151-0404

Question PaperManagement Accounting – I (151) : April 2004

1. Which of the following statements is false?

(a) Management accounting focuses on providing data for internal uses by managers (b) Management accounting extends beyond the boundaries of traditional accounting systems and

practices(c) Management accounting makes extensive use of routinely generated financial accounting data(d) Management accounting is primarily concerned with the reporting of business activities for a

company as a whole(e) Management accounting is an interdisciplinary function, which involves frequent interaction with

sales, personnel, finance and production specialists at all levels.

(1 mark)

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2. Which of the following is not an assumption underlying CVP analysis?

(a) The behavior of total revenue is linear(b) Unit variable expenses remain unchanged as activities vary(c) Inventory levels at the beginning and end of the period are the same(d) Fixed costs remain constant as activity changes(e) The number of units produced exceeds the number of units sold.

(1 mark)

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3. Which of the following points is not to be considered for preparation of statement of equivalent production?

(a) Equivalent units are calculated for normal loss because it is treated as good production in the process(b) Work-in-progress should be stated in equivalent units by applying the percentage of work required to

complete the unfinished work of the previous period(c) An estimate is made of the percentage of completion of work-in-progress(d) Unfinished units representing opening stock do not bear the cost transferred to the process with newly

introduced units(e) Units representing abnormal loss and abnormal gain should be treated like units competed and

transferred to next process.

(1 mark)

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4. Which of the following types of business would be most likely to use a job-order cost accounting system?

(a) Gas manufacturer (b) Petroleum refinery (c) Toy retailer(d) Dairy farmer (e) Highway contractor.

(1 mark)

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5. For absorption of manufacturing overhead costs, which of the following statements is false regarding disadvantages under direct material cost method?

(a) This method is unstable and inaccurate as there exists no logical relationship between items of manufacturing overhead and material cost

(b) Time factor is completely ignored in this method(c) No distinction is made between fixed and variable expenses(d) This method distinguishes the production of workers and that of machine(e) This method is equitable, as a raw material used in production may not pass through all processes.

(1 mark)

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6. Rajesh Ltd. pays bonus to its manager based on operating income. The company uses absorption costing and overhead applied on the basis of direct labor hours. To increase bonuses the company’s managers may do all of the following except

(a) Produces those products requiring the most direct labor(b) Differ expenses such as maintenance to a future period(c) Decrease production of those items requiring most direct labor(d) Increase production schedule independent of customer demand(e) Both (a) and (b) above.

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(1 mark)

7. In first in first out (FIFO) process costing system, equivalent units are a measure of

(a) Work done on the beginning as well as ending work-in-process inventory(b) Work done on units started in the production process this period (c) Work required to complete the beginning work-in-process inventory(d) Work done in the department this period(e) Work performed on the ending work-in-process inventory.

(1 mark)

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8. Which of the following activities is an example of a non-value adding activity?

(a) Manufacturing a product for capturing high market share(b) Painting a product(c) Packing a product for shipment(d) Installing the product for the customer(e) Reworking a defective product.

(1 mark)

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9. Which of the following is not a cost of inventory using variable costing procedures?

(a) Prime costs (b) Variable manufacturing overhead costs(c) Variable marketing costs (d) Direct materials costs (e) Direct labor costs.

(1 mark)

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10.The classification of costs as either direct or indirect depends upon

(a) The timing of the cash outlay for the cost(b) Whether an expenditure is unavoidable because it cannot be changed regardless of any action taken (c) The behavior of the cost in response to volume changes(d) Whether the cost is expensed in the period in which it is incurred(e) The cost object to which the cost is being related.

(1 mark)

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11. In allocating factory service department costs to producing departments, which of the following items would most likely be used as an activity?

(a) Units of product sold(b) Direct materials usage(c) Units of electric power consumed(d) Salary of service department employees (e) Rent of production departments.

(1 mark)

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12.Which of the following best describes direct labor?

(a) A purchase cost (b) A prime cost (c) A period cost(d) A product cost (e) Both product cost and prime cost.

(1 mark)

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13.Which of the following is not a reason for allocating joint costs?

(a) Inventory and cost of goods sold computations(b) Cost reimbursements under contracts(c) Insurance settlement computations(d) Product decisions to sell-or-process-further(e) Determination of product costs and managerial analysis for decision making.

(1 mark)

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14. In accounting for by-products, which of the following is not true?

(a) They are accounted for in the same way as main products(b) They may be accounted for at the time of production and deducted from cost-of-goods sold(c) They are accounted for similar to the constant-gross-margin-percentage (NRV) method(d) They may be recognized at the time of sale with revenue and inventory value recognized(e) They may be treated as miscellaneous income.

(1 mark)

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15.Which of the following items would be treated as an indirect cost?

(a) Wood used to make a chair(b) Metal used for the legs of a chair(c) Fabric to cover the seat of a chair(d) Staples to fix the fabric to the seat of a chair(e) Leather used for making handles of a chair.

(1 mark)

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16.Which of the following statements is not true?

(a) Information is relevant if it is pertinent to a decision making problem(b) Relevant information has a bearing on the future(c) Sunk costs are irrelevant to decision making problem(d) Opportunity costs are irrelevant to decision making problem(e) Relevant and accurate data are of value only if they are in time.

(1 mark)

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17.Which of the following statements is false?

(a) Collection of costs to be assigned is called a cost pool(b) Responsibility centers, products and services are called cost objects(c) The process of assigning costs is called cost allocation(d) An allocation base may be referred to as cost driver(e) Marketing costs allocation should be based on actual revenue.

(1 mark)

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18.The following are the causes of over or under absorption of overhead costs except

(a) The anticipated hours is more or less than the actual hours worked for(b) Non-recurring expenditure incurred due to unexpected changes in the methods of production(c) Overheads are charged to work-in-progress proportionately(d) Actual output is greater than estimated output(e) Wrong estimation in overhead costs.

(1 mark)

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19. If a company uses weighted average method of process costing, the beginning work-in-process units and costs are treated as

(a) Units and costs of the current period(b) Units and costs of the subsequent period(c) Units and costs of the previous year(d) It is ignored in the calculation of equivalent units of activity(e) Their equivalency is measured as the work needed to complete them.

(1 mark)

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20.The use of variable costs as the minimum price to be considered when negotiating for a job order may be acceptable if

(a) The company has idle production capacity(b) The marginal cost accounting system is in use(c) The order will be lost if a higher price is sought(d) The use of this pricing basis secured a previous order from the same customer(e) The production capacity of the company exceeds practical capacity.

(1 mark)

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21.A debit balance on the contractee account should be incorporated in the balance sheet as

(a) A current liability as ‘contract balances outstanding’(b) Set-off against contract stock valuation(c) Excess payments on account not set-off against contract stock value (d) In debtors as ‘amount recoverable on contracts’(e) Set-off against work-in-progress.

(1 mark)

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22. If process scrap is recycled for use in conjunction with new material as well as being sold externally, which of the following is most likely to be the value at which it is debited to the process?

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(a) Standard cost (b) Marginal cost (c) Market price(d) Cost of normal loss (e) Cost of abnormal loss.

(1 mark)

23.Which of the following statements is false?

(a) Operating cost statement is prepared to calculate the cost in case of service costing(b) Motor cost for passengers is ascertained with reference to per passenger per kilometer(c) Service costing is one of the basic methods of operation costing(d) Service costing is applicable in canteens(e) There is no difference between service costing and process costing.

(1 mark)

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24. In the reversal cost method, the manufacturing cost of the main product is reduced by

(a) The actual revenue received from the by-product(b) The estimated market value of the by-product(c) The estimated replacement costs of the by-product(d) The standard cost of the by-product(e) The historical cost of the by-product.

(1 mark)

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25.An increase in variable costs where selling price and fixed cost remain constant, will result in which of the following?

(a) An increase in contribution to sales ratio(b) An increase in margin of safety(c) A fall in the sales level at which the break-even point will occur(d) A rise in the sales level at which the break-even point will occur(e) No change in the sales level at which the break-even point will occur.

(1 mark)

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26.Which of the following statements is correct?

(a) Primary packing of a product is an item of distribution overhead cost(b) Warehousing cost is an item of office or administrative overhead cost(c) Credit and collection cost is an item of administrative overhead cost(d) Under applied or over applied factory overhead cost should be apportioned to cost of sales only(e) If factory overhead control account has a closing debit balance, factory overhead cost is under-

applied.

