Question Paper

Management Accounting – II (152) : April 2004

< Answer
1. If a company uses a predetermined rate of absorbing factory overhead, the volume variance is the >

(a) Under or over applied variable cost element of factory overhead

(b) Under or over applied fixed cost element of factory overhead
(c) Difference in budgeted cost and actual cost of fixed factory overhead items
(d) Difference in budgeted cost and actual cost of variable factory overhead items
(e) Difference in standard cost and actual cost of variable factory overhead items.
(1 mark)
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2. A budget in which a responsibility center manager must justify each planned activity and its >
estimated total cost is known as
(a) Conventional budget (b) Master budget
(c) Participative budget (d) Zero based budget
(e) Program planning and budget system.
(1 mark)
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3. Operation budgets normally cover a period of >

(a) One year or more (b) One year or less

(c) One year to two years (d) One year to three years (e) Two years.
(1 mark)
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4. A fixed factory overhead volume variance will exist if >

(a) Actual labor hours differ from budgeted labor hours

(b) Actual labor hours differ from standard labor hours
(c) Actual production volume differs from standard production volume
(d) The fixed factory overhead applied on the basis of standard labor hours for actual output differs
from actual fixed factory overhead
(e) The fixed factory overhead applied on the basis of standard labor hours for actual output differs
from the budgeted fixed factory overhead.
(1 mark)
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5. AAC Ltd. planned to produce 1,000 units of its product-P during the month of February 2004.The >
standard specifications of one unit of product-P includes 5kg. of material at Rs.12 per kg. Actual
production during the month was 1,068 units of product-P. The accountant computed a favorable
materials purchase price variance of Rs.520 and unfavorable material quantity variance of Rs.280.
Based on these variances, one should conclude that
(a) More materials were purchased than were used
(b) More materials were used than were purchased
(c) The actual cost of materials was less than the standard cost
(d) The actual usage of materials was less than the standard allowed
(e) The standard cost of material was less than the actual cost.
(1 mark)
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6. Life cycle costing >

(a) Includes only the cost of design and development of the product
(b) Includes only manufacturing costs incurred over the life of the product
(c) Includes only manufacturing cost, selling expense and distribution expense
(d) Emphasizes cost savings opportunities during the manufacturing cycle
(e) Is sometimes used as a basis for cost planning and product pricing.
(1 mark)
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7. A limitation of transfer prices based on actual cost is that they >

(a) Charge inefficiencies to the department that is transferring the goods

(b) Can lead to sub optimal decisions for the company as a whole
(c) Must be adjusted by some markup
(d) Must be adjusted by ROI (return on investment)
 (e) Lack clarity and administrative convenience.
(1 mark)
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8. Decentralized firms can delegate authority and yet retain control and monitor managers’ performance >
by structuring the organization into responsibility centers. Which of the following organizational
segments is most like an independent business?
(a) Revenue center (b) Profit center
(c) Cost center (d) Investment center (e) Contribution center.
(1 mark)
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9. Under standard cost system, labor rate variances are usually not attributable to >

(a) Union contracts approved before the budgeting cycle

(b) Labor rate prediction
(c) The use of single average standard rate
(d) The assignment of different skill levels of workers than planned
(e) Approved wage revisions after the budgeting cycle.
(1 mark)
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10. A budget manual, which enhances the operation of a budgeting system, is most likely to include >

(a) Employee hiring policies (b) Documentation of accounting system

(c) Company policies regarding the authorization of transaction
(d) Employee training policies (e) Distribution instructions for budget schedules.
(1 mark)
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11. The direct material usage budget and direct material purchase budget differ because of which of the >
following?
(a) The level of material scrap forecast occur
(b) The level of efficiency of men
(c) The level of efficiency of machines
(d) A change in the level of finished goods stock
(e) A planned change in the level of material stock.
(1 mark)
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12. The question of raw material in the purchases budget of a company may be higher than the quantity >
of raw material in the production budget because
(a) Stock levels are being reduced (b) Raw material prices are
falling
(c) The company obtains discount for bulk purchases
(d) Units sold will be higher than units made (e) High efficiency of men.
(1 mark)
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13. Which of the following departments has the primary responsibility for an unfavorable material yield >
variance?
(a) Purchasing department (b) Production department
(c) Stores department (d) Engineering department
(e) Inspection department.
(1 mark)
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14. If a company produces more than one product, the sales volume variance can be divided into which >
of the following additional variances?
(a) Sales price variance and flexible budget variance
(b) Sales mix variance and sales price variance
(c) Sales quantity variance and sales mix variance
(d) Sales mix variance and production volume variance
(e) Sales quantity variance and flexible budget variance.
(1 mark)
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15. Comparing actual results with a budget based on achieved volume is possible with the use of a >

(a) Monthly budget (b) Master budget

(c) Flexible budget (d) Rolling budget (e) Zero-based budget.
 (1 mark)
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16. The information contained in a cost of goods manufactured budget most directly relates to the >

(a) Materials used, direct labor, overhead applied, and ending work-in-process budgets
(b) Materials used, direct labor, overhead applied, and work-in-process inventories budgets
(c) Materials used, direct labor, overhead applied, work-in-process inventories, and finished goods
inventories budgets
(d) Materials used, direct labor, overhead applied and finished goods inventories budgets
(e) Material purchased, direct labor, overhead incurred and budgeted finished goods inventory.
(1 mark)
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17. The cash receipt budget includes >

(a) Funded depreciation (b) Operating supplies

(c) Extinguishments of debt (d) Loan proceeds
(e) Amortization of preliminary expenses.
(1 mark)
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18. If budgets are used to evaluate performance and to set limits on spending, the process will often result >
in departments adding something extra to ensure the budgets will be met. This extra is
(a) Management by objectives (b) Strategic planning
(c) Continuous budgeting (d) Budgetary slack
(e) Management by exception.
(1 mark)
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19. ‘The average human being has an inherent dislike for work and will avoid it if he can’- this job >
attitude is specifically dealt with in
(a) Douglas McGregor’s Theory X (b) Douglas McGregor’s Theory
Y
(c) The principles of human motivation as revealed by Abraham Maslow
(d) Herzberg’s Two Factor Theory (e) McDonald’s Theory Z.
(1 mark)
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20. The system of identification and communication that signals the manager when his attention is >
needed is known as
(a) Management by objective (b) Management information system
(c) Management by exception (d) Management control
(e) Responsibility accounting.
(1 mark)
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21. The budget that describes the long term position, goals and objectives of an entity within its >
environment is the
(a) Capital budget (b) Operating budget
(c) Cash management budget (d) Strategic budget
(e) Production budget.
(1 mark)
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22. Which of the following techniques would be best for evaluating the management performance of a >
department that is operated as a cost center?
(a) Return on assets ratio (b) Return on investment ratio
(c) Flexible budgeting (d) Variance analysis
(e) Residual income.
(1 mark)
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23. A set of concepts and tools applied for getting all the employees focused on continuous improvement >
in the eyes of the customers is popularly known as
(a) Quality control (b) Cost control
(c) Customer orientation (d) Self management
(e) Total quality management.
(1 mark)
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24. If the sales manager of a company accepts a rush order that will result in higher than normal >
manufacturing cost, these additional costs are charged to the sales manager because the authority to
accept or decline the rush order was given to the sales manager. This type of accounting system is
known as
(a) Responsibility accounting (b) Functional accounting
(c) Historical accounting (d) Reciprocal allocation
(e) Transfer price accounting.
(1 mark)
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25. For monitoring the overall financial and physical performance of an organization, which of the >
following information is required?
(a) Breakdown of sales, region-wise and customer-wise
(b) Return on investment (c) Production levels of various products
(d) Cash structure (e) All of the above.
(1 mark)
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26. Operating management of an organization requires the following information except >

(a) Capacity utilization (b) Productivity of labor and machinery

(c) Technological advances and new product development
(d) Overtime payments (e) Marketing and distribution costs.
(1 mark)
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27. Which of the following statements is false? >

(a) Value-chain is the linked set of value-creating activities from the basic raw material sources for
suppliers to the ultimate end-use product delivered
(b) Value chain requires an internal focus
(c) No firm is likely to span the entire value chain
(d) Each firm must be understood in the context of the overall value chain of value-creating
activities
(e) A firm is only a part of the larger set of activities in the value delivery system.
(1 mark)
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28. Scrap and costs of spoiled units that cannot be salvaged are the examples of >

(a) Appraisal costs (b) Internal failure costs

(c) External failure costs (d) Prevention costs
(e) Committed costs.
(1 mark)
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29. Which of the following is usually the longest stage in the product life cycle? >

