Management Accounting (MB161): January 2005

1
Question Paper

Management Accounting (MB161): January 2005

· Answer all questions.
· Marks are indicated against each question.
1. In a broader sense, cost accounting can best be defined within the accounting system as an
(a) Internal reporting to plan and control routine operations
(b) Internal and external reporting for making non routine decisions and developing plans and policies
(c) Internal reporting for use in management planning and control and external reporting to the extent its
product-costing function satisfies external reporting requirements
(d) External reporting to Government, various outside parties etc.
(e) External reporting to investors of an organization.
(1 mark)
< Answer >
2. Which of the following statements are false?
I. Management accounting statements are prepared in accordance with the Generally Accepted
Accounting Principles
II. Management accounting is mandatory for business organizations because it should be maintained as per
various legal statutes
III. The application of Management accounting cannot be extended beyond the traditional accounting
system
IV. Management accounting focuses more on a company as a whole and less on the parts or segments of a
company
(a) Both (I) and (II) above (b) Both (I) and (IV) above
(c) Both (II) and (IV) above (d) (I), (II) and (IV) above
(e) (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
3. Which of the following is least likely to be an objective of a cost accounting system?
(a) Product pricing (b) Product mix determination
(c) Department efficiency (d) Inventory valuation
(e) Sales commission determination.
(1 mark)
< Answer >
4. The cost proposed annually for the plant service for the grounds at corporate headquarters is an example of
(a) Prime cost (b) Sunk cost (c) Discretionary cost
(d) Imputed cost (e) Relevant cost.
(1 mark)
< Answer >
5. The cost of goods manufactured, under a periodic cost accumulation system, is equal to the
(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)
< Answer >
6. A manager of a company wants to control and reduce, if possible, the company's production costs. He must
determine how production costs are related to and affected by various business activities. The manager needs
to understand
(a) Cost behaviors (b) Relevant ranges
(c) Fixed costs (d) Variable costs (e) Total costs.
(1 mark)
< Answer >
2
7. The term ‘variable costs’ refers to
(a) All costs which are likely to respond to the amount of attention devoted to them by a specified manager
(b) All costs which are associated with marketing, shipping, warehousing and billing activities
(c) All costs which do not change in total for a given period of time and relevant range but become
progressively smaller on a per unit basis as volume increases
(d) All manufacturing costs incurred to produce units of output
(e) All costs which fluctuate in total in response to small change in the rate of utilization of capacity.
(1 mark)
< Answer >
8. Which of the following statements is true?
(a) All costs are controllable
(b) Variable cost per unit varies with the increase in the volume of output
(c) Depreciation is an out -of-pocket cost
(d) An item of cost that is direct for one business may be indirect for another
(e) Fixed cost per unit remains constant.
(1 mark)
< Answer >
9. The term used to describe the assignment of direct costs to a particular cost object is
(a) Cost allocation (b) Cost tracing
(c) Cost accumulation (d) Cost assignment (e) Cost absorption.
(1 mark)
< Answer >
10. Consider the following information of a company:
Beginning merchandise inventory Rs. 45,000
Gross Profit Rs. 50,000
Sales revenue Rs. 4,00,000
Merchandise Purchases Rs. 3,30,000
The value of the ending merchandise inventory is
(a) Rs.25,000 (b) Rs.30,000 (c) Rs.35,000 (d) Rs.40,000 (e) Rs.1,15,000.
(1 mark)
< Answer >
11. The classification of cost as either direct or indirect depends upon
(a) The cost object to which the cost is being related
(b) The timing of the cash outlay for the cost
(c) The behavior of the cost in response to volume changes
(d) The controllability of costs
(e) The avoidability of costs.
(1 mark)
< Answer >
12. Costs are allocated to cost objects in many ways and for many reasons. Which of the following is a purpose
of cost allocation?
(a) Implementing activity-based costing
(b) Evaluating revenue center performance
(c) Budgeting cash and controlling expenditures
(d) Aiding in variable costing for internal reporting
(e) Measuring income and assets for external reporting.
(1 mark)
< Answer >
13. At 60% capacity utilization, the overhead recovery rate is Rs.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.
(1 mark)
< Answer >
3
14. Ajex Ltd. had the following inventories at the beginning and end of the month of December 2004:
Particulars December 1, 2004 (Rs.) December 31, 2004 (Rs.)
Finished goods 1,25,000 1,17,000
Work-in-process 2,35,000 2,51,000
Direct materials 1,34,000 1,24,000
The following additional manufacturing data were available for the month of December 2004:
Particulars (Rs.)
Direct materials purchased 1,89,000
Purchase returns 1,000
Transportation 3,000
Direct labor 3,00,000
Actual factory overhead 1,75,000
The company applies factory overhead at a rate of 60% of direct labor cost and any overapplied or
underapplied factory overhead is deferred until the end of the year 2004-05.
The manufacturing cost of the company for the month of December 2004 was
(a) Rs.6,81,000 (b) Rs.6,65,000 (c) Rs.4,89,000 (d) Rs.6,76,000 (e) Rs.6,73,000.
(2 marks)
< Answer >
15. The allocation of costs to a particular cost object allows a firm to analyze all of the following except
(a) Whether a production manager earns a bonus
(b) Whether a particular department should be expanded
(c) Whether a product line should be discontinued
(d) The causes of increase in the sales of a particular product
(e) The decision with regard to a particular product, which should be purchased or manufactured in-house.
(1 mark)
< Answer >
16. The Value Chain is a sequence of activities that should contribute more to the ultimate value of the product
than to its cost. The first cycle of the Value Chain is
(a) Research, Development, and Engineering
(b) Manufacturing Cycle
(c) Post-Sale Service and Disposal Cycle
(d) Benchmarking
(e) Activity Based Costing.
(1 mark)
< Answer >
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17. A factory has three production departments – P1, P2 and P3 and 2 service departments – S1 and S2. Budgeted
overheads for the next year have been allocated or apportioned by the cost department among the 5
departments. The secondary distribution of service department overheads is pending and the following details
are given:
Department Overheads apportioned/ allocated (Rs.) Estimated level of activity
P1 48,000 5,000 labor hours
P2 1,12,000 12,000 machine hours
P3 52,000 6,000 labor hours
Department Overheads ap portioned/
allocated (Rs.)
Apportionment of service
department costs
S1 16,000 P1(20%),P2(40%), P3(20%) & S2(20%)
S2 24,000 P1(10%), P2(60%), P3(20%) & S1(10%)
The overhead rate of P2 department after completing the distribution of service department costs is
(a) Rs.11.00 (b) Rs.11.35 (c) Rs.10.91 (d) Rs.10.22 (e)
Rs.10.50.
(2 marks)
< Answer >
18. Consider the following data pertaining to inventories of Calex Ltd. for the month of December 2004:
Particulars Opening inventory
(Rs.)
Closing inventory
(Rs.)
Raw materials 7,120 8,635
Work-in-process 8,000 3,000
Finished goods 9,000 11,000
Other information:
i. Raw materials used Rs. 32,665
ii. Total manufacturing costs charged to product
(it includes raw materials, direct labor and factory
overheads applied @ 60% of direct labor cost) Rs. 82,601
iii. Cost of goods available for sale Rs. 1,02,600
iv. Selling and general expenses Rs. 5,500
The costs of raw materials purchased and the amount of factory overhead applied are
(a) Rs.31,270 and Rs.49,936 respectively
(b) Rs.31,150 and Rs.31,210 respectively
(c) Rs.34,180 and Rs.31,210 respectively
(d) Rs.34,180 and Rs.18,726 respectively
(e) Rs.34,180 and Rs.12,484 respectively.
(2 marks)
< Answer >
19. The accounts in which a variety of similar cost elements with a common cause are accumulated prior to
allocation to cost objects on some common basis is known as
(a) Cost center (b) Cost pool (c) Cost behavior (d) Cost driver
(e) Cost allocation.
