mb162 1007

Suggested Answers with Examiner's Feedback Page 1 of 27
Edited by Foxit PDF Editor

Copyright (c) by Foxit Software Company, 2004
For Evaluation Only.
Question Paper
Management Accounting - II (MB162): October 2007
• Answer all questions.
• Marks are indicated against each question.
1. The contribution or income that is forgone by not using a limited resource for its next best alternative
use is called
(a) Discretionary cost
(b) Potential cost
(c) Opportunity cost
(d) Marginal cost
(e) Out of pocket cost.
(1 mark)
2. Assuming that the mark-up-percentage and the quantity of production/sales remain constant, which of
the following pricing methods will give more profit as the fixed cost of production increases?
(a) Return on investment pricing
(b) Full cost pricing
(c) Contribution margin approach to pricing
(d) Differential cost pricing
(e) Economic theory of pricing.
(1 mark)
3. Mona Ltd. has furnished the following information pertaining to one of its product ‘Integrated Circuits’
for a period:
Variable cost per unit (Rs.) Rs. 21

Fixed cost (Rs.) Rs.1,20,000
Production units 24,000
Market price per unit of similar product is Rs.30 per unit, which the company finds suitable to achieve
its required mark – up percentage. If variable cost is increased by 25%, the mark-up percentage on
variable cost is
(a) 32.40%
(b) 42.50%
(c) 46.67%
(d) 34.28%
(e) 75.24%.
(2 marks)
4. Which of the following items would not be included in the calculation of controllable divisional profit
before tax?
(a) Head office costs
(b) Sales to outside customers
(c) Sales to other divisions
(d) Variable divisional expenses
(e) Controllable divisional fixed costs.
(1 mark)
5. Two articles X and Y are manufactured in a department. Their specifications show that 3 units of X or 9
units of Y can be produced in one hour. The budgeted production for the month of September 2007 was
240 units of X and 450 units of Y. The actual production during the month was 270 units of X and 513
units of Y and the actual hours spent on this production were 150. The activity ratio for the month of
September 2007 was
(a) 123.33%
(b) 106.67%
(c) 113.08%
(d) 88.43%
(e) 97.06%.
(2 marks)
6. Which of the following statements is true?
(a) In make or buy decisions, all costs should be determined on a per unit basis so that the cost per unit of
making a product can be compared to the cost per unit of purchasing a product
(b) When a product is dropped, all of the variable expenses and fixed expenses assigned to the product will
be eliminated
(c) Expenses that will no longer be incurred if a particular action is taken are called unavoidable expenses
(d) Differential cost analysis cannot be used for the purpose of knowing whether the product can be sold
profitably or it requires further processing to charge a premium for the product
(e) The decision regarding closing down a factory will depend on whether the product is making
contribution towards fixed cost or not.
(1 mark)
7. Which of the following statements is false in respect of full cost pricing and contribution margin
pricing?
(a) These cannot be considered as competing with each other
(b) In both the methods, the selling prices proposed must be only tentative and they are always subject to
adjustments
(c) Fixed costs are important in both the pricing models
(d) In both the methods, a normal mark-up on total costs is made and the volume of production is taken into
consideration
(e) They represent to a certain degree, cost plus pricing.
(1 mark)
8. Lokesh Ltd. has been approached by a foreign customer who wants to place an order for 2,500 units of
Product C at Rs.30 a unit, although the company currently sells this item for Rs.45 a unit, and the item
has a cost of Rs.37 a unit. Further analysis reveals that the company will not pay sales commission of
Rs.3.50 a unit on these sales and its packaging requirement will save an additional amount of Rs.2.50
per unit. However, the additional graphics required on this job will cost Rs.4,500. The fixed costs
amounting to Rs.6,00,000 for the production of 50,000 units of such products by the company will not
change. Accepting this job by the company will
(a) Increase profit by Rs.24,500
(b) Increase profit by Rs.23,000
(c) Increase profit by Rs.13,000
(d) Decrease profit by Rs.13,000
(e) Decrease profit by Rs.15,000.
(2 marks)
9. If the selling sub-unit is operating at full capacity and can sell everything produced either internally or
externally, the transfer price of the product will be fixed up on the basis of
(a) Negotiations between the divisions
(b) Market price
(c) Variable cost
(d) Cost plus a mark-up
(e) Full cost pricing.
(1 mark)
10. Lota Ltd. manufactures a single product at the operating capacity of 50,000 units while the normal
capacity of the plant is 75,000 units per annum. The company has estimated 20% profit on sales
realization and furnished the following budgeted information:
Particulars 75,000 units 50,000 units
Fixed overheads Rs. 1,25,000 Rs.1,25,000
Variable overheads Rs. 2,25,000 Rs.1,50,000
Semi-variable overheads Rs. 2,75,000 Rs.2,00,000
Sales realization Rs.13,15,625 Rs.9,50,000
The company has received an order from a customer for a quantity equivalent to 20% of the normal
capacity. It is noted that prime cost per unit of product is constant. The minimum price per unit of new
order, if the company desires to maintain the same percentage of profit on selling price, will be
(a) Rs.12.81
(b) Rs.13.67
(c) Rs.14.91
(d) Rs.12.67
(e) Rs.14.63.
(2 marks)
11. Which of the following statements is false in respect of activity based costing?
(a) It does not segregate variable and fixed costs
(b) It tends to be more costly than traditional methods of costing
(c) It is based on historical costs
(d) It highlights the causes of costs
(e) It deals with the direct costs only.
(1 mark)
12. Consider the following particulars pertaining to Lincee Ltd. for the month of September 2007:
Overheads cost variance Rs.5,320 (Adverse)
Overheads volume variance Rs.3,250 (Adverse)
Budgeted hours for September 2007 3,000 hours
Budgeted overheads for September 2007 Rs.25,630
Actual rate of overheads Rs.10 per hour.
The overhead capacity variance is
(a) Rs.1,965 (Favorable)
(b) Rs.1,040 (Favorable)
(c) Rs.1,965 (Adverse)
(d) Rs.1,040 (Adverse)
(e) Rs.2,320 (Adverse).
(2 marks)
13. Consider the following data pertaining to the division of a company for the year 2006-07:
Investment in working capital Rs.12,30,000
Investment in fixed assets Rs.20,50,000
Total cost Rs.10,10,000
Imputed interest cost 12%
If the company desires to achieve a residual income of Rs.2,42,000, the revenue of the division would
be
(a) Rs.15,40,000
(b) Rs.16,45,600
(c) Rs.12,02,500
(d) Rs.14,30,000
(e) Rs.15,61,000.
(1 mark)
14. Pranay Ltd. has furnished the following information pertaining to product M for the month of
September 2007:
Particulars Actual Budget
Sales (units) 18,500 19,750
Sales revenue (Rs.) 2,29,400 2,36,210
The sales price variance for the month is
(a) Rs.10,800 (Adverse)
(c) Rs. 8,140 (Favorable)
(e) Rs.12,960 (Favorable).
(1 mark)
15. Which of the following statements is false?
(a) The use of budget by management to monitor and control a company’s operations is called
budgetary control
(b) The first financial budget prepared is the cash budget
(c) In a fixed budgetary control system, the master budget is based on a single prediction for sales or
production volume
(d) Successful budget should have adequate flexibility to meet changing business conditions
(e) Indirect materials are generally included in factory overhead budget.
(1 mark)
16. A budget manual, which enhances the operation of a budgeting system, is most likely to include
(a) Employee training policies
(b) Distribution instructions for budget schedules
(c) Employee hiring policies
(d) Documentation of the accounting system
(e) Company policies regarding the authorization of transactions.
(1 mark)
17. Pavani Ltd. produces and sells 800 units of product-H each month with total variable costs of Rs.11,200
and total fixed costs of Rs.10,000. Idle capacity would permit the acceptance of a special sales order for
600 units each month. Which of the following minimum selling prices is acceptable for the product?
(a) Rs.28.00
(b) Rs.26.00
(c) Rs.16.00
(d) Rs.12.00
(e) Rs.10.00.
(1 mark)
18. Basic standards are known as
(a) Ideal standards
(b) Current standards
(c) Measurement standards
(d) High standards
(e) Expected standards.
(1 mark)
19. Sandeep Ltd. is attempting to compute costs for its three products for pricing purposes. The company
has annual fixed manufacturing costs of Rs.3,20,000. The variable costs of the company’s products are
as follows:
Variable costs of manufacture
Product (per unit)
(Rs.)
A 18
B 22
C 24
The company expects to produce and sell 6,000 units of A, 9,000 units of B and 5,000 units of C
annually. The policy of the company is to fix the selling price so as to earn a profit of 33⅓ % on
selling price of each product. The selling prices of product A, B and C, if fixed costs are allocated on
the basis of number of units produced, are
(a) Rs.52.85, Rs.59.25 and Rs.68.00 respectively
(b) Rs.52.50, Rs.57.00 and Rs.68.00 respectively
(c) Rs.52.50, Rs.57.00 and Rs.65.00 respectively
(d) Rs.51.00, Rs.57.00 and Rs.60.00 respectively
(e) Rs.51.00, Rs.57.00 and Rs.65.00 respectively.
(2 marks)
20. Shobhana Ltd. has furnished the following data for the last year:
Particulars Budget Actual
Factory overheads (Rs.) 6,86,400 6,87,000
Machine hours ? 23,675
If the absorbed factory overheads were Rs.6,77,105, the budgeted machine hours were
(a) 16,400
(b) 17,655
(c) 24,000
(d) 25,454
(e) 24,545.
(1 mark)

