Question Paper Management Accounting – I (151) : January 2006 Answer all questions. Marks are indicated against each question. 1. Which of the following statements is true? (a) Management accounting is mandatory for business organizations because it should be maintained as per various legal statutes (b) The application of management accounting cannot be extended beyond the traditional accounting system (c) Management accounting focuses more on a company as a whole and less on the parts or segments of a company (d) Management accounting statements are prepared in accordance with Generally Accepted Accounting Principles (e) Management accounting refers to reports prepared to fulfill the needs of management. (1 mark) < Answer > 2. Which of the following is not a valid difference between Financial accounting and Management accounting? (a) Financial accounting provides data for external users like shareholders where as Management accounting provides data for internal users like managers (b) Financial accounting is usually a summary of past costs whereas management accounting is useful for decision-making that considers the future scenario also (c) Financial accounting relies heavily on the concept of responsibility where as Management accounting do not rely on the concept of responsibility (d) Financial accounting statements must be prepared in accordance with Generally Accepted Accounting Principles (GAAP) where as Management accounting is not governed by GAAP (e) Financial accounting is mandatory for business organizations whereas Management accounting is not mandatory. (1 mark) < Answer > 3. The costs having clear relationship to output are known as (a) Opportunity costs (b) Engineered costs (c) Manufacturing costs (d) Overhead costs (e) Budgeted costs. (1 mark) < Answer >
Transcript
Question PaperManagement Accounting – I (151) : January 2006
Answer all questions. Marks are indicated against each question.
1. Which of the following statements is true?
(a) Management accounting is mandatory for business organizations because it should be maintained as per various legal statutes
(b) The application of management accounting cannot be extended beyond the traditional accounting system
(c) Management accounting focuses more on a company as a whole and less on the parts or segments of a company
(d) Management accounting statements are prepared in accordance with Generally Accepted Accounting Principles
(e) Management accounting refers to reports prepared to fulfill the needs of management.
(1 mark)
< Answer >
2. Which of the following is not a valid difference between Financial accounting and Management accounting?
(a) Financial accounting provides data for external users like shareholders where as Management accounting provides data for internal users like managers
(b) Financial accounting is usually a summary of past costs whereas management accounting is useful for decision-making that considers the future scenario also
(c) Financial accounting relies heavily on the concept of responsibility where as Management accounting do not rely on the concept of responsibility
(d) Financial accounting statements must be prepared in accordance with Generally Accepted Accounting Principles (GAAP) where as Management accounting is not governed by GAAP
(e) Financial accounting is mandatory for business organizations whereas Management accounting is not mandatory.
(1 mark)
< Answer >
3. The costs having clear relationship to output are known as
5. The cost of goods manufactured, under a periodic cost accumulation system, is equal to the
(a) Cost of goods sold less beginning work-in-process(b) Cost of goods put into production plus beginning work-in-process less ending work-in-process(c) Cost of goods put into production plus ending work-in-process less beginning work-in-process (d) Cost of goods available for sale plus beginning finished goods less ending finished goods(e) Cost of goods available for sale plus ending finished goods less beginning finished goods.
(1 mark)
< Answer >
6. Which of the following is true? < Answer >
(a) Decremental cost means the cost of an added unit(b) Standard cost tells us what the actual cost is for the product(c) Period costs are not assigned to products(d) Cost center and cost unit are the same(e) Cost of production is equal to prime cost plus works cost.
(1 mark)
7. A manager of a company wants to control and reduce, 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
Particulars Jeans Shorts Total (Rs.)Units 10,00,000 2,00,000
Selling price per unit Rs.30 Rs.26
Direct labor (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)
< Answer >
9. Pioneer Ltd. manufactures a single product and absorbs the production overheads at a predetermined rate of Rs.10 per machine hour. At the end of financial year ending December 2005, it has been found that actual production overheads incurred were Rs.6,00,000. It included Rs.45,000 on account of ‘written off’ obsolete stores and Rs.30,000 being the wages paid for the strike period under an award. The production and sales data for the year ending December 2005 is as under:
Production UnitsFinished goods 20,000
< Answer >
Work-in-progress (50% complete in all respects) 8,000 Sales 18,000
The actual machine hours worked during the period were 48,000. It has been found that one-third of the under-absorption of production overheads was due to lack of production planning and the rest was attributable to normal increase in costs.The supplementary rate for absorption of overhead is
(a) Rs.2.25 per unit (b) Rs.1.00 per unit (c) Rs.1.25 per unit(d) Rs.1.50 per unit (e) Rs.2.00 per unit.
(2 marks)
10. When manufacturing expenses are recovered on a proper basis, the journal entry to be passed is
(a) Debit Work-in-process account and credit General ledger adjustment 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 Manufacturing overhead control account.
(1 mark)
< Answer >
11. The budgeted overhead cost of Alatt Ltd. amounts to Rs.3,00,000 based on an output of 200 units of A, 300 units of B, and 500 units of C. Direct labor costs of A, B, and C per unit amount to Rs.75, Rs.50, and Rs.40 respectively. Overhead costs are applied based on budgeted overhead rates using labor cost as cost driver. If actual overhead costs amount to Rs.3,19,000 for the production of 300, 350, and 400 units of A, B, C respectively, the under or over applied overhead amounts to
(a) Rs.19,000 under applied(b) Rs.19,000 over applied(c) Rs.17,000 under applied(d) Rs.17,000 over applied(e) Rs. 36,000 under applied.
(1 mark)
< Answer >
12. Ravinder Ltd. has furnished the following data for the month of December 2005:
Direct labor was Rs.17,500, which was 175% of factory overheads. Cost of goods sold excluding administrative expenses was Rs.56,000. Inventory account showed the following opening and closing balances:
13. PQR Ltd. has three jobs outstanding. The company uses normal costing and the overhead rate, which is 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.81,000 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
< Answer >
(a) Debited by Rs.8,053 (b) Credited by Rs. 8,053(c) Debited by Rs.9,361 (d) Debited by Rs.9,256(e) Credited by Rs.9,256.
(2 marks)
14. 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 that 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) 100% (b) 90% (c) 88% (d) 72% (e) 63%.
(1 mark)
< Answer >
15. Precision Ltd. has furnished the following information pertaining to its machine:
Total cost of machine to be depreciated Rs.2,30,000 Life of machine – 10 years; Depreciation on straight line basis
Departmental annual overhead costs:Rent – Rs.50,000; Heat and light – Rs.20,000; Supervision – Rs.1,30,000Area of the Department – 70,000 square metersMachine area – 2,500 square metersNumber of machines – 26Annual cost of reserve equipment for machinery – Rs.1,500Hours run on production – 1,800
Hours for setting and adjusting – 200Power cost – Re.0.50 per hour of running time
Labor:* When setting and adjusting – full time attention* When machine is producing – one worker can look after 3 machines* Labor rate is Rs.6 per hour.