(1 mark)
< Answer >
5
20. Air Purifier Ltd. uses process cost system to manufacture Dust Density Sensors for the mining industry. The
following information pertains to operations for the month of December 2004:
Particulars Units
Opening work-in-process (December 01, 2004) 450
Introduced in production during December 2004 4,100
Closing work -in-process (December 31, 2004) 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 2004 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, 2004, 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 >
21. The yield of a certain process is 80%, the by-product is 16% and normal loss is 4% of its main product. 5,000
units of materials are put in process and its cost is Rs.24.80 per unit and other expenses amounted to
Rs.15,150, 40% of which was accounted for by power cost. It is the practice of the company that the power
cost is chargeable to the main-product and the by -product in the ratio of 3:2. The cost of the by-product is
(a) Rs.24,606 (b) Rs.55,660 (c) Rs.26,727 (d) Rs.22,264 (e) Rs.23,718.
(2 marks)
< Answer >
22. Mr. Subramaniyam owns a fleet of taxis and the following information is available from the records
maintained by him:
Number of taxis 5
Cost of each taxi Rs.2,70,000
Salary of manager Rs.6,500 per month
Salary of accountant Rs.5,000 per month
Salary of cleaner Rs.800 per month
Salary of mechanic Rs.2,200 per month
Garage rent Rs.2,000 per month
Insurance premium 5% per annum
Annual tax Rs.4,200 per taxi
Salary of driver Rs.5,000 per month per taxi
Annual repairs Rs.2,000 per taxi
Oil and other sundries Rs.10 per 100 kms
The total life of a taxi is about 3,00,000 km. A taxi runs in all 4,500 km in a month of which 20% it runs
empty. Petrol consumption is 5.62 km per litre. The cost of petrol is Rs.36 per litre.
The cost of running a taxi per km. is
(a) Rs.15.00 (b) Rs.14.30 (c) Rs.12.80 (d) Rs.12.03 (e) Rs.10.80.
(2 marks)
< Answer >
6
23. Sitpax Ltd. purchases raw materials worth Rs.16.56 lakh and processes them into 4 products – A, B, C and D.
The sale value per unit of products A, B, C and D is Rs.4.50, Rs.13.50, Rs.24 and Rs.90 respectively at splitoff
point, as these could be sold as such to other processors. However, during a year, the company decided to
further process and sell products A, B and D while C was not to be processed further but sold at split-off
point to other processors. The processing of raw materials into 4 products cost Rs.42 lakh to the company.
The company has furnished the following information pertaining to the 4 products:
Product
Output
(units)
Sales after further processing
(Rs. in lakh)
Additional processing
cost after split off
(all variable cost)
(Rs. in lakh)
A 10,00,000 69.00 18.00
B 20,000 6.00 3.60
C 10,000 2.40 –
D 18,000 18.00 0.60
The maximum profit of the company after adopting best sales strategy is
(a) Rs.16.24 lakh (b) Rs.15.86 lakh (c) Rs.14.64 lakh
(d) Rs.14.94 lakh (e) Rs. 7.74 lakh.
(3 marks)
< Answer >
24. If the size of a batch increases, the
(a) Setting-up cost per unit decreases (b) Setting-up cost per unit increases
(c) Setting-up cost per unit remains the same (d) Total cost of the batch decreases
(e) Total profit of the batch decreases.
(1 mark)
< Answer >
25. Consider the following data of a company:
Material Purchased - Rs.1,70,000. 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.6,450
Units started - 20,000 units
Units completed - 15,000 units
Actual overheads - Rs.6,200
Ending Inventory - 60% complete.
The value of ending inventory is
(a) Rs.50,000 (b) Rs.30,000 (c) Rs.20,000 (d) Rs. 5,000 (e) Rs.25,000.
(2 marks)
< Answer >
26. Which of the following is/are not true in relation to Value Chain Analysis?
I. Value chain is the linked set of value -creating activities from the basic raw material sources for
suppliers to the ultimate end-use product delivered to the customer
II. No individual firm is likely to span the entire value chain
III. Value chain requires an internal focus unlike conventional management accounting in which focus is
external to the firm
IV. Each firm must be understood in the context of the overall value chain of value-creating activities
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Only (IV) above
(e) Both (II) and (III) above.
(1 mark)
< Answer >
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27. XIL Ltd. has furnished the following data pertaining to its process account for the month of December 2004:
Materials introduced –– 5,000 unit s
Opening work-in-process –– 600 units (completion of material – 80%)
Closing work-in-process –– 400 units (completion of material – 60%)
Under average method, the equivalent completed units of material in the process is
(a) 5,600 units (b) 5,440 units (c) 5,400 units (d) 5,200 units (e) 4,960 units.
(1 mark)
< Answer >
28. Dip Construction Ltd. has furnished the following information pertaining to a contract for the year ended
March 31, 2004:
Particulars Rs.
Material sent to site 2,25,500
Materials in hand (March 31, 2004) 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, 2004) 1,02,500
Contract price 7,50,000
Cash received from the contractee 3,50,000
Direct expenses 72,000
The value of closing work-in-progress (WIP) of the company at the end of the period is
(a) Rs.36,900 (b) Rs.50,840 (c) Rs.58,450 (d) Rs.1,49,635 (e) Rs.1,09,490.
(2 marks)
< Answer >
29. 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 market ability 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 >
30. In which of the following situations, is job costing ideal?
(a) Where two or more products are produced from the same process
(b) Where the products are dissimilar and non-repetitive in nature
(c) Where the products are homogeneous
(d) Where the production is in continuous flow
(e) Where the production is carried on in batches.
(1 mark)
< Answer >
31. Which of the following is true regarding contract costing?
(a) Both work certified and work uncertified are valued at cost price
(b) Both work certified and work uncertified are valued at market price
(c) Both work certified and work uncertified are valued at contract price
(d) Work certified is valued at contract price whereas work uncertified is valued at cost price
(e) Work certified is valued at cost price whereas work uncertified is v alued at market price.
(1 mark)
< Answer >
8
32. DKM Chemicals manufactures three products in one common process but each product is capable of being
further processed separately after the split off point. The company has furnished the following estimated cost
of the three products:
Particulars Product
A
Product
B
Product
C
Selling price per litre at split-off-point (Rs.) 12 16 18
Selling price per litre after further processing (Rs.) 20 40 60
Post separation point costs (Rs.) 40,000 20,000 45,000
Output in litres 3,500 2,500 2,000
Pre-separation joint costs are estimated to Rs.80,000 and it is the practice of the company to apportion the
joint costs to the products on the basis of output.
If the three products are processed further, the estimated profit/(loss) for each product is
Product A
(Rs.)
Product B
(Rs.)
Product C
(Rs.)
(a) 5,000 50,000 55,000
(b) (5,000) 50,000 55,000
(c) (5,000) 55,000 55,000
(d) 5,000 40,000 60,000
(e) 5,000 50,000 50,000.
(1 mark)
< Answer >
33. Consider the following data pertaining to a manufacturing company:
Particulars Present (2003-04) Forecast (2004-05)
Sales (units) 10,000 15,000
Loss (Rs.) 5,000 -
Fixed cost (Rs.) 25,000 25,000
Profit (Rs.) - 5,000
The variable cost of sales has been taken at Rs.7 per unit up to 15,000 units and it shall be Rs.8 per unit
beyond 15,000 units.
What percentage of increase in sales is required to cover additional 50 paise per unit towards extra packaging
cost in the year 2004-05 for achieving the forecasted contribution level?
(a) 100% (b) 150% (c) 200% (d) 75% (e) 50%.
(2 marks)
< Answer >
34. Which of the following is not a characteristic of Product Life Cycle Costing?
(a) Product cost, revenue and profit patterns tend to follow predictable courses through the product life
cycle
(b) Each phase of the product life cycle poses different threats and opportunities
(c) The products have infinite life period
(d) Profit per unit varies as product move through their life cycle
(e) Products require different functional emphasis in each phase.
