Question Paper

Management Accounting - II - (152) – July 2004




• • Answer all questions.
• • Marks are indicated against each question.


1. Which of the following statements is/are true with respect to transfer pricing?
(a) It motivates divisional managers to make good economic decisions
(b) It is useful for evaluating performance of the divisional managers
(c) It is a selling price established for goods or services sold by one division to other under the same
organisation
(d) It does not help in measuring divisional performances
(e) All (a), (b) and (c) above.
(1 mark)
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2. The most fundamental responsibility center affected by the use of market-based transfer prices is
(a) Revenue center (b) Cost center (c) Profit center
(d) Investment center (e) Production center.
(1 mark)
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3. Which of the following pricing techniques ignores fixed cost?
(a) Standard cost based pricing (b) Full cost pricing
(c) Cost plus profit pricing (d) Return on investment based pricing
(e) Differential cost pricing.
(1 mark)
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4. Which of the following factors should be considered while fixing the price?
(a) Product cost (b) Competitors’ price
(c) Prices of substitutes (d) Unique features of the product
(e) All of the above.
(1 mark)
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5. Which of the following statements is false in respect of full cost pricing and contribution margin
pricing?
(a) They are not 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)
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6. Assuming that the mark-up-percentage and the quantity of production/sales remain constant, which of
the following pricing method/ methods will give more profit as the fixed cost of production increases?
(a) Return on investment pricing (b) Full cost pricing
(c) Contribution margin approach to pricing (d) Both (a) and (b) above
(e) Both (b) and (c) above.
(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
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(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)
8. Which of the following statements is true with regard to the difference between a flexible budget and
a fixed budget?
(a) A flexible budget primarily is prepared for planning purposes while a fixed budget is prepared for
performance evaluation
(b) A flexible budget provides cost allowances for different levels of activity whereas a fixed budget
provides costs for one level of activity
(c) A flexible budget includes only variable costs whereas a fixed budget includes only fixed costs
(d) A flexible budget is established by operating management while a fixed budget is determined by
top management
(e) The variances are usually larger with a flexible budget than with a fixed budget.
(1 mark)
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9. While preparing a performance report for a cost center using flexible budgeting techniques, the
planned cost column should be based on
(a) Cost incorporated in the master budget
(b) Budgeted amount in the original budget prepared before the beginning of the period
(c) Budget adjusted to the actual level of activity for the period being reported
(d) Actual amount for the same period in the preceding year
(e) Budget adjusted to the planned level of activity for the period being reported.
(1 mark)
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10. Which of the following may be considered as an independent item in the preparation of master budget?
(a) Production budget (b) Capital investment budget
(c) Proforma income statement (d) Proforma statement of financial position
(e) Overhead expenses budget.
(1 mark)
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11. 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) It aggregates the monetary details of the operating budget
(b) It is calculated from the desired ending inventory and the sales forecast
(c) It includes required material purchases
(d) It includes required direct labor hours
(e) It summarizes all discretionary costs.
(1 mark)
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12. Which of the following statements is false?
(a) Insufficient training is a reason for labor efficiency variance
(b) When workers are not able to do the work due to some reason during the hours for which they are
paid, it results in idle time variance
(c) High labor turnover is a reason for labor efficiency variance
(d) Different rates being paid to workers employed to meet seasonal demands leads to labor rate
variance
(e) Promotion of employees without proper authorization by personal favoritism or supervisors leads
to labor efficiency variance.
(1 mark)
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13. Which of the following factors is/are considered in determining the period of the short-range budget?
(a) The budget period should be long enough to allow for the financing of production
well in advance of actual needs
(b) The budget period should be long enough to cover complete production of various products
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(c) For business of a seasonal nature, the budget period should cover at least one entire seasonal
cycle
(d) The budget period should coincide with the financial accounting period for comparison
(e) All of the above.
(1 mark)
14. Which of the following statements most appropriately describe(s) the role of budgets?
(a) Budgets should be administered rigidly so that people believe in them
(b) Attaining the budget is an end in itself
(c) Managers should commit to the budget and keep it as adopted
(d) Changing conditions call for changes in plans and long-term goal of the organization should be
the guide for changes to the budget itself
(e) All of the above are true.
(1 mark)
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15. If the budget of a company is reviewed and updated at regular intervals, it is known as
(a) Capital budget (b) Rolling budget (c) Flexible budget
(d) Fixed budget (e) Zero-based budget.
(1 mark)
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16. Which of the following budget challenges the existence of every budgetary unit at every budget
period?
(a) Rolling budget (b) Participative budget (c) Zero based budget
(d) Strategic budget (e) Short-range budget.
(1 mark)
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17. The relationship between the budgeted number of working hours and the maximum possible working
hours in a budgeted period is
(a) Efficiency ratio (b) Activity ratio (c) Calendar ratio (d) Capacity
usage ratio (e) Capacity utilization ratio.
(1 mark)
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18. 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) Develop forecasting procedures
(b) Organize a budget committee and appoint a budget director
(c) Report daily to operating management all deviations from the plan
(d) Report daily to top management all deviations from the plan
(e) Synchronize the budgeting and accounting systems within the organizational structure.
(1 mark)
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19. Material yield variance can be defined as
(a) Standard cost per unit × (Actual loss ~ Standard loss)
(b) Standard cost per unit × (Actual loss ~ Standard loss on actual input)
(c) Standard cost per unit × (Actual loss ~ Standard loss on standard input)
(d) Actual cost per unit × (Actual loss ~ Standard loss)
(e) Actual cost per unit × (Actual loss ~ Standard loss on actual input).
(1 mark)
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20. If a company has unfavorable material price variance, which of the following departments is primarily
held responsible?
(a) Stores department (b) Production department
(c) Inspection department (d) Purchase department
(e) Receiving department.
(1 mark)
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21. Which of the following statements is true?
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(a) Material price variance is caused on account of pilferage of materials
(b) Material usage variance is caused on account of excessive shrinkage or loss of material in transit
(c) Material price variance occurs if defective materials are purchased
(d) Material price variance arises because of purchasing substitute materials at different prices
(e) Material mix variance will result if materials are used into production in the same ratio as the
standard mix.
(1 mark)
22. A debit balance of materials usage variance indicates that
(a) Standard quantities of materials exceed actual quantities
(b) Actual quantities of materials exceed standard quantities
(c) Standard rates of standard quantities exceed actual cost
(d) Standard rates of actual quantities exceed actual rate of actual quantities
(e) Standard rates of standard quantities exceed actual rate of actual quantities.
(1 mark)
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23. A favorable materials price variance coupled with an unfavorable materials usage variance would most
likely result from
(a) The purchase of lower than standard quality materials
(b) The purchase and use of higher than standard quality materials
(c) Product mix changes in production
(d) Machine efficiency problems
(e) Labor efficiency problems.
(1 mark)
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24. Fixed overhead efficiency variance is equal to
(a) Standard fixed overhead rate per hour × (Actual hours – Budgeted hours)
(b) Actual fixed overhead rate per hour × (Actual hours – Budgeted hours)
(c) Actual fixed overhead rate per hour × (Actual hours – Standard hours for actual production)
(d) Standard fixed overhead rate per hour × (Actual hours – Standard hours for standard production)
(e) Standard fixed overhead rate per hour × (Actual hours – Standard hours for actual production).
(1 mark)
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25. The difference between budgeted fixed overhead costs and applied fixed overhead costs is known as
(a) Fixed overhead costs variance
(b) Fixed overhead expenditure variance
(c) Fixed overhead volume variance
(d) Fixed overhead efficiency variance
(e) Fixed overhead capacity variance.
(1 mark)
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26. The difference between the budget amount and the best estimate is called
(a) Variance (b) Contingency provision (c) Slack
(d) Standard error (e) Probability.
(1 mark)
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27. A standard which can be attained under the most favorable conditions is called
(a) Current standard (b) Ideal standard (c) Basic standard
(d) High standard (e) Expected standard.
(1 mark)
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28. The data, equipment and computer programs that are used to develop information for managerial use is
known as
(a) Management by exception (b) Management by objective
(c) Management control (d) Management information system
(e) Value chain analysis.
(1 mark)
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29. Which of the following information is required by the Operating Management?
(a) Changes in government policies (b) Overtime payments
(c) Working capital (d) Order bookings
(e) Return on investment.
(1 mark)
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30. Which of the following activities is not useful in standard costing technique?
(a) Pricing decisions (b) Performance appraisal (c) Cost awareness
(d) Cost control (e) Cost reduction.
(1 mark)
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31. In responsibility accounting, a center’s performance is measured by controllable costs. Controllable
