151-0705

Page 1 of 31

Question Paper

Management Accounting – I (151) : July 2005 Section A : Basic Concepts • •

1.

Answer all questions. Each question carries one mark.

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The resources consumed to accomplish a specified objective are called as (a) Expense Loss.

(b) Cost

(c) Revenue

(d) Profit

(e) (1 mark)

2.

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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 (c) Both (II) and (IV) above (e) Both (III) and (IV) above.

(b) Both (II) and (III) above (d) Both (I) and (III) above (1 mark)

3.

Management accounting information to be relevant must possess which of the following characteristics?

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I. II.

It should affect the accomplishment of the objectives of the decision-maker. 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 (c) Both (II) and (III) above (e) Both (I) and (II) above.

(b) Only (II) above (d) Both (I) and (III) above (1 mark)

4.

When manufacturing expenses are recovered on a suitable basis, the journal entry to be passed is

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(a) (b)

Debit Work-in-process account and credit General ledger adjustment account 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) 5.

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Which of the following statements is not true? (a) (b) (c) (d) (e)

Product cost for merchandise is the cost of purchases plus transportation Cost of merchandise sold is called the cost of goods sold Retailers and wholesalers treat period costs as expenses Period costs are treated as product costs with service industry firms At the end of the year, inventory on hand is an asset. (1 mark)

6.

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A method which provides a continuous record of the quantities of inventory is the (a) (b) (c) (d) (e)

Periodic inventory method Step-down method Perpetual inventory method Reciprocal method Periodic concept method. (1 mark)

7.

Which of the following statements is/are true?

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Page 2 of 31 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 (c) Only (III) above (e) Both (I) and (III) above.

(b) Both (II) and (III) above (d) Both (I) and (II) above (1 mark)

8.

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For the purpose of planning and control, costs are classified as (a) (b) (c) (d) (e)

Normal and abnormal costs Historical and predetermined costs Product and period costs Budgeted and standard costs Controllable and uncontrollable costs. (1 mark)

9.

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You recently made the following out-of-pocket expenditures on your 1993 model car: New tyres Engine tune up Dent repairs New paint Battery replacement

Rs.160 Rs.240 Rs.300 Rs.360 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) (b) (c) (d) (e)

You will lose Rs.310 You will lose Rs.1,110 You will gain Rs.310 The amount you paid to refurbish your old car is irrelevant to the decision 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) (b) (c) (d) (e)

Minimizing employee involvement Minimizing employee concerns related to reemployment Minimizing employee concerns related to fringe benefits Minimize employee's desire to have company succeed Minimize employees turnover. (1 mark)

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.

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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% 63%.

(b) 90%

(c) 88%

(d) 72%

(e) (1 mark)

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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Page 3 of 31 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 Rs.20.14.

(d) Rs.17.64

(e) (2 marks)

13. For a department, the standard overhead rate is Rs.5 per hour and overhead allowances are as follows: Activity level (hours) 6,000 14,000 22,000

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Budgeted overhead allowances (Rs.) 20,000 36,000 52,000

The normal capacity level on the basis of which the standard overhead rate has been worked out is (a) 3,667 hours (d) 2,000 hours

(b) 2,667 hours (e) 5,000 hours.

(c) 4,000 hours (1 mark)

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 Rs. 15.

(b) Rs. 10

(c) Rs. 5

(d) Rs. 25

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(e) (2 marks)

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 No. of workers No. of machine hours Percentage of HP

A 400 50,000 40

Value of assets 20 Direct wages 16 Indirect wages Supervisory salaries Depreciation Insurance Electricity charges Welfare expenses Office and other expenses 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.

B

C

400 50,000 25

800 60,000 35

35 20

30 24

Total 1,600 1,60,000 100 (Rs. In lakh) 85.00 60.00 18.00 7.00 8.50 4.25 12.00 9.00 16.00

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Page 4 of 31 (2 marks) 16. XY Ltd., manufacturers of engineering components, has provided the following budgeted information for the year 2005-06: Department

Machine hours

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Overhead Rs.

Machine hours 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) (b)

The aggregate of indirect material, indirect wages and indirect expenses is overhead costs 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) 18. Which of the following statements is true regarding service, merchandising and manufacturing companies?

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I. II. III.

For service companies the most significant cost is usually cost of goods sold. Merchandising companies convert raw materials into finished products. 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 (c) Only (III) above (e) Both (III) and (IV) above.

