Question Paper

Management Accounting – I (151) : January 2006

• Answer all questions.
• Marks are indicated against each question.
< Answer >
1. Which of the following statements is true?
(a) Management accounting is mandatory for business organizations because it should be maintained
as per 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 Generally Accepted
Accounting Principles
(e) Management accounting refers to reports prepared to fulfill the needs of management.
(1 mark)
2. Which of the following is not a valid difference between Financial accounting and Management< Answer >
accounting?
(a) Financial accounting provides data for external users like shareholders where as Management
accounting provides data for internal users like managers
(b) Financial accounting is usually a summary of past costs whereas management accounting is useful
for decision-making that considers the future scenario also
(c) Financial accounting relies heavily on the concept of responsibility where as Management
accounting do not rely on the concept of responsibility
(d) Financial accounting statements must be prepared in accordance with Generally Accepted
Accounting Principles (GAAP) where as Management accounting is not governed by GAAP
(e) Financial accounting is mandatory for business organizations whereas Management accounting is
not mandatory.
(1 mark)
< Answer >
3. The costs having clear relationship to output are known as
(a) Opportunity costs (b) Engineered costs
(c) Manufacturing costs (d) Overhead costs (e) Budgeted costs.
(1 mark)
4. The cost proposed annually for the plant service for the grounds at corporate headquarters is an example < Answer >
of
(a) Prime cost (b) Sunk cost
(c) Discretionary cost (d) Imputed cost (e) Relevant cost.
(1 mark)
< Answer >
5. The cost of goods manufactured, under a periodic cost accumulation system, is equal to the
(a) Cost of goods sold less beginning work-in-process
(b) Cost of goods put into production plus beginning work-in-process less ending work-in-process
(c) Cost of goods put into production plus ending work-in-process less beginning work-in-process
(d) Cost of goods available for sale plus beginning finished goods less ending finished goods
(e) Cost of goods available for sale plus ending finished goods less beginning finished goods.
(1 mark)
< Answer >
6. Which of the following is true?
 (a) Decremental cost means the cost of an added unit
(b) Standard cost tells us what the actual cost is for the product
(c) Period costs are not assigned to products
(d) Cost center and cost unit are the same
(e) Cost of production is equal to prime cost plus works cost.
(1 mark)
7. A manager of a company wants to control and reduce, if possible, the company's production costs. He< Answer >
must determine how production costs are related to and affected by various business activities. The
manager needs to understand
(a) Cost behaviors (b) Relevant ranges
(c) Fixed costs (d) Variable costs (e) Total costs.
(1 mark)
< Answer >
8. ABCL Ltd. has furnished the following data:
Particulars Jeans Shorts Total (Rs.)
Units 10,00,000 2,00,000
Selling price per unit Rs.30 Rs.26
Direct labor (Rs.10 per hour) Rs.3,60,000 Rs.80,000
Direct material Rs.88,50,000 Rs.9,00,000
Machine set-ups 1,600 900
Machine utility 6,00,000
Machine maintenance 8,00,000
Quality control 4,00,000
Material handling during set-ups 18,50,000
Product engineering 30.00.000
Rent of manufacturing space 20,00,000
Security 9,50,000
Miscellaneous production expense 20,00,000
Which of
the following is considered to be a product-level cost?
(a) Machine maintenance (b) Rent of manufacturing facility
(c) Material handling (d) Product engineering
(e) Quality control.
(1 mark)
9. Pioneer Ltd. manufactures a single product and absorbs the production overheads at a predetermined< Answer >
rate of Rs.10 per machine hour. At the end of financial year ending December 2005, it has been found
that actual production overheads incurred were Rs.6,00,000. It included Rs.45,000 on account of
‘written off’ obsolete stores and Rs.30,000 being the wages paid for the strike period under an award.
The production and sales data for the year ending December 2005 is as under:
 Production Units
Finished goods 20,000
Work-in-progress (50% complete in all respects) 8,000
Sales 18,000 The actual machine
hours worked during the period were 48,000. It has been found that one-third of the under-absorption of
production overheads was due to lack of production planning and the rest was attributable to normal
increase in costs.
The supplementary rate for absorption of overhead is
(a) Rs.2.25 per unit (b) Rs.1.00 per unit (c) Rs.1.25 per unit
(d) Rs.1.50 per unit (e) Rs.2.00 per unit.
(2 marks)
< Answer >
10. When manufacturing expenses are recovered on a proper basis, the journal entry to be passed is
(a) Debit Work-in-process account and credit General ledger adjustment account
(b) Debit Manufacturing overhead control account and credit stores ledger control account, wages
control account and general ledger adjustment account
(c) Debit Manufacturing overhead control account and credit work-in-process account
(d) Debit General ledger adjustment account and credit Work-in-process account
(e) Debit Work-in-process account and credit Manufacturing overhead control account.
(1 mark)
11. The budgeted overhead cost of Alatt Ltd. amounts to Rs.3,00,000 based on an output of 200 units of A,< Answer >
300 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 costs are applied based on budgeted overhead rates using labor cost as
cost driver. If actual overhead costs amount to Rs.3,19,000 for the production of 300, 350, and 400 units
of A, B, C respectively, the under or over applied overhead amounts to
(a) Rs.19,000 under applied
(b) Rs.19,000 over applied
(c) Rs.17,000 under applied
(d) Rs.17,000 over applied
(e) Rs. 36,000 under applied.
(1 mark)
< Answer >
12. Ravinder Ltd. has furnished the following data for the month of December 2005:
Direct labor was Rs.17,500, which was 175% of factory overheads. Cost of goods sold excluding
administrative expenses was Rs.56,000. Inventory account showed the following opening and closing
balances:
December 01, 2005 December 31, 2005
Particulars
Rs. Rs.
Raw materials 8,000 10,600
Work in progress 10,500 14,500
Finished goods 17,600 19,000 The value of raw
materials purchased during the month is
(a) Rs.38,500 (b) Rs.34,500 (c) Rs.36,500 (d) Rs.35,500 (e) Rs.40,500.
(2 marks)
13. PQR Ltd. has three jobs outstanding. The company uses normal costing and the overhead rate, which is < Answer >
based on machine hours amounts to Rs.85 per machine hour based on a forecast of 4,000 hours. Job 1
with a direct cost of Rs.85,500 has used 1,290 machine hours. Job 2 with a direct cost of Rs.74,700 has
used 1,760 machine hours. Job 3 with a direct cost of Rs.81,000 has used 789 hours. Actual overhead
amounted to Rs.3,50,000. Job 1 is completed and sold for Rs.2,76,500. Job 2 is completed and not yet
 delivered. Job 3 is still in process. If over or under applied overhead is prorated to cost of sales and
inventory accounts based on total costs in each job, finished goods inventory will be
(a) Debited by Rs.8,053 (b) Credited by Rs. 8,053
(c) Debited by Rs.9,361 (d) Debited by Rs.9,256
(e) Credited by Rs.9,256.
(2 marks)
14. Because of shortage of labor and materials, a department in a factory is working at 55% of its normal < Answer >
capacity. In its cost records, it charges manufacturing overhead to work-in-progress as a percentage of
direct labor.
For the current year, budgeted direct labor cost is Rs.2,50,000, budgeted manufacturing fixed overhead
is Rs.1,00,000 and budgeted manufacturing variable overhead is Rs.1,25,000.
A dispute has arisen as to the percentage of direct labor that should be charged to work-in-progress. One
officer claims that it should be 90%, another claim that it should be less than that. The appropriate
recovery rate should be
(a) 100% (b) 90% (c) 88% (d) 72% (e) 63%.
(1 mark)
< Answer >
15. Precision Ltd. has furnished the following information pertaining to its machine:
Total cost of machine to be depreciated Rs.2,30,000
Life of machine – 10 years; Depreciation on straight line basis
Departmental annual overhead costs:
Rent – Rs.50,000; Heat and light – Rs.20,000; Supervision – Rs.1,30,000
Area of the Department – 70,000 square meters
Machine area – 2,500 square meters
Number of machines – 26
Annual cost of reserve equipment for machinery – Rs.1,500
Hours run on production – 1,800
Hours for setting and adjusting – 200
Power cost – Re.0.50 per hour of running time
Labor:
* When setting and adjusting – full time attention
* When machine is producing – one worker can look after 3 machines
* Labor rate is Rs.6 per hour.
The hourly rate for standing charges of the company is
(a) Rs.25.25 (b) Rs.22.25 (c) Rs.20.80 (d) Rs.17.64 (e) Rs.20.14.
(2 marks)
< Answer >
16. The budgeted working conditions of a cost centre of Rastikan Ltd. are as follows:
Normal working per week – 42 hours
Number of machines – 14
Normal weekly loss of hours on maintenance etc. – 5 hours per machine
Number of weeks worked per year – 48
Estimated annual overheads – Rs.1,24,320
Estimated direct wage rate – Rs.4 per hour
Actual results in respect of a 4 week period are:
Wages incurred – Rs.9,000
Overheads incurred – Rs.10,400
Machines used – 2,000 hours
The amount of under or over absorption of wages and overheads respectively are
(a) Rs.408 (over) and Rs.200 (under) respectively
 (b) Rs.408 (under) and Rs.400 (under) respectively
(c) Rs.408 (over) and Rs.400 (under) respectively
(d) Rs.400 (over) and Rs.408 (over) respectively
(e) Rs.400 (under) and Rs.400 (over) respectively.
(2 marks)
< Answer >
17. Which of the following statements is true?
(a) Basis of apportionment of cost of steam is wages of each department
(b) Direct labor hour rate of absorption of overhead is suitable where most of the production is done
by using machines
(c) The time factor is ignored when the cost of materials is used as the basis for absorption of
overhead
(d) Direct assignment of factory overhead costs to each department is known as apportion-ment
(e) The secondary distribution on a reciprocal basis is known as the stepladder method.
(1 mark)
< Answer >
18. Which of the following statements is false?
(a) When large amount of under or over-absorption of factory overhead is due to wrong estimation of
overhead costs, it should be disposed off by supplementary rate method
(b) The cost of searching for new or improved products, new applications of materials or new or
improved methods is known as research cost
(c) The process of grouping costs according to their common characteristics is known as cost
collection
(d) Administrative overhead costs are usually absorbed as a percentage of work costs
(e) Selling cost is the cost of seeking to create and stimulate demand and for securing order.
(1 mark)
19. Neelam Sing Ltd. produces products X and Y. The direct cost of X is Rs.250 per unit (Rs.100 materials < Answer >
and Rs.150 labor) and Y is Rs.350 (Rs.230 material and Rs.120 labor) per unit. 50 units of X and 150
units of Y were produced. Overhead amounts to Rs.130,000 and is composed of material handling
Rs.12,000, labor support Rs.60,000, machine operation Rs.48,000 and general administration
Rs.10,000. Material handling cost driver is material cost; labor support cost driver is labor cost.
Machine operation cost resulted from running the machines a total of 480 hours (75% of which was for
product X). General administration effort related equally to product X and Y. Material handling
chargeable per unit of X (rounded off to the nearest rupee) amounts to
(a) Rs.30 (b) Rs.40 (c) Rs.60 (d) Rs.70 (e) Rs.50.
(1 mark)
< Answer >
20. Kumar Ltd. has furnished the following data pertaining to products:

