Question Paper Management Accounting II (152) – January 2005

• Answer all questions. • Marks are indicated against each question. 1. In developing a system of transfer pricing for any particular situation, which of the following circumstantial factors need not be considered? (a) Existence of competitive market (c) Movability constraint (e) Capacity level of selling division. 2. (b) Sourcing constraint (d) Quantum of transfers (1 mark) The most fundamental responsibility center affected by the use of market-based transfer prices is (a) Revenue center (b) Cost center (d) Investment center (e) Production center. 3. (c) Profit center (1 mark) A budget manual, which enhances the operation of a budgeting system, is most likely to include (a) (b) (c) (d) (e) 4. Budgeted training policies of employees Distribution instructions for budget schedules Budgeted hiring policies of employees Documentation of the accounting system Company policies regarding the authorization of transactions. (1 mark) Which of the following statements is false in respect of full cost pricing and contribution margin pricing? (a) They can not be considered competing to each other (b) In both the methods, the selling prices proposed must be only tentative and they are always subject to adjustments (c) Fixed costs are important in both the pricing models (d) In both the methods, a normal mark-up on total costs is made and the volume of production is taken into consideration (e) They represent to a certain degree, cost plus pricing. (1 mark) 5. ABC Ltd. is preparing its cash budget for the year 2005-06. An extract from its sales budget for the same year shows the following sales values: March 2005 April 2005 May 2005 June 2005 Rs.1,20,000 Rs.1,40,000 Rs.1,10,000 Rs.1,30,000
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40% of its sales are expected to be for cash. Of its credit sales, 50% are expected to pay in the month after the month of sales and 50% are expected to pay in the second month after the month of sales. The value of sales receipts to be shown in the cash budget for May 2005 is (a) Rs.1,85,000 (b) Rs.1,33,000 (c) Rs.1,30,000 (d) Rs.1,22,000 (e) Rs.1,10,000. (1 mark)

6.

Consider the following costs per unit of production of a company: Direct material Direct labor Production overheads Selling & administrative overheads Total costs Normal Production (a) Rs.77,500 (b) Rs.75,000 Rs.10 Rs.12 Rs.20 (40% fixed) Rs.20 (50% fixed) Rs.62 1,000 units (c) Rs.73,000 The total costs for 1,250 units are (d) Rs.65,000 (e) Rs.55,000. (1 mark)

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7.

The information contained in cost of goods manufactured budget most directly relates to (a) Materials used, direct labor, overhead applied and ending work-in-process budgets (b) Materials used, direct labor, overhead applied and work-in-process inventories budgets (c) Materials used, direct labor, overhead applied, work-in-process inventories and finished goods inventories budgets (d) Materials used, direct labor, overhead applied and finished goods inventories budgets (e) Materials used, direct labor, overhead applied, unit production and raw materials inventories budgets. (1 mark)

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8.

There are various budgets within the master budget. One of these budgets is the production budget. Which of the following best describes the production budget ? (a) (b) (c) (d) (e) It aggregates the monetary details of the operating budget It is calculated from the desired ending inventory and the sales forecast It includes required material purchases It includes required direct labor hours It summarizes all discretionary costs. (1 mark)

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9.

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

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10.

The budgeting process that uses management by objectives and inputs from the individual managers is an example of the application of (a) Flexible budgeting (c) Responsibility accounting (b) Capital budgeting (d) Program budgeting (e) Cost-benefit accounting. (1 mark)

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11.

A company is currently using the budget as a tool for planning. The management has decided to use the budgets for control purposes also. To affect this change, the financial controller must (a) (b) (c) (d) (e) Develop forecasting procedures Organize a budget committee and appoint a budget director Report daily to operating management all deviations from the plan Report daily to top management all deviations from the plan Synchronize the budgeting and accounting systems within the organizational structure. (1 mark)

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12.

XIL Ltd. manufactures a single product at the operated capacity of 40,000 units while the normal capacity of the plant is 50,000 units per annum. The company has estimated 20% profit on sales realization and furnished the following budgeted information: Particulars Fixed overheads Variable overheads Semi-variable overheads Sales realization 50,000 units (Rs.) 2,00,000 3,00,000 3,00,000 18,00,000 40,000 units (Rs.) 2,00,000 2,40,000 2,60,000 14,40,000

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The company has received an order from a customer for a quantity equivalent to 10% of the normal capacity. It is noticed that prime cost per unit of product is constant. If the company desires to maintain the same percentage of profit on selling price, the minimum price per unit to be quoted for new order is (a) Rs.26.63 13. (b) Rs.27.97 (c) Rs.25.40 (d) Rs.23.26 (e) Rs.30.59. (2 marks)
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Moti Ltd. pays commission to its salesmen in the month the company receives cash for sales, which is equal to 4% of the cash inflows. The company has budgeted sales of Rs.3,15,000 for January 2005, Rs.4,25,000 for February 2005 and Rs.4,85,000 for March 2005. 50% of the sales are on credit. Experience indicates that 70% of the budgeted credit sales will be collected in the month following the sales. 25% are expected to be realized in the second month following the month of sales and remaining 5% will be non-recoverable. The total amount of sales commission for the month of March 2005 is (a) Rs.24,750 (b) Rs.21,250 (c) Rs.18,750 (d) Rs.17,225 (e) Rs.15,650. (2 marks)

14.

White X Ltd. has had no significant bad debt experience with its customers. Cash sales of the company account for 10% of total sales and payments for credit sales have been received as follows: i. ii. iii. iv. 40% of credit sales in the month of sales 30% of credit sales in the first month following the month of sales 25% of credit sales in the second month following the month of sales 5% of credit sales in the third month following the month of sales Sales (Rs.) 1,00,000 1,20,000 1,35,000 1,50,000 1,70,000 2,00,000 The estimated cash inflows of the company in the month of March (c) Rs.1,36,950 (d) Rs.1,50,500 (e) Rs.1,56,500. (2 marks)

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The forecast for both cash and credit sales is as follows: Month December 2004 January 2005 February 2005 March 2005 April 2005 May 2005 2005 will be (a) Rs.1,05,450 15. (b) Rs.1,32,450

Look Back Ltd. has furnished the following data for the month of December 2004: Sales Gross profit margin Increase in accounts payable for inventories Decrease in stock for the month is (a) Rs.6,70,000 (b) Rs.7,22,000 Rs.10,00,000 25% Rs.28,000 Rs.52,000 (c) Rs.8,30,000

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The estimated cash disbursement (e) Rs.7,50,000. (1 mark)
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(d) Rs.6,98,000

16.

Which of the following budget challenges the existence of every budgetary unit at every budget period? (a) Rolling budget (b) Participative budget (d) Strategic budget (e) Short-range budget. (c) Zero based budget (1 mark)

17.

Top-to-bottom budget is also known as (a) Participative budget (c) Zero-based budget (b) Imposed budget (d) Manpower budget (e) Master budget. (1 mark)

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18.

Acer Ltd. manufactures 5,000 units of Product PT at a cost of Rs.90 per unit. Presently, the company is utilizing 50% of the total capacity. The information pertaining to cost per unit of the product is as follows: Material Labor Factory overheads Administrative overheads – – – – Rs.50 Rs.15 Rs.15 (40% fixed) Rs.10 (50% fixed)

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Other information:

i. The current selling price of the product is Rs.100 per unit. ii. At 60% capacity level –Material cost per unit will increase by 2% and current selling price per unit will reduce by 2%. iii. At 80% capacity level – Material cost per unit will increase by 5% and current selling price per unit will reduce by 5%. The profit per unit of the product of the company at 60% and 80% capacity level will be (a) Rs.8.83 and Rs.10.00 respectively (c) Rs.8.83 and Rs.7.83 respectively (e) Rs.8.83 and Rs.6.63 respectively. 19. (b) Rs.6.63 and Rs.8.83 respectively (d) Rs.6.63 and Rs.10.00 respectively (2 marks) Mittal Ltd. expected to sell 1,50,000 board games during the month of December 2004, and the company’s master budget contained the following data related to the sales and production of these games: Particulars Revenue Cost of goods sold: Direct materials Direct labor Variable overhead Contribution Fixed overhead Fixed selling/administration Operating income 6,75,000 3,00,000 4,50,000 9,75,000 2,50,000 5,00,000 2,25,000 Rs. 24,00,000
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Actual sales during December 2004 were 1,80,000 games. Using a flexible budget, the company’s actual operating income for the month of December 2004 is (a) Rs. 2,25,000 (b) Rs. 2,70,000 (c) Rs. 4,20,000 (d) Rs. 5,10,000 (e) Rs. 3,00,000. (1 mark)

20.