(1 mark)
< Answer >
35. ABC Ltd. has fixed costs of Rs.2,00,000. The company manufactures 2 products – A and B. The company
sells these products in the ratio of 2 units of A to 1 unit of B. The unit contribution is Re.1 per unit for A and
Rs.2 per unit for B. How many units of A would be sold at the break-even point?
(a) 2,00,000 units (b) 1,00,000 units (c) 1,50,000 units
(d) 75,000 units (e) 50,000 units.
(2 marks)
< Answer >
9
36. The following data are obtained from the records of a company:
Particulars First year (Rs.) Second year (Rs.)
Sales 80,000 90,000
Profit 10,000 14,000
The break-even sales in rupees of the company is
(a) Rs.70,000 (b) Rs.65,000 (c) Rs.60,000 (d) Rs.55,000 (e) Rs.50,000.
(2 marks)
< Answer >
37. Which of the following can improve break -even point?
(a) Increase in variable cost (b) Increase in fixed cost
(c) Increase in sale price (d) Increase in sales volume
(e) Increase in production volume.
(1 mark)
< Answer >
38. Which of the following is true with respect to target costing?
(a) It is a method of price skimming
(b) It is used to develop a short run price
(c) It is a method of penetration pricing
(d) It is a process where the cost of the product is determined and then an appropriate price is chosen
(e) It is the maximum manufacturing cost for a product which is arrived at by subtracting the acceptable
profit margin from the expected market price.
(1 mark)
< Answer >
39. Vikas Ltd. had an income of Rs.1,20,000 using absorption costing for a given period. The opening and
closing inventory for that period were 25,000 units and 18,000 units respectively. If the fixed overhead
application rate is Rs.6 per unit, the income under direct costing will be
(a) Rs.1,80,000 (b) Rs.1,62,000 (c) Rs.1,20,000 (d) Rs.1,00,000
(e) Rs.78,000.
(1 mark)
< Answer >
40. Which of the following statements is true?
(a) Marginal costing and absorption costing are the same
(b) In marginal costing technique, profit is the difference between sales and marginal cost
(c) In marginal costing technique, a portion of fixed overheads is carried over to the next period
(d) In marginal costing, under or over absorption of fixed overheads is bound to arise
(e) If marginal costing technique is used, only variable costs are charged to p roducts.
(1 mark)
< Answer >
41. 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 extra 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 >
10
42.
AOL Ltd. produces and sells two products M and N for Rs.29 and Rs.19 a unit respectively. Variable costs
amount to Rs.14 per unit for M and Rs.12 per unit for N. It takes 1½ hours to make one unit of M and ½ hour
to make one unit of N. Total manpower available is 1,300 hours and maximum demand for is 1,800 units of
M and 1,700 units of N. Fixed costs amount to Rs.9,700. The optimum profit will be
(a) Rs.4,500 (b) Rs.11,900 (c) Rs.6,700 (d) Rs.16,400
(e) Rs.15,200.
(2 marks)
< Answer >
43. ACD Ltd. has two departments - cosmetics and other goods. Cosmetics had a profit of Rs.87,500 and other
goods had a loss of Rs.35,200 in the las t year. 30% of the rent of Rs.1,20,000 is charged to other goods. If the
company closes the other goods, the company can sublet the space and receive an income of Rs.18,800 for it.
If the company closes the other goods,
(a) Loss will decrease by Rs.18,800 (b) Loss will decrease by Rs.18,000
(c) Loss will increase by Rs.18,000 (d) Profit will decrease by Rs.18,800
(e) Profit will increase by Rs.18,000.
(1 mark)
< Answer >
44. Relevant costs are
(a) Past costs that are different among competing alternatives
(b) Past costs that are the same among competing alternatives
(c) Future costs that are different among competing alternatives
(d) Future costs that are the same among competing alternatives
(e) Current costs that are same among competing alternatives.
(1 mark)
< Answer >
45. XLNT Ltd. has 500 units of obsolete finished goods whose manufacturing cost is Rs.17,500. If these goods
are reworked for Rs.3,000, they can be sold for Rs.9,000. Alternatively, these finished goods (without
reworking) can be sold at Rs.4,000 to a customer. The opportunity cost of reworking the goods is
(a) Rs.17,500 (b) Rs.3,000 (c) Rs.9,000 (d) Rs.6,000 (e) Rs.4,000.
(1 mark)
< Answer >
46. Sai Sibani Ltd. needs a machine with the capacity to produce 2,00,000 units of a particular product. Two
equipment suppliers have submitted their bids for two models of machine – S1 & S2
. The following
information relating to S1 and S2 models is furnished at a capacity of 2,00,000 units:
Particulars Model S1
(Rs.)
Model S2
(Rs.)
Fixed cost per annum 80,000 51,000
Profit 80,000 69,000
The sale price of the product is Rs.2
The sales value, at which two machines produce same profit , is
(a) Rs.3,20,000 (b) Rs.3,00,000 (c) Rs.2,90,000 (d) Rs.2,50,000 (e) Rs.2,20,000.
(2 marks)
< Answer >
47. If a product is not available in the market, then the transfer price can be based on
(a) Total cost (b) Marginal cost (c) Market price
(d) Full cost plus profit (e) Fixed cost plus mark-up.
(1 mark)
< Answer >
48. 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 >
11
49. 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
Variable cost per unit Rs.30
If the company desires to earn a profit of 20% on investment, the selling price should be
(a) Rs.100 (b) Rs.86 (c) Rs.70 (d) Rs.56(e)
Rs.46.
(1 mark)
< Answer >
50. AP 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, 2004:
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 overhead costs of the products A and P on the basis of a suitable cost
driver, using Activity Based Costing method, are
(a) Rs. 2,06,827 and Rs.1,41,673 respectively (b) Rs.1,82,827 and Rs.1,41,673 respectively
(c) Rs 2,06,827 and Rs.1,16,473 respectively (d) Rs.1,74,250 and Rs.1,74,250 respectively
(e) Rs 2,40,000 and Rs.1,08,500 respectively
(2 marks)
< Answer >
51.
ABC Ltd. is preparing its cash budget for the year 2005-06. An extract from its sales budget for the same year
shows the following sales values:
March 2005 Rs.1,20,000
April 2005 Rs.1,40,000
May 2005 Rs.1,10,000
June 2005 Rs.1,30,000
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 value of sales receipts to be shown in the cash budget for the month of May 2005 is
(a) Rs.1,85,000 (b) Rs.1,33,000 (c) Rs.1,30,000 (d) Rs.1,22,000
(e) Rs.1,10,000.
(1 mark)
< Answer >
12
52. Consider the following costs per unit of a product of SB Ltd.:
Direct material Rs.10
Direct labor Rs.12
Production overheads Rs.20 (40% fixed)
Selling & administrative overheads Rs.20 (50% fixed)
Total costs Rs.62
Normal Production 1,000 units
The total costs for 1,250 units are
(a) Rs.77,500 (b) Rs.75,000 (c) Rs.73,000 (d) Rs.65,000
(e) Rs.55,000.
(1 mark)
< Answer >
53. Which of the following statements is true?
(a) Material price variance is caused on account of pilferage of materials
(b) Material usage variance is caused on account of excessive shrinkage or loss of material in transit
(c) Material price variance occurs, if defective materials are purchased
(d) Material price variance arises because of purchasing substitute materials at different prices
(e) Material mix variance will result, if materials are not placed into production in the same ratio as the
standard mix of output.
(1 mark)
< Answer >
54. A favorable material price variance coupled with an unfavorable materials usage variance would most likely
result from the
(a) Purchase of lower than standard quality materials
(b) Purchase and use of higher than standard quality materials
(c) Changes in product mix
(d) Machine efficiency problems
(e) Labor efficiency problems.
