Quiz

Management Accounting I
1. Which of the following is the primary objective of costing? (a) Ascertainment of cost (c) Cost reduction (e) Preparation of financial statements. (b) Control of cost (d) Estimation of sales price (1 mark) 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 Sales (1,00,000 units @ Rs.15 per unit) Cost of sales: Direct materials Direct labor Variable production overhead Fixed production overhead Fixed administrative overhead Variable selling & distribution overhead Fixed selling & distribution overhead Total costs Profit Rs. Rs. 15,00,000

3,00,000 2,00,000 60,000 3,00,000 1,50,000 90,000 1,50,000 12,50,000 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) 3. Which of the following can improve break-even point? (a) Increase in variable cost (c) Increase in sale price (e) Increase in production volume. (b) Increase in fixed cost (d) Increase in sales volume (1 mark) 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) 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 (c) Conversion cost The term cost refers to (a) (b) (c) (d) (e) The present value of future benefits An asset that has given benefit and is now expired An asset that has not given benefit and is now expired The price of products sold or services rendered The value of the sacrifice made to acquire goods or services. (1 mark) (b) Programmed cost (d) Commercial cost (e) Imputed cost. (1 mark) 6.

7.

Which of the following costs is not an example of a committed fixed cost? (a) (b) (c) (d) (e) Interest payments on a long-term loan Property taxes on land and related buildings Employees training Lease payments on production equipment Depreciation on plant & machinery. (1 mark)

8.

Non-production overhead costs are not considered in stock valuation, because (a) (b) (c) (d) (e) They are outside the control of production manager They are fixed period costs They cannot be identified with individual product They are incurred after stock has been brought to its present location and condition They are indirect costs. (1 mark)

9.

The cost of goods sold under a periodic cost accumulation system is equal to the (a) (b) (c) (d) (e) Cost of goods available for sale less ending finished goods inventory Cost of goods available for sale plus beginning finished goods inventory Cost of goods manufactured plus beginning finished goods inventory Cost of goods manufactured less beginning finished goods inventory Cost of goods available for sale less beginning finished goods inventory. (1 mark)

10.

Which of the following is a cost-behavior oriented approach to product costing? (a) Absorption costing (c) Process costing (e) Job order costing. (b) Marginal costing (d) Uniform costing (1 mark)

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 (c) Activity based costing Which of the following statements is false? (a) (b) (c) (d) (e) Notional costs are not included while ascertaining costs Administrative expenses are mostly fixed Historical costs are useful solely for estimating costs that lie ahead Abnormal cost is controllable Direct cost is one that can be conveniently identified with and charged to a particular unit of cost. (1 mark) (b) Target costing (d) Variable costing (e) Cycle-time costing. (1 mark)

12.

13.

Ponchu Das Pvt.Ltd. of Kolkata is currently operating at 80% capacity. The following is the income statement furnished by the company: Particulars Sales Cost of sales: Direct materials Direct expenses Variable overheads Fixed overheads Total cost Net income Rs. in lakh Rs. in lakh 640 200 80 40 260 580 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)

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) 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) Which of the following statements is/are false? I. II. III. IV. Depreciation is an out-of-pocket cost. Conversion cost is equal to direct wages plus factory overhead. An item of cost that is direct for one business may be indirect for another. All costs are controllable. (b) Only (IV) above (d) Both (II) and (III) above (1 mark)

15.

16.

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

17.

AB Ltd. has furnished the following data pertaining to its product at 40% capacity level, which is its break-even level: Particulars Selling price per ton Variable cost per ton Fixed expenses Rs. 69.50 35.50 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 (d) Rs.11,68,456 (b) Rs.13,41,563 (e) Rs.7,89,734. (c) Rs.6,24,738 (2 marks) 18. Jem Ltd. has the following data pertaining to the year ending March 31, 2005: Particulars Purchases Opening stock Closing stock Freight-in Freight-out 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) Rs. 9,00,000 3,40,000 4,20,000 1,00,000 1,50,000

19.

