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Question Paper

Management Accounting – II (MB162) : October 2006

• Answer all questions.

• Marks are indicated against each question.

1. Sahara Ltd. received an offer for a project which requires the material XYZ. XYZ is not the material which is

being regularly used. However, XYZ purchased one year ago is in stock and can be utilized for this project. If the

material is not used in this project, it will have to be disposed off.

Which of the following items is relevant with regard to the material XYZ to decide the acceptance of the project?

(a) Replacement cost

(b) Realizable value

(c) Cost price

(d) Profit which can be earned by disposing XYZ

(e) Replacement cost minus realizable value.

(1 mark)

< Answer >

2. Where the machine hours is a key factor, the products to be produced should have

(a) Highest sales price per unit

(b) Highest contribution per unit

(c) Lowest machine hours per unit

(d) Highest sales volume potential

(e) Highest contribution per machine hour.

(1 mark)

< Answer >

3. 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 >

4. The term relevant cost applies to all the following decisional situations, except the

(a) Determination of a product price

(b) Replacement of equipment

(c) Deletion of a product line

(d) Manufacture or purchase of component parts

(e) Acceptance of a special order.

(1 mark)

< Answer >

5. Relevant costs are

(a) All fixed costs

(b) All variable costs

(c) Costs that would be incurred within the relevant range of production

(d) Anticipated future costs that will differ among various alternatives

(e) Past costs that are expected to be different in the future.

(1 mark)

< Answer >

6. Suju Ltd. has furnished the following cost per unit to manufacture and market ‘XL’ product:

i. Manufacturing costs:

Direct materials Rs.5.00

Direct labor Rs.4.00

Variable overheads Rs.3.00

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Fixed overheads Rs.2.00

ii. Marketing costs:

Variable Rs.1.25

Fixed Rs.1.00

The company is planning whether to make the product or buy it from an outside supplier. If the company buys it

from the market, fixed marketing costs would be unaffected but variable marketing costs would be reduced by

40%.

The maximum amount per unit of the product that the company can pay to the supplier without decreasing the

operating income, is

(a) Rs.12.75

(b) Rs.16.25

(c) Rs.13.25

(d) Rs.12.50

(e) Rs.14.00.

(2 marks)

7. While considering a special order which enables a company to make use of current idle capacity, the irrelevant

cost in decision making is

(a) Direct materials

(b) Direct labor

(c) Depreciation

(d) Variable manufacturing overhead

(e) Variable selling overhead.

(1 mark)

< Answer >

8. The relevance of a particular cost to a decision is determined by the

(a) Basis of apportionment of cost

(b) Size of the cost

(c) Riskiness of the decision

(d) Accuracy of the cost

(e) Potential effect on the decision.

(1 mark)

< Answer >

9. The objective of standard costing is to

(a) Determine profitability of a product

(b) Determine break-even production level

(c) Control costs

(d) Allocate costs with more accuracy

(e) Eliminate the need for subjective decisions by management.

(1 mark)

< Answer >

10. The cost of manufacturing a sub-assembly of Pinky Ltd. is given below:

Particular Rs. per unit

Material cost 12

Direct labour cost 7

Variable overhead cost 6

Annual fixed overhead which can be avoided by purchasing the sub-assembly is Rs.1,60,000. The sub-assembly

can be purchased from outside for Rs.30 per unit. If annual purchases are over 30,000 units, a discount of 10% is

available on the purchase price for the total quantity ordered. If annual requirement of the sub-assembly is 40,000

units, then buying it from outside will

(a) Save Rs.2,00,000

(b) Save Rs.40,000

(c) Cost Rs.2,00,000 more

(d) Cost Rs.80,000 more

(e) Save Rs.80,000.

(2 marks)

< Answer >

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11. Toti Ltd. of Kolkata is currently operating at 80% capacity. The following is the income statement furnished by

the company:

Particulars Rs. in lakh Rs. in lakh

Sales 720

Cost of sales:

Direct materials

200

Direct expenses 80

Variable overheads 40

Fixed overheads 260

Total cost 580

Net income 140

The Managing Director has been discussing an offer from Middle East for the supply of a quantity, which will

require 50% capacity of the factory. The price is 10% less than the current price in the local market. Order cannot

be split. The capacity of the factory can be augmented by 10% by adding facilities at an increase of Rs.40 lakh in

fixed cost. If the proposal is accepted with the increased facilities, the profit will increase by

(a) Rs.50 lakh

(b) Rs.40 lakh

(c) Rs.60 lakh

(d) Rs.65 lakh

(e) Rs.35 lakh.

(2 marks)

< Answer >

12. Pioneer Sports Ltd. manufactures tracksuits for athletes. Presently its output is 80% of its full capacity of 20,000

units per annum. One exporter has approved the sample and has offered to buy 7,000 tracksuits at a special price

of Rs.750 per suit. At present the company sells tracksuits at the rate of Rs.975 per suit. The standard cost per suit

is as follows:

Particulars Rs.

Cloth and other materials 375

Labor cost 220

Fixed cost 200

Other variable cost 55

Total 850

The net profit or loss of accepting the order of 7,000 tracksuits is

(a) Rs.64,500 (profit)

(b) Rs.2,75,000 (loss)

(c) Rs.3,78,000 (loss)

(d) Rs.4,25,000 (loss)

(e) Rs.3,00,000 (profit).

(2 marks)

< Answer >

13. Consider the following data pertaining to a company for the month of September 2006:

Budgeted hours 300 hours

Actual hours 280 hours

Maximum possible hours in the budget period 350 hours

Standard hours for actual production 330 hours

The capacity usage ratio of the company for the month is

(a) 1.17

(b) 1.07

(c) 1.06

(d) 0.86

(e) 0.80.

(1 mark)

< Answer >

14. The standards which are based on conditions, which may be realized in actual practice are

(a) Ideal standards

(b) Expected standards

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(c) Current standards

(d) Basic standards

(e) Measurement standards.

(1 mark)

15. 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) Key factor.

(1 mark)

< Answer >

16. Which of the following is not a cause for Material Usage Variance?

(a) Sub-standard materials

(b) Pilferage of materials

(c) Non-standard material mixture

(d) Wastage due to inefficient mixture

(e) Purchasing in non-standard lots.

(1 mark)

< Answer >

17. The number of standard hours equivalent to the work produced expressed as a percentage of the budgeted standard

hours is known as

(a) Efficiency ratio

(b) Activity ratio

(c) Calendar ratio

(d) Capacity usage ratio

(e) Capacity utilization ratio.

(1 mark)

< Answer >

18. Consider the following data pertaining to Banhi Ltd. for 500 units of product-N which requires two raw materials

– A and B:

Standard material cost per unit:

Material A - 3 kg at the rate of Rs.14 = Rs.42

Material B - 2 kg at the rate of Rs.25 = Rs.50

Materials issued:

Material A - 1,560 kg at a cost of Rs.22,932

Material B - 980 kg at a cost of Rs.25,578

The total material usage variance is

(a) Rs.340 (Adverse)

(b) Rs.340 (Favorable)

(c) Rs.1,340 (Adverse)

(d) Rs.1,340 (Favorable)

(e) Rs.650 (Adverse).

(2 marks)

< Answer >

19. Which of the following is false with respect to Return on Investment (ROI) and Residual Income (RI)?

(a) In case of RI, there is a problem of defining the minimum required rate of return associated with various

investment opportunities

(b) ROI can be readily employed for inter-divisional comparisons

(c) A project will be rejected under ROI method and accepted under RI method if the rate of return from

such project is more than the minimum required rate of return but less than the current ROI

(d) RI is the rate of return which a division is able to earn above the minimum required rate of return on

operating assets

(e) Under RI approach, the larger divisions will be expected to have more RI than the smaller divisions.

(1 mark)

< Answer >

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20. In case the resources of an enterprise are not fully utilized, which of the following will be zero?

(a) Standard cost

(b) Shadow price

(c) Residual income

(d) Margin of Safety

(e) Marginal revenue.

