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Question Paper

Management Accounting – I (151) : October 2005


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

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1. A major difference between Financial Accounting and Management Accounting relates to differences Answer
in the users. Related to Tinku Ltd., which of the following best describes a user of Management >
Accounting Information?
(a) Credit Manager of a vendor of Tinku Ltd
(b) Income Tax Commissioner reviewing the tax return of Tinku Ltd
(c) Bank Manager reviewing a loan application from Tinku Ltd
(d) Purchasing Manager for Tinku Ltd
(e) Shareholders of Tinku Ltd.
(1 mark)
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2. When comparing managerial accounting information with financial accounting information, it is Answer
expected that managerial accounting information would >
(a) Be based upon GAAP
(b) Emphasize information on the company as a whole
(c) Be mandatory for business organizations
(d) Include an analysis of historical cost
(e) Present estimates of future financial operations.
(1 mark)
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3. Which of the following statements are false? Answer
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I. Management accounting statements are prepared in accordance with Generally Accepted
Accounting Principles.
II. Management accounting is mandatory for business organizations because it should be maintained
as per various legal statutes.
III. The application of Management accounting can be extended beyond the traditional accounting
system.
IV. Management accounting focuses more on a company as a whole and less on the parts or segments
of a company.
(a) Both (I) and (II) above
(b) Both (I) and (IV) above
(c) Both (II) and (IV) above
(d) (I), (II) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
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4. Which of the following is least likely to be an objective of cost accounting system? Answer
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(a) Provision for taxation
(b) Optimum sales mix determination
(c) Maximization of profit
(d) Inventory valuation
(e) Product costing.
(1 mark)
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5. Which of the following is true? Answer
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(a) Decremental cost means the cost of an added unit
(b) Period costs are not assigned to products
(c) Standard cost tells us what the actual cost is for the product
(d) Cost center and cost unit are the same
(e) Cost of production is equal to prime cost plus works cost.

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(1 mark)
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6. Which of the following costs is an example of a discretionary fixed cost? Answer
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(a) Interest payments on a long-term loan
(b) Property taxes on land and related buildings
(c) Employees training
(d) Lease payments on production equipment
(e) Depreciation on plant & machinery.
(1 mark)
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7. Mr. Alfanso, a manager of ISFS Ltd., wants to control and reduce, if possible, the company's Answer
production costs. He must determine how production costs are related to and affected by various >
business activities. The manager needs to understand
(a) Variable costs (b) Relevant ranges (c) Fixed costs
(d) Cost behaviors (e) Total costs.
(1 mark)
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8. Product cost is defined as the cost Answer
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I. Incurred when an asset is used up or sold for the purpose of generating revenue.
II. That is assigned to goods that were purchased for resale.
III. That is assigned to goods manufactured for resale.
IV. That is inventoriable.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
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9. ABCL manufactures 2 products – ‘AB’ and ‘CL’. The company has furnished the following Answer
information pertaining to products: >
Particulars AB CL Total (Rs.)
Units 10,00,000 2,00,000
Selling Price per unit Rs.30 Rs.26
Direct labor hours (Rs.10 per hour) Rs.3,60,000 Rs.80,000
Direct material Rs.88,50,000 Rs.9,00,000
Machine Set-ups 1,600 900
Machine Utility 6,00,000
Machine Maintenance 8,00,000
Quality Control 4,00,000
Material Handling during set-ups 18,50,000
Product Engineering 30,00,000
Rent of Manufacturing Space 20,00,000
Security 9,50,000
Miscellaneous Production Expense 20,00,000
Which of the following is considered to be a product-level cost?
(a) Machine maintenance
(b) Rent of manufacturing facility
(c) Material handling
(d) Product engineering
(e) Quality control.
(1 mark)
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10. When manufacturing expenses are recovered, the journal entry is to be passed as Answer
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(a) Debit Work-in-process account and credit Manufacturing overhead control account
(b) Debit Manufacturing overhead control account and credit stores ledger control account, wages
control account and general ledger adjustment account
(c) Debit Manufacturing overhead control account and credit work-in-process account
(d) Debit General ledger adjustment account and credit Work-in-process account
(e) Debit Work-in-process account and credit General ledger adjustment account.

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(1 mark)
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11. The cost of manufacturing a sub-assembly of Chetan Ltd. is given below: Answer
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Particular Rs. per unit
Material cost 8.00
Direct labour cost 6.00
Variable overhead cost 3.00
Annual fixed overhead which can be avoided by purchasing the sub-assembly is Rs.90,000. The sub-
assembly can be purchased from outside for Rs.20 per unit. If annual purchases are over 30,000 units, a
discount of 10% is available on the purchase price for the total quantity ordered. If annual requirement
of the sub-assembly is 40,000 units, then buying it from outside will
(a) Save Rs.16,000 (b) Save Rs.40,000
(c) Cost Rs.16,000 more (d) Cost Rs.30,000 more (e) Save Rs.50,000.
(1 mark)
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12. Which of the following statements is/are false? Answer
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I. Depreciation is an out-of-pocket cost.
II. Conversion cost is equal to direct wages plus factory overhead costs.
III. An item of cost that is direct for one business may be indirect for another.
IV. All costs are controllable.
(a) Only (I) above (b) Only (II) above
(c) Both (III) and (IV) above (d) Both (II) and (III) above
(e) Both (I) and (IV) above.
(1 mark)
13. Ankit Pvt. Ltd. of Kolkata is currently operating at 80% capacity. The following is the income Answer<
statement furnished by the company: >

Particulars Rs. in lakh Rs. in lakh


Sales 720
Cost of sales:
Direct materials 200
Direct expenses 80
Variable overheads 40
Fixed overheads 260
Total cost 580
Net income 140
The Managing Director has been discussing an offer from Middle East for the supply of a quantity,
which will require 50% capacity of the factory. The price is 10% less than the current price in the local
market. Order cannot be split. The capacity of the factory can be augmented by 10% by adding
facilities at an increase of Rs.40 lakh in fixed cost. If the proposal is accepted with the increased
facilities, the profit will increase by
(a) Rs.50 lakh (b) Rs.40 lakh (c) Rs.60 lakh
(d) Rs.65 lakh (e) Rs.35 lakh.
(2 marks)
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14. If an owned building is proposed to be used for a project, then the rent that can be earned by leasing out Answer
the building is an example of >
(a) Sunk cost (b) Opportunity cost
(c) Replacement cost (d) Out of pocket cost(e) Marginal cost.
(1 mark)
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15. Due to changes that are occurring in the basic operations of many firms, all of the following represent Answer
trends of allocation of indirect cost except >
(a) Treating direct labor as an indirect manufacturing cost in an automated factory
(b) Using throughput time as an application base to increase awareness of the costs associated with
lengthened throughput time
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(c) Preferring plant-wide application rates that are applied to machine hours rather than incurring the
cost of detailed allocations
(d) Using several machine cost pools to measure product costs on the basis of time in a machine
center
(e) Using cost drivers as application to increase the accuracy of reported product costs.
(1 mark)
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16. At 70% capacity utilization, the overhead recovery rate is Rs.20 per unit. At 80% capacity level, the Answer
rate gets reduced to Rs.18 per unit. If the production attains 92% of the capacity utilization, the >
recovery rate would be
(a) Rs.16.17 (b) Rs.17.78 (c) Rs.14.16 (d) Rs.15.92 (e)
Rs.19.00.
(1 mark)
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17. Exotica Ltd. has furnished the following data for the month of September 2005: Answer
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Direct labor was15,000, which was 150 % of factory overheads. Cost of goods sold excluding
administrative expenses was Rs.1,12,000. Inventory account showed the following opening and closing
balances:
September1, 2005 September 30, 2005
Particulars
Rs. Rs.
Raw materials 8,000 10,600
Work in progress 9,000 12,500
Finished goods 35,000 38,000
The value of raw material purchased during the month is
(a) Rs.77,900 (b) Rs.96,100 (c) Rs.1,21,100
(d) Rs.1,06,100 (e) Rs.1,36,100.
(2 marks)
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18. Tri-Star Ltd. has three jobs outstanding. The company uses normal costing and the overhead rate that is Answer
based on machine hours amounts to Rs.85 per machine hour based on a forecast of 4,000 hours. Job 1 >
with a direct cost of Rs.85,500 has used 1,290 machine hours. Job 2 with a direct cost of Rs.74,700 has
used 1,760 machine hours. Job 3 with a direct cost of Rs.87,470 has used 789 hours. Actual overhead
amounted to Rs.3,50,000. Job 1 is completed and sold for Rs.2,76,500. Job 2 is completed and not yet
delivered. Job 3 is still in process. If over or under applied overhead is prorated to cost of sales and
inventory accounts based on total costs in each job, finished goods inventory will be
(a) Debited by Rs.8,053 (b) Credited by Rs.8,053
(c) Debited by Rs.9,256 (d) Credited by Rs.9,256 (e) Debited by Rs.6,377.
(1 mark)
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19. Jagan Lamps Ltd. has furnished the following information pertaining to 2 products – P and Q: Answer
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Activity Cost driver P’s share Q’s share Unused Rs.
Set ups Number of set ups 10 40 5 5,500
Ordering Number of orders 5 10 5 3,200
Receiving Number of receipts 22 12 6 2,400
Product dev. Number of parts 180 120 100 2,800
Gen. Mgmt. Number of labor hrs 2,900 4,100 1,000 7,200
Security Area covered 3,200 5,400 400 9,000
Materials No. of units produced 400 800 120,000
Labor No. of Direct labor hours 1,700 3,100 1,200 56,000
The cost of unused capacity amounts to
(a) Rs.11,260 (b) Rs.11,460 (c) Rs.11,860
(d) Rs.14,860 (e) Rs.12,360.
(1 mark)