(a) Introduction phase (b) Growth phase

(c) Maturity phase (d) Saturation phase (e) Decline Phase.
(1 mark)
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30. Which of the following is not a disadvantage of shadow price? >

(a) The use of shadow price is incompatible with the philosophy of decentralization through
divisionalisation
(b) To derive the shadow price, one has to obtain the dual solution to the mathematical
programming model developed for solving the production planning problem of the buying
division
(c) Assimilating the data and application of the model becomes a highly centralized affair
(d) Operating managers often do not understand and appreciate the concept of shadow price
(e) Shadow price can be used only when the resources are available in plenty and are not scarce.
(1 mark)
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31. Activities, their drivers and their costs may be classified as unit-level, batch level, product level, and >
facility level. If activity based costing information is prepared for internal purposes, the costs of
which of the following levels is/are most likely to be treated as period costs?
(a) Unit level (b) Batch level
(c) Product level (d) Facility level (e) Both (a) and (c)
 above.
(1 mark)
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32. Target pricing >

(a) Is more appropriate when applied to mature and long-established products

(b) Considers the variable costs and excludes fixed costs
(c) Is often used when costs are difficult to control
(d) Is a pricing strategy used to create competitive advantage
(e) Is well suited for complex products that require many sub-assemblies.
(1 mark)
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33. Top-to-bottom budget is also known as >

(a) Participative budget (b) Imposed budget

(c) Zero-based budget (d) Manpower budget (e) Master budget.
(1 mark)
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34. Basic standards are known as >

(a) Ideal standards (b) Current standards

(c) Measurement standards (d) High standards (e) Expected standards.
(1 mark)
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35. Which of the following is false with regard to full-cost pricing? >

(a) It is prone to distortion by accounting misapplications

(b) The normal mark-up is based on total cost
(c) It is useful in case the company has full knowledge of the demand curve
(d) Sellers do not take advantage of the buyers when the latter’s demand becomes acute
(e) It ignores vital economic considerations.
(1 mark)
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36. The relationship between the budgeted number of working hours and the maximum possible working >
hours in a budgeted period is
(a) Efficiency ratio (b) Activity ratio
(c) Calendar ratio (d) Capacity usage ratio
(e) Capacity utilization ratio.
(1 mark)
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37. Which of the following statements is true regarding flexible budget? >

(a) It accommodates changes in the interest rate

(b) It accommodates changes in the inflation rate
(c) It accommodates changes in activity levels
(d) It is used to evaluate capacity use
(e) It is a static budget that has been revised for changes in prices.
(1 mark)
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38. A company is currently using the budget as a tool for planning. The management has decided to use >
the budgets for control purposes also. To affect this change, the financial controller must
(a) Develop forecasting procedures
(b) Organize a budget committee and appoint a budget director
(c) Report daily to operating management all deviations from the plan
(d) Report daily to top management all deviations from the plan
(e) Synchronize the budgeting and accounting systems within the organizational structure.
(1 mark)
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39. Which of the following is/are true with regard to the period of budget? >

I. The budget period should be long enough to cover complete production of various products
II. For business of a seasonal nature, the budget period should cover atleast one entire seasonal
cycle
III. The budget period should be long enough to allow for the financing of production well in
advance of actual needs.
 (a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (I) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
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40. Fixed overhead cost variance is the difference between >

(a) Actual fixed cost and Budgeted fixed cost

(b) Actual fixed cost and Standard fixed cost
(c) Actual fixed cost and Applied fixed cost
(d) Budgeted fixed cost and Applied fixed cost
(e) Standard fixed cost and Applied fixed cost.
(1 mark)
< Answer
41. Sify Ltd. produces a commodity by blending two raw materials – X and Y. The following are the >
details regarding the raw materials:
Material Standard mix Standard price per kg.
X 44.4% Rs.5
Y 55.6% Rs.4 The standard process
loss is 15%. During the month of March 2004, the company produced 4,000 kg. of finished product.
The position of stock and purchases for the month of March 2004 is as under:
Material Stock as on March 01, Stock as on March 31, Purchases during
2004 2004 March 2004
Kg. Kg. Kg. Rs.
X 80 30 2,000 9,200
Y 100 120 2,500 9,500
The material yield variance of the company is
(a) Rs.747.50 (Favorable) (b) Rs.747.50 (Adverse)
(c) Rs.776.52 (Adverse) (d) Rs.776.52 (Favorable) (e) Rs.781.70 (Favorable).
(3 marks)
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42. Consider the following particulars pertaining to 1,000 units of a product produced during the month of >
March 2004:
Standard price per kg. of raw material Rs.10
Standard direct labor cost Rs.5,000
Standard direct labor hours 500
Standard overheads per direct labor hour Rs.3
Total standard cost per unit Rs.20
Material usage variance Rs.860 (A) The actual quantity of
raw material consumed during the month of March 2004 is
(a) 1,264 kgs (b) 1,364 kgs (c) 1,436 kgs (d) 1,634 kgs (e) 1,350
kgs.
(2 marks)
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43. Hiset Ltd. uses standard process costing method. The standard process cost card per month shows that >
3 hours of direct labor is required to produce one kg. of finished product and the fixed overheads,
which are recovered on direct labor hours, amount to Rs.120 per kg. of output. The budgeted output is
1,400 kgs. per month.
Actual production during the month of March 2004 is 1,370 kgs. and the direct labor hours utilized
during the month were 3,880.
The details of opening and closing work-in progress (WIP) are as under:
Opening work-in-progress – 200 kgs.: Degree of completion of labor and overheads – 60%
Closing work-in-progress – 350 kgs.: Degree of completion of labor and overheads – 40%
The company uses FIFO method for evaluation of stocks.
The fixed overhead efficiency variance is
(a) Rs.11,600 (Adverse) (b) Rs.11,600 (Favorable)
(c) Rs. 4,800 (Adverse) (d) Rs. 4,800 (Favorable) (e) Rs. 9,500 (Favorable).
(3 marks)
 < Answer
44. Tilak Ltd. has two divisions - A and B. The division A has the capacity to manufacture 83,000 units of >
a special component SC annually and it has some idle capacity currently. The budgeted residual income
for the division A is Rs.6,00,000. The relevant details extracted from the budget of A are as under:
Sales (to outside customers) = 65,000 units @ Rs.120 per unit
Variable cost per unit = Rs.78
Divisional fixed cost = Rs.15,00,000
Capital employed = Rs.50,00,000
Cost of capital = 18% per annum
Division B received an order for which it requires 18,000 units of a component similar to SC. An
additional variable cost of Rs.7 per unit will be incurred to make minor modifications to SC to suit the
requirements of Division B.
The minimum transfer price per unit which A should quote to B to achieve its budgeted residual
income is
(a) Rs.152 (b) Rs.93 (c) Rs.135 (d) Rs.163 (e) Rs.100.
(3 marks)
< Answer
45. Sai Ltd. manufactures three products – A, B and C. The following is the information pertaining to the >
products for the month of March 2004:
Product Units Machine hours per unit
A 300 2
B 520 5
C 450 4 The overheads incurred for the month of
March 2004 are as under:
Particulars Rs.
Factory overhead applicable to machine oriented activity 52,500
Set up costs 8,330
Costs of ordering materials 6,850
Handling materials 11,340 These
overheads are being absorbed on a machine hour rate. However, investigation into the production
overhead activities for the period reveals the following:
Particulars A B C
Number of set-ups 7 6 4
Number of material orders 3 4 3
Number of times material was handled 8 10 9 The
approximate overhead cost per unit of product B under Activity Based Costing is
(a) Rs.75.00 (b) Rs.71.50 (c) Rs.72.80 (d) Rs.70.50 (e)
Rs.65.00.
(3 marks)
< Answer
46. A company estimates its direct material requirements for the month of May 2004 to be Rs.3,00,000 and >
the direct labor to be Rs.1,80,000. It is the policy of the company to absorb overheads as under:
Factory overheads 50% of direct labor
Administrative overheads 20% of factory cost
Selling and distribution overheads 20% of factory cost

It is estimated that the selling and distribution overheads will increase by 15% in the month of May
2004. The company sells goods at a profit of 20% on sales.
The budgeted sales for the month of May 2004 is
(a) Rs.8,15,100 (b) Rs.9,78,120 (c) Rs.10,18,875 (d) Rs.9,57,600 (e) Rs.9,97,500.
(2 marks)
< Answer
47. MM Ltd. has estimated the following quarter-wise sales for its product for the year 2004-05: >

Quarter I II III IV
Sales (units) 5,000 6,250 6,500 7,000 The stocks to be
maintained are as under:
 Particulars Finished goods (units) Raw materials (kg.)