(a) In case of Residual Income (RI), there is a problem of defining the minimum required rate of
return associated with various investment opportunities
(b) Return on Investment (ROI) can be readily employed for inter-divisional comparisons
(c) A project will be rejected under ROI method and accepted under RI method if the rate of return
from such project is more than the minimum required rate of return but less than the current ROI
(d) RI is the rate of return which a division is able to earn above the minimum required rate of return
on operating assets
(e) Under RI approach, the larger divisions will be expected to have more RI than the smaller
divisions.
(1 mark)
22. A fixed overhead volume variance based on standard direct labor hours measures
(a) Fixed overhead efficiency
(b) Fixed overhead used
(c) Deviation from the standard direct labor hours in the goods sold
(d) Deviation from the normal level of direct labor hours
(e) Deviation from the standard direct labor hours capacity.
(1 mark)
23. Mohit Ltd. has furnished the following costs for 3,000 units of its product ‘Z’:
Direct material Rs.22,800
Direct wages Rs.15,600
Manufacturing overheads:
Variable Rs.14,400
Fixed Rs.16,000
Selling overheads:
Variable Rs.15,000
Fixed Rs.18,000
Product ‘Z’ is available in the market. If the company buys it from the market, fixed selling costs would
be the same but the variable selling costs would be reduced by 25%. The maximum amount per unit of
the product that the company can pay to the supplier without reducing the operating income, is
(a) Rs.22.93
(b) Rs.21.35
(c) Rs.23.10
(d) Rs.24.70
(e) Rs.18.85.
(2 marks)
24. Aruna Exports Ltd. has furnished the following data pertaining to its Product ‘A’ at 80% of its normal
capacity level for the quarter ending September 30, 2007:
Sales Rs.8,00,000
Administrative costs:
Office salaries Rs.1,00,000
General expenses 2% of sales
Depreciation Rs.12,000
Rates and Taxes Rs.8,500
Selling costs:
Salaries 8% of sales
Traveling expenses 2% of sales
Sales office 1% of sales
General expenses 1% of sales
Distribution costs:
Wages Rs.25,000
Rent 1% of sales
Other expenses 4% of sales
The total of administration, selling and distribution expenses of the company at 90% capacity level will
be
(a) Rs.3,16,500
(b) Rs.3,49,500
(c) Rs.3,37,300
(d) Rs.3,25,000
(e) Rs.3,27,800.
(2 marks)
25. Dhruva Ltd. has furnished the following data relating to a product for the second quarter ending
September 30, 2007:
Units produced 3,600
Direct materials (Rs.) 4,50,000
Direct labor (Rs.) 3,30,000
Manufacturing overheads (Rs.) 1,25,000 (30% fixed)
Selling and administrative overheads (Rs.) 1,60,000 (45% fixed)
If the company manufactured 3,950 units in the next quarter, the cost per unit will be
(a) Rs.300.23
(b) Rs.328.13
(c) Rs.293.14
(d) Rs.330.10
(e) Rs.295.83.
(2 marks)
26. Consider the following data of C-Tex Ltd. for the quarter ending September 2007:
Projected sales 32,000 units
Raw materials per unit of finished goods 4 kg
Opening stock of finished goods 2,250 units
Closing stock of finished goods 3,750 units
Opening stock of raw materials 23,000 kg
Closing stock of raw materials 25,000 kg
The total quantity of materials purchased during the quarter is

(a) 1,36,000 kg
(b) 1,25,000 kg
(c) 1,13,000 kg
(d) 1,15,000 kg
(e) 1,17,000 kg.
(2 marks)
27. Uttara Ltd. has furnished the following data relating to its product for the month of September 2007:
Sales (in units) 1,75,000 1,80,000
Production (in units) 1,75,000 1,90,000
Direct labor hours 2,80,000 3,10,000
Machine hours 7,00,000 7,95,000
Fixed overhead (Rs.) 3,15,000 3,67,000
The fixed overhead capacity variance for the month was

(a) Rs.50,000 (F)
(b) Rs.50,000 (A)
(c) Rs.27,000 (F)
(d) Rs.27,000 (A)
(e) Rs.38,000 (A).
(2 marks)
28. While comparing performance report information of top management with that of lower level
management
(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)
29. The following information is extracted from the books of Bishakha Ltd. for product ‘H’ for the month
of September 2007:
Standard labor hours per unit 4 hours
Actual hours 240 hours
Labor rate variance Rs.180(Adverse)
Actual labor rate Rs.16
Units produced 75 units
The labor efficiency variance was
(b) Rs.1,411 (Adverse)
(c) Rs. 915 (Adverse)
(d) Rs. 915 (Favorable)
(2 marks)
30. Which of the following statements is false with regard to product life cycle?
(a) Product cost, revenue and profit patterns tend to follow predictable courses through the product
life cycle
(b) The functional emphasis is the same in all phases of the product life cycle
(c) Profit per unit varies as products move through their life cycles
(d) The products have finite lives
(e) Each phase of product life cycle poses different threats and opportunities.
(1 mark)
31. Samarth Ltd., a manufacturer of a single product, uses standard absorption costing system. The
following data have been extracted from the budget for the month of September 2007:
Budgeted production units 10,500
Budgeted fixed production overhead costs Rs.71,400
During the month of September 2007, the fixed production overhead cost was over absorbed by
Rs.10,360 and the fixed production overhead expenditure variance was Rs.8,000 (Adverse). The actual
number of units produced by the company for the month was
(a) 13,389
(b) 9,667
(c) 11,722
(d) 13,200
(e) 11,000.
(2 marks)
(a) Under full cost pricing, the normal mark-up is based on sales value
(b) Full cost pricing is designed to recover both fixed costs and variable costs
(c) Under full cost pricing, sellers do not take advantage of buyers when latter’s demand becomes
acute
(d) Pricing decisions may be influenced by internal factors such as cost and profit objectives
(e) Contribution margin approach to pricing is concerned with cost, volume and profit.
(1 mark)
33. The data relating to Manoshi Ltd. for the month of September 2007 were as follows:
Output (units) 9,000

Wages paid for 16,600 hours Rs. 62,990
Material 4,300 kg Rs. 50,970
The following variances were provided by the company:
Variances Rs.
Labor rate 1,680 (F)
Labor efficiency 860 (A)
Labor idle time 630 (A)

