Management Accounting

Management Accounting (MB161): July 2005

• Answer all questions.

• Marks are indicated against each question.

1. Which of the following statements is/are true?

I. The reporting entities of management accounting are segments of the organization rather

than the

organization as a whole.

II. In order to provide data necessary for management accounting functions, two accounting

information systems are maintained; one for financial accounting and one for management

accounting.

III. Manufacturing costs are often divided into four broad categories: Direct materials, Direct

labor,

Manufacturing overheads and Administrative and Selling & Distribution overheads.

(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)

< Answer >


I. Activity-based costing (ABC) entails developing cost pools and determining the most

appropriate

cost driver with which to apply the costs to production.

II. ABC may lead to adjustments in the selling prices of products.

III. Under ABC, the Manufacturing Overhead account will usually have an under applied

balance at

the end of the accounting period.



(e) Both (II) and (III) above.

(1 mark)

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I. The monthly rent expense on a manufacturing facility is a conversion cost.

II. The work-in-process inventory is composed of conversion costs and prime costs.

III. If the value of the beginning work-in-process and the ending work-in-process are equal,

the cost of

goods manufactured will be equal to total manufacturing costs.


(c) Only (III) above (d) Both (I) and (III) above (e) All (I), (II) and (III) above.

(1 mark)

< Answer >

4. A cost that can be substantially influenced by a manager is often referred to as which of

the following?

(a) Sunk cost (b) Direct cost (c) Opportunity cost

(d) Controllable cost (e) Indirect cost.

(1 mark)

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5. Which of the following is a period cost?

I. Research and development costs.

II. Direct labor cost.

III. Direct material cost.

IV. Indirect material cost.

(a) Only (I) above (b) Both (II) and (III) above

(c) Only (III) above (d) Only (IV) above

(e) Both (I) and (III) above.

(1 mark)

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6. Which of the following functions can be related to the treasurer of an organization?

(a) Planning and control (b) Tax administration

< Answer >

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(c) Protection of assets (d) Credits and collections

(e) Economic appraisal.

(1 mark)

7. For a department, the standard overhead rate is Rs.5 per hour and overhead allowances

are as follows:

Activity level

(hours)

Budgeted overhead

allowances (Rs.)

6,000 20,000

14,000 36,000

22,000 52,000

The normal capacity level on the basis of which the standard overhead rate has been

worked out is

(a) 3,667 hours (b) 2,667 hours (c) 4,000 hours (d) 2,000 hours (e) 5,000 hours.

(1 mark)

< Answer >

8. ABC 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 June 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 June 2005 is as under:

Production:

Finished goods 20,000 units

Work-in-progress (50% complete in all respects) 8,000 units

Sales 18,000 units

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)

< Answer >

9. Arindum Manufacturing Co. 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 realise 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 15 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.

The machine hour rate for recovery of the running cost of the machine is

(a) Rs.95.00 (b) Rs.92.75 (c) Rs.96.50 (d) Rs.84.16 (e) Rs.88.92.

(2 marks)

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10. The following are the operating results of MNC 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

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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 percent

II. Material price to increase by 15 percent

III. Direct wages to increase by 12 percent

IV. Overhead- Factory overheads will be limited to Rs.6.56 lakh & administration and selling

and

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


(2 marks)

11. 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.13,850 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.5.14 per hour (e) Rs.7.00 per hour.

(2 marks)

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12. Canman Ltd. uses a process costing system. Products are manufactured in a series of

three departments.

The following data relate to Department 2 for the month of June 2005:

Beginning work-in-progress

(70% complete in respect of materials, labour and overhead)

15,000 units

Goods introduced 1,20,000 units

Ending work-in-progress

(60% complete in respect of materials, labour and overhead)

7,500 units

The beginning work in progress was valued at Rs.99,000 consisting of Rs.30,000 of

transferred in costs,

Rs.45,000 of materials costs and Rs.24,000 of conversion costs. Materials are added at the

beginning of

the process; conversion costs are added evenly throughout the process. Costs added to

production

during the month are as follows:

Transferred in Rs.24,000

Materials used Rs.1,32,000

Conversion costs Rs.75,000

All preliminary and final calculations are rounded to two decimal places.

Under the weighted average method, how much conversion cost did Canman Ltd. transfer

out of

Department 2 during the month?

(a) Rs.92,250 (b) Rs.95,625 (c) Rs.99,000 (d) Rs.96,222 (e) Rs.1,00,256.

(2 marks)

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13. Sumika Sintex Ltd. has the following beginning and ending inventories for the month of

June 2005:

Particulars June 1 (Rs.) June 30 (Rs)

Direct materials 1,00,500 90,000

Work-in-process 2,17,500 2,55,000

Finished goods 1,27,500 1,05,000

Production data for the month are as follows:

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Purchase returns 3,300

The company uses factory overhead control account and charges factory overhead to

production at 70%

of direct labour cost. The company does not formally recognize over or under applied

overhead until

year end. What is the prime cost for the month of June 2005?

(a) Rs.6,12,750 (b) Rs.4,30,500 (c) Rs.8,13,150 (d) Rs.6,08,850 (e) Rs.5,98,950.

(2 marks)

14. Which of the following accounts is not a control account in a job order costing system?

(a) Finished Goods Inventory (b) Materials Inventory

(c) Work in Process Inventory (d) Direct Labor

(e) Manufacturing Overhead.

(1 mark)

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15. Poulo Transport Ltd. is running 4 buses between two towns, which are 50 km apart.

Seating capacity of

each bus is 40 passengers. The following particulars are obtained from the records for the

month of

June 2005

Particulars Rs.

i. Wages of drivers, conductors and cleaners 24,000

ii. Salaries of office and supervisory staff 10,000

iii. Diesel oil and other oil 40,000

iv. Repairs and maintenance 8,000

v. Taxes, insurance etc. 16,000

vi. Depreciation 26,000

vii. Interest and other charges 20,000

Total 1,44,000

The seating capacity utilized was 75%. All the four buses ran on all days of the month. Each

bus had

made one round trip daily.

The cost per passenger km is

(a) Re. 0.80 (b) Re. 0.60 (c) Re. 0.40 (d) Re. 0.50 (e) Re. 0.20.

(1 mark)

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16. DKM Chemicals manufactures three products in one common process but each product

is capable of

being further processed separately after the split off point. The company has furnished the

following

estimated cost of the three products:

Particulars Product

A

Product

B

Product

C

Selling price per litre at split-off-point (Rs.) 12 16 18

Selling price per litre after further processing (Rs.) 20 40 60

Post separation point costs (Rs.) 40,000 20,000 45,000

Output in litres 3,500 2,500 2,000

Pre-separation joint costs are estimated to Rs.80,000 and it is the practice of the company

to apportion

the joint costs to the products on the basis of output

If the three products are processed further, the estimated profit/(loss) for each product is

Product A (Rs.) Product B (Rs.) Product C (Rs.)

(a) 5,000 50,000 55,000

(b) (5,000) 50,000 55,000

(c) (5,000) 55,000 55,000

(d) 5,000 40,000 60,000

(e) 5,000 50,000 50,000.

(2 marks)

< Answer >

17. Progressive Ltd. makes a special assemblies to customers orders and uses job costing.

The company has

furnished the following information pertaining to various jobs for a period:

Particulars Job-A21 Job-B09 Job-C14

(Rs.) (Rs.) (Rs.)

Opening Work-in-process 13,400 21,390 -

Material introduced 8,640 - 9,250

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Material introduced 8,640 - 9,250

Labor 7,250 1,750 12,300

The budgeted overheads for the period are Rs.63,900. The company absorbs overheads

based on labor

costs

The overhead costs to be absorbed to job C14 for the period are

(a) Rs.40,000 (b) Rs.36,900 (c) Rs.27,750 (d) Rs.21,750 (e) Rs.5,250.

(1 mark)

18. 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)

< Answer >

19. The following particulars are provided by Raheja Constructions Ltd.:

Particulars Rs.

Total expenditure to date 1,70,000

Estimated further expenditure to complete the contract (including

contingencies)

34,000

Contract price 3,06,000

Work certified 2,00,000

Work not certified 17,000

Cash received 1,63,200

The estimated profit on the contract (which has been 70% complete) is


(1 mark)

< Answer >

20. Watex Ltd. a chemical manufacturers, has furnished the following information relating to

Process 1:

Opening Work-in-process 3,500 litres (Completion of :

Materials – 100%

Conversion – 40%)

Materials introduced 36,000 litres

Normal loss 10% of material introduced

Output transferred to Process 2 29,250 litres

Closing Work-in-process 4,500 litres (Completion of :

Materials – 100%

Conversion – 45%)

The equivalent units of production of materials and conversion, under FIFO method, are

Materials Conversion

(a) 33,450 30,975

(b) 31,350 28,875

(c) 32,400 32,025

(d) 31,350 32,375

(e) 26,850 28,950.

