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Question Paper

Management Accounting – II (152): July 2005


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

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1. Which of the following is/are not true about differential cost analysis?
I. It furnishes an excellent tool for pricing.
II. It provides useful information for profit planning when the entire productive output can be
disposed of in a single market.
III. It is related closely to economic marginal analysis.
IV. One proposal selling price is established for all units produced at any given level of activity.
(a) Only (III) above (b) Both (II) and (IV) above
(c) Only (II) above (d) (I), (II) and (III) above
(e) Only (IV) above.
(1 mark)
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2. Which of the following statements is true with regard to the difference between a flexible budget and a
fixed budget?
(a) A flexible budget primarily is prepared for planning purposes while a fixed budget is prepared for
performance evaluation
(b) A flexible budget provides cost allowances for different levels of activity whereas a fixed budget
provides costs for one level of activity
(c) A flexible budget includes only variable costs whereas a fixed budget includes only fixed costs
(d) A flexible budget is established by operating management while a fixed budget is determined by
top management
(e) The variances are usually larger with a flexible budget than with a fixed budget.
(1 mark)
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3. All of the following are major considerations in fixing a selling price except
(a) Competitors price
(b) Unique product features
(c) Price of substitutes
(d) Product costs which set a ceiling to the price
(e) Capturing market share.
(1 mark)
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4. Which of the following is not a general method for determining the transfer price?
(a) Negotiated transfer pricing
(b) Cost-based transfer pricing
(c) Income-based transfer pricing
(d) ROI based transfer pricing
(e) Market based transfer pricing.
(1 mark)
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5. Which of the following with respect to pricing is/are true?
I. Cost accounting helps in setting the final price.
II. Pricing objectives may include profit maximization, company growth, market share or a
combination of such factors.
III. Management sets a price in order to accomplish several objectives as is justified by the price.
(a) Only (I) above (b) All (I), (II) and (III) above
(c) Both (I) and (III) above (d) Both (II) and (III) above

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(e) Both (I) and (II) above.
(1 mark)
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6. The state of General Motors, which was languishing in sales in 1992, dramatically soared in 1993 and
in the first six months of 1993, it became the seventh best selling vehicle in US. It could do so by
adopting
(a) Marginal pricing b) Full cost pricing
(c) Skim pricing (d) Penetration pricing (e) Value pricing.
(1 mark)
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7. A timber merchant purchased 2,000 cft. of timber logs on January 1, 2005 at the rate of Rs.200 per
cft. and stored them in his timber yard for six months for seasoning. The following items of expenses
were incurred during the period of seasoning:
Rent per month - Rs 2, 500
Salaries of 4 guards @ Rs. 500 per month
Incidental expenditure for power, maintenance
and lighting etc. - Rs. 1,500 per month
Annual share of administration - Rs. 20,000
50% of the floor area of the godown was used for stocking the seasoned timber and another connected
operations. Loss in volume of the logs due to seasoning could be assumed to be 10 %.
If the timber merchants desires a profit of 10 % on cost, the selling price of the seasoned timber per cft.
as on July 1, 2005 will be
(a) Rs.199.75 (b) Rs.270.25 (c) Rs.243.25 (d) Rs.235.00 (e) Rs.258.50.
(2 marks)
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8. Center 1 of Rajendra Manufacturing Ltd. sells parts to Center 2 of the same organization. The cost to
Center 1 for providing the parts to Center 2 is Rs.38.50 per unit. With an additional cost of Rs.16.50 per
unit, Center 2 sells the units to an outside party for Rs.88 per unit. What transfer price will provide a
profit of Rs.27.50 per unit to Center 2?
(a) Rs.12 (b) Rs.14 (c) Rs.44 (d) Rs.48 (e) Rs.52.
(1 mark)
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9. Seedco Ltd. has furnished the following data relating to its new fertilizer for the year 2004-05:
Material cost (Rs.) 2,70,000
Other variable costs (Rs.) 5,40,000
Fixed cost (Rs.) 1,80,000
Assume that income tax rate is 45%. The company desires to earn a post tax profit of 23% on listed sale
price when trade discount is 40%. If the net sale price per unit is Rs.87.12, the number of units to be
sold is
(a) 62,500 (b) 11,364 (c) 23,365 (d) 37,500 (e) 40,400.
(1 mark)
10. Magnus Ltd. produces only one product. It expects a return of 20% (after-tax) on capital employed. The
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capital employed consists of fixed capital of Rs.30,00,000 and working capital equals to 30 % on sales.
The tax rate is 20% for the company. Other information is furnished below:
Units produced 40,000
Direct materials Rs.1,25,000
Direct labour Rs.2,75,000
Production overheads Rs.2,40,000
Administration overheads Rs.1,60,000
Selling and distribution costs 10 % on sales
The sale price at which the product should be sold in the market in order to meet the return requirement
is
(a) Rs.45.80 (b) Rs.40.76 (c) Rs.44.29 (d) Rs.39.90 (e) Rs.49.78.
(2 marks)
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11. Full cost pricing suffers from the following limitations except

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I. It is prone to distortion by accounting misapplications such as over-dependence on historical costs.
II. The price so obtained by full cost pricing is inclusive of fixed costs which in many circumstances
is the irrelevant cost.
III. When the company lacks knowledge of the demand curve for its single product, it can adopt this
kind of pricing.
(a) Only (II) above (b) Only (III) above
(c) Both (I) and (II) above (d) Both (I) and (III) above
(e) Both (II) and (III) above.
(1 mark)
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12. Komitsu Manufacturing Ltd. currently uses the company’s budget only as a planning tool. Management
has decided that it would be beneficial also to use budgets for control purposes. In order to implement
this change, the management accountant must
(a) Appoint a budget director
(b) Organize a budget committee
(c) Develop forecasting procedures
(d) Integrate all aspects like budgeting and accounting system of an enterprise
(e) Change the organisation structure.
(1 mark)
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13. Natesans Machineries has developed the following production plan:
Month Units
July 2005 22,000
August 2005 17,600
September 2005 19,800
October 2005 26,400
Each unit contains 5 kg of raw materials. The desired quantity of raw material at the end of each month
is 120% of the next month’s production, plus 600 kg. How much raw material should Natesans
Machineries purchase in the month of September 2005?
(a) 1,38,600 kg (b) 59,400 kg (c) 1,38,000 kg
(d) 1,59,000 kg (e) 1,32,000 kg.
(1 mark)
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14. The following are the operating results of Maze Ltd. a manufacturing company, for the current year:
Particulars Rs. in lakh
Sales (40,000 units) 48.00
Less trade discounts 2.40
Net sales 45.60
Cost of sales:
Direct material 14.40
Direct Labour 12.60
Factory overheads 6.30
Administration expenses 3.60
Selling and distribution expenses 4.50
The following changes are anticipated during the next year:
I. Units to be sold to increase by 25%.
II. Material price to increase by 15%.
III. Direct wages to increase by 12%.
IV. Overhead - Factory overheads will be limited to Rs.6.56 lakhs. Administration expenses and
selling & distribution expenses are estimated to increase by 8 percent and 14 percent respectively.
V. Inventory - No change in opening and closing inventories in quantity. The change in value may be
ignored.
VI. Trade discount – No change in the rate.
VII. Profit target for the year – Rs.6 lakh.
The selling price per unit for the next year is
(a) Rs.155.78 (b) Rs.126.14 (c) Rs.288.80 (d) Rs.113.05 (e) Rs.215.79.
(2 marks)

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15. Swami Ltd. has furnished the following information pertaining to production costs for a certain period:
Particulars Rs.
Direct wages 90,000
Direct materials 1,20,000
Production overheads – fixed 40,000
– Variable 60,000

During the forthcoming year it is anticipated that:


I The average rate for direct labour remuneration will fall from Re.0.90 per hour to Re.0.75 per
hour.
II. Production efficiency will be reduced by 5%.
III Price per unit for direct material and of other materials and services that comprise overheads will
remain unchanged.
IV. Direct labour hours will increase by 33 1/3%.
V. The overhead rate being absorbed on a direct wage basis.
The estimated works cost, after considering the above anticipation, is
(a) Rs.2,52,000 (b) Rs.1,16,000 (c) Rs.3,68,000 (d) Rs.3,20,000 (e) Rs.2,80,000.
(2 marks)
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16. MCN Ltd. manufactures 3 products –A, B and C and these are made in 4 production departments from
4 materials X, Y, Z and W. The company has provided the following information pertaining to its
business operation:
Used in Cost of Product
Materials
departments Material /unit (unit per product)
Rs. A B C
X 1 1.00 - 1 2
Y 2 0.40 1 - 2
Z 3 0.50 2 1 -
W 4 0.30 2 2 1
Normal rejection as % of production 5% 10% 10%
Budget details:
1. Sales
Sales for the year (Rs. in thousand) 520 1160 900
Sales price per unit (Rs.) 10 20 12
2. Inventory (finished goods)
Beginning of the year (units in thousand) 5 10 15
End of the year (units in thousand) 10 15 30

Raw material inventory (units in thousand) X Y Z W


Beginning of the year 30 40 10 60
End of the year 40 30 20 50

The budgeted costs of direct material used in department 2 and 4 are


(a) Rs.2,70,000 and 1,04,000 respectively
(b) Rs.1,04,000 and 95,000 respectively
(c) Rs.95,000 and 1,08,000 respectively
(d) Rs.1,04,000 and 1,08,000 respectively
(e) Rs.2,70,000 and 1,08,000 respectively.
(3 marks)
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17. AB Ltd. manufactures two products - X and Y. A forecast of units to be sold in the next five months of
the year 2005 is given below:
Months X (units) Y (units)
August 1,000 2,800

