting – II (MB162) : July 2006

Management Accounting – II (MB162) : July 2006

· Answer all questions.
· Marks are indicated against each question.
1. Which of the following best identifies the decision-making relationship between cost drivers, cost objects
and accumulated cost?
(a) Cost objects are used to allocate estimated accumulated cost to cost drivers
(b) Cost objects are used to allocate actual accumulated cost to cost drivers
(c) Cost drivers are used to allocate estimated accumulated cost to cost objects
(d) Cost drivers are used to allocate actual accumulated cost to cost objects
(e) Cost objects are used to apportion actual accumulated cost to cost drivers.
(1 mark)
< Answer >
2. The most fundamental responsibility center affected by the use of market-based transfer prices is
(a) Revenue center (b) Cost center (c) Profit center
(d) Investment center (e) Production center.
(1 mark)
< Answer >
3. A credit balance of materials usage variance indicates that
(a) Standard quantities of materials exceed actual quantities
(b) Actual quantities of materials exceed standard quantities
(c) Standard rates of standard quantities exceed actual cost
(d) Standard rates of actual quantities exceed actual rate of actual quantities
(e) Standard rates of standard quantities exceed actual rate of actual quantities.
(1 mark)
< Answer >
4. Which of the following statements is false in respect of full cost pricing and contribution margin pricing?
(a) They can not be considered competing to each other
(b) In both the methods, the selling prices proposed must be only tentative and they are always subject
to adjustments
(c) Fixed costs are important in both the pricing models
(d) In both the methods, a normal mark-up on total costs is made and the volume of production is taken
into consideration
(e) In both the methods, cost plus pricing is represented to a certain degree.
(1 mark)
< Answer >
5. Enjoy Ltd. is preparing its cash budget for the year 2006-07. An extract from its sales budget for the same
year shows the following sales values:
June 2006 Rs.1,10,000
July 2006 Rs.1,20,000
August 2006 Rs.1,40,000
September 2006 Rs.1,10,000
October 2006 Rs.1,30,000
40% of its sales are expected to be in cash. Of its credit sales, 50% are expected to pay in the month
following the month of sales and 45% are expected to pay in the second month following the month of
sale. 5% of the credit sales are expected to be unrecovered.
The total cash (from cash sales and credit sales) to be shown in the cash budget for the month of
September 2006 will be
(a) Rs.1,19,360 (b) Rs.1,18,400 (c) Rs.1,30,000 (d) Rs.1,22,000 (e) Rs.1,10,000.
(1 mark)
< Answer >
2
6. Which of the following statements is true with regard to the difference between a flexible budget and a
fixed budget?
(a) A flexible budget primarily is prepared for planning purposes while a fixed budget is prepared for
performance evaluation
(b) The variances are usually larger with a flexible budget than with a fixed budget
(c) A flexible budget includes only variable costs whereas a fixed budget includes only fixed costs
(d) A flexible budget is established by operating management while a fixed budget is determined by top
management
(e) A flexible budget provides cost allowances for different levels of activity whereas a fixed budget
provides costs for one level of activity.
(1 mark)
< Answer >
7. Ajay Ltd. has furnished the following information pertaining to estimated cost of 3 products – P, Q and R
for the month of August 2006:
Particulars P Q R
Variable cost per unit (Rs.) 12.50 15.50 16.50
Selling price per unit (Rs.) 27.00 28.00 30.00
Attributable fixed cost (Rs.) 24,000 23,500 20,300
Production & Sales (Units) 6,000 5,000 5,200
The common fixed cost is Rs.63,180. It is the practice of the company to apportion the common fixed
cost on the basis of sales units.
The total budgeted profit or (loss) of products Q and R are
(a) Rs.19,500 and Rs.46,110 respectively
(b) Rs.29,640 and Rs.46,110 respectively
(c) Rs.19,500 and Rs.29,640 respectively
(d) Rs.46,110 and Rs.37,500 respectively
(e) Rs.46,110 and Rs.19,500 respectively.
(2 marks)
< Answer >
8. A favorable materials price variance coupled with an unfavorable materials usage variance would most
likely result from
(a) The purchase and use of higher than standard quality materials
(b) The purchase of lower than standard quality materials
(c) Product mix production changes
(d) Machine efficiency problems
(e) Labor efficiency problems.
(1 mark)
< Answer >
9. Which of the following is/are the characteristic(s) of a corporate management?
I. The corporate management is responsible for strategic planning and overall financial monitoring of
the firm.
II. The corporate management is responsible for executing various tasks within the framework of plans,
programs and schedules.
III. The corporate management translates corporate strategy into programs.
IV. The corporate management is concerned with tasks such as budget formulation, decision on routine
capital expenditures, choice of product improvement etc.
(a) Only (I) above (b) Both (II) and (III) above
(c) Only (III) above (d) Only (IV) above
(e) Both (III) and (IV) above.
(1 mark)
< Answer >
3
10.Which of the following is not an assumption of McGregor’s Theory Y?
(a) Man will exercise self-direction and self-control in the service of objectives to which he is
committed
(b) The average human being learns, under proper conditions, not only to accept but to seek
responsibility
(c) The average human being does not inherently dislike work
(d) Commitment to objectives is a function of the rewards associated with their achievements
(e) The capacity to exercise a relatively high degree of imagination, ingenuity, and creativity in the
solution of organizational problems is narrowly distributed in the population.
(1 mark)
< Answer >
11.Target pricing
(a) Is more appropriate when applied to mature and long-established products
(b) Considers the variable costs and excludes fixed costs
(c) Is often used when costs are difficult to control
(d) Is a pricing strategy used to create competitive advantage
(e) Is well suited for complex products that require many sub-assemblies.
(1 mark)
< Answer >
12.Which of the following is false in relation to Value Chain Analysis?
(a) Value chain is the linked set of value-creating activities from the basic raw material sources for
suppliers to the ultimate end-use product delivered to the customer
(b) No individual firm is likely to span the entire value chain
(c) Value chain requires an internal focus unlike conventional management accounting in which focus
is external to the firm
(d) Each firm must be understood in the context of the overall value chain of value-creating activities
(e) A firm is only a part of the larger set of activities in the value delivery system.
(1 mark)
< Answer >
13.Bhatt Ltd. has estimated Rs.1,20,000 and Rs.1,80,000 for direct material and direct labor respectively for
the month of July 2006. It is the policy of the company to absorb overheads as under:
Factory overheads 50% of direct wages
Administrative overheads 20% of works cost
Selling and distribution overheads 15% of works cost
It is estimated that the selling and distribution overheads will increase by 10% in July 2006. The company
sells goods at a profit of 20% on sales.
The budgeted sales for the month of July 2006 will be
(a) Rs.6,65,438 (b) Rs.6,31,800 (c) Rs.6,58,125
(d) Rs.6,38,820 (e) Rs.6,45,560.
(2 marks)
< Answer >
4
14.Sai Apna Ltd. uses standard costing system. The following details have been extracted from the standard
cost card in respect of direct materials for the month of June 2006:
Material usage per unit – 8 kg at the rate of Rs.1.20 per kg
Budgeted production– 800 units
The company has furnished the following information relating to direct material for the month of June
2006:
Materials purchased 7,800 kg at a price of Rs.8,560
Materials issued to production 6,520 kg
Actual production 830 units
The material price and material usage variances were
(a) Rs.410 (A) and Rs.209 (A) respectively
(b) Rs.800 (A) and Rs.209 (A) respectively
(c) Rs.800 (F) and Rs.144 (A) respectively
(d) Rs.800 (F) and Rs.144 (F) respectively
(e) Rs.410 (A) and Rs.144 (F) respectively.
(2 marks)
< Answer >
15.Shiva Ltd. has furnished the following data pertaining to a product for the month of June 2006:
Particulars Budget Actual
Production (units) 8,000 8,200
Labor hours 2,000 2,150
Fixed overheads (Rs.) 24,000 24,300
Number of working days 24 23
The fixed overhead volume variance was
(a) Rs.1,200 (favorable) (b) Rs.600 (favorable)
(c) Rs.600 (adverse) (d) Rs.900 (favorable) (e) Rs.900 (adverse).
(1 mark)
< Answer >
16.A group of workers usually consists of 14 skilled, 6 semi -skilled and 5 unskilled workers, paid at standard
hourly rates of Rs.6.00, Rs.3.50 and Rs.3.20 respectively. In a normal working week of 40 hours, the
group is expected to produce 1,000 units of output. In certain week, the group consisted of 16 skilled, 5
semi -skilled and 4 unskilled employees; actual wages paid per hour were Rs.5.75, Rs.4.00 and Rs.3.00
respectively. Two hours were lost due to abnormal idle time and 960 units of output were produced.The
labor cost variance and labor usage variance are
(a) Rs.152 (A) and Rs.376 (A) respectively
(b) Rs.280 (A) and Rs.376 (A) respectively
(c) Rs.120 (A) and Rs.406 (A) respectively
(d) Rs.120 (F) and Rs.156 (A) respectively
(e) Rs.406 (A) and Rs.152 (F) respectively.