(b) Both (II) and (IV) above (d) Only (IV) above (1 mark)

19. Ajex Ltd. had the following inventories at the beginning and end of the month of June 2005. Particulars Finished goods Work-in-process Direct materials

June 1, 2005 (Rs.) 1,25,000 2,35,000 1,34,000

June 30, 2005 (Rs.) 1,17,000 2,51,000 1,24,000

The following additional manufacturing data were available for the month of June 2005: Particulars Direct materials purchased Purchase returns and allowances Transportation Direct labor Actual factory overhead

(Rs.) 1,89,000 1,000 3,000 2,50,000 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 (d) Rs.6,01,000

(b) Rs.6,26,000 (e) Rs.6,73,000.

(c) Rs.4,89,000

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Page 5 of 31 (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. (a) Only (I) above (c) Only (III) above (e) Both (III) and (IV) above.

(b) Only (II) 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 Rs.150.00.

(b) Rs.266.67

(c) Rs.216.67

(d) Rs.187.50 (e) (1 mark) < Answer >

22. Which of the following is/are not the advantages of departmentalization of overhead? (a) (b) (c)

It facilitates control of overhead expenses by means of forecasted budgets It helps in controlling the uses made of the services rendered to the respective departments 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) 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.

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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 Rs.8,97,500.

(b) Rs.6,82,908

(c) Rs.1,17,034

(d) Rs.97,55,800 (e) (2 marks)

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 overheads (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 Units Produced

Direct Material

Direct Labour

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Page 6 of 31 (a) Rs.18.25 Rs.18.50.

(b) Rs.19.00

(c) Rs.18.75

(d) Rs.19.25

(e) (2 marks)

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:

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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 Materials Labour Processing charges

Rs. 2,80,000 1,00,000 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 Rs. 792.

(b) Rs. 630

(c) Rs. 730

(d) Rs. 770

(e) (2 marks) < Answer >

27. Which of the following statements is/are true? 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) (b) (c) (d) (e)

Only (I) above Only (II) above Both (I) and (III) above Both (II) and (III) above All (I), (II) and (III) above. (1 mark) < Answer >

28. Which of the following statements is/are true? 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 (c) Only (III) above (e) All (I), (II) and (III) above.

(b) Both (I) and (II) above (d) Both (I) and (III) above (1 mark)

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. 1

No. of pieces Input 60,000

No. of pieces Rejected 20,000

No.of pieces Output 40,000

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Page 7 of 31 2 3

66,000 48,000

6,000 8,000

60,000 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 Rs. 4.69.

(b) Rs. 3.96

(c) Rs. 4.32

(d) Rs. 3.54

(e) (2 marks)

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.

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The following information is supplied regarding the contract which is incomplete on 31 st march 2005: Costs incurred Fabrication costs to date: Direct materials Direct labour Overheads

Rs. 2,80,000 90,000 75,000

Erection costs to date: Total

15,000 4,60,000

Contract price Cash received on account Technical estimate of completed to date: Fabrication Direct materials Direct labour and overheads Erection -

Rs.8,19,000 Rs.6,00,000 work

80% 75% 25%

The estimated profit of the contract is (a) Rs. 1,38,462 (d) Rs. 3,19,538

(b) Rs. 2,58,358 (e) Rs. 2,98,550.

(c) Rs. 1,89,000 (2 marks) < Answer >

31. An operating costing system is (a) (b) (c)

Identical to process costing system except that actual cost is used for manufacturing overhead A method of cost accumulation designed to determine the cost of services 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) 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 Materials (Rs.) Labor (Rs.) Overheads (Rs.) Selling price per kg. (Rs.) Estimated profit per unit of Gamma (Rs.) No. of units produced

Pre-separation costs 92,000 66,000 42,000

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Post-separation costs Beta Gamma 8,000 3,000 4,500 2,600 2,800 1,900 110 26 6 2,200 950

The company uses reverse cost method of accounting for by-products whereby the sales value of byproducts 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 (d) Rs.53,500 (e) Rs.11,500.

(c) Rs.26,700 (2 marks)

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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Page 8 of 31 Department

Overheads apportioned/allocated (Rs.)

P1 P2 P3

48,000 1,12,000 52,000

Department

Overheads apportioned / allocated (Rs.)