(2 marks)

< Answer >

21. AB Ltd. manufactures product XL 101 in batches of 100 units by a series of operations in

the

Fabrication and Assembly department of a factory. The following details relate to 42 batches

manufactured by the firm during the month of June 2005:

Fabrication dept:

Materials: Issued 2,420 kg. of an alloy costing Rs.25 per kg., 200 kg. were returned at the

end of the

month. Off-cuts and scrap fetched Rs.500.

Labour: Normal rate of wages is Rs.15 per hour. Time office recorded 2,460 hours for June

2005.

This included 240 hours overtime work paid at double the normal rate.

< Answer >

6

Assembly department:

Materials: Cost of components used Rs.57,900

Labour: Workers are paid at a piecework rate of Rs.4 per unit for production up to 3,000

units. For

production over 3,000 units and up to 4,000 units, the rate is 25% more and for production

over 4000 units, the rate is 50% more. During the month of June 2005, there was a

stoppage of production for 10 hrs. Due to machine breakdown and for this stoppage ten

workers in the department were paid wages at time rate of Rs.15 per hour.

The average prime cost per unit of XL101 manufactured during June 2005 was


(2 marks)

22. Operating income can be determined by multiplying the contribution margin ratio by

what other factor?

(a) Unit contribution margin (b) Margin of safety

(c) Variable costs per unit (d) Unit sales price (e) Change in sales volume.

(1 mark)

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23. 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 which 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


(2 marks)

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I. The marginal cost of producing one additional unit of product will be equal to the average

cost per

unit of all the units produced prior to producing the additional unit, if more than one unit has

been

produced.

II. A product-costing system is of little value in financial accounting.

III. Hospitals would have little need for a product-costing system.

IV. A product-costing system accumulates the costs of a production process and assigns

them to the

products that comprise the organization’s output.

(a) Only (I) above (b) Only (IV) above

(c) Both (III) and (IV) above (d) (I), (II) and (IV) above

(e) Both (II) and (IV) above.

(1 mark)

< Answer >

25. The current sales price of a company is Rs.80 per unit. Variable costs are expected to

increase from

Rs.65.00 to Rs.67.50 per unit. Fixed costs of Rs.3,00,000 will not change. How many

additional sales

units are required in order to maintain an operating income of Rs.3,60,000?

(a) 8,000 (b) 8,800 (c) 10,800 (d) 12,000 (e) 2,800.

(1 mark)

< Answer >

26. The following information relates to Sun Ltd. pertaining to the half-year ended June 30,

2005.

Fixed Expenses Rs.25,000

Sales Value Rs.80,000

Profit Rs.15,000

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Profit Rs.15,000

During the second half of the year, the company has projected a loss of Rs.5,000

The Margin of Safety (MOS) is


(1 mark)

27. Two companies – A and B, produce and sell the same product in a competitive industry.

Thus the

selling price of the product for each company is the same. Company A has a contribution

margin ratio

of 40% and fixed costs of Rs.25 lakh. Company B is more automated, making its fixed costs

40%

higher than those of Company A. Company B also has a contribution margin ratio greater

than that of

Company A by 30%. The sales value, at which profits of both the companies are same, is

(a) Rs.83,33,333

(b) Rs.83,00,000

(c) Rs.81,15,000

(d) Rs.82,45,000

(e) Rs.81,50,000

(2 marks)

< Answer >

28. Alphonsa runs a beverages club. He buys 5 different drinks in cases of 10 each and sells

the drink in

cases of 5, each case containing one bottle of each type.

Purchase cost per case of 10: Rs.

Cabernet 270.00

Chardonnay 270.00

Merlot 279.00

Bordeaux 315.00

Burgundy 306.00

Selling price per case of 5 180.00

Variable distribution cost per case 7.50

Annual Fixed Expenses

Storage 30,000.00

Wages 15,000.00

What is the break-even point in sales revenue?


(1 mark)

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29. Which of the following statements is/are false?

I. In make or buy decisions, all costs should be determined on a per unit basis so that the

cost per

unit of making a product can be compared to the cost per unit of purchasing a product.

II. When a product is dropped, all of the variable expenses and fixed expenses assigned to

the product

will be eliminated.

III. Expenses that will no longer be incurred if a particular action is taken are called

unavoidable

expenses.


(c) Only (III) above (d) Both (II) and (III) above

(e) All (I), (II) and (III) above.

(1 mark)

< Answer >

30. The following data pertains to Unique Telecommunications in its proposed revamping

activity of its

project at Bangalore:

Cables & wires Rs.500 lakh per annum

Instruments Rs.1,250 lakh per annum

Rent of building (fixed) Rs.240 lakh per annum

Cost of law suits pending Rs.5,40,000

The idea of revamping its project is perceived mainly to reduce certain costs. Accordingly,

the company

predicts it can cut down costs on instruments if it takes the same on lease at Rs.1,150 lakh

per annum,

cables & wires at Rs.480 lakh.The law suits are expected to be settled in this financial year

which shall

bring about a cash inflow of Rs.10,00,000 for the defamation suit the company filed against

a journalist.

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8

For revamping the project shall bring about a change in profit by

(a) Rs.10 lakh (b) Rs.20 lakh (c) Rs.100 lakh (d) Rs.110 lakh (e) Rs.120 lakh.

(1 mark)


I. The decision to further process a joint product into other products or to change its

characteristics is

dependent upon the amount of total joint cost at the split-off point.

II. If the separable processing costs will exceed the incremental revenue from further

processing,

there is no net benefit from further processing.

III. The factors used to arrive at short-run decisions and long-run decisions are the same.

IV. A major difference between conventional and activity-based costing analysis is in the

identification of avoidable and unavoidable costs.

(a) Only (I) above

(b) Only (II) above

(c) Both (I) and (III) above

(d) Both (II) and (IV) above

(e) All (I), (II), (III) and (IV) above.

(1 mark)

< Answer >

32. A company manufactures two products – X and Y in one of its factories. Production

capacity is limited

to 85,000 machine hours per period. There is no restriction on direct labour hours.

The following further information is provided concerning the two products :

Particulars Product X Product Y

Estimated demand (000 units) 315 135

Selling price per unit Rs.11.20 Rs.15.70

Variable cost per unit Rs.6.30 Rs.8.70

Fixed costs per unit Rs.4.00 Rs.7.00

Machine hours( per 000 units) 160 280

Direct labour hours (per 000 units) 120 140

Fixed costs are absorbed into unit cost at a rate per machine hour based upon full capacity.

The production quantities of products X and Y which are required per period in order to

maximize the

profit in the situation as above is

(a) 3,15,000 units of X and 1,23,571 units of Y

(b) 3,00,000 units of X and 1,35,000 units of Y

(c) 2,89,000 units of X and 1,78,000 units of Y

(d) 3,50,000 units of X and 1,17,890 units of Y

(e) 3,15,000 units of X and 79,786 units of Y.

(2 marks)

< Answer >

33. Toy Manufacturing Ltd. produces different models of toy cars. The company has

furnished the

following budget in respect of model A-20 for the month of June 2005:

Particulars Rs. in lac Rs. in lacs

Net realisation 700.00

Variable cost:

Materials 264.00

Labor 52.00

Direct expenses 124.00

Total variable cost 440.00

Specific fixed cost 90.00

Allocated fixed cost 112.50

Total fixed cost 202.50

Total cost 642.50

Profit 57.50

The budgeted output of the company is 40,000 units. If the material price is increased by

10%, the

number of toy cars to be sold to maintain the same profit and same selling price is

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(a) 50,000 units (b) 48,555 units (c) 47,762 units (d) 44,000 units (e) 44,521 units.

(2 marks)

34. When the objectives of the decisions are in conflict, one objective may be specified as

the decision

criterion and the other objectives are established as

(a) Secondary criteria (b) Differential criteria

(c) Irrelevant criteria (d) Constraints (e) Opportunity costs.

