Question Paper

Management Accounting – I (151) : July 2004

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

< Answer
1. Costs are allocated to cost objects in many ways and for many reasons. Which of the following is a >
purpose of cost allocation?
(a) Implementing activity-based costing
(b) Evaluating revenue center performance
(c) Budgeting cash and controlling expenditures
(d) Aiding in variable costing for internal reporting
(e) Measuring income and assets for external reporting.
(1 mark)
< Answer
2. Which of the following costs is irrelevant to a decision to accept or reject an order? >

(a) Differential costs (b) Replacement costs

(c) Opportunity costs (d) Unavoidable costs
(e) Out-of-pocket costs.
(1 mark)
< Answer
3. Which of the following is false with regard to the supplementary rate method for accounting of under >
or over absorption of overheads?
(a) It facilitates the absorption of actual overhead for production
(b) The value of stock is distorted under this method
(c) The supplementary rate can be determined only after the end of the accounting period
(d) It requires a lot of clerical work
(e) Correction of costs through supplementary rates is necessary for maintaining data for
comparison.
(1 mark)
< Answer
4. The average method of valuation of inventory in process costing is suitable, if >

(a) Prices are increasing

(b) Prices of inventory fluctuate from period to period
(c) Abnormal loss is incurred at the beginning of the process
(d) Material is continually introduced
(e) Material is introduced at the beginning of the process.
(1 mark)
< Answer
5. Which of the following statements is true with respect to Absorption costing and Variable costing? >

(a) Overhead costs are treated in the same manner under both the costing methods
(b) Variable manufacturing costs are lower under variable costing
(c) Fixed manufacturing costs are treated in the same manner under both the costing methods
(d) If finished goods inventory increases, variable costing results in lower income
(e) Gross margins are same under both the costing methods.
(1 mark)
< Answer
6. The upper limit of a company’s productive output capacity given its existing resources is called >

(a) Theoretical capacity (b) Practical capacity

(c) Normal capacity (d) Excess capacity
(e) Cycle-time capacity.
(1 mark)
< Answer
7. The term relevant cost applies to all the following decision situations except the >
 (a) Acceptance of a special order
(b) Manufacture or purchase of component parts
(c) Determination of a product price
(d) Replacement of equipment
(e) Addition or deletion of a product line.
(1 mark)
< Answer
8. Which of the following assumptions is false with respect to Cost-Volume-Profit analysis? >

(a) This analysis assumes that production and sales will be synchronized at all points of time
(b) This analysis assumes that prices of input factors will vary
(c) This analysis assumes that efficiency and productivity remain unchanged
(d) This analysis assumes that selling prices are constant at all levels of sales
(e) This analysis assumes that the cost can be divided into fixed and variable categories.
(1 mark)
< Answer
9. Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be >
used if
(a) A company wants to adopt a standard cost system
(b) A company wants to adopt a direct costing system
(c) The manufactured products differ in the resources consumed from the individual departments in
the plant
(d) Manufacturing overhead is the largest cost component of its product cost
(e) The manufacturing operations of a company are all highly automated.
(1 mark)
< Answer
10. The total of costs incurred in the operation of a business undertaking other than the cost of >
manufacturing and production is
(a) Out-of-pocket cost (b) Programmed cost
(c) Conversion cost (d) Commercial cost
(e) Imputed cost.
(1 mark)
< Answer
11. Which of the following statements is false? >

(a) Management Accounting provides data for internal uses whereas Financial Accounting provides
data for external users
(b) Management Accounting is concerned with a strong orientation towards future while Financial
Accounting is concerned with a record of financial data of the past
(c) Management Accounting relies on the concept of responsibility whereas Financial Accounting
does not rely on the concept of responsibility
(d) Financial Accounting is mandatory for business organizations whereas Management Accounting
is not mandatory
(e) Financial Accounting statements have to be prepared in accordance with the GAAP whereas
managers set their own rules in the form and content of Management Accounting statements.
(1 mark)
< Answer
12. Which of the following statements is false? >

(a) By-product is a secondary product, which incidentally results from the manufacture of main
product
(b) Joint products are produced from the same basic raw material, and by a common process
(c) The main difference between joint products and by-products is its commercial value
(d) Where the by-products are utilized in the same undertaking, the by-product is valued at standard
cost
(e) The relationship between main product and by-product changes with changes in economic
conditions.
(1 mark)
< Answer
13. An Operation Costing System is >

(a) Identical to a process costing system except that actual cost is used for manufacturing overhead
 (b) The same as a job-order costing system except that no overhead allocations are made since
actual costs are used throughout
(c) The same as a job-order costing system except that materials are accounted for in the same way
as they are in a process costing system
(d) The same as a process costing system except that materials are allocated on the basis of batches
of production
(e) Identical to direct costing system except that no overhead allocations are made since actual costs
are used throughout.
(1 mark)
< Answer
14. Fixed cost is the product of >

(a) Break-even sales and margin of safety

(b) Sales and margin of safety
(c) Sales and profit-volume ratio
(d) Profit-volume ratio and excess of sales over margin of safety
(e) Profit-volume ratio and excess of sales over break-even point.
(1 mark)
< Answer
15. Insurance Premium is an example of >

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

(d) Discretionary cost (e) Committed cost.
(1 mark)
< Answer
16. Which of the following is an indirect labor? >

(a) A floor cleaner in a factory

(b) A Painter in a furniture shop
(c) An assembly worker in a company manufacturing televisions
(d) A Cobbler in a footwear company
(e) A Goldsmith of a jewelry manufacturing company.
(1 mark)
< Answer
17. Which of the following items is controllable by the production manager? >

(a) Price paid for raw materials (b) Usage of raw material
(c) Depreciation on machinery (d) Insurance on machinery
(e) Rent for floor space.
(1 mark)
< Answer
18. Equivalent units of production are used in process accounting to >

(a) Measure the efficiency of the production process

(b) Measure the effectiveness of the cost center
(c) Allocate overheads to production
(d) Establish standard costs
(e) Provide a means of allocating costs to partially completed units.
(1 mark)
< Answer
19. Market survey costs incurred for a new product are >

(a) Sunk costs (b) Conversion costs (c) Joint costs

(d) Relevant costs (e) Avoidable costs.
(1 mark)
< Answer
20. If a product is the result of a common process, which of the following costs are relevant for future >
decision-making?
(a) Joint costs before allocation (b) Joint costs allocated to the products
(c) Joint and separable costs in total (d) Separable costs only
(e) None of the above.
(1 mark)
< Answer
21. Which of the following activities uses process costing? >
 (a) Foundry (b) Automobile repair
(c) Road building (d) Electrical contracting
(e) Newspaper publishing.
(1 mark)
< Answer
22. Which of the following is/are considered as component of fixed factory overhead? >

I. Repairs and factory upkeep

II. Factory Supervision
III. Bad debts
IV. Cost incurred on trade magazine printing.
(a) Both (I) and (II) above (b) Both (I) and (III) above
(c) Both (II) and (IV) above (d) (I), (II) and (III) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer
23. Which of the following is true with respect to direct costs? >

(a) They are incurred for the benefit of cost centers

(b) They are incurred as a direct consequence of a decision
(c) They can be economically identified with the item being costed
(d) They cannot be economically identified with the item being costed
(e) They can be controlled immediately when it is incurred.
(1 mark)
< Answer
24. Overhead rate per unit of production is an appropriate overhead allocation base when >

(a) Several well differentiated products are manufactured

(b) Direct labor costs are low
(c) Direct material costs are large relative to direct labor costs
(d) Only one product is manufactured
(e) The manufacturing process is complex.
(1 mark)
< Answer
25. Which of the following statements is false? >

(a) In process costing, cost is accumulated according to processes or departments

(b) In job costing, the basis of cost accumulation is job order or batch size
(c) In process costing, cost is accumulated on time basis
(d) In job costing, cost is computed at the end of the cost period
(e) In process costing, items of prime cost cannot be traced with a particular order due to continuous
production.
(1 mark)
< Answer
26. The costs which reflect the policies of the top management and result in periodic appropriation are >
known as
(a) Imputed costs (b) Relevant costs (c) Programmed costs
(d) Committed costs (e) Discretionary costs.
(1 mark)
< Answer
27. Which of the following costs would be lower than the original budget, if the actual output is lower >
than the budgeted output?
(a) Total variable costs (b) Total fixed costs
(c) Variable costs per unit (d) Fixed costs per unit
(e) Both (c) and (d) above.
(1 mark)
< Answer
28. Which of the following expenses is related to the selling and distribution function? >