The hourly rate for standing charges of the company is
16. The budgeted working conditions of a cost centre of Rastikan Ltd. are as follows:
Normal working per week – 42 hoursNumber of machines – 14Normal weekly loss of hours on maintenance etc. – 5 hours per machineNumber of weeks worked per year – 48Estimated annual overheads – Rs.1,24,320Estimated direct wage rate – Rs.4 per hourActual results in respect of a 4 week period are:Wages incurred – Rs.9,000Overheads incurred – Rs.10,400Machines used – 2,000 hours
The amount of under or over absorption of wages and overheads respectively are
(a) Rs.408 (over) and Rs.200 (under) respectively(b) Rs.408 (under) and Rs.400 (under) respectively(c) Rs.408 (over) and Rs.400 (under) respectively(d) Rs.400 (over) and Rs.408 (over) respectively
< Answer >
(e) Rs.400 (under) and Rs.400 (over) respectively.
(2 marks)
17. 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 apportion-ment(e) The secondary distribution on a reciprocal basis is known as the stepladder method.
(1 mark)
< Answer >
18. 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 off by supplementary rate method
(b) The cost of searching for new or improved products, new applications of materials or new or improved methods is known as research cost
(c) The process of grouping costs according to their common characteristics is known as cost collection
(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 for securing order.
(1 mark)
< Answer >
19. Neelam Sing Ltd. produces products X and Y. The direct cost of X is Rs.250 per unit (Rs.100 materials and Rs.150 labor) and Y is Rs.350 (Rs.230 material and Rs.120 labor) per unit. 50 units of X and 150 units of Y were produced. Overhead amounts to Rs.130,000 and is composed of material handling Rs.12,000, labor support Rs.60,000, machine operation Rs.48,000 and general administration Rs.10,000. Material handling cost driver is material cost; labor support cost driver is labor cost. Machine operation cost resulted from running the machines a total of 480 hours (75% of which was for product X). General administration effort related equally to product X and Y. Material handling chargeable per unit of X (rounded off to the nearest rupee) amounts to
20. Kumar Ltd. has furnished the following data pertaining to products:
DepartmentNumber of
Employees*Number of
HoursSquare
feetNumber ofUnits sold
Sales(Rs.)
A 10 (10) 20,000 20,000 200 13,50,000
B 14 (8) 18,000 4,000 400 9,50,000
C 20 (6) 22,000 6,000 1,000 7,50,000
D 30(4) 15,000 10,000 3,000 3,75,000
Total 74 75,000 40,000 4,600 34,25,000
* The number of full time employees is listed in the parenthesis. Full time employees work on an average 4 years with the company, part-time employees work on an average 5 months with the company.
The Personnel Department costs amount to Rs.81,400. The personnel department is responsible for recruiting, hiring and managing benefits.
What would be the amount of Personnel Department cost allocated to Department C assuming the
21. The company has some costs that have not been allocated. These include, electricity for heat, cleaning and telephones. Of the following allocation methods which is/are the better method(s) of allocating these unallocated costs?
I. Establishing one cost pool and allocating the cost based upon square feet.II. Establishing one cost pool and allocating the cost based upon number of employees.III. Establishing two cost pools, one pool for telephones and allocate the cost based upon number of
employees, and the other pool for heat and cleaning and allocate the cost based upon square feet.IV. Establishing two cost pools, one pool for telephones and allocate the cost based upon number of
employees, and the other pool for heat and cleaning and allocate based upon sales rupees.
(a) Only (I) above(b) Both (II) and (III) above(c) Only (III) above(d) Both (II) and (IV) above(e) Both (I) and (IV) above.
(1 mark)
< Answer >
22. Mukherjee Ltd. uses job costing system, has furnished the following cost data for Job No.36:
Particulars Rs.
Direct material 9,00,000
Direct wages 7,50,000
Profit 6,09,000
Selling & distribution overhead 5,25,000
Administrative overhead 4,20,000
Factory overhead 4,50,000
The cost of sales and works cost for job no.36 are
(a) Rs.16,50,000 and Rs.21,00,000 respectively(b) Rs.21,00,000 and Rs.36,54,000 respectively(c) Rs.30,45,000 and Rs.21,00,000 respectively(d) Rs.30,45,000 and Rs.25,20,000 respectively(e) Rs.30,35,000 and Rs.16,50,000 respectively.
(1 mark)
< Answer >
23. Multiple or departmental overhead rates are considered preferable to a single or plant-wide overhead rate when
(a) Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques
(b) Individual cost drivers cannot accurately be determined with respect to cause and effect relationships
(c) Manufacturing is limited to a single product flowing through identical departments in a fixed sequence
(d) Cost drivers, such as direct labor, are the same over all processes(e) The single or plant-wide rate is related to several identified cost drivers.
(1 mark)
< Answer >
24. Balaji Ltd. operates several production processes involving the mixing of ingredients to produce bulk 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 December 31, 2005:
Cost incurred: Rs.
Transferred from process 1 1,87,704Raw materials 47,972Conversion costs 63,176Opening work-in-process 3,009
Transferred from process 1 1,12,000Completed output 1,05,400Closing work-in-process 1,600 (Material – 100% complete Conversion – 75% complete)
Normal wastage of materials (on 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%, 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.2,96,021 and Rs.4,212 respectively(c) Rs.2,96,273 and Rs.4,295 respectively(d) Rs.2,96,021 and Rs.4,259 respectively(e) Rs.2,96,273 and Rs.4,259 respectively.
(2 marks)
< Answer >
25. The total production cost for making 20,000 units was Rs.21,000 and the total production cost for making 50,000 units was Rs.34,000. Once production exceeds 25,000 units, additional fixed costs of Rs.4,000 are incurred. The full production cost per unit for making 30,000 units is
26. DKM Ltd. is operating at 70% capacity and presents the following information:
Break-even point Rs. 200 croresP/V ratio 40%Margin of safety Rs.50 crores
The management feels that it can operate at 95% capacity level with the following modifications:
(i) Selling price will be reduced by 8%.(ii) Variable cost will be reduced by 5%.(iii) Fixed cost will increase by Rs.20 crores including depreciation on additions but excluding interest
on additional capital.(iv) Additional capital of Rs.50 crores will be needed for capital expenditures and working capital.
The sales needed to earn Rs.10 crores profits over and above the present profit and also to meet 20%
27. Jai Sai Ltd. has furnished the following data pertaining to its process account for the last month:
Opening work-in-process (50% complete) 40,000 units
Started in the last month 2,40,000 units
Closing work-in-process (60% complete) 25,000 units
Materials are added in the beginning of the process. The company uses average method. The equivalent units of production for materials and conversion for the month were
(a) 2,40,000 and 2,50,000 respectively(b) 2,80,000 and 2,70,000 respectively(c) 2,80,000 and 2,80,000 respectively(d) 2,80,000 and 2,50,000 respectively(e) 2,55,000 and 2,55,000 respectively.
(1 mark)
< Answer >
28. Hyderabad Transport Ltd. has been given a route of 20 km. long to run a bus. The cost of a bus is 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.1,500 per month and the conductor’s salary will be Rs.1,000 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.3,500 per month.
Petrol and oil will be Rs.250 per 100 km. The bus will make 3 round trips carrying on an 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.
