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1. A form of cost not measured by either Financial Accounting System or Management Accounting System is < Answer >
known as
(a) Product Cost (b) Period Cost (c) Opportunity Cost
(d) Indirect Cost (e) Direct cost.
(1 mark)
2. Which of the following statements is true? < Answer >
(a) Management accounting is mandatory for business organizations because it should be maintained as
per the various legal statutes
(b) The application of management accounting cannot be extended beyond the traditional accounting
system
(c) Management accounting focuses more on a company as a whole and less on the parts or segments of a
company
(d) Management accounting statements are prepared in accordance with the Generally Accepted
Accounting Principles
(e) Management accounting refers to the reports prepared to fulfill the needs of the management.
(1 mark)
3. Which of the following is least likely to be an objective of a cost accounting system? < Answer >
(a) Managers of all companies analyze costs to control material, labor and overhead
(b) Managers of all companies analyze cost to properly value inventory
(c) Managers of all companies need to improve quality
(d) Managers of all companies need to improve productivity
(e) Managers of all companies need to improve efficiency.
(1 mark)
11. ABC Company’s budgeted overhead amounts to Rs.3,00,000 based on an output of 200 units of A, 300 < Answer >
units of B, and 500 units of C. Direct labor costs of A, B, and C per unit amount to Rs.75, Rs.50, and Rs.40
respectively. Overhead is applied based on budgeted overhead rates using labor cost as cost driver. If actual
overhead amounts to Rs.3,19,000 for the production of 300, 350, and 400 units of A, B and C respectively,
the under or over applied overhead amounts to
(a) Rs.19,000 underapplied (b) Rs.19,000 overapplied (c) Rs.17,000 underapplied
(d) Rs.17,000 overapplied (e) Rs.14,000 under applied.
(1 mark)
12. Which of the following is an indirect labor? < Answer >
I. A cost unit is a unit of output in the production of which costs are incurred
II. A cost center is the smallest segment of activity or area of responsibility for which costs are
accumulated
III. Typically departments are cost centers and there may be many departments in a cost center.
* The number of full time employees is listed in the parenthesis. Full time employees work on an
average for 4 years with the company, part-time employees work on an average for 5 months with the
company.
The Personnel Department costs amount to Rs.81,400. The personnel department is responsible for
recruiting, hiring and managing the benefits.
What would be the amount of Personnel Department cost allocated to Department C assuming that the
allocation is based on the number of employees?
(a) Rs.4,400 (b) Rs.13,200 (c) Rs. 44,000 (d) Rs.1,62,800 (e) Rs.22,000.
(1 mark)
25. Replacement cost is the < Answer >
(a) Written-down value of the abondoned asset less its scrap value
(b) Cost which is not essential for the decision(s) under consideration
(c) Cost at which there could be purchase of an asset identical to that which is being replaced or revalued
4
(d) Maximum possible alternative earning that might have been earned if the productive capacity or
services had been put to some alternative use
(e) Change in cost due to the change in the level of activity.
(1 mark)
26. If under or over applied overhead is considered to be relevant, which accounts should it be allocated to? < Answer >
5
(2 marks)
31. The rate which is used to carry out adjustment for the difference between overheads absorbed and overheads < Answer >
incurred is known as
(a) Blanket rate (b) Plant wide rate (c) Single rate
(d) Supplementary rate (e) Moving average rate.
(1 mark)
32. Consider the following data pertaining to inventories of Calex Ltd. for the month of December 2004: < Answer >
(a) Identical to a process costing system except that actual cost is used for manufacturing overhead
(b) The same as a job-order costing system except that no overhead allocations are made since actual costs
are used throughout
(c) The same as a job-order costing system except that materials are accounted for in the same way as they
are in a process costing system
(d) The same as a process costing system except that materials are allocated on the basis of batches of
production
(e) Identical to direct costing system except that no overhead allocations are made since actual costs are
used throughout.
(1 mark)
34. Sun Flower Ltd. has furnished the following data of its process account for the month of December 2004: < Answer >
6
Materials Rs. 6,850
Conversion Rs. 4,350
During the month:
Materials Rs.71,050
Conversion Rs.57,372
The total cost of closing work-in-process on December 31, 2004, using FIFO method, is
(a) Rs.10,708.62 (b) Rs.11,649.63 (c) Rs.12,573.78 (d) Rs.11,557.00 (e) Rs.12,443.00.
(2 marks)
36. The yield of a certain process is 80%, the by-product is 16% and normal loss is 4% of its main product. < Answer >
5,000 units of materials are put in process and its cost is Rs.24.80 per unit and other expenses amounted to
Rs.15,150, 40% of which was accounted for by power cost. It is the practice of the company that the power
cost is chargeable to the main-product and the by-product in the ratio of 3:2. The cost of the by-product is
(a) Rs.24,606 (b) Rs.55,660 (c) Rs.26,727 (d) Rs.22,264 (e) Rs.23,718.
