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Question Paper Management Accounting - I (MB161): October 2007 • •
1.
Answer all questions. Marks are indicated against each question.
The basic function of management accounting is to (a) (b) (c) (d) (e)
Record all business transactions Interpret the financial data Prepare reports about the use of the firm’s resources to meet the needs of internal users Assist in cost determination Prepare financial statements. (1 mark)
2.
Which of the following statements is true regarding management accounting? (a) (b) (c) (d) (e)
Management accounting is based on a set of accepted principles The application of management accounting cannot be extended beyond the traditional accounting system Management accounting focuses more on a company as a whole and less on the parts or segments of a company Management accounting provides an alternative to administration Management accounting refers to reports prepared to fulfill the needs of management. (1 mark)
3.
Which of the following costs is not an example of a committed fixed cost? (a) (b) (c) (d) (e)
Interest payments on a long-term loan Property taxes on land and related buildings Employees’ training Insurance premium Depreciation on plant and machinery. (1 mark)
4.
A manager of a company wants to control and reduce, if possible, the company's production costs. He must determine how production costs are related to and affected by various business activities. The manager needs to understand (a) (b) (c) (d) (e)
Cost behaviors Relevant ranges Quantum of cost Sources of cost Opportunity cost. (1 mark)
5.
The following statements are true except (a) (b) (c) (d) (e)
Managers of all companies analyze costs to control labor and overhead Managers of all companies analyze costs to properly value inventory Managers of all companies need to improve quality Managers of all companies need to improve productivity Managers of all companies need to improve efficiency. (1 mark)
6.
Padmini Ltd. uses a predetermined overhead rate of Rs.27 per machine hour. The company utilized 532 machine hours. The standard hours were 550 machine hours. If the actual overhead costs of the company are Rs.14,703, the under or over absorption of overhead is (a) (b) (c) (d) (e)
Rs.656 (over) Rs.339 (under) Rs.320 (over) Rs.656 (under) Rs.320 (under). (1 mark)
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7.
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Which of the following statements is true with respect to overheads? (a) (b) (c) (d) (e)
Variable overheads vary with time Direct assignment of factory overhead costs to each department is known as apportionment Factory rent is a direct cost to the factory as a whole but indirect to the departments Primary distribution is effected on the basis of service rendered to the production departments by service departments The secondary distribution on a reciprocal basis is known as the step-ladder method. (1 mark)
8.
Which of the following statements is false? (a) (b) (c) (d) (e)
When large amount of under or over-absorption of factory overhead is due to wrong estimation of overhead costs, it should be disposed of by supplementary rate method The cost of searching of new or improved products, new applications of materials or new or improved methods is known as research cost Administrative overhead costs are usually absorbed as a percentage of work costs The process of grouping costs according to their common characteristics is known as cost collection Selling cost is the cost of seeking to create and stimulate demand and cost of securing order. (1 mark)
9.
Gangotri Ltd. uses historical cost system and applies overheads on the basis of predetermined rates. The following data are made available by the company for the year ended March 31, 2007: Particulars Manufacturing overheads incurred Manufacturing overheads applied Work-in-progress Finished goods Cost of goods sold
Rs. 65,15,000 64,70,000 6,00,000 19,00,000 2,75,00,000
The amount of over/(under) absorbed overheads to be adjusted to cost of goods sold, using supplementary rate, is (a) (b) (c) (d) (e)
Rs.(2,850) Rs. (900) Rs. 2,850 Rs.(41,250) Rs. 41,250. (2 marks)
10. Which of the following is an overhead cost? (a) (b) (c) (d) (e)
Direct material costs Income tax Penal interests on loans Electricity expenses Subscriptions. (1 mark)
11. Kailash Ltd. has furnished the following information pertaining to its process account for the last month: Opening work-in-process Closing work-in-process
220 units (75% complete) 160 units (60% complete)
Units started
1,200 units
Value of opening work-in-process
Rs.5,875
Cost incurred during the month
Rs.42,876
Costs are incurred evenly throughout the month. The company uses FIFO flow of costs. The value of finished goods was (a) (b) (c)
Rs.45,295 Rs.43,135 Rs.39,778
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(d) (e)
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Rs.41,155 Rs.35,280. (2 marks)
12. Cost-volume-profit analysis is most important for the determination of (a) (b) (c) (d) (e)
Volume of operations necessary to break-even Margin of safety necessary to equal fixed costs Sales revenue necessary to equal fixed costs Relationship between revenues and costs at various level of operations Sales revenue necessary to equal total costs. (1 mark)
13. Vaishali Ltd. has 3 production departments – P1, P2 and P3 and 2 service departments – S1 and S2. The company has furnished the following overhead costs of production as well as service departments: Department
Overhead costs (Rs.) 24,200 25,600 22,400 13,600 7,500
P1 P2 P3 S1 S2
The expenses of service departments which are charged to production as well as service departments on a percentage basis are as follows: Department S1 S2
P1 35% 40%
P2 30% 35%
P3 15% 10%
S1 15%
S2 20% -
The total overhead expenses of P1 and P3, using reciprocal method, are (a) (b) (c) (d) (e)
Rs.29,865 and Rs.33,727 respectively Rs.33,842 and Rs.29,865 respectively Rs.33,727 and Rs.25,731 respectively Rs.33,842 and Rs.25,731 respectively Rs.33,727 and Rs.33,842 respectively. (2 marks)
14. Neha Ltd. makes a product known as ‘FT’. The company has provided the following balances as on April 01, 2007:
(a) (b) (c) (d) (e)
Finished goods – 500 units Work-in-process – Rs. 7,850 Raw materials – Rs. 14,750 The following data are available as on September 30, 2007: Indirect labor – Rs. 14,250 Freight in – Rs. 6,820 Direct labor – Rs. 34,750 Raw material – Rs. 10,850 Factory overhead expenses – Rs. 33,360 Work-in-process – Rs. 9,320 Sales (15,000 units) – Rs.4,20,000 Indirect material – Rs. 25,620 Total manufacturing costs incurred – Rs.2,36,200 There were 1,500 units of finished goods of product–FT as on September 30, 2007. The amount of raw materials purchased during the half-year ended September 30, 2007 was Rs.1,22,750 Rs.1,21,400 Rs.1,36,150 Rs.1,17,500 Rs.1,32,250. (2 marks)
15. The following data pertains to Process I of Vinit Ltd. for the month of September 2007: Opening work in process 1700 units (Degree of completion: Materials - 100%; Labour & Overheads - 30%)
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Input of materials 19,300 units Normal loss 8% of total input (opening + units put in) Closing work-in-process 5,000 units (Degree of completion: Materials - 100%; Labour and Overheads - 25%) Units transferred to next process 16,000 units Equivalent units of material and labour & overheads, under FIFO method, were (a) (b) (c) (d) (e)