(1 mark)

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27.Retention monies are defined as

(a) Cost of work to date minus the cost of work not certified plus estimated profit to date(b) Cash returned to the contractee if actual profits on a contract are 20% higher than the agreed figure(c) Cash withheld by the contractee under the terms of the contract when payments of the value certified

are being made(d) Payments to the contractor where it is desired to secure his services for a future contract(e) Cash withheld by the contractee in order to improve the cash flow of the contractor.

(1 mark)

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28.Which of the following statements are true regarding the characteristics of controllable costs?

I. They are in relation to a particular responsibility centerII. The head of a responsibility center has significant influence but not complete influence on

its controllabilityIII. They are relevant for the time period under reviewIV. They are irrelevant for the time period under review

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

(1 mark)

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29.Which of the following statements is false?

(a) Committed fixed costs are irrelevant costs while taking decisions(b) Variable costs are only relevant costs

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(c) In situations where additional fixed costs to be incurred become relevant costs as a result of a decision

(d) Relevant costs are incremental costs(e) Out of pocket costs are relevant for decision making.

(1 mark)

30.The cost proposed annually for the plant service for the grounds at corporate headquarters is an example of

(a) Opportunity cost (b) Prime cost (c) Relevant cost(d) Committed cost (e) Discretionary cost.

(1 mark)

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31.Which of the following statements is true regarding process costing?

(a) It is applied in garment industry(b) Inclusion of inter-profit in accounts will not require any adjustment in stocks(c) Abnormal gain should reduce the normal loss and balance is transferred to costing profit and loss

account(d) Abnormal loss is spread on good units of production(e) Normal loss does not increase the cost per unit of usual production.

(1 mark)

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32.Which of the following components of production are allocable as joint costs when a single manufacturing process produces several saleable products?

(a) Direct material and direct labor(b) Direct material, direct labor and selling expenses(c) Direct material, direct labor and factory overhead(d) Direct material, direct labor, factory overhead and selling expenses(e) Direct labor and factory overhead.

(1 mark)

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33.What will be the difference in net profit calculated under direct costing method as opposed to absorption costing, if the closing inventory increases with respect to the opening inventory in units?

(a) Net profit under direct costing will be lower(b) Net profit under direct costing will be higher(c) Net profit under absorption costing will be lower(d) There will be no difference in net profit (e) The difference in net profit cannot be determined from the information given.

(1 mark)

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34.Which of the following statements is false?

(a) For absorption of overhead costs, direct material cost method is useful where output is uniform and material cost is stable

(b) The time factor is ignored when the cost of material is used as the basis for absorption of overhead(c) Basis of apportionment of cost of steam is wages of each department(d) Basis of apportionment of depreciation of plants is values of plants in each department(e) Predetermined rate of absorption of overhead helps in quick preparation of cost estimates and quoting

prices.

(1 mark)

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35.Which of the following assumptions in respect of practical capacity as plant capacity concept is true?

(a) It assumes all personnel and equipments will operate at the maximum efficiency and the total plant capacity will be used.

(b) It does not consider idle time caused by inadequate sales demand(c) It includes consideration of idle time caused by both limited sales orders and human and equipment

inefficiencies(d) It is the production volume that is always less than the actual use of capacity(e) It is the production volume that is necessary to meet sales demand for the next year.

(1 mark)

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36.Which of the following would increase the unit contribution margin the most?

(a) A 5% increase in selling price per unit (b) A 5% increase in variable cost per unit(c) A 5% increase in fixed cost per unit (d) A 5% increase in total semi-fixed cost

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(e) A 5% decrease in variable cost per unit.

(1 mark)

37. If there is a change in cost due to change in the level of activity or pattern or method of production, it is known as

(a) Controllable cost (b) Semi-variable cost (c) Discretionary cost(d) Differential cost (e) Avoidable cost.

(1 mark)

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38.The principal disadvantage of using the physical quantity method of allocating joint costs is that

(a) Costs assigned to inventories may have no relationship to their value(b) Physical quantities may be difficult to measure(c) Additional processing costs affect the allocation base(d) Joint cost, by definition, should not be separated on a unit basis(e) By-products affect the allocation base.

(1 mark)

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39.The appropriate method for the disposition of under or over applied factory overhead

(a) Is to adjust it to cost of goods sold only(b) Is to adjust it to work-in-process only(c) Is to adjust it to finished goods inventory only (d) Is to apportion to cost of goods sold and finished goods only(e) Depends on the significance of the amount.

(1 mark)

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

(a) Depends on whether the company is operating at or below break-even(b) Depends on whether the company is operating at or below normal volume(c) Involves an analysis of avoidable costs(d) Requires use of absorption costing(e) Requires use of activity based costing.

(1 mark)

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41.A-Joy Ltd. and B-Joy Ltd. manufacture and sell product-AB in a competitive industry. The selling prices of the product for each the company are same. A-Joy Ltd.has a contribution margin ratio of 30% and fixed cost of Rs.2,85,000. B-Joy Ltd.is more automated, making its fixed costs 35% higher than that of A-Joy Ltd. B-Joy Ltd.has a contribution margin ratio that is 1.5 times the contribution margin ratio of A-Joy Ltd.

Which of the following statements is/are true?

I. The break-even sales value of A-Joy Ltd.is more than B-Joy Ltd.II. The break-even sales value of B-Joy Ltd.is more than A-Joy Ltd.III. Beyond the indifference point (at which profits of the two companies are equal), A-Joy Ltd. will

make more profit than B-Joy Ltd.IV. Beyond the indifference point (at which profits of the two companies are equal), B-Joy Ltd. will

make more profit than A-Joy Ltd.(a) Only (I) above (b) Only (II) above (c) Only (IV) above(d) Both (II) and (III) above (e) Both (I) and (IV) above.

(2 marks)

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42.

AB Ltd. uses process cost system to manufacture product Alfa. The company has furnished the following information pertaining to operations for the month of March 2004:

Particulars UnitsOpening work-in-process (March 01, 2004) 300Introduced in production during March, 2004 5,000Closing work-in-process (March 31, 2004) 450

There is no loss in the manufacturing process. The opening inventory was 80% complete for materials and conversion costs. The closing inventory was 80% complete for material and 60% complete for conversion costs.

Costs pertaining to the month of March 2004 are as follows:

Opening work in process:  

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Materials Rs.12,300Conversion Rs.10,500

During the month:  Materials Rs.62,125Conversion Rs.51,240

The total cost of closing work-in-process on March2004, using FIFO method, is

(a) Rs.10,350 (b) Rs. 7,335 (c) Rs.12,300 (d) Rs. 9,850(e) Rs.11,100.

(3 marks)

43.Satyam Ltd. has furnished the following balances for its inventory for the month of March 2004:

ParticularsMarch 1, 2004

(Rs.)March 31, 2004

(Rs.)Raw materials 20,000 18,000Work-in-process 41,500 43,200Finished goods 21,500 18,300

Production data for the month are as follows:Direct labor Rs.1,78,000Actual factory overhead Rs. 95,600Raw materials purchased Rs.2,10,000Freight-in Rs. 15,200Purchase returns Rs. 9,800

The company maintains factory overhead control account and charges factory overhead to production at 45% of direct labor cost. The company does not formally recognize over and under applied overhead until year-end.

The cost of goods sold for the month of March 2004 of the company is

(a) Rs.4,77,000 (b) Rs.4,75,500 (c) Rs.2,17,400(d) Rs.4,74,000 (e) Rs.4,70,400.

(3 marks)

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44.XYZ Ltd. manufactures a single product and has a manufacturing capacity of 2,000 units per week of 48 hours. From the cost records of the company, the following data are available relating to output and cost for three consecutive months:

Month

Units Manufactured

Direct Material (Rs.)

Direct Labor (Rs.)

Factory Overheads (Rs.)

