Question Paper Management Accounting – I (151) : July 2004 · Answer all questions. · Marks are indicated against each question. 1. Costs are allocated to cost objects in many ways and for many reasons. Which of the following is a purpose of cost allocation? (a) Implementing activity-based costing (b) Evaluating revenue center performance (c) Budgeting cash and controlling expenditures (d) Aiding in variable costing for internal reporting (e) Measuring income and assets for external reporting. (1 mark) < Answer > 2. Which of the following costs is irrelevant to a decision to accept or reject an order? (a) Differential costs (b) Replacement costs (c) Opportunity costs (d) Unavoidable costs (e) Out-of-pocket costs. (1 mark) < Answer > 3. Which of the following is false with regard to the supplementary rate method for accounting of under or over absorption of overheads? (a) It facilitates the absorption of actual overhead for production (b) The value of stock is distorted under this method (c) The supplementary rate can be determined only after the end of the accounting period (d) It requires a lot of clerical work (e) Correction of costs through supplementary rates is necessary for maintaining data for comparison. (1 mark) < Answer > 4. The average method of valuation of inventory in process costing is suitable, if (a) Prices are increasing (b) Prices of inventory fluctuate from period to period (c) Abnormal loss is incurred at the beginning of the process (d) Material is continually introduced (e) Material is introduced at the beginning of the process. (1 mark) < Answer > 5. Which of the following statements is true with respect to Absorption costing and Variable costing? (a) Overhead costs are treated in the same manner under both the costing methods (b) Variable manufacturing costs are lower under variable costing < Answer >
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Question PaperManagement Accounting – I (151) : July 2004
· Answer all questions.
· Marks are indicated against each question.
1. Costs are allocated to cost objects in many ways and for many reasons. Which of the following is a purpose of cost allocation?
(a) Implementing activity-based costing(b) Evaluating revenue center performance(c) Budgeting cash and controlling expenditures(d) Aiding in variable costing for internal reporting(e) Measuring income and assets for external reporting.
(1 mark)
< Answer >
2. Which of the following costs is irrelevant to a decision to accept or reject an order?
3. Which of the following is false with regard to the supplementary rate method for accounting of under or over absorption of overheads?
(a) It facilitates the absorption of actual overhead for production(b) The value of stock is distorted under this method(c) The supplementary rate can be determined only after the end of the accounting period(d) It requires a lot of clerical work(e) Correction of costs through supplementary rates is necessary for maintaining data for
comparison.
(1 mark)
< Answer >
4. The average method of valuation of inventory in process costing is suitable, if
(a) Prices are increasing(b) Prices of inventory fluctuate from period to period(c) Abnormal loss is incurred at the beginning of the process(d) Material is continually introduced(e) Material is introduced at the beginning of the process.
(1 mark)
< Answer >
5. Which of the following statements is true with respect to Absorption costing and Variable costing?
(a) Overhead costs are treated in the same manner under both the costing methods(b) Variable manufacturing costs are lower under variable costing(c) Fixed manufacturing costs are treated in the same manner under both the costing methods(d) If finished goods inventory increases, variable costing results in lower income(e) Gross margins are same under both the costing methods.
(1 mark)
< Answer >
6. The upper limit of a company’s productive output capacity given its existing resources is called
(a) Acceptance of a special order(b) Manufacture or purchase of component parts(c) Determination of a product price(d) Replacement of equipment(e) Addition or deletion of a product line.
(1 mark)
8. Which of the following assumptions is false with respect to Cost-Volume-Profit analysis?
(a) This analysis assumes that production and sales will be synchronized at all points of time(b) This analysis assumes that prices of input factors will vary(c) This analysis assumes that efficiency and productivity remain unchanged(d) This analysis assumes that selling prices are constant at all levels of sales(e) This analysis assumes that the cost can be divided into fixed and variable categories.
(1 mark)
< Answer >
9. Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be used if
(a) A company wants to adopt a standard cost system(b) A company wants to adopt a direct costing system(c) The manufactured products differ in the resources consumed from the individual departments in
the plant(d) Manufacturing overhead is the largest cost component of its product cost(e) The manufacturing operations of a company are all highly automated.
(1 mark)
< Answer >
10. The total of costs incurred in the operation of a business undertaking other than the cost of manufacturing and production is
(a) Management Accounting provides data for internal uses whereas Financial Accounting provides data for external users
(b) Management Accounting is concerned with a strong orientation towards future while Financial Accounting is concerned with a record of financial data of the past
(c) Management Accounting relies on the concept of responsibility whereas Financial Accounting does not rely on the concept of responsibility
(d) Financial Accounting is mandatory for business organizations whereas Management Accounting is not mandatory
(e) Financial Accounting statements have to be prepared in accordance with the GAAP whereas managers set their own rules in the form and content of Management Accounting statements.
(1 mark)
< Answer >
12. Which of the following statements is false?
(a) By-product is a secondary product, which incidentally results from the manufacture of main product
(b) Joint products are produced from the same basic raw material, and by a common process(c) The main difference between joint products and by-products is its commercial value(d) Where the by-products are utilized in the same undertaking, the by-product is valued at standard
cost(e) The relationship between main product and by-product changes with changes in economic
conditions.