(2 marks)
< Answer >
5
17.Mr.Lalmohan is the general Manager of Rexine Product Division and his performance is measured using
the residual income method. He has estimated the following cash flows for his division for the next
year:
Particulars Rs.
Investment in Plant and equipment 16,40,000
Investment in Working capital 7,85,000
Revenue 8,75,000
If the imputed interest cost is 12% and Mr.Lalmohan desires to achieve a residual income of Rs.2,15,000,
the total costs, in order to achieve the target, would be
(a) Rs.2,91,000 (b) Rs.8,75,800 (c) Rs.5,06,400
(d) Rs.2,15,200 (e) Rs.3,69,000.
(2 marks)
< Answer >
18.In a day of 8 hours, a direct worker is expected to produce 12 units of product A or 8 units of product B
or 5 units of product C. The budgeted production and actual production for the month of June 2006 are as
follows:
Product Budgeted production Actual production
A 360 units 330 units
B 250 units 280 units
C 300 units 250 units
During the month, 870 direct labor hours were worked. The efficiency and capacity utilization ratios were
(a) 103.4% and 97.56% respectively (b) 101% and 89.7% respectively
(c) 104% and 81.08% respectively (d) 103.4% and 89.7% respectively
(e) 99% and 81.08% respectively.
(2 marks)
< Answer >
19.Traditional cost management does not involve
(a) Market research into customer requirements
(b) Estimation of product cost
(c) Obtaining prices from suppliers
(d) Value engineering
(e) Overheads absorption.
(1 mark)
< Answer >
20.Which of the following techniques would be best for evaluating the management performance of a
department that is operated as a cost center?
(a) Return on assets ratio (b) Return on investment ratio
(c) Flexible budgeting (d) Variance analysis
(e) Residual income.
(1 mark)
< Answer >
6
21.Grey Silver Ltd. is producing three complimentary products. The demand for the products is very much
fluctuative. The demand estimates for the products are as below:
Product Selling price
(Rs.)
Variable cost per unit
(Rs.)
Sales units
A 15 9 15,000
B 20 13 20,000
C 22 16 5,000
Fixed cost is Rs.85,000. At the end of the budget period the total sales margin variance is found to be
Rs.70,000 (Adverse) but same sales mix, cost and price are maintained because of the complimentary
nature. The actual profit for the budgeted period is
(a) Rs.30,000 (b) Rs.10,000 (c) Rs.1,10,000
(d) Rs.1,90,000 (e) Rs.1,05,000.
(2 marks)
< Answer >
22.The actual data for the last two quarters of a company were as follows:
Particulars Quarter I Quarter II
Capacity usage 40% 50%
Net profit / (loss) (Rs.) (10,000) 15,000
The budgeted profit for quarter III is Rs.47,500. The capacity utilization at budgeted production for
quarter III is
(a) 63% (b) 71% (c) 70% (d) 65% (e) 60%.
(2 marks)
< Answer >
23.A comp any estimates the following quarter-wise sales for its product for the next year:
Quarter I II III IV
Sales (units) 45,000 56,250 61,875 67,500
The stocks to be maintained are as under:
Particulars Finished goods (units) Raw materials (kg.)
Opening stock 15,000 15,000
Closing stock 24,375 7,500
Each unit of finished output requires 2 kg of raw materials. The production pattern in each quarter is
based on 80% of the sales of the current quarter and 20% of the sales of the next quarter. The company
proposes to purchase the entire annual requirement of raw material in the first three quarters as under:
Quarter Purchase of raw materials as % of total
annual requirement in quantity
Price per kg.
Rs.
I 30% 2
II 50% 3
III 20% 4
The budgeted amount to be spent to purchase raw materials in the next year is
(a) Rs.8,55,000 (b) Rs.14,13,750 (c) Rs.12,61,500 (d) Rs.6,85,125 (e) Rs.13,70,250.
(2 marks)
< Answer >
24.Which of the following pricing techniques ignores fixed cost?
(a) Standard cost based pricing (b) Full cost pricing
(c) Cost plus profit pricing (d) Return on investment based pricing
(e) Differential cost pricing.
(1 mark)
< Answer >
25.Julia Ltd. produces and sells 600 units of a product each month with total variable costs of Rs.7,500 and
total fixed costs of Rs.7,500. Idle capacity would permit the acceptance of a special sales order for 150
units each month. The average unit cost per month of producing and selling the total output, if the special
order is accepted, would be
(a) Rs.12.50 (b) Rs.18.75 (c) Rs.22.00 (d) Rs.24.00 (e) Rs.22.50.
(1 mark)
< Answer >
7
26.Consider the following data of a company:
Quarter 1st 2nd 3rd 4th
Budgeted direct-labor hours 65,000 80,000 70,000 75,000
Variable overhead rate per labor hour Rs.2.50 Rs.2.60 Rs.2.80 Rs.3.00
Fixed manufacturing overhead Rs.75,000 Rs.75,000 Rs.80,000 Rs.80,000
The fixed manufacturing overhead includes depreciation of Rs.30,000 per quarter.
85% of the cash payments related to manufacturing overhead costs for each quarter are made during the
quarter, and the remaining 15% is made in the following quarter. The overhead costs to be paid during the
3rd quarter are
(a) Rs.2,47,050 (b) Rs.2,79,000 (c) Rs.2,34,600
(d) Rs.3,49,000 (e) Rs.2,65,800.
(2 marks)
< Answer >
27.If a company uses predetermined rate of absorbing factory overhead, the volume variance is the
(a) Under or over applied variable cost element of factory overhead
(b) Under or over applied fixed cost element of factory overhead
(c) Difference in budgeted cost and actual cost of fixed factory overhead items
(d) Difference in budgeted cost and actual cost of variable factory overhead items
(e) Difference in standard cost and actual cost of variable factory overhead items.
(1 mark)
< Answer >
28.A limitation of transfer prices based on actual cost is that they
(a) Charge inefficiencies to the department that is transferring the goods
(b) Can lead to sub optimal decisions for the company as a whole
(c) Must be adjusted by some markup
(d) Must be adjusted by ROI (return on investment)
(e) Lack clarity and administrative convenience.
(1 mark)
< Answer >
29.An ABC (Activity Based Costing) cost allocation system excludes consideration of
(a) Variable non-manufacturing costs
(b) Direct costs of materials
(c) Committed fixed costs
(d) Costs allocated to service departments using the reciprocal costing method
(e) Manufacturing fixed overhead costs.
(1 mark)
< Answer >
30.Deekay Ltd. uses a standard absorption costin g system. The following data have been extracted from its
budget for the month of June 2006:
Fixed production overhead cost Rs.51,000
Production 3,400 units
In June 2006, the fixed production overhead cost was over absorbed by Rs.6,000 and the fixed production
overhead expenditure variance was Rs.3,000 (favorable).
The actual number of units produced was
(a) 3,200 units (b) 5,400 units (c) 5,000 units (d) 4,200 units (e) 3,600 units.
(2 marks)
< Answer >
8
31.Moumita Ltd. pays commission to its salesmen in the month the company receives cash for sales, which
is equal to 5% of the cash inflows. The company has budgeted sales of Rs.3,25,000 for August 2006,
Rs.4,10,000 for September 2006 and Rs.4,55,000 for October 2006. 70% of the sales are on credit.
Experience indicates that 60% of the budgeted credit sales will be collected in the month following the
month of sales. 35% are expected to be realized in the second month following the month of sales and
remaining 5% will be non-recoverable. The total amount of sales commission for the month of October
2006 will be
(a) Rs.24,750 (b) Rs.21,250 (c) Rs.19,416 (d) Rs.17,225 (e) Rs.15,650.
(2 marks)
< Answer >
32.All of the following are major considerations in fixing a selling price except
(a) Competitors price
(b) Unique product features
(c) Price of substitutes
(d) Product costs which set a ceiling to the price
(e) Capturing market share.
(1 mark)
< Answer >
33.A set of concepts and tools applied for getting all the employees focused on continuous improvement in
the eyes of the customers is popularly known as
(a) Quality control (b) Cost control
(c) Customer orientation (d) Self management
(e) Total quality management.
(1 mark)
< Answer >
34.In which of the following situations, can cost based transfer prices be used?
I. No market price exists.
II. Difficulties in negotiating market prices.
III. Where the product contains a secret ingredient or production process which the top management do
not wish to disclose to outside customers.
IV. The transferor division is constrained by capacity limitation.
(a) Both (I) and (II) above (b) Both (II) and (IV) above
(c) Both (III) and (IV) above (d) (I), (II) and (III) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
35.VCD Ltd. has been approached by a foreign customer who wants to place an order for 1,500 units of
Product C at Rs.25 a unit although the company currently sells this item for Rs.38 a unit, and the item has
a cost of Rs.30 a unit. Further analysis reveals that the company will not pay sales commission of Rs.2.50
a unit on this sales and its packaging requirement will save an additional cost of Rs.1.50 per unit.