Jan’ 2004 4,000 48,000 29,000.00 24,000

Feb’ 2004 4,800 57,600 34,800.00 27,200

Mar’ 2004 5,150 61,800 37,337.50 28,600

It is the practice of the company to charge a profit of 15% on selling price. If the company manufactures and sells 5,000 units in the month of April 2004, the selling price per unit will be

(a) Rs.22.53 (b) Rs.24.53 (c) Rs.29.24 (d) Rs.22.92 (e) Rs.24.85.(2 marks)

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45.Shiva Ltd. has 3 identical machines manned by 2 operators. The operators are fully engaged on machines. The total original cost of these 3 machines is Rs.9,00,000. The company has furnished the following information pertaining to operations for last quarter ending March 31, 2004:

Normal available hours per month per operator 480 hoursAbsenteeism (without pay) 22 hoursLeave (with pay) 48 hoursNormal idle time (unavoidable) 10 hoursAverage rate of wages per hour Rs.10Estimated production bonus 10% on wagesValue of power consumed Rs.19,350Supervision and indirect labor Rs.21,300Electricity and lighting Rs.16,500Repairs and maintenance per quarter 1% on value of machines

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Depreciation per annum 10% on original costMiscellaneous expenses per annum Rs.22,400General management expenses per annum Rs.62,300

The comprehensive machine hour rate for the machine shop for the quarter ending March 31, 2004 is

(a) Rs.48.36 (b) Rs.58.36 (c) Rs.42.84 (d) Rs.38.92 (e) Rs.36.94.

(3 marks)

46.Muni Ltd. manufactures plastic toy guns. The company is working at 60% capacity level, which represents 6,000 guns per month. The cost break-up per gun is as under:

Materials – Rs.98Labor – Rs.62Overheads – Rs.50 (60% fixed)

The selling price is Rs.380 per gun. The company is planning to produce at 80% capacity level. At 80% capacity level the selling price falls by 5% accompanied by a similar fall in the price of materials.

The break-even point in units and profit at 80% level of capacity of the company are

(a) 900 units and Rs.13,07,200 respectively(b) 969 units and Rs.12,68,000 respectively(c) 900 units and Rs.12,68,000 respectively(d) 969 units and Rs.13,07,200 respectively(e) 969 units and Rs.10,20,800 respectively.

(2 marks)

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47.ACD Ltd. manufactures chemical ‘AC’ and in the course of its manufacture, a by-product ‘D’ is produced, which after further processing has a commercial value. The company has furnished the following summarized cost data pertaining to main product ‘AC’ and by-product ‘D’ for the month of March 2004:

ParticularsPre-separation

costsPost-separation costs

AC D

Materials (Rs.)

47,500 3,200 1,900

Labor (Rs.)

52,800 5,200 2,050

Overheads (Rs.)

36,300 2,800 1,200

Selling price per kg (Rs.)

  95 20

Estimated profit per unit of D (Rs.)     5No. of units produced   1,700 720

The company uses reverse cost method of accounting for by-products whereby the sales value of by-products after deduction of the estimated profit, post-separation costs and selling & distribution expenses relating to by-product is credited to the pre-separation cost account.

The profit of main product ‘AC’ is  (a) Rs. 5,650 (b) Rs.30,550 (c) Rs.11,200 (d) Rs.19,350(e) Rs.30,500.

(2 marks)

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48.Mathur Ltd. has furnished the following cost data pertaining to various jobs for the year ended March 31, 2004:

Particulars Rs.Direct material 8,90,000Direct wages 7,25,000Profit 5,85,396Selling & distribution overhead 2,18,160Administrative overhead 2,72,700Factory overhead 2,03,000

The company absorbs factory overhead on the basis of direct wages and recovers administrative and

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selling & distribution overheads on factory cost.

The company received an order for Job No. A-26 and furnished the following cost data of the job:

Direct material – Rs.32,500Direct Wages – Rs.23,500

If the administrative overhead is increased by 4%, the total sales value of Job No. A-26 is

(a) Rs.92,525 (b) Rs.91,275 (c) Rs.90,428 (d) Rs.99,815 (e) Rs.95,822.

(2 marks)

49.Meena Ltd. has budgeted the factory overhead for the year 2004-05 as Rs.8,00,000 for production department –A. The factory overhead incurred during the year was Rs.6,84,500. During the year the company has absorbed Rs.6,84,000 of factory overhead on a budgeted labor hours of 50,000.The actual labor hour worked for the year is

(a) 45,000 hours (b) 42,781 hours (c) 42,719 hours (d) 42,750 hours (e) 42,813 hours.

(1 mark)

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50.Gopi Constructions undertook a contract for construction of a large building. 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 52,00,000Work certified 38,00,000Progress payment received 30,00,000Material issued to site 13,50,000Planning and estimating costs 1,20,000Direct wages paid 6,30,000Plant hire charges 73,500Head office expenses apportioned 62,700Direct expenses incurred 21,700Work not certified 4,21,000Materials at site 70,500Accrued wages 45,200

The total of work-in-process to be shown in the balance sheet as on March 31, 2004 is

(a) Rs. 2,99,350 (b) Rs. 2,79,126 (c) Rs.12,21,000 (d) Rs. 7,00,126 (e) Rs. 9,41,874.

(2 marks)

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51.Ajay Ltd. has furnished the following information pertaining to estimated cost of 3 products – P, Q & R for the month of March 2004:

Particulars P Q RVariable cost per unit (Rs.) 12.50 14.25 10.80Selling price per unit (Rs.) 27.00 28.00 26.50Attributable fixed cost (Rs.) 24,000 23,540 20,300Production & Sales (Units) 6,000 5,500 5,800

The common fixed cost is Rs.73,525. It is the practice of the company to apportion the common fixed cost on the basis of sales units.

The total budgeted profit or (loss) of products Q and R are

(a) Rs.28,710 and Rs.46,110 respectively(b) Rs.37,500 and Rs.46,110 respectively(c) Rs.28,710 and Rs.37,500 respectively(d) Rs.46,110 and Rs.37,500 respectively(e) Rs.46,110 and Rs.23,211 respectively.

(2 marks)

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52.M Ltd. and N Ltd. have decided to merge their business operations. The following information is furnished by the two companies:

Particulars M Ltd. N Ltd.Capacity utilization 90% 70%Sales value (Rs.) 54,00,000 56,00,000Variable cost (Rs.) 40,50,000 44,80,000

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Fixed cost (Rs.) 8,00,000 11,00,000

The profitability of the merged plant at 85% capacity level is

(a) 10.50% (b) 9.75% (c) 6.18%(d) 7.50% (e) 9.50%.

(2 marks)

53.Country Club is involved in providing staying facilities and Gym facilities to its members. It has a capacity of 50 single rooms and 15 double rooms and the gym facility is provided for residents in the club and also outsiders. The club has furnished the following cost structure:

Service Variable cost per daySingle Room Rs.80Double Room Rs.60Gym facility Rs.40

The fixed cost per day is:For single room – Rs.20For double room – Rs.25For Gym – Rs.15The average occupancy rate in the club is 80% for 365 days of the year.

The club deserves a margin of 20% on hire of room and that the rent of double room should be fixed at 120% of a single room.

The rent of a double room per day is

(a) Rs.165.00 (b) Rs.182.41 (c) Rs.138.42 (d) Rs.144.80(e) Rs.132.88.

(2 marks)

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54.Zintex Ltd. absorbs overheads at a predetermined rate of Rs.15 per labor hour. In the month of March 2004, the company has incurred Rs.64,700 as factory overheads and labor hours worked in the factory were 4,200. During this month, the company sold 250 units. At the end of the month 25 units were held as stock while there was no opening stock of finished stock. Similarly, at the end of this period, 40 units were held as uncompleted units that are considered as 60% complete but there was no stock of uncompleted units at the beginning of the year.

The company has analyzed the reasons and found that 65% of the unabsorbed overheads were due to defective planning and the balances were attributable to increase in overhead cost.

The supplementary overhead absorption rate of the company is(a) Rs.3.20 (b) Rs.2.10 (c) Rs.1.60 (d) Rs.1.99 (e) Rs.1.80.

(2 marks)

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55.Cifco Ltd. manufactures and sells product ‘C’. The sale price per unit of the product is Rs.60. The company will incur a loss of Rs.6.00 per unit if it sells 6,000 units and if the volume is raised to 10,000 units, the company will make a profit of Rs.4.00 per unit. The break-even point in units is

(a) 7,000 (b) 7,500(c) 8,975 (d) 7,895 (e) 7,985.

(2 marks)

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56.Consider the following data pertaining to the production of a company for the month of March, 2004:

Particulars Rs.

Opening stock of raw material 12,350

Closing stock of raw material 11,875

Purchase of raw material during the month 80,080

Total manufacturing cost charged to product 3,12,500

Factory overheads are applied at the rate of 50% of direct labor cost.

The amount of factory overheads applied to production is

(a) Rs. 77,315 (b) Rs.1,50,300 (c) Rs. 87,500 (d) Rs.1,54,630 (e) Rs. 75,150.

