Management Accounting (MB161): July 2005

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Question Paper

Management Accounting (MB161): July 2005

• Answer all questions.
• Marks are indicated against each question.
1. Which of the following statements is/are true?
I. The reporting entities of management accounting are segments of the organization rather than the
organization as a whole.
II. In order to provide data necessary for management accounting functions, two accounting
information systems are maintained; one for financial accounting and one for management
accounting.
III. Manufacturing costs are often divided into four broad categories: Direct materials, Direct labor,
Manufacturing overheads and Administrative and Selling & Distribution overheads.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
(1 mark)
< Answer >
2. Which of the following statements is/are true?
I. Activity-based costing (ABC) entails developing cost pools and determining the most appropriate
cost driver with which to apply the costs to production.
II. ABC may lead to adjustments in the selling prices of products.
III. Under ABC, the Manufacturing Overhead account will usually have an under applied balance at
the end of the accounting period.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
(1 mark)
< Answer >
3. Which of the following statements is/are true?
I. The monthly rent expense on a manufacturing facility is a conversion cost.
II. The work-in-process inventory is composed of conversion costs and prime costs.
III. If the value of the beginning work-in-process and the ending work-in-process are equal, the cost of
goods manufactured will be equal to total manufacturing costs.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (III) above (e) All (I), (II) and (III) above.
(1 mark)
< Answer >
4. A cost that can be substantially influenced by a manager is often referred to as which of the following?
(a) Sunk cost (b) Direct cost (c) Opportunity cost
(d) Controllable cost (e) Indirect cost.
(1 mark)
< Answer >
5. Which of the following is a period cost?
I. Research and development costs.
II. Direct labor cost.
III. Direct material cost.
IV. Indirect material cost.
(a) Only (I) above (b) Both (II) and (III) above
(c) Only (III) above (d) Only (IV) above
(e) Both (I) and (III) above.
(1 mark)
< Answer >
6. Which of the following functions can be related to the treasurer of an organization?
(a) Planning and control (b) Tax administration
< Answer >
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(c) Protection of assets (d) Credits and collections
(e) Economic appraisal.
(1 mark)
7. For a department, the standard overhead rate is Rs.5 per hour and overhead allowances are as follows:
Activity level
(hours)
Budgeted overhead
allowances (Rs.)
6,000 20,000
14,000 36,000
22,000 52,000
The normal capacity level on the basis of which the standard overhead rate has been worked out is
(a) 3,667 hours (b) 2,667 hours (c) 4,000 hours (d) 2,000 hours (e) 5,000 hours.
(1 mark)
< Answer >
8. ABC Ltd. manufactures a single product and absorbs the production overheads at a predetermined rate
of Rs.10 per machine hour. At the end of financial year ending June 2005, it has been found that actual
production overheads incurred were Rs.6,00,000. It included Rs.45,000 on account of ‘written off’
obsolete stores and Rs.30,000 being the wages paid for the strike period under an award. The
production and sales data for the year ending June 2005 is as under:
Production:
Finished goods 20,000 units
Work-in-progress (50% complete in all respects) 8,000 units
Sales 18,000 units
The actual machine hours worked during the period were 48,000. It has been found that one-third of the
under-absorption of production overheads was due to lack of production planning and the rest was
attributable to normal increase in costs.
The supplementary rate for absorption of overhead is
(a) Rs.2.25 per unit (b) Rs.1.00 per unit
(c) Rs.1.25 per unit (d) Rs.1.50 per unit (e) Rs.2.00 per unit.
(2 marks)
< Answer >
9. Arindum Manufacturing Co. has added a new machine to its fleet of five existing machines. The total
cost of purchase and installation of the machine is Rs.7,50,000. The machine has an estimated life of 15
years and is expected to realise Rs.30,000 as scrap at the end of its working life.
Other relevant data are as follows:
i. Budgeted working hours is 2,400 based on 8 hours per day for 300 days. This include 400 hours
for plant maintenance.
ii. Electricity used by the machine is 15 units per hour at a cost of Rs.2.00 per unit. No current is
drawn during maintenance.
iii. The machine requires special oil for heating which is replaced once in every month at a cost of
Rs.2,500 on each occasion.
iv. Estimated cost of maintenance of the machine is Rs.500 per week of 6 working days.
v. 3 operators control the operations of the entire battery of six machines and the average wages per
person amounts to Rs.450 per week plus 40% fringe benefits.
vi. Departmental and general works overheads allocated to the operation during the last year was
Rs.60,000. During the current year it is estimated that there will be an increase of 12.5% of this
amount. No incremental overhead is envisaged for the installation of the new machine.
The machine hour rate for recovery of the running cost of the machine is
(a) Rs.95.00 (b) Rs.92.75 (c) Rs.96.50 (d) Rs.84.16 (e) Rs.88.92.
(2 marks)
< Answer >
10. The following are the operating results of MNC Ltd. a manufacturing company, for the current year:
Particulars Rs. in lakh
Sales (40,000 units) 48.00
Less trade discounts 2.40
Net sales 45.60
Cost of sales:
Direct material 14.40
Direct Labour 12.60
Factory overheads 6.30
Administration expenses 3.60
< Answer >
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Administration expenses 3.60
Selling and distribution expenses 4.50
The following changes are anticipated during the next year:
I. Units to be sold to increase by 25 percent
II. Material price to increase by 15 percent
III. Direct wages to increase by 12 percent
IV. Overhead- Factory overheads will be limited to Rs.6.56 lakh & administration and selling and
distribution expenses are estimated to increase by 8 percent and 14 percent respectively.
V. Inventory – No change in opening and closing inventories in quantity. The change in value may be
ignored .
VI. “Trade discount” – No change in the rate
VII. Profit target for the year – Rs.6 lakh.
The selling price per unit for the next year is
(a) Rs.155.78 (b) Rs.215.79 (c) Rs.288.80 (d) Rs.113.05 (e) Rs.126.14.
(2 marks)
11. Olden Engineering Ltd. manufactures motor engine parts. The factory normally operates 6 days a week
on a single eight-hour shift. During the year 2004-05 it is closed on 16 working days for holidays.
Equipments are idle for 160 hours for cleaning, oiling, etc. If the overhead amounts to Rs.13,850 and is
to be absorbed at a rate per machine hour, what is the overhead absorption rate in the year 2004-05?
(a) Rs.6.74 per hour (b) Rs.6.25 per hour
(c) Rs.5.76 per hour (d) Rs.5.14 per hour (e) Rs.7.00 per hour.
(2 marks)
< Answer >
12. Canman Ltd. uses a process costing system. Products are manufactured in a series of three departments.
The following data relate to Department 2 for the month of June 2005:
Beginning work-in-progress
(70% complete in respect of materials, labour and overhead)
15,000 units
Goods introduced 1,20,000 units
Ending work-in-progress
(60% complete in respect of materials, labour and overhead)
7,500 units
The beginning work in progress was valued at Rs.99,000 consisting of Rs.30,000 of transferred in costs,
Rs.45,000 of materials costs and Rs.24,000 of conversion costs. Materials are added at the beginning of
the process; conversion costs are added evenly throughout the process. Costs added to production
during the month are as follows:
Transferred in Rs.24,000
Materials used Rs.1,32,000
Conversion costs Rs.75,000
All preliminary and final calculations are rounded to two decimal places.
Under the weighted average method, how much conversion cost did Canman Ltd. transfer out of
Department 2 during the month?
(a) Rs.92,250 (b) Rs.95,625 (c) Rs.99,000 (d) Rs.96,222 (e) Rs.1,00,256.
(2 marks)
< Answer >
13. Sumika Sintex Ltd. has the following beginning and ending inventories for the month of June 2005:
Particulars June 1 (Rs.) June 30 (Rs)
Direct materials 1,00,500 90,000
Work-in-process 2,17,500 2,55,000
Finished goods 1,27,500 1,05,000
Production data for the month are as follows:
< Answer >
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Purchase returns 3,300
The company uses factory overhead control account and charges factory overhead to production at 70%
of direct labour cost. The company does not formally recognize over or under applied overhead until
year end. What is the prime cost for the month of June 2005?
(a) Rs.6,12,750 (b) Rs.4,30,500 (c) Rs.8,13,150 (d) Rs.6,08,850 (e) Rs.5,98,950.
(2 marks)
14. Which of the following accounts is not a control account in a job order costing system?
(a) Finished Goods Inventory (b) Materials Inventory
(c) Work in Process Inventory (d) Direct Labor
(e) Manufacturing Overhead.
(1 mark)
< Answer >
15. Poulo Transport Ltd. is running 4 buses between two towns, which are 50 km apart. Seating capacity of
each bus is 40 passengers. The following particulars are obtained from the records for the month of
June 2005
Particulars Rs.
i. Wages of drivers, conductors and cleaners 24,000
ii. Salaries of office and supervisory staff 10,000
iii. Diesel oil and other oil 40,000
iv. Repairs and maintenance 8,000
v. Taxes, insurance etc. 16,000
vi. Depreciation 26,000
vii. Interest and other charges 20,000
Total 1,44,000
The seating capacity utilized was 75%. All the four buses ran on all days of the month. Each bus had
made one round trip daily.
The cost per passenger km is
(a) Re. 0.80 (b) Re. 0.60 (c) Re. 0.40 (d) Re. 0.50 (e) Re. 0.20.