(1 mark)

< Answer >

21. Which of the following is false with regard to Target Costing?

(a) Target costs are based on external analysis of markets and competitors

(b) Target costing is a cost management tool which reduces a product’s costs over its entire life cycle

(c) It is difficult to use target costing with complex products that require many sub-assemblies

(d) Target cost is the budgeted cost plus the desired markup

(e) Target costing is used to control costs before the company incurs any production costs.

(1 mark)

< Answer >

22. Budget that addresses “What is” rather than “What was” or “What was expected” is

(a) Fixed budget

(b) Flexible budget

(c) Zero based budget

(d) Performance budget

(e) Master budget.

(1 mark)

< Answer >

23. 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 >

24. The phase in product life cycle, where intensified marketing efforts may prolong the period of maturity, but only

by increasing costs disproportionately is referred to as

(a) Introduction phase

(b) Growth phase

(c) Maturity phase

(d) Saturation phase

(e) Decline phase.

(1 mark)

< Answer >

25. The budgeting process that uses management by objectives and inputs from the individual managers is an example

of the application of

(a) Flexible budgeting

(b) Capital budgeting

(c) Responsibility accounting

(d) Program budgeting

(e) Cost-benefit accounting.

(1 mark)

< Answer >

26. In responsibility accounting, a center’s performance is measured by controllable costs. Controllable costs are best

described as including

(a) Direct material and direct labor, only

(b) Only discretionary costs

(c) Only committed costs

(d) Only those costs that the manager can influence in the current time period

(e) Those costs about which the manager is knowledgeable and informed.

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(1 mark)

27. 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 >

28. Which of the following does not lead to an increase in the return on investment?

(a) Increase in sales volume

(b) Increase in selling price

(c) Increase in operating assets

(d) Reduction in variable costs

(e) Reduction in fixed costs.

(1 mark)

< Answer >

29. A favorable materials price variance coupled with an unfavorable materials usage variance would most likely

result from

(a) The purchase of lower than standard quality materials

(b) The purchase and use of higher than standard quality materials

(c) Product mix production changes

(d) Machine efficiency problems

(e) Labor efficiency problems.

(1 mark)

< Answer >

30. The difference between the budget amount and the best estimate is called

(a) Variance

(b) Contingency provision

(c) Slack

(d) Standard error

(e) Probability.

(1 mark)

< Answer >

31. The difference between budgeted fixed overhead costs and applied fixed overhead costs is known as

(a) Fixed overhead costs variance

(b) Fixed overhead expenditure variance

(c) Fixed overhead volume variance

(d) Fixed overhead efficiency variance

(e) Fixed overhead capacity variance.

(1 mark)

< Answer >

32. Which of the following statements is false?

(a) Under full-cost pricing, the normal mark-up is based on sales value

(b) Full cost pricing is designed to recover both fixed and variable costs

(c) Under full-cost pricing, sellers cannot take advantage of buyers when the latter’s demand becomes acute

(d) Pricing decisions may be influenced by internal factors such as cost and profit objectives

(e) Contribution margin approach to pricing is a cost plus type of pricing.

(1 mark)

< Answer >

33. 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.

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(1 mark)

34. The following information pertains to Sonny Ltd. for its new product:

Production units 15,000 units

Investment for the new product Rs.4,00,000

Fixed costs Rs.1,50,000

Variable cost per unit Rs.28

If the company desires to earn 24% return on investment, the selling price should be

(a) Rs.44.60

(b) Rs.38.00

(c) Rs.40.00

(d) Rs.46.60

(e) Rs.44.40.

(1 mark)

< Answer >

35. Which of the following is true in respect of full cost pricing method?

(a) It is used to recover market price plus mark-up

(b) It is used to recover standard cost plus mark-up

(c) It is used to recover fixed costs only

(d) It is used to recover variable costs only

(e) It is used if a company does not have the basic idea of demand for the product.

(1 mark)

< Answer >

36. Which of the following statements is false in respect of full cost pricing and contribution margin pricing?

(a) They can not be considered competing to each other

(b) In both the methods, the selling prices proposed must be only tentative and they are always subject to

adjustments

(c) Fixed costs are important in both the pricing models

(d) In both the methods, a normal mark-up on total costs is made and the volume of production is taken into

consideration

(e) In both the methods, cost plus pricing is represented to a certain degree.

(1 mark)

< Answer >

37. A company manufactures 750 units of product A during a specified period. The variable cost per unit and fixed

costs per annum are Rs.20 and Rs.40,000 respectively. If the company expects an annual profit of Rs.10,000, the

mark-up percentage on variable cost is

(a) 223.90%

(b) 209.23%

(c) 303.33%

(d) 333.33%

(e) 236.75%.

(2 marks)

< Answer >

38. Consider the following costs per unit of production of a company:

Direct material Rs.24

Direct labor Rs.16

Production overheads Rs.25 (40% fixed)

Selling & administrative overheads Rs.30 (50% fixed)

Total costs Rs.95

Normal Production 1,200 units

The total costs for 1,180 units are

(a) Rs.1,12,100

(b) Rs.1,12,600

(c) Rs.1,08,200

(d) Rs.1,10,000

(e) Rs.1,03,750.

< Answer >

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(2 marks)

39. Padma Manufacturing Ltd. has furnished the following information:

Particulars Budget Actual

Output in units 10,000 10,200

Labor hours 5,000 5,040

Variable overhead costs Rs.60,000 Rs.60,800

The variable overhead cost variance is

(a) Rs.400 (Favorable)

(b) Rs.400 (Adverse)

(c) Rs.800 (Favorable)

(d) Rs.800 (Adverse)

(e) Rs.480 (Favorable).

(2 marks)

< Answer >

40. Minolta Ltd. has furnished the following information pertaining to its business:

Sales Rs.12,00,000

Variable costs Rs.7,80,000

Traceable fixed costs Rs.1,20,000

Average invested capital Rs.5,00,000

Imputed interest rate 20%

The residual income of the company is

(a) Rs.2,00,000

(b) Rs.1,44,000

(c) Rs.1,08,000

(d) Rs.1,26,000

(e) Rs.1,24,000.

(1 mark)

< Answer >

41. The imputed interest rate used in the residual income approach to perform evaluation can best be described as the

(a) Average return on investments for the company over the last several years

(b) Target return on investment set by the company’s management

(c) Average lending rate for the year being evaluated

(d) Historical weighted-average cost of capital for the company

(e) Marginal after-tax cost of capital on new equity capital.

(1 mark)

< Answer >

42. The following is the statement showing operating income of Dyeing division of Leo Garments Ltd.:

Particulars Rs.

Sales 1,76,000

Variable manufacturing costs 1,40,000

Administrative expenses 25,000

Selling expenses 4,000

Operating income 7,000

The sales include cloth transferred to Printing division at manufacturing cost of Rs.20,000. The common

administrative expenses of Rs.5,000 and common selling expenses of Rs.2,000 are apportioned to the Dyeing

division. If the internal transfer is at market price, the operating income of Dyeing division using contribution

approach is

(a) Rs.13,000

(b) Rs.20,000

(c) Rs.14,000

(d) Rs.42,000

(e) Rs.12,000.

(2 marks)

< Answer >

43. A segment of an organization is referred to as a profit center if it has < Answer >

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(a) Responsibility for developing markets and selling the output of the organization

(b) Responsibility for combining materials, labor and other factors of production into a final output

(c) Authority to make decisions affecting the major determinants of profit, including the power to choose its

markets and sources of supply

(d) Authority to provide specialized support to other units within the organization

(e) Authority to make decisions affecting the major determinants of profit, including the power to choose its

markets and sources of supply and significant control over the amount of invested capital.

(1 mark)

44. Which of the following statements about ideal standards is false?

(a) It can be used for cash budgeting or product costing

(b) These are standard costs that are set for production under optimal condition

(c) It does not make provision for workers with different degrees of experience and skill levels

(d) It makes no allowance for wastage, spoilage and machine breakdowns

(e) It is called theoretical or maximum efficiency standard.

