151-0405

Question PaperManagement Accounting – I (151) : April 2005

Answer all questions. Marks are indicated against each question.

1. Which of the following is the primary objective of costing?

(a) Ascertainment of cost (b) Control of cost(c) Cost reduction (d) Estimation of sales price(e) Preparation of financial statements.

(1 mark)

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2. Simon Ltd. manufactures a single product with a capacity of 1,50,000 units per annum. The summarised income statement for the year is as under:

Particulars Rs. Rs.Sales (1,00,000 units @ Rs.15 per unit) 15,00,000Cost of sales: Direct materials 3,00,000Direct labor 2,00,000Variable production overhead 60,000Fixed production overhead 3,00,000Fixed administrative overhead 1,50,000Variable selling & distribution overhead 90,000Fixed selling & distribution overhead 1,50,000

Total costs 12,50,000Profit 2,50,000

If the packing of marketable goods is improved at a cost of Re.1 per unit, the amount of sales required to earn a target profit of 25% on sales is(a) Rs.18,00,000 (b) Rs.24,00,000 (c) Rs.20,00,000(d) Rs.17,50,000 (e) Rs.18,50,000.

(1 mark)

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3. Which of the following can improve break-even point?

(a) Increase in variable cost (b) Increase in fixed cost(c) Increase in sale price (d) Increase in sales volume(e) Increase in production volume.

(1 mark)

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4. Due to changes that are occurring in the basic operations of many firms, all of the following represent, trends of allocation of indirect cost, except

(a) Treating direct labor as an indirect manufacturing cost in an automated factory(b) Using throughput time as an application base to increase awareness of the costs associated with

lengthened throughput time(c) Preferring plant-wide application rates that are applied to machine hours rather than incurring the

cost of detailed allocations(d) Using several machine cost pools to measure product costs on the basis of time in a machine

center(e) Using cost drivers as application to increase the accuracy of reported product costs.

(1 mark)

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5. 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)

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6. The term ‘cost’ refers to

(a) The present value of future benefits(b) An asset that has given benefit and is now expired(c) An asset that has not given benefit and is now expired(d) The price of products sold or services rendered(e) The value of the sacrifice made to acquire goods or services.

(1 mark)

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7. Which of the following costs is not an example of a committed fixed cost?

(a) Interest payments on a long-term loan(b) Property taxes on land and related buildings(c) Employees training(d) Lease payments on production equipment(e) Depreciation on plant & machinery.

(1 mark)

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8. Non-production overhead costs are not considered in stock valuation, because

(a) They are outside the control of production manager(b) They are fixed period costs(c) They cannot be identified with individual product(d) They are incurred after stock has been brought to its present location and condition(e) They are indirect costs.

(1 mark)

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9. The cost of goods sold under a periodic cost accumulation system is equal to the

(a) Cost of goods available for sale less ending finished goods inventory(b) Cost of goods available for sale plus beginning finished goods inventory(c) Cost of goods manufactured plus beginning finished goods inventory(d) Cost of goods manufactured less beginning finished goods inventory(e) Cost of goods available for sale less beginning finished goods inventory.

(1 mark)

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10. Which of the following is a cost-behavior oriented approach to product costing?

(a) Absorption costing (b) Marginal costing(c) Process costing (d) Uniform costing(e) Job order costing.

(1 mark)

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11. An accounting system that collects financial and operating data on the basis of underlying nature and extent to the cost drivers is

(a) Direct costing (b) Target costing (c) Activity based costing (d) Variable costing (e) Cycle-time costing.

(1 mark)

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12. Which of the following statements is false?

(a) Notional costs are not included while ascertaining costs(b) Administrative expenses are mostly fixed (c) Historical costs are useful solely for estimating costs that lie ahead(d) Abnormal cost is controllable(e) Direct cost is one that can be conveniently identified with and charged to a particular unit of cost.

(1 mark)

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13. Ponchu Das Pvt.Ltd. of Kolkata is currently operating at 80% capacity. The following is the income statement furnished by the company:

Particulars Rs. in lakh Rs. in lakhSales 640Cost of sales:Direct materials 200Direct expenses 80Variable overheads 40Fixed overheads 260Total cost 580 Net income 60

The Managing Director has been discussing an offer from Middle East for the supply of a quantity which will require 50% capacity of the factory. The price is 10% less than the current price in the local market. Order cannot be split. The capacity of the factory can be augmented by 10% by adding facilities at an increase of Rs.40 lakh in fixed cost. If the proposal is accepted with the increased facilities, the profit will be increased by

(a) Rs.50 lakh (b) Rs.40 lakh (c) Rs.60 lakh (d) Rs.25 lakh (e) Rs.35 lakh.

(2 marks)

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14. Which of the following assumptions is true in cases where practical capacity is treated as plant capacity?

(a) It assumes all personnel and equipment 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 & 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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15. Cost of idle time arising due to non-availability of raw-materials should be

(a) Charged to costing profit & loss account (b) Charged to factory overheads(c) Recovered by inflating the wage rates (d) Charged to indirect labor cost(e) Charged to direct labor cost.

(1 mark)

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

I. Depreciation is an out-of-pocket cost.II. Conversion cost is equal to direct wages plus factory overhead.III. An item of cost that is direct for one business may be indirect for another.IV. All costs are controllable.

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

(1 mark)

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17. AB Ltd. has furnished the following data pertaining to its product at 40% capacity level, which is its break-even level:

Particulars Rs.

Selling price per ton 69.50

Variable cost per ton 35.50Fixed expenses 18,02,000

The company wants to increase the production by 40%. The selling price will be reduced by 10% for first 20% additional production and 15% of original selling price for next 20% additional capacity. The profit for additional 40% capacity level is

(a) Rs.16,55,250 (b) Rs.13,41,563 (c) Rs.6,24,738(d) Rs.11,68,456 (e) Rs.7,89,734.

(2 marks)

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18. Jem Ltd. has the following data pertaining to the year ending March 31, 2005:

Particulars Rs.Purchases 9,00,000Opening stock 3,40,000Closing stock 4,20,000Freight-in 1,00,000Freight-out 1,50,000

Cost of goods sold during the year 2004-05 is

(a) Rs.13,40,000 (b) Rs.9,70,000 (c) Rs.9,50,000 (d) Rs.9,20,000 (e) Rs.7,70,000.

(1 mark)

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19. Ajex Ltd. had the following inventories at the beginning and end of the month of March 2005:

Particulars March 1, 2005 (Rs.) March 31, 2005 (Rs.)Finished goods 1,25,000 1,17,000Work-in-process 2,35,000 2,51,000Direct materials 1,34,000 1,24,000

The following additional manufacturing data were available for the month of March 2005:

Particulars (Rs.)Direct materials purchased 1,89,000Purchase returns 1,000

Transportation 3,000

Direct labor 3,00,000

Actual factory overhead 1,75,000

The company applies factory overhead at a rate of 60% of direct labor cost and any overapplied or underapplied factory overhead is deferred until the end of the year 2004-05.

The manufacturing cost of the company for the month of March 2005 was

(a) Rs.6,81,000 (b) Rs.6,65,000 (c) Rs.4,89,000 (d) Rs.2,01,000 (e) Rs.6,73,000.

(2 marks)

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20. For a department, the standard overhead rate is Rs.2.50 per hour and overhead allowances are as follows:

Activity level (hours) Budgeted overhead allowance (Rs.)3,000 10,0007,000 18,00011,000 26,000

The normal capacity level, on the basis of which the standard overhead rate has been worked out, is

(a) 4,000 hours (b) 5,000 hours (c) 11,000 hours(d) 8,000 hours (e) 6,500 hours.

(2 marks)

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21. Sai Plastics Ltd. manufactures plastic chairs. The company is working at 60% capacity level, which represents 4,800 chairs per month. The cost break-up per chair is as under:

Materials – Rs.62Labor – Rs.32Overheads – Rs.40 (60% fixed)

The selling price is Rs.180 per chair. 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) 1,646 units and Rs.2,95,040 respectively(b) 1,798 units and Rs.2,56,640 respectively(c) 1,646 units and Rs.2,56,640 respectively(d) 1,798 units and Rs.2,95,040 respectively(e) 1,798 units and Rs.2,20,800 respectively.

(2 marks)

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22. 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)

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23. A company uses a predetermined overhead rate of Rs.30 per machine hour. The company utilized 500 machine hours. The standard hours were 520 machine hours. If the actual overhead costs of the company are Rs.15,900, the under or over absorption of overhead is(a) Rs.900 (over) (b) Rs.900 (under) (c) Rs.300 (over)(d) Rs.300 (under) (e) Rs.20 (under).

