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Question Paper

Management Accounting – I (151) : April 2004

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1. Which of the following statements is false? >

(a) Management accounting focuses on providing data for internal uses by managers
(b) Management accounting extends beyond the boundaries of traditional accounting systems and
(c) Management accounting makes extensive use of routinely generated financial accounting data
(d) Management accounting is primarily concerned with the reporting of business activities for a
company as a whole
(e) Management accounting is an interdisciplinary function, which involves frequent interaction with
sales, personnel, finance and production specialists at all levels.
(1 mark)
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2. Which of the following is not an assumption underlying CVP analysis? >

(a) The behavior of total revenue is linear

(b) Unit variable expenses remain unchanged as activities vary
(c) Inventory levels at the beginning and end of the period are the same
(d) Fixed costs remain constant as activity changes
(e) The number of units produced exceeds the number of units sold.
(1 mark)
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3. Which of the following points is not to be considered for preparation of statement of equivalent >
(a) Equivalent units are calculated for normal loss because it is treated as good production in the process
(b) Work-in-progress should be stated in equivalent units by applying the percentage of work required to
complete the unfinished work of the previous period
(c) An estimate is made of the percentage of completion of work-in-progress
(d) Unfinished units representing opening stock do not bear the cost transferred to the process with newly
introduced units
(e) Units representing abnormal loss and abnormal gain should be treated like units competed and
transferred to next process.
(1 mark)
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4. Which of the following types of business would be most likely to use a job-order cost accounting system? >

(a) Gas manufacturer (b) Petroleum refinery (c) Toy retailer

(d) Dairy farmer (e) Highway contractor.
(1 mark)
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5. For absorption of manufacturing overhead costs, which of the following statements is false regarding >
disadvantages under direct material cost method?
(a) This method is unstable and inaccurate as there exists no logical relationship between items of
manufacturing overhead and material cost
(b) Time factor is completely ignored in this method
(c) No distinction is made between fixed and variable expenses
(d) This method distinguishes the production of workers and that of machine
(e) This method is equitable, as a raw material used in production may not pass through all processes.
(1 mark)
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6. Rajesh Ltd. pays bonus to its manager based on operating income. The company uses absorption costing >
and overhead applied on the basis of direct labor hours. To increase bonuses the company’s managers may
do all of the following except
(a) Produces those products requiring the most direct labor
(b) Differ expenses such as maintenance to a future period
(c) Decrease production of those items requiring most direct labor
(d) Increase production schedule independent of customer demand
(e) Both (a) and (b) above.
(1 mark)
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7. In first in first out (FIFO) process costing system, equivalent units are a measure of >

(a) Work done on the beginning as well as ending work-in-process inventory

(b) Work done on units started in the production process this period
(c) Work required to complete the beginning work-in-process inventory
(d) Work done in the department this period
(e) Work performed on the ending work-in-process inventory.
(1 mark)
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8. Which of the following activities is an example of a non-value adding activity? >

(a) Manufacturing a product for capturing high market share

(b) Painting a product
(c) Packing a product for shipment
(d) Installing the product for the customer
(e) Reworking a defective product.
(1 mark)
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9. Which of the following is not a cost of inventory using variable costing procedures? >

(a) Prime costs (b) Variable manufacturing overhead costs

(c) Variable marketing costs (d) Direct materials costs (e) Direct labor costs.
(1 mark)
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10.The classification of costs as either direct or indirect depends upon >

(a) The timing of the cash outlay for the cost

(b) Whether an expenditure is unavoidable because it cannot be changed regardless of any action taken
(c) The behavior of the cost in response to volume changes
(d) Whether the cost is expensed in the period in which it is incurred
(e) The cost object to which the cost is being related.
(1 mark)
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11. In allocating factory service department costs to producing departments, which of the following items >
would most likely be used as an activity?
(a) Units of product sold
(b) Direct materials usage
(c) Units of electric power consumed
(d) Salary of service department employees
(e) Rent of production departments.
(1 mark)
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12.Which of the following best describes direct labor? >

(a) A purchase cost (b) A prime cost (c) A period cost

(d) A product cost (e) Both product cost and prime cost.
(1 mark)
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13.Which of the following is not a reason for allocating joint costs? >

(a) Inventory and cost of goods sold computations

(b) Cost reimbursements under contracts
(c) Insurance settlement computations
(d) Product decisions to sell-or-process-further
(e) Determination of product costs and managerial analysis for decision making.
(1 mark)
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14.In accounting for by-products, which of the following is not true? >

(a) They are accounted for in the same way as main products
(b) They may be accounted for at the time of production and deducted from cost-of-goods sold
(c) They are accounted for similar to the constant-gross-margin-percentage (NRV) method
(d) They may be recognized at the time of sale with revenue and inventory value recognized
(e) They may be treated as miscellaneous income.
(1 mark)
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15.Which of the following items would be treated as an indirect cost? >

(a) Wood used to make a chair

(b) Metal used for the legs of a chair
(c) Fabric to cover the seat of a chair
(d) Staples to fix the fabric to the seat of a chair
(e) Leather used for making handles of a chair.
(1 mark)
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16.Which of the following statements is not true? >

(a) Information is relevant if it is pertinent to a decision making problem

(b) Relevant information has a bearing on the future
(c) Sunk costs are irrelevant to decision making problem
(d) Opportunity costs are irrelevant to decision making problem
(e) Relevant and accurate data are of value only if they are in time.
(1 mark)
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17.Which of the following statements is false? >

(a) Collection of costs to be assigned is called a cost pool

(b) Responsibility centers, products and services are called cost objects
(c) The process of assigning costs is called cost allocation
(d) An allocation base may be referred to as cost driver
(e) Marketing costs allocation should be based on actual revenue.
(1 mark)
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18.The following are the causes of over or under absorption of overhead costs except >

(a) The anticipated hours is more or less than the actual hours worked for
(b) Non-recurring expenditure incurred due to unexpected changes in the methods of production
(c) Overheads are charged to work-in-progress proportionately
(d) Actual output is greater than estimated output
(e) Wrong estimation in overhead costs.
(1 mark)
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19.If a company uses weighted average method of process costing, the beginning work-in-process units and >
costs are treated as
(a) Units and costs of the current period
(b) Units and costs of the subsequent period
(c) Units and costs of the previous year
(d) It is ignored in the calculation of equivalent units of activity
(e) Their equivalency is measured as the work needed to complete them.
(1 mark)
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20.The use of variable costs as the minimum price to be considered when negotiating for a job order may be >
acceptable if
(a) The company has idle production capacity
(b) The marginal cost accounting system is in use
(c) The order will be lost if a higher price is sought
(d) The use of this pricing basis secured a previous order from the same customer
(e) The production capacity of the company exceeds practical capacity.
(1 mark)
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21.A debit balance on the contractee account should be incorporated in the balance sheet as >

(a) A current liability as ‘contract balances outstanding’

(b) Set-off against contract stock valuation
(c) Excess payments on account not set-off against contract stock value
(d) In debtors as ‘amount recoverable on contracts’
(e) Set-off against work-in-progress.
(1 mark)
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22.If process scrap is recycled for use in conjunction with new material as well as being sold externally, >
which of the following is most likely to be the value at which it is debited to the process?
(a) Standard cost (b) Marginal cost (c) Market price
(d) Cost of normal loss (e) Cost of abnormal loss.
(1 mark)
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23.Which of the following statements is false? >

(a) Operating cost statement is prepared to calculate the cost in case of service costing
(b) Motor cost for passengers is ascertained with reference to per passenger per kilometer
(c) Service costing is one of the basic methods of operation costing
(d) Service costing is applicable in canteens
(e) There is no difference between service costing and process costing.
(1 mark)
< Answer
24.In the reversal cost method, the manufacturing cost of the main product is reduced by >

(a) The actual revenue received from the by-product

(b) The estimated market value of the by-product
(c) The estimated replacement costs of the by-product
(d) The standard cost of the by-product
(e) The historical cost of the by-product.
(1 mark)
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25.An increase in variable costs where selling price and fixed cost remain constant, will result in which of the >
(a) An increase in contribution to sales ratio
(b) An increase in margin of safety
(c) A fall in the sales level at which the break-even point will occur
(d) A rise in the sales level at which the break-even point will occur
(e) No change in the sales level at which the break-even point will occur.
(1 mark)
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26.Which of the following statements is correct? >

(a) Primary packing of a product is an item of distribution overhead cost

(b) Warehousing cost is an item of office or administrative overhead cost
(c) Credit and collection cost is an item of administrative overhead cost
(d) Under applied or over applied factory overhead cost should be apportioned to cost of sales only
(e) If factory overhead control account has a closing debit balance, factory overhead cost is under-
(1 mark)
< Answer
27.Retention monies are defined as >