(1 mark)
< Answer >
16. 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.
(2 marks)
< Answer >
17. Progressive Ltd. makes a special assemblies to customers orders and uses job costing. The company has
furnished the following information pertaining to various jobs for a period:
Particulars Job-A21 Job-B09 Job-C14
(Rs.) (Rs.) (Rs.)
Opening Work-in-process 13,400 21,390 -
Material introduced 8,640 - 9,250
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Material introduced 8,640 - 9,250
Labor 7,250 1,750 12,300
The budgeted overheads for the period are Rs.63,900. The company absorbs overheads based on labor
costs
The overhead costs to be absorbed to job C14 for the period are
(a) Rs.40,000 (b) Rs.36,900 (c) Rs.27,750 (d) Rs.21,750 (e) Rs.5,250.
(1 mark)
18. Two articles X and Y are manufactured in a department. Their specifications show that 2 units of X or 8
units of Y can be produced in one hour. The budgeted production for the month of June 2005 is 200
units of X and 400 units Y. The actual production at the end of the month was 250 units of X and 480
units Y and the actual hours spent on this production was 160. The activity ratio for the month of June
2005 is
(a) 123.33% (b) 106.67% (c) 102.33% (d) 81.08% (e) 97.06%.
(2 marks)
< Answer >
19. The following particulars are provided by Raheja Constructions Ltd.:
Particulars Rs.
Total expenditure to date 1,70,000
Estimated further expenditure to complete the contract (including
contingencies)
34,000
Contract price 3,06,000
Work certified 2,00,000
Work not certified 17,000
Cash received 1,63,200
The estimated profit on the contract (which has been 70% complete) is
(a) Rs.66,667 (b) Rs.54,400 (c) Rs.30,719 (d) Rs.25,568 (e) Rs.12,784.
(1 mark)
< Answer >
20. Watex Ltd. a chemical manufacturers, has furnished the following information relating to Process 1:
Opening Work-in-process 3,500 litres (Completion of :
Materials – 100%
Conversion – 40%)
Materials introduced 36,000 litres
Normal loss 10% of material introduced
Output transferred to Process 2 29,250 litres
Closing Work-in-process 4,500 litres (Completion of :
Materials – 100%
Conversion – 45%)
The equivalent units of production of materials and conversion, under FIFO method, are
Materials Conversion
(a) 33,450 30,975
(b) 31,350 28,875
(c) 32,400 32,025
(d) 31,350 32,375
(e) 26,850 28,950.
(2 marks)
< Answer >
21. AB Ltd. manufactures product XL 101 in batches of 100 units by a series of operations in the
Fabrication and Assembly department of a factory. The following details relate to 42 batches
manufactured by the firm during the month of June 2005:
Fabrication dept:
Materials: Issued 2,420 kg. of an alloy costing Rs.25 per kg., 200 kg. were returned at the end of the
month. Off-cuts and scrap fetched Rs.500.
Labour: Normal rate of wages is Rs.15 per hour. Time office recorded 2,460 hours for June 2005.
This included 240 hours overtime work paid at double the normal rate.
< Answer >
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Assembly department:
Materials: Cost of components used Rs.57,900
Labour: Workers are paid at a piecework rate of Rs.4 per unit for production up to 3,000 units. For
production over 3,000 units and up to 4,000 units, the rate is 25% more and for production
over 4000 units, the rate is 50% more. During the month of June 2005, there was a
stoppage of production for 10 hrs. Due to machine breakdown and for this stoppage ten
workers in the department were paid wages at time rate of Rs.15 per hour.
The average prime cost per unit of XL101 manufactured during June 2005 was
(a) Rs.42.86 (b) Rs.40.86 (c) Rs.55.00 (d) Rs.40.00 (e) Rs.45.50.
(2 marks)
22. Operating income can be determined by multiplying the contribution margin ratio by what other factor?
(a) Unit contribution margin (b) Margin of safety
(c) Variable costs per unit (d) Unit sales price (e) Change in sales volume.
(1 mark)
< Answer >
23. Swami Ltd. has furnished the following information pertaining to production costs for a certain period:
Particulars Rs.
Direct wages 90,000
Direct materials 1,20,000
Production overheads – Fixed 40,000
– Variable 60,000
During the forthcoming year it is anticipated that:
I The average rate for direct labour remuneration will fall from Re.0.90 per hour to Re.0.75 per hour
II. Production efficiency will be reduced by 5%
III Price per unit for direct material and of other materials and services which comprise overheads
will remain unchanged
IV. Direct labour hours will increase by 33 1/3%
V. The overhead rate being absorbed on a direct wage basis.
The estimated works cost, after considering the above anticipation, is
(a) Rs.2,52,000 (b) Rs.1,16,000 (c) Rs.3,68,000 (d) Rs.3,20,000 (e) Rs.2,80,000.
(2 marks)
< Answer >
24. Which of the following statements is/are true?
I. The marginal cost of producing one additional unit of product will be equal to the average cost per
unit of all the units produced prior to producing the additional unit, if more than one unit has been
produced.
II. A product-costing system is of little value in financial accounting.
III. Hospitals would have little need for a product-costing system.
IV. A product-costing system accumulates the costs of a production process and assigns them to the
products that comprise the organization’s output.
(a) Only (I) above (b) Only (IV) above
(c) Both (III) and (IV) above (d) (I), (II) and (IV) above
(e) Both (II) and (IV) above.
(1 mark)
< Answer >
25. The current sales price of a company is Rs.80 per unit. Variable costs are expected to increase from
Rs.65.00 to Rs.67.50 per unit. Fixed costs of Rs.3,00,000 will not change. How many additional sales
units are required in order to maintain an operating income of Rs.3,60,000?
(a) 8,000 (b) 8,800 (c) 10,800 (d) 12,000 (e) 2,800.
(1 mark)
< Answer >
26. The following information relates to Sun Ltd. pertaining to the half-year ended June 30, 2005.
Fixed Expenses Rs.25,000
Sales Value Rs.80,000
Profit Rs.15,000
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Profit Rs.15,000
During the second half of the year, the company has projected a loss of Rs.5,000
The Margin of Safety (MOS) is
(a) Rs.30,000 (b) Rs.45,000 (c) Rs.75,000 (d) Rs.37,000 (e) Rs.60,000.
(1 mark)
27. Two companies – A and B, produce and sell the same product in a competitive industry. Thus the
selling price of the product for each company is the same. Company A has a contribution margin ratio
of 40% and fixed costs of Rs.25 lakh. Company B is more automated, making its fixed costs 40%
higher than those of Company A. Company B also has a contribution margin ratio greater than that of
Company A by 30%. The sales value, at which profits of both the companies are same, is
(a) Rs.83,33,333
(b) Rs.83,00,000
(c) Rs.81,15,000
(d) Rs.82,45,000
(e) Rs.81,50,000
(2 marks)
< Answer >
28. Alphonsa runs a beverages club. He buys 5 different drinks in cases of 10 each and sells the drink in
cases of 5, each case containing one bottle of each type.
Purchase cost per case of 10: Rs.
Cabernet 270.00
Chardonnay 270.00
Merlot 279.00
Bordeaux 315.00
Burgundy 306.00
Selling price per case of 5 180.00
Variable distribution cost per case 7.50
Annual Fixed Expenses
Storage 30,000.00
Wages 15,000.00
What is the break-even point in sales revenue?
(a) Rs.2,50,000 (b) Rs.2,84,210 (c) Rs.1,08,000 (d) Rs.2,25,000 (e) Rs.2,13,500.
(1 mark)
< Answer >
29. Which of the following statements is/are false?
I. In make or buy decisions, all costs should be determined on a per unit basis so that the cost per
unit of making a product can be compared to the cost per unit of purchasing a product.
II. When a product is dropped, all of the variable expenses and fixed expenses assigned to the product
will be eliminated.
III. Expenses that will no longer be incurred if a particular action is taken are called unavoidable
expenses.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
30. The following data pertains to Unique Telecommunications in its proposed revamping activity of its
project at Bangalore:
Cables & wires Rs.500 lakh per annum
Instruments Rs.1,250 lakh per annum
Rent of building (fixed) Rs.240 lakh per annum
Cost of law suits pending Rs.5,40,000
The idea of revamping its project is perceived mainly to reduce certain costs. Accordingly, the company
predicts it can cut down costs on instruments if it takes the same on lease at Rs.1,150 lakh per annum,
cables & wires at Rs.480 lakh.The law suits are expected to be settled in this financial year which shall
bring about a cash inflow of Rs.10,00,000 for the defamation suit the company filed against a journalist.
< Answer >
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For revamping the project shall bring about a change in profit by
(a) Rs.10 lakh (b) Rs.20 lakh (c) Rs.100 lakh (d) Rs.110 lakh (e) Rs.120 lakh.
(1 mark)
31. Which of the following statements is/are true?
I. The decision to further process a joint product into other products or to change its characteristics is
dependent upon the amount of total joint cost at the split-off point.
II. If the separable processing costs will exceed the incremental revenue from further processing,
there is no net benefit from further processing.
III. The factors used to arrive at short-run decisions and long-run decisions are the same.
IV. A major difference between conventional and activity-based costing analysis is in the
identification of avoidable and unavoidable costs.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (III) above
(d) Both (II) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
32. A company manufactures two products – X and Y in one of its factories. Production capacity is limited
to 85,000 machine hours per period. There is no restriction on direct labour hours.