(1 mark)

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24. A machine shop has 5 identical machines manned by 3 operators. The operators are fully engaged on machines. The total original cost of these 5 machines is Rs.8,00,000. The company has furnished the following information pertaining to operations for the last quarter ending March 31, 2005:

Normal available hours per month per operator 200 hoursAbsenteeism (without pay) 12 hoursLeave (with pay) 20 hoursNormal idle time (unavoidable) 8 hoursAverage rate of wages per hour Rs.8Estimated production bonus 10% on wagesValue of power consumed Rs.7,265Supervision and indirect labor Rs.4,100Electricity and lighting Rs.3,800Repairs and maintenance per quarter 1% on value of machinesDepreciation per annum 10% on original costMiscellaneous expenses per annum Rs.7,200 General management expenses per annum Rs.45,800

The comprehensive machine hour rate for the machine shop for the quarter ending March 31, 2005 is(a) Rs.48.58 (b) Rs.49.52 (c) Rs.39.61 (d) Rs.40.12 (e) Rs.32.09.

(2 marks)

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25. Monark Ltd. has undertaken to supply 2,000 units of product – ‘MONO’ per month for the months of April, May and June 2005. Every month a batch order is opened against which materials and labor cost are booked at actual. Overheads are absorbed at a rate per labor hour. The selling price is contracted at Rs.15 per unit. The company has furnished the following data pertaining to the costs for 3 months:

MonthBatch

Production (Units)

Materialcost(Rs.)

Laborcost(Rs.)

Overheadcost(Rs.)

Totallaborhours

April 2005 2,500 12,500 5,000 24,000 8,000May 2005 3,000 18,000 6,000 18,000 9,000June 2005 2,000 10,000 4,000 30,000 10,000

The rate per labor hour is Rs.2. The overall profit of the order of 4,400 units is

(a) Rs.22,000 (b) Rs.20,000 (c) Rs.25,000(d) Rs.24,000 (e) Rs.30,000.

(2 marks)

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26. If predetermined overhead rate is not employed and the volume of production is increased over the level planned, the cost per unit would be expected to

(a) Decrease for fixed costs and remain unchanged for variable costs(b) Remain unchanged for fixed costs and increase for variable costs(c) Decrease for fixed costs and increase for variable costs(d) Increase for fixed costs and increase for variable costs(e) Increase for fixed costs and remain unchanged for variable costs.

(1 mark)

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27. Idle capacity of a plant refers to the difference between

(a) Maximum capacity and practical capacity(b) Maximum capacity and actual capacity(c) Practical capacity and normal capacity(d) Practical capacity and capacity based on sales expectancy(e) Maximum capacity and normal capacity.

(1 mark)

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28. The overhead cost per period of DM Ltd. amounts to Rs.2,48,000 based on an output of 400 units of A, 400 units of B and 200 units of C. Direct labor costs of A, B and C per unit amount to Rs.60, Rs.40, and Rs.30 respectively. Each unit also requires 8, 12, and 22 machine hours per unit of production respectively. Using machine hours as cost driver, the total overhead cost chargeable to B amounts to

(a) Rs.72,000 (b) Rs. 96,000 (c) Rs.1,56,000(d) Rs.1,80,000 (e) Rs.1,64,000.

(1 mark)

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29. HP Ltd. has furnished the following information pertaining to its 3 products:

Department Allocation BaseProduct

AProduct

BProduct

COverhead

costsProduction Machine Hours 1,000 2,000 500 Rs.14,00,000

Purchasing Purchase Orders 100 300 150 Rs. 5,00,500

Inspection Labor Hours 200 200 200 Rs. 3,00,000

Assuming overhead is allocated based on activities, using ABC basis, how much would be allocated to Product B?

(a) Rs.12,57,440 (b) Rs.11,73,000 (c) Rs.7,33,500(d) Rs.6,28,714 (e) Rs.3,14,357.

(1 mark)

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30. AB Ltd. has furnished the following information for its product:

Direct material - Rs.10 per unitDirect labor - Rs. 6 per unitVariable overhead - Rs. 3 per unitFixed overhead - Rs. 4 per unitBudgeted production - 12,000 unitsActual production - 10,000 units There is no overhead spending varianceSales - 9,000 unitsSelling price - Rs.28 per unitUsing Absorption costing, what is the cost per unit based upon actual costs?(a) Rs.27.60 (b) Rs.24.40 (c) Rs.23.80 (d) Rs.23.00 (e) Rs.25.20.

(2 marks)

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31. Which of the following is not considered to be a classification of product costs?

(a) Cost of wood used in making a table top(b) Cost of labor to assemble a table(c) Cost of Company President's salary(d) Cost of electricity to operate machine used to sand wood(e) Cost of decolum to be used on the table top.

(1 mark)

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32. Baisakhi Ltd. has 3 production departments – P1, P2 and P3 and 2 service departments – S1 and S2. The company has furnished the following overhead costs of production as well as service departments:

Department Overhead costs (Rs.)

P1 13,600

P2 14,700

P3 12,800

S1 9,000

S2 3,000

The company has provided the expenses of service departments which are charged to production as well as service departments on the following percentage basis:

Department P1 P2 P3 S1 S2

S1 40% 30% 20% - 10%

S2 30% 30% 20% 20% -

The total overhead expenses of P1 and P3 are

(a) Rs.16,721 and Rs.18,712 respectively(b) Rs.18,712 and Rs.18,833 respectively(c) Rs.18,712 and Rs.15,555 respectively(d) Rs.15,555 and Rs.16,721 respectively(e) Rs 18,833 and Rs.15,555 respectively.

(2 marks)

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33. Mahan Ltd. uses a historical cost system and applies overheads on the basis of predetermined rates. The following data are furnished by the company for the year ended March 31,2005:

Particulars Rs.

Manufacturing overheads 13,84,000

Manufactured overheads applied 14,00,000

Work-in-progress 3,00,000

Finished goods 8,00,000

Cost of goods sold 9,00,000

The amount of under absorbed overheads to be adjusted to work-in-progress, using supplementary rate, is

(a) Rs.7,200 (b) Rs.16,000 (c) Rs.3,200 (d) Rs.2,400 (e) Rs.2,100.

(1 mark)

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34. Which of the following is not an advantage of departmentalization of Overheads?

(a) It facilitates control of overhead expenses by means of forecasted budgets(b) Departmentalization of overheads helps in controlling the uses made of the services rendered to

the respective departments(c) The reasons for variance can be known by the analysis of under or over-absorption of overhead

which in turn helps in taking remedial measures(d) Departmentalization of overheads helps in arriving at the cost of work-in-progress correctly(e) The correct costs can be determined as the actual overhead costs of the respective departments

are taken into consideration in determining the overhead rates.

(1 mark)

< Answer >

35. A home decorating company has certain amount of fixed cost that cannot be recovered due to decrease in the demand for home furnishings and floor coverings. These costs include the cost of Vinyl flooring manufacturing equipment and the cost of warehouses built to store materials and finished goods. These costs are examples of

(a) Incremental costs (b) Hidden costs(c) Contribution margin costs (d) Period costs (e) Capacity costs.

(1 mark)

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36. More accurate cost allocation can be accomplished when

(a) There are less direct costs to allocate(b) Costs are more homogeneous(c) Costs are more indirect(d) Different costs vary depending upon different causes and effects(e) Labor costs are more than material costs.

(1 mark)

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37. 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)

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38. In job order costing, provident fund paid by the employer for factory employee is preferably accounted for as

(a) Direct labor (b) Indirect labor(c) Factory overhead cost (d) Administrative overhead cost(e) Distribution overhead cost.

(1 mark)

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39. Which of the following statements is false?

(a) Canteen expenses are apportioned to cost centers on the basis of number of employees(b) Insurance costs of buildings are apportioned to cost centers on the basis of floor area(c) Supervision expenses are apportioned to cost centers on the basis of estimated time devoted to

each machine(d) Depreciation expenses are apportioned to cost centers on the basis of floor area occupied by each

machine(e) Power expenses are apportioned to cost centers on the basis of machine hours.

(1 mark)

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40. An over-statement of beginning work-in-progress inventory will

(a) Understate cost of goods sold (b) Understate the profit (c) Overstate the net profit (d) Overstate the gross profit(e) Understate the cost of production.

(1 mark)

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41. Which of the following would be considered as an indirect cost in the case of manufacturing of air conditioners?

(a) Cost of the condenser put in an air conditioner unit(b) Cost of inspecting air conditioners(c) Cost of assembling an air conditioner(d) Cost of the box and packaging for an air conditioner(e) Cost of exhaust fan put in an air conditioner.

(1 mark)

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42. ADC Ltd. has furnished the following data pertaining to its business:

Department Employees Sq.ftCosts

Rs.

