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Question Paper
Management Accounting – I (MB161) : October 2006
• Answer all questions.
• Marks are indicated against each question.
1 A collection of costs to be assigned to different subunits is called
(a) Cost driver
(b) Cost pool
(c) Cost allocation
(d) Cost tracking
(e) Cost object.
(1 mark)
< Answer >
2. Notional rent charged on business premises owned by the proprietor is an example of
(a) Programmed cost
(b) Replacement cost
(c) Imputed cost
(d) Committed cost
(e) Discretionary cost.
(1 mark)
< Answer >
3. If the work of specialized nature is performed by a sub-contractor, the cost of subcontracting is debited to
(a) Contract account
(b) Contractee’s account
(c) Profit and loss account
(d) Process account
(e) Contractor’s account.
(1 mark)
< Answer >
4. 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 >
5. Which of the following is not the disadvantage of direct labor hour method of overhead absorption?
(a) It does not consider other factors of production
(b) It is not suitable where piece-rate system is used
(c) No distinction is made between skilled and unskilled workers
(d) It is not affected by the method of wage payment
(e) No distinction is made between fixed and variable costs.
(1 mark)
< Answer >
6. Products of relatively small total value that are produced simultaneously from a common manufacturing process with
products of greater value and quantity are
(a) Scrap
(b) By-products
(c) Spoilage
(d) Waste
(e) Defective.
(1 mark)
< Answer >
2
7. Which of the following statements is false?
(a) Management Accounting provides data for internal uses whereas Financial Accounting provides data for
external users
(b) Management Accounting is concerned with a strong orientation towards future while Financial
Accounting is concerned with a record of financial data of the past
(c) Management Accounting relies on the concept of responsibility whereas Financial Accounting does not
rely on the concept of responsibility
(d) Financial Accounting is mandatory for business organizations whereas Management Accounting is not
mandatory
(e) Financial Accounting statements have to be prepared in accordance with the GAAP whereas managers
set their own rules in the form and content of Management Accounting statements.
(1 mark)
< Answer >
8. The equal percentage changes in selling price per unit and variable cost per unit will cause the break-even point in
rupees to
(a) Increase by the percentage change in variable cost per unit
(b) Decrease by less than the percentage increase in selling price
(c) Decrease by more than the percentage increase in the selling price
(d) Decrease by the percentage change in selling price per unit
(e) Remain unchanged.
(1 mark)
< Answer >
9. Which of the following statements is false?
(a) By-product is a secondary product, which incidentally results from the manufacture of main product
(b) Joint products are produced from the same basic raw material, and by a common process
(c) The main difference between joint products and by-products is its commercial value
(d) Where the by-products are utilized in the same undertaking, the by-product is valued at standard cost
(e) The relationship between main product and by-product changes with changes in economic conditions.
(1 mark)
< Answer >
10. Which of the following is false with regard to the supplementary rate method for accounting of under or over
absorption of overheads?
(a) It facilitates the absorption of actual overhead for production
(b) The value of stock is distorted under this method
(c) The supplementary rate can be determined only after the end of the accounting period
(d) It requires a lot of clerical work
(e) Correction of costs through supplementary rates is necessary for maintaining data for comparison.
(1 mark)
< Answer >
11. The average method of valuation of inventory in process costing is useful, if
(a) Prices are increasing
(b) Prices of inventory fluctuate from period to period
(c) Abnormal loss is incurred at the beginning of the process
(d) Material is continually introduced
(e) Material is introduced at the beginning of the process.
(1 mark)
< Answer >
12. Units of production basis of absorption of overheads is suitable in which of the following situations?
(a) When only one product is manufactured
(b) When material costs are very high
(c) When the products are heterogeneous
(d) When production is in continuous flow
(e) When the manufacturing process is complex.
(1 mark)
< Answer >
13. Classifying a cost as either direct or indirect depends upon
(a) The controllability of costs
(b) The behavior of cost in response to volume changes
< Answer >
3
(c) The ability to specifically identify the cost with the cost object
(d) The relevance of the cost for decision-making
(e) The avoidability of the cost.
(1 mark)
14. A fixed cost that would be considered a direct cost is
(a) A cost accountant’s salary when the cost object is a Unit of Product
(b) A production supervisor’s salary when the cost object is the Production Department
(c) Board of Directors’ fees when the cost object is the Marketing Department
(d) The cost of power when the cost object is the Internal Audit Department
(e) The rent of a warehouse to store inventory when the cost object is the Purchasing Department.
(1 mark)
< Answer >
15. An Operation Costing System is
(a) Identical to a process costing system except that actual cost is used for manufacturing overhead
(b) The same as a job-order costing system except that no overhead allocations are made since actual costs
are used throughout
(c) The same as a job-order costing system except that materials are accounted for in the same way as they
are in a process costing system
(d) The same as a process costing system except that materials are allocated on the basis of batches of
production
(e) Identical to direct costing system except that no overhead allocations are made since actual costs are
used throughout.
(1 mark)
< Answer >
16. Fixed cost is the product of
(a) Break-even sales and margin of safety
(b) Sales and margin of safety
(c) Sales and profit-volume ratio
(d) Profit-volume ratio and excess of sales over margin of safety
(e) Profit-volume ratio and excess of sales over break-even point.
(1 mark)
< Answer >
17. Vijay Electronics Ltd. is planning to launch a new product ‘Vv’. The information pertaining to the costs per unit of
the new product is as follows:
Direct materials Rs.10
Direct labor Rs.12
Distribution expenses Rs.4
The company will incur Rs.8,08,000 of additional fixed costs associated with this new product. A corporate fixed cost
of Rs.82,500 presently absorbed by other products will be allocated to this new product. The selling price per unit of
the new product is estimated as Rs.37. If the company desires to earn a profit of Rs.72,000, the number of units to be
sold by the company is
(a) 92,500
(b) 90,000
(c) 82,500
(d) 80,000
(e) 75,000.
(1 mark)
< Answer >
18. Rakshit Ltd. has furnished the following information pertaining to its products for the month of September 2006:
Particulars Opening inventory
(Rs.)
Closing inventory
(Rs.)
Raw materials 8,635 7,210
Work-in-process 3,000 4,300
Finished goods 11,000 9,500
Other information:
< Answer >
4
ii. Total manufacturing costs charged to product (it includes
raw materials, direct labor and factory overheads applied
@ 60% of direct labor cost) Rs. 86,206
iii. Cost of goods available for sale Rs. 1,06,200
iv. Selling and general expenses Rs. 5,200
The costs of raw materials purchased and the amount of factory overhead applied are
(a) Rs.34,237 and Rs.18,954 respectively
(b) Rs.37,087 and Rs.18,954 respectively
(c) Rs.34,180 and Rs.19,210 respectively
(d) Rs.34,180 and Rs.18,726 respectively
(e) Rs.34,237 and Rs.12,484 respectively.
(2 marks)
19. Monica Ltd. manufactures a single product. The estimated cost data and other information relating to the product are
as follows:
Sale price per unit – Rs.85
Total variable production cost per unit – Rs.48
Sales commission (on sales) – 4%
Fixed costs:
Production overheads – Rs.5,22,300
Administrative and selling overheads – Rs.2,64,000
Effective income tax rate – 35%
The number of units to be sold by the company in order to reach its break-even point is
(a) 21,204
(b) 22,442
(c) 23,402
(d) 20,948
(e) 22,244.
(1 mark)
< Answer >
20. Shiva Ltd. is a manufacturing company. In one of the production departments in its main factory, a machine hour rate
is used for absorption of production overheads. The company has fixed up the predetermined rate of Rs.40 per
machine hour on the basis of normal activity level. The company has estimated the following overhead expenditure at
different activity levels:
Activity level (Machine hour) Overhead expenditure
8,300 Rs.4,25,800
8,800 Rs.4,38,800
9,200 Rs.4,49,200
If the actual machine hours are 13,800, the under or over absorption of overhead is
(a) Rs.13,000 (under)
(b) Rs.10,400 (over)
(c) Rs.10,400 (under)
(d) Rs.16,800 (over)
(e) Rs.16,800 (under).
(2 marks)
< Answer >
21. Which of the following describes a direct-material cost?
(a) Transportation charges incurred on bringing machinery
(b) Ongoing costs to maintain and upgrade software that directs 19 factory robots used in building the
company’s products
(c) The cost of special lubricants that are applied weekly to the production equipment to protect its
mechanical parts from excessive wear
(d) Purchase of tools required for the machine which works on raw materials to get finished goods
(e) The acquisition cost of plastic pellets used to mold computer keyboards and mouse.