Opening stock 1,200 2,800

Closing stock 1,100 3,500 Each unit of finished
output requires 2 kg. of raw materials. The production pattern in each quarter is based on 80% of the
sales of the current quarter and 20% of the sales of the next quarter. The company proposes to purchase
the entire annual requirement of raw material in the first three quarters as under:

Quarter Purchase of raw materials as % of total annual Price per kg.

requirement in quantity Rs.
I 30% 12
II 50% 13
III 20% 14 The budgeted
amount to be spent to purchase raw materials for the year 2004-05 is
(a) Rs.6,45,000 (b) Rs.6,50,160 (c) Rs.6,32,100 (d) Rs.6,42,500 (e)
Rs.6,55,000.
(2 marks)
< Answer
48. Consider the following particulars pertaining to Shiva Ltd. for the month of February 2004: >

Overheads cost variance = Rs.1,880 (Adverse)

Overheads volume variance = Rs.1,050 (Adverse)
Budgeted hours for February 2004 = 800 hours
Budgeted overheads for February 2004 = Rs.16,000
Actual rate of overheads = Rs.19 per hour.
The overhead capacity variance is
(a) Rs.1,700 (Favorable) (b) Rs.1,700 (Adverse)
(c) Rs.1,716 (Favorable) (d) Rs.1,716 (Adverse) (e) NIL.
(2 marks)
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49. Consider the following particulars for the month of March 2004: >

Budgeted fixed production overhead cost= Rs.1,10,000

Budgeted production = 5,500 units
The fixed overhead cost was under absorbed by Rs.12,000 and the fixed production overhead
expenditure variance was Rs.2,500 (Adverse).
The number of units produced during the month of March 2004 was
(a) 5,025 (b) 5,625 (c) 4,775 (d) 4,550 (e) 4,850.
(2 marks)
< Answer
50. Jeevan Ltd. has normal capacity of 50 machines working 8 hours per day of 25 days in a month. The >
budgeted fixed overheads of a month are Rs. 90,000. The standard time required to manufacture one
unit of product is 5 hours. In a particular month, the company worked for 22 days of 390 machine
hours per day and produced 1,700 units of the product. The actual fixed overheads incurred were Rs.
80,000.
The total fixed overhead variance and calendar variance are
(a) Rs.10,000 (F) and Rs.10,800(A) respectively
(b) Rs.3,500 (F) and Rs.10,800 (A) respectively
(c) Rs.10,000 (A) and Rs.9,000 (A) respectively
(d) Rs.3,500 (A) and Rs.10,800 (A) respectively
(e) Rs.13,500 (A) and Rs.10,000 (F) respectively.
(2 marks)
< Answer
51. Consider the following particulars pertaining to products A and B of a company: >

Particulars A B
Estimated production (units) 14,000 16,000
Total variable costs (other than direct labor) (Rs.) 5,60,000 7,20,000
Direct labor cost per hour (Rs.) 8 6
Number of labor hours per unit 4 4
Fixed costs (Rs.) 8,50,000 10,00,000 The
investment in fixed capital is Rs.15,60,000 and working capital requirement amounts to Rs.5,00,000. A
 return of 20% on investment is expected.
If the contribution per direct labor hour is expected to be the same for both the products, the selling
price of product A is
(a) Rs.75.40 (b) Rs. 72.00 (c) Rs.147.40 (d) Rs.115.40 (e)
Rs.107.40.
(2 marks)
< Answer
52. The budgeted and actual sales of a concern are as under: >

Budget Actual
Product Quantity Price Quantity Price
(kgs.) (Rs.) (kgs.) (Rs.)
A 2,500 15 2,400 14.50
B 2,600 18 2,450 19.40
C 2,900 20 3,250 19.60 The sales mix variance is
(a) Rs.1,968.75 (Adverse) (b) Rs.1,968.75 (Favorable)
(c) Rs.4,958.75 (Adverse) (d) Rs.1,021.25 (Favorable)
(e) Rs.7,591.25 (Adverse).
(1 mark)
< Answer
53. The estimated annual production of products P and Q are 8,000 units and 18,000 units respectively. The >
budgeted cost details of these products are as under:
Particulars P Q
Direct materials per unit Rs.60 Rs.45
Direct labor per unit (@Rs.5 per hour) Rs.35 Rs.40
Selling overheads per unit (60% variable) Rs. 8 Rs.10 The
other overheads are charged to the products as under:
Factory overheads (50% fixed) = 80% of direct wages
Administrative overheads (100% fixed) = 10% of factory cost
The fixed capital investment is Rs.15,00,000 and the working capital requirement is equivalent to 3
months stock of cost of sales of P and 4 months stock of cost of sales of Q. A return on investment of
20% is expected.
The expected return on capital employed is
(a) Rs.4,96,580 (b) Rs.4,38,000 (c) Rs.4,61,760 (d) Rs.5,23,760 (e)
Rs.4,90,000.
(3 marks)
< Answer
54. Machining Division of Coalis Ltd., which is operating at full capacity, manufactures and sells 6,000 >
units of component KL in a perfectly competitive market. Revenue and cost data are as follows:
Particulars Rs.
Variable cost per unit 24
Fixed cost 5,00,000
Sales value 18,00,000 The Assembly Division received an order for
which it requires the component KL. The minimum transfer price per unit that should be charged by
Machining Division to other division of the company is
(a) Rs.150 (b) Rs.200 (c) Rs.250 (d) Rs.300 (e) Rs.324.
(1 mark)
< Answer
55. Consider the following information pertaining to Prakash Ltd. >

Particulars May 2004 June 2004 July 2004

Expected sales (units) 12,000 14,000 13,000
Estimated wages and other 2,25,000 2,60,000 2,80,000
manufacturing expenses Rs.)
Prakash Ltd. sells the goods at Rs.65 per unit. 50% of the sales are on cash. The debtors are estimated
to be collected the next month. One unit of finished output requires 2 units of raw material and is
estimated to be purchased for Rs.5 per unit. The production in a month includes half of that month’s
sales and half of next month’s sales. The raw material required in a month is purchased in the same
month on credit. The creditors are paid in the next month. The wages and other expenses are paid in the
 month in which they are incurred. The cash surplus in the month of June 2004 will be
(a) Rs.8,45,000 (b) Rs.4,95,000 (c) Rs.5,65,000 (d) Rs.4,55,000 (e)
Rs.4,52,000.
(3 marks)
< Answer
56. During the month of March 2004, 560 kg. of material was purchased at a total cost of Rs.15,904. The >
stocks of material increased by 15 kg. It is the company’s policy to value the stocks at standard
purchase price. If the material price variance was Rs.224 (Adverse), the standard price per kg. of
material is
(a) Rs.28.40 (b) Rs.28.00 (c) Rs.28.80 (d) Rs.29.20 (e)
Rs.29.60.
(1 mark)
< Answer
57. If the asset turnover and profit margin of a company are 1.85 and 0.35 respectively, the return on >
investment is
(a) 0.65 (b) 0.35 (c) 1.50 (d) 5.29 (e) 0.19
(1 mark)
< Answer
58. Rajni Ltd. is currently operating at 80% capacity level. The production under normal capacity level is >
1,50,000 units. The variable cost per unit is Rs.14 and the total fixed costs are Rs.8,00,000. If the
company wants to earn a profit of Rs.4,00,000, then the price of the product per unit should be
(a) Rs.37.50 (b) Rs.38.25 (c) Rs.24.00 (d) Rs.34.50 (e)
Rs.36.00.
(1 mark)
< Answer
59. AB Ltd. manufactures a single product at the operated capacity of 40,000 units while the normal >
capacity of the plant is 50,000 units per annum. The company has estimated 20% profit on sales
realization and furnished the following budgeted information:
50,000 units 40,000 units
Particulars
(Rs.) (Rs.)
Fixed overheads 2,00,000 2,00,000
Variable overheads 3,00,000 2,40,000
Semi-variable overheads 3,00,000 2,60,000
Sales realization 18,00,000 14,40,000 The company has
received an order from a customer for a quantity equivalent to 10% of the normal capacity. It is noticed
that prime cost per unit of product is constant
If the company desires to maintain the same percentage of profit on selling price, the minimum price
per unit to be quoted for new order is
(a) Rs.26.63 (b) Rs.27.97 (c) Rs.25.40 (d) Rs.23.26 (e)
Rs.30.59.
(3 marks)
< Answer
60. KV Ltd., is planning to produce a new model of calculator. The potential demand for the next year is >
estimated to be 1,75,000 units. The company has the capacity to produce 7,00,000 units and could sell
1,75,000 units at a price of Rs.625 per calculator. The demand would double for every decrease of
Rs.75 in the selling price. The company expects a minimum margin of 20%.
At full capacity level, the target cost per unit will be
(a) Rs.475 (b) Rs.440 (c) Rs.380 (d) Rs.500 (e) Rs.400.
(1 mark)
< Answer
61. Vinak Ltd. services washing machines and clothes dryers. It charges customers for the spare materials >
with markup on variable cost. The company has five employees, each earning Rs. 6,000 per year and
spending 1,000 hours per year on service calls. It sells parts that cost Rs. 45,000 annually. The
company has other costs of Rs. 25,000 a year, which is allocated two-thirds to labor and the remainder
to material. The amount of markup on labor cost, if the target profit of the company is Rs.20,000 per
annum, is
(a) Rs.18,000 (b) Rs.12,000 (c) Rs.30,000 (d) Rs.48,000 (e)
Rs.27,000.
(2 marks)
 < Answer
62. Consider the following data of a company during the month of March 2004: >