(1 mark)

< Answer >

45. Priti Ltd. has furnished the following data relating to its product for the year 2005-06:

Annual production (units) 40,000

Material cost (Rs.) 1,20,000

Other variable costs (Rs.) 1,50,000

Fixed cost (Rs.) 1,30,000

Apportioned investment (Rs.) 5,00,000

Assuming income tax rate of 35%, if the company desires to earn a post tax profit of 15% on listed sale price

when trade discount is 20%, the net sale price per unit would be

(a) Rs.13.87

(b) Rs.12.25

(c) Rs.14.69

(d) Rs.15.78

(e) Rs.14.05.

(2 marks)

< Answer >

46. The two internal roles of management accounting are

(a) Supplying information and providing non-monetary awards

(b) Providing monetary and non-monetary awards

(c) Supplying information and preparing financial reports

(d) Supplying information and control procedures

(e) Preparing financial reports and providing non-monetary award.

(1 mark)

< Answer >

47. Dego Ltd. has estimated Rs.3,50,000 and Rs.2,80,000 for direct material and direct labor respectively for the

month of November 2006. It is the policy of the company to absorb overheads as under:

Factory overheads 50% of direct wages

Administrative overheads 25% of works cost

Selling and distribution overheads 20% of works cost

It is estimated that the selling and distribution overheads will increase by 15% in November 2006. The company

sells goods at a profit of 12.5% on sales. The budgeted sales for the month of November 2006 will be

(a) Rs.9,21,600

(b) Rs.12,82,050

(c) Rs.10,31,771

(d) Rs.13,02,400

(e) Rs.10,15,650.

(2 marks)

< Answer >

48. Figo Ltd. manufactures 5,000 units of Product PT at a cost of Rs.115 per unit. Presently, the company is utilizing

50% of the total capacity. The information pertaining to cost per unit of the product is as follows:

Material – Rs.60

Labor – Rs.20

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Labor – Rs.20

Factory overheads – Rs.25 (40% fixed)

Administrative overheads – Rs.10 (50% fixed)

Other information:

i. The current selling price of the product is Rs.125 per unit.

ii. At 60% capacity level – Material cost per unit will increase by 2% and current selling price per unit

will reduce by 2%.

iii. At 80% capacity level – Material cost per unit will increase by 5% and current selling price per unit

will reduce by 5%.

The profit per unit of the product of the company at 60% and 80% capacity level will be

(a) Rs.10.00 and Rs.6.38 respectively

(b) Rs.8.80 and Rs.10.00 respectively

(c) Rs.6.38 and Rs.9.50 respectively

(d) Rs.10.00 and Rs.9.50 respectively

(e) Rs.8.80 and Rs.6.38 respectively.

(2 marks)

49. Baisaki Ltd., has furnished the following operating result for the current year:

Particulars Rs. in lakh

Sales (40,000 units) 48.00

Less trade discounts 2.40

Net sales 45.60

Cost of sales:

Direct material 14.40

Direct Labour 12.60

Factory overheads 6.30

Administration expenses 3.60

Selling and distribution expenses 4.50

The following changes are anticipated during the next year:

i. Units to be sold to increase by 25%

ii. Material price to increase by 15%

iii. Direct wages to increase by 12%

iv. Overheads – Factory overheads will be limited to Rs.6.56 lakh, and administration and selling & 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 rate

vii. Profit target for the year – Rs.6 lakh.

The selling price per unit for the next year is

(a) Rs.155.78

(b) Rs.215.79

(c) Rs.288.80

(d) Rs.113.05

(e) Rs.126.14.

(2 marks)

< Answer >

50. Nucor Ltd. uses standard process costing method. The standard process cost card per month shows that 3 hours of

direct labor is required to produce one kg of finished product. The fixed overheads, which are recovered on direct

labor hours, amount to Rs.180 per kg of output. The budgeted output is 1,000 kg per month. Actual production

during the month of September 2006 is 900 kg and the direct labor hours utilized during the month were 2,850.

The details of opening and closing work-in progress (WIP) are as under:

Opening work-in-progress – 200 kg (Degree of completion of labor and overheads – 60%)

Closing work-in-progress – 450 kg (Degree of completion of labor and overheads – 20%)

The company uses FIFO method for evaluation of stocks. The fixed overhead efficiency variance is

(a) Rs.18,900 (Adverse)

(b) Rs.9,000 (Favorable)

(c) Rs.9,000 (Adverse)

(d) Rs.14,400 (Favorable)

(e) Rs.14,400 (Adverse).

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(e) Rs.14,400 (Adverse).

(2 marks)

51. A group of workers usually consists of 10 skilled, 5 semi-skilled and 5 unskilled workers, paid at standard hourly

rates of Rs.5.00, Rs.3.20 and Rs.2.80 respectively. In a normal working week of 40 hours, the group is expected

to produce 1,000 units of output. In certain week, the group consisted of 13 skilled, 4 semi-skilled and 3 unskilled

employees; actual wages paid per hour were Rs.4.80, Rs.3.40 and Rs.2.60 respectively. Two hours were lost due

to abnormal idle time and 960 units of output were produced. The labor cost variance is

(a) Rs.152 (Adverse)

(b) Rs.280 (Adverse)

(c) Rs.152 (Favorable)

(d) Rs.249 (Favorable)

(e) Rs.376 (Adverse).

(2 marks)

< Answer >

52. BSL Ltd. sells a line of women’s wear. The performance report of the company for the month of September 2006

is as follows:

The company uses a flexible budget to analyze its performance and to measure the effect on operating income of

the various factors affecting the difference between budgeted and actual operating income.

Particulars Actual Budget

Dresses sold (units) 4,650 5,000

Sales (Rs.)

Less: Variable costs (Rs.)

2,35,000

1,45,000

3,00,000

1,80,000

Contribution margin (Rs.)

Less: Fixed costs (Rs.)

90,000

84,000

1,20,000

80,000

Operating income (Rs.) 6,000 40,000

The effect of the sales quantity variance on the contribution margin and the variable cost flexible budget variance

for September 2006 is

(a) Rs.8,400 (A) and Rs.23,000 (F) respectively

(b) Rs.8,000 (A) and Rs.22,400 (A) respectively

(c) Rs.8,400 (A) and Rs.22,400 (F) respectively

(d) Rs.8,000 (A) and Rs.23,000 (F) respectively

(e) Rs.22,400 (F) and Rs.35,000 (F) respectively.

(2 marks)

< Answer >

53. Mr. Jacob is the general Manager of Fine Product Division and his performance is measured using the residual

income method. He has estimated the following cash flows for his division for the next year:

Particulars Rs.

Investment in Plant and equipment 21,00,000

Investment in Working capital 11,50,000

Revenue 12,75,000

If the imputed interest cost is 14% and Mr.Jacob desires to achieve a residual income of Rs.1,80,000, the total

costs, in order to achieve the target, would be

(a) Rs.3,73,800

(b) Rs.5,95,800

(c) Rs.6,29,400

(d) Rs.6,35,000

(e) Rs.6,40,000.

(2 marks)

< Answer >

54. Pirlo Ltd. has furnished the following information relating to cost at a capacity level of 5,000 units:

Particulars Rs.

Material cost 30,000 (100% variable)

Labour cost 20,000 (100% variable)

Power 1,250 (80% variable)

Repairs and maintenance 2,000 (75% variable)

Stores 1,500 (100% variable)

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Stores 1,500 (100% variable)

Inspection 1,000 (20% variable)

Administration overheads 6,000 (50% variable)

Selling overheads 3,000 (50% variable)

Depreciation 6,000 (100% fixed)

The production cost budget per unit, at the level of 4,800 units, is

(a) Rs.12.55

(b) Rs.14.25

(c) Rs.12.00

(d) Rs.12.45

(e) Rs.14.80.

