Question Paper Management Accounting - II (152) – October 2004 • • • • 1.
Answer all questions. Marks are indicated against each question.
AB Ltd is organized into two large divisions – A and B. Division A produces a component which is used by division B in making a final product. The final product is sold for Rs.480. Division A has a capacity to produce 2,400 units and the entire quantity can be purchased by division B.
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Division A informed that due to installation of new machines, its depreciation cost has gone up and hence wanted to increase the price of the component to be supplied to division B at Rs.264. Division B, however, can buy the component from the outside market at Rs.264 each. The variable cost of division A is Rs.228 and fixed cost is Rs.24 per component. The variable cost of division B in manufacturing the final product by using the component is Rs.180 (excluding the component cost). If division B purchases the entire component from division A, the total contribution of the company as a whole is (a) Rs.5,47,200 (b) Rs. 86,400 (c) Rs.1,72,800 (d) Rs.7,20,000 (e) Rs.1,15,200. (1 mark) 2.
Chakri Ltd. has furnished the following data relating to its product for the year 2003-04: Annual production Material cost Other variable costs Fixed cost
(units) (Rs.) (Rs.) (Rs.)
Total cost Apportioned investment
30,000 90,000 1,80,000 60,000
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3,30,000 3,00,000 Assuming income tax rate of 40%, if the company desires to earn a post tax profit of 15% 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.27.50 (d) Rs.25.00 (e) Rs.17.88. (2 marks) 3.
(Rs.) (Rs.)
Karuna Ltd. has two divisions - A and B. Division A has the capacity to manufacture 1,50,000 units of a special component LKJ annually and it has some idle capacity currently. The budgeted residual income for the division A is Rs.10,00,000. The relevant details extracted from the budget of A are as under:
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Sales (to outside customers) 1,20,000 units @ Rs.180 per unit Variable cost per unit Rs.160 Divisional fixed cost Rs.8,00,000 Capital employed Rs.75,00,000 Cost of capital 12% per annum Division B received an order for which it requires 30,000 units of a component similar to LKJ. An additional variable cost of Rs.5 per unit will be incurred to make minor modifications to LKJ to suit the requirements of Division B. The minimum transfer price per unit which Division A should quote to Division B to achieve its budgeted residual income is (a) Rs.185 (b) Rs.170 (c) Rs.165 (d) Rs.160 (e) Rs.175. (2 marks) 4.
A timber merchant purchased 1,000 cft. of timber logs on April 01, 2004 at the rate of Rs.100 per cft
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and stored them in his timber yard for six months for seasoning. In the timber yard the following items of expenses were incurred during the period of seasoning
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Rent –Rs. 1,250 per month Salaries of 4 guards at the rate of Rs. 250 per month Incidental expenditure for maintenance, power, lighting, etc. Rs. 750 per month Annual share of administration overheads Rs. 10,000. 50% of the floor area of the godown and other connected operations were incurred for stocking the seasoned timber. Loss in volume of the logs due to seasoning should be taken at 10%. If the timber merchant desires a profit of 15% on cost, the selling price of the seasoned timber per cft as on October 01, 2004 is (a) Rs. 142.47 5.
(b) Rs. 128.23
(c) Rs. 111.50
(d) Rs. 123.89
(e) Rs. 132.28. (2 marks) < Answer >
Which of the following pricing techniques ignores fixed cost? (a) Standard cost based pricing (c) Cost plus profit pricing (e) Differential cost pricing.
(b) Full cost pricing (d) Return on investment based pricing (1 mark)
6.
John Ltd. produces and sells 500 units of a product each month with total variable costs of Rs.6,000 and total fixed costs of Rs.6,000. Idle capacity would permit the acceptance of a special sales order for 100 units each month. The average unit cost per month of producing and selling the total output, if the special order is accepted, would be (a) Rs.12
7.
(b) Rs.18
(c) Rs.22
(d) Rs.24
(e) Rs.20. (1 mark)
The standard and actual data for a product are as under Standard Actual Quantity Rs. Quantity Raw Material I 300 Kg 4 per unit 350 Kg Raw Material II 200 Kg 3 per unit 160 Kg Skilled labour 20 hours 10 per hour 22 hours Unskilled labour 10 hours 7 per hour 6 hours There are no price variances .The standard process loss is 10% of input .But actual loss is 14% of output .The total prime cost variance is
Particulars
(a) Rs.8.82(Adverse) (c) Rs8.82(Favorable) (e) Rs.84.10(Favorable).
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(b) Rs.99.82(Adverse) (d) Rs.84.10(Adverse) (2 marks)
8.
Sarada Vilas Bank (SVB) sells services rather than tangible products. It makes auto and home loans, processes other companies’ credit card transactions, and provides account services to individual and commercial checking account customers. SVB managers want to determine how far service revenues could fall below budgeted revenues before losses occur from operations. The managers want to know the bank’s (a) Sales mix (c) Margin of safety (e) Contribution margin.
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(b) Relevant revenue range (d) Variable costs (1 mark)
9.
The variable-cost percentage in sales plus the contribution margin percentage in sales equals to (a) Gross margin
(b) Operating leverage
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(c) 100% 10.
(d) Target net income
ABC Ltd.’s managers want to control, and reduce if possible, the company’s production costs. They must determine how production costs are related to and affected by various business activities. These managers need to understand (a) Variable costs (c) Fixed costs
11.
(e) Contribution to sales ratio. (1 mark)
(b) Cost behaviors (d) Relevant ranges
(e) Variable and fixed costs. (1 mark)
Which of the following statements is false? (a)
Differential cost pricing could bring about pricing decisions that tend to disregard the necessity of recovering total costs in the long run (b) Differential cost pricing is not related to economic marginal analysis (c) Full cost pricing ignores the vital economic considerations of demand and competition (d) Full cost pricing is prone to distortion by accounting misapplication such as an unjustifiable inclusion of manufacturing overhead based on predetermined rates (e) ROI pricing method guides management in determining what selling price will provide a given rate of return. (1 mark) 12.
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A calculated target selling price based on mark-up percentages may be adjusted depending on factors such as
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I. Future capacity available II. Extent of competition from other firms III. Management’s general knowledge about the market. (a) Only (I) above (c) Only (III) above (e) (I), (II) and (III) above.
(b) Only (II) above (d) Both (I) and (III) above (1 mark)
13.
Which of the following is/are particularly associated with operating a system of transfer pricing? I. II. III. IV.
Ensuring that goal congruence is retained among the organization’s separate divisions Ensuring that divisional performance measurement is not affected Ensuring that corporate profits are maximized Ensuring that the group remains competitive.
(a) Only (I) above (d) (I), (II) and (III) above 14.
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(b) Only (IV) above (c) Both (II) and (III) above (e) (I), (II), (III) and (IV) above. (1 mark)
The transfer price which is usually based on the listed price of an identical or similar product or service, or the price of a competitor is called (a) Marginal cost transfer pricing (c) Negotiated transfer pricing (e) Market based transfer pricing.
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(b) Cost plus a mark up transfer pricing (d) Full cost transfer pricing (1 mark)
15.
Which of the following statements is/are true? I.
Quarterly manufacturing cost budgets may legitimately show widely varying manufacturing costs per unit if production is not evenly distributed II. The first financial budget prepared is the cash budget III. A flexible budget is a budget prepared for different levels of activity
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(a) Only (I) above (d) Both (I) and (III) above
(b) Only (II) above (e) (I), (II) and (III) above.
(c) Only (III) above (1 mark)
16.
Which of the following statements is/are false? I. The first step in preparing a master budget is the preparation of the cash budget II. Normally, the last budget prepared is the budgeted balance sheet III. Planned production for the period can be expressed as the budgeted sales units plus the desired ending inventory less the beginning inventory (a) Only (I) above (d) Both (I) and (II) above
17.
(b) Only (II) above (e) (I), (II) and (III) above.
(c) Only (III) above
(1 mark) Which of the following statements is/are true? I. The average time required for the cash invested in inventories to be converted into the cash ultimately collected on sales made to customers is called the operating cycle II A budget is a comprehensive financial plan setting forth the expected route for achieving the financial and operational goals of an organization III. One of the benefits derived from budgeting is the assignment of decision-making responsibilities (a) Both (I) and (III) above (c) Both (II) and (III) above (e) (I), (II) and (III) above.
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(b) Only (II) above (d) Both (I) and (II) above (1 mark)
18.
Which of the following statements is/are false? I.