i. Budgeted hours 4,000

ii. Standard hours for actual production 4,440
iii. Maximum possible hours in the budget period 4,800
iv. Actual hours 3,800
The activity ratio of the company during the month of March 2004 is
(a) 111% (b) 120% (c) 95% (d) 117% (e) 126%.
(1 mark)
< Answer
63. Sanjay is a divisional manager for C-Top Ltd. He has been assigned the task of creating a production >
budget for his division, which produces the company’s most popular stuffed animal. Budgeted sales
for this toy for the next year have been set at 5,00,000 units, desired ending finished goods inventory at
1,50,000 units, and Sanjay desires 60,000 equivalent units in ending work-in-process inventory. The
opening finished goods inventory for the next year is 80,000 units, with 50,000 equivalent units in
beginning work-in-process inventory. How many equivalent units should Vijay plan for his division to
produce?
(a) 5,50,000 (b) 5,75,000 (c) 7,25,000 (d) 5,00,000 (e)
5,80,000.
(2 marks)
< Answer
64. Adarsh Ltd. is preparing its cash budget for the next period. Sales are expected to be Rs. 1,00,000 in >
April 2004, Rs. 2,00,000 in May 2004, Rs.3,00,000 in June 2004 and Rs.1,00,000 in July 2004. Half
of all sales are cash sales, and the other half are on credit. Experience indicates that 70% of the credit
sales will be collected in the month following the sale, 20% the month after that, and 10% in the third
month after the sale. The budgeted collection for the month of July 2004 is
(a) Rs.1,30,000 (b) Rs.1,80,000 (c) Rs.2,60,000 (d) Rs.3,60,000 (e)
Rs.2,00,000.
(2 marks)
< Answer
65. The following data pertaining to Tishan Ltd. which is operating at 70% of the capacity: >

Particulars At 70% capacity (Rs.)

Variable overheads:
Indirect labor 21,000
Indirect material 10,500
Semi-variable overheads:
1 10,500
3
Power ( fixed, balance variable) 1,400
Repairs and maintenance (60 % fixed, 40 % variable)
Fixed overheads: 9,000
Depreciation 4,000
Insurance 3,000
Others
Total 59,400
Estimated direct labor hours – 1,15,500 hrs.
The overhead recovery rate per direct labor hour at 80% is
(a) 0.555 (b) 0.492 (c) 0.536 (d) 0.465 (e) 0.634.
(2 marks)
< Answer
66. A timber merchant purchased 2,000 cft. of timber logs on January 01, 2004 at the rate of Rs.160 per >
cft and stored them in his timber yard for three months for seasoning. In the timber yard the following
items of expenses were incurred during the period of seasoning:
(i) (i) Rent –Rs.14,200 per quarter
(ii) (ii) Salaries of 6 guards at the rate of Rs.300 per month
(iii) (iii) Incidental expenditure for maintenance, power, lighting, etc. Rs.900 per month
(iv) (iv) Annual share of administration overheads Rs.16,000.
70% of the floor area of the godown and other connected operations were incurred for stocking the
 seasoned timber. Loss in volume of the logs due to seasoning should be taken at 8%.
If the timber merchant desires a profit of 20% on cost, the selling price of the seasoned timber per cft
as on March 31, 2004 is
(a) Rs.225.85 (b) Rs.183.92 (c) Rs.203.05 (d) Rs.229.90 (e) Rs.220.70.
(2 marks)
< Answer
67. Chandana Ltd. is attempting to compute costs for its three products A, B and C for pricing purposes. >
The company has annual fixed manufacturing costs of Rs. 4,73,625. The variable costs per unit of the
company’s products are as follows:

Product Variable costs of manufacture (Rs.)

A 10.50
B 12.90
C 11.80
The company expects to produce and sell
45,000 units of A, 90,000 units of B, and 75,500 units of C annually. Company’s policy is to add a
markup of 20 percent to each product’s total manufacturing costs to compute the tentative selling price.
The selling prices of products A, B and C, if fixed costs are allocated on the basis of number of units
produced, are
(a) Rs. 15.30, Rs. 18.18 and Rs. 16.86 respectively
(b) Rs. 18.18, Rs. 15.30 and Rs. 16.86 respectively
(c) Rs. 15.30, Rs. 18.18 and Rs. 19.25 respectively
(d) Rs. 12.53, Rs. 18.18 and Rs. 16.86 respectively
(e) Rs. 15.30, Rs. 18.18 and Rs. 17.85 respectively.
(2 marks)
< Answer
68. The data relating to Bhanu Ltd. for the month of March 2004 are as follows: >

Output (units) 9,500

Wages paid for 18,000 hours Rs. 49,500
Material purchased 5,000 kg Rs. 45,000

Variances :
Particulars Rs.
Labor rate 3,000 (A)
Labor efficiency 5,000 (F)
Labor idle time 675 (A)
Material price 2,200 (F)
Material usage 1,440 (F) The standard prime cost per unit is

(a) Rs.9.43 (b) Rs.12.00 (c) Rs.9.95 (d) Rs.10.47 (e)

Rs.19.89.
(2 marks)
69. ABC Ltd. has the following cost components for 75,000 units of product X for the month of March
2004:
Raw materials = Rs.7,50,000
Direct labor = Rs.6,07,500
Manufacturing overheads = Rs.2,50,000 (40% fixed)
Selling and administrative overheads = Rs.3,75,000 (70 % fixed)
The total costs to produce and sell 90,000 units in the month of April 2004 are
(a) Rs.24,60,000 (b) Rs.24,56,760
(c) Rs.23,86,760 (d) Rs.22,91,000 (e)
Rs.23,06,500.
(2 marks)
< Answer
70. Satish Ltd. is currently working at 50% capacity and produces 10,000 units. >

At 50% working, the product cost is Rs. 180 per unit and it is sold at Rs. 200 per unit.
At 60% working, raw material cost increases by 2% and selling price falls by 2%.
The unit cost of Rs. 180 is made up as follows:
Particulars Rs.
Material 100
Labor 30
Factory overhead 30 (40 % fixed)
Administration overhead 20 (50 % fixed)
The total profit at 60% level of
capacity is
(a) Rs.2,20,000 (b) Rs.2,12,000 (c) Rs.2,32,000
(d) Rs.2,25,000 (e) Rs. 1,95,000.
(2 marks)