(1 mark)

< Answer >

35. A company’s approach to a make or buy decision

(a) Depends on whether the company is operating at or below break-even

(b) Depends on whether the company is operating at or below normal volume

(c) Involves an analysis of avoidable costs

(d) Requires use of absorption costing

(e) Requires use of activity based costing.

(1 mark)

< Answer >

36. The decision to make a particular part of a product inhouse or outsourcing mostly

involves the

I. Costs which can be saved either by making or outsourcing.

II. Variable costs.

III. Fixed costs.

IV. Incremental costs.


(c) Only (III) above (d) Only (IV) above

(e) (I), (II) and (IV) above.

(1 mark)

< Answer >

37. Q Ltd. makes 2 products - Dolly and Molly from the same raw material. The selling price

and the cost

details of these products are shown below:

Particulars Dolly (Rs.) Molly ( Rs.)

Selling price 20.00 18.00

Direct material (Rs.2 per kg) 6.00 5.00

Direct labour 4.00 3.00

Variable overhead unit 2.00 1.50

12.00 9.50

Contribution per unit 8.00 8.50

The maximum demand for these products are:

Dolly 500 units

Molly Unlimited number of units per week

If materials were limited to 2000 kg per week, the shadow price (opportunity cost) of these

materials

would be

(a) Nil (b) Rs.2.00 per kg (c) Rs.2.66 per kg (d) Rs.3.40 per kg (e) Rs.2.50 per kg.

(2 marks)

< Answer >

38. A company manufactures a single product with a capacity of 1,50,000 units per annum.

The

summarised income statement for the year is as under:

Particulars Rs. Rs.

Sales (1,00,000 units @ Rs.15 per unit) 15,00,000

Cost of sales:

Direct labor 2,00,000

Variable production overhead 60,000

Fixed production overhead 3,00,000

Fixed administrative overhead 1,50,000

Variable selling & distribution overhead 90,000

Fixed selling & distribution overhead 1,50,000

Total costs 12,50,000

< Answer >

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Total costs 12,50,000

Profit 2,50,000

The company desires to increase the present level of sales from 1,00,000 units to 1,20,000

at a price of

Rs.18 per unit. If an expenditure of Rs.3,00,000 is made on advertising, the profit of the

company will

be


(2 marks)

39. ABC Company has a machine with a 7 year useful life for which they paid Rs.1,60,000 on

01/02/02

with an expected salvage value of Rs.6,000. On 01.07.05, they have owned the machine for

3 years and

have found a technologically advanced machine that costs Rs.80,000. It has a 4 year useful

life and

Rs.12,000 salvage value. The machine will save Rs.10,000 a year in operating expenses. The

current

machine can be sold at Rs.40,000. If the decision to keep the existing machine is made

based upon the

financial impact for the year ending 31st December 2005, would ABC Company purchase the

new

machine?

(a) Yes, the company benefits Rs.4,000

(b) Yes, the company benefits Rs.3,000

(c) Yes, the new machine has less depreciation that the old machine

(d) No, keeping the old machine results in better operations and less cost for 2005

(e) No, replacing the old machine would result in higher costs for 2005.

(2 marks)

< Answer >

40. Beta Ltd., manufacturers of product X, has furnished the following information pertaining

to its

product:

Material per unit – Rs.60.00; Labour per unit – Rs.20.00; Overheads per unit – Rs.10.00. The

selling

price per unit is Rs.120. Sales during the year is expected to be Rs.18,00,000 and fixed

overhead is

Rs.2,00,000. During the current year direct material cost is expected to increase by 15%,

labor cost by

8%, variable overhead by 6.5% and fixed overheads by 4%.

The contribution to sales ratio for the current year is

(a) 20.00% (b) 25.00% (c) 18.73% (d) 15.63% (e) 10.50%.

(1 mark)

< Answer >

41. Which of the following transfer pricing methods will preserve the subunit autonomy?

(a) Cost-based pricing (b) Negotiated pricing

(c) Variable-cost pricing (d) Full-cost pricing (e) Marginal cost pricing.

(1 mark)

< Answer >

In developing a system of transfer pricing for any particular situation, which of the following

circumstantial factors need not be considered?

(a) Existence of competitive market (b) Sourcing constraint

(c) Movability constraint (d) Quantum of transfers

(e) Capacity level of selling division.

(1 mark)

< Answer >

43. 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)

< Answer >

11

The production cost budget per unit, at the level of 6,000 units, is


(2 marks)

44. Assuming that the mark-up-percentage and the quantity of production/sales remain

constant, which of

the following pricing methods will give more profit as the fixed cost of production increases?

I. Return on investment pricing.

II. Full cost pricing.

III. Contribution margin approach to pricing.

(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)

< Answer >

45. AB Ltd. is organized into two large divisions – A and B. Division A produces a component

which is

used by division B in making a final product. The final product is sold for Rs.480. Division A

has a

capacity to produce 2,400 units and the entire quantity can be purchased by division B.

Division A informed that due to installation of new machines, its depreciation cost has gone

up and

hence wanted to increase the price of the component to be supplied to division B at Rs.264.

Division B,

however, can buy the component from the outside market at Rs.264 each. The variable cost

of division

A is Rs.228 and fixed cost is Rs.24 per component. The variable cost of division B in

manufacturing the

final product by using the component is Rs.180 (excluding the component cost).

If division B purchases the entire component from division A, the total contribution of the

company as a

whole is

(a) Rs.5,47,200 (b) Rs.86,400 (c) Rs.1,72,800 (d) Rs.7,20,000 (e) Rs.8,06,000.

(2 marks)

< Answer >

46. Kashmira Ltd. has two divisions - A and B. The division A has the capacity to

manufacture 1,50,000

units of a special component LKJ annually and it has some idle capacity currently. The

budgeted

residual income for the division A is Rs.10,00,000. The relevant details extracted from the

budget of A

are as under:

Sales (to outside customers) 1,20,000 units @ Rs.180 per unit

Variable cost per unit Rs.160

Divisional fixed cost Rs.8,00,000

Capital employed Rs.75,00,000

Cost of capital 12% per annum

Division B received an order for which it requires 30,000 units of a component similar to LKJ.

An

additional variable cost of Rs.5 per unit will be incurred to make minor modifications to LKJ

to suit the

requirements of Division B.

The minimum transfer price per unit which A should quote to B to achieve its budgeted

residual income

is

(a) Rs.185 (b) Rs.170 (c) Rs.165 (d) Rs.160 (e) Rs.175.

(2 marks)

< Answer >

47. While preparing a performance report for a cost center using flexible budgeting

techniques, the planned

cost column should be based on

(a) Cost incorporated in the master budget

(b) Budgeted amount in the original budget prepared before the beginning of the period

(c) Budget adjusted to the actual level of activity for the period being reported

(d) Actual amount for the same period in the preceding year

(e) Budget adjusted to the planned level of activity for the period being reported.

(1 mark)

< Answer >

48. The extent of which of the following factor’s influence must be first assessed in order to

ensure that the

functional budgets are reasonably capable of fulfillment?

(a) Principal budget factor (b) Functional factor

(c) Influential factor (d) Assessable factor (e) Revenue factor.

< Answer >

12

(1 mark)

49. Zero-base budgeting means

(a) Taking zero as the starting point in calculating the forthcoming year's overhead costs

(b) A budgeting system where variances are zero due to strict financial control

(c) Preparing a budget of zero where any spending will result in an adverse variance

(d) Preparing an initial budget of zero that is increased as actual costs occur

(e) A budget including the activity level of zero.

(1 mark)

< Answer >

50. White X Ltd. has no significant bad debt experience with its customers. Cash sales of the

company

account for 10% of total sales and payments for credit sales have been received as follows:

i. 40% of credit sales in the month of sales.

ii. 30% of credit sales in the first month following the month of sales.

iii. 25% of credit sales in the second month following the month of sales.

iv. 5% of credit sales in the third month following the month of sales.

The forecast for both cash and credit sales is as follows:

Month Sales (Rs.)

July 2005 1,00,000

August 2005 1,20,000

September 2005 1,35,000

October 2005 1,50,000

November 2005 1,70,000

December 2005 2,00,000

The estimated cash inflows of the company in the month of October 2005 will be


(2 marks)

< Answer >

51. Yamini Ltd. has a policy of maintaining a minimum cash balance of Rs.1,00,000 at the

end of each

month. Any deficit will be financed through bank borrowings and any surplus will be utlised

to repay

the outstanding bank borrowing and the balance will be invested in short-term securities.

