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Question Paper

Management Accounting – I (151) : April 2005


• Answer all questions.
• Marks are indicated against each question.

< Answer >


1. Which of the following is the primary objective of costing?
(a) Ascertainment of cost (b) Control of cost
(c) Cost reduction (d) Estimation of sales price
(e) Preparation of financial statements.
(1 mark)

2. Simon Ltd. manufactures a single product with a capacity of 1,50,000 units per annum. The < Answer >
summarised income statement for the year is as under:
Particulars Rs. Rs.
Sales (1,00,000 units @ Rs.15 per unit) 15,00,000
Cost of sales:
Direct materials 3,00,000
Direct labor 2,00,000
Variable production overhead 60,000
Fixed production overhead 3,00,000
Fixed administrative overhead 1,50,000
Variable selling & distribution overhead 90,000
Fixed selling & distribution overhead 1,50,000
Total costs 12,50,000
Profit 2,50,000 If the packing of
marketable goods is improved at a cost of Re.1 per unit, the amount of sales required to earn a target
profit of 25% on sales is
(a) Rs.18,00,000 (b) Rs.24,00,000 (c) Rs.20,00,000
(d) Rs.17,50,000 (e) Rs.18,50,000.
(1 mark)
< Answer >
3. Which of the following can improve break-even point?
(a) Increase in variable cost (b) Increase in fixed cost
(c) Increase in sale price (d) Increase in sales volume
(e) Increase in production volume.
(1 mark)

4. Due to changes that are occurring in the basic operations of many firms, all of the following represent, < Answer >
trends of allocation of indirect cost, except
(a) Treating direct labor as an indirect manufacturing cost in an automated factory
(b) Using throughput time as an application base to increase awareness of the costs associated with
lengthened throughput time
(c) Preferring plant-wide application rates that are applied to machine hours rather than incurring the
cost of detailed allocations
(d) Using several machine cost pools to measure product costs on the basis of time in a machine
center
(e) Using cost drivers as application to increase the accuracy of reported product costs.
(1 mark)
5. The total of costs incurred in the operation of a business undertaking other than the cost of< Answer >
manufacturing and production is
(a) Out-of-pocket cost (b) Programmed cost
(c) Conversion cost (d) Commercial cost (e) Imputed cost.
(1 mark)
< Answer >
6. The term ‘cost’ refers to
(a) The present value of future benefits
(b) An asset that has given benefit and is now expired
(c) An asset that has not given benefit and is now expired
(d) The price of products sold or services rendered
(e) The value of the sacrifice made to acquire goods or services.
(1 mark)
< Answer >
7. Which of the following costs is not an example of a committed fixed cost?
(a) Interest payments on a long-term loan
(b) Property taxes on land and related buildings
(c) Employees training
(d) Lease payments on production equipment
(e) Depreciation on plant & machinery.
(1 mark)
< Answer >
8. Non-production overhead costs are not considered in stock valuation, because
(a) They are outside the control of production manager
(b) They are fixed period costs
(c) They cannot be identified with individual product
(d) They are incurred after stock has been brought to its present location and condition
(e) They are indirect costs.
(1 mark)
< Answer >
9. The cost of goods sold under a periodic cost accumulation system is equal to the
(a) Cost of goods available for sale less ending finished goods inventory
(b) Cost of goods available for sale plus beginning finished goods inventory
(c) Cost of goods manufactured plus beginning finished goods inventory
(d) Cost of goods manufactured less beginning finished goods inventory
(e) Cost of goods available for sale less beginning finished goods inventory.
(1 mark)
< Answer >
10. Which of the following is a cost-behavior oriented approach to product costing?
(a) Absorption costing (b) Marginal costing
(c) Process costing (d) Uniform costing
(e) Job order costing.
(1 mark)

11. An accounting system that collects financial and operating data on the basis of underlying nature and < Answer >
extent to the cost drivers is
(a) Direct costing (b) Target costing
(c) Activity based costing (d) Variable costing (e) Cycle-time costing.
(1 mark)
< Answer >
12. Which of the following statements is false?
(a) Notional costs are not included while ascertaining costs
(b) Administrative expenses are mostly fixed
(c) Historical costs are useful solely for estimating costs that lie ahead
(d) Abnormal cost is controllable
(e) Direct cost is one that can be conveniently identified with and charged to a particular unit of cost.
(1 mark)

13. Ponchu Das Pvt.Ltd. of Kolkata is currently operating at 80% capacity. The following is the income < Answer >
statement furnished by the company:
Particulars Rs. in lakh Rs. in lakh
Sales 640
Cost of sales:
Direct materials 200
Direct expenses 80
Variable overheads 40
Fixed overheads 260
Total cost 580
Net income 60 The Managing Director has been
discussing an offer from Middle East for the supply of a quantity which will require 50% capacity of
the factory. The price is 10% less than the current price in the local market. Order cannot be split. The
capacity of the factory can be augmented by 10% by adding facilities at an increase of Rs.40 lakh in
fixed cost. If the proposal is accepted with the increased facilities, the profit will be increased by
(a) Rs.50 lakh (b) Rs.40 lakh (c) Rs.60 lakh (d) Rs.25 lakh (e) Rs.35 lakh.
(2 marks)

14. Which of the following assumptions is true in cases where practical capacity is treated as plant < Answer >
capacity?
(a) It assumes all personnel and equipment will operate at the maximum efficiency and the total plant
capacity will be used
(b) It does not consider idle time caused by inadequate sales demand
(c) It includes consideration of idle time caused by both limited sales orders and human & equipment
inefficiencies
(d) It is the production volume that is always less than the actual use of capacity
(e) It is the production volume that is necessary to meet sales demand for the next year.
(1 mark)
< Answer >
15. Cost of idle time arising due to non-availability of raw-materials should be
(a) Charged to costing profit & loss account (b) Charged to factory overheads
(c) Recovered by inflating the wage rates (d) Charged to indirect labor cost
(e) Charged to direct labor cost.
(1 mark)
< Answer >
16. Which of the following statements is/are false?
I. Depreciation is an out-of-pocket cost.
II. Conversion cost is equal to direct wages plus factory overhead.
III. An item of cost that is direct for one business may be indirect for another.
IV. All costs are controllable.
(a) Only (I) above (b) Only (IV) above
(c) Only (III) above (d) Both (II) and (III) above
(e) Both (I) and (IV) above.
(1 mark)
17. AB Ltd. has furnished the following data pertaining to its product at 40% capacity level, which is its < Answer >
break-even level:
Particulars Rs.
Selling price per ton 69.50
Variable cost per ton 35.50
Fixed expenses 18,02,000
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
(a) Rs.16,55,250 (b) Rs.13,41,563 (c) Rs.6,24,738
(d) Rs.11,68,456 (e) Rs.7,89,734.
(2 marks)
< Answer >
18. Jem Ltd. has the following data pertaining to the year ending March 31, 2005:
Particulars Rs.
Purchases 9,00,000
Opening stock 3,40,000
Closing stock 4,20,000
Freight-in 1,00,000
Freight-out 1,50,000 Cost of goods sold during the year 2004-05 is

(a) Rs.13,40,000 (b) Rs.9,70,000 (c) Rs.9,50,000 (d) Rs.9,20,000 (e) Rs.7,70,000.
(1 mark)
< Answer >
19. Ajex Ltd. had the following inventories at the beginning and end of the month of March 2005:
Particulars March 1, 2005 (Rs.) March 31, 2005 (Rs.)
Finished goods 1,25,000 1,17,000
Work-in-process 2,35,000 2,51,000
Direct materials 1,34,000 1,24,000 The
following additional manufacturing data were available for the month of March 2005:
Particulars (Rs.)
Direct materials purchased 1,89,000
Purchase returns 1,000
Transportation 3,000
Direct labor 3,00,000
Actual factory overhead 1,75,000 The company applies factory overhead at a rate of
60% of direct labor cost and any overapplied or underapplied factory overhead is deferred until the end
of the year 2004-05.
The manufacturing cost of the company for the month of March 2005 was
(a) Rs.6,81,000 (b) Rs.6,65,000 (c) Rs.4,89,000 (d) Rs.2,01,000 (e) Rs.6,73,000.
(2 marks)
20. For a department, the standard overhead rate is Rs.2.50 per hour and overhead allowances are as < Answer >
follows:
Activity level (hours) Budgeted overhead allowance (Rs.)
3,000 10,000
7,000 18,000
11,000 26,000 The normal capacity level, on the
basis of which the standard overhead rate has been worked out, is
(a) 4,000 hours (b) 5,000 hours (c) 11,000 hours
(d) 8,000 hours (e) 6,500 hours.
(2 marks)

