152-0406 '

Question Paper Management Accounting – II (152): April 2006 • Answer all questions. • Marks are indicated against each question.

1.

< Answer >

In developing a system of transfer pricing for any particular situation, which of the following circumstantial factors need not be considered? (a) Existence of competitive market (c) Movability constraint (e) Capacity level of selling division.

(b) Sourcing constraint (d) Quantum of transfers (1 mark)

2.

Which of the following items would not be incorporated into the calculation of a division’s investment base when using the residual income approach for performance measurement and evaluation? (a) (b) (c) (d) (e)

< Answer >

Fixed assets employed in division’s operations Land being held by the division as a site for a new plant Division inventories when division management exercises control over the inventory levels Division accounts payable when division management exercises control over the amount of shortterm credit used Division accounts receivable when division management exercises control over credit policy and credit terms. (1 mark)

3.

Which of the following statements is false in respect of full cost pricing and contribution margin pricing?

< Answer >

(a) They cannot be considered competing to each other (b) In both the methods, the selling prices proposed must be only tentative and they are always subject to adjustments (c) Fixed costs are important in both the pricing models (d) In both the methods, a normal mark-up on total costs is made and the volume of production is taken into consideration (e) They represent to a certain degree, cost plus pricing. (1 mark) 4.

< Answer >

In which budget do you add credit sales and deduct cash received from debtors? (a) Cash budget (c) Creditors budget (e) Production cost budget.

(b) Debtors budget (d) Sales budget (1 mark)

5.

While preparing a performance report for a cost center using flexible budgeting techniques, the planned cost column should be based on (a) (b) (c) (d) (e)

< Answer >

Cost incorporated in the master budget Budgeted amount in the original budget prepared before the beginning of the period Budget adjusted to the actual level of activity for the period being reported Actual amount for the same period in the preceding year Budget adjusted to the planned level of activity for the period being reported. (1 mark)

6.

< Answer >

Which of the following statements is false in relation to budgets? (a)

Direct labor budget represents direct labor requirements necessary to produce the types and quantities of output planned in the production budget (b) An inventory budget can be prepared to find out the values of direct materials and finished inventory (c) A fixed budget is a budget that is prepared for a range, i.e. for more than one level of activity (d) A direct material budget indicates the expected amount of direct material required to produce the budgeted units of finished good (e) Direct labor budget costs consist of wages paid to employees who are engaged directly in specific production output. (1 mark) 7.

< Answer >

Budget that addresses “What is” rather than “What was” or “What was expected” is (a) Fixed budget (b) Flexible budget (c) Zero based budget(d) Performance budget (e) Master budget.

(1 mark) 8.

< Answer >

Which of the following statements is true? (a) (b) (c) (d) (e)

Material price variance is caused on account of pilferage of materials Material usage variance is caused on account of excessive shrinkage or loss of material in transit Material price variance occurs if defective materials are purchased Material price variance arises because of purchasing substitute materials at different prices Material mix variance will result if materials are not placed into production in the same ratio as the standard mix. (1 mark)

9.

The variance created to segregate the difference due to a new factor like a steep rise in price of material, < Answer > is known as (a) Revision variance (c) Price variance (e) Efficiency variance.

(b) Uncontrollable variance (d) Favorable variance (1 mark)

10. Srikant Ltd. has furnished the following data pertaining to its product during the month of March 2006: Particulars Fixed overhead Production units Number of working days Hours

Budget

Actual

Rs.22,500

Rs.24,066

750 units

764 units

26days

28 days

500

568

< Answer >

The fixed overhead volume variance

is (a) Rs.420 (F) (d) Rs.100 (A)

(b) Rs.420 (A) (e) Rs.1,566 (A).

(c) Rs.366(F) (1 mark)

11. Mukherjee Ltd. has furnished the following payment schedule of current payables related to purchases of direct materials: • • •

< Answer >

60% in the month of purchase. 30% in the month following the month of purchase. 10% in the second month following the month of purchase.

The company purchased the same amount of goods in the months of January 2006 and February 2006. Total credit purchases in the month of March 2006 were Rs.1,00,000 and total payments on credit purchases in the month of March 2006 were Rs.1,40,000. The credit purchase in the month of January 2006 was (a) Rs.1,00,000 (d) Rs.3,00,000

(b) Rs.2,00,000 (e) Rs.4,00,000.

(c) Rs.2,40,000 (2 marks) < Answer >

12. Which of the following information is/are required to the operating management? I. II. III. IV.

Licensed capacity. Installed capacity. Actual production. Rejection of products.

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

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

13. Sai Pump Ltd. manufactures water pumps and uses a standard cost system. The following standard factory overhead costs per water pump are based on direct labor hours: • •

Variable overheads (40 hours at the rate of Rs.8 per hour) Fixed overheads (40 hours at the rate of Rs.4 per hour)

< Answer >

: Rs.320. : Rs.160.

The additional information is available for the month of March 2006: i. ii. iii. iv. v. vi. vii.

2,250 pumps were produced although 2,500 had been scheduled for production. The normal capacity level was 1,00,000 direct labor hours per month. 94,000 direct labor hours were worked at a total cost of Rs.9,40,000. The standard direct labor rate is Rs.10 per hour. The standard direct labor time per unit is 40 hours. Variable overhead costs were Rs.7,40,000. Fixed overhead costs were Rs.3,60,000.

The fixed overhead expenditure variance and direct labor efficiency variance are (a) (b) (c) (d) (e)

Rs.40,000 (F) and Rs.40,000 (A) respectively Rs.40,000 (A) and Rs.54,000 (A) respectively Rs.54,000 (A) and Rs.40,000 (F) respectively Rs.44,000 (A) and Rs.50,000 (A) respectively Rs.40,000 (A) and Rs.54,000 (F) respectively. (2 marks)

14. An organized creative approach, which emphasizes efficient identification of unnecessary cost is known < Answer > as (a) Management by objective (c) Zero-based budgeting (e) Quality costing.

(b) Value analysis (d) Activity based costing (1 mark)

15. Foils Ltd., manufacturing a single product, is operating at 70% level of capacity at which the sales are Rs.7,35,000. The company has estimated the following data for the current year: • •

< Answer >

Rs.150 per unit Rs.85,000 when output is nil plus variable portion of Rs.200 for each additional 1% level of capacity : Rs.2,20,000 at present level of activity. This cost is estimated to • Fixed cost be increased by Rs.50,000 if the level of activity exceeds 80% The company is facing a severe competition in the market. The management of the company is considering a proposal to decrease the selling price by 10%. The present sale price is Rs.350. Variable cost Semi-variable cost

: :

The budgeted operating profit per unit at 90 % level of activity on the assumptions that the selling price is reduced by 10%, is (a) Rs.36.11

(b) Rs.32.55

(c) Rs.48.33

(d) Rs.35.44

(e) Rs.26.85. (1 mark)

16. Activities, their drivers and their costs may be classified as unit-level, batch level, product level and facility level. If activity based costing information is prepared for internal purposes, the costs of which of the following levels is/are most likely to be treated as period costs? I. II. III. IV.

< Answer >

Unit level. Batch level. Product level. Facility level.

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

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

17. Target pricing (a) (b) (c) (d) (e)

< Answer >

Is more appropriate when applied to mature and long-established products Considers the variable costs and excludes fixed costs Is often used when costs are difficult to control Is a pricing strategy used to create competitive advantage Is well suited for complex products that require many sub-assemblies. (1 mark)

18. A profit making firm can increase its return on investment by (a) (b) (c) (d) (e)

< Answer >

Increasing sales revenue and operating expenses by the same amount in rupees Increasing investment and operating expenses by the same amount in rupees Decreasing sales revenue and operating expenses by the same percentage Increasing sales revenue and operating expenses by the same percentage Decreasing investment and sales by the same percentage. (1 mark)

< Answer >

19. Which of the following is true in respect of full cost pricing method? (a) (b) (c) (d) (e)

It is used to recover market price plus mark-up It is used to recover standard cost plus mark-up It is used to recover fixed costs only It is used to recover variable costs only It is used if a company does not have the basic idea of demand for the product. (1 mark) < Answer >

20. Which of the following costs is incurred when lack of quality of conformance does exist? (a) Prevention cost (c) Opportunity cost (e) Sunk cost.

(b) Appraisal cost (d) Internal and external failure costs (1 mark) < Answer >

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

The standard fixed overhead rate is computed by dividing the firm's total budgeted fixed costs by the firm's planned activity (as measured in labor hours, machine hours, or some other appropriate activity measure). II. The variable-overhead efficiency variance is the difference between the actual variable-overhead cost and the product of the standard variable-overhead rate multiplied by the actual hours of an activity base. III. Of the two variable-overhead variances, the spending variance has more significance than the efficiency variance, in terms of controlling variable overhead. (a) Only (I) above (c) Both (II) and (III) above (e) All (I), (II) and (III) above.

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

22. Consider the following data of a company during the month of March 2006: i.

Budgeted hours

3,000 hours

ii.

Standard hours for actual production

3,210 hours

iii.

Maximum possible hours in the budget period

3,500 hours

iv.

Actual hours

2,950 hours

The capacity

utilization ratio of the company during the month was (a) 98.33%

(b) 113.65%

(c) 110.0%

(d) 87.54%

(e) 75.00%. (1 mark) < Answer >

23. Which of the following statements is false? (a) Insufficient training is a reason for labor efficiency variance (b) When workers are not able to do the work due to some reason during the hours for which they are paid, it results in idle time variance (c) High labor turnover is a reason for labor efficiency variance (d) Different rates being paid to workers employed to meet seasonal demands leads to labor rate variance (e) Promotion of employees without proper authorization by personal favoritism or supervisors leads to labor efficiency variance.

