Professional Documents
Culture Documents
1. A form of cost not measured by either Financial Accounting System or Management Accounting System is <
Answer
known as
>
(a) Product Cost (b) Period Cost (c) Opportunity Cost
(d) Indirect Cost (e) Direct cost.
(1 mark)
2. Which of the following statements is true? <
Answer
(a) Management accounting is mandatory for business organizations because it should be maintained as per >
the various legal statutes
(b) The application of management accounting cannot be extended beyond the traditional accounting
system
(c) Management accounting focuses more on a company as a whole and less on the parts or segments of a
company
(d) Management accounting statements are prepared in accordance with the Generally Accepted
Accounting Principles
(e) Management accounting refers to the reports prepared to fulfill the needs of the management.
(1 mark)
3. Which of the following is least likely to be an objective of a cost accounting system? <
Answer
(a) Product pricing (b) Product mix determination >
(c) Department efficiency (d) Inventory valuation
(e) Sales commission determination.
(1 mark)
4. The costs having clear relationship to output are known as <
Answer
(a) Opportunity costs (b) Engineered costs >
(c) Manufacturing costs (d) Overhead costs (e) Budgeted costs.
(1 mark)
5. The cost of goods manufactured, under a periodic cost accumulation system, is equal to the <
Answer
(a) Cost of goods sold less beginning work-in-process >
(b) Cost of goods put into production plus beginning work-in-process less ending work-in-process
(c) Cost of goods put into production plus ending work-in-process less beginning work-in-process
(d) Cost of goods available for sale plus beginning finished goods less ending finished goods
(e) Cost of goods available for sale plus ending finished goods less beginning finished goods.
(1 mark)
6. Which of the following is true? <
Answer
(a) Decremental cost means the cost of an additional unit >
(b) Standard cost tells us what the actual cost is for the product
(c) Period costs are not assigned to products
(d) Cost center and cost unit are the same
(e) Cost of production is equal to prime cost plus works cost.
(1 mark)
7. Which of the following items is not considered in cost accounting? <
Answer
(a) Direct materials (b) Holiday with pay (c) Royalty >
(d) Hire of cranes on job (e) Income tax.
(1 mark)
8. A manager of a company wants to control and reduce, if possible, the company's production costs. He must <
Answer
determine how the production costs are related to and affected by the various business activities. The
>
manager needs to understand the
(a) Cost behaviors (b) Relevant ranges (c) Fixed costs
(d) Variable costs (e) Total costs.
(1 mark)
9. The average method of valuation of inventory in process costing is suitable, if <
Answer
(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)
10. The following statements are true except <
Answer
(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)
11. ABC Company’s budgeted overhead amounts to Rs.3,00,000 based on an output of 200 units of A, 300 units <
Answer
of B, and 500 units of C. Direct labor costs of A, B, and C per unit amount to Rs.75, Rs.50, and Rs.40
>
respectively. Overhead is applied based on budgeted overhead rates using labor cost as cost driver. If actual
overhead amounts to Rs.3,19,000 for the production of 300, 350, and 400 units of A, B and C respectively,
the under or over applied overhead amounts to
(a) Rs.19,000 underapplied (b) Rs.19,000 overapplied (c) Rs.17,000 underapplied
(d) Rs.17,000 overapplied (e) Rs.14,000 under applied.
(1 mark)
12. Which of the following is an indirect labor? <
Answer
(a) A stores assistant in a factory store >
(b) An audit clerk in a firm of auditors
(c) An assembly worker in a company manufacturing televisions
(d) A mason of a construction company
(e) A technician of a machine tool shop.
(1 mark)
13. Which of the following is/are true? <
Answer
I. A cost unit is a unit of output in the production of which costs are incurred >
II. A cost center is the smallest segment of activity or area of responsibility for which costs are
accumulated
III. Typically departments are cost centers and there may be many departments in a cost center.
Production: Units
Opening work-in-process 1,200
(Material – 100% complete apart from process
Conversion cost – 50% complete)
Transferred from process 1 1,12,000
Completed output 1,05,400
Closing work-in-process 1,600
(Material – 100% complete apart from process 2 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 and closing WIP (using FIFO method) are
(a) Rs.2,96,237 and Rs.4,259 respectively
(b) Rs.2,96,021 and Rs.4,212 respectively
(c) Rs.2,96,273 and Rs.4,295 respectively
(d) Rs.2,96,021 and Rs.4,259 respectively
(e) Rs.2,96,273 and Rs.4,259 respectively.
