Management Accounting (MB161) : April 2005

Question Paper

Management Accounting (MB161) : April 2005

· · Answer all questions.
· · Marks are indicated against each question.
1. Which of the following statements is false ?
(a) Differential cost pricing could bring about pricing decis ions that tend to disregard the necessity
of recovering total costs in the long run
(b) Differential cost pricing is not related to economic marginal analysis
(c) Full cost pricing ignores the vital economic considerations of demand and competition
(d) Full cost pricing is prone to distortion by accounting misapplication such as an unjustifiable
inclusion of manufacturing overhead based on predetermined rates
(e) ROI pricing method guides management in determining what selling price will provide a given
rate of return.
(1 mark)
< Answer >
2. If a company desires to earn a 15% profit margin on selling price, the profit mark up on cost of the
company is
(a) 15% (b) 17.65% (c) 85% (d) 13.04% (e)
20%.
(1 mark)
< Answer >
3. The following data relates to Product ‘P’ of Megha Ltd. for the month of March 2005:
Actual direct labor cost (Rs.) 91,700
Normal activity in hours 6,000
Actual hours used 7,000
Standard labor hours allowed 7,500
Direct labor rate variance (Rs.) 700 (Adverse)
Actual total overheads (Rs.) 80,000
Budgeted fixed costs (Rs.) 45,000
Total overhead rate (Rs.) 11.25 per direct labor hour
The overhead cost variance for the month is
(a) Rs.4,375 (Favorable) (b) Rs.4,375 (Adverse) (c) Rs.7,325 (Favorable)
(d) Rs.12,500 (Adverse) (e) Rs.12,500 (Favorable).
(1 mark)
< Answer >
4. An organized creative approach, which emphasizes efficient identification of unnecessary cost is
known as
(a) Management by objective (b) Value analysis
(c) Zero-based budgeting (d) Activity based costing (e) Quality costing.
(1 mark)
< Answer >
5. If the activity level is reduced from 80% to 70%, the fixed cost
(a) Will decrease by 10% (b) Will increase by 10%
(c) Per unit will decrease (d) Per unit will increase
(e) Per unit will increase by 10%.
(1 mark)
< Answer >
6. The purpose for which cost is being ascertained is called
(a) Cost behavior (b) Cost control (c) Cost center
(d) Cost effectiveness (e) Cost objective.
(1 mark)
< Answer >
7. The information contained in cost of goods manufactured budget most directly relates to
(a) Materials used, direct labor, overhead applied, and ending work-in-process budgets
(b) Materials used, direct labor, overhead applied, and work-in-process inventories budgets
(c) Materials used, direct labor, overhead applied, work -in-process inventories, and finished goods
inventories budgets
(d) Materials used, direct labor, overhead applied, and finished goods inventories budgets
(e) Materials used, direct labor, overhead applied, unit production, and raw materials inventories
budgets.
(1 mark)
< Answer >
8. When comparing managerial accounting information with financial accounting information, it is
expected that managerial accounting information would
(a) Be based upon GAAP
(b) Emphasize information on the company as a whole
(c) Present estimates of future financial operations
(d) Include an analysis of historical cost
(e) Be mandatory for business organizations.
(1 mark)
< Answer >
9. The process of pricing the goods and services transferred between departments of an organisation is
called
(a) Shadow pricing (b) Transfer pricing
(c) Full cost pricing (d) Mark-up pricing
(e) Marginal cost pricing.
(1 mark)
< Answer >
10. Monark Ltd. has undertaken to supply 2,000 units of product – ‘MONO’ per month for the months of
April, May and June 2005. Every month a batch order is opened against which materials and labor
cost are booked at actuals. Overheads are absorbed at a rate per labor hour. The selling price is
contracted at Rs.15 per unit. The company has furnished the following data pertaining to the costs for
3 months:
Month Batch Production
(Units)
Material
cost (Rs.)
Labor
cost (Rs.)
Overhead
cost (Rs.)
Total labor
hours
April ’05 2,500 12,500 5,000 24,000 8,000
May ’05 3,000 18,000 6,000 18,000 9,000
June ’05 2,000 10,000 4,000 30,000 10,000
The rate per labor hour is Rs.2. The overall profit of the order of 6,000 units is
(a) Rs.90,000 (b) Rs.80,000 (c) Rs.75,000 (d) Rs.60,000
(e)Rs.30,000.
(3 marks)
< Answer >
11. Mani Ltd. has furnished the following information pertaining to product X :
Budgeted variable overhead cost Rs.15,000
Budgeted fixed overhead cost Rs.30,000
Budgeted direct labor hour s 15,000
Budgeted production in units 7,500
Actual variable overhead cost Rs.14,000
Actual fixed overhead cost Rs.29,000
Actual direct labor hours 13,000
If the company produces 6,000 units, the variable overhead efficiency variance is
(a) Rs.1, 000 favorable (b) Rs.1,000 unfavorable
(c) Rs.2,000 unfavorable (d) Rs.2,000 favorable
(e) Rs.3,000 unfavorable.
(2 marks)
< Answer >
12. 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 >
13. HCL Chemicals produces three products, HC, HL & CL. The raw materials cost is Rs.30,000 and
processing cost is Rs.24,000. At this point 1,500 litre of HC is produced and can be sold for
Rs.20,000. Additional processing cost of Rs.9,000 produces 4,000 litre of HL and 500 litre of CL. The
HL can be sold for Rs.60,000, and the CL can be sold for Rs.5,000 after further processing that costs
Rs.1,000.
The profit (loss) of Product HL is
(a) Rs.60,000 (b) Rs.16,000 (c) (Rs.3,000) (d) (Rs.4,000) (e)
Rs.5,000.
(2 marks)
< Answer >
14. For a given period, profit under absorption costing is less than the profit under marginal costing, if
(a) Production is more than sales (b) Production is equal to sales
(c) Opening stock is equal to sales (d) Sales are more than production
(e) Closing stock is more than opening stock.
(1 mark)
< Answer >
15. Baisakhi Ltd. has 3 production departments – P1, P2 and P3 and 2 service departments – S1 and S2.
The company has furnished the following overhead costs of production departments as well as service
departments:
Department Overhead costs (Rs.)
P1 13,600
P2 14,700
P3 12,800
S1 9,000
S2 3,000
The company has provided the following expenses of service departments which are charged to
production as well as service departments on a percentage basis:
Department P1 P2 P3 S1 S2
S1 40% 30% 20% - 10%
S2 30% 30% 20% 20% -
The total expense of P2 is
(a) Rs.18,712 (b) Rs.18,833 (c) Rs.15,555 (d) Rs.16,721 (e)
Rs.15,833.
(2 marks)
< Answer >
16. Brand Manufacturing Company makes one model of a product known as ‘Brand B’. The company has
provided the following balances as on October 01, 2004:
Finished goods – 500 units
Work-in-process – Rs. 5,740
Raw materials – Rs. 11,620
The following data are available as on March 31, 2005
Indirect labor – Rs. 12,160
Freight in – Rs. 5,570
Direct labor – Rs. 32,640
< Answer >
Raw material – Rs. 9,640
Factory overhead expenses – Rs. 31,730
Work-in-process – Rs. 7,820
Sales (15,000 units) – Rs.3,60,000
Indirect material – Rs. 21,390
Total manufacturing costs incurred – Rs.1,94,080
There were 1,500 units of finished goods of ‘Brand B’ as on March 31, 2005.
The amount of raw materials purchased during the half-year ended March 31, 2005 is
(a) Rs.92,570 (b) Rs.88,610 (c) Rs.94,180 (d) Rs.86,530 (e)
Rs.1,21,250.
(2 marks)
17. Which of the following factors is/are considered in determining the period of the short-range budget?
I. The budget period should be long enough to allow for the financing of production
well in advance of actual needs.
II. The budget period should be long enough to cover complete production of various products.
III. For business of a seasonal nature, the budget period should cover at least one entire seasonal
cycle.