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September 1,200 2,800
October 1,600 2,400
November 2,000 2,000
December 2,400 1,600
Other information as follows:
Cost per unit X (Rs.) Y (Rs.)
Direct material 12.50 19.00
Direct labour 4.50 7.00
Factory overhead per unit 3.00 4.00
There will be no opening or closing stock of work-in-progress (WIP) in any month. The finished
product (in units) equal to half of the budgeted sale of the next month, should be in stock at the end of
each month (including previous month July).
The total production cost budget of X and Y for the period from August to November is
(a) Rs.1,30,000 (b) Rs.2,82,000 (c) Rs.1,52,000 (d) Rs.3,75,000 (e) Rs.4,12,000.
(2 marks)
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18. P Ltd. manufactures two products using one type of material. The following is an extract from the
company’s working papers for the next period budget:
Particulars Product A Product B
Budgeted sales (in units) 3,600 4,800
Budgeted material consumption per unit (kg) 5 3
The budgeted material cost is Rs.12 per kg. There are twelve 5-day weeks in the budget period and it is
anticipated that sales and production will occur evenly throughout the whole period.
It is anticipated that stock at the beginning of the period will be:
Product A - 1,020 units; Product B - 2,400 units.
Raw material - 4,300 kg.
The target closing stock, expressed in terms of anticipated activity during the budget period are:
Product A - 15 days sales; Product B - 20 days sales.
Raw material - 10 days consumption.
The total value of the material purchase budget for the next period is
(a) Rs.3,52,800 (b) Rs.4,11,600 (c) Rs.2,94,000 (d) Rs.4,63,200 (e) Rs.3,60,000.
(2 marks)
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19. Which of the following statements is/are true?
I. The production budget drives the direct material, direct labor and overhead budgets.
II. A cash disbursement budget shows all the expenses of operations and cash disbursements for debt
and taxes.
III. A budgeted income statement will include accrued expenses and other non-cash expenditures also.
(a) Both (I) and (III) above
(b) Both (II) and (III) above
(c) Both (I) and (II) above
(d) Only (I) above
(e) Only (III) above.
(1 mark)
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20. Which of the following statements is/are false?
I. A formal statement of future plans, usually expressed in monetary terms, is called a budget.
II. The budgeting process can be used to stretch the employees to their maximum effort always.
III. The process of planning future business actions and expressing those plans in a formal manner,
usually in non-monetary terms, is called budgeting.
(a) Only (II) above
(b) Only (III) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.

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(1 mark)
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21. MCL Ltd. has provided the following data pertaining to its products for the year:
Quarter 1 : Budgeted materials = Rs.1,08,000
Quarter 2 : Budgeted materials = Rs.1,20,000
Quarter 3 : Budgeted materials = Rs.1,40,000
Quarter 4 : Budgeted materials = Rs.1,12,000
50% of the budgeted materials will be paid in the quarter of purchase, of which half earn a 2% discount
and the remaining 50% will be paid in the following quarter. How much will be forecasted cash
disbursement for materials in the second quarter?
(a) Rs.1,12,800 (b) Rs.1,14,000 (c) Rs.1,30,000 (d) Rs.1,11,720 (e) Rs.1,12,920.
(1 mark)
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22. A budget can be either bottom-up or top-down. The extent to which a budget is bottom-up or top-down
eventually depends on all of the following except
(a) The person who is in charge of the budgeting process
(b) The location of the knowledge
(c) The direction of flow of information, i.e., from top level to bottom level and vice-versa
(d) The participation of the levels of the employees, i.e., whether the budget is prepared with the
participation of lower-level employees or their participation is missing
(e) The extent to which the information content is captured in the budgeting process.
(1 mark)
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23. A company has the following budget formula for annual electricity expense in its shop:
Expense = Rs.10,200 + (Rs.0.75 × Units produced)
If management expects to produce 15,000 units during the month of July 2005, the appropriate monthly
flexible budget allowance for the purpose of performance evaluation should be
(a) Rs.12,100 (b) Rs.11,250 (c) Rs.21,450 (d) Rs.10,200 (e) Rs.22,650.
(1 mark)
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24. There are various factors, which influence the fulfillment of budgeted goals. Out of the following
factors, the influence of which factor on the fulfillment of the budgeted goals should be first assessed?
(a) Functional factor (b) Principal budget factor
(c) Influential factor (d) Assessable factor (e) Revenue factor.
(1 mark)
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25. The production volume variance is due to
I. Inefficient or efficient use of direct labour hours.
II. Efficient or inefficient uses of variable overhead.
III. Difference between the planned level of the base used for overhead allocation and the actual level
achieved.
IV. Excessive application of direct labour hours over the standard amounts for the output level
actually achieved.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Only (IV) above
(e) Both (III) and (IV) above.
(1 mark)
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26. A difference between standard costs used for cost control and budgeted costs
(a) Can exist because standard costs must be determined after the budget is completed
(b) Can exist because budgeted costs are historical costs, whereas standard costs are based on
engineering studies
(c) Cannot exist because they should be the same amounts
(d) Can arise because standard costs are scientifically predetermined unlike budgeted costs
(e) Can arise because standard costs represent what costs should be, whereas budgeted costs represent
expected actual costs.
(1 mark)

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27. Atank Ltd. has provided the following data pertaining to Product – K which requires the mix of 2
materials – P and Q, for the month of June 2005:
Materials Standard mix Actual mix
P 60 units costing Rs.3,000 300 units costing Rs.15,300
Q 40 units costing Rs.1,200 200 units costing Rs.5,600
Standard loss allowed is 10% of input and standard rate of scrap realization is Rs.6 per unit. Actual
output is 440 units.
Material yield variance is
(a) Rs.460 (F) (b) Rs.450 (A) (c) Rs.450 (F) (d) Rs.460 (A) (e) Rs.420 (F).
(2 marks)
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28. One kilogram of product ‘K’ requires two chemicals A and B. The following were the details of 100
Kg. of product ‘K’ for the month of June 2005:
I. Standard mix - Chemical ‘A’ 50% and Chemical B 50%
II. Standard price per kg. of chemical ‘A’ is Rs.12 and chemical ‘B’ is Rs.15
III. Actual input of chemical ‘B’ is 70 kg.
IV. Actual price per kg. of chemical ‘A’ is Rs.15
V. Standard normal loss is 10% of total input
VI. Material cost variance total is Rs.650 adverse
VII. Material yield variance total is Rs.135 adverse
The standard yield for actual input is
(a) 40 kg (b) 110 kg (c) 100 kg (d) 99 kg (e) 85 kg.
(2 marks)
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29. Cubic Co. uses a standard cost system. The following information pertains to direct labour for product
B for the month of June 2005:
Standard hours allowed for actual production 2,400
Actual rate paid per hour Rs.10.00
Standard rate per hour Rs. 9.60
Labour efficiency variance Rs.1,920 (unfavorable)
The actual labor hours worked are
(a) 2,200 (b) 2,172 (c) 2,208 (d) 2,592 (e) 2,600.
(1 mark)
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30. Which of the following statements is/are false?
I. When the manufacturing cost variance is insignificant in amount, the individual variance accounts
are closed by transfer to the Cost of Goods sold account.
II. The manufacturing overhead spending variance is the difference between the budgeted overhead
for the level of production achieved and the actual amount of overhead incurred.
III. Manufacturing overhead volume variances are simply the natural result of fluctuations in the level
of sales from month to month.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
(1 mark)
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31. Excellent Ltd. can produce 4,000 units of a certain product at 100% capacity. The company has
furnished the following information:
Particulars August 2005 September 2005
Unit produced 2,800 3,600
Overhead costs: Rs. Rs.
Repairs and maintenance 500 560
Power 1,800 2,000
Shop labour 700 900

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Consumable stores 1,400 1,800`
Salaries 1,000 1,000
Inspection 200 240
Depreciation 1,400 1,400
The ratio of production per hour is 10 units. Direct material cost per unit is Re.1 and direct wages per
hour is Rs.4.
The cost of production per unit, at 60% level of capacity, is
(a) Rs.3.49 (b) Rs.3.59 (c) Rs.3.73 (d) Rs.3.99 (e) Rs.4.13.
(2 marks)
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32. A manufacturing firm planned to manufacture and sell 2,00,000 units of product during the year at a
variable cost of Rs.2 per unit and a fixed cost of Re.1 per unit. The firm fell short of its goal and only
manufactured 1,60,000 units at a total cost of Rs.5,15,000. The firm’s manufacturing cost variance was
(a) Rs.35,000 favorable (b) Rs.35,000 unfavorable
(c) Rs.5,000 favorable (d) Rs.5,000 unfavorable
(e) Rs.85,000 unfavorable.
(2 marks)
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33. Two articles X and Y are manufactured in a department. Their specifications show that 2 units of X or 8
units of Y can be produced in one hour. The budgeted production for the month of June 2005 is 200
units of X and 400 units Y. The actual production at the end of the month was 250 units of X and 480
units Y and the actual hours spent on this production was 160. The activity ratio for the month of June
2005 is
(a) 123.33% (b) 106.67% (c) 102.33% (d) 81.08% (e) 97.06%.
(2 marks)
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34. Consider the following particulars pertaining to River Ltd. for the month of June 2005:
Overheads cost variance Rs.9,100 (Adverse)
Overheads volume variance Rs.6,500 (Adverse)
Budgeted hours for June 2005 5,000 hours
Budgeted overheads for June 2005 Rs.39,000
Actual rate of overheads Rs.10 per hour.
The overhead capacity variance is
(a) Rs.6,552 (F) (b) Rs.7,052 (F) (c) Rs.5,052 (A) (d) Rs.6,552 (A) (e) Rs.7,052 (A).
(2 marks)
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35. Robin Ltd. uses a standard absorption costing system. The following data pertains to its budget for the
month of June 2005:
Fixed production overhead cost Rs.40,500
Production 2,700 units
In June 2005, the fixed production overhead cost was over-absorbed by Rs.11,510 and the fixed
production overhead expenditure variance was Rs.3,500 (Favorable).
The company’s production was ______ than budgeted units.
(a) 1,000 units more (b) 534 units less (c) 210 units more
(d) 534 units more (e) 1,000 units less.
(2 marks)
< Answer >
36. The production budget of RBC Ltd. is 7,680 units per year and is spread over the quarters as follows:
January to March 2,400 units
April to June 1,600 units
July to September 1,800 units
October to December 1,880 units
Budgeted fixed overheads for the year was Rs.57,600. The company works for 48 weeks in a year, 5
days per week, 8 hours per day. Standard output is 4 units per hour.
During January, 20 days were worked. Actual output was 700 units. Actual hours worked were 150
hours. Actual fixed overheads for the month was Rs.4,850.

