Management Accounting (MB161) : January 2006

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Question Paper

Management Accounting (MB161) : January 2006

· Answer all questions.
· Marks are indicated against each question.
1. When comparing managerial accounting information with financial accounting information, it is expected
that managerial accounting information would
(a) Be based upon GAAP
(b) Emphasize on information for 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 >
2. The following questions are asked and answered in which kind of decision making?
I. Should a new product line be marketed?
II. Should the production and sale of an existing product line be terminated?
III. Should production facilities be expanded?
(a) Planning decisions
(b) Controlling decisions
(c) Executive decisions
(d) Production decisions
(e) Make or buy decisions.
(1 mark)
< Answer >
3. Notional rent charged on business premises owned by the proprietor is an example of
(a) Programmed cost (b) Replacement cost
(c) Imputed cost (d) Committed cost (e) Discretionary cost.
(1 mark)
< Answer >
4. The term ‘cost’ refers to
(a) The present value of future benefits
(b) An asset that has given benefit and is now expired
(c) An asset that has not given benefit and is now expired
(d) The price of products sold or services rendered
(e) The value of the sacrifice made to acquire goods or services.
(1 mark)
< Answer >
5. A manager of a company wants to control and reduce, if possible, the company's production costs. He must
determine how production costs are related to and affected by various business activities. The manager
needs to understand
(a) Cost behaviors (b) Relevant ranges (c) Fixed costs
(d) Variable costs (e) Total costs.
(1 mark)
< Answer >
6. Step costs are classified as a
(a) Fixed cost (b) Variable cost (c) Prime cost
(d) Conversion cost (e) Mixed cost.
(1 mark)
< Answer >
7. ABC Company’s budgeted overhead amounts to Rs.3,00,000 based on an output of 200 units of A, 300 units
of B, and 500 units of C. Direct labor costs of A, B, and C per unit amount to Rs.75, Rs.50, and Rs.40
respectively. Overhead is applied based on budgeted overhead rates using labor cost as cost driver. If actual
overhead amounts to Rs.3,19,000 for the production of 300, 350, and 400 units of A, B and C respectively,
the under or over applied overhead amounts to
< Answer >
2
(a) Rs.19,000 underapplied (b) Rs.19,000 overapplied
(c) Rs.17,000 underapplied (d) Rs.17,000 overapplied
(e) Rs.16,000 under applied.
(1 mark)
8. In a given situation if a product is not produced the company can save on the salary of workers to the tune of
Rs.1,00,000. In this case, the salary of the workers is
(a) Imputed cost (b) Opportunity cost
(c) Replacement cost (d) Unavoidable cost (e) Avoidable cost.
(1 mark)
< Answer >
9. If there is a change in cost due to change in the level of activity or pattern or method of production, it is
known as
(a) Controllable cost (b) Semi-variable cost
(c) Discretionary cost (d) Differential cost (e) Avoidable cost.
(1 mark)
< Answer >
10. Where the machine hours is a key factor, the products to be produced should have
(a) Highest sales price per unit
(b) Highest contribution per unit
(c) Lowest machine hours per unit
(d) Highest sales volume potential
(e) Highest contribution per machine hour.
(1 mark)
< Answer >
11. The costs incurred for the product of a company are as follows:
Particulars Rs.
Direct materials 75,000
Direct wages 50,000
Direct expenses 25,000
Variable manufacturing overheads 37,500
Fixed administrative overheads 25,000
Fixed selling & distribution overheads 15,000
The prime cost of the product is
(a) Rs.1,50,000 (b) Rs.1,65,000 (c) Rs.1,75,000
(d) Rs.1,87,000 (e) Rs.2,27,500.
(1 mark)
< Answer >
12. At 60% capacity utilization, the overhead recovery rate is Rs.17.50 per unit. At 70% capacity level, the rate
gets reduced to Rs.16 per unit. If the production attains 88% of the capacity utilization, the recovery rate
would be
(a) Rs.12.60 (b) Rs.12.46 (c) Rs.14.16 (d) Rs.12.24 (e) Rs.14.00.
(2 marks)
< Answer >
13. For a department, the standard overhead rate is Rs.2.50 per hour and overhead allowances are as follows:
Activity level (hours) Budgeted overhead allowance (Rs.)
3,000 10,000
7,000 18,000
11,000 26,000
The normal capacity level, on the basis of which the standard overhead rate has been worked out, is
(a) 4,000 hours (b) 5,000 hours (c) 5,500 hours (d) 8,000 hours (e) 6,500 hours.
(2 marks)
< Answer >
14. The upper limit of a company’s productive output capacity given its existing resources is called
(a) Theoretical capacity (b) Practical capacity
(c) Normal capacity (d) Excess capacity (e) Cycle-time capacity.
(1 mark)
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15. Which of the following costs is not an example of a committed fixed cost?
(a) Interest payments on a long-term loan
(b) Property taxes on land and related buildings
(c) Employees training
(d) Lease payments on production equipment
(e) Depreciation on plant & machinery.
(1 mark)
< Answer >
16. An increase in variable costs where selling price and fixed cost remain constant will result in which of the
following?
(a) An increase in the margin of safety
(b) A fall in the sales level at which break-even point will occur
(c) A rise in the sales level at which break-even point will occur
(d) No change in the sales level at which break-even point will occur
(e) No change in the margin of safety.
(1 mark)
< Answer >
17. Consider the following data of a company:
Material Purchased - Rs.1,55,000. There was no beginning inventory.
Direct labor incurred - 400 hours at the rate of Rs.10 per hour.
Budgeted overheads - 430 hours
Budgeted overhead cost - Rs.5,160
Units started - 15,000 units
Units completed - 12,000 units
Actual overheads - Rs.5,100
Ending Inventory - 50% complete.
If none of the units are sold and assuming the over or under applied overhead is relevant, how much of the
under applied overhead would be allocated to Finished Goods?
(a) Rs.160.00 (b) Rs.266.67 (c) Rs.216.67 (d) Rs.187.50 (e) Rs.150.00.
(1 mark)
< Answer >
18. Air Purifier Ltd. uses process cost system to manufacture Dust Density Sensors for the mining industry. The
following pertains to operations for the month of December 2005:
Particulars Units
Opening work-in-process (December 01, 2005) 450
Introduced in production during December 2005 4,100
Closing work-in-process (December 31, 2005) 520
There is no loss in the manufacturing process. The opening inventory was 80% complete for materials and
60% complete for conversion costs. The closing inventory was 75% complete for material and 65%
complete for conversion costs.
Costs pertaining to the month of December 2005 are as follows:
Opening work in process:
Materials Rs. 6,850
Conversion Rs. 4,350
During the month:
Materials Rs.71,050
Conversion Rs.57,372
The total cost of closing work-in-process on December 31, 2005, using FIFO method, is
(a) Rs.10,708.62 (b) Rs.11,649.63 (c) Rs.12,573.78 (d) Rs.11,557.00 (e) Rs.12,443.00.
(2 marks)
< Answer >
19. Bhuban Ltd. has furnished the following cost structure of product M:
Direct material 50%
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Overhead costs 30%
The sales price of the product is Rs.45,000. The company has estimated an increase of 15% in the cost of
materials and an increase of 25% in the cost of the labor. These increased costs in relation to the present
selling price would cause a 25% decrease in the amount of present prof it per unit.
The revised selling price to obtain the same percentage of profit to sales as before, is
(a) Rs.30,000 (b) Rs.45,000 (c) Rs.50,500 (d) Rs.50,050 (e) Rs.50,625.
(2 marks)
20. Which of the following statements is false?
(a) Process costing is one aspect of operation costing
(b) Process costing is applied in garment industry
(c) Process costing is used in chemical industry
(d) In process costing ordinarily no distinction is made between direct and indirect materials
(e) The cost of abnormal process loss is not included in the cost of the process.
(1 mark)
< Answer >
21. ABC Ltd. in the course of refining crude oil obtains 4 joint products – M, N, P and Q. The total cost till the
split off point was Rs.97,600. The output and sales in the year 2004-05 were as follows:
Product Output
(gallons)
Sales after further
processing cost (Rs.)
Further processing
costs (Rs.)