costs are best described as including
(a) Direct material and direct labor only
(b) Only those costs that the manager can influence in the current time period
(c) Only discretionary costs
(d) Those costs about which the manager is knowledgeable and informed
(e) Incremental and fixed costs.
(1 mark)
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32. Which of the following is/are not true in relation to Value Chain Analysis?
(a) Value chain is the linked set of value-creating activities from the basic raw material sources for
suppliers to the ultimate end-use product delivered to the customer
(b) No individual firm is likely to span the entire value chain
(c) Value chain requires an internal focus unlike conventional management accounting in which
focus is external to the firm
(d) Each firm must be understood in the context of the overall value chain of value-creating activities
(e) Both (b) and (d) above.
(1 mark)
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33. In activity-based costing system the primary criteria for making cost allocation decisions is
(a) Cause and effect (b) Benefits received (c) Fairness
(d) Ability to bear (e) Total costs before taking into overhead costs.
(1 mark)
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34. Which of the following statements is false with respect to target costing?
(a) Target costing is a customer oriented technique
(b) Target costing requires market research to determine the customer’s perceived value of the
product based on its functions and attributes
(c) The maximum advantage of adopting target costing is when it is deployed at the products selling
stage
(d) A major feature of target costing is that a team approach is adopted to achieve the target cost
(e) Target costs are conceptually different from standard costs.
(1 mark)
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35. Under project–life cycle costing, which of the following costs is not an initial cost of a capital asset
purchased from a supplier?
(a) Installation charges (b) Cost of spares
(c) Research and Development Costs (d) Cost of acquisition
(e) Commission paid.
(1 mark)
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36. Which of the following statements is false with respect to Total Quality Control (TQC)?
(a) TQC is a management process based on the belief that quality costs are minimized with zero
defects
(b) The proponents of TQC do not advocate that ‘quality is free’
(c) TQC begins with the design and engineering of the product
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(d) TQC is often associated with JIT manufacturing
(e) TQC is sometimes referred to as TQM (Total Quality Management).
(1 mark)
37. A profit making firm can increase its return on investment by
(a) Increasing sales revenue and operating expenses by the same amount in rupees
(b) Increasing investment and operating expenses by the same amount in rupees
(c) Decreasing sales revenue and operating expenses by the same percentage
(d) Increasing sales revenue and operating expenses by the same percentage
(e) Decreasing investment and sales by the same percentage.
(1 mark)
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38. Which of the following is false with respect to Return on Investment (ROI) and Residual Income (RI)?
(a) In case of RI, there is a problem of defining the minimum required rate of return associated with
various investment opportunities
(b) ROI can be readily employed for inter-divisional comparisons
(c) A project will be rejected under ROI method and accepted under RI method if the rate of return
from such project is more than the minimum required rate of return but less than the current ROI
(d) RI is the rate of return which a division is able to earn above the minimum required rate of return
on operating assets
(e) Under RI approach, the larger divisions will be expected to have more RI than the smaller
divisions.
(1 mark)
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39. In case the resources of an enterprise are not fully utilized, which of the following will be zero?
(a) Standard cost (b) Shadow price (c) Residual income
(d) Margin of Safety (e) Marginal revenue.
(1 mark)
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40. Scrap and costs of spoiled units that cannot be salvaged are the examples of
(a) Appraisal costs (b) Internal failure costs
(c) External failure costs (d) Prevention costs
(e) Committed costs.
(1 mark)
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41. XY Ltd. fixes the inter-divisional transfer prices for its products on the basis of cost plus estimated
return on investment in its divisions. The relevant position of the budget for the division A for the year
2004-05 is as follows:
Fixed assets (Rs.) 8,00,000
Current assets other than Sundry debtors (Rs.) 3,20,000
Sundry debtors (Rs.) 2,80,000
Annual fixed cost of division A (Rs.) 8,00,000
Variable cost per unit of product (Rs.) 20
Budgeted units of production (units) 50,000
If the company
desires to earn a return of 25% on investment, the transfer price for division A is
(a) Rs.28.00 (b) Rs.40.00 (c) Rs.43.00 (d) Rs.27.00 (e) Rs.41.60.
(1 mark)
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Satya Ltd. has two divisions - A and B. The division A has the capacity to manufacture 50,000 units of a
special component L annually and it has some idle capacity currently. The budgeted residual income for
the division A is Rs.4,00,000. The relevant details extracted from the budget of A are as under:
Sales (to outside customers) 40,000 units @ Rs.80 per unit
Variable cost per unit Rs.50
Divisional fixed cost Rs.5,00,000
Capital employed Rs.60,00,000
Cost of capital 10% per annum
Division B received an order for which it requires 10,000 units of a component similar to L. An
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additional variable cost of Rs.6 per unit will be incurred to make minor modifications to L to suit the
requirements of Division B.The minimum transfer price per unit which A should quote to B to achieve
its budgeted residual income is
(a) Rs.86 (b) Rs.50 (c) Rs.56 (d) Rs.80 (e) Rs.74.
(2 marks)
43. The following is the statement showing operating income of Dyeing division of Kamal Garments Ltd.
Particulars Rs.
Sales 2,50,000
Variable manufacturing costs 2,00,000
Administrative expenses 33,000
Selling expenses 16,000
Operating income 10,000
The sales include cloth transferred to
Printing division at manufacturing cost of Rs.25,000.The common administrative expenses of Rs.8,000
and common selling expenses of Rs.6,000 are apportioned to the Dyeing division. If the internal transfer
is at market price, the operating income of Dyeing division using contribution approach is
(a) Rs.22,143 (b) Rs. 8,143 (c) Rs.57,143 (d) Rs.43,143 (e) Rs.24,000.
(2 marks)
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44. Narayana Ltd. has furnished the following data relating to its product for the year 2003-04:
Annual production (units) 40,000
Material cost (Rs.) 2,80,000
Other variable cost (Rs.) 2,20,000
Fixed cost (Rs.) 2,20,000
Apportioned investment (Rs.) 6,00,000
Assuming income tax rate of
40%, if the company desires to earn a post tax profit of 15% on listed sale price when trade discount is
35%, the net sale price per unit would be
(a) Rs.25.00 (b) Rs.63.75 (c) Rs.41.44 (d) Rs.45.00 (e) Rs.29.25.
(2 marks)
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45. Santaram Ltd. manufactures a single product at the operated capacity of 20,000 units while the normal
capacity of the plant is 25,000 units per annum. The company has estimated 20% profit on sales
realization and furnished the following budgeted information:
Particulars
25,000 units
(Rs.)
20,000 units
(Rs.)
Fixed overheads 2,00,000 2,00,000
Variable overheads 4,00,000 3,20,000
Semi-variable overheads 2,50,000 2,20,000
Sales realization 15,00,000 12,00,000
The
company has received an order from a customer for a quantity equivalent to 10% of the normal capacity.
It is noticed that prime cost per unit of product is constant. 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.33.75 (b) Rs.27.00 (c) Rs.25.25 (d) Rs.41.25 (e) Rs.36.50.
(2 marks)
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46. Jyothi Ltd. is attempting to compute costs for its three products for pricing purposes. The company has
annual fixed manufacturing costs of Rs.5,32,000. The variable costs of the company’s products are as
follows:
Product
Variable costs of manufacture (per
unit) (Rs.)
A
B
C
20
30
40
The company expects to produce and sell 5,000
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units of A, 6,000 units of B, and 8,000 units of C annually. The policy of the company is to add a
markup of 25% to each product’s total manufacturing costs to compute the tentative selling price. The
selling prices of product A, B and C, if fixed costs are allocated on the basis of number of units
produced, are
(a) Rs. 48.00, Rs. 58.00 and Rs. 85.00 respectively
(b) Rs. 60.00, Rs. 72.50 and Rs. 85.00 respectively
(c) Rs. 60.00, Rs. 58.00 and Rs. 85.00 respectively
(d) Rs. 60.00, Rs. 72.50 and Rs. 68.00 respectively
(e) Rs. 68.00, Rs. 85.00 and Rs. 60.00 respectively.
(2 marks)
47. Motilal Ltd. manufactures and sells a single product. The estimated activity of the company for the
month of June 2004 is as follows:
Sales Rs.8,50,000
Gross profit on sales 30%
Increase in inventory during the month Rs.25,800
Increase in sundry debtors Rs.19,500
Total selling and administrative expenses Rs.50,000 + 2.5% on sales
Depreciation expenses which is included in fixed
selling and administrative expenses Rs.20,000
The net
cash surplus or deficit for the month of June 2004 is
(a) Rs.1,58,450 (Surplus) (b) Rs.1,77,950 (Surplus)
(c) Rs.1,38,950 (Surplus) (d) Rs.1,28,450 (Deficit)
(e) Rs.1,07,200 (Deficit).
(2 marks)
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48. Shira 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.6,50,000 for July 2004,
Rs.7,00,000 for August 2004 and Rs.7,50,000 for September 2004. 50% of the sales are on credit.
Experience indicates that 70% of the budgeted credit sales will be collected in the month following the
sales. 25% are expected to be realized in the second month following the month of sales and remaining
5% will be non-recoverable.
The total amount of sales commission for the month of September 2004 is
(a) Rs.30,500 (b) Rs.28,050 (c) Rs.24,800 (d) Rs.18,250 (e) Rs.13,050.
(2 marks)
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49. Tripty Ltd. has a policy of maintaining a minimum cash balance of Rs.50,000 at the end of each month.
Any deficit below Rs.50,000 will be financed through bank borrowings and any surplus will be utlised
to repay the outstanding bank borrowing and the balance will be invested in short-term securities. For
this purpose, the company has an agreement with the bank to borrow in multiples of Rs.5,000 whenever
a need arises subject to a maximum of Rs.60,000. The rate of interest is 12% per annum payable
monthly on the amount borrowed.
50% of the sales are on credit and is expected to be collected in the month following the month of sales.
25% of the purchases are on credit and will be paid in the month following the month of purchases. The
salaries and other expenses are to be paid in the month for which they relate. The following is the
budgeted information for the quarter ending September 2004:
Particulars July 2004 Rs. August
2004
Rs.
September
2004
Rs.
Sales 20,000 30,000 40,000
Purchases 20,000 30,000 30,000
Salaries 10,000 10,000 10,000
Manufacturing and other
administrative expenses