(2 marks)

55. The estimated annual production of products A and B are 5,000 and 15,000 respectively. The budgeted cost details

of these products are as under:

Particulars A B

Direct materials per unit Rs.40 Rs.47

Direct labor per unit (@Rs.9 per hour) Rs.36 Rs.27

Selling overheads per unit (40% variable) Rs.5 Rs.10

The other overheads are charged to the products as under:

• Factory overheads (60% fixed) - 100% of direct wages.

• Administrative overheads (100% fixed)- 5% of factory cost.

The fixed capital investment is Rs.12,00,000 and the working capital requirement is equivalent to 6 months stock

of cost of sales of both the products. A return on investment of 20% is expected. The expected return on capital

employed is

(a) Rs.4,75,375

(b) Rs.3,00,000

(c) Rs.5,44,219

(d) Rs.4,50,275

(e) Rs.5,80,500.

(2 marks)

< Answer >

56. Tony Ltd. manufactures plastic bags. The company’s directors have projected the following sales for the next

three months:

October 2006 2,10,000 units

November 2006 3,60,000 units

December 2006 4,10,000 units

Opening stock of finished goods on October 01, 2006 is 30,000 units. The company has some problems recently in

supplying its customers promptly and the directors have decided to aim for a 10% increase in finished goods

closing stock at the end of each of the three months.

Each bag uses 1.8 kg of plastic that costs Rs.6 per kg. The stock of plastic on October 01, 2006 is 50,000 kg. The

raw material is readily obtainable, but in order to ensure that the company will not run out of stock, the directors

would like to increase the closing stock of plastic by 10% each month for the next three months.

The amount of raw material to be purchased during the month of December 2006 will be

(a) Rs.41,67,060

(b) Rs.42,10,260

(c) Rs.43,47,260

(d) Rs.37,58,970

(e) Rs.45,03,504.

(2 marks)

< Answer >

57. Traditional cost management does not involve

(a) Market research into customer requirements

(b) Estimation of product cost

(c) Obtaining prices from suppliers

< Answer >

13

(c) Obtaining prices from suppliers

(d) Value engineering

(e) Overheads absorption.

(1 mark)

58. The flexible budget for the month of September 2006 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

September 2006 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 >

59. A machine which is purchased for Rs.1,56,000 has a salvage value of Rs.6,000.The machine can be used for

10,000 hours during its life to produce 25,000 units of a product. The current annual demand for the product is

3,000 units. The cost data per unit of the product are:

Direct Material = Rs.20

Direct Labour at the rate of Rs.6 per hour = Rs.30

Power at the rate of Rs.4 per hour = Rs.16

Overheads (Excluding depreciation and power):

Variable cost = Rs.14

Fixed cost per annum = Rs.80,000

The selling price per unit is Rs.150. The organisation has received an export order of 500 units per annum. The

minimum selling price per unit to be quoted for export order is

(a) Rs.65

(b) Rs.70

(c) Rs.68

(d) Rs.61

(e) Rs.86.

(2 marks)

< Answer >

60. Silver Ltd. is producing three complimentary products. The demand for the products is very much fluctuative. The

demand estimates for the products are as below:

Product Selling price (Rs.) Unit Variable cost (Rs.) Sales units

A 12 6 20,000

B 18 11 5,000

C 20 11 15,000

Fixed cost is Rs.1,50,000. At the end of the budget period the total sales margin variance is found to be Rs.18,000

(Adverse) but same sales mix, cost and price are maintained because of the complimentary nature. The actual

profit for the budgeted period is

(a) Rs.1,22,000

(b) Rs.1,16,000

(c) Rs.1,10,000

(d) Rs.1,90,000

(e) Rs.1,62,000.

(2 marks)

< Answer >

61. Akanksha Ltd. is preparing sales budget for 3rd

quarter. The following are the details of the first two quarters:

Particulars 1st quarter 2

nd quarter

Sales Value (Rs.) 28,000

Prime cost (Rs.) 13,000

Overheads (Rs.) 8,000 7,600

Sales Units 200 240

There is a reduction in fixed overhead cost by Rs.500 in 2nd

quarter and same will continue. Variable costs will rd rd

< Answer >

14

increase by 20% in 3rd

quarter. The budgeted sales for the 3rd

quarter to maintain the same amount of profit per

unit as in 1st quarter is

(a) 236 units

(b) 245 units

(c) 224 units

(d) 232 units

(e) 292 units.

(2 marks)

62. The actual data for the last two quarters of a company were as follows:

Particulars Quarter I Quarter II

Capacity usage 40% 50%

Net profit / (loss) (Rs.) (20,000) (5,000)

The budgeted profit for quarter III is Rs.25,000. The capacity utilization at budgeted production for quarter III is

(a) 67%

(b) 71%

(c) 70%

(d) 65%

(e) 60%.

(2 marks)

< Answer >

63. Which of the following items would not be incorporated into the calculation of a division’s investment base when

using the residual income approach for performance measurement and evaluation?

(a) Fixed assets employed in division’s operations

(b) Land being held by the division as a site for a new plant

(c) Division inventories when division management exercises control over the inventory levels

(d) Division accounts payable when division management exercises control over the amount of short-term

credit used

(e) Division accounts receivable when division management exercises control over credit policy and credit

terms.

(1 mark)

< Answer >

64. DK Ltd. manufactures two products – D and K, using same facilities and similar process. The company has

furnished the following information pertaining to two products for the year ending March 31, 2006.

Particulars Product D Product K

Direct labor hours per unit 4 2.5

Machine hours per unit 5 4

Number of set ups during the period 12 18

Number of orders handled during the period 16 19

Production units 6,000 4,340

Total production overhead costs for the period are as follows:

Particulars Rs.

Machine activity costs 2,40,000

Set-ups costs 57,000

Order handling costs 52,500

3,49,500

The absorption of total production overheads of both the products on the basis of a suitable cost driver, using

Activity Based Costing method, is

Product D Product K

(a) Rs.2,06,827 Rs.1,42,637

(b) Rs.1,82,827 Rs.1,66,673

(c) Rs.2,06,827 Rs.1,42,673

(d) Rs.1,98,827 Rs.1,50,673

(e) Rs.1,98,827 Rs.1,68,367.

(2 marks)

< Answer >

65. Which of the following statements is false in relation to budgets?

(a) Direct labor budget represents direct labor requirements necessary to produce the types and quantities of

(b) An inventory budget can be prepared to find out the values of direct materials and finished inventory

< Answer >

15

(b) An inventory budget can be prepared to find out the values of direct materials and finished inventory

(c) A fixed budget is a budget that is prepared for a range, i.e. for more than one level of activity

(d) A direct material budget indicates the expected amount of direct material required to produce the

budgeted units of finished good

(e) Direct labor budget costs consist of wages paid to employees who are engaged directly in specific

production output.

(1 mark)

66. Thomax Ltd. has furnished the following data pertaining to its product during the month of September 2006:

Particulars Budget Actual

Fixed overhead Rs.30,000 Rs.29,400

Production units 750 units 764 units

Number of working days 26 days 28 days

Hours 500 568

The fixed overhead volume variance is

(a) Rs.420 (F)

(b) Rs.420 (A)

(c) Rs.600 (F)

(d) Rs.560 (F)

(e) Rs.560 (A).

(1 mark)

< Answer >

67. Priyanka Plastics Ltd. has furnished the following payment schedule of current payables related to purchases of

direct materials:

• 60% in the month of purchase.

• 30% in the month following the month of purchase.

• 10% in the second month following the month of purchase.

The company purchased the same amount of goods in the months of July 2006 and August 2006. Total credit

purchases in the month of September 2006 were Rs.1,00,000 and total payments on credit purchases in the month

of September 2006 were Rs.1,40,000. The credit purchase in the month of July 2006 was

(a) Rs.1,00,000

(b) Rs.2,00,000

(c) Rs.2,40,000

(d) Rs.3,00,000

(e) Rs.4,00,000.

(2 marks)

< Answer >

68. The data relating to Sangeet Ltd. for the month of September 2006 were as follows:

Output (units)

Wages paid for 16,250 hours

Material purchased 4,000 kg

6,500

Rs.34,125

Rs.36,000

Other information:

Particulars Rs.