Material price 1,345 (F)
Material usage 1,015 (A)
The standard prime cost per unit for the month was
(a) Rs.14.00
(b) Rs.13.75
(c) Rs.13.28
(d) Rs.12.72
(e) Rs.11.37.
(2 marks)
34. If the objectives of the decision are in conflict, one objective may be specified as the decision criterion
and the other objectives are established as
(a) Irrelevant criteria
(b) Differential criteria
(c) Secondary criteria
(d) Opportunity costs
(e) Constraints.
(1 mark)
35. Pearl Sports Ltd. manufactures tracksuits for athletes. Presently its output is 70% of its full capacity of
15,000 units per annum. One exporter has approved the sample and has offered to buy 11,000 tracksuits
at a special price of Rs.680 per suit. At present the company sells tracksuits at the rate of Rs.950 per
suit. The standard cost per suit is as follows:
Particulars Rs.
Cloth and other materials 310
Labor cost 98
Fixed cost 165
Other variable cost 47
The net profit or loss of accepting the order of 11,000 tracksuits is
(a) Rs.7,42,500 (loss)
(b) Rs.4,30,000 (profit)
(c) Rs.2,60,000 (profit)
(d) Rs.2,60,000 (loss)
(e) Rs.6,60,000 (profit).
(2 marks)
36. A limitation of transfer prices based on actual cost is that they
(a) Charge inefficiencies to the department that is transferring the goods
(b) Can lead to sub-optimal decisions for the company as a whole
(c) Must be adjusted by some mark-up
(d) Must be adjusted by ROI (return on investment)
(e) Lack clarity and administrative convenience.
(1 mark)
37. A systematized approach known as zero-based budgeting
(a) Presents the plan for only one level of activity and does not adjust to change in the level of
activity
(b) Presents a statement of expectations for a period of time but does not present a firm commitment
(c) Divides the activities of individual responsibility centers into a series of packages that are
prioritized
(d) Classifies budget requests by activity and estimates the benefits arising from each activity
(e) Commences with the current level of spending.
(1 mark)
38. Rohit Ltd. has furnished the following data pertaining to a product for the month of September 2007:
Production (units) 9,000 10,500
Labor hours 2,000 2,250
Fixed overheads (Rs.) 32,400 25,200
Number of working days 25 21

The fixed overhead volume variance was
(b) Rs. 5,400 (Favorable)
(c) Rs. 5,400 (Adverse)
(d) Rs. 9,000 (Favorable)
(e) Rs. 9,000 (Adverse).
(2 marks)
39. Megha Ltd. manufactures a single product with a capacity of 4,00,000 units per annum. The
summarized income statement for a year is as under:
Particulars Rs. Rs.
Sales (2,50,000 units @ Rs.18 per unit) 45,00,000
Cost of sales:
Direct materials 6,50,000
Direct labor 3,50,000
Variable production overhead 90,000
Fixed production overhead 7,00,000
Fixed administrative overhead 4,50,000
Variable selling & distribution overhead 1,20,000
Fixed selling & distribution overhead 4,50,000
Total costs 28,10,000
Profit 16,90,000
The company desires to increase the present level of sales from 2,50,000 units to 3,25,000 units at a
price of Rs.17 per unit. If an expenditure of Rs.11,50,000 is made on advertising, the profit of the
company will be
(a) Rs.10,25,000
(b) Rs.20,20,000
(c) Rs.15,75,000
(d) Rs.20,02,000
(e) Rs.12,02,000.
(2 marks)
40. Anjuman Ltd. has furnished the following information relating to cost at a capacity level of 5,000 units:
Particulars Rs.
Material cost 24,000 (100% variable)
Labour cost 12,500 (100% variable)
Power 2,400 (75% variable)
Repairs and maintenance 4,500 (60% variable)
Stores 1,800 (100% variable)
Inspection 1,600 (25% variable)
Administration overheads 3,500 (30% variable)
Selling overheads 6,400 (50% variable)
Depreciation 15,320 (100% fixed)
The budgeted production cost per unit, at the level of 7,000 units, is
(a) Rs.12.55
(b) Rs.13.00
(c) Rs.12.00
(d) Rs.12.45
(e) Rs.13.05.
(2 marks)
41. The variance created to segregate the difference due to a new factor like a steep rise in price of material,
is known as
(a) Revision variance
(b) Uncontrollable variance
(c) Price variance
(d) Favorable variance

(e) Efficiency variance.
(1 mark)
42. Magna Ltd. has furnished the following information relating to its production department for a period:
Actual overhead costs Rs.32,500
Standard hours for actual work 12,500 hours
Actual hours during the month 13,500 hours
Standard overhead rate Rs.2.40 per hour
The overhead cost variance is
(a) Rs. 2,500 (Adverse)
(b) Rs. 2,500 (Favorable)
(c) Rs. 8,500 (Favorable)
(e) Rs.10,000 (Favorable).
(1 mark)
43. Consider the following particulars pertaining to 1,000 units of product PNT produced during the month
of September 2007:
Standard price per kg. of raw material Rs.4
Standard direct labor cost Rs.20,000
Standard direct labor hours 4,000
Standard overheads per direct labor hour Rs.2
Total standard cost per unit Rs.40
Material usage variance Rs.1,200 (A)
The actual quantity of raw material consumed during the month of September 2007 was
(a) 3,300 kg
(b) 3,600 kg
(c) 4,000 kg
(d) 3,000 kg
(e) 2,700 kg.
(2 marks)
44. Sheetal Ltd. has furnished the following budget for one of its products ‘toy cars’ for a period:
Percentage
Particulars
to total sales
Direct materials 30
Direct labor 20
Factory overheads – Variable 10
Fixed Fixed 15
Selling and administrative overheads – Variable 09
Fixed Fixed 08
Profit 08
Total 100
After evaluating the first quarter performance, it was observed that the company would be able to
achieve only 90% of the original budgeted sales. The revised budgeted sales as envisaged above were
estimated at Rs.1,980 lakh after taking into account a reduction in selling price by 12%. The original
budgeted sales at original price were
(a) Rs.2,250 lakh
(b) Rs.2,000 lakh
(c) Rs.2,500 lakh
(d) Rs.3,000 lakh
(e) Rs.1,500 lakh.
(2 marks)
45. Nihar Ltd. received an offer for a project which requires the material M. It is not used on regular basis.
However, material M, purchased 1 year ago is in stock and can be utilized for this project. If the
material is not used in this project, it will have to be disposed off.
Which of the following is relevant with regard to the material M to decide the acceptance of the project?
(a) Replacement cost
(b) Realizable value

(c) Cost price
(d) Profit which can be earned by disposing M
(e) Replacement cost minus realizable value.
(1 mark)
46. Notional rent charged on business premises owned by the proprietor is an example of
(a) Programmed cost
(b) Replacement cost
(c) Imputed cost
(d) Committed cost
(e) Discretionary cost.
(1 mark)
47. Familiar Ltd. produces two products - K and B. The following details are furnished by the company:
Particulars K B
Estimated demand (units) 4,800 6,000
Selling price (Rs.) 21 14
Variable cost (Rs.) 14 10
Direct man hours per unit 5 3
Direct man hours per annum are limited to 30,000 hours. The product mix of K and B to maximize
profit in a year is
(a) 4,800 units and 2,000 units respectively
(b) 3,000 units and 6,000 units respectively
(c) 4,800 units and 3,000 units respectively
(d) 3,500 units and 2,000 units respectively
(e) 3,500 units and 6,000 units respectively.
(2 marks)
48. If there is a competitive market for a product and the transferor division has idle capacity, then the
transfer price can be based on
(a) Standard costs
(b) Total costs
(c) Full costs plus profit
(d) Marginal cost
(e) Market price.
(1 mark)
49. Sonata Ltd. pays commission to its salesmen in the month the company receives cash from sales, at the
rate of 3% of the cash inflow. The company has budgeted sales of Rs.3,85,000 for October 2007,
Rs,4,60,000 for November 2007 and Rs.5,15,000 for December 2007. 60% of the sales are on credit.
Experience indicates that 75% of the budgeted credit sales will be collected in the month following the
month of sales. 21% are expected to be realized in the second month following the month of sales and
remaining 4% will be non-recoverable. The total amount of sales commission for the month of
December 2007 will be
(a) Rs.24,750
(b) Rs.26,750
(c) Rs.18,345
(d) Rs.13,845
(e) Rs.15,650.
(2 marks)
50. The smallest segment of activity or area of responsibility for which costs are accumulated is called
(a) Revenue center
(b) Profit center
(c) Cost center
(d) Investment center
(e) Contribution center.
(1 mark)
(a) A responsibility center is a part of an organization where either the incurrence of cost or
generation of revenue or investment can be controlled