(a) Office lighting (b) Director’s remuneration

(c) Electricity expenses in factory (d) Depreciation of goods delivering van
(e) Charitable and political donations.
 (1 mark)
< Answer
29. Which of the following factors need to be considered in a make or buy decision? >

(a) The capability of the company to make the item in terms of capacity
(b) The availability of outside suppliers who can deliver the same in terms of quantity, time and
quality
(c) The opportunity cost of using existing capacity to manufacture alternative items, which would
make a greater contribution
(d) The differential cost of making and buying the item
(e) All of the above.
(1 mark)
< Answer
30. Profits under absorption costing system and marginal costing system will be same for a period, if >

(a) Production is greater than sales

(b) Production is less than sales
(c) Opening inventory is greater than closing inventory
(d) Opening inventory is less than closing inventory
(e) There is no change in opening and closing inventory.
(1 mark)
< Answer
31. Which of the following methods of costing considers both the variable and fixed costs as part of >
product costs?
(a) Direct costing (b) Marginal costing
(c) Absorption costing (d) Standard costing (e) Uniform costing.
(1 mark)
< Answer
32. Which of the following methods is not used for apportionment of joint costs to different joint >
products?
(a) Average unit costs method (b) Physical units method
(c) Standard costs method (d) Replacement costs method
(e) Market value method.
(1 mark)
< Answer
33. Which of the following is an administrative overhead cost? >

(a) Cost of lubricants for sewing machine in production

(b) Chief accountant’s salary
(c) Road tax for delivery vans
(d) Cost of painting advertising slogans on delivery vans
(e) Cost of broadcasting music throughout the factory.
(1 mark)
< Answer
34. When allocating service department costs to production departments, the method that does not >
consider different cost behavior patterns is the
(a) Single-rate method (b) Dual-rate method
(c) Direct method (d) Reciprocal method (e) Step
method.
(1 mark)
< Answer
35. Which of the following statements are true with respect to recovery of fixed manufacturing overhead >
cost under direct material cost method?
I. Time factor is completely ignored in this method
II. Under this method no distinction is made between the production of workers and that of
machines
III. This method is inequitable, if the raw materials used in production are not passed
through all processes
IV. This method is not appropriate, if there is no logical relationship between the items of
manufacturing overhead and material cost.
 (a) Both (I) and (IV) above (b) Both (II) and (III) above
(c) Both (II) and (IV) above (d) Both (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer
36. In which of the following situations, is job costing ideal? >

(a) Where two or more products are produced from the same process
(b) Where the products are dissimilar and non-repetitive in nature
(c) Where the products are homogeneous
(d) Where the production is in continuous flow
(e) Where the production is carried on in batches.
(1 mark)
< Answer
37. Cost drivers are >

(a) Factors that cause costs to increase as the activity increases

(b) Accounting techniques used to control costs
(c) Accounting measurements used to evaluate whether or not performance is proceeding according
to plan
(d) Mechanical basis, such as machine hours, computer time, size of equipment etc. used to assign
costs to departments
(e) Both (a) and (b) above.
(1 mark)
< Answer
38. In which of the following situations does the break-even point (in units) increase? >

(a) When unit variable costs increase and sales price remains unchanged
(b) When unit variable costs decrease and sales price remains unchanged
(c) When unit variable costs remain unchanged and sales price increases
(d) When unit variable costs decrease and sales price increases
(e) When unit variable costs and unit sales price increase by the same amount in rupees.
(1 mark)
< Answer
39. If two service departments provide service to each other, and each department should be charged for >
the cost of service rendered by other, it is known as
(a) Direct method (b) Variable method
(c) Reciprocal service method (d) Linear method (e) Step down method.
(1 mark)
< Answer
40. Which of the following is true regarding contract costing? >

(a) Both work certified and work uncertified are valued at cost price
(b) Both work certified and work uncertified are valued at market price
(c) Both work certified and work uncertified are valued at contract price
(d) Work certified is valued at contract price whereas work uncertified is valued at cost price
(e) Work certified is valued at cost price whereas work uncertified is valued at market price.
(1 mark)
< Answer
41. Samsnit Ltd. uses process cost system to manufacture a special type of kit for the textile industry. The >
company has furnished the following information pertaining to operations for the month of June 2004:
Particulars Units
Opening work-in-process (June 01, 2004) 650
Introduced in production during June2004 7,800
Closing work-in-process (June 30, 2004) 580 There is no loss in the
manufacturing process. The opening inventory was 80% complete for materials and 60% complete for
conversion costs. The closing inventory was 75% complete for material and 65% complete for
conversion costs.
Costs pertaining to the month of June 2004 are as follows:
 Opening work in process:
Materials Rs. 19,850
Conversion Rs. 21,250
During the month:
Materials Rs.4,98,240
Conversion Rs.5,49,990
The total cost of closing work-in-process on June30, 2004, using FIFO method, is
(a) Rs.58,290 (b) Rs.51,242 (c) Rs.52,280 (d) Rs.54,230
(e) Rs.56,280.
(3 marks)
< Answer
•Mani Ltd. has 3 identical machines manned by 4 operators. The operators are fully engaged on >
machines. The total original cost of these 3 machines is Rs.12,00,000. The company has furnished the
following information pertaining to operations for 1st quarter ending
June 30, 2004:
Normal available hours per month per operator 500 hours
Absenteeism (without pay) 50 hours
Leave (with pay) 70 hours
Normal idle time (unavoidable) 10 hours
Average rate of wages per hour Rs.20
Estimated production bonus 8% on wages
Value of power consumed Rs.28,500
Supervision and indirect labor Rs.42,400
Electricity and lighting Rs.19,600
Repairs and maintenance per quarter 1% on value of machines
Depreciation per annum 10% on original cost
Miscellaneous expenses per annum Rs.48,000
General management expenses per annum Rs.80,000 The
comprehensive machine hour rate for the machine shop for the quarter ending
June 30, 2003 is
(a) Rs.84.94 (b) Rs.63.32 (c) Rs.56.11 (d) Rs.72.34 (e) Rs.59.22.
(3 marks)
< Answer
43. Plastic Furniture Ltd. manufactures plastic TV stands. The company is working at 80% capacity level, >
which represents 24,000 units per month. The cost break-up per TV stands is as under:
Materials – Rs.140
Labor – Rs. 60
Overheads – Rs. 80 (50% fixed)
The selling price is Rs.360 per unit. The company is planning to produce at 90% capacity level. At 90%
capacity level the selling price falls by Rs.20 accompanied by 5% fall in the price of materials.
The break-even point in units and profit at 90% level of capacity of the company are
(a) 8,000 units and Rs.19,29,000 respectively
(b) 8,972 units and Rs. 19,09,300 respectively
(c) 8,000 units and Rs.19,20,000 respectively
(d) 8,972 units and Rs.19,29,000 respectively
(e) 8,972 units and Rs.19,20,000 respectively.
(2 marks)
< Answer
44. XY Ltd. wants to buy a new machine to replace the old one, which is having frequent breakdowns. The >
company received offers for two models M1 and M2. The details of the two models are as under:
Particulars Model M1 Model M2
Installed capacity in units 25,000 25,000
Fixed overhead expenses per annum Rs.6,00,000 Rs.2,50,000
Estimated profit at the above capacity Rs.4,00,000 Rs.2,50,000 The sale
price per unit of product manufactured by these types of machines is Rs.80.
The level of sales at which both the models will earn the same profit
(a) 15,000 units (b) 10,000 units (c) 17,500 units (d) 20,000 units
 (e) 12,500 units.
(3 marks)
< Answer
45. Mohan Constructions undertook a contract for construction of a large complex in Secunderabad. The >
construction work commenced on April 01, 2003 and the following data are available for the year ended
March 31, 2004:
Particulars Rs.
Total contract price 1,25,00,000
Work certified 79,00,000
Progress payment received 62,50,000
Material issued to site 40,80,000
Direct wages paid 16,50,000
Materials returned from site 51,500
Plant hire charges 1,25,000
Wage related costs 99,500
Direct expenses incurred 63,500
Work not certified 11,11,500
Materials at site 40,500
Accrued wages 34,000 The contractors own a plant which
originally cost Rs.12,00,000 and has been continuously in use in this contract throughout the year. The
salvage value of the plant after 10 years is nil. The company uses the straight-line method of
depreciation. The total of work-in-process and plant at site to be shown in the balance sheet as on
March 31, 2004 is
(a) Rs.12,15,351 (b) Rs.22,95,351 (c) Rs.20,22,551 (d) Rs.23,30,341
(e) Rs.24,56,149.
(2 marks)
< Answer
46. Vishal Ltd. has furnished the following data pertaining to its product for the year 2003-04: >

