Management Accounting II 1005

Question Paper
Management Accounting – II (152): October 2005

• Answer all questions.
• Marks are indicated against each question.
1. Foils Ltd., manufacturing a single product, is operating at 70% level of capacity at which the sales are < Answer >
Rs.7,35,000. The company has estimated the following data for the current year:
Variable cost Rs.150 per unit
Semi-variable cost Rs.85,000 when output is nil plus variable portion of Rs.200 for
each additional 1% level of capacity
Fixed cost Rs.2,20,000 at present level of activity. This cost is estimated to
be increased by Rs.50,000 if the level of activity exceeds 80%
The company is facing a severe competition in the market. The management of the company is
considering a proposal to decrease the selling price by 10%. The present sale price is Rs.350.
The budgeted operating profit per unit at 90 % level of activity on the assumptions that the selling price
is reduced by 10%, is
(a) Rs.36.11 (b) Rs.32.55 (c) Rs.48.33 (d) Rs.35.44 (e) Rs.26.85.
(1 mark)
< Answer >
2. Which of the following is not a general method for determining the transfer prices?
(a) Cost-based transfer pricing (b) Income-based transfer pricing
(c) Market-based transfer pricing (d) Negotiated transfer pricing
(e) Contribution based transfer pricing.
(1 mark)
< Answer >
3. Which of the following transfer pricing methods will preserve the subunit autonomy?
(a) Cost-based pricing (b) Negotiated pricing
(c) Variable-cost pricing (d) Full-cost pricing
(e) Marginal cost pricing.
(1 mark)
< Answer >
4. The most fundamental responsibility center affected by the use of market-based transfer prices is
(a) Revenue center (b) Cost center (c) Profit center
(d) Investment center (e) Production center.
(1 mark)
< Answer >
5. In which of the following situations can cost based transfer prices be used?
I. Where no market price exists.
II. Where there are difficulties in negotiating market prices.
III. Where the product contains a secret ingredient or production process that the top management do
not wish to disclose to outside customers.
IV. When the transferor division is constrained by capacity limitation.
(a) Both (I) and (II) above (b) Both (II) and (IV) above
(c) Both (III) and (IV) above (d) (I), (II) and (III) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
6. The following information pertains to Sonny Ltd. for its new product.
Production units 10,000 units
Investment for the new product Rs.3,00,000
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Fixed costs Rs.1,00,000
Variable cost per unit Rs.28
If the company desires to earn 22% return on investment, the selling price should be
(1 mark)
< Answer >
7. Which of the following is true in respect of full cost pricing method?
(a) It is used to recover market price plus mark-up
(b) It is used to recover standard cost plus mark-up
(c) It is used to recover fixed costs only
(d) It is used to recover variable costs only
(e) It is used if a company does not have the basic idea of demand for the product.
(1 mark)
8. Which of the following statements is false in respect of full cost pricing and contribution margin < Answer >
pricing?
(a) They can not be considered competing to each other
(b) In both the methods, the selling prices proposed must be only tentative and they are always subject
to adjustments
(c) Fixed costs are important in both the pricing models
(d) In both the methods, a normal mark-up on total costs is made and the volume of production is
taken into consideration
(e) In both the methods, cost plus pricing is represented to a certain degree.
(1 mark)
9. A company manufactures 650 units of product A during a specified period. The variable cost per unit < Answer >
and fixed costs per annum are Rs.25 and Rs.25,000 respectively. If the company expects an annual
profit of Rs.9,000, the mark-up percentage on variable cost is
(a) 223.90% (b) 209.23% (c) 132.82% (d) 136.75% (e) 236.75%.
(1 mark)
< Answer >
10. A-Joy Ltd. is preparing its cash budget for the year 2005-06. An extract from its sales budget for the
same year shows the following sales values:
September 2005 Rs.1,10,000

October 2005 Rs.1,20,000
November 2005 Rs.1,40,000
December 2005 Rs.1,10,000
January 2006 Rs.1,30,000
40% of its sales are expected to be in cash. Of its credit sales, 40% are expected to pay in the month
following the month of sales and 58% are expected to pay in the second month following the month of
sale. 2% of the credit sales are expected to be unrecovered.
The value of sales receipts to be shown in the cash budget for the month of December 2005 is
(a) Rs.1,19,360 (b) Rs.1,20,800 (c) Rs.1,30,000 (d) Rs.1,22,000 (e) Rs.1,10,000.
(1 mark)
< Answer >
11. Consider the following costs per unit of production of a company:
Direct material Rs.18

Direct labor Rs.15
Production overheads Rs.25 (40% fixed)
Selling & administrative overheads Rs.30 (50% fixed)
Total costs Rs.88
Normal Production 2 1,000 units
Normal Production 1,000 units
The total costs for 1,250 units are

(a) Rs.77,500 (b) Rs.75,000 (c) Rs.73,000 (d) Rs.1,10,000 (e) Rs.1,03,750.
(1 mark)
< Answer >
12. Which of the following statements is true with regard to the difference between a flexible budget and a
fixed budget?
(a) A flexible budget primarily is prepared for planning purposes while a fixed budget is prepared for
performance evaluation
(b) The variances are usually larger with a flexible budget than with a fixed budget
(c) A flexible budget includes only variable costs whereas a fixed budget includes only fixed costs
(d) A flexible budget is established by operating management while a fixed budget is determined by
top management
(e) A flexible budget provides cost allowances for different levels of activity whereas a fixed budget
provides costs for one level of activity.
(1 mark)
< Answer >
13. While preparing a performance report for a cost center using flexible budgeting techniques, the planned
cost column should be based on
(a) Budget adjusted to the actual level of activity for the period being reported
(b) Budgeted amount in the original budget prepared before the beginning of the period
(c) Cost incorporated in the master budget
(d) Actual amount for the same period in the preceding year
(e) Budget adjusted to the planned level of activity for the period being reported.
(1 mark)
< Answer >
14. Which of the following budget challenges the existence of every budgetary unit at every budget period?
(a) Rolling budget (b) Participative budget
(c) Zero based budget (d) Strategic budget
(e) Short-range budget.
(1 mark)
< Answer >
15. 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)
< Answer >
16. Which of the following statements is/are true?
I. Corporate Management generally consists of the Departmental heads and/or the sub-divisional
heads.
II. Executive Management consists of managers responsible for certain product groups or markets or
certain aspects of a function.
III. Operating Management requires information on the production quantity and value, sales volume
and price realization etc.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
17. A favorable materials price variance coupled with an unfavorable materials usage variance would most
likely result from
(a) The purchase and use of higher than standard quality materials
(b) The purchase of lower than standard quality materials
(c) Product mix production changes
(d) Machine efficiency problems
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(e) Labor efficiency problems.
(1 mark)
< Answer >
18. Swami Ltd. has furnished the following information pertaining to production costs for a certain period:
Particulars Rs.
Direct wages 90,000
Direct materials 1,20,000
Production overheads – Fixed 40,000
– Variable 60,000
During the forthcoming year it is anticipated that:

I The average rate for direct labour remuneration will fall from Re.0.90 per hour to Re.0.75 per hour
II. Production efficiency will be reduced by 5%
III Price per unit for direct material and of other materials and services which comprise overheads
will remain unchanged
IV. Direct labour hours will increase by 33 1/3%
V. The overhead rate being absorbed on a direct wage basis.
The estimated works cost, after considering the above anticipation, is
(2 marks)
< Answer >
19. Panna Manufacturing Ltd. has furnished the following information:
Particulars Budget Actual

Output in units 6,000 6,500
Labor hours 6,000 6,400
Variable overhead costs Rs.60,000 Rs.60,800
The variable overhead cost variance is