(2 marks)
37. Six Chemicals Ltd. produces high-quality plastic sheets in a continuous manufacturing operation. All < Answer >
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 75% through the manufacturing process,
when some units are separated out as inferior quality. The following data are available for the month of
December 2004:
Material costs Rs.90,000
Conversion costs Rs.70,200
Units introduced 40,000
Units completed 36,000
There is no opening or closing work-in-progress. Past experience indicates that approximately 7.5% of the
units introduced are found to be defective on inspection by quality control.
The cost of abnormal loss for the month of December 2004 is
(a) Rs.3,865 (b) Rs.3,725 (c) Rs.3,600 (d) Rs.3,575 (e) Rs.3,425.
(2 marks)
38. Brand Manufacturing Company makes one model of a product known as ‘Brand B’. The company has < Answer >
provided the following balances as on April 01, 2004:
Finished goods – 500 units
Work-in-process – Rs. 5,740
Raw materials – Rs. 11,620
The following data are available as on September 30, 2004
Indirect labor – Rs. 12,160
Freight in – Rs. 5,570
Direct labor – Rs. 32,640
Raw material – Rs. 9,640
Factory overhead expenses – Rs. 31,730
Work-in-process – Rs. 7,820
Sales (15,000 units) – Rs.3,60,000
Indirect material – Rs. 21,390
Total manufacturing costs incurred – Rs.1,94,080
There were 1,500 units of finished goods of ‘Brand B’ as on September 30, 2004.
The amount of raw materials purchased during the half-year ended September 30, 2004 is
(a) Rs. 92,570 (b) Rs. 88,610 (c) Rs. 94,180 (d) Rs. 86,530 (e) Rs.1,21,250.
(2 marks)
39. Mr. Subramaniyam owns a fleet of taxis and the following information is available from the records < Answer >
maintained by him:
Number of taxis 5
Cost of each taxi Rs.2,70,000
Salary of manager Rs.6,500 per month
Salary of accountant Rs.5,000 per month
Salary of cleaner Rs.800
7 per month
Salary of cleaner Rs.800 per month
Salary of mechanic Rs.2,200 per month
Garage rent Rs.2,000 per month
Insurance premium 5% per annum
Annual tax Rs.4,200 per taxi
Salary of driver Rs.5,000 per month per taxi
Annual repairs Rs.2,000 per taxi
Oil and other sundries Rs.10 per 100 kms
The total life of a taxi is about 3,00,000 km. A taxi runs in all 4,500 km in a month of which 20% it runs empty.
Petrol consumption is 5.62 km per litre. The cost of petrol is Rs.36 per litre.
The cost of running a taxi per km. is
(a) Rs.15.00 (b) Rs.14.30 (c) Rs.12.80 (d) Rs.12.03 (e) Rs.10.80.
(2 marks)
40. PH Ltd. operates several production processes involving the mixing of ingredients to produce bulk animal < Answer >
feedstuffs. One such product is mixed in two separate process operations. The company has furnished the
following information pertaining to process 2 for the quarter ending December 31, 2004:
Cost incurred: Rs.
Transferred from process 1 1,87,704
Raw materials 47,972
Conversion costs 63,176
Opening work-in-process 3,009
Production: Units
Opening work-in-process 1,200
(Material – 100% complete apart from process
Conversion cost – 50% complete)
Transferred from process 1 1,12,000
Completed output 1,05,400
Closing work-in-process 1,600
(Material – 100% complete apart from process 2 Conversion – 75% complete)
Normal wastage of materials (including product transferred from process 1), which occurs in the early stage
of process 2 (after all materials have been added), is expected to be 5% of input, process 2 conversion costs
are all apportioned to units of good output. Wastage materials have no saleable value.
The values of finished goods and closing WIP (using FIFO method) are
(a) Rs.2,96,237 and Rs.4,259 respectively
(b) Rs.2,96,021 and Rs.4,212 respectively
(c) Rs.2,96,273 and Rs.4,295 respectively
(d) Rs.2,96,021 and Rs.4,259 respectively
(e) Rs.2,96,273 and Rs.4,259 respectively.
(2 marks)
41. Sitpax Ltd. purchases raw materials worth Rs.16.56 lakhs and processes them into 4 products – A, B, C and < Answer >
D. The sale value per unit of products A, B, C and D is Rs.4.50, Rs.13.50, Rs.24 and Rs.90 respectively at
split-off point, as these could be sold as such to other processors. However, during a year, the company
decided to further process and sell products A, B and D while C was not to be processed further but sold at
split-off point to other processors. The processing of raw materials into 4 products cost Rs.42 lakhs to the
company. The company has furnished the following information pertaining to the 4 products:
Product Output Sales after further Additional processing cost
A 10,00,000 69.00 18.00
B 20,000 6.00 3.60
C 10,000 2.40 –
D 18,000 18.00 0.60
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D 18,000 18.00 0.60
The maximum profit of the company after adopting best sales strategy is
(a) Rs.16.24 lakhs (b) Rs.15.86 lakhs (c) Rs.14.64 lakhs
(d) Rs.14.94 lakhs (e) Rs. 7.74 lakhs.
(3 marks)
42. If the size of a batch increases < Answer >
(a) Setting-up cost per unit decreases (b) Setting-up cost per unit increases
(c) Setting-up cost per unit remains the same (d) Total cost of the batch decreases
(e) Total profit of the batch decreases.