Opening stock (Units) 19,570

Closing stock (Units) 13,240
Profit based on direct costing (Rs.) 4,25,619
Profit based on absorption costing (Rs.) 3,66,750 The fixed
overhead absorption rate per unit is
(a) Rs.27.70 (b) Rs.32.15 (c) Rs.18.74 (d) Rs.21.75 (e) Rs. 9.30.
(1 mark)
< Answer
47. Consider the following data pertaining to the production of a company for the month of June 2004: >

Particulars Rs.
Opening stock of raw material 11,570
Closing stock of raw material 10,380
Purchase of raw material during the month 1,28,450
Total manufacturing cost charged to product 3,39,165
Factory overheads are
applied at the rate of 45% of direct labor cost.
The amount of factory overheads applied to production is
(a) Rs. 94,287 (b) Rs.1,52,624 (c) Rs.65,025 (d) Rs.1,45,491 (e)
Rs.85,040.
(2 marks)
< Answer
48. In a manufacturing company, the production passes through four processes - A, B, C & D sequentially >
and the output of each process is the input of the subsequent process. The following is the loss of the
four processes:
 A – 12%
B – 14%
C – 16%
D – 15%
If the output in process D is 6,754.44kg., the
input of process A is
(a) 12,500 kg (b) 11,400 kg (c) 10,475 kg (d) 12,800 kg (e) 10,800
kg.
(1 mark)
< Answer
49. Thaparia Ltd., using process costing, manufactures a single product, which passes through two >
processes – process 1 and process 2, the output of process 1 becoming the input to process 2. The
company has furnished the following information relating to the product for the month of June 2004:
I. Raw material issued to process 1 was 4,500 units at a cost of Rs.11.80 per unit.
II. There was no opening or closing work-in-progress but opening and closing stocks of
finished goods were Rs.15,130 and Rs.14,500 respectively.
III. Normal losses and abnormal losses are defective units having a scrap value and cash is
received at the end of the period for all such units.
Other information:
Particulars Process 1 Process 2
Normal loss as a percentage of input 10% 5%
Output in units 4,200 3,970
Scrap value per unit (Rs.) 3.80 2.90
Additional components introduced (Rs.) 1,800 1,150
Direct wages incurred (Rs.) 6,500 7,250
Direct expenses incurred (Rs.) 3,235 3,799
Production overhead as a % of direct wages 60 40 The cost
of goods sold of the product for the month of June 2004 is
(a) Rs.82,740 (b) Rs.84,000 (c) Rs.84,740 (d) Rs.83,370 (e)
Rs.83,000.
(3 marks)
< Answer
50. A product, which uses 100 tons as input per month, passes through two processes – Process 1 >
and Process 2. The details of cost of process 1 for the month of June 2004 are as follows:
Process 1 Cost per ton (Rs.) of input
Direct material cost 1,550
Direct labor cost 1,200
Overhead costs 1,349 The total loss in process 1 is 2% of
input and the scrap is 6% of the input with a value of Rs.850 per ton. The material is transferred to
process 2 at cost. The direct labor cost of Process 2 is Rs.1,250 per ton of input. The overhead is 60%
of direct labor cost. The scrap at process 2 is 10% of input with a value of Rs.850 per ton.
The cost per unit of finished goods in process 2 is
(a) Rs.7,016.67 (b) Rs.4,400.33 (c) Rs.3,533.50 (d) Rs.7,061.76 (e)
Rs.6,566.67.
(2 marks)
< Answer
51. Srikrishna Ltd.manufactures and sells four types of products – A, B, C and D. The sales mix in value >
comprises 20%, 35%, 28% & 17% of A, B, C and D respectively. The total budgeted sales (i.e. 100%)
are Rs.4,75,000 per month. The operating costs are as follows:

i) Variable costs: Product - A 80% of selling price

Product - B 60% of selling price
Product - C 70% of selling price
Product - D 58% of selling price
ii) Fixed cost Rs. 1,29,800 per month The break-
even point for the production on an overall basis (i.e., in total) is
(a) Rs.4,00,500 (b) Rs.3,95,500 (c) Rs.3,87,000 (d) Rs.3,98,500 (e)
 Rs.3,75,000.
(2 marks)
< Answer
52. Shiv Sankar Ltd. manufactures four products – A, B, C & D, which emerge from a particular process of >
operation. The total cost of input for the period ended March 31, 2004 is Rs.4,80,000. The details of
output, additional cost after split-off point and sales value of the products are as follows:

Additional processing cost Sales value after further

Products Output (Kg.)
after split-off point (Rs.) process (Rs.)
A 12,000 22,000 2,40,000
B 6,000 20,000 1,44,000
C 8,000 4,000 1,44,000
D 4,000 18,000 80,000
If the products are sold at split-off point without further processing, the sales value would have been:

A Rs.2,16,000
B Rs.1,26,000
C Rs.1,40,000
D Rs. 56,000 The maximum amount of profit of the company from the four
products is
(a) Rs.82,000 (b) Rs.66,000 (c) Rs.64,000 (d) Rs.84,000 (e)
Rs.80,000.
(3 marks)
< Answer
53. Kappa Ltd. uses a process cost system to manufacture product - K. The company has furnished the >
following information pertaining to operation for the month of June 2004:
Particulars Units
Opening work-in-process inventory, June 1, 2004 5,500
Unit introduced during June 2004 29,000
Unit completed during June 2004 32,500
Closing work-in-process inventory, June 30, 2004 2,000 The opening
inventory was 60% complete for materials and 50% complete for conversion costs. The closing
inventory was 80% complete for materials and 60% complete for conversion costs.
Costs pertaining to the process for the month of June 2004 were as follows:
I) Opening inventory costs are: Materials – Rs.22,500, Labor cost – Rs.16,200
Factory Overhead – Rs.7,500
II) Costs incurred during the month: Materials used – Rs.1,65,000, Labor cost –
Rs.1,10,000
Factory overhead – Rs.62,500
Using the weighted average method, the equivalent unit cost of material for the month of June2004 is
(a) Rs.5.10 (b) Rs.4.20 (c) Rs.6.50 (d) Rs.3.80 (e) Rs.5.50.
(2 marks)
< Answer
54. Satya Sai Chemicals Ltd. runs its boiler on furnace oil obtained from Indian Oil and Bharat Petroleum, >
whose depots are situated at a distance of 15 km and 12 km from the factory site of the company.
Transportation of furnace oil is made by the company’s own tank lorries of 5 tons capacity each.
Onward trips are made only on full load and the lorries return empty. The filling-in time takes an
average of 70 minutes for Indian Oil and 65 minutes for Bharat Petroleum. The emptying time in the
factory is only 25 minutes for both. From the records available, it is seen that the average speed of the
company’s lorries works out to 60 km per hour. The variable operating charges per km is Rs.5.60 and
fixed charges per hour of operation is Rs.20.20.
The cost per ton-km from Indian Oil is
(a) Rs.2.88 (b) Rs.4.20 (c) Rs.3.50 (d) Rs.2.80 (e) Rs.3.88.
(3 marks)
< Answer
55. A company has a profit-volume ratio of 25%. To maintain the same contribution, by what percentage >
(%) must sales be increased to offset 15% reduction in selling price?
(a) 20.00 (b) 40.00 (c) 50.00 (d) 112.50 (e) 75.00.
 (2 marks)
< Answer
56. Allin-B Ltd. has budgeted the factory overhead for the month of June 2004 as Rs.16,50,000 for >
production department –P. The factory overhead incurred during the month was Rs.16,20,300. During
the month the company has absorbed Rs.16,07,100 of factory overhead on a budgeted labor hours of
50,000.The actual labor hour worked for the month is
(a) 48,700 hours (b) 49,100 hours (c) 48,500 hours (d) 49,800 hours (e) 50,000
hours.
(1 mark)
< Answer
57. Consider the following data pertaining to inventories of CBX Ltd. for the month of June 2004: >

