Professional Documents
Culture Documents
1. AB Ltd is organized into two large divisions – A and B. Division A produces a component which is <
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used by division B in making a final product. The final product is sold for Rs.480. Division A has a
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capacity to produce 2,400 units and the entire quantity can be purchased by division B.
Division A informed that due to installation of new machines, its depreciation cost has gone up and
hence wanted to increase the price of the component to be supplied to division B at Rs.264. Division B,
however, can buy the component from the outside market at Rs.264 each. The variable cost of division
A is Rs.228 and fixed cost is Rs.24 per component. The variable cost of division B in manufacturing
the final product by using the component is Rs.180 (excluding the component cost).
If division B purchases the entire component from division A, the total contribution of the company as
a whole is
(a) Rs.5,47,200 (b) Rs. 86,400 (c) Rs.1,72,800 (d) Rs.7,20,000 (e)
Rs.1,15,200.
(1 mark)
2. Chakri Ltd. has furnished the following data relating to its product for the year 2003-04: <
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Annual production (units) 30,000 >
Material cost (Rs.) 90,000
Other variable costs (Rs.) 1,80,000
Fixed cost (Rs.) 60,000
Total cost (Rs.) 3,30,000
Apportioned investment (Rs.) 3,00,000 Assuming income tax rate of 40%, if the
company desires to earn a post tax profit of 15% on listed sale price when trade discount is 35%, the
net sale price per unit would be
(a) Rs.35.00 (b) Rs.30.00 (c) Rs.27.50 (d) Rs.25.00 (e)
Rs.17.88.
(2 marks)
3. Karuna Ltd. has two divisions - A and B. Division A has the capacity to manufacture 1,50,000 units of <
Answer
a special component LKJ annually and it has some idle capacity currently. The budgeted residual
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income for the division A is Rs.10,00,000. The relevant details extracted from the budget of A are as
under:
Sales (to outside customers) 1,20,000 units @ Rs.180 per unit
Variable cost per unit Rs.160
Divisional fixed cost Rs.8,00,000
Capital employed Rs.75,00,000
Cost of capital 12% per annum Division B received an
order for which it requires 30,000 units of a component similar to LKJ. An additional variable cost of
Rs.5 per unit will be incurred to make minor modifications to LKJ to suit the requirements of Division
B.
The minimum transfer price per unit which Division A should quote to Division B to achieve its
budgeted residual income is
(a) Rs.185 (b) Rs.170 (c) Rs.165 (d) Rs.160 (e) Rs.175.
(2 marks)
4. A timber merchant purchased 1,000 cft. of timber logs on April 01, 2004 at the rate of Rs.100 per cft <
and stored them in his timber yard for six months for seasoning. In the timber yard the following items Answer
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of expenses were incurred during the period of seasoning
Rent –Rs. 1,250 per month
Salaries of 4 guards at the rate of Rs. 250 per month
Incidental expenditure for maintenance, power, lighting, etc. Rs. 750 per month
Annual share of administration overheads Rs. 10,000.
50% of the floor area of the godown and other connected operations were incurred for stocking the
seasoned timber. Loss in volume of the logs due to seasoning should be taken at 10%.
If the timber merchant desires a profit of 15% on cost, the selling price of the seasoned timber per cft as
on October 01, 2004 is
(a) Rs. 142.47 (b) Rs. 128.23 (c) Rs. 111.50 (d) Rs. 123.89 (e) Rs. 132.28.
(2 marks)
5. Which of the following pricing techniques ignores fixed cost? <
Answer
(a) Standard cost based pricing (b) Full cost pricing >
(c) Cost plus profit pricing (d) Return on investment based pricing
(e) Differential cost pricing.
(1 mark)
6. John Ltd. produces and sells 500 units of a product each month with total variable costs of Rs.6,000 <
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and total fixed costs of Rs.6,000. Idle capacity would permit the acceptance of a special sales order for
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100 units each month. The average unit cost per month of producing and selling the total output, if the
special order is accepted, would be
(a) Rs.12 (b) Rs.18 (c) Rs.22 (d) Rs.24 (e) Rs.20.
(1 mark)
7. The standard and actual data for a product are as under <
Answer
Standard Actual >
Particulars Quantity Rs. Quantity
Raw Material I 300 Kg 4 per unit 350 Kg
Raw Material II 200 Kg 3 per unit 160 Kg
Skilled labour 20 hours 10 per hour 22 hours
Unskilled labour 10 hours 7 per hour 6 hours There are
no price variances .The standard process loss is 10% of input .But actual loss is 14% of output .The
total prime cost variance is
(a) Rs.8.82(Adverse) (b) Rs.99.82(Adverse)
(c) Rs8.82(Favorable) (d) Rs.84.10(Adverse)
(e) Rs.84.10(Favorable).
(2 marks)
8. Sarada Vilas Bank (SVB) sells services rather than tangible products. It makes auto and home loans, <
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processes other companies’ credit card transactions, and provides account services to individual and
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commercial checking account customers. SVB managers want to determine how far service revenues
could fall below budgeted revenues before losses occur from operations. The managers want to know
the bank’s
(a) Sales mix (b) Relevant revenue range
(c) Margin of safety (d) Variable costs
(e) Contribution margin.
(1 mark)
9. The variable-cost percentage in sales plus the contribution margin percentage in sales equals to <
Answer
(a) Gross margin (b) Operating leverage >
(c) 100% (d) Target net income (e) Contribution to sales ratio.
(1 mark)
10. ABC Ltd.’s managers want to control, and reduce if possible, the company’s production costs. They <
Answer
must determine how production costs are related to and affected by various business activities. These
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managers need to understand
(a) Variable costs (b) Cost behaviors
(c) Fixed costs (d) Relevant ranges (e) Variable and fixed costs.