(b) A cost center is any responsibility center that has control over the incurrence of cost
(c) A profit center is any responsibility center that has control over the generation of revenue only
(d) An investment center is any responsibility center that has control over cost, revenue and
investment of funds
(e) Physical separation is not necessary to become responsibility centre.
(1 mark)
52. The basic difference between a fixed budget and a flexible budget is that a
(a) Flexible budget considers only variable costs but a fixed budget considers all costs
(b) Flexible budget allows management latitude in meeting goals whereas a fixed budget is based on
a fixed standard
(c) Fixed budget is for an entire production facility but a flexible budget is applicable to single
departments only
(d) Fixed budget is based on one specific level of production and a flexible budget can be prepared
for any production level within a relevant range
(e) Fixed budget considers only variable costs, whereas flexible budget considers only fixed costs.
(1 mark)
53. Consider the following projected sales forecast of a company:
Time Period 1st 2nd 3rd 4th
Sales in units 11,000 12,000 14,000 9,000
The desired ending inventory is 15% of the sales units of the subsequent period. How many units will
be produced in the 3rd time period?
(a) 13,100
(b) 13,300
(c) 13,200
(d) 14,100
(e) 13,250.
(2 marks)
54. Budgets are important management processes for
(a) Planning and costing
(b) Directing and process analysis
(c) Planning and controlling
(d) Investing and financing
(e) Implementation of accounting system.
(1 mark)
55. Which of the following is false in respect of zero-based budgeting?
(a) It starts from scratch
(b) It represents a move towards allocation of resources by need
(c) It identifies and eliminates wastage and obsolete operations
(d) It does not create a questioning attitude of the current practice of the organization
(e) It increases communication and coordination within the organization.
(1 mark)
56. Viren Ltd. fixes the inter-divisional transfer prices for its products on the basis of cost plus estimated
return on investment in its divisions. The relevant position of the budget for the division DK for the year
2007-08 is as follows:
Fixed assets (Rs.) 7,80,000
Current assets other than Sundry debtors (Rs.) 1,75,000
Sundry debtors (Rs.) 1,25,000
Annual fixed cost of division DK (Rs.) 8,20,000
Variable cost per unit of product (Rs.) 55
Budgeted units of production (units) 40,000
If the company desires to earn a return of 25% on investment, the transfer price per unit for division DK
is
(a) Rs.87.68
(b) Rs.82.25
(c) Rs.68.87
(d) Rs.15.75
(e) Rs.80.00.
(2 marks)
57. Chandu Ltd., manufacturing a single product, is operating at 65% level of capacity at which the sales
are Rs.8,19,000. The company has estimated the following data for the current year:
Variable cost Rs.180 per unit
Semi-variable cost Rs.90,000 when output is nil plus variable portion of Rs.300
for each additional 1% level of capacity
Fixed cost Rs.2,55,000 at present level of activity. This cost is estimated
to be increased by Rs.65,000 if the level of activity exceeds
80%
The company is facing severe competition in the market. The management of the company is
considering a proposal to decrease the selling price by 8%. The present sale price is Rs.420.
The budgeted operating profit per unit at 90% level of activity on the assumptions that the selling price
is reduced by 8%, is
(a) Rs.23.15
(b) Rs.32.55
(c) Rs.48.33
(d) Rs.35.44
(e) Rs.44.55.
(2 marks)
58. Consider the following data of a product of Sharma Plastics Ltd. for production and sales of 50,000
units:
Particulars Rs.
Material 2,25,000
Labor 1,75,000
Overheads 3,60,000
The fixed portion of capital employed is Rs.60,000 and the varying portion is 45% of sales turnover.
The company desires to earn a profit of 24% on capital employed after payment of 40% tax. The selling
price per unit of the product should be
(a) Rs.18.35
(b) Rs.16.86
(c) Rs.15.88
(d) Rs.11.09
(e) Rs.19.12.
(2 marks)
59. Vikash Ltd. has estimated the following for its operation for the last quarter of 2007-08:
January February March
Particulars
2008 2008 2008
Expected sales (units) 6,000 7,000 8,000
Estimated wages and other
manufacturing expenses (Rs.) 3,25,000 3,50,000 3,80,000
The company sells the goods at Rs.80 per unit. 50% of the sales are on cash. The debtors are estimated
to be collected in the next month. One unit of finished output requires 2 kg of raw material and is
estimated to be purchased for Rs.5 per kg. The production in a month includes half of current month’s
sales and half of next month’s sales. The raw material required in a month is purchased in the same
month on credit. The creditors are paid in the next month. The wages and other expenses are paid in the
month in which they are incurred. The cash surplus in the month of February 2008 will be
(a) Rs.1,20,000
(b) Rs.1,00,000
(c) Rs.1,55,000
(d) Rs.1,05,000
(e) Rs.1,35,000.
(2 marks)
60. Power Ltd. operates under a standard cost system. Factory overhead cost is applied to products on a
direct labor hour basis. At normal operating level, the company utilizes 4,80,000 direct-labor hours per
year. The budgeted overhead cost at normal capacity level is as follows:
Variable – Rs.8,40,000
Fixed – Rs.9,12,000
During the year 2006-07, the actual labor hours were 4,56,000, and standard hours for actual production
were 4,35,000 hours. The overhead efficiency variance during the period was
(a) Rs. 76,650 (F)
(b) Rs. 45,000 (A)
(c) Rs. 45,000 (F)
(d) Rs. 76,650 (A)
(e) Rs.1,00,000 (A).
(2 marks)
61. ‘The average human being has an inherent dislike of work and will avoid it if he can’- this job attitude is
specifically dealt with in
(a) Herzberg’s Two Factor Theory
(b) Douglas McGregor’s Theory Y
(c) The principles of human motivation as revealed by Abraham Maslow
(d) Douglas McGregor’s Theory X
(e) McDonald’s Theory Z.
(1 mark)
62. Managers should focus their attention on the parts of performance reports that do not reflect smoothly
running aspects of operations. This is called
(a) Exceptional management
(b) Management by walking around
(c) Management by perception
(d) Management by exception
(e) Management by objectives.
(1 mark)
63. Which of the following is true in respect of full cost pricing method?
(a) It is used to recover market price plus mark-up
(b) It is used to recover standard cost plus mark-up
(c) It is used to recover fixed costs only
(d) It is used to recover variable costs only
(e) It is used if a company does not have the basic idea of demand for the product.
(1 mark)
64. Which of the following statements is false with respect to transfer pricing?
(a) It motivates divisional managers to make good economic decisions
(b) It is useful for evaluating performance of the divisional managers
(c) It is a selling price established for goods or services sold by one division to other under the same
organisation
(d) It does not help in measuring divisional performances
(e) Cost based transfer pricing can be used when market price does not exist.
(1 mark)
65. The data, equipment and computer programs that are used to develop information for managerial use is
known as
(a) Management by exception
(b) Management by objective
(c) Management control
(d) Management information system
(e) Value chain analysis.
(1 mark)
66. Which of the following may be considered as an independent item in the preparation of master budget?
(a) Production budget
(b) Capital investment budget
(c) Proforma income statement

(d) Proforma statement of financial position
(e) Overhead expenses budget.
(1 mark)
67. Arshad Ltd. has furnished the following estimated data for 10,000 units of planned production:
Direct materials Rs. 88,000
Direct labor Rs.1,24,000
Variable manufacturing overhead costs Rs.1,08,000
Fixed manufacturing overhead costs Rs. 75,000
What is the total budgeted manufacturing cost at a level of 12,000 units, which is below full capacity?
(a) Rs.3,78,000
(b) Rs.3,80,000
(c) Rs.3,85,000
(d) Rs.3,87,000
(e) Rs.4,59,000.
(1
mark)
68. Ansh Ltd. produces oak desks. The company has furnished the following standards for one oak desk:
Direct materials : 32 square feet of oak lumber at Rs.4.25 per square foot.
Direct labor : 8 hours of skilled labor at Rs.12 per hour.
Variable overhead : 8 hours at Rs.12 per hour.
Fixed overhead : Rs.48,000 at a normal operating level of 2,400 desks.
The company produced 1,800 desks at a total materials price of Rs.2,51,430 for 57,800 square feet of
oak lumber. The material price variance is
(c) Rs.5,780 (Adverse)
(d) Rs.5,450 (Favorable)
(1 mark)
69. Olympia Ltd. is preparing its cash budget for the 3rd quarter of 2007-08. An extract from its sales
budget for the same year shows the following sales values:
September 2007 Rs.1,30,000