For this

purpose, the company has an agreement with the bank to borrow in multiples of Rs.10,000

whenever a

need arises subject to a maximum of Rs.2,00,000. The rate of interest is 12% per annum

payable

monthly on the amount borrowed.

50% of the sales are on credit and is expected to be collected in the month following the

month of sales.

25% of the purchases are on credit and will be paid in the month following the month of

purchases. The

salaries and other expenses are to be paid in the month for which they relate. The following

is the

budgeted information for the quarter ending September 2005:

Particulars July 2005

(Rs.)

August 2005

(Rs.)

September 2005

(Rs.)

Sales 40,000 50,000 1,00,000

Purchases 30,000 40,000 40,000

Salaries 60,000 70,000 50,000

Manufacturing and other

administrative expenses 25,000 30,000 12,000

If the closing cash balance for the month of July 2005 is Rs.1,00,000, the cash balance as on

October

01, 2005 will be

(a) Rs.1,07,500 (b) Rs.1,01,500 (c) Rs.81,500 (d) Rs.1,02,500 (e) Rs.1,09,500.

(2 marks)

< Answer >

52. Consider the following information pertaining to Akash Ltd:

Particulars July

2005

August

2005

September

2005

Expected sales (units) 5,000 6,000 7,000

Estimated wages and other

manufacturing expenses (Rs.) 1,25,000 1,65,000 1,80,000

< Answer >

13

The company sells the goods at Rs.50 per unit. 50% of the sales are on cash. The debtors

are estimated

to be collected the next month. One unit of finished output requires 2 kg of raw material and

is

estimated to be purchased for Rs.6 per kg. The production in a month includes half of that

month’s

sales and half of next month’s sales. The raw material required in a month is purchased in

the same

month on credit. The creditors are paid in the next month. The wages and other expenses

are paid in the

month in which they are incurred. The cash surplus in the month of August 2005 will be


(2 marks)

53. In transfer price arbitration, a committee is set up whose function involves all of the

following except

(a) To settle transfer price disputes

(b) To negotiate the final selling price for the product with the customers

(c) To review sourcing changes

(d) To meet that price which brings some degree of parity between the transferor division

and

transferee division

(e) To change the transfer price rules where appropriate.

(1 mark)

< Answer >

54. Consider the following data pertaining to a company for 1,000 units of a product:

Standard material cost per unit:

Material A - 2 kg @ Rs.10 = Rs.20

Material B - 3 kg @ Rs.20 = Rs.60

Materials issued:

Material A - 2,050 kg at a cost of Rs.43,050

Material B - 2,980 kg at a cost of Rs.56,620

The total material usage variance is

(a) Rs.900 (Adverse) (b) Rs.900 (Favorable)

(c) Rs.500 (Adverse) (d) Rs.400 (Favorable) (e) Rs.100 (Adverse).

(1 mark)

< Answer >

55. The variance created to segregate the difference due to a new factor like a steep rise in

price of material,

is known as

(a) Revision variance (b) Uncontrollable variance

(c) Price variance (d) Favorable variance (e) Efficiency variance.

(1 mark)

< Answer >

56. If the actual fixed overhead cost is more than applied fixed overhead cost, it is known as

(a) Fixed overhead costs variance (Adverse)

(b) Fixed overhead efficiency variance (Adverse)

(c) Fixed overhead expenditure variance (Adverse)

(d) Fixed overhead volume variance (Adverse)

(e) Fixed overhead capacity variance (Adverse).

(1 mark)

< Answer >

57. Consider the following data pertaining to production department in Skylab Ltd. for the

month of June

2005:

Actual overhead costs Rs.11,000

Standard hours for actual work 4,500 hours

Actual hours during the month 5,000 hours

Standard overhead rate Rs.2 per hour

The overhead cost variance is

(a) Rs.2,000 (Favorable) (b) Rs.2,000 (Adverse)

(c) Rs.1,500 (Favorable) (d) Rs.1,000 (Adverse) (e) Rs.1,000 (Favorable).

(1 mark)

< Answer >

58. If overhead is applied on the basis of units of output, the variable overhead efficiency

variance will be

(a) A function of the direct labor efficiency variance

< Answer >

14

(b) Favorable, if output exceeds the budgeted level

(c) Unfavorable, if output is less than the budgeted level

(d) Indeterminable from the information given

(e) Zero.

(1 mark)

59. Neem Ltd. has furnished the following data for the month of June 2005.

Particulars Budget Actual

Variable overhead cost Rs.4,000 Rs.3,900

Labor hours 4,000 hours 3,500 hours

Units produced 16,000 units 13,400 units

The variable overhead efficiency variance is

(a) Rs.650 (Adverse) (b) Rs.500 (Favorable)

(c) Rs.500 (Adverse) (d) Rs.150 (Favorable) (e) Rs.150 (Adverse).

(1 mark)

< Answer >

60. 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) Life cycle costing provides management with a better picture of product profitability

(d) Life cycle costing is nothing but the accumulation of costs for activities that occur over

the entire

life cycle of a product

(e) Life cycle costing 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 >

61. Consider the following particulars for the month of June 2005:

Budgeted fixed production overhead cost Rs.60,000

Budgeted production 6,000 units

The fixed overhead cost was under absorbed by Rs.12,500 and the fixed production

overhead

expenditure variance was Rs.2,500 (Adverse).

The number of units produced during the month of June 2005 was

(a) 4,750 (b) 5,000 (c) 5,250 (d) 6,750 (e) 7,250.

(2 marks)

< Answer >

62. The flexible budget for the month of June 2005 was for 9,000 units with direct material

at Rs.15 per

unit. Direct labor was budgeted at 45 minutes per unit for a total of Rs.81,000. Actual output

for the

month was 8,500 units with Rs.1,27,500 in direct material and Rs.77,775 in direct labor

expenses. The

direct labor standard of 45 minutes was maintained throughout the month. The variance

analysis of the

performance for the month of June 2005 would show a(n)

(a) Favorable material usage variance of Rs.7,500

(b) Unfavorable material price variance of Rs.5,000

(c) Favorable direct labor efficiency variance of Rs.1,275

(d) Unfavorable direct labor efficiency variance of Rs.1,275

(e) Unfavorable direct labor rate variance of Rs.1,275.

(2 marks)

< Answer >

63. Hyderabad Processors Ltd. produces a commodity by blending two raw materials – A and

B. The

following are the details regarding the raw materials:

Material Standard mix Standard price per kg.

A 40% Rs.4.00

B 60% Rs.3.00

The standard process loss is 15%. During the month of June 2005, the company produced

3,400 kg. of

finished product. The position of stock and purchases for the month of June 2005 is as

under:

Material Stock as on

June 01 2005

Stock as on

June 30

< Answer >

15

Kg. Rs.

A 70 10 1,600 6,800

B 80 100 2,400 6,000

The material yield variance of the company is

(a) Rs.1,200 (adverse) (b) Rs.136 (adverse) (c)

Rs.119 (adverse)

(d) Rs.136 (favorable) (e) Rs.119 (favorable).

(2 marks)

64. 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 >

65. 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 >

66. 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 (unfavourable)

What were the actual hours worked?

(a) 2,200 (b) 2,172 (c) 2,208 (d) 2,592 (e) 2,600

(1 mark)

< Answer >

67. One kilogram of product ‘K’ requires two chemicals A and B. The following were the

details 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)

< Answer >

68. 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

< Answer >

16

(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

mark-up on price.

(1 mark)

69. 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)

< Answer >

70. 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

(b) Costs which will be incurred in future can be forecasted and 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 >

71. Traditionally the development of a product was assigned to the product design

department and then the

produced product was sent to the costing department. In which of the following cases, the

target

costing system diverts from the traditional way?

I. Under target costing, first a price is established for a product and then it is assigned to a

team to

develop the product within the cost (price) established.

II. The product, from the design department, is sent to the costing department but returned

to the

design department concluding that it impossible to produce the product at its determined

cost.

III. After a team is assigned to develop cost scenario, market research and finding the

suitable rich

market is carried on.




(1 mark)

< Answer >

72. Which of the following is/are true about Activity Based Costing (ABC)?

I. It tries to identify the activities that adds value to the product.

II. An analysis of the courses helping to identify activities that do not add value to the

products is

highlighted by ABC.

III. ABC requires a careful analysis of the total management system.


(c) Only (III) above (d) Both (II) and (III) above


(1 mark)

< Answer >

73. Which of the following items would not be included in the calculation of controllable

divisional profit

before tax?