10,000

10,000

10,000
If the closing
cash balance as on July 31, 2004 is Rs.50,000, the cash balance as on October 01, 2004 before
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borrowing will be
(a) Rs.32,750 (b) Rs.52,500 (c) Rs. 27,500 (d) Rs.52,250 (e) Rs. 37,250.
(3 marks)
50. XY Ltd. has prepared the following budget for the year 2004-05:
Particulars Percentage to total sales(Rs.)
Direct materials 40
Direct labor 20
Factory overheads – Variable 10
Fixed 8
Selling and administrative overheads –Variable 12
Fixed 06
Profit 04
Total 100
After evaluating the first quarter performance, it was observed that the company would be able to
achieve only 80% of the original budgeted sales. The revised budgeted sales as envisaged above was
estimated at Rs.2,400 lakh after taking into account a reduction in selling price by 20%.The original
budgeted sales at original price is
(a) Rs.2,750 lakh (b) Rs.3,600 lakh (c) Rs.3,750 lakh (d) Rs.3,500 lakh (e) Rs.3,000 lakh.
(2 marks)
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51. Sreyi Ltd. has furnished the following data relating to a product for the year 2003–04:
Units produced 4,000
Direct materials
(Rs.)
5,20,000
Direct labor (Rs.) 3,40,000
Manufacturing overheads
(Rs.)
2,00,000 (25% fixed)
Selling and administrative overheads (Rs.) 1,50,000 (40% fixed)
If the
company manufactures 4,400 units in the next year, the total cost per unit would be
(a) Rs.275 (b) Rs.300 (c) Rs.325 (d) Rs.350 (e) Rs.400.
(2 marks)
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52. Leo Ltd. manufactures toy cats with moving parts and a built-in voice box. Projected sales for 5
months are as follows:
Month Projected sales in units
July 2004 3,500
August 2004 3,900
September 2004 4,200
October 2004 4,500
November 2004 4,800
Each toy requires direct
materials from a supplier at Rs.80 for moving parts. Voice boxes are purchased from another supplier at
Rs.20 per toy. Labor cost is Rs.30 per toy and variable overhead cost is Rs.5 per toy. Fixed
manufacturing overhead applicable to production is Rs.51,000 per month. It is the practice of the
company to manufacture an output in a month which is equivalent to 1.2 times of the following month’s
sales.
The production budget for the month of August 2004 and the production cost budget for the month of
September 2004 are
(a) 5,040 units and Rs.7,80,000 respectively
(b) 5,040 units and Rs.7,29,000 respectively
(c) 5,040 units and Rs.7,50,000 respectively
(d) 5,500 units and Rs.7,80,000 respectively
(e) 5,555 units and Rs.7,50,000 respectively.
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(2 marks)
53. The flexible budget for the month of July 2004 was for 12,000 units with direct material cost at Rs.25
per unit. Direct labor was budgeted at 45 minutes per unit for a total cost of Rs.1,44,000. Actual output
for the month was 10,800 units with Rs.2,70,000 in direct material and Rs.1,30,000 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 July 2004 would show a(n)
(a) Favorable material usage variance of Rs.1,200
(b) Unfavorable material price variance of Rs.1,000
(c) Favorable direct labor efficiency variance of Rs.400
(d) Unfavorable direct labor efficiency variance of Rs.400
(e) Unfavorable direct labor rate variance of Rs.400.
(2 marks)
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54. Avoy Ltd. manufactures two products – X and Y, using same facilities and similar process. The
company has furnished the following information pertaining to two products for the year ending March
31, 2004.
Particulars Product X Product Y
Direct labor hours per unit 4 2.5
Machine hours per unit 5 4
Number of set ups during the period 22 18
Number of orders handled during the period 16 19
Production units 6,000 4,340
Total
production overhead costs for the period are as follows:
Particulars Rs.
Machine activity costs 2,40,000
Set-ups costs 56,000
Order handling costs 52,500
3,48,500
The absorption of
total production overheads of both the products on the basis of a suitable cost driver, using Activity
Based Costing method, is
Product X (Rs.) Product Y (Rs.)
(a) 2,06,827 1,41,673
(b) 2,14,462 1,34,038
(c) 2,06,827 1,16,473
(d) 1,93,611 1,54,889
(e) 2,40,000 1,41,673.
(2 marks)
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55. Acer Ltd. manufactures 6,000 units of Product PT at a cost of Rs.150 per unit. Presently, the company is
utilizing 60% of the total capacity. The information pertaining to cost per unit of the product is as
follows:
Material – Rs.80
Labor – Rs.20
Factory overheads – Rs.30 (40% fixed)
Administrative overheads – Rs.20 (50% fixed)
Other information:
i. The current selling price of the product is Rs.200 per unit.
ii. At 70% capacity level – Material cost per unit will increase by 2% and
current selling price per unit will reduce by 2%.
iii. At 90% 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 70% and 90% capacity levels will be
(a) Rs.50.00 and Rs.43.33 respectively
(b) Rs.43.33 and Rs.47.54 respectively
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(c) Rs.47.54 and Rs.43.33 respectively
(d) Rs.47.54 and Rs.46.22 respectively
(e) Rs.43.33 and Rs.50.00 respectively.
(3 marks)
56. Sri Ram Ltd. uses a Standard costing system. The following details have been extracted from the
standard cost card in respect of direct materials for the month of June 2004.
Material usage per unit – 5 kg at the rate of Rs.15 per kg
Budgeted production – 1000 units
The company has furnished the following data relating to direct material for the month of June 2004:
Materials purchased 5,400 kg at a price of Rs.86,400
Materials issued to production 4,670 kgs
Actual production 900 units
The
material price and material usage variances are
(a) Rs.5,400 (A) and Rs.2,550 (A) respectively
(b) Rs.5,400 (A) and Rs.2,550 (F) respectively
(c) Rs.5,400 (A) and Rs.2,750 (A) respectively
(d) Rs.2,750 (A) and Rs.2,550 (A) respectively
(e) Rs.2,750 (F) and Rs.5,400 (F) respectively.
(2 marks)
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57. Mina 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 60% Rs. 8
B 40% Rs.10
The standard process loss is 10%.
During the month of June 2004, the company produced 5,000 kg. of finished product. The position of
stock and purchases for the month of June 2004 is as under:
Material
Stock as on June 01,
2004
Kg.
Stock as on June 30,
2004 Kg.
Purchases during June 2004
Kg. Rs.
A 120 50 3,000 24,900
B 80 30 2,500 24,000
The material yield variance of the company is
(a) Rs.574 (A) (b) Rs.567 (A) (c) Rs.495 (F) (d) Rs.495 (A) (e) Rs.567 (F).
(2 marks)
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58. SD Ltd. uses a standard absorption costing system. The following data have been extracted from its
budget for the month of June 2004:
Fixed production overhead cost Rs.1,20,000
Production 12,000 units
In June 2004, the
fixed production overhead cost was under absorbed by Rs.10,500 and the fixed production overhead
expenditure variance was Rs.2,800 (Adverse).The actual number of units produced was
(a) 1,050 units (b) 1,200 units (c) 10,670 units (d) 11,230 units (e) 12,770 units.
(2 marks)
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59. VK Ltd. has furnished the following data pertaining to a product for the month of June 2004:
Particulars Budget Actual
Production units 10,000 10,400
Labor hours 5,000 4,800
Fixed overheads (Rs.) 85,000 87,200
Number of working days 25 24
The
fixed overhead volume variance is
(a) Rs.2,000 (F) (b) Rs.2,200 (F) (c) Rs.2,200 (A) (d) Rs.3,400 (A) (e) Rs.3,400 (F).
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(1 mark)
60. Sri Durga Pump Ltd. manufactures water pumps and uses a standard cost system. The following
