ADVANCED MANAGEMENT ACCOUNTING (MCQs SET 28)

Q1: Moiz limited produces three products from a single raw material that is limited in supply. Product
for the period 7 are as follows:

Product-R Product-S Product-T

Maximum demand (units) 1000 2400 2800

Optimum planned production 720 --- 2800

Unit contribution Rs. 900 Rs. 960 Rs. 590

Raw material cost per unit (Rs. 100 per kg) Rs. 250 Rs. 300 Rs. 150

The planned production optimizes the use of the 6000 kg of raw material that is available for Moiz
Limited normal supplier at the price Rs. 100 per kg. However a new supplier has been found that is
prepared to supply a further 1000 kg of the material. What is the maximum price that Moiz limited
should be prepared to pay for the additional 1000 kg of the material?

a) Rs. 460,000.

b) Rs. 420,000.

c) Rs. 448,000.

d) Rs. 493,000.

Answer:

2800 x 150 = 420,000.

Q2: Jawad and Sons reported cost of sales of Rs. 150 million and an inventory turnover ratio of 2. The
Company is now adopting just in time inventory system. If the new system is able to reduce the
company’s inventory level and increase the company’s inventory turnover to 5, while maintaining the
same level of sales, how much cash will be freed up?

a) Rs. 40 million.

b) Rs. 45 million.

c) Rs. 50 million.

d) Rs. 30 million.

Answer:

Current average inventory = CGS/ Inventory T.O = 150 million/2 = Rs. 75 million.

New average inventory = CGS/ Inventory T.O = 150 million/5 = Rs. 30 million.

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Cash freed up= 75 – 30 = 45 million.

Q3: If the quantity discount is accepted this will have the following effects, except:

a) the annual ordering cost will increase.

b) the annual purchase price will increase.

c) the annual holding cost will decrease.

d) None of these.

EOQ generally minimizes the total inventory cost. However, EOQ may not be optimal when discounts
are factored into the calculation. The optimal order quantity when discounts are involved is either: ...
Any one of the minimum order quantities above EOQ that qualify for additional discount.

Q4: Beenish furniture limited (BFL) requires raw material “G” in one of its product. The annual demand
of raw material is 1500,000 units. The cost of raw material “G” is Rs. 225 per unit. Procurement costs for
each order are Rs. 3000 and the lead time is estimated to be 3 days. The carrying cost of the inventory is
Rs. 15 per unit and the stock out cost is Rs. 30 per unit. Assuming 250 working days per year the optimal
reorder level will be:

a) 750 units.

b) 6000 units.

c) 24000 units.

d) 18000 units.

Answer:

Reorder level = 1500,000/250 x 3.

Reorder level = 18000 units.

Q5: Williams & Sons last year reported cost of sales of $18 million and an inventory turnover ratio of
2. The company is now adopting a new inventory system. If the new system is able to reduce the
firm's inventory level and increase the firm's inventory turnover ratio to 5 while maintaining the same
level of sales and COGS, how much cash will be freed up?

a) Rs. 2 Million.

b) Rs. 6 Million.

c) Rs. 4 Million.

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d) Rs. 8 Million.

Answer:

Current average inventory = CGS/ Inventory T.O = 18 million/2 = Rs. 9 million.

New average inventory = CGS/ Inventory T.O = 18 million/6 = Rs. 3 million.

Cash freed up= 9 – 3 = 6 million.

Q6: Which of the following costs have no relationship with the level of output?

a) Fixed costs.

b) Variable costs.

c) Stepped fixed costs.

d) Semi-variable cost.

Q7: CVP analysis does not assume that:

a) the behavior of costs and revenues is not linear.

b) there is no uncertainty.

c) output is the only factor affecting costs.

d) total costs are divided into fixed and variable costs.

Q8: Identify the most appropriate feature that distinguishes throughput accounting from other costing
techniques.

a) Work in progress is valued at material cost only.

b) Costs are allocated to products when they are completed or sold.

c) Only labor costs is treated as variable cost.

d) a and b.

Q9: Responsibility centers are departments or organizational functions whose performance is the
direct responsibility of specific managers. One type of responsibility center is a revenue center, which
is responsible for:

a) investments and costs.

b) sales.

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c) sales and profits.

d) profits.

Q10: Yasir Limited (YL) manufactures a single product “M”, which requires 5 hours of machine time for
each unit. Machine time has been identified by YL as the bottleneck resource because of limited number
of machines available for manufacturing. Currently, the company has only 12 machines which are
operated for 12 hours per day and 5 days per week. The following information pertains to each unit of
product M:

Rs. Per Unit

Selling price 1950

Direct material costs 750

Labor costs 800

Factory overhead costs 300 .

The costs are based on weekly production and sales of 200 units. The throughput accounting ratio of
product M would be:

a) 0.285.

b) 1.0909.

c) 2.00.

d) 0.571

Answer:

Throughput accounting ratio (TPAR) = Return per factory hour/cost per factory hour.

Return per factory hour = Throughput per unit / Product's time taken for the limited resource.

Cost per factory hour = Total factory costs / total time available on bottleneck resource.

Throughput = Sale revenue from the product – Direct material costs.

Throughput per unit = 1950 – 750 = Rs. 1200.

Products time taken for limited resource = 5 machine hours.

Return per factory hour = 1200/5 = Rs. 240.

Cost per factory hour = 800 + 300 / 5 = Rs. 220.

TPAR = 240/220 = 1.0909

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Another method:

Throughput Accounting Ratio = Throughput / (Labour + overheads)

= 1200/ 800+300 = 1.0909.

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