(1 mark)
< Answer >
55. Consider the following data pertaining to production department in Skylab Ltd. for the month of December
2004:
Actual overhead costs Rs.11,000
Standard hours for actual work 4,500 hours
Actual hours during the month 5,000 hours
Standard overhead rate Rs.2 per hour
The overhead variance is
(a) Rs.2,000 (Favorable) (b) Rs.2,000 (Adverse)
(c) Rs.1,500 (Favorable) (d) Rs.1,000 (Adverse)
(e) Rs.1,000 (Favorable).
(1 mark)
< Answer >
56. Consider the following data pertaining to a product of a company:
Standard labor hours per unit 5 hours
Standard labor rate per hour Rs.3.00
Units produced 1,000 units
Actual labor hours 5,050 hours at the rate of Rs.3.50 per hour
The labor efficiency variance is
(a) Rs.200 (Adverse) (b) Rs.175 (Favorable)
(c) Rs.175 (Adverse) (d) Rs.150 (Favorable) (e) Rs.150 (Adverse).
(1 mark)
< Answer >
13
57. Consider the following information pertaining to Deys Ltd. for the month of December 2004:
Particulars Actual Budget
Sales (Units) 10,000 12,000
Sales Revenue (Rs.) 1,10,400 1,26,000
The sales price variance for the month is
(a) Rs.5,400 (adverse) (b) Rs.5,400 (favorable)
(c) Rs.6,200 (favorable) (d) Rs.6,480 (adverse) (e) Rs.6,480 (favorable).
(1 mark)
< Answer >
58. The data, equipment and computer program s that are used to develop information for managerial use is
known as
(a) Management by exception (b) Management by objective
(c) Management control (d) Management information system
(e) Value chain analysis.
(1 mark)
< Answer >
59. Top management requires information on
(a) Inventory position of stores (b) Overtime payments
(c) Working capital (d) Order bookings
(e) Technological advances and new product development.
(1 mark)
< Answer >
60.Which of the following information is required by the Operating Management?
(a) Changes in government policies (b) Overtime payments
(c) Working capital (d) Order bookings (e) Return on investment.
(1 mark)
< Answer >
61. A segment of an organization is referred to as a profit center if it has
(a) Responsibility for developing markets for and selling the output of the organization
(b) Authority to make decisions affecting the major determinants of profit, including the power to choose its
markets and sources of supply
(c) Responsibility for combining materials, labor and other factors of production into a final output
(d) Authority to provide specialized support to other units within the organization
(e) Authority to make decisions affecting the major determinants of profit, including the power to choose its
markets and sources of supply and significant control over the amount of invested capital.
(1 mark)
< Answer >
62. The data relating to Mehar Ltd. for the month of December 2004 are as follows:
Output (units)
Wages paid for 16,250 hours
Material 4,000 kg
6,500
Rs. 48,750
Rs. 34,000
Other information related to variances:
Variances Rs.
Labor rate
Labor efficiency
Labor idle time
Material price
Material usage
1,875 (A)
1,275 (F)
700 (A)
1,850 (F)
1,200 (F)
The standard prime cost per unit is
(a) Rs.13.00 (b) Rs.12.73 (c) Rs.7.30 (d) Rs.7.50 (e) Rs.5.70.
(2 marks)
< Answer >
14
63. Consider the following data relating to Max Ltd.:
Sales Rs. 5,00,000
Variable costs Rs. 3,00,000
Traceable fixed costs Rs. 50,000
Average invested capital Rs. 1,00,000
Imputed interest rate 26%
The residual income of the company is
(a) Rs.1,50,000 (b) Rs.1,44,000 (c) Rs.1,30,000 (d) Rs.1,26,000 (e) Rs.1,24,000.
(1 mark)
< Answer >
64. In activity-based costing system, the primary criteria for making cost allocation decisions is
(a) Cause and effect (b) Benefits received
(c) Fairness (d) Ability to bear
(e) Total costs before taking into overhead costs.
(1 mark)
< Answer >
65. 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 >
66. AB Lt d. 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 per unit. 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 supplied to division B to Rs.264. Division B, 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 compon ent 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.1,15,200.
(2 marks)
< Answer >
67. Kashmira Ltd. has two divisions - A and B. The division A has the capacity to manufacture 1,50,000 units of
a special component LKJ annually and it has some idle capacity currently. The budgeted residual income for
the division A is Rs.10,00,000. The relevant details extracted from the budget of A are as under:
Sales (to outside customers) 1,20,000 units @ Rs.180 per unit
Variable cost per unit Rs.160
Divisional fixed cost Rs.8,00,000
Capital employed Rs.75,00,000
Cost of capital 12% per annum
Division B received an order for which it requires 30,000 units of a component similar to LKJ. An additional
variable cost of Rs.5 per unit will be incurred to make minor modifications to LKJ to suit the requirements of
Division B.
The minimum transfer price per unit which A should quote to B to achieve its budgeted residual income is
(a) Rs.185 (b) Rs.170 (c) Rs.165 (d) Rs.160 (e) Rs.175.
(2 marks)
< Answer >
15
68. White X Ltd. has no significant bad debt experience with its customers. Cash sales of the company account
for 10% of total sales and payments for credit sales have been received as follows:
i. 40% of credit sales in the month of sales
ii. 30% of credit sales in the first month following the month of sales
iii. 25% of credit sales in the second month following the month of sales
iv. 5% of credit sales in the third month following the month of sales.
The forecast for both cash and credit sales is as follows:
Month Sales (Rs.)
April 2005 1,00,000
May 2005 1,20,000
June 2005 1,35,000
July 2005 1,50,000
August 2005 1,70,000
September 2005 2,00,000
The estimated cash inflows of the company in the month of July 2005 will be
(a) Rs.1,05,450 (b) Rs.1,32,450 (c) Rs.1,36,950 (d) Rs.1,50,500
(e) Rs.1,56,500.
(2 marks)
< Answer >
69. Leo Toys Ltd. manufactures a toy monkey with moving parts and a built -in voice box. Projected sales for 5
months are as follows:
Month Projected sales in units
April 2005 4,000
May 2005 4,300
June 2005 4,500
July 2005 4,250
August 2005 4,400
Each toy requires direct materials from a supplier at Rs.35 for moving parts. Voice boxes are purchased from
another supplier at Rs.10 per unit. Labor cost is Rs.20 per toy and variable overhead cost is Rs.5 per toy.
Fixed manufacturing overhead applicable to production is Rs.41,000 per month. It is the practice of the
company to manufacture an output in a month which is equivalent to 1.2 times of the following month’s
sales.
The production budget for the month of May 2005 and the production cost budget for the month of June 2005
are
(a) 4,800 units and Rs.3,78,000 respectively (b) 5,400 units and Rs.3,98,000 respectively
(c) 5,160 units and Rs.3,98,000 respectively (d) 5,400 units and Rs.3,57,000 respectively
(e) 5,280 units and Rs.3,24,000 respectively.
(2 marks)
< Answer >
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70. Acer Ltd. manufactures 5,000 units of Product PT at a cost of Rs.90 per unit. Presently, the company is
utilizing 50% of the total capacity. The information pertaining to cost per unit of the product is as follows:
Material – Rs.50
Labor – Rs.15
Factory overheads – Rs.15 (40% fixed)
Administrative overheads – Rs.10 (50% fixed)
Other information:
i. The current selling price of the product is Rs.100 per unit.
ii. At 60% capacity level – Material cost per unit will increase by 2% and current selling price per unit
will reduce by 2%.
iii. At 80% capacity level – Material cost per unit will increase by 5% and current selling price per unit will
reduce by 5%.
The profit per unit of the product of the company at 60% and 80% capacity level will be
(a) Rs.8.83 and Rs.10.00 respectively (b) Rs.6.63 and Rs.8.83 respectively
(c) Rs.8.83 and Rs.7.83 respectively (d) Rs.6.63 and Rs.10.00 respectively
(e) Rs.8.83 and Rs.6.63 respectively.