October 2007 Rs.1,50,000
November 2007 Rs.1,20,000
December 2007 Rs.1,60,000
35% of its sales are expected to be for cash. Of its credit sales, 60% are expected to pay in the month
following the month of sales and 40% are expected to pay in the second month following the month
sales.
The value of sales receipts to be shown in the cash budget for the month of November 2007 will be
(a) Rs.1,85,600
(b) Rs.1,34,300
(c) Rs.1,30,700
(d) Rs.1,22,000
(e) Rs.1,10,000.
(2 marks)
70. Giant Ltd. has furnished the following information pertaining to product X :
Budgeted variable overhead cost Rs.18,000
Budgeted fixed overhead cost Rs.36,000
Budgeted direct labor hours 18,000
Budgeted production 9,000 units
Actual variable overhead cost Rs.16,500
Actual fixed overhead cost Rs.34,000
Actual direct labor hours 16,000
If the company produces 8,250 units, the fixed manufacturing overhead volume variance is
(b) Rs.3,000 (Adverse)

(c) Rs.3,000 (Favorable)
(d) Rs.6,000 (Favorable)
(2 marks)
Suggested Answers
Management Accounting - II (MB162): October 2007
1. Answer : (c)
Reason : An opportunity cost is the maximum benefit sacrificed by employing a scarce productive resource in
specified manner. It is the value of resource in the next best alternative. Therefore (c) is correc
Discretionary cost is not relevant in decision making. Marginal cost is an incremental or differentia
cost. Incremental cost is the difference in total cost between two decision choices. Out of pocket cost i
that portion of cost which involves payment, i.e. gives rise to costs and are relevant for price fixatio
during recession or when make or buy decision is to be made.
2. Answer : (b)
Reason : Under ROI pricing method, mark up percentage is related to investment. The profit will change i
direct proportion to investment. The profit figure computed as a percentage of investment is added t
the total cost to determine the selling price. As a result, when variable or fixed cost of productio
changes the profit per unit or total profit remains the same. Hence (a) is not correct. Under full co
pricing method, mark-up is added as a percentage of total cost of production to arrive at the price
Hence, a change in variable or fixed cost of production will lead to a change in profit if the marku
percentage remains the same. Hence (b) is correct. Contribution margin approach to pricing compute
the profit using the mark up percentage on the variable cost. Therefore, if fixed cost increases the prof
is not affected. Hence (c) is not correct. Differential cost pricing does not consider the fixed cost.
considers only variable cost and new fixed costs. Hence, (d) is not correct. Economic theory of pricin
depends on supply and demand of the product and not its cost. Hence, (e) is not correct. Therefore (b
is the answer.
3. Answer : (d)
Reason : Total sales = Rs.30 × 24,000 units = Rs.7,20,000
Profit = Rs.7,20,000 – Rs.5,04,000 – Rs.1,20,000 = Rs.96,000
Variable cost = Rs.21 × 24,000 units × 1.25 = Rs.6,30,000
Markup % on variable cost
= [(Rs.1,20,000 + Rs.96,000) ÷ Rs.6,30,000] × 100 = 34.28%.
4. Answer : (a)
Reason : The following items would be included in the calculation of controllable divisional profit before tax :
(b) Sales to outside customers
(c) Sales to other divisions
(d) Variable divisional expenses
(e) Controllable divisional fixed costs
So, the correct answer is (a).
5. Answer : (c)
Reason : Standard budgeted hours for September 2007:
X 240 ÷ 3 = 80 hours
Y 450 ÷ 9 = 50 hours
= 130 hours
Standard hours for Actual production:
X 270 ÷ 3 = 90 hours
Y 513 ÷ 9 = 57 hours
= 147 hours
Activity Ratio
= (Standard Hours for Actual Production / Budgeted Standard Hours ) × 100
= (147 hours / 130 hours) × 100 = 113.08%.
6. Answer : (e)
Reason : Unitizing fixed costs can be misleading. Some fixed costs may continue, even if a decision to buy i
made. A make or buy decision is also called an outsourcing decision.
Some expenses will continue when products are dropped. Such expenses are called unavoidabl
expenses, and are usually fixed costs. Expenses that will be eliminated (avoidable expenses) are usuall
variable expenses.
Avoidable expenses are expenses that will no longer be incurred if a particular action is taken
Unavoidable expenses will continue to be incurred even if a subunit or activity is eliminated.
Differential cost analysis can be used for the purpose of knowing whether the product can be sol
profitably or it requires further processing to change a premium for the product.
The decision regarding closing down a factory will depend on whether the product is makin
contribution towards fixed cost or not. Thus, the correct answer is (e).
7. Answer : (d)
Reason : When we look into the relationship between full cost pricing and contribution margin pricing we ca
conclude that although the full cost pricing and contribution margin based approach for pricing ar
considered distinctively different approaches, by and large, they represent to a certain degree, cost plu
pricing. Hence statement (e) is true. They are considered complementary to each other but no
competing. Hence statement (a) is true. In both the pricing models fixed costs are considered importan
Hence option (c) is true. In both the methods, the selling prices proposed must be only tentative an
they are always subjective. Hence statement (b) is also true. However, Full cost pricing makes a norma
mark up on total costs and it does not take volume of production into consideration. On the other han
contribution margin approach to pricing is concerned about cost. Hence statement (d) which states tha
contribution margin method also makes a normal markup on total costs is false.
8. Answer : (b)
Reason : Total cost per unit = Rs.37
Fixed cost per unit at 50,000 units = Rs.6,00,000 ÷ 50,000 = Rs.12.
Variable cost per unit = Rs.37 – Rs.12 = Rs.25
Additional graphics cost per unit = Rs.4,500 ÷ 2,500 = Rs.1.80 per unit.
Cost savings = Commission + packing cost
= Rs.3.50 + Rs.2.50 = Rs.6.00.
Therefore, net cost = Rs.25 + Rs.1.80 – Rs.6.00 = Rs.20.80
Net profit per unit = Rs.30.00 – Rs.20.80 = Rs.9.20
Total profit will increase by = 2,500 × Rs.9.20 = Rs.23,000.
9. Answer : (b)
Reason : Since the division can sell the full capacity production to the outside market, it has no incentive to tak
a lower price i.e. it will not opt for negotiation or variable costing or cost plus a mark-up and full co
pricing methods i.e. it will be willing to use a transfer price set by the market.
10. Answer : (e)
Reason : Computation of differential cost of production of 15,000 additional units (i.e. 20% of normal capacity
Element of cost 50,000 units 65,000 units Differential cost
(Rs.) (Rs.) for 15000 units
(Rs.)
Prime cost – (Working Note 1) 2,85,000 3,70,500 85,500
Variable overhead 1,50,000 1,95,000 45,000
Semi variable overhead 2,00,000 2,45,000 45,000
(Working Note 2)
Fixed overhead 1,25,000 1,25,000 –
7,60,000 9,35,500 1,75,500
Cost per unit of new order (Rs.1,75,500 ÷ 15,000) = Rs.11.70
Profit margin (20% on sale =25% on cost) = Rs. 2.93
Minimum selling price per unit = Rs.14.63
Workings:
1. Computation of prime cost
Rs.
Sales (50,000 units) 9,50,000
Less: Profit margin – 20% 1,90,000
Cost of sales – (80% of Rs.9,50,000) 7,60,000
Less: Variable overheads – Rs.1,50,000
Semi-variable overheads – Rs.2,00,000
Fixed overheads – 4,75,000
Rs.1,25,000
Prime cost 2,85,000
2. Semi-variable overheads
Change in cos t Rs.2,75,000 - Rs.2,00,000
Variable cost = Change in units = 75,000 units - 50,000 units
Rs.75,000
= 25,000 units = Rs.3 per unit
At 50,000 units
Fixed cost = Total cost – Variable cost
= Rs.2,00,000 – 50,000 units × Rs.3 = Rs.50,000
At 65,000 units
Total cost = 65,000 units × Rs.3 + Rs.50,000 = Rs.2,45,000.
11. Answer : (e)
Reason : Activity based costing deals with the overhead costs. Overhead cost is the cost other than direct cost.
does not segregate variable and fixed costs. It is based on historical costs. It highlights the causes o
costs. It is very costly. Therefore (e) is false.
12. Answer : (c)
Reason : Overhead expenditure variance = Overhead cost variance ~ Overhead volume variance = Rs.5,320 (A
~ Rs.3,250 (A) = Rs.2,070(A)
Actual overheads incurred = budgeted overheads ~ overheads expenditure variance =
Rs.25,630 ~ Rs.2,070(A) = Rs.27,700
Actual overheads incurred Rs.27,700
= =2,770 hours
Actual hours = Actual rate of recovery 10
Overheads capacity variance = Standard rate × (Actual hours – budgeted hours)
Rs.25,630
= 3, 000 × (2,770 hours – 3,000 hours) = Rs.1,965 (Adverse).
13. Answer : (b)
Reason : Revenue = Total cost + Target profit
= Total cost + Imputed interest cost + Residual income
= Rs.10,10,000 + 12% on (Rs.12,30,000 + Rs.20,50,000) + Rs.2,42,000
= Rs.10,10,000 + Rs.3,93,600 + Rs.2,42,000
= Rs.16,45,600.
14. Answer : (c)
Reason : The correct answer is (c). The sales price variance is determined by multiplying the differenc
between actual price and budgeted price by actual units.
Actual price = Rs. 2,29,400 ÷ 18,500 units = Rs.12.40
Budgeted = Rs. 2,36,210 ÷ 19,750 units = Rs.11.96
∴ Sales price variance is 18,500 units (Rs.12.40 – Rs.11.96) = Rs.8,140 (favorable).
15. Answer : (b)
Reason : The use of budgets by the management to monitor and control a company’s operations is calle
budgetary control. Budget reports contain relevant information that compares actual results to planne
activities (budgets). The first financial budget prepared is the budgeted income statement. Th
amounts detailed in a budgeted income statement are used in the determination of projected cas
flows. A fixed budget, also called a static budget, is based on a single predicted amount of sales o
production volume. Successful budget should have adequate flexibility to meet changing busines
conditions. Indirect materials are generally included in factory overhead budget. Statements (a), (c
(d) and (e) are true, while (b) is false, hence the correct answer is (b).
16. Answer : (b)
Reason : A budget manual describes how a budget is to be prepared. Items usually included in a budget manua
are a planning calendar and distribution instructions for all budget schedules. Distribution instruction
are important because, once a schedule is prepared, other departments within the organization will us
the schedule to prepare their own budgets. Without distribution instructions, someone who needs
particular schedule may be overlooked.
Answer (a) is incorrect because employees training policies are not required in the budget manual
Answer (c) is incorrect because employee hiring policies are not needed for budget preparation. The
are already available in the personnel manual. Answer (d) is incorrect because software documentation is no
needed in the budget preparation process. Answer (e) is incorrect because the authorization o
transactions is not necessary for budget preparation purposes.
17. Answer : (c)
Reason : The lowest price, Rs.10 and Rs.12 are below variable cost (Rs.14), so it is not acceptable. The othe
costs exceed variable cost, but Rs.16 price is the lowest acceptable price in the given options.
18. Answer : (c)
Reason : Basic standards are known as measurement standards. These are established at a particular time an
remain unchanged over a period of time. These standards are not revised frequently, but if they ar
revised, it is only due to changes in specification of materials and technology. They may also b
revised if there are substantial price changes.
19. Answer : (d)
Reason :
Particulars A B C Total
A Total fixed costs (Rs.) 3,20,000
Number of units 6,000 9,000 5,000 20,000
Fixed cost per unit (Rs.) 16.00 16.00 16.00 16.00
Variable cost per unit 18.00 22.00 24.00
Total unit cost (Rs.) 34.00 38.00 40.00
Markup – 50% on costs 17.00 19.00 20.00
Selling price (Rs.) 51.00 57.00 60.00
20. Answer : (c)
Reason : Standard rate = Overhead absorbed ÷ Actual hours
= 6,77,105 ÷ 23,675 = Rs.28.60
Budgeted machine hours = Rs. 6,86,400 ÷ Rs. 28.60 = 24,000 hours.
21. Answer : (d)
Reason : RI is the net operating income which a division is able to earn above the minimum rate of return o
operating assets. It is in absolute terms and not a ratio. Hence (d) is false. As RI is the income abov
the minimum rate of return, there is a problem of defining the minimum required rate of retur
associated with various investment opportunities. ROI can be readily employed for inter-divisiona
comparisons, as it is a ratio. A project will be rejected under ROI method and accepted under R
method if the rate of return from such project is more than the minimum required rate of return but les
than the current ROI. Under RI approach, the larger divisions will be expected to have more RI tha
the smaller divisions, not necessarily because they are better managed but because of the bigge
numbers involved.
22. Answer : (d)
Reason : The fixed overhead volume variance measures the effect of not operating at the budgeted activity leve
It is the difference between budgeted fixed cost and the product of the standard fixed overhea
application rate and the standard activity level for the actual output. A favorable variance means tha
activity was greater than expected and that fixed overhead was over applied. It might be caused by, fo
example, hiring more workers to provide an extra shift. An unfavorable volume variance means tha
activity was less than budgeted overhead (or under applied), for example, because of insufficient sale
or a labor strike. Accordingly, the volume variance is usually outside the control of productio
management. Moreover, unlike other variances, it does not directly reflect a difference between actua
and budgeted expenditure of resources.
Other options (a), (b), (c) & (e) are incorrect because the volume variance is not related to direct labo
or overhead efficiency, use or capacity.
23. Answer : (e)
Reason : If the company purchases from the market, the avoidable unit cost
= Rs.7.60 + Rs.5.20 + Rs.4.80 + 25% of Rs.5 = Rs.17.60 + Rs.1.25 =Rs.18.85.
24. Answer : (a)
Reason :
Particulars Amount in Rs./% in Sales At 90% capacity (Rs.)
Sales 9,00,000
Office Salaries 1,00,000 1,00,000
General Expenses 2 % of sales 18,000
Depreciation 12,000 12,000
Rates and Taxes 8,500 8,500
Selling Costs :
Salaries 8 % of sales 72,000