15,940 units and 14,320 units respectively 17,620 units and 16,740 units respectively 19,300 units and 15,060 units respectively 17,620 units and 15,060 units respectively 19,300 units and 16,740 units respectively. (2 marks)
16. Samarth Ltd. is engaged in the production of a component – K. The company has agreed to supply 96,000 components per annum to Gangotri Ltd. on a regular basis. The company incurs Re.0.20 as inventory holding cost per component per month and the set-up cost per run of component manufactured is Rs.648. The optimum number of units to be manufactured is (a) (b) (c) (d) (e)
2,400 4,800 5,400 7,200 9,600. (1 mark)
17. There are 2 warehouses for storing finished goods produced in a factory. Warehouse A is at a distance of 15 km and warehouse B is at a distance of 18 km from the factory. A fleet of 8-ton lorries is engaged in transporting the finished goods from the factory. The records show that the average speed of lorries is 40 km per hour when running and regularly take 45 minutes to load at the factory. At warehouse A, unloading takes 30 minutes per load while at warehouse B, it takes 25 minutes per load. Drivers’ wages, depreciation, insurance and taxes amount to Rs.36 per hour operated. Fuel, oil, tyres, repairs and maintenance cost Rs.6.50 per kilometer. The costs per ton-kilometer of carrying the finished goods to warehouses A and B are (a) (b) (c) (d) (e)
Rs.2.04 and Rs.1.85 respectively Rs.2.23 and Rs.2.14 respectively Rs.1.62 and Rs.1.10 respectively Rs.1.62 and Rs.2.14 respectively Rs.2.23 and Rs.1.62 respectively. (2 marks)
18. Sarathi Construction Ltd. has furnished the following information pertaining to a contract for the year ended March 31, 2007: Particulars Rs. Material sent to site 2,33,400 Materials in hand (March 31, 2007) 25,400 Cost of plant installed at site 2,13,000 Labor costs 1,31,600 Work certified 4,50,000 Cost of work not certified 1,15,000 Value of plant (March 31, 2007) 1,43,700 Contract price 8,20,000 Cash received from the contractee 3,60,000 Direct expenses 76,000 The value of work-in-progress (WIP) of the company at the end of the period was (a) Rs.1,57,380 (b) Rs. 37,380 (c) Rs. 42,720 (d) Rs.1,67,620 (e) Rs.1,62,280. (2 marks) 19. Research and development costs incurred for new products are
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(a) (b) (c) (d) (e)
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Sunk costs Conversion costs Joint costs Relevant costs Avoidable costs. (1 mark)
20. When allocating service department costs to production departments, the method that does not consider different cost behavior patterns is the (a) (b) (c) (d) (e)
Single-rate method Dual-rate method Multiple rate method Reciprocal method Step method. (1 mark)
21. What is the margin of safety of Krish Ltd. if the sales of the company during a period are Rs.4,80,000, fixed costs are Rs.62,500 and variable costs are Rs.3,84,000? (a) (b) (c) (d) (e)
Rs.1,67,500 Rs.2,75,000 Rs.3,25,000 Rs.2,92,500 Rs.1,87,000. (1 mark)
22. Generally, individual departmental rates rather than a plant wide rate for applying overhead would be used, if (a) (b) (c) (d) (e)
A company wants to adopt a standard cost system A company wants to adopt a direct costing system The manufactured products differ in the resources consumed from the individual departments in the plant The manufacturing overhead is the largest cost component of its product cost The manufacturing operations of a company are highly automated. (1 mark)
23. The rate, which is used to carry out adjustment for the difference between overheads absorbed and overheads incurred is known as (a) (b) (c) (d) (e)
Blanket rate Plant wide rate Single rate Supplementary rate Moving average rate. (1 mark)
24. Which of the following is an appropriate classification of the salary paid to a foreman incharge of the packing department? (a) (b) (c) (d) (e)
Direct departmental cost Indirect departmental cost Service department cost Direct product cost Administrative cost. (1 mark)
25. Suman Ltd. manufactures and sells four types of products under the brand name of Snip, Chip, Nip and Kip. The sales mix in value comprises 28%, 41%, 23% & 8% of all four products respectively. The total budgeted sales at full capacity are Rs.82,000 per month. The operating costs are as follows: i)
Variable costs:
ii) Break-even sales The fixed cost per month is (a) Rs.52,043
Product Product Product Product
- Snip - Chip - Nip - Kip
65% of selling price 45% of selling price 55% of selling price 60% of selling price 87.8% of full capacity
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(b) (c) (d) (e)
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Rs.43,046 Rs.34,038 Rs.33,046 Rs.38,043. (2 marks)
26. Consider the following data pertaining to the production of BC Ltd. for the month of September 2007: Particulars Opening stock of raw material Closing stock of raw material Purchase of raw material during the month Total manufacturing cost charged to product
Rs. 12,650 14,300 1,32,450 3,37,800
Factory overheads are applied at the rate of 80% of direct labor cost. The amount of factory overhead applied to production was (a) (b) (c) (d) (e)
Rs. 67,400 Rs. 96,617 Rs.1,15,000 Rs.1,28,543 Rs. 92,000. (2 marks)
27. A product, which uses 150 tons as input per month, passes through two processes – Process 1 and Process 2. The details of cost of process 1 for the month of September 2007 were as follows: Cost per ton (Rs.) Direct material cost 2,725 Direct labor cost 810 Overhead costs 1,430 The normal loss in process 1 was 3% of input and the scrap was 7% of the input with a realizable value of Rs.1,500 per ton. The material was transferred to process 2 at cost. The direct labor cost of Process 2 was Rs.880 per ton of input. The overhead was 75% of direct labor cost. The scrap at process 2 was 20% of input with a realizable value of Rs.1,800 per ton. The cost per unit of finished goods in process 2 was (a) Rs.7,800 (b) Rs.8,225 (c) Rs.6,600 (d) Rs.5,160 (e) Rs.7,950. Particulars
(2 marks) 28. Which of the following types of business would be most likely to use a job-order cost accounting system? (a) (b) (c) (d) (e)
Gas manufacturer Dairy farming Toy retailer Highway contractor Petroleum refinery. (1 mark)
29. Trendy Ltd. is a manufacturing company. In one of the production departments in its factory, the machine hour rate is used for absorption of production overheads. The company has fixed up the predetermined rate of Rs.16 per machine hour on the basis of normal activity level. The company has estimated the following overhead expenditure at different activity levels: Activity level (Machine hours) 1,400 1,575 1,850
Overhead expenditure (Rs.) 26,320 27,160 28,480
The machine hours at normal activity level are (a) 1,400
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(b) (c) (d) (e)
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1,850 1,500 1,750 1,650. (2 marks)
30. The following are the non-cost methods for accounting of by-product except (a) (b) (c) (d) (e)
Reserved cost method Replacement cost method Total sales less net yield of by-product method Miscellaneous income method Total sales less total costs method. (1 mark)
31. The profits and sales of Shiva Ltd. for 2 consecutive years were as follows: Year
Profits (Rs.)
Sales (Rs.)