(3 marks)
< Answer >
71. Deekay Ltd. uses a standard absorption costing system. The following data have been extracted from its
budget for the month of December 2004:
Fixed production overhead cost Rs.48,000
Production 4,800 units
In December 2004, the fixed production overhead cost was over absorbed by Rs.8,000 and the fixed
production overhead expenditure variance was Rs.2,000 (Favourable).
The company has produced ______ than budgeted units.
(a) 1,000 units more (b) 600 units more (c) 200 units more
(d) 600 units less (e) 1,000 units less.
(2 marks)
< Answer >
72. Consider the following particulars pertaining to Jasmine Ltd. for the month of December 2004:
Overheads cost variance Rs.3,640 (Adverse)
Overheads volume variance Rs.2,600 (Adverse)
Budgeted hours for December 2004 3,120 hours
Budgeted overheads for December 2004 Rs.15,600
Actual rate of overheads Rs.8 per hour.
The overhead capacity variance is
(a) Rs.5,200 (Favorable) (b) Rs.1,040 (Favorable)
(c) Rs.5,200 (Adverse) (d) Rs.6,240 (Adverse) (e) Rs.8,320 (Adverse).
(2 marks)
< Answer >
17
73. Dutta Ltd. manufactures a line of products distributed nationally through whole sellers. Presented below are
planned manufacturing data for 2004-05 and actual data for December 2004. The company applies overhead
based on planned machine hours using a predetermined annual rate.
2004-05 planning data
Particulars
Annual December 2004
Fixed manufacturing overheads (Rs.) 12,00,000 1,00,000
Variable manufacturing overhead (Rs.) 24,00,000 2,20,000
Direct labor hours 48,000 4,000
Machine hours 2,40,000 22,000
Particulars Data for December 2004
Direct labor hours (actual) 4,200
Direct labor hours (plan based on output) 4,000
Machine hours (actual) 21,600
Machine hours (plan based on output) 21,000
Fixed manufacturing overheads (Rs.) 1,01,200
Variable manufacturing overheads (Rs.) 2,14,000
The total amount of overhead applied to production and the variable overhead expenditure (spending)
variance for December 2004 are
(a) Rs. 3,16,200 and Rs. 6,000 (F) respectively
(b) Rs. 3,15,000 and Rs. 2,000 (F) respectively
(c) Rs. 3,20,000 and Rs. 14,000 (A) respectively
(d) Rs. 3,15,000 and Rs. 6,000 (A) respectively
(e) Rs. 3,24,000 and Rs. 2,000 (A) respectively.
(2 marks)
< Answer >
74. Consider the following data of a company for the month of December 2004:
i. Budgeted hours 3,200
ii. Standard hours for actual production 3,520
iii. Maximum possible hours in the budget period 4,000
iv. Actual hours 3,000
The activity ratio of the company during the month of December 2004 is
(a) 133.3% (b) 113.6% (c) 110.0% (d) 87.5% (e) 75.0%.
(1 mark )
< Answer >
18
Suggested Answers
Management Accounting (MB161): January 2005
1. Answer: (a)
Reason: Cost accounting is the internal reporting system for an organization’s own management for
decision-making. The major emphasis is on functions, activities, products, and processes and on
internal planning and control and information needs of the organization. Option (b), (c), (d) and
(e) are incorrect as Cost accounting has nothing to do with external reporting.
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2. Answer: (e)
Reason: Management accounting is not mandatory. The applications of management accounting can be
extended beyond the traditional accounting system. It focuses more on the parts/segments of a
company and less on the company as a whole. It is not governed by GAAP. It prepares reports to
fulfill the needs of management. Therefore, all the options are false and so the correct answer is
(e).
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3. Answer: (e)
Reason: A cost accounting system has numerous objectives, including product costing, assessing
departmental efficiency, inventory valuation, product mix determination and planning evaluating
and controlling operations. Determining sales commissions is not an objective of a cost
accounting system because such commissions are based on sales, not costs.
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4. Answer: (c)
Reason: A discretionary cost is characterized by uncertainty about the relationship of input (the cost) to
output. It also tends to the subject of a periodic decision regarding the outlay to be made.
Research, Advertisement and Public Relation are common examples. Thus the annual cost of
plant service is discretionary because of the difficulty of valuing the output. Other options are not
correct.
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5. 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.
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6. 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.
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7. Answer: (e)
Reason: Variable costs refer to all costs, which fluctuate in total in response to small change in the rate of
utilization of capacity. Other statements given in (a), (b), (c) and (d) are not correct in respect of
meaning of variable cost. Therefore, (e) is correct.
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8. Answer: (d)
Reason: An item of cost that direct for one business may be indirect for another is a true statement.
Other statements are not correct. Therefore, (d) is correct.
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9. Answer: (a)
Reason: The term used to describe the assignment of direct costs to the particular cost object is cost
allocation. It is not the cost tracing, cost assignment, cost accumulation and cost absorption.
Therefore, (a) is correct
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10. Answer: (a)
Reason: Closing inventory = Sales – (Opening inventory + Purchases + Gross Profit)
= 4,00,000 – (45,000 + 3,30,000 + 50,000)
= Rs. 25,000.
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11. Answer: (a)
Reason: A direct cost can be specifically associated with a single cost object in an economically feasible
way. An indirect cost cannot be specifically associated with a single cost object. Thus the specific
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cost object influences whether a cost is direct or indirect. For example, a cost might be directly
associated with a single plant. The same cost however might not be directly associated with a
particular department in the plant. Therefore (a) is correct.
Option (b) is not correct because the timing of the cash outlay has no effect on whether a cost is
direct or indirect. Option (c) is not correct because the behavior of cost in response to volume
changes is a factor only if the cost object is a product. Options (d) and (e) are not correct because
controllability and avoidability of costs have no effect on whether a cost is direct or indirect.
12. Answer: (e)
Reason: The purpose of cost allocation is to measure income and assets for external reporting. The other
options given (a), (b), (c) and (d) are not the purposes of cost allocation.
Cost allocation is a process of assigning and reassigning costs to cost objects. It is used for these
costs that cannot be directly associated with a specific cost object. It is often used for purposes of
measuring income and assets for external reporting purposes. It is less meaningful for internal
purposes because responsibility accounting systems emphasize controllability, a process often
ignored in cost allocation.
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13. Answer: (c)
Reason: Let, at 100% capacity level, units produced = 100
At 60% capacity, the overhead recovery rate = Rs.17.50 per unit
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.
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14. Answer: (a)
Reason:
Beginning direct materials invent ory 1,34,000
Add: Purchases 1,89,000
Less: Purchase returns (1,000)
Add: Transportation 3,000
Total direct materials available 3,25,000
Less: Ending direct materials inventory (1,24,000)
Direct material used 2,01,000
Direct labor 3,00,000
Total prime costs 5,01,000
Manufacturing cost = Rs.5,01,000 + 60% of Rs.3,00,000 (Direct labor)
= Rs.6,81,000.
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15. Answer: (d)
Reason: Allocation of costs is a distribution of costs that cannot be directly assigned to the cost objects
that are assumed to have caused them. An allocation of costs does not enable a company to
determine why the sales of a particular product have increased. Many factors affect consumer
demand such as advertising, consumer confidence, availability of substitutes and changes in
tastes. Cost allocation is an internal matter that does not affect demand except to the extent it
results in a change in price.
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16. Answer: (a)
Reason: Value Chain analysis starts with customers as the ultimate aim. The fist stage of Value Chain is
thus research, development and engineering.
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17. Answer: (b)
Reason: It is given in the question that the secondary distribution of service departrments’overhead is
pending. The same is thus attempted by use of simultaneous equation method.
