Quiz

Management Accounting - VI


1. AB Ltd is organized into two large divisions A and B. Division A produces a component which is
used by division B in making a final product. The final product is sold for Rs.480. Division A has a
capacity to produce 2,400 units and the entire quantity can be purchased by division B.
Division A informed that due to installation of new machines, its depreciation cost has gone up and
hence wanted to increase the price of the component to be supplied to division B at Rs.264. Division B,
however, can buy the component from the outside market at Rs.264 each. The variable cost of division
A is Rs.228 and fixed cost is Rs.24 per component. The variable cost of division B in manufacturing
the final product by using the component is Rs.180 (excluding the component cost).
If division B purchases the entire component from division A, the total contribution of the company as
a whole is
(a) Rs.5,47,200 (b) Rs. 86,400 (c) Rs.1,72,800 (d) Rs.7,20,000 (e) Rs.1,15,200.
(1 mark)

2. Chakri Ltd. has furnished the following data relating to its product for the year 2003-04:
Annual production (units) 30,000
Material cost (Rs.) 90,000
Other variable costs (Rs.) 1,80,000
Fixed cost (Rs.) 60,000
Total cost (Rs.) 3,30,000
Apportioned investment (Rs.) 3,00,000
Assuming income tax rate of 40%, if the company desires to earn a post tax profit of 15% on listed sale
price when trade discount is 35%, the net sale price per unit would be
(a) Rs.35.00 (b) Rs.30.00 (c) Rs.27.50 (d) Rs.25.00 (e)
Rs.17.88.
(2 marks)

3. Karuna Ltd. has two divisions - A and B. Division A has the capacity to manufacture 1,50,000 units of
a special component LKJ annually and it has some idle capacity currently. The budgeted residual
income for the division A is Rs.10,00,000. The relevant details extracted from the budget of A are as
under:
Sales (to outside customers) 1,20,000 units @ Rs.180 per unit
Variable cost per unit Rs.160
Divisional fixed cost Rs.8,00,000
Capital employed Rs.75,00,000
Cost of capital 12% per annum
Division B received an order for which it requires 30,000 units of a component similar to LKJ. An
additional variable cost of Rs.5 per unit will be incurred to make minor modifications to LKJ to suit the
requirements of Division B.
The minimum transfer price per unit which Division A should quote to Division B to achieve its
budgeted residual income is
(a) Rs.185 (b) Rs.170 (c) Rs.165 (d) Rs.160 (e) Rs.175.
(2 marks)

4. A timber merchant purchased 1,000 cft. of timber logs on April 01, 2004 at the rate of Rs.100 per cft
and stored them in his timber yard for six months for seasoning. In the timber yard the following items
of expenses were incurred during the period of seasoning
Rent Rs. 1,250 per month

Salaries of 4 guards at the rate of Rs. 250 per month
Incidental expenditure for maintenance, power, lighting, etc. Rs. 750 per month
Annual share of administration overheads Rs. 10,000.
50% of the floor area of the godown and other connected operations were incurred for stocking the
seasoned timber. Loss in volume of the logs due to seasoning should be taken at 10%.
If the timber merchant desires a profit of 15% on cost, the selling price of the seasoned timber per cft as
on October 01, 2004 is
(a) Rs. 142.47 (b) Rs. 128.23 (c) Rs. 111.50 (d) Rs. 123.89 (e) Rs. 132.28.
(2 marks)
5. Which of the following pricing techniques ignores fixed cost?
(a) Standard cost based pricing (b) Full cost pricing
(c) Cost plus profit pricing (d) Return on investment based pricing
(e) Differential cost pricing.
(1 mark)

6. John Ltd. produces and sells 500 units of a product each month with total variable costs of Rs.6,000 and
total fixed costs of Rs.6,000. Idle capacity would permit the acceptance of a special sales order for 100
units each month. The average unit cost per month of producing and selling the total output, if the
special order is accepted, would be
(a) Rs.12 (b) Rs.18 (c) Rs.22 (d) Rs.24 (e) Rs.20.
(1 mark)

7. The standard and actual data for a product are as under
Particulars
Standard Actual
Quantity Rs. Quantity
Raw Material I 300 Kg 4 per unit 350 Kg
Raw Material II 200 Kg 3 per unit 160 Kg
Skilled labour 20 hours 10 per hour 22 hours
Unskilled labour 10 hours 7 per hour 6 hours
There are no price variances .The standard process loss is 10% of input .But actual loss is 14% of
output .The total prime cost variance is
(a) Rs.8.82(Adverse) (b) Rs.99.82(Adverse)
(c) Rs8.82(Favorable) (d) Rs.84.10(Adverse)
(e) Rs.84.10(Favorable).
(2 marks)

8. Sarada Vilas Bank (SVB) sells services rather than tangible products. It makes auto and home loans,
processes other companies credit card transactions, and provides account services to individual and
commercial checking account customers. SVB managers want to determine how far service revenues
could fall below budgeted revenues before losses occur from operations. The managers want to know
the banks
(a) Sales mix (b) Relevant revenue range
(c) Margin of safety (d) Variable costs
(e) Contribution margin.
(1 mark)

9. The variable-cost percentage in sales plus the contribution margin percentage in sales equals to
(a) Gross margin (b) Operating leverage
(c) 100% (d) Target net income (e) Contribution to sales ratio.
(1 mark)

10. ABC Ltd.s managers want to control, and reduce if possible, the companys production costs. They
must determine how production costs are related to and affected by various business activities. These

managers need to understand
(a) Variable costs (b) Cost behaviors
(c) Fixed costs (d) Relevant ranges (e) Variable and fixed costs.
(1 mark)
11. Which of the following statements is false?
(a) Differential cost pricing could bring about pricing decisions that tend to disregard the necessity of
recovering total costs in the long run
(b) Differential cost pricing is not related to economic marginal analysis
(c) Full cost pricing ignores the vital economic considerations of demand and competition
(d) Full cost pricing is prone to distortion by accounting misapplication such as an unjustifiable
inclusion of manufacturing overhead based on predetermined rates
(e) ROI pricing method guides management in determining what selling price will provide a given
rate of return.
(1 mark)

12. A calculated target selling price based on mark-up percentages may be adjusted depending on factors
such as
I. Future capacity available
II. Extent of competition from other firms
III. Managements general knowledge about the market.

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

13. Which of the following is/are particularly associated with operating a system of transfer pricing?
I. Ensuring that goal congruence is retained among the organizations separate divisions
II. Ensuring that divisional performance measurement is not affected
III. Ensuring that corporate profits are maximized
IV. Ensuring that the group remains competitive.

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

14. The transfer price which is usually based on the listed price of an identical or similar product or service,
or the price of a competitor is called
(a) Marginal cost transfer pricing (b) Cost plus a mark up transfer pricing
(c) Negotiated transfer pricing (d) Full cost transfer pricing
(e) Market based transfer pricing.
(1 mark)

15. Which of the following statements is/are true?
I . Quarterly manufacturing cost budgets may legitimately show widely varying manufacturing costs
per unit if production is not evenly distributed
II. The first financial budget prepared is the cash budget
III. A flexible budget is a budget prepared for different levels of activity

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

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

I. The first step in preparing a master budget is the preparation of the cash budget
II. Normally, the last budget prepared is the budgeted balance sheet
III. Planned production for the period can be expressed as the budgeted sales units plus the
desired ending inventory less the beginning inventory

(a) Only (I) above (b) Only (II) above (c) Only (III) above
(d) Both (I) and (II) above (e) (I), (II) and (III) above.
(1 mark)
17.
Which of the following statements is/are true?
I. The average time required for the cash invested in inventories to be converted into the cash
ultimately collected on sales made to customers is called the operating cycle
II A budget is a comprehensive financial plan setting forth the expected route for achieving the
financial and operational goals of an organization
III. One of the benefits derived from budgeting is the assignment of decision-making
responsibilities

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

18. Which of the following statements is/are false?
I. The budget director or chief budget officer, should not only consider financial resources
when preparing the budget, but should also take into consideration human resources.
II. A set of written instructions that specifies who will provide budgetary data and its form, and
who should receive various schedules comprising the budget, can be found in the budget
manual.
III. The master budget reflects the impact of only operating decisions.