(1 mark)
11. Which of the following statements is false? <
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(a) Differential cost pricing could bring about pricing decisions that tend to disregard the necessity of >
recovering total costs in the long run
(b) Differential cost pricing is not related to economic marginal analysis
(c) Full cost pricing ignores the vital economic considerations of demand and competition
(d) Full cost pricing is prone to distortion by accounting misapplication such as an unjustifiable
inclusion of manufacturing overhead based on predetermined rates
(e) ROI pricing method guides management in determining what selling price will provide a given
rate of return.
(1 mark)
12. A calculated target selling price based on mark-up percentages may be adjusted depending on factors <
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such as
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I. Future capacity available
II. Extent of competition from other firms
III. Management’s general knowledge about the market.
(a) Only (I) above (b) Only (IV) above (c) Both (II) and (III) above
(d) (I), (II) and (III) above (e) (I), (II), (III) and (IV) above.
(1 mark)
14. The transfer price which is usually based on the listed price of an identical or similar product or <
Answer
service, or the price of a competitor is called
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(a) Marginal cost transfer pricing (b) Cost plus a mark up transfer pricing
(c) Negotiated transfer pricing (d) Full cost transfer pricing
(e) Market based transfer pricing.
(1 mark)
15. Which of the following statements is/are true? <
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I. Quarterly manufacturing cost budgets may legitimately show widely varying manufacturing costs >
per unit if production is not evenly distributed
II. The first financial budget prepared is the cash budget
III. A flexible budget is a budget prepared for different levels of activity
(a) Only (I) above (b) Only (II) above (c) Only (III) above
(d) Both (I) and (III) above (e) (I), (II) and (III) above.
(1 mark)
16. Which of the following statements is/are false? <
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I. The first step in preparing a master budget is the preparation of the cash budget >
II. Normally, the last budget prepared is the budgeted balance sheet
III. Planned production for the period can be expressed as the budgeted sales units plus the
desired ending inventory less the beginning inventory
(a) Only (I) above (b) Only (II) above (c) Only (III) above
(d) Both (I) and (II) above (e) (I), (II) and (III) above.
(1 mark)
17. Which of the following statements is/are true? <
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I. The average time required for the cash invested in inventories to be converted into the cash
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ultimately collected on sales made to customers is called the operating cycle
II A budget is a comprehensive financial plan setting forth the expected route for achieving the
financial and operational goals of an organization
III. One of the benefits derived from budgeting is the assignment of decision-making
responsibilities
(a) Both (I) and (III) above (b) Only (II) above
(c) Both (II) and (III) above (d) Both (I) and (II) above
(e) (I), (II) and (III) above.
(1 mark)
18. Which of the following statements is/are false? <
Answer
I. The budget director or chief budget officer, should not only consider financial resources >
when preparing the budget, but should also take into consideration human resources.
II. A set of written instructions that specifies who will provide budgetary data and its form, and
who should receive various schedules comprising the budget, can be found in the budget
manual.
III. The master budget reflects the impact of only operating decisions.
Variances Rs.
Labor rate 1,875 (A)
Labor efficiency 1,275 (F)
Labor idle time 700 (A)
Material price 1,850 (F)
Material usage 1,200 (F) The standard prime cost per unit is
(a) Rs. 13.00 (b) Rs. 12.73 (c) Rs. 7.30 (d) Rs. 7.50 (e) Rs. 5.70.
(2 marks)
40. Monarch Ltd.has furnished the following production budget pertaining to a single product for the <
Answer
month of September 2004:
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Production quantity 2,40,000 units
Production costs:
Material 3,36,000 kg at Rs.4.10 per kg
Direct labor 2,16,000 hours at Rs.4.50 per hour
Variable overheads Rs. 4,75,200
Fixed overheads Rs.15,21,600 The variable overheads are absorbed
at a predetermined direct labor hour rate and the fixed overheads are absorbed at a predetermined rate
per unit of output.
During the month the actual production was 2,20,000 units and the following costs were incurred:
Material 3,13,060 kg at Rs.12,45,980
Direct labor 1,94,920 hours at Rs.8,86,886
Variable overheads Rs.4,33,700
Fixed overheads Rs.15,01,240 The variable overhead efficiency variance
and fixed overhead volume variance are
(a) Rs.1,900 (F) and Rs.1,26,800 (A) respectively
(b) Rs.6,776 (F) and Rs.1,06,440 (A) respectively
(c) Rs.6,776 (F) and Rs.4,876 (A) respectively
(d) Rs.6,776 (F) and Rs.1,26,800 (A) respectively
(e) Rs.4,876 (A) and Rs.1,26,800 (F) respectively.
(2 marks)
41. Performance reports should be designed to meet organizational needs. In this regard, which of the <
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following are normally included in performance reports?
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I. Specific time horizons
II. Strategic plans
III. Exceptional items that are controllable
IV. A relationship to the organizational structure
V. A user focus.
(a) (I), (II) and (IV) above (b) (I), (II), (III) and (IV) above
(c) (I), (II), (IV) and (V) above (d) (I), (III), (IV) and (V) above
(e) (I), (II), (III), (IV) and (V) above.
(1 mark)
42. For information to be relevant <
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I. It must relate to the future >
II. It must differ among alternatives
III. It must be completely accurate
Which of the given statement(s) is/are true?
(a) (I) only (b) Both (I) and (II) above
(c) (I), (II) and (III) above (d) Both (I) and (III) above (e) Both (II) and (III) above.
(1 mark)
43. When comparing performance report information for top management with that for lower level <
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management
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(a) Top management reports are more detailed
(b) Lower level management reports are typically for longer time periods
(c) Top management reports show control over fewer costs
(d) Lower level management reports are likely to contain more quantitative data and less financial data
(e) Top management reports are usually not of the exception type but present a complete analysis of
all variances.