However, the additional graphics required on this job will cost Rs.3,000. The fixed costs amounting to
Rs.3,50,000 for the production of 50,000 of such products by the company will not change. They decided
to accept this order, but another customer who buys an average of 220 units for the period wants to pay
you Rs.25 rather than the regular price of Rs.38 a unit. Accepting the foreign order of 1,500 units and the
regular customer at Rs.25 for 220 units, the net income will be
(a) Increased by Rs.6,000 (b) Decreased by Rs.2,860
(c) Increased by Rs.3,140 (d) Decreased by Rs.5,250
(e) Increased by Rs.1,620.
(2 marks)
< Answer >
9
36.Vansh Ltd. has provided the following data pertaining to Product – K which requires the mix of 2
materials – P and Q, for the month of June 2006:
Materials Standard mix Actual mix
P 70 units costing Rs.2,240 320 units costing Rs.9,600
Q 30 units costing Rs.1,500 180 units costing Rs.8,640
Standard loss allowed is 5% of input and standard rate of scrap realization is Rs.8 per unit. Actual output
is 453 units. Material yield variance was
(a) Rs.644 (F) (b) Rs.974 (A) (c) Rs.450 (A)
(d) Rs.857 (A) (e) Rs.756 (F).
(2 marks)
< Answer >
37.Which of the following statements is/are true?
I. Quarterly manufacturing cost budgets may legitimately show widely varying manufacturing costs
per unit, if production is not evenly distributed.
II. The first financial budget prepared is the cash budget.
III. A flexible budget is a budget prepared for different levels of activity.
(a) Only (I) above (b) Only (II) above
(c) Both (II) and (III) above (d) Both (I) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
38.The cost per unit of manufacturing a sub-assembly of Chetah Ltd. is given below:
Particulars Rs.
Material cost 7.00
Direct labour cost 5.00
Variable overhead cost 2.50
Annual fixed overhead which can be avoided by purchasing the sub-assembly is Rs.80,000. The subassembly
can be purchased from outside for Rs.20 per unit. If annual purchases are over 30,000 units, a
discount of 20% is available on the purchase price for the total quantity ordered. If annual requirement of
the sub-assembly is 32,000 units, then buying it from outside will
(a) Save Rs.16,000 (b) Save Rs.32,000
(c) Cost Rs.48,000 more (d) Cost Rs.30,000 more (e) Save Rs.48,000.
(2 marks)
< Answer >
39.Consider the following particulars pertaining to River Ltd. for the month of June 2006:
Overheads cost variance Rs.11,500 (Adverse)
Overheads volume variance Rs.6,900 (Adverse)
Budgeted hours for June 2006 5,600 hours
Budgeted overheads for June 2006 Rs.42,000
Actual rate of overheads Rs.10 per hour.
The overhead capacity variance was
(a) Rs.6,552 (F) (b) Rs.7,050 (F) (c) Rs.9,300 (A) (d) Rs.6,552 (A) (e) Rs.7,050 (A).
(2 marks)
< Answer >
40.Jharna Ltd. presents following data for the month of June 2006:
Particulars Budget Actual
Number of working days 25 21
Man hours per day 300 275
Output per man hour (kg) - 3.6
Standard fixed overhead rate per kg Rs.9.00 -
If the fixed overhead capacity variance was Rs.29,295 (A), the budgeted output per man hour was
(a) 2.7 kg (b) 3.5 kg (c) 6.2 kg (d) 4.6 kg (e) 5.5 kg.
(2 marks)
< Answer >
10
41.The budgeted and actual sales of a concern are as under:
Product Budget Actual
Quantity (kg) Price (Rs.) Quantity (kg) Price (Rs.)
A 5,200 24 5,400 23.00
B 3,100 30 2,700 30.20
C 4,200 18 4,300 17.10
The sales mix variance is
(a) Rs.3,052.80 (Favorable) (b) Rs.16,351.50 (Favorable)
(c) Rs.15,480.00 (Favorable) (d) Rs.3,052.80 (Adverse)
(e) Rs.16,351.50 (Adverse).
(2 marks)
< Answer >
42.
Lavanya Ltd. has furnished the following information relating to cost at a capacity level of 4,000 units:
Particulars Rs.
Material cost 40,000 (100% variable)
Labour cost 25,000 (100% variable)
Power 2,000 (70% variable)
Repairs and maintenance 3,000 (60% variable)
Stores 1,600 (100% variable)
Inspection 600 (25% variable)
Administration overheads 5,000 (20% variable)
Selling overheads 4,000 (50% variable)
Depreciation 10,000 (100% fixed)
The production cost budget per unit, at the level of 6,000 units, is
(a) Rs.21.28 (b) Rs.13.37 (c) Rs.12.00 (d) Rs.12.45 (e) Rs.13.05.
(2 marks)
< Answer >
43.Which of the following information is required by the Operating Management?
(a) Changes in government policies (b) Overtime payments
(c) Working capital (d) Order bookings
(e) Return on investment.
(1 mark)
< Answer >
44.The last year’s income of Sabina Ltd. was Rs.4,52,500. Its previous invested capital was Rs.25,00,000.
The company has purchased machinery for Rs.3,75,000, that has, by estimate increased income by 15%.
But, if the residual income of the company actually decreased by Rs.7,800, the firm’s cost of capital is
(a) 20.18% (b) 13.50% (c) 12.50% (d) 11.25% (e) 16.00%.
(2 marks)
< Answer >
45.A financial budget is
(a) A part of master budget that focuses on finance
(b) A part of master budget that focuses on how business activities affect cash
(c) The same as the long-range planning budget
(d) The same as the capital budget
(e) A part of the operating expenses budget that focuses on sales.
(1 mark)
< Answer >
46.Which of the following is not a characteristic or assumption of Product Life Cycle Costing?
(a) Product cost, revenue and profit patterns tend to follow predictable courses through the product life
cycle
(b) Each phase of the product life cycle poses different threats and opportunities
(c) The products have infinite life period
(d) Profit per unit varies as product move through their life cycle
(e) Products require different functional emphasis in each phase.
(1 mark)
< Answer >
11
47.In make or buy decision, the relevant costs include
(a) Factory management costs plus variable manufacturing costs
(b) Variable manufacturing costs plus depreciation costs
(c) Avoidable fixed costs plus variable manufacturing costs
(d) Variable manufacturing costs plus unavoidable fixed costs
(e) Avoidable fixed costs plus depreciation costs.
(1 mark)
< Answer >
48.Consider the following data pertaining to an integrated circuit manufactured by Nonalisa Ltd.:
Variable cost per unit (Rs.) Rs.15
Fixed cost(Rs.) Rs.75,000
Production units 20,000
Market price per unit of similar product is Rs.24 per unit, which the company finds suitable to achieve its
required mark up percentage. If variable cost is increased by 25%, the mark-up percentage on variable
cost is
(a) 48.0% (b) 68.18% (c) 72.9% (d) 80.08% (e) 81.82%.
(1 mark)
< Answer >
49.Individual budget schedules are prepared to develop an annual comprehensive or master budget. The
budget schedule which provides the necessary input data for the Direct Labor Budget is
(a) Sales budget
(b) Raw materials purchases budget
(c) Schedule of cash receipts and disbursements
(d) Schedule of manufacturing overhead
(e) Production budget.
(1 mark)
< Answer >
50.AB Ltd. is organized into two large divisions – A and B. Division A produces a component which is used
by division B in making a final product. The final product is sold for Rs.300. Division A has a capacity to
produce 2,000 units and the entire quantity can be purchased by division B.
Division A informed that due to installation of new machines, its depreciation cost has gone up and hence
wanted to increase the price of the component to be supplied to division B to Rs.185. Division B,
however, can buy the component from the outside market at Rs.185 each. The variable cost of division A
is Rs.158 and fixed cost is Rs.25 per component. The variable cost of division B in manufacturing the
final product by using the component is Rs.78 (excluding the component cost).
If division B purchases the entire component from division A, the total contribution of the company as a
whole is
(a) Rs.5,47,200 (b) Rs.86,400 (c) Rs.1,72,800
(d) Rs.1,28,000 (e) Rs.5,18,400.
(2 marks)
< Answer >
51.Consider the following data of Product ‘LM’ of a company for production and sales of 40,000 units:
Material – Rs.1,00,000
Labor – Rs. 80,000
Overheads – Rs.3,20,000
The fixed portion of capital employed is Rs.40,000 and the varying portion is 40% of sales turnover. The
company desires to earn a profit of 10% on capital employed after payment of tax at 50%. The selling
price of the product is
(a) Rs.13.80 (b) Rs.11.09 (c) Rs.15.88 (d) Rs.10.00 (e) Rs.12.29.