(1 mark)

24. The number of standard hours equivalent to the work produced expressed as a percentage of the budgeted standard hours is known as (a) Efficiency ratio (c) Calendar ratio (e) Capacity utilization ratio.

< Answer >

(b) Activity ratio (d) Capacity usage ratio (1 mark)

25. Kumar Ltd. has two divisions - A and B. The division A has the capacity to manufacture 1,20,000 units of a special component MKJ annually and it has some idle capacity currently. The budgeted residual income for the division A is Rs.10,00,000. The relevant details extracted from the budget of A are as under: Sales (to outside customers)

:

1,00,000 units @ Rs.200 per unit

Variable cost per unit

:

Rs.170

Divisional fixed cost

:

Rs.8,00,000

Capital employed

:

Rs.75,00,000

Cost of capital

:

18% per annum

< Answer >

Division B received an order for which it requires 20,000 units of a component similar to MKJ. An additional variable cost of Rs.12 per unit will be incurred to make minor modifications to LKJ to suit the requirements of Division B. The minimum transfer price per unit, which A should quote to B to achieve its budgeted residual income is (a) Rs.189.50 (d) Rs.160.00

(b) Rs.170.00 (e) Rs.175.00.

(c) Rs.165.50 (2 marks) < Answer >

26. Batik-T Ltd. has furnished the following data relating to its product for the year 2005-06: Annual production

(units)

20,000

Material cost

(Rs.)

90,000

Other variable costs

(Rs.)

1,65,000

Fixed cost

(Rs.)

60,000

Total cost

(Rs.)

3,15,000

Apportioned investment

(Rs.)

3,00,000

Assuming income tax rate of 33%, if the company desires to earn a post tax profit of 13.4% on listed sale price when trade discount is 35%, the net sale price per unit would be (a) Rs.35.00

(b) Rs.30.00

(c) Rs.22.75

(d) Rs.25.00

(e) Rs.17.88. (2 marks)

27. Red Blu Ltd. has estimated 10% of total sales as cash sales and payments for credit sales to be received is as follows: i. ii. iii. iv. v.

< Answer >

40% of credit sales in the month of sales. 30% of credit sales in the first month following the month of sales. 20% of credit sales in the second month following the month of sales. 5% of credit sales in the third month following the month of sales. 5% is non-recoverable.

The company has furnished the following expected total sales for a period of six months: Month

Sales

May 2006

Rs.1,00,000

June 2006

Rs.1,20,000

July 2006 August 2006

Rs.1,35,000

September 2006

Rs.1,70,000

October 2006

Rs.2,00,000

Rs.1,50,000

The estimated cash inflows of the company in the month of

August 2006 will be (a) Rs.1,31,550 (d) Rs.1,50,500

(b) Rs.1,32,450 (e) Rs.1,56,500.

(c) Rs.1,36,950 (2 marks)

28. During the month of March 2006, the budgeted production and the budgeted fixed production overhead costs of Epsilon Ltd. were 6,000 units and Rs.81,000 respectively. The fixed overhead cost was under absorbed by Rs.8,980 and the fixed production overhead expenditure variance was Rs.2,500 (Adverse).

< Answer >

The number of units produced during the month of March 2006 was (a) 4,750

(b) 5,520

(c) 5,250

(d) 6,750

(e) 7,250. (2 marks)

29. Acer Ltd. manufactures 5,000 units of Product PT at a cost of Rs.90 per unit. Presently, the company is utilizing 50% of the total capacity. The information pertaining to cost per unit of the product is as follows: Material Labor Factory overheads Administrative overheads i. ii. iii.

: : :

< Answer >

Rs.50 Rs.15 Rs.15 (40% fixed) Rs.10 (50% fixed)

:

Other information: The current selling price of the product is Rs.100 per unit. At 60% capacity level – Material cost per unit will increase by 2%. At 80% capacity level – Material cost per unit will increase by 5% and current selling price per unit will reduce by 8%.

The profit per unit of the product of the company at 60% and 80% capacity level will be (a) (b) (c) (d) (e)

Rs.10.83 and Rs.10.00 respectively Rs.6.63 and Rs.8.83 respectively Rs.10.83 and Rs.3.62 respectively Rs.6.63 and Rs.10.83 respectively Rs.8.83 and Rs.6.63 respectively. (2 marks)

30. Beta Ltd. manufactures a single product using three raw materials J, K and L. The details of standard cost and actual cost for the month of March 2006 were as under:

< Answer >

Standard Cost Material

Kg

J K L

Price per kg

15

Rs.4

12

Rs.3

8

Rs.6

35 Less: loss

3

Standard Yield

32

Material

Kg

Price per kg

J

1,680

4.25

K

1,650

2.80

L

870

6.40

Actual Cost

4,200 Less: Loss Actual Yield (a) Rs.864 (F) (d) Rs.791 (F)

552 3,648

The material yield variance is (b) Rs.864 (A) (e) Rs.791 (A) .

(c) Rs.2,484 (F) (2 marks)

< Answer >

31. The sales volume variance is (a)

The difference between actual and master budget sales volume, times actual unit contribution margin (b) The difference between flexible budget and master budget sales volume, times master budget unit contribution margin (c) The difference between flexible budget and master budget sales volume, times actual unit contribution margin (d) The difference between flexible budget and actual sales volume, times master budget unit contribution margin (e) The difference between actual and master budget sales volume, times actual unit net profit margin. (1 mark) 32. Tripti Ltd. produces a single product – ‘T’. The following budgeted data are available for the month of March 2006: Production (units)

15,000

25,000

(Rs.)

(Rs.)

Material

30,000

50,000

Labor

45,000

75,000

Indirect material

15,000

25,000

Indirect labor

30,000

50,000

Supervision

26,250

33,750

Heat, Light and Power

15,250

22,750

Depreciation

63,000

63,000

8,000

8,000

2,32,500

3,27,500

Flexible budget data:

< Answer >

Factory overhead:

Insurance and Taxes Total Manufacturing cost

Other information for the month

of March 2006: Standard time

:

0.5 direct labor hour per unit of product

ii.

Normal capacity

:

10,000 direct labor hours

iii.

Units produced

:

21,000 units

iv.

Actual labor hours

10,800 hours

v.

Factory overheads incurred

: :

i.

Rs.1,91,000

Standard factory overhead rates are based on direct labor hours. The overhead efficiency variance and overhead capacity variance are (a) (b) (c) (d) (e)

Rs.2,700 (F) and Rs.4,700 (A) respectively Rs.2,700 (F) and Rs.9,000 (F) respectively Rs.2,700 (A) and Rs.4,500 (F) respectively Rs.2,700 (A) and Rs.8,000 (A) respectively Rs.4,700 (A) and Rs.2,700 (A) respectively. (2 marks)

33. Vinayak Ltd. has normal capacity of 100 machines working 8 hours per day of 25 days in a month. The < Answer > budgeted fixed overheads of a month are Rs.1,50,000. The standard time required to manufacture one unit of product is 4 hours. In a particular month, the company worked for 24 days of 750 machine hours per day and produced 4,500 units of the product. The actual fixed overheads incurred were Rs.1,45,000. The total fixed overhead variance and calendar variance are (a) (b) (c) (d) (e)

Rs.15,000 (A) and Rs.6,000(A) Rs.10,000 (A) and Rs.6,000 (A) Rs.10,000 (A) and Rs.9,000 (A) Rs.5,000 (A) and Rs.9,000 (A) Rs.5,000 (F) and Rs.6,000 (F). (2 marks)

34. Vardhini Ltd. has furnished the following production budget pertaining to a single product for the month < Answer > of March 2006: Production quantity

:

Production costs: Material Direct labor

:

Variable overheads

:

Rs. 4,86,000

Fixed overheads

:

Rs.14,88,000

Material

3,13,060 kg at Rs.12,45,980

Direct labor

1,94,920 hours at Rs.8,86,886

Variable overheads

Rs.4,33,700

Fixed overheads

Rs.15,01,240

2,40,000 units 3,36,000 kg at Rs.4.10 per kg 2,16,000 hours at Rs.4.50 per hour

The variable overheads are absorbed at a predetermined direct labor hour rate and the fixed overheads are absorbed at a predetermined rate per unit of output. During the month the actual production was 2,20,000 units and the following costs were incurred:

The variable overhead efficiency

variance and fixed overhead volume variance are (a) (b) (c) (d) (e)

Rs.6,930 (F) and Rs.1,26,800 (A) respectively Rs.6,930 (F) and Rs.1,24,000 (A) respectively Rs.6,776 (F) and Rs.4,876 (A) respectively Rs.6,776 (F) and Rs.1,26,800 (A) respectively Rs.4,876 (A) and Rs.1,26,800 (F) respectively. (2 marks)

< Answer >

35. The data relating to Pioneer Ltd. for the month of March 2006 were as follows: Output (units) Wages paid for 16,250 hours Material purchased 4,000 kg

Other information:

Rs.