(1 mark)
43. Consider the following data of a company: < Answer >
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Output transferred from process B to process C - 9,120 units for Rs.49,263
Expenses incurred in process C:
Materials – Rs.1,480; Labor cost – Rs.6,500; Direct expenses – Rs.1,605.
The wastage of process C is sold at Re.1 per unit.The overheads were 168% of direct labor. The final
product was sold at Rs.10 per unit after charging a profit of 20% on sales.
There is no closing stock.The percentage of wastage in process C is
(a) 10% (b) 5% (c) 15% (d) 8% (e) 12%.
(2 marks)
48. A certain chemical process yields 75% of material introduced as main product, 20% as by-product and 5% < Answer >
being lost. In the process one unit of main product requires double the material required for one unit of by-
product. Further one unit of main product needs 1.5 times the time needed for one unit of by-product.
Overheads are absorbed in the ratio of 3:1.
During a week, 1,000 units of raw material at a cost of Rs.17,000 were introduced. Total labor cost was
Rs.5,300. Total Overheads came to Rs.2,700. Wastages realised Rs.300.
The cost of by-product per unit is
(a) Rs.35.50 (b) Rs.28.40 (c) Rs.25.50 (d) Rs.17.00 (e) Rs.41.94.
(2 marks)
49. Which of the following activities uses process costing? < Answer >
(a) Job costing can be more suitably used in concerns producing uniform products on repetitive basis
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(b) Job costing is applied only in small concerns
(c) Escalation clause in a contract provides that the contract price is fixed
(d) Final contract price to be paid is certain in cost plus contracts
(e) In contract costing credit is taken only for a part of the profit on incomplete contracts.
(1 mark)
53. If the amount of wastage in a manufacturing process is abnormal, it should be classified as < Answer >
i. The fixed costs will be Rs.80,000 for production of 7,500 units or less. If the production is more than
7,500 units, the fixed costs will be Rs.1,20,000.
ii. The variable cost ratio is 60% of the sales for the first 7,500 units and it will be reduced to 50% of
sales for units in excess of 7,500 units.
iii. The sale price of the product per unit is Rs.25.
If the company manufactures more than 7,500 units, the break-even units of the new product is
(a) 12,000 (b) 11,100 (c) 12,500 (d) 9,600 (e) 8,500.
(2 marks)
56. X, Y and Z are three similar plants under the same management of AB Ltd. The details are as follows: < Answer >
Plant X Y Z
Capacity operated 90% 60% 50%
Particulars (Rs.in lakhs) (Rs.in lakhs) (Rs.in lakhs)
Turnover 270 240 150
Variable cost 180 180 75
Fixed cost 70 50 62
The Break-even percentage of the merged plant is
(a) 50% (b) 52% (c) 35% (d) 55% (e) 49%.
(2 marks)
57. Consider the following data of a company: < Answer >
11
58. Cost-volume-profit analysis is most important for the determination of < Answer >
(a) Machine hour rate is suitable where the machine is the major factor in production
(b) Labor hour rate should not be used where machines are used extensively for production
(c) Labor hour rate is very useful where labor is the main factor in production
(d) Prime cost percentage method considers both materials and labor in charging overhead to each job or
product
(e) Prime cost percentage method is suitable in capital intensive organisation.
(1 mark)
60. Which of the following statements is true for a firm that uses variable costing? < Answer >
(a) The type of product manufactured by a company does not influence the type of accounting system
used
(b) The manufacturing process does not influence the type of accounting system used by a company
(c) That cost systems require the use of some form of cost averaging
(d) That managers rely upon the cost system to provide information based only upon actual costs
(e) That managers rely upon the cost system to provide information based only upon standard costs.
(1 mark)
63. ABC Company sells three products – A, B and C with the price of Rs.20 per unit. However, A’s variable < Answer >
cost is at 40%, B’s at 50% and C’s at 60%. Fixed costs amount to Rs.18,000. An additional Rs.9,000 need
to be spent on advertising to boost sales. Sales mix is 500, 1,500 and 3,000 units for A, B, and C
respectively. Sales in rupees for B at break-even amounts to
(a) Rs.18,000 (b) Rs.27,000 (c) Rs.24,000 (d) Rs.12,000 (e) Rs.22,500.
(1 mark)
64. Consider the following data pertaining to a manufacturing company: < Answer >
Present Forecast
Particulars
(2004-05) (2005-06)
Sales (units) 10,000 15,000
Loss (Rs.) 5,000 -
Fixed cost (Rs.) 25,000 25,000
Profit (Rs.) - 5,000
The variable cost of sales has been taken at Rs.7 per unit up to 15,000 units and it shall be Rs.8 per unit
beyond 15,000 units.
What percentage of increase in sales is required to cover additional 50 paisa per unit towards extra
packaging cost in the year 2005-06 for achieving the forecasted contribution level?
(a) 100% (b) 150% (c) 200% (d) 75% (e) 50%.