(2 marks)
< Answer >
12
52.A profit making firm can increase its return on investment by
(a) Increasing sales revenue and operating expenses by the same amount in rupees
(b) Increasing investment and operating expenses by the same amount in rupees
(c) Decreasing sales revenue and operating expenses by the same percentage
(d) Increasing sales revenue and operating expenses by the same percentage
(e) Decreasing investment and sales by the same percentage.
(1 mark)
< Answer >
53.Consider the following particulars pertaining to 1,000 units of product PVR produced during the month
of June 2006:
Standard price per kg of raw material Rs.6
Standard direct labor cost Rs.16,000
Standard direct labor hours 3,200
Standard overheads per direct labor hour Re.1
Total standard cost per unit Rs.42
Material usage variance Rs.1,200 (F)
The actual quantity of raw material consumed during the month of June 2006 was
(a) 8,000 kg (b) 3,600 kg (c) 4,000 kg (d) 3,200 kg (e) 2,400 kg.
(2 marks)
< Answer >
54.Mohini Electronics Ltd., a camera manufacturer, is planning to produce a new model of cameras. The
potential demand for the next year is estimated to be 60,000 units. The company has the capacity to
produce 2,40,000 units and could sell 60,000 units at a price of Rs.1200 per camera. The demand would
double for every decrease of Rs.160 in the selling price. The company expects a minimum margin of
20%. At full capacity level, the target cost per unit will be
(a) Rs.585 (b) Rs.975 (c) Rs.936 (d) Rs.704 (e) Rs.1,008.
(2 marks)
< Answer >
55.In developing a system of transfer pricing for any particular situation, which of the following
circumstantial factors need not be considered?
(a) Existence of competitive market
(b) Sourcing constraint
(c) Movability constraint
(d) Quantum of transfers
(e) Capacity level of selling division.
(1 mark)
< Answer >
56.Banerjee Ltd. uses standard process costing method. The standard process cost card per month shows that
3 hours of direct labor is required to produce one kg of finished product. The fixed overheads, which are
recovered on direct labor hours, amount to Rs.180 per kg of output. The budgeted output is 1,000 kg per
month. Actual production during the month of June 2006 is 950 kg and the direct labor hours utilized
during the month were 3,030.
The details of opening and closing work-in progress (WIP) are as under:
Opening work-in-progress – 250 kg (Degree of completion of labor and overheads – 60%)
Closing work-in -progress – 450 kg (Degree of completion of labor and overheads – 20%)
The company uses FIFO method for evaluation of stocks. The fixed overhead efficiency variance is
(a) Rs.37,800 (Adverse) (b) Rs.21,600 (Favorable)
(c) Rs.21,600 (Adverse) (d) Rs .5,400 (Favorable) (e) Rs.5,400 (Adverse).
(2 marks)
< Answer >
13
57.The sales volume variance is
(a) The difference between actual and master budget sales volume, times actual unit contribution
margin
(b) The difference between flexible budget and actual sales volume, times master budget unit
contribution margin
(c) The difference between flexible budget and master budget sales volume, times actual unit
contribution margin
(d) The difference between flexible budget and master budget sales volume, times master budget unit
contribution margin
(e) The difference between actual and master budget sales volume, times actual unit net profit margin.
(1 mark)
< Answer >
58.Which of the following is false with regard to Target Costing?
(a) Target costs are based on external analysis of markets and competitors
(b) Target costing is a cost management tool which reduces a product’s costs over its entire life cycle
(c) It is difficult to use target costing with complex products that require many
sub-assemblies
(d) Target cost is the budgeted cost plus the desired markup
(e) Target costing is used to control costs before the company incurs any production costs.
(1 mark)
< Answer >
59.Basic standards are known as
(a) Ideal standards (b) Current standards
(c) Measurement standards (d) High standards
(e) Expected standards.
(1 mark)
< Answer >
60.The system of identification and communication that signals the manager when his attention is needed is
known as
(a) Management by objective (b) Management information system
(c) Management by exception (d) Management control
(e) Responsibility accounting.
(1 mark)
< Answer >
61.The data relating to Mehar Ltd. for the month of June 2006 are as follows:
Output (units)
Wages paid for 11,000 hours
Material purchased 7,000 kg
6,300
Rs.44,000
Rs.35,000
Variances Rs.
Labor rate
Labor efficiency
Labor idle time
Material price
Material usage
1,405 (F)
1,350 (A)
900 (A)
1,600 (F)
1,950 (A)
The standard prime cost per unit was
(a) Rs.13.00 (b) Rs.12.35 (c) Rs.6.85 (d) Rs.7.50 (e) Rs.5.50.
(2 marks)
< Answer >
14
62.Mohan Ltd. is currently working at 60% capacity and produces 9,000 units. At 70% capacity level, raw
material cost increases by 2.5% and selling price falls by 2%. At 60% capacity level, the product cost is
Rs.212 per unit and it is sold at Rs.250 per unit. The company has furnished the following break-up of
product cost per unit:
Particulars Rs.
Material
Labor
Factory overhead
Administration overhead
120
35
32 (50% fixed)
25 (60% fixed)
The profit at 70% level of capacity is
(a) Rs.3,42,000 (b) Rs.3,51,000 (c) Rs.3,75,000 (d) Rs .3,61,500 (e) Rs.3,30,000.
(2 marks)
< Answer >
63.Which of the following is false with respect to Return on Investment (ROI) and Residual Income (RI)?
(a) In case of RI, there is a problem of defining the minimum required rate of return associated with
various investment opportunities
(b) ROI can be readily employed for inter-divisional comparisons
(c) A project will be rejected under ROI method and accepted under RI method if the rate of return
from such project is more than the minimum required rate of return but less than the current ROI
(d) RI is the rate of return which a division is able to earn above the minimum required rate of return on
operating assets
(e) Under RI approach, the larger divisions will be expected to have more RI than the smaller divisions.
(1 mark)
< Answer >
64.The phase in product life cycle, where intensified marketing efforts may prolong the period of maturity,
but only by increasing costs disproportionately is referred to as
(a) Introduction phase (b) Growth phase
(c) Maturity phase (d) Saturation phase
(e) Decline phase.
(1 mark)
< Answer >
65.Which of the following is/are pre-requisite(s) for effective divisionalisation?
I. The organization will have two or more units for which revenues and costs can be measured.
II. Each division should be sufficiently independent of other divisions.
III. Top management should not interfere too much in divisional matters.
(a) Only (I) above (b) Both (I) and (II) above
(c) Both (I) and (III) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
66.Which of the following variances is most controllable by the production control supervisor?
(a) Material price variance
(b) Material usage variance
(c) Variable overhead spending variance
(d) Fixed overhead budget variance
(e) Fixed overhead volume variance.
(1 mark)
< Answer >
67.While preparing a performance report for a cost center using flexible budgeting techniques, the planned
cost column should be based on
(a) Cost incorporated in the master budget
(b) Budgeted amount in the original budget prepared before the beginning of the period
(c) Budget adjusted to the actual level of activity for the period being reported
(d) Actual amount for the same period in the preceding year
(e) Budget adjusted to the planned level of activity for the period being reported.
(1 mark)
< Answer >
15
68.Which of the following statements is false with respect to Total Quality Control (TQC)?
(a) TQC is a management process based on the belief that quality costs are minimized with zero defects
(b) The proponents of TQC do not advocate that ‘quality is free’
(c) TQC begins with the design and engineering of the product
(d) TQC is often associated with JIT manufacturing
(e) TQC is sometimes referred to as TQM (Total Quality Management).
(1 mark)
< Answer >
69.A difference between standard costs used for cost control and budgeted costs
(a) Can exist because standard costs must be determined after the budget is completed
(b) Can exist because standard costs represent what cost should be, whereas budgeted costs represent
expected actual costs
(c) Can exist because budgeted costs are historical costs, whereas standard costs are based on
engineering studies
(d) Cannot exist because they should be the same amounts
(e) Can exist because standard costs must be determined before the budget is completed.
(1 mark)
< Answer >
70.The following is the statement showing operating income of Dyeing division of Komalika Garments Ltd.:
Particulars Rs.
Sales 3,00,000
Variable manufacturing costs 2,25,000
Administrative expenses 40,000
Selling expenses 22,500
Operating income 9,000
The sales include cloth transferred to Printing division at manufacturing cost of Rs.40,000. The common
administrative expenses of Rs.10,000 and common selling expenses of Rs.7,500 are apportioned to the
Dyeing division. If the internal transfer is at market price, the operating income of Dyeing division using
contribution approach is
(a) Rs.37,216 (b) Rs.73,716 (c) Rs.91,216 (d) Rs.28,716 (e) Rs.46,216.
(2 marks)
< Answer >
71.Motiram Ltd. manufactures a single product at the operated capacity of 24,000 units while the normal
capacity of the plant is 30,000 units per annum. The company has estimated 25% profit on sales
realization and furnished the following budgeted information:
Particulars 30,000 units
(Rs.)
24,000 units
(Rs.)