IV. The budget period should coincide with the financial accounting period for comparison.
(a) Only (I) above (b) Only (III) above
(c) Both (II) and (III) above (d) Both (I) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
18. In case of weighted average price method, the need for calculating a new issue price arises every time
when
(a) A new purchase is made
(b) A new issue is made
(c) The price must be fixed at alternate issues
(d) The price must be fixe d at alternate purchases
(e) Both a new issue and a new purchase are made.
(1 mark)
< Answer >
19. A debit balance of material 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 >
20. Jai Shivani Ltd. manufactures and sells four types of products under the brand names of Alfa, Beta,
Gamma & Delt a. The sales mix in value comprises 33%, 42%, 16% & 9% of Alfa, Beta, Gamma &
Delta respectively. The total budgeted sales (i.e. 100%) are Rs.60,000 per month. The operating costs
are as follows:
i) Variable costs: Product - Alfa 60% of selling price
Product - Beta 65% of selling price
Product - Gamma 80% of selling price
Product - Delta 40% of selling price
ii) Fixed cost Rs. 17,520 per month
The break-even point for the production on an overall basis (i.e., in total) is
(a) Rs.45,213 (b) Rs.43,800 (c) Rs.50,057 (d) Rs.48,000 (e)
Rs.87,600.
(2 marks)
< Answer >
21. The costs having clear relationship to output are known as
(a) Opportunity costs (b) Engineered costs
(c) Manufacturing costs (d) Overhead costs (e) Budgeted costs.
(1 mark)
< Answer >
22. The standards which are based on conditions which may be realized in actual practice are
(a) Ideal standards (b) Expected standards
(c) Current standards (d) Basic standards (e) Measurement standards.
(1 mark)
< Answer >
23. The cost data pertaining to Product “X” of XL Ltd. are as follows:
Maximum capacity 30,000 units
Normal capacity 15,000 units
Increase in inventory 1,880 units
Variable cost per unit Rs.12
Selling price per unit Rs.50
Fixed manufacturing overhead costs Rs.3,60,000
If the profit under Absorption costing method is Rs.1,01,000, the profit under Marginal costing
method would be
(a) Rs.1,46,120 (b) Rs.1,23,560 (c) Rs. 78,440 (d) Rs. 55,880 (e) Rs.
73,340.
(1 mark)
< Answer >
24. The transfer price which is usually based on the listed price of an identical or similar product or
service, or the price of a competitor, is called
(a) Marginal cost transfer pricing (b) Cost plus a mark up transfer pricing
(c) Negotiated transfer pricing (d) Full cost transfer pricing
(e) Market based transfer pricing.
(1 mark)
< Answer >
25. The use of standard costs in the budgeting process signifies that an organization has most likely
implemented a
(a) Flexible budget (b) Capital budget (c) Zero-base budget
(d) Static budget (e) Strategic budget.
(1 mark)
< Answer >
26. BJK Ltd. is preparing its cash budget for the year 2005-06. An extract from its budget for the same
year shows the following values:
Month Sales Purchase of material Wages
April 2005 Rs.1,50,000 50,000 10,000
May 2005 Rs.1,80,000 60,000 12,000
June 2005 Rs.1,40,000 65,000 13,000
July 2005 Rs.1,50,000 70,000 14,000
40% of its sales are expected to be for cash. Of its credit sales, 50% are expected to pay in the month
after the month of sales and 50% are expected to pay in the second month after the month of sales.
The company has estimated to pay 50% of total materials in cash and rest amount will be paid in the
following month. Wages are paid on the 2nd day of the following month.
The net receipts to be shown in the cash budget for the month of June 2005 is
(a) Rs.80,500 (b) Rs.92,500 (c) Rs.1,55,000 (d) Rs.2,29,500 (e)
Rs.2,17,500.
(2 marks)
< Answer >
27. The cost of goods manufactured, under a periodic cost accumulation system, is equal to the
< Answer >
(a) Cost of goods sold less beginning work-in-process
(b) Cost of goods put into production plus beginning work-in-process less ending work-in-process
(c) Cost of goods put into production plus ending work-in-process less beginning work-in-process
(d) Cost of goods available for sale plus beginning finished goods less ending finished goods
(e) Cost of goods available for sale plus ending finished goods less beginning finished goods.
(1 mark)
28. AB Ltd. uses process-costing system to manufacture product Alfa. The company has furnished the
following information pertaining to operations for the month of March 2005:
Particulars Units
Opening work-in-process (March 01, 2005) 300
Introduced in production during March 2005 5,000
Closing work-in-process (March 31, 2005) 450
There is no loss in the manufacturing process. The opening inventory was 80% complete for materials
and conversion costs. The closing inventory was 80% complete for material and 60% complete for
conversion costs.
Costs pertaining to the month of March 2005 are as follows:
Opening work in process:
Materials Rs.12,300
Conversion Rs.10,500
During the month:
Materials Rs.62,125
Conversion Rs.51,240
The total cost of closing work-in-process for the month of March 2005, using FIFO method, is
(a) Rs.10,350 (b) Rs.7,335 (c) Rs.12,300 (d) Rs.9,850 (e) Rs.11,100.
(2 marks)
< Answer >
29. In a decision analysis situation, which of the following costs is generally not relevant?
(a) Incremental cost (b) Differential cost (c) Replacement cost
(d) Avoidable cost (e) Historical cost.
(1 mark)
< Answer >
30. Which of the following bases is not appropriate for apportionment of Transport department’s cost?
(a) Crane hours (b) Crane value (c) Truck mileage (d) Truck hours (e) Truck
tonnage.
(1 mark)
< Answer >
31. Which of the following will decrease the contribution margin per unit?
I. Increase in variable cost per unit.
II. Decrease in selling price per unit.
III. Decrease in fixed cost per unit.
(a) Only (I) above (b) Only (II) above (c) Only (III) above
(d) Both (I) and (II) above (e) Both (II) and (III) above.
(1 mark)
< Answer >
32. Beta Ltd. manufactures cabinets and outsources handles of the cabinet. Each cabinet requires five
handles. The direct labor time for assembly work is 40 minutes per cabinet. The closing stock of
finished cabinets in a month is estimated to be 50% of projected unit sales for the next month. The
closing stock of handles in a month is planned to be 70% of the requirement for the second following
month.
The company has furnished the following projected unit sales:
April
2005
280
cabinets
May
2005
286
cabinets
< Answer >
June
2005
290
cabinets
July 2005 320
cabinets
The closing inventory of the company for the month of March 2005 is as follows:
Cabinets 124
Handles 900
The number of handles to be purchased in the month of April 2005 is
(a) 900 units (b) 1,008 units (c) 1,387 units (d) 1,495 units (e) 1,603
units.
(2 marks)
33. AB Ltd. manufactures two products – A and B. The company has furnished the following data relating
to the products:
Particulars Product A (Rs.) Product B
(Rs.)
Variable cost per unit 24.00 18.00
Fixed cost per unit 15.00 20.00
Total cost 39.00 38.00
The company has received the following price quotations for the two products from a supplier:
A – Rs.25 per unit B – Rs.40 per unit
Which of the following decisions should be considered by the company?
(a) Make Product A and buy Product B (b) Make Product B and buy Product A
(c) Make both the products (d) Buy both the products
(e) Insufficient information for making decision.
(1 mark)
< Answer >
34. The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus disposal
decision is an example of
(a) Uncontrollable cost (b) Opportunity cost (c) Sunk cost
(d) Avoidable cost (e) Relevant cost.
(1 mark)
< Answer >
35. On setting the price at which the customers will buy and accordingly bringing down the costs so as to
earn the desired profits, is a technique adopted under
(a) Activity based costing (b) Life cycle costing
(c) Value chain analysis (d) Target costing (e) Quality costing.
(1 mark)
< Answer >
36. A company absorbs overheads on machine hours. In a period, the actual machine hours were 17,285,
the actual overheads were Rs.4,96,500 and there was under absorption of Rs.12,520.
The budgeted level of overheads of the company is
(a) Rs.4,83,980 (b) Rs.4,96,500 (c) Rs.5,09,020
(d) Rs.5,13,785 (e) The data is insufficient.