Consider the following data pertaining to a company for 1,000 units of a product: Standard material cost per unit: Material A Material B Materials issued: Material A Material B (a) Rs.900 (Adverse) (c) Rs.500 (Adverse) 2,050 kg at a cost of Rs.43,050 2,980 kg at a cost of Rs.56,620 (b) Rs.900 (Favorable) (d) Rs.400 (Favorable) 2 kg at a rate of Rs.10 per kg = Rs.20 3 kg at a rate of Rs.20 per kg = Rs.60

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The total material usage variance is (e) Rs.100 (Adverse). (1 mark) 21. Which of the following is not a cause for material usage variance? (a) Sub-standard materials (c) Non-standard material mixture (e) Purchasing in non-standard lots. 22. (b) Pilferage of materials (d) Wastage due to inefficient mixture (1 mark) Vasco Ltd. has furnished the following data pertaining to its product during the month of December 2004: Particulars Fixed overhead Production units Number of working days Hours variance is (a) Rs.200 (Favorable) (c) Rs.100 (Favorable) 23. (b) Rs.200 (Adverse) (d) Rs.100 (Adverse) (e) NIL. (1 mark)
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Budget Rs.2,400 12,000 units 25 days 6,000

Actual Rs.2,500 13,000 units 28 days 6,600 The fixed overhead volume

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Greatsky has furnished the following information Particulars Output in units Labor hours Variable overhead costs variance is (a) Rs.800 (Adverse) (d) Rs.300 (Favorable) (b) Rs.500 (Adverse) (e) Rs.300 (Adverse). (c) Rs.500 (Favorable) (1 mark) Budget 12,000 6,000 Rs.12,000 Actual 12,500 6,500 Rs.12,800 The variable overhead cost

24.

Which of the following statements is true in respect of normal costing? (a) (b) (c) (d) (e) It involves tracing direct costs to output and tracing indirect costs to the output It involves tracing direct costs to output and allocating indirect costs to the output It involves allocating direct costs to output and tracing indirect costs to the output It involves allocating direct costs to output and allocating indirect costs to the output It involves only allocating direct costs to output. (1 mark)

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25.

Hyderabad Processors Ltd. produces a commodity by blending two raw materials – A and B. The following are the details regarding the raw materials: Material Standard mix Standard price per kg. A 40% Rs.4.00 B 60% Rs.3.00 The standard process loss is 15%. During the month of December 2004, the company produced 3,400 kg. of finished product. The position of stock and purchases for the month of December 2004 is as under:

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Material

Stock as on December 01, 2004 (Kg.)

A 70 B 80 material yield variance of the company is (a) Rs.1,200 (adverse) (c) Rs. 119 (adverse) 26.

Stock as on December 31, 2004 (Kg.) 10 100 (b) Rs. 136 (adverse) (d) Rs. 136 (favorable)

Purchases during December 2004 (Kg.) 1,600 2,400 (Rs.) 6,800 6,000 The

(e) Rs. 119 (favorable). (2 marks)
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Deekay Ltd. uses a standard absorption costing system. The following data have been extracted from its budget for the month of December 2004: Fixed production overhead cost Production Rs.48,000 4,800 units

In December 2004, the fixed production overhead cost was over absorbed by Rs.8,000 and the fixed production overhead expenditure variance was Rs.2,000 (Favourable). The company has produced ______ than budgeted units. (a) 1,000 units more (d) 600 units less 27. (b) 600 units more (e) 1,000 units less. (c) 200 units more (2 marks) Which of the following information is required for the lower management level? (a) (c) Control information Formal information (b) Operational information (d) Informal information (e) Strategic information. (1 mark)
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28.

Consider the following data pertaining to overhead costs of a company for the month of December 2004: i. Overhead cost variance ii. Overhead volume variance iii. Budgeted hours for the month iv. Budgeted overheads for the month v. Actual rate of recovery of overheads the company is (a) Rs.2,400 (b) Rs.8,400 – – – – – Rs.1,400 (A) Rs.1,000 (A) 1,200 Rs.6,000 Rs.8 per hour

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The actual overhead incurred by (e) Rs.6,800. (1 mark)
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(c) Rs.7,000

(d) Rs.6,400

29.

Titri Ltd. produces a single product – ‘k’. The following budgeted data are available for the month of December 2004: Production (units) Flexible budget data: Material Labor Factory overhead: Indirect material Indirect labor Supervision Heat, Light and Power Depreciation Insurance and Taxes Total Manufacturing cost December 2004: i. ii. iii. iv. v. Standard time Normal capacity Units produced Actual labor hours Factory overheads incurred : : : : : 0.5 direct labor hour per unit of product 10,000 direct labor hours 22,000 units 10,700 hours Rs.1,91,000 15,000 30,000 26,250 15,250 63,000 8,000 2,32,500 25,000 50,000 33,750 22,750 63,000 8,000 3,27,500 Other information for the month of 15,000 (Rs.) 30,000 45,000 25,000 (Rs.) 50,000 75,000

Standard factory overhead rates are based on direct labor hours. The overhead efficiency variance and overhead capacity variance are (a) (b) (c) (d) (e) Rs.2,700 (F) and Rs.4,700 (A) respectively Rs.2,700 (F) and Rs.9,000 (F) respectively Rs.4,700 (A) and Rs.4,700 (F) respectively Rs.2,700 (A) and Rs.9,000 (A) respectively Rs.4,700 (A) and Rs.2,700 (A) respectively. (2 marks)

30.

Shivam Ltd. uses standard process costing method. The standard process cost card per month shows that 3 hours of direct labor is required to produce one kg. of finished product and the fixed overheads, which are recovered on direct labor hours, amount to Rs.180 per kg. of output. The budgeted output is 1,000 kg. per month. Actual production during the month of December 2004 is 1200 kg. and the direct labor hours utilized during the month were 3,300. The details of opening and closing work-in progress (WIP) are as under: Opening work-in-progress – 250 kg :Degree of completion of labor and overheads – 60% Closing work-in-progress – 450 kg : Degree of completion of labor and overheads – 20% The company uses FIFO method for evaluation of stocks. The fixed overhead efficiency variance is (a) Rs.52,200 (Favorable) (c) Rs.18,000 (Adverse) (b) Rs.18,000 (Favorable) (d) Rs. 7,200 (Favorable) (e) Rs. 7,200 (Adverse). (2 marks)

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31.

Sigma Ltd. has furnished the following standard labor component and the actual labor component for a job in a week: Particulars i. Standard number of workers in the gang ii. Standard wage rate per hour (Rs.) iii. Actual number of workers employed in the gang during the week iv. Actual wage rate per hour (Rs.) The labor efficiency variance is (a) Rs.2,048 (A) (b) Rs.2,880 (A) (c) Rs.2,432 (A) (d) Rs.2,016 (F) (e) Rs.2,000 (F). (2 marks) Skilled workers 32 12 28 14 Semi-skilled workers 12 10 18 8 Unskilled workers 6 8 4 6

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During the 40 hours working week, the gang produced 1,800 standard labor hours of work.

32.

Believing that its traditional cost system may be providing misleading information, Munna Ltd.is considering an Activity Based Costing (ABC) approach. It now employs a full cost system and has been applying its manufacturing overhead on the basis of machine hours. The organization plans on using 50,000 direct labor hours and 30,000 machine hours in the coming year. The following data show the manufacturing overhead that is budgeted: Activity Material handling Setup costs Machine costs Quality control Total overhead cost Cost driver No. of parts handled No. of setups Machine hours No. of batches Budgeted activity 60,00,000 750 30,000 500 Budgeted cost (Rs.) 7,20,000 3,15,000 5,40,000 2,25,000 18,00,000

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Cost, sales, and production data for one of the organization’s finished products for the coming year are as follows: Prime costs: Direct material cost per unit Direct labor cost per unit (0.05 Direct labor hours at the rate of Rs. 15.00 Direct labor hours) Re 0.75 Total prime cost Sales and production data: Expected production and sales Batch size Setups Total parts per finished unit Machine hours required 20,000 units 5,000 units 2 per batch 5 parts 80 machine hours per batch If the organization (e) Rs.6.41. (3 marks)
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Rs.4.40

Rs.5.15

employs ABC system, the cost per unit of the product for the coming year will be (a) 33. Rs.6.00 (b) Rs.6.08 (c) Rs.6.18 (d) Rs.6.30

Sharada Ltd. services washing machines and clothes dryers. It charges customers for the spare materials with markup on cost. The company has five employees, each earning Rs.6,000 per year and spending 1,000 hours per year on service calls. It sells parts that cost Rs.45,000 annually. The company has other costs of Rs.25,000 a year, which is allocated two-thirds to labor and the remainder to material. The amount of markup on parts, if the target profit of the company is Rs.20,000 per annum, is (a) Rs.72,000 (b) Rs.75,000 (c) Rs.30,000 (d) Rs.45,000 (e) Rs.27,000. (2 marks)

34.

South Division of Tiru Ltd. has furnished the following financial information for the year 2003-04: Particulars Average plant and machinery Cost of goods sold Net sales General and administrative expenses Average working capital Rs. in thousands 1,815 3,660 4,480 170 785

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If the company treats the South Division as an investment center for measurement of performance, the Return on Investment (ROI) for the year is (a) 35.82% 35. (b) 31.54% (c) 25.00% (d) 23.25% (e) 22.00%. (1 mark)
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Consider the following particulars pertaining to products A and B of a company: Particulars A B Estimated production (units) 4,000 6,000 Total variable costs (other than direct labor) (Rs.) 1,60,000 2,70,000 Direct labor cost per hour (Rs.) 6.00 4.50 Number of labor hours per unit 3 4 Fixed costs (Rs.) 1,15,000 1,10,000 The investment in fixed capital is Rs.7,60,000 and working capital requirements amount to Rs.5,00,000. A return of 25% on investment is expected. If the contribution per direct labor hour is expected to be the same for both the products, the selling price of product A is (a) Rs.73 (b) Rs.58 (c) Rs.103 (d) Rs.140 (e) Rs.65. (2 marks)

36.