Ajex Ltd. had the following inventories at the beginning and end of the month of March 2005: Particulars Finished goods Work-in-process Direct materials March 1, 2005 (Rs.) 1,25,000 2,35,000 1,34,000 March 31, 2005 (Rs.) 1,17,000 2,51,000 1,24,000

The following additional manufacturing data were available for the month of March 2005: Particulars Direct materials purchased Purchase returns Transportation Direct labor Actual factory overhead (Rs.) 1,89,000 1,000 3,000 3,00,000 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) 20. For a department, the standard overhead rate is Rs.2.50 per hour and overhead allowances are as follows: Activity level (hours) 3,000 7,000 11,000 Budgeted overhead allowance (Rs.) 10,000 18,000 26,000

The normal capacity level, on the basis of which the standard overhead rate has been worked out, is (a) 4,000 hours (d) 8,000 hours (b) 5,000 hours (e) 6,500 hours. (c) 11,000 hours (2 marks) 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 Labor Overheads Rs.62 Rs.32 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) (b) (c) (d) (e) 1,646 units and Rs.2,95,040 respectively 1,798 units and Rs.2,56,640 respectively 1,646 units and Rs.2,56,640 respectively 1,798 units and Rs.2,95,040 respectively 1,798 units and Rs.2,20,800 respectively. (2 marks) 22. Which of the following is false with regard to the supplementary rate method for accounting of under or over absorption of overheads? (a) (b) (c) (d) (e) It facilitates the absorption of actual overhead for production The value of stock is distorted under this method 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. (1 mark)

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) 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 hours Absenteeism (without pay) 12 hours Leave (with pay) 20 hours Normal idle time (unavoidable) 8 hours Average rate of wages per hour Rs.8 Estimated production bonus 10% on wages Value of power consumed Rs.7,265 Supervision and indirect labor Rs.4,100 Electricity and lighting Rs.3,800 Repairs and maintenance per quarter 1% on value of machines Depreciation per annum 10% on original cost Miscellaneous 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) 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: Month April 2005 May 2005 June 2005 (a) Rs.22,000 (d) Rs.24,000 Batch Production (Units) 2,500 3,000 2,000 Material cost (Rs.) 12,500 18,000 10,000 (c) Rs.25,000 (2 marks) Labor cost (Rs.) 5,000 6,000 4,000 Overhead cost (Rs.) 24,000 18,000 30,000 Total labor hours 8,000 9,000 10,000

24.

25.

The rate per labor hour is Rs.2. The overall profit of the order of 4,400 units is (b) Rs.20,000 (e) Rs.30,000.

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) (b) (c) (d) (e) Decrease for fixed costs and remain unchanged for variable costs Remain unchanged for fixed costs and increase for variable costs Decrease for fixed costs and increase for variable costs Increase for fixed costs and increase for variable costs Increase for fixed costs and remain unchanged for variable costs. (1 mark)

27.

Idle capacity of a plant refers to the difference between (a) (b) (c) (d) (e) Maximum capacity and practical capacity Maximum capacity and actual capacity Practical capacity and normal capacity Practical capacity and capacity based on sales expectancy Maximum capacity and normal capacity. (1 mark)

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

29.

HP Ltd. has furnished the following information pertaining to its 3 products: Department Production Purchasing Inspection Allocation Base Machine Hours Purchase Orders Labor Hours Product A 1,000 100 200 Product B 2,000 300 200 Product C 500 150 200 Overhead costs Rs.14,00,000 Rs. 5,00,500 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 (d) Rs.6,28,714 (b) Rs.11,73,000 (e) Rs.3,14,357. (c) Rs.7,33,500 (1 mark) 30. AB Ltd. has furnished the following information for its product: Direct material - Rs.10 per unit Direct labor - Rs. 6 per unit Variable overhead - Rs. 3 per unit Fixed overhead - Rs. 4 per unit Budgeted production - 12,000 units Actual production - 10,000 units There is no overhead spending variance Sales - 9,000 units Selling price - Rs.28 per unit Using 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 Which of the following is not considered to be a classification of product costs? (a) (b) (c) (d) (e) Cost of wood used in making a table Cost of labor to assemble a table Cost of Company President's salary Cost of electricity to operate machine used to sand wood Cost of decolum to be used on the table . (1 mark)

(e) Rs.25.20. (2 marks)

31.