(2 marks)
41. Sitpax Ltd. purchases raw materials worth Rs.16.56 lakhs and processes them into 4 products – A, B, C and <
D. The sale value per unit of products A, B, C and D is Rs.4.50, Rs.13.50, Rs.24 and Rs.90 respectively at Answer
>
split-off point, as these could be sold as such to other processors. However, during a year, the company
decided to further process and sell products A, B and D while C was not to be processed further but sold at
split-off point to other processors. The processing of raw materials into 4 products cost Rs.42 lakhs to the
company. The company has furnished the following information pertaining to the 4 products:
Additional processing cost
Sales after further
Output after split off
Product processing
(units) (all variable cost)
(Rs. in lakhs)
(Rs. in lakhs)
A 10,00,000 69.00 18.00
B 20,000 6.00 3.60
C 10,000 2.40 –
D 18,000 18.00 0.60 The
maximum profit of the company after adopting best sales strategy is
(a) Rs.16.24 lakhs (b) Rs.15.86 lakhs (c) Rs.14.64 lakhs
(d) Rs.14.94 lakhs (e) Rs. 7.74 lakhs.
(3 marks)
42. If the size of a batch increases <
Answer
(a) Setting-up cost per unit decreases (b) Setting-up cost per unit increases >
(c) Setting-up cost per unit remains the same (d) Total cost of the batch decreases
(e) Total profit of the batch decreases.
(1 mark)
43. Consider the following data of a company: <
Answer
Material Purchased - Rs.170,000. There was no beginning inventory >
Direct labor incurred - 400 hours at the rate of Rs.10 per hour
Budgeted overheads - 430 hours
Budgeted overhead cost - Rs.6,450
Units started - 20,000 units
Units completed - 15,000 units
Actual overheads - Rs.6,200
Ending Inventory - 60% complete.
The value of ending inventory is
(a) Rs.50,000 (b) Rs.30,000 (c) Rs.20,000 (d) Rs. 5,000 (e) Rs.25,000.
(2 marks)
44. Bhuban Ltd. has furnished the following cost structure of product M: <
Answer
Direct material 50% >
71. Clamp fix Ltd. manufactures multipurpose woodworking clamps in a simple manufacturing process that uses <
Answer
special equipment. The company is planning to drop the product line. The variable cost of the product is Rs.6
>
per unit. Fixed overhead costs, exclusive of depreciation, have been allocated to this product at a rate of
Rs.3.50 per unit and will continue irrespective of production. Depreciation on the special equipment amounts
to Rs.20,000 a year. If the production of the clamp is discontinued, the special equipment can be sold for
Rs.18,000. If production continues, the equipment will be useless for further production at the end of year 1
and will have no salvage value. The selling price of the clamp is Rs.10 per unit. The minimum number of
units that would have to be sold in the current year to justify the continuation of the production is
(a) 9,500 units (b) 3,000 units (c) 5,000 units (d) 4,500 units (e) 12,500 units.
(2 marks)
72. Which of the following statements is true? <
Answer
(a) Differential cost technique does not prove useful in decision making >
(b) Export orders should not be accepted at a price below the total cost, otherwise there will be a loss from
export sales
(c) A company with a higher break-even point is considered better than a company with a lower break-even
point
(d) In make or buy decision, supplier’s offer price per unit is compared with own total cost per unit
(e) Effect of price reduction is always to reduce contribution to sales ratio and increase the break-even
point.
(1 mark)
Suggested Answers
Management Accounting I (151) – January 2005
1. Answer : (c) < TOP >
Reason : Opportunity Cost is the cost of lost opportunities. Neither a Financial Accounting System nor a
Managerial Accounting System measure the opportunity cost. Therefore, (c) is correct.
2. Answer : (e) < TOP >
Reason : Management accounting is not mandatory. The application of management accounting can be extended
beyond the traditional accounting system. It focuses more on the parts or segments of a company and less
on a company as a whole. It is not governed by GAAP. It refers to reports prepared to fulfill the needs of
management. Therefore, (e) is correct
3. Answer : (e) < TOP >
Reason : A cost accounting system has numerous objectives, including product costing, assessing departmental
efficiency, inventory valuation, product mix determination and planning evaluating and controlling
operations. Determining sales commissions is not an objective of a cost accounting system because such
commissions are based on sales, not costs.