21. Sai Plastics Ltd. manufactures plastic chairs. The company is working at 60% capacity level, which< Answer >
represents 4,800 chairs per month. The cost break-up per chair is as under:
Materials – Rs.62
Labor – Rs.32
Overheads – Rs.40 (60% fixed)
The selling price is Rs.180 per chair. The company is planning to produce at 80% capacity level. At
80% capacity level the selling price falls by 5% accompanied by a similar fall in the price of materials.
The break-even point in units and profit at 80% level of capacity of the company are
(a) 1,646 units and Rs.2,95,040 respectively
(b) 1,798 units and Rs.2,56,640 respectively
(c) 1,646 units and Rs.2,56,640 respectively
(d) 1,798 units and Rs.2,95,040 respectively
(e) 1,798 units and Rs.2,20,800 respectively.
(2 marks)

22. Which of the following is false with regard to the supplementary rate method for accounting of under< Answer >
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)
A company uses a predetermined overhead rate of Rs.30 per machine hour. The company utilized 500 < Answer >
23.
machine hours. The standard hours were 520 machine hours. If the actual overhead costs of the
company are Rs.15,900, the under or over absorption of overhead is
(a) Rs.900 (over) (b) Rs.900 (under) (c) Rs.300 (over)
(d) Rs.300 (under) (e) Rs.20 (under).
(1 mark)
24. A machine shop has 5 identical machines manned by 3 operators. The operators are fully engaged on < Answer >
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 the last quarter ending March 31, 2005:
Normal available hours per month per operator 200 hours
Absenteeism (without pay) 12 hours
Leave (with pay) 20 hours
Normal idle time (unavoidable) 8 hours
Average rate of wages per hour Rs.8
Estimated production bonus 10% on wages
Value of power consumed Rs.7,265
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 annum Rs.7,200
General management expenses per annum Rs.45,800 The
comprehensive machine hour rate for the machine shop for the quarter ending March 31, 2005 is
(a) Rs.48.58 (b) Rs.49.52 (c) Rs.39.61 (d) Rs.40.12 (e)
Rs.32.09.
(2 marks)

25. Monark Ltd. has undertaken to supply 2,000 units of product – ‘MONO’ per month for the months of < Answer >
April, May and June 2005. Every month a batch order is opened against which materials and labor cost
are booked at actual. Overheads are absorbed at a rate per labor hour. The selling price is contracted at
Rs.15 per unit. The company has furnished the following data pertaining to the costs for 3 months:
Batch Material Labor Overhead Total
Month Production cost cost cost labor
(Units) (Rs.) (Rs.) (Rs.) hours
April 2005 2,500 12,500 5,000 24,000 8,000
May 2005 3,000 18,000 6,000 18,000 9,000
June 2005 2,000 10,000 4,000 30,000 10,000 The rate per
labor hour is Rs.2. The overall profit of the order of 4,400 units is
(a) Rs.22,000 (b) Rs.20,000 (c) Rs.25,000
(d) Rs.24,000 (e) Rs.30,000.
(2 marks)

26. If predetermined overhead rate is not employed and the volume of production is increased over the < Answer >
level planned, the cost per unit would be expected to
(a) Decrease for fixed costs and remain unchanged for variable costs
(b) Remain unchanged for fixed costs and increase for variable costs
(c) Decrease for fixed costs and increase for variable costs
(d) Increase for fixed costs and increase for variable costs
(e) Increase for fixed costs and remain unchanged for variable costs.
(1 mark)
< Answer >
27. Idle capacity of a plant refers to the difference between
(a) Maximum capacity and practical capacity
(b) Maximum capacity and actual capacity
(c) Practical capacity and normal capacity
(d) Practical capacity and capacity based on sales expectancy
(e) Maximum capacity and normal capacity.
(1 mark)
28. The overhead cost per period of DM Ltd. amounts to Rs.2,48,000 based on an output of 400 units of A, < Answer >
400 units of B and 200 units of C. Direct labor costs of A, B and C per unit amount to Rs.60, Rs.40, and
Rs.30 respectively. Each unit also requires 8, 12, and 22 machine hours per unit of production
respectively. Using machine hours as cost driver, the total overhead cost chargeable to B amounts to
(a) Rs.72,000 (b) Rs. 96,000 (c) Rs.1,56,000
(d) Rs.1,80,000 (e) Rs.1,64,000.
(1 mark)
< Answer >
29. HP Ltd. has furnished the following information pertaining to its 3 products:
Product Product Product Overhead
Department Allocation Base
A B C costs
Production Machine Hours 1,000 2,000 500 Rs.14,00,000
Purchasing Purchase Orders 100 300 150 Rs. 5,00,500
Inspection Labor Hours 200 200 200 Rs. 3,00,000
Assuming overhead is allocated based on activities, using ABC basis, how much would be allocated to
Product B?
(a) Rs.12,57,440 (b) Rs.11,73,000 (c) Rs.7,33,500
(d) Rs.6,28,714 (e) Rs.3,14,357.
(1 mark)
< Answer >
30. AB Ltd. has furnished the following information for its product:
Direct material - Rs.10 per unit
Direct labor - Rs. 6 per unit
Variable overhead - Rs. 3 per unit
Fixed overhead - Rs. 4 per unit
Budgeted production - 12,000 units
Actual production - 10,000 units
There is no overhead spending variance
Sales - 9,000 units
Selling price - Rs.28 per unit
Using Absorption costing, what is the cost per unit based upon actual costs?
(a) Rs.27.60 (b) Rs.24.40 (c) Rs.23.80 (d) Rs.23.00 (e) Rs.25.20.
(2 marks)
< Answer >
31. Which of the following is not considered to be a classification of product costs?
(a) Cost of wood used in making a table top
(b) Cost of labor to assemble a table
(c) Cost of Company President's salary
(d) Cost of electricity to operate machine used to sand wood
(e) Cost of decolum to be used on the table top.
(1 mark)
32. Baisakhi Ltd. has 3 production departments – P1, P2 and P3 and 2 service departments – S1 and S2. < Answer >
The company has furnished the following overhead costs of production as well as service departments:

Department Overhead costs (Rs.)


P1 13,600
P2 14,700
P3 12,800
S1 9,000
S2 3,000
The company has provided the
expenses of service departments which are charged to production as well as service departments on the
following percentage basis:

Department P1 P2 P3 S1 S2
S1 40% 30% 20% - 10%
S2 30% 30% 20% 20% -
The total overhead expenses of P1 and P3
are
(a) Rs.16,721 and Rs.18,712 respectively
(b) Rs.18,712 and Rs.18,833 respectively
(c) Rs.18,712 and Rs.15,555 respectively
(d) Rs.15,555 and Rs.16,721 respectively
(e) Rs 18,833 and Rs.15,555 respectively.
(2 marks)

33. Mahan Ltd. uses a historical cost system and applies overheads on the basis of predetermined rates. The < Answer >
following data are furnished by the company for the year ended March 31,2005:

Particulars Rs.
Manufacturing overheads 13,84,000
Manufactured overheads applied 14,00,000
Work-in-progress 3,00,000
Finished goods 8,00,000
Cost of goods sold 9,00,000
The amount of under absorbed
overheads to be adjusted to work-in-progress, using supplementary rate, is
(a) Rs.7,200 (b) Rs.16,000 (c) Rs.3,200 (d) Rs.2,400 (e)
Rs.2,100.
(1 mark)
< Answer >
34. Which of the following is not an advantage of departmentalization of Overheads?
(a) It facilitates control of overhead expenses by means of forecasted budgets
(b) Departmentalization of overheads helps in controlling the uses made of the services rendered to
the respective departments
(c) The reasons for variance can be known by the analysis of under or over-absorption of overhead
which in turn helps in taking remedial measures
(d) Departmentalization of overheads helps in arriving at the cost of work-in-progress correctly
(e) The correct costs can be determined as the actual overhead costs of the respective departments
are taken into consideration in determining the overhead rates.
(1 mark)
35. A home decorating company has certain amount of fixed cost that cannot be recovered due to decrease < Answer >
in the demand for home furnishings and floor coverings. These costs include the cost of Vinyl flooring
manufacturing equipment and the cost of warehouses built to store materials and finished goods. These
costs are examples of
(a) Incremental costs (b) Hidden costs
(c) Contribution margin costs (d) Period costs (e) Capacity costs.
(1 mark)
< Answer >
36. More accurate cost allocation can be accomplished when
(a) There are less direct costs to allocate
(b) Costs are more homogeneous
(c) Costs are more indirect
(d) Different costs vary depending upon different causes and effects
(e) Labor costs are more than material costs.
(1 mark)
< Answer >
37. 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)