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 P1 P2 P3 S1 S2 Overhead costs (Rs.) 13,600 14,700 12,800 9,000 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 S1 S2 P1 40% 30% P2 30% 30% P3 20% 20% S1 20% S2 10% -

The total overhead expenses of P1 and P3 are (a) (b) (c) (d) (e) Rs.16,721 and Rs.18,712 respectively Rs.18,712 and Rs.18,833 respectively Rs.18,712 and Rs.15,555 respectively Rs.15,555 and Rs.16,721 respectively Rs 18,833 and Rs.15,555 respectively. (2 marks) 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 Manufacturing overheads Manufactured overheads applied Work-in-progress Finished goods Cost of goods sold Rs. 13,84,000 14,00,000 3,00,000 8,00,000 9,00,000

The amount of under absorbed overheads to be adjusted to work-in-progress, using supplementary rate, is (a) Rs.7,200 Rs.2,100. (b) Rs.16,000 (c) Rs.3,200 (d) Rs.2,400 (e) (1 mark) 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) 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 (c) Contribution margin costs (b) Hidden costs (d) Period costs (e) Capacity costs. (1 mark)

36.

More accurate cost allocation can be accomplished when (a) (b) (c) (d) (e) There are less direct costs to allocate Costs are more homogeneous Costs are more indirect Different costs vary depending upon different causes and effects Labor costs are more than material costs. (1 mark)

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) In job order costing, provident fund paid by the employer for factory employee is preferably accounted for as (a) Direct labor (c) Factory overhead cost (e) Distribution overhead cost. 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) An over-statement of beginning work-in-progress inventory will (a) Understate cost of goods sold (c) Overstate the net profit (e) Understate the cost of production. (b) Understate the profit (d) Overstate the gross profit (1 mark) (b) Indirect labor (d) Administrative overhead cost (1 mark)

38.

39.

40.

41.

Which of the following would be considered as an indirect cost in the case of manufacturing of air conditioners? (a) (b) (c) (d) (e) Cost of the condenser put in an air conditioner unit Cost of inspecting air conditioners Cost of assembling an air conditioner Cost of the box and packaging for an air conditioner Cost of exhaust fan put in an air conditioner. (1 mark)

42.

ADC Ltd. has furnished the following data pertaining to its business: Department Personnel Cleaning Operating Dept. A Operating Dept. B Employees 3 5 30 10 Sq.ft 1,000 3,750 3,000 Costs Rs. 1,80,000 2,22,750 25,00,000 30,00,000 Direct Hours 45,000 27,000 Allocation Base Employees Square feet Hours 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) 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) 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) 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. II. III. IV. Average fixed cost per unit Average semivariable cost per unit Average variable cost per unit Average total cost per unit (b) Both (I) and (IV) above (d) Only (IV) above (e) (I), (II) and (III) above. (1 mark) 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)

(a) Only (I) above (c) Both (I) and (II) above

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 Units Opening work-in-process (March 01, 2005) 1,280 Introduced in production during March 2005 7,200 Closing 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 20,500 Conversion 16,350 During the month: Materials 1,12,830 Conversion 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) 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) 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 companys 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 companys 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)

48.

49.

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 Rs.3,000. (b) Rs.6,000 (c) Rs.5,000 (d) Rs.3,500 (e) (2 marks)

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 Conversion costs Units introduced Units completed Rs.36,000 Rs.19,500 8,000 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) 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 units Work-in-process Rs.7,450 Raw materials Rs.16,120 The following data are available as on March 31, 2005 Indirect labor Rs.16,100 Freight in Rs.7,500 Direct labor Rs.43,240 Raw material Rs.6,490 Factory overhead expenses Rs.31,300 Work-in-process Rs.6,800 Sales (15,000 units) Rs.3,60,000 Indirect material Rs.25,500 Total 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) 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.6,450 Units started - 20,000 units Units completed - 15,000 units Actual overheads - Rs.6,200 Ending 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)