Fixed overheads 2,50,000 2,50,000
Variable overheads 3,00,000 2,40,000
Semi -variable overheads 2,90,000 2,60,000
Sales realization 22,50,000 18,00,000
The company has received an order from a customer for a quantity equivalent to 10% of the normal
capacity. It is noticed that prime cost per unit of product is constant. If the company desires to maintain
the same percentage of profit on selling price, the minimu m price per unit to be quoted for new order is
(a) Rs.33.75 (b) Rs.53.33 (c) Rs.25.25 (d) Rs.41.25 (e) Rs.36.50.
(2 marks)
< Answer >
16
Suggested Answers
Management Accounting – II (MB162) : July 2006
1. Answer : (c)
Reason : A cost driver has a cause and effect relationship with a cost object. For decision-making
estimated costs are important because actual costs are not known until the decision is made.
Therefore, Cost drivers are used to allocate estimated accumulated cost to cost objects. So, (c)
is correct.
< TOP >
2. Answer : (c)
Reason : Transfer prices are often used by profit centers and investment centers. Profit centers are the
most fundamental of these two centers because the investment centers are responsible not only
for the revenues and costs but also for invested capital. Answer (a) is incorrect because a
revenue center is responsible only for revenue generation, not cost control or profitability.
Answer (b) is incorrect because transfer prices are not used in a cost center. Transfer prices are
used to compute profitability but a cost center is responsible only for cost control. Answer (d) is
not correct because an investment center is not as fundamental as a profit center. Answer (e) is
not correct because a production center may be a cost center, a profit center or even an
investment center.
< TOP >
3. Answer : (a)
Reason : A credit balance of materials usage variance indicates the favorable variance. It means the
standard quantities of materials exceed actual quantities. Other statements stated in (b), (c), (d)
and (e) are not true.
< TOP >
4. Answer : (d)
Reason : When we look into the relationship between full cost and contribution margin pricing we can
conclude that although the full cost pricing and contribution margin based approach for pricing
are considered distinctively different approaches, by and large, they represent to a certain
degree, cost plus pricing. Hence statement (e) is true. They are considered complementary to
each other but not competing. Hence statement (a) is true. In both the pricing models fixed
costs are considered important. Hence option (c) is true. In both the methods, the selling prices
proposed mu st be only tentative and they are always subjective. Hence statement (b) is also
true. However, Full cost pricing makes a normal mark up on total costs and it does not take
volume of production into consideration. On the other hand contribution margin approach to
pricing is concerned about cost. Hence statement (d) which states that Contribution margin
method also makes a normal markup on total costs is false.
< TOP >
5. Answer : (b)
Reason :
Particulars Rs.
Cash sales Rs.1,10,000 ´ .4 44,000
Credit sales realized:
August Rs.1,40,000 ´ .6 ´ .5 42,000
July Rs.1,20,000 ´ .6 ´ .45 32,400
Sales receipts 1,18,400
< TOP >
6. Answer : (e)
Reason : A flexible budget is a series of budgets prepared for different levels of activity. It allows
adjustments of the budget to the actual level of activity before comparing the budgeted activity
with actual result. Fixed budget is a budget prepared for one level of activity. Therefore (e) is
correct. Other statements mentioned in (a), (b), (c) and (d) are not correct.
< TOP >
7. Answer : (c)
Reason : Total Production & Sales unit = 6,000 + 5,000 + 5,200 = 16,200 units
Common fixed cost per unit = Rs.63,180 ¸ 16,200 = Rs.3.90
Particulars Q R
Sales units 5,000 5,200
Sales Price 28.00 30.00
Variable cost 15.50 16.50
Attributable Fixed cost 4.70 3.90
< TOP >
17
Common fixed cost 3.90 3.90
Profit per unit 3.90 5.70
Total profit 19,500 29,640
8. Answer : (b)
Reason : A favorable materials price variance is the result of paying less than the standard price for
materials. An unfavorable materials usage variance is the result of using an excessive quantity
of materials. If a purchasing manager is to buy substandard materials to achieve a favorable
price variance, an unfavorable quality variance could result from using an excessive amount of
poor quality materials.
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9. Answer : (a)
Reason : The three distinguishable levels of management in an organization consists of – corporate
management, executive management and operating management. The corporate management,
consisting of board of directors, chief executive and function heads is responsible for strategic
planning and overall financial monitoring of the firm. Executive management consists of
managers responsible for certain product groups or markets. They are entrusted with the
responsibility to translate corporate strategy into program and are concerned with tasks such as
budget formulation, decision on routine capital expenditures, choice of product improvement
etc. The operating management is represented by executives entrusted with specific operational
tasks and is responsible for executing various tasks within the framework of plans, programs,
and schedules. Hence only (a) is the characteristic of corporate management.
< TOP >
10. Answer : (e)
Reason : According to McGregor’s Theory Y, the capacity to exercise a relatively high degree of
imagination, ingenuity, and creativity in the solution of organizational problems is widely, not
narrowly, distributed in the population. Hence the answer is (e). The other assumptions of
Theory Y are: External control and threat of punishment are not the only means of bringing
about effort towards organizational objectives. Man will exercise self-direction and self-control
in the service of objectives to which he is committed. The average human being learns, under
proper conditions, not only to accept but to seek responsibility. The expenditure of physical and
mental effort in work is as natural as play or rest. The average human being does not inherently
dislike work. Commitment to objectives is a function of the rewards associated with their
achievements e.g. the satisfaction of ego and self-actualization needs can be direct products of
efforts directed towards organizational objectives.
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11. Answer : (d)
Reason : Target pricing and costing may result in a competitive advantage because it is customeroriented
approach that focuses on what products can be sold at what prices. Hence (d) is the
answer. It is also advantageous because it emphasizes control over costs prior to their being
locked in during the early links in the value chain. The company sets a target price for a
potential product reflecting what it believes consumer will pay and competitors will do. After
subtracting the desired profit margin, the long-run target cost is known. If current costs are too
high to allow an acceptable profit, cost-cutting measures are implemented or the product is
abandoned. The assumption is that target price is the constraint. Option (a) is incorrect because
target pricing is used on products that have not yet been developed. Option (b) is incorrect
because target pricing includes all costs. Option (c) is incorrect because target pricing can be
used in any situation but is most likely to succeed when costs can be well controlled. Option (e)
is not correct because it is difficult to use with complex products that require many subassemblies
such as automobiles. This is because tracking costs becomes too complicated and
tedious, and cost analysis must be performed at so many levels.
< TOP >
12. Answer : (c)
Reason : Value chain requires an external focus, unlike conventional management accounting in which
the focus is internal to the firm i.e., option ‘c’ is the right option. Options (a), (b), (d) and (e) are
the correct statements in relation to value chain analysis. Hence they are not right options.
< TOP >
13. Answer : (a)
Reason :
Rs.
Direct material 1,20,000
Direct labor 1,80,000
Factory overheads (50% of direct labor) 90,000
Works cost 3,90,000
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18
Administrative overheads (20% of works cost) 78,000
Selling and distribution expenses
(15% of works cost + 10%)
(i.e. 58,500 ´ 1.1)
64,350
5,32,350
Profit 20% on sales (i.e. 25% on cost) 1,33,088
Budgeted sales 6,65,438
14. Answer : (d)
Reason : Material price variance = 7,800 kg × Rs.1.20 – Rs.8,560
Rs.9,360 – Rs.8,560 = Rs.800 (Favorable)
Material usage variance = Rs.1.20 (830 units × 8 kg – 6,520 kg)
= Rs.1.20 × (6,640 kg – 6,520 kg) = Rs.1.20 × 120 = Rs.144 (Favorable)
< TOP >
15. Answer : (b)
Reason : Standard rate per unit =
Rs.24,000
Rs.3.
8,000
=
Standard rate per hour =
Rs.24,000
Rs.12
2,000
=
Standard time for Budgeted production =
8,000units
4unitsperhour
2,000hrs
=
Standard time for actual production =
8,200
2,050hrs
4
=
Volume variance = Rs.12 (2,000 hrs – 2,050 hrs)
= Rs.12 ´ 50 hrs = Rs.600 (Favorable)
< TOP >
16. Answer : (c)
Reason : The standard labor cost per unit of output
Grade
(1)
No. of
Workers
(2)
Hours
(3)
Man-hours
(2 x3) (4)
Rate per hour
(Rs.) (5)
Labor cost
(Rs.)
(4 x 5)
Skilled
Semi -skilled
Unskilled
14
65
40
40
40
560
240
200
6.00
3.50
3.20
3,360
840
640
Total 1000 4,840
Labor cost per unit = Total labor cost/No of units produced = Rs.4.84 per unit
Actual cost
Grade
(1)
No. of
workers
(2)
Hours
(3)
Man-hours
(2 x3) (4)
Rate
per hour
(Rs.) (5)
Labor cost
(Rs.) (4 x 5)
Skilled
Semi -skilled
Unskilled
16
5
4
40
40
40
640
200
160
5.75
4.00
3.00
3,680
800
480
Total 1000 4,960
Labor cost variance = Rs.4,840 ~ Rs.4,960 = Rs.120 (A).