Direct

Hours

Allocation

Base

Personnel 3 1,000 1,80,000 – Employees

Cleaning 5 – 2,22,750 – Square feet

Operating Dept. A 30 3,750 25,00,000 45,000 Hours

Operating Dept. B 10 3,000 30,00,000 27,000 Hours

Using the Step Method to allocate Personnel Department and Cleaning Department costs, what is the appropriate overhead allocation rate to Department B?(a) Rs.116.59 (b) Rs.116.44 (c) Rs.119.34 (d) Rs.209.18 (e) Rs.216.44.

(2 marks)

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43. 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) The manufacturing overhead is the largest cost component of its product cost(e) The manufacturing operations of a company are highly automated.

(1 mark)

< Answer >

44. For a period, opening stock was 18,900 units and closing stock was 21,150 units. The profit based on marginal costing was Rs.75,600 and profit under absorption costing was Rs.90,225. The fixed overheads absorption rate per unit is

(a) Rs.6.00 (b) Rs.6.50 (c) Rs.7.00 (d) Rs.8.50 (e) Rs.9.50.

(1 mark)

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45. Which of the following average costs per unit may be expected to decrease by the greatest percentage with an increase in the volume of units produced?

I. Average fixed cost per unitII. Average semivariable cost per unitIII. Average variable cost per unitIV. Average total cost per unit

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

(1 mark)

< Answer >

46. Retention monies are best defined as

(a) Cash returned to contractee, if actual profits on a contract are 20% higher than negotiated amount(b) Cash returned to contractee, if actual profits on a contract are 25% higher than negotiated amount(c) Cash withheld by the contractee, under the terms of contract when payments of the value certified

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

(1 mark)

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47. APW Ltd. uses process cost system to manufacture Dust Density Sensors for the mining industry. The following pertains to operations for the month of March 2005:

Particulars UnitsOpening work-in-process (March 01, 2005) 1,280Introduced in production during March 2005 7,200Closing work-in-process (March 31, 2005) 950

There is no loss in the manufacturing process. The opening inventory was 60% complete for materials and 50% complete for conversion costs. The closing inventory was 80% complete for material and 60% complete for conversion costs.

Costs pertaining to the month of March 2005 are as follows:Particulars Rs.Opening work in process:

Materials 20,500Conversion 16,350

During the month:Materials 1,12,830Conversion 89,520

The total cost of closing work-in-process on March 31, 2005, using FIFO method, is(a) Rs.18,240 (b) Rs.25,650 (c) Rs.20,520(d) Rs.14,250 (e) Rs.15,390.

(2 marks)

< Answer >

48. 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 >

49. Shivam Chemicals Ltd. runs its boiler on furnace oil obtained from Indian Oil and Bharat Petroleum, whose depots are situated at a distance of 10 km and 8 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 50 minutes for Indian Oil and 45 minutes for Bharat Petroleum. The emptying time in the factory is only 45 minutes for both. From the records available, it is seen that the average speed of the company’s lorries works out to 40 km per hour. The variable operating charges per km is Rs.2.20 and fixed charges per hour of operation is Rs.13.20.

The cost per ton-mile from Indian Oil is(a) Rs.1.36 (b) Rs.1.43 (c) Rs.1.51 (d) Re.0.72 (e) Re.0.75.

(2 marks)

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50. During the month of March 2005, Murphi Ltd. manufactured 5,000 units of product ‘P’ at a cost of Rs.60,000, exclusive of spoilage allocation. The company sold 2,500 units of product ‘P’ during the month. An additional 1,000 units, costing Rs.8,000, were completed to the extent of 50% by March 31, 2005. All units were inspected between the completion of manufacturing and transfer to finished goods inventory. Normal spoilage for the month was Rs.2,000 and abnormal spoilage of Rs.5,000 was also incurred during the month. The portion of total spoilage that should be charged against revenue in the month of March 2005 is

(a) Rs.7,000 (b) Rs.6,000 (c) Rs.5,000 (d) Rs.3,500 (e) Rs.3,000.

(2 marks)

< Answer >

51. Sigma Chemicals Ltd. produces high-quality plastic sheets in a continuous manufacturing operation. All materials are introduced at the beginning of the process. Conversion costs are incurred evenly throughout the process. A quality control inspection occurs when units are 80% through with the manufacturing process, when some units are separated out as inferior quality. The following data are available for the month of March 2005:

Material costs Rs.36,000Conversion costs Rs.19,500Units introduced 8,000Units completed 7,000

There is no opening or closing work-in-progress. Past experience indicates that approximately 8% of the units introduced are found to be defective on inspection by quality control.The cost of abnormal loss for the month of March 2005 is(a) Rs.3,750 (b) Rs.3,250 (c) Rs.3,600 (d) Rs.2,520 (e) Rs.2,340.

(2 marks)

< Answer >

52. Anjani Ltd. makes one model of a product known as ‘Brand D’. The company has provided the following balances as on October 01, 2004:

Finished goods – 500 unitsWork-in-process – Rs.7,450Raw materials – Rs.16,120

The following data are available as on March 31, 2005Indirect labor – Rs.16,100Freight in – Rs.7,500Direct labor – Rs.43,240Raw material – Rs.6,490Factory overhead expenses – Rs.31,300Work-in-process – Rs.6,800Sales (15,000 units) – Rs.3,60,000Indirect material – Rs.25,500Total manufacturing costs incurred – Rs.2,15,500

There were 1,500 units of finished goods of ‘Brand D’ as on March 31, 2005.The amount of raw materials purchased during the half-year ended March 31, 2005 was(a) Rs.82,230 (b) Rs.88,610 (c) Rs.1,01,490(d) Rs.1,87,970 (e) Rs.98,350.

(2 marks)

< Answer >

53. Consider the following data of Hifi Ltd:

Material Purchased - Rs.1,70,000. There was no beginning inventory.Direct labor incurred - 400 hours at the rate of Rs.10 per hour.Budgeted overheads - 430 hours Budgeted overhead cost - Rs.6,450Units started - 20,000 unitsUnits completed - 15,000 unitsActual overheads - Rs.6,200Ending Inventory - 60% complete.The value of ending inventory is(a) Rs.50,000 (b) Rs.30,000 (c) Rs.20,000(d) Rs. 5,000 (e) Rs.25,000.

(1 mark)

< Answer >

54. Ganpati Ltd. uses a particular raw material in its 3 process accounts – A, B and C. The following information furnished by the company relating to inputs, outputs and rejections during the month of March 2005:

ProcessInput including opening

W.I.P (pieces)Rejections

(pieces)Output (Pieces)

A 18,000 6,000 12,000

B 19,800 1,800 18,000

C 20,400 3,400 17,000

What should be the inputs in Process A, if the final product transferred from Process C is 1,000 pieces?(a) 1,250 pieces (b) 1,700 pieces (c) 1,800 pieces(d) 1,900 pieces (e) 1,980 pieces.

(2 marks)

< Answer >

55. KBKM Ltd. has furnished the following information pertaining to its process account for the last month:

Opening work-in-process 100 units (70% complete)

Closing work-in-process 50 units (60% complete)

Units started 500 units

Value of opening work-in-process Rs.1,042

Cost incurred during the month Rs.9,282

Costs incurred evenly throughout the month. The company uses weighted average flow of costs.The value of finished goods was

(a) Rs.8,736 (b) Rs.9,778 (c) Rs.10,832 (d) Rs.9,790 (e) Rs.9,464.

(1 mark)

< Answer >

56. Shiva Ltd. had 8,000 units of work-in-procress inventory in department A on March 1, 2005. These units were 60% complete as to conversion costs. Direct materials are added at the beginning of the process. During the month of March 2005, 34,000 units were started and 36,000 units completed. The company had 6,000 units of work-in-process inventory on March 31, 2005. These units were 80% complete as to conversion costs.

The equivalent production unit of conversion (under the average method) exceeds the equivalent production of conversion (under FIFO method) by

(a) 8,000 units (b) 6,000 units (c) 3,200 units(d) 4,800 units (e) 5,000 units.

(2 marks)

< Answer >

57. Which of the following is/are true regarding transport costing?

I. The costs of a transport company includes publicity costs.II. Operating costs and running costs are the costs which vary more or less in direct proportion to the

distance traveled.III. Semi-variable costs are incurred in the form of tyre maintenance, painting etc.IV. Insurance of the vehicle can be considered as running cost.

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

(1 mark)

< Answer >

58. In an engineering company, the factory overheads are recovered on a fixed percentage basis on direct wages and administrative overheads are absorbed on a fixed percentage basis on factory cost.The company has furnished the following data relating to 2 jobs undertaken by it in a period:

Particulars Job A1 Job B2

Direct materials (Rs.) 54,000 37,500

Direct wages (Rs.) 42,000 30,000

Selling price (Rs.) 1,66,650 1,28,250

Profit % on total cost 10% 20%

The company has received an order of Job no A3. The company has furnished the following information pertaining to Job A3:

Direct materials (Rs.) Rs.24,000

Direct wages (Rs.) Rs.20,000

Profit % on selling price 12.5%

The selling price of Job A3, using the above recovery rates, is

(a) Rs.91,100 (b) Rs.93,900 (c) Rs.78,750(d) Rs.80,000 (e) Rs.70,000.