(1 mark)
< Answer >
37. Which of the following is classified under the Job Costing System?
(a) Wallpaper Manufacturer (b) Beverage Drink Manufacturer
(c) Paint Manufacturer (d) Printing Shop (e) Oil Refinery.
(1 mark)
< Answer >
38. The opportunity cost of making a component part in a factory with no excess capacity is the
(a) Fixed manufacturing cost of the component
(b) Variable manufacturing cost of the component
(c) Total manufacturing cost of the component
(d) Cost of production given up in order to manufacture the component
(e) Net benefit given up from the best alternative use of the capacity.
(1 mark)
< Answer >
39. Which of the following can be decentralized segments?
I. Cost centers. II. Profit centers.
III. Investment centers. IV. Revenue centers.
(a) Only (I) above (b) Only (II) above
(c) Both (II) and (III) above (d) (I), (II) and (III) above
(e) All (I),(II),(III) and (IV) above.
(1 mark)
< Answer >
40. Quadila Ltd. has furnished the following information pertaining to its product for the year ended
March 31, 2005:
Selling price per unit Rs.80
Variable cost per unit Rs.35
Fixed cost Rs.5,96,000
The company plans to improve the quality of its sole product by
i. Replacing a component that costs Rs.6.25 with a higher-grade unit that costs Rs.8.00.
ii. Acquiring a packing machine of Rs.80,000.
The company will depreciate the machine over a period of 10 years with no estimated salvage value
by the Straight Line Method of depreciation. The income tax rate is 40%. If the company desires to
earn a post-tax income of Rs.1,12,200 in the upcoming period, the units to be sold by the company are
(a) 16,560 (b) 18,104 (c) 16,375 (d) 18,289 (e) 17,519.
(2 marks)
< Answer >
41. Which of the following costs is not considered as a product cost under Absorption Costing as well as
Direct Costing?
(a) Insurance of factory (b) Direct labor cost
(c) Freight-in (d) Packaging and shipping cost
(e) Manufacturing supplies.
(1 mark)
< Answer >
42. Rungta Electricity Generation and Distribution Ltd. has furnished the following information pertaining
to the year 2004 -05:
Total units generated 20,00,000 kwh
Operating labor Rs.50,000
Repairs and maintenance Rs.50,000
Lubricants,spares and stores Rs.40,000
Plant supervision Rs.30,000
Administrative overheads Rs.20,000
Coal consumed per kwh for the year is 2.5 kg. at the rate of Re.0.02 per kg. Depreciation charges at
the rate of 5% on capital cost of Rs.2,00,000. The total cost per kwh is
(a) Re.0.005 (b) Re.0.010 (c) Re.0.015 (d) Re.0.018 (e)
Re.0.150.
(2 marks)
< Answer >
43. The costing method in which fixed factory overheads are added to inventory is
< Answer >
(a) Direct costing (b) Marginal costing
(c) Absorption costing (d) Standard costing (e) Historical costing.
(1 mark)
44. The biggest problem with market -based transfer prices is that
(a) It does not allow both the buyer and the seller to calculate unit incomes
(b) It requires too much negotiation
(c) Market prices seldom exist
(d) It does not provide the proper economic guidance
(e) Market based transfer price may not be acceptable to the receiving division.
(1 mark)
< Answer >
45. The following information pertains to Suman Ltd. for its new product:
Production units 4,000 units
Investment for the new product Rs.5,00,000
Fixed costs Rs.3,00,000
Variable cost per unit Rs.25
If the company desires to earn a return of 25% on investment, the selling price should be
(a) Rs.100.00 (b) Rs.106.25 (c) Rs.131.25 (d) Rs.56.25 (e)
Rs.81.25.
(1 mark)
< Answer >
46. Which of the following items are included in inventory carried by a manufacturer?
(a) Raw materials, work-in-process, and merchandise
(b) Raw materials, work-in-process, and finished goods
(c) Office supplies, work-in-process, and merchandise
(d) Raw materials, finished goods, and cost of goods sold
(e) Office supplies, cost of goods sold and merchandise.
(1 mark)
< Answer >
47. Ramana Ltd. a manufacturer of portable radios, purchases the components from subcontractors and
assembles them into a complete radio. Each radio requires three units of part X which has standard
cost of Rs.145 per unit.
Following is the result pertaining to part X for the month of March 2005:
Particulars Units
Purchases (Rs.18,00,000)
Consumed in manufacturing
Radios manufactured
12,000
10,000
3,000
The material efficiency variance for the month of March 2005 is
(a) Rs.1,45,000 unfavorable (b) Rs.1,45,000 favorable
(c) Rs.4,35,000 unfavorable (d) Rs.4,35,000 favorable (e) Rs.4,50,000 favorable.
(1 mark)
< Answer >
48. SJH Ltd. has the following information with respect to variable manufacturing overhead for the month
of March 2005. The budget calls for 11,000 units to be produced using a total of 4,400 machine-hours.
The variable overhead costs for the period are budgeted to be Rs.1,32,000. During the month, the
actual output was 10,000 units. The actual variable overhead costs were Rs.1,32,250 and 4,600
machine-hours were actually used. What is the variable overhead flexible-budget variance for the
month?
(a) Rs.250 Favorable (b) Rs.250 Unfavorable
(c) Rs.12,250 Favorable (d) Rs.12,250 Unfavorable
(e) Rs.12,000 Unfavorable.
(2 marks)
< Answer >
49. Opportunity cost is a(n)
(a) Notional cost
(b) Cost foregone on account of not using the facilities in the original manner as planned
(c) Out of pocket cost
(d) Irrelevant cost
(e) Product cost.
(1 mark)
< Answer >
50. Armada Company’s expected volume was 48,000 units at 12,000 hours of labor. The variable
overhead rate is Rs.5 per hour. Actual variable overhead was Rs.50,000 for 40,000 units of production
at 9,600 hours of labor. Which of the following is correct about the variable overhead variances?
(a) Spending variance – Rs.2,000 (A); efficiency variance – Rs.2,000 (A)
(b) Spending variance – Rs.2,500 (F); efficiency variance – Rs.2,900 (A)
(c) Spending variance – Rs.2,500 (A); efficiency variance – Rs.2,500 (F)
(d) Spending variance – Rs.2,000 (F); efficiency variance – Rs.2,500 (A)
(e) Spending variance – Rs.2,000 (A); efficiency variance – Rs.2,000 (F).
(2 marks)
< Answer >
51. Saba Plastics Ltd. has a beginning work-in-process inventory of 250 yards,100% complete with regard
to material and 80% complete with regard to conversion. 9,250 yards were added during the period.
7,200 yards were completed. Normal loss amounted to 5% of completed units. Abnormal loss
amounted to 490 yards. Ending work-in-process of the period was 80% complete with regard to
materials and 60% complete with regard to conversion costs. The cost of beginning work-in-process
was Rs.3,500, Rs.1000 of which was for conversion costs. From the total cost of Rs.1,32,280 of added
costs, Rs.37,410 was for conversion costs.
The equivalent number of production units of material, using weighted method, is
(a) 8,700 (b) 8,910 (c) 8,950 (d) 9,210 (e) 8,850.
(2 marks)
< Answer >
52. Mohan Constructions undertook a contract for construction of a large complex in Secunderabad. The
construction work commenced on April 01, 2004 and the following data are available for the year
ended March 31, 2005:
Particulars Rs.
Total contract price 1,25,00,000
Work certified 79,00,000
Progress payment received 62,50,000
Material issued to site 40,80,000
Direct wages paid 16,50,000
Materials returned from site 51,500
Plant hire charges 1,25,000
Wage related costs 99,500
Direct expenses incurred 63,500
Work not certified 11,11,500
Materials at site 40,500
Accrued wages 34,000
The contractors own a plant which originally costs Rs.12,00,000 and has been continuously in use in
this contract throughout the year. The salvage value of the plant after 10 years is nil. The company
uses the straight-line method of depreciation. The total of work-in-process and plant at site to be
shown in the balance sheet as on March 31, 2005 is
(a) Rs.12,15,351 (b) Rs.22,95,351 (c) Rs.20,22,551
(d) Rs.23,30,341 (e) Rs.24,56,149.