38. In job order costing, provident fund paid by the employer for factory employee is preferably accounted< Answer >
for as
(a) Direct labor (b) Indirect labor
(c) Factory overhead cost (d) Administrative overhead cost
(e) Distribution overhead cost.
(1 mark)
< Answer >
39. Which of the following statements is false?
(a) Canteen expenses are apportioned to cost centers on the basis of number of employees
(b) Insurance costs of buildings are apportioned to cost centers on the basis of floor area
(c) Supervision expenses are apportioned to cost centers on the basis of estimated time devoted to
each machine
(d) Depreciation expenses are apportioned to cost centers on the basis of floor area occupied by each
machine
(e) Power expenses are apportioned to cost centers on the basis of machine hours.
(1 mark)
< Answer >
40. An over-statement of beginning work-in-progress inventory will
(a) Understate cost of goods sold (b) Understate the profit
(c) Overstate the net profit (d) Overstate the gross profit
(e) Understate the cost of production.
(1 mark)
41. Which of the following would be considered as an indirect cost in the case of manufacturing of air < Answer >
conditioners?
(a) Cost of the condenser put in an air conditioner unit
(b) Cost of inspecting air conditioners
(c) Cost of assembling an air conditioner
(d) Cost of the box and packaging for an air conditioner
(e) Cost of exhaust fan put in an air conditioner.
(1 mark)
< Answer >
42. ADC Ltd. has furnished the following data pertaining to its business:
Costs Direct Allocation
Department Employees Sq.ft
Rs. Hours Base
Personnel 3 1,000 1,80,000 – Employees
Cleaning 5 – 2,22,750 – Square feet
Operating Dept. A 30 3,750 25,00,000 45,000 Hours
Operating Dept. B 10 3,000 30,00,000 27,000 Hours
Using the
Step Method to allocate Personnel Department and Cleaning Department costs, what is the appropriate
overhead allocation rate to Department B?
(a) Rs.116.59 (b) Rs.116.44 (c) Rs.119.34 (d) Rs.209.18 (e) Rs.216.44.
(2 marks)

43. Generally, individual departmental rates rather than a plant wide rate for applying overhead would be < Answer >
used if
(a) A company wants to adopt a standard cost system
(b) A company wants to adopt a direct costing system
(c) The manufactured products differ in the resources consumed from the individual departments in
the plant
(d) The manufacturing overhead is the largest cost component of its product cost
(e) The manufacturing operations of a company are highly automated.
(1 mark)

44. For a period, opening stock was 18,900 units and closing stock was 21,150 units. The profit based on< Answer >
marginal costing was Rs.75,600 and profit under absorption costing was Rs.90,225. The fixed
overheads absorption rate per unit is
(a) Rs.6.00 (b) Rs.6.50 (c) Rs.7.00 (d) Rs.8.50 (e) Rs.9.50.
(1 mark)

45. Which of the following average costs per unit may be expected to decrease by the greatest percentage < Answer >
with an increase in the volume of units produced?
I. Average fixed cost per unit
II. Average semivariable cost per unit
III. Average variable cost per unit
IV. Average total cost per unit
(a) Only (I) above (b) Both (I) and (IV) above
(c) Both (I) and (II) above (d) Only (IV) above (e) (I), (II) and (III) above.
(1 mark)
< Answer >
46. Retention monies are best defined as
(a) Cash returned to contractee, if actual profits on a contract are 20% higher than negotiated amount
(b) Cash returned to contractee, if actual profits on a contract are 25% higher than negotiated amount
(c) Cash withheld by the contractee, under the terms of contract when payments of the value certified
are being made
(d) Cash withheld by the contractee, in order to improve the cash flow of the contractor
(e) Payments to the contractor, where it is desired to secure his service for a future contract.
(1 mark)

47. APW Ltd. uses process cost system to manufacture Dust Density Sensors for the mining industry. The < Answer >
following pertains to operations for the month of March 2005:
Particulars Units
Opening work-in-process (March 01, 2005) 1,280
Introduced in production during March 2005 7,200
Closing work-in-process (March 31, 2005) 950 There is no loss in the
manufacturing process. The opening inventory was 60% complete for materials and 50% complete for
conversion costs. The closing inventory was 80% complete for material and 60% complete for
conversion costs.
Costs pertaining to the month of March 2005 are as follows:
Particulars Rs.
Opening work in process:
Materials 20,500
Conversion 16,350
During the month:
Materials 1,12,830
Conversion 89,520 The total cost of closing work-in-process on March 31,
2005, using FIFO method, is
(a) Rs.18,240 (b) Rs.25,650 (c) Rs.20,520
(d) Rs.14,250 (e) Rs.15,390.
(2 marks)
< Answer >
48. 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)

49. Shivam Chemicals Ltd. runs its boiler on furnace oil obtained from Indian Oil and Bharat Petroleum, < Answer >
whose depots are situated at a distance of 10 km and 8 km from the factory site of the company.
Transportation of furnace oil is made by the company’s own tank lorries of 5 tons capacity each.
Onward trips are made only on full load and the lorries return empty. The filling-in time takes an
average of 50 minutes for Indian Oil and 45 minutes for Bharat Petroleum. The emptying time in the
factory is only 45 minutes for both. From the records available, it is seen that the average speed of the
company’s lorries works out to 40 km per hour. The variable operating charges per km is Rs.2.20 and
fixed charges per hour of operation is Rs.13.20.
The cost per ton-mile from Indian Oil is
(a) Rs.1.36 (b) Rs.1.43 (c) Rs.1.51 (d) Re.0.72 (e) Re.0.75.
(2 marks)
50. During the month of March 2005, Murphi Ltd. manufactured 5,000 units of product ‘P’ at a cost of< Answer >
Rs.60,000, exclusive of spoilage allocation. The company sold 2,500 units of product ‘P’ during the
month. An additional 1,000 units, costing Rs.8,000, were completed to the extent of 50% by March 31,
2005. All units were inspected between the completion of manufacturing and transfer to finished goods
inventory. Normal spoilage for the month was Rs.2,000 and abnormal spoilage of Rs.5,000 was also
incurred during the month. The portion of total spoilage that should be charged against revenue in the
month of March 2005 is
(a) Rs.7,000 (b) Rs.6,000 (c) Rs.5,000 (d) Rs.3,500 (e)
Rs.3,000.
(2 marks)

51. Sigma Chemicals Ltd. produces high-quality plastic sheets in a continuous manufacturing operation. < Answer >
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 80% through with the
manufacturing process, when some units are separated out as inferior quality. The following data are
available for the month of March 2005:
Material costs Rs.36,000
Conversion costs Rs.19,500
Units introduced 8,000
Units completed 7,000 There is no opening or closing work-in-progress. Past
experience indicates that approximately 8% of the units introduced are found to be defective on
inspection by quality control.
The cost of abnormal loss for the month of March 2005 is
(a) Rs.3,750 (b) Rs.3,250 (c) Rs.3,600 (d) Rs.2,520 (e)
Rs.2,340.
(2 marks)

52. Anjani Ltd. makes one model of a product known as ‘Brand D’. The company has provided the< Answer >
following balances as on October 01, 2004:
Finished goods – 500 units
Work-in-process – Rs.7,450
Raw materials – Rs.16,120
The following data are available as on March 31, 2005
Indirect labor – Rs.16,100
Freight in – Rs.7,500
Direct labor – Rs.43,240
Raw material – Rs.6,490
Factory overhead expenses – Rs.31,300
Work-in-process – Rs.6,800
Sales (15,000 units) – Rs.3,60,000
Indirect material – Rs.25,500
Total manufacturing costs incurred – Rs.2,15,500
There were 1,500 units of finished goods of ‘Brand D’ as on March 31, 2005.
The amount of raw materials purchased during the half-year ended March 31, 2005 was
(a) Rs.82,230 (b) Rs.88,610 (c) Rs.1,01,490
(d) Rs.1,87,970 (e) Rs.98,350.
(2 marks)
< Answer >
53. Consider the following data of Hifi Ltd:
Material Purchased - Rs.1,70,000. There was no beginning inventory.
Direct labor incurred - 400 hours at the rate of Rs.10 per hour.
Budgeted overheads - 430 hours
Budgeted overhead cost - Rs.6,450
Units started - 20,000 units
Units completed - 15,000 units
Actual overheads - Rs.6,200
Ending Inventory - 60% complete.
The value of ending inventory is
(a) Rs.50,000 (b) Rs.30,000 (c) Rs.20,000
(d) Rs. 5,000 (e) Rs.25,000.
(1 mark)

54. Ganpati Ltd. uses a particular raw material in its 3 process accounts – A, B and C. The following < Answer >
information furnished by the company relating to inputs, outputs and rejections during the month of
March 2005:

Input including opening Rejections Output


Process
W.I.P (pieces) (pieces) (Pieces)
A 18,000 6,000 12,000
B 19,800 1,800 18,000
C 20,400 3,400 17,000 What should be the
inputs in Process A, if the final product transferred from Process C is 1,000 pieces?
(a) 1,250 pieces (b) 1,700 pieces (c) 1,800 pieces
(d) 1,900 pieces (e) 1,980 pieces.
(2 marks)

55. KBKM Ltd. has furnished the following information pertaining to its process account for the last < Answer >
month:

Opening work-in-process 100 units (70% complete)


Closing work-in-process 50 units (60% complete)
Units started 500 units
Value of opening work-in-process Rs.1,042
Cost incurred during the month Rs.9,282
Costs incurred evenly
throughout the month. The company uses weighted average flow of costs.The value of finished goods
was
(a) Rs.8,736 (b) Rs.9,778 (c) Rs.10,832 (d) Rs.9,790 (e)
Rs.9,464.
(1 mark)

56. Shiva Ltd. had 8,000 units of work-in-procress inventory in department A on March 1, 2005. These < Answer >
units were 60% complete as to conversion costs. Direct materials are added at the beginning of the
process. During the month of March 2005, 34,000 units were started and 36,000 units completed. The
company had 6,000 units of work-in-process inventory on March 31, 2005. These units were 80%
complete as to conversion costs.
The equivalent production unit of conversion (under the average method) exceeds the equivalent
production of conversion (under FIFO method) by
(a) 8,000 units (b) 6,000 units (c) 3,200 units
(d) 4,800 units (e) 5,000 units.
(2 marks)
< Answer >
57. Which of the following is/are true regarding transport costing?
I. The costs of a transport company includes publicity costs.
II. Operating costs and running costs are the costs which vary more or less in direct proportion to the
distance traveled.
III. Semi-variable costs are incurred in the form of tyre maintenance, painting etc.
IV. Insurance of the vehicle can be considered as running cost.