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20. Because of shortage of labor and materials, a department in a factory is working at 55% of its normal
capacity. In its cost records, it charges manufacturing overhead to work-in-progress as a percentage of
direct labor.
For the current year, budgeted direct labor cost is Rs.2,50,000, budgeted manufacturing fixed overhead
is Rs.1,00,000 and budgeted manufacturing variable overhead is Rs.1,25,000.
A dispute has arisen as to the percentage of direct labor which should be charged to work-in-progress.
One officer claims that it should be 90%, another claim that it should be less than that.
The appropriate recovery rate should be
(a) 67.5% (b) 90% (c) 88% (d) 72% (e) 63%.
(1 mark)
21. For a department of Cadila Healthcare Ltd., the standard overhead rate is Rs.3 per hour and overhead
allowances are as follows:
Activity level (hours) Budgeted overhead allowance (Rs.)
3,00
(1 mark)
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25. The allocation of costs to a particular cost object allows a firm to analyze all of the following except Answer
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(a) Whether a particular manager earns a bonus
(b) Whether a particular department should be expanded
(c) Whether a product line should be discontinued
(d) The causes of increase in the sales of a particular product
(e) The decision with regard to a particular product that should be purchased or manufactured in-
house.
(1 mark)
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26. A machine shop of Piston Ltd. has 5 identical machines manned by 5 operators. The operators are fully Answer
engaged on machines. The total original cost of these 5 machines is Rs.8,00,000. The company has >
furnished the following information pertaining to operations for 2nd quarter ending September 30, 2005:
Normal available hours per month per operator 220 hours
Absenteeism (without pay) per month per operator 12 hours
Leave (with pay) per month per operator 20 hours
Normal idle time (unavoidable) per month per operator 8 hours
Average rate of wages per hour Rs.10
Estimated production bonus 10% on wages
Value of power consumed Rs.7,280
Supervision and indirect labor Rs.4,100
Electricity and lighting Rs.3,800
Repairs and maintenance per quarter 1% on value of machines
Depreciation per annum 10% on original cost
Miscellaneous expenses per month Rs.600
General management expenses per annum Rs.50,000
The comprehensive machine hour rate for the machine shop for the quarter ending September 30, 2005
is
(a) Rs.48.58 (b) Rs.49.52 (c) Rs.39.61 (d) Rs.29.42 (e)
Rs.34.00.
(2 marks)
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27. The budgeted working conditions of a cost centre of Limsy Ltd. are as follows: Answer
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Normal working per week – 40 hours
No. of machines – 15
Normal weekly loss of hours on maintenance etc. – 5 hours per machine
No. of weeks worked per year – 48
Estimated annual overheads – Rs.1,76,400
Estimated direct wage rate – Rs.5 per hour
Actual results in respect of a 4 week period are:
Wages incurred – Rs.11,600
Overheads incurred – Rs.17,500
Machines used – 2,400 hours
The amount of under or over absorption of wages and overheads respectively are
(a) Rs.400 (over) and Rs.700 (under) respectively
(b) Rs.400 (under) and Rs.400 (under) respectively
(c) Rs.400 (over) and Rs.400 (under) respectively
(d) Rs.400 (over) and Rs.700 (over) respectively
(e) Rs.400 (under) and Rs.700 (over) respectively.
(2 marks)
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28. Theoretical capacity minus idle time resulting from holidays, downtime, changeover time etc. but not Answer
from inadequate sales demand, is called >
(a) Maximum capacity (b) Normal capacity
(c) Practical capacity (d) Actual capacity (e) Standard capacity.
(1 mark)
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29. Apportionment of overhead cost may be defined as Answer

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(a) Charge to a cost center of an overhead cost item with no estimation
(b) Charge to each cost center with a share of an overhead cost using an apportionment basis to
estimate the benefit extracted by each cost center
(c) Charge to cost units for the use of an overhead cost
(d) Classification of overhead cost as fixed or variable
(e) Charge to cost center for the use of an overhead cost.
(1 mark)
30. Which of the following statements is true?
(a) Basis of apportionment of cost of steam is wages of each department
(b) Direct labor hour rate of absorption of overhead is suitable where most of the production is done
by using machines
(c) The time factor is ignored when the cost of materials is used as the basis for absorption of
overhead
(d) Direct assignment of factory overhead costs to each department is known as apportionment
(e) The secondary distribution on a reciprocal basis is known as the stepladder method.
(1 mark)
31. Which of the following statements is false?
(a) When large amount of under or over-absorption of factory overhead is due to wrong estimation of
overhead costs, it should be disposed of by supplementary rate method
(b) The process of grouping costs according to their common characteristics is known as cost
collection
(c) The cost of searching for new or improved products, new applications of materials or new or
improved methods is known as research cost
(d) Administrative overhead costs are usually absorbed as a percentage of work costs
(e) Selling cost is the cost of seeking to create and stimulate demand and of securing order.
(1 mark)
32. DVD Ltd. has been approached by a foreign customer who wants to place an order for 1,500 units of
Product C at Rs.22.50 a unit although the company currently sells this item for Rs.39 a unit, and the
item has a cost of Rs.29 a unit. Further analysis reveals that the company will not pay sales commission
of Rs.2.50 a unit on this sales and its packaging requirement will save an additional Rs.1.50 per unit.
However, the additional graphics required on this job will cost Rs.3,000. The fixed costs amounting to
Rs.4,00,000 for the production of 50,000 of such products by the company will not change. They
decided to accept this order, but another customer who buys an average of 220 units for the period
wants to pay you Rs.22.50 rather than the regular price of Rs.39 a unit. Accepting the foreign order of
1,500 units and the regular customer at Rs.22.50 for 220 units, the net income will be
(a) Increased by Rs.6,020 (b) Decreased by Rs.1,950
(c) Increased by Rs.5,250 (d) Decreased by Rs.5,250
(e) Increased by Rs.1,620.
(2 marks)
33. The cost of idl2 0 0 10.02 138.8076 2 458.0399 279.9803 Tm Tm pa 0 0 10.02 138.8076 t8oTm81371pa 0 0 .7676 260.6005(.2
Personnel 3 1,000 1,80,000 Employees
Cleaning 5 2,22,750 Square feet
Operating Dept. A 30 3,750 25,00,000 45,000 Hours
Operating Dept. B 10 3,000 30,00,000 40,000 Hours
Using the Direct method to allocate the Personnel Department and Cleaning Department costs, what is
the appropriate overhead allocation rate
costs are
(a) Rs.11.00 and Rs.13.62 respectively (b) Rs.11.35 and Rs.10.30respectively
(c) Rs.11.35 and Rs.10.22 respectively (d) Rs.10.30 and Rs.11.00 respectively
(e) Rs.10.30 and Rs.13.62 respectively.
(2 marks)
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39. Sarabhai Ltd. uses a historical cost system and applies overheads on the basis of predetermined rates. Answer
The following data are made available by the company for the year ended March 31, 2005: >

Particulars Rs.
Manufacturing overheads incurred 8,72,000
Manufacturing overheads applied 8,00,000
Work-in-progress 5,00,000
Finished goods 15,00,000
Cost of goods sold 2,20,00,000

The amount of under absorbed overheads to be adjusted to work-in-progress, using supplementary rate,
is
(a) Rs.5,000 (b) Rs.4,500 (c) Rs.1,500
(d) Rs.54,000 (e) Rs.66,000.
(1 mark)
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40. Which of the following statements are true with respect to absorption of fixed manufacturing overhead Answer
cost on the basis of direct material cost? >
I. Time factor is completely ignored in this method.
II. Under this method no distinction is made between the production of workers and that of machines.
III. This method is inequitable, if the raw materials used in production are not passed through all
processes.
IV. This method is not appropriate, if there is no logical relationship between the items of
manufacturing overhead and material cost.
(a) Both (I) and (IV) above
(b) Both (II) and (III) above
(c) Both (II) and (IV) above
(d) Both (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
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41. Consider the following data pertaining to inventories of Safed Ali Ltd. for the month of September Answer
2005: >

Particulars Opening inventory Closing inventory


(Rs.) (Rs.)
Raw materials 7,120 8,635
Work-in-process 8,000 3,000
Finished goods 9,000 11,000

Other information:

i. Raw materials purchased Rs.34,180


ii. Total manufacturing costs charged to product
(it includes raw materials, direct labor and factory overheads applied @
60% of direct labor cost) Rs.82,601
iii. Cost of goods available for sale Rs.1,02,600
iv. Selling and general expenses Rs.2,500

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The costs of raw materials used and the amount of factory overhead applied are
(a) Rs.32,665 and Rs.18,726 respectively
(b) Rs.32,665 and Rs.31,210 respectively
(c) Rs.34,180 and Rs.31,210 respectively
(d) Rs.34,180 and Rs.18,726 respectively
(e) Rs.34,180 and Rs.12,484 respectively.
(1 mark)
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ADD Ltd. uses process cost system to manufacture Dust Density Sensors for the mining industry. The Answer
42. following pertains to operations for the month of September 2005: >