(a) Rs.1,000 (Adverse) (b) Rs.4,200 (Adverse)
(c) Rs.4,200 (Favorable) (d) Rs.1,000 (Favorable) (e) Rs.800 (Adverse).
(1 mark)
< Answer >
20. The sales volume variance is
(a) The difference between actual and master budget sales volume, times actual unit contribution
margin
(b) The difference between flexible budget and master budget sales volume, times master budget unit
contribution margin
(c) The difference between flexible budget and master budget sales volume, times actual unit
contribution margin
(d) The difference between flexible budget and actual sales volume, times master budget unit
contribution margin
(e) The difference between actual and master budget sales volume, times actual unit net profit margin.
(1 mark)
< Answer >
21. Which of the following is/are the characteristic(s) of a corporate management?
I. The corporate management is responsible for strategic planning and overall financial monitoring
of the firm.
II. The corporate management is responsible for executing various tasks within the framework of
plans, programs and schedules.
III. The corporate management translates corporate strategy into programs.
IV. The corporate management is concerned with tasks such as budget formulation, decision on
routine capital expenditures, choice of product improvement etc.
(a) Only (I) above (b) Both (II) and (III) above (c) Only (III) above
(d) Only (IV) above (e) Both (III) and (IV) above.
(1 mark)
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< Answer >
22. Positive reinforcement approach to achieving commitment to organizational objectives largely through
external controls is based on finding of
(a) Douglas McGregor (b) Herzberg (c) Ron Webber
(d) Camman and Nadler (e) B.F.Skinner.
(1 mark)
< Answer >
23. ‘The average human being has an inherent dislike of work and will avoid it if he can’- this job attitude
is specifically dealt with in
(a) Herzberg’s Two Factor Theory
(b) Douglas McGregor’s Theory Y
(c) The principles of human motivation as revealed by Abraham Maslow
(d) Douglas McGregor’s Theory X
(e) McDonald’s Theory Z.
(1 mark)
< Answer >
24. An organized creative approach, which emphasizes efficient identification of unnecessary cost is known
as
(a) Management by objective (b) Activity based costing
(c) Target costing (d) Value analysis (e) Quality costing.
(1 mark)
< Answer >
25. Which of the following is not an assumption of McGregor’s Theory Y?
(a) Man will exercise self-direction and self-control in the service of objectives to which he is
committed
(b) The average human being learns, under proper conditions, not only to accept but to seek
responsibility
(c) The average human being does not inherently dislike work
(d) Commitment to objectives is a function of the rewards associated with their achievements
(e) The capacity to exercise a relatively high degree of imagination, ingenuity, and creativity in the
solution of organizational problems is narrowly distributed in the population.
(1 mark)
< Answer >
26. Which of the following variances is of least significance from a behavioral control perspective?
(a) Unfavorable material quantity variance amounting to 20% of the quantity allowed for the output
attained
(b) Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for the
output attained
(c) Favorable labor rate variance resulting from an inability to hire experienced workers to replace
retiring workers
(d) Favorable material price variance obtained by purchasing raw material from a new vendor
(e) Fixed overhead volume variance resulting from management’s decision midway through the fiscal
year to reduce its budgeted output by 20%.
(1 mark)
< Answer >
27. Traditionally the development of a product was assigned to the product design department and then the
produced product was sent to the costing department. In which of the following cases, the target
costing system diverts from the traditional way?
I. Under target costing, first a price is established for a product and then it is assigned to a team to
develop the product within the cost (price) established.
II. The product, from the design department, is sent to the costing department but returned to the
design department concluding that it is impossible to produce the product at its determined cost.
III. After a team is assigned to develop cost scenario, market research and finding the suitable rich
market is carried on.
(a) Only (I) above (b) Only (II) above
(c) Both (II) and (III) above (d) Both (I) and (II) above
(e) Both (I) and (III) above.
(1 mark)
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< Answer >
28. Which of the following statements is false with respect to target costing?
(a) Target costing is a customer oriented technique
(b) Target costing requires market research to determine the customer’s perceived value of the
product based on its functions and attributes
(c) The maximum advantage of adopting target costing is when it is deployed at the products selling
stage
(d) A major feature of target costing is that a team approach is adopted to achieve the target cost
(e) Target costs are conceptually different from standard costs.
(1 mark)
< Answer >
29. 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)
< Answer >
30. 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) Total quality management
(c) Customer orientation (d) Self management
(e) Cost control.
(1 mark)
< Answer >
31. A profit making firm can increase its return on investment by
(a) Increasing sales revenue and operating expenses by the same amount in rupees
(b) Increasing investment and operating expenses by the same amount in rupees
(c) Decreasing sales revenue and operating expenses by the same percentage
(d) Increasing sales revenue and operating expenses by the same percentage
(e) Decreasing investment and sales by the same percentage.
(1 mark)
< Answer >
32. Minolta Ltd. has furnished the following information pertaining to its business:
Sales Rs. 8,00,000

Variable costs Rs. 4,80,000
Traceable fixed costs Rs. 1,20,000
Average invested capital Rs. 4,00,000
Imputed interest rate 23%
The residual income of the company is

(a) Rs.80,400 (b) Rs.1,44,000 (c) Rs.1,08,000 (d) Rs.1,26,000 (e) Rs.1,24,000.
(1 mark)
< Answer >
33. The imputed interest rate used in the residual income approach to perform evaluation can best be
described as the
(a) Average return on investments for the company over the last several years
(b) Target return on investment set by the company’s management
(c) Average lending rate for the year being evaluated
(d) Historical weighted-average cost of capital for the company
(e) Marginal after-tax cost of capital on new equity capital.
(1 mark)
< Answer >
34. Which of the following are pre-requisites of effective divisionalisation?
I. The organization must have two or more units.
II. The costs and revenues of each division can be measured separately.
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III. Each division is sufficiently independent of other divisions.
IV. Top management should not interfere too much in divisional matters.
(a) Both (I) and (II) above (b) Both (I) and (III) above
(c) (I), (II) and (III) above (d) (I), (II) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
35. 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) Shadow price can be used only when the resources are available in plenty and are not scarce
(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) 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.
(1 mark)
< Answer >
36. A segment of an organization is referred to as a profit center if it has
(a) Responsibility for developing markets and selling the output of the organization
(b) Responsibility for combining materials, labor and other factors of production into a final output
(c) Authority to make decisions affecting the major determinants of profit, including the power to
choose its markets and sources of supply
(d) Authority to provide specialized support to other units within the organization
(e) Authority to make decisions affecting the major determinants of profit, including the power to
choose its markets and sources of supply and significant control over the amount of invested
capital.
(1 mark)
< Answer >
37. Which of the following statements about ideal standards is false?
(a) It can be used for cash budgeting or product costing
(b) These are standard costs that are set for production under optimal condition
(c) It does not make provision for workers with different degrees of experience and skill levels
(d) It makes no allowance for wastage, spoilage and machine breakdowns
(e) It is called theoretical or maximum efficiency standard.
(1 mark)
< Answer >
38. AB Ltd. is organized into two large divisions – A and B. Division A produces a component which is
used by division B in making a final product. The final product is sold for Rs.650. Division A has a
capacity to produce 3,200 units and the entire quantity can be purchased by division B.
Division A informed that due to installation of new machines, its depreciation cost has gone up and
hence wanted to increase the price of the component to be supplied to division B at Rs.430. Division B,
however, can buy the component from the outside market at Rs.430 each. The variable cost of division
A is Rs.320 and fixed cost is Rs.70 per component. The variable cost of division B in manufacturing the
final product by using the component is Rs.180 (excluding the component cost).
If division B purchases the entire component from division A, the total contribution of the company as a
whole is
(2 marks)
< Answer >
39. Premier Ltd. has furnished the following data relating to its product for the year 2004-05:
Annual production (units) 40,000
Material cost (Rs.) 1,00,000
Other variable costs (Rs.) 1,80,000
Fixed cost (Rs.) 1,50,000
Apportioned investment (Rs.) 5,00,000
7
Assuming income tax rate of 35%, if the company desires to earn a post tax profit of 12% on listed sale
price when trade discount is 18%, the net sale price per unit would be
(1 mark)
< Answer >
40. Sharma 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 3,50,000 2,80,000
Semi-variable overheads 3,50,000 3,00,000
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
(2 marks)
< Answer >
41. Sharp Ltd. manufactures and sells a special model of calculator – CZ 69. The company has estimated
the following activity of the company for the month of November 2005:
Sales Rs.5,80,000
Gross profit on sales 25%
Increase in inventory during the month Rs.18,400
Decrease in sundry debtors Rs.12,500
Total selling and administrative expenses Rs.22,000 + 2.5% on sales
Depreciation expenses which is included in Rs.8,800
fixed selling and administrative expenses
The net cash surplus or deficit for the month of November 2005 is
(a) Rs.86,400 (Surplus) (b) Rs.40,000 (Deficit)
(c) Rs.30,000 (Surplus) (d) Rs.1,02,600 (Deficit)
(e) Rs.1,11,400 (Surplus).
(1 mark)
42. Prasad Ltd. has a policy of maintaining a minimum cash balance of Rs.1,00,000 at the end of each < Answer >
month. Any deficit will be financed through bank borrowings and any surplus will be utilized to repay
the outstanding bank borrowing and the balance will be invested in short-term securities. For this
purpose, the company has an agreement with the bank to borrow in multiples of Rs.10,000 whenever a
need arises subject to a maximum of Rs.2,00,000. The rate of interest is 12% per annum payable
monthly on the amount borrowed.
50% of the sales are on credit and is expected to be collected in the month following the month of sales.
25% of the purchases are on credit and will be paid in the month following the month of purchases. The
salaries and other expenses are to be paid in the month for which they relate. The following is the
budgeted information for the quarter ending December 2005:
Particulars October 2005 November 2005 December 2005
Sales 40,000 50,000 1,00,000
Purchases 30,000 40,000 40,000
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Purchases 30,000 40,000 40,000
Salaries 60,000 70,000 50,000
Manufacturing and other
25,000 30,000 10,000
administrative expenses
If the closing cash balance for the month of October 2005 is Rs.1,02,500, the cash to be borrowed from
the bank at the end of December 2005 is
(a) Rs.1,07,500 (b) Rs.1,01,500 (c) Rs.1,04,100 (d) Rs.30,000 (e) Rs.20,000.
(2 marks)
< Answer >
43. Ballack Ltd. has estimated Rs.2,80,000 and Rs.2,20,000 for direct material and direct labor respectively
for the month of November 2005. It is the policy of the company to absorb overheads as under:
Factory overheads 50% of direct wages
Administrative overheads 25% of works cost
Selling and distribution overheads 20% of works cost
It is estimated that the selling and distribution overheads will increase by 15% in November 2005. The
company sells goods at a profit of 12.5% on sales.
The budgeted sales for the month of November 2005 is
(a) Rs.9,21,600 (b) Rs. 9,09,900 (c) Rs.10,31,771 (d) Rs. 8,56,800 (e) Rs.10,15,650.
(2 marks)
< Answer >
44. Leo Toys manufactures a toy monkey with moving parts and a built-in voice box. Projected sales for 5
months are as follows:
Month Projected sales in units