END OF QUESTION PAPER

 Suggested Answers
Management Accounting – II (152) : April 2004
Section A

1. Answer : (b) < TOP

>
Reason : The volume variance is the under applied or over applied of fixed factory overhead. It is the
difference between the budgeted fixed factory overhead and applied (standard) fixed factory
overhead. The volume variance is not applicable in case of variable factory overhead. Other
options (a), (c), (d) and (e) are not correct.
2. Answer : (d) < TOP
>
Reason : A budget in which a responsibility center manager must justify each planned activity and its
estimated total cost is called Zero based budget. Other options are not correct.
3. Answer : (b) < TOP
>
Reason : Operation budgets normally cover a period of one year or less. Other options are not correct.
4. Answer : (e) < TOP
>
Reason : A fixed factory overhead volume variance is the difference between the budgeted fixed factory
overhead and the overhead applied based on a predetermined rate and standard direct labor
hours allowed for the actual output. Option (a) is incorrect. Option (b) is incorrect because the
difference between actual direct labor hours and standard direct labor hours allowed is the
basis of the variable overhead efficiency variance. Option (c) is incorrect because it is not the
difference between actual production and standard production. Option (d) is incorrect because
the difference between fixed factory overhead applied on the absis of standard allowed direct
labor hours and for actual output the budgeted fixed factory overhead defines the total fixed
overhead variances.
5. Answer : (c) < TOP
>
Reason : The materials price variance may be isolated at the time of purchase or at the time of transfer
to production. It equals the actual quantity of materials purchased or transferred times the
difference between the actual and standard unit prices. Hence, a favorable materials price
variance means that materials were purchased at a price less than the standard price. Therefore,
option (e) is not correct. Option (c) is correct.
Option (a) and (b) are incorrect because no variance relates quantity purchased to quantity
used. Option (d) is incorrect because the unfavorable quantity variance indicates the more
materials were used than allowed by the standard. The material quantity variance equals the
standard unit price times the difference between the actual quantity used and the standard
quantity used and the standard quantity allowed for the actual output.
6. Answer : (e) < TOP
>
Reason : Life cycle costing estimates a product’s revenue and expenses over its expected life cycle. This
approach is especially useful when revenues and related costs do not occur in the same period.
It emphasizes the need to price products to cover all costs, not just those for production.
Hence, costs are determined for all value chain categories: upstream ( R & D, design),
manufacturing and downstream (marketing, distribution and customer service). The result is to
highlight upstream and downstream costs in the cost planning process that often receive
insufficient attention.
7. Answer : (b) < TOP
>
Reason : The optimal transfer price of a selling division should be set at a point that will have the most
desirable economic effect on the firm as a whole while at the same time continuing to motivate
the management of every division to perform efficiently. Setting the transfer price based on
actual costs rather than standard costs would give the selling division little incentive to control
costs.
Option (a) is incorrect because inefficiencies are charged to the buying department. Options
(c) and (d) are not correct, because by definition, cost based transfer prices are not adjusted by
mark-up or ROI. Option (e) is incorrect because cost-based transfer price which provides the
advantages of clarity and administrative convenience.
8. Answer : (d) < TOP
>
Reason : An investment center is the organizational type most like an independent business because it is
 responsible for its own revenues, cost incurred and capital invested. The other types of centers
do not incorporate all three elements.
Option (a) is incorrect because a revenue center is responsible only for revenue generation, not
for costs or capital investment. Option (b) is incorrect because a profit center is responsible for
revenues and costs but not for invested capital. Option (c) is incorrect because a cost center is
evaluated only on the basis of costs incurred. It is not responsible for revenues and invested
capital. Option (e) is not correct because it is responsible for revenues and variable costs but
not invested capital.
9. Answer : (a) < TOP
>
Reason : The labor price (rate) variance is the difference between the actual rate paid and standard rate
times the actual hours. The difference may be attributable to a change in labor rates since the
establishment of the standards, using a single average standard rate despite different rates
earned among different employees, assigning higher-paid workers to job estimated to require
lower-paid workers (or vice versa), or paying hourly rates but basing standards on piece work
rates (or vice versa). The difference should not be caused by a union contract approved before
the budgeting cycle because such rates would have been incorporated into the standards. Other
options given in (b), (c), (d) and (e) are the causes for labor rate variance.
10. Answer : (e) < TOP
>
Reason : A budget manual describes how a budget is to be prepared. Items usually included in a budget
manual are a planning calendar and distribution instructions for all budget schedules.
Distribution instructions are important because once a schedule is prepared, other departments
within the organization will use the schedule to prepare their own budget. Without distribution
instructions, someone who needs a particular schedule may be overlooked. Therefore option
(e) is correct.
11. Answer : (e) < TOP
>
Reason : The direct material usage budget and direct material purchases budget differ because of a
change in the level of material stock. If stock is required to maintain in the production,
material purchase should be more than the material usage. Therefore, (e) is correct.
12. Answer : (c) < TOP
>
Reason : If the company obtains discount for bulk purchases, the company can purchase more quantity
of materials than requirements for cost saving. The high purchase of materials is not useful if
the company wants to reduce the stock level. The low price of materials and high sales volume
are not the reasons for high purchase of materials.
13. Answer : (b) < TOP
>
Reason : When actual production is less than the standard production it is an unfavorable material yield
variance. This is the responsibility of the production department. This is not the responsibility
of the purchasing, stores, engineering and inspection department. Therefore (b) is true.
14. Answer : (c) < TOP
>
Reason : The sales volume variance can be divided into the sales quantity variance and the sales mix
variance. The sales quantity variance is the change in contribution margin caused by the
difference between actual and budgeted volume, assuming that budgeted sales mix, unit
variable costs, and unit sales prices are constant. Thus, it equals the sales volume variance
when the sales mix variance is zero. In a multiproduct company, the sales mix variance is a
variance caused by a sales mix that differs from that budgeted. For example, even when the
sales quantity is exactly as budgeted, an unfavorable sales mix variance can be caused by
greater sales of a low-contribution product at the expense of lower sales of a high-contribution
product.
15. Answer : (c) < TOP
>
Reason : A flexible budget is essentially a series of several budgets prepared for many levels of sales of
production. At the end of the period, management can compare actual costs or performance
with the appropriate budgeted level in the flexible budget. New columns can quickly be made
by interpolation or extrapolation, if necessary. A flexible budget is designed to allow
adjustment of the budget to the actual level of activity before comparing the budgeted activity
with actual results.
16. Answer : (b) < TOP
>
Reason : Cost of goods manufactured is equivalent to manufacturing costs incurred during the period,
plus beginning work-in-process, minus ending work-in-process. A cost of goods manufactured
budget is therefore based on materials, direct labor, factory overhead, and work-in-process.
17. Answer : (d) < TOP
>
Reason : A cash budget may be prepared monthly or even weekly to facilitate cash planning and
control. The purpose is to anticipate cash needs while minimizing the amount of idle cash.
The cash receipts section of the budget includes all sources of cash. One such source is the
proceeds of loans.
18. Answer : (d) < TOP
>
Reason : Budgetary slack is the term referring to the underestimation of probable performance in a
budget. With slack in a budget, a manager can achieve the budget more easily. Slack must be
avoided if a budget is to have its desired effects. Other options are not correct.
19. Answer : (a) < TOP
>
Reason : McGregor’s Theory X is based on the conception that ‘The average human being has an
inherent dislike of work and will avoid it if he can’. Because of this human characteristic of
dislike for work most people must be coerced, controlled, and directed towards the
achievement of goal. Option (b) is incorrect as this theory is based on principles of human
motivation as revealed by Abraham Maslow. Option (c) is incorrect as it is set forth hierarchy
of human needs. Option (d) and (e) are not correct.
20. Answer : (c) < TOP
>
Reason : The system of identification and communication that signals the manager when his attention is
needed is known as management by exception. The system remains silent when attention of
the manager is not required. The manager can devote attention only to those areas which
require managerial action.
21. Answer : (d) < TOP
>
Reason : Strategic budget is a form of long range planning based on identifying and specifying
organizational goals and objectives. The strength and weaknesses of the organization are
evaluated and risk levels are assessed. The influences of environmental factors are forecasted
to derive the best strategy for reaching the organization’s objectives. Other options are not
correct.
< TOP
22. Answer : (d) >
Reason : A cost center is a responsibility center that is responsible for costs only. Of the alternatives
given, variance analysis is the only one that can be used in a cost center. Variance analysis
involves comparing actual costs with predicted or standard costs. Other options are not true.
< TOP
23. Answer : (e) >
Reason : Total quality management is often termed as a set of concepts and tools for getting all
employees focused on continuous improvement in the eyes of the customer. It is neither
quality control (a) nor cost control (b). Customer orientation is one of the core concepts of