The budget director or chief budget officer, should not only consider financial resources when preparing the budget, but should also take into consideration human resources. II. A set of written instructions that specifies who will provide budgetary data and its form, and who should receive various schedules comprising the budget, can be found in the budget manual. III. The master budget reflects the impact of only operating decisions. (a) Only (I) above (c) Only (III) above (e) (I), (II) and (III) above.
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(b) Only (II) above (d) Both (I) and (II) above (1 mark)
19.
Which of the following statements is true with regard to the difference between a flexible budget and a fixed budget?
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(a)
A flexible budget primarily is prepared for planning purposes while a fixed budget is prepared for performance evaluation (b) A flexible budget provides cost allowances for different levels of activity whereas a fixed budget provides costs for one level of activity (c) A flexible budget includes only variable costs whereas a fixed budget includes only fixed costs (d) A flexible budget is established by operating management while a fixed budget is determined by top management (e) The variances are usually larger with a flexible budget than with a fixed budget. (1 mark) 20.
Consider the following data of a company:
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Quarters 1st 2nd 3rd Budgeted direct-labor hours 60,000 80,000 75,000 Variable overhead rate per labor hour Rs.3.00 Rs.3.00 Rs.3.00 Fixed manufacturing overhead Rs.80,000 Rs.80,000 Rs.80,000 fixed manufacturing overhead includes depreciation of Rs.35,000 per quarter.
4th 70,000 Rs.3.00 Rs.80,000 The
Ninety percent of the cash payments for manufacturing overhead for each quarter are made during the quarter, and the remaining 10% is made in the following quarter. The amount of overhead costs to be paid during the 2nd quarter is (a) Rs.274,500 Rs.354,000.
(b) Rs.279,000
(c) Rs.314,000
(d) Rs.349,000
(e) (1 mark)
21.
Consider the following sales forecast, the manufacturing cost budget, and the schedules of cash payment of a company:
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Quarter 1st 2nd Planned production units 7,000 7,500 Budgeted variable overhead costs Rs.15,000 Rs.18,750 Budgeted fixed manufacturing overhead costs unknown unknown Budgeted depreciation included in total overhead Rs. 3,000 Rs. 3,000 Budgeted cash payments for total overhead Rs.20,000 Rs.23,750 All budgeted overhead costs, except for budgeted fixed manufacturing overhead, are shown. What is the amount of budgeted fixed manufacturing overhead for 1st quarter? (a) Rs.2,000 22.
(b) Rs.6,000
(c) Rs.7,000
(d) Rs.8,000
(e) Rs.9,000. (1 mark)
Consider the following production schedule of Telectron Ltd: Quarter 1st 2nd 3rd Beginning inventory (Units) 5,0000 4,000 12,000 Budgeted unit sales (Units) 50,000 40,000 1,20,000 Desired ending finished goods (Units) 4,000 12,000 15,000 Direct labor completes 2 units per hour at Rs.8 per hour. Which of the following statements is false? (a) (b) (c) (d) (e)
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Desired ending inventory is 10% of the next quarter's sales units Direct labor cost for the 4th quarter cannot be determined Direct labor cost for the 2nd quarter will be Rs.192,000 Sales units of 150,000 are projected for the 4th quarter Direct labor hours for the 3rd quarter will be 66,000. (2 marks)
23.
Santa Ltd. has furnished the following payment schedule related to purchases of direct materials: 60% of purchase payment
in the month of purchase
30% of purchase payment
in the month following the month of purchase
10% of purchase payment
in the second month following the month of purchase.
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The company purchased the same amount of goods in the months of July and August 2004.Total credit purchases in the month of September 2004 were Rs.100,000, and total payments on credit purchases in the month of September 2004 were Rs.140,000. What were the credit purchases in the month of July 2004? (a) Rs.1,00,000 24.
(b) Rs.2,00,000
Kavita Ltd. had following production costs:
(c) Rs.2,40,000
(d) Rs.3,00,000
(e) Rs.4,00,000. (2 marks) < Answer
Direct wages Direct material Production overhead Fixed Variable year:
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Rs.1,50,000 Rs.2,25,000 Rs. 60,000 Rs.1,00,000
Following are the budgeted values for the current
Labor rate is expected to decrease from Re.1.00 per hour to Re.0.80 per hour, Production efficiency is expected to fall by 10%. Production will increase by 40%. The budgeted cost of production for the year is (a) Rs.6,00,000 Rs.7,23,000.
(b) Rs.6,59,800
(c) Rs.7,13,800
(d) Rs.7,17,223
(e) (2 marks)
25.
Economic value added (EVA) is (a) (b) (c) (d) (e)
26.
A variant of residual income Net operating income minus shareholders' equity Cost of capital Net operating income minus weighted average cost of capital multiplied by sum of long-term liabilities and shareholders' equity Both (a) and (d) above. (1 mark)
Moin Limited manufactures plastic bags. The company’s directors have projected the following sales for the next three months:
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October 2004 2,10,000 Units November 2004 3,60,000 Units December 2004 4,10,000 Units Opening stock of finished goods on October 01, 2004 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 October 01, 2004 is 50,000 kg. The raw material is readily obtainable, but in order to ensure that the company will not run out of stock, the directors would like to increase the closing stock of plastic by 10% each month for the next three months. The amount of raw material to be purchased during the month of December 2004 will be (a) Rs.41,67,060 Rs.38,40,060.
(b) Rs.42,10,260
(c) Rs.38,47,260
(d) Rs.37,58,970
(e) (2 marks)
27.
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An ABC (Activity Based Costing) cost allocation system excludes consideration of (a) (b) (c) (d) (e)
Variable non-manufacturing costs Direct costs of materials Committed fixed costs Costs allocated to service departments using the reciprocal costing method Manufacturing fixed overhead costs. (1 mark)
28.
To identify the interrelationships between key activities and resources consumed is a part of the (a) Activity Based Costing method of cost allocation (b) Classification of costs as either fixed, mixed, variable or semi-fixed (c) Absorption costing method
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(d) Step-down method to allocate cost pools from one service department to other service departments (e) Reciprocal services method. (1 mark) 29.
Particulars Fixed Overheads Output per labor hour Number of working days Labor hours per day
Budgeted Rs.3,75,000 2 units 25 5,000
(a) Rs.40,225 (favorable) (c) Rs.45,225 (favorable) 30.
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Basha Ltd. has furnished the following data: Actual Rs.3,77,500 1.9 units 27 5,500
Fixed overhead volume variance is (b) Rs.40,225 (adverse) (d) Rs.45,225 (adverse) (e) Rs.48,225 (favorable). (2 marks) < Answer >
Budgets are an important management process for (a) Planning and costing (c) Planning and controlling (e) Implementation of accounting system.
(b) Directing and process analysis (d) Investing and financing (1 mark)
31.
The master budget is a proforma financial statement. It summarizes all the planned activities of all subunits. The information comprises (a) (b) (c) (d) (e)
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General estimates of financial targets and costs Detailed schedules and financial statements Activity cost drivers and cost-volume-profit analyses Planned expenditures for new facilities and financing plans Changes in financial cash flows only. (1 mark)
32.
There is no conceptual difference between a budget amount and a standard amount if standards are (a) Ideal standards (c) Currently attainable standards
33.
(b) Perfection standards (d) Flexible standards
(e) Controllable standards. (1 mark)
When a normal costing system is used, budgeted rates would be used for applying costs by the absorption-costing method for (a) (b) (c) (d) (e)
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Direct labour and variable factory overhead Variable factory overhead and fixed factory overhead Fixed factory overhead and direct materials Direct materials and direct labour Fixed factory overhead and direct labour. (1 mark)
34.
Quality cost may include I. II. III. IV. (a) (b) (c) (d) (e)
Inspection costs Rework costs Lost sales Redesign of the production process
Only (I) above Both (I) and (III) above (I), (II) and (III) above Both (I) and (II) above All (I), (II), (III) and (IV) above.
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(1 mark) 35.
Rama Ltd. produces a single product – ‘k’. The following budgeted data are available for the month of September 2004: Production (units) Flexible budget data: Material Labor Factory overhead: Indirect material Indirect labor Supervision Heat, Light and Power Depreciation Insurance and Taxes Total factory overhead Total Manufacturing cost
15,000 (Rs.) 30,000 45,000 15,000 30,000 26,250 15,250 63,000 8,000 1,57,500 2,32,500
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25,000 (Rs.) 50,000 75,000 25,000 50,000 33,750 22,750 63,000 8,000 2,02,500 3,27,500 Other information for the month of September
2004: Standard time 0.5 direct labor hour per unit of product Normal capacity 10,000 direct labor hours iii. Units produced 22,000 units Actual labor hours 10,700 hours. Factory overheads incurred Rs.1,91,000. overhead rates are based on direct labor hours.