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The fixed overhead volume variance for the month of January was
(a) Rs.250 (F) (b) Rs.400 (F) (c) Rs.450 (F) (d) Rs.400 (A) (e) Rs.450 (A).
(2 marks)
< Answer >
37. RBC Ltd. presents following data for a fixed quarter of 2005-06:

Particulars Budget Actual


Number of working days 60 66
Man hours per day 800 -
Output per man hour (units) 1 -
Total output 48,000 66,000
Fixed overhead expenditure 4,800 2,300
The Efficiency Variance of the company for the quarter was Rs.594 (F). The actual man hours per day
was
(a) 680 hours (b) 760 hours (c) 840 hours (d) 880 hours (e) 910 hours.
(2 marks)
< Answer >
38. Jharna Ltd. presents following data for the month of June 2005:

Particulars Budget Actual


Number of working days 25 22
Man hours per day 300 280
Output per man hour (kg) - 3.8
Standard fixed overhead rate per unit Rs.9.50 -

If the fixed overhead capacity variance was Rs.22,990 (A), the budgeted output per man hour was
(a) 2.7kg (b) 3kg (c) 4.2 kg (d) 4.6 kg (e) 5.5kg.
(2 marks)
< Answer >
39. ABC Ltd. is preparing its cash budget for the year 2005-06. An extract from its sales budget for the
same year shows the following sales values:

April 2005 Rs.1,20,000


May 2005 Rs.1,40,000
June 2005 Rs.1,10,000
July 2005 Rs.1,30,000

40% of its sales are expected to be for cash. Of its credit sales, 50% are expected to pay in the month
following the month of sales and 50% are expected to pay in the second month following the month of
sale.
The value of sales receipts to be shown in the cash budget for June 2005 is
(a) Rs.1,85,000 (b) Rs.1,33,000 (c) Rs.1,30,000
(d) Rs.1,22,000 (e) Rs.1,10,000.
(1 mark)
< Answer >
40. Performance is designed to meet organizational needs. In this regard, which of the following are
normally not included in performance reports?
I. Strategic plans.
II. Specific time horizons.
III. Exceptional items that are controllable.
IV. A relationship to the organization structure.
V. A user focus.
(a) Only (I) above (b) Only (II) above
(c) Both (III) and (IV) above (d) Both (IV) and (V) above
(e) Only (V) above.

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(1 mark)
< Answer >
41. Operating management is more concerned with the operational aspects of management. Which of the
following information is not required to the operating management?
(a) Capital requirements
(b) Installed capacity
(c) Utilized capacity
(d) Acceptance or rejection of products
(e) Licensed capacity.
(1 mark)
< Answer >
Comparing performance report of the top-level management with that of the lower level management is
an important part of an overall organization structure. Which of the following is true with respect to
performance measurement report?
(a) Top management reports are detailed
(b) Low-level management reports are typically for longer 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)
< Answer >
43. Which of the following information is required by the executive management?
(a) Cash flows (b) Sundry debtors balance
(c) Overdrafts (d) Overtime payments
(e) Order bookings.
(1 mark)
< Answer >
44. Which of the following statements is/are true?
I. Corporate Management generally consists of the Departmental heads and/or the sub-divisional
heads.
II. Executive Management consists of managers responsible for certain product groups or markets or
certain aspects of a function.
III. Operating Management requires information on the production quantity and value, sales volume
and price realization etc.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
45. XLNT Ltd. while preparing its cash budget for August 2005 made the following projections:
Sales Rs.7,50,000
Gross profit margin 20%
Decrease in inventories Rs.40,000
Decrease in accounts payable Rs.30,000
The amount of cash disbursement for the month of August 2005 is
(a) Rs.8,20,000 (b) Rs.7,40,000 (c) Rs.6,80,000 (d) Rs.6,10,000 (e) Rs.5,90,000.
(1 mark)
< Answer >
46. Return on Investment (ROI) pricing takes into account the investment needed to manufacture a product
and the return it wishes to earn. This return is added to the product cost to develop a selling price for the
product. Which of the following statement is false regarding ROI pricing?
(a) It helps in determining what rate of return a given price for the product will give to the company
(b) It does not recognize capital investment in determining the proposed selling price
(c) It guides management in determining what selling price will provide a given rate of return
(d) This method furnishes an analytical tool for appraisal of alternative selling prices
(e) Under this method, the required rate of return is applied on capital investment to reach the normal
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mark-up on price.
(1 mark)
< Answer >
47. Nasta Ltd. has furnished the following information relating to cost at a capacity level of 5,000 units:
Particulars Rs.
Material cost 25,000 (100% variable)
Labour cost 15,000 (100% variable)
Power 1,250 (80% variable)
Repairs and maintenance 2,000 (75% variable)
Stores 1,000 (100% variable)
Inspection 500 (20% variable)
Administration overheads 5,000 (25% variable)
Selling overheads 3,000 (50% variable)
Depreciation 10,000 (100% fixed)
The production cost budget per unit, at the level of 6,000 units, is
(a) Rs.12.55 (b) Rs.13.37 (c) Rs.12.00 (d) Rs.12.45 (e) Rs.13.05.
(2 marks)
< Answer >
48. If the asset turnover and return on investment of Jiban Ltd. are 1.8 and 0.63 respectively, the profit
margin is
(a) 0.25 (b) 0.29 (c) 0.35 (d) 0.38 (e) 0.40.
(1 mark)
< Answer >
49. PAT Ltd, manufactures two products using one grade of labour. The following is an extract from the
company’s working papers for the next period’s budget:
Particulars Product A Product B
Budgeted production (units) 3,480 4,000
Standard hours allowed per product 5 4
The budgeted wage rate is Rs.8 per hour. Overtime premium is 50% and is payable, if a worker works
for more than 40 hours a week. There are 90 direct workers.
The target productivity ratio (or efficiency ratio) for the productive hours worked by the direct workers
in actual production is 80%. In addition the non-productive downtime is budgeted at 20% of the
productive hours worked. There are twelve 5-days weeks in the budget period.
The total budgeted wages to be paid to workers are
(a) Rs.3,45,600 (b) Rs.4,28,400 (c) Rs.2,62,800 (d) Rs.4,00,800 (e) Rs.4,83,600.
(2 marks)
< Answer >
50. Which of the following statements is/are true?
I. The master budget is the overall composition of all other types of budget.
II. A set of written instructions that specifies who will provide budgetary data and its form and who
should receive various schedules comprising the budget can be found in the budget manual.
III. The budget director or chief budget officer should not only consider financial resources when
preparing the budget, but should also take into consideration human resources.
(a) Both (II) and (III) above (b) Both (I) and (II) above
(c) Both (I) and (III) above (d) Only (II) above
(e) Only (III) above.
(1 mark)
< Answer >
51. Leo Ltd. has two divisions - A and B whose return on investment is 18% and 10% respectively. Both
the divisions are considering an outlay on new investment projects, the details of which are as under:
Particulars Project of Division A Project of Division B
Investment outlay Rs.3,00,000 Rs.3,00,000
Net annual return Rs.48,000 Rs.33,000
11
Net annual return Rs.48,000 Rs.33,000
The cost of capital of the company is 13% per annum.
Which of the following statements is true in case the performance measurement used in Return on
Investment (ROI) and Residual Income (RI)?
(a) Using ROI or RI, Project of A will be accepted and project of B will be rejected
(b) Using ROI or RI, Project of A will be rejected and project of B will be accepted
(c) Using ROI, Project of A will be accepted and project of B will be rejected whereas using RI,
Project of A will be rejected and project of B will be accepted
(d) Using ROI, Project of A will be rejected and project of B will be accepted whereas using RI,
Project of A will be accepted and project of B will be rejected
(e) Using ROI, Project of A will be accepted and project of B will be rejected whereas using RI, both
the projects will be rejected.
(1 mark)
< Answer >
52. The last year’s income of Sabera Ltd. was Rs.4,12,500. Its previous invested capital was Rs.22,00,000.
The company has purchased machinery for Rs.3,25,000, that has, by estimate increased income by
10%. But, if the residual income of the company actually decreased by Rs.2,625, the firm’s cost of
capital is
(a) 13.75% (b) 13.50% (c) 12.50% (d) 11.25% (e) 10.25%.
(2 marks)
< Answer >
53. An investment center manager is considering four possible investments. The required investments,
annual profits, and the ROIs of each investment are as follows:

Project Required Investment Annual Profits ROI


(Rs.) (Rs.) %
A 3,60,000 72,000 20.0

B 2,40,000 36,000 15.0


C 4,20,000 78,000 18.5
D 1,50,000 12,000 8.0
The investment center is currently generating an ROI of 18% based on Rs.10,00,000 in assets and a
profit of Rs.1,80,000. The company can borrow cash at a rate of 12% per annum. Which of the
following projects will increase the investment center’s ROI?
(a) Projects A and B (b) Projects A and C
(c) Projects B and D (d) Project A only
(e) Project D only.
(2 marks)
< Answer >
54. Magnus Ltd. has furnished the following details regarding the payment schedule of current payables
related to purchases of direct materials:
60 % in the month of purchases
30 % in the month following the month of purchases
10 % in the second month following the month of purchase.
The company purchased the same amount of goods in the months of April and May 2005. Total credit
purchases in the month of June 2005 were Rs.2,00,000 and total payments on credit purchases in the
month of June were Rs.280000. The credit purchase in the month of April 2005 was
(a) Rs.2,00,000 (b) Rs.4,00,000 (c) Rs.4,80,000
(d) Rs.6,00,000 (e) Rs.8,00,000.
(2 marks)
< Answer >
55. According to Abraham Maslow, a satisfied need is not a motivator of behavior. So, when the lowest
level of need, i.e. _____________ need is satisfied, the individual moves on to the next level in the need
hierarchy which is ________
(a) Physiological; Social
(b) Physiological; Need for safety
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(c) Safety; Self-esteem need
(d) Physiological; self-actualization need
(e) Self-esteem; self-actualization need.
(1 mark)
56. A system under which each superior-subordinate pair would develop six to eight major objectives
< Answer >
mutually agreed upon is known as
(a) Maslow’s hierarchy of needs
(b) McGregor’s Theory X
(c) Management by Objective
(d) Management by Combination
(e) Management by Intention.
(1 mark)
< Answer >
57. Which of the following is/are true regarding goal congruence?
I. It is the common effort on the part of individuals to achieve their individual goals collectively.
II. Managers & employees can best achieve their personal goals by directing their efforts towards the
success of the organization.
III. Goal congruence can be best thought of as the goals of many organizations meeting on one
particular aspect of management control.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (II) and (III) above
(e) Both (I) and (II) above.
(1 mark)
< Answer >
58. How should managers ideally handle budget deviations?
I. If unfavorable variances occur, superiors should rightly punish or criticize subordinate managers.
II. Managers should view unfavorable variances as an area of joint problem solving and as
opportunities for individual growth.
III. Subordinate managers view budget variance reports as means of controlling them.
(a) Only (I) above
(b) Only (III) above
(c) Both (I) and (II) above
(d) Both (I) and (III) above
(e) Both (II) and (III) above.
(1 mark)
< Answer >
59. A financial budget is
(a) A part of master budget that focuses on finance
(b) A part of master budget that focuses on how business activities affect cash
(c) The same as the long-range planning budget
(d) The same as the capital budget
(e) A part of the operating expenses budget that focuses on sales.
(1 mark)
< Answer >
60. If the overhead spending variance is favorable and if more units are produced than the ‘normal’ level,
then it can be said that
(a) Actual overhead costs exceed budgeted overhead costs
(b) An adverse overhead volume variance will result
(c) Labor efficiency variance will be favorable
(d) Manufacturing overhead will be under-applied
(e) Manufacturing overhead will be over-applied.
(1 mark)
< Answer >
61. Target costing apart from having many advantages suffers from some disadvantages. Which of the
following is a disadvantage of target costing?
(a) It is difficult to use in case of complex products

13
(b) Costs which will be incurred in future can be forecasted & thereby providing motivation to meet
future cost goals
(c) It is used to measure different cost scenarios
(d) It helps in saving a great deal of time and money
(e) It helps in promoting the requirements of consumers.
(1 mark)
< Answer >
62. Which of the following statements is false with respect to Life Cycle costing?
(a) It is the inter dependence of activities in different time periods making it effective for cost control
(b) Under Life cycle costing, greater majority of costs are incurred during the later phase of a product,
after it being marketed
(c) It provides management with a better picture of product profitability
(d) It is nothing but the accumulation of costs for activities that occur over the entire life cycle of a
product
(e) It is inherent to products, which pass through a life cycle and go on accumulating costs in different
phases over their life cycle.
(1 mark)
< Answer >
63. McGregor Ltd. has furnished the following details relating to its Product ‘Y’ :
Budgeted variable overhead cost Rs. 30,000
Budgeted fixed overhead cost Rs. 60,000
Budgeted direct labor hours 30,000
Budgeted production (units) 15,000
Actual variable overhead cost Rs. 28,000
Actual fixed overhead cost Rs. 58,000
Actual direct labor hours 26,000
If McGregor produces 12,000 units, the variable overhead spending variance is
(a) Rs.2,000 adverse (b) Rs.1,000 favorable
(c) Rs.3,000 adverse (d) Rs.1,000 adverse
(e) Rs.4,000 favorable.
(1 mark)
< Answer >
64. Sonic Electronics follows target costing in selling its products in the oversees market. After developing
its product, it found its cost to be Rs.12. On careful market survey of its competitors’ products and a
survey of its target customers, it found that the customers are willing to pay at the most Rs.10.00 for
single unit of that product. Sonic Electronics desire to earn a profit of 20 % on its sales. The target cost
would be
(a) Rs.9.00 (b) Rs.12.00 (c) Rs.10.00 (d) Rs.8.00 (e) Rs.14.00.
(1 mark)
< Answer >
65. PK Ltd. manufactures and sells two products – Super and Bumper. The company has furnished the
following data pertaining to cost per unit of the products:
Super Bumper
Particulars
(Rs.) (Rs.)
Direct material 96 72
Direct labor (at the rate of Rs.20 per hour) 80 100
Variable production overheads at the rate of Rs.24 per hour 24 48
200 220
The fixed manufacturing overheads of the company are Rs.4,00,000 per month and the budgeted direct
labor hours are 20,000 per month. The company has carried out an analysis of its production support
activities and found that its fixed cost varies in accordance with non-volume-related factors, which are
given under:
Super Bumper Total cost
Activity Cost driver
(No. of times) (No. of times) (Rs.)
Setup Production run 30 20 52,000
Material handling Production run 20 30 1,20,500
Inspection Inspection 26 65 2,27,500
4,00,000

14
Budgeted production is 1,250 units of product Super and 3,000 units of Product Bumper. The company
desires to earn a profit of 20% on total production costs.
The selling prices of product Super and product Bumper using Activity based costing, are
(a) Rs.378.62 and Rs.366.24 respectively
(b) Rs.373.62 and Rs.366.24 respectively
(c) Rs.378.62 and Rs.361.24 respectively
(d) Rs.373.62 and Rs.361.24 respectively
(e) Rs.370.62 and Rs.376.24 respectively.
(2 marks)
< Answer >
66. Bright Light Ltd. manufactures two products - Bright and Delight, using the same equipment and
similar processes. The following information is extracted from the production department pertaining to
the two products for the quarter ending June 30, 2005:
Particulars Bright Delight
Quantity produced (units) 10,000 15,000
Direct labor hours per unit 2 4
Machine hours per unit 3 1
Number of set-ups in the period 20 80
Number of orders handled in the period 30 120
Total production overheads recovered for the period has been analyzed as follows:
Particulars Rs.
Relating to machine activity 4,50,000
Relating to production run set-ups 40,000
Relating to handling of orders 90,000
Total 5,80,000
The production overheads to be absorbed by each unit of the products under traditional costing
approach, using a direct labor hour rate to absorb overheads, are
(a) Bright Rs.16.50; Delight Rs.29 per unit
(b) Bright Rs.14.50; Delight Rs.27 per unit
(c) Bright Rs.15.50; Delight Rs.27 per unit
(d) Bright Rs.15.50; Delight Rs.29 per unit
(e) Bright Rs.14.50; Delight Rs.29 per unit.
(1 mark)
< Answer >
67. The following information pertains to Dalal Ltd.:
Standard price per unit (Rs.) 2.25
Actual quantity purchased (units) 1200
Standard quantity allowed for actual production (units) 1075
Materials price variance (Rs.) 300 (F)
The actual purchase price per unit of material is
(a) Rs.4.25 (b) Re.0.25 (c) Rs.4.50 (d) Rs.2.00 (e) Rs.3.75.
(1 mark)
< Answer >
68. Supreme-cal Ltd., a calculator manufacturer, is planning to produce a new model of calculator. The
potential demand for the next year is estimated to be 1,00,000 units. Supreme-cal Ltd. has the capacity
to produce 4,00,000 units and could sell 1,00,000 units at a price of Rs.200 per calculator. The demand
would double for every Rs.30 decrease in the selling price. A minimum margin of 25% is required. At
full capacity level, the target cost per unit is
(a) Rs.70 (b) Rs.100 (c) Rs.105 (d) Rs.110 (e) Rs.140.
(1 mark)
< Answer >
69. Consider the following data pertaining to product – K of KBC Ltd.:
Fixed overhead is Rs.3,00,000 p.a. The single product is produced at a selling price of Rs.6 and a
variable cost of Rs.2. Handling excess inventory costs Rs.0.50 per unit. There is no beginning inventory
of finished goods. Handling costs are expensed in the year they are incurred. Which production level

15
causes the highest income for a year in which 100,000 units are sold?
(a) 100,000 (b) 150,000 (c) 200,000 (d) 250,000 (e) 300,000.
(2 marks)
< Answer >
70. Mangatrai Ltd. has two divisions – the Machining division and the Assembly division. The Machining
department which is operating at full capacity, manufactures and sells 24,000 units of component Z in a
perfectly competitive market. The revenue and cost data is given as follows :