(2 marks)

< Answer >

59. Which of the following is/are the best explanation of the relevance of equivalent production units in process costing?

I. A means of equalizing production charged into stock of each period.II. A means by which the output achieved may be compared with the equivalent quantity budgeted

for the period under review.III. The conversion of partly completed units into an equivalent number of completed units in order

that costs may be shared on an equitable basis.

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

(1 mark)

< Answer >

60. 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 >

61. Presidency Club is involved in providing staying facilities and Gym facilities to its members. It has a capacity of 25 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.65Double Room Rs.45Gym facility Rs.50

The fixed cost per day is:

For single room – Rs.25For double room – Rs.35For Gym – Rs.10

The average occupancy rate in the club is 80% for 365 days of the year.

The club deserves a margin of 25% on hire of room and the rent of double room should be fixed at 150% of a single room.

The rent of a double room per day is

(a) Rs.100 (b) Rs.150 (c) Rs.145 (d) Rs. 97 (e) Rs.109.

(2 marks)

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62. Simul Petroleum is a small company that acquires crude oil and manufactures three intermediate products- A, B & C, differing only in grade. No opening inventory of finished goods and work-in-process existed on March 01, 2005. The production costs for March 2005 were as follows (assume separable costs were negligible):

Particulars Rs.Crude oil acquired and used in production 4,00,000Direct labor and related costs 2,00,000Factory overhead 3,00,000

The output and sales for the month of March 2005 were as follows:

Particulars A B C

Number of Barrels produced 300 240 120

Number of Barrels sold 80 150 120

Prices per Barrel sold (Rs.) 3,000 4,000 5,000

If joint costs are apportioned on the basis of relative sales value of output, the cost of closing inventory of product B is(a) Rs.1,75,610 (b) Rs.1,23,476 (c) Rs.2,19,512(d) Rs.3,51,220 (e) Rs.1,31,707.

(2 marks)

< Answer >

63. Small Pumps Ltd. manufactures standardized electric motors. The company has furnished the following information pertaining to a job of 50 motors:

i. Selling price per motor – Rs.9,000ii. Selling and distribution expenses – 20% of sales valueiii. Cost incurred as per job card:

Direct material – Rs.1,50,000Direct labor – Rs.40,000Overheads – Rs.1,20,000

iv. Number of motors completed – 25and transferred

v. Completion stage of work-in-progress:Direct material – 100%Direct labor and overheads – 60%

The value of work-in-process is(a)Rs.1,75,000 (b) Rs.1,35,000 (c) Rs.1,20,000 (d) Rs.1,80,000 (e) Rs.1,50,000.

(2 marks)

< Answer >

64. Modern Construction Ltd. has furnished the following information pertaining to a contract for the year ended March 31, 2005:

Particulars Rs.

Material sent to site 2,25,500

Materials on hand (March 31, 2005) 18,375

Cost of plant installed at site 1,71,000

Labor costs 1,23,500

Work certified 4,00,000

Cost of work not certified 1,20,000

Value of plant (March 31, 2005) 1,02,500

Contract price 7,50,000

Cash received from the contractee 3,50,000

Direct expenses 72,000

The profit to be transferred to reserve account is

(a) Rs.28,510 (b) Rs.34,620 (c) Rs.14,255(d) Rs.20,365 (e) Rs.32,100.

(2 marks)

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65. JK Ltd. manufactures two joint products – J and K in a common process. A by-product ‘B’ is also produced. Information related to products for the month of March 2005 is as follows:

Opening stock Nil

Cost of processing:

Direct material Rs.25,500

Direct labor Rs.10,000

Production overheads are absorbed at the rate of 300% of direct labor costs.

Output and Sales for the month are as follows:

Particulars Production units Sales units Selling price

per unit

Product J 8,000 7,000 Rs.4.00

Product K 8,000 6,000 Rs.6.00

By-product ‘B’ 1,000 1,000 Re.0.50

It is the practice of the company to credit the realizable value of by-product in the process costs before apportioning costs to each joint product. Costs of the common processing are apportioned between products J and K on the basis of sales value of production.

The profit of products J and K is

(a) Rs.5,250 and Rs.3,000 respectively (b) Rs.3,000 and Rs.5,250 respectively(c) Rs.6,750 and Rs.2,000 respectively (d) Rs.5,250 and Rs.6,750 respectively(e) Rs.3,000 and Rs.6,750 respectively.

(2 marks)

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66. Which of the following statements is true?

(a) Escalation clause in a contract provides that contract price is fixed(b) In contract costing, credit is taken for the full amount of profit on complete portions of the

incomplete contract(c) Work-in-progress certified and uncertified in a contract is valued at cost(d) Salary of supervisor employed on a contract is an indirect cost(e) Cost plus contract protects the contractor from the risk of market fluctuations in the prices of

material, labor and other elements.

(1 mark)

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67. ABC Ltd. in the course of refining crude oil obtains 4 joint products – M,N,P and Q. The total cost till the split off point was Rs.97,600. The output and sales in the year 2004-05 were as follows:

Product Output(gallons) Sales(Rs.) Separate costs(Rs.)M 5,00,000 1,15,000 30,000N 10,000 10,000 6,000P 5,000 4,000 -Q 9,000 30,000 1,000

If the joint costs are apportioned on the basis of relative sales value of the different products at the split off point, the net incomes of products M and P are

(a) Rs. 5,800 and Rs.1,600 respectively(b) Rs.17,000 and Rs.5,800 respectively(c) Rs. 17,000 and Rs.800 respectively(d) Rs. 17,000 and Rs.1,600 respectively(e) Rs.800 and Rs.5,800 respectively.

(2 marks)

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68. Varun Electronics Ltd. is planning to launch a new product ‘K’. The information pertaining to the costs per unit of the new product is as follows:

Direct materials Rs.6.00Direct labor Rs.4.00Distribution expenses Re.0.50

The company will incur Rs.6,30,625 of additional fixed costs associated with this new product. A corporate fixed cost of Rs.82,500 presently absorbed by other products will be allocated to this new product. The selling price per unit of the new product is estimated as Rs.18.75. If the company desires to earn a profit of Rs.50,000, the number of units to be sold by the company is

(a) 92,500 (b) 90,000 (c) 82,500 (d) 80,000 (e) 75,000.

(1 mark)

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69. SMK Ltd. has a productive capacity of 2,50,000 units of Product ‘K’ per quarter. The company estimated its normal capacity utilization at 90% for the quarter ending March 31, 2005. The variable manufacturing cost is Rs.22 per unit and the fixed factory overheads were budgeted at Rs.9,00,000 per quarter. The variable selling overheads amounted to Rs.6 per unit and the fixed selling expenses were budgeted at Rs.6,30,000. The operating data for the quarter ending March 31, 2005 are as under:

Opening stock of finished goods – 12,500 units

Production2,00,000 units

Sales at the rate of Rs.40 per unit – 1,87,500 units

The cost analysis revealed an excess spending of variable factory overheads to the extent of Rs.1,00,000. There is no other variance.

The profits under absorption costing method and marginal costing method are

(a) Rs.7,70,000 and Rs.6,20,000 respectively(b) Rs.6,70,000 and Rs.5,20,000 respectively(c) Rs.6,70,000 and Rs.6,20,000 respectively(d) Rs.6,70,000 and Rs.7,20,000 respectively(e) Rs.6,70,000 and Rs.7,70,000 respectively.

(2 marks)

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70. A, B and C are three similar plants under the same management of Apicon Ltd. The details are as follows:

Plant A B CCapacity operated 80% 70% 60%Particulars (Rs. in lakh) (Rs. in lakh) (Rs. in lakh)Turnover 240 280 180Variable cost 160 210 90Fixed cost 60 70 60

The Break-even percentage of the merged plant is (a) 50.25% (b) 52.75% (c) 54.29% (d) 58.78% (e) 55.48%.

(2 marks)

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71. A company has three factories situated in North, East and South with its head office in Hyderabad. The management has received the following summary report on the operations of each factory for a period:

RegionActual sales

(Rs.)

Over/(under)budgeted sales

(Rs.)

Actual profit(Rs.)

Over/(under)budgeted profit

(Rs.)North 1,100 (400) 135 (180)

East 1,450 150 210 90

South 1,200 (200) 330 (110)

If the variable cost ratio, fixed costs and sales mixes are as per budget, the break-even sales in rupees of the company as a whole is(a) Rs.2,500 (b) Rs.1,500 (c) Rs.1,200 (d) Rs.1,750 (e) Rs.1,600.