29. A certain chemical process yields 75% of material introduced as main product, 20% as by-product and 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 3:1.
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.2,700. Wastages realized Rs.300.
30. A, B and C are the main products and M is the by-product of a company, where A is a liquid and B is a gas and C is a solid. If product A and product B are further processed before being in a saleable state and product C is sold without further processing, then which of the following is the most appropriate basis for apportionment of costs of M to joint products A, B and C?
< Answer >
(a) Physical units(b) Sales value at separation point(c) Notional sales value at separation point(d) Standard sales value at separation point(e) Sales value after further processing cost.
(1 mark)
31. Shiladitya Ltd., using process costing, manufactures a single product, which passes through two processes – process 1 and process 2, the output of process 1 becoming the input of process 2. The company has furnished the following information relating to the product for the month of December 2005:
i) Raw material issued to process 1 was 3,000 units at a cost of Rs.5 per unit.ii) There was no opening or closing work-in-progress but opening and closing stocks of finished
goods were Rs.20,000 and Rs.23,000 respectively.iii) Normal losses and abnormal losses are defective units having a scrap value and cash is received at
the end of the period for all such units.
Other information:
Particulars Process 1 Process 2Normal loss as a percentage of input 10% 5%Output in units 2,800 2,600Scrap value per unit (Rs.) 2 5Additional components introduced (Rs.) 1,000 780Direct wages incurred (Rs.) 4,000 6,000Direct expenses incurred (Rs.) 10,000 14,000Production overhead as a % of direct wages 75 125
The cost of goods sold of the product for the month of December 2005 is
32. Binny Ltd. is planning its advertising campaign for 2005-06 and has prepared the following budget data base on a zero advertising expenditure:
Normal plant capacity : 2,00,000 unitsSales : 1,50,000 unitsVariable manufacturing costs : Rs.15.00 per unitSelling price : Rs.25.00 per unitFixed costs:Manufacturing : Rs.8,00,000Selling and administrative : Rs.7,00,000
An advertising agency claims that an aggressive advertising campaign would enable the company to increase its units sales by 20%. What is the maximum amount that Binny can pay for advertising and obtain an operating profit of Rs.2,00,000?
33. Which of the following statements is true for a firm that uses variable costing?
(a) Product costs include variable selling costs(b) An idle facility variation is calculated(c) The cost of a unit of product changes because of changes in number of units manufactured(d) Profits fluctuate with sales(e) Product costs include variable administrative costs.
< Answer >
(1 mark)
34. The break-even point of a company is 40,000 units and the profit for this year is expected to be Rs.14,00,000. The selling price of the product is Rs.50 per unit and the variable cost is Rs.25. Based on the market feed back three options are available before the management.
Options Selling price reduced by Quantity sold increased byI 5% 10%II 7% 20%III 10% 25%
Based on the profitability considerations the best option is
(a) Only option (I) above(b) Only option (II) above(c) Only option (III) above(d) Both options (I) and (III) above(e) Both options (II) and (III) above.
(2 marks)
< Answer >
35. Which of the following is true with respect to the effect on net profit reported under marginal cost and absorption cost methods due to an increase of Rs.1,000 fixed selling overheads?
(a) Decrease in net profit only where absorption costing is used(b) Decrease in net profit only where marginal costing is used(c) Decrease in net profit equally in both absorption and marginal costing(d) No change in net profit in both absorption and marginal costing(e) Increase in net profit in marginal costing and decrease in net profit in absorption costing.
(1 mark)
< Answer >
36. CVP Ltd. sells a single product at a price of Rs.15 per unit. The product cost details are as follows:
Fixed cost : Rs.7,84,000Variable costs per unit : Rs.8
Due to inflation the variable costs are expected to increase by 10% whereas fixed costs will increase by only 5%. If CVP raised its selling price by 4% the break-even point in units will approximately
(a) Increase by 8.09% (b) Increase by 4.06%(c) Decrease by 4% (d) Decrease by 8% (e) Decrease by 11%.
(1 mark)
< Answer >
37. Piston Manufacturing Ltd. has added a new machine to its fleet of five existing machines. The total cost of purchase and installation of the machine is Rs.7,50,000. The machine has an estimated life of 15 years and is expected to realize Rs.30,000 as scrap at the end of its working life.
Other relevant data are as follows:i. Budgeted working hours is 2,400 based on 8 hours per day for 300 days. This include 400 hours
for plant maintenance.ii. Electricity used by the machine is 12 units per hour at a cost of Rs.2.00 per unit. No current is
drawn during maintenance.iii. The machine requires special oil for heating which is replaced once in every month at a cost of
Rs.2,500 on each occasion.iv. Estimated cost of maintenance of the machine is Rs.500 per week of 6 working days.v. 3 operators control the operations of the entire battery of six machines and the average wages per
person amounts to Rs.450 per week plus 40% fringe benefits.vi. Departmental and general works overheads allocated to the operation during the last year was
Rs.60,000. During the current year it is estimated that there will be an increase of 12.5% of this amount. No incremental overhead is envisaged for the installation of the new machine.
< Answer >
The machine hour rate for recovery of the running cost of the machine is
38. _________________ is relevant for price fixation during recession or when making a buy or make decision.
(a) Differential cost (b) Out of pocket cost(c) Sunk cost (d) Marginal cost (e) Imputed cost.
(1 mark)
< Answer >
39. If the price rises, which of the following methods of valuing stock will give the lowest profit?
(a) LIFO method(b) Replacement cost method(c) FIFO method(d) Simple average method(e) Specific order method.
(1 mark)
< Answer >
40. An accounting system that collects financial and operating data on the basis of underlying nature and extent to the cost drivers is
(a) Direct costing (b) Target costing (c) Activity based costing(d) Variable costing(e) Cycle-time costing.
(1 mark)
< Answer >
41. Which of the following statements is false?
(a) Notional costs are not included while ascertaining costs(b) Administrative expenses is mostly fixed (c) Historical costs are useful solely for estimating costs that lie ahead(d) Abnormal cost is controllable(e) Direct cost is one that can be conveniently identified with and charged to a particular unit of cost.
(1 mark)
< Answer >
42. The cost of electricity required for manufacturing aluminum ingots is an item of
(a) Direct material (b) Direct labor (c) Direct expense(d) Factory overheads(e) Indirect labor.
(1 mark)
< Answer >
43. Which of the following is not true?
(a) Product cost for merchandise is the cost of purchases plus transportation(b) Cost of merchandise sold is called the cost of goods sold.(c) Retailers and wholesalers treat period costs as expenses.(d) Period costs are treated as product costs with service industry firms(e) At the end of the year, inventory on hand is an asset.
(1 mark)
< Answer >
44. The following are the operating results of MNC Ltd., a manufacturing company, for the current year:
Particulars Rs. in lakhSales (40,000 units) 48.00
< Answer >
Less trade discounts 2.40Net sales 45.60Cost of sales:
Direct material 14.40Direct Labour 12.60Factory overheads 6.30Administration expenses 3.60Selling 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 lakh & administration and selling and
distribution expenses are estimated to increase by 8% and 14%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 rateVII. Profit target for the year – Rs.6 lakhThe selling price per unit for the next year is (a) Rs.155.78 (b) Rs.215.79 (c) Rs.288.80 (d) Rs.113.05 (e) Rs.126.14.