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: Process A B C Input including opening W.I.P (pieces) 18,000 19,800 20,400 Rejections (pieces) 6,000 1,800 3,400 Output (Pieces) 12,000 18,000 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) 55. KBKM Ltd. has furnished the following information pertaining to its process account for the last month: Opening work-in-process Closing work-in-process Units started Value of opening work-in-process Cost incurred during the month 100 units (70% complete) 50 units (60% complete) 500 units Rs.1,042 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 Rs.9,464. (b) Rs.9,778 (c) Rs.10,832 (d) Rs.9,790 (e) (1 mark) 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 (d) 4,800 units (b) 6,000 units (e) 5,000 units. (c) 3,200 units (2 marks) 57. Which of the following is/are true regarding transport costing? I. II. The costs of a transport company includes publicity costs. 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 (c) Only (III) above (b) Only (II) above (d) Both (II) and (IV) above (e) Both (II) and (III) above. (1 mark)

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 Direct materials (Rs.) Direct wages Selling price (Rs.) (Rs.) Job A1 54,000 42,000 1,66,650 10% Job B2 37,500 30,000 1,28,250 20%

Profit % on total cost

The company has received an order of Job no A3. The company has furnished the following information pertaining to Job A3: Direct materials Direct wages (Rs.) (Rs.) Rs.24,000 Rs.20,000 12.5%

Profit % on selling price The selling price of Job A3, using the above recovery rates, is (a) Rs.91,100 (d) Rs.80,000 (b) Rs.93,900 (e) Rs.70,000. (c) Rs.78,750

(2 marks) 59. Which of the following is/are the best explanation of the relevance of equivalent production units in process costing? I. II. A means of equalizing production charged into stock of each period. 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 (c) Only (III) above (e) Both (I) and (II) above. Which of the following statements is false? (a) (b) (c) (d) (e) In process costing, cost is accumulated according to processes or departments In job costing, the basis of cost accumulation is job order or batch size In process costing, cost is accumulated on time basis In job costing, cost is computed at the end of the cost period In process costing, items of prime cost cannot be traced with a particular order due to continuous production. (1 mark) (b) Only (II) above (d) Both (II) and (III) above (1 mark) 60.

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 Single Room Double Room Gym facility

The fixed cost per day is: For single room For double room For Gym Rs.25 Rs.35 Rs.10

Variable cost per day Rs.65 Rs.45 Rs.50

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) 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-inprocess existed on March 01, 2005. The production costs for March 2005 were as follows (assume separable costs were negligible): Particulars Crude oil acquired and used in production Direct labor and related costs Factory overhead The output and sales for the month of March 2005 were as follows: A Particulars Number of Barrels produced Number of Barrels sold Prices per Barrel sold (Rs.) 300 80 3,000 Rs. 4,00,000 2,00,000 3,00,000 B 240 150 4,000 C 120 120 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) 63. Small Pumps Ltd. manufactures standardized electric motors. The company has furnished the following information pertaining to a job of 50 motors: i. ii. iii. Selling price per motor Selling and distribution expenses Cost incurred as per job card: Direct material Direct labor Overheads iv. Number of motors completed and transferred v. Completion stage of work-in-progress: Direct material Direct labor and overheads The value of work-in-process is (a)Rs.1,75,000 (b) Rs.1,35,000 Rs.1,50,000. Rs.9,000 20% of sales value 25 60% (d) Rs.1,80,000 (e) (2 marks) Rs.1,50,000 Rs.40,000 Rs.1,20,000

100%

(c) Rs.1,20,000

64.

Modern Construction Ltd. has furnished the following information pertaining to a contract for the year ended March 31, 2005: Particulars Material sent to site Materials on hand (March 31, 2005) Cost of plant installed at site Labor costs Work certified Cost of work not certified Value of plant (March 31, 2005) Contract price Cash received from the contractee Direct expenses The profit to be transferred to reserve account is (a) Rs.28,510 (d) Rs.20,365 (b) Rs.34,620 (e) Rs.32,100. (c) Rs.14,255 (2 marks) Rs. 2,25,500 18,375 1,71,000 1,23,500 4,00,000 1,20,000 1,02,500 7,50,000 3,50,000 72,000

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 Cost of processing: Direct material Direct labor Rs.25,500 Rs.10,000 Nil

Production overheads are absorbed at the rate of 300% of direct labor costs. Output and Sales for the month are as follows: Particulars Product J Product K By-product B Production units 8,000 8,000 1,000 Sales units 7,000 6,000 1,000 Selling price per unit Rs.4.00 Rs.6.00 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 (c) Rs.6,750 and Rs.2,000 respectively (e) Rs.3,000 and Rs.6,750 respectively. 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) (b) Rs.3,000 and Rs.5,250 respectively (d) Rs.5,250 and Rs.6,750 respectively (2 marks) 66.

