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 <
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factors need not be considered?
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(a) Existence of competitive market (b) Sourcing constraint
(c) Movability constraint (d) Quantum of transfers
(e) Capacity level of selling division.
(1 mark)
2. The most fundamental responsibility center affected by the use of market-based transfer prices is <
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(a) Revenue center (b) Cost center (c) Profit center >
(d) Investment center (e) Production center.
(1 mark)
3. A budget manual, which enhances the operation of a budgeting system, is most likely to include <
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(a) Budgeted training policies of employees >
(b) Distribution instructions for budget schedules
(c) Budgeted hiring policies of employees
(d) Documentation of the accounting system
(e) Company policies regarding the authorization of transactions.
(1 mark)
4. Which of the following statements is false in respect of full cost pricing and contribution margin pricing? <
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(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 <
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year shows the following sales values:
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March 2005 Rs.1,20,000
April 2005 Rs.1,40,000
May 2005 Rs.1,10,000
June 2005 Rs.1,30,000
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: <
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Direct material Rs.10 >

Direct labor Rs.12

Production overheads Rs.20 (40% fixed)
Selling & administrative overheads Rs.20 (50% fixed)
Total costs Rs.62
Normal Production 1,000 units
The total costs for 1,250 units are
(a) Rs.77,500 (b) Rs.75,000 (c) Rs.73,000 (d) Rs.65,000 (e) Rs.55,000.
(1 mark)
7. The information contained in cost of goods manufactured budget most directly relates to <
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(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)
8. There are various budgets within the master budget. One of these budgets is the production budget. Which <
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of the following best describes the production budget ?
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(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)
9. Which of the following statements is false in relation to budgets? <
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(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)
10. The budgeting process that uses management by objectives and inputs from the individual managers is an <
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example of the application of
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(a) Flexible budgeting (b) Capital budgeting
(c) Responsibility accounting (d) Program budgeting (e) Cost-benefit accounting.
(1 mark)
11. A company is currently using the budget as a tool for planning. The management has decided to use the <
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budgets for control purposes also. To affect this change, the financial controller must
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(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)
12. XIL Ltd. manufactures a single product at the operated capacity of 40,000 units while the normal capacity <
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of the plant is 50,000 units per annum. The company has estimated 20% profit on sales realization and
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furnished the following budgeted information:
50,000 units 40,000 units
Particulars
(Rs.) (Rs.)
Fixed overheads 2,00,000 2,00,000
Variable overheads 3,00,000 2,40,000
Semi-variable overheads 3,00,000 2,60,000
Sales realization 18,00,000 14,40,000
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.26.63 (b) Rs.27.97 (c) Rs.25.40 (d) Rs.23.26 (e) Rs.30.59.
(2 marks)
13. Moti Ltd. pays commission to its salesmen in the month the company receives cash for sales, which is <
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equal to 4% of the cash inflows. The company has budgeted sales of Rs.3,15,000 for January 2005,
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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 <
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account for 10% of total sales and payments for credit sales have been received as follows:
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i. 40% of credit sales in the month of sales
ii. 30% of credit sales in the first month following the month of sales
iii. 25% of credit sales in the second month following the month of sales
iv. 5% of credit sales in the third month following the month of sales
The forecast for both cash and credit sales is as follows:
Month Sales (Rs.)
December 2004 1,00,000
January 2005 1,20,000
February 2005 1,35,000
March 2005 1,50,000
April 2005 1,70,000
May 2005 2,00,000
The estimated cash inflows of the company in the month of March
2005 will be
(a) Rs.1,05,450 (b) Rs.1,32,450 (c) Rs.1,36,950 (d) Rs.1,50,500 (e) Rs.1,56,500.
(2 marks)
15. Look Back Ltd. has furnished the following data for the month of December 2004: <
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Sales Rs.10,00,000 >
Gross profit margin 25%
Increase in accounts payable for inventories Rs.28,000
Decrease in stock Rs.52,000 The estimated cash disbursement
for the month is
(a) Rs.6,70,000 (b) Rs.7,22,000 (c) Rs.8,30,000 (d) Rs.6,98,000 (e) Rs.7,50,000.
(1 mark)
16. Which of the following budget challenges the existence of every budgetary unit at every budget period? <
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(a) Rolling budget (b) Participative budget (c) Zero based budget >
(d) Strategic budget (e) Short-range budget.
(1 mark)
17. Top-to-bottom budget is also known as <
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(a) Participative budget (b) Imposed budget >
(c) Zero-based budget (d) Manpower budget (e) Master budget.
(1 mark)
18. Acer Ltd. manufactures 5,000 units of Product PT at a cost of Rs.90 per unit. Presently, the company is <
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utilizing 50% of the total capacity. The information pertaining to cost per unit of the product is as follows:
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Material – Rs.50
Labor – Rs.15
Factory overheads – Rs.15 (40% fixed)
Administrative overheads – Rs.10 (50% fixed) 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 (b) Rs.6.63 and Rs.8.83 respectively
(c) Rs.8.83 and Rs.7.83 respectively (d) Rs.6.63 and Rs.10.00 respectively
(e) Rs.8.83 and Rs.6.63 respectively.
(2 marks)
19. Mittal Ltd. expected to sell 1,50,000 board games during the month of December 2004, and the company’s <
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master budget contained the following data related to the sales and production of these games:
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Particulars Rs.
Revenue 24,00,000
Cost of goods sold:
Direct materials 6,75,000
Direct labor 3,00,000
Variable overhead 4,50,000
Contribution 9,75,000
Fixed overhead 2,50,000
Fixed selling/administration 5,00,000
Operating income 2,25,000
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: <
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Standard material cost per unit: >