(a) Cost of work to date minus the cost of work not certified plus estimated profit to date
(b) Cash returned to the contractee if actual profits on a contract are 20% higher than the agreed figure
(c) Cash withheld by the contractee under the terms of the contract when payments of the value certified
are being made
(d) Payments to the contractor where it is desired to secure his services for a future contract
(e) Cash withheld by the contractee in order to improve the cash flow of the contractor.
(1 mark)
< Answer
28.Which of the following statements are true regarding the characteristics of controllable costs? >

I. They are in relation to a particular responsibility center

II. The head of a responsibility center has significant influence but not complete influence on
its controllability
III. They are relevant for the time period under review
IV. They are irrelevant for the time period under review

(a) Both (I) and (IV) above (b) Both (I) and (II) above (c) Both (I) and (III) above
(d) (I), (II) and (III) above (e) (I), (II) and (IV) above.
(1 mark)
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29.Which of the following statements is false? >

(a) Committed fixed costs are irrelevant costs while taking decisions
(b) Variable costs are only relevant costs
(c) In situations where additional fixed costs to be incurred become relevant costs as a result of a
(d) Relevant costs are incremental costs
(e) Out of pocket costs are relevant for decision making.
(1 mark)
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30.The cost proposed annually for the plant service for the grounds at corporate headquarters is an example of >

(a) Opportunity cost (b) Prime cost (c) Relevant cost

(d) Committed cost (e) Discretionary cost.
(1 mark)
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31.Which of the following statements is true regarding process costing? >

(a) It is applied in garment industry

(b) Inclusion of inter-profit in accounts will not require any adjustment in stocks
(c) Abnormal gain should reduce the normal loss and balance is transferred to costing profit and loss
(d) Abnormal loss is spread on good units of production
(e) Normal loss does not increase the cost per unit of usual production.
(1 mark)
< Answer
32.Which of the following components of production are allocable as joint costs when a single manufacturing >
process produces several saleable products?
(a) Direct material and direct labor
(b) Direct material, direct labor and selling expenses
(c) Direct material, direct labor and factory overhead
(d) Direct material, direct labor, factory overhead and selling expenses
(e) Direct labor and factory overhead.
(1 mark)
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33.What will be the difference in net profit calculated under direct costing method as opposed to absorption >
costing, if the closing inventory increases with respect to the opening inventory in units?
(a) Net profit under direct costing will be lower
(b) Net profit under direct costing will be higher
(c) Net profit under absorption costing will be lower
(d) There will be no difference in net profit
(e) The difference in net profit cannot be determined from the information given.
(1 mark)
< Answer
34.Which of the following statements is false? >

(a) For absorption of overhead costs, direct material cost method is useful where output is uniform and
material cost is stable
(b) The time factor is ignored when the cost of material is used as the basis for absorption of overhead
(c) Basis of apportionment of cost of steam is wages of each department
(d) Basis of apportionment of depreciation of plants is values of plants in each department
(e) Predetermined rate of absorption of overhead helps in quick preparation of cost estimates and quoting
(1 mark)
< Answer
35.Which of the following assumptions in respect of practical capacity as plant capacity concept is true? >

(a) It assumes all personnel and equipments will operate at the maximum efficiency and the total plant
capacity will be used.
(b) It does not consider idle time caused by inadequate sales demand
(c) It includes consideration of idle time caused by both limited sales orders and human and equipment
(d) It is the production volume that is always less than the actual use of capacity
(e) It is the production volume that is necessary to meet sales demand for the next year.
(1 mark)
< Answer
36.Which of the following would increase the unit contribution margin the most? >

(a) A 5% increase in selling price per unit (b) A 5% increase in variable cost per unit
(c) A 5% increase in fixed cost per unit (d) A 5% increase in total semi-fixed cost
(e) A 5% decrease in variable cost per unit.
(1 mark)
< Answer
37.If there is a change in cost due to change in the level of activity or pattern or method of production, it is >
known as
(a) Controllable cost (b) Semi-variable cost (c) Discretionary cost
(d) Differential cost (e) Avoidable cost.
(1 mark)
< Answer
38.The principal disadvantage of using the physical quantity method of allocating joint costs is that >

(a) Costs assigned to inventories may have no relationship to their value

(b) Physical quantities may be difficult to measure
(c) Additional processing costs affect the allocation base
(d) Joint cost, by definition, should not be separated on a unit basis
(e) By-products affect the allocation base.
(1 mark)
< Answer
39.The appropriate method for the disposition of under or over applied factory overhead >

(a) Is to adjust it to cost of goods sold only

(b) Is to adjust it to work-in-process only
(c) Is to adjust it to finished goods inventory only
(d) Is to apportion to cost of goods sold and finished goods only
(e) Depends on the significance of the amount.
(1 mark)
< Answer
40.A company’s approach to a make or buy decision >

(a) Depends on whether the company is operating at or below break-even

(b) Depends on whether the company is operating at or below normal volume
(c) Involves an analysis of avoidable costs
(d) Requires use of absorption costing
(e) Requires use of activity based costing.
(1 mark)
< Answer
41.A-Joy Ltd. and B-Joy Ltd. manufacture and sell product-AB in a competitive industry. The selling prices >
of the product for each the company are same. A-Joy Ltd.has a contribution margin ratio of 30% and fixed
cost of Rs.2,85,000. B-Joy more automated, making its fixed costs 35% higher than that of A-Joy
Ltd. B-Joy Ltd.has a contribution margin ratio that is 1.5 times the contribution margin ratio of A-Joy Ltd.
Which of the following statements is/are true?
I. The break-even sales value of A-Joy more than B-Joy Ltd.
II. The break-even sales value of B-Joy more than A-Joy Ltd.
III. Beyond the indifference point (at which profits of the two companies are equal), A-Joy Ltd. will
make more profit than B-Joy Ltd.
IV. Beyond the indifference point (at which profits of the two companies are equal), B-Joy Ltd. will
make more profit than A-Joy Ltd.
(a) Only (I) above (b) Only (II) above (c) Only (IV) above
(d) Both (II) and (III) above (e) Both (I) and (IV) above.
(2 marks)
42 < Answer
AB Ltd. uses process cost system to manufacture product Alfa. The company has furnished the following >
information pertaining to operations for the month of March 2004:
Particulars Units
Opening work-in-process (March 01, 2004) 300
Introduced in production during March, 2004 5,000
Closing work-in-process (March 31, 2004) 450 There is no loss in the
manufacturing process. The opening inventory was 80% complete for materials and conversion costs. The
closing inventory was 80% complete for material and 60% complete for conversion costs.
Costs pertaining to the month of March 2004 are as follows:
Opening work in process:
Materials Rs.12,300
Conversion Rs.10,500
During the month:
Materials Rs.62,125
Conversion Rs.51,240 The total cost of closing work-in-process on
March2004, using FIFO method, is
(a) Rs.10,350 (b) Rs. 7,335 (c) Rs.12,300 (d) Rs. 9,850
(e) Rs.11,100.
(3 marks)
< Answer
43.Satyam Ltd. has furnished the following balances for its inventory for the month of March 2004: >

March 1, 2004 March 31, 2004

(Rs.) (Rs.)
Raw materials 20,000 18,000
Work-in-process 41,500 43,200
Finished goods 21,500 18,300 Production data for the
month are as follows:
Direct labor Rs.1,78,000
Actual factory overhead Rs. 95,600
Raw materials purchased Rs.2,10,000
Freight-in Rs. 15,200
Purchase returns Rs. 9,800 The company maintains factory
overhead control account and charges factory overhead to production at 45% of direct labor cost. The
company does not formally recognize over and under applied overhead until year-end.
The cost of goods sold for the month of March 2004 of the company is
(a) Rs.4,77,000 (b) Rs.4,75,500 (c) Rs.2,17,400
(d) Rs.4,74,000 (e) Rs.4,70,400.
(3 marks)
< Answer
44.XYZ Ltd. manufactures a single product and has a manufacturing capacity of 2,000 units per week of 48 >
hours. From the cost records of the company, the following data are available relating to output and cost
for three consecutive months:
Month Units Direct Material Direct Labor Factory Overheads
Manufactured (Rs.) (Rs.) (Rs.)