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 M N P Q Output(gallons) 5,00,000 10,000 5,000 9,000 Sales(Rs.) 1,15,000 10,000 4,000 30,000 Separate costs(Rs.) 30,000 6,000 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) (b) (c) (d) (e) Rs. 5,800 and Rs.1,600 respectively Rs.17,000 and Rs.5,800 respectively Rs. 17,000 and Rs.800 respectively Rs. 17,000 and Rs.1,600 respectively Rs.800 and Rs.5,800 respectively. (2 marks) 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 Direct labor Distribution expenses Rs.6.00 Rs.4.00 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) 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 Production 2,00,000 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) 70. A, B and C are three similar plants under the same management of Apicon Ltd. The details are as follows: Plant A B C Capacity operated 80% 70% 60% Particulars (Rs. in lakh) (Rs. in lakh) (Rs. in lakh) Turnover 240 280 180 Variable cost 160 210 90 Fixed 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)

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: Region North East South Actual sales (Rs.) 1,100 1,450 1,200 Over/(under) budgeted sales (Rs.) (400) 150 (200) Actual profit (Rs.) 135 210 330 Over/(under) budgeted profit (Rs.) (180) 90 (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) 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 Fixed production cost per year Variable selling cost Fixed selling cost per year Selling price Production during the year Sales during the year Closing inventory Rs.11 per unit Rs.3,60,000 Rs.3 per unit Rs.2,70,000 Rs.20 per unit 1,60,000 units 1,50,000 units 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)

Suggested solution

Management Accounting I
1. : (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. : (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 : (c) Fixed cost Sale price per unit Variable cost per unit

2.

3.

Reason : Break even point = From the above relation, increase in sale price can improve break-even point. Breakeven 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. 4. : (c) Reason : With the recent automation of factories and the corresponding emphasis on activitybased 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. : (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 : (e) Reason : The cost means the value of the sacrifice made to acquire goods or services. Therefore, (e) is correct. : (c) Reason : Employee training cost is usually a discretionary fixed cost. It is typically fixed since

5.

6.

7.

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. 8. : (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 : (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. : (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. : (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. : (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. : (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. : (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. : (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. : (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 is (e). : (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

9.

10 .

11 .

12 . 13 .

14 .

15 . 16 .

17 .

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. 18 . : (d) Reason : The correct 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, (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. : (a) Beginning direct materials inventory 1,34,000 Add: Purchases 1,89,000 Less: Purchase returns (1,000) Add: Transportation 3,000 Total direct materials available 3,25,000 Less: Ending direct materials inventory (1,24,000) Direct material used 2,01,000 Direct labor 3,00,000 Total prime costs 5,01,000 Manufacturing cost = Rs.5,01,000 + 60% of Rs.3,00,000 (Direct labor) = Rs.6,81,000. : (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. : (d) Reason : Particulars Sales unit Sale value Materials Labor Overheads (variable) Total variable cost Contribution Fixed cost (40 60% 4,800) Profit Break even point 22 . 180 62 32 16 110 70 Per unit (Rs.) 60% 4,800 Rs. 8,64,000 2,97,600 1,53,600 76,800 5,28,000 3,36,000 1,15,200 2,20,800 1646 units Per unit (Rs.) 171.00 58.90 32.00 16.00 106.90 64.10 80% 6,400 Rs. 10,94,400 3,76,960 2,04,800 1,02,400 6,84,160 4,10,240 1,15,200 2,95,040 1,798 units

19 .

20 .

21 .

: (b) Reason: The value of stock is not distorted under this method. Hence the 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. : (b) Reason : Prodetermined overhead rate = Rs.30 per machine hour Actual machine hours = 500 hours

23 .