Standard
factory
The overhead efficiency variance and overhead capacity variance are (a) Rs.2,700 (F) and Rs.4,700 (A) respectively (b) Rs.2,700 (F) and Rs.9,000 (F) respectively (c) Rs.2,700 (A) and Rs.4,700 (F) respectively (d) Rs.2,700 (A) and Rs.9,000 (A) respectively (e) Rs.4,700 (A) and Rs.2,700 (A) respectively. (2 marks) 36.
Yasoda Garments Ltd. (YGL) sells a line of women’s dresses. YGL’s performance report of September 2004 is as follows: The company uses a flexible budget to analyze its performance and to measure the effect on operating income of the various factors affecting the difference between budgeted and actual operating income. Particulars Dresses sold Sales Variable costs
Actual
Budget
(units) (Rs.) (Rs.)
5,000 2,35,000 (1,45,000)
6,000 3,00,000 (1,80,000)
Contribution margin (Rs.) Fixed costs (Rs.)
90,000 (84,000)
1,20,000 (80,000)
6,000
40,000
Operating income
(Rs.)
The effect of the sales quantity variance on the contribution margin and the variable cost flexible budget variance for October 2004 is (a) (b) (c) (d) (e)
Rs. 20,000 unfavorable and Rs. 5,000 favorable respectively Rs. 18,000 unfavorable and Rs. 5,000 unfavorable respectively Rs. 20,000 unfavorable and Rs. 4,000 favorable respectively Rs. 15,000 unfavorable and Rs. 4,000 unfavorable respectively Rs. 30,000 favorable and Rs. 5,000 favorable respectively. (2 marks)
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37.
Zinta Ltd. uses a Standard costing system. The following details have been extracted from the standard cost card in respect of direct materials for the month of September 2004: Material usage per unit Budgeted production
– –
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8 kg at the rate of Re.0.80 per kg 850 units
The company has furnished the following data relating to direct material for the month of September 2004: Materials purchased Materials issued to production Actual production
8,200 kgs at a price of Rs.6,888 7,150 kgs 870 units
The material price and
material usage variances are (a) Rs.286 (A) and Rs.152 (A) respectively (c) Rs.286 (A) and Rs.294 (A) respectively (e) Rs.328 (A) and Rs.280 (A) respectively.
(b) Rs.286 (A) and Rs.280 (A) respectively (d) Rs.328 (A) and Rs.152 (A) respectively (2 marks)
38.
Deekay Ltd. uses a standard absorption costing system. The following data have been extracted from its budget for the month of September 2004: Fixed production overhead cost Production
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Rs.48,000 4,800 units
In September 2004, the fixed production overhead cost was under absorbed by Rs.8,000 and the fixed production overhead expenditure variance was Rs.2,000 (Adverse). The actual number of units produced was (a) 5,800 units 39.
(c) 5,000 units
(d) 4,200 units
(e) 3,800 units. (2 marks) < Answer >
The data relating to Mehar Ltd. for the month of September 2004 are as follows: Output (units) Wages paid for 16,250 hours Material 4,000 kg
6,500 Rs. 48,750 Rs. 34,000
Variances Labor rate Labor efficiency Labor idle time Material price Material usage
The standard prime cost per unit is
(a) Rs. 13.00 40.
(b) 5,400 units
Rs. 1,875 (A) 1,275 (F) 700 (A) 1,850 (F) 1,200 (F)
(b) Rs. 12.73
(c) Rs. 7.30
(d) Rs. 7.50
(e) Rs. 5.70. (2 marks)
Monarch Ltd.has furnished the following production budget pertaining to a single product for the month of September 2004: Production quantity 2,40,000 units Production costs: Material 3,36,000 kg at Rs.4.10 per kg Direct labor 2,16,000 hours at Rs.4.50 per hour Variable overheads Rs. 4,75,200 Fixed overheads Rs.15,21,600 The variable overheads are absorbed at a predetermined direct labor hour rate and the fixed overheads are absorbed at a predetermined rate
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per unit of output. During the month the actual production was 2,20,000 units and the following costs were incurred: 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 and fixed overhead volume variance are (a) (b) (c) (d) (e)
The variable overhead efficiency variance
Rs.1,900 (F) and Rs.1,26,800 (A) respectively Rs.6,776 (F) and Rs.1,06,440 (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)
41. 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.
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Specific time horizons Strategic plans Exceptional items that 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) (I), (II), (III), (IV) and (V) above.
(b) (I), (II), (III) and (IV) above (d) (I), (III), (IV) and (V) above (1 mark)
42. For information to be relevant
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I. It must relate to the future II. It must differ among alternatives III. It must be completely accurate Which of the given statement(s) is/are true? (a) (I) only (c) (I), (II) and (III) above
(b) Both (I) and (II) above (d) Both (I) and (III) above
(e) Both (II) and (III) above. (1 mark)
43. When comparing performance report information for top management with that for lower level management (a) (b) (c) (d) (e)
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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 >
44. Scrap and costs of spoiled units that cannot be salvaged are the examples of (a) Appraisal costs (c) External failure costs 45. Responsibility accounting is a system where
(b) Internal failure costs (d) Prevention costs
(e) Committed costs. (1 mark) < Answer
(a) The accounting department is responsible for all cost accounting and financial reporting activities (b) Critical processes and key success factors are the primary activities for which accounting data is gathered (c) Lower-level managers are responsible for meeting specific objectives and reporting on the results (d) Everyone in the organization is accountable for achieving corporate goals (e) An accounting system where activity based costing is implemented. (1 mark)
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46. In which type of responsibility center the manager is held accountable for its profits? I. II. III. IV.
Cost center Profit center Revenue center Investment center
(a) (II), (III) and (IV) above (c) Both (I) and (II) above (e) Both (II) and (IV) above.
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(b) Only (II) above (d) Both (II) and (III) above (1 mark)
47. 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)
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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) < Answer >
48. The following data pertain to Division X of Pioneer Ltd. for the year 2003-04: Sales
Rs.6,20,000
Operating Margin
11.29%
Capital turnover
4
Imputed interest rate
13%
(a) Nil (d) Rs.44,500
(b) Rs.22,325 (e) Rs.49,850.
The residual income of the division is (c) Rs.31,480 (1 mark)
49. There are various budgets within the master budget. One of these budgets is the production budget. Which of the following best describes the production budget? (a) (b) (c) (d) (e)
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It aggregates the monetary details of the operating budget It is calculated from the desired ending inventory and the sales forecast It includes required material purchases It includes required direct labor hours It summarizes all discretionary costs. (1 mark)
50. The primary responsibility for establishing and maintaining an internal control structure rests with (a) The top management (c) The external auditor
(b) The Management Accountant (d) The internal auditor
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(e) The controller. (1 mark)
51. Zindal, a server at Bisroy Restaurant, takes personal pride and satisfaction in doing his very best to provide customers with outstanding service. Likewise, Bisroy’s owners have identified customer service
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as one of several organizational goals for the restaurant. When the organization and its employees share the same goals, they are said to have (a) Total quality management (c) A long-range plan
(b) Goal congruence (d) Participative management
(e) Centralized control. (1 mark) < Answer >
52. The two internal roles of management accounting are (a) (b) (c) (d) (e)
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Supplying information and providing no monetary awards Providing monetary and non monetary awards Supplying information and preparing financial reports Supplying information and control procedures Supplying information and monetary awards. (1 mark)
53. Action Plan Ltd. manufactures two products – A and P, using same facilities and similar process. The company has furnished the following information pertaining to two products for the year ending September 30, 2004. Particulars Direct labor hours per unit Machine hours per unit Number of set ups during the period Number of orders handled during the period Production units
Product A 4 5 22 16 6,000
Product P 2.5 4 18 19 4,340
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Total
production overhead costs for the period are as follows: Particulars Machine activity costs Set-ups costs Order handling costs
Rs. 2,40,000 56,000 52,500 3,48,500 The absorption of total production overheads of both the products on the basis of a suitable cost driver, using Activity Based Costing method, is (a) (b) (c) (d) (e)
Product A (Rs.) 2,06,827 1,82,827 2,06,827 1,74,250 2,40,000
Product P (Rs.) 1,41,673 1,41,673 1,16,473 1,74,250 1,08,500. (2 marks)
54. Which of the following factors is/are considered in determining the period of the short-range budget? I.
The budget period should be long enough to allow for the financing of production well in advance of actual needs II. The budget period should be long enough to cover complete production of various products III. For business of a seasonal nature, the budget period should cover at least one entire seasonal cycle IV. The budget period should coincide with the financial accounting period for comparison (a) (b) (c) (d) (e)
Only (I) above Both (II) and (III) above (I), (II) and (III) above Both (I) and (III) above (I), (II), (III) and (IV) above.