1 2
25,500 43,500
2,10,000 2,70,000
The required sales value to earn a profit of Rs.22,500 is (a) Rs.1,25,000 (b) Rs.1,10,000 (c) Rs.1,50,000 (d) Rs.2,00,000 (e) Rs.1,75,000. (2 marks) 32. Narayana Ltd. has furnished the following information pertaining to its production: Direct material Direct labor Production overheads Selling & administrative overheads Normal production
Rs.18 Rs.14 Rs.25 (40% variable) Rs.20 (50% fixed) 1,200 units
The total cost of producing 1,450 units is (a) Rs.1,05,400 (b) Rs.1,06,650 (c) Rs.1,03,300 (d) Rs.1,02,100 (e) Rs.1,11,650. (2 marks) 33. Kanti Ltd. is engaged in the production of a component –SW103. The company has agreed to supply 24,000 components per annum to Yamini Ltd. on a regular basis. The company incurs Re.0.10 as inventory holding cost per component per month and the set-up cost per run of component manufacture is Rs.324. The minimum inventory cost is (a) (b) (c) (d) (e)
Rs.1,080 Rs.2,160 Rs.4,320 Rs.4,500 Rs.4,800. (2 marks)
34. If the work of specialized nature is performed by a sub-contractor, the cost of subcontracting is debited to (a) (b) (c) (d) (e)
Contract account Contractee’s account Profit and loss account Work-in-progress account Contractor’s account. (1 mark)
35. In which of the following situations, is job costing ideal?
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(a) (b) (c) (d) (e)
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Where two or more products are produced from the same process Where the products are dissimilar and non-repetitive in nature Where the products are homogeneous Where the production is in continuous flow Where the production is carried on in batches. (1 mark)
36. The equal percentage changes in selling price per unit and variable cost per unit will cause the breakeven point in rupees to (a) (b) (c) (d) (e)
Increase by the percentage change in variable cost per unit Decrease by less than the percentage increase in selling price per unit Decrease by more than the percentage increase in the selling price per unit Decrease by the percentage change in selling price per unit Remain unchanged. (1 mark)
37. In joint-product costing and analysis, which of the following costs is relevant when deciding the point at which a product should be sold to maximize profits? (a) (b) (c) (d) (e)
Joint costs upto the split-off point Labor costs required for the joint products Material costs required for the joint products Separable costs after split-off point Salaries of sales department for the period when the units were produced. (1 mark)
38. Stella Ltd. manufactures product X to the extent of 70% of total sales revenue and product Y to the extent of 30% of the total sales revenue. The variable cost of product X is 55% of its selling price and product Y is 75% of its selling price. If the total fixed cost of the company is Rs.3,62,700, the breakeven point of the company is (a) (b) (c) (d) (e)
Rs.4,27,500 Rs.6,39,714 Rs.5,13,000 Rs.8,55,000 Rs.9,30,000. (2 marks)
39. Which of the following business activities uses process costing? (a) (b) (c) (d) (e)
Foundry Automobile repair Road building Electrical contracting Newspaper publishing. (1 mark)
40. Rajeev Ltd. uses predetermined overhead rate based on machine hours. During the month of September 2007, the company absorbed Rs.1,44,000 of factory overheads on 30,000 actual machine hours. Budgeted factory overheads for the month amounted to Rs.1,38,000 but the actual factory overheads incurred were Rs.1,40,500. The budgeted machine hours of the company were (a) (b) (c) (d) (e)
28,750 29,270 25,400 29,466 30,544. (1 mark)
41. The opening stock and closing stock of Sparsh Ltd. are 13,650 units and 15,250 units respectively. If the profit based on marginal costing is Rs.1,83,600 and profit under absorption costing is Rs.2,08,080, the fixed overhead absorption rate per unit is (a) (b) (c) (d) (e)
Rs.14.20 Rs.15.30 Rs.15.10 Rs.14.60 Rs.15.65.
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42. Which of the following factors should not be taken into consideration for determining the basis for applying overheads to products? (a) (b) (c) (d) (e)
Adequacy Convenience Time factor Seasonal fluctuation of overhead costs Manual or machine work. (1 mark)
43. Marginal costing is a valuable technique to the management for the following reasons except (a) (b) (c) (d) (e)
It integrates with other aspects of management accounting example – cost-volumeprofit analysis, flexible budgeting and standard costing It emphasizes the significance of key factors affecting the performance of the business in the profit-planning and decision-making area The profit for a period is affected by changes in absorption of fixed expenses resulting from building or reducing inventory The impact of fixed cost on profits is emphasized because the total amount of such cost for the period appears in the income statement There is a close relationship between variable costs and controllable costs classification. (1 mark)
44. If inventories are expected to change, the type of costing that provides the best information for breakeven analysis is (a) (b) (c) (d) (e)
Process costing Direct costing Job costing Absorption costing Uniform costing. (1 mark)
45. Which of the following statements is true for a firm that uses direct costing? (a) (b) (c) (d) (e)
The cost per unit of a product changes because of changes in number of units manufactured An idle facility variation is calculated Product cost includes variable administrative costs Product cost includes fixed manufacturing costs Profits fluctuate with sales. (1 mark)
46. When a company prepares financial reports by using absorption costing (a) (b) (c) (d) (e)
Profits will always increase with increase in sales Profits will always decrease with decrease in sales Profits may decrease with increased sales even if there is no change in selling prices and costs Decreased output and constant sales result in increased profits Profit will always increase with increase in production. (1 mark)
47. Costs are allocated to cost objects in many ways and for many reasons. Which of the following is a purpose of cost allocation? (a) (b) (c) (d) (e)
Implementing activity-based costing Evaluating revenue center performance Budgeting cash and controlling expenditures Aiding in variable costing for internal reporting Measuring income and assets for external reporting. (1 mark)
48. A product requires three processes for completion. The following data are available relating to the three processes for a period: Particulars Direct Material Direct wages
Process I (Rs.) 5,250 350
Process II (Rs.) 850 550
Process III (Rs.) 460 400
Total (Rs.) 6,560 1,300
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Direct Expenses 750 650 1,400 The total production overhead incurred is Rs.2,340 and is recoverable at 180% of direct wages. Production during the period was 400 units. There was no opening or closing work in progress. The cost per unit of finished unit was (a) Rs.39 (b) Rs.33 (c) Rs.24 (d) Rs.25 (e) Rs.29. (2 marks) 49. The term used to describe the assignment of direct costs to a particular cost object is (a) (b) (c) (d) (e)
Cost allocation Cost tracing Cost accumulation Cost assignment Cost absorption. (1 mark)
50. Which of the following is true regarding contract costing? (a) (b) (c) (d) (e)
Both work certified and work uncertified are valued at cost price Both work certified and work uncertified are valued at market price Both work certified and work uncertified are valued at contract price Work certified is valued at contract price whereas work uncertified is valued at cost price Work certified is valued at cost price whereas work uncertified is valued at market price. (1 mark)
51. Which of the following is a period cost? (a) (b) (c) (d) (e)
Research and development costs Direct labor cost Repair cost Indirect material cost Power cost. (1 mark)
52. Two manufacturing companies – Sonu Ltd. and Monu Ltd. have decided to merge their business operations. They have furnished the following details: Particulars Capacity utilization (%) Sales (Rs. in lakh) Variable costs (Rs. in lakh) Fixed costs (Rs. in lakh) The profit of the merged plant at 72% capacity level is (a) Rs.140.5 lakh (b) Rs.168.4 lakh (c) Rs.170.0 lakh (d) Rs.210.8 lakh (e) Rs.220.0 lakh.