(a) Only (I) above (b) Only (II) above


(c) Only (III) above (d) Both (II) and (IV) above (e) Both (II) and (III) above.
(1 mark)

58. In an engineering company, the factory overheads are recovered on a fixed percentage basis on direct < Answer >
wages and administrative overheads are absorbed on a fixed percentage basis on factory cost.The
company has furnished the following data relating to 2 jobs undertaken by it in a period:

Particulars Job A1 Job B2


Direct materials (Rs.) 54,000 37,500
Direct wages (Rs.) 42,000 30,000
Selling price (Rs.) 1,66,650 1,28,250
Profit % on total cost 10% 20%
The company has received an order of Job
no A3. The company has furnished the following information pertaining to Job A3:

Direct materials (Rs.) Rs.24,000


Direct wages (Rs.) Rs.20,000
Profit % on selling price 12.5%
The selling price of Job A3, using the above recovery
rates, is
(a) Rs.91,100 (b) Rs.93,900 (c) Rs.78,750
(d) Rs.80,000 (e) Rs.70,000.
(2 marks)

59. Which of the following is/are the best explanation of the relevance of equivalent production units in< Answer >
process costing?
I. A means of equalizing production charged into stock of each period.
II. A means by which the output achieved may be compared with the equivalent quantity budgeted
for the period under review.
III. The conversion of partly completed units into an equivalent number of completed units in order
that costs may be shared on an equitable basis.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (II) and (III) above
(e) Both (I) and (II) above.
(1 mark)
< Answer >
60. Which of the following statements is false?
(a) In process costing, cost is accumulated according to processes or departments
(b) In job costing, the basis of cost accumulation is job order or batch size
(c) In process costing, cost is accumulated on time basis
(d) In job costing, cost is computed at the end of the cost period
(e) In process costing, items of prime cost cannot be traced with a particular order due to continuous
production.
(1 mark)
61. Presidency Club is involved in providing staying facilities and Gym facilities to its members. It has a < Answer >
capacity of 25 single rooms and 15 double rooms and the gym facility is provided for residents in the
club and also outsiders. The club has furnished the following cost structure:
Service Variable cost per day
Single Room Rs.65
Double Room Rs.45
Gym facility Rs.50 The fixed cost per day is:
For single room – Rs.25
For double room – Rs.35
For Gym – Rs.10
The average occupancy rate in the club is 80% for 365 days of the year.
The club deserves a margin of 25% on hire of room and the rent of double room should be fixed at
150% of a single room.
The rent of a double room per day is
(a) Rs.100 (b) Rs.150 (c) Rs.145 (d) Rs. 97 (e) Rs.109.
(2 marks)

62. Simul Petroleum is a small company that acquires crude oil and manufactures three intermediate < Answer >
products- A, B & C, differing only in grade. No opening inventory of finished goods and work-in-
process existed on March 01, 2005. The production costs for March 2005 were as follows (assume
separable costs were negligible):
Particulars Rs.
Crude oil acquired and used in production 4,00,000
Direct labor and related costs 2,00,000
Factory overhead 3,00,000 The output and sales for the
month of March 2005 were as follows:
Particulars A B C

Number of Barrels produced 300 240 120


Number of Barrels sold 80 150 120
Prices per Barrel sold (Rs.) 3,000 4,000 5,000
If joint costs are apportioned on
the basis of relative sales value of output, the cost of closing inventory of product B is
(a) Rs.1,75,610 (b) Rs.1,23,476 (c) Rs.2,19,512
(d) Rs.3,51,220 (e) Rs.1,31,707.
(2 marks)
63. Small Pumps Ltd. manufactures standardized electric motors. The company has furnished the following< Answer >
information pertaining to a job of 50 motors:
i. Selling price per motor – Rs.9,000
ii. Selling and distribution expenses – 20% of sales value
iii. Cost incurred as per job card:
Direct material – Rs.1,50,000
Direct labor – Rs.40,000
Overheads – Rs.1,20,000
iv. Number of motors completed – 25
and transferred
v. Completion stage of work-in-progress:
Direct material – 100%
Direct labor and overheads – 60%
The value of work-in-process is
(a)Rs.1,75,000 (b) Rs.1,35,000 (c) Rs.1,20,000 (d) Rs.1,80,000 (e)
Rs.1,50,000.
(2 marks)

64. Modern Construction Ltd. has furnished the following information pertaining to a contract for the year< Answer >
ended March 31, 2005:

Particulars Rs.

Material sent to site 2,25,500


Materials on hand (March 31, 2005) 18,375
Cost of plant installed at site 1,71,000
Labor costs 1,23,500
Work certified 4,00,000
Cost of work not certified 1,20,000
Value of plant (March 31, 2005) 1,02,500
Contract price 7,50,000
Cash received from the contractee 3,50,000
Direct expenses 72,000
The profit to be transferred to reserve
account is
(a) Rs.28,510 (b) Rs.34,620 (c) Rs.14,255
(d) Rs.20,365 (e) Rs.32,100.
(2 marks)
65. JK Ltd. manufactures two joint products – J and K in a common process. A by-product ‘B’ is also< Answer >
produced. Information related to products for the month of March 2005 is as follows:

Opening stock Nil


Cost of processing:
Direct material Rs.25,500
Direct labor Rs.10,000
Production overheads are absorbed at the rate of 300% of
direct labor costs.
Output and Sales for the month are as follows:

Particulars Production units Sales units Selling price


per unit
Product J 8,000 7,000 Rs.4.00
Product K 8,000 6,000 Rs.6.00
By-product ‘B’ 1,000 1,000 Re.0.50
It is the practice of
the company to credit the realizable value of by-product in the process costs before apportioning costs
to each joint product. Costs of the common processing are apportioned between products J and K on
the basis of sales value of production.
The profit of products J and K is
(a) Rs.5,250 and Rs.3,000 respectively (b) Rs.3,000 and Rs.5,250 respectively
(c) Rs.6,750 and Rs.2,000 respectively (d) Rs.5,250 and Rs.6,750 respectively
(e) Rs.3,000 and Rs.6,750 respectively.
(2 marks)
< Answer >
66. Which of the following statements is true?
(a) Escalation clause in a contract provides that contract price is fixed
(b) In contract costing, credit is taken for the full amount of profit on complete portions of the
incomplete contract
(c) Work-in-progress certified and uncertified in a contract is valued at cost
(d) Salary of supervisor employed on a contract is an indirect cost
(e) Cost plus contract protects the contractor from the risk of market fluctuations in the prices of
material, labor and other elements.
(1 mark)

67. ABC Ltd. in the course of refining crude oil obtains 4 joint products – M,N,P and Q. The total cost till < Answer >
the split off point was Rs.97,600. The output and sales in the year 2004-05 were as follows:

Product Output(gallons) Sales(Rs.) Separate costs(Rs.)


M 5,00,000 1,15,000 30,000
N 10,000 10,000 6,000
P 5,000 4,000 -
Q 9,000 30,000 1,000 If the joint costs
are apportioned on the basis of relative sales value of the different products at the split off point, the net
incomes of products M and P are
(a) Rs. 5,800 and Rs.1,600 respectively
(b) Rs.17,000 and Rs.5,800 respectively
(c) Rs. 17,000 and Rs.800 respectively
(d) Rs. 17,000 and Rs.1,600 respectively
(e) Rs.800 and Rs.5,800 respectively.
(2 marks)
68. Varun Electronics Ltd. is planning to launch a new product ‘K’. The information pertaining to the costs < Answer >
per unit of the new product is as follows:
Direct materials Rs.6.00
Direct labor Rs.4.00
Distribution expenses Re.0.50 The company will incur Rs.6,30,625 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.18.75. If the company desires to earn a profit of Rs.50,000, 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)

69. SMK Ltd. has a productive capacity of 2,50,000 units of Product ‘K’ per quarter. The company< Answer >
estimated its normal capacity utilization at 90% for the quarter ending March 31, 2005. 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 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 March 31, 2005 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 cost analysis revealed an excess spending of variable factory overheads to the extent of
Rs.1,00,000. There is no other variance.
The profits under absorption costing method and marginal costing method are
(a) Rs.7,70,000 and Rs.6,20,000 respectively
(b) Rs.6,70,000 and Rs.5,20,000 respectively
(c) Rs.6,70,000 and Rs.6,20,000 respectively
(d) Rs.6,70,000 and Rs.7,20,000 respectively
(e) Rs.6,70,000 and Rs.7,70,000 respectively.
(2 marks)