Particulars Units
Opening work-in-process (September 01, 2005) 500
Introduced in production during September 2005 5,000
Closing work-in-process (September 30, 2005) 400
There is no loss in the manufacturing process. The opening inventory was 80% complete for materials
and 60% complete for conversion costs. The closing inventory was 75% complete for material and 65%
complete for conversion costs.
Costs pertaining to the month of September 2005 are as follows:
Opening work in process:
Materials Rs. 6,850
Conversion Rs. 4,350
During the month:
Materials Rs.90,000
Conversion Rs.75,900
The total cost of closing work-in-process on September 30, 2005, using FIFO method, is
(a) Rs.9,300.00 (b) Rs.11,649.63 (c) Rs.12,573.78
(d) Rs.11,557.00 (e) Rs.12,443.00.
(2 marks)
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43. Bharghab Plastics Ltd. has a productive capacity of 2,50,000 units of Product BP per quarter. The Answer
company estimated its normal capacity utilization at 90% for the quarter ending September 30, 2005. >
The variable manufacturing cost is Rs.22 per unit and the fixed factory overheads were budgeted at
Rs.9,00,000 per quarter. The variable selling overheads amounted to Rs.6 per unit and the fixed selling
expenses were budgeted at Rs.6,30,000. The operating data for the quarter ending September 30, 2005
are as under:
Opening stock of finished goods – 12,500 units
Production – 2,00,000 units
Sales at the rate of Rs.40 per unit – 1,87,500 units
The cost analysis revealed an excess spending of variable factory overheads to the extent of
Rs.1,00,000. There is no other variance.
The profits under marginal costing method and absorption costing method are
(a) Rs.7,20,000 and Rs.6,70,000 respectively
(b) Rs.6,20,000 and Rs.6,70,000 respectively
(c) Rs.6,20,000 and Rs.7,20,000 respectively
(d) Rs.6,70,000 and Rs.7,20,000 respectively
(e) Rs.6,70,000 and Rs.7,70,000 respectively.
(2 marks)
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44. Leo Toys Ltd. can produce and sell a toy cell phone that has a variable cost of Rs.16 a unit and total Answer
fixed costs of Rs.9,000 regardless of volume. At a price of Rs.18 a unit, 12,000 units can be sold. At >
Rs.20 a unit, 4,000 units can be sold; at Rs.21 with a promotion cost of Rs.6,000, 5,000 units can be
sold; and at Rs.22 with a promotion cost of Rs.10,000, 6,000 units can be sold. If the company decides
to spend no money on promotion, the best option would be to sell
(a) 12,000 units because its contribution margin will amount to Rs.16,000
(b) 4,000 units because its contribution margin will amount to Rs.16,000
(c) 4,000 units because its profit will amount to Rs.15,000
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(d) 12,000 units because its profit will amount to Rs.15,000
(e) 4,000 units because its profit will amount to Rs.3,000.
(1 mark)
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45. Kadambari Ltd. makes one model of a product known as ‘Brand Blow’. The company has provided the Answer
following balances as on April 01, 2005: >
Finished goods – 500 units
Work-in-process – Rs. 5,740
Raw materials – Rs. 12,610
The following data are available as on September 30, 2005:
Indirect labor – Rs. 12,160
Freight in – Rs. 5,570
Direct labor – Rs. 32,460
Raw material – Rs. 9,460
Factory overhead expenses – Rs. 31,730
Work-in-process – Rs. 7,820
Sales (15,000 units) – Rs.3,60,000
Indirect material – Rs. 21,390
Total manufacturing costs incurred – Rs.1,98,400
There were 1,500 units of finished goods of ‘Brand Blow’ as on September 30, 2005.
The amount of raw materials purchased during the half-year ended September 30, 2005
(a) Rs.92,570 (b) Rs.88,610 (c) Rs.94,180
(d) Rs.86,530 (e) Rs.91,940.
(2 marks)
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46. A company has three factories situated in North, East and South with its head office in Hyderabad. The Answer
management has received the following summary report on the operations of each factory for a period: >

Over/(under) Over/(under)
Actual sales Actual profit
Region budgeted sales budgeted profit
(Rs.) (Rs.)
(Rs.) (Rs.)
North 1,200 (400) 135 (180)
East 1,540 150 210 90
South 1,100 (200) 330 (110)

If the variable cost ratio, fixed costs and sales mixes are as per budget, the break-even sales in rupees of
the company as a whole is
(a) Rs.2,500 (b) Rs.1,500 (c) Rs.2,586 (d) Rs.1,750 (e)
Rs.1,600.
(2 marks)
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47. Dibson Ltd. operates several production processes involving the mixing of ingredients to produce bulk Answer
animal feedstuffs. One such product is mixed in two separate process operations. The company has >
furnished the following information pertaining to process 2 for the quarter ending September 30, 2005:

Cost incurred: Rs.


Transferred from process 1 1,78,704
Raw materials 74,972
Conversion costs 63,176
Opening work-in-process 3,009

Production: Units
Opening work-in-process 1,200
(Material – 100% complete apart from process
Conversion cost – 50% complete)
Transferred from process 1 1,12,000
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Transferred from process 1 1,12,000
Completed output 1,05,400
Closing work-in-process 1,600
(Material – 100% complete apart from process 2
Conversion – 75% complete)
Normal wastage of materials (including product transferred from process 1), which occurs in the early
stage of process 2 (after all materials have been added), is expected to be 5% of input, process 2
conversion costs are all apportioned to units of good output. Wastage materials have no saleable value.
The values of finished goods and closing WIP (using FIFO method) are
(a) Rs.2,96,237 and Rs.4,259 respectively (b) Rs.3,13,883 and Rs.4,529 respectively
(c) Rs.2,96,273 and Rs.4,529 respectively (d) Rs.2,96,021 and Rs.4,259 respectively
(e) Rs.3,13,883 and Rs.4,259 respectively.
(2 marks)
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48. Sitpax Ltd. purchases raw materials worth Rs.16.56 lakhs and processes them into 4 products – A, B, C Answer
and D. The sale value per unit of products A, B, C and D is Rs.4.50, Rs.13.50, Rs.24 and Rs.90 >
respectively at split-off point, as these could be sold as such to other processors. However, during a
year, the company decided to further process and sell products A, B and D, while C was not to be
processed further but sold at split-off point to other processors. The processing of raw materials into 4
products cost Rs.45 lakhs to the company. The company has furnished the following information
pertaining to the 4 products:
Sales after further Additional processing cost after split
Output
Product processing off (all variable cost)
(units)
(Rs. in lakhs) (Rs. in lakhs)
A 10,00,000 69.00 18.00
B 20,000 6.00 3.60
C 10,000 2.40 –
D 18,000 18.00 0.60
The maximum profit of the company after adopting best sales strategy is
(a) Rs.16.24 lakhs (b) Rs.15.86 lakhs (c) Rs.14.64 lakhs
(d) Rs.14.94 lakhs (e) Rs.11.94 lakhs.
(2 marks)
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49. Omid Ltd. produces and sells two products M and N for Rs.29 and Rs.19 a unit respectively. Variable Answer
costs amount to Rs.14 for M and Rs.12 for N per unit. It takes 1½ hours to make one unit of M and ½ >
hour to make one unit of N. Total manpower available is 1,300 hours and maximum demand for is
1800 units of M and 1,700 units of N. The optimum production units of M to maximize profit should
be
(a) 300 (b) 900 (c) 1,700 (d) 1,800 (e) 450.
(1 mark)
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50. Vinayak Ltd. uses a particular raw material in its 3 process accounts – A, B and C. The following Answer
information furnished by the company relating to inputs, outputs and rejections during the month of >
September 2005:

Input including opening Rejections Output


Process
W.I.P (units) (units) (units)
A 18,000 6,000 12,000
B 19,800 3,600 18,000
C 20,400 3,400 17,000
What should be the inputs in Process A, if the final product transferred from Process C is 1,000 units?
(a) 2,160 units (b) 1,700 units (c) 1,800 units
(d) 1,900 units (e) 1,980 units.
(2 marks)
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51. Sunobhai Ltd. has furnished the following information pertaining to its process account for the last Answer
month:
12
month: >

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


Closing work-in-process 150 units (60% complete)
Units started 500 units
Value of opening work-in-process Rs. 9,780
Cost incurred during the month Rs.92,820

Costs incurred evenly throughout the month. The company uses weighted average flow of costs. The
value of finished goods was
(a) Rs.88,736 (b) Rs.85,500 (c) Rs.70,832
(d) Rs.89,790 (e) Rs.79,464.
(1 mark)
<
52. Clifton Ltd. had 8,000 units of work-in-process inventory in department A on September 1, 2005. Answer
These units were 70% complete as to conversion costs. Direct materials are added at the beginning of >
the process. During the month of September 2005, 45,000 units were started and 42,000 units
completed. The company had 11,000 units of work-in-process inventory on 30th September 2005.
These units were 70% complete as to conversion costs.
The equivalent production unit of conversion (under weighted average method) exceeds the equivalent
production of conversion (under FIFO method) by
(a) 8,000 units (b) 5,600 units (c) 3,200 units
(d) 4,800 units (e) 5,000 units.
(2 marks)
<
53. There are 2 warehouses for storing finished goods produced in a factory. Warehouse A is at a distance Answer
of 10 km and warehouse B is at a distance of 15 km. From the factory A, a fleet of 5- ton lorries is >
engaged in transporting the finished goods from the factory. The records show that the average speed of
lorries is 30 km per hour when running and regularly take 40 minutes to load at the factory. At
warehouse A, unloading takes 30 minutes per load while at warehouse B, it takes 20 minutes per load.
Drivers’ wages, depreciation, insurance and taxes amount to Rs.18 per hour operated. Fuel, oil, tyres,
repairs and maintenance cost Rs.2.40 per kilometer.
The cost per ton kilometer of carrying the finished goods to warehouses A and B are
(a) Rs.1.26 and Rs.1.20 respectively
(b) Rs.1.10 and Rs.1.44 respectively
(c) Rs.1.62 and Rs.1.44 respectively
(d) Rs.1.62 and Rs.1.10 respectively
(e) Rs.1.44 and Rs.1.62 respectively.
(2 marks)
<
54. Tarnaka Transport Ltd. has been given a route of 20 km long to run a bus. The cost of a bus is Answer
Rs.5,00,000. It has been insured at 3% per annum and the annual tax will amount to Rs.10,000. Garage >
rent is Rs.1,000 per month. Actual repairs will be Rs.10,000 per annum and the bus is likely to last for
5 years.
The driver’s salary will be Rs.7,500 per month and the conductor’s salary will be Rs.4,000 per month in
addition to 10% of the tickets selling as commission ( to be shared by the driver and the conductor
equally). Cost of stationery will be Rs.500 per month. The salary of Manager-cum- accountant is
Rs.10,500 per month.
Petrol and oil will be Rs.250 per 10 km. The bus will make 3 round trips carrying on the average 40
passengers on each trip. The expected profit is 15% of total ticket selling. The bus will run on an
average of 25 days in a month.
The bus fare to be charged to each passenger is
(a) Rs.1.22 (b) Re.0.30 (c) Rs.1.35 (d) Re.0.40 (e) Re.0.50.
(2 marks)
<
55. A certain chemical process yields 75% of material introduced as main product, 20% as by-product and Answer
5% being lost In the process one unit of main product requires double the material required for one unit
13
5% being lost. In the process one unit of main product requires double the material required for one unit >
of by-product. Further one unit of main product needs 1.5 times the time needed for one unit of by-
product. Overheads are absorbed in the ratio of 3:2.
During a week, 1,000 units of raw material at a cost of Rs.17,000 were introduced. Total labor cost was
Rs.5,300. Overheads came to Rs.3,500. Wastages realized Rs.500.
The cost of by-product per unit is
(a) Rs.35.50 (b) Rs.28.40 (c) Rs.25.50 (d) Rs.17.00 (e)
Rs.20.00.
(2 marks)
<
56. Megha Construction Ltd. has furnished the following information pertaining to a contract for the year Answer
ended March 31, 2005: >