Traveling expenses 2 % of sales 18,000
Sales Office 1 % of sales 9,000
General expenses 1 % of sales 9,000
Distribution costs :
Wages 25,000 25,000
Rent 1 % of sales 9,000
Other expenses 4 % of sales 36,000
Total of Administrative, Selling 3,16,500
and distribution expenses at
90% capacity level
25. Answer : (c)
Reason :
Particulars Rs.
Direct materials 4,50,000
Direct labor 3,30,000
Manufacturing overheads 87,500
Selling and administrative overheads 88,000
Total variable cost 9,55,500
Per unit variable cost 265.42
Total cost of 3,950 units = Rs.265.42 x 3,950 units + Rs.37,500 + Rs.72,000
= Rs.10,48,396 + Rs.1,09,500 = Rs.11,57,896
Cost per unit = Rs.293.14
26. Answer : (a)
Reason :
Closing finished goods 3,750 units
Add: Budgeted sales 32,000 units
Total requirement of sales 35,750 units
Less: Opening finished goods 2,250 units
Required production of finished
33,500 units
goods
Raw material per unit x 4 kg
Material usage 1,34,000 kg
Add: Closing raw material 25,000 kg
1,59,000 kg
Less: Opening raw material 23,000 kg
Required purchases 1,36,000 kg
27. Answer : (c)
Reason :
Budget allowance for fixed overhead Rs.3,15,000
Fixed overhead applied:
Rs.3,15, 000
Rs.3,42,000
1,90,000 units × 1, 75, 000
Capacity variance Rs.27,000 (F)
28. Answer : (d)
Reason : The reports for the lower level of management are fairly detailed though limited in scope and they ar
quantitative in nature. The reports for the top management are highly summarized with financial data.
29. Answer : (d)
Reason : Labor rate variance = Actual hours × (Standard rate ~ Actual rate)
Rs.180(A) = 240 (Standard rate ~ Rs.16)
Standard rate ~ Rs.16 = Re.0.75 (A)
Standard rate = Rs.15.25
Labor efficiency variance = Standard rate (Standard hours ~ Actual hours)
= Rs.15.25(4 hours × 75 units ~240 hours)
= Rs.15.25(300 hours ~ 240 hours) = Rs. 15.25 × 60 hours = Rs. 915 (F).
30. Answer : (b)