(2 marks)

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57.Sindhu Ltd. plans to purchase one automatic machine. There are two suppliers of this machine – Mahesh < Answer >

Ltd. and Kappa Ltd.

The company has furnished the following data relating to the two machines:

Particulars Machine from Mahesh Machine from KappaFixed cost (Rs.) 5,00,000 3,80,000Profit (Rs.) 3,00,000 2,00,000Capacity of production (Units) 2,500 2,500

The sale price of the product per unit is Rs.480. The sales volume at which the two machines produce same profit is

(a) 1,100 units (b) 1,250 units (c) 1,364 units (d) 1,050 units (e) 1,200 units.

(2 marks)

58.Bradh Ltd. has furnished the following income statement computed under marginal costing system for the year ended March 31, 2004 :

Sales (20,000 units)   Rs.1,05,000Variable expenses:    Manufacturing Rs. 56,000  Marketing Rs. 14,000 Rs.70,000Contribution margin   Rs.35,000Fixed expenses:    Manufacturing Rs.32,500  Other Rs. 6,500 Rs.39,000Net loss   Rs. 4,000

During the year, the company has manufactured 25,000 units. The profit or (loss) under absorption costing is

(a) Rs.6,500 (b) Rs.4,000 (c) (Rs.4,000) (d) Rs.2,500 (e) (Rs.2,500).

(2 marks)

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59.MN Ltd. manufactures and sells 2 (two) machines – M1 & M2, which have been designed to produce the same product but M1 is less automatic than M2 and requires somewhat more labor to operate. Pertinent costs of the two machines are as follows:

Particulars Type M1 Type M2Set up cost (Rs.) 500 700Variable cost per unit (Rs.) 5.00 4.50

Which type of machine should be used for processing 650 units and what is the cost of those units?

(a) Type M1 and Rs.3,950 (b) Type M2 and Rs.3,625 (c) Type M1 and Rs.3625

(d) Type M2 and Rs.3,950 (e) Type M1 and Rs.2,910.

(2 marks)

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60.A product, which uses 100 tons as input per month, passes through two processes – Process A and Process B. The details of cost of process A for the month of March, 2004 are as follows:

Process A Cost per ton (Rs.)

Direct material cost 1,610

Direct labor cost 650

Overhead costs 1,350

The total loss in process A is 4% of input and the scrap is 10% of the input with a value of Rs.840 per ton. The material is transferred to process B at cost. The direct labor cost of Process B is Rs.750 per ton of input. The overhead is 60% of direct labor cost. The scrap at process B is 20% of input with a value of Rs.1,050 per ton.

The cost per unit of finished goods in process B is

(a) Rs.6,200.00 (b) Rs.6,500.00 (c) Rs.5,600.00 (d) Rs.6,100.00

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(e) Rs.6,362.50.

(2 marks)

61.ABC Ltd. manufactures Sports Shoes. Presently its output is 80% of its full capacity of 20,000 units per annum. One exporter has approved the sample and has offered to buy 10,000 sports shoes at a special price of Rs. 850 per suit. At present the company sells it at the rate of Rs.1,200 per shoe. The standard cost per unit is as follows:

Particulars Rs.

Materials 520Labor cost 150Fixed cost 200Other variable cost 90

Total 960

The net profit or loss of accepting the order of 10,000 sports shoes is

(a) Rs.17,40,000 (profit) (b) Rs.17,40,000 (loss) (c) Rs.5,40,000 (loss)(d) Rs.13,00,000 (loss) (e) Rs.3,60,000 (profit).

(2 marks)

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62.PQRS Ltd manufactures and sells four types of products under the brand names of P, Q, R & S. The sales mix in value comprises 43%, 32%, 6% & 19% of P, Q, R & S respectively. The total budgeted sales (i.e. 100%) are Rs.90,000 per month. The operating costs are as follows:

i) Variable costs: Product - P 70% of selling price Product - Q 60% of selling price Product - R 40% of selling price Product - S 50% of selling priceii) Fixed cost Rs. 25,000 per month

The break-even point for the production on an overall basis (i.e., in total) is

(a) Rs.64,433 (b) Rs.69,000 (c) Rs.62,500 (d) Rs.40,850 (e) Rs.65,000.

(2 marks)

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63.The yield of a certain process is 85%, the by-product is 10% and normal loss is 5% of its main product. 10,000 units of materials are put in the process and its cost is Rs.30 per unit and other expenses amounted to Rs.25,400, 30% of which was accounted for by power cost. It is the practice of the company that the power cost is chargeable to the main-product and the by-product in the ratio of 5:3. The cost of the by-product is

(a) Rs.36,309 (b) Rs.38,282 (c) Rs.32,636 (d) Rs.36,712 (e) Rs.32,540.

(2 marks)

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64.The cost-volume-profit relationship of a company is described by the equation y = Rs.8,00,000 + 0.60x, in which x represents sales revenue and y is the total cost at the sales volume represented by x. If the company desires to earn a profit of 20% on sales, the required sales will be

(a) Rs.40,00,000 (b) Rs.35,50,000 (c) Rs.24,00,000 (d) Rs.13,33,333 (e) Rs.20,00,000.

(1 mark)

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65.Delta Ltd. manufactures four products – P,Q,R & S, which emerge from a particular process of operation. The total cost of input for the period ended March 31, 2004 is Rs.2,80,000. The details of output, additional cost after split-off point and sales value of the products are as follows:

Products Output (Kg.)Additional processing cost

after split-off point (Rs.)Sales value after further

process (Rs.)P 10,000 20,000 2,20,000Q 3,000 20,000 1,15,000R 6,000 17,000 1,05,000

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S 4,000 50,000 1,70,000

If the products are sold at split-off point without further processing, the sales value would have been:

P Rs.1,90,000Q Rs. 1,00,000R Rs. 85,000S Rs. 1,05,000

The maximum amount of profit of the company from the four products is

(a) Rs. 3,15,000 (b) Rs. 2,28,000 (c) Rs. 2,23,000 (d) Rs. 3,35,000 (e) Rs. 2,43,000.

(3 marks)

66.Kappa Ltd. manufactures and sells three products – A, B and C. All the products are passed through a machining process, the capacity of which is limited to 10,000 hours per annum, both by equipment design and government regulation. The following information pertaining to the three products is available:

Particulars Product A Product B Product C

Selling price per unit (Rs.) 1,000 1,500 2,000Variable cost per unit (Rs.) 800 800 1,200Machine hours per unit 4 7 10Maximum possible sales unit 500 700 400

The fixed cost of the company for the year is Rs.4,45,000. The maximum profit of the company from the best mix of the three products is

(a) Rs.4,50,000 (b) Rs.4,65,000 (c) Rs.3,93,000 (d) Rs.4,20,000 (e) Rs.5,20,000.

(2 marks)

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67.A company has a profit-volume ratio of 40%. To maintain the same contribution, by what percentage (%) must sales be increased to offset 20% reduction in selling price?

(a) 10 (b) 20 (c) 40 (d) 50 (e) 60.

(1 mark)

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68.Consider the following data pertaining to a manufacturing company:Particulars Present (2003-04) Forecast (2004-05)Sales (units) 5,000 12,000Loss (Rs.) 5,000 -Fixed cost (Rs.) 20,000 20,000Profit (Rs.) - 16,000

The variable cost of sales has been taken at Rs.12 per unit up to 12,000 units and it shall be Rs.13 per unit beyond 12,000 units.

What percentage of increase in sales is required to cover additional 25 paisa per unit towards extra packaging cost in the year 2004-05 for achieving the forecasted contribution level?

(a) 168% (b) 174% (c) 34% (d) 160%(e) 140%.

(2 marks)

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69.The cost data pertaining to Product “X” of XL Ltd. are as follows:

Maximum capacity 30,000 unitsNormal capacity 15,000 unitsIncrease in inventory 1,880 unitsVariable cost per unit Rs.12Selling price per unit Rs.50Fixed manufacturing overhead costs Rs.3,60,000

If the profit under Absorption costing method is Rs.1,01,000, the profit under Marginal costing method would be

(a) Rs.1,46,120 (b) Rs.1,23,560 (c) Rs. 78,440 (d) Rs. 55,880 (e) Rs. 73,340.

(2 marks)

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70.Mona Ltd. has furnished the following data pertaining to the process of Chemical X for the month of March 2004:

< Answer >

Input 2,000 kg.Output 1,900 kg.Normal loss 10% of inputSale value of normal loss as scrap Rs.2.80 per kg.