(2 marks)
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65. Xenil Ltd. has furnished the following cost per unit to manufacture and market ‘XL’ product: < Answer >
i. Manufacturing costs:
Direct materials Rs.4.00
Direct labor Rs.4.80
Variable overheads Rs.3.20
Fixed overheads Rs.2.00
71. Clamp fix Ltd. manufactures multipurpose woodworking clamps in a simple manufacturing process that < Answer >
uses special equipment. The company is planning to drop the product line. The variable cost of the product
is Rs.6 per unit. Fixed overhead costs, exclusive of depreciation, have been allocated to this product at a rate
of Rs.3.50 per unit and will continue irrespective of production. Depreciation on the special equipment
amounts to Rs.20,000 a year. If the production of the clamp is discontinued, the special equipment can be
sold for Rs.18,000. If production continues, the equipment will be useless for further production at the end
of year 1 and will have no salvage value. The selling price of the clamp is Rs.10 per unit. The minimum
number of units that would have to be sold in the current year to justify the continuation of the production is
(a) 9,500 units (b) 3,000 units (c) 5,000 units (d) 4,500 units (e) 12,500 units.
(2 marks)
72. Which of the following statements is true? < Answer >
(a) Differential cost technique does not prove useful in decision making
(b) Export orders should not be accepted at a price below the total cost, otherwise there will be a loss from
export sales
(c) A company with a higher break-even point is considered better than a company with a lower break-
even point
(d) In make or buy decision, supplier’s offer price per unit is compared with own total cost per unit
(e) Effect of price reduction is always to reduce contribution to sales ratio and increase the break-even
point.
(1 mark)
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Suggested Answers
Management Accounting I (151) – January 2005
1. Answer : (c) < TOP >
Reason : Opportunity Cost is the cost of lost opportunities. Neither a Financial Accounting System
nor a Managerial Accounting System measure the opportunity cost. Therefore, (c) is
correct.
2. Answer : (e) < TOP >
Reason : A cost accounting system has numerous objectives, including product costing, assessing
departmental efficiency, inventory valuation, product mix determination and planning
evaluating and controlling operations. Determining sales commissions is not an objective
of a cost accounting system because such commissions are based on sales, not costs.
4. Answer : (b) < TOP >
Reason : The costs having clear relationship to output are known as engineered costs. Direct
material cost is an example of engineered costs.
5. Answer : (b) < TOP >
Reason : Under periodic cost accumulation system, the cost of goods manufactured is equal to cost
of goods put into production plus beginning work-in-process less ending work-in-
process. Therefore (b) is correct. Other options are not correct.
6. Answer : (c) < TOP >
Reason : Decremental cost is not the cost of an added unit. Standard cost never tells us the actual
cost of the product. Cost center and cost units are not the same thing. Cost of production
is not equal to prime cost plus works cost. The correct statement is that the period cost is
not assigned to products. It is a fixed cost and does not vary with the production.
Therefore, ( c) is correct.
7. Answer : (e) < TOP >
Reason : The amount of income tax is not considered in cost accounting. Other items given in (a),
(b), (c) and (d) are considered in cost accounting.
8. Answer : (a) < TOP >
Reason : The manager wants to control, and reduces if possible, the company's production costs.
He must determine how production costs are related to and affected by various business
activities. The manager needs to understand cost behaviors. A knowledge of cost
behavior is useful because it helps managers forecast (plan) results under different
activity levels
9. Answer : (b) < TOP >
Reason : The average method of valuation of inventory in process costing is useful when prices are
fluctuating from period to period. It is not useful in respect of other options (a),(c),(d)
and (e).
10. Answer : (b) < TOP >
Reason : Service companies do not have Inventory. So Managers of service companies do not
analyze cost to properly value inventory. Therefore, option (b) is not correct.
11. Answer: (d) < TOP >
15
= (Rs. 22,500 + Rs. 17,500 + 16,000) x 6
= Rs.56,000 x Rs.6 = Rs.3,36,000
Over applied overhead: Rs.3,36,000 – Rs.3,19,000 = Rs.17,000.
12. Answer : (a) < TOP >
Reason : A stores assistant in a factory store is an indirect labor. Therefore (a) is correct. Other
options mentioned in (b), (c), (d) and (e) are examples of direct labor.
13. Answer : (d) < TOP >
Reason : Options (I) and (II) are true. But, option (III) is not, as cost centers because cost centers
are departments and there may be several cost centers in a department, but not many
departments in a cost center.
14. Answer : (a) < TOP >
Reason : A direct cost can be specifically associated with a single cost object in an economically
feasible way. An indirect cost cannot be specifically associated with a single cost object.
Thus the specific cost object influences whether a cost is direct or indirect. For example,
a cost might be directly associated with a single plant. The same cost however might not
be directly associated with a particular department in the plant. Therefore (a) is correct.
Option (b) is not correct because the timing of the cash outlay has no effect on whether a
cost is direct or indirect. Option (c) is not correct because the behavior of cost in response
to volume changes is a factor only if the cost object is a product. Options (d) and (e) are
not correct because controllability and avoidability of costs have no effect on whether a
cost is direct or indirect.