October 2005 4,000
November 2005 4,300
December2005 4,500
January 2006 4,250
February 2006 4,400
March 2006 4,500
Each toy requires direct materials from a supplier at Rs.25 for moving parts. Voice boxes are purchased
from another supplier at Rs.10 per toy. Labor cost is Rs.25 per toy and variable overhead cost is Rs.5
per toy. Fixed manufacturing overhead applicable to production is Rs.39,000 per month. It is the
practice of the company to manufacture an output in a month, which is equivalent to 80% of the current
month sales and 40% of the following month sales.
The production budget for the month of December 2005 and the production cost budget for the month
of January 2006 are
(a) 5,300 units and Rs.3,74,400 respectively
(b) 5,400 units and Rs.3,98,000 respectively
(c) 5,300 units and Rs.3,98,000 respectively
(d) 5,400 units and Rs.3,74,400 respectively
(e) 5,280 units and Rs.3,24,000 respectively.
(2 marks)
45. Akton Ltd. manufactures 5,000 units of Product PT at a cost of Rs.90 per unit. Presently, the company < Answer >
is utilizing 50% of the total capacity. The information pertaining to cost per unit of the product is as
follows:
Material – Rs.50
Labor – Rs.20
Factory overheads – Rs.20 (40% fixed)
Administrative overheads – Rs.10 (50% fixed)
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Other information:
i. The current selling price of the product is Rs.110 per unit.
ii. At 60% capacity level – Material cost per unit will increase by 2% and current selling
price per unit will reduce by 2%.
iii. At 80% capacity level – Material cost per unit will increase by 5% and current selling
price per unit will reduce by 5%.
The profit per unit of the product of the company at 60% and 80% capacity level will be
(a) Rs.8.83 and Rs.9.50 respectively
(b) Rs.8.97 and Rs.6.88 respectively
(c) Rs.8.97 and Rs.8.83 respectively
(d) Rs.6.63 and Rs.6.88 respectively
(e) Rs.8.83 and Rs.6.63 respectively.
(2 marks)
< Answer >
46. Sai Apna Ltd. uses standard costing system. The following details have been extracted from the
standard cost card in respect of direct materials for the month of September 2005:
Material usage per unit – 8 kg at the rate of Rs.1.10 per kg
Budgeted production – 850 units
The company has furnished the following data relating to direct material for the month of September
2005:
Materials purchased 8,200 kg at a price of Rs.9,430

Materials issued to production 7,150 kg
Actual production 870 units
The material price and material usage variances are

(a) Rs.410 (A) and Rs.209 (A) respectively
(b) Rs.328 (A) and Rs.209 (A) respectively
(c) Rs.286 (A) and Rs.294 (A) respectively
(d) Rs.328 (A) and Rs.152 (A) respectively
(e) Rs.410 (A) and Rs.280 (A) respectively.
(1 mark)
< Answer >
47. Mphasis Ltd. manufactures a single product using three raw materials J, K and L. The details of
standard cost and actual cost for the month of September 2005 are as under:
Standard cost
Particulars Kg Price per kg
Material J 15 Rs.4
Material K 12 Rs.3
Material L 8 Rs.6
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Less: Standard loss 5
Standard yield 30
Actual cost
10
Actual yield 3,645
The material yield variance is

(a) Rs.864 (F) (b) Rs.864 (A) (c) Rs.2,484 (F) (d) Rs.216 (F) (e) Rs.791 (A).
(2 marks)
< Answer >
48. Shiva Ltd. has furnished the following data pertaining to a product for the month of September 2005:
Particulars Budget Actual

Production (units) 6,000 6,300
Labor hours 2,000 2,150
Fixed overheads (Rs.) 42,000 42,600
Number of working days 24 23
The fixed overhead volume variance is

(a) Rs.2,100 (favorable) (b) Rs.1,050 (favorable)
(c) Rs.1,050 (adverse) (d) Rs.2,250 (favorable) (e) Rs.2,250 (adverse).
(1 mark)
< Answer >
49. 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. Overheads – Factory overheads will be limited to Rs.6.56 lakh, and administration and selling &
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
(2 marks)
< Answer >
50. Banerjee 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. The fixed overheads,
which are recovered on direct labor hours, amount to Rs.180 per kg of output. The budgeted output is
1,000 kg per month. Actual production during the month of September 2005 is 950 kg and the direct
labor hours utilized during the month were 3,300.
The details of opening and closing work-in progress (WIP) are as under:
Opening work-in-progress – 250 kg (Degree of completion of labor and overheads – 60%)
Closing work-in-progress – 450 kg (Degree of completion of labor and overheads – 20%)
The company uses FIFO method for evaluation of stocks. The fixed overhead efficiency variance is
(a) Rs.37,800 (Adverse) (b) Rs.18,000 (Favorable)
(c) Rs.18,000 (Adverse) (d) Rs.7,200 (Favorable) (e) Rs.7,200 (Adverse).
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(2 marks)
< Answer >
51. Pomy Machinery & Tools Ltd. has a 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.1,00,000. The standard time
required to manufacture one unit of product is 4 hours. In a particular month, the company worked for
24 days of 350 machine hours per day and produced 2,320 units of the product. The actual fixed
overheads incurred were Rs.88,800.
The total fixed overhead variance and calendar variance are
(a) Rs. 4,000 (A) and Rs.6,000(A) respectively
(b) Rs.10,000 (F) and Rs.6,000 (A) respectively
(c) Rs.10,000 (A) and Rs.9,000 (F) respectively
(d) Rs. 5,000 (A) and Rs.9,000 (A) respectively
(e) Rs. 4,000 (F) and Rs.4,000 (A) respectively.
(2 marks)
< Answer >
52. A group of workers usually consists of 10 skilled, 5 semi-skilled and 5 unskilled workers, paid at
standard hourly rates of Rs.5.00, Rs.3.20 and Rs.2.80 respectively. In a normal working week of 40
hours, the group is expected to produce 1,000 units of output. In certain week, the group consisted of 13
skilled, 4 semi-skilled and 3 unskilled employees; actual wages paid per hour were Rs. 4.80, Rs. 3.40
and Rs. 2.60 respectively. Two hours were lost due to abnormal idle time and 960 units of output were
produced. The labor cost variance and labor usage variance are
(a) Rs.152 (A) and Rs.376 (A) respectively
(b) Rs.280 (A) and Rs.376 (A) respectively
(c) Rs.152 (F) and Rs.376 (F) respectively
(d) Rs.249 (F) and Rs.1,562 (A) respectively
(e) Rs.376 (A) and Rs.152 (F) respectively.
(2 marks)
< Answer >
53. The budgeted and actual sales of Chatterjee Chemicals Ltd. are as under:
Budget Actual
Product Price/kg Quantity Price/kg
Quantity (kg)
(Rs.) (kg) (Rs.)
A 4,000 24 4,300 23.00
B 3,000 30 2,500 30.20
C 5,000 18 5,500 17.10
The sales mix variance is

(a) Rs.4,650 (Favorable) (b) Rs.26,950 (Favorable)
(c) Rs.15,480 (Favorable) (d) Rs.4,650 (Adverse)
(e) Rs.5,700 (Adverse).
(1 mark)
< Answer >
54. Nift Fashions Ltd. (NFL) sells a line of women’s wear. NFL’s performance report of September 2005
is as follows:
The company uses a flexible budget to analyze its performance and to measure the effect on operating
income of the various factors affecting the difference between budgeted and actual operating income.
Particulars Actual Budget
Dresses sold (units) 5,600 6,000
Sales (Rs.) 2,35,000 3,00,000

Less: Variable costs (Rs.) 1,45,000 1,80,000
Contribution margin (Rs.) 90,000 1,20,000
Less: Fixed costs (Rs.) 84,000 80,000
Operating income (Rs.) 6,000 40,000
The effect of the sales quantity variance on the contribution margin and the variable cost flexible budget
variance for September 2005 is
12
(a) Rs. 20,000 (A) and Rs. 23,000 (F) respectively
(b) Rs. 8,000 (A) and Rs. 15,000 (A) respectively
(c) Rs. 20,000 (A) and Rs. 8,000 (F) respectively
(d) Rs. 8,000 (A) and Rs. 23,000 (F) respectively
(e) Rs. 30,000 (F) and Rs. 35,000 (F) respectively.
(2 marks)
< Answer >
55. DK Ltd. manufactures two products – D and K, using same facilities and similar process. The company
has furnished the following information pertaining to two products for the year ending March 31, 2005.
Particulars Product D Product K

Direct labor hours per unit 4 2.5
Machine hours per unit 5 4
Number of set ups during the period 12 18
Number of orders handled during the period 16 19
Production units 6,000 4,340
Total production overhead costs for the period are as follows:
Particulars Rs.
Machine activity costs 2,40,000
Set-ups costs 57,000
Order handling costs 52,500
3,49,500
The absorption of total production overheads of both the products on the basis of a suitable cost driver,
using Activity Based Costing method, is
Product D Product K
(a) Rs.2,06,827 Rs.1,42,637
(b) Rs.1,82,827 Rs.1,66,673
(c) Rs.2,06,827 Rs.1,42,673
(d) Rs.1,98,827 Rs.1,50,673
(e) Rs.1,81,133 Rs.1,68,367.
(2 marks)
< Answer >
56. Mr.Lalmohan is the general Manager of Fine Product Division and his performance is measured using
the residual income method. He has estimated the following cash flows for his division for the next
year:
Particulars Rs.
Investment in Plant and equipment 17,20,000
Investment in Working capital 8,10,000
Revenue 9,50,000
If the imputed interest cost is 14% and Mr.Lalmohan desires to achieve a residual income of
Rs.2,22,000, the total costs, in order to achieve the target, would be
(a) Rs.3,73,800 (b) Rs.5,95,800 (c) Rs.6,29,400
(d) Rs.4,87,200 (e) Rs.5,76,400.
(1 mark)
< Answer >
57. Consider the following details pertaining to Apkar Ltd. for the month of September 2005:
Particulars Rs.
Sales 40,000
Direct materials 17,500
Direct labor 10,000
Variable overheads 5,000
13
Variable overheads 5,000
Capital employed 25,000
The return on investment in September 2005 is 12.5%. In the month of October 2005, it is expected that
the volume of sales increases by 15%, the selling price increases by 4% and there is a reduction of all
the costs by 2%. The return on investment for the month of October 2005 as compared to September
2005 has
(a) Increased by 12.5% (b) Increased by 92.16%
(c) Decreased by 92.16% (d) Decreased by 6.5%
(e) Increased by 121.6%.
(2 marks)
< Answer >
58. Nasta Ltd. has furnished the following information relating to cost at a capacity level of 5,000 units:
Particulars Rs.
Material cost 25,000 (100% variable)
Labour cost 15,000 (100% variable)
Power 1,250 (80% variable)
Repairs and maintenance 2,000 (75% variable)
Stores 1,000 (100% variable)
Inspection 500 (20% variable)
Administration overheads 5,000 (25% variable)
Selling overheads 3,000 (50% variable)
Depreciation 10,000 (100% fixed)
The production cost budget per unit, at the level of 6,000 units, is
(2 marks)
< Answer >
59. One kilogram of product ‘K’ requires two chemicals A and B. The following were the details of product
‘K’ for the month of September 2005:
i. Standard mix - Chemical ‘A’ 50% and Chemical ‘B’ 50%
ii. Standard price per kg of chemical ‘A’ is Rs.12 and chemical ‘B’ is Rs.15
iii. Actual input of chemical ‘B’ is 70 kg.
iv. Actual price per kg of chemical ‘A’ is Rs.15
v. Standard normal loss is 10% of total input
vi. Material cost variance total is Rs.650 adverse
vii. Material yield variance total is Rs.135 adverse
If the actual output is 90 kg, the standard yield for actual input is
(a) 40 kg (b) 110 kg (c) 100 kg (d) 99 kg (e) 85 kg.
(2 marks)
< Answer >
60. In a day of 10 hours, a direct worker is expected to produce 20 units of product A or 10 units of Product
B or 5 units of product C. The budgeted production and actual production for the month of September
2005 are as follows:
Product Budgeted production Actual production
A 250 units 260 units
B 200 units 250 units
C 300 units 200 units
During the month, 750 direct labor hours were worked. The efficiency and capacity ratios are
(a) 104% and 97.56% respectively (b) 101% and 97.56% respectively
(c) 104% and 81.08% respectively (d) 101% and 104% respectively
14
(e) 99% and 81.08% respectively.
(2 marks)
< Answer >
61. Podder Ltd. manufactures plastic bags. The company’s directors have projected the following sales for
the next three months:
October 2005 2,10,000 units