(a) Head office costs

(b) Sales to outside customers

(c) Sales to other divisions

(d) Variable divisional expenses

(e) Controllable divisional fixed costs.

(1 mark)

< Answer >

END OF QUESTION PAPER

17

Suggested Answers

Management Accounting (MB161): July 2005

1. Answer: (a)

Reason: The reporting entity for management accounting is management or a component of

the company's value chain, such as a business segment, supplier, customer, product

line, department, or product.

There is a single accounting information system that serves multiple sets of users.

However, financial accounting deals with historical or current data. Management

accounting uses historical or current data to plan future events or make predictions.

Manufacturing costs are often divided into three broad categories: Direct materials,

Direct labor and Manufacturing overhead.

Since, only statement (I) is true, the correct answer is (a).

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2. Answer: (d)

Reason: ABC helps managers understand what activities drive overhead costs, which may

lead to operating procedures that will reduce costs.

Using a single cost driver for all overhead costs can distort (understate or overstate)

the overhead cost applied to a particular process and eventually to different products.

Consequently, under ABC products can be more fairly priced and competitive.

One advantage of ABC is that all of the overhead costs are allocated to cost pools,

which are in turn allocated to processes then to products.

Since, only statements (I) and (II) are true, the correct answer is (d).

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3. Answer: (e)

Reason: Conversion costs include manufacturing overhead costs and direct labor costs.

Prime cost includes direct material and direct labor. Conversion cost includes direct

labor and manufacturing overhead. The work-in-process inventory includes the costs

(direct material, direct labor and manufacturing overhead) of completing the

inventory to its present (partial) stage of completion.

Total manufacturing costs are the total cost of raw materials used, direct labor and

manufacturing overhead. The cost of goods manufactured is equal to the beginning

WIP plus total manufacturing costs less ending WIP inventory.

Since all of (I), (II) and (III) are true, the correct answer is (e).

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4. Answer: (d)

Reason: A sunk cost is a cost that has been incurred in the past and cannot be altered by

any

current or future decision. A direct cost is a cost that can be directly traced to a

particular department. A cost that is not direct cost is called indirect cost. An

opportunity cost is a potential benefit given up when the choice of one action

precludes selection of a different action. A cost that can be substantially influenced

by a manger is called a controllable cost. Hence, the correct answer is (d).

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5. Answer : (a)

Reason : All research, administrative, and selling costs are treated as period costs.

(a) Direct labor costs are product or inventoriable costs.

(b) Direct material costs are treated inventoriable or product costs.

(c) Indirect materials costs are treated as manufacturing overhead costs.

The correct answer is (a).

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6. Answer: (d)

Reason: Credits and collections are the functions of the treasurer. Planning and control, Tax

administration, Protection of assets and Economic appraisal are the functions of the

controller. So, the correct answer is (d).

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7. Answer: (b)

Reason: Variable cost = Change of cost ÷ Change in level of activity

= (Rs. 36,000 – Rs. 20,000) ÷ (14,000 hours – 6,000 hours)

= Rs. 16,000 ÷ 8,000 hours = Rs. 2.00

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Fixed cost = Rs. 36,000 – 14000 × Rs. 2 = Rs. 8,000

Standard overhead rate = Rs. 5.00 (given)

Standard fixed cost = Rs. 5 – Rs. 2 = Rs. 3

Normal capacity level = 8,000 ÷ 3.00 = 2,667 hours.

8. 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

45,000

30,000 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 %) 15,000

2. Balance to be distributed to WIP, finished goods & cost

of sales by using supplementary rate (66 2/3 %)

30,000

Total 45,000

Computation of equivalent units

WIP (8,000 units × 50%) 4,000

Finished goods (20,000 – 18,000) 2,000

Cost 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.

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9. Answer: (a)

Reason:

Depreciation (Rs. 7,50,000 – Rs. 30,000) ÷ 15 years Rs. 48,000p.a

Electricity (15 units per hour × Rs. 2 per unit) Rs. 30

Special oil (Rs. 2,500 × 12) Rs. 30,000p.a

Maintenance (Rs. 500 ÷ 6 days × 300 days) Rs. 25,000p.a

Operating wages for 6 machines Rs.

Rs. 450 × 3 operators × 50 67,500

Add: 40% fringe benefits 27,000

Wages for six machines 94,500

Departmental and general work overhead Rs.

Last year actual 60,000

Add: 12.5% increase 7,500

Total (for 6 machines) 67,500

Computation of machine hour rate Rs.

Particulars Amount Per hr

Standing Charges:

Operators Wages

Departmental and general

overhead

Total

94,500

67,500

1,62,000

Standing charges per

machine hour

Rs.1,62,000 ÷ (6 machines ×

2,000 hrs)

13.50

Machine Expenses:

Depreciation

Electricity

Special oil

Maintenance

Machine Hour rate

(Rs. 48,000 ÷ 2,000 hrs)

(Rs. 30,000 ÷ 2,000 hrs)

(Rs. 25,000 ÷ 2,000 hrs)

24.00

30.00

15.00

12.50

95.00

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10. Answer: (e) <

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Reason:

Budgeted operating income statement of MNCLtd.

Rs. in lakh

Particulars Amount

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

(Rs.18.66 lakh + Rs.2.918 lakh)

21.578

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

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11. Answer: (b)

Reason:

Maximum capacity = Total days in 2004-05

X Single eight-hour shift

= 365x 8

2,920 hrs

Less: Idle capacity

Sundays = 52 x 8 = 416 hrs

Holidays = 16 x 8 = 128 hrs

Stoppage due

to cleaning, oiling, etc

= 160 hrs 704 hrs

Normal capacity 2,216 hrs

Overhead absorption rate = Overhead amount /

Normal capacity

Rs. 13,850 /

2,216

Rs. 6.25 per hr

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12. Answer: (b)

Reason:

Equivalent unit calaculation under weighted average method:

Beginning WIP 15,000 units x 100% = 15,000

Introduced & completed 1,12,500 x 100% = 1,12,500

Ending WIP 7,500 x 60% = 4,500

1,32,000

Conversion cost in

Beginning inventory

Rs. 24,000

Conversion cost incurred

during the month

Rs. 75,000

Total conversion cost Rs, 99,000

Unit conversion cost Rs. 0.75

(Rs. 99,000 ÷ 1,32,000

equivalent units)

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Thus the total conversion cost transferred was Rs. 95,625 [Rs. 0.75 x (15,000 units in

beginning WIP + 1,20,000 units introduced – 7,500 closing WIP)]

13. Answer: (a)

Reason:

Prime costs comprises of direct labour and direct material.

Direct material cost :

Amount in Rs.

Beginning materials inventory 1,00,500

Purchases 2,68,950

Carriage inward 6,600

Less: Purchase returns (3,300)

Less: Closing inventory (90,000)

Material Cost 2,82,750

Direct labour: Rs. 3,30,000

Prime cost = Rs. 2,82,750 + Rs. 3,30,000 = Rs. 6,12,750.

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14. Answer: (d)

Reason: Direct labor is not a control account. All of the other accounts are controlling

accounts, accounts supported with subsidiary ledgers containing the details of the

gross amounts shown in the accounts.

The correct answer is (d).

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15. Answer: (c)

Reason:

Total kilometer covered in June 2005

= 4 buses × 50 kms × 2 × 30 days = 12,000 km.

Total passenger kilometer covered in June 2005

= 12,000 km × 40 passengers × 75/100 = 3,60,000 passenger km.

Total operating cost during June 2005 = Rs. 1,44,000

The cost per passenger km.

= Rs. 1,44,000 / 3,60,000 passenger km. = Re.0.40 per passenger km.

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16. Answer: (c)

Reason:

Particulars Product A Product B Product C Rs. Rs. Rs.

Revenue 70,000 1,00,000 1,20,000

Pre-Separation Joint costs: 35,000 25,000 20,000

Costs:

A = Rs.80,000 ×

3,500

8,000

B = Rs.80,000 ×

2,500

8,000

C = Rs.80,000 ×

2,000

8,000

Post-separation cost 40,000 20,000 45,000

Profit/(Loss) (5,000) 55,000 55,000

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17. Answer: (b)

Reason: Total labor cost = Rs. 7,250 + Rs. 1,750 + Rs. 12,300 = Rs. 21,300

Overhead recovery rate = Rs. 63,900 ÷ 21,300 = Rs. 3/- per Re.1/- of labor

Overheads charged to Job C14 = Rs. 12,300 x Rs. 3 = Rs. 36,900.