(2 marks)
< Answer >
53. Which of the following is/are the disadvantage(s) of Activity-based costing?
I. It analyses those costs that do not add value to the products.
< Answer >
II. It does not partition the fixed and the variable costs.
III. It is only as accurate as the cost drivers.
(a) Only (I) above (b) Only (III) above (c) Both (I) and (II) above
(d) Both (I) and (III) above (e) Both (II) and (III) above.
(1 mark)
54. MBA Ltd. has furnished the following production budget pertaining to a single product for the month
of March 2005:
Production quantity 2,40,000 units
Production costs:
Material
Direct labor
3,36,000 kg at Rs.4.10 per kg
2,16,000 hours at Rs.4.50 per hour
Variable overheads Rs. 4,75,200
Fixed overheads Rs.15,21,600
The variable overheads are absorbed at a predetermined direct labor hour rate and the fixed overheads
are absorbed at a predetermined rate per unit of output.
During the month, the actual production was 2,20,000 units and the following costs were incurred:
Material 3,13,060 kg at
Rs.12,45,980
Direct labor 1,94,920 hours at
Rs.8,86,886
Variable overheads Rs.4,33,700
Fixed overheads Rs.15,01,240
The variable overhead efficiency variance and fixed overhead volume variance are
(a) Rs.1,900 (F) and Rs.1,26,800 (A) respectively
(b) Rs.6,776 (F) and Rs.1,06,440 (A) respectively
(c) Rs.6,776 (F) and Rs.4,876 (A) respectively
(d) Rs.6,776 (F) and Rs.1,26,800 (A) respectively
(e) Rs.4,876 (A) and Rs.1,26,800 (F) respectively.
(2 marks)
< Answer >
55. Which of the following is usually the longest stage in the product life cycle?
(a) Introduction phase (b) Growth phase (c) Maturity phase
(d) Saturation phase (e) Decline Phase.
(1 mark)
< Answer >
56. Committed cost
(a) Is a cost which is essential for the decision under consideration
(b) Is a fixed cost which results from the decisions of the management in the prior period and is not
subject to the management control in the short run
(c) Is a cost at which there could be purchase of an asset or material identical to that which is being
replaced or revalued
(d) Is the maximum possible alternative earnings that might have been earned if the production
capacity or services had been put to some alternative use
(e) Is that portion of the cost, which involves payment to outsiders.
(1 mark)
< Answer >
57. Consider the following costs of a company:
Activity in Cost A Cost B Cost C
units Total
(Rs.)
Average
(Rs.)
Total
(Rs.)
Average
(Rs.)
Total
(Rs.)
Average
(Rs.)
1,000 50,000 50 60,000 60 45,000 45
2,000 1,00,000 50 60,000 30 60,000 30
3,000 1,50,000 50 60,000 20 75,000 25
Which of the costs, A, B, or C, is/are variable cost/s?
< Answer >
(a) Cost A (b) Cost B (c) Cost C
(d) Both Cost A and Cost C (e) Both Cost B and Cost C.
(1 mark)
58. The following data are obtained from the records of a company:
Particulars First year (Rs.) Second year (Rs.)
Sales 2,50,000 2,80,000
Profit 60,000 72,000
The break-even sales in rupees of the company is
(a) Rs.1,50,000 (b) Rs.1,00,000 (c) Rs.1,60,000 (d) Rs.1,55,000 (e)
Rs.1,80,000.
(2 marks)
< Answer >
59. Which of the following terms would be used in a process costing system but not in a job order cost
system?
(a) Escalation clause (b) Job order cost sheet
(c) Equivalent units (d) Notional profit (e) Production order
number.
(1 mark)
< Answer >
60. The critical test of profitability of a decentralized segment is
(a) The absolute amount of profit
(b) The relationship of profit to sales
(c) The relationship of profit to the number of employees
(d) The relationship of profit to invested capital
(e) The relationship of costs to sales.
(1 mark)
< Answer >
61. An organization's break-even point is 4,000 units at a sales price of Rs.50 per unit, variable cost of
Rs.30 per unit and total fixed costs of Rs.80,000. If the company sells 500 additional units, by how
much will its profit increase?
(a) Rs.25,000 (b) Rs.15,000 (c) Rs.12,000 (d) Rs.37,000 (e)
Rs.10,000.
(1 mark)
< Answer >
62. If a company manufactures two products from a common process, which of the following factors
determines whether the output consists of joint products or one principal product and a by-product?
(a) Management policy
(b) Potential marketability for each product
(c) Commercial value
(d) Quantum of work expended in the production of each product
(e) Average unit cost of the products.
(1 mark)
< Answer >
63. Which of the following is/are methods of by-product accounting?
I. Reserve cost method. II. Net value method. III. Replacement cost method.
IV. Standard cost method.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (II) and (IV) above
(e) (I), (III) and (IV) above.
(1 mark)
< Answer >
64. Fantoosh Ltd. has prepared the following budget for the year 2005-06:
Particulars Percentage
to total sales
< Answer >
Direct materials 35
Direct labor 25
Factory overheads – Variable 12
Fixed 10
Selling and administrative overheads – Variable 08
Fixed 06
Profit 04
Total 100
After evaluating the first quarter performance, it was observed that the company would be able to
achieve only 75% of the original budgeted sales. The revised budgeted sales as envisaged above were
estimated at Rs.1,530 lacs after taking into account a reduction in selling price by 15%.
The original budgeted sales at original price are
(a) Rs.2,500 lakh (b) Rs.2,400 lakh
(c) Rs.2,200 lakh (d) Rs.1,734 lakh (e) Rs.1,350 lakh.
(2 marks)
65. 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 >
66. Sarkar Ltd. is preparing its cash budget for the next period. Sales are expected to be Rs.1,00,000 in
April, Rs.2,00,000 in May, Rs.3,00,000 in June and Rs.1,00,000 in July. Half of total sales are cash
sales and the other half are on credit. Experience indicates that 70% of the credit sales will be
collected in the month following the month of sale, 20% in the second month following the month of
sale and 10% in the third month following the month of sale. The budgeted collection from sales for
the month of July is
(a) Rs.1,30,000 (b) Rs.1,80,000 (c) Rs.2,60,000
(d) Rs.3,60,000 (e) Rs.2,00,000.
(2 marks)
< Answer >
67. A company manufactures two products – X and Y in one of its factories. Production capacity is
limited to 85,000 machine hours per period. There is no restriction on direct labour hours.
The following further information is provided concerning the two products :
Particulars Product X Product Y
Estimated demand (’000 units) 315 135
Selling price per unit Rs. 11.20 Rs. 15.70
Variable cost per unit Rs. 6.30 Rs. 8.70
Fixed costs per unit Rs. 4.00 Rs. 7.00
Machine hours per 1000 units 160 280
Direct labour hours per 1000 units 120 140
Fixed costs are absorbed at a rate per machine hour based upon full capacity.
The production quantities of Products X and Y per period which will fully utilize both machine
capacity and direct labour hours, where the available direct labour hours are restricted to 55,000 per
period, are
(a) 3,12,500 units and 1,25,000 units respectively
(b) 3,02,000 units and 1,20,000 units respectively
(c) 3,22,500 units and 98,000 units respectively
(d) 3,33,500 units and 89,000 units respectively
(e) 3,16,700 units and 1,15,000 units respectively.
< Answer >
(3 marks)
68. Consider the following data pertaining to a product of Megha Sai Ltd. for the month of March 2005:
Fixed Costs – Rs.2,20,000
Net Profit – Rs.1,04,000
Total Sales – Rs.8,10,000
The margin of safety of the product for the month was
(a) Rs.5,00,000 (b) Rs.4,00,000 (c) Rs.3,00,000
(d) Rs.2,60,000 (e) Rs.2,00,000.
(1 mark)
< Answer >
69. 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 m anufacturing costs plus unavoidable fixed costs
(e) Avoidable fixed costs plus depreciation costs.