Which of the following statements is true about Management by exception? (a) (b) (c) (d) (e) It helps to focus management's attention on employees meeting standards and benefiting the company It helps to focus attention on the large unfavorable variances first It helps to focus attention on the largest problem areas first It is the only management tool that is really needed to be a successful company It helps to focus attention on the large favorable variances first. (1 mark) It is based on a cost control concept It assumes stability in the current manufacturing process The goal is to meet cost performance standards It assumes production workers have the best knowledge to reduce costs It motivates employees to try to reach target established. (1 mark)

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37.

Which of the following is not true about a standard costing system? (a) (b) (c) (d) (e)

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38.

An example of a non-value-added activity is (a) Machine operations (c) Product inspection operations (e) Packaging. (b) Assembly operations (d) Delivering products to customers (1 mark)

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39.

The value chain is a sequence of activities that should contribute more to the ultimate value of the product than to its cost. The first cycle of the value chain is (a) Research, Development, and Engineering (c) Post-Sale Service and Disposal Cycle (e) Activity Based Costing. (b) Manufacturing Cycle (d) Benchmarking (1 mark)

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40.

While using target costing, which part of a product's life cycle is extremely important in reducing costs? (a) Customer service (d) Planning (b) Production (e) Quality checking. (c) Design and engineering (1 mark)

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41. The master budget variance is the difference between (a) (b) (c) (d) (e) Flexible budget and master budget Actual result and flexible budget Rolling budget and actual result Total costs at actual prices and actual inputs and master budget Flexible Budget and static budget. (1 mark) 42.Which of the following information is/are required to the operating management? I. Licensed capacity III. Actual production (a) Only (I) above (c) Both (I) and (III) above (e) All (I), (II), (III) and (IV) above. II. Installed capacity IV.Rejection of products (b) Both (II) and (III) above (d) Both (III) and (IV) above (1 mark) 43. The data, equipment and computer programs that are used to develop information for managerial use is known as (a) Management by exception (c) Management control (e) Value chain analysis. (b) Management by objective (d) Management information system (1 mark) 44. Which of the following is/are the characteristic(s) of a corporate management? I. The corporate management is responsible for strategic planning and overall financial monitoring of the firm II. The corporate management is responsible for executing various tasks within the framework of plans, programs and schedules III. The corporate management translates corporate strategy into programs IV. The corporate management is concerned with tasks such as budget formulation, decision on routine capital expenditures, choice of product improvement etc. (a) Only (I) above (d) Only (IV) above (b) Only (II) above (c) Only (III) above (e) Both (III) and (IV) above. (1 mark)

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45. Which of the following is not an assumption of McGregor’s Theory Y? (a) (b) (c) (d) (e) Man will exercise self-direction and self-control in the service of objectives to which he is committed The average human being learns, under proper conditions, not only to accept but to seek responsibility The average human being does not inherently dislike work Commitment to objectives is a function of the rewards associated with their achievements The capacity to exercise a relatively high degree of imagination, ingenuity and creativity in the solution of organizational problems is narrowly distributed in the population. (1 mark)

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46. Which of the following variances is of least significance from a behavioral control perspective? (a) Unfavorable material quantity variance amounting to 20% of the quantity allowed for the output attained (b) Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for the output attained (c) Favorable labor rate variance resulting from an inability to hire experienced workers to replace retiring workers (d) Favorable material price variance obtained by purchasing raw material from a new vendor (e) Fixed overhead volume variance resulting from management’s decision midway through the fiscal year to reduce its budgeted output by 20%. (1 mark) 47. The contribution approach to pricing makes a basic distinction between I. II. III. IV. Relevant and irrelevant costs Past and future costs Fixed and variable costs Manufacturing and non-manufacturing costs (b) Only (II) above (e) Both (I) and (III) above. (c) Only (III) above (1 mark) 48. The most common measure of performance of investment center is (a) Margin of safety (b) Sales margin (c) Return on investment (d) Return on equity (e) Capital turnover. (1 mark) 49. When a company charges a price that customer is willing to pay i.e. the customer decides the price of the product and the costs will be used as per the required profits, then such pricing strategy is called as (a) Predatory pricing (c) Target pricing (b) Discriminatory pricing (d) Full cost pricing (e) Back flush pricing. (1 mark) 50. Which of the following statements about activity-based costing (ABC) is false? (a) ABC appeals to managers because costs are assigned according to well-measured and understood activities (b) ABC creates another layer of product costing activities in addition to those required to perform volume-based product costing (c) ABC usually reduces the costs assigned to high-volume products (d) ABC usually increases the costs assigned to low-volume and complex products (e) ABC is well suited to the new manufacturing environment. (1 mark)

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(a) Only (I) above (d) Only (IV) above

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51. An example of a profit center is the (a) Painting department (c) Company-owned restaurant in a fast-food chain (e) Maintenance department. 52. In an imperfect market, the pricing strategy to maximize volume is (a) Full cost pricing (c) Back flush pricing (e) Skimming price. 53. Which of the following statements is true? (a) Under a standard costing system, the costs of every product planned to be worked on during the period can be computed at the end of the period (b) Under a standard costing system, the costs of every product planned to be worked on during the period can be computed at the mid-point of the period (c) Under a standard costing system, the costs of every product planned to be worked on during the period can be computed at the beginning of the period (d) Under a standard costing system, the costs of every product planned to be worked on during the period can be computed at the time when actual capacity is equivalent to particular capacity (e) Under a standard costing system, the costs of every product planned to be worked on during the period can be computed at any time after 6 months during the period. (1 mark) 54. Jaya Ltd. manufactures 2 products – Jaya and Sasi.The information relating to two products during the month of December 2004 is stated below: Particulars Jaya Sasi Units produced 1600 units 250 units Standard production time per unit 1 hour 6 hours during the month are 3,500 and the budgeted hours during the year are 45,600. The Efficiency ratio is (a) 88.57% (b) 86.11% (c) 82.63% (d) 84.88 % (b) Return on investment based pricing (d) Any price above marginal cost (1 mark) (b) Sales department (d) Reservation department (1 mark)

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The actual man hours

(e) 83.11%. (1 mark)

55. NK Ltd. manufactures two products - N and K, using the same equipment and similar processes. The following are the production data for the month ending December 31, 2004: Particulars N Production (units) 20,000 Direct labor hours per unit 2 Machine hours per unit 1.5 Number of set-ups in the month 40 Number of orders handled in the month 30 recovered for the month has been analyzed as follows: Particulars Relating to machine activity Relating to production run set-ups Relating to handling of orders K 7,500 4 2 160 120

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Total production overheads

Rs. 4,50,000 40,000 90,000 5,80,000 The production overheads to be absorbed by each unit of the products N and K, using activity based costing approach, are (a) Rs.16.30 and Rs.33.87 respectively (c) Rs.14.50 and Rs.27.00 respectively (e) Rs.16.50 and Rs.29.00 respectively. (b) Rs.16.30 and Rs.29.00 respectively (d) Rs.16.50 and Rs.33.87 respectively (2 marks) 56. The budget manager of Dhananjay Ltd. has estimated the following costs for Product A for the accounting year 2005-06: Direct material cost – Rs.12 per unit Direct labor cost – Rs.8 per hour Direct labor hours – 1.5 hours per unit Overhead expenses have been estimated in the following volume of production units: 40,000 units 65,000 units Production units (Rs.) (Rs.) Indirect materials 1,20,000 1,95,000 Indirect labor 2,00,000 3,25,000 Inspection 1,30,000 1,80,000 Maintenance 1,60,000 2,35,000 Supervision 1,44,000 1,44,000 Depreciation on plant & machinery 80,000 80,000 Administrative expenses 60,000 60,000 Selling & distribution expenses 1,70,000 2,45,000 The normal production of the company is 60,000 units. The budgeted cost per unit at the level of 55,000 units of Product A is (a) Rs.40.00 (b) Rs.42.00 (c) Rs.40.71 (d) Rs.47.71 (e) Rs.45.71. (2 marks) 57. Ostrich Ltd. has furnished the following data for the month of December 2004: Particulars Variable overhead cost Labor hours Units produced (a) 3,000 (b) 3,700 Budget Rs.4,000 16,000 units (c) 4,000 Actual Rs.3,900 3,500 hours 13,400 units If the variable overhead efficiency (e) 5,100. (2 marks)
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variance is Rs.150 (Adverse), the budgeted labor hours are (d) 4,500

58. Barahnagar Foundry Ltd. has furnished the following data for the month of December 2004: Particulars Variable overhead cost Labor hours Budget Rs.5,000 2,500 Actual Rs.4,900 2,000 The budgeted production units are 12,500

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and the variable overhead efficiency variance is Rs.800 (adverse). If all other factors remain constant, by how many units should the production be increased in the next month to have a zero efficiency variance? (a) 1,800 units (b) 2,000 units (c) 2,300 units (d) 2,900 units (e) 3,500 units. (2 marks)
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59. Girija Ltd. has furnished the following data regarding production of a machine part for the month of December 2004: Particulars Standard material cost per Material Alpha 3 pieces@Rs.40.00 Units completed unit: 120.00 2,000 Rs.