standard factory overhead costs per water pump are based on direct labor hours:
Variable overheads (40 hours at the rate of Rs.20 per hour) Rs.800
Fixed overheads (40 hours at the rate of Rs.15 per hour) Rs.600
The additional information is available for the month of June 2004:
i. 4,000 pumps were produced although 4,200 had been scheduled for production
ii. The normal capacity level was 1,68,000 direct labor hours per month
iii. 1,59,000 direct labor hours were worked at a total cost of Rs.38,16,000
iv. The standard direct labor rate is Rs.25 per hour
v. The standard direct labor time per unit is 40 hours
vi. Variable overhead costs were Rs.33,20,000
vii. Fixed overhead costs were Rs.25,50,000
The fixed overhead expenditure variance and direct labor efficiency variance are
(a) Rs.25,000 (F) and Rs.30,000 (F) respectively
(b) Rs.25,000 (A) and Rs.30,000 (A) respectively
(c) Rs.30,000 (A) and Rs.25,000 (F) respectively
(d) Rs.30,000 (A) and Rs.20,000 (A) respectively
(e) Rs.30,000 (A) and Rs.28,000 (A) respectively.
(2 Marks)
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61. Consider the following data pertaining to overhead cost for the month of June 2004:
i. Overhead cost variance – Rs.5,200 (A)
ii. Overhead volume variance – Rs.3,800 (A)
iii. Budgeted hours for the month – 2,500
iv. Budgeted overheads for the month – Rs.20,000
v. Rate of recovery of overheads – Rs.20 per hour
The actual overhead incurred by the company is
(a) Rs.21,400 (b) Rs.18,600 (c) Rs.23,800 (d) Rs.16,200 (e) Rs.25,200.
(1 mark)
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62. X Ltd. operates under a standard cost system. Factory overhead cost is applied to products on a direct
labor hour basis. At normal operating level, the company utilizes 2,00,000 direct-labor hours per year.
The budgeted overhead cost at normal capacity level is as follows:
Variable – Rs.6,50,000
Fixed – Rs.4,20,000
During the year 2003-04, the actual labor hours were 2,20,000 to get production that should have
required only 1,80,000 hours. The overhead efficiency variance is
(a) Rs.1,30,000 (F) (b) Rs.1,30,000 (A) (c) Rs.2,14,000 (A) (d) Rs.2,14,000 (F) (e) Nil.
(2 marks)
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63. MN Ltd. uses standard process costing method. The standard process cost card per month shows that 4
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 4,000
kgs. per month.
Actual production during the month of June 2004 is 3,800 kgs. and the direct labor hours utilized during
the month were 14,800.
The details of opening and closing work-in progress (WIP) are as under:
Opening work-in-progress – 300 kgs.(Degree of completion of labor and overheads – 60%)
Closing work-in-progress – 480 kgs.(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.2,880 (F) (b) Rs.2,880 (A) (c) Rs.2,480 (F) (d) Rs.2,500 (A) (e) Rs.2,500 (F).
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(3 marks)
64. The standard labor component and the actual labor component for a job in a week are given below:
Particulars
Skilled
workers
Semi-skilled
workers
Unskilled
workers
i. Standard number of workers in the
gang
40 30 20
ii. Standard wage rate per hour (Rs.)
20 16 10
iii. Actual number of workers employed in
the gang during the week
36 20 34
iv. Actual wage rate per hour (Rs.)
32 23 8
During the 40 hours working week, the gang produced 3,400 standard labor hours of work.
The labor efficiency variance is
(a) Rs.2,132 (F) (b) Rs.2,132 (A) (c) Rs.708 (F) (d) Rs.708(A) (e) Nil.
(2 marks)
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65. The budgeted and actual sales of a concern are as under:
Product
Budget Actual
Quantity
(kgs.)
Price
(Rs.)
Quantity
(kgs.)
Price (Rs.)
A 2,500 30 2,700 32
B 1,500 25 1,300 26
C 2,000 20 2,200 18
The sales mix variance is
(a) Rs. 3,933 (F) (b) Rs.5,417 (F) (c) Rs.3,933 (A) (d) Rs. 5,417 (A) (e) Rs.83 (A).
(1 mark)
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66. The data relating to Sinha Ltd. for the month of June 2004 are as follows:
Output (units)
Wages paid for 4,850 hours
Material purchased 2,500 kg
5,000
Rs. 87,300
Rs. 40,000
Variances:
Variances Rs.
Labor rate
Labor efficiency
Labor idle time
Material price
Material usage
2,130 (A)
2,250 (F)
300 (A)
2,560 (F)
2,940 (F)
The standard prime cost per unit is
(a) Rs. 24.30 (b) Rs. 17.42 (c) Rs. 24.40 (d) Rs. 26.52 (e) Rs. 25.50.
(2 marks)
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67. Jaya Electronics Ltd., a camera manufacturer, is planning to produce a new model of cameras. The
potential demand for the next year is estimated to be 50,000 units. The company has the capacity to
produce 2,00,000 units and could sell 50,000 units at a price of Rs.900 per camera. The demand would
double for every decrease of Rs.60 in the selling price. The company expects a minimum margin of
25%. At full capacity level, the target cost per unit will be
(a) Rs.585 (b) Rs.975 (c) Rs.936 (d) Rs.630 (e) Rs.1,008.
(1 mark)
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68. Mr.Kanai the General Manager of Main Product Division of Sai Ltd. has estimated the following cash
flows for his division for the next year:
Particulars Rs.
Investment in Plant and equipment 18,50,000
Investment in Working capital 7,50,000
Revenue 7,80,000
If the imputed interest cost is 12%
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and Mr. Kanai desires to achieve a residual income of Rs.1,80,000, the total costs, in order to achieve the
target, would be
(a) Rs.3,50,000 (b) Rs.2,88,000 (c) Rs.4,20,000 (d) Rs.2,65,000 (e) Rs.3,12,000.
(2 marks)
69. Consider the following details pertaining to Srikanth Ltd. for the month of June 2004:
Particulars Rs.
Sales 60,000
Direct materials 18,500
Direct labor 14,000
Variable overheads 8,000
Capital employed 1,20,000
The return on investment in June 2004 is 12.5%.
In the month of July 2004, it is expected that the volume of sales will be increased by 15%, the selling
price will be increased by 2% and there will be a reduction of all other costs by 2%. The change in the
return on investment for the month of July 2004 will be
(a) An increase of 12.5% (b) An increase of 35.52%
(c) A decrease of 35.52% (d) A decrease of 43.24%
(e) An increase of 42.00%.
(2 marks)
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70. Consider the following data of AB Ltd. for the quarter ending June 30, 2004:
Projected sales 5,000 units
Raw materials per unit of finished goods 4 kg
Opening stock of finished goods 675units
Closing stock of finished goods 850units
Opening stock of raw materials 4,500 kg
Closing stock of raw materials 6,200 kg
The total
quantity of materials purchased during the quarter is
(a) 19,000 kg (b) 21,400 kg (c) 22,400 kg (d) 21,000 kg (e) 17,600 kg.
(2 marks)
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71. Siva Ltd. manufacturers cabinets and outsources handles of the cabinet. Each cabinet requires four
handles. The direct labor time for assembly work is 30 minutes per cabinet. The closing stock of
finished cabinets in a month is estimated to be 50% of projected unit sales for the next month. The
closing stock of handles in a month is planned to be 60% of the requirement for the second following
month.
The company has furnished the following projected unit sales:
July 2004 300 cabinets
August 2004 310 cabinets
September 2004 320 cabinets
October 2004 350 cabinets
The closing inventory of the company for
the month of June 2004 are as follows:
Cabinets 150
Handles 800
The number of handles to be purchased in the
month of July 2004 is
(a) 1,240 units (b) 1,387 units (c) 1,216 units (d) 1,164 units (e) 1,176 units.
(2 marks)
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END OF QUESTION PAPER


