Test

Paper 2
May 2021 Group-1
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Subject: Cost and Management Accounting.

Marks: 30 Marks Duration: 55 Min.

Question 1.

(A) Madhu Ltd. has calculated a predetermined overhead rate of Rs.22 per machine hour for its Quality Check
(QC) department. This rate has been calculated for the budgeted level of activity and is considered as
appropriate for absorbing overheads. The following overhead expenditures at various activity levels had
been estimated.
 Total overheads Number of machine hours
Rs.3,38,875 14,500
Rs.3,47,625 15,500
Rs.3,56,375 16,500

You are required to:

1. Calculate the variable overhead absorption rate per machine hour.

2. Calculate the estimated total fixed overheads.
3. Calculate the budgeted level of activity in machine hours.
4. Calculate the amount of under/over absorption of overheads if the actual machine hours were 14,970
and actual overheads were Rs.3,22,000.
5. Analyse the arguments for and against using departmental absorption rates as opposed to a single or
blanket factory wide rate.

(5 Marks)

(B) Linex Limited manufactures three products P, Q and R which are similar in nature and are usually
produced in production runs of 100 units. Product P and R require both machine hours and assembly
hours, whereas product Q requires only machine hours. The overheads incurred by the company during
the first quarter are as under:

Machine Department expenses 18,48,000

Assembly Department expenses 6,72,000
Setup costs 90,000
Stores receiving cost 1,20,000
Order processing and dispatch 1,80,000
Inspect and Quality control cost 36,000

The date related to the three products during the period are as under:

P Q R
Units produced and sold 15,000 12,000 18,000
Machine hours worked 30,000 hrs. 48,000 54,000 hrs.
hrs.
Assembly hours worked (direct labour 15,000 hrs. - 27,000 hrs.
hours)
Customers’ orders executed (in numbers) 1,250 1,000 1,500
Number of requisitions raised on the stores 40 30 50

Required

Prepare a statement showing details of overhead costs allocated to each product type using activity based
costing.

(10 Marks)

Question 2.

(A) Gemini Enterprises undertakes three different jobs A, B and C. All of them require the use of a special
machine and also the use of a computer. The computer is hired and the hire charges work out to ₹
4,20,000 per annum. The expenses regarding the machine are estimated as follows:

(₹)
Rent for the quarter 17,500
Depreciation per annum 2,00,000
Indirect charges per annum 1,50,000

During the first month of operation the following details were taken from the job register :

Job
Number of hours the machine was used : A B C
(a) Without the use of the computer 600 900 -
(b) With the use of the computer 400 600 1,000

You are required to compute the machine hour rate :

(a) For the firm as a whole for the month when the computer was used and when the computer was not used.

(b) For the individual jobs A, B and C.

(10 Marks)

(B) MST Limited has collected the following data for its two activities. It calculates activity cost rates based
on cost driver capacity.
Activity Cost Driver Capacity Cost
Power Kilowatt hours 50,000 kilowatt hours ₹ 2,00,000
Quality Inspections Number of Inspections 10,000 Inspections ₹ 3,00,000

The company makes three products M, S and T. For the year ended March 31, 20X4, the following
consumption of cost drivers was reported:

Product Kilowatt hours Quality inspections

M 10,000 3,500
S 20,000 2,500
T 15,000 3,000

Required:

(i) Compute the costs allocated to each product from each activity.

(ii) Calculate the cost of unused capacity for each activity.

(iii) Discuss the factors the management considers in choosing a capacity level to compute the budgeted fixed
overhead cost rate.
(5 Marks)