152-0404

Question PaperManagement Accounting – II (152) : April 2004

1. If a company uses a predetermined rate of absorbing factory overhead, the volume variance is the

(a) Under or over applied variable cost element of factory overhead(b) Under or over applied fixed cost element of factory overhead(c) Difference in budgeted cost and actual cost of fixed factory overhead items(d) Difference in budgeted cost and actual cost of variable factory overhead items(e) Difference in standard cost and actual cost of variable factory overhead items.

(1 mark)

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2. A budget in which a responsibility center manager must justify each planned activity and its estimated total cost is known as

(a) Conventional budget (b) Master budget(c) Participative budget (d) Zero based budget(e) Program planning and budget system.

(1 mark)

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3. Operation budgets normally cover a period of

(a) One year or more (b) One year or less(c) One year to two years (d) One year to three years (e) Two years.

(1 mark)

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4. A fixed factory overhead volume variance will exist if

(a) Actual labor hours differ from budgeted labor hours(b) Actual labor hours differ from standard labor hours(c) Actual production volume differs from standard production volume(d) The fixed factory overhead applied on the basis of standard labor hours for actual output differs

from actual fixed factory overhead(e) The fixed factory overhead applied on the basis of standard labor hours for actual output differs

from the budgeted fixed factory overhead.

(1 mark)

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5. AAC Ltd. planned to produce 1,000 units of its product-P during the month of February 2004.The standard specifications of one unit of product-P includes 5kg. of material at Rs.12 per kg. Actual production during the month was 1,068 units of product-P. The accountant computed a favorable materials purchase price variance of Rs.520 and unfavorable material quantity variance of Rs.280. Based on these variances, one should conclude that

(a) More materials were purchased than were used(b) More materials were used than were purchased(c) The actual cost of materials was less than the standard cost(d) The actual usage of materials was less than the standard allowed(e) The standard cost of material was less than the actual cost.

(1 mark)

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6. Life cycle costing

(a) Includes only the cost of design and development of the product(b) Includes only manufacturing costs incurred over the life of the product(c) Includes only manufacturing cost, selling expense and distribution expense(d) Emphasizes cost savings opportunities during the manufacturing cycle(e) Is sometimes used as a basis for cost planning and product pricing.

(1 mark)

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7. A limitation of transfer prices based on actual cost is that they

(a) Charge inefficiencies to the department that is transferring the goods(b) Can lead to sub optimal decisions for the company as a whole(c) Must be adjusted by some markup(d) Must be adjusted by ROI (return on investment)

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(e) Lack clarity and administrative convenience.

(1 mark)

8. Decentralized firms can delegate authority and yet retain control and monitor managers’ performance by structuring the organization into responsibility centers. Which of the following organizational segments is most like an independent business?

(a) Revenue center (b) Profit center(c) Cost center (d) Investment center (e) Contribution center.

(1 mark)

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9. Under standard cost system, labor rate variances are usually not attributable to

(a) Union contracts approved before the budgeting cycle(b) Labor rate prediction(c) The use of single average standard rate(d) The assignment of different skill levels of workers than planned(e) Approved wage revisions after the budgeting cycle.

(1 mark)

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10. A budget manual, which enhances the operation of a budgeting system, is most likely to include

(a) Employee hiring policies (b) Documentation of accounting system(c) Company policies regarding the authorization of transaction(d) Employee training policies (e) Distribution instructions for budget

schedules.

(1 mark)

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11. The direct material usage budget and direct material purchase budget differ because of which of the following?

(a) The level of material scrap forecast occur (b) The level of efficiency of men(c) The level of efficiency of machines(d) A change in the level of finished goods stock(e) A planned change in the level of material stock.

(1 mark)

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12. The question of raw material in the purchases budget of a company may be higher than the quantity of raw material in the production budget because

(a) Stock levels are being reduced (b) Raw material prices are falling(c) The company obtains discount for bulk purchases(d) Units sold will be higher than units made (e) High efficiency of men.

(1 mark)

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13. Which of the following departments has the primary responsibility for an unfavorable material yield variance?

(a) Purchasing department (b) Production department(c) Stores department (d) Engineering department(e) Inspection department.

(1 mark)

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14. If a company produces more than one product, the sales volume variance can be divided into which of the following additional variances?

(a) Sales price variance and flexible budget variance(b) Sales mix variance and sales price variance(c) Sales quantity variance and sales mix variance(d) Sales mix variance and production volume variance(e) Sales quantity variance and flexible budget variance.

(1 mark)

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15. Comparing actual results with a budget based on achieved volume is possible with the use of a

(a) Monthly budget (b) Master budget(c) Flexible budget (d) Rolling budget (e) Zero-based budget.

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(1 mark)

16. The information contained in a cost of goods manufactured budget most directly relates to the

(a) Materials used, direct labor, overhead applied, and ending work-in-process budgets(b) Materials used, direct labor, overhead applied, and work-in-process inventories budgets(c) Materials used, direct labor, overhead applied, work-in-process inventories, and finished goods

inventories budgets(d) Materials used, direct labor, overhead applied and finished goods inventories budgets(e) Material purchased, direct labor, overhead incurred and budgeted finished goods inventory.

(1 mark)

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17. The cash receipt budget includes

(a) Funded depreciation (b) Operating supplies(c) Extinguishments of debt (d) Loan proceeds(e) Amortization of preliminary expenses.

(1 mark)

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18. If budgets are used to evaluate performance and to set limits on spending, the process will often result in departments adding something extra to ensure the budgets will be met. This extra is

(a) Management by objectives (b) Strategic planning(c) Continuous budgeting (d) Budgetary slack(e) Management by exception.

(1 mark)

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19. ‘The average human being has an inherent dislike for work and will avoid it if he can’- this job attitude is specifically dealt with in

(a) Douglas McGregor’s Theory X (b) Douglas McGregor’s Theory Y(c) The principles of human motivation as revealed by Abraham Maslow(d) Herzberg’s Two Factor Theory (e) McDonald’s Theory Z.

(1 mark)

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20. The system of identification and communication that signals the manager when his attention is needed is known as

(a) Management by objective (b) Management information system(c) Management by exception (d) Management control(e) Responsibility accounting.

(1 mark)

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21. The budget that describes the long term position, goals and objectives of an entity within its environment is the

(a) Capital budget (b) Operating budget(c) Cash management budget (d) Strategic budget(e) Production budget.

(1 mark)

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22. Which of the following techniques would be best for evaluating the management performance of a department that is operated as a cost center?

(a) Return on assets ratio (b) Return on investment ratio(c) Flexible budgeting (d) Variance analysis(e) Residual income.

(1 mark)

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23. A set of concepts and tools applied for getting all the employees focused on continuous improvement in the eyes of the customers is popularly known as

(a) Quality control (b) Cost control(c) Customer orientation (d) Self management(e) Total quality management.

(1 mark)

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24. If the sales manager of a company accepts a rush order that will result in higher than normal manufacturing cost, these additional costs are charged to the sales manager because the authority to accept or decline the rush order was given to the sales manager. This type of accounting system is known as

(a) Responsibility accounting (b) Functional accounting(c) Historical accounting (d) Reciprocal allocation(e) Transfer price accounting.

(1 mark)

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25. For monitoring the overall financial and physical performance of an organization, which of the following information is required?

(a) Breakdown of sales, region-wise and customer-wise(b) Return on investment (c) Production levels of various products(d) Cash structure (e) All of the above.

(1 mark)

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26. Operating management of an organization requires the following information except

(a) Capacity utilization (b) Productivity of labor and machinery(c) Technological advances and new product development(d) Overtime payments (e) Marketing and distribution costs.

(1 mark)

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27. Which of the following statements is false?

(a) Value-chain is the linked set of value-creating activities from the basic raw material sources for suppliers to the ultimate end-use product delivered

(b) Value chain requires an internal focus(c) No firm is likely to span the entire value chain(d) Each firm must be understood in the context of the overall value chain of value-creating

activities(e) A firm is only a part of the larger set of activities in the value delivery system.