70. A, B and C are three similar plants under the same management of Apicon Ltd. The details are as < Answer >
follows:
Plant A B C
Capacity operated 80% 70% 60%
Particulars (Rs. in lakh) (Rs. in lakh) (Rs. in lakh)
Turnover 240 280 180
Variable cost 160 210 90
Fixed cost 60 70 60 The Break-even
percentage of the merged plant is
(a) 50.25% (b) 52.75% (c) 54.29% (d) 58.78% (e) 55.48%.
(2 marks)
71. A company has three factories situated in North, East and South with its head office in Hyderabad. The < Answer >
management has received the following summary report on the operations of each factory for a period:
Over/(under) Over/(under)
Actual sales Actual profit
Region budgeted sales budgeted profit
(Rs.) (Rs.)
(Rs.) (Rs.)
North 1,100 (400) 135 (180)
East 1,450 150 210 90
South 1,200 (200) 330 (110)
If the variable
cost ratio, fixed costs and sales mixes are as per budget, the break-even sales in rupees of the company
as a whole is
(a) Rs.2,500 (b) Rs.1,500 (c) Rs.1,200 (d) Rs.1,750 (e)
Rs.1,600.
(2 marks)

72. CVP Ltd. has a production capacity of 2,00,000 units per year.Normal capacity utilisation is reckoned< Answer >
as 90%. The following details are provided by the company:
Standard variable production costs Rs.11 per unit
Fixed production cost per year Rs.3,60,000
Variable selling cost Rs.3 per unit
Fixed selling cost per year Rs.2,70,000
Selling price Rs.20 per unit
Production during the year 1,60,000 units
Sales during the year 1,50,000 units
Closing inventory 20,000 units The actual variable production costs for
the year were Rs.35,000 higher than the standard.
The net profit under absorption costing, by using FIFO method, is
(a) Rs.2,46,375 (b) Rs.2,91,118 (c) Rs.2,24,118
(d) Rs.2,64,375 (e) Rs.2,19,118.
(2 marks)
Suggested Answers
Management Accounting – I (151) : April 2005
1. Answer : (b) < TOP >

Reason : The primary object of costing is to control cost. Cost reduction is not the primary object of
costing. Similarly, estimation of sales price and preparation of financial statements are not the
primary object of costing. Therefore,(b) is correct.
2. Answer : (b) < TOP >

Reason : Total fixed cost = Rs.3,00,000 + Rs.1,50,000 + Rs.1,50,000


= Rs.6,00,000;
Variable cost per unit = Rs.3.00 + Rs.2.00 + Re.0.60 + Re.0.90
= Rs.6.50;
Variable cost after improving packing cost = Rs.6.50 + Re.1.00
= Rs.7.50;
Contribution to sales ratio = Rs.7.50 / Rs.15 = 50%;
Let, x = desired sales; desired profit = 25% on sales;
Contribution to sales ratio = Contribution / Sales
= (Fixed cost + profit) / sales;
50% = (Rs.6,00,000 + 0.25x) / x
0.5x = Rs.6,00,000 + 0.25x
x = Rs.24,00,000
3. Answer : (c) < TOP >

Fixed cost
Sale price per unit − Variable cost per unit
Reason : Break even point =
From the above relation, increase in sale price can improve break-even point. Break-even point
will not improve with the increase in variable cost, fixed cost, sales volume and production
volume. Other statements mentioned in (a), (b), (d) and (e) are not correct.
4. Answer : (c) < TOP >

Reason : With the recent automation of factories and the corresponding emphasis on activity-based
costing(ABC),companies are finding new ways of allocating indirect factory overhead. One
change is that plant-wide application rates are being used less often because a closer matching of
costs with cost drivers provides better information to management. ABC results in a more accurate
application of indirect costs because it provides more refined data. Instead of a single cost goal for
a process, a department, or even an entire plant, an indirect cost pool is established for each
identified activity. The related cost driver, the factor that changes the cost of the activity, is also
identified.
Option (a) is incorrect because one effect of computerization is that the amount of direct labor
relative to other costs has been decreasing. For this reason some companies have found that it is no
longer expedient to track direct costs as closely as was once done. Thus, some companies are
treating direct labor as an indirect factory overhead cost.
Option (b) is incorrect because through put time is one of the cost drivers that is beginning to be
used more often as an overhead application base. Throughput is the rate of production over a
stated time. This rate clearly drives (influences) costs.
Option (d) is incorrect because multiple cost pools are preferable. They permit a better matching
of indirect costs with cost drivers.
Option (e) is incorrect because ABC uses cost drivers (causes) as application bases to provide
more refined data.
5. Answer : (d) < TOP >

Reason : The total of costs incurred in the operation of a business undertaking other than the cost of
manufacturing and production is commercial cost
6. Answer : (e) < TOP >

Reason : The cost means the value of the sacrifice made to acquire goods or services. Therefore, (e) is
correct.
7. Answer : (c) < TOP >

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.
8. Answer : (d) < TOP >

Reason : Non-production costs are incurred in the place other than production function. So these costs are
either administrative or selling and distribution cost. Therefore, it is not a part of production cost.
So, (d) is correct
9. Answer : (a) < TOP >

Reason : The cost of goods sold under a periodic cost accumulation system is equal to the cost of goods
available for sale less ending finished goods inventories. Therefore, (a) is correct.
10. Answer : (b) < TOP >

Reason : Marginal costing or direct costing is a cost behavior oriented approach to product costing. In this
method costs are separated into fixed and variable cost. If volume of production increases, the
total contribution increases and profit is also increased after covering fixed costs. This approach is
not available in other types of costing like absorption costing, process costing, job order costing
and uniform costing. Therefore (b) is correct.
11. Answer : (c) < TOP >

Reason : An activity based costing system identifies the casual relationship between the incurrence of cost
and underlying activities that cause those costs. Under this system, costs are applied to products on
the basis of resources consumed (drivers). Therefore, (c) is correct. Other options are not correct.
12. Answer : (a) < TOP >

Reason : Notional costs should be included while ascertaining costs. This statement (a) is false. Other
options given (b), (c), (d) and (e) are all correct.
13. Answer : (b) < TOP >

Reason: Proposed sales = Local sales + Middle East sales = Local sales of 60% + Export sales of 50%
= (Rs.640 / 80%) x 60% + [(Rs.640 / 80%) x 50% - 10% of (Rs.640 / 80%) x 50%] = Rs.480 +
Rs.360 = Rs.840; Present sales = Rs.640;
Incremental revenue = Rs.840 – Rs.640 = Rs.200lakh.
Proposed cost = 60% local + 50% Middle East = Direct material at 110% + Direct expenses at
110% + variable expenses at 110% + fixed expenses = (Rs.200/80) x 110 + (Rs.80/80) x 110 +
(40/80) x 110 + (Rs.260 + Rs.40) = Rs.275 + Rs.110 + Rs.55 + Rs.300 = Rs.740
Differential cost = Rs.740 – Rs.580 = Rs.160 lakh.
Incremental profit = Rs.200 – Rs.160 = Rs.40 lakh.
14. Answer : (b) < TOP >

Reason : Practical capacity is the maximum level at which output is produced efficiently. It includes
consideration of idle time caused by human and equipment inefficiencies. Practical capacity
always exceeds the actual use of capacity. It is not necessary to meet sales demand for the next
year. It does not consider idle time caused by inadequate sales demand. Therefore, option (b) is
correct.
15. Answer : (a) < TOP >

Reason : Cost of idle time arriving due to non-availability of raw-materials must be charged to costing
profit & loss account. Other options are not correct. Therefore, (a) is correct.
16. Answer : (e) < TOP >

Reason : Depreciation is not an out-of-pocket costs as there is no real outflow of cash. All costs are not
controllable. So, alternatives (II) and (III) are true. But alternatives (I) and (IV) are not true. So,
the correct answer is (e).
17. Answer : (b) < TOP >

Reason : Contribution = Rs.69.50 – Rs.35.50 = Rs.34.