Reason : Products require different functional emphasis in each phase of the product life cycle. For example, R
& D emphasis in the development phase and a cost control emphasis in the decline. Product cos
revenue and profit patterns tend to follow predictable courses through the product life cycle. Profit pe
unit varies as products move through their life cycles. The products have finite lives and pass throug
the cycle of development, introduction, growth, maturity, decline and deletion. Each phase of produc
life cycle poses different threats and opportunities.
31. Answer : (d)
Reason :
Budgeted overhead cost Rs.71,400
Actual cost Rs. 79,400 {i.e. 71,400 + 8,000 (A) exp. variance}
Absorbed overhead Rs. 89,760 [i.e. 79,400 + 10,360 (over absorbed)]
Overhead absorption rate per unit Rs.71,400 ÷ 10,500 = Rs.6.80
Output Rs.89,760 ÷ Rs.6.80 = 13,200 units
32. Answer : (a)
Reason : Under full cost pricing, the normal mark-up is not based on sales value. It is generally based on tota
cost or variable cost to recover profit and/or fixed cost. Under full cost pricing, sellers do not tak
advantage of the buyers when demand for the goods is very high, pricing decision may be influence
by internal factors and contribution margin approach to pricing is concerned with the cost, volume an
profit. Therefore (a) is false.
33. Answer : (d)
Reason : Standard material cost = Actual material cost + Favorable material price variance – adverse material
usage variance
Standard wages = Actual wages paid - adverse labor efficiency variance + favorable labor rate varianc
– adverse labor idle time variance
Particulars Total Per unit
Standard material cost (50,970 + 1,345 – 1,015) 51,300 5.70
Standard wages (62,990 - 860 + 1,680 - 630) 63,180 7.02
Standard prime costs 1,14,480 12.72
34. Answer : (e)
Reason : If objectives of the decisions are in conflict, one objective may be specified as the decision criterio
and the other objectives are established as constraints.
35. Answer : (a)
Reason : Full capacity = 15,000 units
Present capacity (70%) = 10,500 units
Unutilized capacity = 4,500 units
Variable cost per suit = Rs.310 + Rs.98 + Rs.47 = Rs.455
Incremental revenue for export = 11,000 units ( Rs.680 – Rs.455 ) = Rs.24,75,000
Opportunity cost of indigenous production = 6,500 units (i.e.11,000 – 4,500) x (Rs.950 – Rs.455) =
Rs.32,17,500
Net loss = Rs.24,75,000 –Rs.32,17,500 = Rs.7,42,500
36. Answer : (b)
Reason : The optimal transfer price of a selling division should be set at a point that will have the most desirabl
economic effect on the firm as a whole while at the same time continuing to motivate the managemen
of every division to perform efficiently. Setting the transfer price based on actual costs rather tha
standard costs would give the selling division little incentive to control costs.
Option (a) is incorrect because inefficiencies are charged to the buying department. Options (c) an
(d) are not correct, because by definition, cost based transfer prices are not adjusted by mark-up o
ROI. Option (e) is incorrect because cost-based transfer price which provides the advantages of clarit
and administrative convenience.
37. Answer : (c)
Reason : Zero-based budgeting is a technique by which manager of each decision unit is to justify his entir
budget request in complete detail with a zero base. The manager of the decision unit has to isolate eac
item of his budget in order to analyze it in separate decision packages, which are ranked in order o
importance.
38. Answer : (b)
Rs.32, 400
= Rs.3.60.
Reason : Standard rate per unit = 9, 000
Rs.32, 400
= Rs.16.20
Standard rate per hour = 2, 000
9, 000 units
= 4.5 units per hour
Standard time for Budgeted production = 2, 000 hrs
10, 500
= 2, 333.33 hrs
Standard time for actual production = 4.50
Volume variance = Rs.16.20(2,000 hrs – 2,333.33 hrs)
= Rs.16.20 × 233.33 hrs = Rs.5,400 (Favorable)
39. Answer : (e)
Reason : Total fixed cost = Rs.7,00,000 + Rs.4,50,000 + Rs.4,50,000 = Rs.16,00,000
Revised fixed cost = Rs.16,00,000 + Rs.11,50,000 = Rs.27,50,000 and selling price per unit =
Rs.17
Variable cost per unit = Rs.2.60 + Rs.1.40 + Re.0.36 + Re.0.48 = Rs.4.84
Total contribution = 3,25,000 × (Rs.17 - Rs.4.84) = Rs.39,52,000
Profit = Rs.39,52,000 – Rs.27,50,000 = Rs.12,02,000.
40. Answer : (b)
Reason : The production cost budget
Particulars Rs.
Material cost (variable) 33,600
Labor cost (variable) 17,500
Stores (variable) 2,520
Power (semi-variable) 3,120
Repairs and maintenance (semi- 5,580
variable)
Inspection (semi-variable) 1,760
Administration overheads (semi- 3,920
variable)
Selling overheads (semi-variable) 7,680
Depreciation (fixed) 15,320
Total 91,000
Cost per unit 13.00
41. Answer : (a)
Reason : Due to some unforeseen circumstances, it may be necessary to alter a standard during an accountin
period. Once a standard has been set, it is undesirable that it should be changed, because this affect
budgets, standard costs, etc. Therefore, it is often preferable to create a revision variance, whic
segregates the difference due to this factor.
42. Answer : (a)
Reason :
Actual overheads cost Rs.32,500
Less: Applied overhead cost = Rs. 30,000
(Standard hours for actual work × standard overhead
rate)
12,500 hours × Rs.2.40
Overhead cost variance Rs.2,500 (Adverse)
Other options (b), (c), (d) and (e) are not correct.
43. Answer : (a)
Reason :
Particulars Rs.
Total standard cost of XLN (1,000 units @ 40,000
Rs.40)
Less: Standard direct labor cost 20,000
Standard overhead cost (4,000 hours @ Rs.2) 8,000
Standard cost of raw material 12,000

Total standard quantity of raw material required
Standard cost of raw material used Rs.12,000
=
= Standard rate per kg. of raw material Rs.4 = 3,000 kg.
Material usage variance = Standard rate × (Standard quantity ~ Actual quantity)
Rs.1,200 (A) = Rs.4 × (3,000 kg. ~ Actual quantity)
300 (A) = 3,000 kg ~ Actual quantity
Actual quantity = 3,300 kg.
44. Answer : (c)
Reason : If revised sale price 88%, the original sale price is 100. Therefore, revised budgeted sales at origina
Rs.1, 980
sale price = .88 = Rs.2,250 lakh
Revised budgeted sales at original sale price = Rs.2,250 lakh
Since, revised budgeted sales at original sale price are Rs.90 then the original budgeted sales at origina
sale price are Rs.100.
Rs.2, 250 lakhs
Therefore, original sales at original sale price = 0.90 = Rs.2,500 lakh.
45. Answer : (b)
Reason : Relevant costs are those costs that are associated with a particular decision situation and will b
incurred if that decision situation is undertaken. It can be differentiated from those costs which ar
incurred irrespective of whether the decision is taken or not. A sunk cost is the cost of resource
already acquired when the total is unaffected by the choice of alternatives. They are created by
decision made in the past and hence not relevant for decision-making in future. As the material M i
not being used regularly, if it is not used in this project, it will be disposed. Hence, the relevant cost i
realizable value.
46. Answer : (c)
Reason : The costs which are not incurred but appeared in cost accounts only are called imputed costs. e.g. Th
notional rent charged on business premises owned by the proprietor is imputed cost.
47. Answer : (a)
Reason :
Particulars K (Rs.) B (Rs.)
Selling price 21 14
Variable cost 14 10
Contribution per unit 7 4
Direct man hours per unit 5 3
Contribution per man hours 1.40 1.33
Rank 1 2
Units 4,800 6,000
Number of B units = 30,000 hrs – 4,800 × 5 = 6,000 hrs.
Therefore, 6,000 hrs. ÷ 3 = 2,000 units.
K = 4,800 units and B = 2,000 units
48. Answer : (d)
Reason : If there is a competitive market for a product and the transferor division has idle capacity, the transfe
price can be based on marginal cost only because fixed cost is already recovered by existin
production. If there is no idle capacity, the transfer price will be based on marginal cost plu
opportunity cost.
The transferor division cannot fix up the transfer price at standard costs, total costs, full costs plu
profit and market price under the situation of unutilized capacity.
49. Answer : (d)
Reason :
Cash sales for December 2007 (Rs.5,15,000 x 0.4) Rs.2,06,000
Cash flows for the credit sales in the month of October 2007
Rs. 48,510
(Rs.3,85,000 x 0.6 x 0.21)
Cash flows for the credit sales in the month of November 2007
Rs.2,07,000
(Rs.4,60,000x 0.6 x 0.75)
Rs.4,61,510
Total commission payable to salesmen = Rs.4,61,510 x 3% = Rs.13,845.
50. Answer : (c)
Reason : A cost center is the most basic level of financial responsibility, but this does not mean that all co
centers are small or their operations simple. The Department of National Defence is essentially a co
centre, and it certainly is neither small nor simple.
51. Answer : (c)
Reason : A profit center is held accountable for profit. Since profit is equal to revenue minus expense, prof
center managers are held accountable for both the revenue and expenses. It has control not only on th
generation of revenue but also has control on expenditure, therefore it is false. Other statement
mentioned in (a), (b), (d) and (e) are correct.
52. Answer : (d)
Reason : A flexible budget is a series of budgets prepared for different levels of activity. It allows adjustment
of the budget to the actual level of activity before comparing the budgeted activity with actual resul
Fixed budget is a budget prepared for one level of activity. So option (d) is correct.
53. Answer : (e)
Reason : The beginning inventory was 2,100 (15% of the current period's sales units).
Units budgeted to be available are = [14,000 + (9,000 x 0.15)] =15,350.
Planned production of finished goods: (15,350 - 14,000x0.15)= 13,250.
54. Answer : (c)
Reason: Budgets are used to plan and control all functions in the value chain, including design, production
distribution, and sales.
55. Answer : (d)
Reason : Zero-based budgeting starts from scratch, moves towards allocation of resources by needs, identifie
and eliminates wastage and obsolete operation, increases communication and coordination within th
firm. It also helps to create a questioning attitude of the current practice of the organization. Therefore
(d) is false.
56. Answer : (b)
Reason : Total investments = Rs.7,80,000 + Rs.1,75,000 + Rs.1,25,000
= Rs.10,80,000
Total Return = 25% of Rs. 10,80,000 = Rs.2,70,000
Variable cost 40,000 × Rs.55
22,00,000
Fixed cost
8,20,000
Return
2,70,000
Sales price
32,90,000
Sales price per unit Rs.32,90,000 ÷ 40,000
Rs.82.25
57. Answer : (e)
Reason :
Level of activity 90%
Units 2,700
(Rs.)
a. Variable cost 4,86,000
b. Semi variable cost
Variable portion 27,000
Fixed portion 90,000
c. Fixed cost 3,20,000
Total cost 9,23,000
ii. Sale price reduced by 8% (i.e., Rs.420) 10,43,280