(1 mark)
< Answer >
13. An Operation Costing System is
(a) Identical to a process costing system except that actual cost is used for manufacturing overhead
(b) The same as a job-order costing system except that no overhead allocations are made since actual costs are used throughout
(c) The same as a job-order costing system except that materials are accounted for in the same way as they are in a process costing system
(d) The same as a process costing system except that materials are allocated on the basis of batches of production
(e) Identical to direct costing system except that no overhead allocations are made since actual costs are used throughout.
(1 mark)
14. Fixed cost is the product of
(a) Break-even sales and margin of safety(b) Sales and margin of safety(c) Sales and profit-volume ratio(d) Profit-volume ratio and excess of sales over margin of safety(e) Profit-volume ratio and excess of sales over break-even point.
(a) A floor cleaner in a factory(b) A Painter in a furniture shop(c) An assembly worker in a company manufacturing televisions(d) A Cobbler in a footwear company(e) A Goldsmith of a jewelry manufacturing company.
(1 mark)
< Answer >
17. Which of the following items is controllable by the production manager?
(a) Price paid for raw materials (b) Usage of raw material(c) Depreciation on machinery (d) Insurance on machinery(e) Rent for floor space.
(1 mark)
< Answer >
18. Equivalent units of production are used in process accounting to
(a) Measure the efficiency of the production process(b) Measure the effectiveness of the cost center(c) Allocate overheads to production(d) Establish standard costs(e) Provide a means of allocating costs to partially completed units.
(1 mark)
< Answer >
19. Market survey costs incurred for a new product are
20. If a product is the result of a common process, which of the following costs are relevant for future decision-making?
(a) Joint costs before allocation (b) Joint costs allocated to the products(c) Joint and separable costs in total (d) Separable costs only(e) None of the above.
(1 mark)
< Answer >
21. Which of the following activities uses process costing?< Answer >
22. Which of the following is/are considered as component of fixed factory overhead?
I. Repairs and factory upkeepII. Factory SupervisionIII. Bad debtsIV. Cost incurred on trade magazine printing.
(a) Both (I) and (II) above (b) Both (I) and (III) above(c) Both (II) and (IV) above (d) (I), (II) and (III) above(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
23. Which of the following is true with respect to direct costs?
(a) They are incurred for the benefit of cost centers (b) They are incurred as a direct consequence of a decision (c) They can be economically identified with the item being costed (d) They cannot be economically identified with the item being costed(e) They can be controlled immediately when it is incurred.
(1 mark)
< Answer >
24. Overhead rate per unit of production is an appropriate overhead allocation base when
(a) Several well differentiated products are manufactured(b) Direct labor costs are low(c) Direct material costs are large relative to direct labor costs(d) Only one product is manufactured(e) The manufacturing process is complex.
(1 mark)
< Answer >
25. Which of the following statements is false?
(a) In process costing, cost is accumulated according to processes or departments(b) In job costing, the basis of cost accumulation is job order or batch size(c) In process costing, cost is accumulated on time basis(d) In job costing, cost is computed at the end of the cost period(e) In process costing, items of prime cost cannot be traced with a particular order due to continuous
production.
(1 mark)
< Answer >
26. The costs which reflect the policies of the top management and result in periodic appropriation are known as
(c) Electricity expenses in factory (d) Depreciation of goods delivering van(e) Charitable and political donations.
(1 mark)
29. Which of the following factors need to be considered in a make or buy decision?
(a) The capability of the company to make the item in terms of capacity(b) The availability of outside suppliers who can deliver the same in terms of quantity, time and
quality(c) The opportunity cost of using existing capacity to manufacture alternative items, which would
make a greater contribution(d) The differential cost of making and buying the item(e) All of the above.
(1 mark)
< Answer >
30. Profits under absorption costing system and marginal costing system will be same for a period, if
(a) Production is greater than sales(b) Production is less than sales(c) Opening inventory is greater than closing inventory(d) Opening inventory is less than closing inventory(e) There is no change in opening and closing inventory.
(1 mark)
< Answer >
31. Which of the following methods of costing considers both the variable and fixed costs as part of product costs?
(a) Direct costing (b) Marginal costing(c) Absorption costing (d) Standard costing (e) Uniform costing.
(1 mark)
< Answer >
32. Which of the following methods is not used for apportionment of joint costs to different joint products?
(a) Average unit costs method (b) Physical units method(c) Standard costs method (d) Replacement costs method(e) Market value method.
(1 mark)
< Answer >
33. Which of the following is an administrative overhead cost?
(a) Cost of lubricants for sewing machine in production(b) Chief accountant’s salary(c) Road tax for delivery vans(d) Cost of painting advertising slogans on delivery vans(e) Cost of broadcasting music throughout the factory.
(1 mark)
< Answer >
34. When allocating service department costs to production departments, the method that does not consider different cost behavior patterns is the
(a) Both (I) and (IV) above (b) Both (II) and (III) above(c) Both (II) and (IV) above (d) Both (III) and (IV) above(e) All (I), (II), (III) and (IV) above.
(1 mark)
36. In which of the following situations, is job costing ideal?
(a) Where two or more products are produced from the same process(b) Where the products are dissimilar and non-repetitive in nature (c) Where the products are homogeneous(d) Where the production is in continuous flow(e) Where the production is carried on in batches.