November 2005 3,60,000 units
December 2005 4,10,000 units
Opening stock of finished goods on October 01, 2005 is 30,000 units. The company has some problems
recently in supplying its customers promptly and the directors have decided to aim for a 10% increase
in finished goods closing stock at the end of each of the three months.
Each bag uses 1.8 kg of plastic that costs Rs.6 per kg. The stock of plastic on October 01, 2005 is
50,000 kg. The raw material is readily obtainable, but in order to ensure that the company will not run
out of stock, the directors would like to increase the closing stock of plastic by 10% each month for the
next three months.
The amount of raw material to be purchased during the month of December 2005 will be
(a) Rs.41,67,060 (b) Rs.42,10,260 (c) Rs.43,47,260
(d) Rs.37,58,970 (e) Rs.45,03,504.
(2 marks)
< Answer >
62. A favorable variance of Rs.12,000 for the flexible budget demonstrates that
(a) Actual costs were Rs.12,000 more than the master budget
(b) Costs were Rs.12,000 less than for the planned level of activity
(c) The total of the planning and efficiency variances is Rs.12,000
(d) Costs were Rs.12,000 less than standard for the achieved level of activity
(e) The cost under master budget is Rs 12,000 more than cost under planned level of activity.
(1 mark)
< Answer >
63. Traditional cost management does not involve
(a) Market research into customer requirements
(b) Estimation of product cost
(c) Obtaining prices from suppliers
(d) Value engineering
(e) Overheads absorption.
(1 mark)
< Answer >
64. When comparing performance report information of top management with that of lower level
management
(a) Top management reports are more detailed
(b) Lower level management reports are typically for longer time periods
(c) Top management reports show control over fewer costs
(d) Lower level management reports are likely to contain more quantitative data and less financial
data
(e) Top management reports are usually not of the exception type but present a complete analysis of
all variances.
(1 mark)
< Answer >
65. A systematized approach known as zero-base budgeting (ZBB)
(a) Presents the plan for only one level of activity and does not adjust to change in the level of activity
(b) Presents a statement of expectations for a period of time but does not present a firm commitment
(c) Divides the activities of individual responsibility centers into a series of packages that are
prioritized
(d) Classifies budget requests by activity and estimates the benefits arising from each activity
(e) Commences with the current level of spending.
(1 mark)
15
< Answer >
66. Kashmira Ltd. has two divisions - A and B. The division A has the capacity to manufacture 1,50,000
units of a special component LKJ annually and it has some idle capacity currently. The budgeted
residual income for the division A is Rs.10,00,000. The relevant details extracted from the budget of A
are as under:
Sales (to outside customers) 1,20,000 units @ Rs.180 per unit
Variable cost per unit Rs.160
Divisional fixed cost Rs.8,00,000
Capital employed Rs.75,00,000
Cost of capital 12% per annum
Division B received an order for which it requires 25,000 units of a component similar to LKJ. An
additional variable cost of Rs.5 per unit will be incurred to make minor modifications to LKJ to suit the
requirements of Division B.
The minimum transfer price per unit which A should quote to B to achieve its budgeted residual income
is
(a) Rs.175 (b) Rs.170 (c) Rs.165 (d) Rs.177 (e) Rs.185.
(2 marks)
< Answer >
67. The flexible budget for the month of September 2005 was for 9,000 units with direct material at Rs.15
per unit. Direct labor was budgeted at 45 minutes per unit for a total of Rs.81,000. Actual output for the
month was 8,500 units with Rs.1,27,500 in direct material and Rs.77,775 in direct labor expenses. The
direct labor standard of 45 minutes was maintained throughout the month. The variance analysis of the
performance for the month of September 2005 would show a(n)
(a) Favorable material usage variance of Rs.7,500
(b) Unfavorable material price variance of Rs.5,000
(c) Favorable direct labor efficiency variance of Rs.1,275
(d) Unfavorable direct labor efficiency variance of Rs.1,275
(e) Unfavorable direct labor rate variance of Rs.1,275.
(2 marks)
< Answer >
68. A machine which is purchased for Rs.1,26,000 has a salvage value of Rs.6,000.The machine can be
used for 12,000 hours during its life to produce 24,000 units of a product. The current annual demand
for the product is 3,000 units. The cost data per unit of the product are:
Direct Material = Rs.30
Direct Labour at the rate of Rs.6 per hour = Rs.18
Power at the rate of Rs.4 per hour = Rs. 8
Overheads (Excluding depreciation and power):
Variable cost = Rs. 9
Fixed cost per annum = Rs.62,000
The selling price per unit is Rs.100. The organisation has received an export order of 500 units per
annum. The minimum selling price per unit to be quoted for export order is
(a) Rs.65 (b) Rs.70 (c) Rs.56 (d) Rs.61 (e) Rs.44.
(2 marks)
< Answer >
69. White Silver Ltd. is producing three complimentary products. The demand for the products is very
much fluctuative. The demand estimates for the products are as below:
Product Selling price (Rs.) Unit Variable cost (Rs.) Sales units
A 12 6 15,000
B 18 11 20,000
C 20 11 5,000
Fixed cost is Rs.90,000. At the end of the budget period the total sales margin variance is found to be
Rs.75,000 (Adverse) but same sales mix, cost and price are maintained because of the complimentary
nature. The actual profit for the budgeted period is
(a) Rs.30,000 (b) Rs.10,000 (c) Rs.1,10,000
(d) Rs 1,90,000 (e) Rs.2,00,000.
(2 marks)
16
< Answer >
70. Laxmi Ltd. is preparing sales budget for 3rd quarter. The details of the first two quarters are
Particulars 1st quarter 2nd quarter

Sales Value (Rs.) 8,000
Prime cost (Rs.) 3,000
Overheads (Rs.) 4,000 3,900
Sales Units 200 240
nd
There is a reduction in fixed overhead cost by Rs.200 in 2 quarter and same will continue. Variable
costs will increase by 20% in 3rd quarter. The budgeted sales for the 3rd quarter to maintain the same
amount of profit per unit as in 1st quarter is
(a) 236 units (b) 245 units (c) 230 units (d) 250 units (e) 200 units.
(2 marks)
< Answer >
71. The actual data for the last two quarters of a company were as follows:
Particulars Quarter I Quarter II

Capacity usage 40% 50%
Net profit / (loss) (Rs.) (20,000) (5,000)
The budgeted profit for quarter III is Rs.10,000. The capacity utilization at budgeted production for
quarter III is
(a) 67% (b) 71% (c) 70% (d) 65% (e) 60%.
(2 marks)
< Answer >
72. The standard and actual data for a product of a company are as under:
Standard Actual
Particulars
Quantity Kg Rs. Quantity Kg Rs.
Raw Material I 300 4 per kg 350 4.50 per kg
Raw Material II 200 3 per kg 160 2.80 per kg
Out put (units) 1,200 1,160
By how much percentage, the deviation of actual prices from standard prices has contributed for
variance in total variance?
(a) 55.33% (b) 54.53% (c) 60.53% (d) 50.53% (e) 61.33%.
(2 marks)
< Answer >
73. Exotica Ltd. has estimated the following sales for its 2 products – A and B for 2nd half of the year
2005-06:
October November December January February March

Product 2005 2005 2005 2006 2006 2006
(units) (units) (units) (units) (units) (units)
A 2,000 2,000 2,100 2,400 2,800 3,400
B 1,500 1,600 1,700 2,000 2,000 2,200

The other costs are as follows:
Product
Particulars
A B
Budgeted production per annum 30,000 units 20,000 units
Direct material per unit Rs.40 Rs.60
Direct labor per unit Rs.30 Rs.40
17
Other manufacturing expenses per annum Rs.6,30,000 Rs.6,40,000
It is the policy of the company to hold a closing stock of 40% of the estimated quantity of sales of the
following month but not to carry any closing work-in-process at the end of any month.
The total production cost for both the products for the five months period ending February 2006 is
(a) Rs. 22,77,820 (b) Rs.21,18,850 (c) Rs.25,94,780
(d) Rs.23,94,780 (e) Rs.22,94,780.
(2 marks)
18
Suggested Answers
Management Accounting – II (152): October 2005
1. Answer : (e) < TOP >
Reason :
Level of activity 90%
Units 2,700
(Rs.)
a. Variable cost 4,05,000
b. Semi variable cost
Variable portion 18,000
Fixed portion 85,000
c. Fixed cost 2,70,000
Total cost 7,78,000
Level of activity 90%