(1 mark)

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28. Scrap and costs of spoiled units that cannot be salvaged are the examples of

(a) Appraisal costs (b) Internal failure costs(c) External failure costs (d) Prevention costs(e) Committed costs.

(1 mark)

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29. Which of the following is usually the longest stage in the product life cycle?

(a) Introduction phase (b) Growth phase(c) Maturity phase (d) Saturation phase (e) Decline Phase.

(1 mark)

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30. Which of the following is not a disadvantage of shadow price?

(a) The use of shadow price is incompatible with the philosophy of decentralization through divisionalisation

(b) To derive the shadow price, one has to obtain the dual solution to the mathematical programming model developed for solving the production planning problem of the buying division

(c) Assimilating the data and application of the model becomes a highly centralized affair(d) Operating managers often do not understand and appreciate the concept of shadow price(e) Shadow price can be used only when the resources are available in plenty and are not scarce.

(1 mark)

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31. Activities, their drivers and their costs may be classified as unit-level, batch level, product level, and facility level. If activity based costing information is prepared for internal purposes, the costs of which of the following levels is/are most likely to be treated as period costs?

(a) Unit level (b) Batch level(c) Product level (d) Facility level (e) Both (a) and (c)

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above.

(1 mark)

32. Target pricing

(a) Is more appropriate when applied to mature and long-established products(b) Considers the variable costs and excludes fixed costs(c) Is often used when costs are difficult to control(d) Is a pricing strategy used to create competitive advantage(e) Is well suited for complex products that require many sub-assemblies.

(1 mark)

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33. Top-to-bottom budget is also known as

(a) Participative budget (b) Imposed budget(c) Zero-based budget (d) Manpower budget (e) Master budget.

(1 mark)

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34. Basic standards are known as

(a) Ideal standards (b) Current standards(c) Measurement standards (d) High standards (e) Expected standards.

(1 mark)

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35. Which of the following is false with regard to full-cost pricing?

(a) It is prone to distortion by accounting misapplications(b) The normal mark-up is based on total cost(c) It is useful in case the company has full knowledge of the demand curve(d) Sellers do not take advantage of the buyers when the latter’s demand becomes acute(e) It ignores vital economic considerations.

(1 mark)

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36. The relationship between the budgeted number of working hours and the maximum possible working hours in a budgeted period is

(a) Efficiency ratio (b) Activity ratio(c) Calendar ratio (d) Capacity usage ratio(e) Capacity utilization ratio.

(1 mark)

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37. Which of the following statements is true regarding flexible budget?

(a) It accommodates changes in the interest rate(b) It accommodates changes in the inflation rate(c) It accommodates changes in activity levels(d) It is used to evaluate capacity use(e) It is a static budget that has been revised for changes in prices.

(1 mark)

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38. A company is currently using the budget as a tool for planning. The management has decided to use the budgets for control purposes also. To affect this change, the financial controller must

(a) Develop forecasting procedures(b) Organize a budget committee and appoint a budget director(c) Report daily to operating management all deviations from the plan(d) Report daily to top management all deviations from the plan(e) Synchronize the budgeting and accounting systems within the organizational structure.

(1 mark)

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39. Which of the following is/are true with regard to the period of budget?

I. The budget period should be long enough to cover complete production of various productsII. For business of a seasonal nature, the budget period should cover atleast one entire seasonal

cycleIII. The budget period should be long enough to allow for the financing of production well in

advance of actual needs.

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

(1 mark)

40. Fixed overhead cost variance is the difference between

(a) Actual fixed cost and Budgeted fixed cost(b) Actual fixed cost and Standard fixed cost(c) Actual fixed cost and Applied fixed cost(d) Budgeted fixed cost and Applied fixed cost(e) Standard fixed cost and Applied fixed cost.

(1 mark)

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41. Sify Ltd. produces a commodity by blending two raw materials – X and Y. The following are the details regarding the raw materials:

Material Standard mix Standard price per kg.X 44.4% Rs.5Y 55.6% Rs.4

The standard process loss is 15%. During the month of March 2004, the company produced 4,000 kg. of finished product. The position of stock and purchases for the month of March 2004 is as under:

Material Stock as on March 01, 2004Kg.

Stock as on March 31, 2004 Kg.

Purchases during March 2004

Kg. Rs.

X 80 30 2,000 9,200Y 100 120 2,500 9,500

The material yield variance of the company is(a) Rs.747.50 (Favorable) (b) Rs.747.50 (Adverse)(c) Rs.776.52 (Adverse) (d) Rs.776.52 (Favorable) (e) Rs.781.70 (Favorable).

(3 marks)

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42. Consider the following particulars pertaining to 1,000 units of a product produced during the month of March 2004:

Standard price per kg. of raw material Rs.10Standard direct labor cost Rs.5,000Standard direct labor hours 500Standard overheads per direct labor hour Rs.3Total standard cost per unit Rs.20Material usage variance Rs.860 (A)

The actual quantity of raw material consumed during the month of March 2004 is

(a) 1,264 kgs (b) 1,364 kgs (c) 1,436 kgs (d) 1,634 kgs (e) 1,350 kgs.

(2 marks)

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43. Hiset 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 and the fixed overheads, which are recovered on direct labor hours, amount to Rs.120 per kg. of output. The budgeted output is 1,400 kgs. per month.

Actual production during the month of March 2004 is 1,370 kgs. and the direct labor hours utilized during the month were 3,880.

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

Opening work-in-progress – 200 kgs.: Degree of completion of labor and overheads – 60% Closing work-in-progress – 350 kgs.: Degree of completion of labor and overheads – 40%The company uses FIFO method for evaluation of stocks. The fixed overhead efficiency variance is

(a) Rs.11,600 (Adverse) (b) Rs.11,600 (Favorable)(c) Rs. 4,800 (Adverse) (d) Rs. 4,800 (Favorable) (e) Rs. 9,500 (Favorable).

(3 marks)

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44. Tilak Ltd. has two divisions - A and B. The division A has the capacity to manufacture 83,000 units of a special component SC annually and it has some idle capacity currently. The budgeted residual income for the division A is Rs.6,00,000. The relevant details extracted from the budget of A are as under:

Sales (to outside customers) = 65,000 units @ Rs.120 per unitVariable cost per unit = Rs.78Divisional fixed cost = Rs.15,00,000Capital employed = Rs.50,00,000Cost of capital = 18% per annum

Division B received an order for which it requires 18,000 units of a component similar to SC. An additional variable cost of Rs.7 per unit will be incurred to make minor modifications to SC 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.152 (b) Rs.93 (c) Rs.135 (d) Rs.163 (e) Rs.100.

(3 marks)

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45. Sai Ltd. manufactures three products – A, B and C. The following is the information pertaining to the products for the month of March 2004:

Product Units Machine hours per unit A 300 2B 520 5C 450 4

The overheads incurred for the month of March 2004 are as under:

Particulars Rs.Factory overhead applicable to machine oriented activity 52,500Set up costs 8,330Costs of ordering materials 6,850Handling materials 11,340

These overheads are being absorbed on a machine hour rate. However, investigation into the production overhead activities for the period reveals the following:

Particulars A B CNumber of set-ups 7 6 4Number of material orders 3 4 3Number of times material was handled 8 10 9

The approximate overhead cost per unit of product B under Activity Based Costing is

(a) Rs.75.00 (b) Rs.71.50 (c) Rs.72.80 (d) Rs.70.50 (e) Rs.65.00.

(3 marks)

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46. A company estimates its direct material requirements for the month of May 2004 to be Rs.3,00,000 and the direct labor to be Rs.1,80,000. It is the policy of the company to absorb overheads as under:

Factory overheads 50% of direct laborAdministrative overheads 20% of factory costSelling and distribution overheads 20% of factory cost

It is estimated that the selling and distribution overheads will increase by 15% in the month of May 2004. The company sells goods at a profit of 20% on sales.