(1 mark)
44. Scrap and costs of spoiled units that cannot be salvaged are the examples of <
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(a) Appraisal costs (b) Internal failure costs >
(c) External failure costs (d) Prevention costs (e) Committed costs.
(1 mark)
45. Responsibility accounting is a system where <
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(a) The accounting department is responsible for all cost accounting and financial reporting activities >
(b) Critical processes and key success factors are the primary activities for which accounting data is
gathered
(c) Lower-level managers are responsible for meeting specific objectives and reporting on the results
(d) Everyone in the organization is accountable for achieving corporate goals
(e) An accounting system where activity based costing is implemented.
(1 mark)
46. In which type of responsibility center the manager is held accountable for its profits? <
Answer
I. Cost center >
II. Profit center
III. Revenue center
IV. Investment center
(a) (II), (III) and (IV) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) Both (II) and (IV) above.
(1 mark)
47. While preparing a performance report for a cost center using flexible budgeting techniques, the planned <
Answer
cost column should be based on
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(a) Cost incorporated in the master budget
(b) Budgeted amount in the original budget prepared before the beginning of the period
(c) Budget adjusted to the actual level of activity for the period being reported
(d) Actual amount for the same period in the preceding year
(e) Budget adjusted to the planned level of activity for the period being reported.
(1 mark)
48. The following data pertain to Division X of Pioneer Ltd. for the year 2003-04: <
Answer
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Sales Rs.6,20,000
Operating Margin 11.29%
Capital turnover 4
Imputed interest rate 13%
The residual income of the division is
(a) Nil (b) Rs.22,325 (c) Rs.31,480
(d) Rs.44,500 (e) Rs.49,850.
(1 mark)
49. There are various budgets within the master budget. One of these budgets is the production budget. <
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Which of the following best describes the production budget?
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(a) It aggregates the monetary details of the operating budget
(b) It is calculated from the desired ending inventory and the sales forecast
(c) It includes required material purchases
(d) It includes required direct labor hours
(e) It summarizes all discretionary costs.
(1 mark)
50. The primary responsibility for establishing and maintaining an internal control structure rests with <
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(a) The top management (b) The Management Accountant >
(c) The external auditor (d) The internal auditor (e) The controller.
(1 mark)
51. Zindal, a server at Bisroy Restaurant, takes personal pride and satisfaction in doing his very best to <
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provide customers with outstanding service. Likewise, Bisroy’s owners have identified customer service
as one of several organizational goals for the restaurant. When the organization and its employees share >
the same goals, they are said to have
(a) Total quality management (b) Goal congruence
(c) A long-range plan (d) Participative management (e) Centralized control.
(1 mark)
52. The two internal roles of management accounting are <
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(a) Supplying information and providing no monetary awards >
(b) Providing monetary and non monetary awards
(c) Supplying information and preparing financial reports
(d) Supplying information and control procedures
(e) Supplying information and monetary awards.
(1 mark)
53. Action Plan Ltd. manufactures two products – A and P, using same facilities and similar process. The <
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company has furnished the following information pertaining to two products for the year ending
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September 30, 2004.
Particulars Product A Product P
Direct labor hours per unit 4 2.5
Machine hours per unit 5 4
Number of set ups during the period 22 18
Number of orders handled during the period 16 19
Production units 6,000 4,340 Total
production overhead costs for the period are as follows:
Particulars Rs.
Machine activity costs 2,40,000
Set-ups costs 56,000
Order handling costs 52,500
3,48,500 The absorption of total production overheads of both the
products on the basis of a suitable cost driver, using Activity Based Costing method, is
Product A (Rs.) Product P (Rs.)
(a) 2,06,827 1,41,673
(b) 1,82,827 1,41,673
(c) 2,06,827 1,16,473
(d) 1,74,250 1,74,250
(e) 2,40,000 1,08,500.
(2 marks)
54. Which of the following factors is/are considered in determining the period of the short-range budget? <
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I. The budget period should be long enough to allow for the financing of production >
well in advance of actual needs
II. The budget period should be long enough to cover complete production of various products
III. For business of a seasonal nature, the budget period should cover at least one entire seasonal
cycle
IV. The budget period should coincide with the financial accounting period for comparison
The company wants to change its credit policy from next month as:
30% of sales Cash sales
40% of sales in the month following the month of sales
Balance In the second month following the month of sales with a bad debts of 8%
on the balance payable.
The amount to be collected in the month of November 2004 is:
(a) Rs.64,20,000 (b) Rs.64,64,000 (c) Rs.62,78,000 (d) Rs.58,76,000 (e) Rs.58,40,000.
(2 marks)
62. Firewall Company manufactures a single product at the operated capacity of 40,000 units while the <
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normal capacity of the plant is 50,000 units per annum. The company has estimated 20% profit on sales
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realization and furnished the following budgeted information:
50,000 units 40,000 units
Particulars
(Rs.) (Rs.)
Fixed overheads 2,00,000 2,00,000
Variable overheads 3,00,000 2,40,000
Semi-variable overheads 3,00,000 2,60,000
Sales realization 18,00,000 14,40,000 The company
has received an order from a customer for a quantity equivalent to 10% of the normal capacity. It is
noticed that prime cost per unit of product is constant
If the company desires to maintain the same percentage of profit on selling price, the minimum price per
unit to be quoted for new order is
(a) Rs.26.63 (b) Rs.27.97 (c) Rs.25.40 (d) Rs.23.26 (e) Rs.30.59.
(2 marks)
63. Moti Ltd. pays commission to its salesmen in the month the company receives cash for sales, which is <
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equal to 4% of the cash inflows. The company has budgeted sales of Rs.3,15,000 for October 2004,
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Rs,4,25,000 for November 2004 and Rs.4,85,000 for December 2004. 50% of the sales are on credit.