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

19. Which of the following statements is true with regard to the difference between a flexible budget and a
fixed budget?
(a) A flexible budget primarily is prepared for planning purposes while a fixed budget is prepared for
performance evaluation
(b) A flexible budget provides cost allowances for different levels of activity whereas a fixed budget
provides costs for one level of activity
(c) A flexible budget includes only variable costs whereas a fixed budget includes only fixed costs
(d) A flexible budget is established by operating management while a fixed budget is determined by
management
(e) The variances are usually larger with a flexible budget than with a fixed budget.
(1 mark)

20. Consider the following data of a company:
Quarters 1st 2nd 3rd 4th
Budgeted direct-labor hours 60,000 80,000 75,000 70,000
Variable overhead rate per labor hour Rs.3.00 Rs.3.00 Rs.3.00 Rs.3.00
Fixed manufacturing overhead Rs.80,000 Rs.80,000 Rs.80,000 Rs.80,000
The fixed manufacturing overhead includes depreciation of Rs.35,000 per quarter.
Ninety percent of the cash payments for manufacturing overhead for each quarter are made during the
quarter, and the remaining 10% is made in the following quarter. The amount of overhead costs to be

paid during the 2
nd
quarter is
(a) Rs.274,500 (b) Rs.279,000 (c) Rs.314,000 (d) Rs.349,000 (e) Rs.354,000.
(1 mark)
21. Consider the following sales forecast, the manufacturing cost budget, and the schedules of cash
payment of a company:
Quarter 1st 2nd
Planned production units 7,000 7,500
Budgeted variable overhead costs Rs.15,000 Rs.18,750
Budgeted fixed manufacturing overhead costs unknown unknown
Budgeted depreciation included in total overhead Rs. 3,000 Rs. 3,000
Budgeted cash payments for total overhead Rs.20,000 Rs.23,750
All budgeted overhead costs, except for budgeted fixed manufacturing overhead, are shown. What is
the amount of budgeted fixed manufacturing overhead for 1st quarter?
(a) Rs.2,000 (b) Rs.6,000 (c) Rs.7,000 (d) Rs.8,000 (e) Rs.9,000.
(1 mark)

22. Consider the following production schedule of Telectron Ltd:
Quarter 1st 2nd 3
rd
Beginning inventory (Units) 5,0000 4,000 12,000
Budgeted unit sales (Units) 50,000 40,000 1,20,000
Desired ending finished goods (Units) 4,000 12,000 15,000
Direct labor completes 2 units per hour at Rs.8 per hour. Which of the following statements is false?
(a) Desired ending inventory is 10% of the next quarter's sales units
(b) Direct labor cost for the 4th quarter cannot be determined
(c) Direct labor cost for the 2nd quarter will be Rs.192,000
(d) Sales units of 150,000 are projected for the 4th quarter
(e) Direct labor hours for the 3rd quarter will be 66,000.
(2 marks)

23. Santa Ltd. has furnished the following payment schedule related to purchases of direct materials:
60% of purchase payment in the month of purchase
30% of purchase payment in the month following the month of purchase
10% of purchase payment in the second month following the month of purchase.
The company purchased the same amount of goods in the months of July and August 2004.Total credit
purchases in the month of September 2004 were Rs.100,000, and total payments on credit purchases in
the month of September 2004 were Rs.140,000. What were the credit purchases in the month of July
2004?
(a) Rs.1,00,000 (b) Rs.2,00,000 (c) Rs.2,40,000 (d) Rs.3,00,000 (e) Rs.4,00,000.
(2 marks)

24. Kavita Ltd. had following production costs:
Direct wages Rs.1,50,000
Direct material Rs.2,25,000
Production overhead
Fixed Rs. 60,000
Variable Rs.1,00,000
Following are the budgeted values for the current year:

Labor rate is expected to decrease from Re.1.00 per hour to Re.0.80 per hour,
Production efficiency is expected to fall by 10%. Production will increase by 40%.
The budgeted cost of production for the year is
(a) Rs.6,00,000 (b) Rs.6,59,800 (c) Rs.7,13,800 (d) Rs.7,17,223 (e) Rs.7,23,000.
(2 marks)
25. Economic value added (EVA) is
(a) A variant of residual income
(b) Net operating income minus shareholders' equity
(c) Cost of capital
(d) Net operating income minus weighted average cost of capital multiplied by sum of long-term
liabilities and shareholders' equity
(e) Both (a) and (d) above.
(1 mark)

26. Moin Limited manufactures plastic bags. The companys directors have projected the following sales
for the next three months:
October 2004 2,10,000 Units
November 2004 3,60,000 Units
December 2004 4,10,000 Units
Opening stock of finished goods on October 01, 2004 is 30,000 units. The company has some problems
recently in supplying its customers promptly and the directors have decided to aim for a 10% increase
in finished goods closing stock at the end of each of the three months.
Each bag uses 1.5 kg of plastic that costs Rs.6 per kg. The stock of plastic on October 01, 2004 is
50,000 kg. The raw material is readily obtainable, but in order to ensure that the company will not run
out of stock, the directors would like to increase the closing stock of plastic by 10% each month for the
next three months.
The amount of raw material to be purchased during the month of December 2004 will be
(a) Rs.41,67,060 (b) Rs.42,10,260 (c) Rs.38,47,260 (d) Rs.37,58,970 (e)
Rs.38,40,060.
(2 marks)

27. An ABC (Activity Based Costing) cost allocation system excludes consideration of
(a) Variable non-manufacturing costs
(b) Direct costs of materials
(c) Committed fixed costs
(d) Costs allocated to service departments using the reciprocal costing method
(e) Manufacturing fixed overhead costs.
(1 mark)

28. To identify the interrelationships between key activities and resources consumed is a part of the
(a) Activity Based Costing method of cost allocation
(b) Classification of costs as either fixed, mixed, variable or semi-fixed
(c) Absorption costing method
(d) Step-down method to allocate cost pools from one service department to other service departments
(e) Reciprocal services method.
(1 mark)

29. Basha Ltd. has furnished the following data:
Particulars Budgeted Actual
Fixed Overheads Rs.3,75,000 Rs.3,77,500
Output per labor hour 2 units 1.9 units

Number of working days 25 27
Labor hours per day 5,000 5,500
Fixed overhead volume variance is
(a) Rs.40,225 (favorable) (b) Rs.40,225 (adverse)
(c) Rs.45,225 (favorable) (d) Rs.45,225 (adverse) (e) Rs.48,225 (favorable).
(2 marks)
30. Budgets are an important management process for
(a) Planning and costing (b) Directing and process analysis
(c) Planning and controlling (d) Investing and financing
(e) Implementation of accounting system.
(1 mark)

31. The master budget is a proforma financial statement. It summarizes all the planned activities of all
subunits. The information comprises
(a) General estimates of financial targets and costs
(b) Detailed schedules and financial statements
(c) Activity cost drivers and cost-volume-profit analyses
(d) Planned expenditures for new facilities and financing plans
(e) Changes in financial cash flows only.
(1 mark)

32. There is no conceptual difference between a budget amount and a standard amount if standards are
(a) Ideal standards (b) Perfection standards
(c) Currently attainable standards (d) Flexible standards (e) Controllable standards.
(1 mark)

33. When a normal costing system is used, budgeted rates would be used for applying costs by the
absorption-costing method for
(a) Direct labour and variable factory overhead
(b) Variable factory overhead and fixed factory overhead
(c) Fixed factory overhead and direct materials
(d) Direct materials and direct labour
(e) Fixed factory overhead and direct labour.
(1 mark)

34. Quality cost may include
I. Inspection costs
II. Rework costs
III. Lost sales
IV. Redesign of the production process

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

35. Rama Ltd. produces a single product k. The following budgeted data are available for the month of
September 2004:
Production (units) 15,000 25,000
Flexible budget data: (Rs.) (Rs.)
Material 30,000 50,000
Labor 45,000 75,000
Factory overhead:
Indirect material 15,000 25,000
Indirect labor 30,000 50,000
Supervision 26,250 33,750
Heat, Light and Power 15,250 22,750
Depreciation 63,000 63,000
Insurance and Taxes 8,000 8,000
Total factory overhead 1,57,500 2,02,500
Total Manufacturing cost 2,32,500 3,27,500
Other information for the month of September 2004:
Standard time 0.5 direct labor hour per unit of product
Normal capacity 10,000 direct labor hours
iii. Units produced 22,000 units
iv. Actual labor hours 10,700 hours.
Factory overheads incurred Rs.1,91,000.
Standard factory overhead rates are based on direct labor hours.
The overhead efficiency variance and overhead capacity variance are
(a) Rs.2,700 (F) and Rs.4,700 (A) respectively (b) Rs.2,700 (F) and Rs.9,000 (F) respectively
(c) Rs.2,700 (A) and Rs.4,700 (F) respectively (d) Rs.2,700 (A) and Rs.9,000 (A) respectively
(e) Rs.4,700 (A) and Rs.2,700 (A) respectively.
(2 marks)

36. Yasoda Garments Ltd. (YGL) sells a line of womens dresses. YGLs performance report of
September 2004 is as follows:
The company uses a flexible budget to analyze its performance and to measure the effect on operating
income of the various factors affecting the difference between budgeted and actual operating income.
Particulars Actual Budget
Dresses sold (units) 5,000 6,000
Sales (Rs.)
Variable costs (Rs.)
2,35,000
(1,45,000)
3,00,000
(1,80,000)
Contribution margin (Rs.)
Fixed costs (Rs.)
90,000
(84,000)
1,20,000
(80,000)
Operating income (Rs.) 6,000 40,000
The effect of the sales quantity variance on the contribution margin and the variable cost flexible
budget variance for October 2004 is
(a) Rs. 20,000 unfavorable and Rs. 5,000 favorable respectively
(b) Rs. 18,000 unfavorable and Rs. 5,000 unfavorable respectively
(c) Rs. 20,000 unfavorable and Rs. 4,000 favorable respectively
(d) Rs. 15,000 unfavorable and Rs. 4,000 unfavorable respectively
(e) Rs. 30,000 favorable and Rs. 5,000 favorable respectively.
(2 marks)