Particulars Labor rate variances Labor efficiency variances Labor idle time variances Material price variances Material usage variances (a) Rs.13.00

6,500 Rs. 48,750 Rs. 34,000

(b) Rs.12.73

1,875 (A) 2,575 (F) 700 (A) 1,800 (F) 1,575 (F)

The standard prime cost per unit is

(c) Rs.13.25

(d) Rs.7.50

(e) Rs.5.70. (2 marks)

< Answer > 36. Gamma Ltd. services washing machines and clothes dryers. It charges customers for the spare materials with markup on cost. The company has five employees, each earning Rs.6,000 per year and spending 1,000 hours per year on service calls. It sells parts that cost Rs.45,000 annually. The company has other costs of Rs.25,000 a year, which is allocated two-thirds to labor and the remainder to material. If the target profit of the company is Rs.20,000 per annum, the amount of mark-up on labor costs, is

(a) Rs.18,000 (d) Rs.45,000

(b) Rs.75,000 (e) Rs.27,000.

(c) Rs.30,000 (2 marks) < Answer >

37. Consider the following particulars pertaining to products A and B of a company: Particulars

A

Estimated production

B

(units)

4,000

6,000

Total variable costs (other than direct labor) (Rs.)

1,60,000

2,70,000

6

4.50

3

4

1,73,000

1,60,000

Direct labor cost per hour

(Rs.)

Number of labor hours per unit Fixed costs

(Rs.)

The investment in fixed capital is Rs.7,60,000 and working capital requirements amount to Rs.5,00,000. A return of 25% on investment is expected. If the contribution per direct labor hour is expected to be the same for both the products, the selling price of product B is (a) Rs.73

(b) Rs.58

(c) Rs.103

(d) Rs.140

(e) Rs.135. (2 marks)

38. The estimated annual production of products A and B are 5,000 and 15,000 respectively. The budgeted cost details of these products are as under: Particulars

A

Direct materials per unit

Rs.40

Rs.47

Direct labor per unit (@Rs.9 per hour)

Rs.36

Rs.27

Selling overheads per unit (40% variable)

Rs. 5

Rs.10

< Answer >

B

The other overheads are

charged to the products as under: •

Factory overheads (60% fixed) - 100% of direct wages.

•

Administrative overheads (100% fixed)- 5% of factory cost.

The fixed capital investment is Rs.12,00,000 and the working capital requirement is equivalent to 6 months stock of cost of sales of both the products. A return on investment of 20% is expected. The expected return on capital employed is (a) Rs.4,75,375 (d) Rs.4,50,275

(b) Rs.3,00,000 (e) Rs.5,80,500.

(c) Rs.5,44,219 (2 marks)

39. Sankar Ltd. manufactures tables for schools, restaurants, hotels and other institutions. The company manufactures tabletops and purchases four legs for each table from an outside supplier and assembles them. It takes 20 minutes of labor to assemble a table. The company follows a policy of producing enough tables to ensure that 40% of next month’s sales are in the finished goods inventory. The company also purchases sufficient raw materials to ensure that raw materials inventory is 60% of the following month’s scheduled production. The sales budget for tables in units for the first quarter is as follows:

< Answer >

April 2006 – 3,200 May 2006 – 3,500 June 2006 – 3,300 July 2006 – 3,000 The closing inventory in units for the month of March 2006 were as follows: Finished goods – 1,900 Raw materials (table legs) – 4,000 The number of table legs to be purchased in the month of May 2006 are (a) 10,000

(b) 11,040

(c) 19,440

(d) 13,104

(e) 12,940. (2 marks)

< Answer >

40. Limcy Ltd. manufactures plastic bags. The company’s directors have projected the following sales for the next three months: July 2006

2,10,000 units

August 2006

3,60,000 units

September 2006

4,10,000 units

Opening stock of finished goods on July 01, 2006 is 30,000 units. The company has some problems recently in supplying its customers promptly and the directors have decided to aim for a 10% increase in finished goods closing stock at the end of each of the three months. Each bag uses 1.5 kg of plastic that costs Rs.6 per kg. The stock of plastic on July 01, 2006 is 50,000 kg. The raw material is readily available, but in order to ensure that the company will not run out of stock, the directors would like to increase the closing stock of plastic by 10% each month for the next three months. The amount of raw material to be purchased during the month of September 2006 will be (a) Rs.37,58,970 (d) Rs.38,04,060

(b) Rs.42,10,260 (e) Rs.38,40,060.

(c) Rs.38,47,260 (2 marks) < Answer >

41. The two internal roles of management accounting are (a) (b) (c) (d) (e)

Supplying information and providing non-monetary awards Providing monetary and non-monetary awards Supplying information and preparing financial reports Supplying information and control procedures Preparing financial reports and providing non-monetary award. (1 mark) < Answer >

42. Which of the following statements about costs is not correct? (a)

Once recorded in the accounting system, costs can then be traced and allocated to one or more cost objectives (b) Costs are resources you receive from customers doing business with your organization (c) Costs are first recorded in a basic form, using accounts such as salaries, rent or taxes (d) Costs are measured in terms of monetary units paid for merchandise or services (e) Cost is an expenditure that can be real or notional. (1 mark) < Answer >

43. Which of the following terms is not used to describe cost allocation? (a) Retain

(b) Redistribute

(c) Assign

(d) Apply

(e) Charge. (1 mark)

44. A supervisor of Nise Ltd., who frequently makes decisions based on his personal preference for handling the task manages the material preparation department. These decisions are often in conflict with organizational objectives. This manager’s actions would be described as (a) Dysfunctional (c) Decentralized decision-making (e) Congruence.

< Answer >

(b) Cost center reductions (d) Irrational (1 mark)

45. Which of the following variances is of least significance from a behavioral control perspective?

< Answer >

(a)

Unfavorable material quantity variance amounting to 20% of the quantity allowed for the output attained (b) Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for the output attained (c) Favorable labor rate variance resulting from an inability to hire experienced workers to replace retiring workers (d) Favorable material price variance obtained by purchasing raw material from a new vendor (e) Fixed overhead volume variance resulting from management’s decision midway through the fiscal year to reduce its budgeted output by 20%. (1 mark) < Answer >

46. Transfer prices should not be based on actual costs because I. II.

Efficient producing divisions have higher costs of production. Inefficient producing divisions have higher costs of production, which would be passed on to buying divisions. III. Producing divisions have no incentives to control costs. IV. Inefficient units with high costs of production have no opportunity for profit. (a) Only (I) above (c) Only (III) above (e) Both (II) and (III) above.

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

47. Which of the following are pre-requisites of effective divisionalisation? I. II. III. IV.

The organization must have two or more units. The costs and revenues of each division can be measured separately. Each division is sufficiently independent of other divisions. Top management should not interfere too much in divisional matters.

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

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

48. When comparing performance report information of top management with that of lower level management (a) (b) (c) (d) (e)

Top management reports are more detailed Lower level management reports are typically for longer time periods Top management reports show control over fewer costs Lower level management reports are likely to contain more quantitative data and less financial data Top management reports are usually not of the exception type but present a complete analysis of all variances. (1 mark) < Answer >

49. Management by exception is best defined as (a) (b) (c) (d) (e)

Choosing exceptional managers Controlling actions of subordinates through acceptance by them of management techniques Investigating unfavorable variances Devoting management time to follow up on significant variances Controlling costs so that non-zero variances are quite exceptional. (1 mark)

< Answer >

50. The basic purpose of responsibility accounting system is (a) Control (d) Authority

(b) Budgeting (c) Motivation (e) Variance analysis. (1 mark)

51. Performance reports should be designed to meet organizational needs. In this regard, which of the following are normally included in performance reports? I. II. III. IV. V.

< Answer >

Specific time horizons. Strategic plans. Exceptional items those are controllable. A relationship to the organizational structure. A user focus.

(a) (I), (II) and (IV) above (c) (I), (II), (IV) and (V) above (e) All (I), (II), (III), (IV) and (V) above.

(b) (I), (II), (III) and (IV) above (d) (I), (III), (IV) and (V) above (1 mark)

52. Sharma Ltd. manufactures a single product at the operated capacity of 40,000 units while the normal capacity of the plant is 50,000 units per annum. The company has estimated 20% profit on sales realization and furnished the following budgeted information: 50,000 units (Rs.)

Particulars

40,000 units (Rs.)

Fixed overheads

2,00,000

2,00,000

Variable overheads

3,50,000

2,80,000

Semi-variable overheads

3,50,000

3,00,000

18,00,000

14,40,000

Sales realization

< Answer >

The company has received an order from a customer for a quantity equivalent to 10% of the normal capacity. It is noticed that prime cost per unit of product is constant. If the company desires to maintain the same percentage of profit on selling price, the minimum price per unit to be quoted for new order is (a) Rs.26.63

(b) Rs.37.60

(c) Rs.25.40

(d) Rs.25.56

(e) Rs.30.59. (2 marks)

< Answer >

53. Medicare Ltd. had the following sales for the last quarter ending March 2006: January 2006 : 50,000 units February 2006 : 40,000 units March 2006 : 60,000 units Selling price : Rs.100 per unit Target for next quarter: Sales quantity increases by 20% (over the previous quarter corresponding month’s quantity) Selling price increases by 10% (over the previous quarter corresponding month’s value) The organization’s collection policy was: 20% is cash sales, 40% of credit sales are received in the month following the month of sale, 30% of the credit sales in the 2nd month following the month of sales, 25% in third month following the month of sales and 5% of credit sales are bad debts. The company wants to change its credit policy from next month as: 30% is cash sales, 40% of sales collected in the following month of sales, then it estimates the balance can be received in the second month following the month of sales with a bad debts of 8% on the balance payable. Then collections amount in the month of May 2006 will be (a) Rs.64,20,000 (d) Rs.58,76,000

(b) Rs.64,64,000 (e) Rs.58,40,000.