Particulars Rs.
Variable cost per unit 72
Fixed cost 9,60,000
Sales value 24,00,000
The Assembly division received an order for supplying Product Q for which it requires component Z.
The minimum transfer price that should be charged by Machining division to Assembly division is
(a) Rs.40.00 (b) Rs.54.00 (c) Rs.76.00 (d) Rs.120.00 (e) Rs.100.00.
(1 mark)
< Answer >
71. Consider the following data pertaining to an integrated circuit manufactured by Minilectronics Ltd.:

Variable cost per unit (Rs.) Rs.11


Fixed cost (Rs.) Rs.90,000
Production units 25,000

Market price per unit of similar products is Rs.20 per unit, which the company finds suitable to achieve
its required mark up percentage. If variable cost is increased by 20%, the mark-up percentage on
variable cost is
(a) 112% (b) 68.18% (c) 72.9% (d) 80.08% (e) 81.82%.
(1 mark)
< Answer >
72. United Steels Ltd. has the following cost components for 1,00,000 units of product for the year:

Particulars Rs.
Raw materials 1,00,000
Direct labour 50,000
Manufacturing overhead 1,00,000
Selling & administrative expenses 75,000
All costs are variable except for Rs.50,000 of manufacturing overhead and Rs.50,000 of selling and
administrative expenses. The total costs to produce and sell 1,10,000 units for the year are
(a) Rs.3,25,000 (b) Rs.3,57,500 (c) Rs.2,70,000 (d) Rs.3,47,500 (e) Rs.2,56,500.
(1 mark)
< Answer >
73. Consider the following data pertaining to XYZ Ltd.:
Gross profit is Rs.12,000, Opening stock is Rs.10,000, Purchases is Rs.25,000 and closing stock is
Rs.7,000, the assets include Fixed assets (net block) of Rs.50,000, Investments in subsidiaries
Rs.30,000, Cash in hand/bank is Rs.10,000 and the income from sale of goods is Rs.200 and expenses
are Rs.300. The Return on Investment is
(a) 17.76 % (b) 12.27 % (c) 16.78 % (d) 18.97 % (e) 11.54 %.
(1 mark)
< Answer >
74. Sharada Ltd. services washing machines and clothes dryers. It charges customers for the spare
materials with markup on cost. The company has five employees, each earning Rs.6,000 per
year and spending 1,000 hours per year on service calls. It sells parts that cost Rs.45,000 annually. The
company has other costs of Rs.25,000 a year, which is allocated two-thirds to labor and the remainder
to material. The amount of markup on parts, if the target profit of the company is Rs.20,000 per annum,
is

16
(a) Rs.72,000 (b) Rs.75,000 (c) Rs.30,000 (d) Rs.45,000 (e) Rs.27,000.
(2 marks)

Suggested Answers
Management Accounting – II (152): July 2005
1. Answer : (e) <
TOP
Reason : (I) The differential cost analysis furnishes an excellent tool for pricing >
(II) It provides useful information for profit planning when th entire
productive output can be disposed of in a single market
(III) It is related closely to economic marginal analysis which helps a firm to
produce at the point where the marginal revenue equals marginal cost.
(IV) One proposal selling price is established for all units produced at any
given level of activity is true in case of full-cost pricing and not in
differential cost analysis.
The statement mentioned in option (IV) is not true. Therefore, answer is (e)
2. Answer : (b) <
TOP
Reason : A flexible budget is a series of budgets prepared for different levels of >
activity. It allows adjustments of the budget to the actual level of activity
before comparing the budgeted activity with actual result. Fixed budget is a
budget prepared for one level of activity. Therefore (b) is correct. Other
statements mentioned in (a), (c), (d) and (e) are not correct.
3. Answer : (d) <
TOP
Reason : If fixing selling price, competitors price, unique product feature, price of the >
substitutes and capturing market share are considered. Product costs sets a
floor to the price. Product costs, which set a ceiling to the price, are not
correct. Therefore, (d) is the answer.
4. Answer : (c) <
TOP
Reason : Income-based transfer pricing is not a general method for determining the >
transfer price. So, the correct answer is (c).
5. Answer : (e) <
TOP
Reason : Cost accounting assists in making analysis of costs which helps management >
to decide upon the price. So, statement (I) is true. The pricing objective may
include profit maximization, company growth, market share or a combination
of such factors. So, statement (II) is also true. Statement (III) is false, as
several objectives is not sought to be achieved through a single price. So, the
correct answer is (e).
6. Answer : (e) <
TOP
Reason : Value pricing is a marketing tactic that involves setting a fixed, lowered price >
on a car that is packaged with attractive options. So, the correct answer is
(e).Other options are not the appropriate tactic of pricing.
7. Answer : (e) <
TOP
Reason : Statement showing the determination of selling price of seasoned timber >
As on April 1, 2005
Particulars Qty.( cft) Rs.
Cost of timber logs @ Rs. 200 per cft. 2,000 4,00,000
Seasonal expenses for 6 months :
Rent ( Rs. 2,500 x 6 x 0.5 ) 7,500
Salaries of 4 guards 6,000
Incidental expenses 4,500
Administrative overheads 5,000

17
( 20,000 x 0.5 x 0.5 )
Total 2,000 4,23,000
Less : Normal loss – 10 % of 2,000 200 -
Total ( net) 1,800 4,23,000
Profit margin ( 10 % of cost ) 42,300
Total selling price 4,65,300
Selling price per cft. (4,65,300 / 1800) Rs. 258.50
8. Answer : (c) <
TOP
Reason : Profit = Revenue – (Transfer price + Division cost). >
Let the required transfer price be X
Rs.88 – (X + Rs.16.50) = Rs.27.50
X = Rs.44.
9. Answer : (d) <
TOP
Reason : Let, sale value = X >
0.23X = [X(1 - 0.40) – Rs. 2,70,000–Rs. 5,40,000– Rs. 1,80,000] x (I - tax
rate)
0.23X =[0.6X – Rs.9,90,000] x (1 – 0.45)
0.10X =Rs.5,44,500
X = Rs.54,45,000
Net sale price = Rs.87.12.
Sale price / unit before discount = Rs.87.12 ÷ 0.60= Rs.145.20
Number of units to be sold = Rs.54,45,000 ÷ Rs.145.20 = 37,500.
10. Answer : (c) <
TOP
Reason : Let the selling price be ‘S’ >
Total sale = 40,000 S
20%
Return on Capital Employed = 0.80 x (30,00,000 + 30 % of 40,000 S)
Selling and distribution = 10 % of 40,000 S = 4,000 S
Sale = Total cost + profit
20%
40,000 S = ( 1,25,000 + 2,75,000 + 2,40,000 + 1,60,000 + 4,000 S) + 0.80

( 30,00,000+ 4,000 S)
40,000 S = 8,00,000 + 4,000 S + 7,50,000 + 1,000 S
or, 35,000 S = 15,50,000
S = Rs. 44.29
11. Answer : (b) <
TOP
Reason : The first two statements are the limitations of full cost pricing while the third >
statement is the situation when full cost pricing is used. So, the correct
answer is (b). When the company lacks knowledge of the demand curve for
its single product, it can adopt this kind of pricing. So, this is not a limitation
of full cost pricing.
12. Answer : (d) <
TOP
Reason : Budget is a numeric representation of the manager’s plans for a specified >
period of time. It can be used for communication, co-ordination, measurement
of success, motivations and control. For the budgetary process to serve
effectively as a control function, it must be integrated with functional and
operational systems and the organisation structure. Budget provides the
standards for evaluating the data generated by the accounting system.
Relating the budgeting and accounting systems to the organizational structure
will therefore enhance control by transmitting data and assigning variances to
the proper organizational subunits.

18
13. Answer : (a) <
TOP
Reason : >
(in kgs)
Production requirement 19,800 ×5 99,000
(+)Closing inventory (26,400 × 5) ×120% + 600 1,59,000
(-)Opening inventory (19,800 × 5) ×120% + 600 1,19,400
Purchases for September 1,38,600
14. Answer : (b) <
TOP
Reason : >
Budgeted operating income statement of Maze Ltd.

Particulars Rs. in Rs.in


lakh lakh
Sales (40,000 x 1.25 = 50,000 units) x Rs.120 60.00
Less trade discount (5%) 3.00
Net sales 57.00
Less variable costs
Direct material @Rs.41.40 per unit (Rs.36 + 15%) 20.70
Direct labour @Rs.35.28 per unit (Rs.31.50 + 12%) 17.64 38.34
Contribution 18.66
Less fixed overheads
Factory 6.560
Administration (Rs.3.60 lakh + 8%) 3.888
Selling and distribution (Rs.4.50 lakh + 14%) 5.130 15.578
Net income (indicated) 3.082
Additional income needed (6 – 3.082) 2.918
Contribution required 21.578
(Rs.18.66 lakh + Rs.2.918 lakh)
Add variable costs 38.340
Net sales 59,918
Add trade discount 3.154
Gross sales (50,000 units)[(Rs.59.918 / 95) × 100] 63.072
Sales price per unit (Rs.) 126.14
15. Answer : (c) <
TOP
Reason : >
Output in the forthcoming year will increase by 26 2/3 %. It is calculated as
follows:
Output last year 100%
Increase due to 33 1/3% increase in labour hours 33 1/3 %
Total 133 1/3%
Less: 5% decline in production efficiency (133 1/3% × 5/100) 6 2/3%
Net 126 2/3%
So output will increase by 26 2/3 %
Labour hours worked last year were: Wages Rs.90,000
Rate per hour 90 paise
∴ Number of labour hours last year Rs.90,000/90
Paise = 90,000 × 100/90 =1,00,000 hrs.
BUDGET FOR THE FORTHCOMING YEAR
Rs. Rs.
Direct Material last year 1,20,000
Add: 26 2/3 increase in material due to 26 32,000 1,52,000
2/3 % increase in out put (1,20,000 × 80/3)
/ 100
Direct wages:
Labour hours last year 1,00,000
Increase in labour hours, 33 1/3% 1,00,000/3
Total labour hours in the forthcoming year 4,00,000/3
19
Rate per hour 0.75
∴ Wages (4,00,000 / 3) × 0.75 1,00,000
Prime Cost 2,52,000
Production Overheads:
Fixed 40,000
Variable last year Rs.60,000
Add: 26 2/3 increase due to increase in 76,000 1,16,000
output ( 60,000 × 80/3) / 100 = Rs.16,000
Estimated Works Cost 3,68,000
Factory Overhead Rate based on Direct
Wages is
Rs.1,16,000/1,00,000 (Production
Overhead/wages) × 100 = 116%
16. Answer : (d) <
TOP
Reason : >
Production budget (units) of MNC Ltd.
Particulars A B C
Planned sales for the year 52,000 58,000 75,000
(Sales revenue/sales price/unit
Add planned inventory at the 10,000 15,000 30,000
end of year
Less planned opening inventory (5,000) (10,000) (15,000)
at the beginning of year
No. of units to be produced A 57,000 63,000 90,000
Normal rejection percentage 5% 10% 10%
Add normal rejection B 3,000 7,000 10,000
(57,000 × (63,000 × (90,000 ×
100/95) 100/90) 100/90)
Budget Production (A+B) 60,000 70,000 1,00,000