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(1 mark) 55. Which of the following methods reduces the development cycle of a product by reducing the wastage of time and resources? (a) Activity based costing (c) Target costing
(b) Auditing (d) Benchmarking
(e) Benchtrending. (1 mark) < Answer >
56. Which of the following is considered as cost driver in activity based costing? (a) (b) (c) (d) (e)
< Answer >
An overhead cost is incurred as a direct consequence of a cost object Any direct cost element in a product cost Any activity or product item for which costs are incurred Any factor which causes a change in the cost of an activity An indirect cost in a product cost. (1 mark)
57. The basic concept of value chain analysis is to look at what the organization does through the eyes of (a) Customers (d) Production workers
(b) Management (e) Suppliers.
(c) Stockholders
< Answer >
(1 mark) 58. To evaluate customers, an organization should treat them as (a) Cost objects (b) Activities in the value chain (d) Scarce resources (e) Trade-offs.
(c) Costs in the supply chain
< Answer >
(1 mark) < Answer >
59. Product life cycle begins with (a) Marketing (d) Design and engineering
(b) Production (e) None of the above.
(c) Customer Service (1 mark)
60. Direct material purchases totaled Rs.128,000 for 32,000 tons of material. The standard material price per ton is Rs.4.25. Which of the following would be included in the journal entry to record the purchase under a standard costing system? (a) (b) (c) (d) (e)
< Answer >
Debit to Materials Price Variance for Rs.8,000 Credit to Materials Price Variance for Rs.8,000 Credit to Accounts Payable for Rs.136,000 Debit to Raw Materials Inventory for Rs.128,000 Both (a) and (c) above. (1 mark)
61. Ravi Ltd. had the following sales for the quarter ending September 2004: July 2004 August 2004 September 2004
50,000 units 40,000 units 60,000 units
Selling price per unit is Rs.100.
Target for the next quarter: October 2004 November 2004 December 2004 10%
60,000 units 48,000 units 72,000 units
The collection policy of the company is as follows:
The selling price will be increased by
< Answer >
20% of sales 40% of Credit sales 30% of Credit sales 25% of Credit sales 5% of Credit sales
Cash sales in the month following the month of sales In the second month following the month of sales In the third month following the month of sales Not recoverable
The company wants to change its credit policy from next month as: 30% of sales 40% of sales Balance
Cash sales in the month following the month of sales In the second month following the month of sales with a bad debts of 8% on the balance payable. The amount to be collected in the month of November 2004 is: (a) Rs.64,20,000
(b) Rs.64,64,000
(c) Rs.62,78,000
(d) Rs.58,76,000
(e) Rs.58,40,000. (2 marks)
62. Firewall Company 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:
< Answer >
50,000 units 40,000 units (Rs.) (Rs.) Fixed overheads 2,00,000 2,00,000 Variable overheads 3,00,000 2,40,000 Semi-variable overheads 3,00,000 2,60,000 Sales realization 18,00,000 14,40,000 The company has received an order from a customer for a quantity equivalent to 10% of the normal capacity. It is noticed that prime cost per unit of product is constant Particulars
If the company desires to maintain the same percentage of profit on selling price, the minimum price per unit to be quoted for new order is (a) Rs.26.63 (b) Rs.27.97 (c) Rs.25.40 (d) Rs.23.26 (e) Rs.30.59. (2 marks) 63. Moti 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.3,15,000 for October 2004, Rs,4,25,000 for November 2004 and Rs.4,85,000 for December 2004. 50% of the sales are on credit. Experience indicates that 70% of the budgeted credit sales will be collected in the month following the 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 December 2004 is (a) Rs.24,750 (b) Rs.21,250 (c) Rs.18,750 (d) Rs.17,225
< Answer >
(e) Rs.15,650. (2 marks)
64. Leo Toys manufactures a toy monkey with moving parts and a built-in voice box. Projected sales for 5 months are as follows:
< Answer >
Month November 2004 December 2004 January 2005 February 2005 March 2005
Projected sales in units 4,000 4,300 4,500 4,250 4,400
Each toy requires direct materials from a supplier at Rs.35 for moving parts. Voice boxes are purchased from another supplier at Rs.10 per toy. Labor cost is Rs.20 per toy and variable overhead cost is Rs.5 per toy. Fixed manufacturing overhead applicable to production is Rs.41,000 per month. It is the practice of the company to manufacture an output in a month which is equivalent to 1.2 times of the following month’s sales. The production budget for the month of December 2004 and the production cost budget for the month of January 2005 are (a) 4,800 units and Rs.3,78,000 respectively (b) 5,400 units and Rs.3,98,000 respectively (c) 5,160 units and Rs.3,98,000 respectively (d) 5,400 units and Rs.3,57,000 respectively (e) 5,280 units and Rs.3,24,000 respectively. (2 marks) 65. ABC Ltd. is producing three complimentary products .The demand for the products is very much fluctuative. The demand estimates for the products at normal capacity are as follows:
< Answer >
Product Selling price (Rs.) Unit Variable cost (Rs.) Sales units A 10 4 15,000 B 15 8 20,000 C 18 9 5,000 Fixed cost is Rs.80,000(totally indirect cost).At the end of the budget period the total sales margin variance is found to be Rs.1,65,000 (Adverse) but the same sales mix, cost and price were maintained because of the complimentary nature. If there are no opening and closing inventories of WIP, finished goods and raw materials, the fixed overhead cost variance is (a) Rs.48,000 (Favorable) (c) Rs.85,000 (Adverse)
(b) Rs.48,000 (Adverse) (d) Rs.85,000(Favorable)
(e) Nil. (2 marks)
66. Eslow Ltd. manufactures a single product using three raw materials J, K and L. The details of standard cost and actual cost for the month of September 2004 are as under: Standard Cost Particulars Material J Material K Material L Less: Standard loss Standard Yield Actual Cost
Kg 15 12 8 35 3 32
Price per kilogram (Rs.) 4 3 6
< Answer >
Particulars Material J Material K Material L
Kg 1,680 1,650 870 4,200 552 3,648
Less: Loss Actual Yield
Price per kilogram (Rs.) 4.25 2.80 6.40
The material yield variance is (a) Rs.2484 (A) (d) Rs. 791 (F)
(b) Rs. 864 (A) (e) Rs 791 (A).
(c) Rs.2484 (F) (2 marks)
67. Shivam Ltd. uses standard process costing method. The standard process cost card per month shows that 3 hours of direct labor is required to produce one kg. of finished product and the fixed overheads, which are recovered on direct labor hours, amount to Rs.180 per kg. of output. The budgeted output is 1,000 kg. per month. Actual production during the month of September 2004 is 1200 kg. and the direct labor hours utilized during the month were 3,300.
< Answer >
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.25,200 (Adverse) (c) Rs.18,000 (Adverse) (e) Rs. 7,200 (Adverse).
(b) Rs.18,000 (Favorable) (d) Rs. 7,200 (Favorable) (2 marks)
68. Alpha Ltd. Is preparing sales budget for 3rd quarter .The details of the first two quarters are 1st Quarter
Particulars
2nd Quarter
Sales Value (Rs.)
8,000
Prime cost (Rs.)
3,000
Overheads (Rs.)
4,000
3,900
200
240
Sales Units
< Answer >
There is a reduction in fixed overheads by Rs.200 in 2 quarter and same will continue. The variable costs will increase by 20% in 3rd quarter .The budgeted sales for the 3rd quarter to maintain the same profit per unit as in 1st quarter is (a) 168 units (b) 130 units (c) 138 units (d) 145units (e) 122 units. (2 marks) nd
69. Free Flow Ltd. presently sells 50,000 executive model pens per month. In next budget period it wants to produce economy model. The details are as follows:
< Answer >
Particulars
Actuals for executive model (Rs.)
Estimates for economy model (Rs.)
Selling price per unit
10
2
Variable cost per unit
6
0.70
Fixed cost per month
1,00,000
20,000
It is estimated by the company that sale of executive pen model will fall at the rate of 1 unit for every 10 pens sale of economy model. Presently the value of assets is Rs.9,00,000.New model requires an additional investment of Rs.3,00,000.The number of units of economy model to be sold to get a ROI of 10% on additional investment in addition to existing profit is (a) 50,556 units (b) 65,556 units (c) 62,556 units (d) 55,556 units (e) 58,556 units. (2 marks) < Answer >
70. Shining India Ltd’s performance for the last year is : Net Profit Sales Net assets
= = =
Rs. 2,00,000 Rs.18,00,000 Rs.10,00,000.