The following further information is provided concerning the two products :
Particulars Product X Product Y
Estimated demand (000 units) 315 135
Selling price per unit Rs.11.20 Rs.15.70
Variable cost per unit Rs.6.30 Rs.8.70
Fixed costs per unit Rs.4.00 Rs.7.00
Machine hours( per 000 units) 160 280
Direct labour hours (per 000 units) 120 140
Fixed costs are absorbed into unit cost at a rate per machine hour based upon full capacity.
The production quantities of products X and Y which are required per period in order to maximize the
profit in the situation as above is
(a) 3,15,000 units of X and 1,23,571 units of Y
(b) 3,00,000 units of X and 1,35,000 units of Y
(c) 2,89,000 units of X and 1,78,000 units of Y
(d) 3,50,000 units of X and 1,17,890 units of Y
(e) 3,15,000 units of X and 79,786 units of Y.
(2 marks)
< Answer >
33. Toy Manufacturing Ltd. produces different models of toy cars. The company has furnished the
following budget in respect of model A-20 for the month of June 2005:
Particulars Rs. in lac Rs. in lacs
Net realisation 700.00
Variable cost:
Materials 264.00
Labor 52.00
Direct expenses 124.00
Total variable cost 440.00
Specific fixed cost 90.00
Allocated fixed cost 112.50
Total fixed cost 202.50
Total cost 642.50
Profit 57.50
The budgeted output of the company is 40,000 units. If the material price is increased by 10%, the
number of toy cars to be sold to maintain the same profit and same selling price is
< Answer >
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(a) 50,000 units (b) 48,555 units (c) 47,762 units (d) 44,000 units (e) 44,521 units.
(2 marks)
34. When the objectives of the decisions are in conflict, one objective may be specified as the decision
criterion and the other objectives are established as
(a) Secondary criteria (b) Differential criteria
(c) Irrelevant criteria (d) Constraints (e) Opportunity costs.
(1 mark)
< Answer >
35. A company’s approach to a make or buy decision
(a) Depends on whether the company is operating at or below break-even
(b) Depends on whether the company is operating at or below normal volume
(c) Involves an analysis of avoidable costs
(d) Requires use of absorption costing
(e) Requires use of activity based costing.
(1 mark)
< Answer >
36. The decision to make a particular part of a product inhouse or outsourcing mostly involves the
I. Costs which can be saved either by making or outsourcing.
II. Variable costs.
III. Fixed costs.
IV. Incremental costs.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Only (IV) above
(e) (I), (II) and (IV) above.
(1 mark)
< Answer >
37. Q Ltd. makes 2 products - Dolly and Molly from the same raw material. The selling price and the cost
details of these products are shown below:
Particulars Dolly (Rs.) Molly ( Rs.)
Selling price 20.00 18.00
Direct material (Rs.2 per kg) 6.00 5.00
Direct labour 4.00 3.00
Variable overhead unit 2.00 1.50
12.00 9.50
Contribution per unit 8.00 8.50
The maximum demand for these products are:
Dolly 500 units
Molly Unlimited number of units per week
If materials were limited to 2000 kg per week, the shadow price (opportunity cost) of these materials
would be
(a) Nil (b) Rs.2.00 per kg (c) Rs.2.66 per kg (d) Rs.3.40 per kg (e) Rs.2.50 per kg.
(2 marks)
< Answer >
38. A company manufactures a single product with a capacity of 1,50,000 units per annum. The
summarised income statement for the year is as under:
Particulars Rs. Rs.
Sales (1,00,000 units @ Rs.15 per unit) 15,00,000
Cost of sales:
Direct labor 2,00,000
Variable production overhead 60,000
Fixed production overhead 3,00,000
Fixed administrative overhead 1,50,000
Variable selling & distribution overhead 90,000
Fixed selling & distribution overhead 1,50,000
Total costs 12,50,000
< Answer >
10
Total costs 12,50,000
Profit 2,50,000
The company desires to increase the present level of sales from 1,00,000 units to 1,20,000 at a price of
Rs.18 per unit. If an expenditure of Rs.3,00,000 is made on advertising, the profit of the company will
be
(a) Rs.2,00,000 (b) Rs.2,60,000 (c) Rs.3,00,000 (d) Rs.4,20,000 (e) Rs.4,80,000.
(2 marks)
39. ABC Company has a machine with a 7 year useful life for which they paid Rs.1,60,000 on 01/02/02
with an expected salvage value of Rs.6,000. On 01.07.05, they have owned the machine for 3 years and
have found a technologically advanced machine that costs Rs.80,000. It has a 4 year useful life and
Rs.12,000 salvage value. The machine will save Rs.10,000 a year in operating expenses. The current
machine can be sold at Rs.40,000. If the decision to keep the existing machine is made based upon the
financial impact for the year ending 31st December 2005, would ABC Company purchase the new
machine?
(a) Yes, the company benefits Rs.4,000
(b) Yes, the company benefits Rs.3,000
(c) Yes, the new machine has less depreciation that the old machine
(d) No, keeping the old machine results in better operations and less cost for 2005
(e) No, replacing the old machine would result in higher costs for 2005.
(2 marks)
< Answer >
40. Beta Ltd., manufacturers of product X, has furnished the following information pertaining to its
product:
Material per unit – Rs.60.00; Labour per unit – Rs.20.00; Overheads per unit – Rs.10.00. The selling
price per unit is Rs.120. Sales during the year is expected to be Rs.18,00,000 and fixed overhead is
Rs.2,00,000. During the current year direct material cost is expected to increase by 15%, labor cost by
8%, variable overhead by 6.5% and fixed overheads by 4%.
The contribution to sales ratio for the current year is
(a) 20.00% (b) 25.00% (c) 18.73% (d) 15.63% (e) 10.50%.
(1 mark)
< Answer >
41. Which of the following transfer pricing methods will preserve the subunit autonomy?
(a) Cost-based pricing (b) Negotiated pricing
(c) Variable-cost pricing (d) Full-cost pricing (e) Marginal cost pricing.
(1 mark)
< Answer >
In developing a system of transfer pricing for any particular situation, which of the following
circumstantial factors need not be considered?
(a) Existence of competitive market (b) Sourcing constraint
(c) Movability constraint (d) Quantum of transfers
(e) Capacity level of selling division.
(1 mark)
< Answer >
43. Nasta Ltd. has furnished the following information relating to cost at a capacity level of 5,000 units:
Particulars Rs.
Material cost 25,000 (100% variable)
Labour cost 15,000 (100% variable)
Power 1,250 (80% variable)
Repairs and maintenance 2,000 (75% variable)
Stores 1,000 (100% variable)
Inspection 500 (20% variable)
Administration overheads 5,000 (25% variable)
Selling overheads 3,000 (50% variable)
Depreciation 10,000 (100% fixed)
< Answer >
11
The production cost budget per unit, at the level of 6,000 units, is
(a) Rs.12.55 (b) Rs.13.37 (c) Rs.12.00 (d) Rs.12.45 (e) Rs.13.05.
(2 marks)
44. Assuming that the mark-up-percentage and the quantity of production/sales remain constant, which of
the following pricing methods will give more profit as the fixed cost of production increases?
I. Return on investment pricing.
II. Full cost pricing.
III. Contribution margin approach to pricing.
(a) Only (I) above (b) Only (II) above (c) Only (III) above
(d) Both (I) and (II) above (e) Both (II) and (III) above.
(1 mark)
< Answer >
45. 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 supplied to division B at 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 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)
< Answer >
46. 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 >
47. While preparing a performance report for a cost center using flexible budgeting techniques, the planned
cost column should be based on
(a) Cost incorporated in the master budget
(b) Budgeted amount in the original budget prepared before the beginning of the period
(c) Budget adjusted to the actual level of activity for the period being reported
(d) Actual amount for the same period in the preceding year
(e) Budget adjusted to the planned level of activity for the period being reported.
(1 mark)
< Answer >
48. The extent of which of the following factor’s influence must be first assessed in order to ensure that the
functional budgets are reasonably capable of fulfillment?
(a) Principal budget factor (b) Functional factor
(c) Influential factor (d) Assessable factor (e) Revenue factor.
< Answer >
12
(1 mark)
49. Zero-base budgeting means
(a) Taking zero as the starting point in calculating the forthcoming year's overhead costs
(b) A budgeting system where variances are zero due to strict financial control
(c) Preparing a budget of zero where any spending will result in an adverse variance
(d) Preparing an initial budget of zero that is increased as actual costs occur
(e) A budget including the activity level of zero.
(1 mark)
< Answer >
50. 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.)
July 2005 1,00,000
August 2005 1,20,000
September 2005 1,35,000
October 2005 1,50,000
November 2005 1,70,000
December 2005 2,00,000
The estimated cash inflows of the company in the month of October 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 >
51. Yamini Ltd. has a policy of maintaining a minimum cash balance of Rs.1,00,000 at the end of each
month. Any deficit will be financed through bank borrowings and any surplus will be utlised to repay
the outstanding bank borrowing and the balance will be invested in short-term securities. For this
purpose, the company has an agreement with the bank to borrow in multiples of Rs.10,000 whenever a
need arises subject to a maximum of Rs.2,00,000. The rate of interest is 12% per annum payable
monthly on the amount borrowed.