Material Used (product wise) Department


1 2 3 4
Material X: Re1 per unit
Product B Rs.70,000
(70,000 x 1) (70,000)
Product C Rs.2,00,000
(1,00,000 x 2) (2,00,000)
Material Y: Re0.40 per unit
Product A Rs.24,000
(60,000 x 1) (60,000)
Product C Rs.80,000
(1,00,000 x 2) (2,00,000)
Material Z: Re.0.50 per unit

Product A Rs.60,000
(60,000 x 2) (1,20,000)
Product B Rs.35,000
(70,000 x 1) (70,000)
Material W: Rs.0.30 per unit
Product A Rs.36,000
(60,000 x 2) (1,20,000)
Product B Rs.42,000
(70,000 x 2) (1,40,000)
Product C Rs.30,000
(1,00,000 x 1) (1,00,000)
Budgeted cost of materials 2,70,000 1,04,000 95,000 1,08,000

20
17. Answer : (e) <
TOP
Reason : >
Budgeted production =
Budgeted sales + Desired closing inventory – Opening inventory
Planned inventory level Budgeted
Projected
(units) Production
Months Sales
Closing Opening (units)
X Y X Y X Y X Y
August 1,000 2,800 600 1,400 500 1,400 1,100 2,800
September 1,200 2,800 800 1,200 600 1,400 1,400 2,600
October 1,600 2,400 1,000 1,000 800 1,200 1,800 2,200
November 2,000 2,000 1,200 800 1,000 1,000 2,200 1,800
Total Budgeted Production in units 6,500 9,400
Total production cost of X and Y
= 6,500 (Rs.12.50 + Rs.4.50 + Rs 3.00) + 9,400 (Rs.19.00 + Rs.7.00 +
Rs.4.00) = 6,500 × Rs. 20 + 9,400 × Rs. 30 = Rs.1,30,000 + Rs.2,82,000 = Rs.
4,12,000.
18. Answer : (e) <
TOP
Reason : >
MATERIAL PURCHASE BUDGET
Particulars Product A Product B
Budgeted Sales (units) 3,600 4,800
Add: Closing Stock 900 1,600
(3,600/60 days) (4,800/60 days)
× 15 × 20
Total 4,500 6,400
Less: Anticipated Opening Stock 1,020 2,400
Production requirements (units) 3,480 4,000
Material consumption per unit (kgs) 5 3

Total 17,400 12,000 29,400


Add: Closing Stock of Materials 4,900
10 days Consumption
i.e. (29,400 / 60days) × 10
34,300
Less: Opening Stock of material 4,300
Total materials to be purchased 30,000
Cost of materials to be purchased = 30,000 kgs × Rs.12= Rs.3,60,000
19. Answer : (a) <
TOP
Reason : The production budget drives the direct material, direct labor and overhead >
budgets and that budgeted income statement will include accrued expenses
and other non-cash expenditures also. These statements are true. The other
statement is false. So, the correct answer is (a).
20. Answer : (d) <
TOP
Reason : Statement (II) is false as the budgeted figures are the estimate to provide the >
employees to give their maximum effort to achieve the target but it may not
always help in achieve the budget. Statement (III) is false as it is expressed in
monetary terms. Statement (I) is true. So, the correct answer is (d).
21. Answer : (a) <
TOP
Reason : The forecasted cash disbursements of materials in the second quarter >
= ( Rs.1,08,000 x 0.50) + ( Rs.1,20,000 x 0.98 x 0.5) = Rs.1,12,800.
So, the correct answer is (a).
<
22. Answer : (a) TOP
Reason : The extent to which a budget is bottom-up or top-down eventually depends on >

21
all the following :
(a) The location of the knowledge
(b) The direction of flow of information, ie, from top level to bottom level
and vice-versa
(c) The participation of the levels of the employees, ie, whether the budget
is prepared with the participation of lower-level employees or their
participation is missing
(d) The extent to which the information content is captured in the budgeting
process.
But, the person who is in charge of the budgeting process has nothing to do
in determining whether a budget is top-down or bottom-up. So, the correct
answer is (a).
<
23. Answer: (a) TOP
Reason: The formula given is for annual period. Thus, monthly fixed expense >
= Rs. 850 (Rs. 10,200 / 12)
Hence, the appropriate monthly flexible budget allowance for the purpose of
performance evaluation is
= Rs. 850 + (Rs.0.75 x 15000)
= Rs. 12,100.
24. Answer : (b) <
TOP
Reason : When budgets are made, there are invariably some factors which sets a limit >
to the quantity which can be made or sold. This is known as the limiting
factor or the principal budget factor. So, the correct answer is (b).
25. Answer : (c) <
TOP
Reason : The production volume variance (also called an idle capacity variance) is a >
component of the total factory overhead variance. It is the difference between
budgeted fixed costs and the product of the standard fixed cost per unit of
input times the standard units of input allowed for the actual output. Thus, the
production volume variance equals under or over applied fixed factory
overhead. This variance results when actual activity differs from the activity
base used to calculate the fixed factory overhead application rate.
26. Answer : (e) <
TOP
Reason : Standard costs are predetermined attainable unit costs. One advantage of >
standard costs is that they facilitate flexible budgeting. Accordingly, standard
and budgeted costs should not differ when standards are currently attainable.
However, in practice, budgeted (estimated actual) costs may differ from
standard costs when operating conditions are not expected to reflect those
anticipated when the standards were developed.
27. Answer : (d) <
TOP
Reason : Standard cost = Standard cost of material P + standard cost of material Q – >
Realizable value of standard loss = Rs.3,000 + Rs.1,200 – (10% of 100 units
x Rs.6) = Rs.4,200 - Rs.60 = Rs.4,140.
Standard output = 60 units + 40 units – 10% of (60 + 40) units = 100 units –
10 units = 90 units.
Therefore, standard cost per unit = Rs.4,140 / 90 units = Rs.46.
Actual yield = 300 units + 200 units – 60 units = 440 units (i.e. given).
Standard yield = 300 units + 200 units – 10% of (300 + 200) = 450 units.
Material yield variance = Standard cost per unit (Actual yield – Standard
yield) = Rs.46 (440 units ~ 450 units) = Rs.460 (A).
28. Answer : (d) <
TOP
Reason : Standard Cost of Standard mix of input >

Particulars Quantity Price Amount


Chemical A (50% of 100 kgs) 50 12 600
Chemical B (50% of 100 kgs) 50 15 750
22
Chemical B (50% of 100 kgs) 50 15 750
Input 100 1,350
Standard Loss 10 –
Output 90 1,350
Standard rate of output per kg. = Rs.1,350 / 90 = Rs.15
Yield variance =
Standard Rate of Output × (Actual yield – Standard yield for Actual input)
Rs.135 (A) = Rs.15 (90 kg – Standard yield for actual input)
9kg (A) = 90 kg – Standard yield for actual input
Standard yield for actual input = 90 + 9 = 99kg.
29. Answer : (e) <
TOP
Reason : The standard hours for actual production allowed equaled 2,400 and the >
labour efficiency variance was Rs. 1,920 unfavorable, i.e., actual hours
exceeded standard hours. The labour efficiency variance equals the standard
rate (Rs. 9.60 per hour) times the excess hours. Given the variance is Rs.
1,920, excess hours = Rs. 1,920 ÷ Rs. 9.60 = 200 hours. Thus actual hours =
Standard hours + excess hours
= 2,400 + 200 = 2,600 hours
30. Answer : (c) <
TOP
Reason : Manufacturing overhead volume variances are simply the natural result of >
fluctuations in the level of sales from month to month. But this statement is
false. The first two statements are true. So, the correct answer is (c).
31. Answer : (e) <
TOP
Reason : COST OF PRODUCTION UNDER FLEXIBLE BUDGET >

Capacity
Item
100% 60%
Units 4,000 2,400
Production hours - @ 10 units per hour 400 240
Rs. Rs.
Direct material 4,000 2,400
Direct wages 1,600 960
Prime Cost 5,600 3,360
Production Overhead variable:
Shop Labour 1,000 600
Consumer Stores 2,000 1,200
Semi-Variable:
Power 2,100 1,700
Repair & Maintenance 590 470
Inspection 260 180
Fixed:
Depreciation 1,400 1,400
Salaries 1,000 1,000
Total Overheads 8,350 6,550
Cost of production 13,950 9,910
Cost of production per unit 3.49 4.13

Working :
Calculation of semi –variable overheads: Power
Difference in capacity Difference in overhead (Rs.)
20% 200
1% 10
At 80% variable cost is 80 × Rs.10 = Rs.800 and fixed cost is Rs.1,100.