S1 S2

16,000 24,000

Estimated level of activity 5,000 labor hours 12,000 machine hours 6,000 labor hours Apportionment of service department costs

P1(20%),P2(40%), P3(20%) & S2(20%) 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) (b) (c) (d) (e)

Rs.10.91 and Rs.10.22 respectively Rs.10.91 and Rs.11.35 respectively Rs.11.35 and Rs.10.22 respectively Rs.10.91 and Rs.11.00 respectively Rs.11.00 and Rs.11.35 respectively. (2 marks)

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: Transferred from process 1 Raw materials Conversion costs Opening work-in-process

Rs. 1,87,704 47,972 63,176 3,009

Production: Opening work-in-process (Material – 100% complete apart from process Conversion cost – 50% complete) Transferred from process 1 Completed output Closing work-in-process (Material – 100% complete apart from process 2 Conversion – 75% complete)

Units 1,200

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1,12,000 1,05,400 1,600

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) (b) (c) (d) (e)

Rs.2,96,237 and Rs.4,259 respectively Rs.2,96,021 and Rs.4,212 respectively Rs.2,96,273 and Rs.4,295 respectively Rs.2,96,021 and Rs.4,259 respectively Rs.2,96,273 and Rs.4,259 respectively. (2 marks)

35. Which of the following methods is not used for apportionment of joint costs to different joint products? (a) Average unit costs method (c) Standard costs method (e) Market value method.

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(b) Physical units method (d) Replacement costs method (1 mark)

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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Page 9 of 31 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 Rs.1.71.

(b) Rs.1.43

(c) Rs.1.51

(d) Rs.1.30

(e) (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) 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.

< Answer >

Net profit when the by-product is credited to cost of production is (a) Rs.45,200 (d) Rs.31,800

(b) Rs.28,800 (e) Rs.33,000.

(c) Rs.47,700 (1 mark)

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 (c) Finished-Goods Inventory (e) Manufacturing Supplies Inventory.

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(b) Raw-Material Inventory (d) Indirect materials (1 mark)

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 Units introduced Units completed Material costs (Rs.) Conversion costs (Rs.)

Pressing 1,200 1,000 96,000 2,88,000

< Answer >

Polishing 1,000 500 8,800 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) (b) (c) (d) (e)

Understate cost of goods produced Overstate cost of goods sold Overstate current asset Overstate gross profit Understate net profit. (1 mark)

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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Page 10 of 31 (b) (c) (d) (e)

An addition to material costs in the new department An addition to conversion costs in the new department Partly material and partly conversion cost in the new department 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) (b) (c) (d) (e)

In completed units In incomplete units Without losses Where the closing work-in-progress is 100% complete Where there is no opening and closing work-in-progress. (1 mark)

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 Conversion costs Units introduced Units completed

< Answer >

Rs.90,000 Rs.70,200 40,000 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 Rs.3,425.

(b) Rs.3,725

(c) Rs.3,600

(d) Rs.3,575

(e) (2 marks)

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 Production Sales at the rate of Rs.40 per unit

– – –

< Answer >

12,500 units 2,00,000 units 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) (b) (c) (d) (e)

Rs.7,70,000 and Rs.6,20,000 respectively Rs.6,70,000 and Rs.5,20,000 respectively Rs.6,70,000 and Rs.6,20,000 respectively Rs.6,70,000 and Rs.7,20,000 respectively Rs.6,70,000 and Rs.7,70,000 respectively. (2 marks)

47. Which of the following statements is/are true? I. II.

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. 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.

< Answer >

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 (c) Only (III) above (e) All (I), (II), and (III) above.

(b) Both (I) and (II) above (d) Both (I) and (III) above (1 mark)

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% 75.00% (d) Greater than 75%

(b) 51.75%

< Answer >

(c)

(e) Less than 50%. (1 mark) < Answer >

49. Which of the following statements is/are true? 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. (a) Only (I) above (c) Both (I) and (III) above (e) All (I), (II) and (III) above.

(b) Only (II) above (d) Both (II) and (III) above (1 mark)

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.

< Answer >

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) 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) (b) (c) (d) (e)

< Answer >

Gross margin per unit for each additional unit Contribution margin per unit for each additional unit sold Fixed cost per unit for each additional unit sold Variable cost per unit for each additional unit sold Sale price per unit for each additional unit sold. (1 mark)

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 80,000 69,000 Profit 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

< Answer >

Page 12 of 31 (e)

Rs.2,40,000

Rs.1,20,000. (2 marks)

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:

< Answer >

Product B Particulars Product R 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) 54. Which of the following is/are true regarding the differences between marginal costing and absorption costing?

< Answer >

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 (c) Only (III) above (e) Both (I) and (II) above.