50% of the sales are on credit and is expected to be collected in the month following the month of sales.
25% of the purchases are on credit and will be paid in the month following the month of purchases. The
salaries and other expenses are to be paid in the month for which they relate. The following is the
budgeted information for the quarter ending September 2005:
Particulars July 2005
(Rs.)
August 2005
(Rs.)
September 2005
(Rs.)
Sales 40,000 50,000 1,00,000
Purchases 30,000 40,000 40,000
Salaries 60,000 70,000 50,000
Manufacturing and other
administrative expenses 25,000 30,000 12,000
If the closing cash balance for the month of July 2005 is Rs.1,00,000, the cash balance as on October
01, 2005 will be
(a) Rs.1,07,500 (b) Rs.1,01,500 (c) Rs.81,500 (d) Rs.1,02,500 (e) Rs.1,09,500.
(2 marks)
< Answer >
52. Consider the following information pertaining to Akash Ltd:
Particulars July
2005
August
2005
September
2005
Expected sales (units) 5,000 6,000 7,000
Estimated wages and other
manufacturing expenses (Rs.) 1,25,000 1,65,000 1,80,000
< Answer >
13
The company sells the goods at Rs.50 per unit. 50% of the sales are on cash. The debtors are estimated
to be collected the next month. One unit of finished output requires 2 kg of raw material and is
estimated to be purchased for Rs.6 per kg. The production in a month includes half of that month’s
sales and half of next month’s sales. The raw material required in a month is purchased in the same
month on credit. The creditors are paid in the next month. The wages and other expenses are paid in the
month in which they are incurred. The cash surplus in the month of August 2005 will be
(a) Rs.49,000 (b) Rs.74,000 (c) Rs.44,000 (d) Rs.62,000 (e) Rs.82,000.
(2 marks)
53. In transfer price arbitration, a committee is set up whose function involves all of the following except
(a) To settle transfer price disputes
(b) To negotiate the final selling price for the product with the customers
(c) To review sourcing changes
(d) To meet that price which brings some degree of parity between the transferor division and
transferee division
(e) To change the transfer price rules where appropriate.
(1 mark)
< Answer >
54. Consider the following data pertaining to a company for 1,000 units of a product:
Standard material cost per unit:
Material A - 2 kg @ Rs.10 = Rs.20
Material B - 3 kg @ Rs.20 = Rs.60
Materials issued:
Material A - 2,050 kg at a cost of Rs.43,050
Material B - 2,980 kg at a cost of Rs.56,620
The total material usage variance is
(a) Rs.900 (Adverse) (b) Rs.900 (Favorable)
(c) Rs.500 (Adverse) (d) Rs.400 (Favorable) (e) Rs.100 (Adverse).
(1 mark)
< Answer >
55. The variance created to segregate the difference due to a new factor like a steep rise in price of material,
is known as
(a) Revision variance (b) Uncontrollable variance
(c) Price variance (d) Favorable variance (e) Efficiency variance.
(1 mark)
< Answer >
56. If the actual 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 >
57. Consider the following data pertaining to production department in Skylab Ltd. for the month of June
2005:
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 cost 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 >
58. If overhead is applied on the basis of units of output, the variable overhead efficiency variance will be
(a) A function of the direct labor efficiency variance
< Answer >
14
(b) Favorable, if output exceeds the budgeted level
(c) Unfavorable, if output is less than the budgeted level
(d) Indeterminable from the information given
(e) Zero.
(1 mark)
59. Neem Ltd. has furnished the following data for the month of June 2005.
Particulars Budget Actual
Variable overhead cost Rs.4,000 Rs.3,900
Labor hours 4,000 hours 3,500 hours
Units produced 16,000 units 13,400 units
The variable overhead efficiency variance is
(a) Rs.650 (Adverse) (b) Rs.500 (Favorable)
(c) Rs.500 (Adverse) (d) Rs.150 (Favorable) (e) Rs.150 (Adverse).
(1 mark)
< Answer >
60. Which of the following statements is false with respect to Life Cycle costing?
(a) It is the inter dependence of activities in different time periods making it effective for cost control.
(b) Under Life cycle costing, greater majority of costs are incurred during the later phase of a product,
after it being marketed
(c) Life cycle costing provides management with a better picture of product profitability
(d) Life cycle costing is nothing but the accumulation of costs for activities that occur over the entire
life cycle of a product
(e) Life cycle costing is inherent to products which pass through a life cycle and go on accumulating
costs in different phases over their life cycle.
(1 mark)
< Answer >
61. Consider the following particulars for the month of June 2005:
Budgeted fixed production overhead cost Rs.60,000
Budgeted production 6,000 units
The fixed overhead cost was under absorbed by Rs.12,500 and the fixed production overhead
expenditure variance was Rs.2,500 (Adverse).
The number of units produced during the month of June 2005 was
(a) 4,750 (b) 5,000 (c) 5,250 (d) 6,750 (e) 7,250.
(2 marks)
< Answer >
62. The flexible budget for the month of June 2005 was for 9,000 units with direct material at Rs.15 per
unit. Direct labor was budgeted at 45 minutes per unit for a total of Rs.81,000. Actual output for the
month was 8,500 units with Rs.1,27,500 in direct material and Rs.77,775 in direct labor expenses. The
direct labor standard of 45 minutes was maintained throughout the month. The variance analysis of the
performance for the month of June 2005 would show a(n)
(a) Favorable material usage variance of Rs.7,500
(b) Unfavorable material price variance of Rs.5,000
(c) Favorable direct labor efficiency variance of Rs.1,275
(d) Unfavorable direct labor efficiency variance of Rs.1,275
(e) Unfavorable direct labor rate variance of Rs.1,275.
(2 marks)
< Answer >
63. Hyderabad Processors Ltd. produces a commodity by blending two raw materials – A and B. The
following are the details regarding the raw materials:
Material Standard mix Standard price per kg.
A 40% Rs.4.00
B 60% Rs.3.00
The standard process loss is 15%. During the month of June 2005, the company produced 3,400 kg. of
finished product. The position of stock and purchases for the month of June 2005 is as under:
Material Stock as on
June 01 2005
Stock as on
June 30
< Answer >
15
Kg. Rs.
A 70 10 1,600 6,800
B 80 100 2,400 6,000
The material yield variance of the company is
(a) Rs.1,200 (adverse) (b) Rs.136 (adverse) (c)
Rs.119 (adverse)
(d) Rs.136 (favorable) (e) Rs.119 (favorable).
(2 marks)
64. Operating management is more concerned with the operational aspects of management. Which of the
following information is not required to the operating management?
(a) Capital requirements
(b) Installed capacity
(c) Utilized capacity
(d) Acceptance or rejection of products
(e) Licensed capacity.
(1 mark)
< Answer >
65. Comparing performance report of the top-level management with that of the lower level management is
an important part of an overall organization structure. Which of the following is true with respect to
performance measurement report ?
(a) Top management reports are detailed
(b) Low-level management reports are typically for longer periods
(c) Top management reports show control over fewer costs
(d) Lower level management reports are likely to contain more quantitative data and less financial
data
(e) Top management reports are usually not of the exception type but present a complete analysis of
all variances.
(1 mark)
< Answer >
66. Cubic Co. uses a standard cost system. The following information pertains to direct labour for product
B for the month of June 2005:
Standard hours allowed for actual production 2,400
Actual rate paid per hour Rs.10.00
Standard rate per hour Rs.9.60
Labour efficiency variance Rs.1,920 (unfavourable)
What were the actual hours worked?
(a) 2,200 (b) 2,172 (c) 2,208 (d) 2,592 (e) 2,600
(1 mark)
< Answer >
67. One kilogram of product ‘K’ requires two chemicals A and B. The following were the details of product
‘K’ for the month of June 2005:
I. Standard mix - Chemical ‘A’ 50% and Chemical B 50%
II. Standard price per kg. of chemical ‘A’ is Rs.12 and chemical ‘B’ is Rs.15
III. Actual input of chemical ‘B’ is 70 kg.
IV. Actual price per kg. of chemical ‘A’ is Rs.15
V. Standard normal loss is 10% of total input
VI. Material cost variance total is Rs.650 adverse
VII. Material yield variance total is Rs.135 adverse.
The standard yield for actual input is
(a) 40 kg (b) 110 kg (c) 100 kg (d) 99 kg (e) 85 kg.
(2 marks)
< Answer >
68. Return on Investment (ROI) pricing takes into account the investment needed to manufacture a product
and the return it wishes to earn. This return is added to the product cost to develop a selling price for the
product. Which of the following statement is false regarding ROI pricing?
(a) It helps in determining what rate of return a given price for the product will give to the company
< Answer >
16
(b) It does not recognize capital investment in determining the proposed selling price
(c) It guides management in determining what selling price will provide a given rate of return
(d) This method furnishes an analytical tool for appraisal of alternative selling prices
(e) Under this method, the required rate of return is applied on capital investment to reach the normal
mark-up on price.
(1 mark)
69. All of the following are major considerations in fixing a selling price except
(a) Competitors price
(b) Unique product features
(c) Price of substitutes
(d) Product costs which set a ceiling to the price
(e) Capturing market share.
(1 mark)
< Answer >
70. Target costing apart from having many advantages suffers from some disadvantages. Which of the
following is a disadvantage of target costing?