Suggested Answers
Management Accounting II (152) – July 2004
1. Answer : (e)
Reason : Transfer pricing motivates divisional managers to perform well. It is useful for evaluating
performance of the divisional managers. It also helps in measuring divisional performance. It is
the selling price established for goods or services sold by one division to other under the same
organization. Therefore, (d) is not correct, (e) is correct.
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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.
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3. Answer : (e)
Reason : Differential cost technique for pricing ignores fixed cost. Differential cost technique considers
the change of cost for different options. Therefore, fixed cost has no relevancy with these
differential cost techniques. Other techniques mentioned in (a), (b), (c) and (d) consider the
fixed cost in pricing the goods.
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4. Answer : (e)
Reason : Pricing decisions are influenced by internal factors such as costs and profit objectives. The first
consideration is the product costs that forms the basis of price. Competitors prices and prices of
substitutes are the middle level consideration that the company has to take into account while
setting prices. They help the firm to establish where its prices might be set and the company can
use them as orientation point for its own pricing. The last one, the unique product features in the
company establish the ceiling on its price. Hence all (a), (b), (c) and (d) above are correct.
Hence the right option is (e).
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5. 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 not competing to each other.
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
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6. Answer : (b)
Reason : Under ROI pricing method, mark up percentage is related to investment. The profit will change
in direct proportion to investment. The profit figure computed as a percentage of investment is
added to the total cost to determine the selling price. As a result, when variable or fixed cost of
production changes the profit per unit or total profit remains the same. Hence (a) is not correct
Under full cost pricing method, mark-up is added as a percentage of total cost of production to
arrive at the price. Hence a change in variable or fixed cost of production will lead to a change
in profit if the markup percentage remains the same. Hence (b) is correct
Contribution margin approach to pricing computes the profit using the mark up percentage on the
variable cost. Therefore, if fixed cost increases the profit is not affected. Hence (c) is not correct.
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Therefore (b) is the answer.
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 flexible budget is a series of budgets prepared for different levels of activity. It allows
adjustments of the budget to the actual level of activity before comparing the budgeted activity
with actual result. Fixed budget is a budget prepared for one level of activity. Therefore (b) is
correct. Other statements mentioned in (a), (c), (d) and (e) are not correct.
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9. Answer : (c)
Reason : When preparing a performance report for a cost center using flexible budgeting techniques, the
planned cost column should be based on budget adjusted to the actual level of activity for the
period being reported.
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10
.
Answer : (b)
Reason : The capital investment budget may be prepared more than a year in advance, unlike the other
elements of the master budget. In case of preparation of master budget, it requires production
budget, overhead expenses budget, proforma income statement and balance sheet. It does not
require capital investment budget at the time of its preparation.
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11. 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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12
.
Answer : (e)
Reason : Promotion of employees without proper authorization by personal favoritism or supervisors
leads to labor rate variance as they are paid rates fixed for higher job classification. Hence (e) is
false. Insufficient training is a reason for labor efficiency variance. When workers are not able
to do the work due to some reason during the hours for which they are paid, it results in idle
time variance. High labor turnover is a reason for labor efficiency variance and different rates
being paid to workers employed to meet seasonal demands leads to labor rate variance.
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13
.
Answer : (e)
Reason : Short range budgets may cover periods of three, six and twelve months depending on the nature
of the business. In determination of the period of short range budget all the factors as stated in
(a) financing of production well in advance; (b) cover complete production; (c) entire seasonal
cycle; (d) coincide with the financial accounting period are all considered. Hence option (e) is
the correct option.
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14
.
Answer : (d)
Reason : Budgets must allow for changes because of changing conditions. Changing conditions call for
changes in plans and long-run benefit to the organization should be the guide for changes to the
budget itself. Budgets cannot be administered rigidly. Attaining the budget is not an end itself.
Managers cannot be forced upon to commit to the budget and keep it as adopted.
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15
.
Answer : (b)
Reason : If the budget of a company is reviewed and updated at regular intervals, it is defined as rolling
budget. It is continuously updated by periodically adding a new incremental time period, such as
a quarter, and dropping the period just completed, Therefore (b) is correct.
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16
.
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.
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17
.
Answer : (d)
Reason : The relationship between the budgeted number of working hours and the maximum possible
working hours in a budgeted period is capacity usage ratio. Hence the answer is (d). The
standard hours equivalent to the work produced expressed as a percentage of the actual hours
spent in producing that work is efficiency ratio. The activity ratio is the number of standard
hours equivalent to the work produced expressed as a percentage of the budgeted standard
hours. Calendar ratio is the relationship between the number of working days in a period and the
number of working days in the relative budget period. Capacity utilization ratio is the
relationship between the actual hours in a budget period and the budgeted working hours in a
given period.
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18
.
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 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.
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19
.
Answer : (b)
Reason : Material yield variance can be defined as the difference between the actual loss and the standard
loss on actual output multiplied by standard cost per unit. It is not true in respect of other
options mentioned in (a), (c), (d) and (e).
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20
.
Answer : (d)
Reason : Purchase department is responsible for an unfavorable materials price variance. Other
departments like store, production, inspection, and receiving are not responsible for unfavorable
materials price variance.
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21
.
Answer : (d)
Reason : Material price variance arises due to purchase of substitutes at different prices. It does not arise
due to pilferage or defective material. Other statements mentioned in (a), (b), (c) and (e) are
false.
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22
.
Answer : (b)
Reason : A debit balance of materials usage variance indicates the unfavorable variance. It means the
actual quantities of materials exceed standard quantities. Other statements stated in (a), (c), (d)
and (e) are not true.
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23
.
Answer : (a)
Reason : A favorable materials price variance is the result of paying less than the standard price for
materials. An unfavorable materials usage variance is the result of using an excessive quantity of
materials. If a purchasing manager is to buy substandard materials to achieve a favorable price
variance, an unfavorable quality variance could result from using an excessive amount of poor
quality materials.
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24
.
Answer : (e)
Reason : Fixed overhead efficiency variance = Standard fixed overhead rate per hour × (Actual hours –
Standard hours for actual production)
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25 Answer : (c)
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. Reason : Fixed overhead volume variance = Budgeted fixed overhead costs – Applied fixed overhead
costs. Therefore, (c) is correct.
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26
.
Answer : (c)
Reason : Many budgetees tend to budget revenues somewhat lower, and expenses somewhat higher, than
their best estimates of these amounts. The difference between the budget amount and the best
estimate is called Slack. In examining the budget, superiors attempt to discover and eliminate
slack. Variance is the difference between the budget and actual. Standard error and Probability
has no link with the difference between the budget amount and the best estimate.
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27
.
Answer : (b)
Reason : A standard which can be attained under the most favorable conditions is called Ideal standard.
Ideal standards are not widely used in practice because they may influence employee’s
motivation adversely. All the options defined here are incorrect. (a) The standards which are set
for use over a limited period to reflect current conditions is called current standard. (c) Basic
standard is the standard established for use over a long period from which a current standard can
be developed. (d) High standards represent the best possible performance. (e) Expected standard
is standard based on conditions which may be realized in actual practice.
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28
.
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.
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29
.
Answer : (b)
Reason : The operating management is responsible for executing various tasks within the framework of
plans, programs and schedules defined by executive management. They need the information
regarding the overtime payments. The information regarding the changes in government
policies, return on investment is required by top management and the information regarding the
working capital, order bookings, etc. is required by the executive management.
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30
.
Answer : (e)
Reason : Under standard costing technique, it is possible to take pricing decisions, to do performance
appraisal, to create cost awareness among the employees and to control the cost. Through this
technique, it is not possible to reduce cost. So, cost reduction is not useful in standard costing
technique.
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31
.
Answer : (b)
Reason : Control is the process of making certain that plans are achieving the desired objectives. A
controllable cost is one that is directly regulated by a specific manager at a given level of
production within a given time span. For example, fixed costs are often not controllable in the
short run.
Answer (a) is incorrect because many overhead costs are also controllable. Answer (c) is incorrect
because controllable costs need not be discretionary. Discretionary costs are characterized by
uncertainty about the relationship between input and the value of the related output; they may or
may not be controllable. Answer (d) is incorrect because controllable costs are those over which
a manager has control; the manager may be knowledgeable and informed about costs that he
cannot control. Answer (e) is incorrect because fixed costs are often not controllable in the
current period.
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32
.
Answer : (c)
Reason : Value chain requires an external focus, unlike conventional management accounting in which
the focus is internal to the firm i.e., option ‘c’ is the right option.
Options (a), (b), and (d) are the correct statements in relation to value chain analysis. Hence they
are not right options.
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33
.
Answer : (a)
Reason : Applying overhead costs to each product or service based on the extent to which that product or
service causes overhead cost to be incurred is the primary objective of accounting for overhead
costs. Thus, ABC uses cost hierarchy to determine the cost drivers that cause a cost incurred.
Hence the options given in (b), (c), (d) and (e) are not correct. Therefore, option (a) is correct.
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34 Answer : (c)
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. Reason : The major advantage of adopting target costing is that it is deployed during a products design
and planning stage so that it can have a maximum impact in determining the level of the locked
in costs. Target costing is not deployed at the product selling stage. Therefore (c) is false.
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35
.
Answer : (c)
Reason : The project life-cycle costs of a capital asset can be grouped into three broad categories i.e.,
Initial costs, Operating costs and Disposal costs. The capital cost of an asset purchased from a
supplier does not include Research and Development Costs. These costs accrue or arise only
when the asset is constructed ‘in-home’. The costs mentioned in alternatives (a) Installation
charges, (b)Cost of spares, (d) Cost of acquisition and (e) Commission paid are the initial costs
of an asset purchased from a supplier.
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36
.
Answer : (b)
Reason : TQC is a management process based on the belief that quality costs are minimized with zero
defects. The phrase ‘Quality is free’ is commonly advocated by the proponents of TQC. Hence
statement (b) is incorrect and all other statements (a), (c), (d) and (e) are correct.
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37
.
Answer : (d)
Reason : Return on investment (ROI) equals to net income divided by invested capital. If a firm is already
profitable, increasing sales and expenses by the same percentage will increase the ROI. Other
options given in (a), (b), (c) and (e) are not correct.
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38
.
Answer : (d)
Reason : RI is the net operating income which a division is able to earn above the minimum rate of return
on operating assets. It is in absolute terms and not a ratio. Hence (d) is false. As RI is the
income above the minimum rate of return, there is a problem of defining the minimum required
rate of return associated with various investment opportunities. ROI can be readily employed for
inter-divisional comparisons as it is a ratio. A project will be rejected under ROI method and
accepted under RI method if the rate of return from such project is more than the minimum
required rate of return but less than the current ROI. Under RI approach, the larger divisions
will be expected to have more RI than the smaller divisions, not necessarily because they are
better managed but because of the bigger numbers involved.
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39
.
Answer : (b)
Reason : Shadow price represents the opportunity cost of a unit of constrained resource. It is the increase
in the value of objective function, which would be achieved, if one more units of the resource
was available. Only constrained resource has a shadow price. In case the resources are not fully
utilized, the shadow price will be zero.
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40
.
Answer : (b)
Reason : Scrap and costs of spoiled units that cannot be salvaged are examples of internal failure costs.
These are the costs associated with materials and products that fail to meet quality standards and
result in manufacturing losses. These defects are identified before the goods are shipped to
customers. Hence the answer is (b). Appraisal costs are incurred to ensure that materials,
products and services meet quality standards. They begin with the inspection of raw materials
and parts from vendors. External failure costs are the costs incurred when inferior-quality
products or services are sold to customers. Prevention costs are the costs incurred to reduce the
number of defective units produced or the incidence of poor-quality service. Committed costs
are fixed costs which result from the decision of the management in the prior period and is not
subject to the management control in the present on a short-run basis.
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41
.
Answer : (c)
Reason : Total investments = Rs.8,00,000 + Rs.3,20,000 + Rs.2,80,000 = Rs.14,00,000
Total Return = 25% of Rs.14,00,000 = Rs.3,50,000
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Particulars Rs.
Variable cost (50,000 × 20) 10,00,000
Fixed cost 8,00,000
Return 3,50,000
Sales price 21,50,000
Sales price / unit
21, 50, 000
50, 000
43