total quality management. TQM aims at eliciting greater employee commitment through
shared decision making and introduce various forms of self management (d). This is one of the
elements in TQM.
24. Answer : (a) < TOP
>
Reason : Responsibility accounting holds managers responsible only for factors under their control. For
this purpose, operations are organized into responsibility centers. Costs are classified as
controllable and non-controllable, which implies that some revenues and costs can be changed
through effective management. If a manager has authority to incur costs, a responsibility
accounting system will charge them to the manager’s responsibility center. So, this type of
accounting is known as Responsibility accounting.
25. Answer : (e) < TOP
>
Reason : For monitoring the overall financial and physical performance of the organization, information
relating to breakdown of sales, region-wise and customer-wise, return on investment,
production levels of various products, cash structure is required to the corporate management.
Therefore, option (e) is correct.
26. Answer : (c) < TOP
>
Reason : The information pertaining to technological advances and new product development is
required to corporate management of the organization. Other information like capacity
utilization, productivity of labor and machinery, overtime payments and marketing and
distribution costs is required to operating management of the organization.
27. Answer : (b) (b)
 Reason : Value chain requires an external focus unlike conventional management accounting. Hence (b)
is false. Value-chain is the linked set of value-creating activities from the basic raw material
sources for suppliers to the ultimate end-use product delivered into the final customer’s hands.
No firm is likely to span the entire value chain. Typically, a firm is only a part of the larger set
of activities in the value delivery system. Each firm must be understood in the context of the
overall value chain of value-creating activities.
28. Answer : (b) < TOP
>
Reason : Scrap and costs of spoiled units that cannot be salvaged are examples of internal failure costs.
These are the costs associated with materials and products that fail to meet quality standards
and result in manufacturing losses. These defects are identified before the goods are shipped to
customers. Hence the answer is (b). Appraisal costs are incurred to ensure that materials,
products and services meet quality standards. They begin with the inspection of raw materials
and parts from vendors. External failure costs are the costs incurred when inferior-quality
products or services are sold to customers. Prevention costs are the costs incurred to reduce the
number of defective units produced or the incidence of poor-quality service. Committed cost is
fixed costs which results from the decision of the management in the prior period and is not
subject to the management control in the present on a short-run basis.
29. Answer : (c) < TOP
>
Reason : The maturity phase begins after sales cease to rise exponentially. The causes of the declining
percentage growth rate is the market saturation. Sales growth continues but at a diminishing
rate because of the diminishing number of potential customers. This is usually the longest
stage in the life cycle and most existing products are in this stage.
30. Answer : (e) < TOP
>
Reason : Only a constrained resource has shadow price. Where resources are not fully utilized, shadow
price is zero. The shadow price can be used only when the resources are scarce. Hence the
answer is (e). The use of shadow prices is incompatible with the philosophy of
decentralization through divisionalisation. To derive at the shadow prices one has to obtain the
dual solution to the mathematical programming model developed for solving the production
planning problem of the buying division. A great deal of data like the market data for the
buying division, cost data for the selling and buying divisions and capcacity data for both the
divisions are required. Hence assimilating the data and application of the model becomes a
highly centralized affair. Operating managers do not understand and appreciate the concept of
shadow price.
31. Answer : (d) < TOP
>
Reason : A difficulty in applying ABC is that, whereas the unit level, batch level and product level costs
of activities pertain to specific products or services, facility level costs do not. Thus facility
level costs are not accurately assignable to products. The theoretically sound solution is to
treat them as period costs. Nevertheless, Organizations that apply ABC ordinarily assign them
to products to obtain a full absorption costs suitable for external reporting. However, for
internal purposes, facility level costs should be treated as period costs to avoid distorting
decisions about cost efficiency, pricing and profitability.
32. Answer : (d) < TOP
>
Reason : Target pricing and costing may result in a competitive advantage because it is customer-
oriented approach that focuses on what products can be sold at what prices. Hence (d) is the
answer. It is also advantageous because it emphasizes control over costs prior to their being
locked in during the early links in the value chain. The company sets a target price for a
potential product reflecting what it believes consumer will pay and competitors will do. After
subtracting the desired profit margin, the long-run target cost is known. If current costs are too
high to allow an acceptable profit, cost-cutting measures are implemented or the product is
abandoned. The assumption is that target price is the constraint. Option (a) is incorrect because
target pricing is used on products that have not yet been developed. Option (b) is incorrect
because target pricing includes all costs. Option (c) is incorrect because target pricing can be
used in any situation but is most likely to succeed when costs can be well controlled. Option
(e) is not correct because it is difficult to use with complex products that require many sub-
assemblies such as automobiles. This is because tracking costs becomes too complicated and
tedious, and cost analysis must be performed at so many levels.
33. Answer : (b) < TOP
>
Reason : Top-to-bottom budget is also known as imposed budget. In this type of budget, the budgeted
quantities are obtained from the top level managers and then communicated downward to
lower level managers. Lower level managers do not participate in this type of budget. Hence
 the answer is (b). In participative budget, estimations of lower level managers are coordinated
and communicated upward to the top-level managers. Zero-based budgeting is a method of
budget review and evaluation that requires all projects and programs to justify all resources.
Manpower budget will take an overall view of the organizations needs for manpower for all
areas of activity for a period of years. Master budget is a budget which is prepared from and
summarizes the functional budgets.
34. Answer : (c) < TOP
>
Reason : Basic standards are known as measurement standards. These are established at a particular
time and remain unchanged over a period of time. These standards are not revised frequently,
but if they are revised, it is only due to changes in specification of materials and technology.
They may also be revised if there are substantial price changes.
< TOP
35. Answer : (c) >
Reason : Full-cost pricing is useful in case the company lacks knowledge of demand curve. Hence (c) is
false. It is prone to distortion by accounting misapplications such as undue reliance upon
historical cost, an unjustifiable inclusion of manufacturing overhead based on predetermined
rates, and an ignorance of the effect of volume on unit costs and profits. In full-cost pricing,
the price is determined by adding a mark-up on full cost. Cost plus pricing is fairer to both
buyers and sellers. Sellers do not take advantage of buyers when the latter’s demand becomes
acute. It ignores vital economic considerations of demand and competition.
36. Answer : (d) < TOP
>
Reason : The relationship between the budgeted number of working hours and the maximum possible
working hours in a budgeted period is capacity usage ratio. Hence the answer is (d). The
standard hours equivalent to the work produced expressed as a percentage of the actual hours
spent in producing that work is efficiency ratio. The activity ratio is the number of standard
hours equivalent to the work produced expressed as a percentage of the budgeted standard
hours. Calendar ratio is the relationship between the number of working days in a period and
the number of working days in the relative budget period. Capacity utilization ratio is the
relationship between the actual hours in a budget period and the budgeted working hours in a
given period.
37. Answer : (c) < TOP
>
Reason : The correct answer is (c). A flexible budget is essentially a series of several budgets prepared
for various levels of operating activity. A flexible budget facilitates comparison of actual
results with budget figures.
(a) and (b) are not correct because accounting for interest and inflation is the same in static
budgets.
(d) is not correct because the purpose of the flexible budgets is to provide plans for different
levels of activity.
(e) is not correct because a flexible budget is actually a series of static budgets for different
operating activities.
38. Answer : (e) < TOP
>
Reason : A budget is a means of control because it sets standard guidelines with which actual
performance can be compared. The feedback provided by comparison of actual and budgeted
performance reveals whether a manager has used company assts efficiently. If a budget is to be
used for control purposes, however, the accounting system must be designed to produce
information required for at the control process. Further, the budgeting and accounting system
must be related the organizational structure. So that variances twill be assigned to the proper
individuals.
Option (a) is incorrect because the company should already be using forecasting procedures if
the budget is being used as planning tool.
Option (b) is not correct because a budget director and committee are needed even if a budget
is to be used only for planning.
Option (c) and (d) are incorrect because daily reporting is usually not necessary.
39. Answer : (e) < TOP
>
Reason : The budget period should be long enough to cover complete production of various products.
For business of a seasonal nature, the budget period should cover atleast one entire seasonal
cycle. The budget period should be long enough to allow for the financing of production well
in advance of actual needs as it should provide adequate time to arrange the funds for
production and other purposes. Thus the answer is (e).
40. Answer : (c) < TOP
>
Reason : Fixed overhead cost variance = Actual fixed overhead cost ~ Applied fixed overhead cost.
Other options mentioned in (a), (b), (d) and (e) are not correct.