M 5,00,000 1,15,000 30,000
N 10,000 10,000 6,000
P 5,000 4,000 -
Q 9,000 30,000 1,000
If the joint costs are apportioned on the basis of relative sales value of the different products at the split off
point, the net incomes of products M and Q are
(a) Rs.5,800 and Rs.1,600 respectively
(b) Rs.17,000 and Rs.5,800 respectively
(c) Rs.17,000 and Rs.800 respectively
(d) Rs.17,000 and Rs.1,600 respectively
(e) Rs.800 and Rs.5,800 respectively.
(2 marks)
< Answer >
22. Which of the following methods of costing considers both the variable and fixed costs as part of product
costs?
(a) Direct costing (b) Marginal costing
(c) Absorption costing (d) Standard costing (e) Uniform costing.
(1 mark)
< Answer >
23. Tifco Ltd. has furnished the following information pertaining to a new product:
i. The fixed costs will be Rs.80,000 for production of 7,500 units or less. If the production is more than
7,500 units, the fixed costs will be Rs.1,20,000.
ii. The variable cost ratio is 60% of the sales for the first 7,500 units and it will be reduced to 50% of sales
for units in excess of 7,500 units.
iii. The sale price of the product per unit is Rs.25.
If the company manufactures more than 7,500 units, the break-even units of the new product is
(a) 12,000 (b) 11,100 (c) 12,500 (d) 11,600 (e) 8,500.
(2 marks)
< Answer >
24. When a company prepares financial reports using absorption costing,
(a) Profits increase with increase in sales
(b) Profit decrease with decrease in sales
(c) Profits may decrease with increased sales even if there is no change in selling prices and costs
(d) Decreased production and constant sales result in increased profits
(e) Profits decrease with increase in production.
(1 mark)
< Answer >
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25. The contribution to sales ratio depends upon
(a) Fixed cost per unit (b) Total fixed cost
(c) Sales volume (d) Production volume (e) Direct expenses.
(1 mark)
< Answer >
26. Excel Lt d. incurred the following costs for manufacturing 6,000 units of product ‘x’ during the period 2004-
05:
Particulars Rs.
Direct materials 50,000
Direct labor 40,000
Production overhead:
Variable 30,000
Fixed 15,000
Selling & distribution overhead:
Variable 25,000
Fixed 20,000
Total costs 1,80,000
Under direct costing method, the cost per unit of product ‘x’ was
(a) Rs.30.00 (b) Rs.26.67 (c) Rs.22.50 (d) Rs.20.00 (e) Rs.15.00.
(1 mark)
< Answer >
27. The cost dat a pertaining to Product “PK” of PKMG Ltd. are as follows:
Maximum capacity 20,000 units
Normal capacity 18,000 units
Increase in inventory 1,880 units
Variable cost per unit Rs.15
Selling price per unit Rs.40
Fixed manufacturing overhead costs Rs.3,06,000
If the profit under Absorption costing method is Rs.1,01,000, the profit under Marginal costing method
would be
(a) Rs.1,32,960 (b) Rs.72,236 (c) Rs.1,29,764 (d) Rs.69,040 (e) Rs.73,340.
(1 mark)
< Answer >
28. The operating results of M/s. Krupa Ltd. for the year 2004-05 were as under:
Product Sales Mix (%) PV Ratio
A 40 20
B 10 6
C 30 12
D 20 10
Total sales value of all the products was Rs.80 lakh and fixed costs amount to Rs.10 lakh. The composite
P/V ratio is
(a) 15.2% (b) 14.2% (c) 14.0% (d) 15.0% (e) 16.0%.
(2 marks)
< Answer >
29. Bharti Ltd. has furnished the following data pertaining to manufacturing operations for the month of
December 2005:
Particulars Rs.
Raw m aterials (December 1, 2005) 6,000
Direct labor cost 25,000 (125% of factory overhead)
Work-in-progress (December 1, 2005) 7,000
Finished goods (December 1, 2005) 12,000
Cost of goods sold 88,000
Selling expenses 8,500
Raw materials (December 31, 2005) 6,800
Work-in-progress (December 31, 2005) 6,500
Finished goods (December 31, 2005) 12,800
Sales for the month 1,12,500
< Answer >
6
The material purchased and profit earned by the company for the month of December 2005 are
(a) Rs.43,500 and Rs.24,500 respectively
(b) Rs.42,500 and Rs.16,000 respectively
(c) Rs.43,300 and Rs.16,000 respectively
(d) Rs.44,100 and Rs.16,000 respectively
(e) Rs.44,100 and Rs.24,500 respectively.
(2 marks)
30. Jai Shivani Ltd. manufactures and sells four types of products under the brand name of Alfa, Beta, Gamma
and Delta. The sales mix in value comprises 33%, 42%, 16% & 9% of Alfa, Beta, Gamma and 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 overall break-even sales value is
(a) Rs.45,213 (b) Rs.43,800 (c) Rs.50,057 (d) Rs.48,000 (e) Rs.87,600.
(2 marks)
< Answer >
31. Greatsky Ltd. manufactures a single product. The company has furnished the following details about the
single product:
Particulars Rs. per unit
Selling price 100
Direct material 60
Direct labour 10
Variable overheads 10
The number of units sold by the company during the period is 5,035. The wages cost would be increased by
10%. The number of additional units to be sold to maintain the same quantum of profit is
(a) 200 units (b) 250 units (c) 265 units (d) 225 units (e) 240 units.
(1 mark)
< Answer >
32. AB Ltd. produces and sells two products A and B for Rs.29 and Rs.19 a unit respectively. Variable costs
amount to Rs.14 for A and Rs.12 for B per unit. It takes 1½ hours to make one unit of A and ½ hour to make
one unit of B. Total manpower available is 1,300 hours and maximum demand is 1800 units of A and 1,700
units of B. The optimum production units of A to maximize profit should be
(a) 300 (b) 450 (c) 600 (d) 900 (e) 750.
(2 marks)
< Answer >
33. ACD Ltd. has been approached by a foreign customer who wants to place an order for 1,500 units of
Product C at Rs.22.50 a unit although the company currently sells this item for Rs.39 a unit, and the item has
a cost of Rs.29 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 amount of Rs.1.50 per unit.
However, the ad ditional graphics required on this job will cost Rs.3,000. The fixed costs amounting to
Rs.4,00,000 for the production of 50,000 units of such products by the company will not change. Accepting
this job by the company will
(a) Increase profit by Rs.1,950 (b) Increase profit by Rs.6,750
(c) Increase profit by Rs.5,250 (d) Decrease profit by Rs.5,250
(e) Decrease profit by Rs.1,950.
(2 marks)
< Answer >
34. When using the five-step decision model, which one of the fol lowing steps should be done last?
(a) Obtain information
(b) Choose an alternative
(c) Evaluation and feedback
(d) Implementing the decision
(e) Predict future costs.
(1 mark)
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35. Nagarjun fertiliser Ltd. produces 3 chemical products, i.e. sulphura, sulphury and sulphurus, which are three
joint products of a particular production process. For each 15,000 kg batch of material converted into
products, Rs.75,000 of joint production costs is incurred. At the split off point, 50% of the output is
sulphura, 30% of the output is sulphury and 20% of the output is sulphurus. Each product is processed
beyond split off and the following costs are incurred for additional processing:
Product Additional Processing cost per kg (Rs.)
Sulphura 1.00
Sulphury 5.00
Sulphurus 2.50
The following information is related to sale price per unit at different stages:
Product At split off After further processing
Sulphura Rs. 5.00 Rs. 6.50
Sulphury Rs.13.00 Rs.16.00
Sulphurus Rs.22.00 Rs.27.50
Based on the above information, which of the following is correct?
I. Product sulphura should be processed further.
II. Product sulphury should be processed further.
III. Product sulphurus should be processed further.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (I) and (III) above
(e) All (I), (II) and (III) above.
(2 marks)
< Answer >
36. A machine costs Rs. 90,000 and is deemed to have a scrap value of 5% at the end of its effective life
(19 years). Ordinarily, the machine is expected to run for 2,400 hours per annum but it is estimated
that 150 hours will be lost for normal repairs and maintenance and further 750 hours will be lost due
to staggering. The other details in respect of the machine shop are:
Particulars Rs.