4. Answer : (b) < TOP >
Reason : The costs having clear relationship to output are known as engineered costs. Direct material cost is an
example of engineered costs.
5. Answer : (b) < TOP >
Reason : Under periodic cost accumulation system, the cost of goods manufactured is equal to cost of goods put
into production plus beginning work-in-process less ending work-in-process. Therefore (b) is correct.
Other options are not correct.
6. Answer : (c) < TOP >
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 are 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, ( c) is correct.
7. Answer : (e) < TOP >
Reason : The amount of income tax is not considered in cost accounting. Other items given in (a), (b), (c) and (d)
are considered in cost accounting.
8. Answer : (a) < TOP >
Reason : The manager wants to control, and reduces if possible, the company's production costs. He must
determine how production costs are related to and affected by various business activities. The manager
needs to understand cost behaviors. A knowledge of cost behavior is useful because it helps managers
forecast (plan) results under different activity levels
9. Answer : (b) < TOP >
Reason : The average method of valuation of inventory in process costing is useful when prices are fluctuating from
period to period. It is not useful in respect of other options (a),(c),(d) and (e).
10. Answer : (b) < TOP >
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.
11. Answer: (d) < TOP >
Reason : A stores assistant in a factory store is an indirect labor. Therefore (a) is correct. Other options mentioned
in (b), (c), (d) and (e) are examples of direct labor.
13. Answer : (d) < TOP >
Reason : Options (I) and (II) are true. But, option (III) is not, as cost centers because cost centers are departments
and there may be several cost centers in a department, but not many departments in a cost center.
14. Answer : (a) < TOP >
Reason : A direct cost can be specifically associated with a single cost object in an economically feasible way. An
indirect cost cannot be specifically associated with a single cost object. Thus the specific cost object
influences whether a cost is direct or indirect. For example, a cost might be directly associated with a
single plant. The same cost however might not be directly associated with a particular department in the
plant. Therefore (a) is correct.
Option (b) is not correct because the timing of the cash outlay has no effect on whether a cost is direct or
indirect. Option (c) is not correct because the behavior of cost in response to volume changes is a
factor only if the cost object is a product. Options (d) and (e) are not correct because controllability and
avoidability of costs have no effect on whether a cost is direct or indirect.
15. Answer : (e) < TOP >
Reason : The purpose of cost allocation is to measure income and assets for external reporting. The other options
given (a), (b), (c) and (d) are not the purposes of cost allocation.
Cost allocation is a process of assigning and reassigning costs to cost objects. It is used for these costs
that cannot be directly associated with a specific cost object. It is often used for purposes of measuring
income and assets for external reporting purposes. It is less meaningful for internal purposes because
responsibility accounting systems emphasize controllability, a process often ignored in cost allocation.
16. Answer : (b) < TOP >
Reason : Service department costs are considered part of factory overhead and should be allocated to the
production department that use the services. A basis reflecting causes and effect should be used to
allocate service department costs. Units of electric power consumed i.e., the number of kilowatt hours
used by each producing department is probably the best allocation base for electricity base.
Option (a) is not correct because salary of service department employees is the cost allocated ,not a basis
Option (c) is incorrect because making allocation on the basis of material usage may not meet the cause-
and-effect criterion. Option (d) and (e) are incorrect because making allocation on the basis of goods
shipped and units sold may not meet the cause-and-effect criterion.
17. Answer : (c) < TOP >
Reason : Allocation of costs is a distribution of costs that cannot be directly assigned to the cost objects that are
assumed to have caused them. An allocation of costs does not enable a company to determine why the
sales of a particular product have increased. Many factors affect consumer demand such as advertising,
consumer confidence, availability of substitutes and changes in tastes. Cost allocation is an internal
matter that does not affect demand except to the extent it results in a change in price.
< TOP >
22. Answer : (a)
Reason : If predetermined overhead rate is not employed and the volume of production is increased over the level
planned, the cost per unit will be reduced because fixed cost per unit will be reduced and variable cost per
unit will remain same. Therefore, (a) is correct.
< TOP >
23. Answer: (a)
Reason: Machine operation charge per hour = Rs.60,000 / 600 = Rs.100;
Machine operation charged to Q = Rs.100 x (600 hr. /4) = Rs.15,000;
Machine operation charged per unit of Q = Rs.15,000 / 150
= Rs.100 per unit.