Material Alpha was purchased at the rate of Rs.42.00. If the material price variance is Rs.11,000(adverse), the material usage variance is (a) Rs.10,000 (favorable) (c) Rs.20,000 (favorable) (b) Rs.15,500 (favorable) (d) Rs.20,000 (adverse) (e) Rs.15,500 (adverse). (1 mark)
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60. PQ Ltd. manufactures product A which requires two raw materials – P and Q. One unit of finished product requires 20 kg of raw material. The standard mix is as follows: Material P Material Q 20% 80% 4kg. at a cost of Rs.4.00 16kg. During a period, one unit

of the product was produced at the following costs: Material P Material Q 16 kg. at a cost of Rs.16 8 kg. at a cost of Rs.8 The material mix variance was Rs.5.60 (d) Rs.1.50 (e) Rs.1.70. (2 marks)
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(adverse). The standard price per unit of material Q was (a) Re.0.50 (b) Rs.1.00 (c) Rs.1.25

61. Consider the following information relating to production of a company: To convert 1500 kg of raw materials into 1200 kg of finished product, the company requires 25 hours at Rs. 2 per hour. Actual direct labour hours for a month are 4750 hours at a cost of Rs. 9,025. The actual finished product for the month is 2,40,000 kg. The raw materials quantity used is 2,88,000 kg. The labour yield variance is (a) Rs. 2,320 favorable (c) Rs. 2,320 adverse (b) Rs. 1,760 favorable (d) Rs. 1,760 adverse (e) Rs. 2,120 favorable. (2 marks)

62. MNC Ltd. 2004-05:

has

furnished (units) (Rs.) (Rs.) (Rs.)

the

following

data

relating

to

its

product

for

the

year

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Assuming income tax rate of 30%, if the company desires to earn a post tax profit of 20% on listed sale price when trade discount is 60%, the net sale price per unit would be (a) Rs.1,120 (b) Rs.1,040 (c) Rs.924 (d) Rs.826 (e) Rs.1,386. (2 marks)
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Annual production Material cost Other variable costs Fixed cost

1,875 1,35,000 2,70,000 90,000

63. Consider the following data pertaining to an integrated circuit manufactured by Minilectronics Ltd.: Variable cost per unit Fixed cost (Rs.) Production units (Rs.) 11.00 90,000 25,000

Market price per unit of similar products is Rs.20 per unit, which the company finds suitable to achieve its required mark up percentage. The mark-up percentage on variable cost is (a) 112% (b) 58.75% (c) 72.9% (d) 80% (e) 81.82%. (1 mark)
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64. ABC Ltd. currently operates at 50% capacity level. The normal capacity is 1,20,000 units. The variable cost per unit is Rs.15 and the total fixed costs are Rs.17,00,000. If the company aims to earn a profit of at least Rs.2,30,000, the price of the product per unit should not be less than (a) Rs.28.92 (b) Rs.32.80 (c) Rs.39.83 (d) Rs.44.63 (e) Rs.47.17. (1 mark)

65. After evaluating the first quarter performance, it was observed that Tarang Ltd. would be able to achieve only 80% of the original budgeted sales. The revised budgeted sales as envisaged above was estimated at Rs.39,00,000 after taking into account a reduction in selling price by 22%. The original budgeted sales at original price is (a) Rs.40,00,000 (d) Rs.67,50,000 (b) Rs.50,00,000 (e) Rs.96,50,000. (c) Rs.62,50,000 (1 mark) 66. Which of the following statements is/are true? I. To prepare a flexible budget, each type of cost must be examined to determine whether it should be classified as a fixed cost or a variable cost. II. Preparation of flexible budgets does not involve the use of standard costs. III. Variance analysis is most appropriately used when the analysis is made of the actual results of operations (actual performance) compared to a fixed budget. (a) Only (I) above (c) Only (III) above (e) All of (I), (II) and (III) above. (b) Only (II) above (d) Both (I) and (II) above (1 mark)

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67. The budgeted and actual sales of Baidik Pharma Ltd. are as under: Product P Q R Budget Quantity (kg.) Price (Rs.) 10,000 20 6,000 25 8,000 30 (b) Rs.3,250 (F) Actual Quantity (kg.) Price (Rs.) 11,000 23.00 5,000 26.20 8,600 29.10 The sales mix variance is (c) Rs.3,750 (A) (d) Rs.1,750 (F) (e) Rs.3,250 (A). (1 mark)

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(a) Rs.1,750 (A)

68. The flexible budget for the month of January 2005 was for 9,000 units with direct material at Rs.15 per unit. Direct labor was budgeted at 45 minutes per unit for a total of Rs.81,000. Actual output for the month was 8,500 units with Rs.1,27,500 in direct material and Rs.77,775 in direct labor expenses. The direct labor standard of 45 minutes was maintained throughout the month. The variance analysis of the performance for the month of January 2005 would show a(n) (a) (b) (c) (d) (e) Favorable material usage variance of Rs.7,500 Unfavorable material price variance of Rs.5,000 Favorable direct labor efficiency variance of Rs.1,275 Unfavorable direct labor efficiency variance of Rs.1,275 Unfavorable direct labor rate variance of Rs.1,275. (2 marks) 69. Automatic Iron Ltd. has furnished the following data pertaining to budgeted expenses for 10,000 electrical automatic iron: Particulars Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead (Rs.1,50,000) Selling expenses (20% fixed) Administrative expenses (100% fixed) Distribution expenses (40% fixed) Total 160 Per unit cost (Rs.) 60 40 20 15 15 5 5

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If the company desires to earn a profit of 20% on sales value, the sales value of 8,000 electrical automatic iron is (a) Rs.12,80,000 (b) Rs.16,00,000 (c) Rs.16,62,500 (d) Rs.15,00,000 (e) Rs.15,37,500. (2 marks)

70. MBA Ltd.has furnished the following production budget pertaining to a single product for the month of December 2004: • • • • • • Production quantity Production costs: Material Direct labor Variable overheads Fixed overheads • • • • • • 3,36,000 kg at Rs.4.10 per kg 2,16,000 hours at Rs.4.50 per hour Rs. 4,75,200 Rs.15,21,600 2,40,000 units

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The variable overheads are absorbed at a predetermined direct labor hour rate and the fixed overheads are absorbed at a predetermined rate per unit of output. During the month, the actual production was 2,20,000 units and the following costs were incurred: • • • • Material Direct labor Variable overheads Fixed overheads • • • • 3,13,060 kg at Rs.12,45,980 1,94,920 hours at Rs.8,86,886 Rs.4,33,700 Rs.15,01,240 The variable overhead efficiency variance

and fixed overhead volume variance are (a) Rs.1,900 (F) and Rs.1,26,800 (A) respectively (b) Rs.6,776 (F) and Rs.1,06,440 (A) respectively (c) Rs.6,776 (F) and Rs.4,876 (A) respectively (d) Rs.6,776 (F) and Rs.1,26,800 (A) respectively (e) Rs.4,876 (A) and Rs.1,26,800 (F) respectively. (3 marks) 71. The data relating to Mehar Ltd. for the month of December 2004 are as follows: Output (units) Wages paid for 16,250 hours Material 4,000 kg Variances Labor rate Labor efficiency Labor idle time Material price Material usage (a) Rs. 13.00 (b) Rs. 12.73 6,500 Rs. 48,750 Rs. 34,000 Variances: Rs. 1,875 (A) 1,275 (F) 700 (A) 1,850 (F) 1,200 (F) (c) Rs. 7.30
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The standard prime cost per unit is (d) Rs. 7.50 (e) Rs. 5.70. (2 marks)
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72. The costs incurred to ensure that materials, products and services meet quality standards are known as (a) Quality costs (c) Appraisal costs (b) Prevention costs (d) External failure costs (e) Standard costs. (1 mark)

73. A set of concepts and tools applied for getting all the employees focused on continuous improvement in the eyes of the customers is popularly known as (a) Quality control (c) Customer orientation (b) Cost control (d) Self management (e) Total quality management. (1 mark)

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74. Consider the following details pertaining to Yamha Ltd. for the month of December 2004: Particulars Rs. Sales 40,000 Direct materials 17,500 Direct labor 10,000 Variable overheads 5,000 Capital employed 25,000 The return on investment in December 2004 is 12.5%. In the month of January 2005 it is expected that the volume of sales increases by 15%, the selling price increases by 2% and there is a reduction of all the costs by 2%. The return on investment for the month of January 2005 will (a) Increase by 12.5% (b) Increase by 92.16% (c) Decrease by 92.16% (d) Decrease by 24.02% (e) Increase by 24.02%. (2 marks)