(1 mark)
< Answer >
70. 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) Only (II) above (c) Only (III) above
(d) Only (IV) above (e) Both (III) and (IV) above.
(1 mark)
< Answer >
71. Action Plan Ltd. manufactures two products – A and P, using same facilities and similar process. The
company has furnished the following information pertaining to two products for the year ending
March 31, 2005.
Particulars Product A Product P
Direct labor hours per unit 4 2.5
Machine hours per unit 5 4
Number of set ups during the period 22 18
Number of orders handled during the period 16 19
Production units 6,000 4,340
Total production overhead costs for the period are as follows:
Particulars Rs.
Machine activity costs 2,40,000
Set-ups costs 56,000
Order handling costs 52,500
3,48,500
The absorption of total production overheads of product P on the basis of a suitable cost driver, using
Activity Based Costing method, is
(a) Rs.2,06,827 (b) Rs.1,41,673 (c) Rs.1,16,473
(d) Rs.1,74,250 (e) Rs.1,08,500.
(2 marks)
< Answer >
72. Pallavi Ltd. has provided the following information for the year ending 2004-05:
< Answer >
Particulars Rs.
Sales 1,00,000
Direct materials used 40,000
Direct labour 15,000
Fixed manufacturing overh ead 20,000
Fixed selling and distribution overhead 10,000
Gross profit 20,000
Net loss 5,000
The contribution Margin in rupees is
(a) Rs.15,000 (b) Rs.25,000 (c) Rs.40,000 (d) Rs.20,000 (e) Rs.23,000.
(2 marks)
73. Kavya Ltd. has the following estimates for the month of May, 2005:
Advertisement Rs.2,500
Salaries of the Sales Department Rs.5,000
Expenses of Sales Department Rs.1,500
Counter Salesmen’s Salaries and D.A Rs.6,000
Commission to Counter Salesmen 1 % of their sales
Traveling Salesmen’s Commission 10 % of their sales
Traveling Salesmen’s Expenses 5 % of their sales
If the estimated sales through counter and through traveling salesmen are Rs.1, 40,000 and Rs.20,000
respectively, the total sales overhead cost is
(a) Rs.16,000 (b) Rs.17,000 (c) Rs.17,400(d) Rs.18,000 (e) Rs.19,400.
(2 marks)
< Answer >
74. AB Ltd. has furnished the following estimation pertaining to Product “A” at 80% of its normal
capacity level for the quarter ending March 31, 2005:
Sales Rs.6,00,000
Administrative costs :
Office salaries Rs.90,000
General expenses 2 % of sales
Depreciation Rs.7,500
Rates and Taxes Rs.8,750
Selling costs :
Salaries 8 % of sales
Traveling expenses 2 % of sales
Sales office 1 % of sales
General expenses 1 % of sales
Distribution costs :
Wages Rs.15,000
Rent 1 % of sales
Other expenses 4 % of sales
The total of Administrative, Selling and Distribution expenses at 90 % capacity level is
(a) Rs.2,25,000 (b) Rs.2,49,500 (c) Rs.2,50,000 (d) Rs.2,60,0000 (e) Rs.2,68,500.
(2 marks)
< Answer >
Suggested Answers
Management Accounting (MB161): April 2005
1. Answer : (b)
Reason :As the economist maintains that to maximize income, a firm should produce at
the point where the marginal revenue equals marginal cost, in differential cost
analysis, the accountant says that the firm should produce at the point where
differential costs equal differential income. So differential cost Pricing is
related to economic marginal analysis. Hence, statement (b) is false. All other
statements are true.
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2. Answer : (b)
Reason : If the sale price is Rs.100, the profit is 15% i.e. Rs.15. Therefore, the cost
is Rs.85. So, the profit mark-up on cost is Rs.15 / Rs.85 i.e. 17.65%.
< TOP >
3. Answer : (a)
Reason : Actual overheads = Rs.80,000
Applied overhead
(Standard hours allowed x Total overhead cost)
7,500 hrs x Rs.11.25 = Rs.84,375
Rs. 4,375 (F)
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4. Answer : (b)
Reason : An organized creative approach, which emphasises efficient identification
of unnecessary cost i.e. cost that provides neither quality, nor use, nor life, nor
appearance, nor customer’s satisfaction is known as value-analysis
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5. Answer : (d)
Reason :If the activity level is decreased from 80% to 70%. The total fixed costs remain
fixed. Hence, the fixed cost per unit will increase but not in the same proportion
of 10%. Fixed cost per unit or in total does not decrease with a decrease in the
activity level. Therefore (d) is correct.
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6. Answer : (e)
Reason :Cost objective means the object undergoing costing. It can be a product,
service, job etc. Therefore, (e) is correct. Other alternatives mentioned in (a),
(b), (c) and (d) are not correct.
< TOP >
7. Answer : (b)
Reason : Cost of goods manufactured is equal to all manufacturing costs incurred during the period, plus
beginning work-in-process, minus ending work -in-process. A cost of goods manufactured
budget is therefore based on materials, direct labor, factory overhead, and work-in-process.
Answer (a) is incorrect because both beginning and ending work-inprocess
must be included. Answer (c) and (d) are incorrect because finished
goods are excluded. They are the end product of the manufacturing process.
Answer (e) is incorrect because work-in-process inventories must be included.
< TOP >
8. Answer : (c)
Reason :Management Accounting includes estimates. Financial Accounting looks at the
company as a whole based upon GAAP including analysis of historical costs.
Financial accounting is mandatory for business organizations. Therefore, (c) is
correct.
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9. Answer: (b)
Reason: The process of pricing the transfer of goods and services between departments
of an organisation is called transfer pricing. This is not shadow price, full cost
price, mark-up price and marginal cost price.
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10. Answer : (e)
Reason :
Particulars April May June Total
Batch Production (units) 2,500 3,000 2,000 7,500
(Rs.) (Rs.) (Rs.) (Rs.)
Total sales value (@
Rs.15)
37,500 45,000 30,000 1,12,500
Less: Costs:
Material Materials 12,500 18,000 10,000 40,500
Labor 5,000 6,000 4,000 15,000
Overheads (Workings) 7,500 6,000 6,000 19,500
25,000 30,000 20,000 75,000
Profit 12,500 15,000 10,000 37,500
Profit per unit 5 5 5
Cost per unit 10 10 10
Profit for 6,000 units
Sales – 6,000 ´
Rs.15
Rs.90,000
Cost – 6,000 ´
Rs.10 Rs.60,000
Profit Rs.30,000
Workings:
Batch labor hours Rs.5,000 ¸ Rs.2
= 2,500 hours
Rs.6,000 ¸ Rs.2
= 3,000 hours
Rs.4,000 ¸ Rs.2
= 2,000 hours
Overhead per hour
(Total Overheads ¸
Total labor hours)
Rs.24,000 ¸ 8,000
= Rs.3
Rs.18,000 ¸ 9,000
= Rs.2
Rs.30,000 ¸ 10,000
= Rs.3
Overhead for the batch Rs.7,500 Rs.6,000 Rs.6,000
< TOP >
11. Answer : (b)
Reason : Standard hrs per unit = 15,000 hrs/7,500units = 2hrs/unit.
6,000 units produced x 2 Labor hours allowed per unit = 12,000 Labor hours
allowed for production.
Step 2: 12,000 Labor hours allowed - 13,000 Labor hours actually incurred =
1,000 Labor hours( Unfavorable).
Step 3: 1,000 hrs x Re.1 std variable overhe ad rate = Rs.1,000 (unfavorable).
< TOP >
12. 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 >
13. Answer: (b)
Reason: The margin for product HL = Sales Rs.60,000 - Processing Cost
Rs.44,000 = Rs.16,000.
Workings:
The initial joint costs of Rs.54,000 (Rs.30,000 + Rs.24,000) produces 6,000
litre for a cost of Rs.9.00 per litre. The next process costs Rs.9,000 to produce
4,500 litre for an additional cost of Rs.2.00 per litre. 4,000 litre x Rs.11.00 per
litre = Rs.44,000.