Let, total overheads of department S1 = x; and total overheads of S2 = y;
According to problem, we get x = 16,000 + 0.1y and y = 24,000 + 0.2x;
Therefore, x = 16,000 + 0.1(24,000 + 0.2x) = 16,000 + 2,400 + 0.02x
Or, x (1 – 0.02) = 18,400, or, x = 18,400 / 0.98 = 18,775, then y = 27,755;
Statement of secondary distribution:
Particulars P1 (Rs.) P2 (Rs.) P3 (Rs.) Total (Rs.)
Direct allocation 48,000 1,12,000 52,000 2,12,000
S1 (80% of 18,775) 3,755 7,510 3,755 15,020
S2 (90% of Rs.27,755) 2,776 16,653 5,551 24,980
Total 54,531 1,36,163 61,306 2,52,000
Budgeted machine hours 5,000 12,000 6,000
Overhead rate per machine hour 10.91 11.35 10.22
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18. Answer: (d)
Reason: Materials purchased = Rs.32,665 + Rs.8,635 – Rs.7,120
= Rs.34,180
Total manufacturing costs =Direct material + Direct labor + 60% of Direct labor
Rs.82,601 = Rs.32,665 + Direct labor + 0.6 Direct labor
1.6 direct labor = 49,936
Direct labor = Rs.31,210
Applied factory overhead = 60% of Rs.31,210 = Rs.18,726.
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19. Answer: (b)
Reason: Cost pools are accounts in which a variety of similar cost elements with a common cause are
accumulated prior to allocation to cost objects on some common basis. Hence, option (b) is
correct.
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20. 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 the month Rs.71,050 Rs. 57,372
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
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21. Answer: (a)
Reason: Input = 5,000 units. Main product = 80% of 5,000 units = 4,000 units.
By-product = 16% of 5,000 units = 800 units
Process loss = 4% of 5,000 units = 200 units
Share of by-product:
Material cost = 5,000 units x Rs.24.80 = (Rs.1,24,000 x 800 ) / 4,800
= Rs.20,667
Other cost = 60% of Rs.15,150 = (Rs. 9,090 x 800) / 4,800 = Rs.1,515
Power cost = 40% of Rs.15,150 = (Rs.6,060 x 2) / 5 = Rs.2,424
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Total costs of by-product = Rs.20,667 + Rs.1,515 + Rs.2,424 = Rs.24,606
22. Answer: (d)
Reason:
Particulars Per month Per km.
Fixed expenses:
Salary of Manager 6,500
Accountant 5,000
Cleaner 800
Mechanic 2,200
Garage rent 2,000
Insurance:
5%on5 2,70,000
12
´ 5,625
Drivers salary (Rs.5,000 ´ 5) 25,000
Annual tax
Rs.4,200 5
12
´
1,750
48,875
Effective km = Rs.4,500 ´ .8 ´ 5 = 18,000 2.72
Depreciation Rs.2,70,000 ¸ (3,00,000 ´ .8) 1.13
Repairs Rs.2,000 ¸ (12 ´ 3,600) 0.05
Petrol (4,500 ´ Rs.36) ¸ (5.62 ´ 3600) 8.00
Oil and other sundries (Rs.10 ´ 4,500)¸(100km ´ 3,600) 0.13
Cost of plying taxi per km. 12.03
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23. Answer: (d)
Reason: Joint costs = Material cost + Processing cost
= Rs.16.56 + Rs.42 = Rs.58.56 lakhs
Net realizable value (NPV): Rs. (in lakhs)
Product A = Rs.69 – Rs.18 = Rs.51.00
B = Rs.6 – Rs.3.60 = Rs. 2.40
C = Rs.2.40 – 0 = Rs. 2.40
D = Rs.18.00 – Re.0.60 = Rs.17.40
Rs.73.20
A = Rs.58.56 ´
Rs.51.00
Rs.73.20 = Rs.40.80
B = Rs.58.56 ´
Rs.2.40
Rs.73.20 = Rs.1.92
C = Rs.58.56 ´
Rs.2.40
Rs.73.20 = Rs.1.92
D = Rs.58.56 ´
Rs.17.40
Rs.73.20 = Rs.13.92
(Rs. in lakhs)
A (Rs) B (Rs) C (Rs) D (Rs)
Sales at split-off point 45.00 2.70 2.40 16.20
Sales after split-off point 69.00 6.00 2.40 18.00
Incremental sale 24.00 3.30 NIL 1.80
Incremental cost 18.00 3.60 – 0.60
Profit (loss) 6.00 (0.30) NIL 1.20
Profitability St:
Sale at split-off point – 2.70 2.40 –
Sale after processing 69.00 – – 18.00
Less cost:
Pre
Post
40.80
18.00
æ ö
ç ÷
è ø
æ1.92 ö
ç - ÷ è ø
æ1.92 ö
ç - ÷ è ø
13.92
0.60
æ ö
ç ÷
è ø
Profit 10.20 0.78 0.48 3.48
Total Profit 14.94
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24. Answer: (a) < TOP
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22
Reason: If the batch size increases, setting up cost per unit decreases. Similarly, if the batch size
decreases, setting up cost per unit increases. Therefore, (a) is correct.
25. Answer: (b)
Reason: Cost per equivalent unit of ending inventory = Rs.10.00 x 3,000 equivalent units in ending
inventory = Rs.30,000.
Equivalent units 15,000 completed + 3,000 in ending inventory (60% x 5,000) = 18,000
equivalent units.
Total cost = Material Rs.1,70,000 + labor 4,000 + applied overhead Rs. 6,000 (400 hours x
Rs.15/hour). = Rs.1,80,000
(Overhead rate = Rs. 6,450 ¸ 430 = Rs. 15)
Cost per unit = Rs.180,000/18,000 = Rs.10.00 per equivalent unit.
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26. Answer: (c)
Reason: Value chain requires an external focus, unlike conventional management accounting in which the
focus is internal to the firm i.e., option ‘c’ is the right option. Options (a), (b), and (d) are the
correct statements in relation to value chain analysis. Hence they are not right options.
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27. Answer: (b)
Reason: Opening WIP – 600 units
Material introduced – 5,000 units
5,600 units
Less: Closing WIP 400 units
Completed units 5,200 units
Equivalent units under average method = 100% of completed units + 60% of closing WIP
= 100% of 5,200 units +60% of 400 units
= 5,200 units + 240 units = 5,440 units
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28. Answer: (d)
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
Profit transferred to P/L a/c =
2
3 ´ Rs.48,875 ´
Rs.3,50,000
Rs.4,00,000
= Rs.28,510
Profit transferred to Reserve a/c = Rs.48,875 – Rs.28,510
= Rs.20,365
Work certified - Rs. 4,00,000
Work not certified - Rs. 1,20,000
Rs. 5,20,000
(–) cash received - (Rs. 3,50,000 )
- Rs. 1,70,000
(–) unrealized profit - (Rs. 20,365)
Value of WIP Rs. 1,49,635 .
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29. Answer: (c)
Reason: Joint product and by-products arise in situations where the production of one 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 have a minor sales value in comparison to Joint product is called
by-products. Therefore, option (c) is correct.
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30. Answer: (b)
Reason: Job costing is a type of specific order costing, which applies where work is undertaken as an
identifiable unit. Under job costing method, cost of an individual job or work order is ascertained
separately. Hence it is ideal where the products are dissimilar and non-repetitive in nature
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31. Answer: (d)
Reason: In contract costing, work certified is valued at contract price and work uncertified is valued at
cost price. Both are not valued at cost price, market price or contract price. Therefore (d) is true.
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32. Answer: (c)
Reason:
Particulars Product A Product B Product C
Rs. Rs. Rs.