(b) Both (I) and (III) above (d) Both (II) and (III) above (1 mark)

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 breakeven of the company in terms of rupees as well as units are (a) (b) (c) (d) (e)

< Answer >

Rs.1,62,000 and 9,000 units respectively Rs.1,72,800 and 9,600 units respectively Rs.2,23,200 and 12,400 units respectively Rs.2,59,200 and 28,800 units respectively Rs.2,59,200 and 14,400 units respectively. (2 marks) < Answer >

56. Which of the following statements is/are true? 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) (b) (c) (d) (e)

Only (I) above Both (II) and (III) above Only (III) above Both (I) and (II) above All (I), (II) and (III) above. (1 mark) < Answer >

57. The following are the details of a Product Zebra of Cross Roads Ltd.: Particulars Selling price Direct material Direct labor

Rs. 300 40 30

Page 13 of 31 Variable manufacturing overhead Fixed manufacturing overhead Shipping and handling Fixed selling costs

24 60 6 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 Rs. 150.

(b) Rs. 140

(c) Rs. 174

(d) Rs. 200

(e) (2 marks) < Answer >

58. Which of the following is most relevant to a manufacturing equipment replacement decision? (a) (b) (c) (d) (e)

Original cost of the old equipment Disposal price of the old equipment Gain or loss on the disposal of the old equipment A lumpsum write off amount from the disposal of the old equipment Depreciation provided on the equipment. (1 mark)

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

< Answer >

(e) Opportunity cost. (1 mark)

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:

< Answer >

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) 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.

< Answer >

Page 14 of 31 II. III.

Product sulphury should be processed further. Product sulphurus should be processed further.

(a) Only (I) above (c) Both (I) and (II) above (e) All (I), (II) and (III) above.

(b) Only (II) above (d) Both (I) and (III) above (2 marks)

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

< Answer >

(a) Secondary criteria (b) Differential criteria (c) Irrelevant criteria (d) Constraints (e) Opportunity costs. (1 mark) 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 Selling price per unit (Rs.) Variable cost per unit (Rs.) Machine hours per unit Maximum possible sales unit

Product X

Product Y

Product Z

3,400 1,800 4 10,000

3,000 1,200 3 2,000

4,000 1,600 2 1,000

< Answer >

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 (c) Rs. 55,74,500

(b) Rs.1,60,25,500 (d) Rs.1,48,25,500

(e) Rs.2,20,00,000. (2 marks)

64. Decision-making is a complex process involving qualitative & quantitative aspects. The steps in decision making in sequential order involves

< Answer >

(a) (b) (c)

Developing alternative solutions, evaluating the alternatives and arriving at a decision Defining the problem, developing alternative solutions and arriving at a decision 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) 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.

< Answer >

The following further information is provided concerning the two products : Particulars Estimated demand (000 units) Selling price per unit Variable cost per unit Fixed costs per unit Machine hours (per 000 units) Direct labour hours ( per 000 units)

Product X 315 Rs. 11.20 Rs. 6.30 Rs. 4.00 160 120

Product Y 135 Rs. 15.70 Rs. 8.70 Rs. 7.00 280 140

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) (b) (c) (d) (e)

312,500 units of X and 1,25,000 units of Y 302,000 units of X and 120,000 units of Y 322,500 units of X and 98,000 units of Y 333,500 units of X and 89,000 units of Y 316,700 units of X and 115,000 units of Y. (2 marks)

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

< Answer >

Page 15 of 31 II. III.

Any costs to be considered relevant cost for decision making purpose must pertain to the future 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) (b) (c) (d) (e)

Both (I) and (II) above Both (I) and (III) above Both (II) and (IV) above (I), (II) and (III) above (I), (II) and (IV) above. (1 mark) < Answer >

67. Which of the following best describes Relevant Information? (a) (b) (c) (d) (e)

Focuses on the past and differs between the alternatives under consideration Focuses on the past and is not related to the decision under consideration Focuses on the future and differs between the alternatives under consideration Focuses on the future and not related to the decision under consideration Focuses on the present and not related to the decision under consideration. (1 mark) < Answer >

68. Which of the following statements is true? (a) (b)

Differential cost technique does not prove useful in decision making 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) 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 (c) Variable costs (e) Fixed costs.