Cost of input to the process Rs.7,850

The cost of abnormal loss /gain to the process account is

(a) Rs.405 (loss) (b) Rs.365 (gain) (c) Rs.390 (loss) (d) Rs.405 (gain)(e) Rs.436 (loss).

(1 mark)

  END OF QUESTION PAPER  

Suggested AnswersManagement Accounting – I (151) April 2004

1. Answer : (d)

Reason : Management accounting is not concerned with the reporting of business activities for a company. It focuses less on the whole and more on the parts and segment of a company. In management accounting, segmented reporting is of primary emphasis. Therefore, (d) is false.

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2. Answer : (e)

Reason : Since option (c) is one of the assumptions of CVP analysis, option (e) is not the assumption of CVP analysis. Therefore, (e) is the answer.

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3. Answer : (a)

Reason : Equivalent completed units are not calculated for normal loss because it is shared by good production in the process. It is not considered as good units. Therefore, option (a) is not the correct approach in the preparation of statement of equivalent production.

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4. Answer : (e)

Reason : Highway contractor uses the job-order costing system for recording transactions other business like gas manufacturing, patrol refinery, toy retailer and diary farmer use the process costing system. Therefore, (e) is correct.

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5. Answer : (d)

Reason : This method does not differentiate between the production of workers and that of machine. Therefore, (d) is false with respect to the disadvantages under direct material cost method for absorption of manufacturing overhead. Other options are correct regarding the disadvantages under direct material cost method for overhead absorption.

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6. Answer : (c)

Reason : Under an absorption costing system income can be manipulated by producing more products than are sold because more fixed manufacturing overhead will be allocated to the ending inventory when inventory increases some fixed costs are capitalized rather than expensed decreasing production, however, will result in lower income because more of the fixed manufacturing overhead will be expensed.

Answer (a) is incorrect because producing more of the products requiring the most direct labor will permit more fixed overhead to be capitalized in the inventory account.

Answer (b) is incorrect because differing expenses such as maintenance will increase income in the current year but may result in long range losses caused by excessive down trend.

Answer (d) is incorrect because increasing production without a concurrent increase in demand applies more fixed cost to inventory. Answer (e) is also incorrect.

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7. Answer : (d)

Reason : Under FIFO method, the equivalent units are a measure of work done in the department this period. It is not the measure of unit started or opening WIP or closing WIP. It is the combine measure of some part of opening WIP completed to finished goods, units completed and part of closing WIP to the extent of completed units in the department this period. Therefore, (d) is correct.

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8. Answer : (e)

Reason : Manufacturing a product, painting a product, packing a product for shipment and installing the product for the customer are the examples of value adding activities. The example of non-value adding activity is the reworking of defective product, it means there is no value addition in repairing the defective product. Therefore, option (e) is correct.

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9. Answer : (c)

Reason : In computation of cost of inventory, marketing costs are not considered. Here, variable marketing costs are not the items of cost of inventory under variable costing procedures. Therefore, options (c) is correct.

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10. Answer : (e)

Reason : A direct cost can be specifically associated with a single cost object in an economically feasible way. An indirect cost cannot be specifically associated with a single cost object. Thus, the specific cost object influences whether a cost is direct or indirect. For example, a cost might be directly associated with a single plant. The same cost, however, might not be directly associated

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with a particular department in the plant. Therefore, (e) is correct. Other options are not correct.

11. Answer : (c)

Reason : Service department costs are considered part of factory overhead and should be allocated to the production departments that use the services. A basis reflecting cause and effect should be used to allocate service department costs. For example, the number of kilowatt-hours used by each production department is probably the best allocation base for electricity costs. Other options are not correct, because units of product sold, salary of service department employees, direct materials usage and rent of production departments are not the basis of allocating the overhead costs. These are not to meet the cause and effect criterion.

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12. Answer : (e)

Reason : Direct labor is both a product cost and a prime cost. Product costs are incurred to produce units of output and are deferred to future periods to the extent that output is not sold. Prime costs are defined as direct materials and direct labor. Other options are not correct.

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13. Answer : (d)

Reason : Product decisions to sell or process further is not the reason for allocating joint costs. Other options given in (a), (b), (c) and (e) are the reasons for allocating joint costs. Option (d) is the reason for decision making whether to process further or sell at split -off point therefore, answer (d) is correct.

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14. Answer : (a)

Reason : In accounting by products the realizable value of the by products are credited to cost of goods sold or credited to profit and loss account as miscellaneous income. They are recognized at the time of sale. They are not accounted for in the same way as main product. Therefore, (a) is correct.

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15. Answer : (d)

Reason : Wood, Metal, Fabric and Leather used in the chair would be treated as direct cost but the staples used to fix the fabric will be treated as indirect cost.

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16. Answer : (d)

Reason : Opportunity costs are always relevant to decision making problem. Sunk cost are always irrelevant to decision making problem because it is already incurred, it cannot be changed for future. Relevant and accurate data are very important for decision making if it is available in time. Information relating to decision making problem is always relevant. Therefore option (d) is not true.

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17. Answer : (e)

Reason : Centers that exceed expected results will bear larger assignments of costs than centers that only meet or fall below expectations. Thus, the costs distributed to the more successful centers are misleading and unfair. So, marketing cost allocation should not be based on actual revenues. Therefore option (e) is incorrect.

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18. Answer : (c)

Reason : Overhead costs are fully recovered from production, if actual rate method of absorption is adopted. But if a predetermined rate is used, the actual expenses may be different from the applied or budgeted overhead expenses. Number of causes are there for under or over absorption of overheads. All the reasons or causes given in options (a), (b), (d) and (e) are correct except the option (c). If overheads are not charged to work-in-progress proportionately, there is a difference in overhead absorption.

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19. Answer : (a)

Reason : A key feature of the weighted average method is the number of equivalent units of activity is calculated without making a distinction as to whether the activity occurred in the current accounting period or the preceding accounting period. Therefore, option (a) is correct.

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20. Answer : (a)

Reason : If there is an idle capacity of a company, the variable cost of the product will be considered as minimum price. If there is no unutilized capacity, the pricing of a job will be fixed up at total cost plus profit. Therefore, option (a) is correct. Other options are not correct. Because the extra cost of using idle capacity is variable cost. Any price above variable cost can be accepted.

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21. Answer : (d)

Reason : A debit balance on the contractee account should be appeared in the balance sheet under the head debtors as amount recoverable on contracts. Therefore, option (d) is correct.

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22. Answer : (c)

Reason : If the process scrap is used in conjunction with new raw materials as well as being sold externally, the market price of the scrap will be considered to debit the process account. Therefore, option (c) is correct.

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23. Answer : (e)

Reason : Service costing and process costing are different from each other. Therefore, option (e) is false. Other options given in (a), (b), (c) and (d) are true.

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24. Answer : (b)

Reason : Under the reversal cost method, the manufacturing cost of the main product is reduced by the estimated market value of the by-product. Other options are not correct.

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25. Answer : (d)

Reason : If variable cost is increased and the selling price and the fixed cost remain constant, the break even point will increase, margin of safety will decrease and contribution to sales will decrease. Therefore, option (d) is correct.

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26. Answer : (e)

Reason : Factory overhead control account is debited by indirect material, indirect labor and indirect expenses incurred. The debit side of this account represents the total factory expenses incurred. The credit side of this account represents the applied factory cost. The closing debit balance of this account indicates under-applied factory overhead cost.

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27. Answer : (c)

Reason : Retention money means the cash withheld by the contractee under the terms of the contract when payments of the value certified are being made. Therefore, option (c) is correct. Other options are not correct.

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28. Answer : (d)

Reason : The important characteristics of controllable costs are: (i) They are in relation to a particular responsibility center (or the managerial area of responsibility involved); (ii) the head of the responsibility center has significant influence but not complete influence on its controllability; (iii) they are relevant for the time period under review.

The characteristic indicates that the concept of controllable costs is a relative concept in the sense that when a company is viewed as a single entity, all costs care controllable at one level or another level of management. For instance, the top management may decide to close down one of the departments/divisions/segments of the business and thus reduce its cost to zero. The management may also decide to purchase a component from an outside supplier, hitherto manufactured by the company itself. These examples indicate that costs are uncontrollable only at intermediate and lower levels of management. A departmental supervisor has no control over the fixed costs allocated to his department, a sales manager has no control over the price/cost, at which goods have been transferred to his department by the production manager. Thus, allocated costs are not controllable by the responsibility center to which the allocation is made. Hence, option (d) is correct.