The budgeted sales for the month of May 2004 is

(a) Rs.8,15,100 (b) Rs.9,78,120 (c) Rs.10,18,875 (d) Rs.9,57,600 (e) Rs.9,97,500.

(2 marks)

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47. MM Ltd. has estimated the following quarter-wise sales for its product for the year 2004-05:

Quarter I II III IVSales (units) 5,000 6,250 6,500 7,000

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The stocks to be maintained are as under:

Particulars Finished goods (units) Raw materials (kg.)

Opening stock 1,200 2,800 Closing stock 1,100 3,500

Each unit of finished output requires 2 kg. of raw materials. The production pattern in each quarter is based on 80% of the sales of the current quarter and 20% of the sales of the next quarter. The company proposes to purchase the entire annual requirement of raw material in the first three quarters as under:

Quarter Purchase of raw materials as % of total annual requirement in quantity

Price per kg.Rs.

I 30% 12II 50% 13III 20% 14

The budgeted amount to be spent to purchase raw materials for the year 2004-05 is


(2 marks)

48. Consider the following particulars pertaining to Shiva Ltd. for the month of February 2004:

Overheads cost variance = Rs.1,880 (Adverse)Overheads volume variance = Rs.1,050 (Adverse)Budgeted hours for February 2004 = 800 hoursBudgeted overheads for February 2004 = Rs.16,000Actual rate of overheads = Rs.19 per hour.

The overhead capacity variance is(a) Rs.1,700 (Favorable) (b) Rs.1,700 (Adverse)(c) Rs.1,716 (Favorable) (d) Rs.1,716 (Adverse) (e) NIL.

(2 marks)

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49. Consider the following particulars for the month of March 2004:

Budgeted fixed production overhead cost = Rs.1,10,000Budgeted production = 5,500 unitsThe fixed overhead cost was under absorbed by Rs.12,000 and the fixed production overhead expenditure variance was Rs.2,500 (Adverse). The number of units produced during the month of March 2004 was(a) 5,025 (b) 5,625 (c) 4,775 (d) 4,550 (e) 4,850.

(2 marks)

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50. Jeevan Ltd. has normal capacity of 50 machines working 8 hours per day of 25 days in a month. The budgeted fixed overheads of a month are Rs. 90,000. The standard time required to manufacture one unit of product is 5 hours. In a particular month, the company worked for 22 days of 390 machine hours per day and produced 1,700 units of the product. The actual fixed overheads incurred were Rs. 80,000.

The total fixed overhead variance and calendar variance are

(a) Rs.10,000 (F) and Rs.10,800(A) respectively(b) Rs.3,500 (F) and Rs.10,800 (A) respectively(c) Rs.10,000 (A) and Rs.9,000 (A) respectively(d) Rs.3,500 (A) and Rs.10,800 (A) respectively(e) Rs.13,500 (A) and Rs.10,000 (F) respectively.

(2 marks)

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

Particulars A BEstimated production (units) 14,000 16,000Total variable costs (other than direct labor) (Rs.) 5,60,000 7,20,000Direct labor cost per hour (Rs.) 8 6Number of labor hours per unit 4 4

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Fixed costs (Rs.) 8,50,000 10,00,000

The investment in fixed capital is Rs.15,60,000 and working capital requirement amounts to Rs.5,00,000. A return of 20% 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 A is(a) Rs.75.40 (b) Rs. 72.00 (c) Rs.147.40 (d) Rs.115.40 (e) Rs.107.40.

(2 marks)

52. The budgeted and actual sales of a concern are as under:

ProductBudget Actual

Quantity (kgs.)

Price (Rs.)

Quantity (kgs.)

Price (Rs.)

A 2,500 15 2,400 14.50B 2,600 18 2,450 19.40C 2,900 20 3,250 19.60

The sales mix variance is

(a) Rs.1,968.75 (Adverse) (b) Rs.1,968.75 (Favorable)(c) Rs.4,958.75 (Adverse) (d) Rs.1,021.25 (Favorable)(e) Rs.7,591.25 (Adverse).

(1 mark)

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53. The estimated annual production of products P and Q are 8,000 units and 18,000 units respectively. The budgeted cost details of these products are as under:

Particulars P QDirect materials per unit Rs.60 Rs.45Direct labor per unit (@Rs.5 per hour) Rs.35 Rs.40Selling overheads per unit (60% variable) Rs. 8 Rs.10

The other overheads are charged to the products as under:Factory overheads (50% fixed) = 80% of direct wagesAdministrative overheads (100% fixed) = 10% of factory cost

The fixed capital investment is Rs.15,00,000 and the working capital requirement is equivalent to 3 months stock of cost of sales of P and 4 months stock of cost of sales of Q. A return on investment of 20% is expected.

The expected return on capital employed is


(3 marks)

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54. Machining Division of Coalis Ltd., which is operating at full capacity, manufactures and sells 6,000 units of component KL in a perfectly competitive market. Revenue and cost data are as follows:

Particulars Rs.Variable cost per unit 24

Fixed cost 5,00,000

Sales value 18,00,000The Assembly Division received an order for which it requires the component KL. The minimum transfer price per unit that should be charged by Machining Division to other division of the company is


(1 mark)

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55. Consider the following information pertaining to Prakash Ltd.

Particulars May 2004 June 2004 July 2004Expected sales (units) 12,000 14,000 13,000Estimated wages and other manufacturing expenses Rs.)

2,25,000 2,60,000 2,80,000

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Prakash Ltd. sells the goods at Rs.65 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 units of raw material and is estimated to be purchased for Rs.5 per unit. 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 June 2004 will be


(3 marks)

56. During the month of March 2004, 560 kg. of material was purchased at a total cost of Rs.15,904. The stocks of material increased by 15 kg. It is the company’s policy to value the stocks at standard purchase price. If the material price variance was Rs.224 (Adverse), the standard price per kg. of material is


(1 mark)

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57. If the asset turnover and profit margin of a company are 1.85 and 0.35 respectively, the return on investment is

(a) 0.65 (b) 0.35 (c) 1.50 (d) 5.29 (e) 0.19

(1 mark)

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58. Rajni Ltd. is currently operating at 80% capacity level. The production under normal capacity level is 1,50,000 units. The variable cost per unit is Rs.14 and the total fixed costs are Rs.8,00,000. If the company wants to earn a profit of Rs.4,00,000, then the price of the product per unit should be


(1 mark)

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59. AB Ltd. manufactures a single product at the operated capacity of 40,000 units while the normal capacity of the plant is 50,000 units per annum. The company has estimated 20% profit on sales realization and furnished the following budgeted information:

Particulars50,000 units

(Rs.)40,000 units

(Rs.)Fixed overheads 2,00,000 2,00,000Variable overheads 3,00,000 2,40,000Semi-variable overheads 3,00,000 2,60,000Sales realization 18,00,000 14,40,000

The company has received an order from a customer for a quantity equivalent to 10% of the normal capacity. It is noticed that prime cost per unit of product is constant

If the company desires to maintain the same percentage of profit on selling price, the minimum price per unit to be quoted for new order is


(3 marks)

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60. KV Ltd., is planning to produce a new model of calculator. The potential demand for the next year is estimated to be 1,75,000 units. The company has the capacity to produce 7,00,000 units and could sell 1,75,000 units at a price of Rs.625 per calculator. The demand would double for every decrease of Rs.75 in the selling price. The company expects a minimum margin of 20%.

At full capacity level, the target cost per unit will be


(1 mark)

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61. Vinak Ltd. services washing machines and clothes dryers. It charges customers for the spare materials with markup on variable cost. The company has five employees, each earning Rs. 6,000 per year and spending 1,000 hours per year on service calls. It sells parts that cost Rs. 45,000 annually. The company has other costs of Rs. 25,000 a year, which is allocated two-thirds to labor and the remainder to material. The amount of markup on labor cost, if the target profit of the company is Rs.20,000 per

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annum, is

(a) Rs.18,000 (b) Rs.12,000 (c) Rs.30,000 (d) Rs.48,000 (e) Rs.27,000.