< Answer >

(b) Indirect costs (d) Non-value-added costs (1 mark) < Answer >

70. Which of the following statements is/are true? I. II. III. (a) (c) (e)

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. 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. 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. Only (I) above (b) Both (I) and (III) above Only (III) above (d) Both (I) and (II) above Both (II) and (III) above. (1 mark) < Answer >

71. Within the relevant range of production, average variable cost per unit tends to (a) (b) (c) (d) (e)

Fluctuate drastically Vary inversely with the level of production Vary directly and proportionately with the level of production Remain relatively constant Vary directly but not proportionately with the level of production. (1 mark)

72. Mr. Subramaniyam owns a fleet of taxis and the following information is available from the records maintained by him: Number of taxis Cost of each taxi Salary of manager

5 Rs.2,70,000 Rs.6,500 per month

< Answer >

Page 16 of 31 Salary of accountant Salary of cleaner Salary of mechanic Garage rent Insurance premium Annual tax Salary of driver Annual repairs Oil and other sundries

Rs.5,000 per month Rs.800 per month Rs.2,200 per month Rs.2,000 per month 5% per annum Rs.4,200 per taxi Rs.5,000 per month per taxi Rs.2,000 per taxi 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: Reason:

2.

Answer : Reason :

3.

Answer : Reason :

4.

Answer : Reason :

5.

Answer : Reason :

6.

Answer : Reason :

7.

Answer : Reason :

8.

Answer : Reason :

(b) Cost is defined as the resources consumed to accomplish a specified objective. The other options are wrong. Option (b) is correct. (e) 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). (d) 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. (e) 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. (c) 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. (c) 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. (e) 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). (d) 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 controllable and uncontrollable costs

Association with product Controllability

< TOP >

< TOP >

< TOP >

< TOP >

< TOP >

< TOP >

< TOP >

< TOP >

< TOP > Answer : (d) 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. < TOP > 10. Answer : (b) 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.

9.

Page 18 of 31 < TOP > 11. Answer : (d) 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% < TOP > 12. Answer : (d) Reason : Computation of hourly rate for standing charges:

Expenses Standing charges: Rent, heat and light

Workings

Supervision Depreciation Reserve equipment cost Labor cost during setting and adjustment Hourly rate for standing charges

Rs.

Rs.

(Rs.70,000 / 70,000) x 2,500 Rs.1,30,000 / 26 10% of Rs.2,30,000 Rs.1,500 / 26 200 hours x Rs.6

2,500 5,000 23,000 58 1,200

Rs.31,758 / 1,800

31,758

17.64 < TOP >

13. Answer : (b) 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. 14. Answer : (c) Reason : Computation of under absorbed overheads Actual factory overhead Less: factory overheads recovered Under-absorbed factory overheads

< TOP >

45,00,000 (2,00,000 machine hrs × Rs.20)

40,00,000 5,00,000

Analysis of under-absorbed overheads Particulars Due to defective planning Due to rising price levels Total

(Rs. 5,00,000 × 60 ÷ 100)

Amt (Rs.) 3,00,000 2,00,000 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. 15. Answer : (b) Reason : Computation of composite machine hour rate Item Basis of Total Cost centers

< TOP >

Page 19 of 31 Direct wages Depreciation Indirect wages Supervisory salaries Insurance Electricity charges Welfare expenses Office and other exps Total No. of machine hours Machine hour rate

Apportionment Actual Value of assets Direct wages No. of workers

60.00 8.50 18.00 7.00

A 16.00 2.00 4.80 1.75

B 20.00 3.50 6.00 1.75

C 24.00 3.00 7.20 3.50

Value of assets H.P. %

4.25 12.00

1.00 4.80

1.75 3.00

1.50 4.20

No. of workers

9.00

2.25

2.25

4.50

Machine hours

16.00

5.00

5.00

6.00

(lakh of hours)

134.75 1.60

37.60 0.50

43.25 0.50

53.90 0.60

75.20

86.50

89.83

16. Answer: (c) 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

< TOP >

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 < TOP > 17. Answer : (b) 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. < TOP > 18. Answer : (d) 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 < TOP >

19. Answer : (d) Beginning direct materials inventory Add: Purchases Less: Purchase returns Add: Transportation Total direct materials available Less: Ending direct materials inventory Direct material used Direct labor Total prime costs

20. Answer : Reason : 21. Answer : Reason :

1,34,000 1,89,000 (1,000) 3,000 3,25,000 (1,24,000) 2,01,000 2,50,000 4,51,000

Manufacturing cost = Rs.4,51,000 + 60% of Rs.2,50,000 (Direct labor) = Rs.6,01,000. < TOP > (b) When factory overhead control account has an ending debit balance, factory overhead was under-applied. So, the correct answer is (b). < TOP > (b) 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 Less: factory overheads recovered Under-absorbed factory overheads

(1,86,500 ×Rs.40)

machine

hrs

88,96,000 74,60,000 14,36,000

Analysis of under-absorbed overheads Particulars Due to initial inaccuracies Due to rising price levels Total

% 37.5

Amount Rs. 5,38,500

62.5

8,97,500

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:

24.