Particulars Rs.
Material sent to site 2,25,500
Materials in hand (March 31, 2005) 18,375
Cost of plant installed at site 1,71,000
Labor costs 1,23,500
Work certified 4,00,000
Cost of work not certified 1,20,000
Value of plant (March 31, 2005) 1,02,500
Contract price 7,50,000
Cash received from the contractee 3,60,000
Direct expenses 72,000
The value of closing work-in-progress (WIP) of the company at the end of the period is
(a) Rs.1,40,450 (b) Rs.48,875 (c) Rs.58,450
(d) Rs.1,49,635 (e) Rs.1,09,490.
(2 marks)
<
57. Which of the following statements is false? Answer
>
(a) In job costing, each job is a cost unit to which all costs are assigned
(b) Job costing can be used in conjunction with marginal costing
(c) In cost plus contract, the contractor runs a risk of incurring loss
(d) Most of the items of costs are direct in contract costing than in job costing
(e) Contract costing is a basic method of specific order costing.
(1 mark)
<
58. Which of the following statements is false? Answer
>
(a) Process costing is one aspect of operation costing
(b) Process costing is applied in garment industry
(c) Process costing is used in chemical industry
(d) In process costing ordinarily no distinction is made between direct and indirect materials
(e) The cost of abnormal process loss is not included in the cost of the process.
(1 mark)
<
59. Which of the following statements is false? Answer
>
(a) The most important criterion for distinguishing between scrap, by-product and joint products is
relative sales value of the products
(b) By-products may be sold in their original form i.e., without further processing
(c) The stage of production at which separate products are identified is known as split off point
(d) The allocation of joint costs to joint product and by-products affects the overall profit or loss
account
(e) Under the other income method of accounting of by-products, the sale value of the by-product is
credited to profit and loss account.
14
(1 mark)
<
60. Which of the following assumptions is true in cases where practical capacity is treated as plant Answer
capacity? >
(a) It assumes all personnel and equipment will operate at the maximum efficiency and the total plant
capacity will be used
(b) It does not consider idle time caused by inadequate sales demand
(c) It includes consideration of idle time caused by both limited sales orders and human & equipment
inefficiencies
(d) It is the production volume that is always less than the actual use of capacity
(e) It is the production volume that is necessary to meet sales demand for the next year.
(1 mark)
<
61. Netaji runs a canteen for the benefit of employees of Corporation Bank and employees are catered here Answer
at subsidized rates through coupon sales. He has provided the following information pertaining to the >
cost for the month of September 2005 and for the same month last year:
Particulars September 2005 September 2004
Number of employees 400 360
Sales realization through coupons (Rs.) 50,000 40,000
Materials consumed (Rs.) 30,000 25,000
Labor and supervision (Rs.) 20,000 16,000
Overheads (Rs.) 29,000 24,000
Subsidy per employee is to be increased by the bank in the month of September 2005 by
(a) Rs.3.06 (b) Rs.1.00 (c) Rs.1.25 (d) Rs.1.30 (e) Rs.1.50.
(1 mark)
<
62. J.B.Ltd. produces four joint products A, B, C and D, all of which emerge from the processing of one Answer
raw material. The following are the relevant data: >
Production for the period:
Joint Product Number of units Selling price
A 900 Rs.18.00
B 500 Rs. 8.00
C 400 Rs. 4.00
D 200 Rs.11.00
The company budgets a profit of 10% of sales value for a period. The other estimated costs are:
Carriage inwards Rs.1,000
Direct wages Rs.3,000
Manufacturing overhead Rs.2,000
Administration overhead 10% of sales value
The maximum price that may be paid for the raw material is
(a) Rs.16,000 (b) Rs.13,200 (c)Rs.10,000
(d) Rs.15,000 (e) Rs.14,000.
(2 marks)
<
63. D. Hedger Ltd. manufactures a product, currently utilizing 80% capacity with a turnover of Rs.8,00,000 Answer
at Rs.40 per unit. The company has furnished the following cost data: >
Material cost - Rs.12.00 per unit; Labor cost - Rs.8.25 per unit; Semi-variable cost (including variable
cost of Rs.3.75 per unit) – Rs.1,80,000; Fixed cost Rs.90,000 up to 80% level of output and beyond
this, an additional Rs.20,000 will be incurred.
The activity level at break-even point is
(a) 60.00% (b) 50.00% (c) 40.25% (d) 48.75% (e) 25.75%.
(2 marks)
<
64. Vijay Ltd. has furnished the following information pertaining to its 2 products – A and B: Answer
>
Product A has a contribution to sales ratio of 0.50 and Product B has a contribution to sales ratio of

15
0.40. At present 100 units of each product are sold. If the total sales units remain at the present level but
an extra 20 units of B are substituted for 20 units of A, which of the following is true of the overall
position?
(a) Contribution to sales ratio remains unchanged
(b) Contribution to sales ratio rises form 0.45 to 0.46
(c) Contribution to sales ratio rises from 0.45 to 0.48
(d) Contribution to sales ratio falls from 0.45 to 0.44
(e) Contribution to sales ratio rises from 0.45 to 0.50.
(1 mark)
<
65. Which of the following is/are true when sales units remain constant each month but production units Answer
fluctuate? >
I. Profit reported each month will always fluctuate in proportion to units produced.
II. Absorption cost stock valuation will lead to a higher profit being reported where sales exceed
production.
III. Marginal cost stock valuation will give a higher profit where sales exceed production.
IV. Marginal cost stock valuation will result in the same profit being reported each month.
(a) Only (I) above (b) Only (II) above
(c) Both (III) and (IV) above (d) Only (IV) above
(e) Both (I) and (II) above.
(1 mark)
<
66. A company sells its product at Rs.20 per unit. In a period, if it produces and sells 8,000 units, it incurs a Answer
loss of Rs.5 per unit. If the volume is raised to 20,000 units, it earns a profit of Rs.5 per unit. The break >
even point is
(a) 11,431 units (b) 12,567 units (c) 15,334 units
(d) 12,000 units (e) 13,500 units.
(2 marks)
<
67. CVP Ltd. has a production capacity of 2,00,000 units per year. Normal capacity utilization is reckoned Answer
as 90%. The following details are provided by the company: >
Standard variable production costs Rs.11 per unit
Fixed production cost per year Rs.3,60,000
Variable selling cost Rs.3 per unit
Fixed selling cost per year Rs.2,70,000
Selling price Rs.20 per unit
Production during the year 1,60,000 units
Sales during the year 1,50,000 units
Closing inventory 20,000 units
The actual variable production costs for the year were Rs.40,000 higher than the standard.
The net profit under absorption costing, by using FIFO method, is
(a) Rs.2,46,375 (b) Rs.2,91,118 (c) Rs.2,24,118
(d) Rs.2,64,375 (e) Rs.2,60,000.
(2 marks)
<
68. Iswar Chemicals Limited has two factories – X and Y with similar plant and machinery for Answer
manufacture of soda ash. The board of directors of the company has expressed the desire to merge them >
and to run them as one integrated unit. The following data are available in respect of these two
factories:
Factory X Y
Capacity in operation 60% 100%
Turnover 120 lakhs 300 lakhs
Variable cost 90 lakhs 220 lakhs
Fixed cost 25 lakhs 40 lakhs

16
If the merged company wants to earn a profit of Rs.65 lakh, the turnover should be
(a) Rs.480.77 lakh (b) Rs.525.00 lakh (c) Rs.430.50 lakh
(d) Rs.250.00 lakh (e) Rs.500.00 lakh.
(2 marks)

69. The cost data pertaining to Product “PK” of Siraj Ltd. are as follows:
Maximum capacity 20,000 units
Normal capacity 18,000 units
Decrease in inventory 1,880 units
Variable cost per unit Rs.15
Selling price per unit Rs.40
Fixed manufacturing overhead costs Rs.3,06,000
If the profit under Absorption costing method is Rs.1,01,000, the profit under Marginal costing method
would be
(a) Rs.1,32,960 (b) Rs.72,236 (c) Rs.1,29,764
(d) Rs.69,040 (e) Rs.73,340.
(1 mark)

70. Dewang Ltd. has an annual fixed cost of Rs.1,90,000. In the year 2004-05, sales amounted to
Rs.7,50,000 as compared with Rs.6,00,000 in the year 2003-04 and the profit for the year 2004-05 was
more than the profit for 2003-04 by Rs.60,000.
If there is a reduction of selling price by 10% in the year 2005-06 and the company desires to earn the
same amount of profit as in 2004-05, the required sales volume would be
(a) Rs.9,45,000 (b) Rs.5,60,000 (c) Rs.9,00,000
(d) Rs.7,55,000 (e) Rs.6,75,000.
(2 marks)

71. Cost-volume-profit analysis allows management to determine relative profitability of a product by


I. Highlighting potential bottlenecks in the production process.
II. Keeping fixed costs to an absolute minimum.
III. Determining contribution margin per unit and projected profits at various levels of production.
IV. Assigning cost to a product in a manner that maximizes the contribution margin.
(a) Only (I) above (b) Both (II) and (III) above
(c) Only (III) above (d) Only (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)

72. The operating results of Manasi Ltd for the year 2004-05 were as under:

Product Sales Mix (%) PV Ratio


A 40 20
B 30 15
C 10 8
D 20 10
Total sales value of all the products was Rs.120 lakhs and fixed costs amount to Rs.20 lakhs. The
composite P/V ratio is
(a) 15.2% (b) 14.2% (c) 14.0% (d) 15.3% (e) 16.0%.
(1 mark)