(2 marks)

62. Consider the following data of a company during the month of March 2004:

i. Budgeted hours 4,000ii. Standard hours for actual production 4,440iii. Maximum possible hours in the budget period 4,800iv. Actual hours 3,800

The activity ratio of the company during the month of March 2004 is

(a) 111% (b) 120% (c) 95% (d) 117% (e) 126%.

(1 mark)

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63. Sanjay is a divisional manager for C-Top Ltd. He has been assigned the task of creating a production budget for his division, which produces the company’s most popular stuffed animal. Budgeted sales for this toy for the next year have been set at 5,00,000 units, desired ending finished goods inventory at 1,50,000 units, and Sanjay desires 60,000 equivalent units in ending work-in-process inventory. The opening finished goods inventory for the next year is 80,000 units, with 50,000 equivalent units in beginning work-in-process inventory. How many equivalent units should Vijay plan for his division to produce?

(a) 5,50,000 (b) 5,75,000 (c) 7,25,000 (d) 5,00,000 (e) 5,80,000.

(2 marks)

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64. Adarsh Ltd. is preparing its cash budget for the next period. Sales are expected to be Rs. 1,00,000 in April 2004, Rs. 2,00,000 in May 2004, Rs.3,00,000 in June 2004 and Rs.1,00,000 in July 2004. Half of all sales are cash sales, and the other half are on credit. Experience indicates that 70% of the credit sales will be collected in the month following the sale, 20% the month after that, and 10% in the third month after the sale. The budgeted collection for the month of July 2004 is


(2 marks)

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65. The following data pertaining to Tishan Ltd. which is operating at 70% of the capacity:

Particulars At 70% capacity (Rs.)Variable overheads:

Indirect laborIndirect material

Semi-variable overheads:

Power (

1

3 fixed, balance variable)Repairs and maintenance (60 % fixed, 40 % variable)

Fixed overheads:DepreciationInsuranceOthers

21,00010,500

10,500

1,400

9,0004,0003,000

Total 59,400

Estimated direct labor hours – 1,15,500 hrs.

The overhead recovery rate per direct labor hour at 80% is

(a) 0.555 (b) 0.492 (c) 0.536 (d) 0.465 (e) 0.634.

(2 marks)

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66. A timber merchant purchased 2,000 cft. of timber logs on January 01, 2004 at the rate of Rs.160 per cft and stored them in his timber yard for three months for seasoning. In the timber yard the following items of expenses were incurred during the period of seasoning:

(i) (i) Rent –Rs.14,200 per quarter

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(ii) (ii) Salaries of 6 guards at the rate of Rs.300 per month(iii) (iii) Incidental expenditure for maintenance, power, lighting, etc. Rs.900 per month(iv) (iv) Annual share of administration overheads Rs.16,000.

70% of the floor area of the godown and other connected operations were incurred for stocking the seasoned timber. Loss in volume of the logs due to seasoning should be taken at 8%.

If the timber merchant desires a profit of 20% on cost, the selling price of the seasoned timber per cft as on March 31, 2004 is


(2 marks)

67. Chandana Ltd. is attempting to compute costs for its three products A, B and C for pricing purposes. The company has annual fixed manufacturing costs of Rs. 4,73,625. The variable costs per unit of the company’s products are as follows:

Product Variable costs of manufacture (Rs.)

A

B

C

10.50

12.90

11.80

The company expects to produce and sell 45,000 units of A, 90,000 units of B, and 75,500 units of C annually. Company’s policy is to add a markup of 20 percent to each product’s total manufacturing costs to compute the tentative selling price.

The selling prices of products A, B and C, if fixed costs are allocated on the basis of number of units produced, are

(a) Rs. 15.30, Rs. 18.18 and Rs. 16.86 respectively (b) Rs. 18.18, Rs. 15.30 and Rs. 16.86 respectively(c) Rs. 15.30, Rs. 18.18 and Rs. 19.25 respectively(d) Rs. 12.53, Rs. 18.18 and Rs. 16.86 respectively(e) Rs. 15.30, Rs. 18.18 and Rs. 17.85 respectively.

(2 marks)

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68. The data relating to Bhanu Ltd. for the month of March 2004 are as follows:

Output (units)Wages paid for 18,000 hoursMaterial purchased 5,000 kg

9,500 Rs. 49,500 Rs. 45,000

Variances :

Particulars Rs.Labor rateLabor efficiencyLabor idle timeMaterial priceMaterial usage

3,000 (A)5,000 (F)

675 (A)2,200 (F)1,440 (F)

The standard prime cost per unit is


(2 marks)

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69. ABC Ltd. has the following cost components for 75,000 units of product X for the month of March 2004:

Raw materials = Rs.7,50,000Direct labor = Rs.6,07,500Manufacturing overheads = Rs.2,50,000 (40% fixed)Selling and administrative overheads = Rs.3,75,000 (70 % fixed)

The total costs to produce and sell 90,000 units in the month of April 2004 are

(a) Rs.24,60,000 (b) Rs.24,56,760(c) Rs.23,86,760 (d) Rs.22,91,000 (e) Rs.23,06,500.



(2 marks)

70. Satish Ltd. is currently working at 50% capacity and produces 10,000 units.

At 50% working, the product cost is Rs. 180 per unit and it is sold at Rs. 200 per unit.

At 60% working, raw material cost increases by 2% and selling price falls by 2%.

The unit cost of Rs. 180 is made up as follows:

Particulars Rs.MaterialLaborFactory overheadAdministration overhead

1003030 (40 % fixed)20 (50 % fixed)

The total profit at 60% level of capacity is (a) Rs.2,20,000 (b) Rs.2,12,000 (c) Rs.2,32,000 (d) Rs.2,25,000 (e) Rs. 1,95,000.

(2 marks)

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END OF QUESTION PAPER


Suggested AnswersManagement Accounting – II (152) : April 2004

Section A

1. Answer : (b)

Reason : The volume variance is the under applied or over applied of fixed factory overhead. It is the difference between the budgeted fixed factory overhead and applied (standard) fixed factory overhead. The volume variance is not applicable in case of variable factory overhead. Other options (a), (c), (d) and (e) are not correct.

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2. Answer : (d)

Reason : A budget in which a responsibility center manager must justify each planned activity and its estimated total cost is called Zero based budget. Other options are not correct.

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3. Answer : (b)

Reason : Operation budgets normally cover a period of one year or less. Other options are not correct.

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4. Answer : (e)

Reason : A fixed factory overhead volume variance is the difference between the budgeted fixed factory overhead and the overhead applied based on a predetermined rate and standard direct labor hours allowed for the actual output. Option (a) is incorrect. Option (b) is incorrect because the difference between actual direct labor hours and standard direct labor hours allowed is the basis of the variable overhead efficiency variance. Option (c) is incorrect because it is not the difference between actual production and standard production. Option (d) is incorrect because the difference between fixed factory overhead applied on the absis of standard allowed direct labor hours and for actual output the budgeted fixed factory overhead defines the total fixed overhead variances.

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5. Answer : (c)

Reason : The materials price variance may be isolated at the time of purchase or at the time of transfer to production. It equals the actual quantity of materials purchased or transferred times the difference between the actual and standard unit prices. Hence, a favorable materials price variance means that materials were purchased at a price less than the standard price. Therefore, option (e) is not correct. Option (c) is correct.

Option (a) and (b) are incorrect because no variance relates quantity purchased to quantity used. Option (d) is incorrect because the unfavorable quantity variance indicates the more materials were used than allowed by the standard. The material quantity variance equals the standard unit price times the difference between the actual quantity used and the standard quantity used and the standard quantity allowed for the actual output.

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6. Answer : (e)

Reason : Life cycle costing estimates a product’s revenue and expenses over its expected life cycle. This approach is especially useful when revenues and related costs do not occur in the same period. It emphasizes the need to price products to cover all costs, not just those for production. Hence, costs are determined for all value chain categories: upstream ( R & D, design), manufacturing and downstream (marketing, distribution and customer service). The result is to highlight upstream and downstream costs in the cost planning process that often receive insufficient attention.