Revenue 70,000 1,00,000 1,20,000
Pre-Separation Joint costs: 35,000 25,000 20,000
A = Rs.80,000 ´
3,500
8,000
B = Rs.80,000 ´
2,500
8,000
C = Rs.80,000 ´
2,000
8,000
Post-separation cost 40,000 20,000 45,000
Profit / (Loss) (5,000) 55,000 55,000
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33. Answer: (c)
Reason: Sales for 2003-04 =
Variable cost + Fixed cost –Loss = Rs.7 x 10,000 units + Rs.25,000 – Rs.5,000
= Rs.90,000, Selling price per unit = Rs.90,000 / 10,000 = Rs.9.
Contribution required for 15,000 units = Rs.25,000 + Rs.5,000 = Rs.30,000
Contribution from 15,000 units = 15,000 units (Rs.9 – Rs.7.50) = Rs.22,500
Additional contribution required from additional units = Rs.30,000 – Rs.22,500
= Rs.7,500
Units required to earn contribution of Rs.7,500 = Rs.7,500 / (Rs.9 – Rs.8.50)
= 15,000 units
Proposed sales = 15,000 units + 15,000 units = 30,000 units
Required increase in sales = 30,000 units – 10,000 units = 20,000 units
Percentage increase required = (20,000 / 10,000) x 100 = 200%.
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34. Answer: (c)
Reason: Options (a), (b), (d) and (e) are the characteristics of the Product Life Cycle Costing i.e., they are
not right options. One of the major characteristics of the Product Life Cycle Costing is that
products have finite lives and hence pass through the cycle of development, introduction growth,
maturity, decline and deletion. Hence, correct answer is (c).
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35. Answer: (b)
Reason: Units are produced at the rate of 2 units of A to 1 unit of B
Suppose units of B produced at BEP = x ; Units of A produced at BEP = 2x;
Contribution made by A = Re.1per unit and B = Rs.2 per unit;
Total contribution at BEP = Rs.2x + Rs.2x; Fixed cost = Rs.2,00,000
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Therefore, 4x = Rs.2,00,000
x = Rs.2,00,000 / 4 = 50,000 units. So, A = 50,000 x 2 = 1,00,000 units.
36. Answer: (d)
Reason: Contribution to sales ratio= Change of profit / Change of sales
= Rs.4,000 / Rs.10,000 = 0.40 = 40%
Break-even point:
Sales x contribution to sales ratio = Fixed cost + Profit
Rs.80,000 x 40% = Fixed cost + Rs.10,000
Fixed cost = Rs.32,000 – Rs.10,000 = Rs.22,000
Break-even sales in rupees = Rs.22,000 / 0.40 = Rs.55,000.
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37. Answer: (c)
Reason: Break even point = Sale priceperunit Variable costperunit
Fixed cost
-
From the above relation, increase in sale price can improve break-even point. Break -even point
will not improve with the increase in variable cost, fixed cost, sales volume and production
volume. Other statements mentioned in (a), (b), (d) and (e) are not correct.
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38. Answer: (e)
Reason: Target cost = Sale price (for the target market share) – Desired profit. In compet itive industries, a
unit sale price would be established independent of the initial product cost. Management decides
that the cost of a product should be based on marketing factors rather than manufacturing. Hence
(e) is true.
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39. Answer: (b)
Reason: Stock has been reduced by 7,000 unit (i.e. 25,000–18,000)
Fixed overhead application rate = Rs.6
Income under direct costing = Rs. 1,20,000 + Rs. 6 x 7,000 units
= Rs. 1,20,000 + Rs. 42,000
= Rs. 1,62,000.
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40. Answer: (e)
Reason: Under marginal costing technique, products are valued at variable cost. Fixed costs are not
considered for valuation of product. Therefore, this statement is correct. Other statements given
in (a), (b), (c) and (d) are not correct statements.
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41. 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
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42. Answer: (c)
Reason: Contribution of M per hour= (Rs.29 – Rs.14) / 1.5 = Rs.10;
Contribution of N per hour= (Rs.19 – Rs.12) / 0.50 = Rs.14;
The company must produce N first: 1700 x 0.50 = 850 hours;
1,300 hours – 850 hours = 450 hours left; 450 / 1.5 = 300 units of M.
Optimum profit: (300 x Rs.15) + (1700 x Rs.7) – Rs.9,700 = Rs.6,700.
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43. Answer: (e)
Reason: Profit will increase by = (Rs.120,000 x 0.30) – Rs.35,200 = Rs.800;
Rs.18,800 – Rs.800 = Rs.18,000
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44. Answer: (c)
Reason: Relevant costs are future costs that are different among competing alternatives. It is not the past
or current costs. There must be a change in relevant cost. Therefore, (c) is correct.
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45. Answer: (e)
Reason: Opportunity costs are based on a specified course of action and alternative actions. Thus, the
opportunity costs associated with the ‘rework’ action is Rs.4,000 revenue from sale to a
customer. Note that the opportunity cost of the decision to sell to a customer is Rs.6,000 (i.e
Rs.9,000 – Rs.3,000). Therefore (e) is correct.
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46. Answer: (c)
Reason: Contribution of S1 = Rs. 80,000 + Rs. 80,000 = Rs. 1,60,000
Contribution of S2 = Rs. 51,000 + Rs. 69,000 = Rs. 1,20,000
Contribution to sales ratio of:
S1 = Rs. 1,60,000 / 2,00,000 x Rs. 2 = Rs. 1,60, 000 / Rs. 4,00,000 = 0.4
S2 = Rs. 1,20,000 / 2,00,000 x Rs. 2 = Rs. 1,20,000 / Rs. 4,00,000 = 0.3
Let the sale value = x
Therefore, 0.4x – Rs.80,000 = 0.3x – Rs.51,000
0.1x = Rs.29,000
x = Rs.2,90,000.
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47. Answer: (d)
Reason: If a product is not available in the market, the transfer price should be fixed up between the
departments of an organisation on the basis of full cost plus profit. Under this approach, the
transferor department can recover total cost plus profit under the specified situation. Otherwise,
competitive market price will be considered as transfer price. In this context the options (a), (b),
(c) and (e) cannot be proper bases.
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48. 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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49. 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
+
= Rs.30 + Rs.40 + Rs.16 = Rs.86.
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50. Answer: (a)
Reason: Machine activity cost per hour =
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
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51. The correct answer is (d).
Particulars Rs.
Cash sales Rs.1,10,000 ´ .4 44,000
Credit sales realized:
April Rs.1,40,000 ´ .6 ´ .5 42,000
March Rs.1,20,000 ´ .6 ´ .5 36,000
Sales receipts 1,22,000
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52. Answer: (c)
Reason: Variance cost per unit = Rs.10 + Rs.12 + Rs.12 + Rs.10 = Rs.44
Fixed cost = Rs.8 ´ 1,000 units + Rs.10 ´ 1,000 units
= Rs.8,000 + Rs.10,000 = Rs.18,000
Cost of 1,250 units = 1,250 units ´ Rs.44 + Rs.18,000
= Rs.55,000 + Rs.18,000 = R s.73,000
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53. Answer: (d)
Reason: Material price variance arises due to purchase of substitutes at different prices. It does not arise due
to pilferage or defective material. Other statements mentioned in (a), (b), (c) and (e) are false.
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54. Answer: (a)
Reason: A favorable materials price variance is the result of paying less than the standard price for materials.
An unfavorable materials usage variance is the result of using an excessive quantity of materials. If a
purchasing manager is to buy substandard materials to achieve a favorable price variance, an unfavorable
quality variance could result from using an excessive amount of poor quality materials.
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55. Answer: (b)
Reason:
Actual overheads cost Rs.11,000
Less: Applied overhead cost =
(Standard hours for actual work ´ standard overhead rate)
4,500 hours ´ Rs.2
Rs. 9,000
Overhead cost variance Rs. 2,000 (Adverse)
Other options (a), (c), (d) and ( e) are not correct.
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56. Answer: (e)
Reason: Labor efficiency variance = standard rate (Actual hours ~ standard hours)
= Rs.3 (5,050 hours ~ 1,000 units ´ 5 hours)
= Rs.3 ´ (5,050 hours – 5,000 hours)
= Rs.3 ´ 50 hours = Rs.150 (Adverse).