Sonu Ltd. 84 630 336 120
Monu Ltd. 75 240 150 50
(2 marks) 53. A cost that can be substantially influenced by a manager is often referred as (a) (b) (c) (d) (e)
Sunk cost Direct cost Opportunity cost Controllable cost Indirect cost. (1 mark)
54. Which of the following factors is required to be multiplied with contribution margin ratio to calculate fixed costs? (a)
Break-even sales value
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(b) (c) (d) (e)
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Margin of safety Variable costs per unit Unit sales price Change in sales volume. (1 mark)
55. The current sales price of a company is Rs.125 per unit. Variable costs are expected to increase from Rs.80 to Rs.85 per unit. Fixed costs of Rs.3,50,000 will not change. How many additional sales units are required to be sold in order to maintain an operating income of Rs.2,80,000? (a) (b) (c) (d) (e)
6,222 1,750 972 2,200 2,800. (2 marks)
56. The following particulars are provided by Kashyap Constructions Ltd.: Particulars Total expenditure to date Estimated further expenditure to complete the contract (including contingencies) Contract price Work certified Work not certified Cash received
Rs. 1,74,600 45,800 3,50,000 2,35,000 18,500 1,78,700
The profit of the contract to be transferred to profit and loss account is (a) (b) (c) (d) (e)
Rs.58,498 Rs.78,900 Rs.39,998 Rs.38,902 Rs.97,400. (2 marks)
57. In producing toy car, Linux Ltd. uses 6 hours of direct labor per unit. The labour rate is Rs.9.00 per hour. The material cost per unit is Rs.132. The company incurs the following overhead costs: Material Handling Rs.48,000 Rs.39,600 Assembly Supervisor Purchasing Rs.27,150 The company has produced 4,500 units. If the company sells 3,600 units, the value of ending inventory would be (a) Rs.1,90,350 (b) Rs.1,18,800 (c) Rs.3,85,600 (d) Rs.5,51,750 (e) Rs.7,61,400. (2 marks) 58. Cubical Engineering Ltd. manufactures motor engine parts. The factory normally operates 6 days a week on a single seven-hour shift. During the year 2006-07 it was closed for 18 working days for holidays. Equipments were idle for 118 hours for cleaning, oiling, etc. The overhead costs amounted to Rs.17,815 and it was absorbed on machine hour rate. The overhead absorption rate during the same period was (a) (b) (c) (d) (e)
Rs.7.10 per hour Rs.6.25 per hour Rs.6.10 per hour Rs.9.15 per hour Rs.8.67 per hour. (2 marks)
59. Moon-lite Gravel Ltd. purchases raw gravel in 50-ton lots from which it manufactures 4 grades of gravel, which consists of its sales mix: 10 ton of Decorative Stone, 12 ton of Road Stone, 15 ton of Pea Gravel and 13 ton of Construction Gravel. The contribution margin ratio of each product is 32%, 45%,
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60% and 55% respectively. The overall contribution margin ratio for every 50 ton of gravel sold is (a) (b) (c) (d) (e)
58.50% 51.75% 48.72% 80.00% 49.50%. (2 marks)
60. Sudhir Ltd. manufactures from a common process 4 joint products – A, B, C and D. The total cost till the split off point was Rs.78,750. The output and sales in the year 2006-07 were as follows: Product A B C D
Output (gallons) 6,00,000 12,000 7,500 12,000
Sales after further processing cost (Rs.) 1,25,500 21,000 4,500 53,500
Further processing costs (Rs.) 21,500 2,500 5,500
If the joint costs are apportioned on the basis of relative sales value of the different products at the split off point, the net incomes of products A and D are (a) (b) (c) (d) (e)
Rs.57,200 and Rs.10,175 respectively Rs.26,400 and Rs.10,175 respectively Rs.26,400 and Rs.46,320 respectively Rs.57,200 and Rs.26,400 respectively Rs.10,175 and Rs.26,400 respectively. (2 marks)
61. Mirra Ltd. has furnished the following information pertaining to its Process Z for the month of September 2007: Opening Work in process units 25,000 (Stage of completion: Materials – 80%, Labour – 60%, Overheads – 60%) New units introduced in process 55,000 Units completed 60,000 Closing WIP units 20,000 (Stage of completion: Materials – 80%, Labour – 80%, Overheads – 80%) The equivalent production units of materials under LIFO method is (a) 56,000 (b) 52,000 (c) 72,000 (d) 60,000 (e) 64,000. (2 marks) 62. Vitadot Ltd. has furnished the following information pertaining to a new product: i. The fixed costs will be Rs.1,25,000 for production of 12,000 units or less. If the production is more than 12,000 units, the fixed costs will be Rs.1,65,000. ii. The variable cost to sales ratio is 80% of the sales for the first 12,000 units and it will be reduced to 76% of sales for units in excess of 12,000 units. iii. The sale price of the product per unit is Rs.50. If the company manufactures more than 12,000 units, the break-even units of the new product is (a) (b) (c) (d) (e)
15,750 19,000 12,000 3,750 5,000. (2 marks)
63. Vainavi Ltd. has estimated Rs.4,20,000 as its direct material requirements and Rs.1,80,000 as the direct labour for the month of November 2007. It is the policy of the company to absorb overheads as under: Factory overheads Administrative overheads Selling and distribution overheads
60% of direct wages 20% of works cost 15% of works cost
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It is estimated that the selling and distribution overheads will increase by 10% in the month of November 2007. The company sells goods at a profit of 20% on sales. The budgeted sales for the month of November 2007 will be (a) Rs.12,08,025 (b) Rs.11,17,500 (c) Rs.10,75,575 (d) Rs.10,72,850 (e) Rs.10,87,500. (2 marks) 64. A company has a profit-volume ratio of 32%. To maintain the same contribution, by what percentage must sales be increased to offset 15% reduction in selling price? (a) (b) (c) (d) (e)
10% 20% 30% 35% 60%. (2 marks)
65. A major difference between Financial Accounting and Management Accounting relates to differences in the users. Related to Vandana Ltd. who of the following is best described as a user of Management Accounting Information? (a) (b) (c) (d) (e)
Credit Manager of a vendor for Vandana Ltd. Purchase Manager for Vandana Ltd. Bank Manager reviewing a loan application from Vandana Ltd. Income Tax Commissioner reviewing the tax return of Vandana Ltd. A shareholder of Vandana Ltd. (1 mark)
66. Normal wastage is classified as (a) (b) (c) (d) (e)
Product cost Period cost Standard cost Extraordinary item Deferred charge. (1 mark)
67. Savitha Petroleum is a small company that acquires crude oil and manufactures three intermediate products - A, B & C, differing only in grade. There was no opening inventory of finished goods but there was opening work-in-process on September 01, 2007. The production costs for September 2007 were as follows (assume separable costs were negligible): Particulars Crude oil acquired and used in production Direct labor and related costs Factory overhead The output and sales for the month of September 2007 were as follows:
Rs. 5,25,000 2,30,000 3,15,000
Particulars A B C Number of Barrels produced 325 260 135 235 175 135 Number of Barrels sold Prices per Barrel sold (Rs.) 3,300 4,500 5,600 If joint costs are apportioned on the basis of relative sales value of output, the cost of closing inventory of product A for the month is (a) Rs.1,75,610 (b) Rs.1,05,983 (c) Rs.2,19,512 (d) Rs.3,51,220 (e) Rs.1,31,707. (2 marks) 68. Bharat Ltd. uses job costing system and has furnished the following cost data for Job No.3A:
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Particulars Direct material Direct wages Profit Selling & distribution overhead Administrative overhead Factory overhead
Rs. 5,40,000 3,25,000 2,77,425 1,54,125 2,05,500 1,62,500
The cost of sales and works cost for Job No.3A are (a) Rs.16,64,550 and Rs.11,75,000 respectively (b) Rs.13,87,125 and Rs.10,27,500 respectively (c) Rs.16,64,550 and Rs.10,27,500 respectively (d) Rs.13,87,125 and Rs.12,33,000 respectively (e) Rs.12,33,000 and Rs.11,75,000 respectively. (2 marks) 69. Which of the following basis of apportionment is most suitable for allocating the rent of a factory building between cost centers? (a) (b) (c) (d) (e)
Machine hours Labour hours Number of laborers Floor area Kilowatt hours. (1 mark)
70. Two companies – A and B, produce and sell the same product in a competitive industry. Thus the selling price of the product for each company is the same. Company A has a contribution margin ratio of 40% and fixed costs of Rs.20 lakh. Company B is more automated, making its fixed costs 20% higher than those of Company A. Company B also has a contribution margin ratio greater than that of Company A by 10%. The sales value, at which profits of both the companies are same, is (a) (b) (c) (d) (e)
Rs. 83,33,333 Rs. 83,00,000 Rs. 81,15,000 Rs.100,00,000 Rs.110,00,000. (2 marks)
Suggested Answers Management Accounting - I (MB161): October 2007 1.