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29. Answer : (b)

Reason : Variable costs are not only the relevant costs. There are two characteristics of relevant costs – change of costs and future costs. If the variable costs are not changed due to change of options it is not relevant costs. At the same time if it is not required in future it is not relevant for the options. Therefore, variable, costs are not always relevant costs. Therefore, option (b) is false.

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30. Answer : (e)

Reason : The discretionary cost is characterized by uncertainty about the relationship of input (the cost) to output. It also tends to the subject of a periodic decision regarding the outlay to be made. Research, advertisement and public relation are common examples. Thus the annual cost of plant service is discretionary because of the difficulty of valuing the output. Other options are not correct.

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31. Answer : (c)

Reason : If there is any abnormal gain, that should be credited to the normal loss account and the balance of normal loss account should be transferred to costing profit and loss account. Process costing is not applied in garment industry. Normal loss increases the cost per unit of usual production. Good units of production cannot bear the abnormal loss. Inclusion of inter-profit in accounts requires adjustment in stock. Therefore, option (c) is correct.

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32. Answer : (c)

Reason : Joint cost consists of direct material, direct labor and factory overhead. Therefore, option ( c) is correct.

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33. Answer : (a)

Reason : If closing inventory increases, the net profit under direct costing method will be lower in comparison to net profit under absorption costing method. Under direct costing method, the fixed factory overheads are charged entirely in the current year, but under absorption costing method, the part of fixed cost are carried forward to the following year with the value of closing inventory, therefore, the profit under absorption costing shows higher profit. Other options are not correct.

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34. Answer : (c)

Reason : There is no link in between cost of steam and wages paid to labor. Therefore, wages paid to each department are not the basis of apportionment of overhead cost of steam. Other options given in (a), (b), (d) and (e) are correct.

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35. Answer : (b)

Reason : Practical capacity is the maximum level at which output is produced efficiently. It includes consideration of idle time caused by human and equipment inefficiency. Practical capacity always exceeds the actual use of capacity. It is not necessary to meet sales demand. Therefore (b) is correct.

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36. Answer : (a)

Reason : The plausible options are an increase in selling price or a decrease in variable cost because unit contribution margin equals unit sales price minus unit variable cost. However, a given percentage change in unit sales price must have a greater effect than an equal but opposite percentage change in unit variable cost because the former is greater than latter. Therefore, option (a) is correct.

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37. Answer : (d)

Reason : If a change increases or decreases the cost, it is called Differential cost. The change of cost due to change in the level of activity or pattern or method of production is known as Differential cost It is not the Controllable cost, Semi-variable cost, Discretionary cost or Avoidable cost.

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38. Answer : (a)

Reason : Joint costs are most often assigned on the basis of relative sales value or net realizable value. Basing allocation on physical quantities, such as Kg. Liter, etc. is usually not desirable because the cost assigned may have no relationship to value. When large items have low selling prices and small items have high selling prices, the large items might always sell at a loss when physical quantities are used to allocate joint costs. Therefore, the correct answer is (a).

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39. Answer : (e)

Reason : Overapplied or underapplied factory overhead should be disposed of at the end of the accounting period by transferring the balance either to cost of goods sold (if the amount is not material) or to cost of goods sold, finished goods inventory and work-in process inventory. Theoretically, the allocation is preferred, but, because the amount is usually immaterial, the entire balance is often transferred directly to cost of goods sold. Thus the entry depends upon the significance of the amount. Other options are not correct.

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40. Answer : (c)

Reason : The principle underlying a make or buy decision is to use available resources as efficiently as possible before buying from an outside supplier. The manager considers only the costs relevant to the investment decision. If the total relevant costs of production are less than the cost to buy the item, it should be produced in-house. The key variable is relevant costs. Thus the costs that can be avoided under either decision choice must be determined.

Option (a) is incorrect because the breakeven point is not relevant, but the extent of the use of operating capacity may be a consideration.

Option (b) is incorrect because whether operations are at normal volume is less important than the amount of idle capacity. The company is less likely to buy if it has sufficient unused capacity.

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

Option (e) is incorrect because activity based costing is used to allocate fixed overhead. Fixed overhead would not be a relevant cost in a make or buy decision unless it is avoidable by not

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making the item.

41. Answer : (e)

Reason : A-Joy Ltd.’s breakeven point is lower because its fixed costs are lower. A-Joy Ltd.’s breakeven point is Rs.9,50,000 (i.e., Rs.2,85,000 ¸ 30%). B-Joy’s breakeven point is Rs.8,55,000 (i.e., Rs.2,85,000 ´ 1.35 ¸ 30% ´ 1.5)

The indifferent point, at which profits are equal is:

Rs.2,85,000 + .7x = Rs.3,84,750 + .55x (Let x = units at indifference point)

x = Rs.6,65,000

Once the indifferent point is passed, A-Joy Ltd. will make lower profits than B-Joy Ltd., because company B-Joy has higher contribution margin.

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42. Answer : (b)

Reason : Statement of equivalent Production Unit (FIFO)

Input units Output Completed: units Material Conversion

Opening 300 Opening 300 20% 60 20% 60Introduced 5,000 Introduced 4,550 100% 4,550 100% 4,550    Closing 450 80% 360 60% 270

  5,300   5,300   4,970   4,880

   Costs during the month     Rs.62,125   Rs.51,240

    Cost per unit     Rs. 12.50   Rs. 10.50

The total cost of closing work-in-process

Material – 360 ´ Rs.12.50 = Rs.4,500Conversion – 270 ´ Rs.10.50 = Rs.2,835

  Rs.7,335

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43. Answer : (a)

Reason : Material used=Rs.20,000 + Rs.2,10,000 + Rs.15,200 – Rs.9,800 – Rs.18,000 = Rs.2,17,400.

Total Manufacturing cost = Material used + Direct labor + Factory overhead cost

= Rs.2,17,400 + Rs.1,78,000 + 45% of Rs.1,78,000

= Rs.2,17,400 + Rs.1,78,000 + Rs.80,100 = Rs.4,75,500

Cost of goods sold = Total manufacturing cost + Opening W.I.P. + OP. Finished goods – Closing W.I.P – Cl. Finished goods

= Rs.4,75,500+ Rs.41,500 + Rs.21,500 – Rs.43,200 – Rs.18,300

= Rs.4,77,000.

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44. Answer : (c)

Reason : Direct material cost per unit = Rs.48,000 / 4,000 units = Rs.12

Direct labor cost per unit = Rs.29,000 / 4,000 units = Rs.7.25

Factory overhead cost,

Variable cost per unit = Change of cost / change of units

= (Rs.27,200 – Rs.24,000) / (4,800 – 4,000) = Rs.4

Fixed cost (at 4,800 units) = Total cost – variable cost

= Rs.27,200 – 4,800units x Rs.4 = Rs.27,200 – Rs.19,600

=Rs.8,000

Total cost of 5,000 units = 5,000 (Rs.12 + Rs.7.25 + Rs.4) + Rs.8,000 = Rs.1,24,250

Selling price = (Rs. 1,24,250) x (100/85)= Rs.1,46,176.50

Selling price per unit = Rs.1,46,176.50 ¸ 5,000 = Rs.29.24

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45. Answer : (b)

Reason : Computation of total utilized machine hours:

Normal available hours per month per operator   480 hoursLess: Unutilized hours due to    

Absenteeism 22  

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Leave 48  Idle time 10 80 hours

Total utilized hours per operator per month   400 hours

Total hours for 2 operators ´ 3 months = 400 ´ 2 ´ 3 = 2,400 hours

Therefore, machine utilized is 2,400 hours (Machine cannot work without operator).

Normal hours for which wages are to be paid = 480 – 22= 458 hours

Wages for 3 months = 458 hours´2´3´Rs.10 = Rs.27,480

Comprehensive Machine hour rate Rs.Operators wages 27,480Production Bonus (10% on Rs.27,480) 2,748Power consumed (last quarter) 19,350Supervision & indirect labor 21,300Electricity & Lighting 16,500Repairs & Maintenance (1% on Rs.9,00,000) 9,000Depreciation (10% of Rs.9,00,000 ¸ 4) 22,500Miscellaneous expenses (Rs.22,400 ¸ 4) 5,600General management expenses (Rs.62,300 ¸ 4) 15,575  1,40,053

Comprehensive machine hour rate = Rs.1,40,053 ¸ 2,400 hours

= Rs.58.36.