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7. Answer : (b)

Reason : The optimal transfer price of a selling division should be set at a point that will have the most desirable economic effect on the firm as a whole while at the same time continuing to motivate the management of every division to perform efficiently. Setting the transfer price based on actual costs rather than standard costs would give the selling division little incentive to control costs.

Option (a) is incorrect because inefficiencies are charged to the buying department. Options (c) and (d) are not correct, because by definition, cost based transfer prices are not adjusted by mark-up or ROI. Option (e) is incorrect because cost-based transfer price which provides the advantages of clarity and administrative convenience.

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8. Answer : (d)

Reason : An investment center is the organizational type most like an independent business because it

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http://www.icfai.org/suggested/152-0404.htm#Q8%23Q8








is responsible for its own revenues, cost incurred and capital invested. The other types of centers do not incorporate all three elements.

Option (a) is incorrect because a revenue center is responsible only for revenue generation, not for costs or capital investment. Option (b) is incorrect because a profit center is responsible for revenues and costs but not for invested capital. Option (c) is incorrect because a cost center is evaluated only on the basis of costs incurred. It is not responsible for revenues and invested capital. Option (e) is not correct because it is responsible for revenues and variable costs but not invested capital.

9. Answer : (a)

Reason : The labor price (rate) variance is the difference between the actual rate paid and standard rate times the actual hours. The difference may be attributable to a change in labor rates since the establishment of the standards, using a single average standard rate despite different rates earned among different employees, assigning higher-paid workers to job estimated to require lower-paid workers (or vice versa), or paying hourly rates but basing standards on piece work rates (or vice versa). The difference should not be caused by a union contract approved before the budgeting cycle because such rates would have been incorporated into the standards. Other options given in (b), (c), (d) and (e) are the causes for labor rate variance.

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10. Answer : (e)

Reason : A budget manual describes how a budget is to be prepared. Items usually included in a budget manual are a planning calendar and distribution instructions for all budget schedules. Distribution instructions are important because once a schedule is prepared, other departments within the organization will use the schedule to prepare their own budget. Without distribution instructions, someone who needs a particular schedule may be overlooked. Therefore option (e) is correct.

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11. Answer : (e)

Reason : The direct material usage budget and direct material purchases budget differ because of a change in the level of material stock. If stock is required to maintain in the production, material purchase should be more than the material usage. Therefore, (e) is correct.

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12. Answer : (c)

Reason : If the company obtains discount for bulk purchases, the company can purchase more quantity of materials than requirements for cost saving. The high purchase of materials is not useful if the company wants to reduce the stock level. The low price of materials and high sales volume are not the reasons for high purchase of materials.

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13. Answer : (b)

Reason : When actual production is less than the standard production it is an unfavorable material yield variance. This is the responsibility of the production department. This is not the responsibility of the purchasing, stores, engineering and inspection department. Therefore (b) is true.

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14. Answer : (c)

Reason : The sales volume variance can be divided into the sales quantity variance and the sales mix variance. The sales quantity variance is the change in contribution margin caused by the difference between actual and budgeted volume, assuming that budgeted sales mix, unit variable costs, and unit sales prices are constant. Thus, it equals the sales volume variance when the sales mix variance is zero. In a multiproduct company, the sales mix variance is a variance caused by a sales mix that differs from that budgeted. For example, even when the sales quantity is exactly as budgeted, an unfavorable sales mix variance can be caused by greater sales of a low-contribution product at the expense of lower sales of a high-contribution product.

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15. Answer : (c)

Reason : A flexible budget is essentially a series of several budgets prepared for many levels of sales of production. At the end of the period, management can compare actual costs or performance with the appropriate budgeted level in the flexible budget. New columns can quickly be made by interpolation or extrapolation, if necessary. A flexible budget is designed to allow adjustment of the budget to the actual level of activity before comparing the budgeted activity with actual results.

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16. Answer : (b)

Reason : Cost of goods manufactured is equivalent to manufacturing costs incurred during the period, plus beginning work-in-process, minus ending work-in-process. A cost of goods manufactured budget is therefore based on materials, direct labor, factory overhead, and

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work-in-process.

17. Answer : (d)

Reason : A cash budget may be prepared monthly or even weekly to facilitate cash planning and control. The purpose is to anticipate cash needs while minimizing the amount of idle cash. The cash receipts section of the budget includes all sources of cash. One such source is the proceeds of loans.

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18. Answer : (d)

Reason : Budgetary slack is the term referring to the underestimation of probable performance in a budget. With slack in a budget, a manager can achieve the budget more easily. Slack must be avoided if a budget is to have its desired effects. Other options are not correct.

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19. Answer : (a)

Reason : McGregor’s Theory X is based on the conception that ‘The average human being has an inherent dislike of work and will avoid it if he can’. Because of this human characteristic of dislike for work most people must be coerced, controlled, and directed towards the achievement of goal. Option (b) is incorrect as this theory is based on principles of human motivation as revealed by Abraham Maslow. Option (c) is incorrect as it is set forth hierarchy of human needs. Option (d) and (e) are not correct.

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20. Answer : (c)

Reason : The system of identification and communication that signals the manager when his attention is needed is known as management by exception. The system remains silent when attention of the manager is not required. The manager can devote attention only to those areas which require managerial action.

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21. Answer : (d)

Reason : Strategic budget is a form of long range planning based on identifying and specifying organizational goals and objectives. The strength and weaknesses of the organization are evaluated and risk levels are assessed. The influences of environmental factors are forecasted to derive the best strategy for reaching the organization’s objectives. Other options are not correct.

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22. Answer : (d)

Reason : A cost center is a responsibility center that is responsible for costs only. Of the alternatives given, variance analysis is the only one that can be used in a cost center. Variance analysis involves comparing actual costs with predicted or standard costs. Other options are not true.

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23. Answer : (e)

Reason : Total quality management is often termed as a set of concepts and tools for getting all employees focused on continuous improvement in the eyes of the customer. It is neither quality control (a) nor cost control (b). Customer orientation is one of the core concepts of total quality management. TQM aims at eliciting greater employee commitment through shared decision making and introduce various forms of self management (d). This is one of the elements in TQM.

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24. Answer : (a)

Reason : Responsibility accounting holds managers responsible only for factors under their control. For this purpose, operations are organized into responsibility centers. Costs are classified as controllable and non-controllable, which implies that some revenues and costs can be changed through effective management. If a manager has authority to incur costs, a responsibility accounting system will charge them to the manager’s responsibility center. So, this type of accounting is known as Responsibility accounting.

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25. Answer : (e)

Reason : For monitoring the overall financial and physical performance of the organization, information relating to breakdown of sales, region-wise and customer-wise, return on investment, production levels of various products, cash structure is required to the corporate management. Therefore, option (e) is correct.

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26. Answer : (c)

Reason : The information pertaining to technological advances and new product development is required to corporate management of the organization. Other information like capacity utilization, productivity of labor and machinery, overtime payments and marketing and distribution costs is required to operating management of the organization.

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27. Answer : (b)

Reason : Value chain requires an external focus unlike conventional management accounting. Hence (b) is false. Value-chain is the linked set of value-creating activities from the basic raw material sources for suppliers to the ultimate end-use product delivered into the final customer’s hands. No firm is likely to span the entire value chain. Typically, a firm is only a part of the larger set of activities in the value delivery system. Each firm must be understood in the context of the overall value chain of value-creating activities.

(b)

28. Answer : (b)

Reason : Scrap and costs of spoiled units that cannot be salvaged are examples of internal failure costs. These are the costs associated with materials and products that fail to meet quality standards and result in manufacturing losses. These defects are identified before the goods are shipped to customers. Hence the answer is (b). Appraisal costs are incurred to ensure that materials, products and services meet quality standards. They begin with the inspection of raw materials and parts from vendors. External failure costs are the costs incurred when inferior-quality products or services are sold to customers. Prevention costs are the costs incurred to reduce the number of defective units produced or the incidence of poor-quality service. Committed cost is fixed costs which results from the decision of the management in the prior period and is not subject to the management control in the present on a short-run basis.