Experience indicates that 70% of the budgeted credit sales will be collected in the month following the
sales. 25% are expected to be realized in the second month following the month of sales and remaining
5% will be non-recoverable.
The total amount of sales commission for the month of December 2004 is
(a) Rs.24,750 (b) Rs.21,250 (c) Rs.18,750 (d) Rs.17,225 (e) Rs.15,650.
(2 marks)
64. Leo Toys manufactures a toy monkey with moving parts and a built-in voice box. Projected sales for 5 <
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months are as follows:
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Month Projected sales in units
November 2004 4,000
December 2004 4,300
January 2005 4,500
February 2005 4,250
March 2005 4,400 Each toy requires direct materials from a
supplier at Rs.35 for moving parts. Voice boxes are purchased from another supplier at Rs.10 per toy.
Labor cost is Rs.20 per toy and variable overhead cost is Rs.5 per toy. Fixed manufacturing overhead
applicable to production is Rs.41,000 per month. It is the practice of the company to manufacture an
output in a month which is equivalent to 1.2 times of the following month’s sales.
The production budget for the month of December 2004 and the production cost budget for the month of
January 2005 are
(a) 4,800 units and Rs.3,78,000 respectively
(b) 5,400 units and Rs.3,98,000 respectively
(c) 5,160 units and Rs.3,98,000 respectively
(d) 5,400 units and Rs.3,57,000 respectively
(e) 5,280 units and Rs.3,24,000 respectively.
(2 marks)
65. ABC Ltd. is producing three complimentary products .The demand for the products is very much <
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fluctuative. The demand estimates for the products at normal capacity are as follows:
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Product Selling price (Rs.) Unit Variable cost (Rs.) Sales units
A 10 4 15,000
B 15 8 20,000
C 18 9 5,000 Fixed cost is
Rs.80,000(totally indirect cost).At the end of the budget period the total sales margin variance is found
to be Rs.1,65,000 (Adverse) but the same sales mix, cost and price were maintained because of the
complimentary nature. If there are no opening and closing inventories of WIP, finished goods and raw
materials, the fixed overhead cost variance is
66. Eslow Ltd. manufactures a single product using three raw materials J, K and L. The details of standard <
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cost and actual cost for the month of September 2004 are as under:
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Standard Cost
Particulars Kg Price per kilogram (Rs.)
Material J 15 4
Material K 12 3
Material L 8 6
35
Less: Standard loss 3
Standard Yield 32
Actual Cost
Particulars Kg Price per kilogram (Rs.)
Material J 1,680 4.25
Material K 1,650 2.80
Material L 870 6.40
4,200
Less: Loss 552
Actual Yield 3,648
67. Shivam Ltd. uses standard process costing method. The standard process cost card per month shows that <
Answer
3 hours of direct labor is required to produce one kg. of finished product and the fixed overheads, which
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are recovered on direct labor hours, amount to Rs.180 per kg. of output. The budgeted output is 1,000
kg. per month. Actual production during the month of September 2004 is 1200 kg. and the direct labor
hours utilized during the month were 3,300.
The details of opening and closing work-in progress (WIP) are as under:
Opening work-in-progress – 250 kg. (Degree of completion of labor and overheads – 60%)
Closing work-in-progress – 450 kg. (Degree of completion of labor and overheads – 20%)
The company uses FIFO method for evaluation of stocks.
The fixed overhead efficiency variance is
(a) Rs.25,200 (Adverse) (b) Rs.18,000 (Favorable)
(c) Rs.18,000 (Adverse) (d) Rs. 7,200 (Favorable)
(e) Rs. 7,200 (Adverse).
(2 marks)
68. Alpha Ltd. Is preparing sales budget for 3rd quarter .The details of the first two quarters are <
Answer
>
Particulars 1st Quarter 2nd Quarter
Sales Value (Rs.) 8,000
Prime cost (Rs.) 3,000
Overheads (Rs.) 4,000 3,900
Sales Units 200 240
There is a reduction in
nd
fixed overheads by Rs.200 in 2 quarter and same will continue. The variable costs will increase by
20% in 3rd quarter .The budgeted sales for the 3rd quarter to maintain the same profit per unit as in 1st
quarter is
(a) 168 units (b) 130 units (c) 138 units (d) 145units (e) 122 units.
(2 marks)
69. Free Flow Ltd. presently sells 50,000 executive model pens per month. In next budget period it wants to <
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produce economy model. The details are as follows:
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Particulars Actuals for executive Estimates for economy
model (Rs.) model (Rs.)
70. Shining India Ltd’s performance for the last year is : <
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Net Profit = Rs. 2,00,000 >
Sales = Rs.18,00,000
Net assets = Rs.10,00,000.
At the end of last year it was proposed to purchase machinery whose cost was equal to 5% of existing
net assets. If ROI and profit margin ratio remain to be same in the next budgeted
year, then the % increase in sales required is
(a) 5.75 (b) 4.00 (c) 5.00 (d) 4.76 (e) 6.55.
(2 marks)
71. The standard and actual data for a product are as under <
Answer
>
Standard Actual
Particulars
Quantity Kg Rs. Quantity Kg Rs.
Raw Material I 300 4 per unit 350 4.50 per unit
Raw Material II 200 3 per unit 160 2.80 per unit
Out put (units) 1,200 1,160
By how
much percentage, the deviation of actual prices from standard prices has contributed in material cost
variance?
(a) 50.53% (b) 54.53% (c) 60.53% (d) 55.33% (e) 61.33%.
(2 marks)
(a) 67% (b) 71% (c) 70% (d) 65% (e) 60%.
(2 marks)
Suggested Answers
Management Accounting - II (152) – October 2004
1. Answer : (c) < TOP
>
Reason : Rs.