Labor rate variances

Labor efficiency variances

Labor idle time variances

Material price variances

Material usage variances

1,275 (A)

3,575 (F)

675 (A)

1,300 (A)

4,300 (F)

The standard prime cost per unit is

(a) Rs.13.00

(b) Rs.12.73

(c) Rs.13.25

(d) Rs.12.65

(e) Rs.11.50.

(2 marks)

< Answer >

16

69. Anand Ltd. services washing machines and clothes dryers. It charges customers for the spare materials with

markup on cost. The company has five employees, each earning Rs.6,000 per year and spending 1,000 hours per

year on service calls. It sells parts that cost Rs.30,000 annually. The company has other costs of Rs.25,000 a

year, which is allocated two-thirds to labor and the remainder to material. If the target profit of the company is

Rs.20,000 per annum, the amount of mark-up on labor costs, is

(a) Rs.18,000

(b) Rs.75,000

(c) Rs.25,000

(d) Rs.22,500

(e) Rs.27,000.

(2 marks)

< Answer >

70. Consider the following particulars pertaining to products A and B of a company:

Particulars A B

Estimated production (units) 4,000 6,000

Total variable costs (other than direct labor) (Rs.) 1,60,000 2,70,000

Direct labor cost per hour (Rs.) 6 4.50

Number of labor hours per unit 3 4

Fixed costs (Rs.) 1,73,000 1,60,000

The investment in fixed capital is Rs.7,60,000 and working capital requirements amount to Rs.5,00,000. A return

of 25% on investment is expected. If the contribution per direct labor hour is expected to be the same for both the

products, the selling price of product B is

(a) Rs.105

(b) Rs.112

(c) Rs.103

(d) Rs.140

(e) Rs.135.

(2 marks)

< Answer >

17

Suggested Answers

Management Accounting – II (MB162): October 2006

1. Answer : (b)

Reason : As the material XYZ is not being used regularly, if it is not used in this project, it will be disposed.

Hence the relevant cost is realizable value.

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2. Answer : (e)

Reason : Where the machine hours is a key factor, the products which should be produced should have highest

contribution per machine hour.

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3. 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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4. Answer : (a)

Reason : Relevant costs are those expected future costs that vary with the action taken. All other costs are

assumed to be constant and thus have no effect on the decision. It is considered in the analysis of

decisions to make or buy a product, accept a special order, replace capital equipment or delete a product

line. It applies to many special decisions but not in determining a product price.

< TOP >

5. Answer : (d)

Reason : Relevant cost is the cost which is relevant or pertinent to the decision. In decision making, the relevancy

of cost data takes on a special meaning. It exhibits two fundamental characteristics – it must be future

and it must differ between alternatives. Other costs mentioned in (a), (b), (c) and (e) are not correct.

Hence (d) is true.

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6. Answer : (d)

Reason : If the company buys from the market, the avoidable unit cost

= Rs.5.00 + Rs.4.00 + Rs.3.00 + 40% of Rs.1.25

= Rs.12 + Re.0.50 = Rs.12.50.

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7. Answer : (c)

Reason : The correct answer is (c) because deprecation will be expensed whether or not the company accepts the

special order, it is irrelevant to the decision. Only the variable costs are relevant hence answer (a), (b),

(d) and (e) are not correct.

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8. Answer : (e)

Reason : Managerial decisions should be based on the relevant revenues and costs. Hence, a relevant cost or revenue has the ability to affect the decision made.

(a) and (b) are not correct because the size and nature of the cost is irrelevant if the cost does not affect

the decision process.

(c) is not correct because the riskiness of the decision is irrelevant if the cost does not affect the decision

process. (d) is not correct answer because some estimates of the cost must be considered regardless of

its accuracy.

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9. Answer : (c)

Reason : The correct answer is (c).The purpose of standard costing is to control costs. (a) and (b) are not correct

because a standard costing system is not required to determine profitability of a product or to appraise

break-even analysis. (d) is not correct because standard costing does not allocate costs more accurately,

especially when variances exist. (e) is not correct because standard costs are used by management as an

aid in decision making.

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10. Answer : (e)

Reason : Cost of manufacturing is :

Particulars Rs. Per unit

Variable cost (Rs.12 + Rs.7 + Rs.6) 25

Fixed cost Rs.1,60,000 ÷ 40,000 units 4

Total cost 29

Cost of purchasing is Rs.30 – 10% Discount 30 – 3 = 27

Hence purchasing the subassembly will

×

80,000

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18

save Rs.(29 – 27) × 40,000

11. Answer : (d)

Reason : Proposed sales = Local sales + Middle East sales = Local sales of 60% + Export sales of 50%

= (Rs.720 ÷ 80%) × 60% + [(Rs.720 ÷ 80%) × 50% – 10% of (Rs.720 ÷ 80%) × 50%] = Rs.540 +

Rs.450 – Rs.45 = Rs.945; Present sales = Rs.720;

Incremental revenue = Rs.945 – Rs.720 = Rs.225 lakh.

Proposed cost = 60% local + 50% Middle East = Direct material at 110% + Direct expenses at 110% +

variable expenses at 110% + fixed expenses = (Rs.200 ÷ 80) × 110 + (Rs.80 ÷ 80) × 110 + (40 ÷ 80) ×

110 + (Rs.260 + Rs.40) = Rs.275 + Rs.110 + Rs.55 + Rs.300 = Rs.740

Differential cost = Rs.740 – Rs.580 = Rs.160 lakh.

Incremental profit = Rs.225 – Rs.160 = Rs.65 lakh.

< TOP >

12. Answer : (b)

Reason :

Full capacity = 20,000 units

Present capacity (80%) = 16,000 units

Unutilized capacity = 4,000 units

Variable cost per suit = Rs.375 + Rs.220 + Rs.55 = Rs.650

Incremental revenue for export = 7,000 units × ( Rs.750 – Rs.650 )

= Rs.7,00,000

Opportunity cost of indigenous production

= 3,000 units (i.e.7,000 – 4,000) × (Rs.975 – Rs.650)

= 3,000 × Rs.325 = Rs.9,75,000

Net loss = Rs.9,75,000 –Rs.7,00,000 = Rs.2,75,000.

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13. Answer: (d)

Reason : Capacity usage ratio = Budgeted hours ÷ Maximum possible hours in the budget period

= 300 hours ÷ 350 hours

= 0.86.

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14. Answer : (b)

Reason : The standards which are based on conditions which may be realized in actual practice are called

expected standards. These standards are set on the assumption of efficient operation and are feasible to

attain.

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15. 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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16. Answer : (e)

Reason : Sub-standard materials, Pilferage of materials, Non-standard material mixture, Wastage due to

inefficient mixture are causes of material usage variance. However purchasing non-standard lots lead to

reduction in quantity discount which is a cause for material price variance.

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17. Answer : (b)

Reason : The number of standard hours equivalent to the work produced expressed as a percentage of the

budgeted standard hours is known as activity ratio.

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18. Answer : (a)

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

Material A = Rs.14 (1,560 kg ~ 500 units × 3 kg)

= Rs.14 × 60 kg =

Rs.840 (Adverse)

Material B = Rs.25 (980 kg ~ 500 units × 2 kg)

= Rs.25 × 20 kg =

Rs.500 (Favorable)

Material usage variance Rs.340 (Adverse)

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19

19. Answer : (d)

Reason : RI is the net operating income which a division is able to earn above the minimum rate of return on

operating assets. It is in absolute terms and not a ratio. Hence (d) is false. As RI is the income above the

minimum rate of return, there is a problem of defining the minimum required rate of return associated

with various investment opportunities. ROI can be readily employed for inter-divisional comparisons as

it is a ratio. A project will be rejected under ROI method and accepted under RI method if the rate of

return from such project is more than the minimum required rate of return but less than the current ROI.

Under RI approach, the larger divisions will be expected to have more RI than the smaller divisions, not

necessarily because they are better managed but because of the bigger numbers involved.