(1 mark)
< Answer >
5
22. Bita Chemicals Ltd. produces high-quality plastic sheets in a continuous manufacturing operation. All materials are
introduced at the beginning of the process. Conversion costs are incurred evenly throughout the process. A quality
control inspection occurs when units are 75% through the manufacturing process, when some units are separated out
as inferior quality. The following data are available for the month of September 2006:
Material costs Rs.1,20,000
Conversion costs Rs. 87,750
Units introduced 12,000
Units completed 9,000
There is no opening or closing work-in-progress. Past experience indicates that approximately 10% of the units
introduced are found to be defective on inspection by quality control.
The cost of abnormal loss for the month of September 2006 is
(a) Rs.13,865
(b) Rs.23,725
(c) Rs.33,600
(d) Rs.28,530
(e) Rs.32,040.
(2 marks)
< Answer >
23. Cisco Ltd. has furnished the following information pertaining to a new product:
i. The fixed costs will be Rs.60,000 for production of 5,000 units or less. If the production is more than 5,000
units, the fixed costs will be Rs.1,00,000.
ii. The variable cost ratio is 60% of the sales for the first 5,000 units and it will be reduced to 50% of sales for units
in excess of 5,000 units.
iii. The sale price of the product per unit is Rs.25.
If the company manufactures more than 5,000 units, the break-even units of the new product is
(a) 12,000
(b) 10,500
(c) 12,500
(d) 9,000
(e) 8,500.
(2 marks)
< Answer >
24. VM Ltd. manufactures and sells a special type of radio. The following data are provided by the company for the year
2005-06:
Particulars Rs.
Factory overheads 86,000
Opening stock of raw materials 30,000
Raw materials purchased during the year 5,40,000
Wages paid 1,70,000
Wages outstanding 30,000
Work-in-progress as on April 01, 2005 15,000
Work-in-progress as on March 31, 2006 12,000
Closing stock of raw materials 25,000
Opening stock of finished goods 60,000
Closing stock of finished goods 55,000
Carriage inward 10,000
Octroi on purchases 1,800
Administrative overheads 30,000
Selling and distribution overheads 13,000
The cost of goods manufactured during the year is
(a) Rs.6,96,800
(b) Rs.8,45,800
< Answer >
6
(c) Rs.7,85,800
(d) Rs.7,80,000
(e) Rs.7,90,800.
(2 marks)
25. Small Pumps Ltd. manufactures standardized electric motors. The company has furnished the following information
pertaining to a job of 50 motors:
i. Selling price per motor – Rs.12,500
ii. Selling and distribution expenses – 20% of sales value
iii. Cost incurred as per job card:
Direct material – Rs.1,80,000
Direct labor – Rs. 80,000
Overheads – Rs. 58,000
iv. Number of motors completed
and transferred – 40
v. Completion stage of work-in-progress:
Direct material – 100%
Direct labor and overheads – 60%
The value of work-in-process is
(a) Rs.54,000
(b) Rs.60,000
(c) Rs.45,000
(d) Rs.50,000
(e) Rs.40,000.
(2 marks)
< Answer >
26. Mr.Kakatia 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.4,20,000
Salary of manager Rs.6,500 per month
Salary of accountant Rs.5,000 per month
Salary of cleaner Rs.1,200 per month
Salary of mechanic Rs.3,000 per month
Garage rent Rs.4,000 per month
Insurance premium 5% per annum
Annual tax Rs.4,200 per taxi
Salary of driver Rs.6,000 per month per taxi
Annual repairs Rs.3,000 per taxi
Oil and other sundries Rs.24 per 100 km
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 8.75 km per liter. The cost of petrol is Rs.54 per liter.
The cost of running a taxi per km. is
(a) Rs.13.17
(b) Rs.14.38
(c) Rs.12.89
(d) Rs.12.03
(e) Rs.11.68.
(2 marks)
< Answer >
27. The opening stock and closing stock of ABB Ltd. are 4,300 units and 4,650 units respectively. The profit based on
marginal costing was Rs.1,11,000 and profit under absorption costing was Rs.1,18,630. The fixed overhead
absorption rate per unit is
(a) Rs.12.50
(b) Rs.17.60
(c) Rs.16.50
(d) Rs.21.80
(e) Rs.13.50.
< Answer >
7
(e) Rs.13.50.
(1 mark)
28. Narayana Ltd. operates several production processes involving the mixing of ingredients to produce bulk animal
feedstuffs. One such product is mixed in two separate process operations. The company has furnished the following
information pertaining to process 2 for the quarter ending September 30, 2006:
i) Cost incurred: Rs.
Transferred from process 1 1,90,675
Raw materials 50,500
Conversion costs 70,720
Opening work-in-process 4,500
ii) Production: Units
Opening work-in-process 2,000
(Material – 100% complete, Conversion – 50% complete)
Transferred from process 1 1,15,500
Completed output 1,07,700
Closing work-in-process 2,800
(Material – 100% complete, Conversion – 75% complete)
Normal wastage of materials (including product transferred from process 1), which occurs in the early stage of
process 2 (after all materials have been added), is expected to be 5% of input, process 2 conversion costs are all
apportioned to units of good output. Wastage materials have no saleable value. The values of finished goods under
FIFO basis is
(a) Rs.3,01,245
(b) Rs.3,05,745
(c) Rs.3,06,945
(d) Rs.3,04,965
(e) Rs.3,03,245.
(2 marks)
< Answer >
29. Arvind Ltd. sells its product at Rs.20 per unit. In a period, if it produces and sells 20,000 units, it incurs a loss of
Rs.1.50 per unit. If the volume is raised to 30,000, it earns a profit of Re.1.00 per unit. The break-even point of the
company in terms of rupees is
(a) Rs.5,56,000
(b) Rs.4,50,000
(c) Rs.5,00,000
(d) Rs.5,40,000
(e) Rs.4,40,000.
(2 marks)
< Answer >
30. Two manufacturing companies – AB Ltd and XY Ltd. have decided to merge their business operations. They have
furnished the following operation details:
Particulars AB Ltd XY Ltd
Capacity utilization (%) 90 70
Sales (Rs. in lakh) 540 350
Variable costs (Rs. in lakh) 396 238
Fixed costs (Rs. in lakh) 100 80
The profitability of the merged plant at 80% capacity level is
(a) 12.95%
(b) 16.95%
(c) 15.75%
(d) 14.45%
(e) 8.64%.
(2 marks)
< Answer >
8
31. The following data are available from the records of Srikanth Ltd. for the year ended
March 31, 2005 and March 31, 2006
Particulars 2004-05
(Rs. in lakh)
2005-06
(Rs. in lakh)
Sales 400 500
Profit 80 125
The required sales to earn a profit of Rs.170 lakh is
(a) Rs.700 lakh
(b) Rs.750 lakh
(c) Rs.800 lakh
(d) Rs.675 lakh
(e) Rs.600 lakh.
(1 mark)
< Answer >
32. Modi Builders Construction Ltd. has furnished the following information pertaining to a contract for the year ended
March 31, 2006:
Particulars Rs.
Material sent to site 4,75,000
Materials in hand (March 31, 2006) 18,375
Cost of plant installed at site 1,71,000
Labor costs 1,23,500
Work certified 6,20,000
Cost of work not certified 1,55,000
Value of plant (March 31, 2006) 1,02,500
Contract price 10,20,000
Cash received from the contractee 5,30,000
Direct expenses 72,000
The profit to be transferred to Reserve account is
(a) Rs.28,510
(b) Rs.34,620
(c) Rs.23,387
(d) Rs.20,365
(e) Rs.32,100.
(2 marks)
< Answer >
33. A-Con Ltd., manufacturers of engineering components, has provided the following budgeted information for the year
2006-07:
Department Machine
hours
Overheads
Rs.
Machine hours required for
Job A
Fabrication 12,000 1,50,000 30
Machining 15,000 1,80,000 40
Assembly 9,000 1,40,000 70
Finishing 8,000 90,000 10
The overheads to be charged to Job A under blanket overhead rate and the departmental overhead rate are
(a) Rs.2,015.00 and Rs.1,909.09 respectively
(b) Rs.2,015.00 and Rs.2,056.00 respectively
(c) Rs.1,909.09 and Rs.2,056.00 respectively
(d) Rs.1,909.09 and Rs.2,015.00 respectively
(e) Rs.2,056.00 and Rs.2,015.00 respectively.
(2 marks)
< Answer >
34. SMK Ltd. has a productive capacity of 2,50,000 units of Product ‘K’ per quarter. The company estimated its normal
capacity utilization at 90% for the quarter ending September 30, 2006. The variable manufacturing cost is Rs.22 per
unit and the fixed factory overheads were budgeted at Rs.9,00,000 per quarter. The variable selling overheads
< Answer >
9
amounted to Rs.6 per unit and the fixed selling expenses were budgeted at Rs.6,30,000. The operating data for the
quarter ending September 30, 2006 are as under:
Opening stock of finished goods – 12,500 units
Production – 2,00,000 units
Sales at the rate of Rs.40 per unit – 1,87,500 units
The profit under absorption costing method is
(a) Rs.7,70,000
(b) Rs.8,70,000
(c) Rs.9,70,000
(d) Rs.6,70,000
(e) Rs.5,70,000.