Contribution of division A
Sales – 2,400 × Rs.264 = 6,33,600
Less : Variable cost:
Purchase cost (2,400 × Rs.228) = 5,47,200
86,400
Contribution of division B
Sales – 2400 × Rs.480 11,52,000
Less : Variable cost
Division A: Rs.6,33,600
Own cost
2,400 × Rs.180 Rs. 4,32,000 10,65,60
0
86,400
Total Contribution - 1,72,800
2. Answer : (e) < TOP
>
Reason : Let, sale value = x
[ x(1 −0.35) −Rs.90, 000 −Rs.1, 80, 000 −Rs.60, 000 ] (1 −Tax rate)
0.15x =
[ 0.65x −Rs.3, 30, 000]
0.15x = 0.6 = 0.39x – Rs.1,98,000
0.24x = Rs.1,98,000
x = Rs.1,98,000 ÷ 0.24 = Rs.8,25,000
Sale price / unit= Rs.8,25,000 ÷ 30,000 = Rs.27.50
Net sale price = 27.50 × .65 = Rs.17.88
3. Answer : (e) < TOP
>
Reason :
Fixed costs 8,00,000
Return on capital employed (Rs.75,00,000 x 12%) 9,00,000
Residual income desired 10,00,000
Total desired contribution 27,00,000
Contribution per unit
from outside sales = Rs.180 – Rs.160 = Rs.20 per unit
Total contribution from outside sales = Rs.20 per unit x 1,20,000 units = 24,00,000
Minimum contribution to be earned from supply to division B
= Rs.27,00,00 – Rs.24,00,000 = Rs. 3,00,000
Rs. 3,00,000
30,000 units
Contribution per unit on additional 30,000 units = = Rs.10 per unit
Variable cost for minor modification = Rs.5 per unit
Minimum transfer price per unit to be quoted = Rs.160 + Rs.10 + Rs.5 = Rs.175
4. Answer : (a) < TOP
>
Reason : Statement showing the determination of selling price of seasoned timber as on 1st October, 2004:
Quantity (cft) Amount (Rs.)
Cost of timber logs at the rate of Rs.100 per cft. 1,000 1,00,000
Seasoning expenses for 6 months:
Rent (Rs. 1,250 x 6 x ½) 3,750
Salaries of 4 guards (Rs. 250 x 4 x 6 x ½) 3,000
Incidental expenses (Rs. 750 x 6 x ½) 2,250
Administration overheads (Rs. 10,000 x ½ x ½) 2,500
Total 1,000 1,11,500
Less: Normal loss at the rate of 10% 100 -
Total(net) 900 1,11,500
Profit margin (15% of cost) 16,725
Total selling price 1,28,225
Selling price per cft (Rs. 1,28,225 ÷ 900) 142.47
5. Answer : (e) < TOP
>
Reason : Differential cost technique for pricing ignores fixed cost. Differential cost technique is the change of cost
for different options. Therefore, fixed cost has no relevancy with these differential cost techniques. Other
techniques mentioned in (a), (b), (c) and (d) consider the fixed cost in pricing the goods
6. Answer : (c) < TOP
>
Reason : The variable cost per unit is Rs.6,000/500 = Rs.12. The average fixed cost per unit with the special order is
Rs.6,000/600 = Rs.10. The average cost is Rs.12+Rs.10 = Rs.22.
7. Answer : (d) < TOP
>
Reason : Total prime cost variance=material cost variance + Labour cost variance material cost variance = Actual
cost of materials used – Standard Material cost of actual out put
Labour cost variance= Actual cost of labour used – Standard labour cost of actual out put
Actual cost of materials used = 350 x Rs.4 + 160 x Rs.3 =Rs.1,880
Standard material cost per unit = (300 x Rs.4 + 200 x Rs.3) / (500 kg of input – 10% of 500) = Rs.4
Actual out put = (350+160) x 100 /114 = 447.37 units
Standard Material cost of actual out put = 447.37 x Rs.4 = Rs.1,789.48
material cost variance = Actual cost of materials used – Standard Material cost of actual out put = Rs.1,880
– Rs.1,789.48=Rs.90.52(Adverse)
Actual cost of labour used=22 x Rs.10+ 6 x Rs.7 = Rs.262
Standard labour cost per unit = (20 x Rs.10 + 10 x Rs.7) / (500 kg of input – 10% of 500) = Re.0.60
Standard labour cost of actual out put=447.37 units x Re.0.60 = Rs.268.42
Labour cost variance= Actual cost of labour used – Standard labourl cost of actual out put=Rs.262 –
Rs.268.42 = Rs.6.42 (Favorable)
Total prime cost variancec=material cost variance + Labour cost variance= Rs.90.52 (Adverse) + Rs.6.42
(Favorable) = Rs.84.10 (Adverse)
8. Answer : (c) < TOP
>
Reason : The margin of safety is equal to planned (budgeted) revenues minus break-even sales revenues. SVB
managers want to determine how far service revenues could fall below budgeted revenues before losses
occur from operations. So the managers want to know the bank’s margin of safety.
9. Answer : (c) < TOP
>
Reason : If sales revenue equals 100% and variable costs are 35%, the contribution margin percentage is the
difference of 65%. Solving this in reverse, the contribution margin percentage of 65% plus the variable-
cost percentage of 35% equals 100% (contribution margin plus variable costs equals sales revenue).
10. Answer : (b) < TOP
>
Reason : A knowledge of cost behavior is useful because it helps managers forecast (plan) results under different
activity levels. Hence the correct answer is (b).
11. Answer : (b) < TOP
>
Reason : As the economist maintains that to maximize income, a firm should produce at the point where the
marginal revenue equals marginal cost, in differential cost analysis, the accountant says that the firm
should produce at the point where differential costs equal differential income. So differential cost Pricing
is related to economic marginal analysis. Hence, statement (b) is false. All other statements are true.