Fixed cost = Rs.18,02,000;
Break-even units = Rs.18,02,000 / Rs.34 = 53,000 ton;
Selling price for 1st 20% = Rs.69.50 x 90% = Rs.62.55;
Selling price for next 20% = Rs.69.50 x 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 x 26,500 = Rs.7,16,825
Profit from next 20% capacity = Rs.23.575 × 26,500 = Rs. 6,24,738
Profit from added production of 40% capacity over break-even volume = Rs.7,16,825 + Rs. 6,24,738 =
Rs.13,41,563.
18. Answer : (d) < TOP >

Reason : The correct answer is (d). 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 (e) are not correct. Cost of goods sold = Rs. 9,00,000 + Rs.
3,40,000 + Rs. 1,00,000 – Rs. 4,20,000 = Rs. 9,20,000.
19. Answer: (a) < TOP >

Beginning direct materials inventory 1,34,000


Add: Purchases 1,89,000
Less: Purchase returns (1,000)
Add: Transportation 3,000
Total direct materials available 3,25,000
Less: Ending direct materials inventory (1,24,000)
Direct material used 2,01,000
Direct labor 3,00,000
Total prime costs 5,01,000 Manufacturing
cost = Rs.5,01,000 + 60% of Rs.3,00,000 (Direct labor)
= Rs.6,81,000.
20. Answer : (d) < TOP >

Reason : Variable cost = Change of cost / change of activity


= (Rs.18,000 – Rs.10,000 ) / (7,000 – 3,000) = Rs.2.
Fixed cost = Rs.18,000 – 7,000 x Rs.2 = Rs.4,000.
Standard overhead = Rs.2.50.
Standard fixed cost = Rs.2.50 – Rs.2.00 = Re.0.50.
Normal capacity level = Rs.4,000 / Re.0.50 = 8,000 hours.
21. Answer : (d) < TOP >

Reason :
Per unit Per unit
Particulars 60% 80%
(Rs.) (Rs.)
Sales unit 4,800 6,400
Rs. Rs.
Sale value 180 8,64,000 171.00 10,94,400
Materials 62 2,97,600 58.90 3,76,960
Labor 32 1,53,600 32.00 2,04,800
Overheads (variable) 16 76,800 16.00 1,02,400
Total variable cost 110 5,28,000 106.90 6,84,160
Contribution 70 3,36,000 64.10 4,10,240
Fixed cost
1,15,200 1,15,200
(40 × 60% × 4,800)
Profit 2,20,800 2,95,040
Break even point 1646 units 1,798 units
22. Answer: (b) < TOP >

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 costs through supplementary rates is necessary for maintaining
data for comparison.
23. Answer : (b) < TOP >

Reason : Prodetermined overhead rate = Rs.30 per machine hour


Actual machine hours = 500 hours
Applied overhead = 500 hours × Rs.30
(Standard rate for actual hours) = Rs.15,000

Actual overhead = Rs.15,900

Under absorption Rs.900


24. Answer : (b) < TOP >

Reason : Computation of total utilized machine hours:


Normal available hours per month per operator 200 hours
Less: Unutilized hours due to
Absenteeism 12
Leave 20
Idle time 8 40
Total utilized hours per operator per month 160 Total
hours for 3 operators × 3 months = 160 × 3 × 3 = 1,440 hours
Therefore, machine utilized is 1,440 hours (Machine cannot work without operator).
Normal hours for which wages are to be paid = 200 – 12 = 188 hours
Wages for 3 months = 188 hours × 3 × 3 × Rs.8 = Rs.13,536
Comprehensive Machine hour rate Rs.
Operators wages 13,536
Production Bonus (10% on Rs.13,536) 1,354
Power consumed (last quarter) 7,265
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.7,200 ÷ 4) 1,800
General management expenses (Rs.45,800 ÷ 4) 11,450
71,305 Comprehensive machine hour
rate = Rs.71,305 ÷ 1,440 hours = Rs.49.52.
25. Answer : (a) < TOP >

Reason :
Particulars April May June Total
Batch Production (units) 2,500 3,000 2,000 7,500
(Rs.) (Rs.) (Rs.) (Rs.)
Total sales value (@ Rs.15) 37,500 45,000 30,000 1,12,500
Less: Costs:
Materials 12,500 18,000 10,000 40,500
Labor 5,000 6,000 4,000 15,000
Overheads (Workings) 7,500 6,000 6,000 19,500
25,000 30,000 20,000 75,000
Profit 12,500 15,000 10,000 37,500
Profit per unit 5 5 5
Cost per unit 10 10 10 Profit
for 4400 units
Sales – 4400 × Rs.15 Rs.66,000
Cost – 4400 × Rs.10 Rs.44,000
Profit Rs.22,000 Workings:
Rs.5,000 ÷ Rs.2 Rs.6,000 ÷ Rs.2 Rs.4,000 ÷ Rs.2
Batch labor hours
= 2,500 hours = 3,000 hours = 2,000 hours
Overhead per hour Rs.24,000 ÷ Rs.30,000 ÷
Rs.18,000 ÷ 9,000
(Total Overheads ÷ 8,000 10,000
= Rs.2
Total labor hours) = Rs.3 = Rs.3
Overhead for the batch Rs.7,500 Rs.6,000 Rs.6,000
26. Answer : (a) < TOP >

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.
27. Answer : (d) < TOP >

Reason : Idle capacity of a plant is the difference between practical capacity and capacity based on sales
expectancy. It is not the difference between the maximum capacity and practical capacity or
maximum capacity and actual capacity or practical capacity and actual capacity. Therefore, (d) is
correct.
28. Answer: (b) < TOP >

Reason: Overhead absorption rate =


Rs.2,48,000 / [(400 x 8) + (400 x 12) + (200 x 22)]
= Rs. 2,48,000 ÷ 12,400 = Rs.20;
Total overhead costs for B = 400 x 12 x 20 = Rs.96,000.
29. Answer : (b) < TOP >

Reason:
Production 2,000/3,500 × Rs.14,00,000 Rs.8,00,000
Purchasing 300/550 × Rs.5,00,500 Rs.2,73,000
Inspection 200/600 × Rs.3,00,000 Rs.1,00,000
Total overheads Rs.11,73,000
30. Answer : (c) < TOP >

Reason : Total fixed overhead = 12,000 units x Rs.4.00 = Rs.48,000. Fixed overhead per unit based on
actual production = Rs.48,000 actual overhead / 10,000 units actual production = Rs.4.80
Total cost per unit = Material Rs.10 + Labor Rs.6 + Variable overhead Rs.3 + Fixed overhead
Rs.4.80 = Rs.23.80.
31. Answer : (c) < TOP >

Reason : President's salary is a period cost and not a product cost. The other costs represent the product
cost classifications of direct material, direct labor, and overhead. Therefore, (c) is correct.
32. Answer : (c) < TOP >

Reason :
Particulars P1 P2 P3 S1 S2
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Primary
13,600 14,700 12,800 9,000 3,000
Distribution
S1 (4:3:2:1) 3,600 2,700 1,800 (-) 9,000 900
S2 (3:3:2:2) 1,170 1,170 780 780 (-) 3,900
S1 (4:3:2:1) 312 234 156 (-) 780 78
S2 (3:3:2:2) 23 23 16 16 (-) 78
S1 (4:3:2:1) 6 5 3 (-) 16 2
S2 (3:3:2:2) 1 1 - - (-) 2
Total 18,712 18,833 15,555
33. Answer : (d) < TOP >

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.3,00,000, Rs.8,00,000 and
Rs.9,00,000 respectively by use of supplementary rate. The total amount = Rs.3,00,000 +
Rs.8,00,000 + Rs.9,00,000 = Rs.20,00,000; The amount of over absorbed = Rs.13,84,000 –
Rs.14,00,000 = Rs.16,000. The amount of over absorbed overhead is adjusted to work-in-progress
= Rs.16,000 x ( Rs.3,00,000 / Rs.20,00,000 ) = Rs.2,400.
34. Answer : (a) < TOP >

Reason : Options (b), (c), (d) and (e) are true of the advantages of departmentalization of overhead. But,
option (a) is not an advantage as departmentalization of overhead facilitates control of overhead
exp. by means of pre-determined budgets and not forecasted budgets.
35. Answer : (e) < TOP >

Reason : These costs are the fixed costs necessary to achieve a desired level of production or to provide a
desired level of service without decreasing product quality or service attributes. If this cost is not
recovered due to low demand, it is known as capacity cost. Therefore, (e) is correct.
36. Answer : (b) < TOP >

Reason : More accurate cost allocation can be accomplished when costs are more homogeneous. Direct
costs are costs traceable to the goods or services and do not have to be allocated. Hence options
(a) and (e) are incorrect. When the costs are more indirect in nature or when the different costs
vary depending upon different causes and effects then the cost allocation becomes more difficult
task and hence the accuracy is affected.
37. Answer : (c) < TOP >

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.
38. Answer : (c) < TOP >

Reason : Provident fund paid by the employer for factory employee must be charged as factory overhead
costs. Other options are not correct.
39. Answer : (d) < TOP >

Reason : Depreciation expenses are apportioned to cost centers on the basis of machine hours, not on the
basis of floor area occupied by each machine. Other options in (a), (b), ( c) and (e) are correct.
40. Answer : (b) < TOP >

Reason : Over-statement of work-in-progress represents the understatement of profits. Other options given
in (a), (c), (d) and (e) are not correct.
41. Answer: (b) < TOP >

Reason: The inspection cost relates to all air conditioners produced and is not easily traced to a specific air
conditioner. It is an indirect cost to the air conditioner industry. Other options are all direct cost to
manufacture air conditioner. Therefore, (b) is correct.
42. Answer: (a) < TOP >