37. Zinta Ltd. uses a Standard costing system. The following details have been extracted from the standard
cost card in respect of direct materials for the month of September 2004:
Material usage per unit 8 kg at the rate of Re.0.80 per kg
Budgeted production 850 units
The company has furnished the following data relating to direct material for the month of September
2004:
Materials purchased 8,200 kgs at a price of Rs.6,888
Materials issued to production 7,150 kgs
Actual production 870 units
The material price and material usage variances are
(a) Rs.286 (A) and Rs.152 (A) respectively (b) Rs.286 (A) and Rs.280 (A) respectively
(c) Rs.286 (A) and Rs.294 (A) respectively (d) Rs.328 (A) and Rs.152 (A) respectively
(e) Rs.328 (A) and Rs.280 (A) respectively.
(2 marks)

38. Deekay Ltd. uses a standard absorption costing system. The following data have been extracted from
its budget for the month of September 2004:
Fixed production overhead cost Rs.48,000
Production 4,800 units
In September 2004, the fixed production overhead cost was under absorbed by Rs.8,000 and the fixed
production overhead expenditure variance was Rs.2,000 (Adverse).
The actual number of units produced was
(a) 5,800 units (b) 5,400 units (c) 5,000 units (d) 4,200 units (e) 3,800 units.
(2 marks)

39. The data relating to Mehar Ltd. for the month of September 2004 are as follows:
Output (units)
Wages paid for 16,250 hours
Material 4,000 kg
6,500
Rs. 48,750
Rs. 34,000

Variances Rs.
Labor rate
Labor efficiency
Labor idle time
Material price
Material usage
1,875 (A)
1,275 (F)
700 (A)
1,850 (F)
1,200 (F)
The standard prime cost per unit is
(a) Rs. 13.00 (b) Rs. 12.73 (c) Rs. 7.30 (d) Rs. 7.50 (e) Rs. 5.70.
(2 marks)

40. Monarch Ltd.has furnished the following production budget pertaining to a single product for the
month of September 2004:
Production quantity 2,40,000 units
Production costs:
Material
Direct labor

3,36,000 kg at Rs.4.10 per kg
2,16,000 hours at Rs.4.50 per hour
Variable overheads Rs. 4,75,200

Fixed overheads Rs.15,21,600
The variable overheads are absorbed at a predetermined direct labor hour rate and the fixed overheads
are absorbed at a predetermined rate per unit of output.
During the month the actual production was 2,20,000 units and the following costs were incurred:
Material 3,13,060 kg at Rs.12,45,980
Direct labor 1,94,920 hours at Rs.8,86,886
Variable overheads Rs.4,33,700
Fixed overheads Rs.15,01,240
The variable overhead efficiency variance and fixed overhead volume variance are
(a) Rs.1,900 (F) and Rs.1,26,800 (A) respectively
(b) Rs.6,776 (F) and Rs.1,06,440 (A) respectively
(c) Rs.6,776 (F) and Rs.4,876 (A) respectively
(d) Rs.6,776 (F) and Rs.1,26,800 (A) respectively
(e) Rs.4,876 (A) and Rs.1,26,800 (F) respectively.
(2 marks)
41. Performance reports should be designed to meet organizational needs. In this regard, which of the
following are normally included in performance reports?
I. Specific time horizons
II. Strategic plans
III. Exceptional items that are controllable
IV. A relationship to the organizational structure
V. A user focus.

(a) (I), (II) and (IV) above (b) (I), (II), (III) and (IV) above
(c) (I), (II), (IV) and (V) above (d) (I), (III), (IV) and (V) above
(e) (I), (II), (III), (IV) and (V) above.
(1 mark)

42.
For information to be relevant
I. It must relate to the future
II. It must differ among alternatives
III. It must be completely accurate
Which of the given statement(s) is/are true?
(a) (I) only (b) Both (I) and (II) above
(c) (I), (II) and (III) above (d) Both (I) and (III) above (e) Both (II) and (III) above.
(1 mark)

43. When comparing performance report information for management with that for lower level management
(a) management reports are more detailed
(b) Lower level management reports are typically for longer time periods
(c) management reports show control over fewer costs
(d) Lower level management reports are likely to contain more quantitative data and less financial data
(e) management reports are usually not of the exception type but present a complete analysis of all
variances.
(1 mark)

44. Scrap and costs of spoiled units that cannot be salvaged are the examples of
(a) Appraisal costs (b) Internal failure costs
(c) External failure costs (d) Prevention costs (e) Committed costs.
(1 mark)

45.
Responsibility accounting is a system where
(a) The accounting department is responsible for all cost accounting and financial reporting activities
(b) Critical processes and key success factors are the primary activities for which accounting data is
gathered
(c) Lower-level managers are responsible for meeting specific objectives and reporting on the results
(d) Everyone in the organization is accountable for achieving corporate goals
(e) An accounting system where activity based costing is implemented.
(1 mark)

46. In which type of responsibility center the manager is held accountable for its profits?
I. Cost center
II. Profit center
III. Revenue center
IV. Investment center

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

47. While preparing a performance report for a cost center using flexible budgeting techniques, the planned
cost column should be based on
(a) Cost incorporated in the master budget
(b) Budgeted amount in the original budget prepared before the beginning of the period
(c) Budget adjusted to the actual level of activity for the period being reported
(d) Actual amount for the same period in the preceding year
(e) Budget adjusted to the planned level of activity for the period being reported.
(1 mark)

48. The following data pertain to Division X of Pioneer Ltd. for the year 2003-04:
Sales Rs.6,20,000
Operating Margin 11.29%
Capital turnover 4
Imputed interest rate 13%
The residual income of the division is
(a) Nil (b) Rs.22,325 (c) Rs.31,480
(d) Rs.44,500 (e) Rs.49,850.
(1 mark)

49. There are various budgets within the master budget. One of these budgets is the production budget.
Which of the following best describes the production budget?
(a) It aggregates the monetary details of the operating budget
(b) It is calculated from the desired ending inventory and the sales forecast
(c) It includes required material purchases
(d) It includes required direct labor hours
(e) It summarizes all discretionary costs.
(1 mark)

50. The primary responsibility for establishing and maintaining an internal control structure rests with
(a) The management (b) The Management Accountant
(c) The external auditor (d) The internal auditor (e) The controller.

(1 mark)
51. Zindal, a server at Bisroy Restaurant, takes personal pride and satisfaction in doing his very best to
provide customers with outstanding service. Likewise, Bisroys owners have identified customer service
as one of several organizational goals for the restaurant. When the organization and its employees share
the same goals, they are said to have
(a) Total quality management (b) Goal congruence
(c) A long-range plan (d) Participative management (e) Centralized control.
(1 mark)

52. The two internal roles of management accounting are
(a) Supplying information and providing no monetary awards
(b) Providing monetary and non monetary awards
(c) Supplying information and preparing financial reports
(d) Supplying information and control procedures
(e) Supplying information and monetary awards.
(1 mark)

53. Action Plan Ltd. manufactures two products A and P, using same facilities and similar process. The
company has furnished the following information pertaining to two products for the year ending
September 30, 2004.
Particulars Product A Product P
Direct labor hours per unit 4 2.5
Machine hours per unit 5 4
Number of set ups during the period 22 18
Number of orders handled during the period 16 19
Production units 6,000 4,340
Total production overhead costs for the period are as follows:
Particulars Rs.
Machine activity costs 2,40,000
Set-ups costs 56,000
Order handling costs 52,500
3,48,500
The absorption of total production overheads of both the products on the basis of a suitable cost driver,
using Activity Based Costing method, is
Product A (Rs.) Product P (Rs.)
(a) 2,06,827 1,41,673
(b) 1,82,827 1,41,673
(c) 2,06,827 1,16,473
(d) 1,74,250 1,74,250
(e) 2,40,000 1,08,500.
(2 marks)

54. Which of the following factors is/are considered in determining the period of the short-range budget?
I. The budget period should be long enough to allow for the financing of production
well in advance of actual needs
II. The budget period should be long enough to cover complete production of various products
III. For business of a seasonal nature, the budget period should cover at least one entire seasonal
cycle
IV. The budget period should coincide with the financial accounting period for comparison


(a) Only (I) above
(b) Both (II) and (III) above
(c) (I), (II) and (III) above
(d) Both (I) and (III) above
(e) (I), (II), (III) and (IV) above.
(1 mark)
55. Which of the following methods reduces the development cycle of a product by reducing the wastage of
time and resources?
(a) Activity based costing (b) Auditing
(c) Target costing (d) Benchmarking (e) Benchtrending.
(1 mark)