Particulars Cost of sales WIP (50% of 36,000) Finished goods stock Total Answer: (c) Reason:

Units 1,05,000 18,000

% 76.09 13.04

Amt (Rs.) 6,82,908 1,17,034

15,000

10.87

97,558

1,38,000

100

8,97,500

Change in factory overheads Variable Overheads = Change in production level

< TOP >

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 Rs. 30,000 Fixed factory cost Total Rs. 60,000 Profit (20% of S.P or 25% of cost) Rs. 15,000 Total selling price Rs.75,000 Rs.18.75 Selling price per unit 75,000 / 4,000 25. Answer : (b) Reason : Raw material requirement Requirement of raw material Raw Per 100 For 3,00,000 Provision for material cft cft of RCC wastage of RCC % Qty 100 3,00,000 5 15,000 Steel (kg) 2,400 72,00,000 3 2,16,000 Cement (kg) Stone (cft) 90 2,70,000 10 27,000 Difference in selling price according to escalation clause: Raw material Requirement

Unit

Price per unit

On tender Actual Difference date Price 315 Ton 610 675 +65 7,416 Ton 100 105 +5 40 38 -2 2,97,000 cft Total increase in contract price due to escalation clause

< TOP >

Total requirement

3,15,000 74,16,000 2,97,000 Difference in value of raw material

Quantity

26. Answer : (b) Reason : Equivalent unit of sales Total production 800 80 Less: Defective production 10% 720 Good production 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 1,00,000 Processing charges Total costs 4,80,000 8,760 Less: sale value of scrap materials 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

+ 20,475 + 37,080 - 5,940 + 51,615 < TOP >

 Rs.5, 54, 400   = Rs. 700  792 Price of good production = 

Discounted price of defective products = (Rs. 700 – 70) = Rs. 630. 27. Answer : (e) Reason : A joint production process results in two or more joint products.

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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). 28. Answer : (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). Answer : (b) 29. Reason : Output Operation Input Rejected % No.of Pieces No. No.of Pieces No.of pieces Rejection 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 Add: Process loss 10% in Process 2 12 Input to Process 2 or output of Process 132 1 Add: Process loss 50% in Process 1 66 198 Input in Process 1 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

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 Rs.20  × 0.198 kg  1kg .   = Rs. 3.96. =  < TOP >

30. Answer : (c) Reason : Particulars

(i) Fabrication costs Direct materials Direct labour Overheads Total (ii) Erection Costs Total costs Estimated profit Total contract price

Cost to date Completion Amt % (Rs.)

Further costs Completion Amt % (Rs.)

Total Cost Rs.

80

2,80,000

20

70,000

3,50,000

75 75

90,000 75,000 4,45,000 15,000 4,60,000

25 25

30,000 25,000 1,25,000 45,000 1,70,000

1,20,000 1,00,000 5,70,000 60,000 6,30,000 1,89,000

25 (i) + (ii)

75

8,19,000

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.

31. Answer : (b) 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. 32. Answer : (b) Reason : Joint Cost to by-product ‘Gamma’ Rs. 24,700 Sales revenue (950 × Rs.26) 5,700 Less: Profit (950 × Rs.6) 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 Total Joint Cost : (Rs.92,000 + Rs.66,000 + Rs.42,000) Less: Joint Cost to Gamma credited Joint Cost to Beta Sale value of Gamma (2,200 × Rs.110) Less: Pre-separation cost

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Rs. 2,00,000 11,500 1,88,500 2,42,000 1,88,500 53,500 15,300 38,200

Less: Post separation cost (Rs.8,000 + Rs.4,500 + Rs.2,800) Profit

33. Answer : (a) 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 5,000 12,000 6,000 Budgeted machine hours Overhead rate per 10.91 11.35 10.22 machine hour

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34. Answer : (e) Reason :