(2 marks)
35. The margin of safety is defined as
(a) The difference between sales and break-even sales
(b) The difference between budgeted sales and budgeted cost
(c) The difference between budgeted contribution margin and fixed costs
(d) The difference between budgeted sales and variable costs
(e) The difference between the break-even sales and cash break-even.
(1 mark)
< Answer >
36. A cost that remains unchanged on a per unit basis in a given period of time, despite changes in the level of activity, is
known as
(a) Variable cost
(b) Opportunity cost
(c) Overhead cost
(d) Imputed cost
(e) Fixed cost.
(1 mark)
< Answer >
37. Rent on factory building is an example of
(a) Opportunity cost
(b) Controllable cost
(c) Sunk cost
(d) Committed cost
(e) Discretionary cost.
(1 mark)
< Answer >
38. The total cost of manufacturing 3,300 units of a product is Rs.4,75,000 which includes fixed costs of Rs.2,60,500. If
the company desires to produce 4,100 units, then the total cost will be
(a) Rs.5,27,000
(b) Rs.5,20,000
(c) Rs.5,00,000
(d) Rs.4,95,000
(e) Rs.4,83,500.
(1 mark)
< Answer >
39. The step-down method of service department cost allocation often begins with allocation of the costs of the service
department which
(a) Provides the least percentage of its services to other service departments
(b) Provides the greatest percentage of its services to other service departments
(c) Has the highest total costs among the service departments
(d) Provides the least total output of services
(e) Provides the greatest total output of services.
(1 mark)
< Answer >
40. A job cost sheet basically does not contain
(a) Direct material cost
(b) Indirect material cost
< Answer >
10
(b) Indirect material cost
(c) Direct labor cost
(d) Production overhead cost
(e) Selling & distribution overhead cost.
(1 mark)
41. The costs incurred for a product are as follows:
Particulars Rs.
Direct materials 63,100
Direct wages 42,300
Direct expenses 11,800
Variable manufacturing overheads 21,000
Fixed administrative overheads 16,500
Fixed selling & distribution overheads 13,300
The prime cost of the product is
(a) Rs.1,05,400
(b) Rs.1,03,100
(c) Rs.1,16,200
(d) Rs.1,68,000
(e) Rs.1,17,200.
(1 mark)
< Answer >
42. Which of the following activities uses process costing?
(a) Foundry
(b) Automobile repair
(c) Road building
(d) Electrical contracting
(e) Newspaper publishing.
(1 mark)
< Answer >
43. A major difference between Financial Accounting and Management Accounting relates to differences in the users.
Related to Tinku Ltd., which of the following best describes a user of Management Accounting Information?
(a) Credit Manager of a vendor of Tinku Ltd.
(b) Income Tax Commissioner reviewing the tax return of Tinku Ltd.
(c) Bank Manager reviewing a loan application from Tinku Ltd.
(d) Purchase Manager for Tinku Ltd.
(e) Shareholders of Tinku Ltd.
(1 mark)
< Answer >
44. Which of the following is true?
(a) Decremental cost means the cost of an added unit
(b) Period costs are not assigned to products
(c) Standard cost tells us what the actual cost is for the product
(d) Cost center and cost unit are the same
(e) Cost of production is equal to prime cost plus works cost.
(1 mark)
< Answer >
45. Which of the following costs is an example of a discretionary fixed cost?
(a) Interest payments on a long-term loan
(b) Property taxes on land and related buildings
(c) Employees training
(d) Lease payments on production equipment
(e) Depreciation on plant & machinery.
(1 mark)
< Answer >
46. At 60% capacity utilization, the overhead recovery rate is Rs.30 per unit. At 80% capacity level, the rate gets reduced
to Rs.24 per unit. If the production attains 86% of the capacity utilization, the recovery rate would be
< Answer >
11
(a) Rs.22.74
(b) Rs.17.78
(c) Rs.18.47
(d) Rs.15.92
(e) Rs.16.23.
(2 marks)
47. Makhani 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 – M1 and M2. The following information relating to
M1 and M2 models is furnished at a capacity of 2,00,000 units:
Particulars Model M1 Model M2
Fixed cost per annum Rs.80,000 Rs.51,000
Profit Rs.80,000 Rs.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 >
48. Because of shortage of labor and materials, a department in a factory is working at 60% of its normal capacity. In its
cost records, it charges manufacturing overhead to work-in-progress as a percentage of direct labor.
For the current year, budgeted direct labor cost is Rs.2,50,000, budgeted manufacturing fixed overhead is Rs.1,60,000
and budgeted manufacturing variable overhead is Rs.1,20,000.
A dispute has arisen as to the percentage of direct labor which should be charged to work-in-progress. One officer
claims that it should be 90%, another claim that it should be less than that. The appropriate recovery rate should be
(a) 67.5%
(b) 82.8%
(c) 85.5%
(d) 72.6%
(e) 86.4%.
(2 marks)
< Answer >
49. Biocon Ltd. has furnished the following information pertaining to its machinery:
The cost of a machine to be depreciated on straight line method - Rs.5,00,000
Life of the machine – 10 years
The departmental overheads per annum are as follows:
Rent – Rs.1,20,000; Heat and light – Rs.90,000; Supervision – Rs.1,56,000.
Area of the department – 70,000 square metre
Machine area – 2,500 square metre; Number of machines – 26
Annual cost of reserve equipment for machinery – Rs.1,560
Hours runs on production – 1,800; Hours for setting and adjusting – 200
Power cost – Re.0.50 per hour of running time
Labor :
* When setting and adjusting – full time attention
* When machine is producing – one worker can look after 3 machines
* Labor rate is Rs.6 per hour.
The hourly rate for standing charges of the company is
(a) Rs.25.25
(b) Rs.34.45
(c) Rs.35.98
(d) Rs.37.29
(e) Rs.28.48.
(2 marks)
< Answer >
50. A machine shop of Piston Ltd. has 5 identical machines manned by 5 operators. The operators are fully engaged on
machines. The total original cost of these 5 machines is Rs.8,00,000. The company has furnished the following
information pertaining to operations for 2nd
quarter ending September 30, 2006:
Normal available hours per month per operator 220 hours Absenteeism (without pay) per month per operator 12 hours
< Answer >
12
Absenteeism (without pay) per month per operator 12 hours
Leave (with pay) per month per operator 20 hours
Normal idle time (unavoidable) per month per operator 8 hours
Average rate of wages per hour Rs.10
Estimated production bonus 10% on wages
Value of power consumed Rs.7,280
Supervision and indirect labor Rs.4,100
Electricity and lighting Rs.3,800
Repairs and maintenance per quarter 1% on value of machines
Depreciation per annum 10% on original cost
Miscellaneous expenses per month Rs.1,000
General management expenses per annum Rs.20,000
The comprehensive machine hour rate for the machine shop for the quarter ending September 30, 2006 is
(a) Rs.48.58
(b) Rs.31.67
(c) Rs.39.61
(d) Rs.29.42
(e) Rs.34.00.
(2 marks)
51. Theoretical capacity minus idle time resulting from holidays, downtime, changeover time etc. but not from inadequate
sales demand, is called
(a) Maximum capacity
(b) Normal capacity
(c) Practical capacity
(d) Actual capacity
(e) Standard capacity.
(1 mark)
< Answer >
52. Apportionment of overhead cost may be defined as
(a) Charge to a cost center of an overhead cost item with no estimation
(b) Charge to each cost center with a share of an overhead cost using an apportionment basis to estimate the
benefit extracted by each cost center
(c) Charge to cost units for the use of an overhead cost
(d) Classification of overhead cost as fixed or variable
(e) Charge to cost center for the use of an overhead cost.
(1 mark)
< Answer >
53. Gross works cost stands for
(a) Works cost as adjusted by stocks of work in progress
(b) Works cost before adjusting stocks of work in progress
(c) Works cost before adjusting stocks of finished goods
(d) Works cost after adjusting stocks of finished goods
(e) Works cost before adjusting labor costs.
(1 mark)
< Answer >
54. Simtex Ltd. has furnished the following data pertaining to its product at 40% capacity level, which is its break-even
level:
Particulars Rs.
Selling price per ton 69.50
Variable cost per ton 35.50
Fixed expenses 18,70,000.00
The company wants to increase the production by 40%. The selling price will be reduced by 10% for first 20%
additional production and 15% of original selling price for next 20% additional capacity. The profit for additional
40% capacity level is
< Answer >
13
(d) Rs.11,68,456
(e) Rs.12,95,656.