Wages, bonus and provident fund contributed to each of two operators (each operator
in charge of two machines) per year
6,000
Rent and rates of the shop per year 3,000
General lighting of the shop per month 250
Insurance premium for the machine per quarter 200
Cost of repairs and maintenance per machine per month 250
Shop supervisor’s salary per month 500
Power consumption of the machine per hour 20 units, rate of power per 100 units Rs. 10
Other factory overhead attributable to the shop Rs. 4,000 per annum
There are four identical machines in the shop. The supervisor is expected to devote one-fifth of his time for
supervising the machine. The comprehensive machine hour rate is
(a) Rs.12.00 (b) Rs.14.00 (c) R s.11.25 (d) Rs.10.50 (e) Rs.9.75.
(2 marks)
< Answer >
37. If the selling sub-unit is operating at full capacity and can sell everything produced either internally or
externally, the transfer price of the product will be fixed up on the basis of
(a) Negotiation between the divisions (b) Market price
(c) Variable cost (d) Cost plus a mark -up
(e) Full cost pricing.
(1 mark)
< Answer >
38. The following information pertains to Soni Ltd. for its new product:
Production units 5,000 units
Investment for the new product Rs.4,00,000
Fixed costs Rs.2,00,000
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Variable cost per unit Rs.30
If the company desires to earn 20% return on investment, the selling price should be
(a) Rs.100 (b) Rs.86 (c) Rs. 70 (d) Rs.56 (e) Rs.46.
(1 mark)
39. 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) They represent to a certain degree, cost plus pricing.
(1 mark)
< Answer >
40. Consider the following budget for a company:
Maximum production capacity (units) 50,000
Normal production (units) 40,000
Fixed overhead costs (Rs.) 4,00,000
Variable cost per unit (Rs.) 15
The cost of 35,000 units, under absorption costing method, is
(a) Rs.9,25,000 (b) Rs.8,75,000 (c) Rs.8,05,000 (d) Rs.7,50,000 (e) Rs.7,00,000.
(1 mark)
< Answer >
41. Which of the following statements is false in relation to budgets?
(a) Direct labor budget represents direct labor requirements necessary to produce the types and quantities
of output planned in the production budget
(b) An inventory budget can be prepared to find out the values of direct materials and finished inventory
(c) A fixed budget is a budget that is prepared for a range, i.e. for more than one level of activity
(d) A direct materials budget indicates the expected amount of direct materials required to produce the
budgeted units of finished good
(e) Direct labor budget costs consist of wages paid to employees who are engaged directly in specific
production output.
(1 mark)
< Answer >
42. If the budgeted fixed overhead cost is more than applied fixed overhead cost, it is known as
(a) Fixed overhead costs variance (Adverse)
(b) Fixed overhead efficiency variance (Adverse)
(c) Fixed overhead expenditure variance (Adverse)
(d) Fixed overhead volume variance (Adverse)
(e) Fixed overhead capacity variance (Adverse).
(1 mark)
< Answer >
43. Sing-Laxmi Ltd. has furnished the following information for the last quarter:
Budgeted output 2,000 units
Standard time allowed per unit 5 hours
Actual output 2,400 units
Actual hours worked 12,400 hours
Actual variable overhead incurred Rs.26,000
If the Overhead Cost Variance is Rs.2,000 (A),the Variable Overhead Efficiency Variance is
(a) Rs.980 (F) (b) Rs.800 (F) (c) Rs.933 (F) (d) Rs.750 (A) (e) Rs.800 (A).
(2 marks)
< Answer >
44. An organized creative approach, which emphasizes an efficient identification of unnecessary cost is known
as
(a) Management by objective (b) Val ue analysis
(c) Zero-based budgeting (d) Activity based costing (e) Quality costing.
(1 mark)
< Answer >
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45. Which of the following statements is false in respect of activity based costing?
(a) It does not segregate variable and fixed costs
(b) It tends to be more costly than traditional methods of costing
(c) It is based on historical costs
(d) It highlights the causes of costs
(e) It deals with the direct costs only.
(1 mark)
< Answer >
46. 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 >
47. 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 >
48. Which of the following statements is false?
(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 >
49. Which of the following is not true with respect to Zero-Based Budgeting?
(a) It is developed using the concept of incrementalization
(b) It is done from scratch
(c) Previous years figures are not considered as the base
(d) It challenges the existence of every budgeting unit and every budget period
(e) It can not be considered as an adjustment for the previous years figures.
(1 mark)
< Answer >
50. Consider the following data pertaining to a company for the month of December 2005:
Budgeted hours 600 hrs.
Actual hours 560 hrs.
Maximum possible hours in the budget period 700 hrs.
Standard hours for actual production 660 hrs.
The capacity usage ratio of the company for the month is
(a) 1.17 (b) 1.07 (c) 1.06 (d) 0.86 (e) 0.80.
(1 mark)
< Answer >
51. 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.480. Division A has a capacity to
produce 2,400 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 sup plied to Division B at a price of Rs.264. Division B,
< Answer >
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however, can buy the component from the outside market at Rs.264 each. The variable cost of Division A is
Rs.228 and fixed cost is Rs.24 per component. The variable cost of Division B in manufacturing the final
product by using the component is Rs.180 (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.7,20,000 (e) Rs.8,06,000.
(2 marks)
52. Megha Construction Ltd. has furnished the following information pertaining to a contract for the year ended
March 31, 2005:
Particulars Rs.
Material sent to site 2,25,500
Materials in hand (March 31, 2005) 18,375
Cost of plant installed at site 1,71,000
Labor costs 1,23,500
Work certified 4,00,000
Cost of work not certified 1,20,000
Value of plant (March 31, 2005) 1,02,500
Contract price 7,60,000
Cash received from the contractee 3,60,000
Direct expenses 72,000
The value of closing work-in-progress (WIP) of the company at the end of the period is
(a) Rs.1,30,675 (b) Rs.1,40,450 (c) Rs.58,450 (d) Rs.1,49,635 (e) Rs.1,09,490.
(2 marks)
< Answer >
53. A company estimates its direct material requirements for the month of February 2006 to be Rs.2,40,000 and
the direct labor to be Rs.1,50,000. It is the policy of the company to absorb overheads as under:
Factory overheads 60% of direct wage s
Administrative overheads 20% of works cost
Selling and distribution overheads 25% of works cost
It is estimated that the selling and distribution overheads will increase by 15% in February 2006. The
company sells goods at a profit of 16.67% on sales.
The budgeted sales for the month of February 2006 is
(a) Rs.9,21,600 (b) Rs.8,56,800 (c) Rs.9,09,900 (d) Rs.6,87,150 (e) Rs.8,35,200.
(2 marks)
< Answer >
54. Jai Sri Ram Ltd. uses a Standard costing system. The followin g details have been extracted from the
standard cost card in respect of direct materials for the month of December 2005.
Material usage per unit – 8 kg at the rate of Re.0.80 per kg
Budgeted production – 850 units
The company has furnished the following data relating to direct material for the month of December 2005:
Materials purchased 8,200 kg at a price of Rs.6,888
Materials issued to production 7,150 kg.
Actual production 870 units
The material price and material usage variances are
(a) Rs.286 (A) and Rs.152 (A) respectively
(b) Rs.286 (A) and Rs.280 (A) respectively
(c) Rs.286 (A) and Rs.294 (A) respectively
(d) Rs.328 (A) and Rs.152 (A) respectively
(e) Rs.328 (A) and Rs.280 (A) respectively.
(2 marks)
< Answer >
55. AB Ltd. has the following budgeted and actual data pertaining to product ‘P’ for the month of December
2005:
Budgeted fixed overhead cost (Rs.) 1,50,000
< Answer >
11
Budgeted production (Units) 12,000
Actual fixed overhead cost (Rs.) 1,62,000
Actual production (Units) 11,800
The fixed overhead volume variance is
(a) Rs.2,500 (Adverse) (b) Rs.2,500 (Favorable)
(c) Rs.2,700 (Adverse) (d) Rs.2,746 (Favorable) (e) Rs.2,746 (Adverse).