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14. Answer : (d)
Reason :If the opening stock is more than closing stock or sales are more than
production, the profit under absorption costing is less than the profit under
marginal costing. On the reverse situation, profit under absorption costing is
more than profit under marginal costing. Therefore, (d) is correct.
< TOP >
15. Answer : (b)
Reason :
Particulars P1(Rs.) P2
(Rs.)
P3
(Rs.)
S1
(Rs.)
S2
(Rs.)
Primary
Distribution
13,600 14,700 12,800 9,000 3,000
S1 (4:3:2:1) 3,600 2,700 1,800 (-)
9,000
900
S2 (3:3:2:2) 1,170 1,170 780 780 (-)
3,900
S1 (4:3:2:1) 312 234 156 (-) 780 78
S2 (3:3:2:2) 23 23 16 16 (-) 78
S1 (4:3:2:1) 6 5 3 (-) 16 2
S2 (3:3:2:2) 1 1 - - (-) 2
Total 18,712 18,833 15,555
< TOP >
16. Answer : (b)
Reason :
Rs. Rs.
Total manufacturing Costs 1,94,080
Less: Overhead costs:
Indirect labor 12,160
Factory
overhead
31,730
Indirect
material
21,390
Freight in 5,570 70,850
1,23,230
Less: Direct labor 32,640
Material
consumed
90,590
Add: Closing material 9,640
1,00,230
Less: Opening material
(as on October 01,
2004
11,620
Material
purchased
88,610
< TOP >
17. Answer : (e)
Reason :Short range budgets may cover periods of three, six and twelve months
depending on the nature of the business. In determination of the period of short
range budget all the factors as stated in (I) financing of production well in
advance; (II) cover complete production; (III) entire seasonal cycle; (IV)
coincide with the financial accounting period are all considered. Hence option
(e) is the correct option.
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18. Answer : (a)
Reason :A new issue price arises every time under weighted average price method,
when a new purchase is made. Other options are not correct. Therefore, (a) is
correct.
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19. Answer : (b)
Reason :A debit balance of materials usage variance indicates the unfavorable variance.
It means the actual quantities of materials exceed standard quantities. Other
statements stated in (a), (c), (d) and (e) are not true.
< TOP >
20. Answer : (d)
Reason :
Particulars Alfa Beta Gamma Delta Total
Sales
(Rs.)
19,800 25,200 9,600 5,400 60,000
Variable costs
(Rs.)
11,880 16,380 7,680 2,160 38,100
Contribution
(Rs.)
7,920 8,820 1,920 3,240 21,900
Fixed costs
(Rs.)
17,520
Profit 4,380
Profit-volume ratio = Rs.21,900 / Rs.60,000 = .365 or 36.5%
Break-even sales = Rs. 17,520 / 0.365 = Rs.48,000
< TOP >
21. Answer : (b)
Reason :The costs having clear relationship to output are known as engineered costs.
Direct material cost is an example of engineered costs.
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22. Answer : (b)
Reason :The standards which are based on conditions which may be realized in actual
practice are called expected standards. These standards are set on the
assumption of efficient operation and are feasible to attain.
< TOP >
23. Answer : (d)
Reason : Fixed cost per unit = Rs.3,60,000 / 15,000 units = Rs.24.
Profit under absorption costing = Rs.1,01,000
Adjustment of fixed manufacturing overhead costs of increased inventory =
1,880units x Rs.24 = Rs.45,120
Profit under marginal costing = Rs.1,01,000 – Rs.45,120= Rs.55,880
< TOP >
24. Answer : (e)
Reason :The market based transfer pricing may reflect the price prevailing in an open
competitive market. Hence, it is based on the listed price of an identical product
in the market, may be even of a competitor. Under other methods of transfer
pricing stated in (a), (b), (c) and (d) are not based on the listed price or
competitors’ price. Hence (e) is correct.
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25. Answer :(a)
Reason : Under flexible budgets, standard cost specified for actual activity is
compared with actual cost.
< TOP >
26. Answer : (a)
Reason :
Particulars Rs.
Cash sales Rs.1,40,000 ´ .4 56,000
Credit sales realized:
< TOP >
May Rs.1,80,000 ´ .6 ´ .5 54,000
April Rs.1,50,000 ´ .6 ´ .5 45,000
Sales receipts 1,55,000
Payment Rs. Rs.
Purchages:
June 32,500
May 30,000 62,500
Wages 12,000
74,500
Net cash receipts of June 2005 = Rs.1,55,000 – Rs.74,500 = Rs.80,500.
27. Answer : (b)
Reason :Under periodic cost accumulation system, the cost of goods manufactures is
equal to cost of goods put into production plus beginning work-in-process less
ending work-in-process. Therefore (b) is correct. Other options are not correct.
< TOP >
28. Answer : (b)
Reason : Statement of equivalent Production Unit (FIFO)
Input units Output Completed:
units Material Conversion
Opening 300 Opening 300 20% 60 20% 60
Introduced 5,000 Introduced 4,550 100% 4,550 100% 4,550
Closing 450 80% 360 60% 270
5,300 5,300 4,970 4,880
Costs during
the month Rs.62,125 Rs.51,240
Cost per
unit Rs. 12.50 Rs. 10.50
The total cost of closing work-in-process
Material – 360 ´
Rs.12.50 = Rs.4,500
Conversion – 270 ´ Rs.10.50
= Rs.2,835
Rs.7,335
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29. Answer : (e)
Reason :Management decision analysis is based on the concept of relevant costs.
Relevant costs differ among decision choices. Thus, incremental (differential or
avoidable) costs are always relevant. Replacement cost is also relevant.
Historical costs occurred in the past, are sunk costs and not relevant to most
management decision analysis
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30. Answer : (b)
Reason :The value of crane is not the basis of apportionment of Transport department’s
cost, because there is no relation between the cost incurred in the transport
department and the value of crane. The costs incurred in transport department
are apportioned on the basis of Crane hours, Truck hours, Truck mileage, Truck
tonnage, etc.
< TOP >
31. Answer : (d)
Reason :Unit contribution = Sale price per unit – Variable cost per unit. There is no
change in unit contribution, if fixed cost is increased or decreased. If va riable
cost per unit increases and unit selling price decreases unit, contribution will
decrease. Similarly, if semi-variable cost decreases, the unit contribution
margin will increase. Therefore, (d) is correct.
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32. Answer : (e)
Reason :To determine the correct number of handles purchased for April 2005, the
projected output of finished goods for April 2005 and May 2005 must be
calculated
(in units)
Projected sales of cabinets in April 2005 280
Add: Required closing finished cabinets
(50% of 286) 143
423
Less: Opening finished cabinets 124
Total cabinet production for April 2005 299
Projected sales of cabinets in May 2005 286
Add: Required closing finished cabinets
(50% of 290) 145
431
Less: Opening finished cabinets 143
Total cabinet production for May 2005 288
Number of Handles:
Handles for April 2005 (299 x 5) 1,495
Add: Handles for May 2005 (288 x 5 x 0.7) 1,008
2,503
Less: Opening inventory 900
Total ha ndles to be purchased 1,603
< TOP >
33. Answer : (c)
Reason :In both the products, variable cost is less than the offered price, therefore, the
company will make both the products. Therefore ‘c’ is correct.
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34. Answer : (c)
Reason :A sunk cost is a cost that cannot be avoided because the expenditure has already
occurred or an irrevocable decision has been made to incur the cost. Sunk costs
are irrelevant to management decision making because they cannot vary with
the option selected. So the costs of obsolete inventory represent the sunk cost
because the costs have already been incurred. Other options are not correct.
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35. Answer : (d)
Reason :Target costing is the technique by which first, the price at which the customers
are willing to buy that particular product is determined and then the cost is
adjusted accordingly to earn the desired profits.
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36. Answer : (e)
Reason :The budgeted level of overheads cannot be calculated from the information
provided.