Jan’ 2004 4,000 48,000 29,000.00 24,000

Feb’ 2004 4,800 57,600 34,800.00 27,200
Mar’ 2004 5,150 61,800 37,337.50 28,600
is the practice of the company to charge a profit of 15% on selling price. If the company manufactures and
sells 5,000 units in the month of April 2004, the selling price per unit will be
(a) Rs.22.53 (b) Rs.24.53 (c) Rs.29.24 (d) Rs.22.92 (e) Rs.24.85.
(2 marks)
< Answer
45.Shiva Ltd. has 3 identical machines manned by 2 operators. The operators are fully engaged on machines. >
The total original cost of these 3 machines is Rs.9,00,000. The company has furnished the following
information pertaining to operations for last quarter ending
March 31, 2004:
Normal available hours per month per operator 480 hours
Absenteeism (without pay) 22 hours
Leave (with pay) 48 hours
Normal idle time (unavoidable) 10 hours
Average rate of wages per hour Rs.10
Estimated production bonus 10% on wages
Value of power consumed Rs.19,350
Supervision and indirect labor Rs.21,300
Electricity and lighting Rs.16,500
Repairs and maintenance per quarter 1% on value of machines
Depreciation per annum 10% on original cost
Miscellaneous expenses per annum Rs.22,400
General management expenses per annum Rs.62,300 The
comprehensive machine hour rate for the machine shop for the quarter ending
March 31, 2004 is
(a) Rs.48.36 (b) Rs.58.36 (c) Rs.42.84 (d) Rs.38.92 (e) Rs.36.94.
(3 marks)
< Answer
46.Muni Ltd. manufactures plastic toy guns. The company is working at 60% capacity level, which represents >
6,000 guns per month. The cost break-up per gun is as under:
Materials – Rs.98
Labor – Rs.62
Overheads – Rs.50 (60% fixed)
The selling price is Rs.380 per gun. The company is planning to produce at 80% capacity level. At 80%
capacity level the selling price falls by 5% accompanied by a similar fall in the price of materials.
The break-even point in units and profit at 80% level of capacity of the company are
(a) 900 units and Rs.13,07,200 respectively
(b) 969 units and Rs.12,68,000 respectively
(c) 900 units and Rs.12,68,000 respectively
(d) 969 units and Rs.13,07,200 respectively
(e) 969 units and Rs.10,20,800 respectively.
(2 marks)
< Answer
47.ACD Ltd. manufactures chemical ‘AC’ and in the course of its manufacture, a by-product ‘D’ is produced, >
which after further processing has a commercial value. The company has furnished the following
summarized cost data pertaining to main product ‘AC’ and
by-product ‘D’ for the month of March 2004:

Particulars Pre-separation Post-separation costs

costs AC D

47,500 3,200 1,900
52,800 5,200 2,050
36,300 2,800 1,200
Selling price per kg
95 20
Estimated profit per unit of D (Rs.) 5
No. of units produced 1,700 720 The
company uses reverse cost method of accounting for by-products whereby the sales value of by-products
after deduction of the estimated profit, post-separation costs and selling & distribution expenses relating to
by-product is credited to the pre-separation cost account.
The profit of main product ‘AC’ is

(a) Rs. 5,650 (b) Rs.30,550 (c) Rs.11,200 (d) Rs.19,350

(e) Rs.30,500.
(2 marks)
< Answer
48.Mathur Ltd. has furnished the following cost data pertaining to various jobs for the year ended March 31, >
Particulars Rs.
Direct material 8,90,000
Direct wages 7,25,000
Profit 5,85,396
Selling & distribution overhead 2,18,160
Administrative overhead 2,72,700
Factory overhead 2,03,000 The company absorbs
factory overhead on the basis of direct wages and recovers administrative and selling & distribution
overheads on factory cost.
The company received an order for Job No. A-26 and furnished the following cost data of the job:
Direct material – Rs.32,500
Direct Wages – Rs.23,500
If the administrative overhead is increased by 4%, the total sales value of Job No. A-26 is
(a) Rs.92,525 (b) Rs.91,275 (c) Rs.90,428 (d) Rs.99,815 (e) Rs.95,822.
(2 marks)
< Answer
49.Meena Ltd. has budgeted the factory overhead for the year 2004-05 as Rs.8,00,000 for production >
department –A. The factory overhead incurred during the year was Rs.6,84,500. During the year the
company has absorbed Rs.6,84,000 of factory overhead on a budgeted labor hours of 50,000.The actual
labor hour worked for the year is
(a) 45,000 hours (b) 42,781 hours (c) 42,719 hours (d) 42,750 hours (e) 42,813 hours.
(1 mark)
< Answer
50.Gopi Constructions undertook a contract for construction of a large building. The construction work >
commenced on April 01, 2003 and the following data are available for the year ended March 31, 2004:
Particulars Rs.
Total contract price 52,00,000
Work certified 38,00,000
Progress payment received 30,00,000
Material issued to site 13,50,000
Planning and estimating costs 1,20,000
Direct wages paid 6,30,000
Plant hire charges 73,500
Head office expenses apportioned 62,700
Direct expenses incurred 21,700
Work not certified 4,21,000
Materials at site 70,500
Accrued wages 45,200 The total of work-in-process to be
shown in the balance sheet as on March 31, 2004 is
(a) Rs. 2,99,350 (b) Rs. 2,79,126 (c) Rs.12,21,000 (d) Rs. 7,00,126 (e) Rs. 9,41,874.
(2 marks)
< Answer
51.Ajay Ltd. has furnished the following information pertaining to estimated cost of 3 products – P, Q & R for >
the month of March 2004:
Particulars P Q R
Variable cost per unit (Rs.) 12.50 14.25 10.80
Selling price per unit (Rs.) 27.00 28.00 26.50
Attributable fixed cost (Rs.) 24,000 23,540 20,300
Production & Sales (Units) 6,000 5,500 5,800 The common
fixed cost is Rs.73,525. It is the practice of the company to apportion the common fixed cost on the basis
of sales units.
The total budgeted profit or (loss) of products Q and R are
(a) Rs.28,710 and Rs.46,110 respectively
(b) Rs.37,500 and Rs.46,110 respectively
(c) Rs.28,710 and Rs.37,500 respectively
(d) Rs.46,110 and Rs.37,500 respectively
(e) Rs.46,110 and Rs.23,211 respectively.
(2 marks)
< Answer
52.M Ltd. and N Ltd. have decided to merge their business operations. The following information is furnished >
by the two companies:
Particulars M Ltd. N Ltd.
Capacity utilization 90% 70%
Sales value (Rs.) 54,00,000 56,00,000
Variable cost (Rs.) 40,50,000 44,80,000
Fixed cost (Rs.) 8,00,000 11,00,000 The profitability of the
merged plant at 85% capacity level is
(a) 10.50% (b) 9.75% (c) 6.18%
(d) 7.50% (e) 9.50%.
(2 marks)
< Answer
53.Country Club is involved in providing staying facilities and Gym facilities to its members. It has a capacity >
of 50 single rooms and 15 double rooms and the gym facility is provided for residents in the club and also
outsiders. The club has furnished the following cost structure:
Service Variable cost per day
Single Room Rs.80
Double Room Rs.60
Gym facility Rs.40 The fixed cost per day is:
For single room – Rs.20
For double room – Rs.25
For Gym – Rs.15
The average occupancy rate in the club is 80% for 365 days of the year.
The club deserves a margin of 20% on hire of room and that the rent of double room should be fixed at
120% of a single room.
The rent of a double room per day is
(a) Rs.165.00 (b) Rs.182.41 (c) Rs.138.42 (d) Rs.144.80
(e) Rs.132.88.
(2 marks)
< Answer
54.Zintex Ltd. absorbs overheads at a predetermined rate of Rs.15 per labor hour. In the month of March >
2004, the company has incurred Rs.64,700 as factory overheads and labor hours worked in the factory
were 4,200. During this month, the company sold 250 units. At the end of the month 25 units were held as
stock while there was no opening stock of finished stock. Similarly, at the end of this period, 40 units were
held as uncompleted units that are considered as 60% complete but there was no stock of uncompleted
units at the beginning of the year.
The company has analyzed the reasons and found that 65% of the unabsorbed overheads were due to
defective planning and the balances were attributable to increase in overhead cost.
The supplementary overhead absorption rate of the company is
(a) Rs.3.20 (b) Rs.2.10 (c) Rs.1.60 (d) Rs.1.99 (e) Rs.1.80.
(2 marks)
< Answer
55.Cifco Ltd. manufactures and sells product ‘C’. The sale price per unit of the product is Rs.60. The >
company will incur a loss of Rs.6.00 per unit if it sells 6,000 units and if the volume is raised to 10,000
units, the company will make a profit of Rs.4.00 per unit. The break-even point in units is
(a) 7,000 (b) 7,500
(c) 8,975 (d) 7,895 (e) 7,985.
(2 marks)
< Answer
56.Consider the following data pertaining to the production of a company for the month of March, 2004: >
Particulars Rs.
Opening stock of raw material 12,350
Closing stock of raw material 11,875
Purchase of raw material during the month 80,080
Total manufacturing cost charged to product 3,12,500
overheads are applied at the rate of 50% of direct labor cost.
The amount of factory overheads applied to production is
(a) Rs. 77,315 (b) Rs.1,50,300 (c) Rs. 87,500 (d) Rs.1,54,630 (e) Rs. 75,150.
(2 marks)
< Answer
57.Sindhu Ltd. plans to purchase one automatic machine. There are two suppliers of this machine – Mahesh >
Ltd. and Kappa Ltd.
The company has furnished the following data relating to the two machines:
Particulars Machine from Mahesh Machine from Kappa
Fixed cost (Rs.) 5,00,000 3,80,000
Profit (Rs.) 3,00,000 2,00,000
Capacity of production(Units) 2,500 2,500 The
sale price of the product per unit is Rs.480. The sales volume at which the two machines produce same
profit is
(a) 1,100 units (b) 1,250 units (c) 1,364 units (d) 1,050 units (e)
1,200 units.
(2 marks)
< Answer
58.Bradh Ltd. has furnished the following income statement computed under marginal costing system for the >
year ended March 31, 2004 :
Sales (20,000 units) Rs.1,05,000
Variable expenses:
Manufacturing Rs. 56,000
Marketing Rs. 14,000 Rs.70,000
Contribution margin Rs.35,000
Fixed expenses:
Manufacturing Rs.32,500
Other Rs. 6,500 Rs.39,000
Net loss Rs. 4,000 During the year, the
company has manufactured 25,000 units. The profit or (loss) under absorption costing is
(a) Rs.6,500 (b) Rs.4,000 (c) (Rs.4,000) (d) Rs.2,500 (e) (Rs.2,500).
(2 marks)
< Answer
59.MN Ltd. manufactures and sells 2 (two) machines – M1 & M2, which have been designed to produce the >
same product but M1 is less automatic than M2 and requires somewhat more labor to operate. Pertinent
costs of the two machines are as follows:
Particulars Type M1 Type M2
Set up cost (Rs.) 500 700
Variable cost per unit (Rs.) 5.00 4.50 Which type of machine
should be used for processing 650 units and what is the cost of those units?
(a) Type M1 and Rs.3,950 (b) Type M2 and Rs.3,625(c) Type M1 and Rs.3625
(d) Type M2 and Rs.3,950 (e) Type M1 and Rs.2,910.
(2 marks)
< Answer
60.A product, which uses 100 tons as input per month, passes through two processes – Process A >
and Process B. The details of cost of process A for the month of March, 2004 are as follows:
Process A Cost per ton (Rs.)