15. Answer : (e) < TOP >
Reason : The purpose of cost allocation is to measure income and assets for external reporting. The
other options given (a), (b), (c) and (d) are not the purposes of cost allocation.
Cost allocation is a process of assigning and reassigning costs to cost objects. It is used
for these costs that cannot be directly associated with a specific cost object. It is often
used for purposes of measuring income and assets for external reporting purposes. It is
less meaningful for internal purposes because responsibility accounting systems
emphasize controllability, a process often ignored in cost allocation.
16. Answer : (b) < TOP >
Reason : Service department costs are considered part of factory overhead and should be allocated
to the production department that use the services. A basis reflecting causes and effect
should be used to allocate service department costs. Units of electric power consumed
i.e., the number of kilowatt hours used by each producing department is probably the best
allocation base for electricity base.
Option (a) is not correct because salary of service department employees is the cost
allocated ,not a basis Option (c) is incorrect because making allocation on the basis of
material usage may not meet the cause-and-effect criterion. Option (d) and (e) are
incorrect because making allocation on the basis of goods shipped and units sold may not
meet the cause-and-effect criterion.
17. Answer : (c) < TOP >
16
Reason :
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.
19. Answer : (d) < TOP >
Reason : Allocation of costs is a distribution of costs that cannot be directly assigned to the cost
objects that are assumed to have caused them. An allocation of costs does not enable a
company to determine why the sales of a particular product have increased. Many factors
affect consumer demand such as advertising, consumer confidence, availability of
substitutes and changes in tastes. Cost allocation is an internal matter that does not affect
demand except to the extent it results in a change in price.
< TOP >
22. Answer : (a)
Reason : If predetermined overhead rate is not employed and the volume of production is increased
over the level planned, the cost per unit will be reduced because fixed cost per unit will be
reduced and variable cost per unit will remain same. Therefore, (a) is correct.
< TOP >
23. Answer: (a)
Reason: Machine operation charge per hour = Rs.60,000 / 600 = Rs.100;
Machine operation charged to Q = Rs.100 x (600 hr. /4) = Rs.15,000;
Machine operation charged per unit of Q = Rs.15,000 / 150
= Rs.100 per unit.
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24. Answer: (e) < TOP >
Reason : Replacement cost is the cost at which there could be purchase of an asset identical to the
one being replaced and hence it is equal to the current market price. Therefore (c) is
correct.
26. Answer: (c) < TOP >
Reason: The under or over applied overhead indicates that all of the inventory worked on during
the period have been absorbed and need to be adjusted. This under or over applied
overhead cost is to be allocated to work-in-process, finished goods and cost of goods sold.
Therefore, (c) is correct.
27. Answer : (b) < TOP >
Reason: Practical capacity is the maximum level at which output is produced efficiently, with an
allowance for unavoidable interruptions. Because this level will be higher than expected
capacity, its use will ordinarily result in under-applied fixed factory overhead. Other
options are not correct.
28. Answer: (b) < TOP >
Reason: Product cost = Rs. 10,000 + Rs. 8,000 + Rs. 3,500 = Rs. 21,500
Cost of Goods Sold =
Product Cost Rs.21,500 - Ending Inventory Rs.2,150 = Rs.19,350 (430 × 45)
Sales Rs.25,000 - Cost of Goods Sold Rs.19,350
= Gross Margin Rs.5,650.
Product Cost / units completed = Rs.21,500 / 50 units = 430 per unit
The cost of 5 units inventory = Rs.430 x 5 = Rs.2,150.
29. Answer : (d) < TOP >
Reason : It is given in the question that the secondary distribution of service departrments’
overhead is pending. The same is thus attempted by use of simultaneous equation
method.
Let, total overheads of department S1 = x; and total overheads of S2 = y;
According to problem, we get x = 16,000 + 0.1y and y = 24,000 + 0.2x;
Therefore, x = 16,000 + 0.1(24,000 + 0.2x) = 16,000 + 2,400 + 0.02x
Or, x (1 – 0.02) = 18,400, or, x = 18,400 / 0.98 = 18,775, then y = 27,755
18
Statement of secondary distribution:
Particulars P1 (Rs.) P2 (Rs.) P3 (Rs.) Total (Rs.)
Direct allocation 48,000 1,12,000 52,000 2,12,000
S1 (80% of 18,775) 3,755 7,510 3,755 15,020
S2 (90% of Rs.27,755) 2,776 16,653 5,551 24,980
Total 54,531 1,36,163 61,306 2,52,000
Budgeted machine hours 5,000 12,000 6,000
Overhead rate per machine hour 10.91 11.35 10.22
Reason : Supplementary rates are used to carry out adjustment for the difference between
overhead absorbed and overhead incurred. Therefore, (d) is correct. Other options are
not correct.
32. Answer : (d) < TOP >
Reason : Operation Costing is a hybrid of Job-order and Process costing systems wherein materials
are allocated on the basis of batches of production. It is used by companies that
manufacture goods that undergo some similar and dissimilar processes. Operation costing
accumulates total conversion cost for each operation. However direct material costs are
charged specifically to products or batches as in job-order system.