Material A - 2 kg at a rate of Rs.10 per kg = Rs.20

Material B - 3 kg at a rate of Rs.20 per kg = Rs.60
Materials issued:
Material A - 2,050 kg at a cost of Rs.43,050
Material B - 2,980 kg at a cost of Rs.56,620
The total material usage variance is
(a) Rs.900 (Adverse) (b) Rs.900 (Favorable)
(c) Rs.500 (Adverse) (d) Rs.400 (Favorable) (e) Rs.100 (Adverse).
(1 mark)
21. Which of the following is not a cause for material usage variance? <
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(a) Sub-standard materials (b) Pilferage of materials >
(c) Non-standard material mixture (d) Wastage due to inefficient mixture
(e) Purchasing in non-standard lots.
(1 mark)
22. Vasco Ltd. has furnished the following data pertaining to its product during the month of December 2004: <
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Particulars Budget Actual >

Fixed overhead Rs.2,400 Rs.2,500

Production units 12,000 units 13,000 units
Number of working days 25 days 28 days
Hours 6,000 6,600
The fixed overhead volume
variance is
(a) Rs.200 (Favorable) (b) Rs.200 (Adverse)
(c) Rs.100 (Favorable) (d) Rs.100 (Adverse) (e) NIL.
(1 mark)
23. Greatsky has furnished the following information <
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Particulars Budget Actual >