Direct material cost 1,610

Direct labor cost 650

Overhead costs 1,350

The total loss in process A is 4% of input and the
scrap is 10% of the input with a value of Rs.840 per ton. The material is transferred to process B at cost.
The direct labor cost of Process B is Rs.750 per ton of input. The overhead is 60% of direct labor cost. The
scrap at process B is 20% of input with a value of Rs.1,050 per ton.
The cost per unit of finished goods in process B is
(a) Rs.6,200.00 (b) Rs.6,500.00 (c) Rs.5,600.00 (d) Rs.6,100.00
(e) Rs.6,362.50.
(2 marks)

< Answer
61.ABC Ltd. manufactures Sports Shoes. Presently its output is 80% of its full capacity of 20,000 units per >
annum. One exporter has approved the sample and has offered to buy 10,000 sports shoes at a special price
of Rs. 850 per suit. At present the company sells it at the rate of Rs.1,200 per shoe. The standard cost per
unit is as follows:
Particulars Rs.
Materials 520
Labor cost 150
Fixed cost 200
Other variable cost 90
Total 960 The net profit or loss of
accepting the order of 10,000 sports shoes is
(a) Rs.17,40,000 (profit) (b) Rs.17,40,000 (loss) (c) Rs.5,40,000 (loss)
(d) Rs.13,00,000 (loss) (e) Rs.3,60,000 (profit).
(2 marks)
< Answer
62.PQRS Ltd manufactures and sells four types of products under the brand names of P, Q, R & S. The sales >
mix in value comprises 43%, 32%, 6% & 19% of P, Q, R & S respectively. The total budgeted sales (i.e.
100%) are Rs.90,000 per month. The operating costs are as follows:
i) Variable costs: Product -P 70% of selling price
Product -Q 60% of selling price
Product -R 40% of selling price
Product -S 50% of selling price
ii) Fixed cost Rs. 25,000 per month The
break-even point for the production on an overall basis (i.e., in total) is
(a) Rs.64,433 (b) Rs.69,000 (c) Rs.62,500 (d) Rs.40,850 (e)
(2 marks)
< Answer
63.The yield of a certain process is 85%, the by-product is 10% and normal loss is 5% of its main product. >
10,000 units of materials are put in the process and its cost is Rs.30 per unit and other expenses amounted
to Rs.25,400, 30% of which was accounted for by power cost. It is the practice of the company that the
power cost is chargeable to the main-product and the by-product in the ratio of 5:3. The cost of the by-
product is
(a) Rs.36,309 (b) Rs.38,282 (c) Rs.32,636 (d) Rs.36,712 (e)
(2 marks)
< Answer
64.The cost-volume-profit relationship of a company is described by the equation y = Rs.8,00,000 >
+ 0.60x, in which x represents sales revenue and y is the total cost at the sales volume represented by x. If
the company desires to earn a profit of 20% on sales, the required sales will be
(a) Rs.40,00,000 (b) Rs.35,50,000 (c) Rs.24,00,000 (d) Rs.13,33,333 (e) Rs.20,00,000.
(1 mark)
< Answer
65.Delta Ltd. manufactures four products – P,Q,R & S, which emerge from a particular process of operation. >
The total cost of input for the period ended March 31, 2004 is Rs.2,80,000. The details of output,
additional cost after split-off point and sales value of the products are as follows:

Additional processing cost Sales value after further

Products Output (Kg.)
after split-off point (Rs.) process (Rs.)
P 10,000 20,000 2,20,000
Q 3,000 20,000 1,15,000
R 6,000 17,000 1,05,000
S 4,000 50,000 1,70,000 If
the products are sold at split-off point without further processing, the sales value would have been:
P Rs.1,90,000
Q Rs. 1,00,000
R Rs. 85,000
S Rs. 1,05,000 The maximum amount of profit of the company from the four products is
(a) Rs. 3,15,000 (b) Rs. 2,28,000 (c) Rs. 2,23,000 (d) Rs. 3,35,000 (e) Rs. 2,43,000.
(3 marks)
< Answer
66. Kappa Ltd. manufactures and sells three products – A, B and C. All the products are passed through a >
machining process, the capacity of which is limited to 10,000 hours per annum, both by equipment design
and government regulation. The following information pertaining to the three products is available:
Particulars Product A Product B Product C
Selling price per unit (Rs.) 1,000 1,500 2,000
Variable cost per unit (Rs.) 800 800 1,200
Machine hours per unit 4 7 10
Maximum possible sales unit 500 700 400 The
fixed cost of the company for the year is Rs.4,45,000. The maximum profit of the company from the best
mix of the three products is
(a) Rs.4,50,000 (b) Rs.4,65,000 (c) Rs.3,93,000 (d) Rs.4,20,000 (e) Rs.5,20,000.
(2 marks)
< Answer
67. A company has a profit-volume ratio of 40%. To maintain the same contribution, by what percentage (%) >
must sales be increased to offset 20% reduction in selling price?
(a) 10 (b) 20 (c) 40 (d) 50 (e) 60.
(1 mark)
< Answer
68. Consider the following data pertaining to a manufacturing company: >
Particulars Present (2003-04) Forecast (2004-05)
Sales (units) 5,000 12,000
Loss (Rs.) 5,000 -
Fixed cost (Rs.) 20,000 20,000
Profit (Rs.) - 16,000 The variable cost of
sales has been taken at Rs.12 per unit up to 12,000 units and it shall be Rs.13 per unit beyond 12,000 units.
What percentage of increase in sales is required to cover additional 25 paisa per unit towards extra
packaging cost in the year 2004-05 for achieving the forecasted contribution level?
(a) 168% (b) 174% (c) 34% (d) 160%
(e) 140%.
(2 marks)
< Answer
69. The cost data pertaining to Product “X” of XL Ltd. are as follows: >
Maximum capacity 30,000 units
Normal capacity 15,000 units
Increase in inventory 1,880 units
Variable cost per unit Rs.12
Selling price per unit Rs.50
Fixed manufacturing overhead costs Rs.3,60,000 If the
profit under Absorption costing method is Rs.1,01,000, the profit under Marginal costing method would be
(a) Rs.1,46,120 (b) Rs.1,23,560 (c) Rs. 78,440 (d) Rs. 55,880 (e) Rs. 73,340.
(2 marks)
< Answer
70.Mona Ltd. has furnished the following data pertaining to the process of Chemical X for the month of >
March 2004:
Input 2,000 kg.
Output 1,900 kg.
Normal loss 10% of input
Sale value of normal loss as scrap Rs.2.80 per kg.
Cost of input to the process Rs.7,850 The cost of
abnormal loss /gain to the process account is
(a) Rs.405 (loss) (b) Rs.365 (gain) (c) Rs.390 (loss) (d) Rs.405 (gain)(e) Rs.436 (loss).
(1 mark)