Reason:
Rs.
Personal Department Cleaning 5/45 20,000
Dept. A 30/45 1,20,000
Dept. B 10/45 40,000
Total 1,80,000
Cleaning Department Dept. A 3,750/6,750 1,34,861
Dept. B 3,000/6,750 1,07,889
Total 2,42,750
Department B =
Rs.40,000 + Rs.1,07,889 + Rs.30,00,000 = Rs.31,47,889
Rate = Rs.31,47,889 / 27,000 = Rs.116.59
43. Answer : (c) < TOP >

Reason : Factory overhead is usually assigned to products based on a predetermined rate or rates. The
activity base for overhead allocation should have a high correlation with the incurrence of
overhead. Given only one cost driver, one overhead application rate is sufficient. If products differ
in the resources consumed in individual departments, multiple rates are preferable
44. Answer : (b) < TOP >

Reason : The profit difference is due to the fixed overheads being incorporated in the stock movements
under the absorption costing system.
Profit difference = Rs.14,625 (i.e. Rs.90,225 – Rs.75,600)
Physical stock movements = 2,250 units (i.e. 21,150units – 18,900units)
Rs.14, 625
2, 250units
Fixed overhead rate per unit = = Rs.6.50.
45. Answer : (a) < TOP >

Reason : (i) average fixed cost per unit = total fixed cost / number of units produced
(ii) Average semivariable cost per unit = total semivariable cost/ number of units produced
(iii) Average variable cost per unit = total variable cost / number of units produced
(iii) Average total cost per unit = total cost / number of units produced
As the numerator is constant, average fixed cost per unit is inversely proportional to the number of
units produced.
All of (ii), (iii) and (iv) has some variable part in them which increases with an increase in the
volume of units produced. So none of them are inversely proportional to the number of units
produced (although inversely related). So Average fixed cost per unit may be expected to decrease
by the greatest percentage with an increase in the volume of units produced.
46. Answer : (c) < TOP >

Reason : Under the terms of the contract, if contractee retains cash at the time of payments of the value
certified of work-in-progress, it is called Retention money. Other options are not correct.
47. Answer : (a) < TOP >

Reason :
Statement of equivalent Production Unit (FIFO)
Output
Input Material Conversion
Completed
1,28 1,28
Opening 0 Opening 0 40% 512 50% 640
7,20 6,25 1 1
Introduced 0 Introduced 0 00% 6,250 00% 6,250
Closing 950 80% 760 60% 570
8,48 8,48
0 0 7,522 7,460
Costs
during
the month Rs.1,12,830 Rs.89,520
Cost per Rs.
unit Rs. 15 12.00
The total cost of closing work-in-process
Material – 760 × Rs.15 = Rs.11,400
Conversion – 570× Rs.12.00 = Rs. 6,840
Rs.18,240
48. Answer : (d) < TOP >

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.
49. Answer : (b) < TOP >

Reason :
Particulars Indian Oil Bharat
Petroleum
Distance (Depots to factory – full load) 10 km 8 km
Distance covered per trip 20 km 16 km
Running time @ 40 km p.h. 30 minutes 24 minutes
Filling-in time 50 minutes 45 minutes
Emptying time 45 minutes 45 minutes
Total time per trip 125 minutes 114 minutes
Details of costs:
Variable operating charges @ Rs.2.20
Indian Oil(20 km x Rs.2.20) Rs.44.00 Rs.35.20
Bharat Petr. (16 km x Rs.2.20)
Fixed charges @ Rs.13.20 per hour
Indian Oil (125mint.x Rs.13.20 / 60mint) Rs.27.50 Rs.25.08
Bharat Petroleum
(114 mint. x Rs.13.20 / 60 mint.)
Total cost per trip Rs.71.50 Rs.60.28
Ton-km (full load)
Indian Oil (5 tons x 10 km) 50 ton-km 40 ton-km
Bharat Petroleum (5 tons x 8 km)
Cost per ton-km (Total cost per trip / Ton-km) Rs.1.43 Rs.1.51
50. Answer : (b) < TOP >

Reason : Normal spoilage is an inventoriable cost of production that is charged to cost of goods sold when
the units are sold. Abnormal spoilage is a period cost recognized when incurred. Rs.5,000 of
abnormal spoilage is therefore expensed during the month of March, 2005. In addition 50% of the
normal spoilage is debited to cost of goods sold because 50% (2,500 ÷ 5,000) of the units
completed were sold during the month. No spoilage is allocated to work-in-process because
inspection occurs after completion.
Therefore, normal spoilage = 50% of Rs.2,000 = Rs.1,000
Total spoilage charged against revenue = Rs.5,000 + Rs.1,000
= Rs.6,000
51. Answer : (e) < TOP >

Reason :
Material Conversion
Input Output % units % units
Units Completed 7,000 100% 7,000 100% 7,000
started
– 8,000
Normal 640 100% 640 80% 512
loss 8%
Abnormal loss 360 100% 360 80% 288
8,000 7,800
Cost Rs.36,000 Rs.19,500
Cost per unit Rs.4.50 Rs.2.50
Cost of abnormal loss = 360 × Rs.4.50 + 288 × Rs.2.50
= Rs.1,620 + Rs.720 = Rs.2,340.
52. Answer : (a) < TOP >

Reason : Rs. Rs.


Total manufacturing Costs 2,15,500
Less: Overhead costs:
Indirect labor 16,10
0
Factory overhead 31,30
0
Indirect material 25,50
0
Freight in 7,500 80,400
1,35,100
Less: Direct labor 43,240
Material consumed 91,860
Add: Closing material 6,490
98,350
Less: Opening material 16,120
Material purchased 82,230
53. Answer: (b) < TOP >

Reason: Cost per equivalent unit of ending inventory = Rs.10.00 x 3,000 equivalent units in ending
inventory = Rs.30,000.
Workings:
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.
54. Answer : (e) < TOP >

Reason : Percentage of rejection on output :


Process A – (6,000 / 12,000) x 100 = 50%
Process B - (1,800 / 18,000) x 100 = 10%
Process C- (3,400 / 17,000) x100 = 20%
Now, inputs have to be calculated in the reverse order based on percentage of output.
No. of
Output % of rejection Input
Process Rejections
(pieces) on output (pieces)
(pieces)
C 1,000 20% 200 1,200
B 1,200 10% 120 1,320
A 1,320 50% 660 1,980 The input of
process A will be 1,980 pieces for an output of 1,000 pieces in process C.
55. Answer : (d) < TOP >

Reason :
Equivalent units of production for the material (weighted average) =
100% of 550 units + 60% of 50 = 580 units;
Total costs = Rs.1,042 + Rs.9,282 = Rs. 10,324;
Cost per unit = Rs.10,324 / Rs.580 = Rs.17.80;
Total cost of finished goods = 550 units x Rs.17.80 = Rs.9,790.
56. Answer : (d) < TOP >

Reason : Weighted Average Method:


Input = 8,000 units + 34,000 units = 42,000 units;
Out put = 36,000 units + 6,000 units = 42,000 units;
Equivalent production units of conversion =
100% of 36,000 + 80% of 6,000 = 36,000 + 4,800 = 40,800 units;
FIFO Method:
Input = 8,000 units + 34,000 units = 42,000 units;
Out put = 8,000 units + 28,000 units + 6,000 units = 42,000 units;
Equivalent production units of conversion =
40% of 8,000 units + 100% of 28,000 units +80% of 6,000 =
= 3,200 + 28,000 + 4,800 = 36,000 units.
Excess equivalent units of production of conversion =
40,800 units – 36,000 units = 4,800 units.
57. Answer : (e) < TOP >

Reason : The costs involved in transporting costing are operating costs and running costs. Running costs are
the costs which vary more or less in direct proportion to the distance traveled like petrol and Semi-
variable costs are incurred in the form of tyre maintenance, painting etc. Insurance of the vehicle
cannot be considered as running cost.
58. Answer : (d) < TOP >

Reason :
Particulars JobA1 (Rs.) Job B2 (Rs.)
Selling price 1,66,650 1,28,250
Less Profit 15,150 21,375
(1,66,650 / 11) (1,28,250 / 6)
Total cost 1,51,500 1,06,875
Let, factory overhead percentage
on direct wages = f, and
Administrative overhead percentage on factory cost = a,
Factory cost of Job A1 = Rs.54,000 + Rs.42,000 + Rs.42,000f
Job B2 = Rs.37,500 + Rs.30,000 + Rs.30,000f
Total cost of production
Job A1 = (Rs.96,000 + Rs.42,000f) + (Rs.96,000 + Rs.42,000f) a = Rs.1,51,500
Job B2 = (Rs.67,500 + Rs.30,000f) + (Rs.67,500 + Rs.30,000f) a = Rs.1,06,875
Solving the 2 equations:
f = 60% = percentage of factory overhead on wages
A = 25% = percentage of administrative overhead on factory cost.
Factory cost of Job A3 = Rs.24,000 + Rs.20,000 + 60% on Rs.20,000
= Rs.56,000
Total cost of Job A3 = Rs.56,000 + 25% of Rs.56,000 = Rs.70,000.
Selling price = Rs. 70,000 ÷ 0.875 = Rs. 80,000 (Since, Profit = 12.5% on sale price)
59. Answer : (c) < TOP >