2.
3.
4.
5.
Answer : (c) Reason : The basic function of management accounting is to prepare reports about the use of the firm’s resource meet the needs of internal uses. Other options in (a), (b), (d) and (e) are not correct. Answer : (e) Reason : Management accounting is not mandatory. Management accounting is not based on any set of acce principles. It focuses more on the parts or segments of a company and less on a company as a whole. It not provide an alternative to administration. It refers to reports prepared to fulfill the needs of managem Therefore, (e) is correct Answer : (c) Reason : Employee training cost is usually a discretionary fixed cost. It is typically fixed since its amount is based on volume. It is discretionary because it is set each year during the planning process. Training c are optional, and they can be altered or perhaps deleted entirely during the year in response to busi environment changes. Other options are related to committed cost. Answer : (a) Reason : The manager wants to control, and reduce if possible, the company's production costs. He must determ how production costs are related to and affected by various business activities. The manager need understand cost behaviors. A knowledge of cost behavior is useful because it helps managers forecast (p results under different activity levels. Answer : (b) Reason : Service companies do not have Inventory. So Managers of service companies do not analyze cos properly value inventory. Therefore, option (b) is not correct.
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6.
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Answer : (b) Reason : Predetermined overhead rate = Rs.27 per machine hour Actual machine hours = 532 hours Applied overhead = 532 hours × Rs.27 (Standard rate for actual hours) Actual overhead
Rs.14,364
= =
Under absorption 7.
8.
9.
Rs.14,703 Rs.
339
Answer : (c) Reason : Factory rent is the rent of a factory so it is a direct expense in the factory but it is considered as indirect to the departments. Other options stated in (a), (b), (d) and (e) are not correct. Answer : (d) Reason : The process of grouping costs according to their common characteristics is known as cost classification cost collection. This statement is false. Other options (a), (b), (c) and (e) are correct statements. Answer : (d) Reason : Under this method the amount of under absorbed overheads is adjusted to work-in-progress, finished go and cost of goods sold in proportion to their values Rs.6,00,000; Rs.19,00,000 and Rs.2,75,00 respectively by use of supplementary rate. The total amount = Rs.6,00,000 + Rs.19,00,000 + Rs.2,75,00 = Rs.3,00,00,000; The amount of under absorbed = Rs.65,15,000 – Rs.64,70,000 = (Rs.45,000). The amount of under absorbed overhead is adjusted to cost of goods sold
10. Answer : Reason :
11. Answer : Reason :
= Rs.45,000 × ( Rs.2,75,00,000 ÷ Rs.3,00,00,000 ) = (Rs.41,250). (d) Direct material costs are variable cost. Income tax, penal interest on loans and subscriptions are consid as finance costs. These are not recorded in cost accounting. Electricity expenses are an item of accounting and it is classified as overhead cost. (a) Equivalent production units = 25% of 220 units + 100% of 1,040 units + 60% of 160 units = 55 units + 1,040 units + 96 units = 1 units Cost per unit = Rs.42,876 ÷ 1,191 = Rs.36. Cost incurred to finish opening work-in-process = 55 units × Rs.36 = Rs.1,980;
Cost of completed goods in this process = 1,040 units × Rs.36 = Rs.37,440; Total cost of finished goods = Rs.37,440 + Rs.1,980 + Rs.5,875 = Rs.45,295. 12. Answer : (d) Reason : Cost-volume-profit analysis is important for the determination of relationship between revenues and cos various level of operation. Other options (a), (b), (c) and (e) are not correct in respect of cost-volume-p analysis. Therefore, (d) is correct. 13. Answer : (c) Reason : P1 P2 P3 S1 S2 Particulars (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) Primary 24,200 25,600 22,400 13,600 7,500 Distribution S1 (7:6:3:4) 4,760 4,080 2,040 (-)13,600 2,720 S2 (8:7:2:3) 4,088 3,577 1,022 1,533 (-)10,220 S1 (7:6:3:4) 536 460 230 (-)1,533 307 S2 (8:7:2:3) 123 107 31 46 (-)307 S1 (7:6:3:4) 16 14 7 (-)46 9 S2 (8:7:2:3) 4 4 1 (-)9 Total 33,727 33,842 25,731 14. Answer : (d) Reason : Rs. Rs. Total manufacturing Costs 2,36,200 Less: Overhead costs: 14,250 Indirect labor
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Factory overhead Indirect material
Less: Add: Less:
33,360 25,620 73,230 6,820
Freight in Prime cost Direct labor Raw material consumed Closing material
80,050 1,56,150 34,750 1,21,400 10,850 1,32,250 14,750 1,17,500
Opening material Raw material purchased
15. Answer : (d) Reason : Material Opening Introduced
& completed In the period Normal loss –1,680 Closing W/P –5,000 Abnormal gain -1,680 Equivalent units
-
-
Labor & OH 70%
100%
14,300
100%
14,300
100%
5,000 19,300 1,680 17,620
25%
1,250 16,740 1,680 15,060
100%
100%
1,190
16. Answer : (d)
Reason : Economic Batch Quantity =
2 US C =
2 ( 96, 000 ( Rs.648 ) ) Re .0.20 (12 )
= 7,200 units
17.