(c) Rs.62,78,000 (2 marks)

54. Arvind Ltd. manufactures and sells product AL, has furnished the following information pertaining to the product AL:

< Answer >

Sales (units) 1,30,000 Material (Rs.) 6,25,000 Labor (Rs.) 5,00,000 Overheads (Rs.) 18,00,000 The fixed portion of capital employed is Rs.6,50,000 and the variable portion is 45% of sales turnover. The company desires to earn a profit of 10% on net capital employed, after payment of tax at 35%. The selling price per unit of product ‘RC’ is (a) Rs.25

(b) Rs.27

(c) Rs.19

(d) Rs.24

(e) Rs.23. (2 marks) < Answer >

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

Corporate Management generally consists of the departmental heads and/or the sub-divisional heads. II. Executive Management consists of managers responsible for certain product groups or markets or certain aspects of a function. III. Operating Management requires information on the production quantity and value, sales volume and price realization etc. (a) Only (I) above (c) Both (I) and (II) above (e) All (I), (II) and (III) above.

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

< Answer >

56. Consider the following data of Akash Ltd.: Gross profit is Rs.12,000, opening stock is Rs. 10,000, purchases is Rs.25,000 and closing stock is Rs.7,000, the assets include Fixed assets ( net block) of Rs.50,000, Investments in subsidiaries Rs.30,000, Cash in hand/bank is Rs.10,000 and the income from sale of goods is Rs.2,200 and expenses are Rs.2,300. The Return on Investment is (a) 17.76 %

(b) 12.37 %

(c) 16.78 %

(d) 18.97 %

(e) 17.91 %. (1 mark)

57. Anish Ltd. among other divisions has two divisions – the Machining division and the Assembly division. Machining division produces a part Z that Assembly division puts into the final product along with the other parts. In the latest general meeting, it was felt that Machining division could perhaps manufacture part Z at a lower cost of Rs. 12.00. But the problem came about when the head of the Assembly division expressed doubt that whether Machining Division can supply the required parts needed for final output in time. Accordingly, the President asked for quotes from various suppliers producing and supplying part Z. It was found that the average price quoted is Rs. 10.00. The suppliers were called upon for assuring about the quality of the input and timely supply, they assured that it can supply the input at zero lead time and at a discount of 5% to Rs. 10.00. When asked to the head of Machining division what is the last price, he can quote for part Z, he said that putting aside the fixed part of cost, he can supply at a price of Rs. 10.50. What should be the appropriate transfer price ? (a) Rs.12.00

(b) Rs.10.00

(c) Rs.9.50

(d) Rs.10.50

< Answer >

(e) Rs.9.00. (1 mark)

58. A system under which each superior-subordinate pair would develop six to eight major objectives mutually agreed upon is known as (a) Maslow’s Hierarchy of Needs (c) Management by Objective (e) Management by Intention.

< Answer >

(b) McGregor’s Theory X (d) Management by Combination (1 mark) < Answer >

59. When a ready market exists for a product, the appropriate basis of transfer pricing is the (a) Shadow price (d) Full cost

(b) Market price (c) Marginal cost (e) Negotiated price. (1 mark) < Answer >

60. Which of the following is a disadvantage of transfer price based on variable cost? (a) The transfer price does not reflect the true effort put in by the transferor division (b) The transfer will always be made at the variable cost thus demotivating the transferor division to make these internal sales (c) The transfer price will reduce the overall company profit as these sales, if made outside, would have generated profits (d) The transfer price will not reflect the fixed costs incurred by the transferor division, hence any additions/alterations towards fixed cost for the future improvement of the production processes is not accounted for (e) The variable cost may include some fixed costs.

(1 mark)

61. Senoy Ltd. pays commission to its salesmen in the month the company receives cash for sales, which is equal to 4% of the cash inflows. The company has budgeted sales of Rs.3,25,000 for May 2006, Rs,4,45,000 for June 2006 and Rs.4,85,000 for July 2006. 50% of the sales are on credit. Experience indicates that 70% of the budgeted credit sales will be collected in the month following the month of sales. 25% are expected to be realized in the second month following the month of sales and remaining 5% will be non-recoverable. The total amount of sales commission for the month of July 2006 is (a) Rs.17,555 (b) Rs.21,250 (c) Rs.18,750 (d) Rs.17,225

< Answer >

(e) Rs.15,650. (2 marks) < Answer >

62. Which of the following statements is/are true? I. A static budget is prepared and planned for a single level of activity. II. A flexible budget covers a range of activity within which the firm may operate. III. The activity measures shown in flexible budgets are the input standards allowed for various levels of output. (a) Both (I) and (II) above (c) Both (II) and (III) above (e) Only (III) above.

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

63. Consider the following projected information pertaining to Clearsoft Cosmetics Ltd. for its new product Activa during the year 2006-07: Variable cost

Rs. 4,30,000

Fixed cost

Rs.10,50,000

Average investment for the product

Rs.13,00,000

Production units

29,000 units

< Answer >

If the company desires to earn

20% return on investment, the selling price per unit should be (a) Rs.100.00

(b) Rs.83.33

(c) Rs.74.00

(d) Rs.60.00

(e) Rs.45.50. (1 mark)

64. Exotica Ltd. uses standard process costing method. The standard process cost card per month shows that < Answer > 3 hours of direct labor is required to produce one kg of finished product. The fixed overheads, which are recovered on direct labor hours, amount to Rs.180 per kg of output. The budgeted output is 1,000 kg per month. Actual production during the month of March 2006 is 950 kg and the direct labor hours utilized during the month were 3,300. The details of opening and closing work-in progress (WIP) are as under: Opening work-in-progress – 250 kg (Degree of completion of labor and overheads – 60%) Closing work-in-progress – 450 kg (Degree of completion of labor and overheads – 20%) The company uses FIFO method for evaluation of stocks. The fixed overhead efficiency variance is (a) Rs.37,800 (Adverse) (c) Rs.18,000 (Adverse)

(b) Rs.18,000 (Favorable) (d) Rs.7,200 (Favorable) (e) Rs.7,200 (Adverse). (2 marks)

65. Performance of machine tools division of Harsh Industries Ltd. is measured using the residual income method. The management has estimated the following cash flows for the division for the next year:

< Answer >

Particulars Rs. Investment in Plant and equipment 50,00,000 Investment in Working capital 24,00,000 Revenue 32,50,000 If the imputed cost is 10% and the management wants to achieve a residual income of Rs.6,25,000, the total costs, in order to achieve the target, would be (a) Rs.19,03,000 (d) Rs.15,11,600

(b) Rs.18,85,000 (e) Rs.9,17,000.

(c) Rs.17,09,500 (1 mark)

66. Manaksia Fashions Ltd. (MFL) sells a line of women’s wear. MFL’s performance report of March 2006 < Answer > is as follows: The company uses a flexible budget to analyze its performance and to measure the effect on operating income of the various factors affecting the difference between budgeted and actual operating income. Actual Budget Particulars 5,600

6,000

Sales (Rs.) Less: Variable costs (Rs.)

2,35,000 1,45,000

3,00,000 1,80,000

Contribution margin (Rs.) Less: Fixed costs (Rs.)

90,000 84,000

1,20,000 80,000

6,000

40,000

Dresses sold

Operating income

(units)

(Rs.)

The effect of the sales quantity variance on the contribution margin and the variable cost flexible budget variance for March 2006 are (a) Rs.20,000 (A) and Rs.23,000 (F) respectively (b) Rs. 8,000 (A) and Rs.15,000 (A) respectively (c) Rs.20,000 (A) and Rs.8,000 (F) respectively (d) Rs.8,000 (A) and Rs.23,000 (F) respectively (e) Rs.30,000 (F) and Rs.35,000 (F) respectively. (2 marks)

67. DK Ltd. manufactures two products – D and K, using same facilities and similar process. The company < Answer > has furnished the following information pertaining to two products for the year ending March 31, 2006. Particulars

Product D

Product K

Direct labor hours per unit

4

2.5

Machine hours per unit

5

4

Number of set ups during the period

12

18

Number of orders handled during the period

16

19

6,000

4,340

Production units

Total

production overhead costs for the period are as follows: Particulars Rs. Machine activity costs

2,40,000

Set-ups costs

57,000

Order handling costs

52,500 3,49,500

The absorption of total production overheads of both the products on the basis of a suitable cost driver, using Activity Based Costing method, is Product D Product K (a) Rs.2,06,827 Rs.1,42,637 (b) Rs.1,82,827 Rs.1,66,673 (c) Rs.2,06,827 Rs.1,42,673 (d) Rs.1,98,827 Rs.1,50,673 (e) Rs.1,81,133 Rs.1,68,367. (2 marks) < Answer >

68. Which of the following is an advantage of shadow price? (a)

The use of shadow price is incompatible with the philosophy of decentralization through divisionalization (b) To derive the shadow price, one has to obtain the dual solution to the mathematical programming model developed for solving the production planning problem of the buying division (c) Assimilating the data and application of the model becomes a highly centralized affair (d) Operating managers often do not understand and appreciate the concept of shadow price (e) Once the shadow prices of scarce resources are known, the value of the products can be readily obtained and these values can be used as transfer price. (1 mark) < Answer >

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

Any responsibility center which is responsible for the generation of revenue only is called the profit center. II. A responsibility center is a part of an organization where either the incurrence of cost or the generation of revenue or investment can be controlled. III. Any responsibility center that has control over the incurrence of cost is called the cost center. (a) Only (I) above (c) Both (I) and (II) above (e) Both (II) and (III) above.