23
In the same way it can be calculated for 100% and 60% capacity. Same way
may be followed for repair and maintenance and inspection.
32. Answer : (c) <
TOP
Reason : >
Standard Cost:
Variable Costs 2,00,000 units × Rs. 2 Rs. 4,00,000
Fixed Costs 2,00,000 units × Re. 1 Rs. 2,00,000
Total Rs. 6,00,000
Budgeted costs:
Variable Costs 1,60,000 units × Rs. 2 Rs. 3,20,000
Fixed Costs Rs. 2,00,000
Total Rs. 5,20,000
Actual cost = Rs. 5,15,000
Manufacturing cost variance = Budgeted costs - Actual cost
= Rs. 5,20,000 – Rs. 5,15,000 = Rs. 5,000 (favorable)
33. Answer : (a) <
TOP
Reason : Standard budgeted hours for June 2005: >

X 200 ÷ 2 = 100 hours


Y 400 ÷ 8 = 50 hours
= 150 hours
Standard hours for Actual production:
X 250 ÷ 2 = 125 hours
Y 480 ÷ 8 = 60 hours
= 185 hours
Activity Ratio =
(Standard Hours for Actual Production ÷ Budgeted Standard Hours) × 100
= (185 hours ÷ 150 hours) × 100 = 123.33%.
34. Answer : (d) <
TOP
Reason : Overhead expenditure variance >
= Overhead cost variance ~ Overhead volume variance
= Rs.9,100 (A) ~ Rs.6,500 (A)
= Rs.2,600(A)
Actual overheads incurred
= budgeted overheads ~ overheads expenditure variance
= Rs. 39,000~ Rs.2,600(A)
= Rs.41,600
Actual hours =Actual overheads incurred ÷ Actual rate of recovery
= 41,600 ÷ 10 = 4,160 hours.
Overheads capacity variance = Standard rate × (Actual hours – budgeted
hours)
=Rs.39,000 ÷ 5,000 (4,160 hours – 5,000)
= Rs.6,552 (Adverse).
<
35. Answer : (d) TOP
Reason : Standard fixed overhead rate =Budgeted cost ÷ Budgeted Output >

= Rs.40,500 ÷ 2,700 = Rs.15


Overheads incurred =
Budgeted fixed production overhead cost + Expenditure variance

24
= Rs.40,500 - Rs.3,500 = Rs.37,000
Overheads absorbed = Actual overhead + Over absorption of overheads
= Rs.37,000 + Rs.11,510 = Rs.48,510
Actual number of units = Rs.48,510 ÷ Rs.15 = 3,234 units.
Units produced above budgeted units = 3,234 units – 2,700 units
=534 units.
36. Answer : (c) <
TOP
Reason : Actual production in terms of standard hours: >
= 700 units x 0.25 hours = 175 standard hours
Standard rate per hour
= Budgeted expenses for the year ÷ Budgeted hours for the year
=Rs.57,600 ÷ ( 48 × 5 × 8)hours = Rs.57,600 ÷ 1,920 hours =Rs.30 per hour
Average budgeted hours per month
=Budget hours for the year ÷ 12 =1,920 ÷ 12 = 160 hours.
Average budgeted hours: 160
Standard hours for actual production = 175
Difference = 160 – 175 = 15 (F)
Fixed overhead volume variance = 15 x Rs.30 = Rs.450 (F).
37. Answer : (e) <
TOP
Reason : Let the actual man hours per day be X. >
Standard production in actual hours worked
= Actual hours worked × Standard output per hour
= 66 days × X hours × 1.0 units = 66X units
Actual production = 66,000units
Difference = 66,000units– 66 X units
Standard overhead rate per unit = 4,800 ÷ 48,000 = Re. 0.10
Efficiency variance
= (66,000 units ~ 66 X units) × Standard overhead rate per unit
= (66,000 units ~ 66 X units) × 0.10= Rs.594 (F).
=66,000 units ~ 66X units = Rs.5940(F).
Standard production in actual hours = 60,060 units
Therefore X = 60,060 ÷ 66 = 910hours.
38. Answer : (e) <
TOP
Reason : Let the budgeted output per man hour be X kg. >
Man hours that should have been worked in actual number of days
=Actual number of days x standard hours per day
=22 × 300 = 6,600 man hours
Actual hours worked =actual number of days x Actual hours per day
= 22 × 280 = 6,160 man hours
Difference = (6,160 – 6,600) hours = 440 hours (A)
Difference in output due to less hours worked
= Additional hours worked x Budgeted output per hour
=440 × X
Fixed overhead capacity variance = 440 × X × 9.50= 22,990 (A)
Therefore X = 5.478 ≈ 5.5 kg.
39. Answer : (d) <
TOP
Reason : The correct answer is (d). >

Particulars Rs.

25
Cash sales Rs.1,10,000 × .4 44,000
Credit sales realized:
May Rs.1,40,000 × .6 × .5 42,000
April Rs.1,20,000 × .6 × .5 36,000
Sales receipts 1,22,000
40. Answer : (a) <
TOP
Reason : Strategic plans are normally not included in performance reports. So, the >
correct answer is (a).
41. Answer : (a) <
TOP
Reason : Information on capital requirements is not required to the operating >
management. So, the correct answer is (a).
42. Answer : (d) <
TOP
Reason : The reports for the lower level of management are fairly detailed through >
limited in scope and they are quantitative in nature. The reports for the top
management are highly summarized with financial data.
43. Answer : (e) <
TOP
Reason : The executive management requires information regarding the order >
bookings. Hence, the correct answer is (e).
44. Answer : (d) <
TOP
Reason : Statement (I) is not true as corporate management consists of board of >
directors, chief executive and the functional heads. Statement (II) is true of
Executive management. Similarly, Statement (III) is true as to the information
required by operating management. So, the correct answer is (d).
45. Answer : (e) <
TOP
Reason: Cost of goods sold= Rs.7,50,000 x 0.8 = Rs.6,00,000 >
Cash disbursement = Rs.6,00,000 – Rs.40,000 + Rs.30,000= Rs.5,90,000
46. Answer : (b) <
TOP
Reason : It does not recognize capital investment in determining the proposed selling >
price which is false. So, the correct answer is (b).
47. Answer : (c) <
TOP
Reason : The production cost budget >
Particulars Rs.
Material cost (variable) 30,000
Labor cost (variable) 18,000
Stores (variable) 1,200
Power (semi-variable) 1,450
Repairs and maintenance (semi-variable) 2,300
Inspection (semi-variable) 520
Administration overheads (semi-variable) 5,250
Selling overheads 3,300
Depreciation (fixed) 10,000
Total 72,020
Cost per unit 12.00
48. Answer : (c) <
TOP
Reason : Return on investment =Asset turnover × Profit margin >
Profit margin = Return on investment / Asset turnover
= 0.63 / 1.8 = 0.35.
49. Answer : (b) <
TOP
Reason : DIRECT WORKERS WAGES BUDGET >
(Showing hours required and wages paid)
Particulars Product Product Total
Budget production in units
A B
3,480 4,000

26
Budget production in units 3,480 4,000
Standard hours for budgeted production 17,400 16,000 33,400
Standard hours for budgeted production 41,750
at target efficiency ratio
33,400 hours × 100/80
Add: Normal productive down time 8,350
(20% × 41,750 hours)
Total labour hours required 50,100
Less: Normal labour hours (90 workers 43,200
× 12 weeks × 5 days × 8 hours)
Difference (over time) 6,900
Wages for normal hours 3,45,600
(43,200 × Rs.8) (Rs.)
Overtime wages (6,900 × Rs.12) (Rs.) 82,800
Total wages (Rs.) 4,28,400

50. Answer : (a) <


TOP
Reason : A set of written instructions that specifies who will provide budgetary data >
and its form and who should receive various schedules comprising the budget
can be found in the budget manual. The budget director or chief budget
officer should not only consider financial resources when preparing the
budget, but should also take into consideration human resources. So, the
correct answer is (a).
51. Answer : (d) <
TOP
Reason : >
Particulars Project A Project B
Investment outlay Rs.3,00,000 Rs.3,00,000
Net annual return Rs. 48,000 Rs. 33,000
Return on investment 16% 11%
(Net annual return / investment outlay)
Target return on investment 18% 10%
Using ROI, Project A will be rejected as its ROI is less than the target ROI
whereas Project B will be accepted.
Particulars Project A (Rs.) Project B (Rs.)
Net annual return 48,000 33,000
Imputed interest (13% of Rs.3,00,000) 39,000 39,000
Residual income 9,000 (6,000)
Using RI, Project A will be accepted as it has a positive RI whereas Project B
will be rejected as its RI is negative. Thus the answer is (d).
52. Answer : (b) <
TOP
Reason : Residual income is income in excess of the cost of capital. >
The current residual income
= [Rs.4,12,500 – (Rs.22,00,000 x X)]
If the equipment is purchased, the residual income
=[( Rs.4,12,500 + Rs.41,250)– (Rs.22,00,000 + Rs.3,25,000) x X)]
Residual income decreases by = Rs.2,625.
Therefore,
[( Rs.4,12,500 + Rs.41,250)– (Rs.22,00,000 + Rs.3,25,000) x X)]
[Rs.4,12,500 – (Rs.22,00,000 x X)] = - Rs.2,625
4,53,750 –25,25,000X –4,12,500 + 22,00,000X =
41,250 –3,25,000X = - Rs.2,625
X = 13.5%.
53. Answer : (b) <
TOP
Reason : Project A: (Rs.1,80,000 + Rs.72,000)/(Rs.10,00,000 + Rs.3,60,000) = 18.53% >