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Suggested Answers Management Accounting II (152) – January 2005
1. Answer : (c) Reason : No single method of transfer pricing is applicable across the board. In developing a system of transfer pricing for any particular situation, the factors needed to be considered are existence of competitive market (a), Sourcing constraint (b), Quantum of transfer (d), and Capacity level of selling division (e). Movability constraint (c) i.e. movement of the product from department to department is not a factor having relation to transfer pricing in any way. Hence (c) is not considered. 2. Answer : (c) Reason : Transfer prices are often used by profit centers and investment centers. Profit centers are the most fundamental of these two centers because the investment centers are responsible not only for the revenues and costs but also for invested capital. Answer (a) is incorrect because a revenue center is responsible only for revenue generation, not cost control or profitability.Answer (b) is incorrect because transfer prices are not used in a cost center.Answer (d) is not correct because an investment center is not as fundamental as a profit center.Answer (e) is not correct because a production center may be a cost center, a profit center or even an investment center. Transfer prices are not used in a cost center. Transfer prices are used to compute profitability but a cost center is responsible only for cost control. 3. Answer : (b) Reason : A budget manual describes how a budget is to be prepared. Items usually included in a budget manual are a planning calendar and distribution instructions for all budget schedules. Distribution instructions are important because, once a schedule is prepared, other departments within the organization will use the schedule to prepare their own budgets. Without distribution instructions, someone who needs a particular schedule may be overlooked.Answer (a) is incorrect because the accounting manual includes a chart of accounts. Answer (c) is incorrect because employee hiring policies are not needed for budget preparation. They are already available in the personnel manual. Answer (d) is incorrect because software documentation is not needed in the budget preparation process. Answer (e) is incorrect because the authorization of transactions is not necessary for budget preparation purposes. 4. Answer : (d) Reason : When we look into the relationship between full cost and contribution margin pricing we can conclude that although the full cost pricing and contribution margin based approach for pricing are considered distinctively different approaches, by and large , they represent to a certain degree, cost plus pricing. Hence statement (e) is true. They are considered complementary to each other but not competing. Hence statement (a) is true. In both the pricing models fixed costs are considered important. Hence option (c) is true. In both the methods, the selling prices proposed must be only be tentative and they are always subjective. Hence statement (b) is also true. However, Full cost pricing makes a normal mark up on total costs and it does not take volume of production into consideration. On the other hand contribution margin approach to pricing is concerned about cost. Hence statement (d) which states that Contribution margin method also makes a normal markup on total costs is false. 5. Answer : (d) Reason : The correct answer is (d). Particulars Cash sales Credit sales realized: April March Sales receipts Rs. Rs.1,10,000 × .4 Rs.1,40,000 × .6 × .5 Rs.1,20,000 × .6 × .5 44,000 42,000 36,000 1,22,000
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6.

Answer : (c) Reason :Variance cost per unit Fixed cost = Rs.10 + Rs.12 + Rs.12 + Rs.10 = Rs.44 = Rs.8 × 1,000 units + Rs.10 × 1,000 units = Rs.8,000 + Rs.10,000 = Rs.18,000 Cost of 1,250 units = Rs.73,000 = 1,250 units × Rs.44 + Rs.18,000

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= Rs.55,000 + Rs.18,000

7.

Answer : (b) Reason : Cost of goods manufactured is equal to all manufacturing costs incurred during the period, plus beginning work-in-process, minus ending work-in-process. A cost of goods manufactured budget is therefore based on materials, direct labor, factory overhead, and work-in-process. Answer (a) is incorrect because both beginning and ending work-in-process must be included. Answer (c) and (d) are incorrect because finished goods are excluded. They are the end product of the manufacturing process. Answer (e) is incorrect because work-in-process inventories must be included.

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8.

Answer : (b) Reason : A production budget is based on sales forecasts, in units, with adjustments for beginning and ending inventories. It is used to plan when items will be produced. After the production budget has been completed, it is used to prepare materials purchases, direct labor, and factory overhead budgets. Answer (a) is incorrect because a production budget is usually prepared in terms of units of output rather than costs. Answers (c) and (d) are incorrect because the direct labor and materials purchases budgets are prepared after the production budget. Answer (e) is incorrect because the production budget is not summarization of discretionary costs.

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9.

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

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10.

Answer : (c) Reason : Management performance should ideally be evaluated only on the basis of those factors controllable by the manager. Manager may control revenues, costs or investments in resources. A well designed responsibility accounting system establishes responsibility centers within the organization. However, controllability is not an absolute basis for establishment of responsibility. More than one manager may be able to influence a cost and responsibility may be assigned on the basis of knowledge about the incurrence of a cost rather than the ability to control it. Management by objective (MBO) is a related concept. It is a behavioral, communication-oriented, responsibility approach to employee self-direction. Under MBO, a manager and his/her subordinates agree upon objectives and the means of attaining them. The plans that result are reflected in responsibility accounting and in the budgeting process.

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11.

Answer : (e) Reason : A budget is a means of control because it sets standard guidelines with which actual performance can be compared. The feedback provided by comparison of actual and budgeted performance reveals whether a manager has used company assets efficiently. If a budget is to be used for control purposes, however, the accounting system must be designed to produce information required for the control process. Further, the budgeting and accounting system must be related to the organizational structure. So that variances will be assigned to the proper individuals.Option (a) is incorrect because the company should

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already be using forecasting procedures if the budget is being used as a planning tool.Option (b) is not correct because a budget director and committee are needed even if a budget is to be used only for planning.Options (c) and (d) are incorrect because daily reporting is usually not necessary. 12. Answer : (a) Reason : Computation of prime cost Rs. Sales (40,000 units) Less: Profit margin – 20% Cost of sales – (80% of Rs.14,40,000) Less: Variable overheads – Semi-variable overheads – Fixed overheads Prime cost
Change in cos t Change in units Rs.3,00,000-Rs.2,60,000 50,000 units-40,000 units

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14,40,000 2,88,000 11,52,000 Rs.2,40,000 Rs.2,60,000 Rs.2,00,000 7,00,000 4,52,000 Semi-variable overheads:

Variable cost =
Rs.40, 000 10, 000 units

=

= = Rs.4per unit At 40,000 units: Fixed cost = Total cost – Variable cost = Rs.2,60,000 – 40,000 units × Rs.4 = Rs.1,00,000 At 45,000 units: Total cost = 45,000 units × Rs.4 + Rs.1,00,000 Computation of differential cost of production of 5,000 additional units (i.e. 10% of normal capacity): Element of cost Prime cost Variable overhead Semi variable overhead Fixed overhead 40,000 units (Rs.) 4,52,000 2,40,000 2,60,000 2,00,000 11,52,000
Rs.1, 06, 500 5, 000

45,000 units (Rs.) 5,08,500 2,70,000 2,80,000 2,00,000 12,58,500

Differential cost for 5000 units (Rs.) 56,500 30,000 20,000 – 1,06,500 Cost per unit of new order =

= Rs.21.30 Profit margin 25% (20% on sale = 25% on cost) = Rs. 5.33 Minimum selling price per unit = Rs.26.63 13. Answer : (d) Reason :
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Cash sales for March 2005(Rs.4,85,000 x 0.5) Cash flows for the credit sales in the month of January 2005 (Rs.3,15,000 x 0.5 x 0.25) Cash flows for the credit sales in the month of February 2005 (Rs.4,25,000x 0.5 x 0.7)

Rs.2,42,500 Rs.39,375 Rs.1,48,750 Rs.4,30,625

Total commission payable to salesmen = Rs.4,30,625 x 4% = Rs.17,225 14. Answer : (c) Reason : Cash inflows in the month of: March 2005 – Rs.1,50,000 × 10% + 1,50,000 × 90% ×40% = Rs.15,000 + Rs.54,000 = Rs. 69,000 Rs. 36,450 Rs. 27,000 Rs. 4,500 Credit sales in February 2005 = Rs.1,35,000 × 90% × 30% = Credit sales in January 2005 = Rs.1,20,000 × 90% × 25% =
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Credit sales in December 2004 = Rs.1,00,000 × 90% × 5% =

Rs.1,36,950 15. Answer : (a) Reason : Cash disbursement = Cost of goods sold –Increase in accounts payable – Decrease in stock = 75% of sales – Rs.28,000 – Rs.52,000 = Rs.7,50,000 – Rs.80,000 = Rs.6,70,000. Answer : (c) Reason : In case of zero based budget, each manager is asked to prepare his own requirement of funds beginning from scratch, ignoring the past and he has to justify the requirements mentioned by him. Hence the main idea behind zero based budget is to challenge the existence of every budgetary unit and every budget period. Answer : (b) Reason : Top-to-bottom budget is also known as imposed budget. In this type of budget, the budgeted quantities are obtained from the top level managers and then communicated downward to lower level managers. Lower level managers do not participate in this type of budget. Hence the answer is (b). In participative budget, estimations of lower level managers are coordinated and communicated upward to the top level to the top level managers. Zero-based budgeting is a method of budget review and evaluation that requires all projects and programs to justify all resources. Manpower budget will take an overall view of the organizations needs for manpower for all areas of activity for a period of years. Master budget is a budget which is prepared from and summarizes the functional budgets. Answer : (e) Reason :
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16.

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17.

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18.

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Capacity Production (units) Material Labor Variable overheads Factory Administrative Total variable cost Fixed overheads Factory Administrative

50% 5,000 (Rs.) 50 15 9 5 79 3,95,00 0 30,000 25,000 4,50,00 0 100 5,00,00 0 50,000 10.00

60% 6,000 (Rs.) 51 15 9 5 80 4,80,00 0 30,000 25,000 5,35,00 0 98 5,88,00 0 53,000 8.83

80% 8,000 (Rs.) 52.50 15.00 9.00 5.00 81.50 6,52,000 30,000 25,000 7,07,000 95 7,60,000 53,000 6.63
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Sale price per unit Sales value Profit Profit per unit 19. Answer : (c)

20.