(1 mark)
< Answer >
37. Cost drivers are
(a) Factors that cause costs to increase as the activity increases(b) Accounting techniques used to control costs(c) Accounting measurements used to evaluate whether or not performance is proceeding according
to plan(d) Mechanical basis, such as machine hours, computer time, size of equipment etc. used to assign
costs to departments(e) Both (a) and (b) above.
(1 mark)
< Answer >
38. In which of the following situations does the break-even point (in units) increase?
(a) When unit variable costs increase and sales price remains unchanged(b) When unit variable costs decrease and sales price remains unchanged(c) When unit variable costs remain unchanged and sales price increases(d) When unit variable costs decrease and sales price increases(e) When unit variable costs and unit sales price increase by the same amount in rupees.
(1 mark)
< Answer >
39. If two service departments provide service to each other, and each department should be charged for the cost of service rendered by other, it is known as
(a) Direct method (b) Variable method(c) Reciprocal service method (d) Linear method (e) Step down method.
(1 mark)
< Answer >
40. Which of the following is true regarding contract costing?
(a) Both work certified and work uncertified are valued at cost price(b) Both work certified and work uncertified are valued at market price(c) Both work certified and work uncertified are valued at contract price(d) Work certified is valued at contract price whereas work uncertified is valued at cost price(e) Work certified is valued at cost price whereas work uncertified is valued at market price.
(1 mark)
< Answer >
41. Samsnit Ltd. uses process cost system to manufacture a special type of kit for the textile industry. The company has furnished the following information pertaining to operations for the month of June 2004:
Particulars UnitsOpening work-in-process (June 01, 2004) 650Introduced in production during June2004 7,800Closing work-in-process (June 30, 2004) 580
There is no loss in the manufacturing process. The opening inventory was 80% complete for materials and 60% complete for conversion costs. The closing inventory was 75% complete for material and 65% complete for conversion costs.
Costs pertaining to the month of June 2004 are as follows:Opening work in process:
During the month: Materials Rs.4,98,240Conversion Rs.5,49,990
The total cost of closing work-in-process on June30, 2004, using FIFO method, is(a) Rs.58,290 (b) Rs.51,242 (c) Rs.52,280 (d) Rs.54,230(e) Rs.56,280.
(3 marks)
Mani Ltd. has 3 identical machines manned by 4 operators. The operators are fully engaged on machines. The total original cost of these 3 machines is Rs.12,00,000. The company has furnished the following information pertaining to operations for 1st quarter ending June 30, 2004:
Normal available hours per month per operator 500 hoursAbsenteeism (without pay) 50 hoursLeave (with pay) 70 hoursNormal idle time (unavoidable) 10 hoursAverage rate of wages per hour Rs.20Estimated production bonus 8% on wagesValue of power consumed Rs.28,500Supervision and indirect labor Rs.42,400Electricity and lighting Rs.19,600
Repairs and maintenance per quarter 1% on value of machinesDepreciation per annum 10% on original costMiscellaneous expenses per annum Rs.48,000 General management expenses per annum Rs.80,000
The comprehensive machine hour rate for the machine shop for the quarter ending June 30, 2003 is(a) Rs.84.94 (b) Rs.63.32 (c) Rs.56.11 (d) Rs.72.34 (e) Rs.59.22.
(3 marks)
< Answer >
43. Plastic Furniture Ltd. manufactures plastic TV stands. The company is working at 80% capacity level, which represents 24,000 units per month. The cost break-up per TV stands is as under:
The selling price is Rs.360 per unit. The company is planning to produce at 90% capacity level. At 90% capacity level the selling price falls by Rs.20 accompanied by 5% fall in the price of materials.
The break-even point in units and profit at 90% level of capacity of the company are
(a) 8,000 units and Rs.19,29,000 respectively(b) 8,972 units and Rs. 19,09,300 respectively(c) 8,000 units and Rs.19,20,000 respectively(d) 8,972 units and Rs.19,29,000 respectively(e) 8,972 units and Rs.19,20,000 respectively.
(2 marks)
< Answer >
44. XY Ltd. wants to buy a new machine to replace the old one, which is having frequent breakdowns. The company received offers for two models M1 and M2. The details of the two models are as under:
Particulars Model M1 Model M2Installed capacity in units 25,000 25,000Fixed overhead expenses per annum Rs.6,00,000 Rs.2,50,000Estimated profit at the above capacity Rs.4,00,000 Rs.2,50,000
The sale price per unit of product manufactured by these types of machines is Rs.80.
The level of sales at which both the models will earn the same profit
(a) 15,000 units (b) 10,000 units (c) 17,500 units (d) 20,000 units(e) 12,500 units.
(3 marks)
45. Mohan Constructions undertook a contract for construction of a large complex in Secunderabad. The construction work commenced on April 01, 2003 and the following data are available for the year ended March 31, 2004:
Particulars Rs.Total contract price 1,25,00,000Work certified 79,00,000Progress payment received 62,50,000Material issued to site 40,80,000Direct wages paid 16,50,000Materials returned from site 51,500Plant hire charges 1,25,000Wage related costs 99,500Direct expenses incurred 63,500Work not certified 11,11,500Materials at site 40,500Accrued wages 34,000
The contractors own a plant which originally cost Rs.12,00,000 and has been continuously in use in this contract throughout the year. The salvage value of the plant after 10 years is nil. The company uses the straight-line method of depreciation. The total of work-in-process and plant at site to be shown in the balance sheet as on March 31, 2004 is
48. In a manufacturing company, the production passes through four processes - A, B, C & D sequentially and the output of each process is the input of the subsequent process. The following is the loss of the four processes:
If the output in process D is 6,754.44kg., the input of process A is
(a) 12,500 kg (b) 11,400 kg (c) 10,475 kg (d) 12,800 kg (e) 10,800 kg.