Suggested Answers
Management Accounting – I (151) April 2004
1. Answer : (d) < TOP
Reason : Management accounting is not concerned with the reporting of business activities for a
company. It focuses less on the whole and more on the parts and segment of a company. In
management accounting, segmented reporting is of primary emphasis. Therefore, (d) is false.
2. Answer : (e) < TOP
Reason : Since option (c) is one of the assumptions of CVP analysis, option (e) is not the assumption of
CVP analysis. Therefore, (e) is the answer.
3. Answer : (a) < TOP
Reason : Equivalent completed units are not calculated for normal loss because it is shared by good
production in the process. It is not considered as good units. Therefore, option (a) is not the
correct approach in the preparation of statement of equivalent production.
4. Answer : (e) < TOP
Reason : Highway contractor uses the job-order costing system for recording transactions other
business like gas manufacturing, patrol refinery, toy retailer and diary farmer use the process
costing system. Therefore, (e) is correct.
5. Answer : (d) < TOP
Reason : This method does not differentiate between the production of workers and that of machine.
Therefore, (d) is false with respect to the disadvantages under direct material cost method for
absorption of manufacturing overhead. Other options are correct regarding the disadvantages
under direct material cost method for overhead absorption.
6. Answer : (c) < TOP
Reason : Under an absorption costing system income can be manipulated by producing more products
than are sold because more fixed manufacturing overhead will be allocated to the ending
inventory when inventory increases some fixed costs are capitalized rather than expensed
decreasing production, however, will result in lower income because more of the fixed
manufacturing overhead will be expensed.
Answer (a) is incorrect because producing more of the products requiring the most direct labor will
permit more fixed overhead to be capitalized in the inventory account.
Answer (b) is incorrect because differing expenses such as maintenance will increase income in the
current year but may result in long range losses caused by excessive down trend.
Answer (d) is incorrect because increasing production without a concurrent increase in demand
applies more fixed cost to inventory. Answer (e) is also incorrect.
7. Answer : (d) < TOP
Reason : Under FIFO method, the equivalent units are a measure of work done in the department this
period. It is not the measure of unit started or opening WIP or closing WIP. It is the combine
measure of some part of opening WIP completed to finished goods, units completed and part
of closing WIP to the extent of completed units in the department this period. Therefore, (d) is
8. Answer : (e) < TOP
Reason : Manufacturing a product, painting a product, packing a product for shipment and installing the
product for the customer are the examples of value adding activities. The example of non-
value adding activity is the reworking of defective product, it means there is no value addition
in repairing the defective product. Therefore, option (e) is correct.
9. Answer : (c) < TOP
Reason : In computation of cost of inventory, marketing costs are not considered. Here, variable
marketing costs are not the items of cost of inventory under variable costing procedures.
Therefore, options (c) is correct.
10 Answer : (e) < TOP
. Reason : A direct cost can be specifically associated with a single cost object in an economically
feasible way. An indirect cost cannot be specifically associated with a single cost object. Thus,
the specific cost object influences whether a cost is direct or indirect. For example, a cost
might be directly associated with a single plant. The same cost, however, might not be directly
associated with a particular department in the plant. Therefore, (e) is correct. Other options are
not correct.
11. Answer : (c) < TOP
Reason : Service department costs are considered part of factory overhead and should be allocated to
the production departments that use the services. A basis reflecting cause and effect should be
used to allocate service department costs. For example, the number of kilowatt-hours used by
each production department is probably the best allocation base for electricity costs. Other
options are not correct, because units of product sold, salary of service department employees,
direct materials usage and rent of production departments are not the basis of allocating the
overhead costs. These are not to meet the cause and effect criterion.
12 Answer : (e) < TOP
. Reason : Direct labor is both a product cost and a prime cost. Product costs are incurred to produce
units of output and are deferred to future periods to the extent that output is not sold. Prime
costs are defined as direct materials and direct labor. Other options are not correct.
13 Answer : (d) < TOP
. Reason : Product decisions to sell or process further is not the reason for allocating joint costs. Other
options given in (a), (b), (c) and (e) are the reasons for allocating joint costs. Option (d) is the
reason for decision making whether to process further or sell at split -off point therefore,
answer (d) is correct.
14 Answer : (a) < TOP
. Reason : In accounting by products the realizable value of the by products are credited to cost of goods
sold or credited to profit and loss account as miscellaneous income. They are recognized at
the time of sale. They are not accounted for in the same way as main product. Therefore, (a)
is correct.
15 Answer : (d) < TOP
. Reason : Wood, Metal, Fabric and Leather used in the chair would be treated as direct cost but the
staples used to fix the fabric will be treated as indirect cost.
16 Answer : (d) < TOP
. Reason : Opportunity costs are always relevant to decision making problem. Sunk cost are always
irrelevant to decision making problem because it is already incurred, it cannot be changed for
future. Relevant and accurate data are very important for decision making if it is available in
time. Information relating to decision making problem is always relevant. Therefore option
(d) is not true.
17 Answer : (e) < TOP
. Reason : Centers that exceed expected results will bear larger assignments of costs than centers that
only meet or fall below expectations. Thus, the costs distributed to the more successful
centers are misleading and unfair. So, marketing cost allocation should not be based on actual
revenues. Therefore option (e) is incorrect.
18 Answer : (c) < TOP
. Reason : Overhead costs are fully recovered from production, if actual rate method of absorption is
adopted. But if a predetermined rate is used, the actual expenses may be different from the
applied or budgeted overhead expenses. Number of causes are there for under or over
absorption of overheads. All the reasons or causes given in options (a), (b), (d) and (e) are
correct except the option (c). If overheads are not charged to work-in-progress proportionately,
there is a difference in overhead absorption.
19 Answer : (a) < TOP
. Reason : A key feature of the weighted average method is the number of equivalent units of activity is
calculated without making a distinction as to whether the activity occurred in the current
accounting period or the preceding accounting period. Therefore, option (a) is correct.
20 Answer : (a) < TOP
. Reason : If there is an idle capacity of a company, the variable cost of the product will be considered as
minimum price. If there is no unutilized capacity, the pricing of a job will be fixed up at total
cost plus profit. Therefore, option (a) is correct. Other options are not correct. Because the
extra cost of using idle capacity is variable cost. Any price above variable cost can be
21 Answer : (d) < TOP
. Reason : A debit balance on the contractee account should be appeared in the balance sheet under the >
head debtors as amount recoverable on contracts. Therefore, option (d) is correct.
22 Answer : (c) >
. Reason : If the process scrap is used in conjunction with new raw materials as well as being sold
externally, the market price of the scrap will be considered to debit the process account.
Therefore, option (c) is correct.
23 Answer : (e) >
. Reason : Service costing and process costing are different from each other. Therefore, option (e) is
false. Other options given in (a), (b), (c) and (d) are true.
24 Answer : (b) < TOP
. Reason : Under the reversal cost method, the manufacturing cost of the main product is reduced by the
estimated market value of the by-product. Other options are not correct.
25 Answer : (d) < TOP
. Reason : If variable cost is increased and the selling price and the fixed cost remain constant, the break
even point will increase, margin of safety will decrease and contribution to sales will decrease.
Therefore, option (d) is correct.
26 Answer : (e) < TOP
. Reason : Factory overhead control account is debited by indirect material, indirect labor and indirect
expenses incurred. The debit side of this account represents the total factory expenses
incurred. The credit side of this account represents the applied factory cost. The closing debit
balance of this account indicates under-applied factory overhead cost.
27 Answer : (c) < TOP
. Reason : Retention money means the cash withheld by the contractee under the terms of the contract
when payments of the value certified are being made. Therefore, option (c) is correct. Other
options are not correct.
28 Answer : (d) < TOP
. Reason : The important characteristics of controllable costs are: (i) They are in relation to a particular
responsibility center (or the managerial area of responsibility involved); (ii) the head of the
responsibility center has significant influence but not complete influence on its controllability;
(iii) they are relevant for the time period under review.
The characteristic indicates that the concept of controllable costs is a relative concept in the
sense that when a company is viewed as a single entity, all costs care controllable at one level
or another level of management. For instance, the top management may decide to close down
one of the departments/divisions/segments of the business and thus reduce its cost to zero.
The management may also decide to purchase a component from an outside supplier, hitherto
manufactured by the company itself. These examples indicate that costs are uncontrollable
only at intermediate and lower levels of management. A departmental supervisor has no
control over the fixed costs allocated to his department, a sales manager has no control over
the price/cost, at which goods have been transferred to his department by the production
manager. Thus, allocated costs are not controllable by the responsibility center to which the
allocation is made. Hence, option (d) is correct.
29 Answer : (b) < TOP
. Reason : Variable costs are not only the relevant costs. There are two characteristics of relevant costs –
change of costs and future costs. If the variable costs are not changed due to change of
options it is not relevant costs. At the same time if it is not required in future it is not relevant
for the options. Therefore, variable, costs are not always relevant costs. Therefore, option (b)
is false.
30 Answer : (e) < TOP
. Reason : The discretionary cost is characterized by uncertainty about the relationship of input (the cost)
to output. It also tends to the subject of a periodic decision regarding the outlay to be made.
Research, advertisement and public relation are common examples. Thus the annual cost of
plant service is discretionary because of the difficulty of valuing the output. Other options are
not correct.
31 Answer : (c) < TOP
. Reason : If there is any abnormal gain, that should be credited to the normal loss account and the
balance of normal loss account should be transferred to costing profit and loss account.
Process costing is not applied in garment industry. Normal loss increases the cost per unit of
usual production. Good units of production cannot bear the abnormal loss. Inclusion of inter-
profit in accounts requires adjustment in stock. Therefore, option (c) is correct.
32 Answer : (c) < TOP
. Reason : Joint cost consists of direct material, direct labor and factory overhead. Therefore, option ( c)
is correct.
33 Answer : (a) < TOP
. Reason : If closing inventory increases, the net profit under direct costing method will be lower in
comparison to net profit under absorption costing method. Under direct costing method, the
fixed factory overheads are charged entirely in the current year, but under absorption costing
method, the part of fixed cost are carried forward to the following year with the value of
closing inventory, therefore, the profit under absorption costing shows higher profit. Other
options are not correct.
34 Answer : (c) < TOP
. Reason : There is no link in between cost of steam and wages paid to labor. Therefore, wages paid to
each department are not the basis of apportionment of overhead cost of steam. Other options
given in (a), (b), (d) and (e) are correct.
35 Answer : (b) >
. Reason : Practical capacity is the maximum level at which output is produced efficiently. It includes
consideration of idle time caused by human and equipment inefficiency. Practical capacity
always exceeds the actual use of capacity. It is not necessary to meet sales demand. Therefore
(b) is correct.
36 Answer : (a) < TOP
. Reason : The plausible options are an increase in selling price or a decrease in variable cost because
unit contribution margin equals unit sales price minus unit variable cost. However, a given
percentage change in unit sales price must have a greater effect than an equal but opposite
percentage change in unit variable cost because the former is greater than latter. Therefore,
option (a) is correct.
37 Answer : (d) < TOP
. Reason : If a change increases or decreases the cost, it is called Differential cost. The change of cost
due to change in the level of activity or pattern or method of production is known as
Differential cost It is not the Controllable cost, Semi-variable cost, Discretionary cost or
Avoidable cost.
38 Answer : (a) < TOP
. Reason : Joint costs are most often assigned on the basis of relative sales value or net realizable value.
Basing allocation on physical quantities, such as Kg. Liter, etc. is usually not desirable
because the cost assigned may have no relationship to value. When large items have low
selling prices and small items have high selling prices, the large items might always sell at a
loss when physical quantities are used to allocate joint costs. Therefore, the correct answer is
39 Answer : (e) < TOP
. Reason : Overapplied or underapplied factory overhead should be disposed of at the end of the
accounting period by transferring the balance either to cost of goods sold (if the amount is not
material) or to cost of goods sold, finished goods inventory and work-in process inventory.
Theoretically, the allocation is preferred, but, because the amount is usually immaterial, the
entire balance is often transferred directly to cost of goods sold. Thus the entry depends upon
the significance of the amount. Other options are not correct.
40 Answer : (c) < TOP
. Reason : The principle underlying a make or buy decision is to use available resources as efficiently as
possible before buying from an outside supplier. The manager considers only the costs
relevant to the investment decision. If the total relevant costs of production are less than the
cost to buy the item, it should be produced in-house. The key variable is relevant costs. Thus
the costs that can be avoided under either decision choice must be determined.
Option (a) is incorrect because the breakeven point is not relevant, but the extent of the use of
operating capacity may be a consideration.
Option (b) is incorrect because whether operations are at normal volume is less important than
the amount of idle capacity. The company is less likely to buy if it has sufficient unused
Option (d) is incorrect because total costs (absorption costing) are not as important as relevant
Option (e) is incorrect because activity based costing is used to allocate fixed overhead. Fixed
overhead would not be a relevant cost in a make or buy decision unless it is avoidable by not
making the item.