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29. Answer : (c)

Reason : The maturity phase begins after sales cease to rise exponentially. The causes of the declining percentage growth rate is the market saturation. Sales growth continues but at a diminishing rate because of the diminishing number of potential customers. This is usually the longest stage in the life cycle and most existing products are in this stage.

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30. Answer : (e)

Reason : Only a constrained resource has shadow price. Where resources are not fully utilized, shadow price is zero. The shadow price can be used only when the resources are scarce. Hence the answer is (e). The use of shadow prices is incompatible with the philosophy of decentralization through divisionalisation. To derive at the shadow prices one has to obtain the dual solution to the mathematical programming model developed for solving the production planning problem of the buying division. A great deal of data like the market data for the buying division, cost data for the selling and buying divisions and capcacity data for both the divisions are required. Hence assimilating the data and application of the model becomes a highly centralized affair. Operating managers do not understand and appreciate the concept of shadow price.

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31. Answer : (d)

Reason : A difficulty in applying ABC is that, whereas the unit level, batch level and product level costs of activities pertain to specific products or services, facility level costs do not. Thus facility level costs are not accurately assignable to products. The theoretically sound solution is to treat them as period costs. Nevertheless, Organizations that apply ABC ordinarily assign them to products to obtain a full absorption costs suitable for external reporting. However, for internal purposes, facility level costs should be treated as period costs to avoid distorting decisions about cost efficiency, pricing and profitability.

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32. Answer : (d)

Reason : Target pricing and costing may result in a competitive advantage because it is customer-oriented approach that focuses on what products can be sold at what prices. Hence (d) is the answer. It is also advantageous because it emphasizes control over costs prior to their being locked in during the early links in the value chain. The company sets a target price for a potential product reflecting what it believes consumer will pay and competitors will do. After subtracting the desired profit margin, the long-run target cost is known. If current costs are too high to allow an acceptable profit, cost-cutting measures are implemented or the product is abandoned. The assumption is that target price is the constraint. Option (a) is incorrect because target pricing is used on products that have not yet been developed. Option (b) is incorrect because target pricing includes all costs. Option (c) is incorrect because target pricing can be used in any situation but is most likely to succeed when costs can be well controlled. Option (e) is not correct because it is difficult to use with complex products that require many sub-assemblies such as automobiles. This is because tracking costs becomes too complicated and tedious, and cost analysis must be performed at so many levels.

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33. Answer : (b)

Reason : Top-to-bottom budget is also known as imposed budget. In this type of budget, the budgeted

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quantities are obtained from the top level managers and then communicated downward to lower level managers. Lower level managers do not participate in this type of budget. Hence the answer is (b). In participative budget, estimations of lower level managers are coordinated and communicated upward to the top-level managers. Zero-based budgeting is a method of budget review and evaluation that requires all projects and programs to justify all resources. Manpower budget will take an overall view of the organizations needs for manpower for all areas of activity for a period of years. Master budget is a budget which is prepared from and summarizes the functional budgets.

34. Answer : (c)

Reason : Basic standards are known as measurement standards. These are established at a particular time and remain unchanged over a period of time. These standards are not revised frequently, but if they are revised, it is only due to changes in specification of materials and technology. They may also be revised if there are substantial price changes.

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35. Answer : (c)

Reason : Full-cost pricing is useful in case the company lacks knowledge of demand curve. Hence (c) is false. It is prone to distortion by accounting misapplications such as undue reliance upon historical cost, an unjustifiable inclusion of manufacturing overhead based on predetermined rates, and an ignorance of the effect of volume on unit costs and profits. In full-cost pricing, the price is determined by adding a mark-up on full cost. Cost plus pricing is fairer to both buyers and sellers. Sellers do not take advantage of buyers when the latter’s demand becomes acute. It ignores vital economic considerations of demand and competition.

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36. Answer : (d)

Reason : The relationship between the budgeted number of working hours and the maximum possible working hours in a budgeted period is capacity usage ratio. Hence the answer is (d). The standard hours equivalent to the work produced expressed as a percentage of the actual hours spent in producing that work is efficiency ratio. The activity ratio is the number of standard hours equivalent to the work produced expressed as a percentage of the budgeted standard hours. Calendar ratio is the relationship between the number of working days in a period and the number of working days in the relative budget period. Capacity utilization ratio is the relationship between the actual hours in a budget period and the budgeted working hours in a given period.

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37. Answer : (c)

Reason : The correct answer is (c). A flexible budget is essentially a series of several budgets prepared for various levels of operating activity. A flexible budget facilitates comparison of actual results with budget figures.

(a) and (b) are not correct because accounting for interest and inflation is the same in static budgets.

(d) is not correct because the purpose of the flexible budgets is to provide plans for different levels of activity.

(e) is not correct because a flexible budget is actually a series of static budgets for different operating activities.

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38. Answer : (e)

Reason : A budget is a means of control because it sets standard guidelines with which actual performance can be compared. The feedback provided by comparison of actual and budgeted performance reveals whether a manager has used company assts efficiently. If a budget is to be used for control purposes, however, the accounting system must be designed to produce information required for at the control process. Further, the budgeting and accounting system must be related the organizational structure. So that variances twill be assigned to the proper individuals.

Option (a) is incorrect because the company should already be using forecasting procedures if the budget is being used as planning tool.

Option (b) is not correct because a budget director and committee are needed even if a budget is to be used only for planning.

Option (c) and (d) are incorrect because daily reporting is usually not necessary.

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39. Answer : (e)

Reason : The budget period should be long enough to cover complete production of various products. For business of a seasonal nature, the budget period should cover atleast one entire seasonal cycle. The budget period should be long enough to allow for the financing of production well

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in advance of actual needs as it should provide adequate time to arrange the funds for production and other purposes. Thus the answer is (e).

40. Answer : (c)

Reason : Fixed overhead cost variance = Actual fixed overhead cost ~ Applied fixed overhead cost.

Other options mentioned in (a), (b), (d) and (e) are not correct.

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41. Answer : (e)

Reason : Actual material consumption:

Particulars X YStock as on March 01, 2004

Kg80 100

Add: Purchases during the month of March 2004Kg

2,000 2,500

2,080 2,600Less: Stock as on March 31, 2004

Kg30 120

Material consumed during the month of March 2004Kg

2,050 2,480

Total material consumption = 2,050 + 2,480 = 4,530kg.

Standard cost:

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

X 2,000 5 10,000

Y 2,500 4 10,000

4,500

Loss: 675

Output 3825 20,000

Standard yield =

Standard output 85 kg.Actual input = × 4,530kg.= 3,850.5kg.

Standard input 100 kg.

Material yield variance = Standard rate of output

(Actual yield – Standard yield) =

Rs.20,000×(3,850.5 kg. - 4000 kg.)

3825 = Rs.781.70 (F)

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42. Answer : (c)

Reason :

Particulars Rs.

Total standard cost (1,000 units @ Rs.20) 20,000

Less: Standard direct labor cost 5,000

Standard overhead cost (500hours @ Rs.3) 1,500

Standard cost of raw material 13,500

Total standard quantity of raw material required

=

Standard cost of raw material used Rs.13,500

Standard rate per kg. of raw material Rs.10

= 1,350 kg.

Material usage variance = Standard rate (standard quantity – actual quantity)

i.e. Rs.860(A) = Rs.10 x (1,350kg. – actual quantity)

Actual quantity =

(Rs.10 × 1,350 kg.) + 860=1,436 kg.