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18. Answer : (a)

Reason : Standard budgeted hours for December 2004:

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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%.

19. Answer: (d)

Reason:

Computation of estimated profit Rs.

Contract price 3,06,000

Less: total expenditure to date 1,70,000

Less: Estimated further expenditure to complete the

contract (including contingencies)

34,000 2,04,000

Estimated profit 1,02,000

Computation of notional profit

Value of work certified 2,00,000

Less: Cost of work certified

Total expenditure to date – work not certified (Rs. 1,70,000 – Rs.

17,000)

1,53,000

Notional profit 47,000

=

2

3 × Notional profit ×

Cashreceived

Workcertified

=

2

3 × Rs.47,000 ×

Rs.1, 63, 200

Rs.2, 00, 000 = Rs.25,568

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20. Answer: (c)

Reason: In put = 3,500 + 36,000 = 39,500 lit

Out put = 29,250 (finished) + 3,600 (N. Loss) + 4,500 (Cl. St) + 2,150 (Ab. Loss)

Equivalent unit of materials = 0% of 3,500 + 100% of 25,750 + 100% of 4,500 +

100% of 2,150

= 25,750 + 4,500 + 2,150

= 32,400

Equivalent unit of conversion = 60% of 3,500 + 100% of 25,750 + 45% of 4,500 +

100% of 2,150

= 2,100 + 25,750 + 2,025 + 2,150

= 32,025.

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21. Answer: (d)

Reason:

Direct materials Rs.

Fabrication dept

Alloy (2,420 × Rs.25) 60,500

Less: Returns to store 5,000

Sale of off cut scrap 500 5,500 55,000

Assembly dept

Cost of components 57,900

Total (A) 1,12,900

Direct labour

Fabrication dept

Wages (2,460 hrs × Rs. 15) 36,900

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Wages (2,460 hrs × Rs. 15) 36,900

Assembly dept

Wages: first 3,000 units Rs. 4 12,000

Next 1,000 units × Rs. 5 5,000

Next 200 units × Rs. 6 1,200 18,200

Total (B) 55,100

Prime cost (A+B) 1,68,000

Average prime cost per unit of XL 101 for March 2005 = Rs. 1,68,000 ÷ 4,200 units

= Rs. 40.

Overhead premium paid by Fabrication department is treated as overhead and hence,

not included in prime cost.

22. Answer: (b)

Reason: Operating income = Margin of safety × Contribution margin ratio.

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23. Answer: (c)

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 year 1,20,000

Add: 26 2/3 increase in material due to 26 2/3 %

increase in out put (1,20,000 × 80/3) / 100

32,000 1,52,000

Direct wages:

Labour hours last year 1,00,000

Increase in labour hours , 331/3% 1,00,000/3

Total labour hours in the forthcoming year 4,00,000/3

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 output ( 60,000

× 80/3) / 100 = Rs.16,000

76,000 1,16,000

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%

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24. Answer: (b)

Reason: Average cost is the total cost of producing a particular quantity of product divided

by

the total number of units produced. Marginal cost is the cost incurred in producing

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one more unit of output.

In financial accounting, product costs are needed to value inventory on the balance

sheet and to compute cost of goods sold expense on the income statement.

For reimbursement of costs by insurance companies or by the government under the

Medicare program, hospitals keep track of the costs of medical procedures.

Product costs are needed for a variety of purposes in financial accounting,

managerial accounting and cost accounting. Product-costing system accumulates the

costs of a production process and assigns them to the products that comprise the

organization’s output.

Since only (IV) is true, the correct answer is (b).

25. Answer: (b)

Reason: Projected unit sales = (Fixed costs + Target operating income) ÷ Unit contribution

margin. Projected unit sales = (Rs.3,00,000 + Rs.3,60,000) ÷ Rs.12.50 = 52,800

units. Current sales units = (Rs.3,00,000 + Rs.3,60,000) ÷ Rs.15 = 44,000 units.

Increase in units: 52,800 - 44,000 = 8,800.

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26. Answer : (a)

Reason :

Contribution = Rs. 25,000 + Rs.15,000 = Rs. 40,000

Contribution to sales ratio = Rs. 40,000 / Rs. 80,000 = 50%

Break-even point = Rs. 25,000 / 50% = Rs. 50,000

Margin of safety = Total sales – Break even sales = Rs. 80,000 – Rs. 50,000

= Rs. 30,000.

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27. Answer: (a)

Reason: Company A’s breakeven point is lower because its fixed costs are lower. Company

A’s breakeven point is Rs. 62,50,000 (i.e.Rs. 25,00,000 / 40%). Company B’s

breakeven point is Rs. 67,30,769 [(Rs. 25,00,000 x 1.4) ÷ (40% x 1.3)]. The

indifference point, at which profits are equal, is as folows:

Profit = Fixed costs + Variable costs

Rs. 25,00,000 + 0.60x = Rs. 35,00,000 + 0.48x

0.12x = Rs. 10,00,000

x = Rs. 83,33,333.

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28. Answer: (b)

Reason:

Rs. Rs.

Selling price per case 180.00

Variable costs per case sold:

Purchase cost:

Cabernet (270/10) 27.00

Chardonnay (270/10) 27.00

Merlot (279/10) 27.90

Bordeaux (315/10) 31.50

Burgundy (306/10) 30.60

Total 144.00

Distribution Costs 7.50

Total Variable costs 151.50

Contribution per case 28.50

Break even sales:

Fixed Costs ÷ Contribution

per case x unit selling price

Rs.45000 ÷ 28.50 x

180

2,84,210.00

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29. Answer: (e)

Reason: Unitizing fixed costs can be misleading. Some fixed costs may continue, even if a

decision to buy is made. A make or buy decision is also called an outsourcing

decision.

Some expenses will continue when products are dropped. Such expenses are called

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unavoidable expenses, and are usually fixed costs. Expenses that will be eliminated

(avoidable expenses) are usually variable expenses.

Avoidable expenses are expenses that will no longer be incurred if a particular action

is taken. Unavoidable expenses will continue to be incurred even if a subunit or

activity is eliminated.

Since all of (I), (II) and (III) are false, the correct answer is (e).

30. Answer : (e)

Reason :

Savings in the cost of the instruments = Rs. 100 lakhs

Savings in the cost of cables & wires = Rs. 20 lakhs

Total savings in costs = Rs. 120 lakhs

Hence, profits will also increase by Rs. 120 lakhs.

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31. Answer: (d)

Reason: At the split-off point, the joint costs are irrelevant to decisions to further process (or

sell) a joint product. The joint costs are sunk costs at the split-off point since they

cannot be changed by either decision.

If the separable processing costs exceed the increase in revenue generated by the

further processing of a joint product into a different salable product, no net benefit

will occur. In such cases, further processing should be avoided.

The same factors are used (relevance, accuracy, timeliness), and the same pitfalls

must be avoided in both; however, when making long-run decisions the time value of

money becomes an additional, important factor.

Some expenses that would be considered to be fixed and unavoidable under

conventional analysis are properly identified as avoidable under activity-based

costing (ABC) analysis, since ABC analysis applies cost drivers to various segments

of fixed costs.

Since only (II) and (IV) are true, the correct answer is (d).

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32. Answer : (a)

Reason :

Particulars Product

X

Product Total

1) Estimated demand (000 units) 315 135

2) Machine hours required

( per 000 units)

160 280

3) Machine hours required to meet

demand (1 x 2 )

50,400 37,800 88,200

The machine hours required to meet demand are in excess of the machine hours

available. So, the machine hours are the limiting factor and the company should

allocate capacity according to contribution per machine hour.

Particulars Product X (Rs.) Product Y (Rs.)

Selling price 11.20 15.70

Variable cost 6.30 8.70

Contribution 4.90 7.00

Machine hours required per unit 0.16 0.28

Contribution per machine hours Rs. 30.625 Rs. 25

The company should concentrate on maximizing the output of product X. Meeting

the max. demand for product X will require 50,400 machine hours and this will

leave 34,600 hours (85,000 – 50,400) to be allocated to product Y. So, 1,23,571

units, ie, 34600 hrs./ 0.28 hrs of Y and 3,15,000 units of X should be produced.