Units 2,700
(Rs.)
i. Sale Price (Rs.350) 9,45,000
Less: Total cost 7,78,000
Profit 1,67,000
Profit per unit 61.85
ii. Sale price reduced by 10% (i.e., Rs.315) 8,50,500

Less: Total cost 7,78,000
Profit 72,500
Profit per unit 26.85
2. Answer : (b) < TOP >
Reason : Cost-based transfer pricing, Market-based transfer pricing, contribution based transfer
pricing and Negotiated transfer pricing are the general methods followed in
determining transfer pricing. Income-based transfer pricing is not a general method
followed in determining the transfer prices
Reason : All Cost-based pricing, Variable-cost pricing, Full-cost pricing and Marginal cost
pricing are rule-based methods, which does not allow for the subunit to preserve its
autonomy. According to negotiated pricing, the individual divisions (transferor and
transferee) are considered as subunit autonomy. Hence correct answer is (b).
4. Answer : (c) < TOP >
Reason : Transfer prices are often used by profit centers and investment centers. Profit centers
are the most fundamental of these two centers because the investment centers are
responsible not only for the revenues and costs but also for invested capital. Answer
(a) is incorrect because a revenue center is responsible only for revenue generation, not
cost control or profitability. Answer (b) is incorrect because transfer prices are not used
in a cost center. Transfer prices are used to compute profitability but a cost center is
responsible only for cost control. Answer (d) is not correct because an investment
center is not as fundamental as a profit center. Answer (e) is not correct because a
production center may be a cost center, a profit center or even an investment center.
5. Answer : (d) < TOP >
Reason : The cost based transfer pricing is used in the following situations:
I No market prices exist
II. Difficulties in negotiating market-prices
III. Where the product contains a secret ingredient or production process which the
top management do not wish to disclose to outside customers.
Where the transferor division is constrained by capacity limitation, shadow price is the
best suited transfer price.
19
6. Answer : (a) < TOP >
Reason : 20% return on investment = 22% of Rs.3,00,000 = Rs.66,000

Selling price per unit
= Variable cost per unit + fixed costs per unit + profit per unit
Rs.1, 00, 000 Rs.66, 000
+
= Rs.28 + 10, 000units 10, 000 units
= Rs.28 + Rs.10 + Rs.6.60 = Rs.44.60.
Reason : Full cost pricing method is used if a company does not have the basic idea of demand
for the product. It is not used to recover the only fixed costs or only variable cost. It is
not used to recover market price plus mark-up or standard cost plus mark-up.
Reason : When we look into the relationship between full cost and contribution margin pricing
we can conclude that although the full cost pricing and contribution margin based
approach for pricing are considered distinctively different approaches, by and large,
they represent to a certain degree, cost plus pricing. Hence statement (e) is true. They
are considered complementary to each other but not competing. Hence statement (a) is
true. In both the pricing models fixed costs are considered important. Hence option (c)
is true. In both the methods, the selling prices proposed must be only tentative and they
are always subjective. Hence statement (b) is also true. However, Full cost pricing
makes a normal mark up on total costs and it does not take volume of production into
consideration. On the other hand contribution margin approach to pricing is concerned
about cost. Hence statement (d) which states that Contribution margin method also
makes a normal markup on total costs is false.
Sales-Variable costs
×100
Reason : Mark-up percentage = Variable costs
Now sales = 650 units × Rs.25 + Rs.25,000 + Rs.9,000

= Rs.16,250 + Rs.25,000 + Rs.9,000
= Rs.50,250
Variable cost = Rs.25 × 650 = Rs.16,250
Rs.50,250 - Rs.16,250
×100
∴ Mark-up percentage = Rs.16,250 = 209.23%.
Reason :
Particulars Rs.
Cash sales Rs.1,10,000 × .4 44,000
Credit sales realized:
November Rs.1,40,000 × .6 × .4 33,600
October Rs.1,20,000 × .6 × .58 41,760
Sales receipts 1,19,360
Reason : Variable cost per unit = Rs.18 + Rs.15 + Rs.15 + Rs.15 = Rs.63
Fixed cost = Rs.10 × 1,000 units + Rs.15 × 1,000 units
= Rs.10,000 + Rs.15,000
= Rs.25,000
Cost of 1,250 units = 1,250 units × Rs.63 + Rs.25,000
= Rs.78,750 + Rs.25,000
= Rs.1,03,750.
20
Reason : A flexible budget is a series of budgets prepared for different levels of activity. It
allows adjustments of the budget to the actual level of activity before comparing the
budgeted activity with actual result. Fixed budget is a budget prepared for one level of
activity. Therefore (e) is correct. Other statements mentioned in (a), (b), (c) and (d) are
not correct.
Reason : While preparing a performance report for a cost center using flexible budgeting
techniques, the planned cost column should be based on budget adjusted to the actual
level of activity for the period being reported.
Reason : In case of zero based budget, each manager is asked to prepare his own requirement of
funds beginning from scratch, ignoring the past and he has to justify the requirements
mentioned by him. Hence the main idea behind zero based budget is to challenge the
existence of every budgetary unit and every budget period.
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.
Reason : Statement (I) is not true as corporate management consists of board of directors, chief
executive and the functional heads. Statement (II) is true of Executive management.
Similarly, Statement (III) is true as to the information required by operating
management. So, the correct answer is (d).
Reason : A favorable materials price variance is the result of paying less than the standard price
for materials. An unfavorable materials usage variance is the result of using an
excessive quantity of materials. If a purchasing manager is to buy substandard
materials to achieve a favorable price variance, an unfavorable quality variance could
result from using an excessive amount of poor quality materials.
18. Answer: (c) < TOP >
Reason: Output in the forthcoming year will increase by 26 2/3 % . It is calculated as follows:
Output last year 100%
Increase due to 33 1/3% increase in labour hours 33 1/3 %
Total 133 1/3%
Less: 5% decline in production efficiency (133 1/3% × 6 2/3%
Net 126 2/3%
So output will increase by 26 2/3 %
Labour hours worked last year were:
Wages Rs.90,000
Rate per hour 90 paise
∴ Number of labour hours last year Rs.90,000/90 Paise =
BUDGET FOR THE FORTHCOMING YEAR
21
Labour hours last year 1,00,000
Increase in labour hours , 331/3% 1,00,000/3
Total labour hours in the forthcoming year 4,00,000/3
Rate per hour 0.75
∴ Wages (4,00,000 / 3) × 0.75 1,00,000
Prime Cost 2,52,000
Production Overheads:
Fixed 40,000
Variable last year Rs.60,000
Add: 26 2/3 increase due to increase in output ( 60,000 × 76,000 1,16,000
80/3) / 100 = Rs.16,000
Estimated Works Cost 3,68,000
Factory Overhead Rate based on Direct Wages is
Rs.1,16,000/1,00,000 (Production Overhead/wages) × 100
= 116%
Budgeted variable costs

Reason : Standard variable cost per unit = Budgeted units
Rs.60, 000
= 6, 000 = Rs.10
Variable overhead cost variance
= Actual variable overhead costs – Standard variable overhead cost per unit ×
Actual output
= Rs.60,800 – Rs.10 × 6,500 units
= Rs.60,800 – Rs.65,000= Rs.4,200 (favorable).
Reason : For a single-product company, the sales volume variance is the difference between
flexible budget and master budget sales quantity, times master budget unit contribution
margin. This amount can also be calculated for each product in a sales mix, and the
results are added to determine the total sales volume variance. This variance may be
further decomposed into quantity and mix variances. Other options are incorrect.
Reason : The three distinguishable levels of management in an organization consists of –

corporate management, executive management and operating management. The
corporate management, consisting of board of directors, chief executive and function
heads is responsible for strategic planning and overall financial monitoring of the firm.
Executive management consists of managers responsible for certain product groups or
markets. They are entrusted with the responsibility to translate corporate strategy into
program and are concerned with tasks such as budget formulation, decision on routine
capital expenditures, choice of product improvement etc. The operating management is
represented by executives entrusted with specific operational tasks and is responsible
for executing various tasks within the framework of plans, programs, and schedules.
Hence only (a) is the characteristic of corporate management.
< TOP >
22. Answer : (e)
Reason : Positive reinforcement approach to achieving commitment to organizational objectives,
largely through external controls, emphasizes the rewarding of ‘desirable
performance’. This is an application of operant conditioning which is based on work of
B.F.Skinner. Hence option (e) is correct. All other options (a), (b), (c) and (d) are
incorrect.
< TOP >
23. Answer : (d)
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
22
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 the
principles that the average human being does not inherently dislike work. Option (c) is
incorrect as it is set forth hierarchy of human needs. Option (a) and (e) are not correct
related to the question asked. Therefore, (d) is correct.
Reason : An organized creative approach, which emphasizes efficient identification of