12. Answer : (e) < TOP
>
Reason : Once target selling price based on mark-up percentages has been calculated, it is rarely adopted without
amendment. The price is adjusted upwards or downwards depending on factors such as the future capacity
that is available, the extent of competition from other firms and management’s general knowledge of the
market.
13. Answer : (d) < TOP
>
Reason : A balance needs to be kept between divisional autonomy to provide incentives and motivation, and
retaining centralized authority to ensure that the organization’s divisions are all working towards the same
targets, the benefit of the organization as a whole. It ensures the goal congruence, divisional performance
in different division and maximize the corporate profit. Therefore (d) is correct.
14. Answer : (e) < TOP
>
Reason : The market based transfer pricing may reflect the price prevailing in an open competitive market. Hence, it
is based on the listed price of an identical product in the market, may be even of a competitor. Under other
methods of transfer pricing stated in (a), (b), (c) and (d) are not based on the listed price or competitors’
price. Hence (e) is correct.
15. Answer : (d) < TOP
>
Reason : Fixed costs remain unchanged in total. The fixed cost per unit will vary according to the level of activity
achieved in each quarter. The first financial budget prepared is the budgeted income statement. The
amounts detailed in a budgeted income statement are used in the determination of projected cash flows. A
flexible budget makes it possible to measure a manager's performance against costs that should occur for
the level of activity achieved, rather than measuring the manager's performance against a single,
predetermined level of activity. Statements (I) and (III) are true. Hence the correct answer is (d).
16. Answer : (a) < TOP
>
Reason : The first step in preparing a master budget are to prepare a sales forecast and sales budget, the information
from which most other budgets will be based. The budgeted balance sheet will be prepared by using
amounts found in the cash budget, collection and payment schedules, inventory budget, capital
expenditures budget, and the budgeted income statement. It will show the anticipated financial position of
the company at the end of the budget period. This will limit production to the number of units required to
meet sales and provide an adequate ending inventory for sales in the beginning of the subsequent period.
Statement (II) and (III) are true. Only statement (I) is false. So the correct answer is (a).
17. Answer : (e) < TOP
>
Reason : The operating cycle is the total of the number of days required to convert finished goods (or merchandise
inventory) into accounts receivable plus the number of days required to collect the accounts receivable.
The use of a budget is a key element of financial planning and it assists managers in controlling costs.
Virtually all economic entities engage in some form of budgeting. Benefits derived from budgeting include
enhanced management responsibility, assignment of decision-making responsibilities, coordination of
activities, and performance evaluation. Since all the statements of (I), (II) and (III) are true the correct
answer is (e).
18. Answer : (c) < TOP
>
Reason : The financial budget can have a tremendous impact (negatively and positively) on the organization's
human resources. The behavioral effects of budgets should not be overlooked. The budget and the
budgeting process can have considerable influence on an organization's effectiveness. A budget manual is
a set of written instructions that specifies who will provide budgetary data and its form, and who should
receive various schedules comprising the budget. The master budget reflects not only the operating
decisions, but also the financing decisions. So, statement (III) is false. Therefore, the correct answer is
(c).
19. Answer : (b) < TOP
>
Reason : A flexible budget is a series of budgets prepared for different levels of activity. It allows adjustments of the
budget to the actual level of activity before comparing the budgeted activity with actual result. Fixed
budget is a budget prepared for one level of activity. Therefore (b) is correct. Other statements mentioned
in (a), (c), (d) and (e) are not correct.
20. Answer : (b) < TOP
>
Reason : Total planned overhead costs for the first quarter = (60,000x3 + 80,000) = Rs.260,000
I quarter cash payments = 90% x (260,000 – 35,000), (depreciation is excluded)
=Rs.202,500
Total planned overhead costs for the second quarter = (80,000x3 + 80,000) = Rs.320,000.
II quarter cash payments = {90% x (320,000 – 35,000} + {10% x (Rs.260,000 - Rs.35,000)}
= (2,56,500 + 22,500) = Rs.279,000.
21. Answer : (d) < TOP
>
Reason :
Total budgeted overhead for the 1st quarter = (Rs.3,000 + Rs.20,000)=Rs.23,000.
Budgeted fixed manufacturing overhead =(Rs.23,000 - Rs.15,000)= Rs.8,000.
Total budgeted overhead for the 2nd quarter = (Rs.3,000 + Rs.23,750)=Rs.26,750.
Budgeted fixed manufacturing overhead =(Rs.26,750 - Rs.18,750)= Rs.8,000.
< TOP
22. Answer : (e) >
Reason : Third quarter planned production will be 123,000 units (120,000 + 15,000 - 12,000). Direct labor hours, 2
units per hour, for the third quarter will be 123,000/2 = 61,500. So statement (e) is false. All other
statements are true.
< TOP
23. Answer : (b) >
Reason : Payment for September purchases were Rs.100,000 x 0.6 = Rs.60,000, which leaves Rs.80,000 to apply to
July and August. The ratio of the balance for July and August is 1:3. August purchases were ((Rs.80,000 x
.75))/0.3) = Rs.2,00,000. July purchases were ((Rs.80,000 x .25))/0.1) = Rs.2,00,000.
24. Answer : (d) < TOP
>
Reason :
Labor hours = 1,50,000/1.00 = 1,50,000 hours.
Increase in labour hours due to decrease in production efficiency by 10% and 40% increase in production
= 1,50,000 x (1 + 0.40)
= Rs.9,000 (F)
36. Answer : (a) < TOP
>
Reason : The sales quantity variance is the difference between the actual and budgeted units, times the budgeted
unit contribution margin. (5,000-6,000) x Rs. 1,20,000/6,000 = Rs. 20,000 unfavorable. The variable cost
flexible budget variance is equal to the difference between actual variable costs and the product of the
actual quantity sold and the budgeted unit variable cost (Rs.1,80,000÷6,000 = Rs.30), (Rs. 30 x 5,000) –
Rs. 1,45,000 = Rs. 5,000 favorable.