56. Which of the following is considered as cost driver in activity based costing?
(a) An overhead cost is incurred as a direct consequence of a cost object
(b) Any direct cost element in a product cost
(c) Any activity or product item for which costs are incurred
(d) Any factor which causes a change in the cost of an activity
(e) An indirect cost in a product cost.
(1 mark)

57. The basic concept of value chain analysis is to look at what the organization does through the eyes of
(a) Customers (b) Management (c) Stockholders
(d) Production workers (e) Suppliers.
(1 mark)

58. To evaluate customers, an organization should treat them as
(a) Cost objects (b) Activities in the value chain (c) Costs in the supply chain
(d) Scarce resources (e) Trade-offs.
(1 mark)

59. Product life cycle begins with
(a) Marketing (b) Production (c) Customer Service
(d) Design and engineering (e) None of the above.
(1 mark)

60. Direct material purchases totaled Rs.128,000 for 32,000 tons of material. The standard material price per
ton is Rs.4.25. Which of the following would be included in the journal entry to record the purchase
under a standard costing system?
(a) Debit to Materials Price Variance for Rs.8,000
(b) Credit to Materials Price Variance for Rs.8,000
(c) Credit to Accounts Payable for Rs.136,000
(d) Debit to Raw Materials Inventory for Rs.128,000
(e) Both (a) and (c) above.
(1 mark)

61. Ravi Ltd. had the following sales for the quarter ending September 2004:
July 2004 50,000 units
August 2004 40,000 units
September 2004 60,000 units
Selling price per unit is Rs.100.
Target for the next quarter:
October 2004 60,000 units
November 2004 48,000 units
December 2004 72,000 units
The selling price will be increased by 10%
The collection policy of the company is as follows:
20% of sales Cash sales
40% of Credit sales in the month following the month of sales
30% of Credit sales In the second month following the month of sales
25% of Credit sales In the third month following the month of sales
5% of Credit sales Not recoverable

The company wants to change its credit policy from next month as:
30% of sales Cash sales
40% of sales in the month following the month of sales
Balance In the second month following the month of sales with a bad debts of 8%
on the balance payable.
The amount to be collected in the month of November 2004 is:

(a) Rs.64,20,000 (b) Rs.64,64,000 (c) Rs.62,78,000 (d) Rs.58,76,000 (e) Rs.58,40,000.
(2 marks)

62. Firewall Company manufactures a single product at the operated capacity of 40,000 units while the
normal capacity of the plant is 50,000 units per annum. The company has estimated 20% profit on sales
realization and furnished the following budgeted information:
Particulars
50,000 units
(Rs.)
40,000 units
(Rs.)
Fixed overheads 2,00,000 2,00,000
Variable overheads 3,00,000 2,40,000
Semi-variable overheads 3,00,000 2,60,000
Sales realization 18,00,000 14,40,000
The company has received an order from a customer for a quantity equivalent to 10% of the normal
capacity. It is noticed that prime cost per unit of product is constant
If the company desires to maintain the same percentage of profit on selling price, the minimum price per
unit to be quoted for new order is
(a) Rs.26.63 (b) Rs.27.97 (c) Rs.25.40 (d) Rs.23.26 (e) Rs.30.59.
(2 marks)

63. Moti Ltd. pays commission to its salesmen in the month the company receives cash for sales, which is
equal to 4% of the cash inflows. The company has budgeted sales of Rs.3,15,000 for October 2004,
Rs,4,25,000 for November 2004 and Rs.4,85,000 for December 2004. 50% of the sales are on credit.
Experience indicates that 70% of the budgeted credit sales will be collected in the month following the

sales. 25% are expected to be realized in the second month following the month of sales and remaining
5% will be non-recoverable.
The total amount of sales commission for the month of December 2004 is
(a) Rs.24,750 (b) Rs.21,250 (c) Rs.18,750 (d) Rs.17,225 (e) Rs.15,650.
(2 marks)
64. Leo Toys manufactures a toy monkey with moving parts and a built-in voice box. Projected sales for 5
months are as follows:
Month Projected sales in units
November 2004 4,000
December 2004 4,300
January 2005 4,500
February 2005 4,250
March 2005 4,400
Each toy requires direct materials from a supplier at Rs.35 for moving parts. Voice boxes are purchased
from another supplier at Rs.10 per toy. Labor cost is Rs.20 per toy and variable overhead cost is Rs.5 per
toy. Fixed manufacturing overhead applicable to production is Rs.41,000 per month. It is the practice of
the company to manufacture an output in a month which is equivalent to 1.2 times of the following
months sales.
The production budget for the month of December 2004 and the production cost budget for the month of
January 2005 are
(a) 4,800 units and Rs.3,78,000 respectively
(b) 5,400 units and Rs.3,98,000 respectively
(c) 5,160 units and Rs.3,98,000 respectively
(d) 5,400 units and Rs.3,57,000 respectively
(e) 5,280 units and Rs.3,24,000 respectively.
(2 marks)

65. ABC Ltd. is producing three complimentary products .The demand for the products is very much
fluctuative. The demand estimates for the products at normal capacity are as follows:
Product Selling price (Rs.) Unit Variable cost (Rs.) Sales units
A 10 4 15,000
B 15 8 20,000
C 18 9 5,000
Fixed cost is Rs.80,000(totally indirect cost).At the end of the budget period the total sales margin
variance is found to be Rs.1,65,000 (Adverse) but the same sales mix, cost and price were maintained
because of the complimentary nature. If there are no opening and closing inventories of WIP, finished
goods and raw materials, the fixed overhead cost variance is

(a) Rs.48,000 (Favorable) (b) Rs.48,000 (Adverse)
(c) Rs.85,000 (Adverse) (d) Rs.85,000(Favorable) (e) Nil.
(2 marks)

66. Eslow Ltd. manufactures a single product using three raw materials J, K and L. The details of standard
cost and actual cost for the month of September 2004 are as under:
Standard Cost

Particulars Kg Price per kilogram (Rs.)
Material J 15 4
Material K 12 3
Material L 8 6
35
Less: Standard loss 3
Standard Yield 32

Actual Cost
Particulars Kg Price per kilogram (Rs.)
Material J 1,680 4.25
Material K 1,650 2.80
Material L 870 6.40
4,200
Less: Loss 552
Actual Yield 3,648

The material yield variance is
(a) Rs.2484 (A) (b) Rs. 864 (A) (c) Rs.2484 (F)
(d) Rs. 791 (F) (e) Rs 791 (A).
(2 marks)
67. Shivam Ltd. uses standard process costing method. The standard process cost card per month shows that
3 hours of direct labor is required to produce one kg. of finished product and the fixed overheads, which
are recovered on direct labor hours, amount to Rs.180 per kg. of output. The budgeted output is 1,000 kg.
per month. Actual production during the month of September 2004 is 1200 kg. and the direct labor hours
utilized during the month were 3,300.
The details of opening and closing work-in progress (WIP) are as under:
Opening work-in-progress 250 kg. (Degree of completion of labor and overheads 60%)
Closing work-in-progress 450 kg. (Degree of completion of labor and overheads 20%)
The company uses FIFO method for evaluation of stocks.
The fixed overhead efficiency variance is
(a) Rs.25,200 (Adverse) (b) Rs.18,000 (Favorable)
(c) Rs.18,000 (Adverse) (d) Rs. 7,200 (Favorable)
(e) Rs. 7,200 (Adverse).
(2 marks)

68. Alpha Ltd. Is preparing sales budget for 3
rd
quarter .The details of the first two quarters are
Particulars 1
st
Quarter 2
nd
Quarter
Sales Value (Rs.) 8,000
Prime cost (Rs.) 3,000
Overheads (Rs.) 4,000 3,900
Sales Units 200 240
There is a reduction in fixed overheads by Rs.200 in 2
nd
quarter and same will continue. The variable
costs will increase by 20% in 3
rd
quarter .The budgeted sales for the 3
rd
quarter to maintain the same
profit per unit as in 1
st
quarter is
(a) 168 units (b) 130 units (c) 138 units (d) 145units (e) 122 units.

(2 marks)
69. Free Flow Ltd. presently sells 50,000 executive model pens per month. In next budget period it wants to
produce economy model. The details are as follows:
Particulars Actuals for executive
model (Rs.)
Estimates for economy
model (Rs.)
Selling price per unit 10 2
Variable cost per unit 6 0.70
Fixed cost per month 1,00,000 20,000
It is estimated by the company that sale of executive pen model will fall at the rate of 1 unit for every 10
pens sale of economy model. Presently the value of assets is Rs.9,00,000.New model requires an
additional investment of Rs.3,00,000.The number of units of economy model to be sold to get a ROI of
10% on additional investment in addition to existing profit is
(a) 50,556 units (b) 65,556 units (c) 62,556 units (d) 55,556 units (e) 58,556 units.
(2 marks)

70. Shining India Ltds performance for the last year is :
Net Profit = Rs. 2,00,000
Sales = Rs.18,00,000
Net assets = Rs.10,00,000.