Applied overhead = 500 hours Rs.30 (Standard rate for actual hours) = Actual overhead Under absorption 24 . : (b) Reason : Computation of total utilized machine hours: Normal available hours per month per operator Less: Unutilized hours due to Absenteeism Leave Idle time Total utilized hours per operator per month =

Rs.15,000 Rs.15,900 Rs.900

200 hours 12 20 8

40 160

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.13,536 Comprehensive Machine hour rate Operators wages Production Bonus (10% on Rs.13,536) Power consumed (last quarter) Supervisor & indirect labor Electricity & Lighting Repairs & Maintenance (1% on Rs.8,00,000) Depreciation (10% of Rs.8,00,000 4) Miscellaneous expenses (Rs.7,200 4) General management expenses (Rs.45,800 4) Rs. 13,536 1,354 7,265 4,100 3,800 8,000 20,000 1,800 11,450 71,305

Comprehensive machine hour rate = Rs.71,305 1,440 hours = Rs.49.52. 25 . : (a) Reason :
Particulars Batch Production (units) Total sales value (@ Rs.15) Less: Costs: Materials Labor Overheads (Workings) Profit Profit per unit Cost per unit April 2,500 (Rs.) 37,500 12,500 5,000 7,500 25,000 12,500 5 10 May 3,000 (Rs.) 45,000 18,000 6,000 6,000 30,000 15,000 5 10 June 2,000 (Rs.) 30,000 10,000 4,000 6,000 20,000 10,000 5 10 Total 7,500 (Rs.) 1,12,500 40,500 15,000 19,500 75,000 37,500

Profit for 4400 units Sales Cost Profit Workings:

Batch labor hours Overhead per hour (Total Overheads Total labor hours) Overhead for the batch Rs.5,000 Rs.2 = 2,500 hours Rs.24,000 8,000 = Rs.3 Rs.7,500 Rs.6,000 Rs.2 = 3,000 hours Rs.18,000 9,000 = Rs.2 Rs.6,000 Rs.4,000 Rs.2 = 2,000 hours

4400 Rs.15 4400 Rs.10

Rs.66,000 Rs.44,000 Rs.22,000

Rs.30,000 10,000
= Rs.3 Rs.6,000

26 .

: (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. : (d)

27

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. : (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.

28 .

29 .

: (b) Reason: Production 2,000/3,500 Rs.14,00,000 Purchasing Inspection 300/550 Rs.5,00,500 200/600 Rs.3,00,000 Rs.8,00,000 Rs.2,73,000 Rs.1,00,000 Rs.11,73,000

Total overheads 30 .

: (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. : (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. : (c) Reason : Particulars Primary Distribution S1 (4:3:2:1) S2 (3:3:2:2) S1 (4:3:2:1) S2 (3:3:2:2) S1 (4:3:2:1) S2 (3:3:2:2) Total P1 (Rs.) 13,600 3,600 1,170 312 23 6 1 18,712 P2 (Rs.) 14,700 2,700 1,170 234 23 5 1 18,833 P3 (Rs.) 12,800 1,800 780 156 16 3 15,555 S1 (Rs.) 9,000 (-) 9,000 780 (-) 780 16 (-) 16 S2 (Rs.) 3,000 900 (-) 3,900 78 (-) 78 2 (-) 2

31 .

32 .

33 .

: (d) Reason : Under this method the amount of under absorbed overheads is adjusted to work-inprogress, 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. : (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.

34 .

35 .

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

36 .

37 .

38 . 39 .

40 . 41 .

42 .

: (a) Reason: Rs. Personal Department Cleaning Dept. A Dept. B Total Cleaning Department Dept. A Dept. B Total 3,750/6,750 3,000/6,750 5/45 30/45 10/45 20,000 1,20,000 40,000 1,80,000 1,34,861 1,07,889 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 43 . : (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 44 . : (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) Rs.14, 625 2, Fixed overhead rate per unit = 250units = Rs.6.50. : (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 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. : (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. : (a) Reason : Statement of equivalent Production Unit (FIFO)
Input Opening Introduced 1,28 0 7,20 0 8,48 0 Costs during the month Cost per unit Output Completed Opening Introduced Closing 1,28 0 6,25 0 950 8,48 0 40% 100 % 80% Material 512 6,250 760 7,522 Rs.1,12,830 Rs. 15 Conversion 50% 100 % 60% 640 6,250 570 7,460 Rs.89,520 Rs. 12.00

45 .