(2 marks)
45. The costs which reflect the policies of the top management and result in periodic appropriation are known as
46. Olden Engineering Ltd. manufactures motor engine parts. The factory normally operates 6 days a week on a single eight-hour shift. During the year 2004-05 it is closed on 16 working days for holidays. Equipments are idle for 160 hours for cleaning, oiling, etc. If the overhead amounts to Rs.13,580 and is to be absorbed at a rate per machine hour, what is the overhead absorption rate in the year 2004-05?
(a) Rs.6.74 per hour (b) Rs.6.25 per hour(c) Rs.5.76 per hour (d) Rs.5.16 per hour (e) Rs.6.13 per hour.
(2 marks)
< Answer >
47. In allocating factory service department costs to producing departments, which of the following items would most likely be used as an activity base?
(a) Salary of service department employees(b) Units of electric power consumed(c) Direct materials usage(d) Units of finished goods shipped to customers(e) Units of product sold.
(1 mark)
< Answer >
48. The operating results of Aisani Ltd. for the year 2004-05 were as under:
Product Sales mix (%) P/V ratioA 40 20B 10 6
< Answer >
C 30 12D 20 10
Total sales value of all the products was Rs.80 lakh and fixed costs amount to Rs.10 lakh. The composite P/V ratio is
49. Which of the following best describes the impact of under costing?
(a) This is a goal of all companies that under costing all products allows for larger profit margins(b) Companies will use target pricing to undercuts products(c) Under costing some products will lead to over costing other products, which is acceptable because
it all balances(d) Under costing some products can lead to over costing other products which may become
overpriced and lose market share(e) Companies will use standard pricing to under cost products.
(1 mark)
< Answer >
50. Which of the following is false with regard to the supplementary rate method for accounting of under or over absorption of overheads?
(a) It facilitates the absorption of actual overhead for production(b) The value of stock is distorted under this method(c) The supplementary rate can be determined only after the end of the accounting period(d) It requires a lot of clerical work(e) Correction of costs through supplementary rates is necessary for maintaining data for comparison.
(1 mark)
< Answer >
51. The allocation of costs to a particular cost object allows a firm to analyze all of the following except
(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 which should be purchased or manufactured in-
house.
(1 mark)
< Answer >
52. Apportionment of overhead cost may be defined as
(a) Charge to a cost center of an overhead cost item with no estimation(b) Charge 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)
< Answer >
53. Prasant Ltd. sells three products – A, B and C with the price of Rs.20 per unit. However, A’s variable cost is at 40%, B’s at 50% and C’s at 60%. Fixed costs amount to Rs.18,000. An additional Rs.9,000 need to be spent on advertising to boost sales. Sales mix is 500 units, 1,500 units and 3,000 units for A, B, and C respectively. Sales in rupees for B at breakeven amount to
54. CD Ltd. has furnished the following data for its business: < Answer >
Direct material - Rs.15 per unitDirect labor - Rs. 9 per unitVariable overhead - Rs. 5 per unitFixed overhead - Rs. 4 per unitBudgeted production - 12,000 unitsActual production - 10,000 units
There is no overhead spending variance
Sales - 9,000 unitsSales price - Rs.30 per unit
The value of ending inventory using Absorption Costing is
55. A factory has three production departments – P1, P2 and P3 and 2 service departments – S1 and S2. Budgeted overheads for the next year have been allocated or apportioned by the cost department among the 5 departments. The secondary distribution of service department overheads is pending and the following details are given:
DepartmentOverheads apportioned/allocated
(Rs.)Estimated level of activity
P1 48,000 5,000 labor hours
P2 1,12,000 12,000 machine hours
P3 52,000 6,000 labor hours
Department Overheads apportioned/
allocated (Rs.)
Apportionment of service
department costs
S1 16,000 P1(20%),P2(40%), P3(20%) & S2(20%)
S2 24,000 P1(10%), P2(60%), P3(20%) & S1(10%)
The overhead rate of P1 department after completing the distribution of service department costs is
56. During the month of December 2005, Murphi Ltd. manufactured 5,000 units of product ‘P’ at a cost of Rs.60,000, exclusive of spoilage allocation. The company sold 2,500 units of product ‘P’ during the month. An additional 1,000 units, costing Rs.8,000, were completed to the extent of 50% by December 31, 2005. All units were inspected between the completion of manufacturing and transfer to finished goods inventory. Normal spoilage for the month was Rs.2,000 and abnormal spoilage of Rs.5,000 was also incurred during the month. The portion of total spoilage that should be charged against revenue in the month of December 2005 is
57. An increase in variable costs where selling price and fixed cost remain constant will result in which of the following?
(a) An increase in margin of safety(b) A fall in the sales level at which break even point will occur
< Answer >
(c) A rise in the sales level at which break even point will occur(d) No change in the sales level at which break even point will occur(e) No change in margin of safety.
(1 mark)
58. Shiva Ltd. had 8,000 units of work-in-process inventory in department A on December 01, 2005. These units were 60% complete as to conversion costs. Direct materials are added at the beginning of the process. During the month of December 2005, 34,000 units were started and 36,000 units completed. The company had 6,000 units of work-in-process inventory on December 31, 2005. These units were 80% complete as to conversion costs.
The equivalent production unit of conversion (under weighted average method) exceeds the equivalent production unit of conversion (under FIFO method) by
(a) 4,800 units (b) 6,000 units (c) 3,200 units (d) 8,000 units (e) 5,000 units.
(2 marks)
< Answer >
59. There are 2 warehouses for storing finished goods produced in a factory. Warehouse A is at a distance of 10 km. and warehouse B is at a distance of 15 km. From the factory, a fleet of 6-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.1.35 and Rs.1.20 respectively(b) Rs.1.35 and Rs.1.44 respectively(c) Rs.1.62 and Rs.1.10 respectively(d) Rs.1.62 and Rs.1.44 respectively(e) Rs.1.44 and Rs.1.62 respectively.
(2 marks)
< Answer >
60. A company is operating at 80% capacity and has the following details:
An export order has been received that would utilize half the capacity of the factory. The order has to be taken in full and executed at 10% below the normal domestic prices or rejected totally. By accepting the offer the profitability of the company would be
61. Ananya Petroleum is a small company that acquires crude oil and manufactures three intermediate products - A, B & C, differing only in grade. No opening inventory of finished goods and work-in-process existed on December 01, 2005. The production costs for December 2005 were as follows
< Answer >
(assume separable costs were negligible):
Particulars Rs.