73. Kartina Sports Ltd. manufactures tracksuits for athletes. Presently its output is 80% of its full capacity
of 20,000 units per annum. One exporter has approved the sample and has offered to buy 7,000
tracksuits at a special price of Rs. 750 per suit. At present the company sells tracksuits at the rate of
Rs.975 per suit. The standard cost per suit is as follows:

17
Cloth and other materials 375
Labor cost 220
Fixed cost 200
Other variable cost 55
Total 850
The net profit or loss of accepting the order of 7,000 tracksuits is
(a) Rs.64,500 (profit) (b) Rs.2,75,000 (loss)
(c) Rs.3,78,000 (loss) (d) Rs.4,25,000 (loss) (e) Rs.3,00,000 (profit).
(2 marks)

18
Suggested Answers
Management Accounting – I (151) : October 2005
1. Answer : (d) < TOP >

Reason : The Purchasing Manager of Tinku Ltd. would be an internal user of information that
is concerned with production reports and estimates, where as the other individuals are
all external to the company and would expect Financial Accounting information
prepared in accordance with GAAP. Therefore, (d) is correct.
2. Answer : (e) < TOP >

Reason : Management Accounting includes estimates. Financial Accounting looks at the


company as a whole based upon GAAP including analysis of historical costs.
Financial accounting is mandatory for business organizations. Therefore, (e) is
correct.
3. Answer : (d) < TOP >

Reason : Management accounting is not mandatory. The applications of management


accounting can be extended beyond the traditional accounting system. It focuses more
on the parts/segments of a company and less on the company as a whole. It is not
governed by GAAP. It prepares reports to fulfill the needs of management. Therefore,
(I), (II) and (IV) options are false and so the correct answer is (d).
4. Answer : (a) < TOP >

Reason : A cost accounting system has numerous objectives, including product costing,
assessing departmental efficiency, inventory valuation, product mix determination,
optimum sales mix, profit planning, evaluating and controlling operations.
Determining provision for taxation is not an objective of a cost accounting system
because such is an item of financial accounting.
5. Answer : (b) < TOP >

Reason : Decremental cost is not the cost of an added unit. Standard cost never tells us the
actual cost of the product. Cost center and cost units is not the same thing. Cost of
production is not equal to prime cost plus works cost. The correct statement is that the
period cost is not assigned to products. It is a fixed cost and does not vary with the
production. Therefore,
(b) is correct.
6. Answer : (c) < TOP >

Reason : Employee training cost is usually a discretionary fixed cost. It is typically fixed since
its amount is not based on volume. It is discretionary because it is set each year during
the planning process. Training costs are optional, and they can be altered or perhaps
deleted entirely during the year in response to business environment changes. Other
options are related to committed cost.
7. Answer : (d) < TOP >

Reason : The manager wants to control, and reduces if possible, the company's production
costs. He must determine how production costs are related to and affected by various
business activities. The manager needs to understand cost behaviors. Knowledge of
cost behavior is useful because it helps managers forecast (plan) results under
different activity levels.
8. Answer : (e) < TOP >

Reason : Product cost is defined as the cost that is assigned to goods that were purchased for
resale or a goods manufactured for resale and is inventoriable. It is also defined as the
cost incurred when an asset is used up or sold for the purpose of generating revenue.
Therefore, (e) is correct.
9. Answer : (d) < TOP >

Reason : Product engineering is related to development of the product line. Therefore, product
engineering is considered to be a product-level cost.
10. Answer : (a) < TOP >

Reason : When manufacturing expenses are recovered, the journal entry is to be recorded as
19
debit working process account, credit manufacturing overhead control account. Other
options given on (b), (c), (d) and (e) are not correct. Therefore (a) is the answer.
11. Answer : (e) < TOP >

Reason : Cost of manufacturing is :


Particulars Rs. Per unit
Variable cost (Rs. 8 + Rs. 6 + Rs.3) 17.00
Fixed cost Rs.90,000 ÷ 40,000 units 2.25
Total cost 19.25
Cost of purchasing is Rs.20 – 10% Discount 20 – 2 = 18.00
Hence purchasing the subassembly will 50,000
save Rs.(19.25 – 18.00) × 40,000
12. Answer : (e) < TOP >

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

Reason: Proposed sales = Local sales + Middle East sales = Local sales of 60% + Export sales
of 50%
= (Rs.720 ÷ 80%) × 60% + [(Rs.720 ÷ 80%) × 50% – 10% of (Rs.720 ÷ 80%) ×
50%] = Rs.540 + Rs.450 – Rs.45 = Rs.945; Present sales = Rs.720;
Incremental revenue = Rs.945 – Rs.720 = Rs.225 lakh.
Proposed cost = 60% local + 50% Middle East = Direct material at 110% + Direct
expenses at 110% + variable expenses at 110% + fixed expenses = (Rs.200 ÷ 80) ×
110 + (Rs.80 ÷ 80) × 110 + (40 ÷ 80) × 110 + (Rs.260 + Rs.40) = Rs.275 + Rs.110 +
Rs.55 + Rs.300 = Rs.740
Differential cost = Rs.740 – Rs.580 = Rs.160 lakh.
Incremental profit = Rs.225 – Rs.160 = Rs.65 lakh.
14. Answer : (b) < TOP >

Reason : A sunk cost is the cost that has already been incurred. It is past cost.
Opportunity cost is the cost of opportunity lost. It is the cost of selecting one course of
action in terms of the opportunities that are given up to carry out that course of action.
In this question, likely rent of the building is the opportunity cost which should be
taken into consideration for decision-making program.
Replacement cost is the cost at which there could be purchase of an asset identical to
that which is being replaced or revalued.
Out of pocket cost is the cash cost which is relevant for decision-making program.
Marginal cost is the total of variable costs. Therefore, (b) is correct.
15. Answer : (c) < TOP >

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

20
Option (d) is incorrect because multiple cost pools are preferable. They permit a
better matching of indirect costs with cost drivers.
Option (e) is incorrect because ABC uses cost drivers (causes) as application bases to
provide more refined data.
16. Answer : (a) < TOP >

Reason : Let, at 100% capacity level, units produced = 100


At 70% capacity, the overhead recovery rate = Rs.20 per unit
Therefore, total overhead at 70% = 70 × Rs.20= Rs.1,400
At 80% capacity, the recovery rate = Rs.18 per unit
Therefore, total overhead at 80% = Rs.18 × 80 = Rs.1,440
Rs.1, 440 − Rs.1, 400 Rs.40
Therefore, variable cost = 10 = 10 = Rs.4 per unit
Fixed cost = Rs.1,400 – 70 × Rs.4 = Rs.1,400 – Rs.280 = Rs.1,120
At, 92% capacity = Rs.1,120 + 92 × Rs.4 = Rs.1,120 + Rs.368 = Rs.1,488

Rate = Rs. 1,488 ÷ 92 = Rs. 16.17.


17. Answer : (b) < TOP >

Reason :
Particulars Rs. in lakhs
Cost of goods sold 1,12,000
Add: Closing stock of fin. Goods 38,000
1,50,000
Less: Opening stock of fin goods 35,000
1,15,000
Add Closing stock of WIP 12,500
1,27,500
Less: Opening stock of WIP 9,000
Works cost 1,18,500
Less: Factory overheads 10,000
Prime cost 1,08,500
Less: Direct labor 15,000
Raw material consumed 93,500
Add closing stock of raw material 10,600
1,04,100
Less: opening stock of raw material 8,000
Raw material purchased 96,100
18. Answer : (c) < TOP >

Reason : Actual cost – Applied cost


= Rs.3,50,000 - [(1,290 + 1,760 + 789) × Rs.85]
Rs.23,685 under applied as compared to actual overhead.
Based on overhead rate of Rs.85 and given the hours consumed by each job, costs will
be
(J1: Rs.1,09,650 +Rs.85,500) + (J2: Rs.1,49,600 + Rs.74,700) +
(J3: Rs.67,065 + Rs.87,470) = Rs.1,95,150 + Rs.2,24,300 + Rs.1,54,535
= Rs.5,73,985.
Amount chargeable to J2: (Rs.2,24,300 ÷ Rs. 5,73,985) × Rs.23,685 = Rs.9,256
debited to finished goods.
19. Answer : (d) < TOP >

Reason: First divide total cost of each activity by the cost driver activity level to get the rate.
Then, multiply those rates by the unused capacity level indicated:
Set up cost Rs.5,500 ÷55 = Rs.100; Rs.100 × 5 = Rs. 500
Ordering cost Rs.3,200 ÷ 20 = Rs.160; Rs.160 × 5 = Rs. 800
Receiving cost Rs.2,400 ÷ 40 = Rs.60; Rs.60 × 6 = Rs. 360
Product development Rs.2,800 ÷ 400 = Rs.7; Rs.7 × 100 = Rs. 700
General management Rs.7,200 ÷ 8,000 = Rs.0.90; Rs.0.90 × 1,000 = Rs. 900
21
General management Rs.7,200 ÷ 8,000 = Rs.0.90; Rs.0.90 × 1,000 = Rs. 900
Security Rs.9,000 ÷ 9,000 = Re.1; Re.1 × 400 = Rs. 400
Labor cost Rs.56,000 ÷ 6,000 =Rs.9.33; Rs.9.33 × 1,200 = Rs.11,200
Total cost of unused capacity Rs.14,860
20. Answer : (d) < TOP >

Reason : A department is working at 55% of its normal capacity. 45% is treated as idle
capacity. Fixed cost is obviously incurred for the normal capacity work. This 45% of
fixed cost should be excluded from the calculation of overhead recovery rate. Thus
the appropriate recovery rate is to be found by dividing the 55% of fixed cost plus
100% variable manufacturing overhead by the budgeted direct labor cost.
Appropriate recovery rate = (55% of Rs.1,00,000 + 100% of Rs.1,25,000) ÷
Rs.2,50,000 = Rs.1,80,000 ÷ Rs.2,50,000 = 72%
21. Answer : (a)
Reason : Variable cost = Change of cost ÷ change