At the end of last year it was proposed to purchase machinery whose cost was equal to 5% of existing net
assets. If ROI and profit margin ratio remain to be same in the next budgeted
year, then the % increase in sales required is
(a) 5.75 (b) 4.00 (c) 5.00 (d) 4.76 (e) 6.55.
(2 marks)

71. The standard and actual data for a product are as under
Particulars
Standard Actual
Quantity Kg Rs. Quantity Kg Rs.
Raw Material I 300 4 per unit 350 4.50 per unit
Raw Material II 200 3 per unit 160 2.80 per unit
Out put (units) 1,200 1,160
By how much percentage, the deviation of actual prices from standard prices has contributed in material
cost variance?
(a) 50.53% (b) 54.53% (c) 60.53% (d) 55.33% (e) 61.33%.
(2 marks)

72. The details of last two quarters actuals were as
Particulars 1
st
Quarter 2
nd
Quarter
Capacity usage 40% 50%
Net profit / (loss) (Rs.20,000) (Rs.8,000)
The budgeted profit for the 3
rd
quarter is Rs.10,000 .The capacity utilization at budgeted production for
3
rd
quarter is

(a) 67% (b) 71% (c) 70% (d) 65% (e) 60%.
(2 marks)

Suggested solution
Management Accounting - VI
1. : (c)
Reason : Rs.
Contribution of division A
Sales 2,400 Rs.264 = 6,33,600
Less : Variable cost:
Purchase cost (2,400 Rs.228) = 5,47,200
86,400
Contribution of division B
Sales 2400 Rs.480 11,52,00
0
Less : Variable cost
Division A: Rs.6,33,600
Own cost
2,400 Rs.180 Rs. 4,32,000 10,65,60
0
86,400
Total Contribution - 1,72,800

2. : (e)
Reason : Let, sale value = x
0.15x =
[ ] x(1 0.35) Rs.90, 000 Rs.1,80, 000 Rs.60, 000 (1 Tax rate)
0.15x =
[ ] 0.65x Rs.3, 30, 000
0.6 = 0.39x Rs.1,98,000
0.24x = Rs.1,98,000
x = Rs.1,98,000 0.24 = Rs.8,25,000
Sale price / unit= Rs.8,25,000 30,000 = Rs.27.50
Net sale price = 27.50 .65 = Rs.17.88

3. : (e)
Reason :
Fixed costs 8,00,000
Return on capital employed (Rs.75,00,000 x 12%) 9,00,000
Residual income desired 10,00,000
Total desired contribution 27,00,000
Contribution per unit from outside sales = Rs.180 Rs.160 = Rs.20 per unit
Total contribution from outside sales = Rs.20 per unit x 1,20,000 units = 24,00,000
Minimum contribution to be earned from supply to division B
= Rs.27,00,00 Rs.24,00,000 = Rs. 3,00,000
Contribution per unit on additional 30,000 units =
Rs. 3,00,000
30,000 units
= Rs.10 per unit

Variable cost for minor modification = Rs.5 per unit
Minimum transfer price per unit to be quoted = Rs.160 + Rs.10 + Rs.5 = Rs.175

4. : (a)
Reason : Statement showing the determination of selling price of seasoned timber as on 1
st
October,
2004:
Quantity (cft) Amount (Rs.)
Cost of timber logs at the rate of Rs.100 per cft.
Seasoning expenses for 6 months:
Rent (Rs. 1,250 x 6 x )
Salaries of 4 guards (Rs. 250 x 4 x 6 x )
Incidental expenses (Rs. 750 x 6 x )
Administration overheads (Rs. 10,000 x x )
1,000


1,00,000

3,750
3,000
2,250
2,500
Total 1,000 1,11,500
Less: Normal loss at the rate of 10% 100 -
Total(net)
Profit margin (15% of cost)
900 1,11,500
16,725
Total selling price 1,28,225
Selling price per cft (Rs. 1,28,225 900) 142.47

5. : (e)
Reason : Differential cost technique for pricing ignores fixed cost. Differential cost technique is the
change of cost for different options. Therefore, fixed cost has no relevancy with these
differential cost techniques. Other techniques mentioned in (a), (b), (c) and (d) consider the
fixed cost in pricing the goods

6. : (c)
Reason : The variable cost per unit is Rs.6,000/500 = Rs.12. The average fixed cost per unit with the
special order is Rs.6,000/600 = Rs.10. The average cost is Rs.12+Rs.10 = Rs.22.

7. : (d)
Reason : Total prime cost variance=material cost variance + Labour cost variance material cost
variance = Actual cost of materials used Standard Material cost of actual out put
Labour cost variance= Actual cost of labour used Standard labour cost of actual out put
Actual cost of materials used = 350 x Rs.4 + 160 x Rs.3 =Rs.1,880
Standard material cost per unit = (300 x Rs.4 + 200 x Rs.3) / (500 kg of input 10% of 500) =
Rs.4
Actual out put = (350+160) x 100 /114 = 447.37 units
Standard Material cost of actual out put = 447.37 x Rs.4 = Rs.1,789.48
material cost variance = Actual cost of materials used Standard Material cost of actual out
put = Rs.1,880 Rs.1,789.48=Rs.90.52(Adverse)
Actual cost of labour used=22 x Rs.10+ 6 x Rs.7 = Rs.262
Standard labour cost per unit = (20 x Rs.10 + 10 x Rs.7) / (500 kg of input 10% of 500) =
Re.0.60
Standard labour cost of actual out put=447.37 units x Re.0.60 = Rs.268.42

Labour cost variance= Actual cost of labour used Standard labourl cost of actual out
put=Rs.262 Rs.268.42 = Rs.6.42 (Favorable)
Total prime cost variancec=material cost variance + Labour cost variance= Rs.90.52
(Adverse) + Rs.6.42 (Favorable) = Rs.84.10 (Adverse)
8. : (c)
Reason : The margin of safety is equal to planned (budgeted) revenues minus break-even sales
revenues. SVB managers want to determine how far service revenues could fall below
budgeted revenues before losses occur from operations. So the managers want to know the
banks margin of safety.

9. : (c)
Reason : If sales revenue equals 100% and variable costs are 35%, the contribution margin percentage
is the difference of 65%. Solving this in reverse, the contribution margin percentage of 65%
plus the variable-cost percentage of 35% equals 100% (contribution margin plus variable
costs equals sales revenue).

10
.
: (b)
Reason : A knowledge of cost behavior is useful because it helps managers forecast (plan) results under
different activity levels. Hence the correct is (b).

11
.
: (b)
Reason : As the economist maintains that to maximize income, a firm should produce at the point
where the marginal revenue equals marginal cost, in differential cost analysis, the accountant
says that the firm should produce at the point where differential costs equal differential
income. So differential cost Pricing is related to economic marginal analysis. Hence,
statement (b) is false. All other statements are true.

12
.
: (e)
Reason : Once target selling price based on mark-up percentages has been calculated, it is rarely
adopted without amendment. The price is adjusted upwards or downwards depending on
factors such as the future capacity that is available, the extent of competition from other firms
and managements general knowledge of the market.

13
.
: (d)
Reason : A balance needs to be kept between divisional autonomy to provide incentives and
motivation, and retaining centralized authority to ensure that the organizations divisions are
all working towards the same targets, the benefit of the organization as a whole. It ensures the
goal congruence, divisional performance in different division and maximize the corporate
profit. Therefore (d) is correct.

14
.
: (e)
Reason : The market based transfer pricing may reflect the price prevailing in an open competitive
market. Hence, it is based on the listed price of an identical product in the market, may be
even of a competitor. Under other methods of transfer pricing stated in (a), (b), (c) and (d) are
not based on the listed price or competitors price. Hence (e) is correct.

15
.
: (d)
Reason : Fixed costs remain unchanged in total. The fixed cost per unit will vary according to the level
of activity achieved in each quarter. The first financial budget prepared is the budgeted
income statement. The amounts detailed in a budgeted income statement are used in the
determination of projected cash flows. A flexible budget makes it possible to measure a
manager's performance against costs that should occur for the level of activity achieved,
rather than measuring the manager's performance against a single, predetermined level of
activity. Statements (I) and (III) are true. Hence the correct is (d).

