151 0705

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Question Paper
Management Accounting – I (151) : July 2005
Section A : Basic Concepts
• Answer all questions.
• Each question carries one mark.
< Answer >

1. The resources consumed to accomplish a specified objective are called as
(a) Expense (b) Cost (c) Revenue (d) Profit (e)
Loss.
(1 mark)
< Answer >
2. Which of the following functions can be related to the controller of an organization?
I. Credits and collection.
II. Procurement of long-term finance.
III. Tax administration.
IV. Reporting and interpreting.
(a) Both (I) and (II) above (b) Both (II) and (III) above
(c) Both (II) and (IV) above (d) Both (I) and (III) above
(e) Both (III) and (IV) above.
(1 mark)
< Answer >
3. Management accounting information to be relevant must possess which of the following characteristics?
I. It should affect the accomplishment of the objectives of the decision-maker.
II. It should give to the manager a whole of information from which the manager must find out those
needed for his specific purpose(s).
III. To be relevant, the information will change as a result of the decisions or choice made by the
decision-maker.
(a) Only (I) above (b) Only (II) above
(c) Both (II) and (III) above (d) Both (I) and (III) above
(e) Both (I) and (II) above.
(1 mark)
< Answer >
4. When manufacturing expenses are recovered on a suitable basis, the journal entry to be passed is
(a) Debit Work-in-process account and credit General ledger adjustment account
(b) Debit Manufacturing overhead control account and credit stores ledger control account, wages
control account and general ledger adjustment account
(c) Debit Manufacturing overhead control account and credit work-in-process account
(d) Debit General ledger adjustment account and credit Work-in-process account
(e) Debit Work-in-process account and credit Manufacturing overhead control account.
(1 mark)
< Answer >
5. Which of the following statements is not true?
(a) Product cost for merchandise is the cost of purchases plus transportation
(b) Cost of merchandise sold is called the cost of goods sold
(c) Retailers and wholesalers treat period costs as expenses
(d) Period costs are treated as product costs with service industry firms
(e) At the end of the year, inventory on hand is an asset.
(1 mark)
< Answer >
6. A method which provides a continuous record of the quantities of inventory is the
(a) Periodic inventory method
(b) Step-down method
(c) Perpetual inventory method
(d) Reciprocal method
(e) Periodic concept method.
(1 mark)
< Answer >
7. Which of the following statements is/are true?
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I. When recording the end-of-period adjustment for deferred insurance, the portion of insurance
expense that is related to factory operations should be debited to the Manufacturing Overhead
account.
II. The total of production or manufacturing costs of direct material, direct labor, and manufacturing
overhead are also known as direct manufacturing costs.
III. Manufacturing overhead is allocated to production or assigned to products in proportion to some
activity base.
(a) Only (I) above (b) Both (II) and (III) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (I) and (III) above.
(1 mark)
< Answer >
8. For the purpose of planning and control, costs are classified as
(a) Normal and abnormal costs
(b) Historical and predetermined costs
(c) Product and period costs
(d) Budgeted and standard costs
(e) Controllable and uncontrollable costs.
(1 mark)
< Answer >
9. You recently made the following out-of-pocket expenditures on your 1993 model car:
New tyres Rs.160
Engine tune up Rs.240
Dent repairs Rs.300
New paint Rs.360
Battery replacement Rs.150
You have been offered a discount of Rs.800 on the purchase of a different automobile that is priced at
Rs.10,500.
Which of the following statements is true?
(a) You will lose Rs.310
(b) You will lose Rs.1,110
(c) You will gain Rs.310
(d) The amount you paid to refurbish your old car is irrelevant to the decision
(e) The actual cost of the new car will be Rs.10,810.
(1 mark)
< Answer >
10. Which of the following is an important issue when implementing an ABC costing system?
(a) Minimizing employee involvement
(b) Minimizing employee concerns related to reemployment
(c) Minimizing employee concerns related to fringe benefits
(d) Minimize employee's desire to have company succeed
(e) Minimize employees turnover.
(1 mark)
< Answer >
11. Because of shortage of labor and materials, a department in a factory is working at 55% of its normal
capacity. In its cost records, it charges manufacturing overhead to work-in-progress as a percentage of
direct labor.
For the current year, budgeted direct labor cost is Rs.2,50,000, budgeted manufacturing fixed overhead
is Rs.1,00,000 and budgeted manufacturing variable overhead is Rs.1,25,000.
A dispute has arisen as to the percentage of direct labor that should be charged to work-in-progress. One
officer claims that it should be 90%, another claims that it should be less than that.
The appropriate recovery rate should be
(a) 100% (b) 90% (c) 88% (d) 72% (e)
63%.
(1 mark)
< Answer >
12. Precision Ltd. has furnished the following information pertaining to its machine:
Total cost of machine to be depreciated Rs.2,30,000
Life of machine – 10 years
Depreciation on straight line
Departmental overheads (annual)
Rent – Rs.50,000; Heat and light – Rs.20,000; Supervision – Rs.1,30,000
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Area of the Department – 70,000 square meters
Machine area – 2,500 square meters
Number of machines – 26
Annual cost of reserve equipment for machinery – Rs.1,500
Hours runs on production – 1,800
Hours for setting and adjusting – 200
Power cost – Re.0.50 per hour of running time
Labor :
* When setting and adjusting – full time attention
* When machine is producing – one worker can look after 3 machines
Labor rate is Rs.6 per hour.
The hourly rate for standing charges of the company is
(a) Rs.25.25 (b) Rs.22.25 (c) Rs.20.80 (d) Rs.17.64 (e)
Rs.20.14.
(2 marks)
< Answer >
13. For a department, the standard overhead rate is Rs.5 per hour and overhead allowances are as follows:
Activity level Budgeted overhead
(hours) allowances (Rs.)
6,000 20,000
14,000 36,000
22,000 52,000
The normal capacity level on the basis of which the standard overhead rate has been worked out is
(a) 3,667 hours (b) 2,667 hours (c) 4,000 hours
(d) 2,000 hours (e) 5,000 hours.
(1 mark)
< Answer >
14. In Sinnarista Ltd. overhead was recovered at a predetermined rate of Rs. 20 per labour hour. The total
factory overhead incurred and the labour hours actually worked were Rs. 45,00,000 and 2,00,000 labour
hours respectively. During this period 30,000 units were sold. At the end of the period 5,000 units were
held in stock while there was no opening stock of finished goods. Similarly though there was no stock of
uncompleted units at the beginning of the period, at the end of the period there were 10,000
uncompleted units that may be reckoned at 50% complete. On analyzing the reasons it was found that
60% of the unabsorbed overheads was due to defective planning and rest were attributed to increase in
overhead costs. The supplementary overhead absorption rate is
(a) Rs. 20 (b) Rs. 10 (c) Rs. 5 (d) Rs. 25 (e)
Rs. 15.
(2 marks)
< Answer >
15. The following data pertains to the machine shop of Enigma Engineering Ltd. for the year 2004-05. The
machine shop has 3 cost centres A, B and C each having 3 distinct sets of machines. The company has
furnished the following information pertaining to costs and cost centres:
Particulars A B C Total
No. of workers 400 400 800 1,600
No. of machine hours 50,000 50,000 60,000 1,60,000
Percentage of HP 40 25 35 100
(Rs. In lakh)
Value of assets 20 35 30 85.00
Direct wages 16 20 24 60.00
Indirect wages 18.00
Supervisory salaries 7.00
Depreciation 8.50
Insurance 4.25
Electricity charges 12.00
Welfare expenses 9.00
Office and other expenses 16.00
The machine hour rate for the cost centres A and C are
(a) Rs. 75.00 and Rs.53.90 respectively
(b) Rs. 75.20 and Rs.89.83 respectively
(c) Rs. 75.00 and Rs.85.00 respectively
(d) Rs. 75.20 and Rs.55.00 respectively
(e) Rs. 60.50 and Rs.89.83 respectively.
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(2 marks)
< Answer >
16. XY Ltd., manufacturers of engineering components, has provided the following budgeted information
for the year 2005-06:
Department Machine hours Overhead Machine hours
Rs. required for
Job A
Fabrication 12,000 1,50,000 30
Machining 15,000 1,80,000 40
Assembly 9,000 1,40,000 70
Finishing 8,000 90,000 10
The overheads to be charged to Job A under blanket overhead rate and the departmental overhead rate
are
(a) Rs. 2,015.00 and Rs. 1,909.09 respectively
(b) Rs. 2,015.00 and Rs. 2,056.00 respectively
(c) Rs. 1,909.09 and Rs. 2,056.00 respectively
(d) Rs. 1,909.09 and Rs. 2,015.00 respectively
(e) Rs. 2,056.00 and Rs. 2,015.00 respectively.
(2 marks)
< Answer >
17. Which of the following statements is false?
(a) The aggregate of indirect material, indirect wages and indirect expenses is overhead costs
(b) Direct costs are never treated as overhead costs even in cases where efforts involved in identifying
and accounting are disproportionately large
(c) The overheads can be apportioned to a cost center in accordance with the principles of benefit
and/or responsibilities
(d) Capital expenditure should be excluded from costs and should not be treated as overhead
(e) Expenditure that does not relate to production shall not be treated as overhead.
(1 mark)
< Answer >
18. Which of the following statements is true regarding service, merchandising and manufacturing
companies?
I. For service companies the most significant cost is usually cost of goods sold.
II. Merchandising companies convert raw materials into finished products.
III.Examples of merchandising companies are Nike and Reebok (both make shoes and sports apparel
from raw materials)
IV. For manufacturing companies the most significant cost is usually cost of goods sold.
(a) Only (I) above (b) Both (II) and (IV) above
(c) Only (III) above (d) Only (IV) above
(1 mark)
< Answer >
19. Ajex Ltd. had the following inventories at the beginning and end of the month of June 2005.
Particulars June 1, 2005 (Rs.) June 30, 2005 (Rs.)
Finished goods 1,25,000 1,17,000
Work-in-process 2,35,000 2,51,000
Direct materials 1,34,000 1,24,000
The following additional manufacturing data were available for the month of June 2005:
Particulars (Rs.)
Direct materials purchased 1,89,000
Purchase returns and allowances 1,000
Transportation 3,000
Direct labor 2,50,000
Actual factory overhead 1,75,000
The company applies factory overhead at a rate of 60% of direct labor cost, and any overapplied or
underapplied factory overhead is deferred until the end of the year 2005-06.
The manufacturing cost of the company for the month of June 2005 was
(a) Rs.6,81,000 (b) Rs.6,26,000 (c) Rs.4,89,000
(d) Rs.6,01,000 (e) Rs.6,73,000.
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(2 marks)
< Answer >
20. When factory overhead control account has an ending debit balance, factory overhead was
I. Over-applied.
II. Under-applied.
III. At par with labor cost.
IV. At par with prime cost.
(c) Only (III) above (d) Both (II) and (IV) above
(1 mark)
< Answer >
21. Consider the following data of a company:
Material Purchased - Rs.1,55,000. There was no beginning inventory.
Direct labor incurred - 400 hours at the rate of Rs.10 per hour.
Budgeted overheads - 430 hours
Budgeted overhead cost - Rs.5,160
Units started - 15,000 units
Units completed - 12,000 units
Actual overheads - Rs.5,100
Ending Inventory - 50% complete.
If none of the units is sold and assuming the over or under applied overhead is relevant, how much of
the under applied overhead would be allocated to Finished Goods?
(a) Rs.160.00 (b) Rs.266.67 (c) Rs.216.67 (d) Rs.187.50 (e)
Rs.150.00.
(1 mark)
< Answer >
22. Which of the following is/are not the advantages of departmentalization of overhead?
(a) It facilitates control of overhead expenses by means of forecasted budgets
(b) It helps in controlling the uses made of the services rendered to the respective departments
(c) The reasons for variance can be known by the analysis of under or over-absorption of overhead
which in turn helps in taking remedial measures
(d) Departmentalization of overheads helps in arriving at the cost of work-in-progress correctly
(e) The correct costs can be determined as the actual overhead costs of the respective departments are
taken into consideration in determining the overhead rates.
(1 mark)
< Answer >
23. In Enticing Ltd. the predetermined rate of overhead recovery is Rs. 40 per machine hour. During the
year, total factory overhead amounted to Rs. 88,96,000 and machine hours actually worked were
1,86,500 only.
Actual production and sales during the year were 1,20,000 units and 1,05,000 units respectively. The
production shop has 36,000 unfinished units and based on technical estimates these were considered as
50% complete.
Analysis of the data revealed that 37.5% of the unabsorbed overheads were attributable to initial
inaccuracies in the planning and the balance was due to rising price levels. The amount of under
absorption of overheads to be charged to work-in-progress is
(a) Rs. 14,36,000 (b) Rs.6,82,908 (c) Rs.1,17,034 (d) Rs.97,55,800 (e)
Rs.8,97,500.
(2 marks)
< Answer >
24. Sheera Ltd. is manufacturing a single product having a manufacturing capacity of 6,000 units per week
of 48 hours. The output data vis-à-vis different elements of cost for three consecutive weeks are given
below:
Total factory
Units Direct Direct
overheads
Produced Material Labour
(variable & Fixed )
Rs. Rs. Rs.
2,400 4,800 6,000 37,200
2,800 5,600 7,000 38,400
3,600 7,200 9,000 40,800
Assuming a profit of 20% on selling price, the selling price per unit for the activity level of 4,000 units,
is
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(a) Rs.18.25 (b) Rs.19.00 (c) Rs.18.75 (d) Rs.19.25 (e)
Rs.18.50.
(2 marks)
< Answer >
25. A contract for construction of building is governed by an escalation clause in respect of prices of steel,
cement and stone aggregate. The prices ruling on the date of tender for the building and the actual prices
paid by the contractor were as follows:
Particulars On the date Actual (Rs.)
of tender (Rs.)
Steel per ton 610 675
Cement per ton 100 105
Stone aggregate per 100 cft. 40 38
3,00,000 cft of reinforced cement concrete was laid in the building. If 100 kg. of steel, 2,400 kg. of
cement and 90 cft of stone are the net quantities required to cast 100 cft of RCC and the wastages are
5%, 3% and 10 % respectively, the difference in selling price according to the escalation clause (1 ton =
1,000 kg. and assume the wastage percentage based on the net quantity of material) is
(a) Rs. 57,555 (b) Rs. 51,615 (c) Rs. 63,495
(d) Rs. 26,415 (e) Rs. 20,556.
(2 marks)
< Answer >
26. Following information is given pertaining to Tico Ltd. which is producing 800 MT of M.S rods:
Particulars Rs.
Materials 2,80,000
Labour 1,00,000
Processing charges 1,00,000
Of the total output, 10% was defective and had to be sold after a discount of 10% of the normal price.
The scrap arising out of the production realized a sum of Rs. 8,760. The sale price is calculated to yield
15% profit on sales. The discounted price of per M.T of M.S rods is
(a) Rs. 700 (b) Rs. 630 (c) Rs. 730 (d) Rs. 770 (e)
Rs. 792.
(2 marks)
< Answer >
I. The process of sawing logs into various grades and sizes of lumber is an example of a joint
production process.
II. When joint products are allocated joint costs on the basis of their sales prices, the allocation
method is called the relative-sales-value method.
III. The point at which the processing of crude oil results in gasoline, kerosene and diesel is called the
split-off point.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (III) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
I. When preparing financial statements, the accountant will first prepare a schedule of cost of goods
manufactured.
II. The major disadvantage of using an actual overhead rate is the timeliness of the information.
III. A major disadvantage of using an actual overhead rate is the month-to-month fluctuations that
might occur.
(a) Only (I) above (b) Both (I) and (II) above
(c) Only (III) above (d) Both (I) and (III) above
(1 mark)
< Answer >
29. An article passes through three successive operations from the raw material to the finished product
stage. The following data are available from the production records of a particular month:
Operation No. of pieces No. of pieces No.of pieces
No. Input Rejected Output
1 60,000 20,000 40,000
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2 66,000 6,000 60,000
3 48,000 8,000 40,000
The weight of a finished piece is 0.10 kg. and the price of raw material is Rs. 20 per kg.
The cost of raw material, required to produce one piece of finished product, is
(a) Rs. 5.00 (b) Rs. 3.96 (c) Rs. 4.32 (d) Rs. 3.54 (e)
Rs. 4.69.
(2 marks)
< Answer >
30. Kapoor Engineering Ltd. undertakes long-term contracts, which involve the fabrication of prestressed
concrete blocks and the erection of the same on consumer’s site.
The following information is supplied regarding the contract which is incomplete on 31 st march 2005:
Costs incurred Rs.