Answer : (b) Reason : Statement showing operating time: Particulars Warehouse A (Minutes) Warehouse B (minutes) Distance from factory 15 km. (Speed 40 km per hour) Trip up and down journey 45 54 Loading 45 45 Unloading 30 25 Total 120 or 2 hrs. 124 or 2 hrs 4 mints Statement showing operating cost per ton-km. Particulars Warehouse A (8 × 15 = 120 ton- Warehouse B (8 × 18 = 144 tonkm) km) Standing charges 120 mts × Rs.36 per hr. = Rs.72 124 mins × Rs.36 per hr. = Rs. 74.40 Operating charges 30 km. × Rs.6.50 per km. = Rs.195 36 km × Rs.6.50 per km. = Rs. 234 Total operating cost = Rs.267 = Rs.308.40 Cost per ton km. Rs.267 ÷ 120 = Rs.2.23 Rs.308.40 ÷ 144 = Rs.2.14. 18. Answer : (d) Reason : Contract A/C Cr Particulars Materials
Rs 2,33,400
Particulars Work certified
Rs 4,50,000
Labor costs
1,31,600
Work not certified
1,15,000
Direct expenses
76,000 Material in hand
Depreciation on plant (Rs.2,13,000–Rs.1,43,700) Notional profit
25,400
69,300 80,100
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Profit transferred to P/L a/c
19. Answer : Reason :
20. Answer : Reason :
21. Answer : Reason :
22. Answer : Reason :
23. Answer : Reason : 24. Answer : Reason :
25. Answer : Reason :
=
5,90,400
Rs.3, 60, 000 2 Rs.4, 50, 000 = Rs.42,720 × Rs.80,100 × 3
Profit transferred to Reserve a/c = Rs.80,100 – Rs.42,720 = Rs.37,380 Work certified Rs. 4,50,000 Work not certified Rs. 1,15,000 Rs. 5,65,000 (–) Cash received Rs. 3,60,000 Rs. 2,05,000 (–) Unrealized profit Rs. 37,380 Value of WIP Rs. 1,67,620 (a) The research and development costs have already been incurred. Thus, they are costs resulting from a irrevocable decision. These sunk costs are irrelevant to the new product because they are unavoida Therefore (a) is correct (a) The single rate method combines fixed and variable costs. However, dual rates are preferable because allow variable costs to be allocated on a different basis from fixed costs. Options (c), (d) and (e) incorrect because the direct method, reciprocal method and step methods can be used on a single or dual basis. Option (b) is not true because a dual-rate method considers different cost behavior patterns. (a) Break-even sales = Fixed costs/Contribution margin ratio Where, contribution-margin ratio = (Rs. 4,80,000 – Rs. 3,84,000) ÷ Rs. 4,80,000 = 0.2. Thus, Break-even sales = Rs. 62,500 ÷ 0.2 = Rs. 3,12,500 . And, Safety margin = sales – break-even sales = Rs.4,80,000 – Rs.3,12,500 = Rs.1,67,500. (c) Factory overhead is usually assigned to products based on a predetermined rate or rates. The activity for overhead allocation should have a high correlation with the incurrence of overhead. Given only one driver, one overhead application rate is sufficient. If products differ in the resources consumed in indivi departments, multiple rates are preferable. (d) Supplementary rates are used to carry out adjustment for the difference between overhead absorbed overhead incurred. Therefore, (d) is correct. Other options are not correct. (a) The salary paid to a foreman in packing department is to be classified as direct department cost. It is no production cost, indirect department cost, service department cost or administrative cost. Therefore ( correct. (d) Particulars Sales (Rs.) Variable costs (Rs.) Contribution (Rs.)
Snip 22,960
Chip 33,620
Nip 18,860
Kip 6,560
Total 82,000
14,924
15,129
10,373
3,936
44,362
8,036
18,491
8,487
2,624
37,638
Profit-volume ratio = Rs.37,638 ÷ Rs.82,000 = 0.459 or 45.9% Fixed cost = Break-even sales × Profit-volume ratio = 87.8% of Rs.82,000 × 0.459 = Rs.71,996 × 0.459 = Rs.33,046. 26. Answer : (e) Reason : Raw material used = Op. stock + Purchases – Cl. stock = Rs.12,650 + Rs.1,32,450 – Rs.14,300 = Rs.1,30,800 Manufacturing cost = Raw material used + Direct labor + Factory overhead Rs.3,37,800 = Rs.1,30,800 + Direct labor + 80% of Direct labor
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27. Answer : Reason :
28. Answer : Reason :
29. Answer : Reason :
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1.80 Direct labor = Rs.2,07,000 Direct labor = Rs.1,15,000 The amount of factory overhead = 80% of Rs.1,15,000 = Rs.92,000. (b) Total cost of process 1 = 150 tons (Rs.2,725 +Rs.810 + Rs.1,430) = Rs.7,44,750 Number of good units 150 tons – 3% of 150tons – 7% of 150 tons = 135 tons Realizable value of scrap 10.5 units = 10.5 x Rs.1,500 = Rs.15,750 Cost per unit = ( Rs.7,44,750 – Rs.15,750 ) / 135 tons = Rs.5,400 Total cost of process 2 = Input from process 1 + Direct labor + Overhead (75% labor cost = 135 tons x Rs.5,400 + 135 tons x Rs.880 + 75% of Rs.1,18,800 = Rs.7,29,000 + Rs.1,18,800 + Rs.89,100 = Rs.9,36,900 Scrap 20% of input = 20% of 135 = 27units, Realizable value = 27 tons x Rs.1,800 = Rs.48,600 Therefore, cost per unit of finished goods = ( Rs.9,36,900 – Rs.48,600 ) / (135 – 27) tons = Rs.8,88,300 / 108 tons = Rs.8,225 (d) Highway contractor uses the job-order costing system for recording transactions, other business like manufacturing, patrol refinery, toy retailer and diary farming use the process costing system. Therefore is correct. (d) Rs.27,160 − Rs.26, 320 Rs.840 = 1575hrs − 1400hrs = 175hrs = Rs.4.80
Variable overheads
Fixed overhead rate = Rs.26,320 – (Rs.4.80 × 1400 hrs) = Rs.26,320 – Rs.6,720 = Rs.19,600 Standard fixed cost per unit = Rs.16 – Rs.4.80 = Rs.11.20 Normal activity level = Rs.19,600 ÷ Rs.11.20 = 1,750 hours. 30. Answer : (b) Reason : Replacement method or opportunity cost method is the cost method for accounting of by-product. O options mentioned in (a), (c), (d) and (e) are non-cost methods. Therefore, option (b) is the answer. 31. Answer : (d) Reason : Profit (Rs.) 25,500 43,500
Year I Year II Contribution to sales ratio
=
Rs.43, 500 − Rs.25, 500 Rs.18, 000 Rs.2, 70, 000 − Rs.2,10, 000 = Rs.60, 000 = 30%
= =
30% on Rs.2,10,000 – Profit Rs.63,000 – Rs.25,500 = Rs.37,500. = (Fixed cost + target profit) ÷ 30% = (Rs.37,500 + Rs.22,500) ÷ 30% = Rs.60,000 ÷ 30% = Rs.2,00,000
Required sales value
32. Answer : (a) Reason : Variable cost per unit
Costs (Rs.) 1,84,500 2,26,500
Change of Profit Change of Sales
=
Fixed cost (Year I)
Sales (Rs.) 2,10,000 2,70,000
=
Rs.18 + Rs.14 + Rs.10 + Rs.10 = Rs.52
Fixed cost
= = =
Rs.15 × 1,200 units + Rs.10 × 1,200 units Rs.18,000 + Rs.12,000 Rs.30,000
Cost of 1,450 units
=
1,450 units × Rs.52 + Rs.30,000 Rs.75,400 + Rs.30,000 = Rs.1,05,400
=
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33. Answer : (c)
Reason :
Economic Batch Quantity = Total cost Total set up cost When Q is 3,600
= = =
Total carrying cost = When Q is 3,600
34. Answer : Reason : 35. Answer : Reason :
36. Answer : Reason : 37. Answer : Reason :
38. Answer : Reason :
2 US C =
=
2x24, 000xRs.324 Re .0.10 x12 = 3,600 units
Total set up cost + Total carrying cost
(No. of production runs ordered) × (Set up cost per production run)
24, 000 3, 600 × Rs.324 = Rs.2,160 1 2 ×Q×I 1 2 × 3,600 × Re.0.10 × 12 = Rs.2,160
Total cost = Total set up cost + Total carrying cost Minimum inventory cost (at 3,600 units) = Rs.2,160 + Rs.2,160 = Rs.4,320. (a) If the work of specialized nature is performed by a sub-contractor, the cost of subcontracting is debite direct expenses to contract account (b) Job costing is a type of specific order costing which applies where work is undertaken as an identifi unit. Under job costing method, cost of an individual job or work order is ascertained separately. Hence ideal where the products are dissimilar and non-repetitive in nature. (e) The BEP in rupees is equal to the fixed cost divided by the contribution margin ratio. Accordingly, e percentage changes in selling price and variable cost per unit will not affect the break-even point in rupe (d) Joint products are created from processing a common input. Common costs are incurred prior to the s off point and cannot be identified with a particular joint product. Therefore, common costs are irrelevan the timing of sales. However, separable costs incurred after the split-off point are relevant becaus incremental revenues exceed the separable costs, product should be processed further, not sold at the s off point. Therefore, (d) is true. (e) Sales = variable cost + Fixed cost Let, the total sales = S. Where there is no profit no loss. S = Rs.3,62,700 + 0.70 S (.55) + 0.30S (.75) S = Rs.3,62,700 + 0.385 S + 0.225 S S (1–0.385 – 0.225) = Rs.3,62,700
S = Rs.3,62,700 ÷ 0.39 = Rs.9,30,000. 39. Answer : (e) Reason : The correct answer is (e). Process costing is used for continuous manufacturing of relatively homogen units. Newspapers are published in long runs of identical items, hence process costing is indicated. (a), (b), (c) and (d) are not correct because they involve unique projects which require job-order costing 40. Answer : (a) Reason :
Overhead absorbed = Rs.1,44,000 = 30,000 × Overhead rate Overhead rate = Rs.1,44,000 ÷ 30,000 = Rs.4.80 Budgeted overhead = Rs.1,38,000
=
Budgeted machine hours
=
Budgeted machine hour × Rs.4.80 =
41. Answer : (b) Reason : Profit difference Physical stock movement
Rs.1,38,000 ÷ Rs.4.80 28,750 hours.