< TOP >
37. Answer : (d)
Reason :A job costing system is used when products differ from one customer to the
next, that is, when products are heterogeneous. A process costing system is
< TOP >
used when similar products are mass -produced on a continuous basis. A print
shop would use a job costing system because each job will be unique. Each
customer provides the specifications for the product desired. Other options like
Wallpaper manufacturer, Beverage Drink manufacturer, Paint manufacturer and
Oil Refinery are classified under Process costing because in each case similar
products are produced on a continuous basis.
38. Answer : (e)
Reason :The opportunity cost is the maximum benefit foregone by using a scarce
resource for a given purpose. It is the benefit provided by the next best use of
that resource. Thus, in a factory operating at full capacity, the opportunity cost
of making a component is the benefit given up by not selecting an alternative
use of the plant capacity. The other options are not correct.
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39. Answer : (e)
Reason: A decentralized segment may be any type of responsibility center. All are
responsibility centers. So option (e ) is correct.
< TOP >
40. Answer : (d)
Reason :The units to be sold equal to fixed costs plus the desired pretax profit divided
by the units contribution margin. In the preceding year, the unit contribution
margin was Rs.45 (i.e. Rs.80 – Rs.35). The amount will decrease by Rs.1.75
because of use of a higher grade component. The unit contribution will be
Rs.43.25 and the fixed cost will increase from Rs.5,96,000 to Rs.6,04,000 as a
result of Rs.8,000 as depreciation on new packing machine.
Pre-tax profit = Rs.1,12,200 ¸ 0.6 = Rs.1,87,000
Required sales = (Rs.6,04,000 + Rs.1,87,000) ¸ Rs.43.25 = 18,289 units.
< TOP >
41. Answer : (d)
Reason :Under absorption costing, all manufacturing costs, both fixed and variable, are
treated as product costs. Under direct costing, only variable cost of
manufacturing are inventoried as product costs. Fixed manufacturing costs are
expensed as period costs. Packaging and shipping costs are not product costs
under either method because they are incurred after the goods have been
manufactured. Instead they are included in selling and administrative expenses
for the period. Other options (a) , (b), (c) and (e) are as product cost under
respective costing method .
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42. Answer : (e)
Reason :
Particulars Total
(Rs.)
Per
kwh
(Re.)
Plant supervision 30,000 0.015
Administrative overhead 20,000 0.010
Depreciation 10,000 0.005
Coal (2.5 kg x 20,00,000 x
0.02)
1,00,000 0.050
Operating labor 50,000 0.025
Repairs and maintenance 50,000 0.025
Lubricants and supplies 40,000 0.020
Total 3,00,000 0.15
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43. Answer : (c)
Reason : Under absorption costing method, fixed factory overhead costs are added for
valuation of inventory. Therefore, (c) is correct.
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44. Answer : (c)
Reason :The market based transfer pricing may reflect the price prevailing in an open
competitive market. Hence, it is based on the listed price of an identical product
in the market, may be even of a competitor. Transfer prices are charged for
inter-divisional transfer of goods or services. The problem with market based
transfer prices is that they are often not available for the specific goods and
services which are transferred and the prices prevailing in the market for the
same goods or services may not be the same i.e. several prices may exist for
same product or service. The market based transfer pricing may not accept by
the receiving division, it does not require from internal transfer, it has to
purchase from outside at the same price.
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45. Answer : (c)
Reason : 25% return on investment = 25% of Rs.5,00,000 = Rs.1,25,000
Selling price per unit = Variable cost per unit + fixed costs per unit + profit per
unit
= Rs.25 +
Rs.3,00,000 Rs.1,25,000
4,000units 4,000units
+
= Rs.25 + Rs.75+ Rs.31.25= Rs.131.25.
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46. Answer : (b)
Reason : The typical inventories carried by a manufacturer include raw materials, work-in < TOP >
47. Answer : (a)
Reason :Standard usage was three parts per radio at Rs.145 each. For a production level
of 3,000 units, the total materials needed equaled 9,000 parts, but materials
actually used totaled 10,000 parts. Thus, the variance is Rs. 1,45,000
unfavorable [Rs. 145 standard cost per part x (10,000 used – 9,000 standard
usage)]. Answer (b) is incorrect because the variance is unfavorable. The
actual quantity used exceeded the standard input allowed. Answer (c) is
incorrect because Rs. 4,35,000 unfavorable assumes that 12,000 parts were
consumed. Answer (d) is incorrect because Rs. 4,35,000 favorable assumes
that 12,000 parts were consumed and that the variance is favorable. Answer (e)
is incorrect because Rs. 4,50,000 unfavorable assumes that the standard cost per
part is Rs. 1.50 and that 12,000 parts were consumed.
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48. Answer : (d)
Reason: The standard hours per unit = Budgeted machine-hours divided by budgeted
activity = 4,400 hrs/11,000 units = 0.40 hrs/unit.
Variable overhead flexble budget variance = Actual costs minus flexible
budgeted costs = Rs.1,32,250 - ((10,000 x 0.40) x (Rs.132,000 / 4,400))
= Rs.1,32,250 – Rs.1,20,000
= Rs.12,250 unfavorable since actual is more than standard.
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49. Answer: (b)
Reason: Opportunity cost is a cost foregone on account of not using the fac ilities in the
original manner as planned. It is not the notional cost, out-of-pocket cost,
relevant cost or product cost. Therefore, (b) is correct.
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50. Answer : (e)
Reason :The standard hours for actual production were = (40,000/4) = 10,000. The
spending variance equals variable overhead minus actual hours multiplied by
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the standard variable rate = (Rs.50,000 – (9,600 x Rs.5)) = Rs.50,000 –
Rs.48,000 = Rs.2,000 (A). The efficiency varianc e equals the actual hours
multiplied by the standard variable rate minus applied overhead (9,600 x Rs.5)
– (10,000 x Rs.5) = Rs.48,000 – Rs.50,000 = Rs.2,000 (F).
51. Answer: (e)
Reason: Opening WIP + Added =
Completed units + Normal loss + Abnormal loss + closing WIP
250 + 9,250 = 9,500 = 7,200 + 360 + 490 + 1,450
Equivalent production units of material = [7,200 + 490 + (1450 x .80)]
= 7,690 + 1,160 = 8,850.
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52. Answer : (e)
Reason:
Contract A/c
Particulars Rs. Particulars Rs.
To Material 40,80,000 By Work certified 79,00,000
To Direct wages 16,50,000 By Work not
certified
11,11,500
To Wages 99,500 By Material
Returned
51,500
To Wages accrued 34,000 By Material at site 40,500
To Plant hire charges 1,25,000
To Direct expenses 63,500
To Depreciation 1,20,000
To Notional profit 29,31,500
91,03,500 91,03,500
To Profit
2 62,50,000
xRs.29,31,500x
3 79,00,000
15,46,149 By Notional profit 29,31,500
To Reserve 13,85,351
29,31,500 29,31,500
Work-in-Process = Work certified + Work uncertified – Profit in reserve –
Progress payment received
= Rs.79,00,000 + Rs.11,11,500 – Rs.13,85,351 – Rs.62,50,000
= Rs.13,76,149
Plant = Rs.12,00,000 – Rs.1,20,000 = Rs.10,80,000
Total =Rs.13,76,149 + Rs.10,80,000 = Rs.24,56,149.
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53. Answer : (e)
Reason : The weaknesses of Activity-based costing (ABC) is/are :
It does not partition the fixed and the variable costs and ABC is only as
accurate as the cost drivers. Statement (I) is an advantage as it analyzes those
costs that do not add value to the products. So, the correct answer is (e)
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54. Answer : (d)
Reason : Standard variable overhead rate=Rs.4,75,200¸2,16,000 hrs = Rs.2.20 per hour
Standard hours per unit = 2,16,000 hours¸2,40,000 units= 0.9 hours
Fixed overhead rate per unit = Rs.15,21,600¸2,40,000 units= Rs.6.34
Variable overhead efficiency variance:
=(Standard hours for actual production- Actual hours) x Standard rate per hour
=(2,20,000 units x 0.9 hours ~ 1,94,920) x Rs.2.20=3,080 x Rs. 2.20 = Rs.6,776
(F)
Fixed overhead volume variance
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=(Actual output ~ Budgeted output) x Standard rate
=2,20,000 units ~ 2,40,000 units) x Rs.6.34= 20,000 units x Rs.6.34=
Rs.1,26,800 (A)
55. Answer : (c)
Reason :The maturity phase begins after sales cease to rise exponentially. The causes of
the declining percentage growth rate is the market saturation. Sales growth
continues but at a diminishing rate because of the diminishing number of
potential customers. This is usually the longest stage in the life cycle and most
existing products are in this stage..