unnecessary cost i.e. cost that provides neither quality, nor use, nor life, nor
appearance, nor customer’s satisfaction is known as value-analysis
Reason : According to McGregor’s Theory Y, the capacity to exercise a relatively high degree
of imagination, ingenuity, and creativity in the solution of organizational problems is
widely, not narrowly, distributed in the population. Hence the answer is (e). The other
assumptions of Theory Y are: External control and threat of punishment are not the
only means of bringing about effort towards organizational objectives. Man will
exercise self-direction and self-control in the service of objectives to which he is
committed. The average human being learns, under proper conditions, not only to
accept but to seek responsibility. The expenditure of physical and mental effort in work
is as natural as play or rest. The average human being does not inherently dislike work.
Commitment to objectives is a function of the rewards associated with their
achievements e.g. the satisfaction of ego and self-actualization needs can be direct
products of efforts directed towards organizational objectives.
Reason : Most variances are of significance to someone who is responsible for that variance.
However, a fixed overhead volume variance is often not the responsibility of anyone
other than top management. The fixed overhead volume variance equals the difference
between budgeted fixed overhead and the amount applied (standard rate x standard
input allowed for the actual output). It can be caused by economic downturns, labor
strike, bad weather, or a change in planned output. Thus, a fixed overhead volume
variance resulting from a top management decision to reduce output has fewer
behavioral implications than other variances. Answer (a) is incorrect because an
unfavorable materials quantity variance affects production management and possibly
the purchasing function. It may indicate an inefficient use of materials or the use of
poor quality materials. Answer (b) is incorrect because an unfavorable labor efficiency
variance reflects upon production workers who have used too many hours. Answer (c)
is incorrect because a favorable labor rate variance related to hiring is a concern of the
personnel function. The favorable rate variance might be more than offset by an
unfavorable labor efficiency variance or a materials quantity variance (if waste
occurred). Answer (d) is incorrect because the purchasing function is responsible for a
favorable materials price variance.
Reason : Under target costing, first a price is established for a product and then it is assigned to
a team to develop the product within the cost (price) established.
After a team is assigned to develop cost scenario, market research and finding the
suitable rich market is carried on.
These are the ways in which target costing diverts from the traditional ways. So, the
correct answer is (e).
Reason : The major advantage of adopting target costing is that it is deployed during a products
design and planning stage so that it can have a maximum impact in determining the
level of the locked in costs. Target costing is not deployed at the product selling stage.
Therefore (c) is false.
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
23
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.
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 (e). 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.
Reason : Return on investment (ROI) equals to income divided by invested capital. If a firm is
already profitable, increasing sales and expenses by the same percentage will increase
the ROI. Other options given in (a), (b), (c) and (e) are not correct.
Reason :
Sales Rs.8,00,000
Less variable costs Rs.4,80,000
Rs.3,20,000
Less fixed costs (traced) Rs.1,20,000
Rs.2,00,000
Less interest (23% of Rs.4,00,000) Rs. 92,000
Residual income = Rs.1,08,000
Reason : Residual income is the excess of the return on an investment over a targeted amount
equal to an imputed interest charge on invested capital. The rate used is ordinarily set
as a target return by management but is often equal to the weighted average cost of
capital. Some enterprises prefer to measure managerial performance in terms of the
amount of residual income rather than the percentage of ROI because the firm will
benefit from expansion as long as residual income is earned. Therefore, (b) is correct.
Reason : The pre-requisites for effective divisionalisation include that the organization must
have two or more units for which the costs and revenues of each division can be
measured separately, each division is sufficiently independent of other divisions and
top management should not interfere too much in divisional matters. Therefore, (e) is
correct.
< TOP >
35. Answer : (b)
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 (b). 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 capacity 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.
Reason : A profit center is a segment of a company responsible for both revenues and expenses.
24
A profit center has the authority to make decisions concerning markets (revenues) and
sources of supply (costs). Option (a) is not correct because a revenue center is
responsible for developing markets and selling the firm’s products. Option (b) is not
correct because a cost center combines labor, materials, and other factors of production
into a final output. Option (d) is not correct because a service center provides
specialized support to other units of the organization. Option (e) is incorrect because an
investment center is responsible for revenues, expenses, and the amount of invested
capital.
Reason : Ideal (perfect, theoretical or maximum efficiency)standards are standard costs that are
set for production under optimal conditions. They are based on the work of the most
skilled workers with no allowance for waste, spoilage, machine breakdowns, or other
downtime. Tight standards can have positive behavioral implications if workers are
motivated to strive for excellence. However, they are not in wide use because they can
have negative behavioral effects if the standards are impossible to attain. Ideal, or
tight, standards are ordinarily replaced by currently attainable standards for cash
budgeting, product costing, and budgeting departmental performance. Otherwise,
accurate financial planning will be impossible. Answer (e) and (b) are incorrect
because ideal standards are perfection standards. Answer (c) is incorrect because ideal
standards are based solely on the most efficient workers. Answer (d) is incorrect
because ideal standards assume optimal conditions.
Reason : Rs.
Contribution of division A
Sales – 3,200 × Rs.430 = 13,76,000
Less : Variable cost:
Purchase cost (3,200 × Rs.320) = 10,24,000
A 3,52,000
Contribution of division B
Sales – 3,200 × Rs.650 20,80,000
Less : Variable cost
Division A: = Rs.13,76,000
Own cost
3,200 × Rs.180 = Rs. 5,76,000 19,52,000
B 1,28,000
Total Contribution – ( A + B ) 4,80,000
Reason : Let, sale value = x

0.12x = [ x(1 − 0.18) − Rs.1, 00, 000 − Rs.1, 80, 000 − Rs.1, 50, 000] (1 − Tax rate)
0.12x = [ 0.82x − Rs.4, 30, 000] 0.65 = 0.533x – Rs.2,79,500
0.413x = Rs.2,79,500
x = Rs.2,79,500 ÷ 0.413 = Rs.6,76,755
Sale price ÷ unit = Rs.6,76,755 ÷ 40,000 = Rs.16.92
Net sale price = 16.92 × 0.82 = Rs.13.87.
Reason : Working Note – 1: Computation of prime cost

Particulars Rs.
Sales (40,000 units) 14,40,000
Less: Profit margin – 20% 2,88,000
Cost of sales – (80% of Rs.14,40,000) 11,52,000
Less: Variable overheads – Rs.2,80,000
Semi-variable overheads – Rs.3,00,000
Fixed overheads – Rs.2,00,000 7,80,000
Prime cost 3,72,000
Working Note – 2: Semi-variable overheads:
25
Change in cos t Rs.3,50,000-Rs.3,00,000
Variable cost = Change in units = 50,000 units-40,000 units
Rs.50, 000
= 10, 000 units = Rs.5 per unit
At 40,000 units: Fixed cost = Total cost – Variable cost
= Rs.3,00,000 – 40,000 units × Rs.5 = Rs.1,00,000
At 45,000 units: Total cost = 45,000 units × Rs.5 + Rs.1,00,000 = Rs.3,25,000
Computation of differential cost of production of 5,000 additional units
(i.e. 10% of normal capacity):
Differential cost
40,000 units 45,000 units
Element of cost for
(Rs.) (Rs.)
5000 units (Rs.)
Prime cost – (Working Note 1) 3,72,000 4,18,500 46,500
Variable overhead 2,80,000 3,15,000 35,000
Semi variable overhead
3,00,000 3,25,000 25,000
(Working Note 2)
Fixed overhead 2,00,000 2,00,000 –
11,52,000 12,58,500 1,06,500
Rs.1, 06, 500
Cost per unit of new order = 5, 000 = Rs.21.30
Profit margin 25% (20% on sale = 25% on cost) = Rs. 5.33
Minimum selling price per unit = Rs.26.63.
Reason : Cash receipts = Sales + Decrease in sundry debtors

= Rs.5,80,000 + Rs.12,500 = Rs.5,92,500
Cash payment = Cost of goods sold (75%) + Inventory increased + Variable selling
and administrative expenses + Fixed (other than depreciation) selling & administrative
expenses = Rs.4,35,000 + Rs.18,400 + Rs.14,500 + Rs.13,200 = Rs.4,81,100
Surplus in cash = Rs.5,92,500 – Rs.4,81,100 = Rs.1,11,400.
Reason :
Particulars November December
Opening cash balance 1,02,500 1,00,000
Cash sales 25,000 50,000
Collection of credit sales 20,000 25,000
Cash inflows 1,47,500 1,75,000
Cash purchases 30,000 30,000
Payment to creditors 7,500 10,000
Salaries 70,000 50,000
Expenses 30,000 10,000
Interest (Rs.90,000 × 12% × 1/12) - 900
Cash outflows 1,37,500 1,00,900
Closing balance before borrowings 10,000 74,100
Borrowings * 90,000 30,000
Surplus - -
Closing balance 1,00,000 1,04,100
*As the closing balance before borrowings in November 2005 is Rs.10,000, it needs to
borrow Rs.90,000 to make the cash balance to Rs.1,00,000. However as the agreement with
the bank provides to borrow in multiples of Rs.10,000, the company should borrow
Rs.90,000 at the end of November 2005. Similarly, for the month of December 2005, the
company is required to borrow Rs.30,000 to maintain the minimum closing balance of
Rs.1,00,000 on December 31,2005.
26
Reason :
Rs.
Direct material 2,80,000
Direct labor 2,20,000
Factory overheads (50% of direct labor) 1,10,000
Works cost 6,10,000
Administrative overheads (25% of works cost) 1,52,500
Selling and distribution expenses 1,40,300
(20% of works cost + 15%) (6,10,000 × 25% × 11.5%)
9,02,800
Profit 12.5% on sales (i.e. 14.29% on cost) 1,28,971
Budgeted sales 10,31,771
Reason : The production budget for December 2005 = 4,500 units × 0.8 + 4,250 × 0.4
= 3,600 units + 1,700 units = 5,300 units.
The production cost budget for January 2006
= (4,250 × 0.8 + 4,400 × 0.4) × (Rs.25 + Rs.10 + Rs.25 + Rs.5) + Rs.39,000
=(3,400 + 1,760) × Rs.65 + Rs.39,000 = 5,160 units × Rs.65 + Rs.39,000
=Rs.3,35,400 + Rs.39,000 = Rs.3,74,400.
Reason :
Capacity 50% 60% 80%
Production (units) 5,000 6,000 8,000
(Rs.) (Rs.) (Rs.)
Material 50 51 52.50
Labor 20 20 20.00
Variable overheads
Factory 12 12 12.00
Administrative 5 5 5.00
87 88 89.50
Total variable cost 4,35,000 5,28,000 7,16,000
Fixed overheads
Factory 40,000 40,000 40,000
Administrative 25,000 25,000 25,000
5,00,000 5,93,000 7,81,000
Sale price per unit 110.00 107.80 104.50
Sales value 5,50,000 6,46,800 8,36,000
Profit 50,000 53,800 55,000
Profit per unit 10.00 8.97 6.88
Reason :
Material price variance = 8,200 kg × Rs.1.10 – Rs.9,430
Rs.9,020 – Rs.9,430= Rs.410 (Adverse)
Material usage variance = Rs.1.10 (870 units × 8 kg – 7,150 kg)
= Rs.1.10 × (6,960 kg – 7,150 kg) = Rs.1.10 × 190 = Rs.209 (Adverse)
Standard cost per unit of output