Reason : Revenue of Rs. 24,00,000 reflects a unit selling price of Rs. 16 (Rs.24,00,00÷1,50,000 games). The contribution margin is Rs.6.50 per game (Rs. 9,75,000÷1,50,000 games). Thus, unit variable cost is Rs.9.50 (Rs.16-Rs.6.50). Increasing sales will result in an increased contribution margin of Rs. 1,95,000 (30,000 x Rs. 6.50). Assuming no additional fixed costs, net income will increases to Rs. 4,20,000 (Rs. 2,25,000 originally reported + Rs. 1,95,000). Answer : (e) Reason : Material usage variance = Standard rate (Actual quantity ~ Standard quantity) Material A = Material B = = Rs.10 (2,050 kg ~ 1,000 units × 2kg) = Rs.10 × 50 kg = Rs.20 (2,980 kg ~ 1,000 units × 3 kg) = Rs.20 × 20 kg Rs.500 (Adverse) Rs.400 (Favorable) Rs.100 (Adverse)

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Material usage variance 21. Answer : (e)

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Reason :Sub-standard materials, Pilferage of materials, Non-standard material mixture, Wastage due to inefficient mixture are causes of material usage variance. However purchasing non-standard lots lead to reduction in quantity discount which is a cause for material price variance. 22. Answer : (a) Reason : Fixed overhead volume variance = Budgeted fixed overheads cost ~ Applied fixed overheads cost
Rs.2,400 ×13,000 units 12,000 units

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= Rs.2,400 ~

= Rs.2,400 ~ Rs.2,600

= Rs.200 (favorable) Other options (b), (c), (d) and (e) are not correct. 23. Answer : (e)
Budgeted variable costs Budgeted units

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Reason : Standard variable cost per unit =
Rs.12,000 12,000

=

= Re.1

Variable overhead cost variance = Actual variable overhead costs – Standard variable overhead cost per unit × Actual output = Rs.12,800 – Rs.1 × 12,500 units = Rs.12,800 – Rs.12,500 = Rs.300 (Adverse)

24.

Answer : (b) According to normal costing, direct costs are traced, while indirect costs are allocated to the output. So the correct answer is (b).

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25.

Answer : (b) Actual material consumption: Particulars Stock as on December 01, 2004 Add: Purchases during the month of December 2004 Less: Stock as on December 31, 2004 Material consumed during the month of December 2004 Total material consumption = 1,660 + 2,380 = 4,040 kg. Standard cost: A 70 1,600 1,670 10 1,660 B 80 2,400 2,480 100 2,380

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Quantity (kg.) A B Loss: Output 1,600 2,400 4,000 600 3,400

Price (Rs.) 4 3

Amount (Rs.) 6,400 7,200

13,600

Standard

yield

=

Actual standard output 85 kg. ×Actual input = × 4,040kg.= 3,434kg. Standard input 100 kg.

Material

yield

variance

=

Standard

rate

of

output

(Actual

yield

Standard

yield)

=

Rs.13,600 ×(3,400 kg.-3,434 kg.) 3,400

= Rs.136 (Adverse)
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Budgeted cost Rs.48, 000   Rs.10 Budgeted output 4, 800

26.

Answer : (b) Standard fixed overhead rate = Overheads incurred = Budgeted fixed production overhead cost + Expenditure variance = Rs.48,000 - Rs.2,000 = Rs.46,000 Overheads absorbed = Actual overhead + Over absorption of overheads = Rs.46,000 + Rs.8,000 = Rs.54,000 Actual number of units = Rs.54,000 ÷ Rs.10 = 5,400 units. Units produced above budgeted units = 5,400 units – 4,800 units =600 units.

27.

Answer : (b) Operational information generated through the processing of data obtained from internal sources is required for the lower management level. Other information like control information, formal information, informal information and strategic information are not required in the lower level management. Therefore (b) is correct. Answer : (d) Reason : Overhead expenditure variance = Rs.1,400 (A) ∼ Rs.1000 (A) = Rs.400 (A) Actual overhead incurred = Budgeted Overhead ∼ Overhead expenditure variance= Rs.6,000 ∼ Rs.400 (A) = Rs.6,400.

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28.

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29.

Answer : (b) Reason :

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Material Labor

– –

Rs.2.00 Rs.3.00 Rs.4.50 Rs.4.50 Rs.14.00

* Variable overhead ** Fixed overhead Cost per unit

**

* Increase in overhead from 15,000 to 25,000 units is Rs.45,000. Therefore, Rs.4.50 per unit or Rs.9 per hour (Rs.45,000 ÷ 10,000) Total overhead at 25,000 units is Rs.2,02,500, of which Rs.1,12,500 must be variable (i.e.25,000 × Rs.4.50). Remainder of Rs.90,000 must be fixed. Budget for overhead is Rs.90,000 + Rs.9 per hour or Rs.90,000 + Rs.4.50 per unit Overhead efficiency variance = Budget 10,700 hours ∼ budget at 22,000 units. = (10,700 × Rs.9 + Rs.90,000) ∼ (22,000 × Rs.4.50 + Rs.90,000) = Rs.1,86,300 ∼ Rs.1,89,000 = Rs.2,700 (F) Overhead capacity variance = Budget at 22,000 units ∼ overhead applied = (22,000 × Rs.4.50 + Rs.90,000) ∼ (22,000 × Rs.9) = Rs.1,89,000 ∼ Rs.1,98,000 = Rs.9,000 (F)

30.

Answer : (d) Reason : Completed stock: From opening work-in-progress Closing work-in-progress Current production Total Units 250 450 950 Degree of completion 40 % 20 % 100 % Overheads 100 90 950 1,140 Budgeted rate per kg = Rs.180

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No. of direct labor hours per kg = 3 Budgeted rate per hour = Rs.60 Standard hours for actual production = 1,140 x 3 = 3,420 hours Fixed overhead efficiency variance = (Standard hours for actual production – Actual hours) x budgeted rate per hour = ( 3,420 hours – 3,300 hours ) x Rs.60 = Rs.7,200 (F) 31. Answer : (a) Reason : Actual hours = 40 (28 + 18 + 4) = 2,000 hrs Standard hours= 40 (32 + 12 + 6) = 2,000 hrs Standard time for actual output Skilled =
1, 800  40  32 2, 000

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= 1,152 hrs

Semi-skilled =

1, 800  40 12 2, 000 1, 800  40  6 2, 000

= 432 hrs

Unskilled = Efficiency variance:

= 216 hrs

Skilled = Rs.12 (40 ×28 ∼ 1152) = Rs.384 (F) Semi-skilled = Rs.10 (40 × 18 ∼ 432) = Rs.2,880 (A) Unskilled = Rs.8 (40 × 4 ∼ 216) = Rs. 448 (F) Rs.2,048 (A) 32. Answer : (d) Reason : Materials handling cost per part is Rs.0.12 (Rs. 7,20,000÷60,00,000), cost per setup is Rs. 420 (Rs. 3,15,000 ÷750), machining cost per hour is Rs. 18 (Rs. 5,40,000÷30,000), and quality cost per batch is Rs.450 (Rs.2,25,000 ÷ 500). Hence, total manufacturing overhead applied = [(5 parts per unit x 20,000 units x Rs.0.12) + (4 batches x 2 setups per batch x Rs. 420)+ (4 batches x 80 machine hours per batch x Rs.18)+(4 batches x Rs. 450)] = Rs. 12,000 + Rs. 3,360 + Rs.5,760 + Rs.1,800 = Rs.22,920. The total unit cost is Rs. 6.296[Rs. 5.15 prime cost + (Rs.22,920÷20,000 units)overhead] or Rs.6.30. 33. Answer : (e) Reason : Total labor cost 5 x Rs. 6,000 Cost of parts Total variable cost Target profit Fixed cost Mark up % Mark up on parts 34.
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= Rs. 30,000 = Rs. 45,000 Rs.75,000 = Rs. 20,000 = Rs. 25,000 = Rs. 45,000 = = Rs. 45,000 ÷Rs. 75,000 = 60% 60% of Rs. 45,000 = Rs. 27,000
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Answer : (c) Reason : Profit = Rs.4,480 – Rs.3,660 – Rs.170 = Rs.650 Investment = Rs.1,815 + Rs.785 = Rs.2,600 ROI =
Rs.650  25% Rs.2, 600

35.

Answer : (c) Reason : Particulars Fixed cost (Rs. Rs.1,15,000 + Rs.1,10,000) Add: expected return (Rs.7,60,000 + Rs.5,00,000) ×25% Contribution (Expected) Total labor hours: Product A: (3× 4,000 units) Product B: (4× 6,000 units) Total labor hours 12,000 24,000 36,000 Contribution per labor hour =
Rs.5,40,000 36,000 hours

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Rs. 2,25,000 3,15,000 5,40,000

= Rs.15 per labor hour.

Calculation of selling price: Particulars Variable cost other than labor (Rs.1,60,000 / 4,000 units) Direct labor (Rs.6×3 hours) Contribution (Rs.15 ×3) Selling price 36. Rs. 40 18 45 103
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Answer : (b) Reason : Management by Exception is a system of identification and communication that signals the managers when his attention is needed. The system remains silent when attention of a manager is not required. The manager can devote attention only to those areas those require managerial attention. And its prime area of attention is large unfavorable variances. Answer : (d) Reason : Standard costing system does not assume that production workers have the best knowledge to reduce costs that is why it specifies the standards to be achieved. It can be used for cost control and the standards are set assuming stability in the current manufacturing process i.e. there will not be any change in the manufacturing process for short run with an objective of meeting performance standards. It motivates employees to try to reach targets established. Answer : (c) Reason : A value added activity contributes to customer satisfaction or meets a need of the entity. A non-value adding activity does not make such a contribution. It can be eliminated, reduced or redesigned without impairing quantity, quality or responsiveness of the product or service desired by customers or entity. For example, raw materials storage may be greatly reduced or eliminated in just-in-time (JIT) production system without affecting the customer value. All the other activities result into some value addition except Product inspection operations which can either be eliminated or reduced through proper production controls. Answer :(a) Reason : Value Chain analysis starts with customers as the ultimate aim. The fist stage of Value Chain is thus research, development and engineering. Answer :(c) Reason : Product design is an earlier stage in a product's life cycle. Providing the product to customer is a production activity. Under target costing, all the requirements of the entire product life cycle are identified and recognized during the design and engineering stage. So, design and engineering stage is extremely important in reducing costs. Answer : (d) Reason : The master budget variance is the difference between the master budget and actual results, the same as the difference between total costs at actual prices and actual inputs, which are actual results, and the master budget. The difference between the flexible budget and master budget is the activity-level variance. The difference between the actual result and flexible budget is the flexible-budget variance. Answer : (e) Reason : Operating management is mainly concerned with the production. Therefore, information relating to production are important to the operating management. Therefore, all the information relating to

37.