(1 mark)
49. Thaparia Ltd., using process costing, manufactures a single product, which passes through two processes – process 1 and process 2, the output of process 1 becoming the input to process 2. The company has furnished the following information relating to the product for the month of June 2004:
I. Raw material issued to process 1 was 4,500 units at a cost of Rs.11.80 per unit.II. There was no opening or closing work-in-progress but opening and closing stocks of
finished goods were Rs.15,130 and Rs.14,500 respectively.III. Normal losses and abnormal losses are defective units having a scrap value and cash is
received at the end of the period for all such units.Other information:
Particulars Process 1 Process 2Normal loss as a percentage of input 10% 5%Output in units 4,200 3,970Scrap value per unit (Rs.) 3.80 2.90Additional components introduced (Rs.) 1,800 1,150Direct wages incurred (Rs.) 6,500 7,250Direct expenses incurred (Rs.) 3,235 3,799Production overhead as a % of direct wages 60 40
The cost of goods sold of the product for the month of June 2004 is
50. A product, which uses 100 tons as input per month, passes through two processes – Process 1 and Process 2. The details of cost of process 1 for the month of June 2004 are as follows:
Process 1 Cost per ton (Rs.) of inputDirect material cost 1,550Direct labor cost 1,200Overhead costs 1,349
The total loss in process 1 is 2% of input and the scrap is 6% of the input with a value of Rs.850 per ton. The material is transferred to process 2 at cost. The direct labor cost of Process 2 is Rs.1,250 per ton of input. The overhead is 60% of direct labor cost. The scrap at process 2 is 10% of input with a value of Rs.850 per ton.The cost per unit of finished goods in process 2 is(a) Rs.7,016.67 (b) Rs.4,400.33 (c) Rs.3,533.50 (d) Rs.7,061.76 (e) Rs.6,566.67.
(2 marks)
< Answer >
51. Srikrishna Ltd.manufactures and sells four types of products – A, B, C and D. The sales mix in value comprises 20%, 35%, 28% & 17% of A, B, C and D respectively. The total budgeted sales (i.e. 100%) are Rs.4,75,000 per month. The operating costs are as follows:
i) Variable costs: Product - A 80% of selling price Product - B 60% of selling price Product - C 70% of selling price Product - D 58% of selling priceii) Fixed cost Rs. 1,29,800 per month
52. Shiv Sankar Ltd. manufactures four products – A, B, C & D, which emerge from a particular process of operation. The total cost of input for the period ended March 31, 2004 is Rs.4,80,000. The details of output, additional cost after split-off point and sales value of the products are as follows:
Products Output (Kg.)Additional processing cost
after split-off point (Rs.)Sales value after further process (Rs.)
53. Kappa Ltd. uses a process cost system to manufacture product - K. The company has furnished the following information pertaining to operation for the month of June 2004:
Particulars UnitsOpening work-in-process inventory, June 1, 2004 5,500Unit introduced during June 2004 29,000Unit completed during June 2004 32,500Closing work-in-process inventory, June 30, 2004 2,000
The opening inventory was 60% complete for materials and 50% complete for conversion costs. The closing inventory was 80% complete for materials and 60% complete for conversion costs.Costs pertaining to the process for the month of June 2004 were as follows:I) Opening inventory costs are: Materials – Rs.22,500, Labor cost – Rs.16,200 Factory Overhead – Rs.7,500II) Costs incurred during the month: Materials used – Rs.1,65,000, Labor cost –
Rs.1,10,000Factory overhead – Rs.62,500
Using the weighted average method, the equivalent unit cost of material for the month of June2004 is
54. Satya Sai Chemicals Ltd. runs its boiler on furnace oil obtained from Indian Oil and Bharat Petroleum, whose depots are situated at a distance of 15 km and 12 km from the factory site of the company. Transportation of furnace oil is made by the company’s own tank lorries of 5 tons capacity each. Onward trips are made only on full load and the lorries return empty. The filling-in time takes an average of 70 minutes for Indian Oil and 65 minutes for Bharat Petroleum. The emptying time in the factory is only 25 minutes for both. From the records available, it is seen that the average speed of the company’s lorries works out to 60 km per hour. The variable operating charges per km is Rs.5.60 and fixed charges per hour of operation is Rs.20.20.
55. A company has a profit-volume ratio of 25%. To maintain the same contribution, by what percentage (%) must sales be increased to offset 15% reduction in selling price?
56. Allin-B Ltd. has budgeted the factory overhead for the month of June 2004 as Rs.16,50,000 for production department –P. The factory overhead incurred during the month was Rs.16,20,300. During the month the company has absorbed Rs.16,07,100 of factory overhead on a budgeted labor hours of 50,000.The actual labor hour worked for the month is
57. Consider the following data pertaining to inventories of CBX Ltd. for the month of June 2004:
Particulars Opening inventory (Rs.)
Closing inventory (Rs.)