(2 marks)

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72. CVP Ltd. has a production capacity of 2,00,000 units per year.Normal capacity utilisation is reckoned as 90%. The following details are provided by the company:

Standard variable production costs Rs.11 per unit

Fixed production cost per year Rs.3,60,000

Variable selling cost Rs.3 per unit

Fixed selling cost per year Rs.2,70,000

Selling price Rs.20 per unit

Production during the year 1,60,000 units

Sales during the year 1,50,000 units

Closing inventory 20,000 units

The actual variable production costs for the year were Rs.35,000 higher than the standard.The net profit under absorption costing, by using FIFO method, is(a) Rs.2,46,375 (b) Rs.2,91,118 (c) Rs.2,24,118(d) Rs.2,64,375 (e) Rs.2,19,118.

(2 marks)

< Answer >

Suggested AnswersManagement Accounting – I (151) : April 2005

1. Answer : (b)

Reason : The primary object of costing is to control cost. Cost reduction is not the primary object of costing. Similarly, estimation of sales price and preparation of financial statements are not the primary object of costing. Therefore,(b) is correct.

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2. Answer : (b)

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

= Rs.6,00,000;

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

= Rs.6.50;

Variable cost after improving packing cost = Rs.6.50 + Re.1.00

= Rs.7.50;

Contribution to sales ratio = Rs.7.50 / Rs.15 = 50%;

Let, x = desired sales; desired profit = 25% on sales;

Contribution to sales ratio = Contribution / Sales

= (Fixed cost + profit) / sales;

50% = (Rs.6,00,000 + 0.25x) / x

0.5x = Rs.6,00,000 + 0.25x

x = Rs.24,00,000

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3. Answer : (c)

Reason : Break even point = unitpercostVariableunitperpriceSale

costFixed

From the above relation, increase in sale price can improve break-even point. Break-even point will not improve with the increase in variable cost, fixed cost, sales volume and production volume. Other statements mentioned in (a), (b), (d) and (e) are not correct.

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4. Answer : (c)

Reason : With the recent automation of factories and the corresponding emphasis on activity-based costing(ABC),companies are finding new ways of allocating indirect factory overhead. One change is that plant-wide application rates are being used less often because a closer matching of costs with cost drivers provides better information to management. ABC results in a more accurate application of indirect costs because it provides more refined data. Instead of a single cost goal for a process, a department, or even an entire plant, an indirect cost pool is established for each identified activity. The related cost driver, the factor that changes the cost of the activity, is also identified.

Option (a) is incorrect because one effect of computerization is that the amount of direct labor relative to other costs has been decreasing. For this reason some companies have found that it is no longer expedient to track direct costs as closely as was once done. Thus, some companies are treating direct labor as an indirect factory overhead cost.

Option (b) is incorrect because through put time is one of the cost drivers that is beginning to be used more often as an overhead application base. Throughput is the rate of production over a stated time. This rate clearly drives (influences) costs.

Option (d) is incorrect because multiple cost pools are preferable. They permit a better matching of indirect costs with cost drivers.

Option (e) is incorrect because ABC uses cost drivers (causes) as application bases to provide more refined data.

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5. Answer : (d)

Reason : The total of costs incurred in the operation of a business undertaking other than the cost of manufacturing and production is commercial cost

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6. Answer : (e)

Reason : The cost means the value of the sacrifice made to acquire goods or services. Therefore, (e) is correct.

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7. Answer : (c)

Reason : Employee training cost is usually a discretionary fixed cost. It is typically fixed since its amount is not based on volume. It is discretionary because it is set each year during the planning process. Training costs are optional, and they can be altered or perhaps deleted entirely during the year in response to business environment changes. Other options are related to committed cost.

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8. Answer : (d)

Reason : Non-production costs are incurred in the place other than production function. So these costs are either administrative or selling and distribution cost. Therefore, it is not a part of production cost. So, (d) is correct

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9. Answer : (a)

Reason : The cost of goods sold under a periodic cost accumulation system is equal to the cost of goods available for sale less ending finished goods inventories. Therefore, (a) is correct.

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10. Answer : (b)

Reason : Marginal costing or direct costing is a cost behavior oriented approach to product costing. In this method costs are separated into fixed and variable cost. If volume of production increases, the total contribution increases and profit is also increased after covering fixed costs. This approach is not available in other types of costing like absorption costing, process costing, job order costing and uniform costing. Therefore (b) is correct.

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11. Answer : (c)

Reason : An activity based costing system identifies the casual relationship between the incurrence of cost and underlying activities that cause those costs. Under this system, costs are applied to products on the basis of resources consumed (drivers). Therefore, (c) is correct. Other options are not correct.

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12. Answer : (a)

Reason : Notional costs should be included while ascertaining costs. This statement (a) is false. Other options given (b), (c), (d) and (e) are all correct.

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13. Answer : (b)

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

= (Rs.640 / 80%) x 60% + [(Rs.640 / 80%) x 50% - 10% of (Rs.640 / 80%) x 50%] = Rs.480 + Rs.360 = Rs.840; Present sales = Rs.640;

Incremental revenue = Rs.840 – Rs.640 = Rs.200lakh.

Proposed cost = 60% local + 50% Middle East = Direct material at 110% + Direct expenses at 110% + variable expenses at 110% + fixed expenses = (Rs.200/80) x 110 + (Rs.80/80) x 110 + (40/80) x 110 + (Rs.260 + Rs.40) = Rs.275 + Rs.110 + Rs.55 + Rs.300 = Rs.740

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

Incremental profit = Rs.200 – Rs.160 = Rs.40 lakh.

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14. 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 inefficiencies. Practical capacity always exceeds the actual use of capacity. It is not necessary to meet sales demand for the next year. It does not consider idle time caused by inadequate sales demand. Therefore, option (b) is correct.

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15. Answer : (a)

Reason : Cost of idle time arriving due to non-availability of raw-materials must be charged to costing profit & loss account. Other options are not correct. Therefore, (a) is correct.

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16. Answer : (e)

Reason : Depreciation is not an out-of-pocket costs as there is no real outflow of cash. All costs are not controllable. So, alternatives (II) and (III) are true. But alternatives (I) and (IV) are not true. So, the correct answer is (e).

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17. Answer : (b)

Reason : Contribution = Rs.69.50 – Rs.35.50 = Rs.34.

Fixed cost = Rs.18,02,000;

Break-even units = Rs.18,02,000 / Rs.34 = 53,000 ton;

Selling price for 1st 20% = Rs.69.50 x 90% = Rs.62.55;

Selling price for next 20% = Rs.69.50 x 85% = Rs.59.075

Contribution for 1st 20% capacity = Rs.62.55 – Rs.35.50

= Rs.27.05 per unit;

Contribution for next 20% capacity = Rs.59.075 – Rs.35.50

= Rs.23.575 per unit;

Profit from 1st 20% capacity = Rs.27.05 x 26,500 = Rs.7,16,825

Profit from next 20% capacity = Rs.23.575 ´ 26,500 = Rs. 6,24,738

Profit from added production of 40% capacity over break-even volume = Rs.7,16,825 + Rs. 6,24,738 = Rs.13,41,563.

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18. Answer : (d)

Reason : The correct answer is (d). Job cost sheet is designed to record cost of materials, labor and factory overhead applicable to a particular job and it does not include selling and distribution cost. Hence, answer (a), (b), (c) and (e) are not correct. Cost of goods sold = Rs. 9,00,000 + Rs. 3,40,000 + Rs. 1,00,000 – Rs. 4,20,000 = Rs. 9,20,000.

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19. Answer: (a)

Beginning direct materials inventory 1,34,000Add: Purchases 1,89,000Less: Purchase returns (1,000)Add: Transportation 3,000Total direct materials available 3,25,000Less: Ending direct materials inventory (1,24,000)Direct material used 2,01,000Direct labor 3,00,000Total prime costs 5,01,000

Manufacturing cost = Rs.5,01,000 + 60% of Rs.3,00,000 (Direct labor)

= Rs.6,81,000.

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20. Answer : (d)

Reason : Variable cost = Change of cost / change of activity

= (Rs.18,000 – Rs.10,000 ) / (7,000 – 3,000) = Rs.2.

Fixed cost = Rs.18,000 – 7,000 x Rs.2 = Rs.4,000.

Standard overhead = Rs.2.50.

Standard fixed cost = Rs.2.50 – Rs.2.00 = Re.0.50.

Normal capacity level = Rs.4,000 / Re.0.50 = 8,000 hours.

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21. Answer : (d)

Reason :

ParticularsPer unit

(Rs.)60%

Per unit(Rs.)

80%

Sales unit 4,800 6,400Rs. Rs.