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20. Answer : (b)

Reason : Shadow price represents the opportunity cost of a unit of constrained resource. It is the increase in the

value of objective function, which would be achieved, if one more unit of the resource was available.

Only constrained resource has a shadow price. In case the resources are not fully utilized, the shadow

price will be zero.

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21. Answer : (d)

Reason : Target cost is the sale price (for the target market share) minus desired profit. Hence (d) is false. Target

costs are based on external analysis of markets and competitors. Target costing is a cost management

tool which reduces a product’s costs over its entire life cycle. It is difficult to use target costing with

complex products that require many sub-assemblies because tracking costs becomes too complicated

and tedious, and cost analysis must be performed at so many levels. Target costing is used to control

costs before the company incurs any production costs.

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22. Answer : (b)

Reason : Flexible budgets allow managers to adjust budget estimates on a timely basis to reflect fluctuations from

expected activity level, hence are dynamic in nature. Such budgets address “What is” rather than “What

was” or “What was expected”. Hence option (b) is correct. All other options (a), (c), (d) and (e) are

incorrect.

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23. Answer : (c)

Reason : When 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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24. Answer : (d)

Reason : As market becomes saturated, pressure is exerted for a new product and sales along with profits of old

product begin to fall. Intensified marketing effort may prolong the period of maturity, but only by

increasing costs disproportionately. Hence option (d) is correct. All other options (a), (b), (c) and (e)

are incorrect.

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25. Answer : (c)

Reason : Management performance should ideally be evaluated only on the basis of those factors controllable by

the manager. Manager may control revenues, costs or investments in resources. A well designed

responsibility accounting system establishes responsibility centers within the organization. However,

controllability is not an absolute basis for establishment of responsibility. More than one manager may

be able to influence a cost and responsibility may be assigned on the basis of knowledge about the

incurrence of a cost rather than the ability to control it. Management by objective (MBO) is a related

concept. It is a behavioral, communication-oriented, responsibility approach to employee self-direction.

Under MBO, a manager and his/her subordinates agree upon objectives and the means of attaining

them. The plans that result are reflected in responsibility accounting and in the budgeting process.

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26. Answer : (d)

Reason : Control is the process of making certain that plans are achieving the desired objectives. A controllable

cost is one that is directly regulated by a specific manager at a given level of production within a given

time span. For example, fixed costs are often not controllable in the short run.

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27. Answer : (b)

Reason : All Cost-based pricing, Variable-cost pricing and Full-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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28. Answer : (c)

Reason : The return on investment can be increased by increasing sales, reducing expenses (both variable and

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20

fixed) and reduce operating assets. Hence by increasing the operating assets, the return on investments

will decrease.

29. Answer : (a)

Reason : A favorable materials price variance is the result of paying less than the standard price for materials. An

unfavorable materials usage variance is the result of using an excessive quantity of materials. If a

purchasing manager is to buy substandard materials to achieve a favorable price variance, an

unfavorable quality variance could result from using an excessive amount of poor quality materials.

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30. Answer : (c)

Reason : Many budgetees tend to budget revenues somewhat lower, and expenses somewhat higher, than their

best estimates of these amounts. The difference between the budget amount and the best estimate is

called Slack. In examining the budget, superiors attempt to discover and eliminate slack. Variance is the

difference between the budget and actual. Standard error and Probability has no link with the difference

between the budget amount and the best estimate.

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31. Answer : (c)

Reason : Fixed overhead volume variance = Budgeted fixed overhead costs – Applied fixed overhead costs.

Therefore, (c) is correct.

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32. Answer : (a)

Reason : Under full cost pricing, the normal mark-up is not based on sales value. It is generally based on total

cost or variable cost to recover profit and/or fixed cost. Under full cost pricing, sellers do not take

advantage of the buyers when demand for the goods is very high, pricing decision may be influenced by

internal factors and contribution margin approach to pricing is concerned about the cost, volume and

profit. Therefore (a) is false.

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33. 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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34. Answer : (e)

Reason : 24% return on investment = 24% of Rs.4,00,000 = Rs.96,000

Selling price per unit

= Variable cost per unit + fixed costs per unit + profit per unit

= Rs.28 +

Rs.1,50,000 Rs.96,000

15,000units 15,000 units+

= Rs.28 + Rs.10 + Rs.6.40 = Rs.44.40.

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35. Answer : (e)

Reason : Full cost pricing method is used if a company does not have the basic idea of demand for the product. It

is not used to recover the only fixed costs or only variable cost. It is not used to recover market price

plus mark-up or standard cost plus mark-up.

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36. Answer : (d)

Reason : When we look into the relationship between full cost and contribution margin pricing we can conclude

that although the full cost pricing and contribution margin based approach for pricing are considered

distinctively different approaches, by and large, they represent to a certain degree, cost plus pricing.

Hence statement (e) is true. They are considered complementary to each other but not competing. Hence

statement (a) is true. In both the pricing models fixed costs are considered important. Hence option (c)

is true. In both the methods, the selling prices proposed must be only tentative and they are always

subjective. Hence statement (b) is also true. However, Full cost pricing makes a normal mark up on total

costs and it does not take volume of production into consideration. On the other hand contribution

margin approach to pricing is concerned about cost. Hence statement (d) which states that Contribution

margin method also makes a normal markup on total costs is false.

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37. Answer : (d) < TOP >

21

Reason : Mark-up percentage =

Sales-Variablecosts×100

Variablecosts

Now sales = 750 units × Rs.20 + Rs.40,000 + Rs.10,000

= Rs.15,000 + Rs.40,000 + Rs.10,000

= Rs.65,000

Variable cost = Rs.20 × 750 = Rs.15,000

∴ Mark-up percentage =

Rs.65,000 - Rs.15,000100

Rs.15,000×

= 333.33%.

38. Answer : (b)

Reason : Variable cost per unit = Rs.24 + Rs.16 + Rs.15 + Rs.15 = Rs.70

Fixed cost = Rs.10 × 1,200 units + Rs.15 × 1,200 units

= Rs.12,000 + Rs.18,000

= Rs.30,000

Cost of 1,180 units = 1,180 units × Rs.70 + Rs.30,000

= Rs.82,600 + Rs.30,000 = Rs.1,12,600.

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39. Answer : (a)

Reason : Standard variable cost per unit =

Budgeted variable costs

Budgeted units

=

Rs.60,000

10,000 = Rs.6

Variable overhead cost variance

= Actual variable overhead costs – Standard variable overhead cost per unit × Actual output

= Rs.60,800 – Rs.6 × 10,200 units

= Rs.60,800 – Rs.61,200= Rs.400 (favorable).

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40. Answer : (a)

Reason :

Sales Rs.12,00,000

Less variable costs Rs. 7,80,000

Rs. 4,20,000

Less fixed costs (traced) Rs. 1,20,000

Rs. 3,00,000

Less interest (20% of Rs.5,00,000) Rs. 1,00,000

Residual income = Rs. 2,00,000

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41. Answer : (b)

Reason : Residual income is the excess of the return on an investment over a targeted amount equal to an imputed

interest charge on invested capital. The rate used is ordinarily set as a target return by management but

is often equal to the weighted average cost of capital. Some enterprises prefer to measure managerial

performance in terms of the amount of residual income rather than the percentage of ROI because the

firm will benefit from expansion as long as residual income is earned. Therefore, (b) is correct.

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42. Answer : (b)

Reason :

Rs.

Sales to outsiders (Rs.1,76,000 – Rs.20,000) 1,56,000

Less: manufacturing cost of goods sold to outsiders

(Rs.1,40,000 – Rs.20,000)

1,20,000

Contribution 36,000

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22

Mark-up on outside sale =

Rs.36,000=30%

Rs.1,20,000

Particulars Rs.