41 Answer : (e) < TOP

. Reason : A-Joy Ltd.’s breakeven point is lower because its fixed costs are lower. A-Joy Ltd.’s
breakeven point is Rs.9,50,000 (i.e., Rs.2,85,000 ÷ 30%). B-Joy’s breakeven point is
Rs.8,55,000 (i.e., Rs.2,85,000 × 1.35 ÷ 30% × 1.5)
The indifferent point, at which profits are equal is:
Rs.2,85,000 + .7x = Rs.3,84,750 + .55x (Let x = units at indifference point)
x = Rs.6,65,000
Once the indifferent point is passed, A-Joy Ltd. will make lower profits than B-Joy Ltd., because
company B-Joy has higher contribution margin.
42 Answer : (b) < TOP
. Reason : Statement of equivalent Production Unit (FIFO)
Input units Output Completed: units Material Conversion
Opening 300 Opening 300 20% 60 20%
Introduced 5,000 Introduced 4,550 100% 4,550 100%
Closing 450 80% 360 60%
5,300 5,300 4,970
Costs during the Rs.62,12 Rs.51,24
month 5
Cost per unit 12.50
The total cost of closing work-in-process
Material – 360 × Rs.12.50 = Rs.4,500
Conversion – 270 × Rs.10.50 = Rs.2,835
43 Answer : (a) < TOP
. Reason : Material used=Rs.20,000 + Rs.2,10,000 + Rs.15,200 – Rs.9,800 – Rs.18,000 = Rs.2,17,400.
Total Manufacturing cost = Material used + Direct labor + Factory overhead cost
= Rs.2,17,400 + Rs.1,78,000 + 45% of Rs.1,78,000
= Rs.2,17,400 + Rs.1,78,000 + Rs.80,100 = Rs.4,75,500
Cost of goods sold = Total manufacturing cost + Opening W.I.P. + OP. Finished
goods – Closing W.I.P – Cl. Finished goods
= Rs.4,75,500+ Rs.41,500 + Rs.21,500 – Rs.43,200 – Rs.18,300
= Rs.4,77,000.
44 Answer : (c) < TOP
. Reason : Direct material cost per unit = Rs.48,000 / 4,000 units = Rs.12
Direct labor cost per unit = Rs.29,000 / 4,000 units = Rs.7.25
Factory overhead cost,
Variable cost per unit = Change of cost / change of units
= (Rs.27,200 – Rs.24,000) / (4,800 – 4,000) = Rs.4
Fixed cost (at 4,800 units) = Total cost – variable cost
= Rs.27,200 – 4,800units x Rs.4 = Rs.27,200 – Rs.19,600
Total cost of 5,000 units = 5,000 (Rs.12 + Rs.7.25 + Rs.4) + Rs.8,000 = Rs.1,24,250
Selling price = (Rs. 1,24,250) x (100/85)= Rs.1,46,176.50
Selling price per unit = Rs.1,46,176.50 ÷ 5,000 = Rs.29.24
45 Answer : (b) < TOP
. Reason : Computation of total utilized machine hours:
Normal available hours per month per operator 480 hours
Less: Unutilized hours due to
Absenteeism 22
Leave 48
Idle time 10 80 hours
Total utilized hours per operator per month 400 hours
Total hours for 2 operators × 3 months = 400 × 2 × 3 = 2,400 hours
Therefore, machine utilized is 2,400 hours (Machine cannot work without operator).
Normal hours for which wages are to be paid = 480 – 22= 458
Wages for 3 months = 458 hours×2×3×Rs.10 =

Comprehensive Machine hour rate Rs.