Number of Number of Square Number of Sales

Department
Employees* Hours feet Units sold (Rs.)
A 10 (10) 20,000 20,000 200 13,50,000
B 14 (8) 18,000 4,000 400 9,50,000
C 20 (6) 22,000 6,000 1,000 7,50,000
D 30(4) 15,000 10,000 3,000 3,75,000
Total 74 75,000 40,000 4,600 34,25,000
* The
number of full time employees is listed in the parenthesis. Full time employees work on an average
4 years with the company, part-time employees work on an average 5 months with the company.
The Personnel Department costs amount to Rs.81,400. The personnel department is responsible for
 recruiting, hiring and managing benefits.
What would be the amount of Personnel Department cost allocated to Department C assuming the
allocation is based on the number of employees?
(a) Rs.4,400 (b) Rs.15,400 (c) Rs. 44,000 (d) Rs.1,62,800 (e) Rs.22,000.
(1 mark)
21. The company has some costs that have not been allocated. These include, electricity for heat, cleaning< Answer >
and telephones. Of the following allocation methods which is/are the better method(s) of allocating
these unallocated costs?
I. Establishing one cost pool and allocating the cost based upon square feet.
II. Establishing one cost pool and allocating the cost based upon number of employees.
III. Establishing two cost pools, one pool for telephones and allocate the cost based upon number of
employees, and the other pool for heat and cleaning and allocate the cost based upon square feet.
IV. Establishing two cost pools, one pool for telephones and allocate the cost based upon number of
employees, and the other pool for heat and cleaning and allocate based upon sales rupees.
(a) Only (I) above
(b) Both (II) and (III) above
(c) Only (III) above
(d) Both (II) and (IV) above
(e) Both (I) and (IV) above.
(1 mark)
< Answer >
22. Mukherjee Ltd. uses job costing system, has furnished the following cost data for Job No.36:

Particulars Rs.
Direct material 9,00,000
Direct wages 7,50,000
Profit 6,09,000
Selling & distribution overhead 5,25,000
Administrative overhead 4,20,000
Factory overhead 4,50,000
The cost of sales and
works cost for job no.36 are
(a) Rs.16,50,000 and Rs.21,00,000 respectively
(b) Rs.21,00,000 and Rs.36,54,000 respectively
(c) Rs.30,45,000 and Rs.21,00,000 respectively
(d) Rs.30,45,000 and Rs.25,20,000 respectively
(e) Rs.30,35,000 and Rs.16,50,000 respectively.
(1 mark)
23. Multiple or departmental overhead rates are considered preferable to a single or plant-wide overhead< Answer >
rate when
(a) Various products are manufactured that do not pass through the same departments or use the same
manufacturing techniques
(b) Individual cost drivers cannot accurately be determined with respect to cause and effect
relationships
(c) Manufacturing is limited to a single product flowing through identical departments in a fixed
sequence
(d) Cost drivers, such as direct labor, are the same over all processes
 (e) The single or plant-wide rate is related to several identified cost drivers.
(1 mark)
24. Balaji Ltd. operates several production processes involving the mixing of ingredients to produce bulk< Answer >
animal 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, 2005:
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
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
Conversion – 75% complete) Normal wastage of materials (on 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%, 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)
25. The total production cost for making 20,000 units was Rs.21,000 and the total production cost for< Answer >
making 50,000 units was Rs.34,000. Once production exceeds 25,000 units, additional fixed costs of
Rs.4,000 are incurred. The full production cost per unit for making 30,000 units is
(a) 30 paise (b) 50 paise (c) 68 paise (d) 84 paise (e) 93 paise.
(1 mark)
< Answer >
26. DKM Ltd. is operating at 70% capacity and presents the following information:
Break-even point Rs. 200 crores
P/V ratio 40%
Margin of safety Rs.50 crores The management feels that it can operate at 95% capacity
level with the following modifications:
(i) Selling price will be reduced by 8%.
(ii) Variable cost will be reduced by 5%.
(iii) Fixed cost will increase by Rs.20 crores including depreciation on additions but excluding interest
on additional capital.
(iv) Additional capital of Rs.50 crores will be needed for capital expenditures and working capital.
 The sales needed to earn Rs.10 crores profits over and above the present profit and also to meet 20%
interest on the additional capital, is
(a) Rs.311.11 crores (b) Rs. 368.034 crores
(c) Rs.110.00 crores (d) Rs.171.679 crores (e) Rs.312.143 crores.
(2 marks)
< Answer >
27. Jai Sai Ltd. has furnished the following data pertaining to its process account for the last month:

Opening work-in-process (50% complete) 40,000 units

Started in the last month 2,40,000 units
Closing work-in-process (60% complete) 25,000 units
Materials are added in
the beginning of the process. The company uses average method. The equivalent units of production for
materials and conversion for the month were
(a) 2,40,000 and 2,50,000 respectively
(b) 2,80,000 and 2,70,000 respectively
(c) 2,80,000 and 2,80,000 respectively
(d) 2,80,000 and 2,50,000 respectively
(e) 2,55,000 and 2,55,000 respectively.
(1 mark)
28. Hyderabad Transport Ltd. has been given a route of 20 km. long to run a bus. The cost of a bus is < Answer >
Rs.5,00,000. It has been insured at 3% per annum and the annual tax will amount to Rs.10,000. Garage
rent is Rs.1,000 per month. Actual repairs will be Rs.10,000 per annum and the bus is likely to last for 5
years.
The driver’s salary will be Rs.1,500 per month and the conductor’s salary will be Rs.1,000 per month in
addition to 10% of the tickets selling as commission (to be shared by the driver and the conductor
equally). Cost of stationery will be Rs.500 per month. The salary of Manager-cum- accountant is
Rs.3,500 per month.
Petrol and oil will be Rs.250 per 100 km. The bus will make 3 round trips carrying on an average 40
passengers on each trip. The expected profit is 15% of total ticket selling. The bus will run on an
average of 25 days in a month.
The bus fare to be charged to each passenger is
(a) Re.0.25 (b) Re.0.30 (c) Re.0.35 (d) Re.0.40 (e) Re.0.50.
(2 marks)
29. A certain chemical process yields 75% of material introduced as main product, 20% as by-product and < Answer >
5% 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. Overheads came to Rs.2,700. Wastages realized 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)
30. A, B and C are the main products and M is the by-product of a company, where A is a liquid and B is a < Answer >
gas and C is a solid. If product A and product B are further processed before being in a saleable state
and product C is sold without further processing, then which of the following is the most appropriate
 basis for apportionment of costs of M to joint products A, B and C?
(a) Physical units
(b) Sales value at separation point
(c) Notional sales value at separation point
(d) Standard sales value at separation point
(e) Sales value after further processing cost.
(1 mark)
31. Shiladitya Ltd., using process costing, manufactures a single product, which passes through two < Answer >
processes – process 1 and process 2, the output of process 1 becoming the input of process 2. The
company has furnished the following information relating to the product for the month of December
2005:
i) Raw material issued to process 1 was 3,000 units at a cost of Rs.5 per unit.
ii) There was no opening or closing work-in-progress but opening and closing stocks of finished
goods were Rs.20,000 and Rs.23,000 respectively.
iii) Normal losses and abnormal losses are defective units having a scrap value and cash is received at
the end of the period for all such units.
Other information:
Particulars Process 1 Process 2
Normal loss as a percentage of input 10% 5%
Output in units 2,800 2,600
Scrap value per unit (Rs.) 2 5
Additional components introduced (Rs.) 1,000 780
Direct wages incurred (Rs.) 4,000 6,000
Direct expenses incurred (Rs.) 10,000 14,000
Production overhead as a % of direct wages 75 125 The cost of goods
sold of the product for the month of December 2005 is
(a) Rs.59,800 (b) Rs.56,800 (c) Rs.62,800 (d) Rs.64,880 (e) Rs.60,880.
(2 marks)
32. Binny Ltd. is planning its advertising campaign for 2005-06 and has prepared the following budget data< Answer >
base on a zero advertising expenditure:
Normal plant capacity : 2,00,000 units
Sales : 1,50,000 units
Variable manufacturing costs : Rs.15.00 per unit
Selling price : Rs.25.00 per unit
Fixed costs:
Manufacturing : Rs.8,00,000
Selling and administrative : Rs.7,00,000
An advertising agency claims that an aggressive advertising campaign would enable the company to
increase its units sales by 20%. What is the maximum amount that Binny can pay for advertising and
obtain an operating profit of Rs.2,00,000?
(a) Rs.1,00,000 (b) Rs.2,00,000 (c) Rs.3,00,000 (d) Rs.5,50,000 (e) Rs.2,50,000.
(1 mark)
< Answer >
33. Which of the following statements is true for a firm that uses variable costing?
(a) Product costs include variable selling costs
(b) An idle facility variation is calculated
(c) The cost of a unit of product changes because of changes in number of units manufactured
(d) Profits fluctuate with sales
 (e) Product costs include variable administrative costs.
(1 mark)
34. The break-even point of a company is 40,000 units and the profit for this year is expected to be < Answer >
Rs.14,00,000. The selling price of the product is Rs.50 per unit and the variable cost is Rs.25. Based on
the market feed back three options are available before the management.
Options Selling price reduced by Quantity sold increased by
I 5% 10%
II 7% 20%
III 10% 25% Based on the
profitability considerations the best option is
(a) Only option (I) above
(b) Only option (II) above
(c) Only option (III) above
(d) Both options (I) and (III) above
(e) Both options (II) and (III) above.
(2 marks)
35. Which of the following is true with respect to the effect on net profit reported under marginal cost and < Answer >
absorption cost methods due to an increase of Rs.1,000 fixed selling overheads?
(a) Decrease in net profit only where absorption costing is used
(b) Decrease in net profit only where marginal costing is used
(c) Decrease in net profit equally in both absorption and marginal costing
(d) No change in net profit in both absorption and marginal costing
(e) Increase in net profit in marginal costing and decrease in net profit in absorption costing.
(1 mark)
< Answer >
36. CVP Ltd. sells a single product at a price of Rs.15 per unit. The product cost details are as follows:
Fixed cost : Rs.7,84,000
Variable costs per unit : Rs.8
Due to inflation the variable costs are expected to increase by 10% whereas fixed costs will increase by
only 5%. If CVP raised its selling price by 4% the break-even point in units will approximately
(a) Increase by 8.09% (b) Increase by 4.06%
(c) Decrease by 4% (d) Decrease by 8% (e) Decrease by 11%.
(1 mark)
37. Piston Manufacturing Ltd. has added a new machine to its fleet of five existing machines. The total cost < Answer >
of purchase and installation of the machine is Rs.7,50,000. The machine has an estimated life of 15
years and is expected to realize Rs.30,000 as scrap at the end of its working life.
Other relevant data are as follows:
i. Budgeted working hours is 2,400 based on 8 hours per day for 300 days. This include 400 hours
for plant maintenance.
ii. Electricity used by the machine is 12 units per hour at a cost of Rs.2.00 per unit. No current is
drawn during maintenance.
iii. The machine requires special oil for heating which is replaced once in every month at a cost of
Rs.2,500 on each occasion.
iv. Estimated cost of maintenance of the machine is Rs.500 per week of 6 working days.
v. 3 operators control the operations of the entire battery of six machines and the average wages per
person amounts to Rs.450 per week plus 40% fringe benefits.
vi. Departmental and general works overheads allocated to the operation during the last year was
Rs.60,000. During the current year it is estimated that there will be an increase of 12.5% of this
 amount. No incremental overhead is envisaged for the installation of the new machine.
The machine hour rate for recovery of the running cost of the machine is
(a) Rs.95.00 (b) Rs.92.75 (c) Rs.96.50 (d) Rs.84.16 (e) Rs.89.00.
(2 marks)
38. _________________ is relevant for price fixation during recession or when making a buy or make < Answer >
decision.
(a) Differential cost (b) Out of pocket cost
(c) Sunk cost (d) Marginal cost (e) Imputed cost.
(1 mark)
< Answer >
39. If the price rises, which of the following methods of valuing stock will give the lowest profit?
(a) LIFO method
(b) Replacement cost method
(c) FIFO method
(d) Simple average method
(e) Specific order method.
(1 mark)
40. An accounting system that collects financial and operating data on the basis of underlying nature and< Answer >
extent to the cost drivers is
(a) Direct costing
(b) Target costing
(c) Activity based costing
(d) Variable costing
(e) Cycle-time costing.
(1 mark)
< Answer >
41. Which of the following statements is false?
(a) Notional costs are not included while ascertaining costs
(b) Administrative expenses is mostly fixed
(c) Historical costs are useful solely for estimating costs that lie ahead
(d) Abnormal cost is controllable
(e) Direct cost is one that can be conveniently identified with and charged to a particular unit of cost.
(1 mark)
< Answer >
42. The cost of electricity required for manufacturing aluminum ingots is an item of
(a) Direct material (b) Direct labor (c) Direct expense
(d) Factory overheads(e) Indirect labor.
(1 mark)
< Answer >
43. Which of the following is not true?
(a) Product cost for merchandise is the cost of purchases plus transportation
(b) Cost of merchandise sold is called the cost of goods sold.
(c) Retailers and wholesalers treat period costs as expenses.
(d) Period costs are treated as product costs with service industry firms
(e) At the end of the year, inventory on hand is an asset.
(1 mark)
< Answer >
44. The following are the operating results of MNC Ltd., a manufacturing company, for the current year:
 Particulars Rs. in lakh
Sales (40,000 units) 48.00
Less trade discounts 2.40
Net sales 45.60
Cost of sales:
Direct material 14.40
Direct Labour 12.60
Factory overheads 6.30
Administration expenses 3.60
Selling and distribution expenses 4.50 The following changes are
anticipated during the next year:
I. Units to be sold to increase by 25%
II. Material price to increase by 15%
III. Direct wages to increase by 12%
IV. Overhead- Factory overheads will be limited to Rs.6.56 lakh & administration and selling and
distribution expenses are estimated to increase by 8% and 14%respectively.
V. Inventory – No change in opening and closing inventories in quantity. The change in value may be
ignored.
VI. “Trade discount” – No change in the rate
VII. Profit target for the year – Rs.6 lakh
The selling price per unit for the next year is
(a) Rs.155.78 (b) Rs.215.79 (c) Rs.288.80 (d) Rs.113.05 (e) Rs.126.14.
(2 marks)
45. The costs which reflect the policies of the top management and result in periodic appropriation are < Answer >
known as
(a) Notional costs
(b) Relevant costs
(c) Programmed costs
(d) Committed costs
(e) Discretionary costs.
(1 mark)
46. Olden Engineering Ltd. manufactures motor engine parts. The factory normally operates 6 days a week < Answer >
on a single eight-hour shift. During the year 2004-05 it is closed on 16 working days for holidays.
Equipments are idle for 160 hours for cleaning, oiling, etc. If the overhead amounts to Rs.13,580 and is
to be absorbed at a rate per machine hour, what is the overhead absorption rate in the year 2004-05?
(a) Rs.6.74 per hour (b) Rs.6.25 per hour
(c) Rs.5.76 per hour (d) Rs.5.16 per hour (e) Rs.6.13 per hour.
(2 marks)
47. In allocating factory service department costs to producing departments, which of the following items < Answer >
would most likely be used as an activity base?
(a) Salary of service department employees
(b) Units of electric power consumed
(c) Direct materials usage
(d) Units of finished goods shipped to customers
(e) Units of product sold.
(1 mark)
< Answer >
48. The operating results of Aisani Ltd. for the year 2004-05 were as under:
 Product Sales mix (%) P/V ratio
A 40 20
B 10 6
C 30 12
D 20 10 Total sales value of all the products was Rs.80 lakh
and fixed costs amount to Rs.10 lakh. The composite P/V ratio is
(a) 15.2% (b) 14.2% (c) 14.0% (d) 15.0% (e) 16.0%.
(1 mark)
< Answer >
49. Which of the following best describes the impact of under costing?
(a) This is a goal of all companies that under costing all products allows for larger profit margins
(b) Companies will use target pricing to undercuts products
(c) Under costing some products will lead to over costing other products, which is acceptable because
it all balances
(d) Under costing some products can lead to over costing other products which may become
overpriced and lose market share
(e) Companies will use standard pricing to under cost products.
(1 mark)
50. Which of the following is false with regard to the supplementary rate method for accounting of under or< Answer >
over absorption of overheads?
(a) It facilitates the absorption of actual overhead for production
(b) The value of stock is distorted under this method
(c) The supplementary rate can be determined only after the end of the accounting period
(d) It requires a lot of clerical work
(e) Correction of costs through supplementary rates is necessary for maintaining data for comparison.
(1 mark)
< Answer >
51. The allocation of costs to a particular cost object allows a firm to analyze all of the following except
(a) Whether a particular manager earns a bonus
(b) Whether a particular department should be expanded
(c) Whether a product line should be discontinued
(d) The causes of increase in the sales of a particular product
(e) The decision with regard to a particular product which should be purchased or manufactured in-
house.
(1 mark)
< Answer >
52. Apportionment of overhead cost may be defined as
(a) Charge to a cost center of an overhead cost item with no estimation
(b) Charge each cost center with a share of an overhead cost using an apportionment basis to estimate
the benefit extracted by each cost center
(c) Charge to cost units for the use of an overhead cost
(d) Classification of overhead cost as fixed or variable
(e) Charge to cost center for the use of an overhead cost.
(1 mark)
53. Prasant Ltd. 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 units, 1,500 units and 3,000 units for A,
B, and C respectively. Sales in rupees for B at breakeven amount to
(a) Rs.18,000 (b) Rs.27,000 (c) Rs.24,000 (d) Rs.12,000 (e) Rs.22,500.
 (2 marks)
< Answer >
54. CD Ltd. has furnished the following data for its business:
Direct material - Rs.15 per unit
Direct labor - Rs. 9 per unit
Variable overhead - Rs. 5 per unit
Fixed overhead - Rs. 4 per unit
Budgeted production - 12,000 units
Actual production - 10,000 units
There is no overhead spending variance
Sales - 9,000 units
Sales price - Rs.30 per unit
The value of ending inventory using Absorption Costing is
(a) Rs.33,000 (b) Rs.1,01,000 (c) Rs.66,000 (d) Rs.33,800 (e) Rs.99,000.
(1 mark)
55. A factory has three production departments – P1, P2 and P3 and 2 service departments – S1 and S2. < Answer >
Budgeted overheads for the next year have been allocated or apportioned by the cost department among
the 5 departments. The secondary distribution of service department overheads is pending and the
following details are given:

Overheads apportioned/allocated
Department Estimated level of activity
(Rs.)
P1 48,000 5,000 labor hours
P2 1,12,000 12,000 machine hours
P3 52,000 6,000 labor hours

Department Overheads apportioned/ Apportionment of service

allocated (Rs.) department costs
S1 16,000 P1(20%),P2(40%), P3(20%) & S2(20%)
S2 24,000 P1(10%), P2(60%), P3(20%) & S1(10%)
The
overhead rate of P1 department after completing the distribution of service department costs is
(a) Rs.11.00 (b) Rs.11.35 (c) Rs.10.91 (d) Rs.10.22 (e) Rs.10.50.
(2 marks)
56. During the month of December 2005, Murphi Ltd. manufactured 5,000 units of product ‘P’ at a cost of < Answer >
Rs.60,000, exclusive of spoilage allocation. The company sold 2,500 units of product ‘P’ during the
month. An additional 1,000 units, costing Rs.8,000, were completed to the extent of 50% by December
31, 2005. All units were inspected between the completion of manufacturing and transfer to finished
goods inventory. Normal spoilage for the month was Rs.2,000 and abnormal spoilage of Rs.5,000 was
also incurred during the month. The portion of total spoilage that should be charged against revenue in
the month of December 2005 is
(a) Rs.7,000 (b) Rs.6,000 (c) Rs.5,000 (d) Rs.3,500 (e) Rs.3,000.
(2 marks)
57. An increase in variable costs where selling price and fixed cost remain constant will result in which of< Answer >
the following?
(a) An increase in margin of safety
 (b) A fall in the sales level at which break even point will occur
(c) A rise in the sales level at which break even point will occur
(d) No change in the sales level at which break even point will occur
(e) No change in margin of safety.
(1 mark)
58. Shiva Ltd. had 8,000 units of work-in-process inventory in department A on December 01, 2005. These < Answer >
units were 60% complete as to conversion costs. Direct materials are added at the beginning of the
process. During the month of December 2005, 34,000 units were started and 36,000 units completed.
The company had 6,000 units of work-in-process inventory on December 31, 2005. These units were
80% complete as to conversion costs.
The equivalent production unit of conversion (under weighted average method) exceeds the equivalent
production unit of conversion (under FIFO method) by
(a) 4,800 units (b) 6,000 units (c) 3,200 units (d) 8,000 units (e) 5,000 units.
(2 marks)
59. There are 2 warehouses for storing finished goods produced in a factory. Warehouse A is at a distance of < Answer >
10 km. and warehouse B is at a distance of 15 km. From the factory, a fleet of 6-ton lorries is engaged in
transporting the finished goods from the factory. The records show that the average speed of lorries is
30 km. per hour when running and regularly take 40 minutes to load at the factory. At warehouse A,
unloading takes 30 minutes per load while at warehouse B, it takes 20 minutes per load.
Drivers’ wages, depreciation, insurance and taxes amount to Rs.18 per hour operated. Fuel, oil, tyres,
repairs and maintenance cost Rs.2.40 per kilometer.
The cost per ton kilometer of carrying the finished goods to warehouses A and B are
(a) Rs.1.35 and Rs.1.20 respectively
(b) Rs.1.35 and Rs.1.44 respectively
(c) Rs.1.62 and Rs.1.10 respectively
(d) Rs.1.62 and Rs.1.44 respectively
(e) Rs.1.44 and Rs.1.62 respectively.
(2 marks)
< Answer >
60. A company is operating at 80% capacity and has the following details:
Sales Rs.12,80,000
Costs:

Direct material Rs.4,00,000

Direct labour Rs.1,60,000

Variable overheads Rs. 80,000

Fixed overheads Rs.5,20,000 Rs.11,60,000

Profit Rs. 1,20,000
An export order has been received that
would utilize half the capacity of the factory. The order has to be taken in full and executed at 10%
below the normal domestic prices or rejected totally. By accepting the offer the profitability of the
company would be
(a) Rs.2,80,000 (b) Rs.1,20,000 (c) Rs.2,00,000 (d) Rs.2,50,000 (e) Rs.1,80,000.
(2 marks)
61. Ananya Petroleum is a small company that acquires crude oil and manufactures three intermediate < Answer >
products - A, B & C, differing only in grade. No opening inventory of finished goods and work-in-
process existed on December 01, 2005. The production costs for December 2005 were as follows
 (assume separable costs were negligible):

Particulars Rs.
Crude oil acquired and used in production 4,00,000
Direct labor and related costs 2,00,000
Factory overhead 3,00,000
The output and sales for the month
of December 2005 were as follows:

Particulars A B C
Number of Barrels produced 300 240 120
Number of Barrels sold 80 150 120
Prices per Barrel sold (Rs.) 3,000 4,000 5,000
If joint costs are apportioned on the
basis of relative sales value of output, the cost of closing inventory of product B is
(a) Rs.1,75,610 (b) Rs.1,23,476 (c) Rs.2,19,512 (d) Rs.3,51,220(e) Rs.1,31,707.
(2 marks)
< Answer >
62. Retention monies are best defined as
(a) Cash returned to contractee if actual profits on a contract are 20% higher than negotiated amount
(b) Cash returned to contractee if actual profits on a contract are 25% higher than negotiated amount
(c) Cash withheld by the contractee under the terms of contract when payments of the value certified
are being made
(d) Cash withheld by the contractee in order to improve the cash flow of the contractor
(e) Payments to the contractor where it is desired to secure his service for a future contract.
(1 mark)
63. Anu Electricity Generation and Distribution Ltd. (AEGDL) has furnished the following information < Answer >
pertaining to the year 2004-05:
Total units generated 20,00,000 kwh
Operating labor Rs.5,00,000
Repairs and maintenance Rs.5,00,000
Lubricants, spares and stores Rs.4,00,000
Plant supervision Rs.3,00,000
Administrative overheads Rs.2,00,000 Coal consumed per kwh for the
year is 5 kg at the rate of Re.1 per kg. Depreciation is charged at the rate of 5% on capital cost of
Rs.20,00,000. The total cost per kwh is
(a) Rs.2.80 (b) Rs.2.10 (c) Rs.6.00 (d) Rs.4.20 (e) Rs.3.20.
(2 marks)
64. Harish Ltd. manufactures and sells a special type of radio. The following data are provided by the < Answer >
company for the year 2004-05:
 Particulars Rs.
Factory overheads 92,000
Opening stock of raw materials 30,000
Raw materials purchased during the year 4,50,000
Wages paid 2,00,000
Wages outstanding 30,000
Work-in-progress as on April 01, 2004 12,000
Work-in-progress as on March 31, 2005 15,000
Closing stock of raw materials 25,000
Opening stock of finished goods 60,000
Closing stock of finished goods 55,000
Carriage inward 10,000
Octroi on purchases 1,800
Administrative overheads 30,000
Selling and distribution overheads 13,000
The cost of goods manufactured during
the year is
(a) Rs.6,96,800 (b) Rs.8,00,800 (c) Rs.7,85,800 (d) Rs.7,88,800 (e) Rs.7,90,800.
(2 marks)
65. Proful Ltd. manufactures radios, which are sold at Rs.1,600 per unit. The total cost consists of 30% for< Answer >
direct materials, 40% for direct wages and 30% for overheads. An increase in material price by 30% and
in wage rates by 10% is expected in the forthcoming year, as a result of which the profit at current
selling price may decrease by 40% of the present profit per unit. The current and future profit at present
selling price are
(a) Rs.1,207.55 and Rs.724.53 respectively
(b) Rs.520.00 and Rs.312.00 respectively
(c) Rs.392.45 and Rs.235.47 respectively
(d) Rs.235.47 and Rs.392.45 respectively
(e) Rs.392.45 and Rs.277.38 respectively.
(2 marks)
< Answer >
66. Radha Ltd. has furnished the following information pertaining to a new product:
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)
< Answer >
67. X, Y and Z are three similar plants under the same management of AB Ltd. The details are as follows:
 Plant X Y Z
Capacity operated 90% 60% 50%
Particulars (Rs.in lakh) (Rs.in lakh) (Rs.in lakh)
Turnover 270 240 150
Variable cost 180 180 75
Fixed cost 70 43 62
The Break-even percentage of
the merged plant is
(a) 67% (b) 52% (c) 50% (d) 55% (e) 49%.
(2 marks)