Sale value 180 8,64,000 171.00 10,94,400Materials 62 2,97,600 58.90 3,76,960Labor 32 1,53,600 32.00 2,04,800Overheads (variable) 16 76,800 16.00 1,02,400Total variable cost 110 5,28,000 106.90 6,84,160Contribution 70 3,36,000 64.10 4,10,240Fixed cost(40 ´ 60% ´ 4,800)

1,15,200 1,15,200

Profit 2,20,800 2,95,040Break even point 1646 units 1,798 units

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22. Answer: (b)

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.

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23. Answer : (b)

Reason : Prodetermined overhead rate = Rs.30 per machine hour

Actual machine hours = 500 hours

Applied overhead = 500 hours ´ Rs.30(Standard rate for actual hours) = Rs.15,000

Actual overhead = Rs.15,900

Under absorption Rs.900

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24. Answer : (b)

Reason : Computation of total utilized machine hours:Normal available hours per month per operator 200 hoursLess: Unutilized hours due to

Absenteeism 12Leave 20Idle time 8 40

Total utilized hours per operator per month 160

Total hours for 3 operators ´ 3 months = 160 ´ 3 ´ 3 = 1,440 hours

Therefore, machine utilized is 1,440 hours (Machine cannot work without operator).

Normal hours for which wages are to be paid = 200 – 12 = 188 hours

Wages for 3 months = 188 hours ´ 3 ´ 3 ´ Rs.8 = Rs.13,536Comprehensive Machine hour rate Rs.Operators wages 13,536Production Bonus (10% on Rs.13,536) 1,354Power consumed (last quarter) 7,265Supervisor & indirect labor 4,100Electricity & Lighting 3,800Repairs & Maintenance (1% on Rs.8,00,000) 8,000Depreciation (10% of Rs.8,00,000 ¸ 4) 20,000Miscellaneous expenses (Rs.7,200 ¸ 4) 1,800General management expenses (Rs.45,800 ¸ 4) 11,450

71,305

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Comprehensive machine hour rate = Rs.71,305 ¸ 1,440 hours = Rs.49.52.

25. Answer : (a)

Reason :Particulars April May June TotalBatch Production (units) 2,500 3,000 2,000 7,500

(Rs.) (Rs.) (Rs.) (Rs.)Total sales value (@ Rs.15) 37,500 45,000 30,000 1,12,500Less: Costs:Materials 12,500 18,000 10,000 40,500Labor 5,000 6,000 4,000 15,000

Overheads (Workings) 7,500 6,000 6,000 19,50025,000 30,000 20,000 75,000

Profit 12,500 15,000 10,000 37,500Profit per unit 5 5 5Cost per unit 10 10 10

Profit for 4400 units

Sales – 4400 ´ Rs.15 Rs.66,000Cost – 4400 ´ Rs.10 Rs.44,000Profit Rs.22,000

Workings:

Batch labor hoursRs.5,000 ¸ Rs.2 = 2,500 hours

Rs.6,000 ¸ Rs.2 = 3,000 hours

Rs.4,000 ¸ Rs.2 = 2,000 hours

Overhead per hour(Total Overheads ¸Total labor hours)

Rs.24,000 ¸ 8,000= Rs.3

Rs.18,000 ¸ 9,000 = Rs.2

Rs.30,000 ¸ 10,000

= Rs.3Overhead for the batch Rs.7,500 Rs.6,000 Rs.6,000

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26. Answer : (a)

Reason : If predetermined overhead rate is not employed and the volume of production is increased over the level planned, the cost per unit will be reduced because fixed cost per unit will be reduced and variable cost per unit will remain same. Therefore, (a) is correct.

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27. Answer : (d)

Reason : Idle capacity of a plant is the difference between practical capacity and capacity based on sales expectancy. It is not the difference between the maximum capacity and practical capacity or maximum capacity and actual capacity or practical capacity and actual capacity. Therefore, (d) is correct.

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28. Answer: (b)

Reason: Overhead absorption rate =

Rs.2,48,000 / [(400 x 8) + (400 x 12) + (200 x 22)]

= Rs. 2,48,000 ¸ 12,400 = Rs.20;

Total overhead costs for B = 400 x 12 x 20 = Rs.96,000.

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29. Answer : (b)

Reason:

Production 2,000/3,500 ´ Rs.14,00,000 Rs.8,00,000

Purchasing 300/550 ´ Rs.5,00,500 Rs.2,73,000

Inspection 200/600 ´ Rs.3,00,000 Rs.1,00,000

Total overheads Rs.11,73,000

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30. Answer : (c)

Reason : Total fixed overhead = 12,000 units x Rs.4.00 = Rs.48,000. Fixed overhead per unit based on actual production = Rs.48,000 actual overhead / 10,000 units actual production = Rs.4.80

Total cost per unit = Material Rs.10 + Labor Rs.6 + Variable overhead Rs.3 + Fixed overhead Rs.4.80 = Rs.23.80.

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31. Answer : (c)

Reason : President's salary is a period cost and not a product cost. The other costs represent the product cost classifications of direct material, direct labor, and overhead. Therefore, (c) is correct.

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32. Answer : (c)

Reason :

Particulars P1

(Rs.)

P2

(Rs.)

P3

(Rs.)

S1

(Rs.)

S2

(Rs.)

Primary

Distribution13,600 14,700 12,800 9,000 3,000

S1 (4:3:2:1) 3,600 2,700 1,800 (-) 9,000 900

S2 (3:3:2:2) 1,170 1,170 780 780 (-) 3,900

S1 (4:3:2:1) 312 234 156 (-) 780 78

S2 (3:3:2:2) 23 23 16 16 (-) 78

S1 (4:3:2:1) 6 5 3 (-) 16 2

S2 (3:3:2:2) 1 1 - - (-) 2

Total 18,712 18,833 15,555

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33. Answer : (d)

Reason : Under this method the amount of under absorbed overheads is adjusted to work-in-progress, finished goods and cost of goods sold in proportion to their values Rs.3,00,000, Rs.8,00,000 and Rs.9,00,000 respectively by use of supplementary rate. The total amount = Rs.3,00,000 + Rs.8,00,000 + Rs.9,00,000 = Rs.20,00,000; The amount of over absorbed = Rs.13,84,000 – Rs.14,00,000 = Rs.16,000. The amount of over absorbed overhead is adjusted to work-in-progress = Rs.16,000 x ( Rs.3,00,000 / Rs.20,00,000 ) = Rs.2,400.

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34. Answer : (a)

Reason : Options (b), (c), (d) and (e) are true of the advantages of departmentalization of overhead. But, option (a) is not an advantage as departmentalization of overhead facilitates control of overhead exp. by means of pre-determined budgets and not forecasted budgets.

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35. Answer : (e)

Reason : These costs are the fixed costs necessary to achieve a desired level of production or to provide a desired level of service without decreasing product quality or service attributes. If this cost is not recovered due to low demand, it is known as capacity cost. Therefore, (e) is correct.

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36. Answer : (b)

Reason : More accurate cost allocation can be accomplished when costs are more homogeneous. Direct costs are costs traceable to the goods or services and do not have to be allocated. Hence options (a) and (e) are incorrect. When the costs are more indirect in nature or when the different costs vary depending upon different causes and effects then the cost allocation becomes more difficult task and hence the accuracy is affected.

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37. Answer : (c)

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

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content of Management Accounting statements.

38. Answer : (c)

Reason : Provident fund paid by the employer for factory employee must be charged as factory overhead costs. Other options are not correct.

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39. Answer : (d)

Reason : Depreciation expenses are apportioned to cost centers on the basis of machine hours, not on the basis of floor area occupied by each machine. Other options in (a), (b), ( c) and (e) are correct.

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40. Answer : (b)

Reason : Over-statement of work-in-progress represents the understatement of profits. Other options given in (a), (c), (d) and (e) are not correct.

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41. Answer: (b)

Reason: The inspection cost relates to all air conditioners produced and is not easily traced to a specific air conditioner. It is an indirect cost to the air conditioner industry. Other options are all direct cost to manufacture air conditioner. Therefore, (b) is correct.

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42. Answer: (a)

Reason:

Rs.

Personal Department Cleaning 5/45 20,000

Dept. A 30/45 1,20,000

Dept. B 10/45 40,000

Total 1,80,000

Cleaning Department Dept. A 3,750/6,750 1,34,861

Dept. B 3,000/6,750 1,07,889

Total 2,42,750

Department B = Rs.40,000 + Rs.1,07,889 + Rs.30,00,000 = Rs.31,47,889

Rate = Rs.31,47,889 / 27,000 = Rs.116.59

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43. Answer : (c)

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

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44. Answer : (b)

Reason : The profit difference is due to the fixed overheads being incorporated in the stock movements under the absorption costing system.