10

43. Answer : (b)

Reason :

Particulars Units Degree of Overheads



completionCompleted stock: From opening work-in-progress 200 40 % 80Current production (1370-200) 1,170 100 % 1,170Closing work-in-progress 350 40 % 140Total 1,390

Budgeted rate per unit = Rs.120

No. of direct labor hours per unit = 3

Budgeted rate per hour = Rs.40

Standard hours for actual production = 1,390x 3 = 4,170hours

Fixed overhead efficiency variance = (Standard hours for actual production – Actual hours) x budgeted rate per hour = ( 4,170hours – 3,880hours ) x Rs.40 = Rs.11,600(F)

44. Answer : (e)

Reason :

Fixed costs (in Rs.) 15,00,000

Return on capital employed (Rs.50,00,000 x 18%) (in Rs.) 9,00,000

Residual income desired (in Rs.) 6,00,000

Total desired contribution (in Rs.) 30,00,000

Contribution per unit from outside sales = Rs.120 – Rs.78 = Rs.42 per unit

Total contribution from outside sales = Rs.42 per unit x 65,000 units

= Rs.27,30,000

Minimum contribution to be earned from supply to division B

= Rs.30,00,000– Rs.27,30,000= Rs. 2,70,000

Contribution per unit on additional 18,000 units =

Rs. 2,70,000

18,000 units

= Rs.15 per unit

Variable cost for minor modification = Rs.7 per unit

Minimum transfer price per unit to be quoted = Rs.78 + Rs.15 + Rs.7 = Rs.100

45. Answer : (b)

Reason : Total machine hours = (300× 2) + (520× 5) + (450× 4) = 5,000 hours

Machine overhead charges = Rs.52,500 / 5,000 hours = Rs.10.50 per hour

Set-up costs = Rs8,330/ 17 (i.e. total number of set-ups) = Rs.490 per set-up

Material ordering cost = Rs.6,850/10 operations = Rs.685per operation

Material handling cost = Rs.11,340/ 27 operations = Rs.420 per operation

Overhead cost for product B:

Particulars Rs.

Machine overhead charges 5 × Rs.10.50 52.50

Set-up costs 6× Rs.490 / 520 5.65

Material ordering cost 4× Rs.685 / 520 5.27

Material handling cost 10× Rs.420 / 520 8.08

Total overhead cost 71.50

Hence the total overhead cost is Rs.71.50 per unit of B.

46. Answer : (c)

Reason : Rs.Direct material 3,00,000Direct labor 1,80,000Factory overheads (50% of direct labor) 90,000

Factory cost 5,70,000

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Administrative overheads (20% of factory cost) 1,14,000Selling and distribution expenses (20% of factory cost + 15%)= (5,70,000 × 20% × 115%)

1,31,100

8,15,100Profit 20% on sales (i.e. 25% on cost) 2,03,775

Sales 10,18,875

47. Answer : (a)

Reason : unitsSales (total of all quarters) 24,750Add: Closing stock 1,100 25,850Less: opening stock 1,200Total production for next year 24,650

kgRaw material required for production (24,650units ×2) 49,300Add: Closing stock 3,500 52,800Less: opening stock 2,800Raw material to be purchased 50,000

Quarter % of rawmaterial Rawmaterial (kg.) Price per kg. (Rs.) Amount (Rs.)I 30% 15,000 12 1,80,000II 50% 25,000 13 3,25,000III 20% 10,000 14 1,40,000 6,45,000

Total amount of rawmaterial to be purchased is Rs.6,45,000

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48. Answer : (c)

Reason : Overhead expenditure variance = Overhead cost variance ~ Overhead volume variance = Rs.1,880(A) ~ Rs.1,050 (A) = Rs.830(A)

Actual overheads incurred = budgeted overheads ~ overheads expenditure variance = Rs.16,000~ Rs.830(A) = Rs.16,830

Actual hours =

Actual overheads incurred Rs.16,830= =885.8 hours

Actual rate of recovery Rs.19

Overheads capacity variance = Standard rate × (Actual hours – budgeted hours) =

Rs.16,000

800 × (885.8 hours – 800 hours) = Rs.1,716 (F).

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49. Answer : (a)

Reason : Fixed overhead recovery rate =

fixed overhead cost Rs.1,10,000= =Rs.20 per unit

Production (Units) 5,500 units

Particulars Rs.Budgeted fixed overhead 1,10,000Add: Fixed overhead expenditure variance 2,500Actual fixed overhead 1,12,500

Absorbed overhead = Actual fixed overhead – under-absorbed overhead = Rs.1,12,500 – 12,000= Rs.1,00,500

Actual production =

Overhead absorbed Rs.1,00,500=

Fixed overhead rate Rs.20 = 5,025 units

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50. Answer : (d)

Reason : Standard/ Budgeted data

Budgeted fixed overheads (Rs.)Budgeted output unitsBudgeted hours

90,0002,000

10,000

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Budgeted daysStandard labor hours per unitStandard hours worked per dayStandard rate per unit (Rs.)Standard rate per hour (Rs.)Standard fixed overhead rate per day (Rs.)

255

400459

3,600

Actual data

Actual fixed overheads (Rs.)

Actual output units

Actual hours

Actual days

80,000

1,700

8,580

22

The total fixed overhead variance

= (Fixed overhead recovered on actual output – Actual fixed overhead incurred)

= (1,700 units x Rs.45 – Rs.80,000)= Rs.3,500 (A)

Calendar variance = Standard fixed overhead rate per day (Actual days – Budgeted days)

= Rs.3,600 (22 days- 25 days) = Rs.10,800 (A)

51. Answer : (c)

Reason :

Particulars Rs.Fixed cost (Rs.8,50,000 + Rs.10,00,000) 18,50,000Add: expected return (Rs.15,60,000 + Rs.5,00,000) ×20% 4,12,000Contribution 22,62,000

Total labor hours:

Product A: (4× 14,000 units) 56,000Product B: (4× 16,000 units) 64,000Total labor hours 1,20,000

Contribution per labor hour =

Rs.22,62,000

1,20,000 hours = Rs.18.85 per labor hour.

Calculation of selling price:

Particulars Rs.Variable cost other than labor (Rs.5,60,000 / 14,000 units) 40.00Direct labor (Rs.8×4 hours) 32.00Contribution (Rs.18.85 ×4) 75.40Selling price 147.40

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52. Answer : (d)

Reason : Total quantity of actual sales = 2,400+2,450+3,250 = 8,100kgs.

Sales Mix variance = Standard rate × (Actual quantity- Revised Standard quantity)

A15 ×

8,1002, 400 2, 500

8, 000

=

1,968.75 (A)

B18 ×

8,1002, 450 2, 600

8, 000

=

3,285.00 (A)

C20 ×

8,1003, 250 2, 900

8, 000

=

6,275.00 (F)

Total 1,021.25 (F)

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53. Answer : (d)

Reason :

Particulars P QTotal cost

(Rs.)Variable cost

(Rs.)Total cost

(Rs.)Variable cost

(Rs.)Direct material 60.00 60.00 45.00 45.00Direct labor 35.00 35.00 40.00 40.00

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Factory overheads 28.00 14.00 32.00 16.00Total factory cost 123.00 109.00 117.00 101.00Administrative overheads 12.30 11.70 Selling overheads 8.00 4.80 10.00 6.00Total cost per unit 143.30 113.80 138.70 107.00

P – 143 .30 8,000 = Rs.11,46,400Q – 138.70 18,000 = Rs.24,96,600

Particulars Rs.Fixed capital 15,00,000Working capital

P – 11,46,400

3

12

=

2,86,600

Q – 24,96,600

4

12

8,32,200

Total Capital employed 26,18,800Expected ROI 20% Expected Return = 26,18,800 20% = Rs.5,23,760

54. Answer : (d)

Reason : Minimum transfer price, if the division is in a full capacity and product is in a perfectly competitive market, is the sale price of Rs.300, i.e. Rs.18,00,000 ¸ 6,000 units = Rs.300 per unit.