41. Answer : (e) < TOP

>
Reason : Actual material consumption:
Particulars X Y
Stock as on March 01, 2004 80 100
Kg
Add: Purchases during the month of March 2004 2,000 2,500
Kg
2,080 2,600
Less: Stock as on March 31, 2004 30 120
Kg
Material consumed during the month of March 2004 2,050 2,480
Kg
Total material consumption = 2,050 + 2,480 = 4,530kg.
Standard cost:
Quantity (kg.) Price (Rs.) Amount (Rs.)
X 2,000 5 10,000
Y 2,500 4 10,000
4,500
Loss: 675
Output 3825 20,000
Standard yield =
Standard output 85 kg.
×Actual input = × 4,530kg.= 3,850.5kg.
Standard input 100 kg.

Material yield variance = Standard rate of output

Rs.20,000
× (3,850.5 kg. - 4000 kg.)
3825
(Actual yield – Standard yield) = = Rs.781.70 (F)
42. Answer : (c)
Reason :
Particulars Rs.
Total standard cost (1,000 units @ Rs.20) 20,000
Less: Standard direct labor cost 5,000
Standard overhead cost (500hours @ Rs.3) 1,500
Standard cost of raw material 13,500
Total
standard quantity of raw material required
Standard cost of raw material used Rs.13,500
=
Standard rate per kg. of raw material Rs.10
= = 1,350 kg.
Material usage variance = Standard rate (standard quantity – actual quantity)
i.e. Rs.860(A) = Rs.10 x (1,350kg. – actual quantity)
(Rs.10 × 1,350 kg.) + 860
=1,436 kg.
10
Actual quantity =
43. Answer : (b)
Reason :
 Particulars Units Degree of Overheads
completion
Completed stock:
From opening work-in-progress 200 40 % 80
Current production (1370-200) 1,170 100 % 1,170
Closing work-in-progress 350 40 % 140
Total 1,390
Budgeted rate per unit = Rs.120
No. of direct labor hours per unit = 3
Budgeted rate per hour = Rs.40
Standard hours for actual production = 1,390x 3 = 4,170hours
Fixed overhead efficiency variance = (Standard hours for actual production – Actual hours) x
budgeted rate per hour = ( 4,170hours – 3,880hours ) x Rs.40 = Rs.11,600(F)
44. Answer : (e)
Reason :
Fixed costs (in Rs.) 15,00,000
Return on capital employed (Rs.50,00,000 x 18%) (in Rs.) 9,00,000
Residual income desired (in Rs.) 6,00,000
Total desired contribution (in Rs.) 30,00,000
Contribution per unit from outside sales = Rs.120 – Rs.78 = Rs.42 per unit
Total contribution from outside sales = Rs.42 per unit x 65,000 units
= Rs.27,30,000
Minimum contribution to be earned from supply to division B
= Rs.30,00,000– Rs.27,30,000= Rs. 2,70,000
Rs. 2,70,000
18,000 units
Contribution per unit on additional 18,000 units =
= Rs.15 per unit
Variable cost for minor modification = Rs.7 per unit
Minimum transfer price per unit to be quoted = Rs.78 + Rs.15 + Rs.7 =
Rs.100
45. Answer : (b)
Reason : Total machine hours = (300 2) + (520
× ×

5) + (450 4) = 5,000 hours

×

Machine overhead charges = Rs.52,500 / 5,000 hours = Rs.10.50 per hour

Set-up costs = Rs8,330/ 17 (i.e. total number of set-ups) = Rs.490 per set-up
Material ordering cost = Rs.6,850/10 operations = Rs.685per operation
Material handling cost = Rs.11,340/ 27 operations = Rs.420 per operation

Overhead cost for product B:

Particulars Rs.
Machine overhead charges 5 Rs.10.50
×

52.50
Set-up costs 6 ×

Rs.490 / 520 5.65

Material ordering cost 4 ×

Rs.685 / 520 5.27

Material handling cost 10 Rs.420 / 520
×

8.08
Total overhead cost 71.50
Hence the total overhead cost is Rs.71.50 per unit of B.
46. Answer : (c) < TOP
>
Reason : Rs.
 Direct material 3,00,000
Direct labor 1,80,000
Factory overheads (50% of direct labor) 90,000
Factory cost 5,70,000
Administrative overheads (20% of factory cost) 1,14,000
Selling and distribution expenses 1,31,100
(20% of factory cost + 15%)= (5,70,000 × 20% × 115%)
8,15,100
Profit 20% on sales (i.e. 25% on cost) 2,03,775
Sales 10,18,875
47. Answer : (a) < TOP
>
Reason :
units
Sales (total of all quarters) 24,750
Add: Closing stock 1,100
25,850
Less: opening stock 1,200
Total production for next year 24,650
kg
Raw material required for production (24,650units ×2) 49,300
Add: Closing stock 3,500
52,800
Less: opening stock 2,800
Raw material to be purchased 50,000
Quarter % of rawmaterial Rawmaterial (kg.) Price per kg. (Rs.) Amount (Rs.)
I 30% 15,000 12 1,80,000
II 50% 25,000 13 3,25,000
III 20% 10,000 14 1,40,000
6,45,000
Total amount of rawmaterial to be purchased is Rs.6,45,000
48. Answer : (c) < TOP
>
Reason : Overhead expenditure variance = Overhead cost variance ~ Overhead volume variance =
Rs.1,880(A) ~ Rs.1,050 (A) = Rs.830(A)
Actual overheads incurred = budgeted overheads ~ overheads expenditure variance =
Rs.16,000~ Rs.830(A) = Rs.16,830
Actual overheads incurred Rs.16,830
= =885.8 hours
Actual rate of recovery Rs.19
Actual hours =
Overheads capacity variance = Standard rate × (Actual hours – budgeted hours) =
Rs.16,000
800
× (885.8 hours – 800 hours) = Rs.1,716 (F).
49. Answer : (a) < TOP
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fixed overhead cost Rs.1,10,000
= =Rs.20 per unit
Production (Units) 5,500 units
Reason : Fixed overhead recovery rate =
Particulars Rs.
Budgeted fixed overhead 1,10,000
Add: Fixed overhead expenditure variance 2,500
Actual fixed overhead 1,12,500
Absorbed overhead = Actual fixed overhead – under-absorbed overhead
= Rs.1,12,500 – 12,000= Rs.1,00,500
Overhead absorbed Rs.1,00,500
=
Fixed overhead rate Rs.20
Actual production = = 5,025 units
50. Answer : (d) < TOP
>
Reason : Standard/ Budgeted data
 Budgeted fixed overheads (Rs.) 90,000
Budgeted output units 2,000
Budgeted hours 10,000
Budgeted days 25
Standard labor hours per unit 5
Standard hours worked per day 400
Standard rate per unit (Rs.) 45
Standard rate per hour (Rs.) 9
Standard fixed overhead rate per day (Rs.) 3,600 Actual data
Actual fixed overheads (Rs.) 80,000
Actual output units 1,700
Actual hours 8,580
Actual days 22
The total fixed
overhead variance
= (Fixed overhead recovered on actual output – Actual fixed overhead incurred)
= (1,700 units x Rs.45 – Rs.80,000)= Rs.3,500 (A)
Calendar variance = Standard fixed overhead rate per day (Actual days – Budgeted days)
= Rs.3,600 (22 days- 25 days) = Rs.10,800 (A)
51. Answer : (c) < TOP
>
Reason :
Particulars
Fixed cost (Rs.8,50,000 + Rs.10,00,000)
Add: expected return (Rs.15,60,000 + Rs.5,00,000) ×20%
Contribution
Total labor hours:
Product A: (4× 14,000 units)
Product B: (4× 16,000 units)
Total labor hours 1,20,000
Rs.22,62,000
1,20,000 hours
Contribution per labor hour = = Rs.18.85 per labor hour.
Calculation of selling price:
Particulars Rs.
Variable cost other than labor (Rs.5,60,000 / 14,000 units) 40.00
Direct labor (Rs.8×4 hours) 32.00
Contribution (Rs.18.85 ×4) 75.40
Selling price 147.40
52. Answer : (d) < TOP
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Reason : Total quantity of actual sales = 2,400+2,450+3,250 = 8,100kgs.
Sales Mix variance = Standard rate × (Actual quantity- Revised Standard quantity)

  8,100 
A 2, 400 −  × 2, 500  1,968.75 (A)
  8, 000 
15 × =
  8,100 
B 2, 450 −  × 2, 600  3,285.00 (A)
  8, 000 
18 × =
  8,100 
C 3, 250 −  × 2, 900  6,275.00 (F)
  8, 000 
20 × =
Total 1,021.25 (F)
53. Answer : (d) < TOP
>
Reason :
 Particulars P Q
Total cost Variable cost Total cost Variable cost
(Rs.) (Rs.) (Rs.) (Rs.)
Direct material 60.00 60.00 45.00 45.00
Direct labor 35.00 35.00 40.00 40.00
Factory overheads 28.00 14.00 32.00 16.00
Total factory cost 123.00 109.00 117.00 101.00
Administrative overheads 12.30 11.70
Selling overheads 8.00 4.80 10.00 6.00
Total cost per unit 143.30 113.80 138.70 107.00

P – 143 .30 × 8,000 = Rs.11,46,400

Q – 138.70 × 18,000 = Rs.24,96,600

Particulars Rs.
Fixed capital 15,00,000
Working capital
3 2,86,600
×
12
P – 11,46,400 =
4 8,32,200
×
12
Q – 24,96,600
Total Capital employed 26,18,800
Expected ROI 20%
Expected Return = 26,18,800 × 20% = Rs.5,23,760
54. Answer : (d) < TOP
>
Reason : Minimum transfer price, if the division is in a full capacity and product is in a perfectly
competitive market, is the sale price of Rs.300, i.e. Rs.18,00,000 ÷ 6,000 units = Rs.300 per unit.
55. Answer : (d) < TOP
>
Reason :
Particulars May 2004 June 2004
Expected sales (units) 12,000 14,000
Production (units) 6,000+7,000 7,000+6,500
= 13,000 = 13,500
Raw material required for production (units) 26,000 27,000
Amount to be paid for raw material (in Rs.) 1,30,000 1,35,000
Payment to creditors (in Rs.) 1,30,000