22
Absenteeism 12
Leave 20
Idle time 8 40 hours
Total utilized hours per operator per month 180 hours
Total hours for 5 operators × 3 months = 180 × 5 × 3 = 2,700 hours
Therefore, machine utilized is 2,700 hours (Machine cannot work without operator).
Normal hours for which wages are to be paid = 220 – 12 = 208 hours
Wages for 3 months = 208 hours × 5 × 3 × Rs.10 = Rs.31,200
Comprehensive Machine hour rate Rs.
Operators wages 31,200
Production Bonus (10% on Rs.31,200) 3,120
Power consumed (2nd quarter) 7,280
Supervisor & indirect labor 4,100
Electricity & Lighting 3,800
Repairs & Maintenance (1% on Rs.8,00,000) 8,000
Depreciation (10% of Rs.8,00,000 ÷ 4) 20,000
Miscellaneous expenses (Rs.600 × 3) 1,800
General management expenses (Rs.50,000 ÷ 4) 12,500
91,800
Comprehensive machine hour rate = Rs.91,800 ÷ 2,700 hours = Rs.34.
27. Answer : (a) < TOP >

Reason : Normal working hours for the year = 48 wks × 40 hrs × 15 machines
= 28,800 hours
Loss of hours due to maintenance = 3,600 hours
Net effective hours = 25,200 hours
Overhead rate per machine hour = Rs.1,76,400 ÷ 25,200= Rs.7
Wages absorbed = 4 wks × 40 hrs × 15 machines × Rs.5 = Rs.12,000
Wages incurred = Rs.11,600
Over absorption Rs. 400
Overhead incurred = Rs.17,500
Overhead absorbed 2,400 × Rs.7 =Rs. 16,800
Under absorption Rs.700
28. Answer : (c) < TOP >

Reason : Practical capacity is the theoretical capacity or maximum capacity minus idle time
resulting from holidays, downtime, changeover time etc., but not from inadequate
sales demand. Therefore, other options (a), (b), (d) and (e) are not correct
29. Answer : (b) < TOP >

Reason : If the overhead cost charged to each cost center with a share of an overhead cost using
an appropriate basis to estimate the benefit extracted by each cost center is called
apportionment of overhead cost. Therefore (b) is correct.
30. Answer : (c) < TOP >

Reason : If the cost of material is used as the basis for absorption of overhead, the time factor is
ignored. This statement is true (c).Other options given in (a), (b), (d) and (e) are not
correct.
31. Answer : (b) < TOP >

Reason : The process of grouping costs according to their common characteristics is known as
cost classification, not cost collection. This statement is false. Other options (a), (b),
(d) and (e) are correct statements.
32. Answer: (e) < TOP >

Reason: Total cost per unit = Rs.29;


Fixed cost per unit at 50,000 units = Rs.4,00,000 ÷ 50,000 = Rs.8.
Variable cost per unit = Rs.29 – Rs.8 = Rs.21;
Additional graphics cost per unit = Rs.3,000 ÷ 1,500 = Rs.2 per unit.

23
Cost savings = Commission + packing cost
= Rs.2.50 + Rs.1.50 = Rs.4.00.
Therefore, net cost = Rs.21 + Rs.2 – Rs.4 = Rs.19.
Net profit per unit = Rs.22.50 – Rs.19.00 = Rs.3.50
Total profit = 1,500 × Rs.3.50 = Rs.5,250.
Loss from regular customer = 220 × (Rs.39 – Rs.22.50) = Rs.3,630;
Therefore, the profit will increase by = Rs.5,250 - 3,630 = Rs.1,620.
33. Answer : (e) < TOP >

Reason : The cost of normal idle time in production department should be charged to factory
overheads. Therefore, (e) is correct.
34. Answer : (b) < TOP >

Reason : Gross works cost means the works cost before adjusting stock of work-in-process.
Other options are not correct.
< TOP >
35. Answer: (e)
Reason:
Allocation Rs.
Personnel Department 10 ÷ 40 × Rs. 1,80,000 45,000
Cleaning Department 3,000 ÷ 6,750 × Rs.2,22,750 99,000
Department B 30,00,000
Total 31,44,000
Overhead rate per direct labor hour = Rs.31,44,000 ÷ 40,000 hours = Rs.78.60.
36. Answer : (a) < TOP >

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


Fixed cost = Rs.17,85,000;
Break-even units = Rs.17,85,000 ÷ Rs.34 = 52,500 ton;
Selling price for 1st 20% = Rs.69.50 × 90% = Rs.62.55;
Selling price for next 20% = Rs.69.50 × 85% = Rs.59.075
Contribution for 1st 20% capacity = Rs.62.55 – Rs.35.50 = Rs.27.05 per unit;
Contribution for next 20% capacity = Rs.59.075 – Rs.35.50 = Rs.23.575 per unit;
Profit from 1st 20% capacity = Rs.27.05 × 26,250 = Rs.7,10,062.50
Profit from next 20% capacity = Rs.23.575 × 26,250 = Rs. 6,18,843.75
Profit from added production of 40% capacity over break-even volume =
Rs.7,10,062.50 + Rs. 6,18,843.75= Rs.13,28,906.25 or 13,28,906.
37. Answer : (d) < TOP >

Reason : Total fixed overhead = 12,000 units × Rs.4.00 = Rs.48,000.


Rs.48,000 actual overhead ÷ 10,000 units actual production = Rs.4.80.
Fixed overhead per unit = Rs.4.80.
Total cost per unit =
Material Rs.15 + Labor Rs.9 + Variable overhead Rs.5 + Fixed overhead Rs.4.80 =
Rs.33.80.
Cost of ending inventory = Rs.33.80 × 1,000 units
(10,000 units produced - 9,000 units sold) = Rs.33,800.
38. Answer : (e) < TOP >

Reason : It is given in the question that the secondary distribution of service


departrments’overhead is pending. The same is thus attempted by use of simultaneous
equation method.
Let, total overheads of department S1 = x; and total overheads of S2 = y;
According to problem, we get x = 16,000 + 0.1y and y = 24,000 + 0.2x;
Therefore, x = 16,000 + 0.1(24,000 + 0.2x) = 16,000 + 2,400 + 0.02x
Or, x (1 – 0.02) = 18,400, or, x = 18,400 ÷ 0.98 = 18,775, then y = 27,755;

24
Statement of secondary distribution:
Particulars P1 (Rs.) P2 (Rs.) P3 (Rs.) Total
(Rs.)
Direct allocation 1,48,000 1,12,000 52,000 3,12,000
S1 (80% of 18,775) 3,755 7,510 3,755 15,020
S2 (90% of Rs.27,755) 2,776 16,653 5,551 24,980
Total 1,54,531 1,36,163 61,306 3,52,000
Budgeted machine/labor hours 15,000 10,000 6,000
Overhead rate per machine/labor hour 10.30 13.62 10.22
39. Answer : (c) < TOP >

Reason : Under this method the amount of under absorbed overheads is adjusted to work-in-
progress, finished goods and cost of goods sold in proportion to their values
Rs.5,00,000; Rs.15,00,000 and Rs.2,20,00,000 respectively by use of supplementary
rate. The total amount = Rs.5,00,000 + Rs.15,00,000 + Rs.2,20,00,000 =
Rs.2,40,00,000; The amount of under absorbed = Rs.8,72,000 – Rs.8,00,000 =
Rs.72,000.
The amount of under absorbed overhead is adjusted to work-in-progress
= Rs.72,000 × ( Rs.5,00,000 ÷ Rs.2,40,00,000 ) = Rs.1,500.
40. Answer : (e) < TOP >

Reason : All the four statements are true with respect to the absorption of fixed manufacturing
overhead costs on the basis Direct Material Cost.
41. Answer : (a) < TOP >

Reason : Materials used = Rs.34,180+ Rs.7,120– Rs.8,635 = Rs.32,665


Total manufacturing costs =Direct material + Direct labor + 60% of Direct labor
Rs.82,601 = Rs.32,665 + Direct labor + 0.6 Direct labor
1.6 direct labor = 49,936
Direct labor = Rs.31,210
Applied factory overhead = 60% of Rs.31,210 = Rs.18,726
42. Answer : (a) < TOP >

Reason :
Statement of equivalent Production Unit (FIFO)
Output
Input Material Conversion
Completed
Opening 500 Opening 500 20% 100 40% 200
Introduced 5,000 Introduced 4,600 100% 4,600 100% 4,600
Closing 400 75% 300 65% 260
5,500 5,500 5,000 5,060
Costs
during
the month Rs.90,000 Rs.75,900
Cost
per unit Rs. 18 Rs. 15
The total cost of closing work-in-process
Material – 300 × Rs.18 = Rs.5,400
Conversion – 260 × Rs.15 = Rs.3,900
Rs.9,300
43. Answer : (b) < TOP >

Reason :
Profit under absorption costing: Rs. Rs.
Sales – 1,87,500 × Rs.40 75,00,000
Cost of goods sold:
Opening Stock (Rs.22 + Rs.4) × 12,500 3,25,000
Production Rs.26 × 2,00,000 52,00,000
55,25,000
Add: Adverse variable cost variance 1,00,000
56,25,000
25
56,25,000
Less: Closing stock Rs.26 × 25,000 6,50,000
49,75,000
Gross Profit (sales – cost) 25,25,000
Less: Selling expenses:
Variable 1,87,500 × Rs.6 11,25,000
Fixed 6,30,000 17,55,000
7,70,000
Less: Under absorption: 1,00,000
Profit 6,70,000

Profit under Marginal Costing:


Rs. Rs.
Sales – 1,87,500 × Rs.40 75,00,000
Cost of goods sold:
Opening St – 12,500 × Rs.22 2,75,000
Production – 2,00,000 × Rs.22 44,00,000
46,75,000
Less: Closing Stock – 25,000 × Rs.22 5,50,000
41,25,000
Add: Adverse variance 1,00,000
42,25,000
Add: Variable selling expenses 11,25,000 53,50,000
Contribution 21,50,000
Less: Fixed cost: – Manufacturing costs 9,00,000
Selling 6,30,000 15,30,000
Profit 6,20,000
44. Answer: (d) < TOP >