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Input Opening WIP From process 1

units 1,200

Opening

1,12,000

Process 1

1,04,200

Normal loss Abnormal Loss Closing WIP 1,13,200

Units 1,200

–

Conversion 50% 600

100%

1,04,200

100% 1,04,200

5,600

–

–

–

–

600

100%

600

–

–

1,600

100%

1,600

75%

1,200

1,13,200

Materials –

1,06,400

1,06,000

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Materials –

Particulars From Process 1 Process 2

Equivalent units Cost per unit Conversion cost Equivalent units Cost per unit

Rs. 1,87,704 47,972 2,35,676 1,06,400 2.215 63,176 1,06,000 0.596

Finished goods: Opening WIP Process I (1,04,200 × Rs.2.215) Conversion cost (1,04,800 × 0.596)

Rs. 3,009 2,30,803 62,461 2,96,273

Closing WIP: Materials – 1,600 × Rs.2.215 Conversion – 1,200 × 0.596

Rs. 3,544 715 4,259

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) Particulars Distance (Depots to factory – full load) Distance covered per trip Running time @ 40 km p.h. Filling-in time Emptying time Total time per trip Details of costs: Variable operating charges @ Rs.2.50 Indian Oil(20 km x Rs.2.50) Bharat Petr. (16 km x Rs.2.50) Fixed charges @ Rs.15 per hour Indian Oil (125mint.x Rs.15/ 60mint) Bharat Petroleum (114 mint. x Rs.15 / 60 mint.) Total cost per trip Ton-km (full load) Indian Oil (5 tons x 10 km) Bharat Petroleum (5 tons x 8 km) Cost per ton-km (Total cost per trip / Tonkm)

10 km 20 km 30 minutes 50 minutes 45 minutes 125 minutes

Bharat Petroleum 8 km 16 km 24 minutes 45 minutes 45 minutes 114 minutes

Rs.50.00

Rs.40.00

Rs.31.25

Rs.28.50

Rs. 81.25

Rs. 68.50

50 ton-km

40 ton-km

Rs.1.63

Rs.1.71

Indian Oil

37. Answer : (a) 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. 38. Answer : (a) 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.49,200 (Rs. 40,000 – Rs. 1,500) ÷ 10,000 = Rs. 3.85 Less : Administrative cost Rs.4,000 Rs.45,200 39. Answer : (a) Reason : When raw materials are released for production purposes,

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Page 25 of 31 WIP inventory is debited. Therefore (a) is correct. 40. Answer : (d) Reason : Statement of equivalent production Output Pressing: Units completed Work-inprogress Total Polishing: Units completed Work-inprogress Total

Units

1,000 200

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Materials Qty.

%

Conversion Qty.

%

1,000 200

100 100

1,000 120

100 60

1,200

1,200

500 500

500 500

1,000

1,000

1,120

100 100

500 250

100 50

750

Statement of cost: Particulars Pressing: Material cost Conversion cost

Total cost (Rs.) 96,000 2,88,000

Eq. Units 1,200 1,120

Total Polishing: Cost tranf. From pressing (1,000 x Rs.337.14) Material cost Conversion cost Total

Cost per units (Rs.) 80.00 257.14 337.14

3,37,140 8,800 52,000

1,000 1,000 750

337.14 8.80 69.33 415.27

Profit = 25% on selling price = 33 1/3% on cost Selling price = Rs.415.27 x 1.3333 = Rs.553.69. 41. Answer : (e) 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. 42. Answer : (a) 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. 43. Answer : (e) 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. 44. Answer : (a) 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. 45. Answer: (c) Material Conversion Output % units % units Input Units Completed 36,000 100% 36,000 100% 36,000 started – 40,000

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Page 26 of 31 Normal loss 7.5% Abnormal loss Cost Cost unit

3,000

100%

3,000 75%

2,250

1,000

100%

1,000 75%

750

per

40,000 Rs.90,000 Rs.2.25

39,000 Rs.70,200 Rs.1.80

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46. Answer : (c) Reason : Profit under absorption costing:

Rs.

Sales – 1,87,500 × Rs.40 Cost of goods sold: Opening Stock (Rs.22 + Rs.4) × 12,500 Production Rs.26 × 2,00,000

75,00,000 3,25,000 52,00,000 55,25,000 1,00,000 56,25,000 6,50,000 49,75,000 25,25,000

Add: Adverse variable cost variance Less: Closing stock Rs.26 × 25,000 Gross Profit (sales – cost) Less: Selling expenses: Variable 1,87,500 × Rs.6 Fixed

Rs.