Output in units 12,000 12,500

Labor hours 6,000 6,500
Variable overhead costs Rs.12,000 Rs.12,800
The variable overhead cost
variance is
(a) Rs.800 (Adverse) (b) Rs.500 (Adverse) (c) Rs.500 (Favorable)
(d) Rs.300 (Favorable) (e) Rs.300 (Adverse).
(1 mark)
24. Which of the following statements is true in respect of normal costing? <
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(a) It involves tracing direct costs to output and tracing indirect costs to the output >
(b) It involves tracing direct costs to output and allocating indirect costs to the output
(c) It involves allocating direct costs to output and tracing indirect costs to the output
(d) It involves allocating direct costs to output and allocating indirect costs to the output
(e) It involves only allocating direct costs to output.
(1 mark)
25. Hyderabad Processors Ltd. produces a commodity by blending two raw materials – A and B. The following <
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are the details regarding the raw materials:
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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:
Material Stock as on Stock as on Purchases during
December 01, 2004 December 31, December 2004
(Kg.) 2004
(Kg.) (Rs.)
(Kg.)
A 70 10 1,600 6,800
B 80 100 2,400 6,000 The
material yield variance of the company is
(a) Rs.1,200 (adverse) (b) Rs. 136 (adverse)
(c) Rs. 119 (adverse) (d) Rs. 136 (favorable) (e) Rs. 119 (favorable).
(2 marks)
26. Deekay Ltd. uses a standard absorption costing system. The following data have been extracted from its <
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budget for the month of December 2004:
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Fixed production overhead cost Rs.48,000
Production 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 (b) 600 units more (c) 200 units more
(d) 600 units less (e) 1,000 units less.
(2 marks)
27. Which of the following information is required for the lower management level? <
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(a) Control information (b) Operational information >
(c) Formal information (d) Informal information (e) Strategic information.
(1 mark)
28. Consider the following data pertaining to overhead costs of a company for the month of December 2004: <
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i. Overhead cost variance – Rs.1,400 (A) >
ii. Overhead volume variance – Rs.1,000 (A)
iii. Budgeted hours for the month – 1,200
iv. Budgeted overheads for the month – Rs.6,000
v. Actual rate of recovery of overheads – Rs.8 per hour The actual overhead incurred by
the company is
(a) Rs.2,400 (b) Rs.8,400 (c) Rs.7,000 (d) Rs.6,400 (e) Rs.6,800.
(1 mark)
29. Titri Ltd. produces a single product – ‘k’. The following budgeted data are available for the month of <
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December 2004:
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Production (units) 15,000 25,000
Flexible budget data: (Rs.) (Rs.)
Material 30,000 50,000
Labor 45,000 75,000
Factory overhead:
Indirect material 15,000 25,000
Indirect labor 30,000 50,000
Supervision 26,250 33,750
Heat, Light and Power 15,250 22,750
Depreciation 63,000 63,000
Insurance and Taxes 8,000 8,000
Total Manufacturing cost 2,32,500 3,27,500
Other information for the month of
December 2004:
i. Standard time : 0.5 direct labor hour per unit of product
ii. Normal capacity : 10,000 direct labor hours
iii. Units produced : 22,000 units
iv. Actual labor hours : 10,700 hours
v. Factory overheads incurred : Rs.1,91,000
Standard factory overhead rates are based on direct labor hours.
The overhead efficiency variance and overhead capacity variance are
(a) Rs.2,700 (F) and Rs.4,700 (A) respectively
(b) Rs.2,700 (F) and Rs.9,000 (F) respectively
(c) Rs.4,700 (A) and Rs.4,700 (F) respectively
(d) Rs.2,700 (A) and Rs.9,000 (A) respectively
(e) 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 <
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hours of direct labor is required to produce one kg. of finished product and the fixed overheads, which are
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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) (b) Rs.18,000 (Favorable)
(c) Rs.18,000 (Adverse) (d) Rs. 7,200 (Favorable) (e) Rs. 7,200 (Adverse).
(2 marks)
31. Sigma Ltd. has furnished the following standard labor component and the actual labor component for a job <
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in a week:
>
Skilled Semi-skilled Unskilled
Particulars
workers workers workers
i. Standard number of workers in the gang 32 12 6
ii. Standard wage rate per hour (Rs.) 12 10 8
iii. Actual number of workers
28 18 4
employed in the gang during the week
iv. Actual wage rate per hour (Rs.) 14 8 6
During the 40 hours working week, the gang produced 1,800 standard labor hours of work.
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)
32. Believing that its traditional cost system may be providing misleading information, Munna Ltd.is <
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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 Cost driver Budgeted activity Budgeted cost
(Rs.)
Material handling No. of parts handled 60,00,000 7,20,000
Setup costs No. of setups 750 3,15,000
Machine costs Machine hours 30,000 5,40,000
Quality control No. of batches 500 2,25,000
Total overhead cost 18,00,000
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 Rs.4.40
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 Rs.5.15
Sales and production data:

Expected production and sales 20,000 units

Batch size 5,000 units
Setups 2 per batch
Total parts per finished unit 5 parts
Machine hours required 80 machine hours per batch
If the organization
employs ABC system, the cost per unit of the product for the coming year will be
(a) Rs.6.00 (b) Rs.6.08 (c) Rs.6.18 (d) Rs.6.30 (e) Rs.6.41.
(3 marks)
33. Sharada Ltd. services washing machines and clothes dryers. It charges customers for the spare materials <
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with markup on cost. The company has five employees, each earning Rs.6,000 per year and spending 1,000
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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: <
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Particulars Rs. in thousands >

Average plant and machinery 1,815

Cost of goods sold 3,660
Net sales 4,480
General and administrative expenses 170
Average working capital 785
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% (b) 31.54% (c) 25.00% (d) 23.25% (e) 22.00%.
(1 mark)
35. Consider the following particulars pertaining to products A and B of a company: <
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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? <
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(a) It helps to focus management's attention on employees meeting standards and benefiting the company >
(b) It helps to focus attention on the large unfavorable variances first
(c) It helps to focus attention on the largest problem areas first
(d) It is the only management tool that is really needed to be a successful company
(e) It helps to focus attention on the large favorable variances first.
(1 mark)
37. Which of the following is not true about a standard costing system? <
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(a) It is based on a cost control concept >
(b) It assumes stability in the current manufacturing process
(c) The goal is to meet cost performance standards
(d) It assumes production workers have the best knowledge to reduce costs
(e) It motivates employees to try to reach target established.
(1 mark)
38. An example of a non-value-added activity is <
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(a) Machine operations (b) Assembly operations >
(c) Product inspection operations (d) Delivering products to customers
(e) Packaging.
(1 mark)
39. The value chain is a sequence of activities that should contribute more to the ultimate value of the product <
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than to its cost. The first cycle of the value chain is
>
(a) Research, Development, and Engineering (b) Manufacturing Cycle
(c) Post-Sale Service and Disposal Cycle (d) Benchmarking
(e) Activity Based Costing.
(1 mark)
40. While using target costing, which part of a product's life cycle is extremely important in reducing costs? <
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(a) Customer service (b) Production (c) Design and engineering >
(d) Planning (e) Quality checking.
(1 mark)
41. The master budget variance is the difference between <
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(a) Flexible budget and master budget >
(b) Actual result and flexible budget
(c) Rolling budget and actual result
(d) Total costs at actual prices and actual inputs and master budget
(e) Flexible Budget and static budget.
(1 mark)
42.Which of the following information is/are required to the operating management? <
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I. Licensed capacity II. Installed capacity >
III. Actual production IV.Rejection of products

(a) Only (I) above (b) Both (II) and (III) above
(c) Both (I) and (III) above (d) Both (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
43. The data, equipment and computer programs that are used to develop information for managerial use is <
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known as
>
(a) Management by exception (b) Management by objective
(c) Management control (d) Management information system
(e) Value chain analysis.
(1 mark)
44. Which of the following is/are the characteristic(s) of a corporate management? <
Answer
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 (b) Only (II) above (c) Only (III) above
(d) Only (IV) above (e) Both (III) and (IV) above.
(1 mark)
45. Which of the following is not an assumption of McGregor’s Theory Y? <
Answer
(a) Man will exercise self-direction and self-control in the service of objectives to which he is committed >
(b) The average human being learns, under proper conditions, not only to accept but to seek responsibility
(c) The average human being does not inherently dislike work
(d) Commitment to objectives is a function of the rewards associated with their achievements
(e) 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)
46. Which of the following variances is of least significance from a behavioral control perspective? <
Answer
(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 <
Answer
I. Relevant and irrelevant costs >
II. Past and future costs
III. Fixed and variable costs
IV. Manufacturing and non-manufacturing costs