Crude oil acquired and used in production 4,00,000
Direct labor and related costs 2,00,000
Factory overhead 3,00,000
The output and sales for the month of December 2005 were as follows:
Particulars A B C
Number of Barrels produced 300 240 120
Number of Barrels sold 80 150 120
Prices per Barrel sold (Rs.) 3,000 4,000 5,000
If joint costs are apportioned on the basis of relative sales value of output, the cost of closing inventory of product B is
(a) Cash returned to contractee if actual profits on a contract are 20% higher than negotiated amount(b) Cash returned to contractee if actual profits on a contract are 25% higher than negotiated amount(c) Cash withheld by the contractee under the terms of contract when payments of the value certified
are being made(d) Cash withheld by the contractee in order to improve the cash flow of the contractor(e) Payments to the contractor where it is desired to secure his service for a future contract.
(1 mark)
< Answer >
63. Anu Electricity Generation and Distribution Ltd. (AEGDL) has furnished the following information pertaining to the year 2004-05:
Total units generated 20,00,000 kwhOperating labor Rs.5,00,000Repairs and maintenance Rs.5,00,000Lubricants, spares and stores Rs.4,00,000Plant supervision Rs.3,00,000Administrative overheads Rs.2,00,000
Coal consumed per kwh for the year is 5 kg at the rate of Re.1 per kg. Depreciation is charged at the rate of 5% on capital cost of Rs.20,00,000. The total cost per kwh is
64. Harish Ltd. manufactures and sells a special type of radio. The following data are provided by the company for the year 2004-05:
Particulars Rs.Factory overheads 92,000Opening stock of raw materials 30,000Raw materials purchased during the year 4,50,000
< Answer >
Wages paid 2,00,000Wages outstanding 30,000Work-in-progress as on April 01, 2004 12,000Work-in-progress as on March 31, 2005 15,000Closing stock of raw materials 25,000Opening stock of finished goods 60,000Closing stock of finished goods 55,000Carriage inward 10,000Octroi on purchases 1,800Administrative overheads 30,000Selling and distribution overheads 13,000
65. Proful Ltd. manufactures radios, which are sold at Rs.1,600 per unit. The total cost consists of 30% for direct materials, 40% for direct wages and 30% for overheads. An increase in material price by 30% and in wage rates by 10% is expected in the forthcoming year, as a result of which the profit at current selling price may decrease by 40% of the present profit per unit. The current and future profit at present selling price are
(a) Rs.1,207.55 and Rs.724.53 respectively(b) Rs.520.00 and Rs.312.00 respectively(c) Rs.392.45 and Rs.235.47 respectively(d) Rs.235.47 and Rs.392.45 respectively(e) Rs.392.45 and Rs.277.38 respectively.
(2 marks)
< Answer >
66. Radha Ltd. has furnished the following information pertaining to a new product:
i. The fixed costs will be Rs.80,000 for production of 7,500 units or less. If the production is more than 7,500 units, the fixed costs will be Rs.1,20,000.
ii. The variable cost ratio is 60% of the sales for the first 7,500 units and it will be reduced to 50% of sales for units in excess of 7,500 units.
iii. The sale price of the product per unit is Rs.25.
If the company manufactures more than 7,500 units, the break-even units of the new product is
68. Exotica Ltd. manufactures a product, currently utilizing 80% capacity with a turnover of Rs.8,00,000 at Rs.25 per unit. The company has furnished the following cost data:
Material cost - Rs.7.50 per unit; Labor cost - Rs.6.25 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% (b) 50% (c) 40% (d) 31% (e) 25%.
(2 marks)
< Answer >
69. Hotel Sonar Bangla has annual fixed costs applicable to rooms of Rs. 3,75,00,000 for a 300 rooms hotel with average daily room rates of Rs.1,000 and average variable costs of Rs.210 for each room rented. The hotel operates 365 days per year. Income tax rate is 30%. The number of rooms per day the hotel must rent to earn a net income after taxes of Rs.21,00,000 is
70. The average cost per unit is Rs.4 at the volume of sales and production of 3,000 units and the average cost is Rs.3.50 at the sales and production volume of 4,000 units. If the break-even point is 5,000 units, the contribution to sales ratio is
71. CVP Ltd. has a production capacity of 2,00,000 units per year. Normal capacity utilization is reckoned as 90%. The following details are provided by the company:
Standard variable production costs Rs.11 per unit
Fixed production cost per year Rs.3,60,000
Variable selling cost Rs.3 per unit
Fixed selling cost per year Rs.2,70,000
Selling price Rs.20 per unit
Production during the year 1,60,000 units
Sales during the year 1,50,000 units
Closing inventory 20,000 units
The actual variable production costs for the year were Rs.35,000 higher than the standard.
The net profit under absorption costing, by using FIFO method, is
Suggested AnswersManagement Accounting-I (151): January 2006
1. Answer : (e)
Reason : Management accounting is not mandatory. The application of management accounting can be extended beyond the traditional accounting system. It focuses more on the parts or segments of a company and less on a company as a whole. It is not governed by GAAP. It refers to reports prepared to fulfill the needs of management. Therefore, (e) is correct
< TOP >
2. Answer : (c)
Reason : The options in (a), (b), (d) and (e) are valid differences between Financial accounting and Management accounting. Both Financial and Management Accounting rely heavily on the concept of responsibility. Financial accounting is concerned with the concept of responsibility or stewardship over the company as a whole; while Management accounting is concerned with stewardship over its parts; and this concern extends to the last person in the organization who has, any responsibility over cost.
< TOP >
3. Answer : (b)
Reason : The costs having clear relationship to output are known as engineered costs. Direct material cost is an example of engineered costs.
< TOP >
4. Answer : (c)
Reason : A discretionary cost is characterized by uncertainty about the relationship of input (the cost) to output. It also tends to the subject of a periodic decision regarding the outlay to be made. Research, Advertisement and Public Relation are common examples. Thus the annual cost of plant service is discretionary because of the difficulty of valuing the output. Other options are not correct.
< TOP >
5. Answer : (b)
Reason : Under periodic cost accumulation system, the cost of goods manufactures is equal to cost of goods put into production plus beginning work-in-process less ending work-in-process. Therefore (b) is correct. Other options are not correct.
< TOP >
6. Answer : (c)
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, ( c) is correct.
< TOP >
7. Answer : (a)
Reason : The manager wants to control and reduce 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. A knowledge of cost behavior is useful because it helps managers forecast (plan) results under different activity levels.
< TOP >
8. Answer : (d)
Reason : Product engineering is related to development of the product line. Therefore, product engineering is considered to be as product-level cost.
< TOP >
9. Answer: (c)
Reason: Statement showing calculation of the amount of under-absorption of production overheads
Actual production overhead incurred 6,00,000
Less: (i) Obsolete stores written off during the year (ii) Wages paid for the strike period under an award
45,00030,000
75,000
Net actual production overhead incurred 5,25,000
Production overheads absorbed (48,000 machine hours× Rs. 10 per M.H)
4,80,000
Under absorbed production overheads 45,000
Particulars Rs.1. Due to lack of production planning (33 1/3 %) 15,0002. Balance to be distributed to WIP, finished goods & cost of sales by using supplementary rate (66 2/3 %)
30,000
Total 45,000Computation of equivalent units
WIP (8,000 units × 50%) 4,000Finished goods (20,000 – 18,000) 2,000Cost of sales 18,000
Total 24,000
Supplementary rate for absorption of under absorbed production overheads =
Under absorbed overhead / No. of equivalent units = Rs.30,000/24,000 units = Rs.1.25 per unit.