46 .

47 .

The total cost of closing work-in-process Material Conversion 760 Rs.15 570 Rs.12.00 = = Rs.11,400 Rs. 6,840 Rs.18,240 48 . : (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. : (b) Reason :
Particulars Distance (Depots to factory full load) Distance covered per trip Indian Oil 10 km 20 km Bharat Petroleum 8 km 16 km

49 .

Running time @ 40 km p.h. Filling-in time Emptying time Total time per trip Details of costs: Variable operating charges @ Rs.2.20 Indian Oil(20 km x Rs.2.20) Bharat Petr. (16 km x Rs.2.20) Fixed charges @ Rs.13.20 per hour Indian Oil (125mint.x Rs.13.20 / 60mint) Bharat Petroleum (114 mint. x Rs.13.20 / 60 mint.) Total cost per trip Ton-km (full load) Indian Oil (5 tons x 10 km) Bharat Petroleum (5 tons x 8 km) Cost per ton-km (Total cost per trip / Ton-km)

30 minutes 50 minutes 45 minutes 125 minutes Rs.44.00

24 minutes 45 minutes 45 minutes 114 minutes Rs.35.20

Rs.27.50 Rs.71.50 50 ton-km Rs.1.43

Rs.25.08 Rs.60.28 40 ton-km Rs.1.51

50 .

: (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 : (e) Reason :
Material Input Units started 8,000 Output Completed 7,000 % 100% units Conversion % units 7,000

51 .

7,000 100%

Normal loss 8%

640

100% 100%

640 80% 360 80% 8,000

512 288 7,800 Rs.19,500 Rs.2.50

Abnormal loss 360

Cost Cost per unit

Rs.36,000 Rs.4.50

Cost of abnormal loss = 360 Rs.4.50 + 288 Rs.2.50 = Rs.1,620 + Rs.720 = Rs.2,340. 52 . : (a) Reason : Total manufacturing Costs Less: Overhead costs: Indirect labor Factory overhead Indirect material Freight in Less: Add: Less: Direct labor Material consumed Closing material Opening material Material purchased Rs. 2,15,500 16,10 0 31,30 0 25,50 0 7,500 Rs.

80,400 1,35,100 43,240 91,860 6,490 98,350 16,120 82,230

53 .

: (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.

54 .

: (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. Process C B A Output (pieces) 1,000 1,200 1,320 % of rejection on output 20% 10% 50% No. of Rejections (pieces) 200 120 660 Input (pieces) 1,200 1,320 1,980

The input of process A will be 1,980 pieces for an output of 1,000 pieces in process C. 55 . : (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. 56 . : (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. : (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.

57 .

58 .

: (d) Reason : Particulars Selling price Less Profit Total cost JobA1 (Rs.) 1,66,650 15,150 (1,66,650 / 11) 1,51,500 Job B2 (Rs.) 1,28,250 21,375 (1,28,250 / 6) 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) 59 . : (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. : (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. : (c) Reason : Occupancy days in a year For single room For double room = = 25 365 80% = 15 365 80% = 7300 4380

60 .

61 .

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. 62 . : (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. 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 : (b) Reason :

63 .

Output Completed and transferred Work-in-progress Total Cost Rs.1,60,000 Cost per unit Rs. 4,000 25 25 50 100% 100%

Material 25 25 50 100% 60%

Labor and overheads 25 15 40

Rs.1,50,000 Rs. 3,000 25 Rs.3,000 = Rs.