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

70. Yamini Ltd. has a policy of maintaining a minimum cash balance of Rs.1,00,000 at the end of each month. Any deficit will be financed through bank borrowings and any surplus will be utilized to repay the outstanding bank borrowing and the balance will be invested in short-term securities. For this purpose, the company has an agreement with the bank to borrow in multiples of Rs.10,000 whenever a need arises subject to a maximum of Rs.2,00,000. The rate of interest is 12% per annum payable monthly on the amount borrowed.

< Answer >

50% of the sales are on credit and is expected to be collected in the month following the month of sales. 25% of the purchases are on credit and will be paid in the month following the month of purchases. The salaries and other expenses are to be paid in the month for which they relate. The following is the budgeted information for the quarter ending June 2006: Particulars

April 2006 (Rs.)

May 2006 (Rs.)

June 2006 (Rs.)

Sales

40,000

50,000

1,00,000

Purchases

30,000

40,000

40,000

Salaries

60,000

70,000

50,000

Manufacturing and other administrative expenses

25,000

20,000

15,000

If the closing cash balance for the month of April 2006 is Rs.1,02,000, the cash balance as on July 01, 2006 will be (a) Rs.1,07,500 (b) Rs.1,01,500 (c) Rs.1,06,500 (d) Rs.1,02,500 (e) Rs.1,08,600. (2 marks) 71. In transfer price arbitration, a committee is set up whose function involves all of the following except (a) (b) (c) (d) (e)

< Answer >

To settle transfer price disputes To negotiate the final selling price for the product with the customers To review sourcing changes To meet that price which brings some degree of parity between the transferor division and transferee division To change the transfer price rules where appropriate. (1 mark)

72. According to Abraham Maslow, a satisfied need is not a motivator of behaviour. So, when the lowest level of need, _____________ need is satisfied, the individual moves on to the next level in the need hierarchy, which is ________ (a) (b) (c) (d) (e)

< Answer >

Physiological ; Social need Physiological ; Need for safety Safety ; Self-esteem need Physiological ; Self-actualization need Self-esteem; Self-actualization need. (1 mark)

73. Which of the following is false with respect to Return on Investment (ROI) and Residual Income (RI)?

< Answer >

(a)

In case of RI, there is a problem of defining the minimum required rate of return associated with various investment opportunities (b) ROI can be readily employed for inter-divisional comparisons (c) A project will be rejected under ROI method and accepted under RI method if the rate of return from such project is more than the minimum required rate of return but less than the current ROI (d) RI is the rate of return which a division is able to earn above the minimum required rate of return on operating assets (e) Under RI approach, the larger divisions will be expected to have more RI than the smaller divisions. (1 mark) 74. The following is the statement showing operating income of Dyeing division of Leo Garments Ltd.: Particulars

Rs.

Sales

1,76,000

Variable manufacturing costs

1,40,000

Administrative expenses

< Answer >

25,000

Selling expenses

4,000

Operating income

7,000

The sales include cloth transferred to Printing division at manufacturing cost of Rs.20,000. The common administrative expenses of Rs.5,000 and common selling expenses of Rs.2,000 are apportioned to the Dyeing division. If the internal transfer is at market price, the operating income of Dyeing division using contribution approach is (a) Rs.13,000 (b) Rs.20,000 (c) Rs.14,000 (d) Rs.42,000 (e) Rs.12,000. (2 marks)

Suggested Answers Management Accounting – II (152): April 2006 1.

< TOP > Answer : (c) Reason : No single method of transfer pricing is applicable across the board. In developing a system of transfer pricing for any particular situation, the factors needed to be considered are existence of competitive market (a), Sourcing constraint (b), Quantum of transfer (d) and Capacity level of selling division (e). Movability constraint (c) i.e. movement of the product from department to department is not a factor having relation with transfer pricing in any way. Hence (c) is not considered.

2.

< TOP > Answer : (b) Reason : Land being held by the division as a site for new plant is not an operating asset and hence will not be considered in the calculation of residual income.

3.

< TOP > Answer : (d) Reason : When we look into the relationship between full cost and contribution margin pricing we can conclude that although the full cost pricing and contribution margin based approach for pricing are considered distinctively different approaches, by and large, they represent to a certain degree, cost plus pricing. Hence statement (e) is true. They are considered complementary to each other but not competing. Hence statement (a) is true. In both the pricing models fixed costs are considered important. Hence option (c) is true. In both the methods, the selling prices proposed must be only tentative and they are always subjective. Hence statement (b) is also true. However, Full cost pricing makes a normal mark up on total costs and it does not take volume of production into consideration. On the other hand contribution margin approach to pricing is concerned about cost. Hence statement (d) that states that Contribution margin method also makes a normal markup on total costs is false.

4.

< TOP > Answer: (b) Reason: The credit sales will be added and cash received from debtors will be deducted in the debtors budget. In cash budget, only cash received from debtors will be indicated. Neither the credit sales nor cash received from debtors will be indicated in creditors budget, raw material budget and production budget. Thus the answer is (b).

5.

< TOP > Answer : (c) Reason : While preparing a performance report for a cost center using flexible budgeting techniques, the planned cost column should be based on budget adjusted to the actual level of activity for the period being reported.

6.

< TOP > Answer : (c) Reason : A fixed budget is not prepared for a range, rather it is used unaltered during the budget period. It is prepared for a particular activity level and it does not change with actual activity level being higher or lower than the budgeted activity level.

7.

< TOP > Answer : (b) Reason : Flexible budgets allow managers to adjust budget estimates on a timely basis to reflect fluctuations from expected activity level, hence are dynamic in nature. Such budgets address “What is” rather than “What was” or “What was expected”. Hence option (b) is correct. All other options (a), (c), (d) and (e) are incorrect.

8.

< TOP > Answer : (d) Reason : Material price variance arises due to purchase of substitutes at different prices. It does not arise due to pilferage or defective material. Other statements mentioned in (a), (b), (c) and (e) are false.

9.

< TOP > Answer : (a) Reason : Due to some unforeseen circumstances, it may be necessary to alter a standard during an accounting period. Once a standard has been set, it is undesirable that it should be changed, because this affects budgets, standard costs, etc. Therefore, it is often preferable to create a revision variance, which segregates the difference due to this factor.

< TOP > 10 Answer : (a) . Reason : Fixed overhead volume variance = Budgeted fixed overheads cost ~ Applied fixed overheads cost

=

Rs.22,500 ~

=

Rs.22,500 ~ Rs.22,920

=

Rs.420 (F), Other options (b), (c), (d) and (e) are not correct.

< TOP > 11 Answer : (b) . Reason : Payment for March 2006 purchases were Rs.100,000 × 0.6 = Rs.60,000, which leaves Rs.80,000 to apply to January 2006 and February 2006. The ratio of the balance for January 2006 and February 2006 is 1:3. February 2006 purchases were ((Rs.80,000 × 0.75) ÷ 0.3) = Rs.2,00,000. January 2006 purchases were ((Rs.80,000 × 0.25)) ÷ 0.1) = Rs.2,00,000. < TOP > 12 Answer : (e) . Reason : Operating management is mainly concerned with the production. Therefore, information relating to production is important to the operating management. Therefore, all the information relating to production, mentioned in (a), (b), (c) and (d) are important to the operating management. < TOP > 13 Answer : (a) . Reason : Fixed overhead expenditure variance = Budgeted expenses ~ Actual expenses = Rs.4,00,000 ~ Rs.3,60,000 = Rs.40,000 (F) Direct labor efficiency variance = Standard rate (Actual time ~ Standard time) = Rs.10 (94,000 ~ 40 hours × 2,250 units) = Rs.10 (4,000 hrs) = Rs.40,000 (A). < TOP > 14 Answer : (b) . Reason : An organized creative approach, which emphasizes efficient identification of unnecessary cost i.e. cost that provides neither quality, nor use, nor life, nor appearance, nor customer’s satisfaction is known as value-analysis.

< TOP >

15 Answer : (e) . Reason : Level of activity Units a. b. c.

Variable cost Semi variable cost Variable portion Fixed portion Fixed cost Total cost

Level of activity Units

90% 2,700 (Rs.) 4,05,000 18,000 85,000 2,70,000 7,78,000 90% 2,700 (Rs.) 9,45,000 7,78,000 1,67,000 61.85

i.

Sale Price (Rs.350) Less: Total cost Profit Profit per unit

ii.

Sale price reduced by 10% (i.e., Rs.315) Less: Total cost Profit Profit per unit

8,50,500 7,78,000 72,500 26.85

< TOP > 16 Answer : (d) . Reason : A difficulty in applying ABC is that, whereas the unit level, batch level and product level costs of activities pertain to specific products or services, facility level costs do not. Thus facility level costs are not accurately assignable to products. The theoretically sound solution is to treat them as period costs. Nevertheless, Organizations that apply ABC ordinarily assign them to products to obtain a full absorption costs suitable for external reporting. However, for internal purposes, facility level costs should be treated as period costs to avoid distorting decisions about cost efficiency, pricing and profitability. < TOP > 17 Answer : (d) . Reason : Target pricing and costing may result in a competitive advantage because it is customer-oriented approach that focuses on what products can be sold at what prices. Hence (d) is the answer. It is also advantageous because it emphasizes control over costs prior to their being locked in during the early links in the value chain. The company sets a target price for a potential product reflecting what it believes consumer will pay and competitors will do. After subtracting the desired profit margin, the long-run target cost is known. If current costs are too high to allow an acceptable profit, cost-cutting measures are implemented or the product is abandoned. The assumption is that target price is the constraint. Option (a) is incorrect because target pricing is used on products that have not yet been developed. Option (b) is incorrect because target pricing includes all costs. Option (c) is incorrect because target pricing can be used in any situation but is most likely to succeed when costs can be well controlled. Option (e) is not correct because it is difficult to use with complex products that require many sub-assemblies such as automobiles. This is because tracking costs becomes too complicated and tedious, and cost analysis must be performed at so many levels.