Particulars Opening inventory Closing inventory

(Rs.) (Rs.)
Raw materials 16,330 18,540
Work-in-process 9,320 6,520
Finished goods 4,300 4,440 Other information:
i. Raw materials used Rs.78,390
ii. Total manufacturing costs charged to product (it
includes raw materials, direct labor and factory overheads
applied at the rate of 50% of direct labor cost) Rs. 2,85,960
iii. Cost of goods available for sale Rs.3,25,600
iv. Selling and general expenses Rs.6,300
The
costs of raw materials purchased and the direct labor are
(a) Rs.76,180 and Rs.97,400 respectively
(b) Rs.80,600 and Rs.48,700 respectively
(c) Rs.76,180 and Rs.69,190 respectively
(d) Rs.80,600 and Rs.78,390 respectively
(e) Rs.80,600 and Rs.1,38,380 respectively.
(2 marks)
< Answer
58. Sri Shiva Ltd. has furnished the following information pertaining to its product for the year ended >
March 31, 2004:
Selling price per unit Rs.285
Variable cost per unit Rs.171
Fixed cost Rs.18,75,000 The company plans to improve the quality of its sole
product by
i. Replacing a component that costs Rs.16.20 with a higher-grade unit that costs
Rs.22.00.
ii. Acquiring a packing machine of Rs.1,00,000.
The company will depreciate the machine over a period of 10 years with no estimated salvage value by
the Straight Line Method of depreciation. The income tax rate is 40%. If the company desires to earn a
post-tax income of Rs.2,85,000 in the upcoming period, the units to be sold by the company are
(a) 18,500 (b) 18,055 (c) 20,600 (d) 21,812 (e) 20,055.
(2 marks)
< Answer
59. A-1 Ltd. is a manufacturing company. In one of the production departments in its main factory, a >
machine hour rate is used for absorption of production overheads. The company has fixed up the
predetermined rate of Rs.58.75 per machine hour on the basis of normal activity level. The company
has estimated the following overhead expenditure at different activity levels:
Activity level Overhead expenditure
(Machine hour) (Rs.)
3,400 2,20,000
3,600 2,25,000
3,900 2,32,500 If the actual machine hours are 3,860 the
under/over absorption of overhead is
 (a) Rs.7,500 (under) (b) Rs.3,375 (over)
(c) Rs.3,375 (under) (d) Rs.4,725 (over) (e) Rs.4,725 (under).
(2 marks)
< Answer
60. Ciba Ltd.makes one model of a product known as ‘PQ’. The company has provided the following >
balances as on April 01, 2003:
Finished goods – 1,632 units
Work-in-process – Rs. 25,700
Raw materials – Rs.38,350
The following data are available as on March 31, 2004:
Indirect labor – Rs. 42,350
Freight in – Rs. 8,870
Direct labor – Rs. 69,900
Raw material – Rs. 35,200
Factory overhead expenses – Rs. 72,500
Work-in-process – Rs. 12,500
Sales (18,500units) – Rs.15,72,500
Indirect material – Rs. 38,450
Total manufacturing costs incurred – Rs.11,60,000
There were 1,850 units of finished goods of ‘PQ’as on March 31, 2004.The amount of raw materials
purchased during the year 2003-04was
(a) Rs. 9,31,080 (b) Rs. 9,24,780 (c) Rs. 9,94,680 (d) Rs. 10,00,980 (e) Rs.
9,50,680.
(2 marks)
< Answer
61. AB Ltd. has furnished the following data from the cost records in respect of Job No. A17: >

Materials Rs.16,350
Labor costs:
Department A 35 hours @ Rs.20 per hour
Department B 32 hours @ Rs.15 per hour
Overhead expenses of the company for the year are as follows:
Variable:
Department A – Rs.32,500 for 10,000 labor hours
Department B – Rs.30,500 for 5,000 labor hours
Fixed: Rs.60,000 for 10,000 working hours
The company desires to earn a profit of 25% on the selling price. The sale price of Job
No. A17 is
(a) Rs.24,321.27 (b) Rs.23,919.27 (c) Rs.17,932.00 (d) Rs.23,908.74 (e)
Rs.31,892.28.
(2 marks)
< Answer
62. Sri Shakti Ltd. manufactures a single product. The total fixed cost is Rs.8,50,000 which is based on a >
volume of 50,000 units per annum. The total cost per unit of the product is budgeted as Rs.45. During
the year 2003-04, sales volume was 46,800 units and production volume was 48,000 units. The actual
profit for the same period under absorption costing was Rs.1,15,600. The profit under marginal costing
is
(a) Rs.95,200 (b) Rs.1,36,000 (c) Rs.1,17,725 (d) Rs.1,13,475 (e)
Rs.97,325.
(1 mark)
< Answer
63. Two manufacturing companies – Arun Ltd. and Varun Ltd. have decided to merge their business >
operations. They have furnished the following operation details:
 Particulars Arun Ltd Varun Ltd
Capacity utilization (%) 80 70
Sales (Rs. in lacs) 640 490
Variable costs (Rs. in lacs) 480 294
Fixed costs (Rs. in lacs) 100 120 The profitability of the merged plant
at 75% capacity level is
(a) 10.50% (b) 5.69% (c) 32.00% (d) 12.44% (e) 16.05%.
(2 marks)
< Answer
64. The budgeted working conditions of a cost center of Super T Ltd. are as follows: >

Normal working per week – 42 hours

No. of machines – 8
Normal weekly loss of hours on
maintenance etc – 4 hours per machine
No. of weeks worked per year – 50
Estimated annual overheads – Rs.3,04,000
Estimated wage rate – Rs12 per hour
Actual results in respect of a 4 week period are:
Wages incurred – Rs.17,000
Overheads incurred – Rs.23,300
Machines used – 1,200 hours
The amount of under or over absorption of wages and overheads respectively are
(a) Rs.700 (over) and Rs.872 (under)
(b) Rs.700 (under) and Rs.872 (under)
(c) Rs.872 (under) and Rs.700 (over)
(d) Rs.872 (over) and Rs.700 (under)
(e) Rs.872 (under) and Rs.700 (under).
(2 marks)
< Answer
65. At 60% capacity utilization, the overhead recovery rate is Rs.28.00 per unit. At 80% capacity level, the >
rate gets reduced to Rs.25.00 per unit. If the production attains 85% of the capacity utilization, the
recovery rate would be
(a) Rs.26.32 (b) Rs.24.47 (c) Rs.22.53 (d) Rs.22.13 (e) Rs.20.50.
(1 mark)
< Answer
66. XLNT Ltd. has furnished the following information pertaining to the forthcoming year: >

Budgeted Variable costs – 60% of sales value

Budgeted Fixed costs – 20% of sales value If the company increases the
selling price by 10% but the fixed costs, variable cost per unit and sales volume remain unchanged, the
effect on contribution would be
(a) An increase of 10% (b) A decrease of 10%
(c) An increase of 20% (d) A decrease of 20% (e) An increase of 25%.
(1 mark)
< Answer
67. Santosh Ltd. manufactures music systems, which are sold at Rs.3,600 per unit. The total cost consists of >
40% for direct materials, 40% for direct wages and 20% for overheads. An increase in material price by
20% and in wage rates by 10% is expected in the forthcoming year, as a result of which the profit at
current selling price may decrease by 30% of the present profit per unit. The current and future profit at
present selling price are
(a) Rs.720.00 and Rs.1,028.57 respectively
(b) Rs.720.00 and Rs.411.43 respectively
(c) Rs.1028.57 and Rs.308.57 respectively
(d) Rs.1,028.57 and Rs.411.43 respectively
(e) Rs.1,028.57 and Rs.720.00 respectively.
(2 marks)
< Answer
68. Moonstar Ltd. had the following inventories at the beginning and end of the month of June 2004: >
 Particulars June 1, 2004 (Rs.) June 30, 2004 (Rs.)
Finished goods 85,000 81,000
Work-in-process 72,000 63,500
Direct materials 90,000 82,500
The
following additional manufacturing data were available for the month of June 2004:
Particulars (Rs.)
Direct materials purchased 2,93,400
Purchase returns and allowances 2,600
Transportation 2,900
Direct labor 2,68,000
Actual factory overhead 1,65,000
The
company applies factory overhead at a rate of 40% of direct labor cost, and any over applied or under
applied factory overhead is deferred until the end of the year 2004-05.
The manufacturing cost of the company for the month of June 2004 was
(a) Rs.5,69,200 (b) Rs.6,51,700 (c) Rs.6,76,400 (d) Rs.7,34,200
(e) Rs.7,25,500.
(2 marks)
< Answer
69. The variable cost and selling price of a scientific calculator manufactured by AB Ltd. during the current >
year is as follows:

Particulars Rs.
Material 200
Labor 150
Overheads 50
Selling price 700
The fixed cost and sales during the current year are Rs.18,00,000 and
Rs.56,00,000, respectively. During the next year wages will increase by 5% and the material cost,
variable overheads and fixed overheads are expected to increase by 10%, 5% and 2%, respectively.
The new selling price in the forthcoming year if the existing contribution to sales ratio is to be
maintained is
(a) Rs.851.25 (b) Rs. 752.53 (c) Rs. 688.55 (d) Rs. 701.00
(e) Rs. 805.25.
(2 marks)
< Answer
70. Bismat Ltd. manufactures and sells a special type of product ‘K’. Presently, the company manufactures >
8,000 units, which is 80% of the potential capacity. The present cost structure per unit of the product ‘K’
is given below:

Direct materials Rs.200

Direct labor Rs.150
Factory overhead Rs. 100 (40% fixed)
Selling overhead Rs. 80 (50% fixed)
The company estimates to
produce the same number of units of the product during the following year and anticipates that fixed
cost will go up by 10% while the rates of direct materials and direct labor will increase by 8% and 6%
respectively. The company has no intention to increase its present sale price of Rs.580 per unit. Under
these circumstances, the company obtained an offer to supply 1,000 units of the product to a special
customer.
The minimum sale price per unit of additional order of 1,000 units to be quoted to the customer if the
company desires to earn an overall profit of Rs.2,50,000 is
(a) Rs. 589 (b) Rs. 550 (c) Rs. 475 (d) Rs. 611 (e) Rs. 580.
 (2 marks)

END OF QUESTION PAPER

 Suggested Answers
Management Accounting – I (151) : July 2004
1. Answer : (e) <
TOP
Reason : Cost allocation is a process of assigning and reassigning costs to cost objects. It is used for these costs >
that cannot be directly associated with a specific cost object. It is often used for purposes of measuring
income and assets for external reporting purposes. It is less meaningful for internal purposes because
responsibility accounting systems emphasize controllability, a process often ignored in cost allocation
2. Answer : (d) <
TOP
Reason : Unavoidable cost is the cost which will not be eliminated if the decision is to accept or reject an order. >
It is irrelevant to management decision making because they cannot vary with the option selected.
Other costs mentioned in options (a), (b), (c) and (e) are considered as relevant for decision making.
Therefore, (d) is correct.
3. Answer : (b) <
TOP
Reason : The value of stock is not distorted under this method. Hence the answer is (b). The supplementary rate >
method facilitates the absorption of actual overhead incurred for production. The supplementary rate
can be determined only after the end of the accounting period. It requires a lot of clerical work.
Correction of costs through supplementary rates is necessary for maintaining data for comparison.
4. Answer : (b) <
TOP
Reason : The average method of valuation of inventory in process costing is useful when prices are fluctuating >
from period to period. It is not useful in respect of other options (a),(c),(d) and (e).
5. Answer : (d) <
TOP
Reason : Under variable costing, inventories are charged only with the variable costs of production. Fixed >
manufacturing costs are expensed as period costs.
Absorption costing charges to inventory all cost of production. If finished goods inventory increases,
variable costing results in lower income because entire fixed costs are expensed in the current period
but absorption costing results in higher income because it capitalizes some fixed costs. Other options
(a),(b),(c) and (e) are not true
6. Answer : (b) <
TOP
Reason : Practical capacity is the maximum level at which output is produced efficiently, with an allowance for >
unavoidable interruptions. Because this level will be higher than expected capacity, its use will
ordinarily resulting under applied fixed factory overhead. Other options are not correct.
7. Answer : (c) <
TOP
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. Relevant costs are considered in the
analysis of decisions to make or buy a product, accept a special order, replace capital equipment or
add or delete a product line. Relevant costing applies to many special decisions but not for
determining a product’s price. This decision involves an evaluation of, among other things, demand,
competitors’ action, and total manufacturing and selling costs. Therefore, (a),(b),(d) and (e) are
incorrect.
8. Answer : (b) <
TOP
Reason : Cost-volume-profit analysis presumes that prices of input factors will remain constant. In other >
words, this analysis presents a static picture of a dynamic situation. Therefore, option (b) is not
correct. Other options given in (a), (d), (c) and (e) are correct.
9. Answer : (c) <
TOP
Reason : Factory overhead is usually assigned to products based on a predetermined rate or rates. The activity >
base for overhead allocation should have a high correlation with the incurrence of overhead. Given
only one cost driver, one overhead application rate is sufficient. If products differ in the resources
consumed in individual departments, multiple rates are preferable.
10 Answer : (d) <
TOP
. Reason : The total of costs incurred in the operation of a business undertaking other than the cost of >
manufacturing and production is commercial cost.
11. Answer : (c) <
TOP
Reason : Both Financial and Management Accounting rely heavily on the concept of responsibility. Financial >
Accounting is concerned with the concept of responsibility or stewardship over the company as a
whole; while Management Accounting is concerned with stewardship over its parts. Hence (c) is false.
Management Accounting provides data for internal uses by managers whereas Financial Accounting
provides data for external users like shareholders, creditors, etc. Since a large part of the overall
responsibilities of a manager have to do with planning, a manager’s information need has a strong
orientation towards future. On the other hand, Financial Accounting is concerned with a record of
financial data of the past. Financial Accounting is mandatory for business organizations. They should
compulsorily maintain financial records as per various legal statutes like Companies Act, Income Tax
Act, etc. By contrast, Management Accounting is not mandatory. Financial Accounting statements
have to be prepared in accordance with the GAAP whereas managers set their own rules in the form
and content of Management Accounting statements.
12 Answer : (d) <
TOP
. Reason : Where the by-products are utilized in the same undertaking, the by-product is valued at opportunity >
cost or replacement cost. By-product is a secondary product, which incidentally results from the
manufacture of main product. Joint products are produced from the same basic raw material, and by a
common process. The main difference between joint products and by-products is its commercial
value. The relationship between main product and by-product changes with changes in economic
conditions.
13 Answer : (d) <
TOP
. Reason : Operation Costing is a hybrid of Job-order and Process costing systems wherein materials are >
allocated on the basis of batches of production. It is used by companies that manufacture goods that
undergo some similar and dissimilar processes. Operation costing accumulates total conversion cost
for each operation. However direct material costs are charged specifically to products or batches as in
job-order system.
14 Answer : (d) <
TOP
. Reason : Margin of safety = Sales – Break even sales >

Break-even sales = Sales – Margin of safety

Fixed cost
Profit - volume ratio
We know, Break-even point =
∴ Fixed cost = Profit-volume ratio × Break-even sales
= Profit-volume ratio × (Sales – Margin of safety)
15 Answer : (e) <
TOP
. Reason : Committed cost is a fixed cost 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. Insurance premium is
the example of committed cost. Therefore (e) is correct.
16 Answer : (a) <
TOP
. Reason : A floor cleaner in a factory is an indirect labor. Therefore (a) is correct. Other options mentioned in >
(b), (c), (d) and (e) are examples of direct labor.
17 Answer : (b) <
TOP
. Reason : Production manager can control the use of raw-material in the production. Price paid for raw materials >
is the area of purchase manager to control. The production manager cannot control depreciation and
insurance on machinery and rent for floor space. Therefore, (b) is correct.
18 Answer : (e) <
TOP
. Reason : The correct answer is (e). Equivalent units of production (EUP) are used to allocate costs to >
incomplete units. It is usually done separately for direct materials and conversion costs.
(a), (b) and (d) are not correct because EUP are calculated to allocate production costs, not to measure
production efficiency or effectiveness of a cost center. It does not involve in establishing standard
costs.
(c) is not correct because overhead is usually allocated based on a measure of activity.
19 Answer : (a) <
TOP
. Reason : The Market survey costs have already been incurred. Thus, they are costs resulting from a past >
irrevocable decision. These sunk costs are irrelevant to a new product because they are unavoidable.
Therefore (a) is correct.
20 Answer : (d) <
TOP
. Reason : Joint costs by definition are common to the joint products produced and therefore, do not differ among >
alternative courses of action. Hence only separable costs are relevant for future decision making.
Hence correct answer is (d).
21 Answer : (e) <
TOP
. Reason : The correct answer is (e). Process costing is used for continuous manufacturing of relatively >
homogeneous units. Newspapers are published in long runs of identical items, hence process costing
is indicated.
(a), (b), (c) and (d) are not correct because they involve unique projects which require job-order
costing.
<
22 Answer : (a) TOP
. Reason : The correct answer is (a). Repairs and factory upkeep and supervision are the components of factory >

overhead. Bad debts and trade magazine are items of selling expenses and administration expenses
respectively. Therefore answers, (b), (c), (d) and (e) are not correct.
<
23 Answer : (c) TOP
. Reason : A direct cost is a cost which is incurred for and may be conveniently identified with a particular cost >