27
ROI. >

Project B: (Rs.180,000 + Rs.36,000)/(Rs.10,00,000 + Rs.240,000) = 17.4%


ROI.
Project C : [Rs.1,80,000+Rs.78,000]/ [Rs.10,00,000 + Rs.4,20,000]=18.17%
Project D : [Rs1,80,000+12,000]/[Rs.1,00,00,000+Rs.1,00,000]=16.7%.
Projects A and C are increasing ROI than existing 18 %.
54. Answer : (b) <
TOP
Reason : Payment for June purchases = Rs. 2,00,000 x 0.6 = Rs. 1,20,000 which leaves >
Rs. 1,60,000 to apply to April and May. The ratio of the balance for April and
May is 1 : 3. May purchases were 160000 x 0.75/ 0.3 = Rs. 4,00,000. April
purchases were Rs. 160000 x 0.25 / 0.10 = Rs. 4,00,000
55. Answer : (b) <
TOP
Reason : According to Abraham Maslow, when the need for food, shelter & clothing >
i.e. Physiological is satisfied, he moves to the next level of needs hierarchy
which is need for safety.
56. Answer : (c) <
TOP
Reason : Under management by objective, each superior-subordinate pair would >
develop six to eight major objectives which are mutually agreed upon. Hence,
the correct option is (c).
57. Answer : (b) <
TOP
Reason : When managers and employees give their best effort for the success of an >
organization which leads to the achievement of their personal goals is called
goal congruence. Hence, statement (II) only is true and so the correct answer
is (b).
58. Answer : (e) <
TOP
Reason : Statement (I) is false as managers should not penalize or criticize subordinate >
managers for any unfavorable variances. Statement (II) and (III) are true and
hence, the correct answer is (e).
59. Answer : (b) <
TOP
Reason : A financial budget is a part of master budget on how business activities affect >
cash. So, the correct answer is (b).
60. Answer : (e) <
TOP
Reason : If the overhead spending variance is favorable and if more units are produced >
than the ‘normal’ level, then it can be said that manufacturing overhead will
be over-applied. So, the correct answer is (e).
61. Answer : (a) <
TOP
Reason : Option (a) is a disadvantage of target costing, so, the correct answer is (a). >

62. Answer : (b) <


TOP
Reason : In Life-cycle costing, 95% of the costs are committed before production >
begins, so the correct answer is (b).
63. Answer: (a) <
TOP
Reason: Variable overhead rate per hour = Rs. 30,000/ 30,000 hrs. = Re. 1.00 >
Expected variable overhead manf. Costs = 26,000 labor hours @ Re. 1.00
= Rs. 26,000
Actual variable overhead costs = Rs. 28,000
Variable overhead spending variance = Rs. 2,000 adverse.
64. Answer : (d) <
TOP
Reason : Under target costing, the cost which the customers are willing to pay for that >
product will be the selling price for that product. So, Rs. 10 is the selling
price. Deduct 20 % of it , ie, Rs. 2.00 from it , ie, Rs. 10.00 – Rs. 2.00 = Rs.
8.00 is the target cost.

28
65. Answer : (a) <
TOP
Reason : Using ABC, overheads will be allocated on the basis of cost driver >
Super Bumper Total
Particulars
(Rs.) (Rs.) (Rs)
Set ups (30:20) 31,200 20,800 52,000
Materials handling 1,20,500
48,200 72,300
(20:30)
Inspection (26:65) 65,000 1,62,500 2,27,500
Total 1,44,400 2,55,600 4,00,000
Budgeted units 1,250 units 3,000 units
Overheads per unit Rs.115.52 Rs.85.20

Super Bumper
Price of the products
Variable costs Rs.200.00 Rs.220.00
Fixed manufacturing costs Rs.115.52 Rs. 85.20
Rs.315.52 Rs.305.20
Profit mark-up (20%) Rs. 63.10 Rs. 61.04
Rs.378.62 Rs.366.24
66. Answer : (e) <
TOP
Reason : Traditional costing >

Direct labor hours (DLH)


Product - Bright (10,000 units × 2 hours) 20,000hours
Product - Delight (15,000 units × 4 hours) 60,000 hours
80,000 hours
Rs.5,80, 000
∴ Overhead absorption rate = 80, 000 D.L.H = Rs.7.25
Overhead absorbed would be as follows:
Product - Bright (2 hours × Rs.7.25) = Rs.14.50 per unit
Product - Delight (4 hours × Rs.7.25) = Rs.29 per unit
67. Answer : (d) <
TOP
Reason : >
Particulars Rs.
Total standard cost : 1200 x 2.25 2,700
Less : Materials price variance ( F) 300
Total actual cost 2,400
So, the actual cost per unit = Rs. 2400/ 1200 = Rs. 2.00
68. Answer : (c) <
TOP
Target cost = Selling price at capacity – 25% profit margin >
Price (Rs.) Demand (Units)
200 1,00,000
170 2,00,000
140 4,00,000
Target cost = Rs.140 – (Rs.140 × 0.25)
=Rs.140 – 25% × Rs.140 = Rs.105
69. Answer : (d) <
TOP
Reason: Average cost at 100,000 units: (Rs.300,000 + (Rs.2.00 x 100,000)) ÷ 100,000 >
= Rs.5.00. Net income at 100,000 units: (Rs.6 x 100,000)-(Rs.5 x 100,000) =
Rs.100,000.
Average cost at 250,000 units: (Rs.300,000 + (Rs.2 x 250,000)) ÷ 250,000 =
29
Rs.3.20. Net income at 250,000 units: (Rs.6 x 100,000)-(Rs.3.20 x 100,000)-
(Rs.0.50 x 150,000)= Rs.205,000.
Average cost at 150,000 units: (Rs.300,000 + (Rs.2 x 150,000)) ÷ 150,000 =
Rs.4.00. Net income at 150,000 units: (Rs.6 x 100,000)-(Rs.4.00 x 100,000)-
(Rs.0.50 x 50,000) = Rs.175,000.
Average cost at 200,000 units: (Rs.300,000 + (Rs.2 x 200,000)) ÷ 200,000 =
Rs.3.50. Net income at 200,000 units: (Rs.6 x 100,000)-(Rs.3.50 x 100,000)-
(Rs.0.50 x 100,000) = Rs.200,000.
Average cost at 300,000 units: (Rs.300,000 + (Rs.2 x 300,000)) ÷ 300,000 =
Rs.3.00. Net income at 300,000 units: (Rs.6 x 100,000)-(Rs.3.00 x 100,000)-
(Rs.0.50 x 200,000) = Rs.200,000.
Average cost at 250,000 units: (Rs.300,000 + (Rs.2 x 250,000)) ÷ 250,000 =
Rs.3.20. Net income at 250,000 units: (Rs.6 x 100,000)-(Rs.3.20 x 100,000)-
(Rs.0.50 x 150,000)= Rs.205,000. This level provides the highest net income.
70. Answer : (e) <
TOP
Reason : If the transferor division is operating at full capacity and the product is >
perfectly competitive, the appropriate transfer price is the sales value per unit
= Rs. 24,00,000/ 24,000 = Rs. 100.
71. Answer : (b) <
TOP
Reason : Total sales = Rs.20 × 25,000 units =Rs.5,00,000 >
Profit = Rs.5,00,000 – Rs.2,75,000 – Rs.90,000 = Rs.1,35,000
Variable cost = Rs.11 × 25,000 units × 1.20 = Rs.3,30,000
Markup % on variable cost
=[ (Rs.90,000 + Rs.1,35,000) ÷ Rs.3,30,000] × 100 = 68.18%.
72. Answer: (d) <
TOP
Reason : Total costs to produce and sell 1,10,000 units for the year are >

Variable Cost Fixed Cost Total


Particulars
(Rs.) (Rs.) (Rs.)
Raw materials 1,10,000 - 1,10,000
(Rs.100,000/100,000
units = 1)
Direct Labour 55,000 - 55,000
(Rs. 50,000/100,000
units = 0.5)
Manufacturing 55,000 50,000 1,05,000
overhead (Rs. 50,000/100,000
(Note 1) units = 0.5)
Selling/administrative 27,500 50,000 77,500
expenses (Rs. 25,000/100,000
(Note 2) units = 0.25)
Total 2,47,500 1,00,000 3,47,500

Note 1: Variable Manufacturing overhead:


Rs. 100,000 – Rs. 50,000(Fixed) = Rs. 50,000
Note 2: Variable Selling/administrative expenses:
Rs. 75,000 – Rs. 50,000 (Fixed) = Rs. 25,000.
73. Answer: (a) <
TOP
Reason: Operating Assets = Fixed assets + closing stock + Cash in hand/bank >
(Investment in subsidiaries is not taken in the calculation of Operating assets
as it is not an operating asset)
= 50,000 + 10,000 + 7,000 = Rs. 67,000
Operating income = Gross profit + Income from the sale of the goods–
expenses
= 12,000 + 200 – 300 = Rs. 11,900

30
So, ROI = Operating Income/ Operating Assets
= 11,900/ 67,000 = 17.76 %.
74. Answer : (e) <
TOP
Reason: Total labor cost 5 x Rs. 6,000 = Rs. 30,000 >
Cost of parts = Rs. 45,000
Total variable cost Rs.75,000
Target profit = Rs. 20,000
Fixed cost = Rs. 25,000
= Rs. 45,000
Mark up % = Rs. 45,000 ÷Rs. 75,000 = 60%
Mark up on parts = 60% of Rs. 45,000 = Rs. 27,000

< TOP OF THE DOCUMENT >

31

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