< TOP > 18 Answer : (d) . Reason : Return on investment (ROI) equals to income divided by invested capital. If a firm is already profitable, increasing sales and expenses by the same percentage will increase the ROI. Other options given in (a), (b), (c) and (e) are not correct. < TOP > 19 Answer : (e) . Reason : Full cost pricing method is used if a company does not have the basic idea of demand for the product. It is not used to recover the only fixed costs or only variable cost. It is not used to recover market price plus mark-up or standard cost plus mark-up. < TOP > 20 Answer : (d) . Reason : The costs associated with quality of conformance generally can be classified into four types. Prevention costs and appraisal costs which occur because a lack of quality of conformance can exist. Internal failure costs and external failure costs occur because a lack of quality of conformance does exist. Hence option (d) is correct. All other options (a), (b), (c) and (e) are incorrect. < TOP > 21 Answer : (d) . Reason : Unlike variable costs, which remain unchanged per unit within the relevant range of activity, the fixed cost per unit varies inversely with activity. Therefore, the planned level of activity serves as the denominator for determining the standard fixed overhead rate. The difference between the actual variable-overhead rate and the standard variable-overhead rate multiplied by the actual hours of an activity base is called the variable-overhead spending variance, and can be expressed as AH(AVRSVR). The variable-overhead efficiency variance says nothing about efficient or inefficient usage of variable overhead. It simply reflects that the firm used more of the activity measure than planned. The spending variance is the real control variance for variable overhead. Statements (I) and (III) are true, while statement (II) is false. Hence the correct answer is (d). < TOP >

22 Answer : (a) . Reason : Capacity Utilization ratio =

× 100

= × 100 = 98.33%

< TOP > 23 Answer : (e) . Reason : Promotion of employees without proper authorization by personal favoritism or supervisors leads to labor rate variance as they are paid rates fixed for higher job classification. Hence (e) is false. Insufficient training is a reason for labor efficiency variance. When workers are not able to do the work due to some reason during the hours for which they are paid, it results in idle time variance. High labor turnover is a reason for labor efficiency variance and different rates being paid to workers employed to meet seasonal demands leads to labor rate variance. < TOP > 24 Answer : (b) . Reason : The number of standard hours equivalent to the work produced expressed as a percentage of the budgeted standard hours is known as activity ratio.

< TOP >

25 Answer : (a) . Reason : Fixed costs

Rs. 8,00,000

Return on capital employed (Rs.75,00,000 x 18%)

Rs.13,50,000

Residual income desired

Rs.10,00,000

Total desired contribution

Rs.31,50,000

Contribution per unit from outside sales = Rs.200 – Rs.170 = Rs.30 per unit Total contribution from outside sales = Rs.30 per unit × 1,00,000 units = Rs.30,00,000 Minimum contribution to be earned from supply to division B = Rs.31,50,000 – Rs.30,00,000 = Rs. 1,50,000 Contribution per unit on additional 20,000 units = = Rs.7.50 per unit Variable cost for minor modification = Rs.12 per unit Minimum transfer price per unit to be quoted = Rs.170 + Rs.7.50 + Rs.12 = Rs.189.50. < TOP >

26 Answer : (c) . Reason : Let, sale value = x 0.134x = 0.134x = 0.2x = 0.65x – Rs.3,15,000

0.67

x = Rs.3,15,000 ÷ 0.45 = Rs.7,00,000 Sale price per unit = Rs.7,00,000 ÷ 20,000 units = Rs.35 Net sale price = Rs.35 × 0.65 = Rs.22.75 < TOP >

27 Answer : (a) . Reason : Cash inflows in the month of: August 2006 – Rs.1,50,000 × 10% + 1,50,000 × 90% ×40% = Rs.15,000 + Rs.54,000 =

Rs. 69,000

Credit sales in July 2006 = Rs.1,35,000 × 90% × 30% =

Rs. 36,450

Credit sales in June 2006 = Rs.1,20,000 × 90% × 20% =

Rs. 21,600

Credit sales in May 2006 = Rs.1,00,000 × 90% × 5% =

Rs.

Total cash inflow

Rs.1,31,550

4,500

< TOP >

28 Answer : (b) . Reason : Fixed overhead recovery rate = Particulars

Rs.

Budgeted fixed overhead

81,000

Add: Fixed overhead expenditure variance

2,500

Actual fixed overhead

83,500

Absorbed overhead Actual fixed overhead – under-absorbed overhead = Rs.83,500 – Rs.8,980 = Rs.74,520

=

Actual production = < TOP >

29 Answer : (c) . Reason : Capacity Production (units) Material Labor Variable overheads Factory Administrative Total variable cost Fixed overheads Factory Administrative

Sale price per unit Sales value Profit Profit per unit

50% 5,000 (Rs.) 50 15

60% 6,000 (Rs.) 51 15

80% 8,000 (Rs.) 52.50 15.00

9 5 79 3,95,00 0

9 5 80 4,80,00 0

9.00 5.00 81.50 6,52,000

30,000 25,000 4,50,00 0 100 5,00,00 0 50,000 10.00

30,000 25,000 5,35,00 0 100 6,00,00 0 65,000 10.83

30,000 25,000 7,07,000 92 7,36,000 29,000 3.62 < TOP >

30 Answer : (b) . Reason : Standard cost per unit of output =

=

= Rs.4.50

Material yield variance = (Actual yield – Standard yield for actual input) × Standard cost per unit of output = (A)

× Rs.4.50 = (3,648 ~ 3,840) × 4.50 = 192 × 4.50 = Rs.864

< TOP > 31 Answer : (b) . Reason : For a single-product company, the sales volume variance is the difference between flexible budget and master budget sales quantity, times master budget unit contribution margin. This amount can also be calculated for each product in a sales mix, and the results are added to determine the total sales volume variance. This variance may be further decomposed into quantity and mix variances. Other options are incorrect. < TOP >

32 Answer : (c) . Reason : Material

–

Rs.2.00

Labor

–

Rs.3.00

* Variable overhead

Rs.4.50

** Fixed overhead

Rs.4.50

Cost per unit

Rs.14.00

* Increase in overhead from 15,000 to 25,000 units is Rs.45,000. Therefore, Rs.4.50 per unit or Rs.9 per hour (Rs.45,000 ÷ 10,000) ** Total overhead at 25,000 units is Rs.2,02,500, of which Rs.1,12,500 must be variable (i.e.25,000 × Rs.4.50). Remainder of Rs.90,000 must be fixed. Budget for overhead is Rs.90,000 + Rs.9 per hour or Rs.90,000 + Rs.4.50 per unit Overhead efficiency variance = Budget 10,700 hours ∼ budget at 22,000 units. = (10,800 × Rs.9 + Rs.90,000) ∼ (21,000 × Rs.4.50 + Rs.90,000) = Rs.1,87,200 ∼ Rs.1,84,500

= Rs.2,700 (A)

Overhead capacity variance = Budget at 22,000 units ∼ overhead applied = (21,000 × Rs.4.50 + Rs.90,000) ∼ (21,000 × Rs.9) = Rs.1,84,500 ∼ Rs.1,89,000

= Rs.4,500 (F)

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33 Answer : (b) . Reason : Standard/ Budgeted data: Budgeted fixed overheads (Rs.) Budgeted output units Budgeted hours Budgeted days Standard labor hours per unit Standard hours worked per day Standard overhead rate per unit (Rs.) Standard overhead rate per hour (Rs.) Standard fixed overhead rate per day (Rs.) Actual fixed overheads (Rs.) Actual output units Actual hours Actual days = incurred) =

1,50,000 5,000 20,000 25 4 800 30 7.50 6,000

Actual data

1,45,000 4,500 18,000 24

The total fixed overhead variance (Fixed overhead recovered on actual output ~ Actual fixed overhead (4,500 units × Rs. 30 ~ Rs. 1,45,000) = Rs. 10,000 (A)

Calendar variance =

Standard fixed overhead rate per day × (Actual days – Budgeted days)

=

Rs. 6,000 × (24 days ~ 25 days)

= Rs. 6,000 (A)

< TOP > 34 Answer : (b) . Reason : Standard variable overhead rate = Rs.4,86,000 ÷ 2,16,000 hrs = Rs.2.25 per hour

Standard hours per unit = 2,16,000 hours ÷ 2,40,000 units = 0.9 hours Fixed overhead rate per unit = Rs.14,88,000 ÷ 2,40,000 units = Rs.6.20 Variable overhead efficiency variance: = (Standard hours for actual production ~ Actual hours) × Standard rate per hour = (2,20,000 units × 0.9 hours ∼ 1,94,920) × Rs.2.25 = 3,080 × Rs. 2.25 = Rs.6,930 (F) Fixed overhead volume variance = (Actual output ∼ Budgeted output) × Standard rate = (2,20,000 units ∼ 2,40,000 units) × Rs.6.20 = 20,000 units × Rs.6.20 = Rs.1,24,000 (A).