(15 × 4 ) + (12 × 3) + (8 × 6 ) 144
= 30 = 30 = Rs.4.80
Material yield variance = (Actual yield – Standard yield for actual input) × Standard
cost per unit of output
27
  4, 200 
3, 645 −  35 × 30  
=     × Rs.4.80 = (3,645 – 3,600) × Rs.4.80 = 45 × Rs.4.80 = 216
(F)
Rs.42, 000
= Rs.7.
Standard rate per unit = 6, 000
Rs.42, 000
= Rs.21
Standard rate per hour = 2, 000
6, 000 units
= 3 units per hour
Standard time for Budgeted production = 2, 000 hrs
6, 300
= 2,100 hrs
Standard time for actual production = 3
Volume variance = Rs.21 (2,000 hrs – 2,100 hrs)
= Rs.21 × 100 hrs = Rs.2,100 (Favorable)
49. Answer: (e) < TOP >
Reason:
Budgeted operating income statement of MNCLtd.
Rs. in lakh
Particulars Rs. Rs.
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%) 20.70
Direct labour @Rs.35.28 per unit (Rs.31.50 + 17.64 38.34
12%)
Contribution 18.66
Less fixed overheads
Factory 6.560
Administration (Rs.3.60 lakh + 8%) 3.888
Selling and distribution (Rs.4.50 lakh + 14%) 5.130 15.578
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
Reason:
Degree of
Completed stock: Kg. Overheads
completion
From opening work-in-progress 250 40 % 100
Closing work-in-progress 450 20 % 90
Current production 700 100 % 700
Total 890
Budgeted fixed overheads per Kg. = Rs.180
28
No. of direct labor hours per Kg. = 3
Budgeted rate per hour = Rs.60
Standard hours for actual production = 890 × 3 = 2,670hours
Fixed overhead efficiency variance = (Standard hours for actual production – Actual
hours) x budgeted rate per hour = (2,670 hours – 3,300 hours) × Rs.60 = 630 hrs ×
Rs.60
= Rs.37,800 (A)
Reason: Standard/ Budgeted data

Budgeted fixed overheads (Rs.) 1,00,000
Budgeted output units 2,500
Budgeted hours 10,000
Budgeted days 25
Standard labor hours per unit 4
Standard hours worked per day 400
Standard rate per unit (Rs.) 40
Standard rate per hour (Rs.) 10
Standard fixed overhead rate per day (Rs.) 4,000
Actual data
Actual fixed overheads (Rs.) 88,800
Actual output units 2,320
Actual hours 8,400
Actual days 24
The total fixed overhead variance
= (Fixed overhead recovered on actual output ~ Actual fixed overhead incurred)
= (2,320 units × Rs. 40 ~ Rs. 88,800) =Rs.92,800 ~ Rs.88,800 = Rs. 4,000 (F)
Calendar variance
= Standard fixed overhead rate per day (Actual days ~ Budgeted days)
= Rs. 4,000 (24 days ~ 25 days) = Rs.4000 × 1day = Rs. 4,000 (A)
Reason: The standard labor cost per unit of output

Grade No. of Hours Man-hours Rate per hour Labor cost
Skilled 10 40 400 5.00 2,000
Total 800 3,200
Labor cost per unit = Total labor cost/No of units produced = Rs. 3.20 per unit
Actual cost
29
Total 800 3,352
Labor cost variance = Rs.3,200 ~ Rs.3,352 = Rs.152 (A).
Labor usage variance

Grade Standard man Actual Difference Standard Usage Variance
(1) hours for actual Man in hours Rate (Rs.)
production Hours (2 x3) (4) (Rs.) (5) (4 x 5)
(2) (3)
Skilled (400/1,000) x 960 = 384 520 136 (A) 5.00 680.00 (A)
Semi- (200/1000) x 960= 192 160 32 (F) 3.20 102.40 (F)

skilled
Unskilled (200/1000) x 960= 192 120 72 (F) 2.80 201.60 (F)

Total 376.00 (A)
Reason:
Total quantity of actual sales = 5,500+2,500+4,300 = 12,300 kgs.
Sales Mix variance = Standard rate × (Actual quantity- Revised Standard quantity)
  12, 300 
 4, 300 ~  × 4, 000  
A 24 ×   12, 000 
4,800 (F)
= Rs.24 × (4,300 ~ 4,100)
  12, 300 
 2, 500 ~  × 3, 000  
B 30 ×   12, 000 
17,250 (A)
= Rs.30 × (2,500 ~ 3,075)
  12, 300 
5, 500 ~  × 5, 000  
C 18 ×   12, 000 
6,750(F)
= Rs.18 × (5,500 ~ 5,125)
Total 5,700 (A)
Reason: The sales quantity variance is the difference between the actual and budgeted units,
times the budgeted unit contribution margin. (5,600 ~ 6,000) × Rs. 1,20,000 ÷ 6,000 =
Rs. 8,000 (A). The variable cost flexible budget variance is equal to the difference
between actual variable costs and the product of the actual quantity sold and the
budgeted unit variable cost (Rs.1,80,000 ÷ 6,000 = Rs.30) (Rs. 30 × 5,600) – Rs.
1,45,000 = Rs.1,68,000 ~ Rs.1,45,000 = Rs. 23,000 (F).
Reason: Machine activity cost per hour =

Rs.2, 40, 000 Rs.2, 40, 000
= = Rs.5.07 per machine hour
6, 000 x 5 + 4, 340 x 4 47, 360
Rs.57, 000
= Rs.1, 900
Setups cost per set up = 30 per set up
Rs.52, 500
= Rs.1, 500
Order handling cost per order = 35 per order
Particulars Product D (Rs.) Product K (Rs.)
Machine activity cost 1,52,027 87,973
Setups cost 22,800 34,200
Order handling cost 24,000 28,500
1,98,827 1,50,673
30
Reason: Residual income is the excess of the amount of the ROI over a targeted amount equal
to an imputed interest charge on invested capital.
Total investment = Rs.17,20,000 + Rs.8,10,000 = Rs.25,30,000
Imputed interest charge = 14% on Rs.25,30,000 = Rs.3,54,200
Residual income = Rs.2,22,000
Total profit = Rs.5,76,200
Total costs = Revenue – Target profit= Rs.9,50,000 – Rs.5,76,200
= Rs.3,73,800.
The budgeted increase

September Increase
Effect of
Particulars 2005 In sales
change Rs.
(Rs.) volume
Sales 40,000 46,000 46,000 ×104% = 47,840.0
Direct materials 17,500 20,125 20,125 × 98% = 19,722.5
Direct labor 10,000 11,500 11,500 × 98% = 11,270.0
Variable overheads 5,000 5,750 5,750 × 98% = 5,635.0
Fixed overheads* 4,375 4,375 4,375 ×98% = 4,287.5
Profit 3,125 6,925.0
Capital employed 25,000 25,000
Return on investment 12.5% 27.70%
*Return on investment in September 2005 is 12.5%. Hence profit is Rs.25,000 ×
12.5% = Rs.3,125
Hence fixed overheads is sales–variable expenses–profit = Rs.40,000–Rs.32,500 –
Rs.3,125 = Rs.4,375
27.70% − 12.5%
% increase in return on investment = 12.5% = 121.6%
Reason: The production cost budget

Particulars Rs.
Material cost (variable) 30,000
Labor cost (variable) 18,000
Stores (variable) 1,200
Power (semi-variable) 1,450
Repairs and maintenance (semi-variable) 2,300
Inspection (semi-variable) 520
Administration overheads (semi-variable) 5,250
Selling overheads 3,300
Depreciation (fixed) 10,000
Total 72,020
Cost per unit 12.00
Reason: Standard Cost of Standard mix of input

Quantity Price Amount
Particulars
Kgs Rs. Rs.
Chemical A (50% of 100 kgs) 50 12 600
Chemical B (50% of 100 kgs) 50 15 750
Input 100 1,350
Standard Loss 10 –
Output 90 1,350
Standard rate of output per kg. = Rs.1,350 / 90 = Rs.15
31
Yield variance =
Standard Rate of Output × (Actual yield – Standard yield for Actual input)
Rs.135 (A) = Rs.15 (90 kg – Standard yield for actual input)
9kg (A) = 90 kg – Standard yield for actual input
Standard yield for actual input = 90 + 9 = 99kg.
Reason: Standard time per unit
A= 10 = 0.5
20
B= 10 = 1.0
10
C= 10 = 2.0
5
Budgeted Hours
A= 250 × 0.5 = 125
B= 200 × 1.0 = 200
C= 300 × 2.0 = 600
925
Standard hours for actual production
A = 260 × 0.5 = 130
B = 250 × 1.0 = 250
C = 200 × 2.0 = 400
780
Actual hours = 750
780
Efficiency ratio = 750 = 104%
750
Capacity ratio= 925 = 81.08%.
Reason: Finished goods:

Closing stock at end of October must be 10% higher than at the beginning of the
month: 30,000 × 110% = 33,000 units. (Closing stock for January is the same as
opening stock for November)
Closing stock at end of November must be 10% higher than at the beginning of the
month: 33,000 × 110% = 36,300 units.
Closing stock at end of December must be 10% higher than at the beginning of the
month: 36,300 × 110% = 39,930 units.
Production in the month of December 2005 is Closing stock + Sales - Opening stock =
39,930 + 4,10,000 – 36,300 = 4,13,630 units
Raw materials:
Opening stock of raw material at beginning of October = 50,000kg × Rs.6.00
= Rs.3,00 000
Closing stock at end of October must be 10% higher than opening stock
= Rs.3,00,000 × 110% = Rs.3,30,000
Closing stock at end of November must be 10% higher than opening stock:
= Rs.3,30,000 × 110% = Rs.3,63,000
Closing stock at end of December must be 10% higher than opening stock:
= Rs.3,63,000 × 110% = Rs.3,99,300
Purchases in the month of December 2005 is Closing stock + raw materials used in
production – opening stock = Rs.3,99,300 + (4,13,630 units × 1.8kg × Rs.6) –
Rs.3,63,000
=Rs.3,99,300 + Rs.44,67,204 - Rs.3,63,000 = Rs.45,03,504.
32
Reason: A favorable variance denotes that the actual cost for the achieved level of activity was
less than the standard. Here in this case option (d) which says costs were Rs.12, 000
less than standard for the achieved level of activity is correct .All other options are
incorrect
Reason: Value engineering is a modern approach in cost management for various activities on
the value chain where as all other options are traditional approaches. So,(d) is correct.
Reason: The reports for the lower level of management are fairly detailed though limited in
scope and they are quantitative in nature. The reports for the top management are
highly summarized with financial data.
Reason: Zero-based budgeting is a technique by which manager of each decision unit is to

justify his entire budget request in complete detail with a zero base. The manager of
the decision unit has to isolate each item of his budget in order to analyze it in separate
decision packages, which are ranked in order of importance.
Reason:
Fixed costs 8,00,000
Return on capital employed (Rs.75,00,000 x 12%) 9,00,000
Residual income desired 10,00,000
Total desired contribution 27,00,000
Contribution per unit from outside sales = Rs.180 – Rs.160 = Rs.20 per unit
Total contribution from outside sales = Rs.20 per unit x 1,20,000 units
= 24,00,000
Minimum contribution to be earned from supply to division B
= Rs.27,00,00 – Rs.24,00,000 = Rs. 3,00,000
Rs. 3,00,000
Contribution per unit on additional 25,000 units = 25,000 units = Rs.12 per unit
Variable cost for minor modification = Rs.5 per unit
Minimum transfer price per unit to be quoted = Rs.160 + Rs.12 + Rs.5 = Rs.177
Reason: The standard cost of materials for 8,500 units is Rs.1,27,500 (i.e. 8,500 × Rs.15). Thus,
no variance arose with respect to materials. Because labor for 9,000 units was budgeted
at Rs.81,000, the unit labor cost is Rs.9. Thus, the labor budget for 8,500 units is
Rs.76,500 and total labor variance is Rs.1,275 (i.e. Rs.77,775 – Rs.76,500). Because
the actual cost is greater than the budgeted amount, Rs.1,275 variance is unfavorable.
Given that the actual time per unit (45 minutes) was the same as that budgeted, no
labor efficiency variance was incurred. Hence, the entire Rs.1,275 unfavorable
variance must be attributable to labor rate variance.
Reason : The minimum selling price to be quoted is the incremental cost per unit . Here all the
costs including depreciation, except Rs.62,000 fixed cost, are incremental and variable.
So, the incremental cost per unit = cost of {Direct Material = Rs.30 per unit + Direct
Labour at the rate of Rs.6 per hour = Rs.18 per unit + Power at the rate of Rs.4 per
hour =Rs.8 + Variable Overheads = Rs. 9 per unit + Depreciation of [(Rs.1,26,000 –
Rs.6,000) ÷ 24,000 units] = Rs.5 per unit} = Rs.70.
[Cost is different from cash flow and here depreciation is not a period cost and it
increases with increase in number of units produced.]
Reason : Here the total sales margin variance is Rs.75,000 (Adverse ) implies the actual sales
margin (contribution) = Budgeted sales margin – Rs.75,000
33
= [15,000 × Rs.6 + 20,000 × Rs.7 + 5,000 × Rs.9] – Rs.75,000
= Rs.2,75,000 – Rs.75,000 = Rs.2,00,000.
Actual profit = Contribution – Fixed cost = Rs.2,00,000 – Rs.90,000 = Rs.1,10,000.
Reason : Profit for I quarter = Rs.8,000 – (4,000 + 3,000) = Rs.1,000

Variable portion of production overheads:
For 200 units = Rs.4,000
For 240 units = Rs.4,100 ( if there is no reduction in fixed overheads).
So, variable over head per unit = (Rs.4,100 – Rs.4,000) ÷ (240 – 200) = Rs.2.50
Fixed overheads = Rs.4,000 – (200 × 2.50) = Rs.3,500
Because of decrease in fixed overheads, the actual fixed overheads = Rs.3,300
Total variable cost per unit = Prime cost per unit + variable overhead per unit
= (Rs.3,000 ÷ 200) + Rs.2.50 = Rs.17.50
Actual variable cost after 20% increase = Rs.17.50 + 20% of Rs.17.50 = Rs.21
Selling price per unit = Rs.8,000 ÷ 200 = Rs.40 (same as I quarter)
Profit per unit = Rs.1,000 ÷ 200 = Rs.5 (same as I quarter)
Contribution per unit = Rs.40 – Rs.21=Rs.19
Let the number of units to be sold to make a profit per unit of Rs.5 be X then
19X – Rs.3,300 = Rs.5X
X=235.71 or 236 units.
Reason : At 50% capacity, loss = Rs.5,000

At 40% capacity, loss = Rs.20,000
So every 1% increase in capacity utilization increases profit by (Rs.15,000 ÷ 10%)
Rs.1,500.
To get a profit of Rs.10,000 the extra profit required above 50% = Rs.15,000
The extra capacity required for an extra profit of Rs.15,000 = Rs.15,000 ÷ Rs.1,500
=10%
So, the capacity utilization for a profit of Rs.10,000 = 50% + 10% = 60%.
Reason : Standard cost per unit of output = (300 × Rs.4 +200 × Rs.3.00) ÷ 1200 = Rs.1.50
Material cost variance = Actual cost of materials – Standard cost of actual output
= (350kg × Rs.4.50 + 160kg × Rs.2.80) – 1,160kg × Rs.1.50
= Rs. 2,023 – Rs. 1,740 = Rs.283 (A)
Material price variance = Actual quantity (Actual price – Standard price) = 350 ×
(Rs.4.50 – Rs.4.00) + 160 × (Rs.2.80 – Rs.3.00) = Rs.143 (A)
Material price variance represents variance due to deviation of actual prices from
standard prices. It’s percentage in total variance = (Rs.143 ÷ Rs.283) × 100 = 50.53%.
73. Answer: (a) < TOP >
Reason:
Production budget for 5 months ending February 28, 2006
Particulars October November December January February
Product – A
Budgeted sales 2,000 2,000 2,100 2,400 2,800
Add: Closing
Total 2,800 2,840 3,060 3,520 4,160
Less: Opening
34
months sales)
Production 2,000 2,040 2,220 2,560 3,040
Product – B
Budgeted sales 1,500 1,600 1,700 2,000 2,000
(units)
Add closing stock
(units) 640 680 800 800 880
(40% of the
following months
sales)
Total 2,140 2,280 2,500 2,800 2,880
Less: Opening
stock (units) 600 640 680 800 800
(40% of current
month’s sales)
1,540 1,640 1,820 2,000 2,080
Production
Product A B
Total production in 5 months 11,860 units 9,080 units
Unit Total cost of Unit Total cost of

cost 11,860 units cost 9,080 units
Particulars
of A of product A of B of product B
(Rs.) (Rs.) (Rs.) (Rs.)
Direct Material 40 4,74,400 60 5,44,800
Direct Labor 30 3,55,800 40 3,63,200
Other Manufacturing expenses 21 2,49,060 32 2,90,560
(Rs.6,30,000 ÷ 30,000 units)
(Rs.6,40,000 ÷ 20,000 units)
Total cost of production 91 10,79,260 132 11,98,560
Total cost of production for both products is Rs.10,79,260 + Rs.11,98,560 =
Rs.22,77,820.
< TOP OF THE DOCUMENT >
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Management Accounting II 1005

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Question Paper

Management Accounting – II (152): October 2005

September 2005 Rs.1,10,000

Direct material Rs.18

The total costs for 1,250 units are

During the forthcoming year it is anticipated that:

Particulars Budget Actual

The variable overhead cost variance is

Sales Rs. 8,00,000

The residual income of the company is

50,000 units 40,000 units

Month Projected sales in units

Materials purchased 8,200 kg at a price of Rs.9,430

The material price and material usage variances are

The material yield variance is

Particulars Budget Actual

The fixed overhead volume variance is

The sales mix variance is

Dresses sold (units) 5,600 6,000

Sales (Rs.) 2,35,000 3,00,000

Particulars Product D Product K

Product Budgeted production Actual production

A 250 units 260 units

B 200 units 250 units

C 300 units 200 units

October 2005 2,10,000 units

Particulars 1st quarter 2nd quarter

Particulars Quarter I Quarter II

October November December January February March

B 1,500 1,600 1,700 2,000 2,000 2,200

Level of activity 90%

ii. Sale price reduced by 10% (i.e., Rs.315) 8,50,500

Reason : 20% return on investment = 22% of Rs.3,00,000 = Rs.66,000

Now sales = 650 units × Rs.25 + Rs.25,000 + Rs.9,000

Budgeted variable costs

Reason : The three distinguishable levels of management in an organization consists of –

Reason : An organized creative approach, which emphasizes efficient identification of

39. Answer : (a) < TOP >

Reason : Let, sale value = x

Reason : Working Note – 1: Computation of prime cost

Reason : Cash receipts = Sales + Decrease in sundry debtors

Standard cost per unit of output

Reason: Standard/ Budgeted data

Reason: The standard labor cost per unit of output

Labor usage variance

Semi- (200/1000) x 960= 192 160 32 (F) 3.20 102.40 (F)

Unskilled (200/1000) x 960= 192 120 72 (F) 2.80 201.60 (F)

54. Answer : (d) < TOP >

Reason: Machine activity cost per hour =

The budgeted increase

Reason: The production cost budget

Reason: Standard Cost of Standard mix of input

Reason: Standard time per unit

Reason: Finished goods:

Reason: Zero-based budgeting is a technique by which manager of each decision unit is to

Reason : Profit for I quarter = Rs.8,000 – (4,000 + 3,000) = Rs.1,000

Reason : At 50% capacity, loss = Rs.5,000

Unit Total cost of Unit Total cost of

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