24. Answer: (e) < TOP >
Reason : Replacement cost is the cost at which there could be purchase of an asset identical to the one being
replaced and hence it is equal to the current market price. Therefore (c) is correct.
26. Answer: (c) < TOP >
Reason: The under or over applied overhead indicates that all of the inventory worked on during the period have
been absorbed and need to be adjusted. This under or over applied overhead cost is to be allocated to
work-in-process, finished goods and cost of goods sold. Therefore, (c) is correct.
27. Answer : (b) < TOP >
Reason: Practical capacity is the maximum level at which output is produced efficiently, with an allowance for
unavoidable interruptions. Because this level will be higher than expected capacity, its use will ordinarily
result in under-applied fixed factory overhead. Other options are not correct.
28. Answer: (b) < TOP >
Reason: Product cost = Rs. 10,000 + Rs. 8,000 + Rs. 3,500 = Rs. 21,500
Cost of Goods Sold =
Product Cost Rs.21,500 - Ending Inventory Rs.2,150 = Rs.19,350 (430 × 45)
Sales Rs.25,000 - Cost of Goods Sold Rs.19,350
= Gross Margin Rs.5,650.
Product Cost / units completed = Rs.21,500 / 50 units = 430 per unit
The cost of 5 units inventory = Rs.430 x 5 = Rs.2,150.
29. Answer : (d) < TOP >
Reason : It is given in the question that the secondary distribution of service departrments’ overhead is pending.
The same is thus attempted by use of simultaneous equation method.
Let, total overheads of department S1 = x; and total overheads of S2 = y;
According to problem, we get x = 16,000 + 0.1y and y = 24,000 + 0.2x;
Therefore, x = 16,000 + 0.1(24,000 + 0.2x) = 16,000 + 2,400 + 0.02x
Or, x (1 – 0.02) = 18,400, or, x = 18,400 / 0.98 = 18,775, then y = 27,755
Statement of secondary distribution:
Particulars P1 (Rs.) P2 (Rs.) P3 (Rs.) Total (Rs.)
Direct allocation 48,000 1,12,000 52,000 2,12,000
S1 (80% of 18,775) 3,755 7,510 3,755 15,020
S2 (90% of Rs.27,755) 2,776 16,653 5,551 24,980
Total 54,531 1,36,163 61,306 2,52,000
Budgeted machine hours 5,000 12,000 6,000
Overhead rate per machine hour 10.91 11.35 10.22
31. Answer : (d) < TOP >
Reason : Supplementary rates are used to carry out adjustment for the difference between overhead absorbed and
overhead incurred. Therefore, (d) is correct. Other options are not correct.
32. Answer : (d) < TOP >
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.
34. Answer : (c) < TOP >
Reason :
Opening WIP 3,000 units
Materials introduced 13,000 units
16,000 units
Less: Closing WIP 4,000 units
Completed units 12,000 units
Equivalent completed units (under average method) of materials in
the process
= 12,000 units + 50% of 4,000 units (closing stock)
= 12,000 units + 2000 units = 14,000 units.
< TOP >
35. Answer : (d)
Reason :
Statement of equivalent Production Unit (FIFO)
Output
Input Material Conversion
Completed
Opening 450 Opening 450 20% 90 40% 180
4,10 Introduce 3,58 1 1
Introduced 0 d 0 00% 3,580 00% 3,580
Closing 520 75% 390 65% 338
4,55 4,55
0 0 4,060 4,098
Costs
during Rs.71,05
the month 0 Rs.57,372
Cost Rs.
per unit 17.50 Rs. 14.00
The total cost of closing work-
in-process
Material – 390 × Rs.17.50 = Rs.6,825
Conversion – 338 × Rs.14.00 = Rs.4,732
Rs.11,557
36. Answer : (a) < TOP >
Reason : Input = 5,000 units. Main product = 80% of 5,000 units = 4,000 units.
By-product = 16% of 5,000 units = 800 units
Process loss = 4% of 5,000 units = 200 units
Share of by-product:
Material cost = 5,000 units x Rs.24.80 = (Rs.1,24,000 x 800 ) / 4,800
= Rs.20,667
Other cost = 60% of Rs.15,150 = (Rs. 9,090 x 800) / 4,800 = Rs.1,515
Power cost = 40% of Rs.15,150 = (Rs.6,060 x 2) / 5 = Rs.2,424
Total costs of by-product = Rs.20,667 + Rs.1,515 + Rs.2,424 = Rs.24,606.