(1 mark)
56. ST S Ltd. produces a single product – ‘k’. The following budgeted data are available for the month of
December 2005:
Production (units) 15,000 25,000
Flexible budget data: (Rs.) (Rs.)
Material 30,000 50,000
Labor 45,000 75,000
Factory overheads 1,57,500 2,02,500
Other information for the month of December 2005:
i. Standard time : 0.5 direct labor hour per unit of product
ii. Normal capacity : 10,000 direct labor hours
iii. Units produced : 22,000 units
iv. Actual labor hours : 10,700 hours
v. Factory overheads incurred : Rs.1,91,000
Standard factory overhead rates are based on direct labor hours.
The over or under applied overhead is
(a) Rs.7,000 (over) (b) Rs.7,000 (under)
(c) Rs.9,000 (over) (d) Rs.4,700 (under) (e) Rs.4,700 (over).
(2 marks)
< Answer >
57. Beta Ltd. manufacturers cabinets and out sources 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:
January 2006 280 cabinets
February 2006 286 cabinets
March 2006 290 cabinets
April 2006 320 cabinets
The closing inventory of the company for the month of December 2005 are as follows:
Cabinets 124
Handles 900
The number of handles to be purchased in the month of January 2006 is
(a) 2,503 units (b) 1,008 units (c) 1,387 units (d) 1,495 units (e) 1,603 units.
(2 marks)
< Answer >
58. Product life cycle begins with
(a) Marketing
< Answer >
12
(b) Production
(c) Customer Service
(d) Design and engineering
(e) Initial planning and proposal.
(1 mark)
59. Currently attainable standards are performance levels that can be reached through realistic effort levels.
These standards allow for all of the following except
I. Nonproductive time.
II. Normal defects.
III. Normal Spoilage.
IV. Abnormal idle time.
(a) Only (I) above
(b) Only (IV) above
(c) Both (II) and (III) above
(d) Both (I) and (IV) above
(e) Both (III) and (IV) above.
(1 mark)
< Answer >
60. Ray Ltd. manufactures a single product at the operated capacity of 40,000 units while the normal capacity of
the plant is 50,000 units per annum. The company has estimated 20% profit on sales realization and
furnished the following budgeted information:
Particulars 50,000 units 40,000 units
Fixed overheads Rs.1,00,000 Rs.1,00,000
Variable overheads Rs.1,50,000 Rs.1,20,000
Semi-variable overheads Rs.1,50,000 Rs.1,30,000
Sales realization Rs.9,00,000 Rs.7,20,000
The company has received an order from a customer for a quantity equivalent to 10% of the normal
capacity. It is noted that prime cost per unit of product is constant.
The minimum price per unit of new order, if the company desires to maintain the same percentage of profit
on selling price, is
(a) Rs.14.51 (b) Rs.13.31 (c) Rs.15.31 (d) Rs.12.33 (e) Rs.16.31.
(2 marks)
< Answer >
61. Which of the following can be a decentralized segment?
I. Cost center.
II. Profit center.
III. Investment center.
IV. Revenue center.
(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 >
62. Consider the following information of a division of Phani Bhusan Ltd.:
Operating income Rs. 32,000
Revenues Rs. 8,00,000
Capital turnover 5
The return on investment (ROI) is
(a) 4% (b) 5% (c) 10% (d) 20% (e) 40%.
(1 mark)
< Answer >
63. Harish Ltd. produces and sells 500 units of product-A each month with total variable costs of Rs.6,000 and
total fixed costs of Rs.6,000. Idle capacity would permit the acceptance of a special sales order for 100 units
< Answer >
13
each month. Which of the following prices is the lowest acceptable selling price?
(a) Rs.22 (b) Rs.10 (c) Rs.23 (d) Rs.15 (e) Rs.11.
(1 mark)
64. Collection of costs to be assigned to a set of cost objects is called
I. Cost pool.
II. Allocation base.
III. Cost object collection.
IV. Cost driver.
(a) Only (I) above (b) Both (II) and (IV) above (c) Only (III) above
(d) Only (IV) above (e) Both (I) and (III) above.
(1 mark)
< Answer >
65. Anu Ltd. has furnished the following information pertaining to product H:
Standard direct materials per unit of product = 3 kg
Standard direct materials price per kg = Rs.10
Standard labour hours per unit of product = 4 hours
Standard labour rate per hour = Rs.12
Production = 5,000 units
Direct materials actually used = 15,100 kg
Cost of materials used = Rs.1,49,490
Actual labour hours = 19,800
Actual labour cost = Rs.2,39,580
The total direct cost variance is
(a) Rs.930 (favorable) (b) Rs.930 (unfavorable)
(c) Rs.4,230 (unfavorable) (d) Rs.4,530 (favorable)
(e) Rs.6,530 (unfavorable).
(2 marks)
< Answer >
66. An investment center manager is considering four possible investments. The required investments, annual
profits, and the ROIs of each investment are as follows:
Project Required Investment Annual Profits (Rs.) ROI %
A 3,60,000 72,000 20.00
B 2,40,000 36,000 15.00
C 4,20,000 78,000 18.57
D 1,50,000 12,000 8.00
The investment center is currently generating an ROI of 18% based on Rs.10,00,000 in assets and a profit of
Rs.1,80,000. The company can borrow cash at a rate of 12% per annum. Which of the following project will
increase the investment center’s ROI?
(a) Projects A and B (b) Projects A and C
(c) Projects B and D (d) Project A only (e) Project D only.
(1 mark)
< Answer >
67. Narayani Ltd. produces three products X, Y and Z. The company has the policy of maintaining equal profit
per unit for fixation of selling prices and the company can produce and sell 60,000 units of X, 80,000 units
of Y and 1,00,000 units of Z. The total fixed cost for the period is Rs.1,20,000 and the variable costs per unit
for products X, Y and Z are Rs.6, Rs.9 and Rs.10 respectively. The company desires to earn a profit of
Rs.1,20,000. If fixed costs are apportioned on the basis of variable costs, the selling price per unit of X, Y
and Z are
< Answer >
14
(a) Rs.6.85, Rs.10.02 and Rs.11.08 respectively
(b) Rs.6.00, Rs.10.25 and Rs.11.08 respectively
(c) Rs.7.85, Rs.10.02 and Rs.11.95 respectively
(d) Rs.7.85, Rs.11.02 and Rs.11.08 respectively
(e) Rs.6.85, Rs.10.02 and Rs.3.55 respectively.
(2 marks)
68. Radha Ltd. has estimated the following projections for the month of January 2006:
Sales Rs.7,50,000
Gross profit margin 20%
Decrease in inventories Rs.40,000
Decrease in accounts payable Rs.30,000
The amount of cash disbursement for the month of January 2006 is
(a) Rs.8,20,000 (b) Rs.7,40,000 (c) Rs.6,80,000 (d) Rs.6,10,000 (e) Rs.5,90,000.
(1 mark)
< Answer >
69. A gang of workers normally consists of 30 men, 15 women and 10 boys. They are paid standard hourly
rates as under:
Men: Re.0.80; Women: Re.0.60; Boys: Re. 0.40
In a normal working week of 40 hours, the gang is expected to produce 2,000 units of output. During the
week ended December 31, the gang consisted of 40 men, 10 women and 5 boys. The actual wages paid were
at the rate of Re.0.70, Re.0.65 and Re.0.30 respectively. Four hours were lost due to abnormal idle time and
1,600 units were produced. The Labor efficiency variance is
(a) Rs. 416 (adverse) (b) Rs. 512 (adverse)
(c) Rs. 416 (favorable) (d) Rs. 512 (favorable) (e) Rs. 415
(adverse).
(2 marks)
< Answer >
70. DKM Ltd has furnished the following information pertaining to its product – S, which requires 3 materials –
A, B and C for the month of December 2005:
Standard:
Material A : 1,000 units at the rate of Rs. 1.01 per unit
Material B : 615 units at the rate of Re. 1.00 per unit
Material C : 175 units at the rate of Rs. 4.00 per unit
Actual:
Material A : 1,296 units at the rate of Re.1.00 per unit
Material B : 456 units at the rate of Rs.1.50 per unit
Material C : 190 units at the rate of Rs.3.80 per unit
The Material Cost Variance is
(a) Rs.377 (A) (b) Rs.292 (A) (c) Rs.85 (A) (d) Rs.377 (F) (e) Rs.85 (F).