At the end of last year it was proposed to purchase machinery whose cost was equal to 5% of existing net assets. If ROI and profit margin ratio remain to be same in the next budgeted year, then the % increase in sales required is (a) 5.75 (b) 4.00 (c) 5.00 (d) 4.76 (e) 6.55. (2 marks) < Answer >
71. The standard and actual data for a product are as under
Particulars
Standard
Actual
Quantity Kg
Rs.
Quantity Kg
Rs.
Raw Material I
300
4 per unit
350
4.50 per unit
Raw Material II
200
3 per unit
160
2.80 per unit
Out put (units)
1,200
1,160
By how much percentage, the deviation of actual prices from standard prices has contributed in material cost variance? (a) 50.53% (b) 54.53% (c) 60.53% (d) 55.33% (e) 61.33%. (2 marks) 72. The details of last two quarters actuals were as Particulars
1st Quarter
2nd Quarter
Capacity usage
40%
50%
Net profit / (loss)
(Rs.20,000)
(Rs.8,000)
The budgeted profit for the 3 quarter is Rs.10,000 .The capacity utilization at budgeted production for 3rd quarter is (a) 67% (b) 71% (c) 70% (d) 65% (e) 60%. (2 marks) rd
< Answer >
Suggested Answers Management Accounting - II (152) – October 2004 1.
Answer : (c) Reason :
Rs. Contribution of division A Sales – 2,400 × Rs.264 = Less : Variable cost: Purchase cost (2,400 × Rs.228) =
6,33,600 5,47,200 86,400
Contribution of division B Sales – 2400 × Rs.480 Less : Variable cost Division A: Rs.6,33,600 Own cost 2,400 × Rs.180 Rs. 4,32,000
11,52,000
10,65,60 0 86,400 1,72,800
Total Contribution 2.
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Answer : (e) Reason : Let, sale value = x [ x(1 −0.35) −Rs.90, 000 −Rs.1, 80, 000 −Rs.60, 000 ] (1 −Tax
0.15x
=
0.15x 0.24x
= =
Rs.1,98,000
x
=
Rs.1,98,000 ÷ 0.24 = Rs.8,25,000
Sale price / unit=
Rs.8,25,000 ÷ 30,000 = Rs.27.50
[ 0.65x −Rs.3, 30, 000]
rate)
0.6 = 0.39x – Rs.1,98,000
Net sale price = 27.50 × .65 = Rs.17.88 3.
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Answer : (e) Reason : Fixed costs
8,00,000
Return on capital employed (Rs.75,00,000 x 12%)
9,00,000
Residual income desired
10,00,000
Total desired contribution
27,00,000
Contribution from outside sales = Rs.180 – Rs.160 = Rs.20 per unit Total contribution from outside sales = Rs.20 per unit x 1,20,000 units = 24,00,000 Minimum contribution to be earned from supply to division B = Rs.27,00,00 – Rs.24,00,000 = Rs. 3,00,000 Rs. 3,00,000 30,000 units
Contribution per unit on additional 30,000 units = = Rs.10 per unit Variable cost for minor modification = Rs.5 per unit Minimum transfer price per unit to be quoted = Rs.160 + Rs.10 + Rs.5 = Rs.175
per
unit
4.
Answer : (a) Reason : Statement showing the determination of selling price of seasoned timber as on 1st October, 2004: Quantity (cft)
Amount (Rs.)
Cost of timber logs at the rate of Rs.100 per cft. Seasoning expenses for 6 months: Rent (Rs. 1,250 x 6 x ½) Salaries of 4 guards (Rs. 250 x 4 x 6 x ½) Incidental expenses (Rs. 750 x 6 x ½) Administration overheads (Rs. 10,000 x ½ x ½)
1,000
Total
1,000
1,11,500
Less: Normal loss at the rate of 10%
100
-
Total(net) Profit margin (15% of cost)
900
1,11,500 16,725
Total selling price Selling price per cft (Rs. 1,28,225 ÷ 900)
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1,00,000 3,750 3,000 2,250 2,500
1,28,225 142.47
5.
Answer : (e) Reason : Differential cost technique for pricing ignores fixed cost. Differential cost technique is the change of cost for different options. Therefore, fixed cost has no relevancy with these differential cost techniques. Other techniques mentioned in (a), (b), (c) and (d) consider the fixed cost in pricing the goods
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6.
Answer : (c) Reason : The variable cost per unit is Rs.6,000/500 = Rs.12. The average fixed cost per unit with the special order is Rs.6,000/600 = Rs.10. The average cost is Rs.12+Rs.10 = Rs.22.
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7.
Answer : (d) Reason : Total prime cost variance=material cost variance + Labour cost variance material cost variance = Actual cost of materials used – Standard Material cost of actual out put Labour cost variance= Actual cost of labour used – Standard labour cost of actual out put Actual cost of materials used = 350 x Rs.4 + 160 x Rs.3 =Rs.1,880 Standard material cost per unit = (300 x Rs.4 + 200 x Rs.3) / (500 kg of input – 10% of 500) = Rs.4 Actual out put = (350+160) x 100 /114 = 447.37 units Standard Material cost of actual out put = 447.37 x Rs.4 = Rs.1,789.48 material cost variance = Actual cost of materials used – Standard Material cost of actual out put = Rs.1,880 – Rs.1,789.48=Rs.90.52(Adverse) Actual cost of labour used=22 x Rs.10+ 6 x Rs.7 = Rs.262 Standard labour cost per unit = (20 x Rs.10 + 10 x Rs.7) / (500 kg of input – 10% of 500) = Re.0.60 Standard labour cost of actual out put=447.37 units x Re.0.60 = Rs.268.42 Labour cost variance= Actual cost of labour used – Standard labourl cost of actual out put=Rs.262 – Rs.268.42 = Rs.6.42 (Favorable) Total prime cost variancec=material cost variance + Labour cost variance= Rs.90.52 (Adverse) + Rs.6.42 (Favorable) = Rs.84.10 (Adverse)
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8.
Answer : (c) Reason : The margin of safety is equal to planned (budgeted) revenues minus break-even sales revenues. SVB managers want to determine how far service revenues could fall below budgeted revenues before losses
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occur from operations. So the managers want to know the bank’s margin of safety. 9.
Answer : (c) Reason : If sales revenue equals 100% and variable costs are 35%, the contribution margin percentage is the difference of 65%. Solving this in reverse, the contribution margin percentage of 65% plus the variablecost percentage of 35% equals 100% (contribution margin plus variable costs equals sales revenue).
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10.
Answer : (b) Reason : A knowledge of cost behavior is useful because it helps managers forecast (plan) results under different activity levels. Hence the correct answer is (b).
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11.
Answer : (b) Reason : As the economist maintains that to maximize income, a firm should produce at the point where the marginal revenue equals marginal cost, in differential cost analysis, the accountant says that the firm should produce at the point where differential costs equal differential income. So differential cost Pricing is related to economic marginal analysis. Hence, statement (b) is false. All other statements are true.
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12.
Answer : (e) Reason : Once target selling price based on mark-up percentages has been calculated, it is rarely adopted without amendment. The price is adjusted upwards or downwards depending on factors such as the future capacity that is available, the extent of competition from other firms and management’s general knowledge of the market.
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13.
Answer : (d) Reason : A balance needs to be kept between divisional autonomy to provide incentives and motivation, and retaining centralized authority to ensure that the organization’s divisions are all working towards the same targets, the benefit of the organization as a whole. It ensures the goal congruence, divisional performance in different division and maximize the corporate profit. Therefore (d) is correct.
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14.
Answer : (e) Reason : The market based transfer pricing may reflect the price prevailing in an open competitive market. Hence, it is based on the listed price of an identical product in the market, may be even of a competitor. Under other methods of transfer pricing stated in (a), (b), (c) and (d) are not based on the listed price or competitors’ price. Hence (e) is correct.
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15.
Answer : (d) Reason : Fixed costs remain unchanged in total. The fixed cost per unit will vary according to the level of activity achieved in each quarter. The first financial budget prepared is the budgeted income statement. The amounts detailed in a budgeted income statement are used in the determination of projected cash flows. A flexible budget makes it possible to measure a manager's performance against costs that should occur for the level of activity achieved, rather than measuring the manager's performance against a single, predetermined level of activity. Statements (I) and (III) are true. Hence the correct answer is (d).