46. Answer : (d)

Reason :

Particulars Per unit (Rs.) 60% Per unit (Rs.) 80%Sales unit   6,000   8,000    Rs.   Rs.Sale value 380 22,80,000 361.00 28,88,000Materials 98 5,88,000 93.10 7,44,800Labor 62 3,72,000 62.00 4,96,000Overheads (variable) 20 1,20,000 20.00 1,60,000Total variable cost 180 10,80,000 175.10 14,00,800Contribution 200 12,00,000 185.90 14,87,200Fixed cost (50 ´ 60% ´ 6,000)

  1,80,000   1,80,000

Profit   10,20,000   13,07,200Break even point   900 units   969 units

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47. Answer : (d)

Reason :

Joint Cost to by-product ‘D’ Rs.Sales revenue (720 ´ Rs.20) 14,400Less: Profit (720 ´ Rs.5) 3,600  10,800Less: Post Separation Cost (Rs.1,900 + Rs.2,050+ Rs.1,200) 5,150

Selling & distribution cost Nil Cost of Production at split-off point 5,650

Particulars Rs.Total Joint Cost : (Rs.47,500 + Rs.52,800+ Rs.36,300) 1,36,600Less: Joint Cost to ‘D’ 5,650Joint Cost to AC 1,30,950Sale value of ‘AC’ (1,700´ Rs.95) 1,61,500Less: Pre-separation cost 1,30,950  30,550Less: Post separation cost (Rs.3,200 + Rs.5,200 + Rs.2,800) 11,200Profit of AC 19,350

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48. Answer : (d)

Reason :

Particulars Rs.

Direct Material 8,90,000Direct wages 7,25,000

Prime cost 16,15,000Factory overhead: (28% on Direct wages) 2,03,000

Factory cost 18,18,000Administrative Cost (15% on Factory Cost) 2,72,700

  20,90,700Selling & distribution cost (12% on Factory cost) 2,18,160

  23,08,860Profit (25% on cost) 5,77,215

Sales Value 28,86,075

Job : A-26 Rs.Direct Material 32,500Direct Wages 23,500

Prime Cost 56,000Factory overhead (28% on Rs.23,500) 6,580

Factory cost 62,580Administrative overhead (15% in factory cost + 4%) 9,762

  72,342Selling & Distribution (12% on factory cost) 7,510

Total Cost 79,852Profit (25% on cost) 19,963

Sale value 99,815

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49. Answer : (d)

Reason : Predetermine factory overhead rate per labor hour = Rs.8,00,000 / 50,000 hours = Rs.16.

Actual overhead absorbed = Actual hours x Predetermine overhead rate per hour

Rs.6,84,000 = Actual hours x Rs.16

Actual hours = Rs.6,84,000 / Rs.16 = 42,750.

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50. Answer : (b)

Reason : Contract A/c

Particulars Rs. Particulars Rs.

To Material issued 13,50,000By Work-in-Progress:  

To Wages –Direct 6,30,000 Work certified 38,00,000–Accrued 45,200 Work not certified 4,21,000

To Plant hire charges 73,500 By Material at site 70,500To Planning & estimating cost 1,20,000    To Head office expenses appr. 62,700    To Direct expenses 21,700    To Notional profit 19,88,400    

  42,91,500   42,91,500

To Profit & loss A/c: 2 30, 00, 000

19,88, 4003 38, 00, 000´ ´

10,46,526 By Notional Profit 19,88,400To Reserve 9,41,874    

  19,88,400   19,88,400

Work-in-Process = Work certified + Work uncertified – Profit in reserve – Progress payment received= Rs.38,00,000 + Rs.4,21,000 – Rs.9,41,874 – Rs.30,00,000

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= Rs.2,79,126

51. Answer : (a)

Reason : Total Production & Sales unit = 6,000 + 5,500 + 5,800 = 17,300 units

Common fixed cost per unit = Rs.73,525 ¸ 17,300 = Rs.4.25

Particulars Q R

Sales units 5,500 5,800

Sales Price 28.00 26.50

Variable cost 14.25 10.80

Attributable Fixed cost 4.28 3.50

Common fixed cost 4.25 4.25

Profit per unit 5.22 7.95

Total profit 28,710 46,110

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52. Answer : (c)

Reason :

Particulars M Ltd. N Ltd. Total

Capacity 100% 100% 100%

Sales (Rs.) 60,00,000 80,00,000 1,40,00,000

Variable Cost (Rs.) 45,00,000 64,00,000 1,09,00,000

Contribution (Rs.) 15,00,000 16,00,000 31,00,000

Less: Fixed cost (Rs.) 8,00,000 11,00,000 19,00,000

Profit (Rs.) 7,00,000 5,00,000 12,00,000

Contribution at 85% = Rs.31,00,000 ´ 0.85 Rs.26,35,000

Less: Fixed cost Rs.19,00,000

  Rs. 7,35,000

Profitability =

Rs.7, 35, 000100

85% of Rs.1, 40, 00, 000´

=

Rs.7, 35, 000100

Rs.1,19, 00, 000´

= 6.18%.

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53. Answer : (c)

Reason : Occupancy days in a year

For single room = 50 ´ 365 ´ 80% = 14,600

For double room = 15 ´ 365 ´ 80% = 4380

Total room occupancy = 14,600 + 1.2 (4380) = 14,600 + 5,256 = 19,856

Total cost:

Single room = 14,600 (Rs.80 + Rs.20)= Rs. 14,60,000

Double room = 4380 (Rs.60 + Rs.25)= Rs. 3,72,300

Total cost = Rs. 18,32,300

Margin (20% hire charge) = Rs. 4,58,075

Total = Rs. 22,90,375

Rent per day of single room = Rs.22,90,375/ 19,856 = Rs.115.35

Rent of a double room per day = Rs.115.35(1.2) = Rs.138.42.

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54. Answer : (d) < TOP >

Reason : Actual labor hours = 4,200

Actual overheads = Rs.64,700

Overheads absorbed = Rs.15 ´ 4,200 = Rs.63,000

Unabsorbed overhead = Rs.64,700 – Rs.63,000 = Rs.1,700

For defective planning = 65% of Rs.1,700 = Rs.1,105.

For increasing cost = Rs.1,700 – Rs.1,105 = Rs.595

Number of good units = 250 + 25 + 60% of 40 = 299

Supplementary overhead absorption rate = Rs.595 / 299 = Rs.1.99

55. Answer : (d)

Reason : Let, variable cost = x and fixed cost = yTherefore, Rs.60 ´ 6,000 – 6,000x – y = –Rs.36,000Rs.60 ´ 10,000 – 10,000x – y = Rs.40,000Or, 3,96,000 = 6000x + y

5,60,000 =10000x + y1,64,000 = 4000x

x = Rs.41y = Rs.1,50,000

Breakeven point Rs.1,50,000 / (Rs.60 – Rs.41) = 7895 units.

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56. Answer : (a)

Reason : Raw material used = Op. stock + Purchases – Cl. stock

= Rs.12,350+ Rs.80,080 – Rs.11,875= Rs.80,555

Manufacturing cost = Raw material used + Direct labor + Factory overhead

Rs.3,12,500 = Rs.80,555+ Direct labor + 50% of Direct labor

1.50 Direct labor = Rs.2,31,945

Direct labor = Rs.1,54,630

The amount of factory overhead = 50% of Rs.1,28,823 = Rs.77,315

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57. Answer : (c)

Reason :

Particulars Mahesh Kappa

Sale value (Rs.) 12,00,000 12,00,000Fixed cost (Rs.) 5,00,000 3,80,000Profit (Rs.) 3,00,000 2,00,000Variable cost (Rs.) 4,00,000 6,20,000Variable cost per unit (Rs.) 160 248Contribution per unit (Rs.) 320 232

Let, the number of units = x

Therefore, 320x –5,00,000 = 232x –3,80,000

88x = Rs.1,20,000

x = 1,364 units

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58. Answer : (d)

Reason :

Sales (20,000 units) Rs.1,05,000Less: Cost of goods sold:  

Variable manf. cost Rs.56,000Fixed manf. cost  

(Rs.32,500 / 25,000 ´ 20,000) Rs.26,000

Gross profit Rs.23,000Less Marketing & others  (Rs.14,000 + Rs.6,500) Rs.20,500

Net profit Rs. 2,500

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59. Answer : (b)

Reason : Difference in set up (fixed ) cost = Rs.700 – Rs. 500 = Rs.200

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Difference in variable cost per unit = Rs.5.00 – Rs.4.50 = Re.0.50

Indifferent point = Difference in set up cost/Difference in variable cost = Rs.200/Re.0.50 = 400 units.