(1 mark)
< Answer >
71. AR Ltd. has furnished the following balances of some selected ledgers at the end of the year:
Materials Price Variance Rs.4,500 credit balance
Materials Quantity Variance Rs.3,200 debit balance
Labor Rate Variance Rs.1,500 credit balance
Labor Efficiency Variance Rs.1,100 credit balance
Overhead Spending Variance Rs.2,100 credit balance
Overhead Volume Variance Rs.4,000 debit balance
Assume the variances are considered to be immaterial in amount. By how much will the Cost of Goods Sold
account be increased or decreased as a result of closing the above variance accounts?
(a) Increased by Rs.2,000 (b) Decreased by Rs.2,000
(c) Increased by Rs.3,100 (d) Decreased by Rs.6,100 (e) Decreased by Rs.3,900.
(2 marks)
< Answer >
72. Consider the following data of a company: < Answer >
15
Quarters 1st 2nd 3rd 4th
Budgeted direct-labor hours 60,000 80,000 75,000 70,000
Variable overhead rate per hour Rs.3.00 Rs.3.00 Rs.3.00 Rs.3.00
Fixed manufacturing overhead Rs.80,000 Rs.80,000 Rs.80,000 Rs.80,000
The fixed manufacturing overhead includes depreciation of Rs.35,000 per quarter.
Ninety percent of the cash payments for manufacturing overhead for each quarter are made during the
quarter, and the remaining 10% is made in the following quarter. How much cash payments are made for
overhead costs during the period of 2nd quarter?
(a) Rs.2,74,500 (b) Rs.2,79,000 (c) Rs.3,14,000 (d) Rs.3,49,000 (e) Rs.3,54,000.
(2 marks)
73. Consider the following information of Dutta Ltd. for the quarter ended December 31, 2005:
Actual variable overhead is Rs.25,800. Budgeted variable overhead at 25,000 machine hours is Rs.25,000.
The variable
overhead efficiency variance is Rs.800 (F). How many machine hours were actually used?
(a) 22,000 (b) 23,800 (c) 24,200 (d) 26,300 (e) 25,800.
(2 marks)
< Answer >
16
Suggested Answers
Management Accounting (MB161): January 2006
1. 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.
< TOP >
2. Answer : (a)
Reason : Planning decisions is that step in which such questions are answered and to answer such
questions , management accounting information is needed.
< TOP >
3 Answer : (c)
Reason : The costs which are not incurred but appeared in cost accounts only are called imputed costs. e.g.
The notional rent charged on business premises owned by the proprietor is imputed cost.
< TOP >
4 Answer : (e)
Reason : The cost means the value of the sacrifice made to acquire goods or services. Therefore, (e) is
correct.
< TOP >
5 Answer : (a)
Reason : The manager wants to control, and reduces if possible, the company's production costs. He must
determine how production costs are related to and affected by various business activities. The
manager needs to understand cost behaviors. A knowledge of cost behavior is useful because it
helps managers forecast (plan) results under different activity levels
< TOP >
6 Answer : (e)
Reason : Step costs are classified as a mixed cost. It is not a variable cost, fixed cost, prime cost or
conversion cost. Therefore, (e) is correct.
< TOP >
7 Answer: (d)
Reason: Overhead absorption rate per rupee labor cost =
Rs.3,00,000 ¸ [(200 × Rs.75) + (300 × Rs.50) + (500 × Rs.40)
= Rs.3,00,000 ¸ Rs. 50,000 = Rs. 6.
Overhead applied:
[(300 × Rs.75) + (350 × 50) + (400 × 40)] × 6
= (Rs. 22,500 + Rs. 17,500 + 16,000) × 6
= Rs.56,000 × Rs.6 = Rs.3,36,000
Over applied overhead: Rs.3,36,000 – Rs.3,19,000 = Rs.17,000.
< TOP >
8 Answer : (e)
Reason : Avoidable costs are those costs that can be avoided by discounting that product line or department
to which the cost was directly associated. Here, since the salary of workers do not have to be paid
if the product is discontinued, it is avoidable cost.
< TOP >
9 Answer : (d)
Reason : If a change increases or decreases the cost, it is called Differential cost. The change of cost due to
change in the level of activity or pattern or method of production is known as Differential cost. It
is not the Controllable cost, Semi-variable cost, Discretionary cost or Avoidable cost.
< TOP >
10 Answer : (e)
Reason : Where the machine hours is a key factor , the products which should be produced should have
the highest contribution per machine hour.
< TOP >
11 Answer : (a)
Reason : Prime Cost = Direct materials + Direct wages + Direct expenses
Therefore prime cost = Rs.75,000 + Rs.50,000 + Rs.25,000 = Rs.1,50,000.
< TOP >
12 Answer : (c)
Reason : Let, at 100% capacity level, units produced = 100
At 60% capacity, the overhead recovery rate = Rs.17.50 per unit
< TOP >
17
Therefore, total overhead at 60% = 60 ´ Rs.17.50 = Rs.1,050
At 70% capacity, the recovery rate = Rs.16 per unit
Therefore, total overhead at 70% = Rs.16 ´ 70 = Rs.1,120
Therefore, variable cost =
Rs.1,120 Rs.1,050
10
-
=
Rs.70
10 = Rs.7 per unit
Fixed cost = Rs.1,050 – 60 ´ Rs.7 = Rs.630
At, 88% capacity = Rs.630 + 88 ´ Rs.7
= Rs.630 + Rs.616 = Rs.1,246
Rate = Rs. 1,246 ¸ 88 = Rs. 14.16.
13 Answer : (d)
Reason : Variable cost = Change of cost ¸ change of activity
= (Rs.18,000 – Rs.10,000 ) ¸ (7,000 – 3,000) = Rs.2.
Fixed cost = Rs.18,000 – 7,000 ´ Rs.2 = Rs.4,000.
Standard overhead = Rs.2.50.
Standard fixed cost = Rs.2.50 – Rs.2.00 = Re.0.50.
Normal capacity level = Rs.4,000 ¸ Re.0.50 = 8,000 hours.
< TOP >
14 Answer : (b)
Reason : Practical capacity is the maximum level at which output is produced efficiently, with an
allowance for unavoidable interruptions. Because this level will be higher than expected capacity,
its use will ordinarily resulting under applied fixed factory overhead. Other options are not
correct.
< TOP >
15 Answer : (c)
Reason : Employee training cost is usually a discretionary fixed cost. It is typically fixed since its amount
is not based on volume. It is discretionary because it is set each year during the planning process.
Training costs are optional, and they can be altered or perhaps deleted entirely during the year in
response to business environment changes. Other options are related to committed cost.
< TOP >
16 Answer : (c)
Reason : An increase in variable cost without any change in selling price and fixed cost result in increase in
the sales level at which break-even point will occur. Other options stated in (a), (b), (d) and (e)
are not correct.
< TOP >
17 Answer : (b)
Reason : Units completed = 12,000 units.
Equivalent units 12,000 completed + 1,500 in ending inventory
(50% × 3,000) = 13,500 equivalent units.
Amount allocated to finished goods = 12,000units ¸ 13,500 equivalent units × Rs.300 =
Rs.266.67.
[Actual overhead = Rs. 5,100
Applied overhead = (Rs. 5,160 ¸ 430) × 400 = Rs. 4,800
Under absorption of overhead = Rs. 5,100 – Rs. 4,800 = Rs. 300].
< TOP >
18 Answer : (d)
Reason : Statement of equivalent Production Unit (FIFO)
Input
Output
Completed
Material Conversion
Opening 450 Opening 450 20% 90 40% 180
Introduced 4,100 Introduced 3,580 100% 3,580 100% 3,580
Closing 520 75% 390 65% 338
4,550 4,550 4,060 4,098
Costs during Rs.71,050 Rs.57,372
< TOP >
18
the month
Cost per unit Rs. 17.50 Rs. 14.00
The total cost of closing work-in-process
Material – 390 ´ Rs.17.50 = Rs.6,825
Conversion – 338 ´ Rs.14.00 = Rs.4,732
Rs.11,557
19 Answer : (e)
Reason : Let x = total cost and y = profit per unit of product whose selling price is Rs.45,000
x + y = Rs.45,000.