Less: Total cost 9,23,000
Profit 1,20,280
Profit per unit 44.55
58. Answer : (e)
Reason: Let the sale price = x

24%
50,000x = Rs.2,25,000 + Rs.1,75,000 + Rs.3,60,000 + 1 − .4
[ Rs.60, 000 + 0.45(50, 000x)]
50,000x = Rs.7,60,000 + 0.4 (Rs.60,000 + 22,500x)
50,000x = Rs.7,60,000 + Rs.24,000 + 9,000x
41,000x = Rs.7,84,000
x = 19.12.
59. Answer : (d)
Reason :
Particulars January 2008 February 2008
Expected sales Kg. 6,000 7,000
Production (units) 3,000 + 3,500 3,500 + 4,000
= 6,500 = 7,500
Raw material required for production 13,000 15,000
(kg)
Amount to be paid for raw material 65,000 75,000
(Rs.)
Payment to creditors 65,000
Particulars January 2008 February 2008 March 2008

Expected sales (units) 6,000 7,000 8,000
Sales (in Rs.) 4,80,000 5,60,000 6,40,000
Cash sales 2,40,000 2,80,000 3,20,000
Collection from debtors 2,40,000 2,80,000
Particulars February 2008

Cash sales 2,80,000
Collection from debtors 2,40,000
Less: Payment to (65,000)
creditors
Other expenses (3,50,000)
Cash surplus 1,05,000
60. Answer : (d)
Reason : Standard rate of fixed overheads = Rs.9,12,000 ÷ Rs.4,80,000 = Rs.1.90
Standard rate of variable overheads = Rs.8,40,000 ÷ Rs.4,80,000 = Rs.1.75
Total Standard rates = Rs.1.90 + Rs.1.75 = Rs.3.65
Overhead efficiency variance = Rs.3.65 (4,56,000 hrs – 4,35,000 hrs)
= Rs.76,650 (Adverse).
61. Answer : (d)
Reason : McGregor’s Theory X is based on the conception that ‘The average human being has an inheren
dislike of work and will avoid it if he can’. Because of this human characteristic of dislike for wor
most people must be coerced, controlled and directed towards the achievement of goal. Option (b) i
incorrect as this theory is based on the principles that the average human being does not inherentl
dislike work. Option (c) is incorrect as it is set forth hierarchy of human needs. Option (a) and (e) ar
not correct related to the question asked. Therefore, (d) is correct.
62. Answer : (d)
Reason : Management by exception is facilitated by well-designed reports that direct attention to unusua
outcomes. Managers should focus their attention on the parts of performance reports that do not reflec
smoothly running aspects of operations. This is called Management by exception.
63. Answer : (e)
Reason : Full cost pricing method is used if a company does not have the basic idea of demand for the produc
It is not used to recover only fixed costs or only variable cost. It is not used to recover market pric
plus mark-up or standard cost plus mark-up.
64. Answer : (d)
Reason : Transfer pricing motivates divisional managers to perform well. It is useful for evaluating performanc
of the divisional managers. It also helps in measuring divisional performance. It is the selling pric
established for goods or services sold by one division to other under the same organization. Therefore
(d) is not correct, (e) is correct.
65. Answer : (d)
Reason : The data, equipment and computer programs that are used to develop information for managerial use i
called Management Information System (MIS). Other options (a), (b), (c) and (e) are not correct.
66. Answer : (b)
Reason : The capital investment budget may be prepared more than a year in advance, unlike the other element
of the master budget. In case of preparation of master budget, it requires production budget, overhea
expenses budget, proforma income statement and balance sheet. It does not require capital investmen
budget at the time of its preparation.
67. Answer : (e)
Reason : The cost of direct material, direct labor, and variable manufacturing overhead will increase by 20%
Fixed manufacturing overhead will not change given there is no increase in capacity. The tota
manufacturing cost at 12,000 units will be = (Rs.88,000 + Rs.124,000 + Rs.108,000) x 1.20
Rs.75,000 = Rs.4,59,000.
68. Answer : (c)
Reason : Materials price variance: Actual quantity used x (Standard price - Actual price). The actual price i
Rs.2,51,430/57,800 = Rs.4.35. The materials price variance is 57,800 x (Rs.4.25 - Rs.4.35) =
Rs.5,780, an unfavorable variance.
69. Answer : (b)
Reason :
Particulars Rs.
Cash sales (November) Rs.1,20,000 × 0.35 42,000
Credit sales realized:
October Rs.1,50,000 × 0.65 × 0.6 58,500
September Rs.1,30,000 × 0.65 × 0.4 33,800
Sales receipts 1,34,300
70. Answer : (b)
Reason : Step 1: 9,000 budgeted units of production – 8,250 actual units produced = 750 units.
Step 2: 750 units x 2 labor hour allowed per unit = 1,500 labor hour variance.
Step 3: 1,500 labor hour variance x Rs.2 fixed overhead rate = Rs.3,000 (Adverse).
(Budgeted FOH – standard FOH cost of actual output).
< TOP OF THE DOCUMENT >

mb162 1007

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

mb162 1007

Uploaded by

Copyright:

Available Formats

Suggested Answers with Examiner's Feedback Page 1 of 27

Edited by Foxit PDF Editor

Variable cost per unit (Rs.) Rs. 21

21. Which of the following statements is false?

The total quantity of materials purchased during the quarter is

The fixed overhead capacity variance for the month was

Output (units) 9,000

Labor idle time 630 (A)

Number of working days 25 21

(d) Favorable variance

(b) Realizable value

generation of revenue or investment can be controlled

(c) Proforma income statement

September 2007 Rs.1,30,000

(b) Rs.3,000 (Adverse)

Salaries 8 % of sales 72,000

30. Answer : (b)

Standard cost of raw material 12,000

ii. Sale price reduced by 8% (i.e., Rs.420) 10,43,280

Reason: Let the sale price = x

Particulars January 2008 February 2008 March 2008

Particulars February 2008

You might also like