Labor usage variance
Grade
(1)
Standard man
hours for actual
production
(2)
Actual
Man
Hours
(3)
Difference
in hours
(2 –3) (4)
Standard
Rate
(Rs.) (5)
Usage
Variance
(Rs.)
(4 x 5)
Skilled
Semi -
skilled
Unskilled
(560/1,000) x 960 = 537.6
(240/1000) x 960= 230.4
(200/1000) x 960= 192.0
640
200
160
102.4 (A)
30.4 (F)
32 (F)
6.00
3.50
3.20
614.4 (A)
106.4 (F)
102.4 (F)
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19
Total 405.60 (A)/
406 (A)
17. Answer : (e)
Reason : Residual income is the excess of the amount of the ROI over a targeted amount equal to an
imputed interest charge on invested capital.
Total investment = Rs.16,40,000 + Rs.7,85,000 = Rs.24,25,000
Imputed interest charge = 12% on Rs.24,25,000 = Rs.2,91,000
Residual income = Rs.2,15,000
Total profit = Rs.5,06,000
Total costs = Revenue – Target profit= Rs.8,75,000 – Rs.5,06,000
= Rs.3,69,000.
< TOP >
18. Answer : (d)
Reason : Standard time per unit
A = 8
12
= 0.67
B = 8
8
= 1.0
C = 8
5
= 1.6
Budgeted Hours
A = 360 × 0.67 = 240
B = 250 × 1.0 = 250
C = 300 × 1.6 = 480
970
Standard hours for actual production
A = 330 ´ 0.67 = 220
B = 280 ´ 1.0 = 280
C = 250 ´ 1.6 = 400
900
Actual hours = 870
Efficiency ratio =
900
870 = 103.4%
Capacity utilization ratio =
870
970 = 89.7%
< TOP >
19. Answer : (d)
Reason : Value engineering is a modern approach in cost management for various activities on the value
chain where as all other options are traditional approaches. So,(d) is correct.
< TOP >
20. Answer : (d)
Reason : A cost center is a responsibility center that is responsible for costs only. Of the alternatives
given, variance analysis is the only one that can be used in a cost center. Variance analysis
involves comparing actual costs with predicted or standard costs. Other options are not true.
< TOP >
21. Answer : (e)
Reason : Here the total sales margin variance is Rs.70,000 (Adverse ) implies the actual sales margin
(contribution) = Budgeted sales margin – Rs.70,000
= [15,000 × Rs.6 + 20,000 × Rs.7 + 5,000 × Rs.6] – Rs.70,000
= Rs.2,60,000 – Rs.70,000 = Rs.1,90,000.
Actual profit = Contribution – Fixed cost = Rs.1,90,000 – Rs.85,000 = Rs.1,05,000.
< TOP >
22. Answer : (a)
Reason : At 50% capacity, profit = Rs.15,000
At 40% capacity, loss = Rs.10,000
So every 1% increase in capacity utilization increases profit by (Rs. 25,000 ÷ 10%) Rs.2,500.
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20
To get a profit of Rs.47,500 the extra profit required above 50% = Rs.32,500
The extra capacity required for an extra profit of Rs.32,500 = Rs.32,500 ÷ Rs.2,500 =13%
So, the capacity utilization for a profit of Rs.10,000 = 50% + 13% = 63%.
23. Answer : (e)
Reason :
kg
Sales (total of all three quarters) 2,30,625
Add: Closing stock 24,375
2,55,000
Less: opening stock 15,000
Total production for next year 2,40,000
kg
Raw material required for production (2,40,000 units ×2) 4,80,000
Add: Closing stock 7,500
4,87,500
Less: opening stock 15,000
Raw material to be purchased 4,72,500
Quarter % of raw material Raw material
(kg.)
Price per kg.
(Rs.)
Amount
(Rs.)
I 30% 1,41,750 2 2,83,500
II 50% 2,36,250 3 7,08,750
III 20% 94,500 4 3,78,000
13,70,250
Total amount of raw material to be purchased during the next year is Rs.13,70,250
< TOP >
24. Answer : (e)
Reason : Differential cost technique for pricing ignores fixed cost. Differential cost technique is the
change of cost for different options. Therefore, fixed cost has no relevancy with these
differential cost techniques. Other techniques mentioned in (a), (b), (c) and (d) consider the
fixed cost in pricing the goods
< TOP >
25. Answer : (e)
Reason : The variable cost per unit is Rs.7,500/600 = Rs.12.5. The average fixed cost per unit with the
special order is Rs.7,500/750 = Rs.10. The average cost is Rs.12.5+Rs.10 = Rs.22.50.
< TOP >
26. Answer : (a)
Reason : Total planned overhead costs for the second quarter = (80,000 × 2.60 + 75,000) = Rs.2,83,000
II quarter cash payments = 85% x (2,83,000 – 30,000), (depreciation is excluded)
=Rs.2,15,050
Total planned overhead costs for the third quarter = (70,000 × 2.80 + 80,000) = Rs.2,76,000.
III quarter cash payments = {85% x (2,76,000 – 30,000} + {15% x (Rs.2,83,000 - Rs.30,000)}
= (2,09,100 + 37,950) = Rs.2,47,050.
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27. Answer : (b)
Reason : The volume variance is the under applied or over applied of fixed factory overhead. It is the
difference between the budgeted fixed factory overhead and applied (standard) fixed factory
overhead. The volume variance is not applicable in case of variable factory overhead. Other
options (a), (c), (d) and (e ) are not correct.
< TOP >
28. Answer : (b)
Reason : The optimal transfer price of a selling division should be set at a point that will have the most
desirable economic effect on the firm as a whole while at the same time continuing to motivate
the management of every division to perform efficiently. Setting the transfer price based on
actual costs rather than standard costs would give the selling division little incentive to control
costs.
Option (a) is incorrect because inefficiencies are charged to the buying department. Options (c)
and (d) are not correct, because by definition, cost based transfer prices are not adjusted by
mark-up or ROI. Option (e) is incorrect because cost-based transfer price which provides the
advantages of clarity and administrative convenience.
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21
29. Answer : (b)
Reason : ABC cost allocation systems can be used to allocate either variable or fixed manufacturing
overhead, to allocate joint costs, or to reallocate service department costs to outputs. Direct
costs of materials and labour do not need to be allocated to specific cost objectives
< TOP >
30. Answer : (e)
Reason : Standard fixed overhead rate =
Budgeted cost Rs.51,000
Rs.15
Budgeted output 3,400
= =
Overheads incurred = Budgeted fixed production overhead cost + Expenditure
variance
= Rs.51,000 - Rs.3,000 = Rs.48,000
Overheads absorbed = Actual overhead + Over absorption of overheads
= Rs.48,000 + Rs.6,000 = Rs.54,000
Actual number of units = Rs.54,000 ¸ Rs.15 = 3,600 units.
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31. Answer : (c)
Reason :
Cash sales for October 2006 (Rs.4,55,000 x 0.3) Rs.1,36,500
Cash flows for the credit sales in the month of August 2006
(Rs.3,25,000 x 0.7 x 0.35)
Rs.79,625
Cash flows for the credit sales in the month of September 2006
(Rs.4,10,000x 0.7 x 0.6) Rs.1,72,200
Rs.3,88,325
Total commission payable to salesmen = Rs. 3,88,325 x 5% = Rs.19,416
< TOP >
32. Answer : (d)
Reason : In fixing selling price, competitors price, unique product feature, price of the substitutes and
capturing market share are considered. Product costs sets a floor to the price. Product costs,
which set a ceiling to the price, are not correct. Therefore, (d) is the answer.
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33. Answer : (e)
Reason : Total quality management is often termed as a set of concepts and tools for getting all
employees focused on continuous improvement in the eyes of the customer. It is neither quality
control (a) nor cost control (b). Customer orientation is one of the core concepts of total quality
management. TQM aims at eliciting greater employee commitment through shared decision
making and introduce various forms of self management (d). This is one of the elements in
TQM.
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34. Answer : (d)
Reason : The cost based transfer pricing is used in the following situations:
I No market prices exist
II. Difficulties in negotiating market-prices
III. Where the product contains a secret ingredient or production process which the top
management do not wish to disclose to outside customers.
Where the transferor division is constrained by capacity limitation, shadow price is the best
suited transfer price. Therefore, option (d) is true.
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35. Answer : (c)
Reason : Total cost per unit = Rs.30;
Fixed cost per unit at 50,000 units = Rs.3,50,000 ÷ 50,000 = Rs.7.
Variable cost per unit = Rs.30 – Rs.7 = Rs.23;
Additional graphics cost per unit = Rs.3,000 ÷ 1,500 = Rs.2 per unit.