Other options (a), (b), (c) and (d) are not correct.
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57. Answer: (b)
Reason: The correct answer is (b). The sales price variance is determined by multiplying the difference
between actual price and budgeted price by actual units.
Actual price = 10,000 units
Rs.1,10,400
= Rs.11.04
Budgeted = 12,000 units
Rs.1,26,000
= Rs.10.50
\ Sales price variance is 10,000 units (Rs.11.04 – Rs.10.5) = Rs.5,400 (favorable).
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58. Answer: (d) < TOP
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Reason: The data, equipment and computer programs that are used to develop information for managerial
use is called Management Information System (MIS). Other options (a), (b), (c) and (e) are not correct.
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59. Answer: (e)
Reason: Information of inventory position of stores and overtime payments is needed by operating
management. Hence (a) and (b) are not correct. Information of working capital and order booking
is needed by Executive management. Hence options (c) and (d) are not correct options.
Technological advances and new product development information is the most needed
information of top management. Hence correct option is (e).
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60. Answer: (b)
Reason: The operating management is responsible for executing various tasks within the framework of
plans, programs and schedules defined by executive management. They need the information
regarding the overtime payments. The information regarding the changes in government policies,
return on investment is required by top management and the information regarding the working
capital, order bookings, etc. is required by the executive management.
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61. Answer: (b)
Reason: A profit center is a segment of a company responsible for both revenues and expenses. A profit
center has the authority to make decisions concerning markets (revenues) and sources of supply
(costs).Option (a) is not correct because a revenue center is responsible for developing markets
and selling the firm’s products. Option (c) is not correct because a cost center combines labor,
materials, and other factors of production into a final output.Option (d) is not correct because a
service center provides specialized support to other units of the organization. Option (e) is
incorrect because an investment center is responsible for revenues, expenses, and the amount of
invested capital.
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62. Answer: (a)
Reason: Actual cost
Standard material cost
= Actual material cost + Favorable material price variance +Favorable material usage variance
Standard wages =
Actual wages paid + favorable labor efficiency variance – adverse labor rate variance – adverse
labor idle time variance
Particulars Total Per unit
Standard mat erial cost (34,000 + 1,850 + 1,200)
Standard wages (48,750+1,275 – 1,875 – 700)
37,050
47,450
5.70
7.30
Total 84,500 13.00
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63. Answer: (e)
Reason:
Sales Rs.5,00,000
Less variable costs Rs.3,00,000
Rs.2,00,000
Less fixed costs (traced) Rs. 50,000
Rs.1,50,000
Less interest (26% of Rs.1,00,000) Rs. 26,000
Residual income = Rs.1,24,000
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64. Answer: (a)
Reason: Applying overhead costs to each product or service based on the extent to which that product or
service causes overhead cost to be incurred is the primary objective of accounting for overhead
costs. Thus, ABC uses cost hierarchy to determine the cost drivers that cause a cost incurred.
Hence the options given in (b), (c), (d) and (e) are not correct. Therefore, option (a) is correct.
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65. 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
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causes of costs. It is very costly. Therefore (e) is false.
66. Answer: (c)
Reason: Rs.
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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67. Answer: (e)
Reason:
Fixed costs 8,00,000
Return on capital employed (Rs.75,00,000 x 12%) 9,00,000
Residual income desired 10,00,000
Total desired contribution 27,00,000
Contribution per unit from outside sales = Rs.180 – Rs.160 = Rs.20 per unit
Total contribution from outside sales = Rs.20 per unit x 1,20,000 units = 24,00,000
Minimum contribution to be earned from supply to division B
= Rs.27,00,00 – Rs.24,00,000 = Rs. 3,00,000
Contribution per unit on additional 30,000 units =
Rs. 3,00,000
30,000 units = Rs.10 per unit
Variable cost for minor modification = Rs.5 per unit
Minimum transfer price per unit to be quoted = Rs.160 + Rs.10 + Rs.5 = Rs.175
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68. Answer: (c)
Reason: Cash inflows in the month of:
July 2005:
– Rs.1,50,000 ´ 10% + 1,50,000 ´ 90% ´40% = Rs.15,000 + Rs.54,000 = Rs. 69,000
Credit sales in June 2005 = Rs.1, 35,000 ´ 90% ´ 30% = Rs. 36,450
Credit sales in May 2005 = Rs.1,20,000 ´ 90% ´ 25% = Rs. 27,000
Credit sales in April 2005 = Rs.1,00,000 ´ 90% ´ 5% = Rs. 4,500
Rs.1,36,950
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69. Answer: (b)
Reason: The production budget for May 2005 = 4,500 units x 1.2 = 5,400 units
The production cost budget for June 2005
= 1.2 x 4,250 units x (Rs.35 + Rs.10 + Rs.20 + Rs.5) + Rs.41,000
= Rs.3,57,000 + Rs.41,000 = Rs.3,98,000.
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70. Answer: (e)
Reason:
Capacity 50% 60% 80%
Production (units) 5,000 6,000 8,000
(Rs.) (Rs.) (Rs.)
Material 50 51 52.50
Labor 15 15 15.00
Variable overheads
Factory 9 9 9.00
Administrative 5 5 5.00
79 80 81.50
Total variable cost 3,95,000 4,80,0 00 6,52,000
Fixed overheads
Factory 30,000 30,000 30,000
Administrative 25,000 25,000 25,000
4,50,000 5,35,000 7,07,000
Sale price per unit 100 98 95
Sales value 5,00,000 5,88,000 7,60,000
Profit 50,000 53,000 53,000
Profit per unit 10.00 8.83 6.63
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71. Answer : (b)
Standard fixed overhead rate =
Budgeted cost Rs.48,000
Rs.10
Budgeted output 4,800
= =
Overheads incurred = Budgeted fixed production overhead cost + Expenditure variance
= Rs.48,000 – Rs.2,000 = Rs.46,000
Overheads absor bed = Actual overhead + Over absorption of overheads
= Rs.46,000 + Rs.8,000 = Rs.54,000
Actual number of units = Rs.54,000 ¸ Rs.10 = 5,400 units.
Units produced above budgeted units = 5,400 units – 4,800 units =600 units.
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72. Answer: (c)
Reason: Overhead expenditure variance = Overhead cost variance ~ Overhead volume variance
= Rs.3,640 (A) ~ Rs.2,600 (A) = Rs.1,040(A)
Actual overheads incurred = budgeted overheads ~ overheads expenditure variance
= Rs.15,600 ~ Rs.1,040(A) = Rs.16,640
Actual hours =
Actual overheads incurred Rs.16,640
= =2,080 hours
Actual rate of recovery 8
Overheads capacity variance = Standard rate × (Actual hours – budgeted hours)
=
Rs.15,600
3,120 × (2,080 hours – 3,120 hours) = 5,200 (Adverse)
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73. Answer: (b)
Reason: Overhead is applied on the basis of planned machine hours. The predetermined overhead
application rate is Rs. 15 [(Rs. 12,00,000 fixed overheads + Rs. 24,00,000 variable
overheads)¸2,40,000 machine hours]. Thus, total overhead applied was Rs. 3,15,000 (Rs.15 x
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21,000 planned machine hours based on output).
The variable overhead variance is the price variance for overhead. It equals actual hours times the
difference between standard and actual prices. At a variable overhead application rate (standard
cost) of Rs.10 per machine hour (Rs. 24,00,000 ¸ 2,40,000 hours), the total standard cost = Rs.10
´ 21,600 = Rs.2,16,000
Variable overhead expenditure variance = Rs.2,16,000 ~ Rs.2,14,000 = Rs. 2,000 (F).
74. Answer: (c)
Reason:
Activity ratio = Budgeted hours
S tan dard hours for actual producation
´ 100
=
3,520hours
3,200hours ´ 100 = 110%.
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