42
.
Answer : (a)
Reason :
Fixed costs 5,00,000
Return on capital employed (Rs.60,00,000 x 10%) 6,00,000
Residual income desired 4,00,000
Total desired contribution 15,00,000
Contribution per unit from outside sales = Rs.80 – Rs.50 = Rs.30 per unit
Total contribution from outside sales = Rs.30 per unit x 40,000 units = 12,00,000
Minimum contribution to be earned from supply to division B
= Rs.15,00,000 – Rs.12,00,000 = Rs. 3,00,000
Contribution per unit on additional 10,000 units =
Rs. 3,00,000
10,000 units
= Rs.30 per unit
Variable cost for minor modification = Rs.6 per unit
Minimum transfer price per unit to be quoted = Rs.50 + Rs.30 + Rs.6 = Rs.86
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43
.
Answer : (a)
Reason :
Rs.
Sales to outsiders (Rs.2,50,000 – Rs.25,000) 2,25,000
Less: manufacturing cost of goods sold to outsiders (Rs.2,00,000 – Rs.25,000) 1,75,000
Contribution 50,000
Mark-up on outside sale =
Rs.50,000
=28.57%
Rs.1,75,000
Particulars Rs.
Transfer price to outside sales (25,000 × 1.2857%) 32,143
Sales to outsiders 2,25,000
Total sales 2,57,143
Less: Manufacturing expenses 2,00,000
Contribution 57,143
Less: Traceable expenses
Administration expenses 25,000
Selling expenses 10,000
Operating income 22,143
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44
.
Answer : (e)
Reason : Let, sale value = x (listed price)
0.15x =
[ ] x(1 0.35) Rs.2,80, 000 Rs.2, 20, 000 Rs.2, 20, 000 (1 Tax rate) − − − − −
0.15x =
[ ] 0.65x Rs.7, 20, 000 −
0.6 = 0.39x – Rs.4,32,000
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0.24x = Rs.4,32,000
x = Rs.4,32,000 ÷ 0.24 = Rs.18,00,000
Sale price / unit= Rs.18,00,000 ÷ 40,000 = Rs.45
Net sale price = 45 × .65 = Rs.29.25