37. Answer : (c) < TOP >
Reason :
Material Conversion
Input Output % units % units
Units Completed 36,000 100% 36,000 100% 36,000
started
– 40,000
Normal 3,000 100% 3,000 75% 2,250
loss 7.5%
Abnormal loss 1,000 100% 1,000 75% 750
40,000 39,000
Cost Rs.90,000 Rs.70,200
Cost per unit Rs.2.25 Rs.1.80
Cost of
abnormal loss = 1,000 × Rs.2.25 + 750 × Rs.1.80
= Rs.2,250 + Rs.1,350 = Rs.3,600.
Reason :
Rs. Rs.
Total manufacturing Costs 1,94,080
Less: Overhead costs:
Indirect labor 12,160
Factory overhead 31,730
Indirect material 21,390
65,280
Freight in 5,570 70,850
1,23,230
Less: Direct labor 32,640
Material consumed 90,590
Add: Closing material 9,640
1,00,230
Less: Opening material 11,620
Material purchased 88,610
39. Answer : (d) < TOP >
Reason :
Particulars Per month Per km.
Fixed expenses:
Salary of Manager 6,500
Accountant 5,000
Cleaner 800
Mechanic 2,200
Garage rent 2,000
Insurance:
5% on 5 × 2, 70, 000
12
5,625
Rs.4, 200 × 5
12 1,750
Annual tax
48,875
Effective km = Rs.4,500 × .8 × 5 = 18,000 2.72
Depreciation Rs.2,70,000 ÷ (3,00,000 × .8) 1.13
Repairs Rs.2,000 ÷ (12 × 3,600) 0.05
Petrol (4,500 × Rs.36) ÷ (5.62 × 3600) 8.00
Oil and other sundries 0.13
(Rs.10 × 4,500)÷(100km × 3,600)
Cost of plying taxi per km. 12.03
40. Answer : (e) < TOP >
Reason :
Input units Units Materials Conversion
Opening 1,200 Opening 1,200 – – 50% 600
WIP
From 1,12,00 Process 1 1,04,20 100% 1,04,20 100% 1,04,200
process 0 0 0
1
Normal 5,600 – – – –
loss
Abnormal
600 100% 600 – –
Loss
Closing 1,600 100% 1,600 75% 1,200
WIP
1,13,20 1,13,20 1,06,40 1,06,000
0 0 0
Particulars Rs.
Materials – From Process 1 1,87,704
Process 2 47,972
2,35,676
Equivalent units 1,06,400
Cost per unit 2.215
Conversion cost 63,176
Equivalent units 1,06,000
Cost per unit 0.596
(Rs. in lakhs)
A (Rs) B (Rs) C (Rs) D (Rs)
Sales at split-off point 45.00 2.70 2.40 16.20
Sales after split-off point 69.00 6.00 2.40 18.00
Incremental sale 24.00 3.30 NIL 1.80
Incremental cost 18.00 3.60 – 0.60
Profit (loss) 6.00 (0.30) NIL 1.20
Profitability St:
Sale at split-off point – 2.70 2.40 –
Sale after processing 69.00 – – 18.00
Less cost:
Pre 40.80 1.92 1.92 13.92
Post
18.00
−
−
0.60
Reason: Cost per equivalent unit of ending inventory = Rs.10.00 x 3,000 equivalent units in ending inventory =
Rs.30,000.
Equivalent units 15,000 completed + 3,000 in ending inventory (60% x 5,000) = 18,000 equivalent units.
Total cost = Material Rs.170,000 + labor 4,000 + applied overhead Rs. 6,000 (400 hours x Rs.15/hour).
= Rs.1,80,000
(Overhead rate = Rs. 6,450 ÷ 430 = Rs. 15)
Cost per unit = Rs.180,000/18,000 = Rs.10.00 per equivalent unit.
44. Answer : (e) < TOP >
Reason : Let x = total cost and y = profit per unit of product whose selling price is Rs.45,000
x + y = Rs.45,000.
Statement showing the present and anticipated cost
Present Increase Anticipated
Particulars %
cost (Rs.) (Rs.) cost (Rs.)
Direct material 0.5x 15 0.075 0.575x
Direct labor 0.2x 25 0.050 0.250x
Overhead costs 0.3x - 0.300x
x 0.125x 1.125x The increase in the
cost of direct material and wages has reduced the present profit by 25%.