Fabrication costs to date: Contract price Rs.8,19,000
Direct materials 2,80,000 Cash received on account Rs.6,00,000
Direct labour 90,000 Technical estimate of work
completed to date:
Overheads 75,000 Fabrication -
Direct materials 80%
Erection costs to date: 15,000 Direct labour and overheads 75%
Total 4,60,000 Erection - 25%
The estimated profit of the contract is
(a) Rs. 1,38,462 (b) Rs. 2,58,358 (c) Rs. 1,89,000
(d) Rs. 3,19,538 (e) Rs. 2,98,550.
(2 marks)
< Answer >
31. An operating costing system is
(a) Identical to process costing system except that actual cost is used for manufacturing overhead
(b) A method of cost accumulation designed to determine the cost of services
(c) Same as a job-order costing system except that materials are accounted for in the same way as
they are in a process costing system
(d) Same as a job-order costing system except that no overhead allocations are made since actual costs
are used throughout
(e) A costing method where cost of an individual job or work order is ascertained separately.
(1 mark)
< Answer >
32. Beta Chemicals Ltd. manufactures chemical ‘Beta’ and in the course of its manufacture, by-product
‘Gamma’ is produced, which after further processing has a commercial value. The company has
furnished the following summarized cost data pertaining to main product ‘Beta’ and by-product
‘Gamma’ for the month of June 2005:
Particulars Pre-separation Post-separation costs
costs Beta Gamma
Materials (Rs.) 92,000 8,000 3,000
Labor (Rs.) 66,000 4,500 2,600
Overheads (Rs.) 42,000 2,800 1,900
Selling price per kg. (Rs.) 110 26
Estimated profit per unit of Gamma (Rs.) 6
No. of units produced 2,200 950
The company uses reverse cost method of accounting for by-products whereby the sales value of by-
products after deduction of the estimated profit, post-separation costs and selling & distribution
expenses relating to by-product is credited to the pre-separation cost account.
The profit of main product is
(a) Rs. 5,700 (b) Rs.38,200 (c) Rs.26,700
(d) Rs.53,500 (e) Rs.11,500.
(2 marks)
< Answer >
33. A factory has three production departments – P1, P2 and P3 and two service departments – S1 and S2.
Budgeted overheads for the next year have been allocated or apportioned by the cost department among
the five departments. The secondary distribution of service department overheads is pending and the
following details are given:
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Overheads apportioned/allocated Estimated level of
Department
(Rs.) activity
P1 48,000 5,000 labor hours
P2 1,12,000 12,000 machine hours
P3 52,000 6,000 labor hours
Overheads apportioned / Apportionment of service