(a) It is difficult to use in case of complex products
(b) Costs which will be incurred in future can be forecasted and thereby providing motivation to meet
future cost goals
(c) It is used to measure different cost scenarios
(d) It helps in saving a great deal of time and money
(e) It helps in promoting the requirements of consumers.
(1 mark)
< Answer >
71. Traditionally the development of a product was assigned to the product design department and then the
produced product was sent to the costing department. In which of the following cases, the target
costing system diverts from the traditional way?
I. Under target costing, first a price is established for a product and then it is assigned to a team to
develop the product within the cost (price) established.
II. The product, from the design department, is sent to the costing department but returned to the
design department concluding that it impossible to produce the product at its determined cost.
III. After a team is assigned to develop cost scenario, market research and finding the suitable rich
market is carried on.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (I) and (III) above.
(1 mark)
< Answer >
72. Which of the following is/are true about Activity Based Costing (ABC)?
I. It tries to identify the activities that adds value to the product.
II. An analysis of the courses helping to identify activities that do not add value to the products is
highlighted by ABC.
III. ABC requires a careful analysis of the total management system.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (II) and (III) above
(e) Both (I) and (III) above.
(1 mark)
< Answer >
73. Which of the following items would not be included in the calculation of controllable divisional profit
before tax?
(a) Head office costs
(b) Sales to outside customers
(c) Sales to other divisions
(d) Variable divisional expenses
(e) Controllable divisional fixed costs.
(1 mark)
< Answer >
END OF QUESTION PAPER
17
Suggested Answers
Management Accounting (MB161): July 2005
1. Answer: (a)
Reason: The reporting entity for management accounting is management or a component of
the company's value chain, such as a business segment, supplier, customer, product
line, department, or product.
There is a single accounting information system that serves multiple sets of users.
However, financial accounting deals with historical or current data. Management
accounting uses historical or current data to plan future events or make predictions.
Manufacturing costs are often divided into three broad categories: Direct materials,
Direct labor and Manufacturing overhead.
Since, only statement (I) is true, the correct answer is (a).
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2. Answer: (d)
Reason: ABC helps managers understand what activities drive overhead costs, which may
lead to operating procedures that will reduce costs.
Using a single cost driver for all overhead costs can distort (understate or overstate)
the overhead cost applied to a particular process and eventually to different products.
Consequently, under ABC products can be more fairly priced and competitive.
One advantage of ABC is that all of the overhead costs are allocated to cost pools,
which are in turn allocated to processes then to products.
Since, only statements (I) and (II) are true, the correct answer is (d).
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3. Answer: (e)
Reason: Conversion costs include manufacturing overhead costs and direct labor costs.
Prime cost includes direct material and direct labor. Conversion cost includes direct
labor and manufacturing overhead. The work-in-process inventory includes the costs
(direct material, direct labor and manufacturing overhead) of completing the
inventory to its present (partial) stage of completion.
Total manufacturing costs are the total cost of raw materials used, direct labor and
manufacturing overhead. The cost of goods manufactured is equal to the beginning
WIP plus total manufacturing costs less ending WIP inventory.
Since all of (I), (II) and (III) are true, the correct answer is (e).
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4. Answer: (d)
Reason: A sunk cost is a cost that has been incurred in the past and cannot be altered by any
current or future decision. A direct cost is a cost that can be directly traced to a
particular department. A cost that is not direct cost is called indirect cost. An
opportunity cost is a potential benefit given up when the choice of one action
precludes selection of a different action. A cost that can be substantially influenced
by a manger is called a controllable cost. Hence, the correct answer is (d).
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5. Answer : (a)
Reason : All research, administrative, and selling costs are treated as period costs.
(a) Direct labor costs are product or inventoriable costs.
(b) Direct material costs are treated inventoriable or product costs.
(c) Indirect materials costs are treated as manufacturing overhead costs.
The correct answer is (a).
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6. Answer: (d)
Reason: Credits and collections are the functions of the treasurer. Planning and control, Tax
administration, Protection of assets and Economic appraisal are the functions of the
controller. So, the correct answer is (d).
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7. Answer: (b)
Reason: Variable cost = Change of cost ÷ Change in level of activity
= (Rs. 36,000 – Rs. 20,000) ÷ (14,000 hours – 6,000 hours)
= Rs. 16,000 ÷ 8,000 hours = Rs. 2.00
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Fixed cost = Rs. 36,000 – 14000 × Rs. 2 = Rs. 8,000
Standard overhead rate = Rs. 5.00 (given)
Standard fixed cost = Rs. 5 – Rs. 2 = Rs. 3
Normal capacity level = 8,000 ÷ 3.00 = 2,667 hours.
8. Answer: (c)
Reason: Statement showing calculation of the amount of under-absorption of production
overheads
Actual production overhead incurred 6,00,000
Less: (i) Obsolete stores written off during the year
(ii) Wages paid for the strike period under an
award
45,000
30,000 75,000
Net actual production overhead incurred 5,25,000
Production overheads absorbed (48,000 machine hours
× Rs. 10 per M.H)
4,80,000
Under absorbed production overheads 45,000
Particulars Rs.
1. Due to lack of production planning (33 1/3 %) 15,000
2. Balance to be distributed to WIP, finished goods & cost
of sales by using supplementary rate (66 2/3 %)
30,000
Total 45,000
Computation of equivalent units
WIP (8,000 units × 50%) 4,000
Finished goods (20,000 – 18,000) 2,000
Cost of sales 18,000
Total 24,000
Supplementary rate for absorption of under absorbed production overheads =
Under absorbed overhead / No. of equivalent units = Rs.30,000/24,000 units =
Rs.1.25 per unit.
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9. Answer: (a)
Reason:
Depreciation (Rs. 7,50,000 – Rs. 30,000) ÷ 15 years Rs. 48,000p.a
Electricity (15 units per hour × Rs. 2 per unit) Rs. 30
Special oil (Rs. 2,500 × 12) Rs. 30,000p.a
Maintenance (Rs. 500 ÷ 6 days × 300 days) Rs. 25,000p.a
Operating wages for 6 machines Rs.
Rs. 450 × 3 operators × 50 67,500
Add: 40% fringe benefits 27,000
Wages for six machines 94,500
Departmental and general work overhead Rs.
Last year actual 60,000
Add: 12.5% increase 7,500
Total (for 6 machines) 67,500
Computation of machine hour rate Rs.
Particulars Amount Per hr
Standing Charges:
Operators Wages
Departmental and general
overhead
Total
94,500
67,500
1,62,000
Standing charges per
machine hour
Rs.1,62,000 ÷ (6 machines ×
2,000 hrs)
13.50
Machine Expenses:
Depreciation
Electricity
Special oil
Maintenance
Machine Hour rate
(Rs. 48,000 ÷ 2,000 hrs)
(Rs. 30,000 ÷ 2,000 hrs)
(Rs. 25,000 ÷ 2,000 hrs)
24.00
30.00
15.00
12.50
95.00
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10. Answer: (e) <
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Reason:
Budgeted operating income statement of MNCLtd.
Rs. in lakh
Particulars Amount
Sales (40,000 x 1.25 = 50,000 units) x Rs.120 60.00
Less trade discount (5%) 3.00
Net sales 57.00
Less variable costs
Direct material @Rs.41.40 per unit (Rs.36 + 15%) 20.70
Direct labour @Rs.35.28 per unit (Rs.31.50 +
12%)
17.64 38.34
Contribution 18.66
Less fixed overheads
Factory 6.560
Administration (Rs.3.60 lakh + 8%) 3.888
Selling and distribution (Rs.4.50 lakh + 14%) 5.130 15.578
Net income (indicated) 3.082
Additional income needed (6 – 3.082) 2.918
Contribution required
(Rs.18.66 lakh + Rs.2.918 lakh)
21.578
Add variable costs 38.340
Net sales 59,918
Add trade discount 3.154
Gross sales (50,000 units)[(Rs.59.918 / 95) × 100] 63.072
Sales price per unit (Rs.) 126.14
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11. Answer: (b)
Reason:
Maximum capacity = Total days in 2004-05
X Single eight-hour shift
= 365x 8
2,920 hrs
Less: Idle capacity
Sundays = 52 x 8 = 416 hrs
Holidays = 16 x 8 = 128 hrs
Stoppage due
to cleaning, oiling, etc
= 160 hrs 704 hrs
Normal capacity 2,216 hrs
Overhead absorption rate = Overhead amount /
Normal capacity
Rs. 13,850 /
2,216
Rs. 6.25 per hr
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12. Answer: (b)
Reason:
Equivalent unit calaculation under weighted average method:
Beginning WIP 15,000 units x 100% = 15,000
Introduced & completed 1,12,500 x 100% = 1,12,500
Ending WIP 7,500 x 60% = 4,500
1,32,000
Conversion cost in
Beginning inventory
Rs. 24,000
Conversion cost incurred
during the month
Rs. 75,000
Total conversion cost Rs, 99,000
Unit conversion cost Rs. 0.75
(Rs. 99,000 ÷ 1,32,000
equivalent units)
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Thus the total conversion cost transferred was Rs. 95,625 [Rs. 0.75 x (15,000 units in
beginning WIP + 1,20,000 units introduced – 7,500 closing WIP)]
13. Answer: (a)
Reason:
Prime costs comprises of direct labour and direct material.