(a) Only (I) above (b) Only (II) above (c) Only (III) above
(d) Only (IV) above (e) Both (I) and (III) above.
(1 mark)
48. The most common measure of performance of investment center is <
Answer
(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 <
Answer
product and the costs will be used as per the required profits, then such pricing strategy is called as
>
(a) Predatory pricing (b) Discriminatory pricing
(c) Target pricing (d) Full cost pricing (e) Back flush pricing.
(1 mark)
50. Which of the following statements about activity-based costing (ABC) is false? <
Answer
(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)
51. An example of a profit center is the <
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(a) Painting department (b) Sales department >
(c) Company-owned restaurant in a fast-food chain (d) Reservation department
(e) Maintenance department.
(1 mark)
52. In an imperfect market, the pricing strategy to maximize volume is <
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(a) Full cost pricing (b) Return on investment based pricing >
(c) Back flush pricing (d) Any price above marginal cost
(e) Skimming price.
(1 mark)
53. Which of the following statements is true? <
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(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 <
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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 The actual man 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 % (e) 83.11%.
(1 mark)
55. NK Ltd. manufactures two products - N and K, using the same equipment and similar processes. The <
Answer
following are the production data for the month ending December 31, 2004:
>
Particulars N K
Production (units) 20,000 7,500
Direct labor hours per unit 2 4
Machine hours per unit 1.5 2
Number of set-ups in the month 40 160
Number of orders handled in the month 30 120 Total production overheads
recovered for the month has been analyzed as follows:

Particulars Rs.
Relating to machine activity 4,50,000
Relating to production run set-ups 40,000
Relating to handling of orders 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 (b) Rs.16.30 and Rs.29.00 respectively
(c) Rs.14.50 and Rs.27.00 respectively (d) Rs.16.50 and Rs.33.87 respectively
(e) Rs.16.50 and Rs.29.00 respectively.
(2 marks)
56. The budget manager of Dhananjay Ltd. has estimated the following costs for Product A for the accounting <
Answer
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: <
Answer
Particulars Budget Actual >

Variable overhead cost Rs.4,000 Rs.3,900

Labor hours - 3,500 hours
Units produced 16,000 units 13,400 units If the variable overhead efficiency
variance is Rs.150 (Adverse), the budgeted labor hours are
(a) 3,000 (b) 3,700 (c) 4,000 (d) 4,500 (e) 5,100.
(2 marks)
58. Barahnagar Foundry Ltd. has furnished the following data for the month of December 2004: <
Answer
Particulars Budget Actual >

Variable overhead cost Rs.5,000 Rs.4,900

Labor hours 2,500 2,000 The budgeted production units are 12,500
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)
59. Girija Ltd. has furnished the following data regarding production of a machine part for the month of <
Answer
December 2004:
>
Particulars Rs.
Standard material cost per unit:
Material Alpha 3 pieces@Rs.40.00 120.00
Units completed 2,000Material 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) (b) Rs.15,500 (favorable)
(c) Rs.20,000 (favorable) (d) Rs.20,000 (adverse) (e) Rs.15,500 (adverse).
(1 mark)
60. PQ Ltd. manufactures product A which requires two raw materials – P and Q. One unit of finished product <
Answer
requires 20 kg of raw material. The standard mix is as follows:
>

Material P 20% 4kg. at a cost of Rs.4.00

Material Q 80% 16kg.