(2 marks)
55. Vairav Ltd. has furnished the following data for its business:
Direct material - Rs.15 per unit
Direct labor - Rs.9 per unit
Variable overhead - Rs.5.50 per unit
Fixed overhead - Rs.4.50 per unit
Budgeted production - 20,000 units
Actual production - 18,000 units
There is no overhead spending variance
Sales - 16,400 units
Sales price - Rs.40 per unit
The value of ending inventory using Absorption Costing is
(a) Rs.54,400
(b) Rs.55,200
(c) Rs.66,000
(d) Rs.33,800
(e) Rs.52,500.
(2 marks)
< Answer >
56. Sarabhai Ltd. uses a historical cost system and applies overheads on the basis of predetermined rates. The following
data are made available by the company for the year ended March 31, 2006:
Particulars Rs.
Manufacturing overheads incurred 11,20,000
Manufacturing overheads applied 10,00,000
Work-in-progress 5,00,000
Finished goods 15,00,000
Cost of goods sold 2,20,00,000
The amount of under or over absorbed overheads to be adjusted to finished goods, using supplementary rate, is
(a) Rs.2,500 (over)
(b) Rs.4,500 (under)
(c) Rs.1,500 (under)
(d) Rs.1,10,000 (over)
(e) Rs.7,500 (under).
(2 marks)
< Answer >
57. DDS Ltd. uses process cost system to manufacture Dust Density Sensors for the mining industry. The following
pertains to operations for the month of September 2006:
Particulars Units
Opening work-in-process (September 01, 2006) 500
Introduced in production during September 2006 5,000
Closing work-in-process (September 30, 2006) 400
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 September 2006 are as follows:
Opening work in process:
Materials Rs.18,000
Conversion Rs. 4,500
During the month:
Materials Rs.90,000
Conversion Rs.75,900
< Answer >
14
The total cost of closing work-in-process on September 30, 2006, using average method, is
(a) Rs.9,300
(b) Rs.9,900
(c) Rs.8,682
(d) Rs.8,210
(e) Rs.9,150.
(2 marks)
58. Ganapati Ltd. uses a particular raw material in its 3 process accounts – A, B and C. The following information
furnished by the company relating to inputs, outputs and rejections during the month of September 2006:
Process Input including opening
W.I.P (units)
Rejections
(units)
Output
(units)
A 20,000 4,000 16,000
B 22,500 2,500 20,000
C 24,000 6,000 18,000
What should be the inputs in Process A, if the final product transferred from Process C is 1,000 units?
(a) 1,875 units
(b) 1,700 units
(c) 1,800 units
(d) 1,920 units
(e) 2,000 units.
(2 marks)
< Answer >
59. Simran Ltd. had 5,000 units of work-in-process inventory in department A on September 1, 2006. These units were
70% complete as to conversion costs. Direct materials are added at the beginning of the process. During the month of
September 2006, 45,000 units were started and 42,000 units completed. The company had 8,000 units of work-in-
process inventory on 30th September 2006. These units were 70% complete as to conversion costs.
The equivalent production unit of conversion (under weighted average method) exceeds the equivalent production of
conversion (under FIFO method) by
(a) 8,000 units
(b) 5,600 units
(c) 3,500 units
(d) 4,400 units
(e) 5,000 units.
(2 marks)
< Answer >
60. There are 2 warehouses for storing finished goods produced in a factory. Warehouse A is at a distance of 10 km and
warehouse B is at a distance of 15 km from the factory. A fleet of 5- ton lorries is engaged in transporting the finished
goods from the factory. The records show that the average speed of lorries is 30 km per hour when running and
regularly take 40 minutes to load at the factory. At warehouse A, unloading takes 30 minutes per load while at
warehouse B, it takes 20 minutes per load.
Drivers’ wages, depreciation, insurance and taxes amount to Rs.25 per hour operated. Fuel, oil, tyres, repairs and
maintenance cost Rs.4.20 per kilometer.
The cost per ton kilometer of carrying the finished goods to warehouses B is
(a) Rs.2.60
(b) Rs.2.35
(c) Rs.2.20
(d) Rs.1.62
(e) Rs.1.44.
(2 marks)
< Answer >
61. A certain chemical process yields 75% of material introduced as main product, 20% as by-product and 5% being lost.
In the process one unit of main product requires double the material required for one unit of by-product. Further one
unit of main product needs 1.5 times the time needed for one unit of by-product. Overheads are absorbed in the ratio
of 3:2.
During a week, 1,000 units of raw material at a cost of Rs.17,000 were introduced. Total labor cost was Rs.5,300.
< Answer >
15
Overheads came to Rs.3,500. Wastages realized Rs.500.
The cost of by-product per unit is
(a) Rs.35.50
(b) Rs.28.40
(c) Rs.25.50
(d) Rs.17.00
(e) Rs.20.00.
(2 marks)
62. Which of the following statements is false?
(a) Process costing is one aspect of operation costing
(b) Process costing is applied in garment industry
(c) Process costing is used in chemical industry
(d) In process costing ordinarily no distinction is made between direct and indirect materials
(e) The cost of abnormal process loss is not included in the cost of the process.
(1 mark)
< Answer >
63. D. Hedger Ltd. manufactures a product, currently utilizing 80% capacity with a turnover of Rs.8,00,000 at Rs.40 per
unit. The company has furnished the following cost data:
Material cost - Rs.12.00 per unit; Labor cost - Rs.8.25 per unit; Semi-variable cost (including variable cost of
Rs.3.75 per unit) – Rs.1,80,000; Fixed cost Rs.90,000 up to 80% level of output and beyond this, an additional
Rs.20,000 will be incurred.
The activity level at break-even point is
(a) 60.00%
(b) 50.00%
(c) 40.25%
(d) 48.75%
(e) 25.75%.
(2 marks)
< Answer >
64. Vijay Ltd. has furnished the following information pertaining to its 2 products – A and B:
Product A has a contribution to sales ratio of 0.50 and Product B has a contribution to sales ratio of 0.40. At present
100 units of each product are sold. If the total sales units remain at the present level but an extra 20 units of B are
substituted for 20 units of A, which of the following is true of the overall position?
(a) Contribution to sales ratio remains unchanged
(b) Contribution to sales ratio rises form 0.45 to 0.46
(c) Contribution to sales ratio rises from 0.45 to 0.48
(d) Contribution to sales ratio falls from 0.45 to 0.44
(e) Contribution to sales ratio rises from 0.45 to 0.50.
(2 marks)
< Answer >
65. ABC Company’s budgeted overhead amounts to Rs.3,50,000 based on an output of 200 units of A, 300 units of B and
500 units of C. Direct labor costs of A, B and C per unit amount to Rs.75, Rs.50 and Rs.40 respectively. Overhead is
applied based on budgeted overhead rates using labor cost as cost driver. If actual overhead amounts to Rs.3,39,000
for the production of 250, 350 and 400 units of A, B and C respectively. The under or over applied overhead amounts
to
(a) Rs.19,000 under applied
(b) Rs.19,000 over applied
(c) Rs.26,750 under applied
(d) Rs.26,750 over applied
(e) Rs.16,000 under applied.
(2 marks)
< Answer >
66. Megha Constructions obtained a contract to construct a building for Rs.85,00,000. Building work started on
September 1, 2005 and at the close of financial year as on March 31, 2006 the construction was still in progress. The
following information is available:
i. Party paid Rs.52,00,000 which is 80% of the amount as per Surveyor’s Certificate of work completed as on
March 31, 2006.
< Answer >
16
ii. Total cost as per contract account after adjustment of closing work-in-progress was Rs.53,53,500.
The amount of profit to be taken to Profit & loss A/c is
(a) Rs.16,78,133
(b) Rs.6,11,467
(c) Rs.8,39,067
(d) Rs.3,05,733
(e) Rs.5,55,667.
(1 mark)
67. Dewang Ltd. has an annual fixed cost of Rs.1,90,000. In the year 2005-06, sales amounted to Rs.7,50,000 as
compared with Rs.6,00,000 in the year 2004-05 and the profit for the year 2005-06 was more than the profit for 2004-
05 by Rs.60,000.
If there is a reduction of selling price by 10% in the year 2006-07 and the company desires to earn the same amount of
profit as in 2005-06, the required sales volume would be
(a) Rs.9,45,000
(b) Rs.5,60,000
(c) Rs.9,00,000
(d) Rs.7,55,000
(e) Rs.6,75,000.
(2 marks)
< Answer >
68. The operating results of Manasi Ltd for the year 2005-06 were as under:
Product Sales Mix (%) PV Ratio
A 40 20
B 30 15
C 10 8
D 20 10
Total sales value of all the products was Rs.120 lakhs and fixed costs amount to Rs.20 lakhs. The composite P/V ratio
is
(a) 15.2%
(b) 14.2%
(c) 14.0%
(d) 15.3%
(e) 16.0%.