Reason: At a price of Rs.18, the total volume = 12,000,


Therefore, the net profit = [12,000 × (Rs.18 – Rs.16)] – Rs.9,000
= Rs.15,000.
Since the company incurs no promotional expenses, the profit at a price of Rs.20 =
[4,000 ( Rs.20 – Rs.16) – Rs.9,000] = Rs. 7,000 only.
So, option (d) is correct.
45. Answer : (e) < TOP >

Reason :
Rs. Rs.
Total manufacturing Costs 1,98,400
Less: Overhead costs:
Indirect labor 12,160
Factory overhead 31,730
Indirect material 21,390
65,280
Freight in 5,570 70,850
1,27,550
Less: Direct labor 32,460
Material consumed 95,090
Add: Closing material 9,460
1,04,550
Less: Opening material 12,610
Material purchased 91,940
46. Answer : (c) < TOP >

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


North = Rs.180 ÷ Rs.400 = 45%;East = Rs.90 ÷ Rs.150 = 60%;
South = Rs.110 ÷ Rs.200 = 55%;
Fixed cost: North = Rs.1,200 × 45% – Rs.135 = Rs.405;

26
East = Rs.1,540 × 60% – Rs.210 = Rs.714;South = Rs.1,100 × 55% – Rs.330 =
Rs.275;
Total fixed cost = Rs.405 + Rs.714 + Rs.275 = Rs.1,394.
Total sales of 3 region = Rs.3,840; Total profit of 3 region = Rs.675
Therefore, Sales × Contribution to sales ratio = fixed cost + profit
Rs.3,840 × Contribution to sales ratio = Rs.1,394 + Rs.675
Contribution to sales ratio = Rs.2,069 ÷ Rs.3,840 = 0.539 0r 53.9%
Break-even sales = Rs.1,394 ÷ 53.9% = Rs.2,586.
47. Answer : (b) < TOP >

Reason :
Input units Units Materials Conversion
Opening 1,200 Opening 1,200 – – 50% 600
WIP
From 1,12,000 Process 1 1,04,200 100% 1,04,200 100% 1,04,200
process
1
Normal 5,600 – – – –
loss
Abnormal
600 100% 600 – –
Loss
Closing 1,600 100% 1,600 75% 1,200
WIP
1,13,200 1,13,200 1,06,400 1,06,000

Particulars Rs.
Materials – From Process 1 1,78,704
Process 2 74,972
2,53,676
Equivalent units 1,06,400
Cost per unit 2.384
Conversion cost 63,176
Equivalent units 1,06,000
Cost per unit 0.596

Finished goods: Rs.


Opening WIP 3,009
Process I (1,04,200 × Rs.2.384) 2,48,413
Conversion cost (1,04,800 × 0.596) 62,461
3,13,883
Closing WIP: Rs.
Materials – 1,600 × Rs.2.384 3,814
Conversion – 1,200 × 0.596 715
4,529
48. Answer : (e) < TOP >

Reason : Joint costs = Material cost + Processing cost


= Rs.16.56 + Rs.45 = Rs.61.56 lakhs
Net realizable value (NPV): Rs. (in lakhs)
Product A = Rs.69 – Rs.18 = Rs.51.00
B= Rs.6 – Rs.3.60 = Rs. 2.40
C= Rs.2.40 – 0 = Rs. 2.40
D= Rs.18.00 – Re.0.60 = Rs.17.40
Rs. 73.20
Rs.51.00
A = Rs.61.56 × Rs.73.20 = Rs.42.89
27
Rs.2.40
B = Rs.61.56 × s.73.20 = Rs.2.02
R
Rs.2.40
C = Rs.61.56 × Rs.73.20 = Rs.2.02
Rs.17.40
D = Rs.61.56 × Rs.73.20 = Rs.14.63
(Rs. in lakhs)
A (Rs) B (Rs) C (Rs) D (Rs)
Sales at split-off point 45.00 2.70 2.40 16.20
Sales after split-off point 69.00 6.00 2.40 18.00
Incremental sale 24.00 3.30 NIL 1.80
Incremental cost 18.00 3.60 – 0.60
Profit (loss) 6.00 (0.30) NIL 1.20
Profitability statement
Sale at split-off point – 2.70 2.40 –
Sale after processing 69.00 – – 18.00
Less cost:
Pre  42.89   2.02   2.02   14.63 
Post        
 18.00   −   −   0.60 
Profit 8.11 0.68 0.38 2.77
Total Profit 11.94
49. Answer: (a) < TOP >

Reason: Contribution per hour of M = (Rs.29 – Rs.14) ÷ 1.5 = Rs.10;


N contribution per hour: (Rs.19 – Rs.12) ÷ 0.50 = Rs.14;
So it would be best to satisfy the demand for N before we produce any of M, given
the limited hours available.
The company must produce N first:
1700 × 0.50 = 850 hours;
1,300 - 850 = 450 hours left;
450 ÷ 1.5 = 300 units of M.
The optimum production of N is 1,700 units and M is 300 units.
50. Answer : (a) < TOP >

Reason : Percentage of rejection on output :


Process A – (6,000 ÷ 12,000) × 100 = 50%
Process B - (3,600 ÷ 18,000) × 100 = 20%
Process C- (3,400 ÷ 17,000) × 100 = 20%
Now, inputs have to be calculated in the reverse order based on percentage of output.
No. of
Output % of rejection Input
Process Rejections
(units) on output (units)
(units)
C 1,000 20% 200 1,200
B 1,200 20% 240 1,440
A 1,440 50% 720 2,160
The input of process A will be 2,160 units for an output of 1,000 units in process C.
51. Answer : (b) < TOP >

Reason :
Equivalent units of production for the material (weighted average) =
100% of 450 units + 60% of 150 = 450 + 90 = 540 units;
Total costs = Rs.9,780 + Rs.92,820= Rs. 1,02,600;
Cost per unit = Rs.1,02,600 ÷ 540 units = Rs.190;
Total cost of finished goods = 450 units × Rs.190 = Rs.85,500.
52. Answer : (b) < TOP >

28
Reason : Weighted Average Method:
Input = 8,000 units + 45,000 units = 53,000 units;
Output = 42,000 units + 11,000 units = 53,000 units;
Equivalent production units of conversion =
100% of 42,000 + 70% of 11,000 = 42,000 + 7,700 = 49,700 units;
FIFO Method:
Input = 8,000 units + 45,000 units = 53,000 units;
Out put = 8,000 units + 34,000 units + 11,000 units = 53,000 units;
Equivalent production units of conversion =
30% of 8,000 units + 100% of 34,000 units +70% of 11,000 =
= 2,400 + 34,000 + 7,700 = 44,100 units.
Excess equivalent units of production of conversion =
49,700 units – 44,100 units = 5,600 units.
53. Answer : (c) < TOP >

Reason : Statement showing operating time


Particulars Warehouse A (Minutes) Warehouse B (minutes)
Distance from factory 10
km. (Speed 30 km. Per
hour or 1 km in 2minutes)
Trip up and down journey 40 (2 × 20) 60 (2 × 30)
Loading 40 40
Unloading 30 20
Total 110 or 1 hr 50 mts. 120 or 2 hrs
Statement showing operating cost per ton km.
Particulars Warehouse A Warehouse B
(5 × 10 = 50 ton km.) (5 × 15 = 75 ton km.)
Standing 110 mts × Rs.18 per hr. 2 hrs × Rs.18 per hr.
charges = Rs.33 = Rs. 36
Operating 20 km. × Rs.2.40 per km. 30 km × Rs.2.40 per km.
charges = Rs.48 = Rs. 72
Total = Rs.81 = Rs.108
operating cost
Cost per ton km. Rs.81 ÷ 50 = Rs.1.62 Rs.108 ÷ 75 = Rs.1.44.
54. Answer : (a) < TOP >

Reason : Statement showing the fare to be charged from a passenger for one km.
Particulars Per annum Per month
(Rs.) (Rs.)
A. Standing charges:
Insurance charges 15,000
Taxes 10,000
Driver’s salary 90,000
Conductor’s salary 48,000
Cost of stationery 6,000
Manager-cum-accountant salary 1,26,000
Garage Rent 12,000
Total (Rs.3,70,000 ÷ 12) 3,07,000 25,583.33
B. Maintenance charges:
Repairs (Rs.10,000 ÷ 12) 10,000 833.33
C. Running charges:
Depreciation 1,00,000 8,333.33
Petrol (25 days × 3 trip × 2 × Rs.25× 20 km.) 75,000.00
Commission 14,633.33
Profit 15% of tickets selling 21,950.00
Total tickets selling 1,46,333.33
Total effective passenger km. per month
3 × 2 × 20 × 25 × 40 = 1,20,000 )
Bus fare per passenger Rs.1,46,333.33 ÷ 1,20,000 1.22
* In order to calculate the amount of commission payable to the driver and the
conductor, total tickets selling will have to be calculated.
29
Let, total tickets selling = x; Commission = 0.1x; profit = 0.15x;
Total cost per month without including commission = Rs.1,09,750
x = Rs.1,09,750 + 0.1x + 0.15x
x =Rs.1,09,750 ÷ 0.75 = Rs.1,46,333.33
Commission = 10% of Rs.1,46,333.33 = Rs.14,633.33;
Profit = 15% 0f Rs.1,46,333.33 = Rs.21,950.
55. Answer : (e) < TOP >

Reason : Break up of the total units is


Main product 75% of 1,000 = 750; By-product 20% of 1,000 = 200; Loss = 5% of
1,000 = 50 ;
Statement showing the ascertainment of cost
STATEMENT SHOWING THE ASCERTAINMENT OF COST
Main Product By product
Total Total Cost Cost
Total cost
Cost cost per unit per unit
Particulars Ratio
Rs. Rs. Rs. Rs. Rs.
Materials 15:2 17,000 15,000 20.00 2,000 10.00
Labour 45:8 5,300 4,500 6.00 800 4.00
Overheads 3:2 3,000 1,800 2.40 1,200 6.00
25,300 21,300 28.40 4,000 20.00
Scrap realized (Rs.500) is deducted from overheads.
Material ratio between the main product and by-product
750 × 2 = 1,500 ; 200 × 1 = 200; Ratio is 15:2
Labor ratio between the main product and by-product
750 × 3 = 2,250 ; 200 × 2 = 400; Ratio is 45:8
56. Answer: (a) < TOP >