During a period, one unit
of the product was produced at the following costs:
Material P 16 kg. at a cost of Rs.16
Material Q 8 kg. at a cost of Rs.8
The material mix variance was Rs.5.60
(adverse). The standard price per unit of material Q was
(a) Re.0.50 (b) Rs.1.00 (c) Rs.1.25 (d) Rs.1.50 (e) Rs.1.70.
(2 marks)
61. Consider the following information relating to production of a company: <
Answer
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 (b) Rs. 1,760 favorable
(c) Rs. 2,320 adverse (d) Rs. 1,760 adverse (e) Rs. 2,120 favorable.
(2 marks)
62. MNC Ltd. has furnished the following data relating to its product for the year <
Answer
2004-05:
>
Annual production (units) 1,875
Material cost (Rs.) 1,35,000
Other variable costs (Rs.) 2,70,000
Fixed cost (Rs.) 90,000
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)
63. Consider the following data pertaining to an integrated circuit manufactured by Minilectronics Ltd.: <
Answer
Variable cost per unit (Rs.) 11.00 >

Fixed cost (Rs.) 90,000

Production units 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)
64. ABC Ltd. currently operates at 50% capacity level. The normal capacity is 1,20,000 units. The variable cost <
Answer
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 <
Answer
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 (b) Rs.50,00,000 (c) Rs.62,50,000
(d) Rs.67,50,000 (e) Rs.96,50,000.
(1 mark)
66. Which of the following statements is/are true? <
Answer
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 (b) Only (II) above

(c) Only (III) above (d) Both (I) and (II) above
(e) All of (I), (II) and (III) above.
(1 mark)
67. The budgeted and actual sales of Baidik Pharma Ltd. are as under: <
Answer
Budget Actual >
Product
Quantity (kg.) Price (Rs.) Quantity (kg.) Price (Rs.)
P 10,000 20 11,000 23.00
Q 6,000 25 5,000 26.20
R 8,000 30 8,600 29.10 The sales mix variance is
(a) Rs.1,750 (A) (b) Rs.3,250 (F) (c) Rs.3,750 (A) (d) Rs.1,750 (F) (e) Rs.3,250 (A).
(1 mark)
68. The flexible budget for the month of January 2005 was for 9,000 units with direct material at Rs.15 per unit. <
Answer
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) Favorable material usage variance of Rs.7,500
(b) Unfavorable material price variance of Rs.5,000
(c) Favorable direct labor efficiency variance of Rs.1,275
(d) Unfavorable direct labor efficiency variance of Rs.1,275
(e) 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 <
Answer
automatic iron:
>
Particulars Per unit cost (Rs.)
Direct materials 60
Direct labor 40
Variable manufacturing overhead 20
Fixed manufacturing overhead (Rs.1,50,000) 15
Selling expenses (20% fixed) 15
Administrative expenses (100% fixed) 5
Distribution expenses (40% fixed) 5
Total 160
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 <
Answer
December 2004:
>
• Production quantity • 2,40,000 units
• Production costs: •
• Material • 3,36,000 kg at Rs.4.10 per kg
• Direct labor • 2,16,000 hours at Rs.4.50 per hour
• Variable overheads • Rs. 4,75,200
• Fixed overheads • Rs.15,21,600
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 • 3,13,060 kg at Rs.12,45,980
• Direct labor • 1,94,920 hours at Rs.8,86,886
• Variable • Rs.4,33,700
overheads
• Fixed overheads • 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: <
Answer
Output (units) 6,500 >
Wages paid for 16,250 hours Rs. 48,750
Material 4,000 kg Rs. 34,000
Variances:
Variances Rs.
Labor rate 1,875 (A)
Labor efficiency 1,275 (F)
Labor idle time 700 (A)
Material price 1,850 (F)
Material usage 1,200 (F) The standard prime cost per unit is
(a) Rs. 13.00 (b) Rs. 12.73 (c) Rs. 7.30 (d) Rs. 7.50 (e) Rs. 5.70.
(2 marks)

72. The costs incurred to ensure that materials, products and services meet quality standards are known as <
Answer
(a) Quality costs (b) Prevention costs >
(c) Appraisal 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 <
Answer
eyes of the customers is popularly known as
>
(a) Quality control (b) Cost control
(c) Customer orientation (d) Self management (e) Total quality management.
(1 mark)

74. Consider the following details pertaining to Yamha Ltd. for the month of December 2004: <
Answer
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)
 Suggested Answers
Management Accounting II (152) – January 2005
1. Answer : (c) < TOP >

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) < TOP >

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) < TOP >

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) < TOP >

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) < TOP >

Reason : The correct answer is (d).