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38.

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39.

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40.

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41.

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42.

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production, mentioned in (I), (II), (III) and (IV) are important to the operating management. 43. Answer : (d) Reason : The data, equipment and computer programs that are used to develop information for managerial use is called Management Information System (MIS). Other options (a), (b), (c) and (e) are not correct. 44. Answer : (a) Reason : The three distinguishable levels of management in an organization consists of – corporate management, executive management, and operating management. The corporate management, consisting of board of directors, chief executive and functional heads is responsible for strategic planning and overall financial monitoring of the firm. Executive management consists of managers responsible for certain product groups or markets. They are entrusted with the responsibility to translate corporate strategy into program and are concerned with tasks such as budget formulation, decision on routine capital expenditures, choice of product improvement etc. The operating management is represented by executives entrusted with specific operational tasks and are responsible for executing various tasks within the framework of plans, programs, and schedules. Hence only (a) is the responsibility of corporate management. Answer : (e) Reason : According to McGregor’s Theory Y, the capacity to exercise a relatively high degree of imagination, ingenuity and creativity in the solution of organizational problems is widely, not narrowly, distributed in the population. Hence the answer is (e). The other assumptions of Theory Y are: External control and threat of punishment are not the only means of bringing about effort towards organizational objectives. Man will exercise self-direction and self-control in the service of objectives to which he is committed. The average human being learns, under proper conditions, not only to accept but to seek responsibility. The expenditure of physical and mental effort in work is as natural as play or rest. The average human being does not inherently dislikes work. Commitment to objectives is a function of the rewards associated with their achievements e.g. the satisfaction of ego and self-actualisation needs can be direct products of efforts directed towards organizational objectives. Answer : (e) Reason : Most variances are of significance to someone who is responsible for that variance. However, a fixed overhead volume variance is often not the responsibility of anyone other than top management. The fixed overhead volume variance equals the difference between budgeted fixed overhead and the amount applied (standard rate x standard input allowed for the actual output). It can be caused by economic downturns, labor strike, bad weather, or a change in planned output. Thus, a fixed overhead volume variance resulting from a top management decision to reduce output has fewer behavioral implications than other variances. Answer (a) is incorrect because an unfavorable materials quantity variance affects production management and possibly the purchasing function. It may indicate an inefficient use of materials or the use of poor quality materials. Answer (b) is incorrect because an unfavorable labor efficiency variance reflects upon production workers who have used too many hours. Answer (c) is incorrect because a favorable labor rate variance related to hiring is a concern of the personnel function. The favorable rate variance might be more than offset by an unfavorable labor efficiency variance or a materials quantity variance (if waste occurred). Answer (d) is incorrect because the purchasing function is responsible for a favorable materials price variance. Answer : (e) Reason : The costs relevant to pricing using the contribution margin approach are variable costs. i.e. here it considers relevant cost ( ignoring irrelevant costs by differentiating relevant and irrelevant costs) and also between fixed and variable cost. Therefore (e) is correct. Answer : (c) Reason : Return on investment is the most common measure of performance of investment hence (c) is the correct answer. Margin of safety, sales margin, return on equity, capital turnover are only the parts of performance of investment measure. Answer : (c)
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45.

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46.

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47.

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48.

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49.

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Reason : Target Pricing is Pricing Strategy used in case of perfect markets. Under this strategy the products are priced according to the customer’s willingness to pay. 50. Answer : (b) Reason : Regarding ABC a.ABC appeals to managers because costs are assigned according to well-measured and understood activities. c. ABC usually reduces the costs assigned to high-volume products. d.ABC usually increases the costs assigned to low-volume, complex products. e.ABC is well suited to the new manufacturing environment. These are true except (b) i.e. ABC creates another layer of product costing activities in addition to those required to perform volume-based product costing, this is false. Answer : (c) Reason : For a company-owned restaurant in a fast food chain, both cost and profit can be traced, therefore it is an example of profit center. Answer : (d) Reason :In an imperfect market the pricing strategy to maximize volume would be any price above marginal cost because in such a case any material contribution towards recovery of fixed cost is good enough rather than not having any contribution at all. Answer : (c) Reason : A standard costing system allows for the costs to be computed at the beginning of the period. Answer : (a) Reason : Standard hours for actual production Jaya Sasi Total
Standard hours for actual production ×100 Actual hours worked 3,100 hours ×100 3, 500 hours

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51.

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52.

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53. 54.

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1,600 units × 1 hour = 250 units × 6 hours

1,600 hours 1,500 hours 3,100 hours Efficiency ratio =

= 55.

= 88.57%.
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Answer : (a) Reason : Activity Based costing (ABC) Machine hours (MH) Product N Product K (20,000 units × 1.5 hours) (7,500 units × 2 hour) 30,000 hours 15,000 hours 45,000 hours according to the cost drivers: Machine hour driven costs = Rs.4,50,000 ÷ 45,000MH = Rs.10 per machine hour Set-up driven costs = (Rs.40,000 ÷ 200) = Rs.200 per set-up Order driven cost = Rs.90,000 ÷ 150 = Rs.600 per order Using ABC, the overhead costs are absorbed

Overhead costs:

Particulars Machine-driven cost: (30,000 hours × Rs.10) (15,000 hours × Rs.10) Set-up costs: (40 × Rs.200) (160 × Rs.200) Order-handling costs: (30 × Rs.600) (120 × Rs.600) Units produced Overhead cost per unit 56. Answer : (d) Reason :

Product N Rs. 3,00,000 8,000 18,000 3,26,000 20,000 Rs.16.30

Product K Rs. 1,50,000 32,000 72,000 2,54,000 7,500 Rs.33.87
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Budget for the year 2005-06 Production volume – 55,000 units
Variable cost Particulars Per unit (Rs.) Direct materials Direct labor (Rs.8 × 1.5 hours) Indirect materials Indirect labor Inspection Maintenance Supervision Depreciation on plant & machinery Administrative expenses Selling & distribution expenses Total cost Per unit cost 12 12 3 5 2 3 – – – 3 40 – Total (Rs.) 6,60,000 6,60,000 1,65,000 2,75,000 1,10,000 1,65,000 – – – 1,65,000 22,00,000 40 Fixed costs (Rs.) – – – – 50,000 40,000 1,44,000 80,000 60,000 50,000 4,24,000 7.71 Total Costs (Rs.) 6,60,000 6,60,000 1,65,000 2,75,000 1,60,000 2,05,000 1,44,000 80,000 60,000 2,15,000 26,24,000 47.71

Workings: Segregation of semi-variable cost into fixed and variable components.

Inspection: Variable cost =
Rs.1,80,000 − Rs.1,30,000 65,000 units − 40,000 units

=

Rs.50,000 25,000 units

= Rs.2

Fixed cost = Total costs – Variable costs = Rs.1,30,000 – 40,000 units × Rs.2 = Rs.1,30,000 – Rs.80,000 = Rs.50,000 In the same way, it can be determined the fixed and variable components in semi-variable or semi-fixed costs. 57. Answer : (c) Reason: Let budgeted labor hours be X. Standard rate per hour = Budgeted variable overhead cost / Budgeted labor hours …….(i) Again, Standard unit per hour = Budgeted units produced / Budgeted labor hours = 16,000 units /X hours ………………………...(ii) Standard hours for actual production = Actual units produced / Standard unit per hour =13,400 units/(16,000 units /X) = 13,400X/16,000………………………...(iii) Variable overhead efficiency variance = Standard rate per hour x (Standard hours for actual production - Actual labor hours) Hence, standard rate per hour = Variable overhead efficiency variance / (Standard hours for actual production - Actual labor hours) = - 150 / (13,400X/16,000 –3,500)… ………...(iv) From (i) & (iv) 4,000/X = -150 /(13,400X/16,000 – 3,500) or, 4,000 x (13,400X / 16,000 – 3,500) = -150X or, 4,000 x 13,400X/16,000 – 4,000 x 3,500 = - 150X or, 3,350X – 4,000 x 3,500 = - 150X or, 3,500X = 4,000 x 3,500 hence, X = 4,000 hours. 58. Answer : (b) Reason: Let Actual production be X units. Standard rate per hour = Budgeted variable overhead cost / Budgeted labor hours = 5,000 / 2,500 = Rs.2/hour …….…....(i) Again, Standard unit per hour = Budgeted units produced / Budgeted labor hours = 12,500 /2500 =5 units/hour. Standard hours for actual production = Actual units produced / Standard unit per hour =X/5. Variable overhead efficiency variance = Standard rate per hour x (Standard hours for actual production - Actual labor hours) Hence, standard rate per hour = Variable overhead efficiency variance / (Standard hours for actual production - Actual labor hours) = – 800 / (X/5 – 2,000) ……………………….…..(ii)
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= 4,000 / X ……………

59.