< TOP >
10.
Answer : (e)
Reason : When manufacturing expenses are recovered on a proper basis, the journal entry is debit working process account, credit manufacturing overhead control account. Other options given on (a), (b), (c), (d) are not correct
Therefore (e) is the answer.
< TOP >
11.
Answer : (d)
Reason : Overhead absorption rate per rupee labor cost =
Rs.3,00,000 / [(200 x Rs.75) + (300 x Rs.50) + (500 x Rs.40)
= Rs.3,00,000 ¸ Rs. 50,000 = Rs. 6.
Overhead applied:
[(300 x Rs.75) + (350 x 50) + (400 x 40)] x 6
= (Rs. 22,500 + Rs. 17,500 + 16,000) x 6
= Rs.56,000 x Rs.6 = Rs.3,36,000
Over applied overhead: Rs.3,36,000 – Rs.3,19,000 = Rs.17,000.
< TOP >
12.
Answer : (c)
Reason :
Particulars Rs. in lakhs
< TOP >
Cost of goods sold 56,000Add: Closing stock of fin. Goods 19,000
75,000
Less: Opening stock of fin goods 17,60057,400
Add Closing stock of WIP 14,50071,900
Less: Opening stock of WIP 10,500Works cost 61,400Less: Factory overheads 10,000Prime cost 51,400Less: Direct labor 17,500Raw material consumed 33,900Add closing stock of raw material 10,600
44,500
Less: opening stock of raw material 8,000Raw material purchased 36,500
13.
Answer : (c)
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
Amount chargeable to J2: (Rs.2,24,300 ÷ Rs. 5,67,515) × Rs.23,685 = Rs.9,361 debited to finished goods.
< TOP >
14.
Answer : (d)
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%
< TOP >
15.
Answer : (d)
Reason : Computation of hourly rate for standing charges:
Expenses Workings Rs.Standing charges:
Rent, heat and light (Rs.70,000 ÷ 70,000)× 2,500 2,500
Supervision Rs.1,30,000 ÷ 26 5,000
Depreciation 10% of Rs.2,30,000 23,000
< TOP >
Reserve equipment cost Rs.1,500 ÷ 26 58
Labor cost during settingand adjustment
200 hours × Rs.6 1,200
Hourly rate for standing charges Rs.31,758 ÷ 1,800 31,758
16.
Answer : (c)
Reason : Normal working hours for the year = 48 wks ´ 42 hrs ´ 14 machines
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.
< TOP >
18.
Answer : (c)
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.
< TOP >
19.
Answer: (a)
Reason: Material handling charges per unit of X = Rs.12,000 ¸ [(50 ´ Rs. 100) + (150 ´ Rs. 230)] =
Rs. 12,000 ¸ Rs. 39,500 = 0.3038;
Rs.100 ´ 0.3038 = Rs.30.38 around Rs.30.
< TOP >
20.
Answer: (e)
Reason: Cost to be Allocated ¸ Cost Driver = Allocation Rate
= Rs.81,400 ¸ 74 = Rs.1,100
Allocation Rate ´ Cost Driver = Allocated Cost
= Rs.1,100 ´ 20 employees = Rs.22,000.
< TOP >
21.
Answer: (c)
Reason: The goal of using cost pools is to minimize the allocation effort. However, it is also desirable to have the pools reflect the incurrence of the costs. The heat and cleaning cost are probably more related to square feet than they are to number of employee and sales rupees. Therefore (c) is correct.
< TOP >
22.
Answer : (c)
Reason :
Particulars Rs.Direct material 9,00,000
< TOP >
Direct wages 7,50,000Prime cost 16,50,000Factory overhead (60% on direct wages) 4,50,000Works cost 21,00,000Administrative overhead (20% on works cost) 4,20,000Cost of production 25,20,000Selling & distribution overhead (25% on works cost)
5,25,000
Cost of sales 30,45,000Profit (16.67% on sales or 20% on cost of sales) 6,09,000Sales value 36,54,000
23.
Answer : (a)
Reason : Multiple rates are appropriate when a process differs substantially among departments or when products do not go through all departments or all processes. The trend in cost accounting is towards activity based costing, which divides production into numerous activities and identifies the cost driver(s) most relevant to each. The result is a more accurate tracing of costs. Other options are not correct.
< TOP >
24.
Answer : (e)
Reason :
Input units Units Materials Conversion
OpeningWIP
1,200 Opening 1,200 – – 50% 600
Fromprocess 1
1,12,000 Process 1 1,04,200 100% 1,04,200 100% 1,04,200
Normalloss
5,600 – – – –
AbnormalLoss
600 100% 600 – –
ClosingWIP
1,600 100% 1,600 75% 1,200
1,13,200 1,13,200 1,06,400 1,06,000
Particulars Rs.Materials – From Process 1 1,87,704
Process 2 47,9722,35,676
Equivalent units 1,06,400Cost per unit 2.215Conversion cost 63,176Equivalent units 1,06,000Cost per unit 0.596
Scrap realized (Rs.300) 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
< TOP >
30.
Answer : (c)
Reason : If the cost of the by-product is apportioned to joint products, it is made at notional sales value at separation point. Other options are not appropriate for apportionment of by-product to joint products.
< TOP >
31.
Answer : (b)
Reason : Normal loss in process 1 = 10% of 3,000 = 300Output in process 1 = 2,800 units and raw material issued in process 1
= 3,000unitsAbnormal gain = 300 + 2,800 – 3,000 = 100 unitsTotal cost in process 1= 3,000 ´ Rs.5 + Rs.1,000 + Rs.4,000 + Rs.10,000 + 75% of Rs.4,000 = Rs.33,000Net cost = Total cost – Realizable value of normal loss
= Rs.33,000 – 300 ´ Rs.2 = Rs.32,400Number of good units = 3,000 – 300 = 2,700Cost per unit = Rs.32,400 ÷ 2,700 = Rs.12Cost of input in process 2 = 2,800 ´ Rs.12 = Rs.33,600Total cost of process 2 = Rs.33,600 + Rs.780 + Rs.6,000 + Rs.14,000 + 125% of Rs.6,000 = Rs.61,880Total input = 2,800 units, Finished goods = 2,600 units, Normal loss = 140 units & Abnormal loss = 60 (balancing fig.)Cost per good unit =(Rs.61,880 – 140 x Rs.5) ÷ (2,600 units + 60units) = Rs. 61,180 ÷ 2,660 unit = Rs.23Cost of finished goods in process = 2,600 ´ Rs.23 = Rs.59,800
Cost of goods sold = Rs.59,800 + Rs.20,000 (op.fin.goods) – Rs.23,000 (cl.fin.goods)
= Rs.Rs.56,800
< TOP >
32.