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16.
Answer : (a) Reason : The first step in preparing a master budget are to prepare a sales forecast and sales budget, the information from which most other budgets will be based. The budgeted balance sheet will be prepared by using amounts found in the cash budget, collection and payment schedules, inventory budget, capital expenditures budget, and the budgeted income statement. It will show the anticipated financial position of the company at the end of the budget period. This will limit production to the number of units required to meet sales and provide an adequate ending inventory for sales in the beginning of the subsequent period. Statement (II) and (III) are true. Only statement (I) is false. So the correct answer is (a).
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17.
Answer : (e) Reason : The operating cycle is the total of the number of days required to convert finished goods (or merchandise inventory) into accounts receivable plus the number of days required to collect the accounts receivable. The use of a budget is a key element of financial planning and it assists managers in controlling costs. Virtually all economic entities engage in some form of budgeting. Benefits derived from budgeting include
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enhanced management responsibility, assignment of decision-making responsibilities, coordination of activities, and performance evaluation. Since all the statements of (I), (II) and (III) are true the correct answer is (e). 18.
Answer : (c) Reason : The financial budget can have a tremendous impact (negatively and positively) on the organization's human resources. The behavioral effects of budgets should not be overlooked. The budget and the budgeting process can have considerable influence on an organization's effectiveness. A budget manual is a set of written instructions that specifies who will provide budgetary data and its form, and who should receive various schedules comprising the budget. The master budget reflects not only the operating decisions, but also the financing decisions. So, statement (III) is false. Therefore, the correct answer is (c).
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19.
Answer : (b) Reason : A flexible budget is a series of budgets prepared for different levels of activity. It allows adjustments of the budget to the actual level of activity before comparing the budgeted activity with actual result. Fixed budget is a budget prepared for one level of activity. Therefore (b) is correct. Other statements mentioned in (a), (c), (d) and (e) are not correct.
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20.
Answer : (b) Reason : Total planned overhead costs for the first quarter = (60,000x3 + 80,000) = Rs.260,000 I quarter cash payments = 90% x (260,000 – 35,000), (depreciation is excluded) =Rs.202,500 Total planned overhead costs for the second quarter = (80,000x3 + 80,000) = Rs.320,000. II quarter cash payments = {90% x (320,000 – 35,000} + {10% x (Rs.260,000 - Rs.35,000)} = (2,56,500 + 22,500) = Rs.279,000.
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21.
Answer : (d) Reason : Total budgeted overhead for the 1st quarter = (Rs.3,000 + Rs.20,000)=Rs.23,000. Budgeted fixed manufacturing overhead =(Rs.23,000 - Rs.15,000)= Rs.8,000. Total budgeted overhead for the 2nd quarter = (Rs.3,000 + Rs.23,750)=Rs.26,750. Budgeted fixed manufacturing overhead =(Rs.26,750 - Rs.18,750)= Rs.8,000.
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22.
Answer : (e) Reason : Third quarter planned production will be 123,000 units (120,000 + 15,000 - 12,000). Direct labor hours, 2 units per hour, for the third quarter will be 123,000/2 = 61,500. So statement (e) is false. All other statements are true.
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23.
Answer : (b) Reason : Payment for September purchases were Rs.100,000 x 0.6 = Rs.60,000, which leaves Rs.80,000 to apply to July and August. The ratio of the balance for July and August is 1:3. August purchases were ((Rs.80,000 x .75))/0.3) = Rs.2,00,000. July purchases were ((Rs.80,000 x .25))/0.1) = Rs.2,00,000.
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24.
Answer : (d) Reason : Labor hours = 1,50,000/1.00 = 1,50,000 hours. Increase in labour hours due to decrease in production efficiency by 10% and 40% increase in production
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= 1,50,000 x (1 + 0.40) (0.9) = 2,33, 333 hrs. Hence, budgeted wages = 2,33,333 x 0.80 = Rs.1,86,667. Direct material when production increses by 40% = 2,25,000 x (1+0.40) = Rs.3,15,000. Fixed overhead cost = Rs.60,000.
Variable cost after decrease in production efficiency by 10% and 40% increase in Production = Rs.1,00,000 x (1+ 0.40) (0.9) = Rs. 1,55,556 Cost of production = Direct material + Direct labour + Variable overhead + Fixed overhead =Rs.(3,15,000 + 1,86,667 +1,55,556 + 60,000) =Rs.7,17,223.
25.
Answer : (e) Reason : Economic value added is a variant of residual income which is defined as net operating income minus weighted average cost of capital multiplied by sum of long-term liabilities and shareholders' equity in which average invested capital is defined as long-term liabilities plus shareholders' equity.
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26.
Answer : (d) Reason : Finished goods: Closing stock at end of October must be 10% higher than at the beginning of the month: 30,000 x 110% = 33,000 units. (Closing stock for October is the same as opening stock for November.) Closing stock at end of November must be 10% higher than at the beginning of the month: 33,000 x 110% = 36,300 units. Closing stock at end of December must be 10% higher than at the beginning of the month: 36,300 x 110% = 39,930 units. Production in the month of December 2003 is Closing stock + Sales - Opening stock = 39,930 + 4,10,000 – 36,300 = 4,13,630units Raw materials: Opening stock of raw material at beginning of October = 50,000kg x Rs.6.00 = Rs.3,00 000 Closing stock at end of October must be 10% higher than opening stock = Rs.3,00,000 x 110% = Rs.3,30,000 Closing stock at end of November must be 10% higher than opening stock: = Rs.3,30,000 x 110% = Rs.3,63,000 Closing stock at end of December must be 10% higher than opening stock: = Rs.3,63,000 x 110% = Rs.3,99,300 Purchases in the month of December 2004 is Closing stock + raw materials used in production – opening stock = 3,99,300 + (4,13,630x 1.5 x Rs.6) – 3,63,000 = Rs.37,58,970
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27.
Answer : (b) Reason : ABC cost allocation systems can be used to allocate either variable or fixed manufacturing overhead, to allocate joint costs, or to reallocate service department costs to outputs. Direct costs of materials and labour do not need to be allocated to specific cost objectives
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28.
Answer: (a) Reason : Identifying interrelationships between key activities and resources consumed is central to understanding how business activities drive costs. It is part of creating an ABC cost allocation method and usually requires direct input from employees engaged in the process.
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29.
Answer: (e) Reason : Standard output = Standard Number of working days x Standard Labor hours per day x Standard Output per labor hour = 25 x 5000 x 2 = 2,50,000 units Standard fixed overhead rate per unit = Rs. 3,75,000/ 2,50,000 = Rs.1.50 Actual output = Actual Number of working days x Actual Labor hours per day x Actual Output per labor hour = 27 x 5,500 x1.9 = 2,82,150 units Fixed overhead volume variance
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= Actual output x standard rate – Budgeted fixed overheads = 2,82,150 units x Rs.1.50 – Rs.3,75,000 = Rs.4,23,225 – Rs.3,75,000 = Rs.48,225(favorable). 30.
Answer: (c) Reason : Budgets are used to plan and control all functions in the value chain, including design, production, distribution, and sales.
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31.
Answer : (b) Reason : The master budget comprises detailed schedules of all prices, costs, and quantities for every organizational function. It is the mechanism through which all activities are coordinated and includes sales forecasts, expenses, cash receipts and disbursements as well as balance sheets.
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32.
Answer : (c) Reason : Currently attainable standards are expected to be achieved given certain levels of effort; thus, they may be used for budgeting. Ideal or perfection standards cannot be achieved and would not be useful for budgeting. Flexible standards are not standards at all, but are probably just actual results.
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33.
Answer : (b) Reason : Normal costing charges production for the actual prime costs, but budgeted costs for variable and fixed factory overhead. Any combination which includes direct costs like Direct Material and Direct Labour is wrong.
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34.
Answer : (e) Reason : Quality costs include all of these, and more. Inspection costs are classified as appraisal costs. Rework costs are internal failure costs. Lost sales are external failure costs. And redesign of the production process is a prevention cost.
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35.
Answer : (b) Reason :
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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. =
(10,700 × Rs.9 + Rs.90,000) ∼ (22,000 × Rs.4.50 + Rs.90,000)
=
Rs.1,86,300 ∼ Rs.1,89,000
=
Rs.2,700 (F)
Overhead capacity variance = Budget at 22,000 units ∼ overhead applied
=
Rs.9,000 (F)
=
(22,000 × Rs.4.50 + Rs.90,000) ∼ (22,000 × Rs.9)
=
Rs.1,89,000 ∼ Rs.1,98,000
36.