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33. Answer : (e)

Reason : Material cost per unit = Rs.264 lacs / 40,000 units = Rs.660;

Labor cost per unit = Rs.52 lacs / 40,000 units = Rs.130;

Direct expenses per unit = Rs.124 lacs / 40,000 units = Rs.310;

Total cost per unit = Rs.660 + Rs.130 + Rs.310 = Rs.1,100;

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Selling price per unit = Rs.7,00,00,000 / Rs.40,000 = Rs.1,750;

Revised material cost = Rs.660 x 1.1= Rs.726;

Contribution = Rs.1,750 - (Rs.726 + Rs.130 + Rs.310)

= Rs.1,750 – Rs.1,166 = Rs.584

Desired contribution = Fixed cost + profit

= Rs.202.50 + Rs.57.50 = Rs.260

No. of cars = Rs.260 lacs / Rs.584 = 44,521.

34. Answer: (d)

Reason: When the objectives of the decisions are in conflict, one objective may be specified

as the decision criterion and the other objectives are established as constraints

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35. Answer: (c)

Reason: The principle underlying a make or buy decision is to use available resources as

efficiently as possible before buying from an outside supplier. The manager

considers only the costs relevant to the investment decision. If the total relevant costs

of production are less than the cost to buy the item, it should be produced in-house.

The key variable is relevant costs. Thus the costs that can be avoided under either

decision choice must be determined.

Option (a) is incorrect because the breakeven point is not relevant, but the extent of

the use of operating capacity may be a consideration.

Option (b) is incorrect because whether operations are at normal volume is less

important than the amount of idle capacity. The company is less likely to buy if it has

sufficient unused capacity.

Option (d) is incorrect because total costs (absorption costing) are not as important as

relevant costs.

Option (e) is incorrect because activity based costing is used to allocate fixed

overhead. Fixed overhead would not be a relevant cost in a make or buy decision

unless it is avoidable by not making the item.

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36. Answer : (e)

Reason : Costs which can be saved either by making the part in house or outsourcing are

the

relevant costs. These relevant costs are mostly variable costs. So, incremental costs

are the nature of the costs. So, options (I), (II) and (III) are true and hence the correct

answer is (e).

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37. Answer : (d)

Reason : The shadow price is the opportunity cost or contribution per unit of a scarse

resource

Dolly (Rs.) Molly (Rs.)

Contribution per init 8 8.5

Kg per unit (Rs. 6/2) 3 (Rs. 5/2) 2.5

Contribution per kg 2.67 3.40

Scarce materials will be used to make Molly and will yield a contribution of Rs. 3.40

per kg. So, the opportunity cost is Rs. 3.40 per kg.

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38. Answer : (e)

Reason : Total fixed cost = Rs.3,00,000 + Rs.1,50,000 + Rs.1,50,000

= Rs.6,00,000;

Revised fixed cost = Rs.6,00,000 + Rs.3,00,000

= Rs.9,00,000 and selling price per unit = Rs.18

Variable cost per unit = Rs.3.00 + Rs.2.00 + Re.0.60 + Re.0.90

= Rs.6.50;

Total contribution = 1,20,000 x (Rs.18-Rs.6.50 = Rs.13,80,000;

Profit = Rs.13,80,000 – Rs.9,00,000 = Rs.4,80,000

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39. Answer: (e)

Reason:

Particulars Replace old Keep old

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machine machine

Loss on disposal (Rs.1,60,000 –

Rs.22,000 x 3 – Rs.40,000)

Rs.54,000 –

Depreciation expense Rs.17,000 Rs.22,000

Operating Expenses – Rs.10,000

Total Rs.71,000 Rs.32,000

Depreciation on

New machine (Rs.80,000 – Rs.12,000) / 4 = 17,000;

Old machine (Rs.1,60,000 – Rs.6,000) / 7 = Rs.22,000;

Replacing the old machine would result in higher costs for 2005. The company will

not purchase the new machine.

40. Answer : (d)

Reason : Variable cost = Direct material + Direct labor + Overheads

= Rs.60 + Rs.20 + Rs.10 =Rs.90;

Selling price = Rs.120;

Contribution per unit = Rs.120 – Rs.90= Rs.30;

P/V ratio = Contribution per unit / Selling price per unit

= Rs.30 / Rs.120 = 0.25 or 25%.

Material - Rs. 60 x 1.15 = Rs. 69.00

Labor - Rs. 20 x 1.08 = Rs. 21.60

Overheads- Rs. 10 x 1.065 = Rs. 10.65

Variable cost / unit = Rs. 101.25

Contribution = Rs. 120–Rs.101.25 = Rs. 18.75

Contribution to sales ratio = Rs. 18.75 / Rs. 120

= Rs. 0.15625 or

= Rs. 15.63%.

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41. Answer: (b)

Reason: All Cost-based pricing, Variable-cost pricing and Full-cost pricing and Marginal cost

pricing are a rule-based methods, which does not allow for the subunit to preserve its

autonomy. According to negotiated pricing, the individual divisions (transferor and

transferee) are considered as subunit autonomy. Hence correct answer is (b).

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42. Answer: (c)

Reason: No single method of transfer pricing is applicable across the board. In developing a

system of transfer pricing for any particular situation, the factors needed to be

considered are existence of competitive market (a), Sourcing constraint (b), Quantum

of transfer (d), and Capacity level of selling division (e). Movability constraint (c)

i.e. movement of the product from department to department is not a factor having

relation with transfer pricing in any way. Hence (c) is not considered.

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43. Answer: (c)

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

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Reason: Under ROI pricing method, mark up percentage is related to investment. The profit

will change in direct proportion to investment. The profit figure computed as a

percentage of investment is added to the total cost to determine the selling price. As a

result, when variable or fixed cost of production changes the profit per unit or total

profit remains the same. Hence (I) is not correct. Under full cost pricing method,

mark-up is added as a percentage of total cost of production to arrive at the price.

Hence a change in variable or fixed cost of production will lead to a change in profit

if the markup percentage remains the same. Hence (II) is correct

Contribution margin approach to pricing computes the profit using the mark up

percentage on the variable cost. Therefore, if fixed cost increases the profit is not

affected. Hence (III) is not correct. Therefore (b) is the answer.

>

45. Answer : (c)

Reason : Rs.

Contribution of division A

Sales – 2,400 × Rs.264 = 6,33,600

Less : Variable cost:

Purchase cost (2,400 × Rs.228) = 5,47,200

86,400

Contribution of division B

Sales – 2400 × Rs.480 11,52,000

Less : Variable cost

Division A: Rs.6,33,600

Own cost

2,400 × Rs.180 Rs. 4,32,000 10,65,600

86,400

Total Contribution - 1,72,800

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46. Answer : (e)

Reason :

Fixed costs 8,00,000

Return on capital employed (Rs.75,00,000 x 12%) 9,00,000

Residual income desired 10,00,000

Total desired contribution 27,00,000

Contribution per unit from outside sales = Rs.180 – Rs.160 = Rs.20 per unit

Total contribution from outside sales = Rs.20 per unit x 1,20,000 units

= 24,00,000

Minimum contribution to be earned from supply to division B

= Rs.27,00,00 – Rs.24,00,000 = Rs. 3,00,000

Contribution per unit on additional 30,000 units =

Rs. 3,00,000

30,000 units = Rs.10 per unit

Variable cost for minor modification = Rs.5 per unit

Minimum transfer price per unit to be quoted = Rs.160 + Rs.10 + Rs.5 = Rs.175

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47. Answer: (c)

Reason: While preparing a performance report for a cost center using flexible budgeting

techniques, the planned cost column should be based on budget adjusted to the actual

level of activity for the period being reported.

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48. Answer: (a)

Reason: When budgets are made, there is invariably some factor which governs or sets a

limit

to the quantity which can be made or sold. This is known as the limiting or principal

budget factor. The principal budget factor is the factor the extent of whose influence

must be first assessed in order to ensure that the functional budgets are reasonably

capable of fulfillment.

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49. Answer: (a)

Reason: Zero-base budgeting means preparing a budget taking zero as the starting point in

l l ti th f th i ' h d t I f b bd ti

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calculating the forthcoming year's overhead costs. In case of zero-base budgeting,

each manager is asked to prepare his own requirement of funds beginning from

scratch, ignoring the past and he has to justify the requirements mentioned by him.

The main idea behind Zero-base budgeting is to challenge the existence of every

budgetary unit and every budget period. Hence the answer is (a).