=
Rs.2,08,080 – Rs.1,83,600 = Rs.24,480 = 15,250 – 13,650 = 1,600 units
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Fixed overhead rate per unit
=
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Rs.24,480 ÷ 1,600 units = Rs.15.30.
42. Answer : (d) Reason : Seasonal fluctuation of overhead costs is the cause of under or over absorption of overhead costs. Th not considered for determining the basis for applying overheads to products. This is false. Other opt mentioned in (a), (b), (c) and (e) are considered for determining the basis for applying overhead products. Therefore, (d) is the answer. 43. Answer : (c) Reason : The profit for a period is not affected by changes in absorption of fixed expenses resulting from buildin reducing inventory. Other things remaining equal (selling prices, costs, sales mix, etc) profit moves in same direction as sales when marginal costing is in use. This is true. The statement mentioned in (c) is correct. Other options mentioned in (a), (b), (d) and (e) are correct. Therefore, (c) is the answer. 44. Answer : (b) Reason : Direct costing system is best for providing the information needed for CVP analysis because techniques separate the fixed costs from variable costs. CVP analysis calculates a variable cost per unit deducts it from unit sale price to determine the unit contribution margin. The total contribution margin f a given level of sales measures the extent of recovery of fixed costs and profit earned. Direct costin likewise oriented toward determination of the contribution margin because it treats fixed manufactu overhead as a period, not a product cost. Thus, it facilitates CVP analysis by isolating vari manufacturing costs. Answer (a), (c), (d) and (e) are not correct because process and job costing, absorp costing and uniform costing do not separate fixed costs from variable costs. 45. Answer : (e) Reason : In direct costing system, only the variable costs are recorded as product costs. All fixed costs are expe in the period incurred. Because changes in the relationship between production levels and sales levels do cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trend sales. Other options are not correct. 46. Answer : (c) Reason : In absorption costing system, fixed overhead costs are included in inventory. When sales ex production, more overhead is expensed under absorption costing due to fixed overhead carried over from prior inventory. If sale increase over production, more than one period’s factory overhead is recognize expense. Accordingly, if the increase in factory overhead expensed is greater than the contribution margi the increased units sold, there may be less profit with an increased level of sales. Other options are correct. 47. Answer : (e) Reason : The purpose of cost allocation is to measure income and assets for external reporting. The other opt given (a), (b), (c) and (d) are not the purposes of cost allocation. Cost allocation is a process of assig and reassigning costs to cost objects. It is used for those costs that cannot be directly associated wi specific cost object. It is often used for purposes of measuring income and assets for external repor purposes. It is less meaningful for internal purposes because responsibility accounting systems empha controllability, a process often ignored in cost allocation. 48. Answer : (e) Reason : Particulars
49. Answer : Reason : 50. Answer : Reason :
Process I Process II Process III (Rs.) (Rs.) (Rs.) Transfer from previous Process 6,980 9,370 Direct Material 5,250 850 460 Direct Wages 350 550 400 Direct Expenses 750 650 Production overheads 630 990 720 Total 6,980 9,370 11,600 The total cost of 400 units of output = Rs 11,600. Cost per unit = Rs 11,600 / 400 = Rs 29. (a) The term used to describe the assignment of direct costs to the particular cost object is cost allocation. not the cost tracing, cost assignment, cost accumulation and cost absorption. Therefore, (a) is correct (d) In contract costing, work certified is valued at contract price and work uncertified is valued at cost p Both are not valued at cost price, market price or contract price. Therefore (d) is true.
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51. Answer : (a) Reason : All research, administrative, and selling costs are treated as period costs. (i) Direct labor costs and Direct material costs are product or inventorial costs. (ii) Indirect materials costs are treated as manufacturing overhead costs. (iii) Power costs and repair costs are treated as product costs. The correct answer is (a). 52. Answer : (b) Reason : Particulars Sonu Ltd. Monu Ltd. Capacity 100% 100% Sales (Rs.) 750 320 Variable cost (Rs.) 400 200 350 120 Less: Fixed 120 50 cost (Rs.) Profit 230 70 (Rs.) Contribution at 72% level = 470 × 72% Less: Fixed cost
=
Profit
Total 100% 1,070 600 470 170 300
Rs.338.40 lakh Rs.170.00 lakh Rs.168.40 lakh
53. Answer : (d) Reason : A sunk cost is a cost that has been incurred in the past and cannot be altered by any current or fu decision. A direct cost is a cost that can be directly traced to a particular department. A cost that is not d cost is called indirect cost. An opportunity cost is a potential benefit given up when the choice of one ac precludes selection of a different action. A cost that can be substantially influenced by a manger is call controllable cost. Hence, the correct answer is (d). 54. Answer : (a) Reason : Fixed costs = Break-even sales value × Contribution margin ratio. 55. Answer : (b) Reason : Projected unit sales = (Fixed costs + Target operating income) ÷ Unit contribution margin. Projected sales = (Rs.3,50,000 + Rs.2,80,000) ÷ Rs.40 = 15,750 units. Current sales units = (Rs.3,50,00 Rs.2,80,000) ÷ Rs.45 = 14,000 units. Increase in units: 15,750 – 14,000 = 1,750 units. 56. Answer : (c) Reason : Computation of notional profit Rs. 2,35,000 Value of work certified Less: Cost of work certified Total expenditure to date – work not certified 1,56,100 (Rs. 1,74,600 – Rs. 18,500) Notional profit 78,900 Profit to be transferred to P & L a/c 2
=
3 × Notional profit × Cash received Work certified 2
=
Rs.1, 78, 700
3 × Rs.78,900 × Rs.2, 35, 000 = Rs.39,998.