68. Exotica Ltd. manufactures a product, currently utilizing 80% capacity with a turnover of Rs.8,00,000 at< Answer >
Rs.25 per unit. The company has furnished the following cost data:
Material cost - Rs.7.50 per unit; Labor cost - Rs.6.25 per unit; Semi-variable cost (including variable
cost of Rs.3.75 per unit) – Rs.1,80,000; Fixed cost Rs.90,000 up to 80% level of output and beyond
this, an additional Rs.20,000 will be incurred.
The activity level at break-even point is
(a) 60% (b) 50% (c) 40% (d) 31% (e) 25%.
(2 marks)

69. Hotel Sonar Bangla has annual fixed costs applicable to rooms of Rs. 3,75,00,000 for a 300 rooms hotel < Answer >
with average daily room rates of Rs.1,000 and average variable costs of Rs.210 for each room rented.
The hotel operates 365 days per year. Income tax rate is 30%. The number of rooms per day the hotel
must rent to earn a net income after taxes of Rs.21,00,000 is
(a) 137 rooms (b) 183 rooms (c) 141 rooms (d) 200 rooms (e) 295
rooms.
(2 marks)

70. The average cost per unit is Rs.4 at the volume of sales and production of 3,000 units and the average < Answer >
cost is Rs.3.50 at the sales and production volume of 4,000 units. If the break-even point is 5,000 units,
the contribution to sales ratio is
(a) 25.0% (b) 35.5% (c) 40.0% (d) 37.5% (e) 42.5%.
(1 mark)

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

Standard variable production costs Rs.11 per unit

Fixed production cost per year Rs.3,60,000
Variable selling cost Rs.3 per unit
Fixed selling cost per year Rs.2,70,000
Selling price Rs.20 per unit
Production during the year 1,60,000 units
Sales during the year 1,50,000 units
Closing inventory 20,000 units
The actual variable production costs for
the year were Rs.35,000 higher than the standard.
The net profit under absorption costing, by using FIFO method, is
(a) Rs.2,46,375 (b) Rs.2,91,118 (c) Rs.2,24,118 (d) Rs.2,64,375 (e) Rs.2,19,118.
(2 marks)
 Suggested Answers
Management Accounting-I (151): January 2006
1. Answer : (e) <
TO
Reason : Management accounting is not mandatory. The application of management P
accounting can be extended beyond the traditional accounting system. It focuses >
more on the parts or segments of a company and less on a company as a whole. It is
not governed by GAAP. It refers to reports prepared to fulfill the needs of
management. Therefore, (e) is correct
2. Answer : (c) <
TO
Reason : The options in (a), (b), (d) and (e) are valid differences between Financial P
accounting and Management accounting. Both Financial and Management >
Accounting rely heavily on the concept of responsibility. Financial accounting is
concerned with the concept of responsibility or stewardship over the company as a
whole; while Management accounting is concerned with stewardship over its parts;
and this concern extends to the last person in the organization who has, any
responsibility over cost.
3. Answer : (b) <
TO
Reason : The costs having clear relationship to output are known as engineered costs. Direct P
material cost is an example of engineered costs. >

4. Answer : (c) <

TO
Reason : A discretionary cost is characterized by uncertainty about the relationship of input P
(the cost) to output. It also tends to the subject of a periodic decision regarding the >
outlay to be made. Research, Advertisement and Public Relation are common
examples. Thus the annual cost of plant service is discretionary because of the
difficulty of valuing the output. Other options are not correct.
5. Answer : (b) <
TO
Reason : Under periodic cost accumulation system, the cost of goods manufactures is equal P
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) <
TO
Reason : Decremental cost is not the cost of an added unit. Standard cost never tells us the P
actual cost of the product. Cost center and cost units is 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 : (a) <
TO
Reason : The manager wants to control and reduce if possible, the company's production P
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.
8. Answer : (d) <
TO
Reason : Product engineering is related to development of the product line. Therefore, P
product engineering is considered to be as product-level cost. >

9. Answer: (c) <

TO
Reason: Statement showing calculation of the amount of under-absorption of production P
 overheads >
Actual production overhead incurred 6,00,000
Less: (i) Obsolete stores written off during the year 45,000 75,000
(ii) Wages paid for the strike period under an award 30,000
Net actual production overhead incurred 5,25,000
Production overheads absorbed (48,000 machine hours 4,80,000
× Rs. 10 per M.H)
Under absorbed production overheads 45,000

Particulars Rs.
1. Due to lack of production planning (33 1/3 %) 15,000
2. Balance to be distributed to WIP, finished goods & cost 30,000
of sales by using supplementary rate (66 2/3 %)
Total 45,000
Computation of equivalent units
WIP (8,000 units × 50%) 4,000
Finished goods (20,000 – 18,000) 2,000
Cost of sales 18,000

Total 24,000
Supplementary rate for
absorption of under absorbed production overheads =
Under absorbed overhead / No. of equivalent units = Rs.30,000/24,000 units =
Rs.1.25 per unit.
10 Answer : (e) <
TO
. Reason : When manufacturing expenses are recovered on a proper basis, the journal entry is P
debit working process account, credit manufacturing overhead control account. >
Other options given on (a), (b), (c), (d) are not correct
Therefore (e) is the answer.
11. Answer : (d) <
TO
Reason : Overhead absorption rate per rupee labor cost = P
Rs.3,00,000 / [(200 x Rs.75) + (300 x Rs.50) + (500 x Rs.40) >

= Rs.3,00,000 ÷ Rs. 50,000 = Rs. 6.

Overhead applied:
[(300 x Rs.75) + (350 x 50) + (400 x 40)] x 6
= (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 : (c) <
TO
. Reason : P
>
 Particulars Rs. in lakhs
Cost of goods sold 56,000
Add: Closing stock of fin. Goods 19,000
75,000

Less: Opening stock of fin goods 17,600

57,400

Add Closing stock of WIP 14,500

71,900

Less: Opening stock of WIP 10,500

Works cost 61,400
Less: Factory overheads 10,000
Prime cost 51,400
Less: Direct labor 17,500
Raw material consumed 33,900
Add closing stock of raw material 10,600
44,500

Less: opening stock of raw material 8,000

Raw material purchased 36,500
13 Answer : (c) <
TO
. Reason : Actual cost – Applied cost P
= Rs.3,50,000 - [(1,290 + 1,760 + 789) × Rs.85] >

Rs.23,685 under applied as compared to actual overhead.

Based on overhead rate of Rs.85 and given the hours consumed by each job, costs
will be
(J1: Rs.1,09,650 +Rs.85,500) + (J2: Rs.1,49,600 + Rs.74,700) +
(J3: Rs.67,065 + Rs.81,000) = Rs.1,95,150 + Rs.2,24,300 + Rs.1,48,065
= Rs.5,67,515.
Amount chargeable to J2: (Rs.2,24,300 ÷ Rs. 5,67,515) × Rs.23,685 = Rs.9,361
debited to finished goods.
14 Answer : (d) <
TO
. Reason : A department is working at 55% of its normal capacity. 45% is treated as idle P
capacity. Fixed cost is obviously incurred for the normal capacity work. This 45% >
of fixed cost should be excluded from the calculation of overhead recovery rate.
Thus the appropriate recovery rate is to be found by dividing the 55% of fixed cost
plus 100% variable manufacturing overhead by the budgeted direct labor cost.
Appropriate recovery rate = (55% of Rs.1,00,000 + 100% of Rs.1,25,000) ÷
Rs.2,50,000 = Rs.1,80,000 ÷ Rs.2,50,000 = 72%
15 Answer : (d) <
TO
. Reason : Computation of hourly rate for standing charges: P
>
 Expenses Workings Rs. Rs.
Standing charges:

Rent, heat and light (Rs.70,000 ÷ 70,000)× 2,500 2,500

Supervision Rs.1,30,000 ÷ 26 5,000

Depreciation 10% of Rs.2,30,000 23,00

0
Reserve equipment cost Rs.1,500 ÷ 26 58

Labor cost during setting 200 hours × Rs.6 1,200

and adjustment
Hourly rate for standing charges Rs.31,758 ÷ 1,800 31,75 17.64
8
16 Answer : (c)
. Reason : Normal working hours for the year = 48 wks × 42 hrs × 14 machines
= 28,224 hours
Loss of hours due to maintenance = 3,360 hours
Net effective hours = 24,864 hours
Overhead rate per machine hour = Rs.1,24,320 ÷ 24,864 = Rs.5
Wages absorbed = 4 wks × 42 hrs × 14 machines × Rs.4 = Rs.9,408
Wages incurred = Rs.9,000
Over absorption 408
Overhead incurred = Rs.10,400
Overhead absorbed 2,000 × Rs.5 =Rs. 10,000
Under absorption 400
17 Answer : (c) <
TO
. Reason : If the cost of material is used as the basis for absorption of overhead, the time factor P
is ignored. This statement is true (c).Other options given in (a), (b), (d) and (e) are >
not correct.
18 Answer : (c) <
TO
. Reason : The process of grouping costs according to their common characteristics is known P
as cost classification, not cost collection. This statement is false. Other options (a), >
(b), (d) and (e) are correct statements.
19 Answer: (a) <
TO
. Reason: Material handling charges per unit of X = Rs.12,000 ÷ [(50 × Rs. 100) + (150 × P
Rs. 230)] = >