Profit difference = Rs.14,625 (i.e. Rs.90,225 – Rs.75,600)

Physical stock movements = 2,250 units (i.e. 21,150units – 18,900units)

Fixed overhead rate per unit =

Rs.14, 625

2, 250units = Rs.6.50.

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45. Answer : (a)

Reason : (i) average fixed cost per unit = total fixed cost / number of units produced

(ii) Average semivariable cost per unit = total semivariable cost/ number of units produced(iii) Average variable cost per unit = total variable cost / number of units produced(iii) Average total cost per unit = total cost / number of units produced

As the numerator is constant, average fixed cost per unit is inversely proportional to the number of units produced.

All of (ii), (iii) and (iv) has some variable part in them which increases with an increase in the volume of units produced. So none of them are inversely proportional to the number of units

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produced (although inversely related). So Average fixed cost per unit may be expected to decrease by the greatest percentage with an increase in the volume of units produced.

46. Answer : (c)

Reason : Under the terms of the contract, if contractee retains cash at the time of payments of the value certified of work-in-progress, it is called Retention money. Other options are not correct.

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47. Answer : (a)

Reason :

Statement of equivalent Production Unit (FIFO)

InputOutput

CompletedMaterial Conversion

Opening 1,280 Opening 1,280 40% 512 50% 640Introduced 7,200 Introduced 6,250 100% 6,250 100% 6,250

Closing 950 80% 760 60% 5708,480 8,480 7,522 7,460

Costsduringthe month Rs.1,12,830 Rs.89,520Cost per unit Rs. 15 Rs. 12.00

The total cost of closing work-in-process

Material – 760 ´ Rs.15 = Rs.11,400

Conversion – 570´ Rs.12.00 = Rs. 6,840

Rs.18,240

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48. Answer : (d)

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.

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49. Answer : (b)

Reason :Particulars Indian Oil Bharat

PetroleumDistance (Depots to factory – full load) 10 km 8 kmDistance covered per trip 20 km 16 kmRunning time @ 40 km p.h. 30 minutes 24 minutesFilling-in time 50 minutes 45 minutesEmptying time 45 minutes 45 minutes Total time per trip 125 minutes 114 minutesDetails of costs:Variable operating charges @ Rs.2.20Indian Oil(20 km x Rs.2.20)Bharat Petr. (16 km x Rs.2.20)

Rs.44.00 Rs.35.20

Fixed charges @ Rs.13.20 per hourIndian Oil (125mint.x Rs.13.20 / 60mint)Bharat Petroleum(114 mint. x Rs.13.20 / 60 mint.)

Rs.27.50 Rs.25.08

Total cost per trip Rs.71.50 Rs.60.28Ton-km (full load)Indian Oil (5 tons x 10 km)Bharat Petroleum (5 tons x 8 km)

50 ton-km 40 ton-km

Cost per ton-km (Total cost per trip / Ton-km) Rs.1.43 Rs.1.51

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50. Answer : (b)

Reason : Normal spoilage is an inventoriable cost of production that is charged to cost of goods sold when the units are sold. Abnormal spoilage is a period cost recognized when incurred. Rs.5,000 of abnormal spoilage is therefore expensed during the month of March, 2005. In addition 50% of the normal spoilage is debited to cost of goods sold because 50% (2,500 ¸ 5,000) of the units completed were sold during the month. No spoilage is allocated to work-in-process because inspection occurs after completion.

Therefore, normal spoilage = 50% of Rs.2,000 = Rs.1,000

Total spoilage charged against revenue = Rs.5,000 + Rs.1,000

= Rs.6,000

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51. Answer : (e)

Reason :

Material Conversion

Input Output % units % units

Units

started

– 8,000

Completed 7,000 100% 7,000 100% 7,000

Normal

loss 8%

640 100% 640 80% 512

Abnormal loss 360 100% 360 80% 288

8,000 7,800

Cost Rs.36,000 Rs.19,500

Cost per unit Rs.4.50 Rs.2.50

Cost of abnormal loss = 360 ´ Rs.4.50 + 288 ´ Rs.2.50

= Rs.1,620 + Rs.720 = Rs.2,340.

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52. Answer : (a)

Reason : Rs. Rs.

Total manufacturing Costs 2,15,500Less: Overhead costs:

Indirect labor 16,100Factory overhead 31,300Indirect material 25,500Freight in 7,500 80,400

1,35,100Less: Direct labor 43,240

Material consumed 91,860Add: Closing material 6,490

98,350Less: Opening material 16,120

Material purchased 82,230

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53. Answer: (b)

Reason: Cost per equivalent unit of ending inventory = Rs.10.00 x 3,000 equivalent units in ending inventory = Rs.30,000.

Workings:

Equivalent units 15,000 completed + 3,000 in ending inventory (60% x 5,000) = 18,000 equivalent units.

Total cost = Material Rs.170,000 + labor 4,000 + applied overhead Rs. 6,000 (400 hours x Rs.15/hour). = Rs.1,80,000

(Overhead rate = Rs. 6,450 ¸ 430 = Rs. 15)

Cost per unit = Rs.180,000/18,000 = Rs.10.00 per equivalent unit.

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54. Answer : (e)

Reason : Percentage of rejection on output :

Process A – (6,000 / 12,000) x 100 = 50%

Process B - (1,800 / 18,000) x 100 = 10%

Process C- (3,400 / 17,000) x100 = 20%

Now, inputs have to be calculated in the reverse order based on percentage of output.

ProcessOutput(pieces)

% of rejectionon output

No. ofRejections

(pieces)

Input(pieces)

C 1,000 20% 200 1,200

B 1,200 10% 120 1,320

A 1,320 50% 660 1,980

The input of process A will be 1,980 pieces for an output of 1,000 pieces in process C.

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55. Answer : (d)

Reason :

Equivalent units of production for the material (weighted average) =

100% of 550 units + 60% of 50 = 580 units;

Total costs = Rs.1,042 + Rs.9,282 = Rs. 10,324;

Cost per unit = Rs.10,324 / Rs.580 = Rs.17.80;

Total cost of finished goods = 550 units x Rs.17.80 = Rs.9,790.

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56. Answer : (d)

Reason : Weighted Average Method:

Input = 8,000 units + 34,000 units = 42,000 units;

Out put = 36,000 units + 6,000 units = 42,000 units;

Equivalent production units of conversion =

100% of 36,000 + 80% of 6,000 = 36,000 + 4,800 = 40,800 units;

FIFO Method:

Input = 8,000 units + 34,000 units = 42,000 units;

Out put = 8,000 units + 28,000 units + 6,000 units = 42,000 units;

Equivalent production units of conversion =

40% of 8,000 units + 100% of 28,000 units +80% of 6,000 =

= 3,200 + 28,000 + 4,800 = 36,000 units.

Excess equivalent units of production of conversion =

40,800 units – 36,000 units = 4,800 units.

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57. Answer : (e)

Reason : The costs involved in transporting costing are operating costs and running costs. Running costs are the costs which vary more or less in direct proportion to the distance traveled like petrol and Semi-variable costs are incurred in the form of tyre maintenance, painting etc. Insurance of the vehicle cannot be considered as running cost.

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58. Answer : (d)

Reason :

Particulars JobA1 (Rs.) Job B2 (Rs.)

Selling price 1,66,650 1,28,250

Less Profit 15,150

(1,66,650 / 11)

21,375

(1,28,250 / 6)

Total cost 1,51,500 1,06,875

Let, factory overhead percentage on direct wages = f, and

Administrative overhead percentage on factory cost = a,

Factory cost of Job A1 = Rs.54,000 + Rs.42,000 + Rs.42,000f

Job B2 = Rs.37,500 + Rs.30,000 + Rs.30,000f

Total cost of production

Job A1 = (Rs.96,000 + Rs.42,000f) + (Rs.96,000 + Rs.42,000f) a = Rs.1,51,500

Job B2 = (Rs.67,500 + Rs.30,000f) + (Rs.67,500 + Rs.30,000f) a = Rs.1,06,875

Solving the 2 equations:

f = 60% = percentage of factory overhead on wages

A = 25% = percentage of administrative overhead on factory cost.

Factory cost of Job A3 = Rs.24,000 + Rs.20,000 + 60% on Rs.20,000

= Rs.56,000

Total cost of Job A3 = Rs.56,000 + 25% of Rs.56,000 = Rs.70,000.

Selling price = Rs. 70,000 ¸ 0.875 = Rs. 80,000 (Since, Profit = 12.5% on sale price)

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59. Answer : (c)

Reason : Equivalent production unit means the conversion of partly completed units into an equivalent number of completed units in order that costs may be shared on an equitable basis. Other options are not correct.

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60. Answer : (d)

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.