Answer : (a)
Reason: Contribution per unit = Rs.25 – Rs.15 = Rs.10;
Number of units = 1,50,000 ´ 1.20 = 1,80,000;
Total contribution – fixed cost – Desired profit = Advertisement
Reason : In a variable costing system, only the variable manufacturing costs are recorded as product costs. All fixed manufacturing costs are expensed in the period incurred. Because changes in the relationship between production levels and sales level do not cause changes in the amount of fixed manufacturing costs expensed, profits more directly follow the trends in sales. Other options are not correct.
Options I II IIISelling price (Rs.) 47.50 46.50 45.00Less: Variable cost per unit (Rs.) 25.00 25.00 25.00Contribution/ units (Rs.) 22.50 21.50 20.00Revised quantity to be sold (Units) 1,05,600 1,15,200 1,20,000Total contribution (Rs.) 23,76,000 24,76,800 24,00,000
Based on the profitability consideration , option II is the best.
35.
Answer : (c)
Reason : An increase of Rs.1,000 in fixed selling overheads will decrease net profit equally in both absorption and marginal costing. Therefore, (c) is correct.
< TOP >
36.
Answer : (a)
Reason : Breakeven point = Fixed cost ÷ (Selling price – Unit Variable Cost)
= Rs.7,84,000 ÷ (Rs.15 – Rs.8)
= Rs.7,84,000÷ Rs.7 = 1,12,000 units
After inflation, breakeven point = Rs.7,84,000(1.05) ÷ [Rs.15(1.04) – Rs.8(1.10)]
= Rs.8,23,200 ÷ (Rs.15.60 – Rs.8.80)
= Rs.8,23,200 ÷ Rs.6.80 = 1,21,059 units
So the breakeven point will increase by 1,21,059 – 1,12,000 = 9,059 units
Reason : Out of pocket cost is that portion of the cost which involves payment to outsiders, i.e. gives rise to cash expenditure as opposed to such costs as depreciation , which do not involve any outflow of cash. Out of pocket cost are relevant for price fixation during recession or when making a buy or make decision.
< TOP >
39.
Answer : (a)
Reason : Under LIFO method, profit will be less, because the recent purchase of materials with high price are issued to production and old low prices are used to value of closing stock result in high cost of production and low profit. Other options are not correct.
< TOP >
40.
Answer : (c)
Reason : An activity based costing system identifies the casual relationship between the incurrence of cost and underlying activities that cause those cost. Under this system, costs are applied to products on the basis of resources consumed (drivers). Therefore, (c) is correct. Other options are not correct.
< TOP >
41.
Answer : (a)
Reason : Notional costs should be included while ascertaining costs. This statement (a) is false. Other options given (b), (c), (d) and (e) are all correct.
< TOP >
42.
Answer : (c)
Reason : In manufacturing aluminum ingots, the cost of electricity, which is required for processing, is an item of direct expense. It is not to be treated as direct material, direct wages, factory overheads and indirect labor. Therefore, (c) is correct.
< TOP >
43.
Answer : (c)
Reason : Option (c) is not true because wholesaler’s and manufacturers treat period costs as a deferred revenue expenditure and they amortize this expenditure over a few years.
< TOP >
44.
Answer: (e)
Reason: Budgeted operating income statement of MNCLtd.
Rs. in lakhParticulars Amount
Sales (40,000 x 1.25 = 50,000 units) x Rs.120 60.00
Less trade discount (5%) 3.00
< TOP >
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 15.578Net income (indicated) 3.082
Reason : Certain decisions reflect the policies of the top management which results in periodic appropriation and these costs are referred to as programmed cost.
Imputed costs are costs not actually incurred in some transactions but which are relevant to the decisions as they pertain to a particular situation.
Relevant costs are those future costs which differ between alternatives. It is defined as the costs which are affected and changed by a decision.
Committed costs are incurred to maintain the company’s facilities and physical existence, and over which management has little or no discretion.
Discretionary costs are these costs which are not essential for the decision under consideration or the accomplishment of management objectives but it is related to management programs, new researches etc.
< TOP >
46.
Answer: (e)
Reason:
Maximum capacity = Total days in 2004-05× Single eight-hour shift= 365 × 8
Less: Idle capacity
< TOP >
Sundays = 52 × 8 = 416 hrs
Holidays = 16 × 8 = 128 hrs
Stoppage due to cleaning, oiling, etc
= 160 hrs
Normal capacity
Overhead absorption rate = Overhead amount ÷ Normal capacity
Rs. 13,580 ÷ 2,216 Rs. 6.13 per hr
47.
Answer : (b)
Reason : Service department costs are considered part of factory overhead and should be allocated to the production department that use the services. A basis reflecting causes and effect should be used to allocate service department costs. Units of electric power consumed i.e., the number of kilowatt hours used by each producing department is probably the best allocation base for electricity base.
Option (a) is not correct because salary of service department employees is the cost allocated not a basis Option (c) is incorrect because making allocation on the basis of material usage may not meet the cause-and-effect criterion. Option (d) and (e) are incorrect because making allocation on the basis of goods shipped and units sold may not meet the cause-and-effect criterion.
< TOP >
48.
Answer : (b)
Reason :
Product Sales Mix Sales(Rs. Lakh)
Contribution(Rs. Lakh)
A 40 32 6.40B 10 8 0.48C 30 24 2.88D 20 16 1.60
Total 11.36
PV ratio = =
< TOP >
49.
Answer: (d)
Reason: Under costing some products can lead to over costing other products which may become overpriced and lose market share. The use of company-wide allocation rates can result in under costing and over costing products that can lead to inappropriate management decisions.
< TOP >
50.
Answer : (b)
Reason : The value of stock is not distorted under this method. Hence the answer is (b). The supplementary rate method facilitates the absorption of actual overhead incurred for production. The supplementary rate can be determined only after the end of the accounting period. It requires a lot of clerical work. Correction of costs through supplementary rates is necessary for maintaining data for comparison.
< TOP >
51.
Answer : (d)
Reason : Allocation of costs is a distribution of costs that cannot be directly assigned to the cost objects that are assumed to have caused them. An allocation of costs does not enable a company to determine why the
< TOP >
sales of a particular product have increased. Many factors affect consumer demand such as advertising, consumer confidence, availability of substitutes and changes in tastes. Cost allocation is an internal matter that does not affect demand except to the extent it results in a change in price.
52.
Answer : (b)
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. There fore (b) is correct.
< TOP >
53.
Answer: (a)
Reason: Sales mix of products A:B:C= 1:3:6 or 10% of A, 30% of B and 60% of CTotal contribution of the sales mix= Proportionate contribution of A + Proportionate contribution of B + Proportionate contribution of C= 10% of Rs.12 + 30% of Rs.10 + 60% of Rs.8 = Rs.9.Break-even sales units = (Rs.18,000 + Rs.9,000) ÷ Rs.9 = 3,000 units.Break-even sales units of product B = 30% of 3,000 = 900units.
Break-even sales of product B = 900 ´ Rs.20 = Rs.18,000.
< TOP >
54.
Answer : (d)
Reason : Total fixed overhead = 12,000 units x Rs.4.00 = Rs.48,000.
Rs.48,000 actual overhead ÷ 10,000 units actual production = Rs.4.80.
(10,000 units produced - 9,000 units sold) = Rs.33,800.