50. Answer : (c)

Reason : Cash inflows in the month of:

October 2005

– Rs.1,50,000 × 10% + 1,50,000 × 90% ×40%

= Rs.15,000 + Rs.54,000 = Rs. 69,000

Credit sales in September = Rs.1,35,000 × 90% × 30% = Rs. 36,450

Credit sales in August = Rs.1,20,000 × 90% × 25% = Rs. 27,000

Credit sales in July = Rs.1,00,000 × 90% × 5% = Rs. 4,500

Rs.1,36,950

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51. Answer : (e)

Reason :

Particulars August September

Opening cash balance 1,00,000 1,07,500

Cash sales 25,000 50,000

Collection of credit sales 20,000 25,000

Cash inflows 1,45,000 1,82,500

Cash purchases 30,000 30,000

Payment to creditors 7,500 10,000

Salaries 70,000 50,000

Expenses 30,000 12,000

Interest (Rs.1,00,000 × 12% × 1/12) - 1,000

Cash outflows 1,37,500 1,03,000

Closing balance before borrowings 7,500 79,500

Borrowings * 1,00,000 30,000

Surplus - -

Closing balance 1,07,500 1,09,500

*As the closing balance before borrowings in August 2005 is Rs.7,500, it needs to

borrow Rs.92,500 to make the cash balance to Rs.1,00,000. However as the

agreement with the bank provides to borrow in multiples of Rs.10,000, the company

should borrow Rs.1,00,000 at the end of August 2005. Similarly, for the month of

September 2005, the company is required to borrow Rs.30,000

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52. Answer : (c)

Reason :

Particulars July August

Expected sales kg. 5,000 6,000

Production (units) 2,500 + 3,000 + 3,500

Raw material required for production 11,000 13,000

Amount to be paid for raw material 66,000 78,000

Payment to creditors 66,000

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Particulars August 2005

Cash sales 1,50,000

Collection from debtors 1,25,000

Less: Payment to creditors 66,000

Other expenses 1,65,000

Cash surplus 44,000

53. Answer : (b)

Reason: In transfer price arbitration, a committee is set up whose function involves:

(a) To settle transfer price disputes

(c) To review sourcing changes

(d) To meet that price which brings some degree of parity between the transferor

division and transferee division

(e) To change the transfer price rules where appropriate.

Statement (b) is false and is the answer

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54. Answer: (e)

Reason: Material usage variance = Standard rate (Actual quantity ~ Standard quantity)

Material A = Rs.10 (2,050 kg ~ 1,000 units × 2kg)

= Rs.10 × 50 kg = Rs.500 (Adverse)

Material B = Rs.20 (2,980 kg ~ 1,000 units × 3 kg)

= Rs.20 × 20 kg = Rs.400 (Favorable)

Material usage variance Rs.100 (Adverse)

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55. Answer: (a)

Reason: Due to some unforeseen circumstances, it may be necessary to alter a standard

during

an accounting period. Once a standard has been set, it is undesirable that it should be

changed, because this affects budgets, standard costs, etc. Therefore, it is often

preferable to create a revision variance, which segregates the difference due to this

factor.

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56. Answer: (a)

Reason: If the actual fixed overhead cost is more than applied fixed overhead cost, it is

known as fixed overhead cost variance (adverse). It is not fixed overhead

expenditure variance, fixed overhead volume variance, fixed overhead capacity

variance and fixed overhead efficiency variance

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57. Answer: (b)

Reason:

Actual overheads cost Rs.11,000

Less: Applied overhead cost =

(Standard hours for actual work × standard overhead rate)

4,500 hours × Rs.2

Rs. 9,000

Overhead cost variance Rs. 2,000

(Adverse)

Other options (a), (c), (d) and (e) are not correct.

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58. Answer: (e)

Reason: The variable overhead efficiency variance equals the product of the variable

overhead application rate and the difference between the standard input for the

actual output and actual input. Hence, the variance will be zero if variable overhead

is applied on the basis of units of output because the difference between the actual

and standard input cannot be recognized. Option (a) is incorrect because the

correlation between the variable overhead and direct labor efficiency variance occurs

only when overhead is applied on the basis of direct labor. Options (b), (c) and (d)

are incorrect because the variance would be zero.

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59. Answer: (e)

Reason: Standard rate per hour = 4,000 hrs.

Rs.4,000

= Re.1

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Standard unit per hour = 16,000 units ÷ 4,000 hours = 4 units per hour

Standard hours for actual production = 4 units

13,400 units

= 3,350 hours.

Actual hours = 3,500 hours.

Variable overhead efficiency variance = Re.1 (3,500 hours ~ 3,350 hours)

= Rs.150 (Adverse)

60. Answer: (b)

Reason: In Life-cycle costing, 95% of the costs are committed before production begins, so

the correct answer is (b).

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61. Answer : (b)

Reason :

Fixed overhead recovery rate =

fixed overhead cost = Rs.60,000 =Rs.10 per unit

Production (Units) 6,000 units

Rs.

Budgeted fixed overhead 60,000

Add: Fixed overhead expenditure variance 2,500

Actual fixed overhead 62,500

Absorbed overhead = Actual fixed overhead – under-absorbed overhead

= Rs.62,500 – 12,500 = Rs.50,000

Actual production =

Overhead absorbed = Rs.50,000 =Rs.5,000

Fixed overhead rate Rs.10

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62. Answer : (e)

Reason : The standard cost of materials for 8,500 units is Rs.1,27,500 (i.e. 8,500 × Rs.15).

Thus, no variance arose with respect to materials. Because labor for 9,000 units was

budgeted at Rs.81,000, the unit labor cost is Rs.9. Thus, the labor budget for 8,500

units is Rs.76,500 and total labor variance is Rs.1,275 (i.e. Rs.77,775 – Rs.76,500).

Because the actual cost is greater than the budgeted amount, Rs.1,275 variance is

unfavorable. Given that the actual time per unit (45 minutes) was the same as that

budgeted, no labor efficiency variance was incurred. Hence, the entire Rs.1,275

unfavorable variance must be attributable to labor rate variance.

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63. Answer : (b)

Reason: Actual material consumption:

Particulars A B

Stock as on June 01, 2005 70 80

Add: Purchases during the month of June 2005 1,600 2,400

1,670 2,480

Less: Stock as on June 30, 2005 10 100

Material consumed during the month of June 2005 1,660 2,380

Total material consumption = 1,660 + 2,380 = 4,040 kg.

Standard cost:

Quantity (kg.) Price (Rs.) Amount (Rs.)

A 1,600 4 6,400

B 2,400 3 7,200

4,000

Loss: 600

Output 3,400 13,600

Standard yield =

Actual standard output 85 kg.

Actual input = ×4,040kg.= 3,434kg.

Standard input 100 kg.

×

Material yield variance = Standard rate of output (Actual yield – Standard yield) =

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Rs.13,600×(3,400kg.-3,434kg.)

3,400 = Rs.136 (Adverse)

64. Answer: (a)

Reason: Information on capital requirements is not required to the operating management.

So,

the correct answer is (a).

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65. Answer: (d)

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.

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66. Answer: (e)

Reason: The standard hours for actual production allowed equaled 2,400 and the labour

efficiency variance was Rs. 1,920 unfavourable, 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

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67. Answer: (d)

Reason: Standard Cost of Standard mix of input

Particulars Quantity

Kgs

Price

Rs.

Amount

Rs.

Chemical A (50% of 100 kgs) 50 12 600

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.

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68. Answer: (b)

Reason: It does not recognize capital investment in determining the proposed selling price

which is false. So, the correct answer is (b).

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69. Answer: (d)

Reason: Product costs sets a floor to the price. Product costs which set a ceiling to the price

is

not correct. Therefore, (d) is the answer.

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70. Answer: (a)

Reason: Option (a) is a disadvantage of target costing, so, the correct answer is (a).

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71. Answer: (e)

Reason: Under target costing, first a price is established for a product and then it is assigned

to a team to develop the product within the cost (price) established.

After a team is assigned to develop cost scenario, market research and finding the

suitable rich market is carried on.

These are the ways in which target costing diverts from the traditional ways. So, the

correct answer is (e).

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72. Answer: (b)

Reason: An analysis of the courses helping to identify activities that do not add value to the

products is highlighted by ABC is true. The other two statements are not correct.

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32

73. Answer: (a)

Reason: The following items would be included in the calculation of controllable divisional

profit before tax :

(b) Sales to outside customers

(c) Sales to other divisions

(d) Variable divisional expenses

(e) Controllable divisional fixed costs

So, the correct answer is (a).

Posted by MindGrill at 1:34 AM

Labels: Management Accounting (MB161): July 2

Date post:	22-Oct-2014
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Management Accounting

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