Particulars May 2004 June 2004 July 2004

Expected sales (units) 12,000 14,000 13,000
Sales (in Rs.) 7,80,000 9,10,000 8,45,000
Cash sales (in Rs.) 3,90,000 4,55,000 4,22,500
Collection from debtors (in Rs.) 3,90,000 4,55,000

Particulars Rs. June 2003

Cash sales 4,55,000
Collection from debtors 3,90,000
Less: Payment to creditors 1,30,000
Other expenses 2,60,000
Cash surplus 4,55,000
56. Answer : (b) < TOP
>
Reason :
Particulars Rs.
Actual cost 15,904
Less: Adverse material price variance 224
Actual purchases at standard price 15,680
 Rs.15,680
560 kg.
Standard price = = Rs.28
57. Answer : (a) < TOP
>
Reason : Return on investment =Asset turnover × Profit margin = 1.85×0.35 = 0.65
58. Answer : (c) < TOP
>
Reason : Total fixed cost = Rs. 8,00,000
Expected profit = Rs. 4,00,000
Variable cost at 80% level
(80% x 1,50,000 units x Rs.14) = Rs.16,80,000
Total price = Rs.28,80,000
Rs28,80,000
1,20,000 units
Per unit price at 80% level = = Rs.24
59. Answer : (a) < TOP
>
Reason : Computation of prime cost

Rs.
Sales (40,000 units) 14,40,000
Less: Profit margin – 20% 2,88,000
Cost of sales – (80% of Rs.14,4,000) 11,52,000
Less: Variable overheads – Rs.2,40,000
Semi-variable overheads – Rs.2,60,000
Fixed overheads – Rs.2,00,000 7,00,000
Prime cost 4,52,000
Semi-variable overheads:
Change in cos t Rs.3,00,000-Rs.2,60,000
Change in units 50,000 units-40,000 units
Variable cost = =
Rs.40, 000
10, 000 units
= = Rs.4per unit
At 40,000 units
Fixed cost = Total cost – Variable cost
= Rs.2,60,000 – 40,000 units × Rs.4 = Rs.1,00,000
At 45,000 units
Total cost = 45,000 units × Rs.4 + Rs.1,00,000 = Rs.2,80,000

Computation of differential cost of production of 5,000 additional units (i.e. 10% of normal
capacity):
Element of cost 40,000 units 45,000 units Differential cost for
(Rs.) (Rs.) 5000 units (Rs.)
Prime cost – (Working Note 1) 4,52,000 5,08,500 56,500
Variable overhead 2,40,000 2,70,000 30,000
Semi variable overhead (Working Note 2) 2,60,000 2,80,000 20,000
Fixed overhead 2,00,000 2,00,000 –
11,52,000 12,58,500 1,06,500
Rs.1, 06, 500
5, 000
Cost per unit of new order = = Rs.21.30
Profit margin 25% (20% on sale = 25% on cost) = Rs. 5.33
Minimum selling price per unit = Rs.26.63
60. Answer : (c) < TOP
>
Reason : Target cost = Selling price at capacity – 20% profit margin
 Price (Rs.) Demand (Units)
625 1,75,000
550 3,50,000
475 7,00,000 Target cost = Rs.475 –
20% × Rs.475 = Rs.475 – Rs.95 = Rs.380
61. Answer : (a) < TOP
>
Reason : Total labor cost 5 x Rs. 6,000 = Rs. 30,000
Cost of parts = Rs. 45,000
Total variable cost Rs.75,000
Transfer profit = Rs. 20,000
Fixed cost = Rs. 25,000
= Rs. 45,000
Mark up % = Rs. 45,000 ÷ Rs. 75,000 = 60%
Mark up on labor cost = 60% of Rs. 30,000 = Rs. 18,000
62. Answer : (a) < TOP
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S tan dard hours for actual producation
Budgeted hours
Reason : Activity ratio = × 100
4,440 hours
4,000 hours
= × 100 = 111%
63. Answer : (e) < TOP
>
Reason : Using production related budgets, units to produce equals budgeted sales + desired ending
finished goods inventory + desired equivalent units in ending work-in-process inventory –
beginning finished goods inventory – equivalent units in beginning work-in-process inventory.
Therefore, in this case, units to produce is equal to 5,00,000 + 1,50,000 + 60,000 – 80,000–
50,000 = 5,80,000.
64. Answer : (b) < TOP
>
Reason : Collections from July 2004 cash sales will be half of total sales, or Rs. 50,000. From April Rs.
50,000 of credit sales, collections should be 10% or Rs.5,000. From May
Rs. 1,00,000 of credit sales, collections should be 20% or Rs.20,000. From June
Rs. 1,50,000 of credit sales, collections will be 70% or Rs. 1,05,000. Thus, total collections will
amount to Rs. 1,80,000.
65. Answer : (b) < TOP
>
Reason : Flexible budget for overhead.
 Particulars At 80% capacity
level (Rs.)
1. Variable overhead:
(a) indirect labor 24,000
(b) indirect material 12,000
2. Variable portion of semi-variable overhead:
(a) power 8,000
(b) repairs and maintenance 640

Total variable (A) 44,640

3. Fixed portion of semi-variable overheads:
(a) power 3,500
(b) Repairs and maintenance 840
4. Fixed overhead:
(a) Depreciation 9,000
(b) Insurance 4,000
(c) Others 3,000
Total Fixed (B) 20,340
5. Total overheads (A+B) 64,980
6. Estimated direct labor hrs. 1,32,000
7. Overhead recovery rate per direct labor hour (5÷6) 0.492
66. Answer : (e) < TOP
>
Reason : Statement showing the determination of selling price of seasoned timber as on March 31, 2004:
Particulars Qantity (cft) Amount (Rs.)
Cost of timber logs at the rate of Rs.160 per cft. 2,000 3,20,000
Seasoning expenses for 3 months:
Rent (Rs. 14,200 x 70%) 9,940
Salaries of 6 guards (Rs. 300 x 6 x 3 x 70%) 3,780
Incidental expenses (Rs. 900 x 3 x 70%) 1,890
Administration overheads (Rs. 16,000 x ¼ x 70%) 2,800
Total 2,000 3,38,410
Less: Normal loss at the rate of 8% 160
Total(net) 1,840 3,38,410
Profit margin (20% of cost) 67,682
Total selling price 4,06,092
Selling price per cft (Rs. 4,06,092 ÷ 1,840) 220.70
67. Answer : (a) < TOP
>
Reason :
Particulars A B C Total
Total fixed costs (Rs.) 4,73,625
Number of units 45,000 90,000 75,500 2,10,500
Fixed cost per unit (Rs.) 2.25 2.25 2.25
Variable cost per unit 10.50 12.90 11.80
Total unit cost (Rs.) 12.75 15.15 14.05
Markup – 20% 2.55 3.03 2.81
Selling price (Rs.) 15.30 18.18 16.86
68. Answer : (d) < TOP
>
Reason : Actual cost
Standard material cost = Actual material cost + Favorable material price variance + Favorable
material usage variance
Standard wages = Actual wages paid + favorable labor efficiency variance – adverse labor rate
variance – adverse labor idle time variance
 Particulars Rs. Total Rs. Per unit
Standard material cost (45,000 + 2,200 + 1,440) 48,640 5.12
Standard wages (49,500+5,000 – 3,000 – 675) 50,825 5.35
Total 10.47
69. Answer : (e) < TOP
>
Reason : Variable cost :
Raw materials = Rs.7,50,000 ÷ 75,000 units =
Rs. 10.00
Direct labor = Rs.6,07,500 ÷ 75,000 units =
Rs. 8.10
Manufacturing overheads = 60% of Rs.2,50,000 ÷ 75,000 units =
Rs. 2.00
Selling and administrative overheads = 30% of 3,75,000 ÷ 75,000 units = Rs.
1.50

Rs. 21.60
Fixed cost = 40% of Rs.2,50,000 + 70% of Rs.3,75,000
= Rs.1,00,000+ Rs.2,62,500
= Rs.3,62,500
Cost of 90,000 units = 90,000x Rs. 21.60 + Rs. 3,62,500
= Rs. 19,44,000 + Rs. 3,62,500
= Rs. 23,06,500.
70. Answer : (b) < TOP
>
Reason : Statement showing profit at different capacity level
Capacity levels
50 %(Rs.) 60%(Rs.)
Units 10,000 12,000
Selling price per unit 200 196
Material 100 102
Labor 30 30
Factory overhead 18 18
Administration overhead 10 10
Total marginal cost per unit 158 160
Contribution per unit 42 36
Total contribution 4,20,000 4,32,000
Less : Fixed cost 2,20,000 2,20,000
Profit 2,00,000 2,12,000
Incremental profit 12,000
< TOP OF THE DOCUMENT >