Operators wages 27,480
Production Bonus (10% on Rs.27,480) 2,748
Power consumed (last quarter) 19,350
Supervision & indirect labor 21,300
Electricity & Lighting 16,500
Repairs & Maintenance (1% on Rs.9,00,000) 9,000
Depreciation (10% of Rs.9,00,000 ÷ 4) 22,500
Miscellaneous expenses (Rs.22,400 ÷ 4) 5,600
General management expenses (Rs.62,300 ÷ 4) 15,575
1,40,053 Comprehensive
machine hour rate = Rs.1,40,053 ÷ 2,400 hours
= Rs.58.36.
46 Answer : (d) < TOP
. Reason :
Particulars Per unit (Rs.) 60% Per unit (Rs.) 80%
Sales unit 6,000 8,000
Rs. Rs.
Sale value 380 22,80,000 361.00 28,88,000
Materials 98 5,88,000 93.10 7,44,800
Labor 62 3,72,000 62.00 4,96,000
Overheads (variable) 20 1,20,000 20.00 1,60,000
Total variable cost 180 10,80,000 175.10 14,00,800
Contribution 200 12,00,000 185.90 14,87,200
Fixed cost (50 × 60% ×
1,80,000 1,80,000
Profit 10,20,000 13,07,200
Break even point 900 units 969 units
47 Answer : (d) < TOP
. Reason :
Joint Cost to by-product ‘D’ Rs.
Sales revenue (720 × Rs.20) 14,400
Less: Profit (720 × Rs.5) 3,600
Less: Post Separation Cost (Rs.1,900 + Rs.2,050+ Rs.1,200) 5,150
Selling & distribution cost Nil
Cost of Production at split-off point 5,650
Particulars Rs.
Total Joint Cost : (Rs.47,500 + Rs.52,800+ Rs.36,300) 1,36,600
Less: Joint Cost to ‘D’ 5,650
Joint Cost to AC 1,30,950
Sale value of ‘AC’ (1,700× Rs.95) 1,61,500
Less: Pre-separation cost 1,30,950
Less: Post separation cost (Rs.3,200 + Rs.5,200 + Rs.2,800) 11,200
Profit of AC 19,350
48 Answer : (d) < TOP
. Reason :
Particulars Rs.
Direct Material 8,90,000
Direct wages 7,25,000
Prime cost 16,15,000
Factory overhead: (28% on Direct wages) 2,03,000
Factory cost 18,18,000
Administrative Cost (15% on Factory Cost) 2,72,700
Selling & distribution cost (12% on Factory cost) 2,18,160
Profit (25% on cost) 5,77,215
Sales Value 28,86,075
Job : A-26 Rs.
Direct Material 32,500
Direct Wages 23,500
Prime Cost 56,000
Factory overhead (28% on Rs.23,500) 6,580
Factory cost 62,580
Administrative overhead (15% in factory cost + 4%) 9,762
Selling & Distribution (12% on factory cost) 7,510
Total Cost 79,852
Profit (25% on cost) 19,963
Sale value 99,815
49 Answer : (d) < TOP
. Reason : Predetermine factory overhead rate per labor hour = Rs.8,00,000 / 50,000 hours = Rs.16.
Actual overhead absorbed = Actual hours x Predetermine overhead rate per hour
Rs.6,84,000 = Actual hours x Rs.16
Actual hours = Rs.6,84,000 / Rs.16 = 42,750.
50 Answer : (b) < TOP
. Reason : Contract A/c
Particulars Rs. Particulars Rs.
13,50,00 By Work-in-
To Material issued 0 Progress:
To Wages –Direct 6,30,000 Work certified 38,00,000
–Accrued 45,200 Work not certified 4,21,000
To Plant hire charges 73,500 By Material at site 70,500
To Planning & estimating cost 1,20,000
To Head office expenses appr. 62,700
To Direct expenses 21,700
To Notional profit 0
0 42,91,500
To Profit & loss A/c:
2 30, 00, 000
×19, 88, 400 × 10,46,52
3 38, 00, 000
6 By Notional Profit 19,88,400
To Reserve 9,41,874
0 19,88,400
Work-in-Process = Work certified + Work uncertified – Profit in reserve
– Progress payment received
= Rs.38,00,000 + Rs.4,21,000 – Rs.9,41,874 – Rs.30,00,000
= Rs.2,79,126
51 Answer : (a) < TOP
. Reason : Total Production & Sales unit = 6,000 + 5,500 + 5,800 = 17,300 units
Common fixed cost per unit = Rs.73,525 ÷ 17,300 = Rs.4.25

Particulars Q R
Sales units 5,500 5,800
Sales Price 28.00 26.50
Variable cost 14.25 10.80
Attributable Fixed cost 4.28 3.50
Common fixed cost 4.25 4.25
Profit per unit 5.22 7.95
Total profit 28,710 46,110
52 Answer : (c) < TOP
. Reason :
Particulars M Ltd. N Ltd. Total
Capacity 100% 100% 100%
Sales (Rs.) 60,00,000 80,00,000 1,40,00,000
Variable Cost (Rs.) 45,00,000 64,00,000 1,09,00,000
Contribution (Rs.) 15,00,000 16,00,000 31,00,000
Less: Fixed cost (Rs.) 8,00,000 11,00,000 19,00,000
Profit (Rs.) 7,00,000 5,00,000 12,00,000

Contribution at 85% = Rs.31,00,000 × 0.85 Rs.26,35,000

Less: Fixed cost Rs.19,00,000
Rs. 7,35,000
Profitability =
Rs.7, 35, 000
85% of Rs.1, 40, 00, 000

Rs.7, 35, 000

Rs.1,19, 00, 000
= = 6.18%.
53 Answer : (c) < TOP
. Reason : Occupancy days in a year
For single room = 50 × 365 × 80% = 14,600
For double room = 15 × 365 × 80% = 4380
Total room occupancy = 14,600 + 1.2 (4380) = 14,600 + 5,256 = 19,856