Transfer price to outside sales (20,000 × 130%) 26,000

Sales to outsiders 1,56,000

Total sales 1,82,000

Less: Manufacturing expenses 1,40,000

Contribution 42,000

Less: Traceable expenses

Administration expenses 20,000 Selling expenses 2,000

Operating income 20,000

43. Answer : (c)

Reason : A profit center is a segment of a company responsible for both revenues and expenses. A profit center

has the authority to make decisions concerning markets (revenues) and sources of supply (costs). Option

(a) is not correct because a revenue center is responsible for developing markets and selling the firm’s

products. Option (b) is not correct because a cost center combines labor, materials, and other factors of

production into a final output. Option (d) is not correct because a service center provides specialized support to other units of the organization. Option (e) is incorrect because an investment center is

responsible for revenues, expenses, and the amount of invested capital.

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44. Answer : (a)

Reason : Ideal (perfect, theoretical or maximum efficiency)standards are standard costs that are set for production

under optimal conditions. They are based on the work of the most skilled workers with no allowance for

waste, spoilage, machine breakdowns, or other downtime. Tight standards can have positive behavioral implications if workers are motivated to strive for excellence. However, they are not in wide use

because they can have negative behavioral effects if the standards are impossible to attain. Ideal, or

tight, standards are ordinarily replaced by currently attainable standards for cash budgeting, product

costing, and budgeting departmental performance. Otherwise, accurate financial planning will be

impossible. Answer (e) and (b) are incorrect because ideal standards are perfection standards. Answer

(c) is incorrect because ideal standards are based solely on the most efficient workers. Answer (d) is

incorrect because ideal standards assume optimal conditions.

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45. Answer : (e)

Reason : Let, sale value = x

0.15x = [ ]x(1 0.2) Rs.1, 20, 000 Rs.1,50, 000 Rs.1,30, 000 (1 Tax rate)− − − − −

0.15x = [ ]0.8x Rs.4, 00, 000− 0.65 = 0.52x – Rs.2,60,000

0.37x = Rs.2,60,000

x = Rs.2,60,000 ÷ 0.37 = Rs.7,02,703

Sale price ÷ unit = Rs.7,02,703 ÷ 40,000 = Rs.17.57

Net sale price = 17.57 × 0.8 = Rs.14.05.

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46. Answer : (d)

Reason : Generally accountancy is the language of the business through which different information can be

provided to different groups of people. In case of Management accountancy the recipient of the

information is Management. Obviously the purpose of Management accountancy is to facilitate the functions of the recipient of information i.e. management which includes control. So ,the two internal

roles of management accounting are to supply information to assist managers in making better planning

decisions and using management accounting information as controls to ensure the organization's

members are acting in the organization's best interest. Hence (d) is correct.

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47. Answer : (d)

Reason :

Rs.

Direct material 3,50,000

Direct labor 2,80,000

Factory overheads (50% of direct labor) 1,40,000

Works cost 7,70,000

Administrative overheads (25% of works cost) 1,92,500

Selling and distribution expenses 1,77,100

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23

Selling and distribution expenses

(20% of works cost + 15%) (7,70,000 × 20% × 11.5%)

1,77,100

11,39,600

Profit 12.5% on sales (i.e. 14.29% on cost) 1,62,800

Budgeted sales 13,02,400

48. Answer : (e)

Reason :

Capacity 50% 60% 80%

Production (units) 5,000 6,000 8,000

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

Material 60 61.20 63.00

Labor 20 20 20.00

Variable overheads

Factory 15 15 15.00

Administrative 5 5 5.00

100 101.2 103.00

Total variable cost 5,00,000 6,07,200 8,24,000

Fixed overheads

Factory 50,000 50,000 50,000

Administrative 25,000 25,000 25,000

5,75,000 6,82,200 8,99,000

Sale price per unit 125.00 122.50 118.75

Sales value 6,25,000 7,35,000 9,50,000

Profit 50,000 52,800 51,000

Profit per unit 10.00 8.80 6.38

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49. Answer : (e)

Reason : Budgeted operating income statement of Baisaki Ltd.

Rs. in lakh

Particulars Rs. Rs.

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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50. Answer : (e)

Reason :

Completed stock: Kg. Degree of Overheads

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24

completion

From opening work-in-progress 200 40 % 80

Closing work-in-progress 450 20 % 90

Current production 700 100 % 700

Total 870

Budgeted fixed overheads per Kg. = Rs.180

No. of direct labor hours per Kg. = 3

Budgeted rate per hour = Rs.60

Standard hours for actual production = 870 × 3 = 2,610hours

Fixed overhead efficiency variance = (Standard hours for actual production – Actual hours) x budgeted

rate per hour = (2,610 hours – 2,850 hours) × Rs.60 = 240 hrs × Rs.60

= Rs.14,400 (A)

51. Answer : (a)

Reason : The standard labor cost per unit of output

Grade

(1)

No. of

Workers

(2)

Hours

(3)

Man-hours

(2 x3) (4)

Rate per hour

(Rs.) (5)

Labor cost

(Rs.)

(4 x 5)

Skilled

Semi-skilled

Unskilled

10

5

5

40

40

40

400

200

200

5.00

3.20

2.80

2,000

640

560

Total 800 3,200

Labor cost per unit = Total labor cost/No of units produced = Rs. 3.20 per unit

Actual cost

Grade

(1)

No. of

workers

(2)

Hours

(3)

Man-hours

(2 x3) (4)

Rate

per hour

(Rs.) (5)

Labor cost

(Rs.) (4 x 5)

Skilled

Semi-skilled

Unskilled

13

4

3

40

40

40

520

160

120

4.80

3.40

2.60

2,496

544

312

Total 800 3,352

Labor cost variance = Rs.3,200 ~ Rs.3,352 = Rs.152 (A).

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52. Answer : (c)

Reason : The sales quantity variance is the difference between the actual and budgeted units, times the budgeted

unit contribution margin. (4,650 ~ 5,000) × Rs.1,20,000 ÷ 5,000 = Rs.8,400 (A). The variable cost

flexible budget variance is equal to the difference between actual variable costs and the product of the

actual quantity sold and the budgeted unit variable cost (Rs.1,80,000 ÷ 5,000 = Rs.36) (Rs.36 × 4,650) – Rs.1,45,000 = Rs.1,67,400 ~ Rs.1,45,000 = Rs.22,400 (F).

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53. Answer : (e)

Reason : Residual income is the excess of the amount of the ROI over a targeted amount equal to an imputed

interest charge on invested capital.

Total investment = Rs.21,00,000 + Rs.11,50,000 = Rs.32,50,000

Imputed interest charge = 14% on Rs.32,50,000 = Rs. 4,55,000

Residual income = Rs. 1,80,000

Total profit = Rs. 6,35,000

Total costs = Revenue – Target profit= Rs.12,75,000 – Rs.6,35,000 = Rs.6,40,000.

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54. Answer : (b)

Reason : The production cost budget

Particulars Rs.

Material cost (variable) 28,800 Labor cost (variable) 19,200

Stores (variable) 1,440

Power (semi-variable) 1,210

Repairs and maintenance (semi-variable) 1,940

Inspection (semi-variable) 992

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25

Inspection (semi-variable) 992

Administration overheads (semi-variable) 5,880

Selling overheads 2,940

Depreciation (fixed) 6,000

Total 68,402

Cost per unit 14.25

55. Answer : (a)

Reason :

A B

Particulars Total

cost

Variable

cost

Total

cost

Variable

cost

Direct material 40.0 40.0 47.00 47.0

Direct labor 36.0 36.0 27.00 27.0

Factory overheads 36.0 14.4 27.00 10.8

Total factory cost 112.0 90.4 101.00 84.8

Administrative overheads 5.6 5.05

Selling overheads 5.0 2.0 10.00 4.0

Total cost per unit 122.6 92.4 116.05 88.8

Total cost = (Rs.122.6 × 5,000 units) + (Rs.116.05 × 15,000 units) =Rs.23,53,750

Particulars Rs.

Fixed capital 12,00,000

Working capital (Rs.23,53,750 × 6/12) 11,76,875

Total capital employed 23,76,875

Expected ROI = 20%; Expected return = Rs.23,76,875 × 20% = Rs.4,75,375.