34. Answer : (c) < TOP >
Reason :
Opening WIP 3,000 units
Materials introduced 13,000 units
16,000 units
Less: Closing WIP 4,000 units
Completed units 12,000 units
Equivalent completed units (under average method) of materials in the process
= 12,000 units + 50% of 4,000 units (closing stock)
= 12,000 units + 2000 units = 14,000 units.
< TOP >
35. Answer : (d)
Reason :
Statement of equivalent Production Unit (FIFO)
Input Output Material Conversion
Opening 450 Opening 450 20% 90 40% 180
Introduced 4,100 Introduced 3,580 100% 3,580 100% 3,580
Closing 520 75% 390 65% 338
4,550 4,550 4,060 4,098
Costs Rs.71,050 Rs.57,372
19
the month
Cost
per unit Rs. 17.50 Rs. 14.00
The total cost of closing work-in-process
Material – 390 × Rs.17.50 = Rs.6,825
Conversion – 338 × Rs.14.00 = Rs.4,732
Rs.11,557
36. Answer : (a) < TOP >
Reason : Input = 5,000 units. Main product = 80% of 5,000 units = 4,000 units.
By-product = 16% of 5,000 units = 800 units
Process loss = 4% of 5,000 units = 200 units
Share of by-product:
Material cost = 5,000 units x Rs.24.80 = (Rs.1,24,000 x 800 ) / 4,800
= Rs.20,667
Other cost = 60% of Rs.15,150 = (Rs. 9,090 x 800) / 4,800 = Rs.1,515
Power cost = 40% of Rs.15,150 = (Rs.6,060 x 2) / 5 = Rs.2,424
Total costs of by-product = Rs.20,667 + Rs.1,515 + Rs.2,424 = Rs.24,606.
37. Answer : (c) < TOP >
Reason :
Material Conversion
Input Output % units % units
Units Completed 36,000 100% 36,000 100% 36,000
started
– 40,000
Normal 3,000 100% 3,000 75% 2,250
loss 7.5%
Abnormal loss 1,000 100% 1,000 75% 750
40,000 39,000
Cost Rs.90,000 Rs.70,200
Cost per unit Rs.2.25 Rs.1.80
Cost of abnormal loss = 1,000 × Rs.2.25 + 750 × Rs.1.80
= Rs.2,250 + Rs.1,350 = Rs.3,600.
Reason :
Rs. Rs.
Total manufacturing Costs 1,94,080
Less: Overhead costs:
Indirect labor 12,160
Factory overhead 31,730
Indirect material 21,390
65,280
Freight in 5,570 70,850
1,23,230
Less: Direct labor 32,640
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Less: Direct labor 32,640
Material consumed 90,590
Add: Closing material 9,640
1,00,230
Less: Opening material 11,620
Material purchased 88,610
39. Answer : (d) < TOP >
Reason :
Particulars Per month Per km.
Fixed expenses:
Salary of Manager 6,500
Accountant 5,000
Cleaner 800
Mechanic 2,200
Garage rent 2,000
Insurance:
5% on 5 × 2, 70, 000
5,625
12
Drivers salary (Rs.5,000 × 5) 25,000
Rs.4, 200 × 5
1,750
Annual tax 12
48,875
Effective km = Rs.4,500 × .8 × 5 = 18,000 2.72
Depreciation Rs.2,70,000 ÷ (3,00,000 × .8) 1.13
Repairs Rs.2,000 ÷ (12 × 3,600) 0.05
Petrol (4,500 × Rs.36) ÷ (5.62 × 3600) 8.00
Oil and other sundries 0.13
(Rs.10 × 4,500)÷(100km × 3,600)
Cost of plying taxi per km. 12.03
Reason :
Input units Units Materials Conversion
Opening 1,200 Opening 1,200 – – 50% 600
From 1,12,000 Process 1 1,04,200 100% 1,04,200 100% 1,04,200
Normal 5,600 – – – –
Abnormal 600 100% 600 – –
Closing 1,600 100% 1,600 75% 1,200
1,13,200 1,13,200 1,06,400 1,06,000
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1,13,200 1,13,200 1,06,400 1,06,000
Particulars Rs.
Materials – From Process 1 1,87,704
Process 2 47,972
2,35,676
Equivalent units 1,06,400
Cost per unit 2.215
Conversion cost 63,176
Equivalent units 1,06,000
Cost per unit 0.596
(Rs. in lakhs)
A (Rs) B (Rs) C (Rs) D (Rs)
Sales at split-off point 45.00 2.70 2.40 16.20
Sales after split-off point 69.00 6.00 2.40 18.00
Incremental sale 24.00 3.30 NIL 1.80
Incremental cost 18.00 3.60 – 0.60
Profit (loss) 6.00 (0.30) NIL 1.20
Profitability St:
Sale at split-off point – 2.70 2.40 –
Sale after processing 69.00 – – 18.00
Less cost:
Pre 40.80 1.92 1.92 13.92
Post
18.00 − − 0.60
Profit 10.20 0.78 0.48 3.48
Total Profit 14.94
42. Answer : (a) < TOP >
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Reason : If the batch size increases, setting up cost per unit decreases. Similarly, if the batch size
decreases, setting up cost per unit increases. Therefore, (a) is correct.