∴1.125x + 0.75y = Rs.45,000
Solving above 2 equations, we get
x = Rs. 30,000
y = Rs.15,000
Statement showing profit per unit:
Direct Material 0.5x Rs.15,000
Direct Labour 0.2x Rs. 6,000
Overhead 0.3x Rs. 9,000
Total cost Rs. 30,000
Profit (50% of cost or 33-1/3% of S.P) Rs. 15,000
Selling price Rs.45,000
Statement of required selling price Rs.
Direct Material 0.575 of Rs.30,000 17,250
Direct Wages 0.250 of Rs.30,000 7,500
Overhead 0.300 of Rs.30,000 9,000
Total anticipated cost 33,750
Profit 33-1/3% of sales or 50% of cost 16,875
Selling price 50,625
45. Answer : (e) < TOP >
Reason :
At 50,000 units the total cost is Rs.30,000 other than additional Rs.4,000.
At 20,000 units, total costs is Rs.21,000
Variable cost = Change of cost / change of activity =
(Rs.30,000 – Rs.21,000) / (50,000 – 20,000) = 0.30
Fixed cost = Rs.21,000 – 20,000 x 0.30 = Rs.15,000 ;
At 30,000 units = 30,000 x 0.30 + Rs.15,000 = Rs.24,000 ; Total cost = Rs.24,000 + Rs.4,000
(additional cost) = Rs.28,000
Cost per unit = Rs.28,000 / 30,000 = Re. 0.93.
46. Answer : (b) < TOP >
Reason : Total process cost = Rs.49,263 + Rs.1,480 + Rs.6,500 + Rs.1,605 + 168% of Rs.6,500
= Rs.58,848 + Rs.10,920 = Rs.69,768.
Let, the unit of normal loss = x, No. of finished product units =9,120 –x; value of normal loss = Rs.x
Cost of finished goods per unit = Rs.10 – 20% of Rs.10 = Rs.8
Cost of finished goods + value of normal loss = Total cost of process
Rs.8x (9,120 –x) + x = Rs.69,768
Rs.72,960 – Rs.7x = Rs.69,768
Rs.7x = Rs.3,192 ; x = 456 units.
Percentage of normal loss = 456 / 9,120 = 5%.
48. Answer : (d) < TOP >
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.
50. Answer : (a) < TOP >
Reason : Work-in-Process = Work certified + Work uncertified – Profit in reserve – Progress payment received
= Rs.60,60,000 + Rs.4,25,000 – *Rs.4,95,030 – Rs.50,00,000
= Rs.9,89,970
Plant= Rs.18,00,000 – Rs.1,75,000 = Rs.16,25,000
Total= Rs.9,89,970 + Rs.16,25,000 = Rs.26,14,970.
Working:
Particulars Rs. Particulars Rs.
To Material issued 30,80,000 By Work-in-Progress:
To Wages –Direct 12,30,000 Work certified 60,60,000
–Accrued 55,500 Work not certified 4,25,000
To Wages related cost 92,600 By Material
To Plant hire charges 1,82,000 Returned from site 42,500
To Site office cost 26,400 At site 60,000
To Planning & estimating cost 4,80,000
To Head office expenses appr. 80,500
To Direct expenses 85,300
To Depreciation 1,75,000
To Notional profit 11,00,200
65,87,500 65,87,500
To Profit & loss A/c:
2 50, 00, 000
×11, 00, 200 ×
3 60, 60, 000
6,05,170 By Notional Profit 11,00,200
To Reserve *4,95,030
11,00,200 11,00,200
51. Answer : (c) < TOP >
Reason : If the cost of the by-product is apportioned to joint products, it is made at notional sales value at
separation point. Other options are not appropriate for apportionment of by-product to joint products.
52. Answer : (e) < TOP >
Reason : In contract costing, parts of the profit of incomplete contracts are credited to general profit and loss
account. Rest part of the profit is kept as reserve for future loss. Therefore, (e) is correct.
53. Answer : (b) < TOP >
Reason : Abnormal loss should be classified as period cost. If the wastage is normal, it should be product cost.
Abnormal loss cannot be deferred charge, joint cost or discretionary cost. Therefore, (b) is correct.
54. Answer : (d) < TOP >
Reason : Allocating overheads on the basis of units of production is generally not appropriate. However, if a firm
manufactures only one product, this allocation method may be acceptable because all costs are to be
charged to the single product. Other points mentioned in (a), (b), (c) and (e) are not true.