16 : (a)

. Reason : The first step in preparing a master budget are to prepare a sales forecast and sales budget,
the information from which most other budgets will be based. The budgeted balance sheet
will be prepared by using amounts found in the cash budget, collection and payment
schedules, inventory budget, capital expenditures budget, and the budgeted income statement.
It will show the anticipated financial position of the company at the end of the budget period.
This will limit production to the number of units required to meet sales and provide an
adequate ending inventory for sales in the beginning of the subsequent period. Statement (II)
and (III) are true. Only statement (I) is false. So the correct is (a).
17
.
: (e)
Reason : The operating cycle is the total of the number of days required to convert finished goods (or
merchandise inventory) into accounts receivable plus the number of days required to collect
the accounts receivable. The use of a budget is a key element of financial planning and it
assists managers in controlling costs. Virtually all economic entities engage in some form of
budgeting. Benefits derived from budgeting include enhanced management responsibility,
assignment of decision-making responsibilities, coordination of activities, and performance
evaluation. Since all the statements of (I), (II) and (III) are true the correct is (e).

18
.
: (c)
Reason : The financial budget can have a tremendous impact (negatively and positively) on the
organization's human resources. The behavioral effects of budgets should not be overlooked.
The budget and the budgeting process can have considerable influence on an organization's
effectiveness. A budget manual is a set of written instructions that specifies who will provide
budgetary data and its form, and who should receive various schedules comprising the budget.
The master budget reflects not only the operating decisions, but also the financing decisions.
So, statement (III) is false. Therefore, the correct is (c).

19
.
: (b)
Reason : A flexible budget is a series of budgets prepared for different levels of activity. It allows
adjustments of the budget to the actual level of activity before comparing the budgeted
activity with actual result. Fixed budget is a budget prepared for one level of activity.
Therefore (b) is correct. Other statements mentioned in (a), (c), (d) and (e) are not correct.

20
.
: (b)
Reason : Total planned overhead costs for the first quarter = (60,000x3 + 80,000) = Rs.260,000
I quarter cash payments = 90% x (260,000 35,000), (depreciation is excluded)
=Rs.202,500
Total planned overhead costs for the second quarter = (80,000x3 + 80,000) = Rs.320,000.
II quarter cash payments = {90% x (320,000 35,000} + {10% x (Rs.260,000 - Rs.35,000)}
= (2,56,500 + 22,500) = Rs.279,000.

21
.
: (d)
Reason :
Total budgeted overhead for the 1st quarter = (Rs.3,000 + Rs.20,000)=Rs.23,000.
Budgeted fixed manufacturing overhead =(Rs.23,000 - Rs.15,000)= Rs.8,000.
Total budgeted overhead for the 2nd quarter = (Rs.3,000 + Rs.23,750)=Rs.26,750.
Budgeted fixed manufacturing overhead =(Rs.26,750 - Rs.18,750)= Rs.8,000.

22
.
: (e)
Reason : Third quarter planned production will be 123,000 units (120,000 + 15,000 - 12,000). Direct
labor hours, 2 units per hour, for the third quarter will be 123,000/2 = 61,500. So statement
(e) is false. All other statements are true.

23
.
: (b)

Reason : Payment for September purchases were Rs.100,000 x 0.6 = Rs.60,000, which leaves
Rs.80,000 to apply to July and August. The ratio of the balance for July and August is 1:3.
August purchases were ((Rs.80,000 x .75))/0.3) = Rs.2,00,000. July purchases were
((Rs.80,000 x .25))/0.1) = Rs.2,00,000.
24
.
: (d)
Reason :
Labor hours = 1,50,000/1.00 = 1,50,000 hours.
Increase in labour hours due to decrease in production efficiency by 10% and 40% increase in
production
= 1,50,000 x (1 + 0.40)

(0.9) = 2,33, 333 hrs.

Hence, budgeted wages = 2,33,333 x 0.80 = Rs.1,86,667.
Direct material when production increses by 40% = 2,25,000 x (1+0.40) = Rs.3,15,000.
Fixed overhead cost = Rs.60,000.
Variable cost after decrease in production efficiency by 10% and 40% increase in Production
= Rs.1,00,000 x (1+ 0.40)

(0.9) = Rs. 1,55,556

Cost of production
= Direct material + Direct labour + Variable overhead + Fixed overhead
=Rs.(3,15,000 + 1,86,667 +1,55,556 + 60,000)
=Rs.7,17,223.

25
.
: (e)
Reason : Economic value added is a variant of residual income which is defined as net operating
income minus weighted average cost of capital multiplied by sum of long-term liabilities and
shareholders' equity in which average invested capital is defined as long-term liabilities plus
shareholders' equity.

26
.
: (d)
Reason : Finished goods:
Closing stock at end of October must be 10% higher than at the beginning of the month:
30,000 x 110% = 33,000 units. (Closing stock for October is the same as opening stock for
November.)
Closing stock at end of November must be 10% higher than at the beginning of the month:
33,000 x 110% = 36,300 units.
Closing stock at end of December must be 10% higher than at the beginning of the month:
36,300 x 110% = 39,930 units.
Production in the month of December 2003 is Closing stock + Sales - Opening stock = 39,930
+ 4,10,000 36,300 = 4,13,630units
Raw materials:
Opening stock of raw material at beginning of October = 50,000kg x Rs.6.00 = Rs.3,00 000
Closing stock at end of October must be 10% higher than opening stock
= Rs.3,00,000 x 110% = Rs.3,30,000
Closing stock at end of November must be 10% higher than opening stock:
= Rs.3,30,000 x 110% = Rs.3,63,000
Closing stock at end of December must be 10% higher than opening stock:
= Rs.3,63,000 x 110% = Rs.3,99,300
Purchases in the month of December 2004 is Closing stock + raw materials used in
production opening stock = 3,99,300 + (4,13,630x 1.5 x Rs.6) 3,63,000 = Rs.37,58,970

27 : (b)

. Reason : ABC cost allocation systems can be used to allocate either variable or fixed manufacturing
overhead, to allocate joint costs, or to reallocate service department costs to outputs. Direct
costs of materials and labour do not need to be allocated to specific cost objectives
28
.
: (a)
Reason : Identifying interrelationships between key activities and resources consumed is central to
understanding how business activities drive costs. It is part of creating an ABC cost allocation
method and usually requires direct input from employees engaged in the process.

29
.
: (e)
Reason : Standard output = Standard Number of working days x Standard Labor hours per day x
Standard Output per labor hour = 25 x 5000 x 2 = 2,50,000 units
Standard fixed overhead rate per unit = Rs. 3,75,000/ 2,50,000 = Rs.1.50
Actual output = Actual Number of working days x Actual Labor hours per day x Actual
Output per labor hour = 27 x 5,500 x1.9 = 2,82,150 units
Fixed overhead volume variance
= Actual output x standard rate Budgeted fixed overheads
= 2,82,150 units x Rs.1.50 Rs.3,75,000
= Rs.4,23,225 Rs.3,75,000 = Rs.48,225(favorable).

30
.
: (c)
Reason : Budgets are used to plan and control all functions in the value chain, including design,
production, distribution, and sales.

31
.
: (b)
Reason : The master budget comprises detailed schedules of all prices, costs, and quantities for every
organizational function. It is the mechanism through which all activities are coordinated and
includes sales forecasts, expenses, cash receipts and disbursements as well as balance sheets.

32
.
: (c)
Reason : Currently attainable standards are expected to be achieved given certain levels of effort; thus,
they may be used for budgeting. Ideal or perfection standards cannot be achieved and would
not be useful for budgeting. Flexible standards are not standards at all, but are probably just
actual results.

33
.
: (b)
Reason : Normal costing charges production for the actual prime costs, but budgeted costs for variable
and fixed factory overhead. Any combination which includes direct costs like Direct Material
and Direct Labour is wrong.

34
.
: (e)
Reason : Quality costs include all of these, and more. Inspection costs are classified as appraisal costs.
Rework costs are internal failure costs. Lost sales are external failure costs. And redesign of
the production process is a prevention cost.

35
.
: (b)
Reason :
Material Rs.2.00
Labor Rs.3.00
* Variable overhead Rs.4.50
** Fixed overhead Rs.4.50
Cost per unit Rs.14.00

* Increase in overhead from 15,000 to 25,000 units is Rs.45,000. Therefore, Rs.4.50 per unit or
Rs.9 per hour (Rs.45,000 10,000)
** Total overhead at 25,000 units is Rs.2,02,500, of which Rs.1,12,500 must be variable (i.e.25,000
Rs.4.50). Remainder of Rs.90,000 must be fixed.
Budget for overhead is Rs.90,000 + Rs.9 per hour or
Rs.90,000 + Rs.4.50 per unit
Overhead efficiency variance = Budget 10,700 hours budget at 22,000 units.
= (10,700 Rs.9 + Rs.90,000) (22,000 Rs.4.50 + Rs.90,000)
= Rs.1,86,300 Rs.1,89,000
= Rs.2,700 (F)
Overhead capacity variance = Budget at 22,000 units overhead applied
= (22,000 Rs.4.50 + Rs.90,000) (22,000 Rs.9)
= Rs.1,89,000 Rs.1,98,000
= Rs.9,000 (F)
36
.
: (a)
Reason : The sales quantity variance is the difference between the actual and budgeted units, times the
budgeted unit contribution margin. (5,000-6,000) x Rs. 1,20,000/6,000 = Rs. 20,000
unfavorable. The variable cost flexible budget variance is equal to the difference between
actual variable costs and the product of the actual quantity sold and the budgeted unit variable
cost (Rs.1,80,0006,000 = Rs.30), (Rs. 30 x 5,000) Rs. 1,45,000 = Rs. 5,000 favorable.