43. Answer: (b) < TOP >
Reason: Cost per equivalent unit of ending inventory = Rs.10.00 x 3,000 equivalent units in
ending inventory = Rs.30,000.
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.
44. Answer : (e) < TOP >
Reason : Let x = total cost and y = profit per unit of product whose selling price is Rs.45,000
x + y = Rs.45,000.
Statement showing the present and anticipated cost
Present Increase Anticipated
Particulars %
cost (Rs.) (Rs.) cost (Rs.)
Direct material 0.5x 15 0.075 0.575x
Direct labor 0.2x 25 0.050 0.250x
Overhead costs 0.3x - 0.300x
x 0.125x 1.125x
The increase in the cost of direct material and wages has reduced the present profit by
25%.
∴1.125x + 0.75y = Rs.45,000
Solving above 2 equations, we get
x = Rs. 30,000
y = Rs.15,000
Statement showing profit per unit:
Direct Material 0.5x Rs.15,000
Direct Labour 0.2x Rs. 6,000
Overhead 0.3x Rs. 9,000
Total cost Rs. 30,000
Profit (50% of cost or 33-1/3% of S.P) Rs. 15,000
Selling price Rs.45,000
Reason :
At 50,000 units the total cost is Rs.30,000 other than additional Rs.4,000.
At 20,000 units, total costs is Rs.21,000
Variable cost = Change of cost / change of activity =
(Rs.30,000 – Rs.21,000) / (50,000 – 20,000) = 0.30
Fixed cost = Rs.21,000 – 20,000 x 0.30 = Rs.15,000 ;
At 30,000 units = 30,000 x 0.30 + Rs.15,000 = Rs.24,000 ; Total cost = Rs.24,000 +
Rs.4,000 (additional cost) = Rs.28,000
Cost per unit = Rs.28,000 / 30,000 = Re. 0.93.
46. Answer : (b) < TOP >
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Equivalent production of materials =
100% of 12,000 units + 100% of 8,000 units = 20,000 units;
Equivalent production of conversion =
100% of 12,000 units + 75% of 8,000 units = 18,000 units;
Material costs per unit =
(Rs.12,000 + Rs.29,000 + Rs.2,500 + Rs.5,500) / 20,000 units = Rs.2.45
Conversion cost per unit = (Rs.1,000 + Rs.5,000) / 18,000 units = Re.0.33
Total cost per unit of finished goods = Rs.2.45 + Re.0.33 = Rs.2.78.
47. Answer : (b) < TOP >
Reason : Total process cost = Rs.49,263 + Rs.1,480 + Rs.6,500 + Rs.1,605 + 168% of Rs.6,500
= Rs.58,848 + Rs.10,920 = Rs.69,768.
Let, the unit of normal loss = x, No. of finished product units =9,120 –x; value of normal
loss = Rs.x
Cost of finished goods per unit = Rs.10 – 20% of Rs.10 = Rs.8
Cost of finished goods + value of normal loss = Total cost of process
Rs.8x (9,120 –x) + x = Rs.69,768
Rs.72,960 – Rs.7x = Rs.69,768
Rs.7x = Rs.3,192 ; x = 456 units.
Percentage of normal loss = 456 / 9,120 = 5%.
48. Answer : (d) < TOP >
Reason : The correct answer is (e). Process costing is used for continuous manufacturing of
relatively homogeneous units. Newspapers are published in long runs of identical items,
hence process costing is indicated.
(a), (b), (c) and (d) are not correct because they involve unique projects which require
job-order costing.
50. Answer : (a) < TOP >
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Plant= Rs.18,00,000 – Rs.1,75,000 = Rs.16,25,000
Total = Rs.9,89,970 + Rs.16,25,000 = Rs.26,14,970.
Working:
Particulars Rs. Particulars Rs.
To Material issued 30,80,000 By Work-in-Progress:
To Wages –Direct 12,30,000 Work certified 60,60,000
–Accrued 55,500 Work not certified 4,25,000
To Wages related cost 92,600 By Material
To Plant hire charges 1,82,000 Returned from site 42,500
To Site office cost 26,400 At site 60,000
To Planning & estimating cost 4,80,000
To Head office expenses appr. 80,500
To Direct expenses 85,300
To Depreciation 1,75,000
To Notional profit 11,00,200
65,87,500 65,87,500
To Profit & loss A/c:
2 50, 00, 000
× 11, 00, 200 ×
3 60, 60, 000 6,05,170 By Notional Profit 11,00,200
To Reserve *4,95,030
11,00,200 11,00,200
51. Answer : (c) < TOP >
Reason : If the cost of the by-product is apportioned to joint products, it is made at notional sales
value at separation point. Other options are not appropriate for apportionment of by-
product to joint products.
52. Answer : (e) < TOP >
Reason : In contract costing, parts of the profit of incomplete contracts are credited to general
profit and loss account. Rest part of the profit is kept as reserve for future loss. Therefore,
(e) is correct.
53. Answer : (b) < TOP >
Reason : Abnormal loss should be classified as period cost. If the wastage is normal, it should be
product cost. Abnormal loss cannot be deferred charge, joint cost or discretionary cost.