Raw materials 16,330 18,540Work-in-process 9,320 6,520Finished goods 4,300 4,440
Other information:i. Raw materials used Rs.78,390
ii. Total manufacturing costs charged to product (it includes raw materials, direct labor and factory
overheads applied at the rate of 50% of direct labor cost) Rs. 2,85,960iii. Cost of goods available for sale Rs.3,25,600
iv. Selling and general expenses Rs.6,300
The costs of raw materials purchased and the direct labor are
(a) Rs.76,180 and Rs.97,400 respectively(b) Rs.80,600 and Rs.48,700 respectively(c) Rs.76,180 and Rs.69,190 respectively(d) Rs.80,600 and Rs.78,390 respectively(e) Rs.80,600 and Rs.1,38,380 respectively.
(2 marks)
< Answer >
58. Sri Shiva Ltd. has furnished the following information pertaining to its product for the year ended March 31, 2004:
Selling price per unit Rs.285Variable cost per unit Rs.171Fixed cost Rs.18,75,000
The company plans to improve the quality of its sole product byi. Replacing a component that costs Rs.16.20 with a higher-grade unit that costs Rs.22.00.ii. Acquiring a packing machine of Rs.1,00,000.
The company will depreciate the machine over a period of 10 years with no estimated salvage value by the Straight Line Method of depreciation. The income tax rate is 40%. If the company desires to earn a post-tax income of Rs.2,85,000 in the upcoming period, the units to be sold by the company are
59. A-1 Ltd. is a manufacturing company. In one of the production departments in its main factory, a machine hour rate is used for absorption of production overheads. The company has fixed up the predetermined rate of Rs.58.75 per machine hour on the basis of normal activity level. The company
The following data are available as on March 31, 2004:Indirect labor – Rs. 42,350Freight in – Rs. 8,870Direct labor – Rs. 69,900Raw material – Rs. 35,200Factory overhead expenses – Rs. 72,500Work-in-process – Rs. 12,500Sales (18,500units) – Rs.15,72,500Indirect material – Rs. 38,450Total manufacturing costs incurred – Rs.11,60,000
There were 1,850 units of finished goods of ‘PQ’as on March 31, 2004.The amount of raw materials purchased during the year 2003-04was
62. Sri Shakti Ltd. manufactures a single product. The total fixed cost is Rs.8,50,000 which is based on a volume of 50,000 units per annum. The total cost per unit of the product is budgeted as Rs.45. During the year 2003-04, sales volume was 46,800 units and production volume was 48,000 units. The actual profit for the same period under absorption costing was Rs.1,15,600. The profit under marginal costing is
63. Two manufacturing companies – Arun Ltd. and Varun Ltd. have decided to merge their business operations. They have furnished the following operation details:
Particulars Arun Ltd Varun LtdCapacity utilization (%) 80 70Sales (Rs. in lacs) 640 490Variable costs (Rs. in lacs) 480 294Fixed costs (Rs. in lacs) 100 120
The profitability of the merged plant at 75% capacity level is
64. The budgeted working conditions of a cost center of Super T Ltd. are as follows:
Normal working per week – 42 hoursNo. of machines – 8Normal weekly loss of hours on maintenance etc – 4 hours per machineNo. of weeks worked per year – 50Estimated annual overheads – Rs.3,04,000Estimated wage rate – Rs12 per hourActual results in respect of a 4 week period are:
The amount of under or over absorption of wages and overheads respectively are(a) Rs.700 (over) and Rs.872 (under)(b) Rs.700 (under) and Rs.872 (under)(c) Rs.872 (under) and Rs.700 (over)(d) Rs.872 (over) and Rs.700 (under)(e) Rs.872 (under) and Rs.700 (under).
(2 marks)
< Answer >
65. At 60% capacity utilization, the overhead recovery rate is Rs.28.00 per unit. At 80% capacity level, the rate gets reduced to Rs.25.00 per unit. If the production attains 85% of the capacity utilization, the recovery rate would be
66. XLNT Ltd. has furnished the following information pertaining to the forthcoming year:
Budgeted Variable costs – 60% of sales valueBudgeted Fixed costs – 20% of sales value
If the company increases the selling price by 10% but the fixed costs, variable cost per unit and sales volume remain unchanged, the effect on contribution would be
(a) An increase of 10% (b) A decrease of 10%(c) An increase of 20% (d) A decrease of 20% (e) An increase of 25%.
(1 mark)
< Answer >
67. Santosh Ltd. manufactures music systems, which are sold at Rs.3,600 per unit. The total cost consists of 40% for direct materials, 40% for direct wages and 20% for overheads. An increase in material price by 20% and in wage rates by 10% is expected in the forthcoming year, as a result of which the profit at current selling price may decrease by 30% of the present profit per unit. The current and future profit at present selling price are
(b) Rs.720.00 and Rs.411.43 respectively(c) Rs.1028.57 and Rs.308.57 respectively(d) Rs.1,028.57 and Rs.411.43 respectively(e) Rs.1,028.57 and Rs.720.00 respectively.
(2 marks)
68. Moonstar Ltd. had the following inventories at the beginning and end of the month of June 2004:
Particulars June 1, 2004 (Rs.) June 30, 2004 (Rs.)
Finished goods 85,000 81,000
Work-in-process 72,000 63,500
Direct materials 90,000 82,500
The following additional manufacturing data were available for the month of June 2004:
Particulars (Rs.)