Statement showing the present and anticipated cost
Particulars Present
cost (Rs.) % Increase
(Rs.)
Anticipated
cost (Rs.)
Direct material 0.5x 15 0.075 0.575x
Direct labor 0.2x 25 0.050 0.250x
Overhead costs 0.3x - 0.300x
x 0.125x 1.125x
The increase in the cost of direct material and wages has reduced the present profit by 25%.
\1.125x + 0.75y = Rs.45,000
Solving above 2 equations, we get
x = Rs. 30,000
y = Rs.15,000
Statement showing profit per unit:
Direct Material 0.5x Rs.15,000
Direct Labour 0.2x Rs. 6,000
Overhead 0.3x Rs. 9,000
Total cost Rs. 30,000
Profit (50% of cost or 33-1/3% of S.P) Rs. 15,000
Selling price Rs.45,000
Statement of required selling price Rs.
Direct Material 0.575 of Rs.30,000 17,250
Direct Wages 0.250 of Rs.30,000 7,500
Overhead 0.300 of Rs.30,000 9,000
Total anticipated cost 33,750
Profit 33-1/3% of sales or 50% of cost 16,875
Selling price 50,625
< TOP >
20 Answer : (b)
Reason : Process costing is used in chemical works but not in garment industry. Therefore, option (b) is
false. Other options are all correct.
< TOP >
21 Answer : (b)
Reason : Joint costs are apportioned on the basis of relative sales value of the products:
Product
Sales
value
(Rs.)
Separate
costs
(Rs.)
Relative
Sales value
at split
off point
(Rs.)
Share of
joint cost
(Rs.)
Net
income
(Rs.)
M 1,15,000 30,000 85,000 *68,000 17,000
N 10,000 6,000 4,000 3,200 800
P 4,000 - 4,000 3,200 800
Q 30,000 1,000 29,000 23,200 5,800
Total 1,59,000 37,000 1,22,000 97,600 24,400
< TOP >
19
* Rs. 85,000 ¸ Rs. 1,22,000 × Rs. 97,600 = Rs. 68,000.
22 Answer : (c)
Reason : Direct costing and marginal costing are same. It is mainly concerned with the variable costs.
Absorption costing uses both variable cost and fixed cost (i.e. total costs) in product costs.
Standard costing is a technique to control cost. Uniform costing is followed by several business
enterprises using the same costing principles. It is not a separate method of cost accounting.
Therefore, absorption costing uses the total cost approach in the production.
< TOP >
23 Answer: (b)
Reason: BEP =
Fixedcost
Contributionperunit
Upto the product of 7,500 units
BEP =
Rs.80,000
Rs.25- 60%of Rs.25 =
Rs.80,000
Rs.10 = 8,000 units.
At any production level greater than 7,500 units, total fixed costs are Rs.1,20,000 but there are
two contribution margin. The first 7,500 units sold will produce a contribution margin of
Rs.75,000 (i.e. 7,500 ´ Rs.10). Hence, the other Rs.45,000 (i.e. Rs.1,20,000 – Rs.75,000) must be
contributed. The contribution per unit is Rs.12.50 (i.e. Rs.25 – 50% of Rs.25)
Therefore, BEP = Rs.45,000 ¸ Rs.12.50 = 3,600 units.
Therefore, Total BEP = 7,500 units + 3,600 units = 11,100 units.
< TOP >
24 Answer : (c)
Reason : In an absorption costing system, fixed overhead costs are included in inventory. When sales
exceed production, more overheads are expensed under absorption costing due to fixed overhead
carried over from the prior inventory. If sales increase over product ion, more than one period’s
factory overhead is recognized as expense. Accordingly, if the increase in factory overhead
expensed is greater than the contribution margin of the increased units sold, there may be less
profit with an increased level of sales.
< TOP >
25 Answer : (e)
Reason : Contribution to sales ratio = Sales perunit
Contribution per unit
= Sale priceper unit
Sale Pr iceper unit -Variable cost per unit
According to above relation, contribution to sales ratio does not depend upon the total fixed cost,
fixed cost per unit, volume of sales or production. It depends upon the direct expenses which are
the components of variable costs.
< TOP >
26 Answer : (d)
Reason :
Particulars Rs.
Direct materials 50,000
Direct labor 40,000
Variable product ion overhead 30,000
Total product costs 1,20,000
Cost per unit = 6,000 units
Rs.1,20,000
= Rs.20.
The cost per unit mentioned in (a), (b), (c) and (e) are not correct.
< TOP >
27 Answer: (d)
Reason: Fixed cost per unit = Rs.3,06,000 ¸ 18,000 units = Rs.17.
Profit under absorption costing = Rs.1,01,000
Adjustment of fixed manufacturing overhead costs of increased inventory = 1,880 units × Rs.17
= Rs.31,960
Profit under marginal costing = Rs.1,01,000 – Rs.31,960 = Rs.69,040
< TOP >
20
28 Answer : (b)
Reason :
Product Sales Mix Sales
(Rs. Lakh)
Contribution
(Rs. Lakh)
A 40 32 6.40
B 10 8 0.48
C 30 24 2.88
D 20 16 1.60
Total 100 80 11.36
PV ratio =
Contribution
100
Sales
´
=
11.36 100
14.2%
80
´
=
< TOP >
29 Answer : (d)
Reason : Cost of production
= Cost of goods sold + Cl.fin.goods – Op.fin.goods + Cl.W.I.P. – Op.W.I.P.
= Rs.88,000 + Rs.12,800 - Rs.12,000 + Rs.6,500 – Rs.7,000 = Rs.88,300
Raw material consumed =
Cost of production – Direct labor – Factory overhead
= Rs.88,300 – Rs.25,000 –Rs.20,000 = Rs.43,300
Raw material purchased =
Raw material consumed + Cl.Raw material – Op. Raw material
= Rs.43,300 + Rs.6,800 – Rs.6,000 = Rs.44,100
Cost of sales = Cost of goods sold + Selling expenses = Rs.88,000 + Rs.8,500
= Rs.96,500
Profit = Sales – Cost of sales = Rs.1,12,500 – Rs.96,500 = Rs.16,000
< TOP >
30 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 >
31 Answer : (c)
Reason : Contribution per unit = Rs. 100 – Rs.80 = Rs.20
Present contribution = 5,035 ´ 20 = Rs.1,00,700
New contribution per units = Rs.100 – Rs. 81 = Rs.19
Number of units to be sold = 1,00,700 ¸ 19 = 5,300
Extra units to be sold = 5,300 – 5,035 = 265 units
< TOP >
32 Answer : (a)
Reason : A contribution per hour: (Rs.29 – Rs.14) ¸ 1.5 = Rs.10;
Contribution per hour of B = (Rs.19 – Rs.12) ¸ 0.50 = Rs.14;
So it would be best to satisfy the demand for B before we produce any of A, given the limited
hours available.
The company must produce B first:
1700 × 0.50 = 850 hours;
1,300 - 850 = 450 hours left;
450 ¸ 1.5 = 300 units of A.
< TOP >
33 Answer : (c) < TOP >
21
Reason : Total cost per unit = Rs.29;
Fixed cost per unit at 50,000 units = Rs.4,00,000 ¸ 50,000 = Rs.8.
Variable cost per unit = Rs.29 – Rs.8 = Rs.21;
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.21 + Rs.2 – Rs.4 = Rs.19.
Net profit per unit = Rs.22.50 – Rs.19.00 = Rs.3.50
Total profit = 1,500 × Rs.3.50 = Rs.5,250.
34 Answer : (c)
Reason : If a company uses five-step decision model, the last step is Evaluation and feedback. The first
step is information collection, then future cost prediction, then alternative selection, and after that
performance evaluation. Therefore, (c) is correct.
< TOP >
35 Answer : (d)
Reason : Statement showing differential costs and incremental revenue of a batch of 15,000 kg.