Rs. 12,000 ÷ Rs. 39,500 = 0.3038;

Rs.100 × 0.3038 = Rs.30.38 around Rs.30.
20 Answer: (e) <
TO
. Reason: Cost to be Allocated ÷ Cost Driver = Allocation Rate P
>
= Rs.81,400 ÷ 74 = Rs.1,100
Allocation Rate × Cost Driver = Allocated Cost
= Rs.1,100 × 20 employees = Rs.22,000.
21 Answer: (c) <
TO
. Reason: The goal of using cost pools is to minimize the allocation effort. However, it is also P
 desirable to have the pools reflect the incurrence of the costs. The heat and cleaning >
cost are probably more related to square feet than they are to number of employee
and sales rupees. Therefore (c) is correct.
<
22 Answer : (c) TO
. Reason : P
>
Particulars Rs.
Direct material 9,00,000
Direct wages 7,50,000
Prime cost 16,50,000
Factory overhead (60% on direct wages) 4,50,000
Works cost 21,00,000
Administrative overhead (20% on works cost) 4,20,000
Cost of production 25,20,000
Selling & distribution overhead (25% on works 5,25,000
cost)
Cost of sales 30,45,000
Profit (16.67% on sales or 20% on cost of sales) 6,09,000
Sales value 36,54,000
<
23 Answer : (a) TO
. Reason : Multiple rates are appropriate when a process differs substantially among P
departments or when products do not go through all departments or all processes. >
The trend in cost accounting is towards activity based costing, which divides
production into numerous activities and identifies the cost driver(s) most relevant to
each. The result is a more accurate tracing of costs. Other options are not correct.
24 Answer : (e) <
TO
. Reason : P
Input units Units Materials Conversion >

Opening 1,200 Opening 1,200 – – 50% 600

WIP
From 1,12,00 Process 1 1,04,20 100% 1,04,20 100% 1,04,200
process 0 0 0
1
Normal 5,600 – – – –
loss
Abnormal
600 100% 600 – –
Loss
Closing 1,600 100% 1,600 75% 1,200
WIP
1,13,20 1,13,20 1,06,40 1,06,000
0 0 0
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 Finished goods:
Rs.
 Opening WIP 3,009
Process I (1,04,200 × Rs.2.215) 2,30,803
Conversion cost (1,04,800 × 0.596) 62,461
2,96,273
Closing WIP:
Rs.
Materials – 1,600 × Rs.2.215 3,544
Conversion – 1,200 × 0.596 715
4,259

25 Answer : (e) <

TO
. Reason : At 50,000 units the total cost is Rs.30,000 other than additional Rs.4,000. P
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 × 0.30 = Rs.15,000 ;
At 30,000 units = 30,000 × 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.
26 Answer : (b) <
TO
. Reason : Existing profit = 40% of Rs.50 crores = Rs.20 crores. P
Profit need to earn = Rs. 20 crores + Rs. 10 crores = Rs. 30 crores >

Total Fixed costs= Rs. 110 crores

{i.e.,40% of Rs.200 crores + 20% of Rs.50 crores + Rs.20 crores = Rs.110 crores}
Contribution need to earn = Rs.110 crores + Rs.30 crores = Rs. 140 crores
So, Required sales = Rs. 140 crores ÷ 0.3804 (c/s ratio) = Rs. 368.034
crores.
{C/S ratio = [(100 – 8) - (60 – 3)] ÷ 92 = 0.3804}
27 Answer : (b) <
TO
. Reason : Input = 40,000 units + 2,40,000 units = 2,80,000 units; P
Out put = 2,55,000 units + 25,000 units = 2,80,000 units; >

Equivalent units of materials = 100% of 2,55,000 units + 100% of 25,000 units =

2,80,000 units.
Equivalent units of conversion = 100% of 2,55,000 units + 60% of 25,000 =
2,55,000 units + 15,000 units
= 2,70,000 units.
28 Answer : (b) <
TO
. Reason : Statement showing the fare to be charged from a passenger for one km. P
>
 Particulars Per annum Per month
(Rs.) (Rs.)
A. Standing charges:

Insurance charges 15,000

Taxes 10,000

Driver’s salary 18,000

Conductor’s salary 12,000

Cost of stationery 6,000

Manager-cum-accountant salary 42,000

Garage Rent 12,000

Total 1,15,000 9,583.33

B. Maintenance charges:

Repairs (Rs.10,000 ÷ 12) 833.33

C. Running charges:

Depreciation 1,00,000 8,333.33

Petrol (25 days × 3 trip × 2 × Rs.2.50 × 20) 7,500.00

Commission 3,500.00

Profit 15% of tickets selling 5,250.00

Total tickets selling 35,000.00

Total effective passenger km. per month

3 × 2 × 20 × 25 × 40 = 1,20,000 )
Bus fare per passenger Rs.3,500 ÷ 1,20,000 0.30

* In order to calculate the amount of commission payable to the driver and the
conductor, total tickets selling will have to be calculated.
Let, total tickets selling = x; Commission = 0.1x; profit = 0.15x;
Total cost per month without including commission = Rs.26,250
x = Rs.26,250 + 0.1x + 0.15x
x =Rs.26,250 ÷ 0.75 = Rs.35,000
Commission = 10% of Rs.35,000 = Rs.3,500;
Profit = 15% 0f Rs.35,000 = Rs.5,250.
29 Answer : (d) <
TO
. Reason : Break up of the total units is P
Main product 75% of 1,000 = 750; By-product 20% of 1,000 = 200; >

Loss = 5% of 1,000 = 50 ;
Statement showing the ascertainment of cost
STATEMENT SHOWING THE ASCERTAINMENT OF COST
 Main Product By product
Total
Total Cost Cost
Particulars Ratio Cost Total cost
cost per unit per unit
Rs.
Rs. Rs. Rs. Rs.
Materials 15:2 17,000 15,000 20.00 2,000 10.00
Labour 45:8 5,300 4,500 6.00 800 4.00
Overheads 3:1 2,400 1,800 2.40 600 3.00
24,700 21,300 28.40 3,400 17.00
Scrap
realized (Rs.300) is deducted from overheads.
Material ratio between the main product and by-product
750 × 2 = 1,500 ; 200 × 1 = 200 ; Ratio is 15:2
Labor ratio between the main product and by-product
750 × 3 = 2,250 ; 200 × 2 = 400 ; Ratio is 45:8
30 Answer : (c) <
TO
. Reason : If the cost of the by-product is apportioned to joint products, it is made at notional P
sales value at separation point. Other options are not appropriate for apportionment >
of by-product to joint products.
31 Answer : (b) <
TO
. Reason : Normal loss in process 1 = 10% of 3,000 = 300 P
Output in process 1 = 2,800 units and raw material issued in process 1 >
= 3,000units
Abnormal gain = 300 + 2,800 – 3,000 = 100 units
Total cost in process 1
= 3,000 × Rs.5 + Rs.1,000 + Rs.4,000 + Rs.10,000 + 75% of Rs.4,000
= Rs.33,000
Net cost = Total cost – Realizable value of normal loss
= Rs.33,000 – 300 × Rs.2 = Rs.32,400
Number of good units = 3,000 – 300 = 2,700
Cost per unit = Rs.32,400 ÷ 2,700 = Rs.12
Cost of input in process 2 = 2,800 × Rs.12 = Rs.33,600
Total cost of process 2 = Rs.33,600 + Rs.780 + Rs.6,000 + Rs.14,000 + 125% of
Rs.6,000 = Rs.61,880
Total input = 2,800 units, Finished goods = 2,600 units, Normal loss = 140 units &
Abnormal loss = 60 (balancing fig.)
Cost per good unit =
(Rs.61,880 – 140 x Rs.5) ÷ (2,600 units + 60units) = Rs. 61,180 ÷ 2,660 unit =
Rs.23
Cost of finished goods in process = 2,600 × Rs.23 = Rs.59,800
Cost of goods sold = Rs.59,800 + Rs.20,000 (op.fin.goods) – Rs.23,000
(cl.fin.goods)
= Rs.Rs.56,800
32 Answer : (a) <
TO
. Reason: Contribution per unit = Rs.25 – Rs.15 = Rs.10; P
Number of units = 1,50,000 × 1.20 = 1,80,000; >

Total contribution – fixed cost – Desired profit = Advertisement

Advertisement expense =
 1,80,000 × Rs.10 – (Rs.8,00,000 + Rs.7,00,000) – Rs.2,00,000
= Rs.1,00,000.
33 Answer : (d) <
TO
. Reason : In a variable costing system, only the variable manufacturing costs are recorded as P
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.
34 Answer : (b) <
TO
.
P
>
Reason : Break – even point in units =
Fixed cost = 40,000 × (50 – 25) = 40,000 × 25 = 10,00,000
Profit = 14,00,000
Add: Fixed cost 10,00,000
Total contribution 24,00,000