< TOP > 35 Answer : (c) . Reason : Actual cost Standard material cost = Actual material cost + Favorable material price variance +Favorable material usage variance Standard wages = Actual wages paid + favorable labor efficiency variance – adverse labor rate variance – adverse labor idle time variance

Particulars

Total

Per unit

Standard material cost (34,000 + 1,800 + 1,575) Standard wages (48,750 + 2,575 – 1,875 – 700)

37,37 5 48,75 0

5.75 7.50

Total

86,12 5

13.25

36 Answer : (a) . Reason : Total labor cost 5 × Rs. 6,000

< TOP >

= Rs. 30,000

Cost of parts Total variable cost Target profit Fixed cost

= Rs. 45,000 Rs.75,000 = Rs. 20,000 = Rs. 25,000 = Rs. 45,000

Mark up %

= Rs. 45,000 ÷ Rs. 75,000 = 60%

Mark up on labor cost

=

60% of Rs. 30,000 = Rs. 18,000 < TOP >

37 Answer : (e) . Reason : Particulars Fixed cost (Rs. Rs.1,73,000 + Rs.1,60,000) Add: expected return (Rs.7,60,000 + Rs.5,00,000) ×25% Contribution

Rs. 3,33,000 3,15,000 6,48,000 Total

labor hours: Product A: (3 × 4,000 units) Product B: (4 × 6,000 units) Total labor hours

12,000 24,000 36,000

Contribution per labor hour =

= Rs.18 per labor hour. Calculation of selling price of product B: Particulars Variable cost other than labor (Rs.2,70,000 ÷ 6,000 units) Direct labor (Rs.4.50 × 4 hours) Contribution (Rs.18 ×4) Selling price

Rs. 45 18 72 135

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38 Answer : (a) . Reason :

A B Particulars Total Variable Total Variable cost cost cost cost Direct material 40.0 40.0 47.00 47.0 Direct labor 36.0 36.0 27.00 27.0 Factory overheads 36.0 14.4 27.00 10.8 Total factory cost 112.0 90.4 101.00 84.8 Administrative overheads 5.6 5.05 Selling overheads 5.0 2.0 10.00 4.0 Total cost per unit 122.6 92.4 116.05 88.8 Total cost = (Rs.122.6 × 5,000 units) + (Rs.116.05 × 15,000 units) =Rs.23,53,750 Particulars Fixed capital Working capital (Rs.23,53,750 × 6/12) Total capital employed

Rs. 12,00,000 11,76,875 23,76,875 Expected Expected return = Rs.23,76,875 × 20% = Rs.4,75,375.

ROI

=

20%; < TOP >

39 Answer : (d) . Reason : Production of tables for the month of May 2006: 3,500 + 40% of 3,300 = 3,500 + 1,320 = Less: Opening stock (40% of 3,500) Production Production of tables for the month of June 2006: 3,300 + 40% of 3,000 = 3,300 + 1,200 = Less: Opening stock Production

4,820 1,400 3,420 4,500 1,320 3,180 Legs for

May 2006: 4 × 3,420 + 60% of 3,180 × 4 = 13,680 + 7,632 = Less: Opening stock – 60% of 3,420 × 4 To be purchased

21,312 8,208 13,104

< TOP > 40 Answer : (a) . Reason : Finished goods: Closing stock at end of July must be 10% higher than at the beginning of the month: 30,000 × 110% = 33,000 units. (Closing stock for July is the same as opening stock for August.) Closing stock at end of August must be 10% higher than at the beginning of the month: 33,000 × 110% = 36,300 units.

Closing stock at end of September must be 10% higher than at the beginning of the month: 36,300 × 110% = 39,930 units. Production in the month of September 2006 is Closing stock + Sales - Opening stock = 39,930 + 4,10,000 – 36,300 = 4,13,630 units Raw materials: Opening stock of raw material at beginning of July = 50,000 kg × Rs.6.00 = Rs.3,00 000 Closing stock at end of July must be 10% higher than opening stock = Rs.3,00,000 × 110% = Rs.3,30,000 Closing stock at end of August must be 10% higher than opening stock: = Rs.3,30,000 × 110% = Rs.3,63,000 Closing stock at end of September must be 10% higher than opening stock: = Rs.3,63,000 × 110% = Rs.3,99,300 Purchases in the month of September 2006 is Closing stock + Raw materials used in production – opening stock = Rs.3,99,300 + (4,13,630 × 1.5 × Rs.6) – Rs.3,63,000 = Rs.37,58,970 < TOP > 41 Answer : (d) . Reason : Generally accountancy is the language of the business through which different information can be provided to different groups of people. In case of Management accountancy the recipient of the information is Management. Obviously the purpose of Management accountancy is to facilitate the functions of the recipient of information i.e. management which includes control. So ,the two internal roles of management accounting are to supply information to assist managers in making better planning decisions and using management accounting information as controls to ensure the organization's members are acting in the organization's best interest. Hence (d) is correct. < TOP > 4 Answer : (b) 2. Reason : Cost accounting is the process of accounting for costs. Cost is an expenditure that can be real or notional. Costs are measured in terms of monetary units paid for merchandise or services. Costs are first recorded in a basic form, using accounts such as salaries, rent, or taxes. Once recorded in the accounting system, costs can then be traced and allocated to one or more cost objectives. Revenues are what you receive from customers doing business with you. Costs are resources you must give up to run your organization. Therefore, (b) is the answar. < TOP > 43 Answer : (a) . Reason : Redistribute, apply, and assign are terms that can be used interchangeably with the phrase “cost allocation.” All of the terms focus on distributing operating costs to other organization departments or activities. To “retain” costs is to prevent costs from being distributed.

< TOP > 44 Answer : (a) . Reason : Although he might have responsibility and authority to make decisions about material preparation, the supervisor’s behavior is dysfunctional because his actions conflict with organizational goals. < TOP > 45 Answer : (e) . Reason : Most variances are of significance to someone who is responsible for that variance. However, a fixed overhead volume variance is often not the responsibility of anyone other than top management. The fixed overhead volume variance equals the difference between budgeted fixed overhead and the amount applied (standard rate x standard input allowed for the actual output). It can be caused by economic downturns, labor strike, bad weather, or a change in planned output. Thus, a fixed overhead volume variance resulting from a top management decision to reduce output has fewer behavioral implications than other variances. Answer (a) is incorrect because an unfavorable materials quantity variance affects production management and possibly the purchasing function. It may indicate an inefficient use of materials or the use of poor quality materials. Answer (b) is incorrect because an unfavorable labor efficiency variance reflects upon production workers who have used too many hours. Answer (c) is incorrect because a favorable labor rate variance related to hiring is a concern of the personnel function. The favorable rate variance might be more than offset by an unfavorable labor efficiency variance or a materials quantity variance (if waste occurred). Answer (d) is incorrect because the purchasing function is responsible for a favorable materials price variance. < TOP > 46 Answer : (e) . Reason : Producing divisions have no incentives to control costs and hence in order to keep the producing division from passing costs resulting from inefficient operations to the buying division, the producing division should base their cost calculations on standard costs rather than actual costs. Therefore the correct option is (e) < TOP > 47 Answer : (e) . Reason : The pre-requisites for effective divisionalisation include that the organization must have two or more units for which the costs and revenues of each division can be measured separately, each division is sufficiently independent of other divisions and top management should not interfere too much in divisional matters. Therefore, (e) is correct < TOP > 48 Answer : (d) . Reason : The reports for the lower level of management are fairly detailed though limited in scope and they are quantitative in nature. The reports for the top management are highly summarized with financial data. < TOP > 49 Answer : (d) . Reason : Management by exception is a system of identification and communication that signals the managers when his attention is needed (that is when there are variances significant or large from the planned events) by devoting management time to follow up on significant variances. < TOP > 50 Answer : (b) . Reason : The basis of a responsibility accounting system is the designation of each subunit in an organization as a particular type of responsibility center. The performance of each responsibility center is summarized periodically on a performance report. It shows the budgeted and actual amounts of key financial results appropriate for the type of responsibility center involved. Therefore, the main purpose of responsibility accounting is budgeting.

< TOP > 51 Answer : (d) . Reason : Performance reports should be related to the organizational structure and it should have a user focus. It should have specific time horizons and all controllable items should be included in the performance report, even extraordinary items. Strategic plans, however, are not included in a performance report because they are long-range and concern the environment in which the organization operates.

52 Answer : (a) . Reason : Working Note – 1:

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Computation of prime cost

Particulars Sales (40,000 units) Less: Profit margin – 20% Cost of sales – (80% of Rs.14,40,000) Less: Variable overheads – Rs.2,80,000 Semi-variable overheads – Rs.3,00,000 Fixed overheads – Rs.2,00,000 Prime cost Semi-variable overheads: Variable cost =

Rs. 14,40,000 2,88,000 11,52,000 7,80,000 3,72,000 Working Note – 2:

=

= = Rs.5 per unit At 40,000 units: Fixed cost = Total cost – Variable cost = Rs.3,00,000 – 40,000 units × Rs.5 = Rs.1,00,000 At 45,000 units:

Total cost = 45,000 units × Rs.5 + Rs.1,00,000 = Rs.3,25,000

Computation of differential cost of production of 5,000 additional units (i.e. 10% of normal capacity): Element of cost Prime cost – (Working Note 1) Variable overhead Semi variable overhead (Working Note 2) Fixed overhead

40,000 units (Rs.) 3,72,000 2,80,000

45,000 units (Rs.) 4,18,500 3,15,000

Differential cost for 5000 units (Rs.) 46,500 35,000

3,00,000

3,25,000

25,000

2,00,000 11,52,000

2,00,000 12,58,500

1,06,500

Cost per unit of new order = = Rs.21.30 Profit margin 25% (20% on sale = 25% on cost) = Rs. 5.33 Minimum selling price per unit = Rs.26.63. < TOP > 53 Answer : (b) . Reason : Sales receipts in the month of May 2006 = Cash sales of May + 40% of the sales of April + 25% of credit sales of February + 30% of the credit sales of March = 30% of 48,000 @Rs.110+40% of 60,[email protected]+25% of (40,000 – 20% of 40,000) @ Rs.100+30% of (60,000-20% of 60,000)@Rs.100 = Rs.15,84,000+Rs.26,40,000+Rs.8,00,000+Rs.14,40,000 = Rs.64,64,000.