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56. Answer : (b)
Reason : The correct answer is (b). Committed cost is a fixed 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.
Option (a) is false since the costs which are essential for the decision under consideration are
not committed cost.
Option (c) is incorrect as it is more specifically known as replacement cost.
Option (d) is incorrect as it is more specifically known as opportunity cost.
Option (e) is incorrect as it is more specifically known as out of pocket costs.
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57. Answer : (a)
Reason : Cost A is a variable cost, the per unit cost or the average cost remains the same but the total
costs vary with the volume of output. In case of Costs B, the total costs remains the same and in
case of cost C , the average costs vary.
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58. Answer : (b)
Reason : Contribution to sales ratio = Change of profit / Change of sales
= Rs.12,000 / Rs.30,000 = 0.40 = 40%
Break-even point:
Sales x contribution to sales ratio = Fixed cost + Profit
Rs.2,50,000 x 40% = Fixed cost + Rs.60,000
Fixed cost = Rs.1,00,000 – Rs.60,000 = Rs.40,000
Break-even sales in rupees = Rs.40,000 / 0.40 = Rs.1,00,000.
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59. Answer: (c)
Reason: Equivalent units are used exclusively in a process costing system. Escalation
clause, job order cost sheet, production order number and notional profit are
used in job costing. Therefore, (c) is correct.
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60. Answer : (d)
Reason: All are measures of productivity or efficiency, but the best measure of the
segment’s profitability as an investment is profit related to invested capital.
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61. Answer : (e)
Reason : Unit contribution margin is Rs. 50 - Rs.30 = Rs.20. Additional profit will be Rs.10,000 (500 x
Rs.20). After break even, profit is equal to the unit contribution margin multiplied by the
number of units sold beyond break-even.
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62. Answer : (c)
Reason: Joint product and by-products arise in situations where the production of one
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product makes inevitable the production of other products. When a group of
individual products is simultaneously produced and each product has a
significant relative sales value, the output is called Joint products. Products
having a minor sales value in comparison to Joint product is called by-products.
Therefore, option (c) is correct.
63. Answer : (e)
Reason : Options (I),(III) and (IV) are methods of accounting for by -products but option (II) is a method
of accounting for joint products. So, the correct answer is (e).
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64. Answer : (b)
Reason :
If revised sale price 85%, the original sale price is 100. Therefore, revised
budgeted sales at original sale price =
Rs.1,530
.85 = Rs.1,800 lakhs
Revised budgeted sales at original sale price = Rs.1,800 lakhs
Since, revised budgeted sales at original sale price is Rs.75 then the original
budgeted sales at original sale price is Rs.100.
Therefor e, original sales at original sale price =
Rs.1,800lakhs
.75 = Rs.2,400 lakhs
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65. Answer: (c)
Reason : Standard fixed overhead cost per unit = Budgeted units
Budgeted fixed overhead costs
= 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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66. Answer : (b)
Reason:
April 1,00,000 ´ 0.5 ´ 0.1 = Rs. 5,000
May 2,00,000 ´ 0.5 ´ 0.2 = Rs. 20,000
June 3,00,000 ´ 0.5 ´ 0.7 = Rs.1,05,000
July – 1,00,000 ´ 0.5 = Rs. 50,000
Budgeted collection from sales
for July Rs.1,80,000
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67. Answer : (a)
Reason : There are 2 limiting factors
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Let, X = No. of units of X produced (in 000s of units)
Y = No. of units of Y produced ( in 000s units)
160 X + 280 Y = 85,000 machine hours (1)
120 X + 140 Y = 55,000 labour hours (2)
Multiplying equation (2) by 2 and equation (1) by 1
160 X + 280 Y = 85,000 (1)
240 X + 280 Y = 1,10,000
Subtracting eq. (2) from eq.(1)
(-)80 X = - 25000
X = 312.5 units
Substituting for X in eq. (1)
160 ( 312.50) + 280 Y = 85,000
50,000 + 280 Y = 85,000
280 Y= 35,000
or, Y = 125 units.
So, the optimal output to fully utilize both labour and machine capacity is
3,12,500 units of Product X and 1,25,000 units of Product Y.
68. Answer: (d)
Reason : Variable Cost = Total Sales – Fixed Cost – Profit
= Rs. 8,10,000 – Rs.2,20,000 – Rs.1,04,000
= Rs 4,86,000
Contribution to sales = (8,10,000 – Rs.4,86,000) ¸ 8,10,000 = 40%
Margin of Safety = Net Profit ¸ 40% = Rs.1,04,000 ¸ 40% = Rs. 2,60,000
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69. 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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70. 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 are responsible for
executing various tasks within the framework of plans, programs, and
schedules. Hence only (a) is the responsibility of corporate management.
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71. Answer : (b)
Reason : Machine activity cost per hour =
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Rs.2,40,000 Rs.2,40,000
Rs.5.07permachinehour
6,000x5 4,340x4 47,360
= =
+
Setups cost per set up =
Rs.56,000
Rs.1,400
40
=
per set up
Order handling cost per order =
Rs.52,500
Rs.1,500
35
=
per order
Particulars Product A
(Rs.)
Product P
(Rs.)
Machine activity
cost 1,52,027 87,973
Setups cost 30,800 25,200
Order handling
cost 24,000 28,500
2,06,827 1,41,673
72. Answer: (b)
Reason: Sales= Direct Materials used + Direct Labour + Fixed Manufacturing Overhead
+ Variable Manufacturing Overhead + Gross profit
So , Rs.1,00,000 = Rs.40,000 + Rs.15,000 + Rs.20,000 + Variable
Manufacturing Overhead + Rs.20,000
Variable Manufacturing Overhead = Rs.1,00,000 - Rs.40,000 - Rs.15,000 -
Rs.20,000 – 20,000 = Rs 5,000
Total selling and distribution Expenses = Gross Profit – Net Loss = Rs 20,000 –
(- 5,000) = Rs.25,000
Variable selling and distribution expenses = Total selling and distribution
expenses – Fixed selling and distribution expenses = Rs.25,000 – Rs.10,000 =
Rs.15,000.
Contribution Margin = Sales – Variable Cost = Sales –( Direct Materials used
+ Direct Labor + Variable Manufacturing Overhead + Variable selling and
distribution expenses.)
= Rs.1,00,000 – (Rs.40,000 + Rs.15,000 + Rs 5,000 + 15,000) = Rs. 25,000.
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73. Answer: (e)
Reason:
Particulars Rs
Advertisement 2,500
Salaries of the Sales
Department
5,000
Expenses of Sales Department 1,500
Counter Salesmen’s Salaries
and D.A
6,000
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Commission to Counter
Salesmen
1,400
Traveling Salesmen’s
Commission
2,000
Traveling Salesmen’s
Expenses
1,000
Total 19,400
74. Answer: (b)
Reason:
Particulars Amount in Rs (or) % in
Sales
At 90 % capacity (
Rs)
Sales 6,75,000
Office Salaries 90,000 90,000
General Expenses 2 % of sales 13,500
Depreciation 7,500 7,500
Rates and Taxes 8,750 8,750
Selling Costs :
Salaries 8 % of sales 54,000
Traveling expenses 2 % of sales 13,500
Sales Office 1 % of sales 6,750
General expenses 1 % of sales 6,750
Distribution costs :
Wages 15,000 15,000
Rent 1 % of sales 6,750
Other expenses 4 % of sales 27,000
Total of Administrative,
Selling
and distribution expenses
at
90 % capacity level
2,49,500