center or cost unit. It is not for the benefit of cost center. It is not incurred as a direct consequence of a
decision. It cannot be controlled when it is incurred. It can be identified with the item being costed.
Therefore (c) is correct.
24 Answer : (d) <
TOP
. Reason : Allocating overheads on the basis of units of production is generally not appropriate. However, if a >
firm manufactures only one product, this allocation method may be acceptable because all costs are to
be charged to the single product. Other points mentioned in (a), (b), (c) and (e) are not true.
25 Answer : (d) <
TOP
. Reason : In process costing, cost is accumulated on time basis and according to process or departments. In this >
method, prime cost cannot be traced with a particular order due to continuous production. In job
costing, cost is accumulated according to job order or batch size. Job cost is computed when the job is
completed. It does not consider the period of cost. Therefore (d) is false.
26 Answer : (c) <
TOP
. Reason : Certain decisions reflect the policies of the top management which results in periodic appropriation >
and these costs are referred to as programmed cost.
Imputed costs are costs not actually incurred in some transactions but which are relevant to the
decisions as they pertain to a particular situation.
Relevant costs are those future costs which differ between alternatives. It is defined as the costs which
are affected and changed by a decision.
Committed costs are incurred to maintain the company’s facilities and physical existence, and over
which management has little or no discretion.
Discretionary costs are these costs which are not essential for the decision under consideration or the
accomplishment of management objectives but it is related to management programs, new researches
etc.
27 Answer : (a) <
TOP
. Reason : The total variable costs vary in direct proportion to the volume of activity. Total variable costs are linear >
and hence a reduction in the level of the activity implying a reduction in output, results in reduction in
total variable costs. On the other hand, the variable cost per unit remains constant. The fixed cost per
unit increases with a fall in output as the total fixed costs are constant over wide range of activity.
28 Answer : (d) <
TOP
. Reason: Office Lighting, Director’s remuneration, charitable and political donations are related to >
administrative function. Electricity expenses in factory is related to manufacturing function.
Depreciation on goods delivering van is related to selling and distribution function.
29 Answer : (e) <
TOP
. Reason : Make or buy decision is simply the choice between making a part of the article within the company or >
purchasing it from outside. In arriving at the decision all the factors as laid down in option (a), (b) , (c)
and (d) are considered.
30 Answer : (e) <
TOP
. Reason : The net profits under the marginal costing system and absorption costing system are equal if there is >
no opening stock and closing stock, or there is no change in opening stock and closing stock, i.e. when
production is equal to sales.
If production is not equal to sales i.e. changes occur in opening stock and closing stock, the net profits
under the two systems will differ.
31 Answer : (c) <
TOP
. Reason : Direct costing and marginal costing are same. It is mainly concerned with the variable costs. >
Absorption costing uses both variable cost and fixed cost (i.e. total costs) in product costs. Standard
costing is a technique to control cost. Uniform costing is followed by several business enterprises
using the same costing principles. It is not a separate method of cost accounting. Therefore, absorption
costing uses the total cost approach in the production.
32 Answer : (d) <
TOP
. Reason : Joint costs are apportioned to different joint products under average unit costs method, physical units >
method, standard costs method and market value method. It cannot be apportioned under replacement
costs method. Replacement cost method is used for apportionment of by-products but not joint
products.
33 Answer : (b) <
TOP
. Reason : Chief accountant’s salary is an administrative overhead cost. Cost of lubricants and cost of >
broadcasting music throughout the factory are factory overhead costs. Road tax for delivery vans and
cost of painting advertising slogans in delivery vans are selling & distribution overhead costs.
34 Answer : (a) <
TOP
. Reason : The single rate method combines fixed and variable costs. However, dual rates are preferable because >
they allow variable costs to be allocated on a different basis from fixed costs. Options (c), (d) and (e)
are incorrect because the direct method, reciprocal method and step methods can be used on a single
or dual rate basis. Option (b) is not true because a dual-rate method considers different cost behavior
patterns.
<
35 Answer : (e) TOP
. Reason : All the four statements are true with respect to the recovery of fixed manufacturing overhead costs >

under the method of Direct Material Cost.

36 Answer : (b) <
TOP
. Reason : Job costing is a type of specific order costing which applies where work is undertaken as an >
identifiable unit. Under job costing method, cost of an individual job or work order is ascertained
separately. Hence it is ideal where the products are dissimilar and non-repetitive in nature.
37 Answer : (a) <
TOP
. Reason : Activities that cause costs increased as activity increases are called cost drivers. Therefore, (a) is >
correct.
38 Answer : (a) <
TOP
. Reason : The break-even point in units is calculated by dividing the fixed costs by contribution per unit. If >
selling price is constant and variable costs increase, the unit contribution margin will decline. It results
in an increase in the break-even point. Other options given in (b), (c), (d) and (e) are not true.
39 Answer : (c) <
TOP
. Reason : Reciprocal service method indicates that if two service departments provide service to each other and >
each department should be charged for the cost of service rendered by other. It recognizes reciprocal
services among the service departments. Other methods stated in (a), (b), (d) and (e) are not correct.
40 Answer : (d) <
TOP
. Reason : In contract costing, work certified is valued at contract price and work uncertified is valued at cost >
price. Both are not valued at cost price, market price or contract price. Therefore (d) is true.
41 Answer : (d) <
TOP
. Reason: >

Statement of equivalent Production Unit (FIFO)

Input Output Completed: Material Conversion
Opening 650 Opening 650 20% 130 40% 260
Introduced 7,800 Introduced 7,220 100% 7,220 100% 7,220
Closing 580 75% 435 65% 377
8,450 8,450 7,785 7,857
Costs during the Rs.4,98,24 Rs.5,49,99
month 0 0
Cost per unit Rs. 64 Rs. 70
The total cost of closing work-in-process
Material – 435× Rs.64 = Rs.27,840
Conversion – 377× Rs.70 = Rs.26,390
Rs.54,230
42 Answer : (b) <
TOP
. Reason: >

Computation of total utilized machine hours:

Normal available hours per month per operator

500
Less: Unutilized hours due to
Absenteeism 50
Leave 70
Idle time 10 130
Total utilized hours per operator per month 370
Total
hours for 4 operators × 3 months = 370 × 4 × 3 = 4,440 hours
Therefore, machine utilized is 4,440 hours (Machine cannot work without operator).
Normal hours for which wages are to be paid = 500 – 50= 450 hours
Wages for 3 months = 450 hours × 4 × 3 × Rs.20 =
Rs.1,08,000
 Comprehensive Machine hour rate Rs.
Operators wages 1,08,000
Production Bonus (8% on Rs.1,08,000) 8,640
Power consumed (1stquarter) 28,500
Supervisor & indirect labor 42,400
Electricity & Lighting 19,600
Repairs & Maintenance (1% on Rs.12,00,000) 12,000
Depreciation (10% of Rs.12,00,000 ÷ 4) 30,000
Miscellaneous expenses (Rs.48,000 ÷ 4) 12,000
General management expenses (Rs.80,000 ÷ 4) 20,000
2,81,140
Comprehensive machine hour rate =
Rs.2,81,140 ÷ 4,440 hours =Rs.63.32.
43 Answer : (d) <
TOP
. Reason: >

Per unit
Particulars Per unit (Rs.) 80% 90%
(Rs.)
Sales unit 24,000 27,000
Rs. Rs.
Sale value 360 86,40,000 340 91,80,000
Materials 140 33,60,000 133 35,91,000
Labor 60 14,40,000 60 16,20,000
Overheads (variable) 40 9,60,000 40 10,80,000
Total variable cost 240 57,60,000 233 62,91,000
Contribution 120 28,80,000 107 28,89,000
Fixed cost (80 × 50% × 24,000) 9,60,000 9,60,000
Profit 19,20,000 19,29,000
Break even point 8,000units 8,972units
44 Answer : (c) <
TOP
. Reason: >

Particulars Model M1 Model M

Fixed overhead Rs.6,00,000 Rs.2,50,000
Estimated profit Rs.4,00,000 Rs.2,50,000
Contribution (Fixed + Profit) Rs.10,00,000 Rs.5,00,000
Number of units 25,000
Contribution per unit 40
Let the number of units at which both the models give same profit = x
Then profit = no. of units × contribution per units – Fixed cost
40x – 6,00,000 = 20x – 2,50,000
20x = 3,50,000
x = 3,50,000/20 = 17,500 units.
45 Answer : (e) <
TOP
. Reason: >

Contract A/c
 Particulars Rs. Particulars Rs.
To material 40,80,000 By work certified 79,00,000
To Direct wages 16,50,000 By work not certified 11,11,500
To wages 99,500 By Material Returned 51,500
To wages accrued 34,000 By Material at site 40,500
To Plant hire charges 1,25,000
To direct expenses 63,500
To Depreciation 1,20,000
To Notional profit 29,31,500
91,03,500 91,03,500
2 62,50, 000 15,46,149 By Notional profit 29,31,500
x Rs.29,31,500 x
3 79, 00, 000
To profit
To reserve 13,85,351
29,31,500 29,31,500