At a production of 400 units the total costs of both the machines will be same.

Since the number of units required is more than 400 units, M2 machine is suitable

Cost of 650 units using M2 machine= 650 units ´ Rs.4.50 + Rs.700 = Rs.3,625.

(or) Cost of 650 units

Under M1 = 650 ´ 5 + Rs.500 = Rs.3,750

Under M2 = 650 ´ 4.5 + Rs.700 = Rs.3,625

Since cost under M2 is less b is correct.

60. Answer : (e)

Reason : Total cost of process A = 100 tons (Rs.1,610 +Rs.650 + Rs.1,350) = Rs.3,61,000

Number of good units 100 tons – 4% of 100tons – 10% of 100s = 86 tons

Realizable value of scrap 10 units = 10 x Rs.840 = Rs.8,400

Cost per unit = ( Rs.3,61,000 – Rs.8,400 ) / 86 tons = Rs.4,100

Total cost of process 2 = Input from process 1 + Direct labor + Overhead (60% labor cost

= 86 tons x Rs.4,100 + 86 tons x Rs.750 + 60% of Rs.64,500

= Rs.3,52,600 + Rs.64,500 + Rs.38,700 = Rs.4,55,800

Scrap 20% of input = 20% of 86 = 17.2 units, Realizable value = 17.2 tons x Rs.1,050

= Rs.18,060

Therefore, cost per unit of finished goods = ( Rs.4,55,800 – Rs.18,060) / (86 – 17.2) tons

= Rs.4,37,740/ 68.8 tons = Rs.6,362.50

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61. Answer : (b)

Reason : Full capacity = 20,000 units

Present capacity (80%) = 16,000 units

Unutilized capacity = 4,000 units

Variable cost per suit = Rs.520 + Rs.150+ Rs.90 = Rs.760

Incremental revenue for export = 10,000 units ( Rs.850 – Rs.760 ) = Rs.9,00,000

Opportunity cost of indigenous production = 6,000 units (i.e.10,000 – 4,000) x (Rs.1,200 – Rs.760) = Rs.26,40,000

Net loss = Rs.26,40,000 –Rs.9,00,000 = Rs.17,40,000

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62. Answer : (a)

Reason :

Particulars P Q R S Total

Sales (Rs.) 38,700 28,800 5,400 17,100 90,000

Variable costs (Rs.) 27,090 17,280 2,160 8,550 55,080

Contribution (Rs.) 11,610 11,520 3,240 8,550 34,920

Fixed costs (Rs.)         25,000

Profit (Rs.)         9,920

Profit-volume ratio = Rs.34,920 / Rs.90,000 = 0.388 or 38.8 %

Break-even sales = Rs. 25,000 / 0.388 = Rs.64,433

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63. Answer : (a)

Reason : Input = 10,000 units. Main product = 85% of 10,000 units = 8,500 units.

By-product = 10% of 10,000 units = 1000 units

Process loss = 5% of 10,000 units = 500 units

Share of by-product:

Material cost = 10,000 units x Rs.30 = (Rs.3,00,000 x 1000 ) / 9,500 = Rs.31,579

Other cost = 70% of Rs.25,400 = (Rs. 17,780 x 1000) / 9,500 = Rs.1,872

Power cost = 30% of Rs.25,400 = Rs.7,620 i.e 7,620 3 / 8 = Rs.2,858

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Total costs of by-product = Rs.31,579 + Rs.1,872+ Rs.2,858 = Rs.36,309

64. Answer : (a)

Reason : Variable cost = 60%, therefore, contribution to sales ratio = 40% (P/V ratio)

Company’s target profit 20% in sales, therefore, revised contribution which covers only fixed cost = 40% - 20% = 20%.

Required sales = Fixed cost / Revised contribution = Rs.8,00,000 / 20% = Rs.40,00,000

Or Required sales = x =

Fixed cos t Desired profit

P / V ratio

8, 00, 000 0.2xx

0.4

, x = Rs.40,00,00

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65. Answer : (b)

Reason :

Particulars P (Rs.) Q (Rs.) R (Rs.) S(Rs.) Total

Sales value after further process

2,20,000 1,15,000 1,05,000 1,70,000 6,10,000

Sales value at split-off-point 1,90,000 1,00,000 85,000 1,05,000 4,80,000

Incremental sales 30,000 15,000 20,000 65,000 1,30,000

Further processing cost 20,000 20,000 17,000 50,000 1,07,000

Incremental profit (loss) 10,000 (5,000) 3,000 15,000 23,000

Q should be sold at split-off-point and P, R and S should be sold after further processing cost.

Sales of P after further processing Rs. 2,20,000

Sales of Q at split off point Rs. 1,00,000

Sales of R after further processing Rs. 1,05,000

Sales of S after further processing Rs 1,70,000

Total sales Rs. 5,95,000

Less Joint cost Rs. (2,80,000)

Less further processing cost of P, R and S Rs. (87,000)

Maximum profit Rs. 2,28,000

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66. Answer : (d)

Reason :

Particulars Product A Product B Product C

Contribution per unit (Rs.) 200 700 800

Machine hours per unit 4 7 10

Contribution per machine hour (Rs.) 50 100 80

Ranking III I II

Maximum sales units 500 700 400

Machine hours required as per Ranking 1,100 4,900 4,000

Best product mix in unit 275 700 400

Contribution (Rs.) 55,000 4,90,000 3,20,000

Total contribution = Rs.55,000 + Rs.4,90,000 + Rs.3,20,000 = Rs.8,65,000

Profit = Contribution – Fixed cost = Rs. 8,65,000 – Rs.4,45,000 = Rs.4,20,000

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67. Answer : (e)

Reason : Let the present sales = 100 units @ Re.1 per unit

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Present total sales = Rs.100

Present variable cost = Rs.60

Present contribution = Rs.40

If selling price is reduced by 20%,

Selling price per unit = Re.0.80

Variable cost per unit = Re.0.60

Contribution per unit = Re.0.20

To maintain the same contribution, Volume of sales =(Present total contribution x New selling price per unit) / New contribution per unit = (Rs.40 x0. 80) / 0.20 = 160

Therefore, volume of sales will have to be increased by = (160 - 100) / 100 = 60%

68. Answer : (b)

Reason : Sales for 2003-04 = Variable cost + Fixed cost –Loss = Rs.12 x 5,000 units + Rs.20,000 – Rs.5,000

= Rs.75,000, Selling price per unit = Rs.75,000 / 5,000 = Rs.15.

Contribution required for 12,000 units = Rs.20,000 + Rs.16,000 = Rs.36,000

Contribution from 12,000 units = 12,000 units (Rs.15 – Rs.12.25) = Rs.33,000

Additional contribution required from additional units = Rs.36,000 – Rs.33,000 = Rs.3,000

Units required to earn contribution of Rs.3,000 = Rs.3,000 / (Rs.15 – Rs.13.25) = 1714 units

Proposed sales = 12,000 units + 1714 units = 13,714 units

Required increase in sales = 13,714 units – 5,000 units = 8,714 units

Percentage increase required = (8,714/ 5,000) x 100 = 174%

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69. Answer : (d)

Reason : Fixed cost per unit = Rs.3,60,000 / 15,000 units = Rs.24.

Profit under absorption costing = Rs.1,01,000

Adjustment of fixed manufacturing overhead costs of increased inventory = 1,880units x Rs.24 = Rs.45,120

Profit under marginal costing = Rs.1,01,000 – Rs.45,120= Rs.55,880

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70. Answer : (d)

Reason : Cost of normal process = Input - Sale value of normal scrap

Normal loss = 10% of 2,000 kg. = 200 kg.

Sale value of normal loss = Rs.2.80 x 200kg. = Rs.560

Cost of normal process = Rs.7,850– Rs.560 = Rs.7,290

Cost per kg. of normal production = Cost of normal process / Normal output = Rs.7,290/(2,000 – 200) = Rs.4.05 per kg.

Abnormal gain = Actual output – Normal output = 1,900kg. – 1,800 kg. = 100 kg.

Cost of abnormal gain = Rs4.05 x 100 kg. = Rs.405

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