Therefore, (b) is correct.
54. Answer : (d) < TOP >
Reason : Allocating overheads on the basis of units of production is generally not appropriate.
However, if a firm manufactures only one product, this allocation method may be
acceptable because all costs are to be charged to the single product. Other points
mentioned in (a), (b), (c) and (e) are not true.
Fixed cos t
Reason : BEP = Contribution per unit
Upto the product of 7,500 units
Rs.80, 000 Rs.80, 000
BEP = Rs.25 − 60% of Rs.25 = Rs.10 = 8,000 units.
At any production level greater than 7,500 units, total fixed costs are Rs.1,20,000 but
there are two contribution margin. The first 7,500 units sold will produce a contribution
margin of Rs.75,000 (i.e. 7,500 × Rs.10). Hence, the other Rs.45,000 (i.e. Rs.1,20,000 –
Rs.75,000) must be contributed. The contribution per unit is Rs.12.50 (i.e. Rs.25 – 50%
of Rs.25)
Therefore, BEP = Rs.45,000 ÷ Rs.12.50 = 3,600 units.
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Therefore, Total BEP = 7,500 units + 3,600 units = 11,100 units.
Reason :
Plant X Y Z Merged
Capacity
100% 100% 100% 100%
operated
(Rs. in (Rs. in (Rs. in (Rs. in
lakh) lakh) lakh) lakh)
Turnover 300 400 300 1,000
Variable cost 200 300 150 650
Contribution 100 100 150 350
Fixed cost 70 50 62 182
350
× 100 = 35%
P/V ratio of merged plant = 1000
Fixed cos t 182
= = Rs.520 lakhs
Break even point of merged plant = P / V ratio 35%
Break even capacity = (520/1,000) × 100 = 52%
57. Answer : (a) < TOP >
Reason :
Sales (9,000 × Rs.28) 2,52,000
Variable Costs (9,000 × Rs.19) 1,71,000
Contribution Margin 81,000
Fixed costs 48,000
Net Income under variable costing 33,000
Using Absorption Costing:
Sales 2,52,000
Cost of goods sold (*23.80 × 9,000) 2,14,200
Net Income under absorption costing 37,800
Net income increased by Rs.37,800 – Rs.33,000 = Rs.4,800 under absorption costing.
* Total cost per unit = Variable cost + Fixed cost
= Rs. 19 + (12,000 x Rs.4) / 10,000 = Rs. 23.80.
58. Answer : (d) < TOP >
Reason: The prime cost basis combines the total of direct materials cost and direct labor cost and
uses this total as a basis for charging overheads. It considers both materials and labor in
charging overhead to each job or product. This method is not suitable in capital intensive
organisation. It is useful in cases where there are no wide fluctuations in processing. This
statement is false. Other statements given in (a), (b), (c) & (d) are correct.
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60. Answer : (d) < TOP >
Reason : In a variable costing system, only the variable manufacturing costs are recorded as
product costs. All fixed manufacturing costs are expensed in the period incurred. Because
changes in the relationship between production levels and sales level do not cause
changes in the amount of fixed manufacturing costs expensed, profits more directly
follow the trends in sales. Other options are not correct.
61. Answer : (e) < TOP >
Reason: All cost systems utilize some form of cost averaging and estimation. Therefore, (c) is
correct.
63. Answer: (a) < TOP >
Reason : If the company buys from the market, the avoidable unit cost
= Rs.4.00 + Rs.4.80 + Rs.3.20 + 40% of Rs.1.25
= Rs.12 + Re.0.50 = Rs.12.50.
66. Answer : (d) < TOP >
Reason : Costs, which can be reduced or removed from the company’s cost structure without
affecting product or service quality for the customer, are referred to as non-value-added
costs. Non-value-added costs can be removed without changing the customer's perceived
value of the company's service or product. They are costs typically associated with
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activities such as transporting materials, verifying data, or transferring papers from one
department to another. Therefore, (d) is correct.
Reason :
Product Sales Mix Sales Contribution
(Rs. Lakh) (Rs. Lakh)
A 40 32 6.40
B 10 8 0.48
C 30 24 2.88
D 20 16 1.60
Total 11.36
Reason : The minimum number of units is equal to fixed costs divided by the difference between
unit selling price and unit variable cost i.e., unit contribution margin. Rs.18,000 salvage
value, the cash flow to be received if production is discontinued, is treated here as a fixed
cost. Hence, continuation of the product line will permit the firm to break even or make a
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profit only if the total contribution margin is Rs.18,000 or more.
Minimum no of units = Rs.18,000 ÷ (Rs.10 – Rs.6) = 4,500 units
Fixed overhead allocation is not considered in this calculation because it is not a cash
flow and will continue regardless of the decision.
72. Answer : (e) < TOP >
Reason : Effect of price reduction is always to reduce contribution to sales ratio and increase the
break-even point, because contribution is the result of difference between sales and
variable cost. Therefore, (e) is true. Other options (a), (b), (c) and (d) are not correct.
< TOP OF THE DOCUMENT >
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