Work-in-Process = Work certified + Work uncertified – Profit in reserve – Progress payment received
= Rs.79,00,000 + Rs.11,11,500 – Rs.13,85,351 – Rs.62,50,000
= Rs.13,76,149
Plant= Rs.12,00,000 – Rs.1,20,000 = Rs.10,80,000
Total=Rs.13,76,149 + Rs.10,80,000= Rs.24,56,149.
46 Answer : (e) <
TOP
. Reason: Profit difference= Rs.4,25,619– Rs.3,66,750 = Rs.58,869 >

Physical stock movement= 19,570 – 13,240= 6,330

Fixed overhead rate per unit = Rs.58,869 ÷ 6,330= Rs.9.30.
47 Answer : (c) <
TOP
. Reason: Raw material used = Op. stock + Purchases – Cl. stock >

= Rs.11,570 + Rs.1,28,450 – Rs.10,380 = Rs.1,29,640

Manufacturing cost = Raw material used + Direct labor + Factory overhead
Rs.3,39,165 = Rs.1,29,640 + Direct labor + 45% of Direct labor
1.45 Direct labor = Rs.2,09,525
Direct labor = Rs.1,44,500
The amount of factory overhead = 45% of Rs.1,44,500 = Rs.65,025.
48 Answer : (a) <
TOP
. Reason: The input in process A = 6,754.44 / ( 0.88 × 0.86 × 0.84 × 0 .85) = 12,500 kg. >

49 Answer :( b) <
TOP
. Reason: Normal loss in process 1 = 10% of 4,500= 450 >

Output in process 1 = 4,200 units and raw material issued in process 1 = 4,500 units
Abnormal gain = 450 + 4,200 – 4,500 = 150 units
Total cost in process 1 = 4,500 x Rs.11.80 + Rs.1,800 + Rs.6,500 + Rs.3,235 + 60% of Rs.6,500 =
Rs.68,535
Net cost = Total cost – Realizable value of normal loss = Rs.68,535 – 450 x Rs.3.80
= Rs.66,825
Number of good units = 4,500 – 450 = 4,050
Cost per unit = Rs.66,825 / 4,050= Rs.16.50
Cost of input in process 2 = 4,200 x Rs.16.50 = Rs.69,300
Total cost of process 2 = Rs.69,300 + Rs.1,150 + Rs.7,250 + Rs.3,799 + 40% of Rs.7,250 =
 Rs.84,399
Total input = 4,200 units, Finished goods = 3,970 units, Normal loss = 210 units & Abnormal loss =
20(balancing fig.)
Cost per good unit =(Rs.84,399 – 210 x Rs.2.90) / (3,970units + 20units) = Rs.21
Cost of finished goods in process = 3,970 x Rs.21 = Rs.83,370
Cost of goods sold = Rs.83,370 + Rs.15,130 (op.fin.goods) - Rs.14,500 (cl.fin.goods)
= Rs.Rs.84,000
50 Answer :(a) <
TOP
. Reason: Total cost of process 1 = 100 tons (Rs.1,550 +Rs.1,200 + Rs.1,349) = Rs.4,09,900 >

Number of good units 100 tons – 2% of 100 tons – 6% of 100 tons = 92 tons
Realizable value of scrap 6 units = 6 x Rs.850 = Rs.5,100
Cost per unit = ( Rs.4,09,900 – Rs.5,100 ) / 92 tons = Rs.4,400
Total cost of process 2 = Input from process 1 + Direct labor + Overhead (60% labor cost
= 92 tons x Rs.4,400 + 92 tons x Rs.1,250 + 60% of Rs.1,15,000
= Rs.4,04,800 + Rs.1,15,000 + Rs.69,000 = Rs.5,88,800
Scrap 10% of input = 10% of 92 tons = 9.2 tons, Realizable value = 9.2 tons x Rs.850
= Rs.7,820
Therefore, cost per unit of finished goods = ( Rs.5,88,800 – Rs.7,820 ) / (92 – 9.2) tons
= Rs.5,80,980 / 82.8 tons = Rs.7,016.67.
51 Answer : (c) <
TOP
. Reason: >

(Rs.)
Particulars A B C D Total
Sales 95,000 1,66,250 1,33,000 80,750 4,75,000
Variable costs 76,000 99,750 93,100 46,835 3,15,685
Contribution 19,000 66,500 39,900 33,915 1,59,315
Fixed costs 1,29,800
Profit 29,515
Profit-volume ratio = Rs.1,59,315 / Rs.4,75,000 = .3354 or 33.54 %
Break-even sales = Rs. 1,29,800 / 0.3354 = Rs.3,87,000
52 Answer :(b) <
TOP
. Reason: >

(Rs)
Particulars A B C D Total
Sales value after further process 2,40,000 1,44,000 1,44,000 80,000 6,08,000
Sales value at split-off-point 2,16,000 1,26,000 1,40,000 56,000 5,38,000
Incremental sales 24,000 18,000 4,000 24,000 70,000
Further processing cost 22,000 20,000 4,000 18,000 64,000
Incremental profit (loss) 2,000 (2,000) Nil 6,000 6,000
B
and C should be sold at split-off-point and A and D should be sold after further processing .
 Particulars Rs
Sales of A after further processing 2,40,000
Sales of B at split-off point 1,26,000
Sales of C at split-off point 1,40,000
Sales of D after further processing 80,000
Total sales 5,86,000
Less Joint cost (4,80,000)
Less further processing cost of A and D (40,000)
(i.e. Rs.22,000 + Rs.18,000)
Maximum profit 66,000
53 Answer (e) <
TOP
. Reason: The weighted average method averages the work done in the prior period with the work done in the >
current period. There are two layers of units to analyze: those completed during the month and those
still in the closing inventory. The units completed totaled 32,500. The 2,000 ending units are 80%
complete as to materials, so equivalent units of production (EUP) equals to 1,600. Hence total EUP
for materials are 34,100 (i.e., 32,500 + 1,600). The total material costs incurred during the period and
accumulated in opening work-in-process is Rs.1,87,500 (i.e.,Rs.22,500 + Rs.1,65,000). Thus weighted
average unit cost is Rs.5.50 (i.e. Rs.Rs.1,87,500 / 34,100).

54 Answer : (d) <

TOP
. Reason: >

Particulars Indian Oil Bharat Petroleum

Distance (Depots to factory – full load) 15 km 12km
Distance covered per trip 30 km 24 km
Running time @ 60 km p.h. 30 minutes 24 minutes
Filling-in time 70 minutes 65 minutes
Emptying time 25 minutes 25 minutes
Total time per trip 125 minutes 114 minutes
Details of costs:
Variable operating charges @ Rs.5.60
Indian Oil(30 km x Rs.5.60)Bharat Petr. (24km x Rs5.60) Rs.168.00 Rs.134.40
Fixed charges @ Rs.20.20 per hour
Indian Oil (125mint.x Rs.20.20 / 60mint) Rs.42.08 Rs.38.38
Bharat Petroleum (114 mint. x Rs.20.20 / 60 mint.)
Total cost per trip Rs.210.08 Rs.172.78
Ton-km (full load)
Indian Oil (5 tons x 15 km) 75 ton-km 60 ton-km
Bharat Petroleum (5 tons x 12 km)
Cost per ton-km (Total cost per trip / Ton-km) Rs.2.80 Rs.2.88
55 Answer : (d) <
TOP
. Reason: Let the present sales = 100 units @ Re.1 per unit >

Present total sales = Rs.100

Present variable cost = Rs.75
Present contribution = Rs.25
If selling price is reduced by 15%,
Selling price per unit = Re.0.85
Variable cost per unit = Re.0.75
 Contribution per unit = Re.0.10
To maintain the same contribution, Volume of sales =(Present total contribution x New selling price
per unit) / New contribution per unit = (Rs.25 x 0.85) / 0.10 = 212.50
Therefore, volume of sales will have to be increased by = (212.50 - 100.00) / 100 = 112.50%
56 Answer : (a) <
TOP
. Reason: Predetermine factory overhead rate per labor hour = Rs.16,50,000 / 50,000 hours = Rs.33. >

Actual overhead absorbed = Actual hours x Predetermine overhead rate per hour
Rs.16,07,100 = Actual hours x Rs.33
Actual hours = Rs.16,07,100 / Rs.33 = 48,700.
57 Answer : (e) <
TOP
. Reason: Materials purchased = Rs.78,390 + Rs.18,540– Rs.16,330 = Rs.80,600 >