Direct material cost :
Amount in Rs.
Beginning materials inventory 1,00,500
Purchases 2,68,950
Carriage inward 6,600
Less: Purchase returns (3,300)
Less: Closing inventory (90,000)
Material Cost 2,82,750
Direct labour: Rs. 3,30,000
Prime cost = Rs. 2,82,750 + Rs. 3,30,000 = Rs. 6,12,750.
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14. Answer: (d)
Reason: Direct labor is not a control account. All of the other accounts are controlling
accounts, accounts supported with subsidiary ledgers containing the details of the
gross amounts shown in the accounts.
The correct answer is (d).
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15. Answer: (c)
Reason:
Total kilometer covered in June 2005
= 4 buses × 50 kms × 2 × 30 days = 12,000 km.
Total passenger kilometer covered in June 2005
= 12,000 km × 40 passengers × 75/100 = 3,60,000 passenger km.
Total operating cost during June 2005 = Rs. 1,44,000
The cost per passenger km.
= Rs. 1,44,000 / 3,60,000 passenger km. = Re.0.40 per passenger km.
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16. 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
Costs:
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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17. Answer: (b)
Reason: Total labor cost = Rs. 7,250 + Rs. 1,750 + Rs. 12,300 = Rs. 21,300
Overhead recovery rate = Rs. 63,900 ÷ 21,300 = Rs. 3/- per Re.1/- of labor
Overheads charged to Job C14 = Rs. 12,300 x Rs. 3 = Rs. 36,900.
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18. Answer : (a)
Reason : Standard budgeted hours for December 2004:
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X 200 ÷ 2 = 100 hours
Y 400 ÷ 8 = 50 hours
= 150 hours
Standard hours for Actual production:
X 250 ÷ 2 = 125 hours
Y 480 ÷ 8 = 60 hours
= 185 hours
Activity Ratio =
(Standard Hours for Actual Production / Budgeted Standard Hours ) × 100
= (185 hours / 150 hours) × 100 = 123.33%.
19. Answer: (d)
Reason:
Computation of estimated profit Rs.
Contract price 3,06,000
Less: total expenditure to date 1,70,000
Less: Estimated further expenditure to complete the
contract (including contingencies)
34,000 2,04,000
Estimated profit 1,02,000
Computation of notional profit
Value of work certified 2,00,000
Less: Cost of work certified
Total expenditure to date – work not certified (Rs. 1,70,000 – Rs.
17,000)
1,53,000
Notional profit 47,000
=
2
3 × Notional profit ×
Cashreceived
Workcertified
=
2
3 × Rs.47,000 ×
Rs.1, 63, 200
Rs.2, 00, 000 = Rs.25,568
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20. Answer: (c)
Reason: In put = 3,500 + 36,000 = 39,500 lit
Out put = 29,250 (finished) + 3,600 (N. Loss) + 4,500 (Cl. St) + 2,150 (Ab. Loss)
Equivalent unit of materials = 0% of 3,500 + 100% of 25,750 + 100% of 4,500 +
100% of 2,150
= 25,750 + 4,500 + 2,150
= 32,400
Equivalent unit of conversion = 60% of 3,500 + 100% of 25,750 + 45% of 4,500 +
100% of 2,150
= 2,100 + 25,750 + 2,025 + 2,150
= 32,025.
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21. Answer: (d)
Reason:
Direct materials Rs.
Fabrication dept
Alloy (2,420 × Rs.25) 60,500
Less: Returns to store 5,000
Sale of off cut scrap 500 5,500 55,000
Assembly dept
Cost of components 57,900
Total (A) 1,12,900
Direct labour
Fabrication dept
Wages (2,460 hrs × Rs. 15) 36,900
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Wages (2,460 hrs × Rs. 15) 36,900
Assembly dept
Wages: first 3,000 units Rs. 4 12,000
Next 1,000 units × Rs. 5 5,000
Next 200 units × Rs. 6 1,200 18,200
Total (B) 55,100
Prime cost (A+B) 1,68,000
Average prime cost per unit of XL 101 for March 2005 = Rs. 1,68,000 ÷ 4,200 units
= Rs. 40.
Overhead premium paid by Fabrication department is treated as overhead and hence,
not included in prime cost.
22. Answer: (b)
Reason: Operating income = Margin of safety × Contribution margin ratio.
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23. Answer: (c)
Reason: Output in the forthcoming year will increase by 26 2/3 % . It is calculated as follows:
Output last year 100%
Increase due to 33 1/3% increase in labour hours 33 1/3 %
Total 133 1/3%
Less: 5% decline in production efficiency (133 1/3% × 5/100) 6 2/3%
Net 126 2/3%
So output will increase by 26 2/3 %
Labour hours worked last year were:
Wages Rs.90,000
Rate per hour 90 paise
∴ Number of labour hours last year Rs.90,000/90 Paise = 90,000 ×
100/90 =1,00,000 hrs.
BUDGET FOR THE FORTHCOMING YEAR
Rs. Rs.
Direct Material year 1,20,000
Add: 26 2/3 increase in material due to 26 2/3 %
increase in out put (1,20,000 × 80/3) / 100
32,000 1,52,000
Direct wages:
Labour hours last year 1,00,000
Increase in labour hours , 331/3% 1,00,000/3
Total labour hours in the forthcoming year 4,00,000/3
Rate per hour 0.75
∴ Wages (4,00,000 / 3) × 0.75 1,00,000
Prime Cost 2,52,000
Production Overheads:
Fixed 40,000
Variable last year Rs.60,000
Add: 26 2/3 increase due to increase in output ( 60,000
× 80/3) / 100 = Rs.16,000
76,000 1,16,000
Estimated Works Cost 3,68,000
Factory Overhead Rate based on Direct Wages is
Rs.1,16,000/1,00,000 (Production Overhead/wages) ×
100 = 116%
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24. Answer: (b)
Reason: Average cost is the total cost of producing a particular quantity of product divided by
the total number of units produced. Marginal cost is the cost incurred in producing
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one more unit of output.
In financial accounting, product costs are needed to value inventory on the balance
sheet and to compute cost of goods sold expense on the income statement.
For reimbursement of costs by insurance companies or by the government under the
Medicare program, hospitals keep track of the costs of medical procedures.
Product costs are needed for a variety of purposes in financial accounting,
managerial accounting and cost accounting. Product-costing system accumulates the
costs of a production process and assigns them to the products that comprise the
organization’s output.
Since only (IV) is true, the correct answer is (b).
25. Answer: (b)
Reason: Projected unit sales = (Fixed costs + Target operating income) ÷ Unit contribution
margin. Projected unit sales = (Rs.3,00,000 + Rs.3,60,000) ÷ Rs.12.50 = 52,800
units. Current sales units = (Rs.3,00,000 + Rs.3,60,000) ÷ Rs.15 = 44,000 units.
Increase in units: 52,800 - 44,000 = 8,800.
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26. Answer : (a)
Reason :
Contribution = Rs. 25,000 + Rs.15,000 = Rs. 40,000
Contribution to sales ratio = Rs. 40,000 / Rs. 80,000 = 50%
Break-even point = Rs. 25,000 / 50% = Rs. 50,000
Margin of safety = Total sales – Break even sales = Rs. 80,000 – Rs. 50,000
= Rs. 30,000.
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27. Answer: (a)
Reason: Company A’s breakeven point is lower because its fixed costs are lower. Company
A’s breakeven point is Rs. 62,50,000 (i.e.Rs. 25,00,000 / 40%). Company B’s
breakeven point is Rs. 67,30,769 [(Rs. 25,00,000 x 1.4) ÷ (40% x 1.3)]. The
indifference point, at which profits are equal, is as folows:
Profit = Fixed costs + Variable costs
Rs. 25,00,000 + 0.60x = Rs. 35,00,000 + 0.48x
0.12x = Rs. 10,00,000
x = Rs. 83,33,333.
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28. Answer: (b)
Reason:
Rs. Rs.
Selling price per case 180.00
Variable costs per case sold:
Purchase cost:
Cabernet (270/10) 27.00
Chardonnay (270/10) 27.00
Merlot (279/10) 27.90
Bordeaux (315/10) 31.50
Burgundy (306/10) 30.60
Total 144.00
Distribution Costs 7.50
Total Variable costs 151.50
Contribution per case 28.50
Break even sales:
Fixed Costs ÷ Contribution
per case x unit selling price
Rs.45000 ÷ 28.50 x
180
2,84,210.00
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29. Answer: (e)
Reason: Unitizing fixed costs can be misleading. Some fixed costs may continue, even if a
decision to buy is made. A make or buy decision is also called an outsourcing
decision.
Some expenses will continue when products are dropped. Such expenses are called
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unavoidable expenses, and are usually fixed costs. Expenses that will be eliminated
(avoidable expenses) are usually variable expenses.
Avoidable expenses are expenses that will no longer be incurred if a particular action
is taken. Unavoidable expenses will continue to be incurred even if a subunit or
activity is eliminated.
Since all of (I), (II) and (III) are false, the correct answer is (e).
30. Answer : (e)
Reason :
Savings in the cost of the instruments = Rs. 100 lakhs
Savings in the cost of cables & wires = Rs. 20 lakhs
Total savings in costs = Rs. 120 lakhs
Hence, profits will also increase by Rs. 120 lakhs.