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56. Answer : (e)

Reason : Finished goods:

Closing stock at end of October must be 10% higher than at the beginning of the month: 30,000 × 110%

= 33,000 units. (Closing stock for October is the same as opening stock for November)

Closing stock at end of November must be 10% higher than at the beginning of the month: 33,000 ×

110% = 36,300 units.

Closing stock at end of December must be 10% higher than at the beginning of the month: 36,300 ×

110% = 39,930 units.

Production in the month of December 2006 is Closing stock + Sales - Opening stock = 39,930 +

4,10,000 – 36,300 = 4,13,630 units

Raw materials:

Opening stock of raw material at beginning of October = 50,000kg × Rs.6.00

= Rs.3,00 000

Closing stock at end of October must be 10% higher than opening stock

= Rs.3,00,000 × 110% = Rs.3,30,000

Closing stock at end of November must be 10% higher than opening stock:

= Rs.3,30,000 × 110% = Rs.3,63,000

Closing stock at end of December must be 10% higher than opening stock:

= Rs.3,63,000 × 110% = Rs.3,99,300

Purchases in the month of December 2006 is Closing stock + raw materials used in production –

opening stock = Rs.3,99,300 + (4,13,630 units × 1.8kg × Rs.6) – Rs.3,63,000

=Rs.3,99,300 + Rs.44,67,204 - Rs.3,63,000 = Rs.45,03,504.

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57. Answer : (d)

Reason : Value engineering is a modern approach in cost management for various activities on the value chain

where as all other options are traditional approaches. So,(d) is correct.

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58. 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

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26

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.

59. Answer : (e)

Reason : The minimum selling price to be quoted is the incremental cost per unit . Here all the costs including

depreciation, except Rs.80,000 fixed cost, are incremental and variable. So, the incremental cost per unit

= cost of {Direct Material = Rs.20 per unit + Direct Labour at the rate of Rs.6 per hour = Rs.30 per unit

+ Power at the rate of Rs.4 per hour =Rs.16 + Variable Overheads = Rs.14 per unit + Depreciation of

[(Rs.1,56,000 – Rs.6,000) ÷ 25,000 units] = Rs.6 per unit} = Rs.86.

[Cost is different from cash flow and here depreciation is not a period cost and it increases with increase

in number of units produced.]

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60. Answer : (a)

Reason : Here the total sales margin variance is Rs.18,000 (Adverse ) implies the actual sales margin

(contribution) = Budgeted sales margin – Rs.18,000

= [20,000 × Rs.6 + 5,000 × Rs.7 + 15,000 × Rs.9] – Rs.18,000

= Rs.2,90,000 – Rs.18,000 = Rs.2,72,000.

Actual profit = Contribution – Fixed cost = Rs.2,72,000 – Rs.1,50,000 = Rs.1,22,000.

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61. Answer : (e)

Reason : Profit for I quarter = Rs.28,000 – (8,000 + 13,000) = Rs.7,000

Variable portion of production overheads:

For 200 units = Rs.8,000

For 240 units = Rs.8,100 ( if there is no reduction in fixed overheads).

So, variable over head per unit = (Rs.8,100 – Rs.8,000) ÷ (240 – 200) = Rs.2.50

Fixed overheads = Rs.8,000 – (200 × 2.50) = Rs.7,500

Because of decrease in fixed overheads, the actual fixed overheads = Rs.7,000

Total variable cost per unit = Prime cost per unit + variable overhead per unit

= (Rs.13,000 ÷ 200) + Rs.2.50 = Rs.67.50

Actual variable cost after 20% increase = Rs.67.50 + 20% of Rs.67.50 = Rs.81

Selling price per unit = Rs.28,000 ÷ 200 = Rs.140 (same as I quarter)

Profit per unit = Rs.7,000 ÷ 200 = Rs.35 (same as I quarter)

Contribution per unit = Rs.140 – Rs.81=Rs.59

Let the number of units to be sold to make a profit per unit of Rs.35 be X then

59X – Rs.7,000 = Rs.35X

X=291.67 or 292 units.

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62. Answer : (c)

Reason : At 50% capacity, loss = Rs.5,000

At 40% capacity, loss = Rs.20,000

So every 1% increase in capacity utilization increases profit by (Rs.15,000 ÷ 10%) Rs.1,500.

To get a profit of Rs.25,000 the extra profit required above 50% = Rs.30,000

The extra capacity required for an extra profit of Rs.30,000 = Rs.30,000 ÷ Rs.1,500 = 20%

So, the capacity utilization for a profit of Rs.25,000 = 50% + 20% = 70%.

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63. Answer : (b)

Reason : Land being held by the division as a site for new plant is not an operating asset and hence will not be

considered in the calculation of residual income.

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64. Answer : (d)

Reason : Machine activity cost per hour =

Rs.2, 40, 000 Rs.2, 40, 000Rs.5.07 per machine hour

6, 000 x 5 4, 340 x 4 47, 360= =

+

Setups cost per set up =

Rs.57, 000Rs.1,900

30=

per set up

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27

Order handling cost per order =

Rs.52,500Rs.1, 500

35=

per order

Particulars Product D (Rs.) Product K (Rs.)

Machine activity cost 1,52,027 87,973

Setups cost 22,800 34,200

Order handling cost 24,000 28,500

1,98,827 1,50,673

65. Answer : (c)

Reason : A fixed budget is not prepared for a range, rather it is used unaltered during the budget period. It is

prepared for a particular activity level and it does not change with actual activity level being higher or

lower than the budgeted activity level.

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66. Answer : (d)

Reason : Fixed overhead volume variance = Budgeted fixed overheads cost ~ Applied fixed overheads cost

= Rs.30,000 ~

Rs.30,000764units

750units×

= Rs.30,000 ~ Rs.30,560

= Rs.560 (F), Other options (b), (c), (d) and (e) are not correct.

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67. Answer : (b)

Reason : Payment for September 2006 purchases were Rs.100,000 × 0.6 = Rs.60,000, which leaves Rs.80,000 to

apply to July 2006 and August 2006. The ratio of the balance for July 2006 and August 2006 is 1:3.

August 2006 purchases were ((Rs.80,000 × 0.75) ÷ 0.3) = Rs.2,00,000. July 2006 purchases were

((Rs.80,000 × 0.25)) ÷ 0.1) = Rs.2,00,000.

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68. Answer : (e)

Reason : Actual cost

Standard material cost = Actual material cost + Favorable material price variance + Favorable material

usage variance

Standard wages = Actual wages paid + favorable labor efficiency variance – adverse labor rate variance

– adverse labor idle time variance

Particulars Total Per unit

Standard material cost (36,000 – 1,300 + 4,300)

Standard wages (34,125 + 3,575 – 1,275 – 675)

39,000

35,750

6.00

5.50

Total 86,125 11.50

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69. Answer : (d)

Reason : Total labor cost 5 × Rs. 6,000 = Rs. 30,000

Cost of parts = Rs. 30,000

Total variable cost Rs.60,000

Target profit = Rs. 20,000

Fixed cost = Rs. 25,000

= Rs. 45,000

Mark up % = Rs. 45,000 ÷ Rs.60,000 = 75%

Mark up on labor cost = 75% of Rs.30,000 = Rs.22,500

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70. Answer : (e)

Reason :

Particulars Rs.

Fixed cost (Rs. Rs.1,73,000 + Rs.1,60,000) 3,33,000

Add: expected return (Rs.7,60,000 + Rs.5,00,000) ×25% 3,15,000

Contribution 6,48,000

Total labor hours:

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28

Product A: (3 × 4,000 units) 12,000

Product B: (4 × 6,000 units) 24,000

Total labor hours 36,000

Contribution per labor hour =

Rs.6,48,000

36,000 hours = Rs.18 per labor hour.

Calculation of selling price of product B:

Particulars Rs.

Variable cost other than labor (Rs.2,70,000 ÷ 6,000 units) 45

Direct labor (Rs.4.50 × 4 hours) 18

Contribution (Rs.18 ×4) 72

Selling price 135

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