Department
allocated (Rs.) department costs
S1 16,000 P1(20%),P2(40%), P3(20%) & S2(20%)
S2 24,000 P1(10%), P2(60%), P3(20%) & S1(10%)
The overhead rates of P1 and P3 departments after completing the distribution of service department
costs are
(a) Rs.10.91 and Rs.10.22 respectively
(b) Rs.10.91 and Rs.11.35 respectively
(c) Rs.11.35 and Rs.10.22 respectively
(d) Rs.10.91 and Rs.11.00 respectively
(e) Rs.11.00 and Rs.11.35 respectively.
(2 marks)
< Answer >
34. PH Ltd. operates several production processes involving the mixing of ingredients to produce bulk
animal feedstuffs. One such product is mixed in two separate process operations. The company has
furnished the following information pertaining to process 2 for the quarter ending June 30, 2005:
Cost incurred: Rs.
Transferred from process 1 1,87,704
Raw materials 47,972
Conversion costs 63,176
Opening work-in-process 3,009
Production: Units
Opening work-in-process 1,200
(Material – 100% complete apart from process
Conversion cost – 50% complete)
Transferred from process 1 1,12,000
Completed output 1,05,400
Closing work-in-process 1,600
(Material – 100% complete apart from process 2
Conversion – 75% complete)
Normal wastage of materials (including product transferred from process 1), which occurs in the early
stage of process 2 (after all materials have been added), is expected to be 5% of input, process 2
conversion costs are all apportioned to units of good output. Wastage materials have no saleable value.
The values of finished goods and closing WIP (using FIFO method) are
(a) Rs.2,96,237 and Rs.4,259 respectively
(b) Rs.2,96,021 and Rs.4,212 respectively
(c) Rs.2,96,273 and Rs.4,295 respectively
(d) Rs.2,96,021 and Rs.4,259 respectively
(e) Rs.2,96,273 and Rs.4,259 respectively.
(2 marks)
< Answer >
35. Which of the following methods is not used for apportionment of joint costs to different joint products?
(a) Average unit costs method (b) Physical units method
(c) Standard costs method (d) Replacement costs method
(e) Market value method.
(1 mark)
< Answer >
36. Satyam Chemicals Ltd. runs its boiler on furnace oil obtained from Indian Oil and Bharat Petroleum,
whose depots are situated at a distance of 10 km and 8 km from the factory site of the company.
Transportation of furnace oil is made by the company’s own tank lorries of 5 tons capacity each.
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Onward trips are made only on full load and the lorries return empty. The filling-in time takes an
average of 50 minutes for Indian Oil and 45 minutes for Bharat Petroleum. The emptying time in the
factory is only 45 minutes for both. From the records available, it is seen that the average speed of the
company’s lorries works out to 40 km per hour. The variable operating charges per km is Rs.2.50 and
fixed charges per hour of operation is Rs.15.
The cost per ton-mile from Bharat Petroleum is
(a) Rs.1.63 (b) Rs.1.43 (c) Rs.1.51 (d) Rs.1.30 (e)
Rs.1.71.
(2 marks)
< Answer >
37. Incremental revenues are measured as
(a) Revenues directly flowing from the decision + Increase in revenues from other activities as a
result of the decision – Decrease in costs of other activities as a result of the decision
(b) Revenues directly flowing from the decision – Increase in revenues from other activities decision –
Decrease in costs of other activities as a result of the decision
(c) Revenues directly flowing from the decision + Increase in revenues from other activities as a
result of the decision + Decrease in costs of other activities as a result of the decision
(d) Increase in revenues from other activities as a result of the decision + Decrease in costs of other
activities as a result of the decision – Revenues directly flowing from the decision
(e) Revenues directly flowing from the decision – Decrease in costs of other activities as a result of
the decision.
(1 mark)
< Answer >
38. Total production of a company is 10,000 units at a cost of Rs.4 per unit, sales were 8,000 units and the
company had 2,000 units as closing stock. The by-product that was generated was sold for Rs.1,500,
selling price per unit of output was Rs.10. Administration expenses are Rs.4,000.
Net profit when the by-product is credited to cost of production is
(a) Rs.45,200 (b) Rs.28,800 (c) Rs.47,700
(d) Rs.31,800 (e) Rs.33,000.
(1 mark)
< Answer >
39. The release of raw materials for production requires a journal entry that would include a debit to which
of the following?
(a) Work-in-Process Inventory (b) Raw-Material Inventory
(c) Finished-Goods Inventory (d) Indirect materials
(e) Manufacturing Supplies Inventory.
(1 mark)
< Answer >
40. Radha Ltd. manufactures a product, which involves two processes, viz., pressing and polishing. For the
month of March 2005, the following information is available:
Particulars Pressing Polishing
Units introduced 1,200 1,000
Units completed 1,000 500
Material costs (Rs.) 96,000 8,800
Conversion costs (Rs.) 2,88,000 52,000
For incomplete units in processes, charge material costs in both the processes at 100% but conversion
costs at 60% in the pressing process and 50% in the polishing process. If the company desires to earn
25% profit on sales price, the selling price per unit of finished product is
(a) Rs.337.14 (b) Rs.415.27 (c) Rs.138.42
(d) Rs.553.69 (e) Rs.257.14.
(2 marks)
< Answer >
41. An understatement of work-in-progress at the end of a period will
(a) Understate cost of goods produced
(b) Overstate cost of goods sold
(c) Overstate current asset
(d) Overstate gross profit
(e) Understate net profit.
(1 mark)
< Answer >
42. Costs transferred in from another department in a process costing environment are treated as
(a) A separate cost item in the new department
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(b) An addition to material costs in the new department
(c) An addition to conversion costs in the new department
(d) Partly material and partly conversion cost in the new department
(e) An addition to material costs and labor costs in the new department.
(1 mark)
< Answer >
43. Process costing compared to Operation costing
(a) Separates material costs by type of product
(b) Separates conversion costs by type of product
(c) Separates material and conversion costs by type of product
(d) Separates material and labor costs by type of product
(e) Provides an average unit material cost and unit conversion cost.
(1 mark)
< Answer >
44. Equivalent production implies production of a process
(a) In completed units
(b) In incomplete units
(c) Without losses
(d) Where the closing work-in-progress is 100% complete
(e) Where there is no opening and closing work-in-progress.
(1 mark)
< Answer >
45. Six Chemicals Ltd. produces high-quality plastic sheets in a continuous manufacturing operation. All
materials are introduced at the beginning of the process. Conversion costs are incurred evenly
throughout the process. A quality control inspection occurs when units are 75% through the
manufacturing process, when some units are separated out as inferior quality. The following data are
available for the month of June, 2005:
Material costs Rs.90,000
Conversion costs Rs.70,200
Units introduced 40,000
Units completed 36,000
There is no opening or closing work-in-progress. Past experience indicates that approximately 7.5% of
the units introduced are found to be defective on inspection by quality control.
The cost of abnormal loss for the month of June, 2005 is
(a) Rs.3,863 (b) Rs.3,725 (c) Rs.3,600 (d) Rs.3,575 (e)
Rs.3,425.
(2 marks)
< Answer >
46. SMK Ltd. has a productive capacity of 2,50,000 units of Product ‘K’ per quarter. The company
estimated its normal capacity utilization at 90% for the quarter ended June 30, 2005. The variable
manufacturing cost is Rs.22 per unit and the fixed factory overheads were budgeted at Rs.9,00,000 per
quarter. The variable selling overheads amounted to Rs.6 per unit and the fixed selling expenses were
budgeted at Rs.6,30,000. The operating data for the quarter ended June 30, 2005 are as under:
Opening stock of finished goods – 12,500 units
Production – 2,00,000 units
Sales at the rate of Rs.40 per unit – 1,87,500 units
The cost analysis revealed an excess spending of variable factory overheads to the extent of
Rs.1,00,000. There is no other variance.
The profits under absorption costing method and marginal costing method are
(a) Rs.7,70,000 and Rs.6,20,000 respectively
(b) Rs.6,70,000 and Rs.5,20,000 respectively
(c) Rs.6,70,000 and Rs.6,20,000 respectively
(d) Rs.6,70,000 and Rs.7,20,000 respectively
(e) Rs.6,70,000 and Rs.7,70,000 respectively.
(2 marks)
< Answer >
I. If a company's budgeted sales revenue is Rs.24,00,000 and its safety margin is 30%, then the
company's break-even point in sales is Rs.7,20,000.
II. A company's break-even sales revenues are Rs.4,00,000 and its contribution margin is 40%. If
fixed costs increase by Rs.24,000, break-even sales will increase to Rs.4,40,000.
Page 11 of 31
III. An organization's break-even sales revenues are Rs.4,00,000, and its contribution margin is 40%.
If variable costs increase by Rs.60,000, the break-even sales will increase by Rs.60,000.
(a) Only (I) above (b) Both (I) and (II) above
(c) Only (III) above (d) Both (I) and (III) above
(e) All (I), (II), and (III) above.
(1 mark)
< Answer >
48. Rock-a-Way Gravel Ltd. purchases raw gravel in 20-ton lots from which it manufactures 4 grades of
gravel, which consists of its sales mix: 5 tons of Decorative Stone, 8 tons of Road Stone, 4 tons of Pea
Gravel and 3 tons of Construction Gravel. The contribution margin ratio on each product is,
respectively, 50%, 40%, 60% and 75%. What is the average contribution margin ratio for every 20 tons
of gravel sold?
(a) 56.25% (b) 51.75% (c)
75.00%
(d) Greater than 75% (e) Less than 50%.
(1 mark)
< Answer >
I. The unit contribution margin used to calculate the break-even point of an organization’s sales mix
is weighted by the sales proportion of each product in the mix.
II. In an economic recession, the highly automated company with high fixed costs will be better able
to lower consumer demand than a firm with a more labour intensive production process.
III. If a company sells 50 units of A at a Rs. 8 contribution margin and 200 units of B at a Rs. 6
contribution margin, the weighted average contribution margin is Rs. 7.00.
(c) Both (I) and (III) above (d) Both (II) and (III) above
(1 mark)
< Answer >
50. ABC Ltd. is about to launch a new product. Facilities will allow the company to produce up to 20 units
per week. The marketing department has estimated that at a price of Rs.8,000 no units will be sold, but
for each Rs.150 reduction in price one additional unit per week will be sold.
Fixed costs associated with manufacture are expected to be Rs.12,000 per week.
Variable costs are expected to be Rs.4,000 per unit for each of the first 10 units; thereafter each unit will
cost Rs.400 more than the preceding one.
The most profitable level of output per week for the new product is
(a) 10 units (b) 11 units (c) 13 units (d) 14 units (e) 20
units.
(2 marks)
< Answer >
51. Cost-volume-profit (CVP) analysis is a key factor in many decisions including choice of product lines,
pricing of products, marketing strategy and use of productive facilities. A calculation used in a CVP
analysis is the breakeven point. Once the breakeven point has been reached, operating income will
increase by the
(a) Gross margin per unit for each additional unit
(b) Contribution margin per unit for each additional unit sold
(c) Fixed cost per unit for each additional unit sold
(d) Variable cost per unit for each additional unit sold
(e) Sale price per unit for each additional unit sold.
(1 mark)
< Answer >
52. Sai Sibani Ltd. needs a machine with the capacity to produce 2,00,000 units of a particular product. Two
equipment suppliers have submitted their bids for two models of machine – S1 & S2. The following
information relating to S1 and S2 models is furnished at a capacity of 2,00,000 units:
Particulars Model S1 (Rs.) Model S2 (Rs.)
Fixed cost per annum 80,000 51,000
Profit 80,000 69,000
The sale price of the product is Rs.2. The break-even sales of each model of machine are
S1 S2
(a) Rs.2,40,000 Rs.2,80,000
(b) Rs.2,00,000 Rs.1,70,000
(c) Rs.2,00,000 Rs.2,80,000
(d) Rs.1,60,000 Rs.1,20,000
Page 12 of 31
(e) Rs.2,40,000 Rs.1,20,000.
(2 marks)
< Answer >
53. Ranbax Ltd. manufactures two products – ‘R’ and ‘B’. Production capacity of the company is limited
to 30,000 machine hours per annum. There is no restriction on direct labor hours. The company has
furnished the following information pertaining to two products:
Particulars Product R Product B
Estimated demand (units) 3,000 4,500
Selling price per unit (Rs.) 20 18
Variable cost per unit 8 9
Fixed cost per unit 6 5
Machine hours per unit 5 4
Direct labor hours per unit 3.5 2
The company absorbs cost at a rate per machine hour based upon full capacity. The number of units of
product R and B to be produced per annum in order to maximize the profit are
Product R Product B
(a) 3,000 units 4,500 units
(b) 2,400 units 4,500 units
(c) 2,400 units 3,750 units
(d) 3,000 units 3,750 units
(e) 3,000 units 3,000 units.
(2 marks)
< Answer >
54. Which of the following is/are true regarding the differences between marginal costing and absorption
costing?
I. Under marginal costing, fixed costs are treated as product costs while it is excluded under
absorption costing
II. Under absorption costing, under absorption or over-absorption of overhead occurs but it does not
occur under marginal costing
III. The net income under absorption costing is normally more than the net income under marginal
costing
(a) Only (I) above (b) Both (I) and (III) above
(c) Only (III) above (d) Both (II) and (III) above
(e) Both (I) and (II) above.
(1 mark)
< Answer >
55. A company sells its product at Rs.18 per unit. In a period, if it produces and sells 9,600 units, it incurs a
loss of Rs.6 per unit. If the volume is raised to 24,000, it earns a profit of Rs.4.80 per unit. The break-
even of the company in terms of rupees as well as units are
(a) Rs.1,62,000 and 9,000 units respectively
(b) Rs.1,72,800 and 9,600 units respectively
(c) Rs.2,23,200 and 12,400 units respectively
(d) Rs.2,59,200 and 28,800 units respectively
(e) Rs.2,59,200 and 14,400 units respectively.
(2 marks)
< Answer >
I. If you have reduced your working hours to complete an accounting course, the lost wages are an
opportunity cost of completing the course.
II. Payments made for resources may be called out-of-pocket costs.
III. Sunk costs are relevant to future decisions.
(a) Only (I) above
(b) Both (II) and (III) above
(c) Only (III) above
(d) Both (I) and (II) above
(1 mark)
< Answer >
57. The following are the details of a Product Zebra of Cross Roads Ltd.:
Particulars Rs.
Selling price 300
Direct material 40
Direct labor 30
Page 13 of 31
Variable manufacturing overhead 24
Fixed manufacturing overhead 60
Shipping and handling 6
Fixed selling costs 20
The company has received a special one-time order for 1,000 units of product Zebra. Assume that the
company is operating at full capacity and that the contribution margin of the output that would be
displaced by the special order is Rs. 20,000. The minimum price that is acceptable for this one-time
special order is
(a) Rs. 120 (b) Rs. 140 (c) Rs. 174 (d) Rs. 200 (e)
Rs. 150.
(2 marks)
< Answer >
58. Which of the following is most relevant to a manufacturing equipment replacement decision?
(a) Original cost of the old equipment
(b) Disposal price of the old equipment
(c) Gain or loss on the disposal of the old equipment
(d) A lumpsum write off amount from the disposal of the old equipment
(e) Depreciation provided on the equipment.
(1 mark)
< Answer >
59. In a decision analysis situation, which one of the following costs is generally not relevant to the
decision?
(a) Incremental cost (b) Differential cost
(c) Avoidable cost (d) Sunk cost (e) Opportunity cost.
(1 mark)
< Answer >
60. Fina Refinery Ltd., an oil refinery company, has been offered 10,000 gallons of ‘Pentanes Plus’. The
company has furnished the following information pertaining to production, prices and costs of products:
The stock purchased would be processed into Catalytic hydro desulphuric oil and sold at that stage.
‘Pentanes Plus’ is of such a quality and type that it will probably yield 90% Catalytic hydro desulphuric
oil, 4% crude desulphuric oil and 6% loss. Current prices of the products are:
Catalytic hydro desulphuric oil Rs. 6 per gallon