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31. Answer: (d)
Reason: At the split-off point, the joint costs are irrelevant to decisions to further process (or
sell) a joint product. The joint costs are sunk costs at the split-off point since they
cannot be changed by either decision.
If the separable processing costs exceed the increase in revenue generated by the
further processing of a joint product into a different salable product, no net benefit
will occur. In such cases, further processing should be avoided.
The same factors are used (relevance, accuracy, timeliness), and the same pitfalls
must be avoided in both; however, when making long-run decisions the time value of
money becomes an additional, important factor.
Some expenses that would be considered to be fixed and unavoidable under
conventional analysis are properly identified as avoidable under activity-based
costing (ABC) analysis, since ABC analysis applies cost drivers to various segments
of fixed costs.
Since only (II) and (IV) are true, the correct answer is (d).
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32. Answer : (a)
Reason :
Particulars Product
X
Product Total
1) Estimated demand (000 units) 315 135
2) Machine hours required
( per 000 units)
160 280
3) Machine hours required to meet
demand (1 x 2 )
50,400 37,800 88,200
The machine hours required to meet demand are in excess of the machine hours
available. So, the machine hours are the limiting factor and the company should
allocate capacity according to contribution per machine hour.
Particulars Product X (Rs.) Product Y (Rs.)
Selling price 11.20 15.70
Variable cost 6.30 8.70
Contribution 4.90 7.00
Machine hours required per unit 0.16 0.28
Contribution per machine hours Rs. 30.625 Rs. 25
The company should concentrate on maximizing the output of product X. Meeting
the max. demand for product X will require 50,400 machine hours and this will
leave 34,600 hours (85,000 – 50,400) to be allocated to product Y. So, 1,23,571
units, ie, 34600 hrs./ 0.28 hrs of Y and 3,15,000 units of X should be produced.
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33. Answer : (e)
Reason : Material cost per unit = Rs.264 lacs / 40,000 units = Rs.660;
Labor cost per unit = Rs.52 lacs / 40,000 units = Rs.130;
Direct expenses per unit = Rs.124 lacs / 40,000 units = Rs.310;
Total cost per unit = Rs.660 + Rs.130 + Rs.310 = Rs.1,100;
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Selling price per unit = Rs.7,00,00,000 / Rs.40,000 = Rs.1,750;
Revised material cost = Rs.660 x 1.1= Rs.726;
Contribution = Rs.1,750 - (Rs.726 + Rs.130 + Rs.310)
= Rs.1,750 – Rs.1,166 = Rs.584
Desired contribution = Fixed cost + profit
= Rs.202.50 + Rs.57.50 = Rs.260
No. of cars = Rs.260 lacs / Rs.584 = 44,521.
34. Answer: (d)
Reason: When the objectives of the decisions are in conflict, one objective may be specified
as the decision criterion and the other objectives are established as constraints
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35. Answer: (c)
Reason: The principle underlying a make or buy decision is to use available resources as
efficiently as possible before buying from an outside supplier. The manager
considers only the costs relevant to the investment decision. If the total relevant costs
of production are less than the cost to buy the item, it should be produced in-house.
The key variable is relevant costs. Thus the costs that can be avoided under either
decision choice must be determined.
Option (a) is incorrect because the breakeven point is not relevant, but the extent of
the use of operating capacity may be a consideration.
Option (b) is incorrect because whether operations are at normal volume is less
important than the amount of idle capacity. The company is less likely to buy if it has
sufficient unused capacity.
Option (d) is incorrect because total costs (absorption costing) are not as important as
relevant costs.
Option (e) is incorrect because activity based costing is used to allocate fixed
overhead. Fixed overhead would not be a relevant cost in a make or buy decision
unless it is avoidable by not making the item.
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36. Answer : (e)
Reason : Costs which can be saved either by making the part in house or outsourcing are the
relevant costs. These relevant costs are mostly variable costs. So, incremental costs
are the nature of the costs. So, options (I), (II) and (III) are true and hence the correct
answer is (e).
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37. Answer : (d)
Reason : The shadow price is the opportunity cost or contribution per unit of a scarse resource
Dolly (Rs.) Molly (Rs.)
Contribution per init 8 8.5
Kg per unit (Rs. 6/2) 3 (Rs. 5/2) 2.5
Contribution per kg 2.67 3.40
Scarce materials will be used to make Molly and will yield a contribution of Rs. 3.40
per kg. So, the opportunity cost is Rs. 3.40 per kg.
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38. Answer : (e)
Reason : Total fixed cost = Rs.3,00,000 + Rs.1,50,000 + Rs.1,50,000
= Rs.6,00,000;
Revised fixed cost = Rs.6,00,000 + Rs.3,00,000
= Rs.9,00,000 and selling price per unit = Rs.18
Variable cost per unit = Rs.3.00 + Rs.2.00 + Re.0.60 + Re.0.90
= Rs.6.50;
Total contribution = 1,20,000 x (Rs.18-Rs.6.50 = Rs.13,80,000;
Profit = Rs.13,80,000 – Rs.9,00,000 = Rs.4,80,000
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39. Answer: (e)
Reason:
Particulars Replace old Keep old
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machine machine
Loss on disposal (Rs.1,60,000 –
Rs.22,000 x 3 – Rs.40,000)
Rs.54,000 –
Depreciation expense Rs.17,000 Rs.22,000
Operating Expenses – Rs.10,000
Total Rs.71,000 Rs.32,000
Depreciation on
New machine (Rs.80,000 – Rs.12,000) / 4 = 17,000;
Old machine (Rs.1,60,000 – Rs.6,000) / 7 = Rs.22,000;
Replacing the old machine would result in higher costs for 2005. The company will
not purchase the new machine.
40. Answer : (d)
Reason : Variable cost = Direct material + Direct labor + Overheads
= Rs.60 + Rs.20 + Rs.10 =Rs.90;
Selling price = Rs.120;
Contribution per unit = Rs.120 – Rs.90= Rs.30;
P/V ratio = Contribution per unit / Selling price per unit
= Rs.30 / Rs.120 = 0.25 or 25%.
Material - Rs. 60 x 1.15 = Rs. 69.00
Labor - Rs. 20 x 1.08 = Rs. 21.60
Overheads- Rs. 10 x 1.065 = Rs. 10.65
Variable cost / unit = Rs. 101.25
Contribution = Rs. 120–Rs.101.25 = Rs. 18.75
Contribution to sales ratio = Rs. 18.75 / Rs. 120
= Rs. 0.15625 or
= Rs. 15.63%.
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41. Answer: (b)
Reason: All Cost-based pricing, Variable-cost pricing and Full-cost pricing and Marginal cost
pricing are a rule-based methods, which does not allow for the subunit to preserve its
autonomy. According to negotiated pricing, the individual divisions (transferor and
transferee) are considered as subunit autonomy. Hence correct answer is (b).
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42. Answer: (c)
Reason: No single method of transfer pricing is applicable across the board. In developing a
system of transfer pricing for any particular situation, the factors needed to be
considered are existence of competitive market (a), Sourcing constraint (b), Quantum
of transfer (d), and Capacity level of selling division (e). Movability constraint (c)
i.e. movement of the product from department to department is not a factor having
relation with transfer pricing in any way. Hence (c) is not considered.
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43. Answer: (c)
Reason: The production cost budget
Particulars Rs.
Material cost (variable) 30,000
Labor cost (variable) 18,000
Stores (variable) 1,200
Power (semi-variable) 1,450
Repairs and maintenance (semi-variable) 2,300
Inspection (semi-variable) 520
Administration overheads (semi-variable) 5,250
Selling overheads 3,300
Depreciation (fixed) 10,000
Total 72,020
Cost per unit 12.00
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Reason: Under ROI pricing method, mark up percentage is related to investment. The profit
will change in direct proportion to investment. The profit figure computed as a
percentage of investment is added to the total cost to determine the selling price. As a
result, when variable or fixed cost of production changes the profit per unit or total
profit remains the same. Hence (I) is not correct. Under full cost pricing method,
mark-up is added as a percentage of total cost of production to arrive at the price.
Hence a change in variable or fixed cost of production will lead to a change in profit
if the markup percentage remains the same. Hence (II) is correct
Contribution margin approach to pricing computes the profit using the mark up
percentage on the variable cost. Therefore, if fixed cost increases the profit is not
affected. Hence (III) is not correct. Therefore (b) is the answer.
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45. 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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46. 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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47. Answer: (c)
Reason: While preparing a performance report for a cost center using flexible budgeting
techniques, the planned cost column should be based on budget adjusted to the actual
level of activity for the period being reported.
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48. Answer: (a)
Reason: When budgets are made, there is invariably some factor which governs or sets a limit
to the quantity which can be made or sold. This is known as the limiting or principal
budget factor. The principal budget factor is the factor the extent of whose influence
must be first assessed in order to ensure that the functional budgets are reasonably
capable of fulfillment.
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49. Answer: (a)
Reason: Zero-base budgeting means preparing a budget taking zero as the starting point in
l l ti th f th i ' h d t I f b bd ti
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calculating the forthcoming year's overhead costs. In case of zero-base budgeting,
each manager is asked to prepare his own requirement of funds beginning from
scratch, ignoring the past and he has to justify the requirements mentioned by him.