54 Answer : (a) . Reason : Total cost = Rs.6,25,000 + Rs.5,00,000 + Rs.18,00,000 =Rs.29,25,000 ∴ Cost per unit =

< TOP >

= Rs.22.50

Suppose the selling price per unit is x ∴ Sales turnover

= 1,30,000x

Variable portion of capital employed 0.45 × Rs.1,30,000x = Rs.58,500x Fixed portion of capital employed = Rs.6,50,000 Total capital employed = (Rs.6,50,000 + Rs.58,500x) or Capital employed per unit = (Rs.6,50,000 + Rs.58,500x) ÷ 1,30,000units = Rs.5 + 0.45x Profit before tax = Post tax profit per unit = 15.38% (Rs.5 + 0.45x) = Re.0.77 + 0.07x Unit selling price = Total cost per unit + Profit on capital employed per unit x = Rs.22.5 + Re.0.77 + 0.07x Or 0.93x = Rs.23.27 or x = Rs.25.02 =Rs.25 < TOP > 55 Answer : (d) . Reason : Statement (I) is not true as corporate management consists of board of directors, chief executive and the functional heads. Statement (II) is true of Executive management. Similarly, Statement (III) is true as to the information required by operating management. So, the correct answer is (d). < TOP > 56 Answer : (a) . Reason : Operating Assets = Fixed assets + closing stock + Cash in hand/bank (Investment in subsidiaries is not taken in the calculation of Operating assets as it is not an operating asset) = Rs.50,000 + Rs.10,000 + Rs.7,000 = Rs. 67,000

Operating income = Gross profit + Income from the sale of the goods– expenses = Rs.12,000 + Rs.2,200 – Rs.2,300 = Rs. 11,900 So, ROI = Operating Income/ Operating Assets = Rs.11,900 ÷ Rs.67,000 = 17.76 %. < TOP > 57 Answer : (c) . Reason : The appropriate transfer price for a product which is readily available in the market is the price quoted in the market. In this case, since the outside supplier is willing to supply the product at a discount of 5 % , ie, at Rs. 9.50, this is the appropriate transfer price. < TOP > 58 Answer : (c) . Reason : Under management by objective, each superior-subordinate pair would develop six to eight major objectives which are mutually agreed upon. Hence, the correct option is (c). < TOP > 59 Answer : (b) . Reason : When a product has a ready market, the appropriate transfer price will be the market price. So, the correct answer is (b).

< TOP > 60 Answer : (b) . Reason : The transfer will always be made at the variable cost thus demotivating the transferor division to make these internal sales as they cannot realize any profits on these internal transfers. So, the correct answer is (b). < TOP >

61 Answer : (a) . Reason : Cash sales for July2006 (Rs.4,85,000 x 0.5) Cash flows for the credit sales in the month of May 2006 (Rs.3,25,000 x 0.5 x 0.25) Cash flows for the credit sales in the month of June 2006 (Rs.4,45,000x 0.5 x 0.7)

Rs.2,42,500 Rs.40,625 Rs.1,55,750 Rs.4,38,875

Total commission payable to salesmen = Rs.4,38,875 x 4% = Rs.17,555 < TOP > 62 Answer : (a) . Reason : A static budget is prepared and planned for a single level of activity and a flexible budget covers a range of activity within which the firm may operate. So, these statements are true. Statement (III) is false. So, the correct answer is (a). < TOP >

63 Answer : (d) . Reason : Selling price of the product Activa Variable costs

Rs.4,30,000

Fixed costs

Rs.10,50,000

Total costs

Rs.14,80,000

Add: Return on investment (20% on Rs.13,00,000)

Rs. 2,60,000

Total sales

Rs.17,40,000

Selling price per unit = Rs.17,40,000÷ 29,000 units = Rs.60 per unit. < TOP >

64 Answer : (a) . Reason: Completed stock:

Kg.

From opening work-in-progress 250 Closing work-in-progress 450 Current production 700 Total fixed overheads per Kg. = Rs.180 No. of direct labor hours per Kg. = 3 Budgeted rate per hour = Rs.60

Degree of completion 40 % 20 % 100 %

Overheads 100 90 700 890 Budgeted

Standard hours for actual production = 890 × 3 = 2,670hours Fixed overhead efficiency variance = (Standard hours for actual production – Actual hours) x budgeted rate per hour = (2,670 hours – 3,300 hours) × Rs.60 = 630 hrs × Rs.60 = Rs.37,800 (A)

< TOP > 65 Answer : (b) . Reason : Residual income = ROI - targeted amount equal to an imputed interest charge on invested capital. Total investment = Rs.50,00,000 + Rs.24,00,000 =Rs.74,00,000 Imputed interest charge = 10% on Rs.74,00,000 = Rs.7,40,000 Residual income = Rs.6,25,000 Total profit = Rs.13,65,000 Revenue = Total costs + Target profit Total costs = Revenue – Target profit = Rs.32,50,000 – Rs.13,65,000 = Rs.18,85,000. < TOP > 66 Answer : (d) . Reason: The sales quantity variance is the difference between the actual and budgeted units, times the budgeted unit contribution margin. (5,600 ~ 6,000) × Rs. 1,20,000 ÷ 6,000 = Rs. 8,000 (A). The variable cost flexible budget variance is equal to the difference between actual variable costs and the product of the actual quantity sold and the budgeted unit variable cost (Rs.1,80,000 ÷ 6,000 = Rs.30) (Rs. 30 × 5,600) – Rs. 1,45,000 = Rs.1,68,000 ~ Rs.1,45,000 = Rs. 23,000 (F). < TOP >

67 Answer : (d) . Reason: Machine activity cost per hour =

Setups cost per set up =

per set up

Order handling cost per order = Particulars Machine activity cost Setups cost Order handling cost

Product D (Rs.)

per order Product K (Rs.)

1,52,027

87,973

22,800 24,000 1,98,827

34,200 28,500 1,50,673

< TOP > 68 Answer : (e) . Reason : An advantage of shadow price is that if the shadow price of scarce resources are known, the value of the products can be readily obtained and these values can be used as transfer price. The other options are not advantages of shadow price. So, the correct answer is (e). < TOP > 69 Answer : (e) . Reason : Any responsibility center responsible for the generation of revenue only is called the revenue center and not the profit center. So, statement (I) is false. The other statements are true. So, the correct answer is (e).

70 Answer : (e) . Reason :

< TOP >

Particulars May June Opening cash balance 1,02,000 1,09,500 Cash sales 25,000 50,000 Collection of credit sales 20,000 25,000 Cash inflows 1,47,000 1,84,500 Cash purchases 30,000 30,000 Payment to creditors 7,500 10,000 Salaries 70,000 50,000 Expenses 20,000 15,000 Interest (Rs.90,000 × 12% × 1/12) 900 Cash outflows 1,27,500 1,05,900 Closing balance before borrowings 19,500 78,600 Borrowings * 90,000 30,000 Surplus Closing balance 1,09,500 1,08,600 *As the closing balance before borrowings in May 2006 is Rs.7,500, it needs to borrow Rs.80,500 to make the cash balance to Rs.1,00,000. However as the agreement with the bank provides to borrow in multiples of Rs.10,000, the company should borrow Rs.90,000 at the end of May 2006. Similarly, for the month of June 2006, the company is required to borrow Rs.30,000 < TOP > 71 Answer : (b) . Reason : In transfer price arbitration, a committee is set up whose function involves : (a) To settle transfer price disputes (b) To review sourcing changes (c) To meet that price which brings some degree of parity between the transferor division and transferee division (d) To change the transfer price rules where appropriate. Statement (b) is false and is the answer. < TOP > 72 Answer : (b) . Reason : According to Abraham Maslow, when the need for food, shelter & clothing is satisfied, he moves to the next level of needs hierarchy which is need for safety < TOP > 73 Answer : (d) . Reason : RI is the net operating income which a division is able to earn above the minimum rate of return on operating assets. It is in absolute terms and not a ratio. Hence (d) is false. As RI is the income above the minimum rate of return, there is a problem of defining the minimum required rate of return associated with various investment opportunities. ROI can be readily employed for inter-divisional comparisons as it is a ratio. A project will be rejected under ROI method and accepted under RI method if the rate of return from such project is more than the minimum required rate of return but less than the current ROI. Under RI approach, the larger divisions will be expected to have more RI than the smaller divisions, not necessarily because they are better managed but because of the bigger numbers involved.

< TOP >

74 Answer : (b) . Reason :

Sales to outsiders (Rs.1,76,000 – Rs.20,000) Less: manufacturing cost of goods sold to outsiders (Rs.1,40,000 – Rs.20,000) Contribution

Rs. 1,56,000 1,20,000 36,000

outside sale = Particulars Transfer price to outside sales (20,000 × 130%) Sales to outsiders Total sales Less: Manufacturing expenses Contribution Less: Traceable expenses Administration expenses Selling expenses Operating income

Rs. 26,000 1,56,000 1,82,000 1,40,000 42,000 20,000 2,000 20,000

< TOP OF THE DOCUMENT >

Mark-up

on