Crude desulphuric oil Rs. 1 per gallon
The following costs associated with processing of 10,000 gallons of cylinder stock through several
units:
Down stream processing Re.0.30 per gallon
Catalytic cracking Re.0.40 per gallon
Oil distillation Re.0.30 per gallon
Total Re.1.00 per gallon
The maximum price that Fina Refinery can pay for ‘Pentanes Plus’ without incurring loss is
(a) Rs. 5.00 (b) Rs. 4.44 (c) Rs. 4.30 (d) Rs. 5.20 (e)
Rs. 4.80.
(2 marks)
< Answer >
61. Nagarjun fertilisers Ltd. produces 3 chemical products, i.e. sulphura, sulphury and sulphurus which are
three joint products of a particular production process. For each 15,000 kg. batch of material converted
into products, Rs. 75,000 of joint production costs are incurred. At the split off point, 50% of the output
is sulphura, 30% of the output is sulphury and 20% of the output is sulphurus. Each product is processed
beyond split off, and the following costs are incurred for additional processing:
Product Additional Processing cost per kg
(Rs.)
Sulphura 1.00
Sulphury 5.00
Sulphurus 2.50
The following information is related to sale price per unit at different stages:
Product At split off (Rs.) After further processing (Rs.)
Sulphura 5.00 6.50
Sulphury 13.00 16.00
Sulphurus 22.00 27.50
Based on the above information, which of the following is correct?
I. Product sulphura should be processed further.
Page 14 of 31
II. Product sulphury should be processed further.
III. Product sulphurus should be processed further.
(c) Both (I) and (II) above (d) Both (I) and (III) above
(2 marks)
< Answer >
62. When the objectives of the decisions are in conflict, one objective may be specified as the decision
criterion and the other objectives are established as
(a) Secondary criteria (b) Differential criteria
(c) Irrelevant criteria (d) Constraints (e) Opportunity costs.
(1 mark)
< Answer >
63. Kappa Ltd. manufactures and sells three products – X, Y and Z. All the products are passed through a
machining process, the capacity of which is limited to 20,000 hours per annum, both by equipment
design and government regulation. The following information pertaining to the three products is
available:
Particulars Product X Product Y Product Z
Selling price per unit (Rs.) 3,400 3,000 4,000
Variable cost per unit (Rs.) 1,800 1,200 1,600
Machine hours per unit 4 3 2
Maximum possible sales unit 10,000 2,000 1,000
The fixed cost of the company for the year is Rs.52,25,500. The maximum profit of the company from
the best mix of the three products is
(a) Rs.1,08,00,000 (b) Rs.1,60,25,500
(c) Rs. 55,74,500 (d) Rs.1,48,25,500 (e) Rs.2,20,00,000.
(2 marks)
< Answer >
64. Decision-making is a complex process involving qualitative & quantitative aspects. The steps in
decision making in sequential order involves
(a) Developing alternative solutions, evaluating the alternatives and arriving at a decision
(b) Defining the problem, developing alternative solutions and arriving at a decision
(c) Defining the problem, developing alternative solutions, evaluate the alternatives and arrive at a
decision
(d) Developing alternative solutions and arriving at a decision
(e) Evaluating the readily available alternatives and arriving at a decision.
(1 mark)
< Answer >
65. A company manufactures two products – X and Y in one of its factories. Production capacity is limited
to 85,000 machine hours per period. There is no restriction on direct labour hours.
The following further information is provided concerning the two products :
Particulars Product X Product Y
Estimated demand (000 units) 315 135
Selling price per unit Rs. 11.20 Rs. 15.70
Variable cost per unit Rs. 6.30 Rs. 8.70
Fixed costs per unit Rs. 4.00 Rs. 7.00
Machine hours (per 000 units) 160 280
Direct labour hours ( per 000 units) 120 140
Fixed costs are absorbed into unit cost at a rate per machine hour based upon full capacity
The production quantities of Products X and Y per period which will fully utilize both machine capacity
and direct labour hours, where the available direct labour hours are restricted to 55,000 per period, is
(a) 312,500 units of X and 1,25,000 units of Y
(b) 302,000 units of X and 120,000 units of Y
(c) 322,500 units of X and 98,000 units of Y
(d) 333,500 units of X and 89,000 units of Y
(e) 316,700 units of X and 115,000 units of Y.
(2 marks)
< Answer >
66. Which of the following are true regarding costs for decision making purpose ?
I. All future costs are not necessarily relevant costs for decision making purpose
Page 15 of 31
II. Any costs to be considered relevant cost for decision making purpose must pertain to the future
III.The cost which is to be incurred for either of the decisions under consideration are not relevant
costs and is ignored while making decisions
IV. Any costs which are to be incurred in either of the decisions under consideration are relevant
costs and to be considered in decision making process
(a) Both (I) and (II) above
(b) Both (I) and (III) above
(c) Both (II) and (IV) above
(d) (I), (II) and (III) above
(e) (I), (II) and (IV) above.
(1 mark)
< Answer >
67. Which of the following best describes Relevant Information?
(a) Focuses on the past and differs between the alternatives under consideration
(b) Focuses on the past and is not related to the decision under consideration
(c) Focuses on the future and differs between the alternatives under consideration
(d) Focuses on the future and not related to the decision under consideration
(e) Focuses on the present and not related to the decision under consideration.
(1 mark)
< Answer >
68. Which of the following statements is true?
(a) Differential cost technique does not prove useful in decision making
(b) Export orders should not be accepted at a price below total cost, otherwise there will be loss from
export sales
(c) A company with a higher break-even point is considered better than a company with a lower
break-even point
(d) In make or buy decision, supplier’s offer price per unit is compared with own total cost per unit
(e) Effect of price reduction is always to reduce contribution to sales ratio and increase the break-even
point.
(1 mark)
< Answer >
69. Costs which can be reduced or removed from the company's cost structure without affecting product or
service quality for the customer are referred to as
(a) Value-added costs (b) Indirect costs
(c) Variable costs (d) Non-value-added costs
(e) Fixed costs.
(1 mark)
< Answer >
I. Assuming no beginning work in process, if 10,000 units are transferred in from a previous
department and 2,000 of the 10,000 units are still in process at the end of the period, the equivalent
units of production are 8,000.
II. If the number of equivalent units of 5,000 units in process is 4,000, it means that 80% of the 5,000
units are still in process.
III. If 2,000 units were in process at the beginning, 10,000 units were transferred in from a previous
process and 3,000 units are still in process, the number of units started and completed is 7,000.
(a) Only (I) above (b) Both (I) and (III) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
(1 mark)
< Answer >
71. Within the relevant range of production, average variable cost per unit tends to
(a) Fluctuate drastically
(b) Vary inversely with the level of production
(c) Vary directly and proportionately with the level of production
(d) Remain relatively constant
(e) Vary directly but not proportionately with the level of production.
(1 mark)
< Answer >
72. Mr. Subramaniyam owns a fleet of taxis and the following information is available from the records
maintained by him:
Number of taxis 5
Cost of each taxi Rs.2,70,000
Salary of manager Rs.6,500 per month
Page 16 of 31
Salary of accountant Rs.5,000 per month
Salary of cleaner Rs.800 per month
Salary of mechanic Rs.2,200 per month
Garage rent Rs.2,000 per month
Insurance premium 5% per annum
Annual tax Rs.4,200 per taxi
Salary of driver Rs.5,000 per month per taxi
Annual repairs Rs.2,000 per taxi
Oil and other sundries Rs.36 per 100 kms
The total life of a taxi is about 3,00,000 km. A taxi runs in all 4,500 km in a month of which 20% it runs
empty. Petrol consumption is 5.62 km per litre. The cost of petrol is Rs.36 per litre.
The cost of running a taxi per km. is
(a) Rs.12.35 (b) Rs.14.30 (c) Rs.12.80 (d) Rs.12.03 (e)
Rs.10.80.
(2 marks)
END OF SECTION B
Page 17 of 31
Suggested Answers
Management Accounting-I (151): July 2005
1. Answer: (b) < TOP >
Reason: Cost is defined as the resources consumed to accomplish a specified objective. The other
options are wrong. Option (b) is correct.
2. Answer : (e) < TOP >
Reason : Credits and collection and Procurement of long-term finance are the functions of the
treasurer and not of the controller. However, Tax administration and Reporting and
interpreting are the functions of the controller. So, the correct answer is (e).
3. Answer : (d) < TOP >
Reason : Options (I) and (III) are true. Option (II) is not true regarding relevant information
because relevant information shall supply to the manager only that information needed
for the purpose for which management accounting information were sought. Hence,
managers must not have to search out from a whole lot of information to find out only the
relevant information. Therefore (d) is correct.
Reason : If the manufacturing expenses are recovered on a suitable basis, the Work-in-process
account is debited and Manufacturing overhead control account is credited. Other journal
entries given in (a), (b), (c) and (d) are not correct.
5. Answer : (c) < TOP >
Reason : Option (c) is not true because wholesaler’s and manufacturers treat period costs as a
deferred revenue expenditure and they amortize this expenditure over a few years.
Reason : Perpetual inventory records provide for continuous record keeping of the quantities of
inventory (and possibly unit costs and total costs). This method requires a journal entry
every time items are added to or taken from inventory. Hence, option (c) is correct.
Reason : The complete entry will include a debit to Insurance Expense (for the portion of
insurance expense related to general office assets), a debit to Manufacturing Overhead,
and a credit to Prepaid Insurance.
Only direct materials and direct labor are DIRECT manufacturing costs. Manufacturing
overhead is classified as an INDIRECT manufacturing cost. Manufacturing overhead is
indirect because each one of the costs comprising manufacturing costs cannot be traced
easily and directly to specific units of production, but rather benefits the entire production
process as a whole.
Overhead application rate = Estimated overhead costs ÷ Estimated units in the activity
base. The activity base might be direct labor hours, direct machine hours or some other
activity that has a cause-and-effect relationship to the production of units.
Since, only statements (I) and (III) are true, the correct answer is (e).
Reason : For the purpose of planning and control, costs are classified as budgeted and standard
costs. The other options are not correct because:
Classification of costs into Basis
normal and abnormal costs Normality
historical and predetermined costs Time
product and period costs Association with product
controllable and uncontrollable costs Controllability
Reason : The amount paid to refurbish old car is irrelevant to the decision because that amount is
not considered while offering the trade-in-allowance. The cost incurred to refurbish the
old car is irrelevant to the decision-making as it has been already been offered Rs. 800
independent of how much I spent on the car’s refurbishment.
10. Answer : (b) < TOP >
Reason : During many changes employees become concerned that management's sole intention is
job reduction rather than enhancing the goals of the company. Other options (a),(c),(d)
and (e) are not correct.
Page 18 of 31
Reason : A department is working at 55% of its normal capacity. 45% is treated as idle capacity.
Fixed cost is obviously incurred for the normal capacity work. This 45% of fixed cost
should be excluded from the calculation of overhead recovery rate. Thus the appropriate
recovery rate is to be found by dividing the 55% of fixed cost plus 100% variable
manufacturing overhead by the budgeted direct labor cost.
Appropriate recovery rate = (55% of Rs.1,00,000 + 100% of Rs.1,25,000) / Rs.2,50,000 =
Rs.1,80,000 / Rs.2,50,000 = 72%
Reason : Computation of hourly rate for standing charges:
Expenses Workings Rs. Rs.
Standing charges:
Rent, heat and light (Rs.70,000 / 70,000) 2,500
x 2,500
Supervision Rs.1,30,000 / 26 5,000
Depreciation 10% of Rs.2,30,000 23,000
Reserve equipment cost Rs.1,500 / 26 58
Labor cost during setting 200 hours x Rs.6 1,200
and adjustment
Hourly rate for standing Rs.31,758 / 1,800 31,758 17.64
charges
Reason : Variable cost = Change of cost ÷ Change in level of activity
= (Rs. 36,000 – Rs. 20,000) ÷ (14,000 hours – 6,000 hours)
= Rs. 16,000 ÷ 8,000 hours = Rs. 2.00
Fixed cost = Rs. 36,000 – 14000 × Rs. 2 = Rs. 8,000
Standard overhead rate = Rs. 5.00 (given)
Standard fixed cost = Rs. 5 – Rs. 2 = Rs. 3
Normal capacity level = 8,000 ÷ 3.00 = 2,667 hours.
Reason : Computation of under absorbed overheads
Actual factory 45,00,000
overhead
Less: factory (2,00,000 machine hrs 40,00,000
overheads recovered × Rs.20)
Under-absorbed 5,00,000
factory overheads
Analysis of under-absorbed overheads
Particulars Amt (Rs.)
Due to defective (Rs. 5,00,000 × 60 ÷ 3,00,000
planning 100)
Due to rising price levels 2,00,000
Total 5,00,000
The under absorbed overhead due to defective planning of Rs.3,00,000 shall be charged
to costing profit and loss a/c. The under absorbed overhead due to increase in overhead
rates should be adjusted as follows:
Particulars Units % Amt (Rs.)