The main idea behind Zero-base budgeting is to challenge the existence of every
budgetary unit and every budget period. Hence the answer is (a).
50. Answer : (c)
Reason : Cash inflows in the month of:
October 2005
– Rs.1,50,000 × 10% + 1,50,000 × 90% ×40%
= Rs.15,000 + Rs.54,000 = Rs. 69,000
Credit sales in September = Rs.1,35,000 × 90% × 30% = Rs. 36,450
Credit sales in August = Rs.1,20,000 × 90% × 25% = Rs. 27,000
Credit sales in July = Rs.1,00,000 × 90% × 5% = Rs. 4,500
Rs.1,36,950
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51. Answer : (e)
Reason :
Particulars August September
Opening cash balance 1,00,000 1,07,500
Cash sales 25,000 50,000
Collection of credit sales 20,000 25,000
Cash inflows 1,45,000 1,82,500
Cash purchases 30,000 30,000
Payment to creditors 7,500 10,000
Salaries 70,000 50,000
Expenses 30,000 12,000
Interest (Rs.1,00,000 × 12% × 1/12) - 1,000
Cash outflows 1,37,500 1,03,000
Closing balance before borrowings 7,500 79,500
Borrowings * 1,00,000 30,000
Surplus - -
Closing balance 1,07,500 1,09,500
*As the closing balance before borrowings in August 2005 is Rs.7,500, it needs to
borrow Rs.92,500 to make the cash balance to Rs.1,00,000. However as the
agreement with the bank provides to borrow in multiples of Rs.10,000, the company
should borrow Rs.1,00,000 at the end of August 2005. Similarly, for the month of
September 2005, the company is required to borrow Rs.30,000
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52. Answer : (c)
Reason :
Particulars July August
Expected sales kg. 5,000 6,000
Production (units) 2,500 + 3,000 + 3,500
Raw material required for production 11,000 13,000
Amount to be paid for raw material 66,000 78,000
Payment to creditors 66,000
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Particulars August 2005
Cash sales 1,50,000
Collection from debtors 1,25,000
Less: Payment to creditors 66,000
Other expenses 1,65,000
Cash surplus 44,000
53. Answer : (b)
Reason: In transfer price arbitration, a committee is set up whose function involves:
(a) To settle transfer price disputes
(c) To review sourcing changes
(d) To meet that price which brings some degree of parity between the transferor
division and transferee division
(e) To change the transfer price rules where appropriate.
Statement (b) is false and is the answer
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54. Answer: (e)
Reason: Material usage variance = Standard rate (Actual quantity ~ Standard quantity)
Material A = Rs.10 (2,050 kg ~ 1,000 units × 2kg)
= Rs.10 × 50 kg = Rs.500 (Adverse)
Material B = Rs.20 (2,980 kg ~ 1,000 units × 3 kg)
= Rs.20 × 20 kg = Rs.400 (Favorable)
Material usage variance Rs.100 (Adverse)
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55. Answer: (a)
Reason: Due to some unforeseen circumstances, it may be necessary to alter a standard during
an accounting period. Once a standard has been set, it is undesirable that it should be
changed, because this affects budgets, standard costs, etc. Therefore, it is often
preferable to create a revision variance, which segregates the difference due to this
factor.
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56. Answer: (a)
Reason: If the actual fixed overhead cost is more than applied fixed overhead cost, it is
known as fixed overhead cost variance (adverse). It is not fixed overhead
expenditure variance, fixed overhead volume variance, fixed overhead capacity
variance and fixed overhead efficiency variance
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57. 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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58. Answer: (e)
Reason: The variable overhead efficiency variance equals the product of the variable
overhead application rate and the difference between the standard input for the
actual output and actual input. Hence, the variance will be zero if variable overhead
is applied on the basis of units of output because the difference between the actual
and standard input cannot be recognized. Option (a) is incorrect because the
correlation between the variable overhead and direct labor efficiency variance occurs
only when overhead is applied on the basis of direct labor. Options (b), (c) and (d)
are incorrect because the variance would be zero.
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59. Answer: (e)
Reason: Standard rate per hour = 4,000 hrs.
Rs.4,000
= Re.1
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Standard unit per hour = 16,000 units ÷ 4,000 hours = 4 units per hour
Standard hours for actual production = 4 units
13,400 units
= 3,350 hours.
Actual hours = 3,500 hours.
Variable overhead efficiency variance = Re.1 (3,500 hours ~ 3,350 hours)
= Rs.150 (Adverse)
60. Answer: (b)
Reason: In Life-cycle costing, 95% of the costs are committed before production begins, so
the correct answer is (b).
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61. Answer : (b)
Reason :
Fixed overhead recovery rate =
fixed overhead cost = Rs.60,000 =Rs.10 per unit
Production (Units) 6,000 units
Rs.
Budgeted fixed overhead 60,000
Add: Fixed overhead expenditure variance 2,500
Actual fixed overhead 62,500
Absorbed overhead = Actual fixed overhead – under-absorbed overhead
= Rs.62,500 – 12,500 = Rs.50,000
Actual production =
Overhead absorbed = Rs.50,000 =Rs.5,000
Fixed overhead rate Rs.10
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62. Answer : (e)
Reason : The standard cost of materials for 8,500 units is Rs.1,27,500 (i.e. 8,500 × Rs.15).
Thus, no variance arose with respect to materials. Because labor for 9,000 units was
budgeted at Rs.81,000, the unit labor cost is Rs.9. Thus, the labor budget for 8,500
units is Rs.76,500 and total labor variance is Rs.1,275 (i.e. Rs.77,775 – Rs.76,500).
Because the actual cost is greater than the budgeted amount, Rs.1,275 variance is
unfavorable. Given that the actual time per unit (45 minutes) was the same as that
budgeted, no labor efficiency variance was incurred. Hence, the entire Rs.1,275
unfavorable variance must be attributable to labor rate variance.
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63. Answer : (b)
Reason: Actual material consumption:
Particulars A B
Stock as on June 01, 2005 70 80
Add: Purchases during the month of June 2005 1,600 2,400
1,670 2,480
Less: Stock as on June 30, 2005 10 100
Material consumed during the month of June 2005 1,660 2,380
Total material consumption = 1,660 + 2,380 = 4,040 kg.
Standard cost:
Quantity (kg.) Price (Rs.) Amount (Rs.)
A 1,600 4 6,400
B 2,400 3 7,200
4,000
Loss: 600
Output 3,400 13,600
Standard yield =
Actual standard output 85 kg.
Actual input = ×4,040kg.= 3,434kg.
Standard input 100 kg.
×
Material yield variance = Standard rate of output (Actual yield – Standard yield) =
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Rs.13,600×(3,400kg.-3,434kg.)
3,400 = Rs.136 (Adverse)
64. Answer: (a)
Reason: Information on capital requirements is not required to the operating management. So,
the correct answer is (a).
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65. Answer: (d)
Reason: The reports for the lower level of management are fairly detailed through limited in
scope and they are quantitative in nature. The reports for the top management are
highly summarized with financial data.
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66. Answer: (e)
Reason: The standard hours for actual production allowed equaled 2,400 and the labour
efficiency variance was Rs. 1,920 unfavourable, i.e., actual hours exceeded standard
hours. The labour efficiency variance equals the standard rate (Rs. 9.60 per hour)
times the excess hours. Given the variance is Rs. 1,920, excess hours = Rs. 1,920 ÷
Rs. 9.60 = 200 hours. Thus actual hours = Standard hours + excess hours
= 2,400 + 200 = 2,600 hours
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67. Answer: (d)
Reason: Standard Cost of Standard mix of input
Particulars Quantity
Kgs
Price
Rs.
Amount
Rs.
Chemical A (50% of 100 kgs) 50 12 600
Chemical B (50% of 100 kgs) 50 15 750
Input 100 1,350
Standard Loss 10 –
Output 90 1,350
Standard rate of output per kg. = Rs.1,350 / 90 = Rs.15
Yield variance =
Standard Rate of Output × (Actual yield – Standard yield for Actual input)
Rs.135 (A) = Rs.15 (90 kg – Standard yield for actual input)
9kg (A) = 90 kg – Standard yield for actual input
Standard yield for actual input = 90 + 9 = 99kg.
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68. Answer: (b)
Reason: It does not recognize capital investment in determining the proposed selling price
which is false. So, the correct answer is (b).
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69. Answer: (d)
Reason: Product costs sets a floor to the price. Product costs which set a ceiling to the price is
not correct. Therefore, (d) is the answer.
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70. Answer: (a)
Reason: Option (a) is a disadvantage of target costing, so, the correct answer is (a).
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71. Answer: (e)
Reason: Under target costing, first a price is established for a product and then it is assigned
to a team to develop the product within the cost (price) established.
After a team is assigned to develop cost scenario, market research and finding the
suitable rich market is carried on.
These are the ways in which target costing diverts from the traditional ways. So, the
correct answer is (e).
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72. Answer: (b)
Reason: An analysis of the courses helping to identify activities that do not add value to the
products is highlighted by ABC is true. The other two statements are not correct.
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73. Answer: (a)
Reason: The following items would be included in the calculation of controllable divisional
profit before tax :
(b) Sales to outside customers
(c) Sales to other divisions
(d) Variable divisional expenses
(e) Controllable divisional fixed costs
So, the correct answer is (a).