11,25,000 6,30,000

Less: Under absorption: Profit

17,55,000 7,70,000 1,00,000 6,70,000

Profit under Marginal Costing: Rs. Sales – 1,87,500 × Rs.40 Cost of goods sold: Opening St – 12,500 × Rs.22 Production – 2,00,000 × Rs.22 Less: Closing Stock – 25,000 × Rs.22 Less: Adverse variance

47. Answer : Reason :

48. Answer : Reason :

Rs.

75,00,000 2,75,000 44,00,000 46,75,000 5,50,000 41,25,000 1,00,000 42,25,000 11,25,000

53,50,000 Less: Variable selling expenses Contribution 21,50,000 Less: Fixed cost: – Manufacturing Rs. 9,00,000 6,30,000 15,30,000 Selling Profit 6,20,000 (c) 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). (b) The average contribution margin per mix= Total of each product’s contribution margin ration × its relative percentage of sales to the

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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%. 49. Answer : (a) 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]. 50. Answer : (b) Reason : Units Total variable Selling Total sales Total price costs 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) 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. 52. Answer : (b) Reason : Particulars

S1 (Rs.)

Sales (2,00,000 units) Fixed cost Profit Variable cost Sales price per unit Variable cost per unit Contribution to sales margin % BEP

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S2(Rs.) 4,00,000 (51,000) (69,000) 2,80,000 2.00 1.40

4,00,000 (80,000) (80,000) 2,40,000 2.00 1.20 40% 80,000 ÷ 40% = 2,00,000

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30% 51,000 ÷ 30% = 1,70,000 < TOP >

53. Answer : (d) Reason : Product R 3,000 5 15,000 20 8 12 5 2.40 I

Particulars Estimated demand (Units) Machine hours per unit Total machine hours (Hrs) Selling price (Rs.) Variable cost (Rs.) Contribution (Rs.) Machine hours per unit (Rs.) Contribution per machine hour (Rs.) Ranking The company will produce R fully, then B. Therefore, R

=

3,000 × 5 =

B

=

3,750 × 4 =

15,000 hrs 15,000 hrs 30,000 hrs

Product B 4,500 4 18,000 18 9 9 4 2.25 II

Total

33,000

Page 28 of 31 R – 3,000 units B – 3,750 units 54. Answer : (d) 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. 55. Answer : (e) Reason : Sale – Variable cost – Fixed cost = Profit Let, Variable cost = x and Fixed cost = y Therefore,

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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 24,000x + y 3,16,800 = 86400 = 14,400x x = 6 y = 2,30,400 – 9,600(6) = 2,30,400 – 57.600 = 1,72,800 P/V =

18 − 6 12 18 = 18

BEP =

Rs.1, 72,800 = 14,400 units 12

=

66 2/3%

Sales = 14,400 × Rs.18 = Rs.2,59,200 56. Answer : (d) 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). 57. Answer : (a) 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. 58. Answer : (b) 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. 59. Answer : (d) 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

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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. 60. Answer : (b) 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. 61. Answer : (d) Reason : Statement showing differential costs and incremental revenue of a batch of 15,000 kg. Products

62.

63.

64.

65.

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. Answer : (d) 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 Answer : (c) 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.) III II I Ranking Total sales units 10,000 2,000 1,000 12,000 6,000 2,000 Machine hours required as per Ranking 3,000 2,000 1,000 Best product mix in unit 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 Answer : (c) 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). Answer : (a) 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)

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Kg.

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Page 30 of 31

66. Answer : Reason :

67. Answer : Reason : 68. Answer : Reason :

69. Answer : Reason :

70. Answer : Reason :

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. (d) 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). (c) Relevant information differs between the alternatives under consideration and is future oriented. Therefore, (c) is correct. (e) 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. (d) 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. (c)

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. 71. Answer : (d) 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) Reason: Particulars Per month Per km. Fixed expenses: 6,500 Salary of Manager Accountant 5,000 Cleaner 800 Mechanic 2,200 2,000 Garage rent

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I.

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Page 31 of 31 Insurance: 5% on 5 × 2, 70, 000 12 Drivers salary (Rs.5,000 × 5) Rs.4, 200 × 5 Annual tax 12

5,625 25,000 1,750 48,875

Effective km = Rs.4,500 × .8 × 5 = 18,000 Depreciation Rs.2,70,000 ÷ (3,00,000 × .8) Repairs Rs.2,000 ÷ (12 × 3,600) Petrol (4,500 × Rs.36) ÷ (5.62 × 3600) Oil and other sundries (Rs.36 × 4,500)÷(100km × 3,600) Cost of plying taxi per km.

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2.72 1.13 0.05 8.00 0.45 12.35