(1 mark)
< Answer >
69. The following statements are true except
(a) Managers of all companies analyze costs to control material, labor and overhead
(b) Managers of all companies analyze cost to properly value inventory
(c) Managers of all companies need to improve quality
(d) Managers of all companies need to improve productivity
(e) Managers of all companies need to improve efficiency.
(1 mark)
< Answer >
70. Jogomaya Ltd. operates a process, which produces three joint products – A, B and C. The costs of operating this
process during the month of September 2006 amounts to Rs.1,50,000. During the month, the output of the three
products is:
A– 3,000 litre; B – 4,500 litre; & C – 2,500 litre
Product B is further processed at a cost of Rs.14 per litre and incurs a normal loss of 10% of the input. Products A and
C are sold without further processing. The final selling prices of each of the products are:
A – Rs.30 per litre; B – Rs.38 per litre; & C – Rs.28 per litre
Joint costs are attributed to products on the basis of output volume.
The profit attributed to product B is
(a) Rs.40,500
(b) Rs.34,750
(c) Rs.26,150
(d) Rs.24,000
(e) Rs.23,400.
< Answer >
17
(e) Rs.23,400.
(1 mark)
18
Suggested Answers
Management Accounting – I (MB161) : October 2006
1. Answer : (b)
Reason : A collection of costs to be assigned to different subunits is called cost pool. The activities that cause costs
to be incurred are called cost drivers. Cost tracking is an attempt to assign costs on the basis of their
cause. The responsibility centers, products or services to which costs are to be assigned are called cost
objects. The process of assigning the costs in the cost pool to the cost objects is called cost allocation.
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2. Answer : (c)
Reason : The costs which are not incurred but appeared in cost accounts only are called imputed costs. e.g. The
notional rent charged on business premises owned by the proprietor is imputed cost.
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3. Answer : (a)
Reason : If the work of specialized nature is performed by a sub-contractor, the cost of subcontracting is debited as
direct expenses to contract account.
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4. 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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5. Answer : (d)
Reason : The direct labor hour method is not affected by the method of wage payment. It does not consider other
factors of production. No distinction is made between skilled and unskilled labor; fixed and variable
costs.. This method is not suitable where piece rate system is used, as data required for calculation of this
rate is not available.
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6. Answer : (b)
Reason : By-products are products of relatively small total value that are produced simultaneously from a common
manufacturing process with products of greater value and quantity (joint products).
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7. Answer : (c)
Reason : Both Financial and Management Accounting rely heavily on the concept of responsibility. Financial
Accounting is concerned with the concept of responsibility or stewardship over the company as a whole;
while Management Accounting is concerned with stewardship over its parts. Hence (c) is false.
Management Accounting provides data for internal uses by managers whereas Financial Accounting
provides data for external users like shareholders, creditors, etc. Since a large part of the overall
responsibilities of a manager have to do with planning, a manager’s information need has a strong
orientation towards future. On the other hand, Financial Accounting is concerned with a record of
financial data of the past. Financial Accounting is mandatory for business organizations. They should
compulsorily maintain financial records as per various legal statutes like Companies Act, Income Tax
Act, etc. By contrast, Management Accounting is not mandatory. Financial Accounting statements have
to be prepared in accordance with the GAAP whereas managers set their own rules in the form and
content of Management Accounting statements.
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8. Answer : (e)
Reason : The BEP in rupees is equal to the fixed cost divided by the contribution margin ratio. Accordingly, equal
percentage changes in selling price and variable cost per unit will not affect the break-even point in
rupees.
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9. Answer : (d)
Reason : Where the by-products are utilized in the same undertaking, the by-product is valued at opportunity cost
or replacement cost. By-product is a secondary product, which incidentally results from the manufacture
of main product. Joint products are produced from the same basic raw material, and by a common
process. The main difference between joint products and by-products is its commercial value. The
relationship between main product and by-product changes with changes in economic conditions.
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10. Answer : (b)
Reason : The value of stock is not distorted under this method. Hence the answer is (b). The supplementary rate
method facilitates the absorption of actual overhead incurred for production. The supplementary rate can
be determined only after the end of the accounting period. It requires a lot of clerical work. Correction of
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19
costs through supplementary rates is necessary for maintaining data for comparison.
11. Answer : (b)
Reason : The average method of valuation of inventory in process costing is useful when prices are fluctuating
from period to period.
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12. Answer : (a)
Reason : Absorption of overheads on the basis of number of units produced is usually not appropriate. However,
when only one product is manufactured, this allocation method may be acceptable because all costs are to
be charged to the single product.
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13. Answer : (c)
Reason : A direct cost can specifically associated with a single cost object in an economically feasible way. An
indirect cost cannot be specifically associated with a single cost object. Hence the answer is (c).
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14. Answer : (b)
Reason : A direct cost is one that can be specifically associated with a single cost object in an economically feasible way. Thus production supervisor’s salary can be directly associated with the department s(he) supervises.
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15. Answer : (d)
Reason : Operation Costing is a hybrid of Job-order and Process costing systems wherein materials are allocated
on the basis of batches of production. It is used by companies that manufacture goods that undergo some
similar and dissimilar processes. Operation costing accumulates total conversion cost for each operation.
However direct material costs are charged specifically to products or batches as in job-order system.
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16. Answer : (d)
Reason : Margin of safety = Sales – Break even sales
Break-even sales = Sales – Margin of safety
We know, Break-even point =
Fixed cost
Profit - volume ratio
∴ Fixed cost = Profit-volume ratio × Break-even sales
= Profit-volume ratio × (Sales – Margin of safety)
Hence, (d) is true.
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17. Answer : (d)
Reason : Contribution per unit = Rs.37 – Rs.26 = Rs.11.
Required sales = (Rs.8,08,000 + Rs.72,000) ÷ Rs.11 = Rs.8,80,000 ÷ Rs.11 = 80,000 units.
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18. Answer : (a)
Reason : Materials purchased = Rs.35,662 + Rs.7,210 – Rs.8,635 = Rs.34,237
Total manufacturing costs = Direct material + Direct labor + 60% of Direct labor
Rs.86,206 = Rs.35,662 + Direct labor + 0.6 Direct labor
1.6 direct labor =Rs.50,544
Direct labor = Rs.50,544 ÷ 1.6 = Rs.31,590
Applied factory overhead = 60% of Rs.31,590 = Rs.18,954
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19. Answer : (c)
Reason : Break-even point =
Rs.5, 22, 300 Rs.2, 64, 000
Rs.85 (Rs.48 4% on Rs.85)
+
− +
=
Rs.7,86, 300
Rs.33.60 = 23,402 units
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20. Answer : (e)
Reason : Variable overheads =
Rs.4, 38,800 Rs.4, 25,800
8,800hrs 8, 300hrs
−
− =
Rs.13, 000
500hours = Rs.26.00
Fixed overhead rate = Rs.4,25,800 – Rs.26.00 × 8,300 hrs
= Rs.4,25,800 – Rs.2,15,800 = Rs.2,10,000
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20
Normal activity = Rs.2,10,000 ÷ (Rs.40.00 – Rs.26.00) = 15,000 hours
Under absorption = (15,000 hrs – 13,800 hrs) × Rs.14.00 = Rs.16,800
21. Answer : (e)
Reason : Direct-material costs are materials costs identified as part of manufactured goods and can be traced efficiently to the manufactured goods. So option (e) is correct. Option (b) is an indirect manufacturing
cost. Option(c) and (d) are related to manufacturing, but is a cost other than that for direct materials cost
and it is indirect material cost. Transportation charges incurred on bringing machinery is not revenue
expenditure (a).
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22. Answer : (d)
Reason :
Material Conversion
Input Output % units % units
Units started – 12,000 Completed 9,000 100% 9,000 100% 9,000
Defective loss 10% 1,200 100% 1,200 75% 900
Abnormal loss 1,800 100% 1,800 75% 1,350
12,000 12,000 11,250
Cost Rs.1,20,000 Rs.87,750
Cost per unit Rs.10.00 Rs.7.80
Cost of abnormal loss = 1,800 × Rs.10.00 + 1,350 × Rs.7.80 = Rs.18,000 + Rs.10,530 = Rs.28,530.
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23. Answer : (d)
Reason : BEP =
Fixed cos t
Contribution per unit
Up to the product of 5,000 units, BEP =
Rs.60, 000
Rs.25 60% of Rs.25− =
Rs.60, 000
Rs.10 = 6,000 units.
At any production level greater than 5,000 units, total fixed costs are Rs.1,00,000 but there are two contribution margin. The first 5,000 units sold will produce a contribution margin of Rs.50,000 (i.e. 5,000
× Rs.10). Hence, the other Rs.50,000 (i.e. Rs.1,00,000 – Rs.50,000) must be contributed. The contribution per unit is Rs.12.50 (i.e. Rs.25 – 50% of Rs.25)
Therefore, BEP = Rs.50,000 ÷ Rs.12.50 = 4,000 units.