Reason: Contract A/C Cr


Particulars Rs Particulars Rs
Materials 2,25,500 Work certified 4,00,000
Labor costs 1,23,500 Work not certified 1,20,000
Direct expenses 72,000
Material in hand 18,375
Depreciation
on plant 68,500
(Rs.1,71000–Rs.1,02,500)
Notional profit 48,875
5,38,375 5,38,375
2 Rs.3, 60, 000
Profit transferred to P/L a/c = 3 × Rs.48,875 × Rs.4, 00, 000
= Rs.29,325
Profit transferred to Reserve a/c = Rs.48,875 – Rs.29,325
= Rs.19,550
Work certified - Rs. 4,00,000
Work not certified - Rs. 1,20,000
Rs. 5,20,000
(–) cash received - (Rs. 3,60,000)
- Rs. 1,60,000
(–) unrealized profit - (Rs. 19,550)
Rs. 1,40,450
57. Answer : (c) < TOP >

30
Reason : In cost plus contract, the position of contractor is very stable, because if the prices are
increased, the shortfall of the profit is protected by the clause of cost plus contract.
Contractor’s position is not at risk. Therefore (c) is false. Other options are all true.
58. Answer : (b) < TOP >

Reason : Process costing is used in chemical works but not in garment industry. Therefore,
option (b) is false. Other options are all correct.
59. Answer : (d) < TOP >

Reason : There is no affect in the total profit and loss account if joint costs are allocated to joint
products as well as by-product. It affects the individual profits or loss of joint or by-
products but not to the overall profit of the firm.
60. Answer : (b) < TOP >

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

Reason : Comparative cost sheet of the canteen


Total amount for Total amount for
Particulars September 2005 September 2004
(Rs.) (Rs.)
Materials consumed 30,000 25,000
Labor and supervision 20,000 16,000
Overheads 29,000 24,000
Total cost 79,000 65,000
Sales realization through coupons 50,000 40,000
Subsidy to be provided 29,000 25,000
No. of employees 400 360
Subsidy per employee 72.50 69.44
Hence there is an increase of Rs.3.06 in subsidy per employee to be provided to the
canteen by the bank.
62. Answer : (b) < TOP >

Reason :
S.P. Sales
No. of
Joint products per unit value
units
Rs. Rs.
A 900 18 16,200
B 500 8 4,000
C 400 4 1,600
D 200 11 2,200
Total sales value 24,000
Less: Budgeted profit (10%) 2,400
Total joint costs 21,600
Less: Other costs: Carriage inwards 1,000
Manufacturing overhead 2,000
Administration overhead 2,400
Direct wages 3,000 8,400
Maximum price to be paid for R.M. 13,200
63. Answer : (d) < TOP >

Reason: Contribution per unit = Rs.40 – (Rs.12.00 + Rs.8.25 + Rs.3.75) = Rs.16


P/V ratio = (Rs.16 ÷ Rs.40) × 100 = 40%;
Number of units sold at 80% level = Rs.8,00,000 ÷ Rs.40 = 20,000 units; Maximum
capacity = 20,000 ÷ 80% = 25,000 units.
Fixed cost element in semi-variable cost = Rs.1,80,000 – 20,000 × Rs.3.75 =
Rs.1,80,000 – Rs.75,000 = Rs.1,05,000.
Total fixed cost up to 80% = Rs.90,000 + Rs.1,05,000 = Rs.1,95,000;

31
Activity level at break-even point = Fixed cost ÷ contribution per unit
= (Rs.1,95,000 ÷ Rs.16 = 12,187.5
Activity level = 12,187.5 ÷ 25,000 = 0.4875 or 48.75%.
64. Answer : (b) < TOP >

Reason : Let the sale price of both the products is Re.1.


Total contribution of both the products =
100 units × 0.50 × Re.1 + 100 units × 0.40 × Re.1 = Rs.90.
Contribution to sales ratio = Rs.90 ÷ (Rs.100 + Rs.100) = 0.45
If 20 units of B are substituted for 20 units of A, total contribution =
120 units × 0.50 × Re.1 + 80 units × 0.40 × Re.1 = Rs.92.
Contribution to sales ratio = Rs.92 ÷ Rs.200 = 0.46.
Contribution to sales ratio rises from 0.45 to 0.46.
65. Answer : (d) < TOP >

Reason : When sales units remain constant each month but production units fluctuate, marginal
cost stock valuation will result in the same profit being reported each month. Other
options stated in (I), (II) and (III) are not correct. Therefore (d) is true.
66. Answer : (a) < TOP >

Reason : Average cost at 8,000 units = Rs.20 + Rs.5 = Rs.25;


Average cost at 20,000 units = Rs.20 – Rs.5 = Rs.15;
Total cost = 20,000 × Rs.15 = Rs.3,00,000 and Total cost = 8,000 × Rs.25 =
Rs.2,00,000;
Variable cost = change of cost ÷ change of units = Rs.1,00,000 ÷ 12,000units =
Rs.8.33;
Fixed cost = Rs.3,00,000 – 20,000 × Rs.8.33 =Rs.3,00,000 – Rs.1,66,600 =
Rs.1,33,400;
Contribution per unit = Rs.20 – Rs.8.33 = Rs.11.67
Break-even units = Rs.1,33,400 ÷ Rs.11.67 = 11,431 units.
67. Answer : (e)
Reason : Fixed production cost per unit = Rs.3,60,000 ÷ 1,80,000 = Rs.2
Profit Statement for the Year (Under Absorption Costing Method)
Total
Amount
Particulars amount
(Rs.)
(Rs.)
A Sales revenue 1,50,000 × Rs.20 30,00,000
B Cost of production
Variable production cost 1,60,000 × Rs.11 17,60,000
Increase in variable cost 40,000
Fixed cost 3,60,000
21,60,000
Opening stock 10,000 × Rs.13 (Working Note 1) 1,30,000
22,90,000
Less: Closing stock 20,000 units (W N 2) 2,70,000
20,20,000
C. Gross profit (A-B) 9,80,000
D. Selling expenses
Variable (1,50,000 × Rs.3) 4,50,000
Fixed 2,70,000 7,20,000
E. Net profit (C– D)
Working Notes:
1. In the absence of information concerning stock, it is valued at variable cost
Rs.11.00 per unit plus an apportionment of fixed cost at normal capacity, i.e.
Rs.2.
2. Cost of production of 1,60,000 units = Rs.21,60,000
Cost of 20,000 units = (Rs.21,60,000 ÷ 1,60,000) × 20,000 = Rs.2,70,000.
Using the FIFO approach has solved the above question, but using other approaches
like average costing, etc can be solved.
68. Answer : (e) < TOP >

Reason :
Statement Showing the Cost and Profit Situation of Factories X and Y
(Individually and Integrated)
Factory X Factor X Factory Y Combined
Particulars @60% @100% @100% @100%
capacity capacity capacity capacity
Turnover 120 200 300 500
Variable cost 90 150 220 370
Contribution 30 50 80 130
Fixed cost 25 25 40 65
Profit 5 25 40 65
P/V ratio 25% 25% 26.67% 26%
Total contribution required = Profit desired + Fixed cost
= Rs.65 + Rs.65 = Rs.130 lakh
Total turnover required =Rs.130 ÷ 0.26 = Rs.500.00lakh.
69. Answer : (a) < TOP >

Reason : Fixed cost per unit = Rs.3,06,000 ÷ 18,000 units = Rs.17.


Profit under absorption costing = Rs.1,01,000
Adjustment of fixed manufacturing overhead costs of decreased inventory =
1,880units x Rs.17 = Rs.31,960
Profit under marginal costing = Rs.1,01,000 + Rs.31,960 = Rs.1,32,960.
70. Answer: (c) < TOP >

Reason: P/V ratio = Rs.60,000 ÷ (Rs.7,50,000 – Rs.6,00,000) = 40%


Contribution in 2004-05 = 40% of Rs.7,50,000 = Rs.3,00,000.
This has to be maintained in 2005-06.
In 2005-06, the sales volume and contribution after 10% reduction in price are:
Sales= Rs.7,50,000 – 10% of Rs.7,50,000
= Rs.6,75,000 and
Contribution = Rs.3,00,000 – 10% of Rs.7,50,000 = Rs.3,00,000 – Rs.75,000
= Rs.2,25,000.
Therefore, P/V ratio = Rs.2,25,000 ÷ Rs.6,75,000 = 33.33%
Required Sales volume for earning contribution of Rs.3,00,000
= Rs.3,00,000 ÷ 33.33% = Rs.9,00,000.
71. Answer : (c) < TOP >

Reason : Cost volume profit analysis allows management to determine relative profitability of a
product by determining contribution margin per unit and projected profits at various
levels of production
72. Answer : (d) < TOP >

Reason :
Product Sales Mix Sales Contribution
A 40 48 9.60
B 30 36 5.40
C 10 12 0.96
33
C 10 12 0.96
D 20 24 2.40
Total 18.36
Contribution 18.36 × 100
× 100 = 15.3%
PV ratio = Sales = 120
73. Answer: (b) < TOP >

Reason:
Full capacity = 20,000 units
Present capacity (80%) = 16,000 units
Unutilized capacity = 4,000 units
Variable cost per suit = Rs.375 + Rs.220 + Rs.55 = Rs.650
Incremental revenue for export = 7,000 units × ( Rs.750 – Rs.650 )
= Rs.7,00,000
Opportunity cost of indigenous production
= 3,000 units (i.e.7,000 – 4,000) × (Rs.975 – Rs.650)
= 3,000 × Rs. 325 = Rs. 9,75,000
Net loss = Rs.9,75,000 –Rs.7,00,000 = Rs.2,75,000.

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