37
.
: (d)
Reason : Material price variance = 8,200 kgs x Rs.0.80 Rs.6,888
= Rs.6,560 Rs.6,888 = Rs.328 (Adverse)
Material usage variance = Rs.0.80 (870 units x 8 kgs 7,150 kgs)
= Rs.0.80 (6,960 kgs 7,150 kgs) = Rs.152 (Adverse)

38
.
: (d)
Reason :
Standard fixed overhead rate =
Budgeted cost Rs.48, 000
Rs.10
Budgeted output 4, 800

Overheads incurred = Budgeted fixed production overhead cost + Expenditure
variance = Rs.48,000 + Rs.2,000 = Rs.50,000
Overheads absorbed = Actual overhead Underabsorption of overheads
= Rs.50,000 Rs.8,000 = Rs.42,000
Actual number of units = Rs.42,000 Rs.10 = 4,200 units.

39
.
: (a)
Reason : Actual cost
Standard material cost = Actual material cost + Favorable material price variance + Favorable
material usage variance
Standard wages = Actual wages paid + favorable labor efficiency variance adverse labor
rate variance adverse labor idle time variance
Particulars Total Per unit
Standard material cost (34,000 + 1,850 + 1,200) 37,05
0
5.70

Standard wages (48,750+1,275 1,875 700) 47,45
0
7.30
Total 84,50
0
13.00
40
.
: (d)
Reason :
Standard variable overhead rate=Rs.4,75,2002,16,000 hrs = Rs.2.20 per hour
Standard hours per unit = 2,16,000 hours2,40,000 units= 0.9 hours
Fixed overhead rate per unit = Rs.15,21,6002,40,000 units= Rs.6.34
Variable overhead efficiency variance:
=(Standard hours for actual production- Actual hours) x Standard rate per hour
=(2,20,000 units x 0.9 hours 1,94,920) x Rs.2.20=3,080 x Rs. 2.20 = Rs.6,776 (F)
Fixed overhead volume variance
=(Actual output Budgeted output) x Standard rate
=2,20,000 units 2,40,000 units) x Rs.6.34= 20,000 units x Rs.6.34= Rs.1,26,800 (A)

41
.
: (d)
Reason : Performance reports should be related to the organizational structure and it should have a user
focus. It should have specific time horizons and all controllable items should be included in
the performance report, even extraordinary items. Strategic plans, however, are not included
in a performance report because they are long-range and concern the environment in which
the organization operates.

42
.
: (c)
Reason : Relevant information is defined as information which is related to the future and is different
under alternative courses of action and is accurate.

43
.
: (d)
Reason : The reports for the lower level of management are fairly detailed though limited in scope and
they are quantitative in nature and less financial data. The reports for the management are
highly summarized.

44
.
: (b)
Reason : Scrap and costs of spoiled units that cannot be salvaged are examples of internal failure costs.
These are the costs associated with materials and products that fail to meet quality standards
and result in manufacturing losses. These defects are identified before the goods are shipped
to customers. Hence the is (b). Appraisal costs are incurred to ensure that materials, products
and services meet quality standards. They begin with the inspection of raw materials and parts
from vendors. External failure costs are the costs incurred when inferior-quality products or
services are sold to customers. Prevention costs are the costs incurred to reduce the number of
defective units produced or the incidence of poor-quality service. Committed cost is fixed
costs 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.

45
.
: (c)
Reason : Responsibility accounting systems assign responsibility for a group of organizational
activities and objectives to lower-level managers, and then monitor and report on the results.
Lower-level managers play a key role in responsibility accounting systems.

46
.
: (e)
Reason : The managers of a profit center or an investment center are accountable for the center's profit.

47
.
: (c)
Reason : When preparing a performance report for a cost center using flexible budgeting techniques,
the planned cost column should be based on budget adjusted to the actual level of activity for
the period being reported

48
.
: (e)
Reason : Capital Turnover = Sales/Capital
4 = Rs.6,20,000 / Capital
So Capital = Rs.6,20,000/4 = Rs.1,55,000
Residual Income = Operating Income- (Capital*Imputed Interest rate) = Rs.6,20,000 x
11.29
100
(Rs.1,55,000 x 0.13) = Rs.69,998 Rs.20,150= Rs.49,850 (Approx).

49
.
: (b)
Reason : A production budget is based on sales forecasts, in units, with adjustments for beginning and
ending inventories. It is used to plan when items will be produced. After the production
budget has been completed, it is used to prepare materials purchases, direct labor, and factory
overhead budgets.
(a) is incorrect because a production budget is usually prepared in terms of units of output
rather than costs. s (c) and (d) are incorrect because the direct labor and materials purchases
budgets are prepared after the production budget. (e) is incorrect because the production
budget is not summarization of discretionary costs.

50
.
: (a)
Reason : Establishment and maintenance of an internal control structure rests with the management.
An internal control structure is established to provide able assurance that the organizations
objectives are achieved.
Options (b) and (e) are not correct because these individuals are only responsible to the extent
that they are a part of the management team.
Options (c) and (d) are not correct because auditors must consider the internal control
structure, but they do not establish and maintain it.

51
.
: (b)
Reason : Goal congruence occurs when employees, working in their own interests, make decisions that
help meet the overall goals of the organization.This condition exists when individuals and
groups aim to achieve the same organizational goals.

52
.
: (d)
Reason : Generally accountancy is the language of the business through which different informations
can be provided to different groups of people. In case of Management accountancy the
recipient of the information is Management. Obviously the purpose of Management
accountancy is to facilitate the functions of the recipient of information i.e. management
which includes control. So ,the two internal roles of management accounting are to supply
information to assist managers in making better planning decisions and using management
accounting information as controls to ensure the organization's members are acting in the
organization's best interest. Hence (d) is correct.

53
.
: (a)
Reason : Machine activity cost per hour =
Rs.2, 40, 000 Rs.2, 40, 000
Rs.5.07 per machine hour
6, 000 x 5 4, 340 x 4 47, 360

+

Setups cost per set up =
Rs.56, 000
Rs.1, 400
40

per set up
Order handling cost per order =
Rs.52, 500
Rs.1, 500
35

per order
Particulars Product A (Rs.) Product B (Rs.)
Machine activity cost 1,52,027 87,973
Setups cost 30,800 25,200
Order handling cost 24,000 28,500
2,06,827 1,41,673
54
.
: (e)
Reason : Short range budgets may cover periods of three, six and twelve months depending on the
nature of the business. In determination of the period of short range budget all the factors as
stated in (I) financing of production well in advance; (II) cover complete production; (III)
entire seasonal cycle; (IV) coincide with the financial accounting period are all considered.
Hence option (e) is the correct option.

55
.
: (c)
Reason : Target costing is a technique that is aimed at reducing the costs of the product over its life
cycle; especially design related costs. A target cost is the cost at which the management wants
to manufacture the product. The benefit of target costing are : It reduces the development
cycle of a product by reducing the wastage of time and resources. It provides detailed
information on the costs involved in producing a new product.(b) Audits have been used to
monitor a companys financial performance by evaluating it against a set of standards
imposed by government regulators or by professional standards groups.(d) Benchmarking is a
continuous process of comparing products and operations against the best practices in the
industry. It consists of four phases: planning, analysis, bench trending, and strategic bench
trending method.(e) This technique associated with benchmarking are similar to techniques
used in bench trending, but has another structural dimensions. The study of bench trending
includes a projection of the critical market conditions and the consumer preference variable.

56
.
: (d)
Reason : Cost driver determines the size of the cost of an activity or causes a change in the cost of an
activity. For example, the cost of dispatching activity might be determined by the number of
dispatches and so the number of dispatches could be the cost driver. Therefore (d) is correct.

57
.
: (a)
Reason : The basic concept of value chain analysis is to look at what the organization does through the
eyes of customers. From a customer's perspective, only certain activities add value to the
product. These activities are called the value chain.

58
.
: (a)
Reason : When treated as cost objects, customer-related costs are compared with the benefits of having
the customer. In some cases, some types of customers are more costly than the benefit they
provide.

59
.
: (e)
Reason : Product life cycle begins with the initial planning and proposal stage. Design and engineering,
production, marketing, and customer service follow.

60
.
: (b)
Reason : The complete journal entry would be a debit to Raw Materials Inventory for Rs.136,000

(Rs.4.25 x 32,000), a credit to Materials Price Variance of Rs.8,000
(Rs..25 x 32,000), and a credit to Accounts Payable for Rs.128,000.
61
.
: (b)
Reason : Sales receipts in the month of November 2004
= Cash sales of November + 40% of the sales of October + 25% of credit sales of August +
30% of the credit sales of September
= 30% of 48,000 units @Rs.110+40% of 60,000 units @Rs.110+25% of (40,000 20% of
40,000) units @ Rs.100+30% of (60,000-20% of 60,000) units @Rs.100
=Rs.15,84,000+Rs.26,40,000+Rs.8,00,000+Rs.14,40,000 = Rs.64,64,000.