Quantity of units sold =

Options I II III
Selling price (Rs.) 47.50 46.50 45.00
Less: Variable cost per unit (Rs.) 25.00 25.00 25.00
Contribution/ units (Rs.) 22.50 21.50 20.00
Revised quantity to be sold (Units) 1,05,600 1,15,200 1,20,000
Total contribution (Rs.) 23,76,000 24,76,800 24,00,000
Based on the profitability consideration , option II is the best.
<
35 Answer : (c) TO
. Reason : An increase of Rs.1,000 in fixed selling overheads will decrease net profit equally P
in both absorption and marginal costing. Therefore, (c) is correct. >

36 Answer : (a) <

TO
. Reason : Breakeven point = Fixed cost ÷ (Selling price – Unit Variable Cost) P
= Rs.7,84,000 ÷ (Rs.15 – Rs.8) >

= Rs.7,84,000÷ Rs.7 = 1,12,000 units

After inflation, breakeven point = Rs.7,84,000(1.05) ÷ [Rs.15(1.04) –
Rs.8(1.10)]
= Rs.8,23,200 ÷ (Rs.15.60 – Rs.8.80)
= Rs.8,23,200 ÷ Rs.6.80 = 1,21,059 units
So the breakeven point will increase by 1,21,059 – 1,12,000 = 9,059 units
Percentage increase = (9,059 units ÷ 1,12,000 units) × 100 = 8.09%
37 Answer: (e) <
TO
. Reason: P
Depreciation (Rs. 7,50,000 – Rs. 30,000) ÷ 15 years Rs. 48,000p.a >
Electricity (12 units per hour × Rs. 2 per unit) Rs. 24
Special oil (Rs. 2,500 × 12) Rs. 30,000p.a
Maintenance (Rs. 500 ÷ 6 days × 300 days) Rs. 25,000p.a
Operating wages for 6 machines Rs.
 Rs. 450 × 3 operators × 50 67,500
Add: 40% fringe benefits 27,000
Wages for six machines 94,500 Departmental and general
work overhead Rs.
Last year actual 60,000
Add: 12.5% increase 7,500
Total (for 6 machines) 67,500 Computation of machine hour rate
Rs.
Particulars Amount Per hr
Standing Charges: 94,500
Operators Wages 67,500
Departmental and general 1,62,000
overhead
Total
Standing charges per Rs.1,62,000 ÷ (6 machines × 13.50
machine hour 2,000 hrs)
Machine Expenses: (Rs. 48,000 ÷ 2,000 hrs) 24.00
Depreciation (Rs. 30,000 ÷ 2,000 hrs) 24.00
Electricity (Rs. 25,000 ÷ 2,000 hrs) 15.00
Special oil 12.50
Maintenance 89.00
Machine Hour rate
38 Answer : (b) <
TO
. Reason : Out of pocket cost is that portion of the cost which involves payment to outsiders, P
i.e. gives rise to cash expenditure as opposed to such costs as depreciation , which >
do not involve any outflow of cash. Out of pocket cost are relevant for price
fixation during recession or when making a buy or make decision.
39 Answer : (a) <
TO
. Reason : Under LIFO method, profit will be less, because the recent purchase of materials P
with high price are issued to production and old low prices are used to value of >
closing stock result in high cost of production and low profit. Other options are not
correct.
40 Answer : (c) <
TO
. Reason : An activity based costing system identifies the casual relationship between the P
incurrence of cost and underlying activities that cause those cost. Under this >
system, costs are applied to products on the basis of resources consumed (drivers).
Therefore, (c) is correct. Other options are not correct.
41 Answer : (a) <
TO
. Reason : Notional costs should be included while ascertaining costs. This statement (a) is P
false. Other options given (b), (c), (d) and (e) are all correct. >

42 Answer : (c) <

TO
. Reason : In manufacturing aluminum ingots, the cost of electricity, which is required for P
processing, is an item of direct expense. It is not to be treated as direct material, >
direct wages, factory overheads and indirect labor. Therefore, (c) is correct.
43 Answer : (c) <
TO
. Reason : Option (c) is not true because wholesaler’s and manufacturers treat period costs as P
a deferred revenue expenditure and they amortize this expenditure over a few years. >

44 Answer: (e) <

TO
. Reason: Budgeted operating income statement of MNCLtd. P
 >
Rs. in lakh
Particulars Amount

Sales (40,000 x 1.25 = 50,000 units) x Rs.120 60.00

Less trade discount (5%) 3.00

Net sales 57.00

Less variable costs

Direct material @Rs.41.40 per unit (Rs.36 + 15%) 20.7

0
Direct labour @Rs.35.28 per unit (Rs.31.50 + 17.6 38.34
12%) 4
Contribution 18.66

Less fixed overheads

Factory 6.56
0
Administration (Rs.3.60 lakh + 8%) 3.88
8
Selling and distribution (Rs.4.50 lakh + 14%) 5.13 15.578
0
Net income (indicated) 3.082

Additional income needed (6 – 3.082) 2.918

Contribution required 21.578

(Rs.18.66 lakh + Rs.2.918 lakh)
Add variable costs 38.340

Net sales 59,918

Add trade discount 3.154

Gross sales (50,000 units)[(Rs.59.918 / 95) × 100] 63.072

Sales price per unit (Rs.) 126.14

45 Answer : (c) <

TO
. Reason : Certain decisions reflect the policies of the top management which results in P
periodic appropriation and these costs are referred to as programmed cost. >
Imputed costs are costs not actually incurred in some transactions but which are
relevant to the decisions as they pertain to a particular situation.
Relevant costs are those future costs which differ between alternatives. It is defined
as the costs which are affected and changed by a decision.
Committed costs are incurred to maintain the company’s facilities and physical
existence, and over which management has little or no discretion.
Discretionary costs are these costs which are not essential for the decision under
consideration or the accomplishment of management objectives but it is related to
management programs, new researches etc.
46 Answer: (e) <
TO
.
 Reason: P
>
Maximum capacity = Total days in 2004-05 2,920 hrs
× Single eight-hour shift
= 365 × 8
Less: Idle capacity

Sundays = 52 × 8 = 416 hrs

Holidays = 16 × 8 = 128 hrs

Stoppage due to = 160 hrs 704 hrs

cleaning, oiling, etc
Normal capacity 2,216 hrs

Overhead absorption rate = Overhead amount ÷ Rs. 13,580 ÷ 2,216

Normal capacity Rs. 6.13 per hr
47 Answer : (b) <
TO
. Reason : Service department costs are considered part of factory overhead and should be P
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.
48 Answer : (b) <
TO
. Reason : P
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
PV ratio =

=
49 Answer: (d) <
TO
. Reason: Under costing some products can lead to over costing other products which may P
become overpriced and lose market share. The use of company-wide allocation >
rates can result in under costing and over costing products that can lead to
inappropriate management decisions.
50 Answer : (b) <
TO
. Reason : The value of stock is not distorted under this method. Hence the answer is (b). The P
supplementary rate method facilitates the absorption of actual overhead incurred for >
production. The supplementary rate can be determined only after the end of the
accounting period. It requires a lot of clerical work. Correction of costs through
supplementary rates is necessary for maintaining data for comparison.
51 Answer : (d) <
. Reason : Allocation of costs is a distribution of costs that cannot be directly assigned to the TO
P
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.
52 Answer : (b) <
TO
. Reason : If the overhead cost charged to each cost center with a share of an overhead cost P
using an appropriate basis to estimate the benefit extracted by each cost center is >
called apportionment of overhead cost. There fore (b) is correct.
53 Answer: (a) <
TO
. Reason: Sales mix of products A:B:C P
= 1:3:6 or 10% of A, 30% of B and 60% of C >
Total contribution of the sales mix
= Proportionate contribution of A + Proportionate contribution of B +
Proportionate contribution of C
= 10% of Rs.12 + 30% of Rs.10 + 60% of Rs.8 = Rs.9.
Break-even sales units = (Rs.18,000 + Rs.9,000) ÷ Rs.9 = 3,000 units.
Break-even sales units of product B = 30% of 3,000 = 900units.
Break-even sales of product B = 900 × Rs.20 = Rs.18,000.
54 Answer : (d) <
TO
. Reason : Total fixed overhead = 12,000 units x Rs.4.00 = Rs.48,000. P
Rs.48,000 actual overhead ÷ 10,000 units actual production = Rs.4.80. >

Fixed overhead per unit = Rs.4.80.