57. Answer : (a) Reason : Total overhead costs = Rs.48,000 + Rs.39,600 + Rs.27,150 = Rs.1,14,750 Cost to be allocated ÷ Allocation base Allocation Rate Rs.1,14,750 ÷ 27,000 hours Rs.4.25 per hour Material cost Rs. 132.00 Rs. 54.00 Labor cost: 6 hours × Rs.9.00 per hour
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Overhead cost: 6 hours × 4.25 per hour Total cost per unit
Rs . 25.50 Rs. 211.50 Cost of ending inventory = Rs.211.50 × 900 units = Rs.1,90,350. 58. Answer : (d) Reason : Maximum capacity
Less: Idle capacity Sundays Holidays Stoppage due to cleaning, oiling, etc Normal capacity Overhead absorption rate
2,555 hours
= Total days in 2006-07 X Single seven-hour shift = 365 × 7 = 52 × 7= 364 hrs = 18 × 7= 126 hrs = 118 hrs
= Overhead amount ÷ Normal capacity
608 hours 1,947 hours Rs. 17,815 ÷ 1,947 = Rs.9.15 per hour
59. Answer : (e) Reason : Sales mix = 10:12:15:13. The average contribution margin per mix= Total of each produ contribution margin ration × relative percentage of sales to total sales of the mix = (32% × 20%) + (45% × 24% (60% × 30%) + (55% × 26%) = 6.40% + 10.8% + 18% + 14.3% = 49.5%. 60. Answer : (d) Reason : Joint costs are apportioned on the basis of relative sales value of the products: Relative Sales Further Share of Net Sales value value after processing joint cost income at split Product further costs (Rs.) (Rs.) off point process (Rs.) (Rs.) (Rs.) A 1,25,500 21,500 1,04,000 *46,800 57,200 B 21,000 2,500 18,500 8,325 10,175 C 4,500 4,500 2,025 2,475 D 53,500 5,500 48,000 21,600 26,400 Total 2,04,500 29,500 1,75,000 78,750 96,250 * (Rs. 1,04,000 ÷ Rs. 1,75,000) × Rs. 78,750= Rs. 46,800. 61. Answer : (a) Reason : Units Completed: - Units introduced 100% of 55,000 = 55,000 - Opening units 20% of 5,000 = 1,000 Closing WIP: Opening units 0% of 20,000 = 0 Equivalent units of production of materials 56,000 Hence, option (a) is the correct answer 62. Answer : (a) Fixed cos t Reason : BEP = Contribution per unit Upto the production of 12,000 units Rs.1, 25, 000 Rs.1, 25, 000 Rs.50 − 80% of Rs.50 BEP = = = 12,500 units. Rs.10
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At any production level greater than 12,000 units, total fixed costs are Rs.1,65,000 but there are contribution margin. The first 12,000 units sold will produce a contribution margin of Rs.1,20,000 12,000 × Rs.10). Hence, the other Rs.45,000 (i.e. Rs.1,65,000 – Rs.1,20,000) must be contributed. contribution per unit is Rs.12.00 (i.e. Rs.50 – 76% of Rs.50) Therefore, BEP = Rs.45,000 ÷ Rs.12.00 =3,750 units. Therefore, Total BEP = 12,000 units + 3,750 units = 15,750 units. 63. Answer : (a) Reason : Rs. Direct material 4,20,000 Direct labor 1,80,000 Factory overheads (60% of direct labor) 1,08,000 Works cost 7,08,000 Administrative overheads (20% of works cost) 1,41,600 Selling and distribution expenses 1,16,820 (15% of works cost + 10%) (7,08,000 × 15% × 110%) 9,66,420 Profit (20% on sales = 25% on cost) 2,41,605 Sales value 12,08,025 64. Answer : (e) Reason : Let the present sales = 100 units at the rate of Re.1 per unit Present total sales = Rs.100 Present variable cost = Rs.68 Present contribution = Rs.32 If selling price is reduced by 15%, Selling price per unit = Re.0.85 Variable cost per unit = Re.0.68 Contribution per unit = Re.0.17 To maintain the same contribution, Sales value = (Present total contribution ÷ New contribution per unit) × New selling price per unit = (Rs.32 ÷ Re.0.17) × Re.0. 85 = Rs.160 Thus, sales will have to be increased by = (Rs.160 - Rs.100) ÷ Rs.100 = 60% 65. Answer : (b) Reason : The Purchasing Manager of Vandana Ltd. would be an internal user of information that is concerned production reports and estimates, where as the other individuals are all external to the company and w expect Financial Accounting information prepared in accordance with GAAP. Therefore, (b) is correct. 66. Answer : (a) Reason : Normal wastage is classified as product cost and therefore this cost is borne by the good units. It is classified as period cost, standard cost, extraordinary item or deferred charge. 67. Answer : (b) Reason : Joint cost = Rs.5,25,000 + Rs.2,30,000 + Rs.3,15,000 = Rs.10,70,000 Total sales value = 325 × Rs.3,300 + 260 × 4,500 + 135 × 5,600 = Rs.10,72,500 + Rs.11,70,00 Rs.7,56,000 = Rs.29,98,500. Share of joint costs of Product A = (Rs.10,70,000 ÷ Rs.29,98,500) × Rs.10,72,500 = Rs.3,82,716.35 The cost of closing inventory of Product A = (Rs.3,82,716.35 ÷ 325) × 90 = Rs.1,05,983. 68. Answer : (b) Reason : Particulars Rs. Direct material 5,40,000 Direct wages 3,25,000 Prime cost 8,65,000 1,62,500 Factory overhead cost (50% on direct wages) Works cost 10,27,500 Administrative overhead cost (20% on works cost) 2,05,500 Cost of production 12,33,000
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Selling & distribution overhead (15% on works cost) 1,54,125 Cost of sales 13,87,125 Profit (16.67% on sales or 20% on cost of sales) 2,77,425 Sales value 16,64,550 (d) In selecting suitable base for apportioning service department overhead cost, considerations should be g to practicability, simplicity, economy, theoretical soundness and assistance in accurate costing and control. Rent of a factory building should be apportioned on the basis of floor areas of cost centers. The no link between rent expenses of a factory building with other options like machine hours, labor ho number of labors and kilowatt hours. Therefore (d) is correct. (d) Company A’s breakeven point is lower because its fixed costs are lower. Company A’s breakeven poi Rs.50,00,000 (i.e. Rs.20,00,000 ÷ 40%). Company B’s breakeven point is Rs.54,54,545 [(Rs.20,00,00 1.2) ÷ (40% × 1.1)]. The indifference point, at which profits are equal, is as follows: Profit = Fixed costs + Variable costs; Rs.20,00,000 + 0.60x = Rs.24,00,000 + 0.56x Or, 0.04x = Rs.4,00,000 or, x = Rs.100,00,000. < TOP OF THE DOCUMENT >