Cost savings = Commission + packing cost
= Rs.2.50 + Rs.1.50 = Rs.4.00.
Therefore, net cost = Rs.23 + Rs.2 – Rs.4 = Rs.21.
Net profit per unit = Rs.25.00 – Rs.21.00 = Rs.4.
Total profit = 1,500 ´ Rs.4 = Rs.6,000.
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22
Loss from regula r customer = 220 ´ (Rs.38 – Rs.25) = Rs.2,860;
Therefore, the profit will increase by = Rs.6,000 – 2,860 = Rs.3,140.
36. Answer : (d)
Reason : Standard cost = Standard cost of material P + standard cost of material Q – Realizable value of
standard loss = Rs.2,240 + Rs.1,500 – (5% of 100 units x Rs.8) = Rs.3,740 – Rs.40 =
Rs.3,700.
Standard output = 70 units + 30 units – 5% of (70 + 30) units = 100 units – 5 units = 95 units.
Therefore, standard cost per unit = Rs.3,700 / 95 units = Rs.38.95.
Actual yield = 320 units + 180 units – 47 units = 453 units (i.e. given).
Standard yield = 350 units + 150 units – 5% of (350 + 150) = 475 units.
Material yield variance = Standard cost per unit (Actual yield – Standard yield)
= Rs.38.95 (453 units ~ 475 units) = Rs.857 (A).
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37. Answer : (d)
Reason : If the production is not evenly distributed, quarterly manufacturing cost budget may widely
vary. The first financial budget prepared is the budgeted income statement. Hence statement
(II) is wrong. The flexible budget is prepared for different level of activity. Statements (I) and
(III) are true. Hence the correct answer is (d).
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38. Answer : (b)
Reason : Cost of manufacturing is :
Particulars Rs. Per unit
Variable cost (Rs.7 + Rs.5 + Rs.2.50) 14.50
Fixed cost Rs.80,000 ÷ 32,000 units 2.50
Total cost 17.00
Cost of purchasing is Rs.20 – 20% Discount 20 – 4 = 16.00
Hence purchasing the subassembly will
save Rs.(17.00 – 16.00) ´ 32,000
32,000
< TOP >
39. Answer : (e)
Reason : Overhead expenditure variance
= Overhead cost variance ~ Overhead volume variance
= Rs.11,500 (A) ~ Rs.6,900 (A) = Rs.4,600(A)
Actual overheads incurred
= budgeted overheads ~ overheads expenditure variance
= Rs.42,000~ Rs.4,600 (A) = Rs.46,600
Actual hours =Actual overheads incurred ¸ Actual rate of recovery
= 46,600 ¸ 10 = 4,660 hours.
Overheads capacity variance = Standard rate × (Actual hours – budgeted hours)
=Rs.42,000 ¸ 5,600 (4,660 hours – 5,600) = Rs.7,050 (Adverse).
< TOP >
40. Answer : (c)
Reason : Let the budgeted output per man hour be X kg.
Man hours that should have been worked in actual number of days
=Actual number of days x standard hours per day
=21 × 300 = 6,300 man hours
Actual hours worked =actual number of days x Actual hours per day
= 21 × 275 = 5,775 man hours
Difference = (5,775 – 6,300) hours = 525 hours (A)
Difference in output due to less hours worked
= Additional hours worked x Budgeted output per hour
= 525 × X
Fixed overhead capacity variance = 525 × X × 9.00= 29,295 (A)
Therefore X = 6.2 kg.
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23
41. Answer : (d)
Reason : Total quantity of actual sales = 5,400+2,700+4,300 = 12,400 kg.
Sales Mix variance = Standard rate × (Actual quantity- Revised Standard quantity)
(Rs)
A
24 ×
5,400 12,400 5,200
12,500
é æ öù ê -ç ´ ÷ú
ë è øû =
5,798.40 (F)
B
30 ×
2,700 12,400 3,100
12,500
é æ öù ê -ç ´ ÷ú
ë è øû =
11,256.00 (A)
C
18 ×
4,300 12,400 4,200
12,500
é æ öù ê -ç ´ ÷ú
ë è øû =
2,404.80 (F)
Total 3,052.80 (A)
< TOP >
42. Answer : (a)
Reason : The production cost budget
Particulars Rs.
Material cost (variable) 60,000
Labor cost (variable) 37,500
Stores (variable) 2,400
Power (semi-variable) 2,700
Repairs and maintenance (semi-variable) 3,900
Inspection (semi-variable) 675
Administration overheads (semi -variable) 5,500
Selling overheads 5,000
Depreciation (fixed) 10,000
Total 1,27,675
Cost per unit 21.28
< TOP >
43. Answer : (b)
Reason : The operating management is responsible for executing various tasks within the framework of
plans, programs and schedules defined by executive management. They need the information
regarding the overtime payments. The information regarding the changes in government
policies, return on investment is required by top management and the information regarding the
working capital, order bookings, etc. is required by the executive management.
< TOP >
44. Answer : (a)
Reason : Residual income is income in excess of the cost of capital, say X%
The current residual income
= [Rs.4,52,500 – (Rs.25,00,000 × X)]
If the equipment is purchased, the residual income
=[( Rs.4,52,500 + Rs.67,875)– (Rs.25,00,000 + Rs.3,75,000) × X)]
Residual income decreases by = Rs.7,800.
Therefore, [( Rs.4,52,500 + Rs.67,875)– (Rs.25,00,000 + Rs.3,75,000) × X)] -
[Rs.4,52,500 – (Rs.25,00,000 × X)] = - Rs.7,800
5,20,375 –28,75,000X –4,52,500 + 25,00,000X = - Rs.7,800
67,875 –3,75,000X = - Rs.7,800
X = 20.18%.
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45. Answer : (b)
Reason : A financial budget is a part of master budget on how business activities affect cash. So, the
correct answer is (b).
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46. Answer : (c)
Reason : Options (a), (b), (d) and (e) are the characteristics of the Product Life Cycle Costing i.e., they
are not right options. One of the major characteristics of the Product Life Cycle Costing is that
products have finite lives and hence pass through the cycle of development, introduction
growth, maturity, decline and deletion. Hence correct answer is (c).
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24
47. Answer : (c)
Reason : The relevant costs in a make or buy decision are those that differ between the two decision
choices. These costs include any variable costs plus any avoidable fixed costs. Avoidable fixed
costs will not be incurred if the ‘buy’ decision is selected.
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48. Answer : (a)
Reason : Total sales = Rs.24 × 20,000 units = Rs.4,80,000
Profit = Rs.4,80,000 – Rs.3,00,000 – Rs.75,000 = Rs.1,05,000
Variable cost = Rs.15 × 20,000 units × 1.25 = Rs.3,75,000
Markup % on variable cost
= [(Rs.75,000 + Rs.1,05,000) ÷ Rs.3,75,000] × 100 = 48%.
< TOP >
49. Answer : (e)
Reason : A master budget typically begins with the preparation of a sales budget. The next step is to
prepare a production budget. Once the production budget has been completed, the next step is
to prepare the direct labor, raw material and overhead budgets. Thus, the production budget
provides the input necessary for the completion of direct labor budget. Therefore, (e) is correct.
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50. Answer : (d)
Reason : Rs.
Contribution of division A
Sales – 2,000 ´ Rs.185 = 3,70,000
Less : Variable cost:
Purchase cost (2,000 × Rs.158) = 3,16,000
54,000
Contribution of division B
Sales – 2,000 × Rs.300 6,00,000
Less : Variable cost
Division A: Rs.3,70,000
Own cost
2,000 × Rs.78 Rs.1,56,000 5,26,000
74,000
Total Contribution 1,28,000
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51. Answer : (a)
Reason : Let the sale price = x
40,000x = Rs.1,00,000 + Rs.80,000 + Rs.3,20,000 +
10% [Rs.40,000 .4(40,000x)]
1 0.5
+
-
40,000x = Rs.5,00,000 + 0.2 (40,000 + 16,000x)
40,000x = Rs.5,00,000 + Rs.8,000 + 3,200x
36,800x = Rs.5,08,000
x = 13.80.
< TOP >
52. Answer : (d)
Reason : Return on investment (ROI) equals to income divided by invested capital. If a firm is already
profitable, increasing sales and expenses by the same percentage will increase the ROI. Other
options given in (a), (b), (c) and (e) are not correct.
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53. Answer : (b)
Reason :
Particulars Rs.
Total standard cost of PVR (1,000 units @ Rs.42) 42,000
Less: Standard direct labor cost 16,000
Standard overhead cost (3,200 hours @ Re.1) 3,200
Standard cost of raw material 22,800
Total standard quantity of raw material required
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25
=
Standard cost of raw material used Rs.22,800
Standard rate per kg. of raw material Rs.6
=
= 3,800 kg.
Material usage variance = Standard rate (standard quantity – actual quantity)
i.e. Rs.1,200 (F) = Rs.6 x (3,800 kg. – actual quantity)
Actual quantity =
(Rs.6 × 3,800 kg.) - 1,200 =3,600 kg.