Total cost per unit =
Material Rs.15 + Labor Rs.9 + Variable overhead Rs.5 + Fixed overhead Rs.4.80 =
Rs.33.80.
Cost of ending inventory = Rs.33.80 × 1,000 units
(10,000 units produced - 9,000 units sold) = Rs.33,800.
55 Answer : (c) <
TO
. Reason : It is given in the question that the secondary distribution of service P
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;
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

56 Answer : (b) <
TO
. Reason : Normal spoilage is an inventoriable cost of production that is charged to cost of P
goods sold when the units are sold. Abnormal spoilage is a period cost recognized >
when incurred. Rs.5,000 of abnormal spoilage is therefore expensed during the
month of December, 2005. In addition 50% of the normal spoilage is debited to cost
of goods sold because 50% (2,500 ÷ 5,000) of the units completed were sold during
the month. No spoilage is allocated to work-in-process because inspection occurs
after completion.
Therefore, normal spoilage = 50% of Rs.2,000 = Rs.1,000
Total spoilage charged against revenue = Rs.5,000 + Rs.1,000
= Rs.6,000
57 Answer : (c) <
TO
. Reason : If variable cost increases, contribution per unit decreases, break-even point will be P
increased, provided sales price per unit and fixed cost remain same. Other options >
given in (a),(b), (d) and (e) are not correct.
58 Answer : (a) <
TO
. Reason : Weighted Average Method: P
Input = 8,000 units + 34,000 units = 42,000 units; >

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

Equivalent production units of conversion =
100% of 36,000 + 80% of 6,000 = 36,000 + 4,800 = 40,800 units;
FIFO Method:
Input = 8,000 units + 34,000 units = 42,000 units;
Out put = 8,000 units + 28,000 units + 6,000 units = 42,000 units;
Equivalent production units of conversion =
40% of 8,000 units + 100% of 28,000 units + 80% of 6,000 =
= 3,200 + 28,000 + 4,800 = 36,000 units.
Excess equivalent units of production of conversion =
40,800 units – 36,000 units = 4,800 units.
59 Answer : (a) <
TO
. Reason : Statement showing operating time: P
Particulars Warehouse Warehouse >
A (Minutes) B (minutes)
Distance from factory 10
km. (Speed 30km per hour
or 1 km in 2 minutes)
Trip up and down journey 40 (2 × 20) 60 (3×20)
Loading 40 40
Unloading 30 20
Total 110 min. 120 or 2 hrs
Statement
showing operating cost per ton km.
 Particulars Warehouse A Warehouse B
(6 × 10 = 60 ton km.) (6 × 15 = 90 ton km.)
Standing 110 mts × Rs.18 per hr. 2 hrs × Rs.18 per hr.
charges = Rs.33 = Rs. 36
Operating 20 km. × Rs.2.40 per km. 30 km × Rs.2.40 per km.
charges = Rs.48 = Rs. 72
Total = Rs.81 = Rs.108
operating cost
Cost per ton km. Rs.81 ÷ 60 = Rs.1.35 Rs.108 ÷ 90 = Rs.1.20.
60 Answer : (c) <
TO
. Reason : Sales Domestic – 50% ( 1280 ÷ 80) × 50 8,00,000 P
Export (less 10% ) – 50% 7,20,000 >
Total1 15,20,000
Variable cost (640 ÷ 80) × 100 8,00,000
Contribution 7,20,000
Less: Fixed cost 5,20,000
Profit 2,00,000
61 Answer : (e) <
TO
. Reason : Joint cost = Rs.4,00,000 + Rs.2,00,000 + Rs.3,00,000 = Rs.9,00,000 P
Total sales value = 300 × Rs.3,000 + 240 × 4,000 + 120 × 5,000 = Rs.9,00,000 + >

Rs.9,60,000 + Rs.6,00,000 = Rs.24,60,000.

Share of joint costs of Product B = (Rs.9,00,000 ÷ Rs24,60,000) × Rs.9,60,000
= Rs.3,51,219.45
The cost of closing inventory of Product B = (Rs.3,51,219.45 ÷ 240) × 90
= Rs.1,31,707
62 Answer : (c) <
TO
. Reason : Under the terms of the contract, if contractee retains cash at the time of payments of P
the value certified of work-in-progress, it is called Retention money. Other options >
are not correct.
63 Answer : (c) <
TO
. Reason : Operating cost sheet for the year 2004-05: P
Total Per kwh >
Particulars
(Rs.) (Re.)
Plant supervision 3,00,000 0.15
Administrative overhead 2,00,000 0.10
Depreciation 1,00,000 0.05
Coal (5 kg × 20,00,000 × Re.1) 100,00,00 5.00
0
Operating labor 5,00,000 0.25
Repairs and maintenance 5,00,000 0.25
Lubricants and supplies 4,00,000 0.20
Total 120,00,00 6.00
0
64 Answer : (c) <
TO
. Reason : P
Rs. >
 Direct materials:
Opening stock 30,000
Purchases 4,50,000
Carriage inward 10,000
Octroi on purchases 1,800
4,91,800
Less: Closing stock 25,000
Cost of materials used 4,66,800
Add: Wages – paid 2,00,000
Wages – outstanding 30,000
Prime Cost 6,96,800
Add: Factory overheads 92,000
Add: Opening work-in-process 12,000
Cost of Work-in-Process 8,00,800
Less: Closing work-in-process 15,000
Cost of goods manufactured 7,85,800
65 Answer : (c) <
TO
. Reason : Let ‘x’ be the cost, ‘y’ be the profit and Rs.1,600 selling price per unit of radio. P
>
Hence, x + y = 1,600 -------------- (i)
Statement of present and future cost of a radio
Present
Increase in cost Anticipated cost
cost
Particulars (Rs.) (Rs.)
(Rs.)
(b) (c) = (a) + (b)
(a)
Direct material 0.3x 0.09x 0.39x
Direct labor 0.4x 0.04x 0.44x
Overheads 0.3x – 0.30x
Total x 0.13x 1.13x An
increase in material price, and wage rates resulted into a decrease in current profit
by 40% at present selling price; therefore we have:
1.13x + 0.6y = 1,600 --------------- (ii)
On solving (i) and (ii), we get:
x = Rs.1,207.55
y = Rs. 392.45
Current profit Rs.392.45 or 32.5% of cost
Future profit = Rs. 392.45 × 0.6 = Rs.235.47.
66 Answer : (b) <
TO
.
P
>
Reason : BEP =
Up to the product of 7,500 units

BEP = = = 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.
Therefore, Total BEP = 7,500 units + 3,600 units = 11,100 units.
67 Answer : (c) <
TO
. Reason : P
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 43 62 175

P/V ratio of merged plant =

Break even point of merged plant =

Break even capacity = (500/1,000) × 100 = 50%
68 Answer : (b) <
TO
. Reason: P/V ratio = (Rs.7.50 ÷ Rs.25) x 100 = 30%; P
Contribution per unit = Rs.25.00 – (Rs.7.50 + Rs.6.25 + Rs.3.75) = Rs.7.50 >

Number of units sold at 80% level = Rs.8,00,000 ÷ Rs.25 = 32,000 units; Maximum
capacity = 32,000 ÷ 80% = 40,000 units.
Fixed cost element in semi-variable cost = Rs.1,80,000 – 32,000 x Rs.3.75
= Rs.60,000.
Total fixed cost up to 80% = Rs.90,000 + Rs.60,000 = Rs.1,50,000;
Activity level at break-even point = Fixed cost ÷ contribution per unit
= Rs.1,50,000 ÷ 7.50 = 20,000
Activity level = 20,000 ÷ 40,000 = 0.5 or 50%.
69 Answer : (c) <
TO
. Reason : Income before tax = Rs.21,00,000 ÷ (1 – 30%) = Rs.30,00,000; Fixed cost per P
annum = Rs.3,75,00,000; >
Total contribution = Rs.30,00,000 + Rs.3,75,00,000 = Rs.4,05,00,000 ; Daily
contribution = Rs.1,000 – Rs.210 = Rs.790;
Number of room in a year = Rs.4,05,00,000 ÷ Rs.790 = 51,266 rooms ;
Number of rooms per day that the hotel must rent = 51,266 rooms ÷ 365 days =
140.45 or 141 rooms to earn a net income after taxes of Rs.21,00,000.
70 Answer : (d) <
TO
. Reason : Total cost of 4,000 units = Rs.14,000 and total cost of 3,000 units = Rs.12,000. P
Variable cost = Change in total cost ÷ Change in output = Rs.2,000 ÷ 1,000 units = >
Rs.2 per unit.
Fixed cost at 3,000 units = Rs.12,000 – 3,000 x Rs.2 = Rs.6,000
Break-even sales = Fixed cost + variable cost at break-even sales = Rs.6,000 +
5,000 × Rs.2 = Rs.16,000
 Sale price per unit = Rs.16,000 ÷ 5,000 = Rs.3.20 ;
Contribution to sales ratio = (Rs.3.20 – Rs.2) ÷ Rs.3.20 = 0.375 or 37.5%
71 Answer : (d) <
TO
. Reason : Fixed production cost per unit = Rs.3,60,000 /1,80,000 = Rs.2 P
Profit Statement for the Year (Under Absorption Costing Method) >

Total
Amount
Particulars amount
(Rs.)
(Rs.)
A Sales revenue 1,50,000 × Rs.20 30,00,000

B Cost of production

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

Increase in variable cost 35,000

Fixed cost 3,60,000

21,55,000

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

22,85,000

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

20,15,625

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

D. Selling expenses

Variable (1,50,000 × Rs.3) 4,50,000

Fixed 2,70,000 7,20,000

E. Net profit (C– D) 2,64,375

Working Notes:
1. In the absence of information concerning stock, it is valued at variable cost
Rs.11.00 per unit plus an apportionment of fixed cost at normal capacity, i.e.
Rs.2.
2. Cost of production of 1,60,000 units = Rs.21,55,000
Cost of 20,000 units = Rs.21,55,000 ÷ 1,60,000 × 20,000 = Rs.2,69,375.
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