Therefore, Total BEP = 5,000 units + 4,000 units = 9,000 units.
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24. Answer : (b)
Reason : Rs.
Direct materials:
Opening stock 30,000
Purchases 5,40,000
Carriage inward 10,000
Octroi on purchases 1,800
5,81,800
Less: Closing stock 25,000
Cost of materials used 5,56,800
Add: Wages – paid 1,70,000
Wages – outstanding 30,000
Prime Cost 7,56,800
Add: Factory overheads 86,000
Add: Opening work-in-process 15,000
Cost of Work-in-Process 8,57,800
Less: Closing work-in-process 12,000
Cost of goods manufactured 8,45,800
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25. Answer : (a)
Reason :
Output Material Labor and overheads
Completed and transferred 40 100% 40 100% 40
Work-in-progress 10 100% 10 60% 6
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21
Work-in-progress 10 100% 10 60% 6
50 50 46
Total Cost – Rs.1,80,000 Rs.1,38,000
Cost per unit – Rs. 3,600 Rs. 3,000
Value of Work-in-progress: Material – 10 × Rs.3,600 = Rs.36,000
Work-in-progress – 6 × Rs.3,000 = Rs.18,000
= Rs.54,000
26. Answer : (a)
Reason :
Particulars Per month Per km.
Fixed expenses:
Salary of Manager 6,500 Accountant 5,000
Cleaner 1,200
Mechanic 3,000
Garage rent 4,000
Insurance:
5% on 5 4, 20, 000
12
×
8,750
Drivers salary (Rs.6,000 × 5) 30,000
Annual tax
Rs.4,200 5
12
×
1,750
60,200
Effective km = 4,500 km × 0.8 × 5 = 18,000 3.34
Depreciation Rs.4,20,000 ÷ (3,00,000 × .8) 1.75
Repairs Rs.3,000 ÷ (12 × 3,600) 0.07
Petrol (4,500 × Rs.54) ÷ (5.62 × 3600) 7.71
Oil and other sundries (Rs.24 × 4,500)÷(100km × 3,600) 0.30
Cost of plying taxi per km. 13.17
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27. Answer : (d)
Reason : Profit difference = Rs.1,11,000 – Rs.1,18,630 = Rs.7,630
Physical stock movement = 4,650 – 4,300 = 350 units
Fixed overhead rate per unit = Rs.7,630 ÷ 350 units = Rs.21.80.
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28. Answer : (b)
Reason :
Input units Units Materials Conversion
Opening WIP 2,000 Opening 2,000 – – 50% 1,000
From process 1 1,15,500 Process 1 1,05,700 100% 1,05,700 100% 1,05,700
Normal loss 5,875 – – – –
Abnormal Loss 1,125 100% 1,125 – –
Closing WIP 2,800 100% 2,800 75% 2,100
1,17,500 1,17,500 1,09,625 1,08,800
Finished goods: ×
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22
Process I (1,05,700 × Rs.2.20) Rs.2,32,540
Conversion cost (1,05,700 × 0.65) Rs.68,705
Total cost of finished goods 3,05,745
29. Answer : (c)
Reason : Sale – Variable cost – Fixed cost = Profit
Let, Variable cost = x and Fixed cost = y
Therefore,
Rs.20 × 20,000 – 20,000x – y = –Rs.30,000
Rs.20 × 30,000 – 30,000x – y = Rs.30,000
4,00,000 – 20,000x – y = –30,000
6,00,000 – 30,000x – y = 30,000
or, 4,30,000 = 20,000x + y
5,70,000 = 30,000x + y
1,40,000 = 10,000x
x = 14
y = 4,30,000 – 20,000 × 14 = 4,30,000 – 2,80,000 = Rs.1,50,000
P/V = (20 – 14) ÷ 20 = 30%
BE (sales) = Rs.1,50,000 ÷ 30% = Rs.5,00,000
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30. Answer : (e)
Reason :
Particulars AB Ltd XY Ltd Total
Capacity 100% (Rs.) 100%(Rs.) 100%(Rs.)
Sales 600 500 1,100
Variable cost 440 340 780
160 160 320
Less:
Fixed cost
100 80 180
Profit 60 80 140
Contribution at 80% level = 320 × 80% = Rs.256
Less: Fixed cost Rs.180
Profit Rs. 76
Profitability =
Rs.76100
80% of Rs.1,100×
=
Rs.76100
Rs.880×
= 8.64%
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31. Answer : (e)
Reason : P/V =
Change in profit100
Change in sales×
=
Rs.125 Rs.80100
Rs.500 Rs.400
−×
− = Rs.45 ÷ Rs.100 = 0.45 or 45%
Fixed cost = Contribution – Profit
= P/v ratio × Sales – profit
= 45% × Rs.400 – Rs.80 = Rs.100
Required sales =
Rs.100 Rs.170
45%
+
= Rs.600 lakh.
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32. Answer : (c)
Reason : Dr. Contract A/C Cr.
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23
Particulars Rs Particulars Rs
Materials 4,75,000 Work certified 6,20,000
Labor costs 1,23,500 Work not certified 1,55,000
Direct expenses 72,000
Material in hand 18,375
Depreciation on plant
(Rs.1,71000–
Rs.1,02,500)
68,500
Notional profit 54,375
7,93,375 7,93,375
Profit transferred to P/L a/c =
2
3 × Rs.54,375 ×
Rs.5,30,000
Rs.6, 20,000
= Rs.30,988
Profit transferred to Reserve a/c = Rs.54,375 – Rs.30,988
= Rs.23,387
33. Answer : (c)
Reason : Statement showing computation of departmental overhead rate
Department Overhead
Rs.
Machine
hours
Machine hour
Rate (2)/(3)
(1) (2) (3) (4)
Fabrication 1,50,000 12,000 12.50
Machining 1,80,000 15,000 12.00
Assembly 1,40,000 9,000 15.55
Finishing 90,000 8,000 11.25
Total 5,60,000 44,000
Blanket overhead absorption rate = Rs.5,60,000 ÷ 44,000 machine hours = Rs. 12.73. Computation of
overhead to be charged to Job A (basing on blanket overhead rate)
Total machine hours to be used = 30+40+70+10 = 150 machine hours
Overhead to be absorbed to Job A = 150 M.H × Rs.12.73 = Rs.1,909.09.
Computation of overhead to be charged to Job A (basing on departmental overhead rate)
Department Machine hour
Required
Departmental
overhead
absorption
rates (Rs.)
Overhead to be
Absorbed
Rs.
Fabrication 30 12.50 375.00
Machining 40 12.00 480.00
Assembly 70 15.55 1,088.50
Finishing 10 11.25 112.50
Overhead to be charged to Job A 2,056.00
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34. Answer : (a)
Reason : Profit under absorption costing:
Rs. Rs.
Sales – 1,87,500 × Rs.40 75,00,000
Cost of goods sold:
Opening Stock (Rs.22 + Rs.4) × 12,500 3,25,000
Production Rs.26 × 2,00,000 52,00,000
55,25,000
Less: Closing stock Rs.26 × 25,000 6,50,000
48,75,000
Gross Profit (sales – cost) 26,25,000
Less: Selling expenses:
Variable 1,87,500 × Rs.6 11,25,000
Fixed 6,30,000 17,55,000
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24
Fixed 6,30,000 17,55,000
8,70,000
Less: Under absorption: 1,00,000
Profit 7,70,000
35. Answer : (a)
Reason : The correct answer is (a). The margin of safety measures the amount by which sales may decline before
losses occur. It is the excess of actual sales over sales at the BEP.
(b) is not correct because the difference between budgeted sales and budgeted cost is budgeted profit
(c) is not correct because the difference between budgeted contribution margin and fixed cost is the profit
(d) is not correct because the difference between budgeted sales and variable costs is contribution margin
(e) is not correct because difference between break-even sales and cash break-even is not the margin of
safety.
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36. Answer : (a)
Reason : Variable costs are constant per unit but fluctuate in total in direct proportion to changes in total activity or volume.
(b) is not correct because opportunity costs are the foregone profits from the other uses of the same
assets. (c) is not correct because overhead is an indirect cost that may be variable or fixed (d) is not
correct because imputed costs is the notional cost, appears in cost accounts only. (e) is not correct
because total fixed costs do not change within the relevant range. Hence, the per unit fixed cost declines
as production increases
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37. Answer : (d)
Reason : Committed cost is a fixed cost which results from the decisions of the management in the prior period and is not subject to the management control in the present on a short run basis for example rent, depreciation.
(a) is not correct because opportunity costs are the foregone profits from the other uses of the same assets.
(b) Controllable costs are the costs which can be controlled by the management in the short-run.
(c) is not correct because sunk costs are the costs of resources already acquired where the total is
unaffected by the choice between alternatives.
(e) is not correct because discretionary costs are those costs which are not essential for the decision under
consideration.