Cost of sales 30,000 75.00 1,50,000
WIP (50% of 5,000 12.50 25,000
10,000)
Finished goods 5,000 12.50 25,000
stock
Total 40,000 100.00 2,00,000
The supplementary overhead absorption rate = Rs.2,00,000 ÷ 40,000 = Rs. 5 per unit.
Reason : Computation of composite machine hour rate
Item Basis of Total Cost centers
Page 19 of 31
Apportionment A B C
Direct wages Actual 60.00 16.00 20.00 24.00
Depreciation Value of assets 8.50 2.00 3.50 3.00
Indirect wages Direct wages 18.00 4.80 6.00 7.20
Supervisory No. of workers 7.00 1.75 1.75 3.50
salaries
Insurance Value of assets 4.25 1.00 1.75 1.50
Electricity H.P. % 12.00 4.80 3.00 4.20
charges
Welfare No. of workers 9.00 2.25 2.25 4.50
expenses
Office and Machine hours 16.00 5.00 5.00 6.00
other exps
Total 134.75 37.60 43.25 53.90
No. of machine (lakh of hours) 1.60 0.50 0.50 0.60
hours
Machine 75.20 86.50 89.83
hour rate
16. Answer: (c) < TOP >
Reason:
Statement showing computation of departmental overhead rate:
Department Overhead Machine Machine hour
Rs. hours Rate (2)/(3)
(1) (2) (3) (4)
Fabrication 1,50,000 12,000 12.50
Machining 1,80,000 15,000 12.00
Assembly 1,40,000 9,000 15.55
Finishing 90,000 8,000 11.25
Total 5,60,000 44,000
Blanket overhead absorption rate = Rs. 5,60,000 ÷ 44,000 machine hours = Rs. 12.73.
Computation of overhead to be charged to Job A (basing on blanket overhead rate)
Total machine hours to be used = 30+40+70+10 = 150 machine hours
Overhead to be absorbed to Job A = 150 M.H × Rs. 12.73 = Rs. 1,909.09.
Computation of overhead to be charged to Job A (basing on departmental overhead rate)
Department Machine hour Departmental Overhead to be
Required overhead Absorbed
absorption Rs.
rates (Rs.)
Fabrication 30 12.50 375.00
Machining 40 12.00 480.00
Assembly 70 15.55 1,088.50
Finishing 10 11.25 112.50
Overhead to be charged to Job A 2,056.00
Reason : Direct costs are also treated as overheads in cases where efforts involved in identifying
and accounting are disproportionately large. The other statements are true.
The aggregate of indirect material, indirect wages and indirect expenses is overhead costs
(a). The overheads can be apportioned to a cost center in accordance with the principles
of benefit and/or responsibilities(c). Capital expenditure should be excluded from costs
and should not be treated as overhead(d). Expenditure which does not relate to production
shall not be treated as overhead, e.g. Income-tax, donation etc. (e).
Therefore,option (b) is not correct.
Reason : Service corporations usually have very few inventory sales. The most significant cost for
service companies is usually labor.
Merchandising companies resell products previously purchased from suppliers.
Nike and Reebok are manufacturing companies, not merchandising companies, because
they make shoes and sports apparel from raw materials.
Therefore (I) , (II) and (III) are not true.
For manufacturing companies the most significant cost is usually cost of goods sold. Only
(IV) is true. Hence, the correct answer is (d).
Page 20 of 31
Beginning direct materials