Direct materials purchased 2,93,400
Purchase returns and allowances 2,600
Transportation 2,900
Direct labor 2,68,000
Actual factory overhead 1,65,000
The company applies factory overhead at a rate of 40% of direct labor cost, and any over applied or under applied factory overhead is deferred until the end of the year 2004-05.
The manufacturing cost of the company for the month of June 2004 was
69. The variable cost and selling price of a scientific calculator manufactured by AB Ltd. during the current year is as follows:
Particulars Rs.
Material 200
Labor 150
Overheads 50
Selling price 700
The fixed cost and sales during the current year are Rs.18,00,000 and Rs.56,00,000, respectively. During the next year wages will increase by 5% and the material cost, variable overheads and fixed overheads are expected to increase by 10%, 5% and 2%, respectively.
The new selling price in the forthcoming year if the existing contribution to sales ratio is to be maintained is
70. Bismat Ltd. manufactures and sells a special type of product ‘K’. Presently, the company manufactures 8,000 units, which is 80% of the potential capacity. The present cost structure per unit of the product ‘K’ is given below:
The company estimates to produce the same number of units of the product during the following year and anticipates that fixed cost will go up by 10% while the rates of direct materials and direct labor will increase by 8% and 6% respectively. The company has no intention to increase its present sale price of Rs.580 per unit. Under these circumstances, the company obtained an offer to supply 1,000 units of the product to a special customer.
The minimum sale price per unit of additional order of 1,000 units to be quoted to the customer if the company desires to earn an overall profit of Rs.2,50,000 is
Suggested AnswersManagement Accounting – I (151) : July 2004
1. Answer : (e)
Reason : Cost allocation is a process of assigning and reassigning costs to cost objects. It is used for these costs that cannot be directly associated with a specific cost object. It is often used for purposes of measuring income and assets for external reporting purposes. It is less meaningful for internal purposes because responsibility accounting systems emphasize controllability, a process often ignored in cost allocation
< TOP >
2. Answer : (d)
Reason : Unavoidable cost is the cost which will not be eliminated if the decision is to accept or reject an order. It is irrelevant to management decision making because they cannot vary with the option selected. Other costs mentioned in options (a), (b), (c) and (e) are considered as relevant for decision making. Therefore, (d) is correct.
< TOP >
3. 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.
< TOP >
4. Answer : (b)
Reason : The average method of valuation of inventory in process costing is useful when prices are fluctuating from period to period. It is not useful in respect of other options (a),(c),(d) and (e).
< TOP >
5. Answer : (d)
Reason : Under variable costing, inventories are charged only with the variable costs of production. Fixed manufacturing costs are expensed as period costs.
Absorption costing charges to inventory all cost of production. If finished goods inventory increases, variable costing results in lower income because entire fixed costs are expensed in the current period but absorption costing results in higher income because it capitalizes some fixed costs. Other options (a),(b),(c) and (e) are not true
< TOP >
6. Answer : (b)
Reason : Practical capacity is the maximum level at which output is produced efficiently, with an allowance for unavoidable interruptions. Because this level will be higher than expected capacity, its use will ordinarily resulting under applied fixed factory overhead. Other options are not correct.
< TOP >
7. Answer : (c)
Reason : Relevant costs are those expected future costs that vary with the action taken. All other costs are assumed to be constant and thus have no effect on the decision. Relevant costs are considered in the analysis of decisions to make or buy a product, accept a special order, replace capital equipment or add or delete a product line. Relevant costing applies to many special decisions but not for determining a product’s price. This decision involves an evaluation of, among other things, demand, competitors’ action, and total manufacturing and selling costs. Therefore, (a),(b),(d) and (e) are incorrect.
< TOP >
8. Answer : (b)
Reason : Cost-volume-profit analysis presumes that prices of input factors will remain constant. In other words, this analysis presents a static picture of a dynamic situation. Therefore, option (b) is not correct. Other options given in (a), (d), (c) and (e) are correct.
< TOP >
9. 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.
< TOP >
10. 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.
Reason : Both Financial and Management Accounting rely heavily on the concept of responsibility. Financial Accounting is concerned with the concept of responsibility or stewardship over the company as a whole; while Management Accounting is concerned with stewardship over its parts. Hence (c) is false. Management Accounting provides data for internal uses by managers whereas Financial Accounting provides data for external users like shareholders, creditors, etc. Since a large part of the overall responsibilities of a manager have to do with planning, a manager’s information need has a strong orientation towards future. On the other hand, Financial Accounting is concerned with a record of financial data of the past. Financial Accounting is mandatory for business organizations. They should compulsorily maintain financial records as per various legal statutes like Companies Act, Income Tax Act, etc. By contrast, Management Accounting is not mandatory. Financial Accounting statements have to be prepared in accordance with the GAAP whereas managers set their own rules in the form and content of Management Accounting statements.
< TOP >
12. 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.
< TOP >
13. Answer : (d)
Reason : Operation Costing is a hybrid of Job-order and Process costing systems wherein materials are allocated on the basis of batches of production. It is used by companies that manufacture goods that undergo some similar and dissimilar processes. Operation costing accumulates total conversion cost for each operation. However direct material costs are charged specifically to products or batches as in job-order system.