Reason : Equivalent production unit means the conversion of partly completed units into an equivalent
number of completed units in order that costs may be shared on an equitable basis. Other options
are not correct.
60. Answer : (d) < TOP >

Reason : In process costing, cost is accumulated on time basis and according to process or departments. In
this method, prime cost cannot be traced with a particular order due to continuous production. In
job costing, cost is accumulated according to job order or batch size. Job cost is computed when
the job is completed. It does not consider the period of cost. Therefore (d) is false.
61. Answer : (c) < TOP >

Reason : Occupancy days in a year


For single room = 25 × 365 × 80% = 7300
For double room = 15 × 365 × 80% = 4380
Total room occupancy = 7300 + 1.5 (4380) = 7300 + 6570 = 13,870
Total cost:
Single room = 7300 (Rs.65 + Rs.25)= Rs. 6,57,000
Double room = 4380 (Rs.45 + Rs.35)= Rs. 3,50,400
Total cost = Rs. 10,07 400
Margin (25% hire charge) = Rs. 3,35,800
Total = Rs. 13,43,200
Rent per day of single room = Rs.13,43,200 / 13,870 = Rs.96.84
Rent of a double room per day = Rs.96.84 (1.5) = Rs.145.26 or Rs.145.
62. Answer : (e) < TOP >

Reason : Joint cost = Rs.4,00,000 + Rs.2,00,000 + Rs.3,00,000 = Rs.9,00,000


Total sales value of units produced = 300 x Rs.3,000 + 240 x 4,000 + 120 x 5,000 = Rs.9,00,000
+ Rs.9,60,000 + Rs.6,00,000 = Rs.24,60,000.
Share of joint costs of Product B = (Rs.9,00,000 / Rs24,60,000) x Rs.9,60,000
= Rs.3,51,219.51
The cost of closing inventory of Product B = (Rs.3,51,219.51 / 240) x 90
= Rs.1,31,707
63. Answer : (b) < TOP >

Reason :
Labor
Output Material
and overheads
Completed
25 100% 25 100% 25
and transferred
Work-in-progress 25 100% 25 60% 15
50 50 40 Total
Cost – Rs.1,50,000 Rs.1,60,000
Cost per unit – Rs. 3,000 Rs.
4,000
Value of Work-in-progress: Material – 25 × Rs.3,000 = Rs.
75,000
Work-in-progress – Labour & Overheads – 15 × Rs.4,000 = Rs. 60,000

=Rs.1,35,000
64. Answer : (d) < TOP >

Reason : Contract A/C Cr


Particulars Rs Particulars Rs
Materials 2,25,500 Work certified 4,00,000
Labor costs 1,23,500 Work not 1,20,000
certified
Direct expenses 72,000
Material in hand 18,375
Depreciation
on plant 68,500
(Rs.1,71000–Rs.1,02,500)
Notional profit 48,875
5,38,375 5,38,375
Profit
2 Rs.3, 50, 000
3 Rs.4, 00, 000
transferred to P/L a/c= × Rs.48,875 ×
= Rs.28,510
Profit transferred to Reserve a/c = Rs.48,875 – Rs.28,510
= Rs.20,365
65. Answer : (d) < TOP >

Reason :
Sales value of production
J – 8,000 x Rs.4 Rs.32,000 (40%)
K – 8,000 x Rs.6 Rs.48,000 (60%)
Rs.80,000 (100%)
Common cost:
Direct materials Rs.25,500
Direct labor Rs.10,000
Overheads Rs.30,000
Rs.65,500
Less: Sales value of by-product
Rs. 500
(1,000 x Re.0.50)
Rs.65,000

J K Total
(Rs.) (Rs.) (Rs.)
Production cost 26,000 39,000 65,000
Less: Closing stock
J = 1,000, K=2,000 3,250 9,750 13,000
Cost of sales 22,750 29,250 52,000
Sales 28,000 36,000 64,000
Profit 5,250 6,750 12,000
66. Answer : (e) < TOP >

Reason : Cost plus contract protects the contractor from the risk of market fluctuations. Salary of
supervisor is the direct cost of the contract account. In contract account, certified work-in-
progress is valued at contract value and uncertified work-in-progress is valued at cost. If there are
any cost fluctuations, escalation clause will protect the contractor. In contract account, full profit
is not credited to profit and loss account. Therefore, (e) is correct.
67. Answer : (c) < TOP >

Reason : Joint costs are apportioned on the basis of relative sales value of the products:
Relative
Sales Separate Sales value Share of Net
Product value costs at split joint cost income
(Rs.) (Rs.) off point (Rs.) (Rs.)
(Rs.)
M 1,15,000 30,000 85,000 *68,000 17,000
N 10,000 6,000 4,000 3,200 800
P 4,000 - 4,000 3,200 800
Q 30,000 1,000 29,000 23,200 5,800
Total 1,59,000 37,000 1,22,000 97,600 24,400 * Rs.
85,000 ÷ Rs. 1,22,000 x Rs. 97,600 = Rs. 68,000
68. Answer : (c) < TOP >

Reason : Contribution per unit = Rs.18.75 – Rs.10.50 = Rs.8.25


Required sales = (Rs.6,30,625 + Rs.50,000) ÷ Rs.8.25 = 82,500 units.
69. Answer : (c) < TOP >

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
Add: Adverse variable cost variance 1,00,000
56,25,000
Less: Closing stock Rs.26 × 25,000 6,50,000
49,75,000
Gross Profit (sales – cost) 25,25,000
Less: Selling expenses:
Variable 1,87,500 × Rs.6 11,25,000
Fixed 6,30,000 17,55,000
7,70,000
Less: Under absorption: 1,00,000
Profit 6,70,000
Profit under Marginal Costing:
Rs. Rs.
Sales – 1,87,500 × Rs.40 75,00,000
Cost of goods sold:
Opening St – 12,500 × Rs.22 2,75,000
44,00,00
Production – 2,00,000 × Rs.22
0
46,75,00
0
Less: Closing Stock – 25,000 × Rs.22 5,50,000
41,25,00
0
Less: Adverse variance 1,00,000
42,25,00
0
Less: Variable selling expenses 11,25,000 53,50,000
Contribution 21,50,000
Less: Fixed cost: – Manufacturing Rs. 9,00,000
Selling 6,30,000 15,30,000
Profit 6,20,000
70. Answer : (c) < TOP >

Reason :
Plant A B C 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 60 70 60 190 P/V
350
×100 = 35%
1000
ratio of merged plant =
Fixed Cost 190
= = Rs.542.86 lakh
P / V ratio 35%
Break even point of merged plant =
Break even capacity = (542.86/1,000) × 100 = 54.29%.
71. Answer : (a) < TOP >

Reason : Contribution to sales ratio = Change in profit / Change in sales


North = Rs.180 / Rs.400 = 45%;
East = Rs.90 / Rs.150 = 60%; South = Rs.110 / Rs.200 = 55%;
Fixed cost:
North = Rs.1,100 x 45% –Rs.135 = Rs.360;
East = Rs.1,450 x 60% –Rs.210 = Rs.660;
South = Rs.1,200 x 55% - Rs.330 = Rs.330;
Total fixed cost = Rs.360 + Rs.660 + Rs.330 = Rs.1,350.
Total sales of 3 region = Rs.3,750;
Total profit of 3 region = Rs.675
Therefore, Sales x contribution to sales ratio = fixed cost + profit
Rs.3,750 x contribution to sales ratio = Rs.1,350 + Rs.675
Contribution to sales ratio = Rs.2,025 / Rs.3,750 = 54%
Break-even sales = Rs.1,350 / 54% = Rs.2,500.
72. Answer : (d) < TOP >

Reason : Fixed production cost per unit = Rs.3,60,000 /1,80,000 = Rs.2


Profit Statement for the Year (Under Absorption Costing Method)
Total
Amount
Particulars amount
(Rs.)
(Rs.)
A Sales revenue 1,50,000 × Rs.20 30,00,000
B Cost of production
Variable production cost 1,60,000 × Rs.11 17,60,000
Increase in variable cost 35,000
Fixed cost 3,60,000
21,55,000
Opening stock 10,000 × Rs.13 (Working Note) 1,30,000
22,85,000
Less: Closing stock 20,000 units (W N) 2,69,375
20,15,625
C. Gross profit (A-B) 9,84,375
D. Selling expenses
Variable (1,50,000 x Rs.3) 4,50,000
Fixed 2,70,000 7,20,000
E. Net profit (C– D) 2,64,375
Working Notes:
In the absence of information concerning stock, it is valued at variable cost Rs.11.00 per unit plus
an apportionment of fixed cost at normal capacity, i.e. Rs.2.
Cost of production of 1,60,000 units = Rs.21,55,000
Cost of 20,000 units = Rs.21,55,000/1,60,000 × 20,000 = Rs.2,69,375.
Using the FIFO approach has solved the above question, but using other approaches like average
costing, etc can be solved.

< TOP OF THE DOCUMENT >

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