1,34,000
inventory
Add: Purchases 1,89,000
Less: Purchase returns (1,000)
Add: Transportation 3,000
Total direct materials available 3,25,000
Less: Ending direct materials
(1,24,000)
inventory
Direct material used 2,01,000
Direct labor 2,50,000
Total prime costs 4,51,000
Manufacturing cost = Rs.4,51,000 + 60% of Rs.2,50,000 (Direct labor)
= Rs.6,01,000.
Reason : When factory overhead control account has an ending debit balance, factory overhead
was under-applied. So, the correct answer is (b).
Reason : Units completed = 12,000 units.
Equivalent units 12,000 completed + 1,500 in ending inventory
(50% x 3,000) = 13,500 equivalent units.
Amount allocated to finished goods = 12,000units / 13,500 equivalent
units x Rs.300 = Rs.266.67.
[Actual overhead = Rs. 5,100
Appeared overhead = (Rs. 5,160 ÷ 430) x 400 = Rs. 4,800
Under absorption of overhead = Rs. 5,100 – Rs. 4,800 = Rs. 300].
< TOP >
22. Answer : (a)
Reason : Options (b), (c), (d) and (e) are true of the advantages of departmentalization of
overhead. But, option (a) is not an advantage as departmentalization of overhead. It
facilitates control of overhead expenses by means of pre-determined budgets and not
forecasted budgets.
< TOP >
23. Answer : (c)
Reason :
Actual factory overhead 88,96,000
Less: factory overheads (1,86,500 machine hrs 74,60,000
recovered ×Rs.40)
Under-absorbed factory 14,36,000
overheads
Analysis of under-absorbed overheads
Particulars % Amount Rs.
Due to initial 37.5 5,38,500
inaccuracies
Due to rising price 62.5 8,97,500
levels
Total 100 14,36,000
The under absorbed overhead due to initial inaccuracies of Rs.5,38,500 shall be charged
to costing profit and loss a/c. the under absorbed overheads due to rising price levels
should be adjusted as follows:
Particulars Units % Amt (Rs.)
Cost of sales 1,05,000 76.09 6,82,908
WIP (50% of 18,000 13.04 1,17,034
36,000)
Finished goods 15,000 10.87 97,558
stock
Total 1,38,000 100 8,97,500
Change in factory overheads
Reason: Variable Overheads = Change in production level
Page 21 of 31
38, 400 − 37, 200
= Rs.3 perunit
= 2, 800 − 2, 400
Overheads at 2,400 level = 2,400 × Variable OH + Fixed OH = 37,200
2,400 × 3 + Fixed OH = 37,200
Fixed Overhead = 37,200 – 7,200 = 30,000
Computation of selling price at 4,000 units level
Direct Materials x (Rs.4,800 / 2,400 = Rs.2 / unit) 8,000
Direct Labor = Rs.6,000 / 2,400 = Rs. 2.50 / unit 10,000
Variable overheads Rs. 3/units Rs. 12,000
Fixed factory cost Rs. 30,000
Total Rs. 60,000
Profit (20% of S.P or 25% of cost) Rs. 15,000
Total selling price Rs.75,000
Selling price per unit 75,000 / 4,000 Rs.18.75
Reason : Raw material requirement
Requirement of raw material
Raw Per 100 For 3,00,000 Total
Provision for
material cft cft of RCC requirement
wastage
of RCC
% Qty
Steel (kg) 100 3,00,000 5 15,000 3,15,000
Cement (kg) 2,400 72,00,000 3 2,16,000 74,16,000
Stone (cft) 90 2,70,000 10 27,000 2,97,000
Difference in selling price according to escalation clause:
Difference
Raw material
Unit Price per unit in value of
Requirement
raw material
On tender Actual
Quantity Difference
date Price
315 Ton 610 675 +65 + 20,475
7,416 Ton 100 105 +5 + 37,080
2,97,000 cft 40 38 -2 - 5,940
Total increase in contract price due to escalation clause +
51,615
Reason : Equivalent unit of sales
Total production 800
Less: Defective production 10% 80
Good production 720
Add: Equivalent of defective production (@ 90% of 72
80)
Equivalent good production 792
Cost of production of MS Rods
Materials 2,80,000
Labour 1,00,000
Processing charges 1,00,000
Total costs 4,80,000
Less: sale value of scrap materials 8,760
Net cost of production 4,71,240
Profit (@ 15% of sales or 15/85 of cost) 83,160
Total sales value 5,54,400
Equivalent good production = 792 MT
 Rs.5, 54, 400 
Price of good production =  792  = Rs. 700

Discounted price of defective products = (Rs. 700 – 70) = Rs. 630.
Reason : A joint production process results in two or more joint products.
Page 22 of 31
The relative-sales-value method allocates joint costs to joint products in proportion to
their total sales values at the split-off point.
The split-off point is a point in a joint product process at which the joint products become
identifiable as separate products.
Since all of (I), (II) and (III) are true, the correct answer is (e).
Reason : The cost of goods sold shown on the income statement comes from the schedule of cost
of goods sold. The cost of goods manufactured shown on the schedule of cost of goods
sold comes from the schedule of cost of goods manufactured.
While an actual overhead rate provides accuracy, it cannot be computed until the end of
the accounting period. Thus, it provides untimely information.
The problem with using actual overhead is that some manufacturing costs may be
affected seasonally, the volume based driver may vary from period to period, and a
variety of other fluctuations that can occur with manufacturing costs and cost drivers may
occur that result in misleading signals for product pricing and decision making.
Since all of (I), (II) and (III) are true, the correct answer is (e).
Reason :
Operation Input Rejected % Output
No. No.of Pieces No.of pieces Rejection No.of Pieces
on output
1 60,000 20,000 50 40,000
2 66,000 6,000 10 60,000
3 48,000 8,000 20 40,000
Computation of input requirement:
Input requirement based on 100 units of output
Output of Process 3 100
Add: Process loss 20% in Process 3 20
Input to Process 3 or output of Process 120
2
Input to Process 2 or output of Process 132
1
Input in Process 1 198
Computation of cost of raw material per kg.
If output is 100 pieces – input is 198 pieces
If output is 0.10kg – input is 0.198 kg
Rate per kg = Rs. 20
The cost of raw material required to produce one piece of finished product
 Rs.20 
× 0.198 kg
 1kg . 
=   = Rs. 3.96.
Reason :
Particulars Cost to date Further costs
Total
Completion Amt Completion Amt
Cost Rs.
% (Rs.) % (Rs.)
(i) Fabrication
costs
Direct 80 2,80,000 20 70,000 3,50,000
materials
Direct labour 75 90,000 25 30,000 1,20,000
Overheads 75 75,000 25 25,000 1,00,000
Total 4,45,000 1,25,000 5,70,000
(ii) Erection Costs 25 15,000 75 45,000 60,000
Total costs (i) + (ii) 4,60,000 1,70,000 6,30,000
Estimated 1,89,000
profit
Total contract 8,19,000
price
Page 23 of 31
cash received
Total estimated profit of contract × work certified
Rs.6, 00, 000