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55. Answer : (d)

Reason :

Particulars May 2004 June 2004Expected sales (units) 12,000 14,000Production (units) 6,000+7,000

= 13,0007,000+6,500

= 13,500Raw material required for production (units) 26,000 27,000Amount to be paid for raw material (in Rs.) 1,30,000 1,35,000Payment to creditors (in Rs.) 1,30,000

Particulars May 2004 June 2004 July 2004Expected sales (units) 12,000 14,000 13,000Sales (in Rs.) 7,80,000 9,10,000 8,45,000Cash sales (in Rs.) 3,90,000 4,55,000 4,22,500Collection from debtors (in Rs.) 3,90,000 4,55,000

Particulars Rs. June 2003Cash sales 4,55,000Collection from debtors 3,90,000Less: Payment to creditors 1,30,000

Other expenses 2,60,000Cash surplus 4,55,000

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56. Answer : (b)

Reason :

Particulars Rs.

Actual cost 15,904

Less: Adverse material price variance 224

Actual purchases at standard price 15,680

Standard price =

Rs.15,680

560 kg. = Rs.28

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57. Answer : (a)

Reason : Return on investment =Asset turnover Profit margin = 1.85×0.35 = 0.65

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58. Answer : (c)

Reason : Total fixed cost = Rs. 8,00,000

Expected profit = Rs. 4,00,000

Variable cost at 80% level

(80% x 1,50,000 units x Rs.14) = Rs.16,80,000

Total price = Rs.28,80,000

Per unit price at 80% level =

Rs28,80,000

1,20,000 units = Rs.24

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59. Answer : (a)

Reason : Computation of prime cost

Rs.

Sales (40,000 units) 14,40,000Less: Profit margin – 20% 2,88,000

Cost of sales – (80% of Rs.14,4,000) 11,52,000Less: Variable overheads – Rs.2,40,000

Semi-variable overheads – Rs.2,60,000 Fixed overheads – Rs.2,00,000 7,00,000

Prime cost 4,52,000

Semi-variable overheads:

Variable cost = unitsinChange

tcosinChange

=

Rs.3,00,000-Rs.2,60,000

50,000units-40,000units

=

.40, 000

10, 000

Rs

units = Rs.4per unit

At 40,000 units

Fixed cost = Total cost – Variable cost

= Rs.2,60,000 – 40,000 units Rs.4 = Rs.1,00,000

At 45,000 units

Total cost = 45,000 units Rs.4 + Rs.1,00,000 = Rs.2,80,000

Computation of differential cost of production of 5,000 additional units (i.e. 10% of normal capacity):

Element of cost 40,000 units(Rs.)

45,000 units(Rs.)

Differential cost for 5000 units (Rs.)

Prime cost – (Working Note 1) 4,52,000 5,08,500 56,500Variable overhead 2,40,000 2,70,000 30,000Semi variable overhead (Working Note 2) 2,60,000 2,80,000 20,000Fixed overhead 2,00,000 2,00,000 – 11,52,000 12,58,500 1,06,500

Cost per unit of new order =

.1, 06, 500

5, 000

Rs

= Rs.21.30

Profit margin 25% (20% on sale = 25% on cost) = Rs. 5.33

Minimum selling price per unit = Rs.26.63

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60. Answer : (c)

Reason : Target cost = Selling price at capacity – 20% profit margin

Price (Rs.) Demand (Units)625 1,75,000550 3,50,000

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475 7,00,000

Target cost = Rs.475 – 20% Rs.475 = Rs.475 – Rs.95 = Rs.380

61. Answer : (a)

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

Cost of parts = Rs. 45,000

Total variable cost Rs.75,000

Transfer profit = Rs. 20,000

Fixed cost = Rs. 25,000

= Rs. 45,000

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

Mark up on labor cost = 60% of Rs. 30,000 = Rs. 18,000

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62. Answer : (a)

Reason : Activity ratio = hoursBudgeted

nproducatioactualforhoursdardtanS

100

=

4,440 hours

4,000 hours 100 = 111%

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63. Answer : (e)

Reason : Using production related budgets, units to produce equals budgeted sales + desired ending finished goods inventory + desired equivalent units in ending work-in-process inventory – beginning finished goods inventory – equivalent units in beginning work-in-process inventory. Therefore, in this case, units to produce is equal to 5,00,000 + 1,50,000 + 60,000 – 80,000– 50,000 = 5,80,000.

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64. Answer : (b)

Reason : Collections from July 2004 cash sales will be half of total sales, or Rs. 50,000. From April Rs. 50,000 of credit sales, collections should be 10% or Rs.5,000. From May Rs. 1,00,000 of credit sales, collections should be 20% or Rs.20,000. From June Rs. 1,50,000 of credit sales, collections will be 70% or Rs. 1,05,000. Thus, total collections will amount to Rs. 1,80,000.

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65. Answer : (b)

Reason : Flexible budget for overhead.

Particulars At 80% capacity level (Rs.)

1. Variable overhead: (a) indirect labor (b) indirect material2. Variable portion of semi-variable overhead:

(a) power(b) repairs and maintenance

24,00012,000

8,000

640

Total variable (A) 44,640

3. Fixed portion of semi-variable overheads:(a) power(b) Repairs and maintenance

4. Fixed overhead:(a) Depreciation(b) Insurance(c) Others

3,500

840

9,0004,0003,000

Total Fixed (B) 20,340

5. Total overheads (A+B) 64,980

6. Estimated direct labor hrs. 1,32,000

7. Overhead recovery rate per direct labor hour (5¸6) 0.492

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66. Answer : (e)

Reason : Statement showing the determination of selling price of seasoned timber as on March 31, 2004:

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Particulars Qantity (cft) Amount (Rs.)

Cost of timber logs at the rate of Rs.160 per cft.Seasoning expenses for 3 months:Rent (Rs. 14,200 x 70%)Salaries of 6 guards (Rs. 300 x 6 x 3 x 70%)Incidental expenses (Rs. 900 x 3 x 70%)Administration overheads (Rs. 16,000 x ¼ x 70%)

2,000

3,20,000

9,9403,7801,8902,800

Total 2,000 3,38,410

Less: Normal loss at the rate of 8% 160

Total(net)Profit margin (20% of cost)

1,840 3,38,41067,682

Total selling price 4,06,092

Selling price per cft (Rs. 4,06,092 ¸ 1,840) 220.70

67. Answer : (a)

Reason :

Particulars A B C Total

Total fixed costs (Rs.)Number of units

45,000

90,000

75,500

4,73,6252,10,500

Fixed cost per unit (Rs.)Variable cost per unit

2.2510.50

2.2512.90

2.2511.80

Total unit cost (Rs.)Markup – 20%

12.752.55

15.153.03

14.052.81

Selling price (Rs.) 15.30 18.18 16.86

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68. Answer : (d)

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 Rs. Total Rs. Per unit

Standard material cost (45,000 + 2,200 + 1,440)

Standard wages (49,500+5,000 – 3,000 – 675)

48,640

50,825

5.12

5.35

Total 10.47

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69. Answer : (e)

Reason : Variable cost :

Raw materials = Rs.7,50,000 ¸ 75,000 units =Rs. 10.00

Direct labor = Rs.6,07,500 ¸ 75,000 units =Rs. 8.10

Manufacturing overheads = 60% of Rs.2,50,000 ¸ 75,000 units = Rs. 2.00

Selling and administrative overheads = 30% of 3,75,000 ¸ 75,000 units = Rs. 1.50

Rs. 21.60

Fixed cost = 40% of Rs.2,50,000 + 70% of Rs.3,75,000

= Rs.1,00,000+ Rs.2,62,500= Rs.3,62,500

Cost of 90,000 units = 90,000x Rs. 21.60 + Rs. 3,62,500

= Rs. 19,44,000 + Rs. 3,62,500

= Rs. 23,06,500.

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70. Answer : (b)

Reason : Statement showing profit at different capacity level

Capacity levels

50 %(Rs.) 60%(Rs.)

Units 10,000 12,000

Selling price per unit 200 196

Material 100 102

Labor 30 30

Factory overhead 18 18

Administration overhead 10 10

Total marginal cost per unit 158 160

Contribution per unit 42 36

Total contribution 4,20,000 4,32,000

Less : Fixed cost 2,20,000 2,20,000

Profit 2,00,000 2,12,000

Incremental profit 12,000

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