Total cost:
Single room = 14,600 (Rs.80 + Rs.20)= Rs. 14,60,000
Double room = 4380 (Rs.60 + Rs.25)= Rs. 3,72,300
Total cost = Rs. 18,32,300
Margin (20% hire charge) = Rs. 4,58,075
Total = Rs. 22,90,375
Rent per day of single room = Rs.22,90,375/ 19,856 = Rs.115.35
Rent of a double room per day = Rs.115.35(1.2) = Rs.138.42.
54 Answer : (d) < TOP
. Reason : Actual labor hours = 4,200
Actual overheads = Rs.64,700
Overheads absorbed = Rs.15 × 4,200 = Rs.63,000
Unabsorbed overhead = Rs.64,700 – Rs.63,000 = Rs.1,700
For defective planning = 65% of Rs.1,700 = Rs.1,105.
For increasing cost = Rs.1,700 – Rs.1,105 = Rs.595
Number of good units = 250 + 25 + 60% of 40 = 299
Supplementary overhead absorption rate = Rs.595 / 299 = Rs.1.99
55 Answer : (d) < TOP
. Reason : Let, variable cost = x and fixed cost = y
Therefore, Rs.60 × 6,000 – 6,000x – y = –Rs.36,000
Rs.60 × 10,000 – 10,000x – y = Rs.40,000
Or, 3,96,000 = 6000x + y
5,60,000 =10000x + y
1,64,000 = 4000x
x = Rs.41
y = Rs.1,50,000
Breakeven point Rs.1,50,000 / (Rs.60 – Rs.41) = 7895 units.
56 Answer : (a) < TOP
. Reason : Raw material used = Op. stock + Purchases – Cl. stock
= Rs.12,350+ Rs.80,080 – Rs.11,875= Rs.80,555
Manufacturing cost = Raw material used + Direct labor + Factory overhead
Rs.3,12,500 = Rs.80,555+ Direct labor + 50% of Direct labor
1.50 Direct labor = Rs.2,31,945
Direct labor = Rs.1,54,630
The amount of factory overhead = 50% of Rs.1,28,823 = Rs.77,315
57 Answer : (c) < TOP
. Reason :
Particulars Mahesh Kappa
Sale value (Rs.) 12,00,000
Fixed cost (Rs.) 5,00,000 3,80,000
Profit (Rs.) 3,00,000 2,00,000
Variable cost (Rs.) 4,00,000 6,20,000
Variable cost per unit (Rs.) 160 248
Contribution per unit (Rs.) 320 232 Let, the
number of units = x
Therefore, 320x –5,00,000 = 232x –3,80,000
88x = Rs.1,20,000
x = 1,364 units
58 Answer : (d) < TOP
. Reason :
Sales (20,000 units) Rs.1,05,000
Less: Cost of goods sold:
Variable manf. cost Rs.56,000
Fixed manf. cost
(Rs.32,500 / 25,000 × 20,000) Rs.26,000
Gross profit Rs.23,000
Less Marketing & others
(Rs.14,000 + Rs.6,500) Rs.20,500
Net profit Rs. 2,500
59 Answer : (b) < TOP
. Reason : Difference in set up (fixed ) cost = Rs.700 – Rs. 500 = Rs.200
Difference in variable cost per unit = Rs.5.00 – Rs.4.50 = Re.0.50
Indifferent point = Difference in set up cost/Difference in variable cost = Rs.200/Re.0.50 =
400 units.
At a production of 400 units the total costs of both the machines will be same.
Since the number of units required is more than 400 units, M2 machine is suitable
Cost of 650 units using M2 machine= 650 units × Rs.4.50 + Rs.700 = Rs.3,625.
(or) Cost of 650 units
Under M1 = 650 × 5 + Rs.500 = Rs.3,750
Under M2 = 650 × 4.5 + Rs.700 = Rs.3,625
Since cost under M2 is less b is correct.
60 Answer : (e) < TOP
. Reason : Total cost of process A = 100 tons (Rs.1,610 +Rs.650 + Rs.1,350) = Rs.3,61,000
Number of good units 100 tons – 4% of 100tons – 10% of 100s = 86 tons
Realizable value of scrap 10 units = 10 x Rs.840 = Rs.8,400
Cost per unit = ( Rs.3,61,000 – Rs.8,400 ) / 86 tons = Rs.4,100
Total cost of process 2 = Input from process 1 + Direct labor + Overhead (60% labor cost
= 86 tons x Rs.4,100 + 86 tons x Rs.750 + 60% of Rs.64,500
= Rs.3,52,600 + Rs.64,500 + Rs.38,700 = Rs.4,55,800
Scrap 20% of input = 20% of 86 = 17.2 units, Realizable value = 17.2 tons x Rs.1,050
= Rs.18,060
Therefore, cost per unit of finished goods = ( Rs.4,55,800 – Rs.18,060) / (86 – 17.2) tons
= Rs.4,37,740/ 68.8 tons = Rs.6,362.50
61 Answer : (b) < TOP
. Reason : Full capacity = 20,000 units
Present capacity (80%) = 16,000 units
Unutilized capacity = 4,000 units
Variable cost per suit = Rs.520 + Rs.150+ Rs.90 = Rs.760
Incremental revenue for export = 10,000 units ( Rs.850 – Rs.760 ) = Rs.9,00,000
Opportunity cost of indigenous production = 6,000 units (i.e.10,000 – 4,000) x (Rs.1,200 –
Rs.760) = Rs.26,40,000
Net loss = Rs.26,40,000 –Rs.9,00,000 = Rs.17,40,000
62 Answer : (a) < TOP
. Reason :
Particulars P Q R S Total
Sales (Rs.) 38,700 28,800 5,400 17,100 90,000
Variable costs (Rs.) 27,090 17,280 2,160 8,550 55,080
Contribution (Rs.) 11,610 11,520 3,240 8,550 34,920
Fixed costs (Rs.) 25,000
Profit (Rs.) 9,920
Profit-volume ratio = Rs.34,920 / Rs.90,000 = 0.388 or 38.8 %
Break-even sales = Rs. 25,000 / 0.388 = Rs.64,433
63 Answer : (a) < TOP
. Reason : Input = 10,000 units. Main product = 85% of 10,000 units = 8,500 units.
By-product = 10% of 10,000 units = 1000 units
Process loss = 5% of 10,000 units = 500 units
Share of by-product:
Material cost = 10,000 units x Rs.30 = (Rs.3,00,000 x 1000 ) / 9,500 = Rs.31,579
Other cost = 70% of Rs.25,400 = (Rs. 17,780 x 1000) / 9,500 = Rs.1,872
Power cost = 30% of Rs.25,400 = Rs.7,620 i.e 7,620 3 / 8 = Rs.2,858
Total costs of by-product = Rs.31,579 + Rs.1,872+ Rs.2,858 = Rs.36,309
64 Answer : (a) < TOP
. Reason : Variable cost = 60%, therefore, contribution to sales ratio = 40% (P/V ratio)
Company’s target profit 20% in sales, therefore, revised contribution which covers only fixed
cost = 40% - 20% = 20%.
Required sales = Fixed cost / Revised contribution = Rs.8,00,000 / 20% = Rs.40,00,000
Fixed cos t + Desired profit
P / V ratio
Or Required sales = x =
8, 00, 000 + 0.2x
, x = Rs.40,00,00
65 Answer : (b) < TOP
. Reason :
Particulars P (Rs.) Q (Rs.) R (Rs.) S(Rs.) Total
Sales value after further 2,20,000 1,15,000 1,05,00 1,70,00 6,10,000
process 0 0
Sales value at split-off-point 1,90,000 1,00,000 85,000 1,05,00 4,80,000
Incremental sales 30,000 15,000 20,000 65,000 1,30,000
Further processing cost 20,000 20,000 17,000 50,000 1,07,000
Incremental profit (loss) 10,000 (5,000) 3,000 15,000 23,000
Q should be sold at split-off-point and P, R and S should be sold after further processing cost.
Sales of P after further processing Rs. 2,20,000
Sales of Q at split off point Rs. 1,00,000
Sales of R after further processing Rs. 1,05,000
Sales of S after further processing Rs 1,70,000
Total sales Rs. 5,95,000
Less Joint cost Rs. (2,80,000)
Less further processing cost of P, R and S Rs. (87,000)
Maximum profit Rs. 2,28,000
66 Answer : (d) < TOP
. Reason :
Particulars Product A Product B Product C
Contribution per unit (Rs.) 200 700 800
Machine hours per unit 4 7 10
Contribution per machine hour (Rs.) 50 100 80
Ranking III I II
Maximum sales units 500 700 400
Machine hours required as per Ranking 1,100 4,900 4,000
Best product mix in unit 275 700 400
Contribution (Rs.) 55,000 4,90,000 3,20,000
Total contribution = Rs.55,000 + Rs.4,90,000 + Rs.3,20,000 = Rs.8,65,000
Profit = Contribution – Fixed cost = Rs. 8,65,000 – Rs.4,45,000 = Rs.4,20,000
67 Answer : (e) < TOP
. Reason : Let the present sales = 100 units @ Re.1 per unit
Present total sales = Rs.100
Present variable cost = Rs.60
Present contribution = Rs.40
If selling price is reduced by 20%,
Selling price per unit = Re.0.80
Variable cost per unit = Re.0.60
Contribution per unit = Re.0.20
To maintain the same contribution, Volume of sales =(Present total contribution x New selling
price per unit) / New contribution per unit = (Rs.40 x0. 80) / 0.20 = 160
Therefore, volume of sales will have to be increased by = (160 - 100) / 100 = 60%
68 Answer : (b) < TOP
. Reason : Sales for 2003-04 = Variable cost + Fixed cost –Loss = Rs.12 x 5,000 units + Rs.20,000 –
= Rs.75,000, Selling price per unit = Rs.75,000 / 5,000 = Rs.15.
Contribution required for 12,000 units = Rs.20,000 + Rs.16,000 = Rs.36,000
Contribution from 12,000 units = 12,000 units (Rs.15 – Rs.12.25) = Rs.33,000
Additional contribution required from additional units = Rs.36,000 – Rs.33,000 = Rs.3,000
Units required to earn contribution of Rs.3,000 = Rs.3,000 / (Rs.15 – Rs.13.25) = 1714 units
Proposed sales = 12,000 units + 1714 units = 13,714 units
Required increase in sales = 13,714 units – 5,000 units = 8,714 units
Percentage increase required = (8,714/ 5,000) x 100 = 174%
69 Answer : (d) < TOP
. Reason : Fixed cost per unit = Rs.3,60,000 / 15,000 units = Rs.24.
Profit under absorption costing = Rs.1,01,000
Adjustment of fixed manufacturing overhead costs of increased inventory = 1,880units x
Rs.24 = Rs.45,120
Profit under marginal costing = Rs.1,01,000 – Rs.45,120= Rs.55,880
70 Answer : (d) < TOP
. Reason : Cost of normal process = Input - Sale value of normal scrap
Normal loss = 10% of 2,000 kg. = 200 kg.
Sale value of normal loss = Rs.2.80 x 200kg. = Rs.560
Cost of normal process = Rs.7,850– Rs.560 = Rs.7,290
Cost per kg. of normal production = Cost of normal process / Normal output =
Rs.7,290/(2,000 – 200) = Rs.4.05 per kg.
Abnormal gain = Actual output – Normal output = 1,900kg. – 1,800 kg. = 100 kg.
Cost of abnormal gain = Rs4.05 x 100 kg. = Rs.405