45
.
Answer : (d)
Reason : Computation of prime cost

Rs.
Sales (20,000 units) 12,00,000
Less: Profit margin – 20% 2,40,000
Cost of sales – (80% of Rs.12,00,000) 9,60,000
Less: Variable overheads – Rs.3,20,000
Semi-variable overheads – Rs.2,20,000
Fixed overheads – Rs.2,00,000 7,40,000
Prime cost 2,20,000
Semi-variable overheads:
Variable cost =
units in Change
t cos in Change
=
Rs.2,50,000-Rs.2,20,000
25,000units-20,000units
=
.30, 000
5, 000
Rs
units
= Rs.6per unit

At 20,000 units
Fixed cost = Total cost – Variable cost
= Rs.2,20,000 – 20,000 units × Rs.6 = Rs.1,00,000
At 22,500 units
Total cost = 22,500 units × Rs.6 + Rs.1,00,000 = Rs.1,35,000 + Rs.1,00,000 =
Rs.2,35,000
Computation of differential cost of production of 5,000 additional units (i.e. 10% of normal capacity):
Element of cost 20,000 units
(Rs.)
22,500 units
(Rs.)
Differential cost
for 2,500 units
(Rs.)
Prime cost – 2,20,000 2,47,500 27,500
Variable overhead 3,20,000 3,60,000 40,000
Semi variable overhead 2,20,000 2,35,000 15,000
Fixed overhead 2,00,000 2,00,000 –
9,60,000 10,42,500 82,500
Cost per unit of new order =
.82,500
2,500
Rs
= Rs.33.00
Profit margin (20% on sale = 25% on cost) = Rs. 8.25
Minimum selling price per unit = Rs.41.25
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46
.
Answer : (b)
Reason :
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Particulars Total
A Total fixed costs (Rs.)
Number of units

5,000

6,000

8,000
5,32,000
19,000
Fixed cost per unit (Rs.)
Variable cost per unit
28.00
20.00
28.00
30.00
28.00
40.00
28.00
Total unit cost (Rs.)
Markup – 25%
48.00
12.00
58.00
14.50
68.00
17.00

Selling price (Rs.) 60.00 72.50 85.00
47
.
Answer : (a)
Reason : Cash receipts = Sales – Increase in sundry debtors
= Rs.8,50,000 – Rs.19,500 = Rs.8,30,500
Cash payment = Cost of goods sold (70%) + Inventory increase + Variable selling and
administrative expenses + Fixed (other than depreciation) selling &
administrative expenses
= Rs.5,95,000 + Rs.25,800 + Rs.21,250 + Rs.30,000 = Rs.6,72,050
Surplus in cash = Rs.8,30,500 – Rs.6,72,050 = Rs.1,58,450.
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48
.
Answer : (b)
Reason :
Cash sales for September2004 (Rs.7,50,000 x 0.5) Rs.3,75,000
Cash flows from the credit sales in the month of July 2004
(Rs.6,50,000 x 0.5 x 0.25)
Rs.81,250
Cash flows from the credit sales in the month of August 2004
(Rs.7,00,000x 0.5 x 0.7)
Rs.2,45,000
Rs.7,01,250
Total commission payable to salesmen = Rs.7,01,250 x 4% = Rs.28,050
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49
.
Answer : (e)
Reason :
Particulars August September
Opening cash balance 50,000 52,500
Cash sales 15,000 20,000
Collection of credit sales 10,000 15,000
Cash inflows 75,000 87,500
Cash purchases 22,500 22,500
Payment to creditors 5,000 7,500
Salaries 10,000 10,000
Expenses 10,000 10,000
Interest (Rs.25,000 × 12% × 1/12) - 250
Cash outflows 47,500 50,250
Closing balance before borrowings 27,500 37,250
Borrowings 25,000 15,000
Surplus - -
Closing balance 52,500 52,250
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50
.
Answer : (c)
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Reason : If revised sale price 80%, the original sale price is 100. Therefore, revised budgeted sales at
original sale price =
Rs.2, 400
0.8
= Rs.3,000 lakh
Revised budgeted sales at original sale price = Rs.3,000 lakh
Since, revised budgeted sales at original sale price is Rs.80 then the original budgeted sales at original
sale price is Rs.100.
Therefore, original sales at original sale price =
Rs.3, 000lakh
0.8
= Rs.3,750 lakh







51
.
Answer : (b)
Reason :
Particulars Rs.
Direct materials 5,20,000
Direct labor 3,40,000
Manufacturing overheads 1,50,000
Selling and administrative overheads 90,000
Total variable cost 11,00,000
Per unit variable cost 275
Total cost of 4,400 units = Rs.275 x 4,400 units + Rs.50,000 + Rs.60,000
= Rs.12,10,000 + Rs.1,10,000 = Rs.13,20,000
Cost per unit = Rs.300.
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52
.
Answer : (a)
Reason : The production budget for August 2004 = 4,200 units x 1.2 = 5,040 units
The production cost budget for September 2004
= 1.2 x 4,500 units x (Rs.80 + Rs.20 + Rs.30 + Rs.5) + Rs.51,000
= Rs.7,29,000 + Rs.51,000 = Rs.7,80,000.
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53
.
Answer : (e)
Reason : The standard cost of materials for 10,800 units is Rs.2,70,000 (i.e. 10,800 × Rs.25). Thus, no
variance arose with respect to materials. Because labor for 12,000 units was budgeted at
Rs.1,44,000, the unit labor cost is Rs.12. Thus, the labor budget for 10,800 units is Rs.1,29,600
and total labor variance is Rs.400 (i.e. Rs.1,30,000 – Rs.1,29,600). Because the actual cost is
greater than the budgeted amount, Rs.400 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.400 unfavorable variance must be attributable to labor rate variance.
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54
.
Answer : (a)
Reason : Machine activity cost per hour =
Rs.2, 40, 000 Rs.2, 40, 000
Rs.5.07 per machine hour
6, 000 x 5 4, 340 x 4 47, 360
 

Setups cost per set up =
Rs.56, 000
Rs.1, 400
40

per set up
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Order handling cost per order =
Rs.52, 500
Rs.1, 500
35

per order
Particulars Product X (Rs.) Product Y (Rs.)
Machine activity
cost
1,52,027 87,973
Setups cost 30,800 25,200
Order handling cost 24,000 28,500
2,06,827 1,41,673