Total manufacturing costs = Direct material + Direct labor + 50% of Direct labor
Rs.2,85,960 = Rs.78,390 + Direct labor + 0.5 Direct labor
1.5 direct labor = Rs.2,07,570
Direct labor = Rs.1,38,380
58 Answer : (d) <
TOP
. Reason: The units to be sold equal to fixed costs plus the desired pre-tax profit divided by the unit contribution >
margin. In the preceding year, the unit contribution margin was Rs.114 (i.e. Rs.285 – Rs.171). The
amount will decrease by Rs.5.80 because of use of a higher-grade component. The unit contribution
will be Rs.108.20 and the fixed cost will increase from Rs.18,75,000 to Rs.18,85,000 as a result of
Rs.10,000 as depreciation on new packing machine.
Pre-tax profit = Rs.2,85,000 ÷ 0.6 = Rs.4,75,000
Required sales = (Rs.18,85,000 + Rs.4,75,000) ÷ Rs.108.20 = 21,812 units.
59 Answer : (e) <
TOP
. >
Rs.2, 25, 000 − Rs.2, 20, 000 Rs.5, 000
3, 600hrs −3, 400hrs 200hrs
Reason: Variable overheads = = = Rs.25
Fixed overhead rate = Rs.2,20,000 – Rs.25 × 3,400 hrs
= Rs.2,20,000– Rs.85,000 = Rs.1,35,000
Normal activity = Rs.1,35,000 ÷ Rs.33.75 = 4,000 hours
Under absorption = (4,000 hrs – 3,860 hrs) × Rs.33.75
= Rs.4,725
60 Answer : (b) <
TOP
. Reason: >

Particulars Rs Rs
Total manufacturing Costs 11,60,000
Less: Overhead costs:
Indirect labor 42,350
Factory overhead 72,500
Indirect material 38,450
1,53,300
Freight in 8,870 1,62,170
9,97,830
Less: Direct labor 69,900
Material consumed 9,27,930
Add: Closing material 35,200
9,63,130
Less: Opening material 38,350
Material purchased 9,24,780
61 Answer : (a) <
TOP
. Reason: >
 Rs.
Materials 16,350.00
Labor cost:
Department A – 35 hrs @ Rs.20 Rs.700.00
Department B – 32 hrs @ Rs.15 Rs.480.00 1,180.00
Overhead expenses:
Department A – 35 hrs @ Rs.3.25 Rs.113.75
Department B – 32 hrs @ Rs.6.10 Rs.195.20 308.95
Fixed overhead
(35 hrs + 32 hrs) Rs.6 402.00
Cost 18,240.95
1 6,080.32
%
3
Add: Profit 25% on sales = 33 on cost price
24,321.27
62 Answer : (a) <
TOP
. Reason: >

Profit under absorption costing Rs.1,15,600

Less: Fixed overhead cost of closing stock
Rs.20,400
= Rs.17 (48,000 – 46,800)
Profit under marginal costing Rs.95,200

63 Answer : (d) <

TOP
. Reason: >

Particulars ArunLtd VarunLtd Total

Capacity 100% 100% 100%
Sales(Rs) 800 700 1,500
Variable cost(Rs) 600 420 1,020
200 280 480
Less:Fixed cost (Rs) 100 120 220
Profit (Rs) 100 160 260
Rs.
Contribution at 75% level = 480 × 75% 360
Less: Fixed cost 220
Profit 140
Rs.140 Rs.140
×100 ×100
75% of Rs.1, 500 Rs.1,125
Profitability = =
= 12.44%
64 Answer : (c) <
TOP
. Reason: Normal working hours for the year = 50 wks × 42 hrs × 8 machines >

= 16,800 hours
Loss of hours due to maintenance = 1,600 hours
Net effective hours 15,200 hours
 Overhead rate per machine hour = Rs.3,04,000 ÷ 15,200 = Rs.20
Wages absorbed = 4 wks × 42 hrs × 8 machines × Rs.12 = Rs.16,128
Wages incurred = Rs.17,000
Under absorption 872
Overhead incurred = Rs.23,300
Overhead absorbed 1,200 × Rs.20 Rs. 24,000
Over absorption 700

65 Answer : (b) <

TOP
. Reason: Let, at 100% capacity level, units produced = 100 >

At 60% capacity, the overhead recovery rate = Rs.28.00 per unit

Therefore, total overhead at 60% = 60 × Rs.28.00= Rs.1,680
At 80% capacity, the recovery rate = Rs.25 per unit
Therefore, total overhead at 80% = Rs.25 × 80 = Rs.2,000
Rs.2, 000 − Rs.1, 680 Rs.320
20 20
Therefore, variable cost = = = Rs.16 per unit
Fixed cost = Rs.1,680 – 60 × Rs.16 = Rs.720
At, 85% capacity = Rs.720 + 85 × Rs.16
= Rs.720 + Rs.1,360 = Rs.2,080
2080
= Rs.24.47
85
Over head rate =

66 Answer : (e) <

TOP
. Reason: >

Sales (Rs) 100 110 (100 × 1.1)

Variable
60 60
cost(Rs)
Contribution 50-40
40 50 ×100
(Rs) 40
Increase = =
10
× 100
40
= 25%.
67 Answer : (e) <
TOP
. Reason: >

Let ‘x’ be the cost, ‘y’ be the profit and Rs.3,600 selling price per unit of music system.
Hence, x + y = 3,600 -------------- (i)
Statement of present and future cost of a radio
Rs
 Anticipated cost
Particulars Present cost (a) Increase in cost (b)
(c) = (a) + (b)
Direct material 0.4x 0.08x 0.48x
Direct labor 0.4x 0.04x 0.44x
Overheads 0.2x – 0.20x
Total X 0.12x 1.12x
An
increase in material price, and wage rates resulted into a decrease in current profit by 30% at present
selling price; therefore we have:
1.12x + 0.7y = 3,600 --------------- (ii)
On solving (i) and (ii), we get:
x = Rs.2,571.43
y = Rs.1,028.57
Current profit Rs.1,028.57 or 40% of cost
Future profit Rs.720.00
68 Answer : (c) <
TOP
. Reason: >

Particulars Rs. Rs.

Beginning direct materials inventory 90,000
Add: Purchases 2,93,400
Less: Purchase returns (2,600)
Add: Transportation 2,900
Total direct materials available 3,83,700
Less: Ending direct materials inventory (82,500)
Direct material used 3,01,200
Direct labor 2,68,000
Total prime costs 5,69,200
Manufacturing cost = Rs.5,69,200 + 40% of Rs.2,68,000 (Direct labor)
= Rs.6,76,400.

69 Answer : (b) <

TOP
. Reason: >

Number of units sold = Total sales ÷ Selling price per unit

= Rs.56,00,000 ÷ Rs.700 = 8,000 units

Particulars Per unit (Rs.)

Selling price 700
Less:Variable cost
Material 200
Labor 150
Variable overheads 50 400
Contribution 300

∴ Contribution to sales ratio = Rs. 300 ÷ Rs. 700 = 42.86%

Statement
showing the new selling price for the forthcoming year after maintaining the current year’s
 contribution to sales ratio.
Existing Revised
Particulars variable cost % increase variable costs
(Rs.) (Rs.)
Material 200 10 220.00
Labor 150 5 157.50
Variable overheads 50 5 52.50
Revised variable costs 430.00 Now,
Sales −Variable C os ts
Sales
= 42.86%, Let selling price = S
S − Rs.430.00
S
or = 0.4286
or S – Rs. 430 = 0.4286S
or 0.5714S = Rs.430
or S = Rs.752.53
or Revised selling price = Rs.752.53
70 Answer : (a) <
TOP
. Reason: >

Rs
Current year 8,000 units Following year 8,000 units
Particulars Per Unit Total Per unit Total

Sale price 580 46,40,000 580 46,40,000

Less: Variable cost
Direct Materials 200 216
Direct Labor 150 159
Factory overhead 60 60
Selling overhead 40 40
450 36,00,000 475 38,00,000
Contribution: (Sales – Variable cost) 10,40,000 8,40,000
Fixed cost
Factory overhead 3,20,000 3,52,000
Selling overhead 3,20,000 6,40,000 3,52,000 7,04,000
Profit 4,00,000 1,36,000
Variable (Marginal) cost of additional 1,000 units = 1,000 units × Rs.475
= Rs.4,75,000
Increased profitor contribution expected = Rs.2,50,000 – Rs.1,36,000

= Rs.1,14,000
Sale Price = Marginal cost + Expected contribution = Rs.4,75,000 + Rs.1,14,000
= Rs.5,89,000
Rs.5, 89, 000
1, 000 units
Sale price per unit of additional order =
= Rs.589.

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