Products Kg. After
Processing
At Split
off
Incremental
Revenue
Differential
Cost
Sulphura 7,500 48,750 37,500 11,250 7,500
Sulphury 4,500 72,000 58,500 13,500 22,500
Sulphurus 3,000 82,500 66,000 16,500 7,500
Sulphura and Sulphurus should be processed further as the differential cost is lower than the
incremental revenue.
< TOP >
36 Answer : (a)
Reason :
Working notes: Hours
Ordinary machine hours 2,400
Less: Normal repairs and maintenance 150
Lost due to staggering 750 900
Normal working hours 1,500
Computation of machine hour rate
Standing charges per annum Rs. Rs.per hour
Rent and rates (Rs.3,000 ÷ 4) 750
General lighting (Rs.250 × 12 ¸4) 750
Insurance (Rs.200 × 4) 800
Supervisor’s salary (Rs.500 × 12 ÷ 5 1,200
Allocated overheads (Rs.4,000 ÷ 4) 1,000
Total 4,500
Standing charges per hour (4,500÷1,500) 3.00
Machine expenses per hour
Wages etc. {Rs.6,000 ÷ (1,500 × 2)} 2.00
Power (Rs.10 ÷ 100 units × 20 units) 2.00
Repairs and maintenance (Rs.250 ×12) ÷1,500 2.00
Depreciation [(Rs.90,000 – Rs.4,500) ÷ 19] ÷ 1,500 3.00 9.00
Machine hour rate 12.00
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37 Answer : (b)
Reason : Since the division can sell the full capacity production to the outside market, it has no incentive to
take a lower price i.e. it will not opt for negotiation or variable costing or cost plus a mark-up and
full cost pricing methods i.e. it will be willing to use a transfer price set by the market
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38 Answer : (b)
Reason : 20% return on investment = 20% of Rs.4,00,000 = Rs.80,000
Selling price per unit = Variable cost per unit + fixed costs per unit + profit per unit
= Rs.30 + 5,000 units
Rs.80,000
5,000units
Rs.2,00,000
+
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22
= Rs.30 + Rs.40 + Rs.16 = Rs.86.
39 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
must be only be 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.
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40 Answer : (b)
Reason : Total cost of 35,000 units = 35,000 units ´ Rs.15 + (Rs.4,00,000 ¸ 40,000 units) ´ 35,000 units
=Rs.5,25,000 + Rs.3,50,000
=Rs.8,75,000
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41 Answer: (c)
Reason: A fixed budget is not prepared for a range, rather it is used unaltered during the budget period. It
is prepared for a particular activity level and it does not change with actual activity level being
higher or lower than the budgeted activity level.
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42 Answer : (d)
Reason : If the budgeted fixed overhead cost is more than applied fixed overhead cost, it is known as fixed
overhead volume variance (adverse). It is not fixed overhead expenditure variance, fixed
overhead cost variance, fixed overhead capacity variance and fixed overhead efficiency variance
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43 Answer : (e)
Reason : Let the Standard rate per unit be Rs.X.
Standard overhead for actual output
= Actual variable overhead incurred ~ Total overhead cost variance
Or, Actual output × Standard rate per unit
= Actual variable overhead incurred ~ Total overhead cost variance
Or, 2,400 × X = Rs.26,000 ~ 2,000(A) = Rs.24,0 00
Or, X = Rs.10 per unit.
Now, Standard production in actual hours worked
= Actual hours ÷ Standard time allowed per unit = 12,400 ÷ 5 = 2,480 units.
Actual production = 2,400 units.
Variable Overhead Efficiency Variance
= (Standard production in actual hours worked - Actual production) × Standard rate per unit =
(2,480 units – 2,400 units) × Rs.10 = Rs.800 (A).
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44 Answer : (b)
Reason : An organized creative approach, which emphasizes 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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45 Answer : (e)
Reason : Activity based costing deals with the overhead costs. Overhead cost is the cost other than direct
cost. It does not segregate variable and fixed costs. It is based on historical costs. It highlights the
causes of costs. It is very costly. Therefore (e) is false.
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46 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.
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23
Target costing is used to control costs before the company incurs any production costs.
47 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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48 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 interdivisional
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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49 Answer : (a)
Reason : Zero-Based Budgeting is a method of budgeting whereby all activities are re-evaluated each time
a budget is set. In zero-based budgeting no reference is made to previous level of expenditure and
thus each activity is analyzed and questioned afresh. Alternative (a) is false as the concept of
incrementalization is not used in case of Zero-based budgeting.
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50 Answer : (d)
Reason : Capacity usage ratio = Budgeted hours ¸ Maximum possible hours in the budget period
= 600 hours ¸ 700 hours
= 0.86.
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51 Answer : (c)
Reason :
Contribution of division A
Sales – 2,400 ´ Rs.264 = 6,33,600
Less : Variable cost:
Purchase cost (2,400 × Rs.228) = 5,47,200
86,400
Contribution of division B
Sales – 2400 × Rs.480 11,52,000
Less : Variable cost
Division A: Rs.6,33,600
Own cost
2,400 × Rs.180 Rs. 4,32,000 10,65,600
86,400
Total Contribution - 1,72,800
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52 Answer : (b)
Reason : Contract A/C Cr
Particulars Rs Particulars Rs
Materials 2,25,500 Work certified 4,00,000
Labor costs 1,23,500 Work not certified 1,20,000
Direct expenses 72,000
Material in hand 18,375
Depreciation
on plant
(Rs.1,71000–Rs.1,02,500)
68,500
Notional profit 48,875
5,38,375 5,38,375
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24
Profit transferred to P/L a/c =
2
3 ´ Rs.48,875 ´
Rs.3,60,000
Rs.4,00,000
= Rs.29,325
Profit transferred to Reserve a/c = Rs.48,875 – Rs.29,325
= Rs.19,550
Work certified - Rs. 4,00,000
Work not certified - Rs. 1,20,000
Rs. 5,20,000
(–) Cash received - (Rs. 3,60,000)
- Rs. 1,60,000
(–) Unrealized profit - (Rs. 19,550)
Rs. 1,40,450
53 Answer : (b)
Reason : Rs.
Direct material 2,40,000
Direct labor 1,50,000
Factory overheads (60% of direct labor) 90,000
Works cost 4,80,000
Administrative overheads (20% of works cost) 96,000
Selling and distribution expenses
(25% of works cost + 15%) (4,80,000 × 25% × 115%)
1,38,000
7,14,000
Profit 16.67% on sales (i.e. 20% on cost) 1,42,800
Sales 8,56,800
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54 Answer : (d)
Reason : Material price variance = 8,200 kgs × Rs.0.80 – Rs.6,888
Rs.6,560 – Rs.6,888 = Rs.328 (Adverse)
Material usage variance = Rs.0.80 (870 units × 8 kgs – 7,150 kgs)
= Rs.0.80 (6,960 kgs – 7,150 kgs) = Rs.152 (Adverse)
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55 Answer : (a)
Reason: Fixed overhead rate = Rs.1,50,000 ¸ 12,000 units = Rs.12.50
Volume variance = (Actual production – Budgeted production) × Fixed overhead rate
= (11,800 units – 12,000 units) × Rs.12.50 = Rs.2,500 (A).
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56 Answer : (a)
* Increase in overhead from 15,000 to 25,000 units is Rs.45,000.
Therefore, Rs.4.50 per unit or Rs.9 per hour (Rs.45,000 ¸ 10,000)
** Total overhead at 25,000 units is Rs.2,02,500, of which Rs.1,12,500 must be variable (i.e.25,000 ´
Rs.4.50). Remainder of Rs.90,000 must be fixed. Fixed overhead rate = Rs.90,000 ÷ 10,000 hours × 2 =
Rs.4.50.
Actual overhead Rs.1,91,000
Overhead applied 22,000 ´ (Rs.4.50 + Rs.4.50) Rs.1,98,000
Rs.7,000 (over)
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57 Answer : (e)
Reason: To determine the correct number of handles purchased for January 2006, the projected output of
finished goods for January 2006 and February 2006 must be calculated
Projected sales of cabinets in January 2006 280
Add: Required closing finished cabinets (50% of 286) 143
423
Less: Opening finished cabinets 124
Total cabinet production for January 2006 299
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25
Projected sales of cabinets in February 2006 286
Add: Required closing finished cabinets (50% of 290) 145
431
Less: Opening finished cabinets 143
Total cabinet production for February 2006 288
Number of Handles:
Handles for January 2006 (299 × 5) 1,495
Add: Handles for February 2006 (288 × 5 × 0.7) 1,008
2,503
Less: Opening inventory 900
Total handles to be purchased 1,603
58 Answer : (e)
Reason: Product life cycle begins with the initial planning and proposal. The stages Design and
engineering, production, marketing, and customer service follow this stage. Therefore, (e) is
correct.