62
.
: (a)
Reason :
1. Computation of prime cost
Particulars Rs.
Sales (40,000 units) 14,40,000
Less: Profit margin 20% 2,88,000
Cost of sales (80% of Rs.14,4,000) 11,52,000
Less: Variable overheads
Rs.2,40,000

Semi-variable overheads
Rs.2,60,000

Fixed overheads
Rs.2,00,000
7,00,000
Prime cost 4,52,000
2. Semi-variable overheads:
Variable cost =
units in Change
t cos in Change
=
Rs.3,00,000-Rs.2,60,000
50,000units-40,000units
=
.40, 000
10, 000
Rs
units
= Rs.4per unit
At 40,000 units
Fixed cost = Total cost Variable cost
= Rs.2,60,000 40,000 units Rs.4 = Rs.1,00,000
At 45,000 units
Total cost = 45,000 units Rs.4 + Rs.1,00,000=Rs.2,80,000
Computation of differential cost of production of 5,000 additional units (i.e. 10% of
normal capacity):
Element of cost
40,000 units
(Rs.)
45,000 units
(Rs.)
Differential cost
for 5000
units (Rs.)
Prime cost (Working Note 1) 4,52,000 5,08,500 56,500
Variable overhead 2,40,000 2,70,000 30,000
Semi variable overhead (Working Note 2) 2,60,000 2,80,000 20,000
Fixed overhead 2,00,000 2,00,000
11,52,000 12,58,500 1,06,500
Cost per unit of new order =
.1, 06, 500
5, 000
Rs
= Rs.21.30
Profit margin 25% (20% on sale = 25% on cost)= Rs. 5.33

Minimum selling price per unit = Rs.26.63

63
.
: (d)
Reason :
Cash sales for December 2004 (Rs.4,85,000 x 0.5) Rs.2,42,500
Cash flows for the credit sales in the month of October 2004
(Rs.3,15,000 x 0.5 x 0.25)
Rs.39,375
Cash flows for the credit sales in the month of November 2004
(Rs.4,25,000x 0.5 x 0.7)
Rs.1,48,750
Rs.4,30,625
Total commission payable to salesmen = Rs.4,30,625 x 4% = Rs.17,225

64
.
: (b)
Reason : The production budget for December 2004= 4,500 units x 1.2 = 5,400 units
The production cost budget for January 2005
= 1.2 x 4,250 units x (Rs.35 + Rs.10 + Rs.20 + Rs.5) + Rs.41,000
= Rs.3,57,000 + Rs.41,000 = Rs.3,98,000.

65
.
: (b)
Reason : Here the Total sales Margin variance is Rs.1,65,000 (Adverse ) implies the actual sales
margin (contribution) = Budgeted sales margin Rs.1,65,000
= [15,000 x Rs.6+20,000 x Rs.7+5,000 x Rs.9] Rs.1,65,000
= Rs.2,75,000-Rs.1,65,000 = Rs.1,10,000.
Here sales mix ratio is 3:4:1.Let us assume a composite unit has 3 units of product A,4units of
product B and 1 unit of product C. So, contribution from composite unit = 3 x Rs.6+4 x
Rs.7+1 x Rs.9=Rs.55.
Number of composite units to be sold and produced = Contribution of Rs.1,10,000 / Rs.55 =
2,000 units .i.e.
A-2,000 x 3=6,000 units
B-2000 x 4=8,000 units
C-2000 x 1=2,000 units.
The budgeted number of composite units is 5,000 units.
Standard rate per composite unit=Rs.80,000/5,000=Rs.16
Total overhead cost variance = Actual units x Standard rate Actual cost
= 2,000 x Rs.16 Rs.80,000 = Rs.48,000 (adverse)

66
.
: (b)
Standard cost per unit of output
=
( ) ( ) ( ) 15 4 12 3 8 6
32
+ +
=
144
32
= Rs.4.50
Material yield variance = (Actual yield Standard yield for actual input) Standard cost per
unit of output
=
4, 200
3, 648 32 4.50
35
1 _

1
, ]
= (3,648 3,840) 4.50 = 864 (A)

67
.
: (d)

Reason :
Completed stock:
Total 1,140
From opening work-in-progress 250 40 % 100
Closing work-in-progress 450 20 % 90
Current production 950 100 % 950
Units Degree of
completion
Overheads
Budgeted rate per unit = Rs.180
No. of direct labor hours per unit = 3
Budgeted rate per hour = Rs.60
Standard hours for actual production = 1,140 x 3 = 3,420 hours
Fixed overhead efficiency variance = (Standard hours for actual production Actual hours) x
budgeted rate per hour = (3,420 hours 3,300 hours ) x Rs.60 = Rs.7,200 (F)
68
.
: (c)
Reason : Profit for 1
st
quarter = Rs.8,000 (4,00+3,000) = Rs.1,000
Variable portion of production overheads:
For 200 units= Rs.4,000
For 240 units = Rs.4,100 ( if there is no reduction in fixed overheads)
So, variable over head per unit =(Rs.4,100 Rs.4,000)/(240-200) = Rs.2.50
Fixed over heads = Rs.4,000 (200 x 2.50) = Rs.3,500
Because of decrease in fixed over heads , the actual fixed overheads = Rs.3,300
Total variable cost per unit = Prime cost per unit + variable overhead per unit= (Rs.3,000/
200)+Rs.2.50= Rs.17.50
Actual variable cost after 20% increase = Rs.17.50 1.2 = Rs.21
Selling price per unit = Rs.8,000 / 200 = Rs.40 (same as 1
st
quarter)
Profit per unit = Rs.1,000/ 200 = Rs.5 (same as 1
st
quarter)
Contribution per unit = Rs.40-Rs.21=Rs.29
Let the number of units to be sold to make a profit per unit of Rs.5 be X then
29X Rs.3,300 = Rs.5X
X=138 units.

69
.
: (d)
Reason : Additional profit required = 10% of 3,00,000 = Rs.30,000.
Contribution per unit of executive model = Rs.10-Rs.6 = Rs.4
Contribution per unit of economy model = Rs.2.00 - Rs.0.70 = Rs.1.30, but sale of every 10
units of economy model decreases the sales of executive model by 1 unit i.e. decrease in
contribution per unit of sale of economy model = Rs.4.00 /10 = Re.0.40
So, the net contribution per unit of sale of one unit of economy model
= Rs.1.30 Re.0.40 =Re.0.90
Number of units of economy model to be sold to get a profit of Rs.30,000
= (Rs.20,000+Rs.30,000) /Re 0.90 = 55,556 units

70
.
: (c)
Reason : Now ROI = (Rs.2,00,000 x 100)/Rs.10,00,000 = 20%.
Profit Margin Ratio =(Rs.2,00,000 x 100 )/Rs.18,00,000 =Rs.11.11%
In next year the assets = Rs.10,00,000 + 5% of 10,00,000 = Rs.10,50,000

Since ROI is same, profit for next year = 20% of Rs.10,50,000 = Rs.2,10,000
Since profit margin ratio is also same , the sales will be = Rs.2,10,000 / 0.1111
= Rs.18,90,190
Increase in sales = Rs.18,90,190 Rs.18,00,000 = Rs.90,190.
% increase in sales =(Rs.90,190 x 100 )/Rs.18,00,000 = 5%.
71
.
: (a)
Reason : Standard cost per unit of output = (300 x Rs.4 +200 x Rs.3.00) / 1200 = Rs.1.50
Material cost variance = Actual cost of materials Standard cost of actual output
= (350 x Rs.4.50 + 160 x Rs.2.80)-(1,160 x Rs.1.50) = Rs.2,023 Rs.1,740 = Rs.283 (A)
Material price variance = Actual quantity ( Actual price Standard price) = 350 (Rs.4.50-
Rs.4)+160 (Rs.2.80- Rs.3.00) = Rs.175 Rs.32 = Rs.143 (A)
Material price variance represents variance due to deviation of actual prices from standard
prices. Its percentage in total variance = (143/283) x 100 = 50.53%.

72
.
: (d)
Reason : At 50% capacity loss = Rs.8,000
At 40% capacity loss = Rs.20,000
So every 1% increase in capacity utilization increases profit by Rs.1,200
(i.e. (Rs.20,000 Rs. 8,000)/10%).
To get a profit of Rs.10,000 the extra profit required above 50% = Rs.10,000 + Rs.8,000
= Rs.18,000
The extra capacity required for an extra profit of Rs.18,000 = Rs.18,000/Rs.1,200 =15%
So, the capacity utilization for a profit of Rs.10,000 = 50% + 15% =65%.

OF THE DOCUMENT