55
.
Answer : (c)
Reason :
Capacity 60% 70% 90%
Production (units) 6,000 7,000 9,000
(Rs.) (Rs.) (Rs.)
Material 80.00 81.60 84.00
Labor 20.00 20.00 20.00
Variable overheads
Factory 18.00 18.00 18.00
Administrative 10.00 10.00 10.00
128.00 129.60 132.00
Total variable cost 7,68,000 9,07,200 11,88,000
Fixed overheads
Factory 72,000 72,000 72,000
Administrative 60,000 60,000 60,000
9,00,000 10,39,200 13,20,000
Sale price per unit 200 196 190
Sales value 12,00,000 13,72,000 17,10,000
Profit 3,00,000 3,32,800 3,90,000
Profit per unit 50.00 47.54 43.33
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56
.
Answer : (a)
Reason : Material price variance = 5,400 kgs x Rs15– Rs.86,400
= Rs.81,000 – Rs.86,400 = Rs5,400(Adverse)
Material usage variance = Rs.15 (900 units x 5 kgs – 4,670 kgs)
= Rs.15 (4,500 kgs – 4,670 kgs) = Rs.2,550 (Adverse)
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57
.
Answer : (b)
Reason : Actual material consumption:
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Particulars A B
Stock as on June 01, 2004 120 80
Add: Purchases during the month of June 2004 3,000 2,500
3,120 2,580
Less: Stock as on June 30, 2004 50 30
Material consumed during the month of June 2004 3,070 2,550
Total material consumption = 3,070 + 2,550 = 5,620 kg.
Standard cost:
Quantity (kg.) Price (Rs.) Amount (Rs.)
3,000 8 24,000
2,000 10 20,000
5,000
500
4,500 44,000
Standard yield
=
Actualstandardoutput 90kg.
Actualinput = ×5,620kg.=5,058kg.
Standard input 100kg.
×
Material yield variance = Standard rate of output (Actual yield – Standard yield)
=
Rs.44,000
×(5,058kg.-5,000kg.)
4,500
= Rs.567 (Adverse)
58
.
Answer : (d)
Reason : Standard fixed overhead rate =
Budgeted cost Rs.1, 20, 000
Rs.10
Budgeted output 12, 000
· ·
Overheads incurred = Budgeted fixed production overhead cost + Expenditure variance
= Rs.1,20,000 + Rs.2,800 = Rs.1,22,800
Overheads absorbed = Actual overhead – Under absorption of overheads
= Rs.1,22,800 – Rs.10,500 = Rs.1,12,300
Actual number of units = Rs.1,12,300 ÷ Rs.10 = 11,230 units.
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59
.
Answer : (e)
Reason : Standard rate per unit =
Rs.85, 000
Rs.8.50
10, 000
·
Standard rate per hour =
Rs.85, 000
Rs.17
5, 000
·
Standard time for Budgeted production =
10, 000units
2units per hr
5, 000hrs
·
Standard time for actual production =
10, 400
5, 200hrs
2
·
Volume variance = Rs.17 (5,000 hrs – 5,200 hrs)
= Rs.17 x 200 hrs = Rs.3,400 (Favorable)
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60
.
Answer : (c)
Reason : Fixed overhead expenditure variance= Budget expenses ~ Actual expenses
= Rs.15 x 1,68,000 hr. ~ Rs.25,50,000
= Rs.25,20,000 ~ Rs.25,50,000 = Rs.30,000 (A)
Direct labor efficiency variance = Standard rate (Actual time ~ Standard time)
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= Rs.25 (1,59,000 ~ 40 hours x 4,000 units)
= Rs.25 (1,000 hrs) = Rs.25,000 (F).
61
.
Answer : (a)
Reason : Overhead expenditure variance = Rs.5,200 (A) ∼ Rs.3,800 (A)
= Rs.1,400 (A)
Actual overhead incurred = Budgeted Overhead ∼ Overhead expenditure
variance
= Rs.20,000 ∼ Rs.1,400 (A)
= Rs.21,400
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62
.
Answer : (c)
Reason : Budgeted rate = (Rs.6,50,000+Rs.4,20,000)÷2,00,000
=Rs.10,70,000÷2,00,000 = Rs.5.35
Overhead efficiency variance = Budgeted allowance at 2,20,000 hours ∼ Budgeted
allowance at1,80,000 hours
= Rs.5.35 (2,20,000-1,80,000)
= Rs.5.35 × 40,000 = 2,14,000 (A)



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63
.
Answer : (a)
Reason :
Completed stock: Units Degree of
completion
Overheads
From opening work-in-progress 300 40 % 120
Closing work-in-progress 480 20 % 96
Current production 3,500 100 % 3,500
Total 3,716
Budgeted rate per unit = Rs.180
No. of direct labor hours per unit = 4
Budgeted rate per hour = Rs.45
Standard hours for actual production = 3,716x 4 = 14,864 hours
Fixed overhead efficiency variance
= (Standard hours for actual production – Actual hours) x budgeted rate per hour
= (14,864 hours –14,800 hours ) x Rs.45 = Rs.2,880 (F)
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64
.
Answer : (c)
Reason : Actual hours = 40 (36 + 20 + 34) = 3,600 hrs
Total standard = 40 (40 + 30 + 20) = 3,600 hrs
Standard time for actual output
Skilled =
3, 400
40 40
3, 600
× ×
= 1,511 hrs
Semi-skilled =
3, 400
40 30
3, 600
× ×
= 1,133 hrs
Unskilled =
3, 400
40 20
3, 600
× ×
= 756 hrs
Efficiency variance:
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Skilled = Rs.20 (40 ×36 ∼ 1511) = Rs. 1.420 (F)
Semi-skilled = Rs.16 (40 × 20 ∼ 1133) = Rs.5,328 (F)
Unskilled = Rs.10 (40 ×34 ∼ 756) = Rs. 6,040 (A)
Rs708 (F)
65
.
Answer : (e)
Reason : Total quantity of actual sales = 2,700 + 1,300 + 2,200 = 6,200 kgs.
Sales Mix variance = Standard rate × (Actual quantity- Revised Standard quantity)
30 ×
2, 500
2, 700 6, 200
6, 000
] | `
− ×
]
. , ]
=
3,500 (F)
25 ×
1, 500
1, 300 6, 200
6, 000
] | `
− ×
]
. , ]
=
6,250 (A)
20 ×
2, 000
2, 200 6, 200
6, 000
] | `
− ×
]
. , ]
=
2,667 (F)
Total 83 (A)
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66
.
Answer : (d)
Reason : Actual cost
Standard material cost = Actual material cost + Favorable material price variance +Favorable
material usage variance
Standard wages = Actual wages paid + favorable labor efficiency variance – adverse labor rate
variance – adverse labor idle time variance
Particulars Per unit
Standard material cost (40,000 + 2,560 + 2,940)
Standard wages (87,300+2,250 – 2,130 – 300)
45,500
87,120
9.10
17.42
Total 1,32,6 26.52
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67
.
Answer : (a)
Reason : Target cost = Selling price at capacity – 25% profit margin
Price (Rs.) Demand (Units)
900 50,000
840 1,00,000
780 2,00,000
Target cost =
Rs.780 – 25% × Rs.780
= Rs.780 – (Rs.780 × 0.25) = Rs.585
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68
.
Answer : (b)
Reason : Residual income is the excess of the amount of the ROI over a targeted amount equal to an
imputed interest charge on invested capital.
Total investment = Rs.18,50,000 + Rs.7,50,000 = Rs.26,00,000
Imputed interest charge = 12% on Rs.26,00,000 = Rs. 3,12,000
Residual income = Rs. 1,80,000
Total profit = Rs. 4,92,000
Total costs = Revenue – Target profit = Rs.7,80,000 – Rs.4,92,000 = Rs.2,88,000.
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69
.
Answer : (b)
Reason : The budgeted increase
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Particulars June 2004
(Rs.)
Increase in sales
volume
Effect of change Rs.
Sales 60,000 69,000 69,000 ×102% = 70,380.00
Direct materials 18,500 21,275 21,275× 98% = 20,849.50
Direct labor 14,000 16,100 16,100× 98% = 15,778.00
Variable overheads 8,000 9,200 9,200× 98% = 9,016.00
Fixed overheads
*
4,500 4,500 4,500×98% = 4,410.00
Profit 15,000 20,326.50
Capital employed 1,20,000 1,20,000
Return on investment 12.5% 16.94%
*Return on investment in June 2004 is 12.5%. Hence profit is Rs.1,20,000 × 12.5% =
Rs.15,000
Hence fixed overheads is sales–variable expenses–profit = Rs.60,000–Rs.40,500 – Rs.15,000 =
Rs.4,500
% increase in return on investment =
16.94% 12.5%
12.5%

= 35.52%





70
.
Answer : (c)
Reason :
Closing finished goods 850 units
Add: Budgeted sales 5,000 units
Total requirement of sales 5,850 units
Less: Opening finished goods 675 units
Required production of finished goods 5,175 units
Raw material per unit x 4 kg
Material usage 20,700 kg
Add: Closing raw material 6,200 kg
26,900 kg
Less: Opening raw material 4,500 kg
Required purchases 22,400 kg
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71
.
Answer : (e)
Reason : To determine the correct number of handles purchased for July 2004, the projected output of
finished goods for July 2004 and August 2004must be calculated
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Projected sales of cabinets in July 2004 300
Add: Required closing finished cabinets (50% of 310) 155
455
Less: Opening finished cabinets 150
Total cabinet production for July 2004 305
Projected sales of cabinets in August 2004 310
Add: Required closing finished cabinets (50% of 320) 160
470
Less: Opening finished cabinets 155
Total cabinet production for August 2004 315
Number of Handles:
Handles for July 2004 (305 x 4) 1,220
Add: Opening stock for August 2004 (315 x 4 x 0.6) 756
(Closing stock for July)
1,976
Less: Opening inventory 800
Total handles to be purchased 1,176

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