Value of Work-in-progress: Material = Rs. 75,000 Work-in-progress Labour & Overheads 60,000 =Rs.1,35,000 64 . : (d) Reason : Contract A/C Particulars Materials Labor costs Direct expenses Depreciation on plant (Rs.1,71000Rs.1,02,500) Notional profit Rs 2,25,500 1,23,500 72,000 Cr

15 Rs.4,000

Particulars Work certified Work certified not

Rs 4,00,000 1,20,000

Material in hand 68,500 48,875 5,38,375

18,375

5,38,375

Profit transferred to P/L a/c

Rs.3, 50, 000 2 = 3 Rs.48,875 Rs.4, 00, 000

= Rs.28,510 Profit transferred to Reserve a/c = Rs.48,875 Rs.28,510 = Rs.20,365 65 . : (d) Reason : Sales value of production J 8,000 x Rs.4 K 8,000 x Rs.6 Common cost: Direct materials Direct labor Overheads Less: Sales value of by-product (1,000 x Re.0.50) Rs.32,000 (40%) Rs.48,000 (60%) Rs.80,000 (100%) Rs.25,500 Rs.10,000 Rs.30,000 Rs.65,500 Rs. 500 Rs.65,000

J (Rs.) Production cost Less: Closing stock J = 1,000, K=2,000 3,250 26,000

K (Rs.) 39,000 9,750

Total (Rs.) 65,000 13,000

Cost of sales Sales Profit 66 .

22,750 28,000 5,250

29,250 36,000 6,750

52,000 64,000 12,000

: (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. : (c) Reason : Joint costs are apportioned on the basis of relative sales value of the products: Sales value (Rs.) 1,15,000 10,000 4,000 30,000 1,59,000 Separate costs (Rs.) 30,000 6,000 1,000 37,000 Relative Sales value at split off point (Rs.) 85,000 4,000 4,000 29,000 1,22,000 Share of joint cost (Rs.) *68,000 3,200 3,200 23,200 97,600 Net income (Rs.) 17,000 800 800 5,800 24,400

67 .

Product

M N P Q Total 68 .

* Rs. 85,000 Rs. 1,22,000 x Rs. 97,600 = Rs. 68,000 : (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. 69 . : (c) Reason : Profit under absorption costing:
Sales 1,87,500 Rs.40 Cost of goods sold: Opening Stock (Rs.22 + Rs.4) 12,500 Production Rs.26 2,00,000 Add: Adverse variable cost variance Less: Closing stock Rs.26 25,000 Gross Profit (sales cost) Less: Selling expenses: Variable 1,87,500 Rs.6 Fixed Less: Under absorption: Profit

Rs.
75,00,000 3,25,000 52,00,000 55,25,000 1,00,000 56,25,000 6,50,000 49,75,000 25,25,000 11,25,000 6,30,000

Rs.

17,55,000 7,70,000 1,00,000 6,70,000

Profit under Marginal Costing: Rs. Rs.

Sales 1,87,500 Rs.40 Cost of goods sold: Opening St 12,500 Rs.22 Production 2,00,000 Rs.22 75,00,000 2,75,000 44,00,00 0 46,75,00 0 5,50,000 41,25,00 0

Less: Closing Stock 25,000 Rs.22

Less: Adverse variance

Less: Variable selling expenses Contribution Less: Fixed cost: Manufacturing Rs. Selling Profit

1,00,000 42,25,00 0 11,25,00 53,50,000 0 21,50,000 9,00,000 6,30,000 15,30,000 6,20,000

70 .

: (c) Reason : Plant Capacity operated Turnover Variable cost Contribution Fixed cost A 100% (Rs. in lakh) 300 200 100 60 B 100% (Rs. in lakh) 400 300 100 70 C 100% (Rs. in lakh) 300 150 150 60 Merged 100% (Rs. in lakh) 1,000 650 350 190

350 100 = 35% P/V ratio of merged plant = 1000

Break even point of merged plant = 71 .

Fixed Cost 190 = = Rs.542.86 lakh P / V ratio 35%

Break even capacity = (542.86/1,000) 100 = 54.29%. : (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% Break-even sales = Rs.1,350 / 54% = Rs.2,500.

72 .

: (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)
Particulars A B Sales revenue 1,50,000 Rs.20 Cost of production Variable production cost 1,60,000 Rs.11 Increase in variable cost Fixed cost 17,60,000 35,000 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. D. Gross profit (A-B) Selling expenses Variable (1,50,000 x Rs.3) Fixed E. Net profit (C D) 4,50,000 2,70,000 7,20,000 2,64,375 9,84,375 Amount (Rs.) Total amount (Rs.) 30,00,000

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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