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38. Answer : (a)
Reason : Total cost of 3,300units - Rs. 4,75,000
Less Fixed cost - Rs. 2,60,500
Variable cost of 3,300units Rs. 2,14,500
Variable cost per unit = Rs.2,14,500 ÷ 3,300 units = Rs.65.
Total cost of 4,100 units = Rs.4,100 units x Rs.65 + Rs.2,60,500 = Rs.5,27,000
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39. Answer : (b)
Reason : The step down method of service department cost allocation provides the greatest percentage of its
services to other service departments. Hence, answer (b) is correct but not (a).
(c) is not correct because allocating the costs of the service department with the highest total costs is not a
proper allocation base under step-down method. (d) and (e) are not correct because first allocating the
cost of the service department with the greatest / least total output is not a proper allocation base under
the step-down method.
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40. Answer : (e)
Reason : The correct answer is (e). Job cost sheet is designed to record cost of materials, labor and factory
overhead applicable to a particular job and it does not include selling and distribution cost. Hence,
answer (a), (b), (c) and (d) are not correct.
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41. Answer : (e)
Reason : Prime Cost = Direct materials + Direct wages + Direct expenses
Therefore prime cost = Rs.63,100 + Rs.42,300 + Rs.11,800 = Rs.1,17,200.
< TOP >
42. Answer : (e) < TOP >
25
Reason : The correct answer is (e). Process costing is used for continuous manufacturing of relatively
homogeneous units. Newspapers are published in long runs of identical items, hence process costing is
indicated.
(a), (b), (c) and (d) are not correct because they involve unique projects which require job-order costing.
43. Answer : (d)
Reason : The Purchasing Manager of Tinku Ltd. would be an internal user of information that is concerned with
production reports and estimates, where as the other individuals are all external to the company and
would expect Financial Accounting information prepared in accordance with GAAP. Therefore, (d) is
correct.
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44. Answer : (b)
Reason : Decremental cost is not the cost of an added unit. Standard cost never tells us the actual cost of the
product. Cost center and cost units is not the same thing. Cost of production is not equal to prime cost
plus works cost. The correct statement is that the period cost is not assigned to products. It is a fixed cost
and does not vary with the production. Therefore,
(b) is correct.
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45. Answer : (c)
Reason : Employee training cost is usually a discretionary fixed cost. It is typically fixed since its amount is not
based on volume. It is discretionary because it is set each year during the planning process. Training costs
are optional, and they can be altered or perhaps deleted entirely during the year in response to business
environment changes. Other options are related to committed cost.
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46. Answer : (a)
Reason : Let, at 100% capacity level, units produced = 100
At 60% capacity, the overhead recovery rate = Rs.30 per unit
Therefore, total overhead at 60% = 60 × Rs.30= Rs.1,800
At 80% capacity, the recovery rate = Rs.24 per unit
Therefore, total overhead at 80% = Rs.24 × 80 = Rs.1,920
Therefore, variable cost =
Rs.1,920 Rs.1,800
20
−
=
Rs.120
20 = Rs.6 per unit
Fixed cost = Rs.1,800 – 60 × Rs.6 = Rs.1,800 – Rs.360 = Rs.1,440
At, 86% capacity = Rs.1,440 + 86 × Rs.6 = Rs.1,440 + Rs.516 = Rs.1,956
Rate = Rs.1,956 ÷ 86 = Rs.22.74.
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47. Answer : (c)
Reason : Contribution of M1 = Rs. 80,000 + Rs. 80,000 = Rs. 1,60,000
Contribution of M2 = Rs. 51,000 + Rs. 69,000 = Rs. 1,20,000
Contribution to sales ratio of:
M1 = Rs. 1,60,000 ÷ (2,00,000 × Rs. 2) = Rs. 1,60,000 ÷ Rs. 4,00,000 = 0.4
M2 = Rs. 1,20,000 ÷ (2,00,000 × 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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48. Answer : (e)
Reason : A department is working at 60% of its normal capacity. 40% is treated as idle capacity. Fixed cost is
obviously incurred for the normal capacity work. This 40% of fixed cost should be excluded from the
calculation of overhead recovery rate. Thus the appropriate recovery rate is to be found by dividing the
60% of fixed cost plus 100% variable manufacturing overhead by the budgeted direct labor cost.
Appropriate recovery rate = (60% of Rs.1,60,000 + 100% of Rs.1,20,000) ÷ Rs.2,50,000 = Rs.2,16,000 ÷
Rs.2,50,000 = 86.4%
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49. Answer : (c)
Reason : Computation of hourly rate for standing charges:
Expenses Workings Rs. Rs.
Standing charges:
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26
Standing charges:
Rent, heat and light (Rs.2,10,000 ÷ 70,000)× 2,500 7,500
Supervision Rs.1,56,000 ÷ 26 6,000
Depreciation 10% of Rs.5,00,000 50,000
Reserve equipment cost Rs.1,560 ÷ 26 60
Labor cost during setting and adjustment 200 hours × Rs.6 1,200
Hourly rate for standing charges Rs.64,760 ÷ 1,800 64,760 35.98
50. Answer : (b)
Reason : Computation of total utilized machine hours:
Normal available hours per month per operator 220 hours
Less: Unutilized hours due to
Absenteeism 12
Leave 20
Idle time 8 40 hours
Total utilized hours per operator per month 180 hours
Total hours for 5 operators × 3 months = 180 × 5 × 3 = 2,700 hours
Therefore, machine utilized is 2,700 hours (Machine cannot work without operator).
Normal hours for which wages are to be paid = 220 – 12 = 208 hours
Wages for 3 months = 208 hours × 5 × 3 × Rs.10 = Rs.31,200
Comprehensive Machine hour rate Rs.
Operators wages 31,200
Production Bonus (10% on Rs.31,200) 3,120
Power consumed (2nd
quarter) 7,280
Supervisor & indirect labor 4,100
Electricity & Lighting 3,800
Repairs & Maintenance (1% on Rs.8,00,000) 8,000
Depreciation (10% of Rs.8,00,000 ÷ 4) 20,000
Miscellaneous expenses (Rs.1000 × 3) 3,000
General management expenses (Rs.20,000 ÷ 4) 5,000
85,500
Comprehensive machine hour rate = Rs.85,500 ÷ 2,700 hours = Rs.31.67.
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51. Answer : (c)
Reason : Practical capacity is the theoretical capacity or maximum capacity minus idle time resulting from
holidays, downtime, changeover time etc., but not from inadequate sales demand. Therefore, other
options (a), (b), (d) and (e) are not correct
< TOP >
52. Answer : (b)
Reason : If the overhead cost charged to each cost center with a share of an overhead cost using an appropriate
basis to estimate the benefit extracted by each cost center is called apportionment of overhead cost.
Therefore (b) is correct.
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53. Answer : (b)
Reason : Gross works cost means the works cost before adjusting stock of work-in-process. Other options are not
correct.
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54. Answer : (b)
Reason : Contribution = Rs.69.50 – Rs.35.50 = Rs.34.
Break-even units = Rs.18,70,000 ÷ Rs.34 = 55,000 ton;
Selling price for 1st 20% = Rs.69.50 × 90% = Rs.62.55;
Selling price for next 20% = Rs.69.50 × 85% = Rs.59.075
Contribution for 1st 20% capacity = Rs.62.55 – Rs.35.50 = Rs.27.05 per unit;
Contribution for next 20% capacity = Rs.59.075 – Rs.35.50 = Rs.23.575 per unit;
Profit from 1st 20% capacity = Rs.27.05 × 27,500 = Rs.7,43,875
Profit from next 20% capacity = Rs.23.575 × 27,500 = Rs.6,48,312.50
Profit from added production of 40% capacity over break-even volume
= Rs.7,43,875.00 + Rs.6,48,312.50 = Rs.13,92,187.50 or 13,92,188.
< TOP >
55. Answer : (b) < TOP >
27
Reason : Total fixed overhead = 20,000 units × Rs.4.50 = Rs.90,000.
Rs.90,000 actual overhead ÷ 18,000 units actual production = Rs.5.00.
Fixed overhead per unit = Rs.5.00.
Total cost per unit =
Material Rs.15 + Labor Rs.9 + Variable overhead Rs.5.50 + Fixed overhead Rs.5.00 = Rs.34.50.
Cost of ending inventory = Rs.34.50 × 1,600 units (18,000 units produced - 16,400 units sold) =
Rs.55,200.
56. Answer : (e)
Reason : Under this method the amount of under absorbed overheads is adjusted to work-in-progress, finished
goods and cost of goods sold in proportion to their values Rs.5,00,000; Rs.15,00,000 and Rs.2,20,00,000
respectively by use of supplementary rate. The total amount = Rs.5,00,000 + Rs.15,00,000 +
Rs.2,20,00,000 = Rs.2,40,00,000; The amount of under absorbed = Rs.11,20,000 – Rs.10,00,000 =
Rs.1,20,000.