55. Answer : (b) < TOP >
Fixed cos t
Contribution per unit
Reason : BEP =
Upto the product of 7,500 units
Rs.80, 000 Rs.80, 000
Rs.25 60% of Rs.25 Rs.10
BEP = = = 8,000 units.
At any production level greater than 7,500 units, total fixed costs are Rs.1,20,000 but there are two
contribution margin. The first 7,500 units sold will produce a contribution margin of Rs.75,000 (i.e.
7,500 × Rs.10). Hence, the other Rs.45,000 (i.e. Rs.1,20,000 – Rs.75,000) must be contributed. The
contribution per unit is Rs.12.50 (i.e. Rs.25 – 50% of Rs.25)
Therefore, BEP = Rs.45,000 ÷ Rs.12.50 = 3,600 units.
Therefore, Total BEP = 7,500 units + 3,600 units = 11,100 units.
Reason :
Plant X Y Z Merged
Capacity
100% 100% 100% 100%
operated
(Rs. in (Rs. in (Rs. in (Rs. in
lakh) lakh) lakh) lakh)
Turnover 300 400 300 1,000
Variable cost 200 300 150 650
Contribution 100 100 150 350
Fixed cost 70 50 62 182
P/V ratio of
350
×100 = 35%
1000
merged plant =
Fixed cos t 182
= = Rs.520 lakhs
P / V ratio 35%
Break even point of merged plant =
Break even capacity = (520/1,000) × 100 = 52%
57. Answer : (a) < TOP >
Reason :
Sales (9,000 × Rs.28) 2,52,000
Reason : Cost-volume-profit analysis is important for the determination of relationship between revenues and costs
at various level of operation. Other options (a), (b), (c) and (e) are not correct in respect of cost-volume-
profit analysis. Therefore, (d) is correct.
Reason: The prime cost basis combines the total of direct materials cost and direct labor cost and uses this total as
a basis for charging overheads. It considers both materials and labor in charging overhead to each job or
product. This method is not suitable in capital intensive organisation. It is useful in cases where there are
no wide fluctuations in processing. This statement is false. Other statements given in (a), (b), (c) & (d)
are correct.
60. Answer : (d) < TOP >
Reason : In a variable costing system, only the variable manufacturing costs are recorded as product costs. All
fixed manufacturing costs are expensed in the period incurred. Because changes in the relationship
between production levels and sales level do not cause changes in the amount of fixed manufacturing
costs expensed, profits more directly follow the trends in sales. Other options are not correct.
61. Answer : (e) < TOP >
Reason: All cost systems utilize some form of cost averaging and estimation. Therefore, (c) is correct.
63. Answer: (a) < TOP >
Reason : If the company buys from the market, the avoidable unit cost
= Rs.4.00 + Rs.4.80 + Rs.3.20 + 40% of Rs.1.25
= Rs.12 + Re.0.50 = Rs.12.50.
66. Answer : (d) < TOP >
Reason : Costs, which can be reduced or removed from the company’s cost structure without affecting product or
service quality for the customer, are referred to as non-value-added costs. Non-value-added costs can be
removed without changing the customer's perceived value of the company's service or product. They are
costs typically associated with activities such as transporting materials, verifying data, or transferring
papers from one department to another. Therefore, (d) is correct.
Reason :
Product Sales Mix Sales Contribution
(Rs. Lakh) (Rs. Lakh)
A 40 32 6.40
B 10 8 0.48
C 30 24 2.88
D 20 16 1.60
Total 11.36
PV ratio =
Contribution 11.36 ×100
×100 = 14.2%
Sales 80
=
70. Answer: (c) < TOP >
Reason : The minimum number of units is equal to fixed costs divided by the difference between unit selling price
and unit variable cost i.e., unit contribution margin. Rs.18,000 salvage value, the cash flow to be
received if production is discontinued, is treated here as a fixed cost. Hence, continuation of the product
line will permit the firm to break even or make a profit only if the total contribution margin is Rs.18,000
or more.
Minimum no of units = Rs.18,000 ÷ (Rs.10 – Rs.6) = 4,500 units
Fixed overhead allocation is not considered in this calculation because it is not a cash flow and will
continue regardless of the decision.
72. Answer : (e) < TOP >
Reason : Effect of price reduction is always to reduce contribution to sales ratio and increase the break-even point,
because contribution is the result of difference between sales and variable cost. Therefore, (e) is true.
Other options (a), (b), (c) and (d) are not correct.
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