Answer : (a) Reason : The sales quantity variance is the difference between the actual and budgeted units, times the budgeted unit contribution margin. (5,000-6,000) x Rs. 1,20,000/6,000 = Rs. 20,000 unfavorable. 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 x 5,000) – Rs. 1,45,000 = Rs. 5,000 favorable.
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37.
Answer : (d) Reason : Material price variance
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Material usage variance 38.
= = = =
8,200 kgs x Rs.0.80 – Rs.6,888 Rs.6,560 – Rs.6,888 = Rs.328 (Adverse) Rs.0.80 (870 units x 8 kgs – 7,150 kgs) Rs.0.80 (6,960 kgs – 7,150 kgs) = Rs.152 (Adverse)
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Answer : (d) Reason : Budgeted cost Rs.48, 000 Rs.10 Budgeted output 4, 800
Standard fixed overhead rate = Overheads incurred = Budgeted fixed production overhead cost + Expenditure = Rs.48,000 + Rs.2,000 = Rs.50,000 Overheads absorbed = Actual overhead – Underabsorption of overheads = Rs.50,000 – Rs.8,000 = Rs.42,000 Actual number of units 39.
40.
=
variance
Rs.42,000 ÷ Rs.10 = 4,200 units.
Answer : (a) 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 + 1,850 + 1,200) Standard wages (48,750+1,275 – 1,875 – 700)
37,05 0 47,45 0
5.70 7.30
Total
84,50 0
13.00
Answer : (d) Reason : Standard variable overhead rate=Rs.4,75,200÷2,16,000 hrs = Rs.2.20 per hour Standard hours per unit = 2,16,000 hours÷2,40,000 units= 0.9 hours Fixed overhead rate per unit = Rs.15,21,600÷2,40,000 units= Rs.6.34 Variable overhead efficiency variance: =(Standard hours for actual production- Actual hours) x Standard rate per hour =(2,20,000 units x 0.9 hours ∼ 1,94,920) x Rs.2.20=3,080 x Rs. 2.20 = Rs.6,776 (F) Fixed overhead volume variance =(Actual output ∼ Budgeted output) x Standard rate
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=2,20,000 units ∼ 2,40,000 units) x Rs.6.34= 20,000 units x Rs.6.34= Rs.1,26,800 (A) 41.
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.
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42.
Answer : (c) Reason : Relevant information is defined as information which is related to the future and is different under alternative courses of action and is accurate.
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43.
Answer : (d) Reason : The reports for the lower level of management are fairly detailed though limited in scope and they are quantitative in nature and less financial data. The reports for the top management are highly summarized.
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44.
Answer : (b) Reason : Scrap and costs of spoiled units that cannot be salvaged are examples of internal failure costs. These are the costs associated with materials and products that fail to meet quality standards and result in manufacturing losses. These defects are identified before the goods are shipped to customers. Hence the answer is (b). Appraisal costs are incurred to ensure that materials, products and services meet quality standards. They begin with the inspection of raw materials and parts from vendors. External failure costs are the costs incurred when inferior-quality products or services are sold to customers. Prevention costs are the costs incurred to reduce the number of defective units produced or the incidence of poor-quality service. Committed cost is fixed costs which results from the decision of the management in the prior period and is not subject to the management control in the present on a short-run basis.
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45.
Answer : (c) Reason : Responsibility accounting systems assign responsibility for a group of organizational activities and objectives to lower-level managers, and then monitor and report on the results. Lower-level managers play a key role in responsibility accounting systems.
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46.
Answer : (e) Reason : The managers of a profit center or an investment center are accountable for the center's profit.
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47.
Answer : (c) Reason : When 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
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48.
Answer : (e) Reason : Capital Turnover = Sales/Capital 4 = Rs.6,20,000 / Capital So Capital = Rs.6,20,000/4 = Rs.1,55,000
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Residual Income = Operating Income- (Capital*Imputed Interest rate) = Rs.6,20,000 x (Rs.1,55,000 x 0.13) = Rs.69,998 – Rs.20,150= Rs.49,850 (Approx). 49.
11.29 100
–
Answer : (b) Reason : A production budget is based on sales forecasts, in units, with adjustments for beginning and ending inventories. It is used to plan when items will be produced. After the production budget has been completed, it is used to prepare materials purchases, direct labor, and factory overhead budgets. Answer (a) is incorrect because a production budget is usually prepared in terms of units of output rather than costs. Answers (c) and (d) are incorrect because the direct labor and materials purchases budgets are prepared after the production budget. Answer (e) is incorrect because the production budget is not summarization of discretionary costs.
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50.
Answer : (a) Reason : Establishment and maintenance of an internal control structure rests with the top management. An internal control structure is established to provide able assurance that the organization’s objectives are achieved. Options (b) and (e) are not correct because these individuals are only responsible to the extent that they are a part of the management team. Options (c) and (d) are not correct because auditors must consider the internal control structure, but they do not establish and maintain it.
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51.
Answer : (b) Reason : Goal congruence occurs when employees, working in their own interests, make decisions that help meet the overall goals of the organization.This condition exists when individuals and groups aim to achieve the same organizational goals.
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52.
Answer : (d) Reason : Generally accountancy is the language of the business through which different information’s 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.
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53.
Answer : (a) Reason : Machine activity cost per hour =
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Rs.2, 40, 000 Rs.2, 40, 000 Rs.5.07 per machine hour 6, 000 x 5 4, 340 x 4 47, 360
Setups cost per set up =
Rs.56, 000 Rs.1, 400 40
Order handling cost per order = Particulars
per set up
Rs.52, 500 Rs.1, 500 35
Product A (Rs.)
Product B (Rs.)
1,52,027
87,973
Setups cost
30,800
25,200
Order handling cost
24,000
28,500
2,06,827
1,41,673
Machine cost
activity
per order
54.
Answer : (e) Reason : Short range budgets may cover periods of three, six and twelve months depending on the nature of the business. In determination of the period of short range budget all the factors as stated in (I) financing of production well in advance; (II) cover complete production; (III) entire seasonal cycle; (IV) coincide with the financial accounting period are all considered. Hence option (e) is the correct option.
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55.
Answer : (c) Reason : Target costing is a technique that is aimed at reducing the costs of the product over its life cycle; especially design related costs. A target cost is the cost at which the management wants to manufacture the product. The benefit of target costing are : It reduces the development cycle of a product by reducing the wastage of time and resources. It provides detailed information on the costs involved in producing a new product.(b) Audits have been used to monitor a company’s financial performance by evaluating it against a set of standards imposed by government regulators or by professional standards groups.(d) Benchmarking is a
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continuous process of comparing products and operations against the best practices in the industry. It consists of four phases: planning, analysis, bench trending, and strategic bench trending method.(e) This technique associated with benchmarking are similar to techniques used in bench trending, but has another structural dimensions. The study of bench trending includes a projection of the critical market conditions and the consumer preference variable. 56.
Answer : (d) Reason : Cost driver determines the size of the cost of an activity or causes a change in the cost of an activity. For example, the cost of dispatching activity might be determined by the number of dispatches and so the number of dispatches could be the cost driver. Therefore (d) is correct.
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57.
Answer : (a) Reason : The basic concept of value chain analysis is to look at what the organization does through the eyes of customers. From a customer's perspective, only certain activities add value to the product. These activities are called the value chain.
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58.
Answer : (a) Reason : When treated as cost objects, customer-related costs are compared with the benefits of having the customer. In some cases, some types of customers are more costly than the benefit they provide.
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59.
Answer : (e) Reason : Product life cycle begins with the initial planning and proposal stage. Design and engineering, production, marketing, and customer service follow.
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60.
Answer : (b) Reason : The complete journal entry would be a debit to Raw Materials Inventory for Rs.136,000 (Rs.4.25 x 32,000), a credit to Materials Price Variance of Rs.8,000 (Rs..25 x 32,000), and a credit to Accounts Payable for Rs.128,000.
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61.
Answer : (b) Reason : Sales receipts in the month of November 2004 = Cash sales of November + 40% of the sales of October + 25% of credit sales of August + 30% of the credit sales of September = 30% of 48,000 units @Rs.110+40% of 60,000 units @Rs.110+25% of (40,000 – 20% of 40,000) units @ Rs.100+30% of (60,000-20% of 60,000) units @Rs.100 =Rs.15,84,000+Rs.26,40,000+Rs.8,00,000+Rs.14,40,000 = Rs.64,64,000.
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62.
Answer : (a) Reason : 1.