The amount of under absorbed overhead is adjusted to finished goods
= Rs.1,20,000 × ( Rs.15,00,000 ÷ Rs.2,40,00,000 ) = Rs.7,500.
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57. Answer : (b)
Reason :
Statement of equivalent Production Unit (Average)
Input Output
Completed Material Conversion
Opening 500 Completed 5,100 100% 5,100 100% 5,100
Introduced 5,000 Closing 400 75% 300 65% 260
5,500 5,500 5,400 5,360
Opening cost
Costs during
the month
Rs. 18,000
Rs. 90,000
Rs. 4,500
Rs.75,900
Rs.1,08,000 Rs.80,400
Cost per unit Rs.20 Rs.15
The total cost of closing work-in-process
Material – 300 × Rs.20 = Rs.6,000
Conversion – 260 × Rs.15 = Rs.3,900
Rs.9,900
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58. Answer : (a)
Reason : Percentage of rejection on output :
Process A – (4,000 ÷ 16,000) × 100 = 25%
Process B - (2,500 ÷ 20,000) × 100 = 12.5%
Process C- (6,000 ÷ 18,000) × 100 = 33
1
3 %
Now, inputs have to be calculated in the reverse order based on percentage of output.
Process Output
(units)
% of rejection
on output
No. of
Rejections
(units)
Input
(units)
C 1,000 33
1
3 % 334 1,334
B 1,334 12.5% 167 1,500
A 1,500 25% 375 1,875
The input of process A will be 1,875 units for an output of 1,000 units in process C.
< TOP >
59. Answer : (c)
Reason : Weighted Average Method:
Input = 5,000 units + 45,000 units = 50,000 units;
Output = 42,000 units + 8,000 units = 50,000 units;
Equivalent production units of conversion =
100% of 42,000 + 70% of 8,000 = 42,000 + 5,600 = 47,600 units;
FIFO Method:
< TOP >
28
Input = 5,000 units + 45,000 units = 50,000 units;
Out put = 5,000 units + 37,000 units + 8,000 units = 50,000 units;
Equivalent production units of conversion =
30% of 5,000 units + 100% of 37,000 units +70% of 8,000 =
= 1,500 + 37,000 + 5,600 = 44,100 units.
Excess equivalent units of production of conversion =
47,600 units – 44,100 units = 3,500 units.
60. Answer : (b)
Reason : Statement showing operating time
Particulars Warehouse A (Minutes) Warehouse B (minutes)
Distance from factory 10
km. (Speed 30 km. Per
hour or 1 km in 2minutes)
Trip up and down journey 40 (2 × 20) 60 (2 × 30)
Loading 40 40
Unloading 30 20
Total 110 or 1 hr 50 mts. 120 or 2 hrs
Statement showing operating cost per ton km.
Particulars Warehouse A
(5 × 10 = 50 ton km.)
Warehouse B
(5 × 15 = 75 ton km.)
Standing
charges
110 mts × Rs.25 per hr.
= Rs.45.83
2 hrs × Rs.25 per hr.
= Rs.50
Operating
charges
20 km. × Rs.4.20 per km.
= Rs.84
30 km × Rs.4.20 per km.
= Rs.126
Total
operating cost
= Rs.129.83 = Rs.176
Cost per ton km. Rs.129.83 ÷ 50 = Rs.2.60 Rs.176 ÷ 75 = Rs.2.35.
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61. Answer : (e)
Reason : Break up of the total units is
Main product 75% of 1,000 = 750; By-product 20% of 1,000 = 200; Loss = 5% of 1,000 = 50 ;
Statement showing the ascertainment of cost
STATEMENT SHOWING THE ASCERTAINMENT OF COST
Main Product By product
Total
cost
Cost
per unit Total cost
Cost
per unit
Particulars
Ratio
Total
Cost
Rs. Rs. Rs. Rs. Rs.
Materials 15:2 17,000 15,000 20.00 2,000 10.00
Labour 45:8 5,300 4,500 6.00 800 4.00
Overheads 3:2 3,000 1,800 2.40 1,200 6.00
25,300 21,300 28.40 4,000 20.00
Scrap realized (Rs.500) is deducted from overheads.
Material ratio between the main product and by-product
750 × 2 = 1,500 ; 200 × 1 = 200; Ratio is 15:2
Labor ratio between the main product and by-product
750 × 3 = 2,250 ; 200 × 2 = 400; Ratio is 45:8
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62. Answer : (b)
Reason : Process costing is used in chemical works but not in garment industry. Therefore, option (b) is false.
Other options are all correct.
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63. Answer : (d)
Reason: Contribution per unit = Rs.40 – (Rs.12.00 + Rs.8.25 + Rs.3.75) = Rs.16
P/V ratio = (Rs.16 ÷ Rs.40) × 100 = 40%;
< TOP >
29
Number of units sold at 80% level = Rs.8,00,000 ÷ Rs.40 = 20,000 units; Maximum capacity = 20,000 ÷
80% = 25,000 units.
Fixed cost element in semi-variable cost = Rs.1,80,000 – 20,000 × Rs.3.75 = Rs.1,80,000 – Rs.75,000 =
Rs.1,05,000.
Total fixed cost up to 80% = Rs.90,000 + Rs.1,05,000 = Rs.1,95,000;
Activity level at break-even point = Fixed cost ÷ contribution per unit
= (Rs.1,95,000 ÷ Rs.16 = 12,187.5
Activity level = 12,187.5 ÷ 25,000 = 0.4875 or 48.75%.
64. Answer : (b)
Reason : Let the sale price of both the products is Re.1.
Total contribution of both the products =
100 units × 0.50 × Re.1 + 100 units × 0.40 × Re.1 = Rs.90.
Contribution to sales ratio = Rs.90 ÷ (Rs.100 + Rs.100) = 0.45
If 20 units of B are substituted for 20 units of A, total contribution =
120 units × 0.50 × Re.1 + 80 units × 0.40 × Re.1 = Rs.92.
Contribution to sales ratio = Rs.92 ÷ Rs.200 = 0.46.
Contribution to sales ratio rises from 0.45 to 0.46.
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65. Answer : (d)
Reason : Overhead absorption rate per rupee labor cost =
Rs.3,50,000 ÷ [(200 × Rs.75) + (300 × Rs.50) + (500 × Rs.40)
= Rs.3,50,000 ÷ Rs.50,000 = Rs.7.
Overhead applied:
[(250 × Rs.75) + (350 × 50) + (400 × 40)] × 7
= (Rs.18,750 + Rs.17,500 + 16,000) × 7
= Rs.52,250 × Rs.7 = Rs.3,65,750
Over applied overhead: Rs.3,65,750 – Rs.3,39,000 = Rs.26,750.
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66. Answer : (b)
Reason : Work certified (Rs.52,00,000 ÷ 80%) = Rs.65,00,000
Cost of contract up to 31-3-2006 = Rs.53,53,500
Notional profit = Rs.11,46,500
Calculation of profit to be taken to P/L A/C:
2/3 × Notional profit Rs.11,46,500 × Rs.52,00,000 ÷ Rs.65,00,000 = Rs.6,11,467
< TOP >
67. Answer: (c)
Reason: P/V ratio = Rs.60,000 ÷ (Rs.7,50,000 – Rs.6,00,000) = 40%
Contribution in 2005-06 = 40% of Rs.7,50,000 = Rs.3,00,000.
This has to be maintained in 2006-07.
In 2006-07, the sales volume and contribution after 10% reduction in price are:
Sales = Rs.7,50,000 – 10% of Rs.7,50,000
= Rs.6,75,000 and
Contribution = Rs.3,00,000 – 10% of Rs.7,50,000 = Rs.3,00,000 – Rs.75,000
= Rs.2,25,000.
Therefore, P/V ratio = Rs.2,25,000 ÷ Rs.6,75,000 = 33.33%
Required Sales volume for earning contribution of Rs.3,00,000
= Rs.3,00,000 ÷ 33.33% = Rs.9,00,000.
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68. Answer : (d)
Reason :
Product Sales Mix Sales Contribution
A 40 48 9.60
B 30 36 5.40
C 10 12 0.96
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30
C 10 12 0.96
D 20 24 2.40
Total 18.36
PV ratio =
Contribution100
Sales×
=
18.36 10015.3%
120
×=
69. Answer : (b)
Reason : Service companies do not have Inventory. So Managers of service companies do not analyze cost to
properly value inventory. Therefore, option (b) is not correct.
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70. Answer : (e)
Reason : Joint cost apportioned – (4,500 ÷ 10,000) × Rs.1,50,000 = 67,500
Further processing cost ( 4,500 × 14) 63,000
1,30,500
Sales revenue (4,050 × Rs.38) 1,53,900
Profit 23,400
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