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59 Answer : (b)
Reason : Currently attainable standards are production standards where normal worker diligence and effort
permit the company to meet its activity targets and production goals. These standards take into
consideration nonproductive time, normal defects, spoilage but not abnormal idle time. So option
(IV) is correct.
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60 Answer : (b)
Reason : Computation of differential cost of production of 5,000 additional units (i.e. 10% of normal
capacity):
Element of cost 40,000 units
(Rs.)
45,000 units
(Rs.)
Differential
cost for 5000
units (Rs.)
Prime cost – (Working Note 1) 2,26,000 2,54,250 28,250
Variable overhead 1,20,000 1,35,000 15,000
Semi variable overhead (Working
Note 2)
1,30,000 1,40,000 10,000
Fixed overhead 1,00,000 1,00,000 –
5,76,000 6,29,250 53,250
Cost per unit of new order = 5,000
Rs.53,250
= Rs.10.65
Profit margin 25% (20% on sale = 25% on cost) = Rs. 2.66
Minimum selling price per unit = Rs.13.31
Workings:
1. Computation of prime cost
Rs.
Sales (40,000 units) 7,20,000
Less: Profit margin – 20% 1,44,000
Cost of sales – (80% of Rs.7,20,000) 5,76,000
Less: Variable overheads – Rs.1,20,000
Semi-variable overheads – Rs.1,30,000
Fixed overheads – Rs.1,00,000 3,50,000
Prime cost 2,26,000
2. Semi-variable overheads
Variable cost = Change in units
Change in cos t
= 50,000 units 40,000 units
Rs.1,50,000 Rs.1,30,000
-
-
= 10,000 units
Rs.20,000
= Rs.2 per unit
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26
At 40,000 units
Fixed cost = Total cost – Variable cost
= Rs.1,30,000 – 40,000 units ´ Rs.2 = Rs.50,000
At 45,000 units
Total cost = 45,000 units ´ Rs.2 + Rs.50,000 = Rs.1,40,000
61 Answer : (e)
Reason : A decentralized segment may be any type of responsibility center. All are responsibility centers.
So option (e) is correct
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62 Answer : (d)
Reason : ROI = return on sales x capital turnover =(Rs.32,000 ¸ Rs.8,00,000) × 5 × 100 = 20%.
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63 Answer : (d)
Reason : The lowest price, Rs.10 and Rs.11 are below variable cost (Rs.12), so it is not acceptable. The
other costs exceed variable cost, but the Rs.15 price is the lowest acceptable price in the given
options.
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64 Answer : (a)
Reason : A cost pool is a collection of costs to be assigned to a set of cost objects, which are responsibility
centers.
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65 Answer : (a)
Reason : Material cost variance = Actual cost of actual output – standard cost of actual output=
Rs.1,49,490 - Rs (5000 units × 3 × 10) = Rs. 510 Favorable
Labour cost variance= Actual labour cost of actual output – standard labour cost of actual output
= Rs.2,39,580 - (5000 units × 4 hrs × Rs.12)=Rs.420 Favorable
Total direct cost variance = Material cost variance + labour cost variance = Rs.510 F + Rs.420 F=
Rs.930 Favorable.
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66 Answer : (b)
Reason : Project A: (Rs.1,80,000 + Rs.72,000) ÷ (Rs.10,00,000 + Rs.3,60,000) = 18.53% ROI. Project B:
(Rs.1,80,000 + Rs.36,000) ÷ (Rs.10,00,000 + Rs.240,000) = 17.42% ROI.
Project C: [Rs.1,80,000 + Rs.78,000] ÷ [Rs.10,00,000 + Rs.4,20,000] =18.17%ROI.
Project D: [Rs1,80,000 + Rs.12,000] ÷ [Rs.10,00,000 + Rs.1,50,000]=16.70%.
Projects A and C are increasing ROI than existing 18%.
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67 Answer : (a)
Reason : Total number of units = 60,000 + 80,000 + 1,00,000 = 2,40,000.
Profit per unit = Rs.1,20,000 ÷ 2,40,000 = Re.0.50
Particulars X Y Z
Units 60,000 80,000 1,00,000
Variable cost per unit (Rs.) 6 9 10
Total variable cost (Rs.) 3,60,000 7,20,000 10,00,000
Fixed cost (Rs.) 20,769 41,539 57,692
Profit @ Re.0.50 per unit (Rs.) 30,000 40,000 50,000
Sales (Rs.) 4,10,769 8,01,539 11,07,692
Selling price (Rs.) 6.85 10.02 11.08
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68 Answer : (e)
Reason : Cost of goods sold= Rs.7,50,000 × 0.8 = Rs.6,00,000
Cash disbursement = Rs.6,00,000 – Rs.40,000 + Rs.30,000= Rs.5,90,000
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69 Answer : (a)
Reason : Standard gang hours required:
Actual output ÷ Standard output per gang hour =1,600 ÷ (2,000 ÷40)=1,600 ÷50=32
Labor efficiency variance
Standard
Compo-
Standard
Gang
Total
standard
Actual
hours
Standard
Wage
Labor
Efficiency
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27
sition
of gang
hours
for
actual
production
hours
required
paid for
(40 × No.
of
persons)
rate
per
hour
(Re.)
Variance
(Rs.)
Men 30 ´ 32 (960 - 1,600) ´ 0.80 512 (A)
Women 15 ´ 32 (480 - 400) ´ 0.60 48 (F)
Boys 10 ´ 32 (320 - 200) ´ 0.40 48 (F)
Total 416 (A)
70 Answer : (a)
Reason : Standard cost :
Material A : 1,000 units @ Rs.1.01 per unit = Rs. 1,010
Material B : 615 units @ Rs.1.00 per unit = Rs. 615
Material C : 175 units @ Rs.4.00 per unit = Rs. 700
Total = Rs. 2,325
Actual cost :
Material A : 1,296 units @ Re.1.00 per unit = Rs. 1,296
Material B : 456 units @ Rs.1.50 per unit = Rs. 684
Material C : 190 units @ Rs.3.80 per unit = Rs. 722
Total = Rs. 2,702
Material Cost Variance = Standard cost of materials – Actual cost of material
= Rs.2,325 –Rs.2702 = Rs. 377 ( Adv).
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71 Answer : (b)
Reason : Total of variances: Rs.4,500 - Rs.3,200 + Rs.1,500 + Rs.1,100 + Rs.2,100 - Rs.4,000 = Rs.2,000,
a favorable balance. The Cost of Goods Sold account will be reduced by Rs.2,000 when the
variances are closed to that account.
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72 Answer : (b)
Reason : Total planned overhead costs for the first quarter = (60,000 × 3 + Rs.80,000) = Rs.260,000
1st quarter cash payments = 90% × (Rs.260,000 – Rs.35,000), (depreciation is excluded)
= Rs.202,500
Total planned overhead costs for the second quarter = (80,000 × 3 + Rs.80,000) = Rs.3,20,000.
2nd quarter cash payments =
{90% × (Rs.3,20,000 – Rs.35,000} + {10% × (Rs.260,000 – Rs.35,000)}
= (Rs.2,56,500 + Rs.22,500) = Rs.2,79,000.
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73 Answer : (c)
Reason : Variable overhead efficiency variance = Standard variable overhead rate × (actual hours –
standard hours).
The standard variable-overhead rate is Rs.25,000 ÷ 25,000 = Re.1.
Substituting: Re.1(AH – 25,000) = Rs.800(F);
Re.1(AH) – Rs.25,000 = (Rs.800);
Rs.1(AH) = Rs.24,200;
AH = Rs.24,200 ÷ Re.1;
AH = 24,200 machine hours.
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