< TOP >
14. Answer : (d)
Reason : Margin of safety = Sales – Break even sales
Break-even sales = Sales – Margin of safety
We know, Break-even point =
Fixed cost
Profit - volume ratio
\ Fixed cost = Profit-volume ratio ´ Break-even sales
= Profit-volume ratio ´ (Sales – Margin of safety)
< TOP >
15. Answer : (e)
Reason : Committed cost is a fixed cost which results from the decision of the management in the prior period and is not subject to the management control in the present on a short run basis. Insurance premium is the example of committed cost. Therefore (e) is correct.
< TOP >
16. Answer : (a)
Reason : A floor cleaner in a factory is an indirect labor. Therefore (a) is correct. Other options mentioned in (b), (c), (d) and (e) are examples of direct labor.
< TOP >
17. Answer : (b)
Reason : Production manager can control the use of raw-material in the production. Price paid for raw materials is the area of purchase manager to control. The production manager cannot control depreciation and insurance on machinery and rent for floor space. Therefore, (b) is correct.
< TOP >
18. Answer : (e)
Reason : The correct answer is (e). Equivalent units of production (EUP) are used to allocate costs to incomplete units. It is usually done separately for direct materials and conversion costs.
(a), (b) and (d) are not correct because EUP are calculated to allocate production costs, not to measure production efficiency or effectiveness of a cost center. It does not involve in establishing standard costs.
(c) is not correct because overhead is usually allocated based on a measure of activity.
Reason : The Market survey costs have already been incurred. Thus, they are costs resulting from a past irrevocable decision. These sunk costs are irrelevant to a new product because they are unavoidable. Therefore (a) is correct.
20. Answer : (d)
Reason : Joint costs by definition are common to the joint products produced and therefore, do not differ among alternative courses of action. Hence only separable costs are relevant for future decision making. Hence correct answer is (d).
< TOP >
21. Answer : (e)
Reason : The correct answer is (e). Process costing is used for continuous manufacturing of relatively homogeneous units. Newspapers are published in long runs of identical items, hence process costing is indicated.
(a), (b), (c) and (d) are not correct because they involve unique projects which require job-order costing.
< TOP >
22. Answer : (a)
Reason : The correct answer is (a). Repairs and factory upkeep and supervision are the components of factory overhead. Bad debts and trade magazine are items of selling expenses and administration expenses respectively. Therefore answers, (b), (c), (d) and (e) are not correct.
< TOP >
23. Answer : (c)
Reason : A direct cost is a cost which is incurred for and may be conveniently identified with a particular cost center or cost unit. It is not for the benefit of cost center. It is not incurred as a direct consequence of a decision. It cannot be controlled when it is incurred. It can be identified with the item being costed. Therefore (c) is correct.
< TOP >
24. Answer : (d)
Reason : Allocating overheads on the basis of units of production is generally not appropriate. However, if a firm manufactures only one product, this allocation method may be acceptable because all costs are to be charged to the single product. Other points mentioned in (a), (b), (c) and (e) are not true.
< TOP >
25. 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.
< TOP >
26. Answer : (c)
Reason : Certain decisions reflect the policies of the top management which results in periodic appropriation and these costs are referred to as programmed cost.
Imputed costs are costs not actually incurred in some transactions but which are relevant to the decisions as they pertain to a particular situation.
Relevant costs are those future costs which differ between alternatives. It is defined as the costs which are affected and changed by a decision.
Committed costs are incurred to maintain the company’s facilities and physical existence, and over which management has little or no discretion.
Discretionary costs are these costs which are not essential for the decision under consideration or the accomplishment of management objectives but it is related to management programs, new researches etc.
< TOP >
27. Answer : (a)
Reason : The total variable costs vary in direct proportion to the volume of activity. Total variable costs are linear and hence a reduction in the level of the activity implying a reduction in output, results in reduction in total variable costs. On the other hand, the variable cost per unit remains constant. The fixed cost per unit increases with a fall in output as the total fixed costs are constant over wide range of activity.
< TOP >
28. Answer : (d)
Reason: Office Lighting, Director’s remuneration, charitable and political donations are related to administrative function. Electricity expenses in factory is related to manufacturing function. Depreciation on goods delivering van is related to selling and distribution function.
Reason : Make or buy decision is simply the choice between making a part of the article within the company or purchasing it from outside. In arriving at the decision all the factors as laid down in option (a), (b) , (c) and (d) are considered.
< TOP >
30. Answer : (e)
Reason : The net profits under the marginal costing system and absorption costing system are equal if there is no opening stock and closing stock, or there is no change in opening stock and closing stock, i.e. when production is equal to sales.
If production is not equal to sales i.e. changes occur in opening stock and closing stock, the net profits under the two systems will differ.
< TOP >
31. Answer : (c)
Reason : Direct costing and marginal costing are same. It is mainly concerned with the variable costs. Absorption costing uses both variable cost and fixed cost (i.e. total costs) in product costs. Standard costing is a technique to control cost. Uniform costing is followed by several business enterprises using the same costing principles. It is not a separate method of cost accounting. Therefore, absorption costing uses the total cost approach in the production.
< TOP >
32. Answer : (d)
Reason : Joint costs are apportioned to different joint products under average unit costs method, physical units method, standard costs method and market value method. It cannot be apportioned under replacement costs method. Replacement cost method is used for apportionment of by-products but not joint products.