37. Answer : (d) < TOP
>
Reason : Material price variance = 8,200 kgs x Rs.0.80 – Rs.6,888
= Rs.6,560 – Rs.6,888 = Rs.328 (Adverse)
Material usage variance = Rs.0.80 (870 units x 8 kgs – 7,150 kgs)
= Rs.0.80 (6,960 kgs – 7,150 kgs) = Rs.152 (Adverse)
38. Answer : (d) < TOP
>
Reason :
Budgeted cost Rs.48, 000
Rs.10
Budgeted output 4, 800
Standard fixed overhead rate =
Overheads incurred = Budgeted fixed production overhead cost + Expenditure variance
= Rs.48,000 + Rs.2,000 = Rs.50,000
Overheads absorbed = Actual overhead – Underabsorption of overheads
= Rs.50,000 – Rs.8,000 = Rs.42,000
Actual number of units = Rs.42,000 ÷ Rs.10 = 4,200 units.
39. Answer : (a) < TOP
>
Reason : Actual cost
Standard material cost = Actual material cost + Favorable material price variance + Favorable material
usage variance
Standard wages = Actual wages paid + favorable labor efficiency variance – adverse labor rate variance –
adverse labor idle time variance
Particulars Total Per unit
Standard material cost (34,000 + 1,850 + 1,200) 37,05 5.70
Standard wages (48,750+1,275 – 1,875 – 700) 0 7.30
47,45
0
Total 84,50 13.00
0
40. Answer : (d) < TOP
>
Reason :
Standard variable overhead rate=Rs.4,75,200÷2,16,000 hrs = Rs.2.20 per hour
Standard hours per unit = 2,16,000 hours÷2,40,000 units= 0.9 hours
Fixed overhead rate per unit = Rs.15,21,600÷2,40,000 units= Rs.6.34
Variable overhead efficiency variance:
=(Standard hours for actual production- Actual hours) x Standard rate per hour
=(2,20,000 units x 0.9 hours ∼ 1,94,920) x Rs.2.20=3,080 x Rs. 2.20 = Rs.6,776 (F)
Fixed overhead volume variance
=(Actual output ∼ Budgeted output) x Standard rate
=2,20,000 units ∼ 2,40,000 units) x Rs.6.34= 20,000 units x Rs.6.34= Rs.1,26,800 (A)
41. Answer : (d) < TOP
>
Reason : Performance reports should be related to the organizational structure and it should have a user focus. It
should have specific time horizons and all controllable items should be included in the performance report,
even extraordinary items. Strategic plans, however, are not included in a performance report because they
are long-range and concern the environment in which the organization operates.
42. Answer : (c) < TOP
>
Reason : Relevant information is defined as information which is related to the future and is different under
alternative courses of action and is accurate.
43. Answer : (d) < TOP
>
Reason : The reports for the lower level of management are fairly detailed though limited in scope and they are
quantitative in nature and less financial data. The reports for the top management are highly summarized.
44. Answer : (b) < TOP
>
Reason : Scrap and costs of spoiled units that cannot be salvaged are examples of internal failure costs. These are
the costs associated with materials and products that fail to meet quality standards and result in
manufacturing losses. These defects are identified before the goods are shipped to customers. Hence the
answer is (b). Appraisal costs are incurred to ensure that materials, products and services meet quality
standards. They begin with the inspection of raw materials and parts from vendors. External failure costs
are the costs incurred when inferior-quality products or services are sold to customers. Prevention costs are
the costs incurred to reduce the number of defective units produced or the incidence of poor-quality
service. Committed cost is fixed costs which results from the decision of the management in the prior
period and is not subject to the management control in the present on a short-run basis.
45. Answer : (c) < TOP
>
Reason : Responsibility accounting systems assign responsibility for a group of organizational activities and
objectives to lower-level managers, and then monitor and report on the results. Lower-level managers play
a key role in responsibility accounting systems.
46. Answer : (e) < TOP
>
Reason : The managers of a profit center or an investment center are accountable for the center's profit.
47. Answer : (c) < TOP
>
Reason : When preparing a performance report for a cost center using flexible budgeting techniques, the planned
cost column should be based on budget adjusted to the actual level of activity for the period being reported
48. Answer : (e) < TOP
>
Reason : Capital Turnover = Sales/Capital
4 = Rs.6,20,000 / Capital
So Capital = Rs.6,20,000/4 = Rs.1,55,000
11.29
100
Residual Income = Operating Income- (Capital*Imputed Interest rate) = Rs.6,20,000 x –
(Rs.1,55,000 x 0.13) = Rs.69,998 – Rs.20,150= Rs.49,850 (Approx).
49. Answer : (b) < TOP
>
Reason : A production budget is based on sales forecasts, in units, with adjustments for beginning and ending
inventories. It is used to plan when items will be produced. After the production budget has been
completed, it is used to prepare materials purchases, direct labor, and factory overhead budgets.
Answer (a) is incorrect because a production budget is usually prepared in terms of units of output rather
than costs. Answers (c) and (d) are incorrect because the direct labor and materials purchases budgets are
prepared after the production budget. Answer (e) is incorrect because the production budget is not
summarization of discretionary costs.
50. Answer : (a) < TOP
>
Reason : Establishment and maintenance of an internal control structure rests with the top management. An internal
control structure is established to provide able assurance that the organization’s objectives are achieved.
Options (b) and (e) are not correct because these individuals are only responsible to the extent that they are
a part of the management team.