= Rs. 1,89,000 × Rs.8,19, 000 = Rs. 1,38,462.
Reason : Operating costing is the cost procedure used for determining the cost per unit of service.
Operating costing system is a method of cost accumulation designed to determine the cost
of services.
Reason :
Joint Cost to by-product ‘Gamma’ Rs.
Sales revenue (950 × Rs.26) 24,700
Less: Profit (950 × Rs.6) 5,700
19,000
Less: Post Separation Cost (Rs.3,000 + Rs.2,600 + Rs.1,900) 7,500
Selling & distribution cost Nil
Cost of Production at split-off point 11,500
Particulars Rs.
Total Joint Cost : (Rs.92,000 + Rs.66,000 + Rs.42,000) 2,00,000
Less: Joint Cost to Gamma credited 11,500
Joint Cost to Beta 1,88,500
Sale value of Gamma (2,200 × Rs.110) 2,42,000
Less: Pre-separation cost 1,88,500
53,500
Less: Post separation cost (Rs.8,000 + Rs.4,500 + Rs.2,800) 15,300
Profit 38,200
33. Answer : (a) < TOP >
Reason : It is given in the question that the secondary distribution of service
departrments’overhead is pending. The same is thus attempted by use of simultaneous
equation method.
Let, total overheads of department S1 = x; and total overheads of S2 = y;
According to problem, we get x = 16,000 + 0.1y and y = 24,000 + 0.2x;
Therefore, x = 16,000 + 0.1(24,000 + 0.2x) = 16,000 + 2,400 + 0.02x
Or, x (1 – 0.02) = 18,400, or, x = 18,400 / 0.98 = 18,775, then y = 27,755
Statement of secondary distribution:
Particulars P1 (Rs.) P2 (Rs.) P3 (Rs.) Total (Rs.)
Direct allocation 48,000 1,12,000 52,000 2,12,000
S1 (80% of 18,775) 3,755 7,510 3,755 15,020
S2 (90% of Rs.27,755) 2,776 16,653 5,551 24,980
Total 54,531 1,36,163 61,306 2,52,000
Budgeted machine hours 5,000 12,000 6,000
Overhead rate per 10.91 11.35 10.22
machine hour
Reason :
Input units Units Materials Conversion
Opening 1,200 Opening 1,200 – – 50% 600
WIP
From 1,12,000 Process 1 1,04,200 100% 1,04,200 100% 1,04,200
process 1
Normal 5,600 – – – –
loss
Abnormal
600 100% 600 – –
Loss
Closing 1,600 100% 1,600 75% 1,200
WIP
1,13,200 1,13,200 1,06,400 1,06,000
Page 24 of 31
Particulars Rs.
Materials – From Process 1 1,87,704
Process 2 47,972
2,35,676
Equivalent units 1,06,400
Cost per unit 2.215
Conversion cost 63,176
Equivalent units 1,06,000
Cost per unit 0.596
Finished goods: Rs.
Opening WIP 3,009
Process I (1,04,200 × Rs.2.215) 2,30,803
Conversion cost (1,04,800 × 62,461
0.596)
2,96,273
Closing WIP: Rs.
Materials – 1,600 × Rs.2.215 3,544
Conversion – 1,200 × 0.596 715
4,259
< TOP >
35. Answer : (d)
Reason : Joint costs are apportioned to different joint products under average unit costs method,
physical units method, standard costs method and market value method. It cannot be
apportioned under replacement costs method. Replacement cost method is used for
apportionment of by-products but not joint products.
36. Answer: (e) < TOP >
Bharat
Particulars Indian Oil
Petroleum
Distance (Depots to factory – full load) 10 km 8 km
Distance covered per trip 20 km 16 km
Running time @ 40 km p.h. 30 minutes 24 minutes
Filling-in time 50 minutes 45 minutes
Emptying time 45 minutes 45 minutes
Total time per trip 125 minutes 114 minutes
Details of costs:
Variable operating charges @ Rs.2.50
Indian Oil(20 km x Rs.2.50) Rs.50.00 Rs.40.00
Bharat Petr. (16 km x Rs.2.50)
Fixed charges @ Rs.15 per hour
Indian Oil (125mint.x Rs.15/ 60mint) Rs.31.25 Rs.28.50
Bharat Petroleum
(114 mint. x Rs.15 / 60 mint.)
Total cost per trip Rs. 81.25 Rs. 68.50
Ton-km (full load)
Indian Oil (5 tons x 10 km) 50 ton-km 40 ton-km
Bharat Petroleum (5 tons x 8 km)
Cost per ton-km (Total cost per trip / Ton- Rs.1.63 Rs.1.71
km)
Reason : Incremental revenue is measured as revenues directly flowing from the decision +
Increase in revenues from other activities as a result of the decision – Decrease in costs of
other activities as a result of the decision.
Reason :
Sales = 8,000 x Rs. 10 = Rs.80,000
Less : Cost of production of 8,000 units @ Rs.3.85 Rs.30,800
(Rs. 40,000 – Rs. 1,500) ÷ 10,000 = Rs. 3.85 Rs.49,200
Less : Administrative cost Rs.4,000
Rs.45,200
Reason : When raw materials are released for production purposes,
Page 25 of 31
WIP inventory is debited. Therefore (a) is correct.
Reason :
Statement of equivalent production
Materials Conversion
Output Units % %
Qty. Qty.
Pressing:
Units
1,000
completed 1,000 100 1,000 100
200
Work-in- 200 100 120 60
progress
Total 1,200 1,200 1,120
Polishing:
Units
completed 500 500 100 500 100
Work-in- 500 500 100 250 50
progress
Total 1,000 1,000 750
Statement of cost:
Cost
Total cost Eq.
Particulars per units
(Rs.) Units
(Rs.)
Pressing:
Material cost 96,000 1,200 80.00
Conversion cost 2,88,000 1,120 257.14
Total 337.14
Polishing:
Cost tranf. From
pressing 3,37,140 1,000 337.14
(1,000 x Rs.337.14) 8,800 1,000 8.80
Material cost 52,000 750 69.33
Conversion cost
Total 415.27
Profit = 25% on selling price = 33 1/3% on cost
Selling price = Rs.415.27 x 1.3333 = Rs.553.69.
Reason : An understatement of work-in-progress at the end of a period will understate net profit. It
will not overstate gross profit. It will not overstate current asset. It will not affect cost of
goods sold or cost of goods manufactured. Therefore, (e) is correct.
Reason : Costs transferred in from another department in a process costing environment are treated
as a separate cost item in the new department. Other options are not true.
Reason : Process costing compared to Operation costing provides an average unit material and unit
conversion cost. By contrast, operation costing separates costs so that material costs are
assigned by jobs but conversion costs are assigned based on an averaging technique
similar to process costing. Therefore (e) is correct.
Reason : Equivalent production implies production of a process in completed units. It is not the
production of a process in incomplete units or production of a process without losses. It is
not true with respect to 100% complete closing work-in-progress. Therefore, (a) is
correct.
Material Conversion
Input Output % units % units
Units Completed 36,000 100% 36,000 100% 36,000
started
–
40,000
Page 26 of 31
Normal 3,000 100% 3,000 75% 2,250
loss 7.5%
Abnormal 1,000 100% 1,000 75% 750
loss
40,000 39,000
Cost Rs.90,000 Rs.70,200
Cost per Rs.2.25 Rs.1.80
unit
Cost of abnormal loss = 1,000 × Rs.2.25 + 750 × Rs.1.80
= Rs.2,250 + Rs.1,350 = Rs.3,600.
Reason :
Profit under absorption costing: Rs. Rs.
Sales – 1,87,500 × Rs.40 75,00,000
Cost of goods sold:
Opening Stock (Rs.22 + Rs.4) × 12,500 3,25,000
Production Rs.26 × 2,00,000 52,00,000
55,25,000
Add: Adverse variable cost variance 1,00,000
56,25,000
Less: Closing stock Rs.26 × 25,000 6,50,000
49,75,000
Gross Profit (sales – cost) 25,25,000
Less: Selling expenses:
Variable 1,87,500 × Rs.6 11,25,000
Fixed 6,30,000 17,55,000
7,70,000
Less: Under absorption: 1,00,000
Profit 6,70,000
Profit under Marginal Costing:
Rs. Rs.
Sales – 1,87,500 × Rs.40 75,00,000
Cost of goods sold:
Opening St – 12,500 × Rs.22 2,75,000
Production – 2,00,000 × Rs.22 44,00,000
46,75,000
Less: Closing Stock – 25,000 × Rs.22 5,50,000
41,25,000
Less: Adverse variance 1,00,000
42,25,000
Less: Variable selling expenses 11,25,000 53,50,000
Contribution 21,50,000
Less: Fixed cost: – Manufacturing Rs. 9,00,000
Selling 6,30,000 15,30,000
Profit 6,20,000
Reason : The safety margin is the difference between budgeted sales revenue and the break-even
sales revenue, when the budgeted sales revenue exceeds break-even sales revenue. The
safety margin can be expressed in rupees or as a percent of the budgeted sales revenue.
Rs.24,00,000 × 0.70 = Rs.16,80,000, the break-even point.
Currently, variable costs are Rs.240,000 (Rs.400,000 × 0.60) and the fixed costs are
Rs.160,000 (Rs.400,000 - Rs.240,000). To cover the increase in fixed costs, sales must
increase by Rs.60,000 (Rs.24,000 ÷ 0.40). Proof: Rs.4,60,000 × 0.40 = Rs.184,000; an
amount equal to fixed costs.
Currently, variable costs are Rs.400,000 × 0.60 = Rs.240,000. Variable costs will increase
to Rs.300,000. Fixed costs are Rs.160.000. The break-even sales revenue must equal
Rs.460,000 (Rs.300,000 + 160,000).
Since, only (III) is true, the correct answer is (c).
Reason : The average contribution margin per mix=
Total of each product’s contribution margin ration × its relative percentage of sales to the
Page 27 of 31
total sales of the mix
= (50% × 25%) + (40% × 40%) + (60% × 20%) + (75% × 15%)
= 12.5% + 16% + 12% + 11.25%
= 51.75%.
Reason : The relative proportion of each type of product sold in the sales mix is used to determine
the weighted average unit contribution margin. Hence option (a) is correct.
With a high fixed costs resulting from an extensive use of automation, a reduction in sales
revenue can easily result in net losses, since lesser sales revenue will be available to cover
the fixed costs.
The weighted average unit contribution margin is the average of a firm’s several
products’ unit contribution margins, weighted by the relative sales proportion of each
product. The weighted average contribution margin is Rs. 6.40 [Rs. 8 × (50 ÷ 250) +
(Rs.6 x (200 ÷ 250)) = Rs. 1.60 + Rs. 4.80 = Rs. 6.40].
Reason :
Units Total variable Selling Total sales Total
costs price revenue contribution
per unit
Rs. Rs. Rs. Rs.
10 40,000 6,500 65,000 25,000
11 44,400 6,350 69,850 25,450
12 49,200 6,200 74,400 25,200
13 54,400 6,050 78,650 24,250
51. Answer: (b) < TOP >
Reason: At the breakeven point, total revenue equals the fixed cost plus the variable cost. Beyond
the breakeven point, each unit sale will increase operating income by the unit contribution
margin (unit sale price – unit variable cost) because fixed cost already recovered.
Reason :
Particulars S1 (Rs.) S2(Rs.)
Sales (2,00,000 units) 4,00,000 4,00,000