6
54. Answer : (d)
Reason : Target cost = Selling price at capacity – 20% profit margin
Price (Rs.) Demand (Units)
1200 60,000
1040 1,20,000
880 2,40,000
Target cost = Rs.880 – 20% ´ Rs.880
= Rs.880 – (Rs.880 ´ 0.20) = Rs.704
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55. Answer : (c)
Reason : No single method of transfer pricing is applicable across the board. In developing a system of
transfer pricing for any particular situation, the factors needed to be considered are existence of
competitive market (a), Sourcing constraint (b), Quantum of transfer (d), and Capacity level of
selling division (e). Movability constraint (c) i.e. movement of the product from department to
department is not a factor having relation to transfer pricing in any way. Hence (c) is not
considered.
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56. Answer : (c)
Reason :
Completed stock: Kg. Degree of
completion
Overheads
From opening work-in-progress 250 40 % 100
Closing work-in -progress 450 20 % 90
Current production 700 100 % 700
Total 890
Budgeted fixed overheads per kg = Rs.180
No. of direct labor hours per kg = 3
Budgeted rate per hour = Rs.60
Standard hours for actual production = 890 ´ 3 = 2,670 hours
Fixed overhead efficiency variance
= (Standard hours for actual production – Actual hours) ´ budgeted rate per hour
= (2,670 hours – 3,030 hours) ´ Rs.60
= 360 hrs ´ Rs.60 = Rs.21,600 (A).
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57. Answer : (d)
Reason : For a single-product company, the sales volume variance is the difference between flexible
budget and master budget sales quantity, times master budget unit contribution margin (UCM).
This amount can also be calculated for each product in a sales mix, and the results are added to
determine the total sales volume variance. This variance may be further decomposed into
quantity and mix variances.
Other options are incorrect.
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58. Answer : (d)
Reason : Target cost is the sale price (for the target market share) minus desired profit. Hence (d) is
false. Target costs are based on external analysis of markets and competitors. Target costing is
a cost management tool which reduces a product’s costs over its entire life cycle. It is difficult
to use target costing with complex products that require many sub-assemblies because tracking
costs becomes too complicated and tedious, and cost analysis must be performed at so many
levels. Target costing is used to control costs before the company incurs any production costs
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59. Answer : (c) < TOP >
26
Reason : Basic standards are known as measurement standards. These are established at a particular time
and remain unchanged over a period of time. These standards are not revised frequently, but if
they are revised, it is only due to changes in specification of materials and technology. They
may also be revised if there are substantial price changes.
60. Answer : (c)
Reason : The system of identification and communication that signals the manager when his attention is
needed is known as management by exception. The system remains silent when attention of the
manager is not required. The manager can devote attention only to those areas which require
managerial action.
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61. Answer : (b)
Reason : Actual cost
Standard material cost = Actual material cost + Favorable material price variance +Favorable
material usage variance
Standard wages = Actual wages paid + favorable labor efficiency variance – adverse labor rate
variance – adverse labor idle time variance
Particulars Total (Rs.) Per unit (Rs.)
Standard material cost (35,000 + 1,600 – 1,950)
Standard wages (44,000 +1,405 – 1,350 – 900)
34,650
43,155
5.50
6.85
Total 77,805 12.35
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62. Answer : (d)
Reason : Statement showing profit at different capacity levels
Capacity levels
60 %(Rs.) 70%(Rs.)
Units 9,000 10,500
Selling price per unit 250 245
Material 120 123
Labor 35 35
Factory overhead 16 16
Administration overhead 10 10
Total marginal cost per unit 181 184
Contribution per unit 69 61
Total contribution 6,21,000 6,40,500
Less : Fixed cost 2,79,000 2,79,000
Profit 3,42,000 3,61,500
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63. Answer : (d)
Reason : RI is the net operating income which a division is able to earn above the minimum rate of
return on operating assets. It is in absolute terms and not a ratio. Hence (d) is false. As RI is the
income above the minimum rate of return, there is a problem of defining the minimum required
rate of return associated with various investment opportunities. ROI can be readily employed
for inter-divisional comparisons as it is a ratio. A project will be rejected under ROI method
and accepted under RI method if the rate of return from such project is more than the minimum
required rate of return but less than the current ROI. Under RI approach, the larger divisions
will be expected to have more RI than the smaller divisions, not necessarily because they are
better managed but because of the bigger numbers involved.
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64. Answer : (d)
Reason : As market becomes saturated, pressure is exerted for a new product and sales along with profits
of old product begin to fall. Intensified marketing effort may prolong the period of maturity, but
only by increasing costs disproportionately. Hence option (d) is correct. All other options (a),
(b), (c) and (e) are incorrect.
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65. Answer : (e)
Reason : The pre-requisites for effective divisionalisation include
I The organization will have two or more units for which revenues and costs can be
measured.
II. Each division should be sufficiently independent of other divisions.
III. Top management should not interfere too much in divisional matters
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66. Answer : (b) < TOP >
27
Reason : The production control supervisor has the most control over the materials usage variance. The
materials usage variance measures the amount of material used over the amount specified in the
standard. Production control supervisor is not responsible for material price variance, variable
overhead spending variance, fixed overhead budget variance, fixed overhead volume variance.
Therefore, (b) is correct.
67. Answer : (c)
Reason : When preparing a performance report for a cost center using flexible budgeting techniques, the
planned cost column should be based on budget adjusted to the actual level of activity for the
period being reported.
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68. Answer : (b)
Reason : TQC is a management process based on the belief that quality costs are minimized with zero
defects. The phrase ‘Quality is free’ is commonly advocated by the proponents of TQC. Hence
statement (b) is incorrect and all other statements (a), (c), (d) and (e) are correct.
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69. Answer : (b)
Reason : Standard cost are predetermined, attainable unit costs. Standard cost systems isolate deviations
of actual from expected costs. One advantage of standard costs is that they facilitate flexible
budgeting. Accordingly, standard and budgeted costs should not differ when standards are
currently attainable. However, in practice, budgeted (estimated actual) costs may differ from
standard costs when operating conditions are not expected to reflect those anticipated when the
standards were developed. Answer (a) is incorrect because standard costs are determined
independently of the budget. Answer (c) is incorrect because budgeted costs are expected future
costs, not historical cost. Answer (d) is incorrect because budgeted and standard costs should in
principle be the same, but in practice they will differ when standard costs are not expected to be
currently attainable. Answer (e) is not correct. Therefore (b) is the answer.
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70. Answer : (e)
Reason :
Rs.
Sales to outsiders (Rs.3,00,000 – Rs.40,000) 2,60,000
Less: manufacturing cost of goods sold to outsiders
(Rs.2,25,000 – Rs.40,000)
1,85,000
Contribution 75,000
Mark-up on outside sale =
Rs.75,000
= 40.54%
Rs.1,85,000
Particulars Rs.
Transfer price to outside sales (40,000 × 1.4054%) 56,216
Sales to outsiders 2,60,000
Total sales 3,16,216
Less: Manufacturing expenses 2,25,000
Contribution 91,216
Less: Traceable expenses
Administration expenses 30,000
Selling expenses 15,000
Operating income 46,216
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71. Answer : (b)
Reason : Computation of prime cost
Rs.
Sales (24,000 units) 18,00,000
Less: Profit margin – 25% 4,50,000
Cost of sales – (75% of Rs.18,00,000) 13,50,000
Less: Variable overheads – Rs.2,40,000
Semi -variable overheads – Rs.2,60,000
Fixed overheads – Rs.2,50,000 7,50,000
Prime cost 6,00,000
Semi -variable overheads:
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28
Variable cost = Change in units
Change in cos t
=
Rs.2,90,000-Rs.2,60,000
30,000units-24,000units =
.30,000
6,000
Rs
units = Rs.5per unit
At 24,000 units
Fixed cost = Total cost – Variable cost
= Rs.2,60,000 – 24,000 units ´ Rs.5 = Rs.1,40,000
At 27,000 units
Total cost = 27,000 units ´ Rs.5 + Rs.1,40,000 = Rs.1,35,000 + Rs.1,40,000
= Rs.2,75,000
Computation of differential cost of production of 5,000 additional units (i.e. 10% of normal
capacity):
Element of cost 24,000 units
(Rs.)
27,000 units
(Rs.)
Differential cost
for 3,000
units (Rs.)
Prime cost – 6,00,000 6,75,000 75,000
Variable overhead 2,40,000 2,70,000 30,000
Semi variable overhead 2,60,000 2,75,000 15,000
Fixed overhead 2,50,000 2,50,000 –
13,50,000 14,70,000 1,20,000
Cost per unit of new order =
Rs.1,20,000
3,000 = Rs.40.00
Profit margin (25% on sale = 33
1
3 % on cost) = Rs.13.33
Minimum selling price per unit = Rs.53.33
< TOP OF THE DOCUMENT >