Options (c) and (d) are not correct because auditors must consider the internal control structure, but they
do not establish and maintain it.
51. Answer : (b) < TOP
>
Reason : Goal congruence occurs when employees, working in their own interests, make decisions that help meet
the overall goals of the organization.This condition exists when individuals and groups aim to achieve the
same organizational goals.
52. Answer : (d) < TOP
>
Reason : Generally accountancy is the language of the business through which different information’s can be
provided to different groups of people. In case of Management accountancy the recipient of the
information is Management. Obviously the purpose of Management accountancy is to facilitate the
functions of the recipient of information i.e. management which includes control. So ,the two internal roles
of management accounting are to supply information to assist managers in making better planning
decisions and using management accounting information as controls to ensure the organization's members
are acting in the organization's best interest. Hence (d) is correct.
53. Answer : (a) < TOP
>
Reason : Machine activity cost per hour =
Rs.56, 000
Rs.1, 400
40
Setups cost per set up = per set up
Rs.52, 500
Rs.1, 500
35
Order handling cost per order = per order
Particulars Product A (Rs.) Product B (Rs.)
Machine activity
1,52,027 87,973
cost
Setups cost 30,800 25,200
Order handling cost 24,000 28,500
2,06,827 1,41,673
54. Answer : (e) < TOP
>
Reason : Short range budgets may cover periods of three, six and twelve months depending on the nature of the
business. In determination of the period of short range budget all the factors as stated in (I) financing of
production well in advance; (II) cover complete production; (III) entire seasonal cycle; (IV) coincide with
the financial accounting period are all considered. Hence option (e) is the correct option.
55. Answer : (c) < TOP
>
Reason : Target costing is a technique that is aimed at reducing the costs of the product over its life cycle; especially
design related costs. A target cost is the cost at which the management wants to manufacture the product.
The benefit of target costing are : It reduces the development cycle of a product by reducing the wastage of
time and resources. It provides detailed information on the costs involved in producing a new product.(b)
Audits have been used to monitor a company’s financial performance by evaluating it against a set of
standards imposed by government regulators or by professional standards groups.(d) Benchmarking is a
continuous process of comparing products and operations against the best practices in the industry. It
consists of four phases: planning, analysis, bench trending, and strategic bench trending method.(e) This
technique associated with benchmarking are similar to techniques used in bench trending, but has another
structural dimensions. The study of bench trending includes a projection of the critical market conditions
and the consumer preference variable.
56. Answer : (d) < TOP
>
Reason : Cost driver determines the size of the cost of an activity or causes a change in the cost of an activity. For
example, the cost of dispatching activity might be determined by the number of dispatches and so the
number of dispatches could be the cost driver. Therefore (d) is correct.
57. Answer : (a) < TOP
>
Reason : The basic concept of value chain analysis is to look at what the organization does through the eyes of
customers. From a customer's perspective, only certain activities add value to the product. These activities
are called the value chain.
58. Answer : (a) < TOP
>
Reason : When treated as cost objects, customer-related costs are compared with the benefits of having the
customer. In some cases, some types of customers are more costly than the benefit they provide.
59. Answer : (e) < TOP
>
Reason : Product life cycle begins with the initial planning and proposal stage. Design and engineering, production,
marketing, and customer service follow.
60. Answer : (b) < TOP
>
Reason : The complete journal entry would be a debit to Raw Materials Inventory for Rs.136,000 (Rs.4.25 x
32,000), a credit to Materials Price Variance of Rs.8,000
(Rs..25 x 32,000), and a credit to Accounts Payable for Rs.128,000.
61. Answer : (b) < TOP
>
Reason : Sales receipts in the month of November 2004
= Cash sales of November + 40% of the sales of October + 25% of credit sales of August + 30% of the
credit sales of September
= 30% of 48,000 units @Rs.110+40% of 60,000 units @Rs.110+25% of (40,000 – 20% of 40,000) units
@ Rs.100+30% of (60,000-20% of 60,000) units @Rs.100
=Rs.15,84,000+Rs.26,40,000+Rs.8,00,000+Rs.14,40,000 = Rs.64,64,000.
62. Answer : (a) < TOP
>
Reason :
1. Computation of prime cost
Particulars Rs.
Sales (40,000 units) 14,40,000
Less: Profit margin – 20% 2,88,000
Cost of sales – (80% of Rs.14,4,000) 11,52,000
Less: Variable overheads –
Rs.2,40,000
Semi-variable overheads –
Rs.2,60,000
Fixed overheads – 7,00,000
Rs.2,00,000
Prime cost 4,52,000 2. Semi-
variable overheads:
Change in cos t Rs.3,00,000-Rs.2,60,000
Change in units 50,000 units-40,000 units
Variable cost = =
Rs.40, 000
10, 000 units
= = Rs.4per unit
At 40,000 units
Fixed cost = Total cost – Variable cost
= Rs.2,60,000 – 40,000 units × Rs.4 = Rs.1,00,000
At 45,000 units
Total cost = 45,000 units × Rs.4 + Rs.1,00,000=Rs.2,80,000
Computation of differential cost of production of 5,000 additional units (i.e. 10% of normal
capacity):
Differential cost
40,000 units 45,000 units
Element of cost for 5000
(Rs.) (Rs.)
units (Rs.)
Prime cost – (Working Note 1) 4,52,000 5,08,500 56,500
Variable overhead 2,40,000 2,70,000 30,000
Semi variable overhead (Working Note 2) 2,60,000 2,80,000 20,000
Fixed overhead 2,00,000 2,00,000 –
11,52,000 12,58,500 1,06,500
Rs.1, 06, 500
5, 000
Cost per unit of new order = = Rs.21.30
Profit margin 25% (20% on sale = 25% on cost) = Rs. 5.33
Minimum selling price per unit = Rs.26.63