Fixed cost (80,000) (51,000)
Profit (80,000) (69,000)
Variable cost 2,40,000 2,80,000
Sales price per unit 2.00 2.00
Variable cost per unit 1.20 1.40
Contribution to sales margin % 40% 30%
BEP 80,000 ÷ 40% 51,000 ÷ 30%
= 2,00,000 = 1,70,000
Reason :
Particulars Product R Product B Total
Estimated demand (Units) 3,000 4,500
Machine hours per unit 5 4
Total machine hours (Hrs) 15,000 18,000 33,000
Selling price (Rs.) 20 18
Variable cost (Rs.) 8 9
Contribution (Rs.) 12 9
Machine hours per unit (Rs.) 5 4
Contribution per machine hour (Rs.) 2.40 2.25
Ranking I II
The company will produce R fully, then B.
Therefore,
R = 3,000 × 5 = 15,000 hrs
B = 3,750 × 4 = 15,000 hrs
30,000 hrs
Page 28 of 31
R – 3,000 units
B – 3,750 units
Reason : Statements (II) and (III) are true but statement (I) is not as under absorption costing,
fixed costs are treated as product costs while marginal costing excludes fixed costs.
Therefore option (d) is correct.
Reason : Sale – Variable cost – Fixed cost = Profit
Let, Variable cost = x and Fixed cost = y
Therefore,
Rs.18 × 9,600 – 9,600x – y = –57,600
Rs.18 × 24,000 – 24,000x – y = 1,15,200
1,72,800 – 9,600x – y = –57,600
4,32,000 – 24,000x – y = 1,15,200
or, 2,30,400 = 9,600x + y
3,16,800 = 24,000x + y
86400 = 14,400x
x = 6
y = 2,30,400 – 9,600(6)
= 2,30,400 – 57.600
= 1,72,800
18 − 6 12
P/V = 18 = 18 = 66 2/3%
Rs.1, 72,800
BEP = 12 = 14,400 units
Sales = 14,400 × Rs.18 = Rs.2,59,200
Reason : An opportunity cost is the potential benefit given up when the choice of one action
precludes selection of a different action.
Out-of-pocket costs require the expenditure of cash or other assets as a result of their
incurrence.
Costs that have been incurred in the past and cannot be altered by any current or future
decision are sunk costs.
Since only (I) and (II) are true, the correct answer is (d).
Reason : Given no excess capacity, the price must cover the incremental costs. The incremental
costs for the product equals to Rs. 100 (Rs. 40 direct materials + Rs. 30 direct labour +
Rs. 24 variable overhead + Rs. 6 shipping and handling). Opportunity cost is the benefit
of the next best alternative use of scarce resources. Because acceptance of the special
order would cause the company to forgo a contribution of Rs. 20,000 that amount must be
reflected in the price. Hence, the minimum unit prce is:
Rs. 100 unit incremental cost + (Rs. 20,000 lost contribution ÷ 1,000 units)
= Rs. 100 + Rs. 20
= Rs. 120.
Reason : Management decision analysis is based on the concept of relevant costs. Relevant costs
differ among decision choices. Thus, incremental (differntial or avoidable) costs are
always relevant. Historical costs, such as the original cost of the equipment are not
relevant because they occurred in the past and not relevant to mangement decision
analysis. Similarly, any gain or loss on the old equipment is not relevant because this
amount is based on the historical cost. However, the disposal price of the old equipment
is relevant because it involves a future cash inflow that will not occur unless the
equipment is disposed of.
Reason : Management decision analysis is based on the concept of relevant costs. Relevant costs
differ among decision choices. Thus, incremental(differntial or avoidable) costs are
Page 29 of 31
always relevant. Opportunity cost is also relevant because it is the benefit forgone by selecting one
choice instead of another. Sunk costs are not relevant because they occurred in the past
and not relevant to mangement decision analysis.
Reason : Margin establishing limit of purchase cost
Revenue:
Catalytic hydro desulphuric oil Rs.6x 9,000 54,000
Crude desulphuric oil Re.1x 400 400
Total 54,400
Less: Cost Re.1x 10,000 10,000
Margin 44,400
Price at which company makes neither profit nor loss is Rs. 4.44 [44,400 / 10,000].
Hence, the maximum price that Fina Refinery can pay for ‘Pentanes Plus’ without
incurring loss is Rs. 4.44.
Reason : Statement showing differential costs and incremental revenue of a batch of 15,000 kg.
Products Kg. Sales After Sales at Incremental Differential
Processing split off revenue (Rs.) cost (Rs.)
(Rs.) (Rs.)
Sulphura 7,500 48,750 37,500 11,250 7,500
Sulphury 4,500 72,000 58,500 13,500 22,500
Sulphurus 3,000 82,500 66,000 16,500 7,500
Sulphura and Sulphurus should be processed further as the differentials cost is lower than
the incremental revenue.
Reason : When the objectives of the decisions are in conflict, one objective may be specified as
the decision criterion and the other objectives are established as constraints
Reason :
Product Product Product
Particulars
X Y Z
Contribution per unit 1,600 1,800 2,400
(Rs.)
Machine hours per unit 4 3 2
Contribution per machine hour 400 600 1,200
(Rs.)
Ranking III II I
Total sales units 10,000 2,000 1,000
Machine hours required as per 12,000 6,000 2,000
Ranking
Best product mix in unit 3,000 2,000 1,000
Contribution 48,00,000 36,00,000 24,00,000
(Rs.)
Total contribution = Rs.48,00,000 + Rs.36,00,000 + Rs.24,00,000
= Rs.1,08,00,000
Profit = Contribution – Fixed cost
= Rs.1,08,00,000 – Rs.52,25,500
= Rs.55,74,500
Reason : Decision making involves complex process of defining the problem, developing
alternative solutions, evaluating the alternatives and finally arriving at a decision. So, the
correct answer is (c).
Reason : There are 2 limiting factors
Let, X = No. of units of X produced (in 000s of units)
Y = No. of units of Y produced ( in 000s units)
160 X + 280 Y = 85,000 machine hours (1)
120 X + 140 Y = 55,000 labour hours (2)
Page 30 of 31
Multiplying equation (2) by 2 and equation (1) by 1
160 X + 280 Y = 85,000 (1)
240 X + 280 Y = 1,10,000
Subtracting eq. (2) from eq.(1)
(-) 80 X = - 25000
X = 312.5 units
Substituting for X in eq. (1)
160 ( 312.50) + 280 Y = 85,000
50,000 + 280 Y = 85,000
280 Y= 35,000
or, Y = 125 units.
So, the optimal output to fully utilize both labour and machine capacity is 3,12,500 units
of Product X and 1,25,000 units of Product Y.
Reason : For decision making purposes, all future costs are not necessarily relevant costs for
decision making purpose, any costs to be considered relevant cost for decision making
purpose must pertain to the future and the cost which is to be incurred for either of the
decisions under consideration are not relevant costs and is ignored while making
decisions. Statement (IV) is false as those costs which are incurred irrespective of the
decision taken are not relevant costs and hence ignored in decision making process. So,
the correct answer is (d).
Reason : Relevant information differs between the alternatives under consideration and is future
oriented. Therefore, (c) is correct.
Reason : Effect of price reduction is always to reduce contribution to sales ratio and increase the
break-even point, because contribution is the result of difference between sales and
variable cost. Therefore, (e) is true. Other options (a), (b), (c) and (d) are not correct.
Reason : Costs, which can be reduced or removed from the company’s cost structure without
affecting product or service quality for the customer, are referred to as non-value-added
costs. Non-value-added costs can be removed without changing the customer's perceived
value of the company's service or product. They are costs typically associated with
activities such as transporting materials, verifying data, or transferring papers from one
department to another. Therefore, (d) is correct.
Reason :
I. In order to complete equivalent units, it is necessary to know how much work was
done on the units in process(ending work in process) at the end of the period. Hence
the data is insufficient to find out the equivalent units of production.
II. It means that the stage of completion of each of the 5,000 units is 80%. Otherwise
you are assuming 1,000 of the 5,000 units were transferred to a subsequent process
(department) or to finished goods. However, equivalent units allow you to treat the
5,000 units as if 4,000 of them were complete. Hence statement II is false.
III. Units stared and completed (7,000units) = units started (10,000 units)– units of
ending work in process (3,000 units)
Hence option (c) is the correct answer.
Reason : Within the relevant range of production, average variable cost per unit tends to remain
relatively constant. Other options are not correct. Hence, the correct answer is (d).
72. Answer: (a) < TOP >
Reason:
Particulars Per month Per km.
Fixed expenses:
Salary of Manager 6,500
Accountant 5,000
Cleaner 800
Mechanic 2,200
Garage rent 2,000
Page 31 of 31
Insurance:
5% on 5 × 2, 70, 000
5,625
12
Drivers salary (Rs.5,000 × 5) 25,000
Rs.4, 200 × 5
1,750
Annual tax 12
48,875
Effective km = Rs.4,500 × .8 × 5 = 18,000 2.72
Depreciation Rs.2,70,000 ÷ (3,00,000 × .8) 1.13
Repairs Rs.2,000 ÷ (12 × 3,600) 0.05
Petrol (4,500 × Rs.36) ÷ (5.62 × 3600) 8.00
Oil and other sundries 0.45
(Rs.36 × 4,500)÷(100km × 3,600)
Cost of plying taxi per km. 12.35
< TOP OF THE DOCUMENT >

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< Answer >

Costs incurred Rs.

Overheads apportioned / Apportionment of service

Catalytic hydro desulphuric oil Rs. 6 per gallon

Particulars Units % Amt (Rs.)

Beginning direct materials

Rs.6, 00, 000

Sales (2,00,000 units) 4,00,000 4,00,000

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