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Computation of prime cost Particulars Sales (40,000 units) Less: Profit margin – 20% Cost of sales – (80% of Rs.14,4,000) Less: Variable overheads – Rs.2,40,000 Semi-variable overheads – Rs.2,60,000 Fixed overheads – Rs.2,00,000 Prime cost variable overheads: Variable cost =
Change in cos t Change in units
=
Rs. 14,40,000 2,88,000 11,52,000
7,00,000 4,52,000 Rs.3,00,000-Rs.2,60,000 50,000 units-40,000 units
2.
Semi-
= At 40,000 units Fixed cost
Rs.40, 000 10, 000 units
= Rs.4per unit
=
Total cost – Variable cost
=
Rs.2,60,000 – 40,000 units × Rs.4 = Rs.1,00,000
At 45,000 units Total cost
=
45,000 units × Rs.4 + Rs.1,00,000=Rs.2,80,000
Computation of differential cost of production of 5,000 additional units (i.e. 10% of normal capacity): Differential cost 40,000 units 45,000 units Element of cost for 5000 (Rs.) (Rs.) units (Rs.) Prime cost – (Working Note 1) 4,52,000 5,08,500 56,500 Variable overhead 2,40,000 2,70,000 30,000 Semi variable overhead (Working Note 2) 2,60,000 2,80,000 20,000 Fixed overhead 2,00,000 2,00,000 – 11,52,000 12,58,500 1,06,500 Rs.1, 06, 500 5, 000
Cost per unit of new order = Profit margin 25% (20% on sale = 25% on cost) Minimum selling price per unit 63.
= Rs.21.30 = Rs. 5.33 = Rs.26.63 < TOP >
Answer : (d) Reason : Cash sales for December 2004 (Rs.4,85,000 x 0.5) Cash flows for the credit sales in the month of October 2004 (Rs.3,15,000 x 0.5 x 0.25) Cash flows for the credit sales in the month of November 2004 (Rs.4,25,000x 0.5 x 0.7)
Rs.2,42,500 Rs.39,375 Rs.1,48,750
Rs.4,30,625 Total commission payable to salesmen = Rs.4,30,625 x 4% = Rs.17,225 64.
Answer : (b) Reason : The production budget for December 2004= 4,500 units x 1.2 = 5,400 units The production cost budget for January 2005 = 1.2 x 4,250 units x (Rs.35 + Rs.10 + Rs.20 + Rs.5) + Rs.41,000 = Rs.3,57,000 + Rs.41,000 = Rs.3,98,000.
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65.
Answer : (b) Reason : Here the Total sales Margin variance is Rs.1,65,000 (Adverse ) implies the actual sales margin (contribution) = Budgeted sales margin –Rs.1,65,000 = [15,000 x Rs.6+20,000 x Rs.7+5,000 x Rs.9] –Rs.1,65,000 = Rs.2,75,000-Rs.1,65,000 = Rs.1,10,000. Here sales mix ratio is 3:4:1.Let us assume a composite unit has 3 units of product A,4units of product B and 1 unit of product C. So, contribution from composite unit = 3 x Rs.6+4 x Rs.7+1 x Rs.9=Rs.55. Number of composite units to be sold and produced = Contribution of Rs.1,10,000 / Rs.55 = 2,000 units .i.e. A-2,000 x 3=6,000 units
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B-2000 x 4=8,000 units C-2000 x 1=2,000 units. The budgeted number of composite units is 5,000 units. Standard rate per composite unit=Rs.80,000/5,000=Rs.16 Total overhead cost variance = Actual units x Standard rate – Actual cost = 2,000 x Rs.16 – Rs.80,000 = Rs.48,000 (adverse) 66.
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Answer : (b) Standard cost per unit of output ( 15 × 4 ) + ( 12 ×3) + ( 8 ×6 )
= = Rs.4.50
32
=
144 32
Material yield variance = (Actual yield – Standard yield for actual input) × Standard cost per unit of output = 67.
4, 200 3, 648 − 35 ×32 × 4.50
= (3,648 – 3,840) × 4.50 = 864 (A) < TOP >
Answer : (d) Reason : Completed stock: Total From opening work-in-progress Closing work-in-progress Current production
250 450 950 Units
40 % 20 % 100 % Degree of completion
1,140 100 90 950 Overheads
Budgeted rate per unit = Rs.180 No. of direct labor hours per unit = 3 Budgeted rate per hour = Rs.60 Standard hours for actual production = 1,140 x 3 = 3,420 hours Fixed overhead efficiency variance = (Standard hours for actual production – Actual hours) x budgeted rate per hour = (3,420 hours – 3,300 hours ) x Rs.60 = Rs.7,200 (F) 68.
Answer : () Reason : Profit for 1st quarter = Rs.8,000 – (4,00+3,000) = Rs.1,000 Variable portion of production overheads: For 200 units= Rs.4,000 For 240 units = Rs.4,100 ( if there is no reduction in fixed overheads) So, variable over head per unit =(Rs.4,100 –Rs.4,000)/(240-200) = Rs.2.50 Fixed over heads = Rs.4,000 – (200 x 2.50) = Rs.3,500 Because of decrease in fixed over heads , the actual fixed overheads = Rs.3,300 Total variable cost per unit = Prime cost per unit + variable overhead per unit= (Rs.3,000/ 200)+Rs.2.50= Rs.17.50 Actual variable cost after 20% increase = Rs.17.50 × 1.2 = Rs.21 Selling price per unit = Rs.8,000 / 200 = Rs.40 (same as 1st quarter) Profit per unit = Rs.1,000/ 200 = Rs.5 (same as 1st quarter) Contribution per unit = Rs.40-Rs.21=Rs.19 Let the number of units to be sold to make a profit per unit of Rs.5 be X then
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19X – Rs.3,300 = Rs.5X X=235.7 or 236 units. 69.
Answer : (d) Reason : Additional profit required = 10% of 3,00,000 = Rs.30,000. Contribution per unit of executive model = Rs.10-Rs.6 = Rs.4 Contribution per unit of economy model = Rs.2.00 - Rs.0.70 = Rs.1.30, but sale of every 10 units of economy model decreases the sales of executive model by 1 unit i.e. decrease in contribution per unit of sale of economy model = Rs.4.00 /10 = Re.0.40 So, the net contribution per unit of sale of one unit of economy model = Rs.1.30 –Re.0.40 =Re.0.90 Number of units of economy model to be sold to get a profit of Rs.30,000 = (Rs.20,000+Rs.30,000) /Re 0.90 = 55,556 units
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70.
Answer : (c) Reason : Now ROI = (Rs.2,00,000 x 100)/Rs.10,00,000 = 20%. Profit Margin Ratio =(Rs.2,00,000 x 100 )/Rs.18,00,000 =Rs.11.11% In next year the assets = Rs.10,00,000 + 5% of 10,00,000 = Rs.10,50,000 Since ROI is same, profit for next year = 20% of Rs.10,50,000 = Rs.2,10,000 Since profit margin ratio is also same , the sales will be = Rs.2,10,000 / 0.1111 = Rs.18,90,190 Increase in sales = Rs.18,90,190 – Rs.18,00,000 = Rs.90,190. % increase in sales =(Rs.90,190 x 100 )/Rs.18,00,000 = 5%.
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71.
Answer : (a) Reason : Standard cost per unit of output = (300 x Rs.4 +200 x Rs.3.00) / 1200 = Rs.1.50 Material cost variance = Actual cost of materials – Standard cost of actual output = (350 x Rs.4.50 + 160 x Rs.2.80)-(1,160 x Rs.1.50) = Rs.2,023 – Rs.1,740 = Rs.283 (A) Material price variance = Actual quantity ( Actual price – Standard price) = 350 (Rs.4.50- Rs.4)+160 (Rs.2.80- Rs.3.00) = Rs.175 – Rs.32 = Rs.143 (A) Material price variance represents variance due to deviation of actual prices from standard prices. It’s percentage in total variance = (143/283) x 100 = 50.53%.
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72.
Answer : (d) Reason : At 50% capacity loss = Rs.8,000 At 40% capacity loss = Rs.20,000 So every 1% increase in capacity utilization increases profit by Rs.1,200 (i.e. (Rs.20,000 – Rs. 8,000)/10%). To get a profit of Rs.10,000 the extra profit required above 50% = Rs.10,000 + Rs.8,000 = Rs.18,000 The extra capacity required for an extra profit of Rs.18,000 = Rs.18,000/Rs.1,200 =15% So, the capacity utilization for a profit of Rs.10,000 = 50% + 15% =65%.
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