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61. Answer : (c)

Reason : Occupancy days in a year

For single room = 25 ´ 365 ´ 80% = 7300

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

Total room occupancy = 7300 + 1.5 (4380) = 7300 + 6570 = 13,870

Total cost:

Single room = 7300 (Rs.65 + Rs.25)= Rs. 6,57,000

Double room = 4380 (Rs.45 + Rs.35)= Rs. 3,50,400

Total cost = Rs. 10,07 400

Margin (25% hire charge) = Rs. 3,35,800

Total = Rs. 13,43,200

Rent per day of single room = Rs.13,43,200 / 13,870 = Rs.96.84

Rent of a double room per day = Rs.96.84 (1.5) = Rs.145.26 or Rs.145.

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62. Answer : (e)

Reason : Joint cost = Rs.4,00,000 + Rs.2,00,000 + Rs.3,00,000 = Rs.9,00,000

Total sales value of units produced = 300 x Rs.3,000 + 240 x 4,000 + 120 x 5,000 = Rs.9,00,000 + Rs.9,60,000 + Rs.6,00,000 = Rs.24,60,000.

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Share of joint costs of Product B = (Rs.9,00,000 / Rs24,60,000) x Rs.9,60,000

= Rs.3,51,219.51

The cost of closing inventory of Product B = (Rs.3,51,219.51 / 240) x 90

= Rs.1,31,707

63. Answer : (b)

Reason :

Output MaterialLabor

and overheadsCompletedand transferred

25 100% 25 100% 25

Work-in-progress 25 100% 25 60% 1550 50 40

Total Cost – Rs.1,50,000 Rs.1,60,000

Cost per unit – Rs. 3,000 Rs. 4,000

Value of Work-in-progress: Material – 25 ´ Rs.3,000 = Rs. 75,000

Work-in-progress – Labour & Overheads – 15 ´ Rs.4,000 = Rs. 60,000

=Rs.1,35,000

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64. Answer : (d)

Reason : Contract A/C Cr

Particulars Rs Particulars Rs

Materials 2,25,500 Work certified 4,00,000

Labor costs 1,23,500 Work not certified

1,20,000

Direct expenses 72,000

Material in hand 18,375

Depreciationon plant (Rs.1,71000–Rs.1,02,500)

68,500

Notional profit 48,875

5,38,375 5,38,375

Profit transferred to P/L a/c =

2

3 ´ Rs.48,875 ´

Rs.3, 50, 000

Rs.4, 00, 000

= Rs.28,510

Profit transferred to Reserve a/c = Rs.48,875 – Rs.28,510

= Rs.20,365

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65. Answer : (d)

Reason :

Sales value of productionJ – 8,000 x Rs.4 Rs.32,000 (40%)K – 8,000 x Rs.6 Rs.48,000 (60%)

Rs.80,000 (100%)Common cost:

Direct materials Rs.25,500Direct labor Rs.10,000Overheads Rs.30,000

Rs.65,500Less: Sales value of by-product

(1,000 x Re.0.50)Rs. 500

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Rs.65,000

J

(Rs.)

K

(Rs.)

Total

(Rs.)

Production cost 26,000 39,000 65,000

Less: Closing stock

J = 1,000, K=2,000 3,250 9,750 13,000

Cost of sales 22,750 29,250 52,000

Sales 28,000 36,000 64,000

Profit 5,250 6,750 12,000

66. Answer : (e)

Reason : Cost plus contract protects the contractor from the risk of market fluctuations. Salary of supervisor is the direct cost of the contract account. In contract account, certified work-in-progress is valued at contract value and uncertified work-in-progress is valued at cost. If there are any cost fluctuations, escalation clause will protect the contractor. In contract account, full profit is not credited to profit and loss account. Therefore, (e) is correct.

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67. Answer : (c)

Reason : Joint costs are apportioned on the basis of relative sales value of the products:

ProductSalesvalue(Rs.)

Separatecosts(Rs.)

RelativeSales value

at splitoff point

(Rs.)

Share of joint cost

(Rs.)

Net income (Rs.)

M 1,15,000 30,000 85,000 *68,000 17,000

N 10,000 6,000 4,000 3,200 800

P 4,000 - 4,000 3,200 800

Q 30,000 1,000 29,000 23,200 5,800

Total 1,59,000 37,000 1,22,000 97,600 24,400

* Rs. 85,000 ¸ Rs. 1,22,000 x Rs. 97,600 = Rs. 68,000

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68. Answer : (c)

Reason : Contribution per unit = Rs.18.75 – Rs.10.50 = Rs.8.25

Required sales = (Rs.6,30,625 + Rs.50,000) ¸ Rs.8.25 = 82,500 units.

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69. Answer : (c)

Reason :

Profit under absorption costing: Rs. Rs.Sales – 1,87,500 ´ Rs.40 75,00,000Cost of goods sold:Opening Stock (Rs.22 + Rs.4) ´ 12,500 3,25,000Production Rs.26 ´ 2,00,000 52,00,000

55,25,000Add: Adverse variable cost variance 1,00,000

56,25,000Less: Closing stock Rs.26 ´ 25,000 6,50,000

49,75,000Gross Profit (sales – cost) 25,25,000

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Less: Selling expenses: Variable 1,87,500 ´ Rs.6 11,25,000 Fixed 6,30,000 17,55,000

7,70,000Less: Under absorption: 1,00,000

Profit 6,70,000

Profit under Marginal Costing:

Rs. Rs.Sales – 1,87,500 ´ Rs.40 75,00,000Cost of goods sold:Opening St – 12,500 ´ Rs.22 2,75,000Production – 2,00,000 ´ Rs.22 44,00,000

46,75,000Less: Closing Stock – 25,000 ´ Rs.22 5,50,000

41,25,000Less: Adverse variance 1,00,000

42,25,000Less: Variable selling expenses 11,25,000 53,50,000

Contribution 21,50,000Less: Fixed cost: – Manufacturing Rs. 9,00,000

Selling 6,30,000 15,30,000 Profit 6,20,000

70. Answer : (c)

Reason :

Plant A B C MergedCapacityoperated

100% 100% 100% 100%

(Rs. in lakh)

(Rs. in lakh)

(Rs. in lakh)

(Rs. in lakh)

Turnover 300 400 300 1,000Variable cost 200 300 150 650Contribution 100 100 150 350Fixed cost 60 70 60 190

P/V ratio of merged plant =

350100 35%

1000´

Break even point of merged plant =

Fixed Cost 190Rs.542.86 lakh

P / V ratio 35%

Break even capacity = (542.86/1,000) ´ 100 = 54.29%.

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71. Answer : (a)

Reason : Contribution to sales ratio = Change in profit / Change in sales

North = Rs.180 / Rs.400 = 45%;

East = Rs.90 / Rs.150 = 60%; South = Rs.110 / Rs.200 = 55%;

Fixed cost:

North = Rs.1,100 x 45% –Rs.135 = Rs.360;

East = Rs.1,450 x 60% –Rs.210 = Rs.660;

South = Rs.1,200 x 55% - Rs.330 = Rs.330;

Total fixed cost = Rs.360 + Rs.660 + Rs.330 = Rs.1,350.

Total sales of 3 region = Rs.3,750;

Total profit of 3 region = Rs.675

Therefore, Sales x contribution to sales ratio = fixed cost + profit

Rs.3,750 x contribution to sales ratio = Rs.1,350 + Rs.675

Contribution to sales ratio = Rs.2,025 / Rs.3,750 = 54%

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Break-even sales = Rs.1,350 / 54% = Rs.2,500.

72. Answer : (d)

Reason : Fixed production cost per unit = Rs.3,60,000 /1,80,000 = Rs.2

Profit Statement for the Year (Under Absorption Costing Method)

ParticularsAmount

(Rs.)

Totalamount

(Rs.)

A Sales revenue 1,50,000 ´ Rs.20 30,00,000

B Cost of production

Variable production cost 1,60,000 ´ Rs.11 17,60,000

Increase in variable cost 35,000

Fixed cost 3,60,000

21,55,000

Opening stock 10,000 ´ Rs.13 (Working Note) 1,30,000

22,85,000

Less: Closing stock 20,000 units (W N) 2,69,375

20,15,625

C. Gross profit (A-B) 9,84,375

D. Selling expenses

Variable (1,50,000 x Rs.3) 4,50,000

Fixed 2,70,000 7,20,000

E. Net profit (C– D) 2,64,375

Working Notes:

In the absence of information concerning stock, it is valued at variable cost Rs.11.00 per unit plus an apportionment of fixed cost at normal capacity, i.e. Rs.2.

Cost of production of 1,60,000 units = Rs.21,55,000

Cost of 20,000 units = Rs.21,55,000/1,60,000 ´ 20,000 = Rs.2,69,375.

Using the FIFO approach has solved the above question, but using other approaches like average costing, etc can be solved.

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