< TOP >
33. Answer : (b)
Reason : Chief accountant’s salary is an administrative overhead cost. Cost of lubricants and cost of broadcasting music throughout the factory are factory overhead costs. Road tax for delivery vans and cost of painting advertising slogans in delivery vans are selling & distribution overhead costs.
< TOP >
34. Answer : (a)
Reason : The single rate method combines fixed and variable costs. However, dual rates are preferable because they allow variable costs to be allocated on a different basis from fixed costs. Options (c), (d) and (e) are incorrect because the direct method, reciprocal method and step methods can be used on a single or dual rate basis. Option (b) is not true because a dual-rate method considers different cost behavior patterns.
< TOP >
35. Answer : (e)
Reason : All the four statements are true with respect to the recovery of fixed manufacturing overhead costs under the method of Direct Material Cost.
< TOP >
36. Answer : (b)
Reason : Job costing is a type of specific order costing which applies where work is undertaken as an identifiable unit. Under job costing method, cost of an individual job or work order is ascertained separately. Hence it is ideal where the products are dissimilar and non-repetitive in nature.
< TOP >
37. Answer : (a)
Reason : Activities that cause costs increased as activity increases are called cost drivers. Therefore, (a) is correct.
< TOP >
38. Answer : (a)
Reason : The break-even point in units is calculated by dividing the fixed costs by contribution per unit. If selling price is constant and variable costs increase, the unit contribution margin will decline. It results in an increase in the break-even point. Other options given in (b), (c), (d) and (e) are not true.
< TOP >
39. Answer : (c)
Reason : Reciprocal service method indicates that if two service departments provide service to each other and each department should be charged for the cost of service rendered by other. It recognizes reciprocal services among the service departments. Other methods stated in (a), (b), (d) and (e) are not correct.
< TOP >
40. Answer : (d)
Reason : In contract costing, work certified is valued at contract price and work uncertified is valued at cost price. Both are not valued at cost price, market price or contract price. Therefore (d) is true.
B and C should be sold at split-off-point and A and D should be sold after further processing .
Particulars Rs
Sales of A after further processing 2,40,000
Sales of B at split-off point 1,26,000
Sales of C at split-off point 1,40,000
Sales of D after further processing 80,000
Total sales 5,86,000
Less Joint cost (4,80,000)
Less further processing cost of A and D (i.e. Rs.22,000 + Rs.18,000)
(40,000)
Maximum profit 66,000
< TOP >
53. Answer (e)
Reason: The weighted average method averages the work done in the prior period with the work done in the current period. There are two layers of units to analyze: those completed during the month and those still in the closing inventory. The units completed totaled 32,500. The 2,000 ending units are 80%
complete as to materials, so equivalent units of production (EUP) equals to 1,600. Hence total EUP for materials are 34,100 (i.e., 32,500 + 1,600). The total material costs incurred during the period and accumulated in opening work-in-process is Rs.1,87,500 (i.e.,Rs.22,500 + Rs.1,65,000). Thus weighted average unit cost is Rs.5.50 (i.e. Rs.Rs.1,87,500 / 34,100).
54. Answer : (d)
Reason:Particulars Indian Oil Bharat
PetroleumDistance (Depots to factory – full load) 15 km 12kmDistance covered per trip 30 km 24 kmRunning time @ 60 km p.h. 30 minutes 24 minutesFilling-in time 70 minutes 65 minutesEmptying time 25 minutes 25 minutes Total time per trip 125 minutes 114 minutesDetails of costs: Variable operating charges @ Rs.5.60Indian Oil(30 km x Rs.5.60)Bharat Petr. (24km x Rs5.60)
Rs.168.00
Rs.134.40
Fixed charges @ Rs.20.20 per hourIndian Oil (125mint.x Rs.20.20 / 60mint)Bharat Petroleum (114 mint. x Rs.20.20 / 60 mint.)
Rs.42.08
Rs.38.38
Total cost per trip Rs.210.08 Rs.172.78Ton-km (full load)Indian Oil (5 tons x 15 km)Bharat Petroleum (5 tons x 12 km)
75 ton-km
60 ton-km
Cost per ton-km (Total cost per trip / Ton-km) Rs.2.80 Rs.2.88
< TOP >
55. Answer : (d)
Reason: Let the present sales = 100 units @ Re.1 per unit
Present total sales = Rs.100
Present variable cost = Rs.75
Present contribution = Rs.25
If selling price is reduced by 15%,
Selling price per unit = Re.0.85
Variable cost per unit = Re.0.75
Contribution per unit = Re.0.10
To maintain the same contribution, Volume of sales =(Present total contribution x New selling price per unit) / New contribution per unit = (Rs.25 x 0.85) / 0.10 = 212.50
Therefore, volume of sales will have to be increased by = (212.50 - 100.00) / 100 = 112.50%
Reason: The units to be sold equal to fixed costs plus the desired pre-tax profit divided by the unit contribution margin. In the preceding year, the unit contribution margin was Rs.114 (i.e. Rs.285 – Rs.171). The amount will decrease by Rs.5.80 because of use of a higher-grade component. The unit contribution will be Rs.108.20 and the fixed cost will increase from Rs.18,75,000 to Rs.18,85,000 as a result of Rs.10,000 as depreciation on new packing machine.