< TOP >
55.
Answer : (c)
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;
Or, x (1 – 0.02) = 18,400, or, x = 18,400 ÷ 0.98 = 18,775, then y = 27,755;
Statement of secondary distribution:
Particulars P1 (Rs.) P2 (Rs.) P3 (Rs.) Total (Rs.)Direct allocation 48,000 1,12,000 52,000 2,12,000S1 (80% of 18,775) 3,755 7,510 3,755 15,020S2 (90% of Rs.27,755) 2,776 16,653 5,551 24,980 Total 54,531 1,36,163 61,306 2,52,000Budgeted machine hours 5,000 12,000 6,000
< TOP >
Overhead rate per machine hour 10.91 11.35 10.22
56.
Answer : (b)
Reason : Normal spoilage is an inventoriable cost of production that is charged to cost of goods sold when the units are sold. Abnormal spoilage is a period cost recognized when incurred. Rs.5,000 of abnormal spoilage is therefore expensed during the month of December, 2005. In addition 50% of the normal spoilage is debited to cost of goods sold because 50% (2,500 ¸ 5,000) of the units completed were sold during the month. No spoilage is allocated to work-in-process because inspection occurs after completion.
Therefore, normal spoilage = 50% of Rs.2,000 = Rs.1,000
Total spoilage charged against revenue = Rs.5,000 + Rs.1,000
= Rs.6,000
< TOP >
57.
Answer : (c)
Reason : If variable cost increases, contribution per unit decreases, break-even point will be increased, provided sales price per unit and fixed cost remain same. Other options given in (a),(b), (d) and (e) are not correct.
< TOP >
58.
Answer : (a)
Reason : Weighted Average Method:
Input = 8,000 units + 34,000 units = 42,000 units;
Out put = 36,000 units + 6,000 units = 42,000 units;
Equivalent production units of conversion =
100% of 36,000 + 80% of 6,000 = 36,000 + 4,800 = 40,800 units;
FIFO Method:
Input = 8,000 units + 34,000 units = 42,000 units;
Out put = 8,000 units + 28,000 units + 6,000 units = 42,000 units;
Equivalent production units of conversion =
40% of 8,000 units + 100% of 28,000 units + 80% of 6,000 =
= 3,200 + 28,000 + 4,800 = 36,000 units.
Excess equivalent units of production of conversion =
40,800 units – 36,000 units = 4,800 units.
< TOP >
59.
Answer : (a)
Reason : Statement showing operating time:
Particulars Warehouse A (Minutes)
Warehouse B (minutes)
Distance from factory 10 km. (Speed 30km per hour or 1 km in 2 minutes)Trip up and down journey 40 (2 ´ 20) 60 (3×20)
Loading 40 40
Unloading 30 20
Total 110 min. 120 or 2 hrs
Statement showing operating cost per ton km.
Particulars Warehouse A Warehouse B
< TOP >
(6 ´ 10 = 60 ton km.) (6 ´ 15 = 90 ton km.)Standingcharges
110 mts ´ Rs.18 per hr. = Rs.33
2 hrs ´ Rs.18 per hr. = Rs. 36
Operatingcharges
20 km. ´ Rs.2.40 per km.= Rs.48
30 km ´ Rs.2.40 per km.= Rs. 72
Totaloperating cost
= Rs.81 = Rs.108
Cost per ton km. Rs.81 ÷ 60 = Rs.1.35 Rs.108 ÷ 90 = Rs.1.20.
Share of joint costs of Product B = (Rs.9,00,000 ÷ Rs24,60,000) ´ Rs.9,60,000
= Rs.3,51,219.45
The cost of closing inventory of Product B = (Rs.3,51,219.45 ÷ 240) ´ 90
= Rs.1,31,707
< TOP >
62.
Answer : (c)
Reason : Under the terms of the contract, if contractee retains cash at the time of payments of the value certified of work-in-progress, it is called Retention money. Other options are not correct.
< TOP >
63.
Answer : (c)
Reason : Operating cost sheet for the year 2004-05:
Cost of Work-in-Process 8,00,800Less: Closing work-in-process 15,000
Cost of goods manufactured 7,85,800
65.
Answer : (c)
Reason : Let ‘x’ be the cost, ‘y’ be the profit and Rs.1,600 selling price per unit of radio.
Hence, x + y = 1,600 -------------- (i)
Statement of present and future cost of a radio
Particulars
Present cost(Rs.)(a)
Increase in cost(Rs.)(b)
Anticipated cost(Rs.)
(c) = (a) + (b)
Direct material 0.3x 0.09x 0.39xDirect labor 0.4x 0.04x 0.44xOverheads 0.3x – 0.30xTotal x 0.13x 1.13x
An increase in material price, and wage rates resulted into a decrease in current profit by 40% at present selling price; therefore we have:
1.13x + 0.6y = 1,600 --------------- (ii)
On solving (i) and (ii), we get:
x = Rs.1,207.55
y = Rs. 392.45
Current profit Rs.392.45 or 32.5% of cost
Future profit = Rs. 392.45 ´ 0.6 = Rs.235.47.
< TOP >
66.
Answer : (b)
Reason : BEP =
Up to the product of 7,500 units
BEP = = = 8,000 units.
At any production level greater than 7,500 units, total fixed costs are Rs.1,20,000 but there are two contribution margin. The first 7,500 units sold will produce a contribution margin of Rs.75,000 (i.e. 7,500 ´ Rs.10). Hence, the other Rs.45,000 (i.e. Rs.1,20,000 – Rs.75,000) must be contributed. The contribution per unit is Rs.12.50 (i.e. Rs.25 – 50%
< TOP >
of Rs.25)
Therefore, BEP = Rs.45,000 ¸ Rs.12.50 = 3,600 units.
Therefore, Total BEP = 7,500 units + 3,600 units = 11,100 units.
Sale price per unit = Rs.16,000 ÷ 5,000 = Rs.3.20 ;
Contribution to sales ratio = (Rs.3.20 – Rs.2) ÷ Rs.3.20 = 0.375 or 37.5%
71.
Answer : (d)
Reason : Fixed production cost per unit = Rs.3,60,000 /1,80,000 = Rs.2
Profit Statement for the Year (Under Absorption Costing Method)
ParticularsAmount
(Rs.)
Totalamount
(Rs.)
A Sales revenue 1,50,000 ´ Rs.20 30,00,000
B Cost of production
Variable production cost 1,60,000 ´ Rs.11 17,60,000
Increase in variable cost 35,000
Fixed cost 3,60,000
21,55,000
Opening stock 10,000 ´ Rs.13 (Working Note 1)
1,30,000
22,85,000
Less: Closing stock 20,000 units (W N 2) 2,69,375
20,15,625
C. Gross profit (A-B) 9,84,375
D. Selling expenses
Variable (1,50,000 ´ Rs.3) 4,50,000
Fixed 2,70,000 7,20,000
E. Net profit (C– D) 2,64,375
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.21,55,000
Cost of 20,000 units = Rs.21,55,000 ÷ 1,60,000 ´ 20,000 = Rs.2,69,375.