From (i) & (ii) -800 / (X/5 – 2,000) = 2 ; (X/5 – 2,000) = - 400 X = (2,000 – 400)x5 = 8,000. Now, ZeroVariable overhead efficiency variance means Standard hours for actual production = Actual labor hours i.e, X/5 = 2,000 ; X = 10,000 Hence the production should be increased by 10,000 – 8,000 = 2,000 units. Answer: (c) Reason: Material price variance = (Standard price – Actual price) x Actual quantity Hence, Actual quantity = Material price variance / (Standard price – Actual price) = (-11,000) / (40 – 42) = 5,500 pieces. Material usage variance = (Standard quantity – Actual quantity) x Standard price = ( 2,000 x 3 – 5,500) x Rs.40.00 = Rs.20,000 (favorable) Answer: (a) Reason: Let the standard price per unit of material Q be X. Revised standard proportion : Material P = 4/20 x 24 = 4.80 kg. Material Q = 16/20 x 24= 19.20 kg. Material mix variance: Material P = (4.80 – 16) x 1.00 = Rs.11.20(adverse) Material Q = (19.20 – 8) x X =11.20X …………..………..(i) Also, Material mix variance of material Q = Total mix variance - Material mix variance of material P = 5.60(adverse) – 11.20(adverse) = Rs.5.60 (favorable) ….(ii) From (i) and (ii) 11.20X = 5.60 X = 5.60 / 11.20 =Re. 0.50

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60.

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61.

Answer : (a) Reason : Std. hours for actual output = 2,40,000/ 1,200 x 25 = 5,000 hours Expected output from actual input = 1,200/1,500 x 2,88,000 = 2,30,400 kg Std. hours for expected output = 2,30,400/1,500 x 25 = 3,840 hours Std. hours allowed for actual output ( 5,000 x Rs. 2) Std. hours allowed for expected output ( 3,840 x Rs. 2) Labour yield variance = Rs. 10,000 = Rs. 7,680 Rs. 2,320 (F)

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62.

Answer : (c) Reason : Let, sale value = X 0.20X = [X(1 - 0.60) – Rs.1,35,000 –Rs.2,70,000 – Rs.90,000] x (I - tax rate) =[0.4X – Rs.4,95,000] x (1 – 0.30)= 0.28X –Rs.3,46,500 0.08X =Rs.3,46,500 X = Rs.43,31,250 Sale price / unit = Rs.43,31,250 ÷ 1,875 = Rs.2,310 Net sale price = 2,310 × 0.40= Rs.924. Answer : (e) Reason : Total sales = Rs.20 x 25,000 units =Rs.5,00,000

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63.

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Variable cost = Rs.11.00 x 25,000 units = Rs.2,75,000 Profit = Rs.5,00,000– Rs.2,75,000 – Rs.90,000= Rs.1,35,000 Markup % on variable cost =[ (Rs.90,000+ Rs.1,35,000) / Rs.2,75,000] x 100 = 81.82%. 64. Answer : (e) Reason : Total fixed cost = Rs. 17,00,000 Expected profit = Rs. 2,30,000 Variable cost at 50% level (50% x 1,20,000 units x Rs.15) = Rs.9,00,000 Total price = Rs.28,30,000 Per unit price at 50% level = Rs.28,30,000 / (1,20,000 x 50%) =Rs.47.17. Answer : (c) Reason : Revised sale price is 78% (i.e, 100% - 22%) of original sale price. Revised budgeted sales at original sale price = Rs.39,00,000 / (1 - 0.22)= Rs.39,00,000 / (0.78) = Rs.50,00,000 The company would be able to achieve only 80% of the original budgeted sales. Therefore, original sales at original sale price = Rs.50,00,000 / 0.80 =Rs.62,50,000 Answer : (a) Reason : Flexible budgets are budgets in which the expected results of operations at various levels of output are determined. Fixed costs remain unchanged at each level of activity shown in a flexible budget, but variable costs will vary for each activity level. Standard cost refers to the standard cost per unit of input (such as material, labor, or overhead). Standard costs are used to determine the total budgeted cost for an item of input at a specific level of activity. Performance reports and analysis of variances based on actual results compared to a fixed or static budget are misleading, unless the actual results occur at the activity level chosen for the fixed budget. Only statement (I) is true . Hence the correct answer is (a).
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65.

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66.

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67.

Answer : (a) Reason : Total quantity of actual sales = 11,000+5,000+8,600 = 24,600 kg. Sales Mix variance = Standard rate × (Actual quantity- Revised Standard quantity) P = 20 x [11,000 – (24,600/24,000 x 10,000)] = Rs.15,000 (F) Q = 25 x [5,000 – (24,600/24,000 x 6,000)] =Rs. 28,750 (A) R = 30 x [8,600 – (24,600/24,000 x 8,000)] =Rs. 12,000 (F) Total =Rs. 1,750 (A)

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68.

Answer : (e) Reason : The standard cost of materials for 8,500 units is Rs.1,27,500 (i.e. 8,500 × Rs.15). Thus, no variance arose with respect to materials. Because labor for 9,000 units was budgeted at Rs.81,000, the unit labor cost is Rs.9. Thus, the labor budget for 8,500 units is Rs.76,500 and total labor variance is Rs.1,275 (i.e. Rs.77,775 – Rs.76,500). Because the actual cost is greater than the budgeted amount, Rs.1,275 variance is unfavorable. Given that the actual time per unit (45 minutes) was the same as that budgeted, no labor efficiency variance was incurred. Hence, the entire Rs.1,275 unfavorable variance must be attributable to labor rate variance.

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69.

Answer : (c) Reason :

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Particulars Variable cost: Direct materials Direct labor Manufacturing overheads Selling expenses Distribution expenses Total variable cost Fixed cost: Manufacturing overheads Selling expenses Administrative expenses Distribution expenses + Rs.2,50,000

Rs. 60 40 20 12 3 135 1,50,000 30,000 50,000 20,000 2,50,000 Total cost of 8,000 units = 8,000 units × Rs.135

= 10,80,000 + Rs.2,50,000 = Rs.13,30,000 Sales value = Rs. 13,30,000 × 1.25 = Rs. 16,62,500 (20% on sales = 25% on cost) 70. Answer : (d) Reason : Standard variable overhead rate=Rs.4,75,200÷2,16,000 hrs = Rs.2.20 per hour Standard hours per unit = 2,16,000 hours÷2,40,000 units= 0.9 hours Fixed overhead rate per unit = Rs.15,21,600÷2,40,000 units= Rs.6.34 Variable overhead efficiency variance: =(Standard hours for actual production- Actual hours) x Standard rate per hour =(2,20,000 units x 0.9 hours ∼ 1,94,920) x Rs.2.20=3,080 x Rs. 2.20 = Rs.6,776 (F) Fixed overhead volume variance =(Actual output ∼ Budgeted output) x Standard rate =2,20,000 units ∼ 2,40,000 units) x Rs.6.34= 20,000 units x Rs.6.34= Rs.1,26,800 (A) 71. Answer : (a) Reason : Actual cost Standard material cost = Actual material cost + Favorable material price variance +Favorable material usage variance Standard wages = Actual wages paid + favorable labor efficiency variance – adverse labor rate variance – adverse labor idle time variance
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Particulars Standard material cost (34,000 + 1,850 + 1,200) Standard wages (48,750+1,275 – 1,875 – 700)

Total 37,05 0 47,45 0 84,50 0

Per unit 5.70 7.30

Total 72.

13.00
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Answer : (c) Reason : The costs incurred to ensure that materials, products and services meet quality standards are known as appraisal costs. These costs begin with the inspection of raw materials and parts from vendors. Further inspection costs are incurred throughout the production process. Answer : (e) Reason : Total quality management is often termed as a set of concepts and tools for getting all employees focused on continuous improvement in the eyes of the customer. It is neither quality control (a) nor cost control (b) Customer orientation is one of the core concepts of total quality management. TQM aims at eliciting greater employee commitment through shared decision making and introduce various forms of self management (d). This is one of the elements in TQM. Answer : (b) Reason :

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74.

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The budgeted increase
December Increase Effect of 2004 In sales change Rs. (Rs.) volume Sales 40,000 46,000 46,000 ×102% = 46,920 Direct materials 17,500 20,125 20,125 × 98% = 19,722.5 Direct labor 10,000 11,500 11,500 × 98% = 11,270.0 Variable overheads 5,000 5,750 5,750 × 98% = 5,635.0 Fixed overheads* 4,375 4,375 4,375 ×98% = 4,287.5 Profit 3,125 6,005.0 Capital employed 25,000 25,000 Return on investment 12.5% 24.02% *Return on investment December 2003 is 12.5%. Hence profit is Rs.25,000 × 12.5% = Rs.3,125 Hence fixed overheads is sales–variable expenses–profit = Rs.40,000–Rs.32,500 – Rs.3,125 = Rs.4,375

Particulars

in

% increase in return on investment =

24.02% −12.5% 12.5%

= 92.16%

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