Particulars Rs.
Cash sales Rs.1,10,000 × .4 44,000
Credit sales realized:
April Rs.1,40,000 × .6 × .5 42,000
March Rs.1,20,000 × .6 × .5 36,000
Sales receipts 1,22,000
6. Answer : (c) < TOP >

Reason :Variance cost per unit = Rs.10 + Rs.12 + Rs.12 + Rs.10 = Rs.44
Fixed cost = Rs.8 × 1,000 units + Rs.10 × 1,000 units
= Rs.8,000 + Rs.10,000
= Rs.18,000
Cost of 1,250 units = 1,250 units × Rs.44 + Rs.18,000
= Rs.55,000 + Rs.18,000
= Rs.73,000

7. Answer : (b) < TOP >

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.

8. Answer : (b) < TOP >

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.

9. Answer : (c) < TOP >

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.

10. Answer : (c) < TOP >

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.

11. Answer : (e) < TOP >

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.

12. Answer : (a) < TOP >

Reason : Computation of prime cost

Rs.
Sales (40,000 units) 14,40,000
Less: Profit margin – 20% 2,88,000
Cost of sales – (80% of Rs.14,40,000) 11,52,000
Less: Variable overheads – Rs.2,40,000
Semi-variable overheads – Rs.2,60,000
Fixed overheads – Rs.2,00,000 7,00,000
Prime cost 4,52,000
Semi-variable overheads:
Change in cos t Rs.3,00,000-Rs.2,60,000
Change in units 50,000 units-40,000 units
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):
40,000 45,000
Differential cost for
Element of cost units units
5000 units (Rs.)
(Rs.) (Rs.)
Prime cost 4,52,000 5,08,500 56,500
Variable overhead 2,40,000 2,70,000 30,000
Semi variable overhead 2,60,000 2,80,000 20,000
Fixed overhead 2,00,000 2,00,000 –
11,52,000 12,58,500 1,06,500
Cost per unit of new order =
Rs.1, 06, 500
5, 000
= 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) < TOP >

Reason :
 Cash sales for March 2005(Rs.4,85,000 x 0.5) Rs.2,42,500
Cash flows for the credit sales in the month of January 2005
Rs.39,375
(Rs.3,15,000 x 0.5 x 0.25)
Cash flows for the credit sales in the month of February 2005
Rs.1,48,750
(Rs.4,25,000x 0.5 x 0.7)
Rs.4,30,625
Total commission payable to salesmen = Rs.4,30,625 x 4% = Rs.17,225
14. Answer : (c) < TOP >

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
Credit sales in February 2005 = Rs.1,35,000 × 90% × 30% = Rs. 36,450
Credit sales in January 2005 = Rs.1,20,000 × 90% × 25% = Rs. 27,000
Credit sales in December 2004 = Rs.1,00,000 × 90% × 5% = Rs. 4,500
Rs.1,36,950
15. Answer : (a) < TOP >

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.
16. Answer : (c) < TOP >

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.
17. Answer : (b) < TOP >

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.
18. Answer : (e) < TOP >

Reason :
 Capacity 50% 60% 80%
Production (units) 5,000 6,000 8,000
(Rs.) (Rs.) (Rs.)
Material 50 51 52.50
Labor 15 15 15.00
Variable overheads
Factory 9 9 9.00
Administrative 5 5 5.00
79 80 81.50
Total variable cost 3,95,00 4,80,00 6,52,000
0 0
Fixed overheads
Factory 30,000 30,000 30,000
Administrative 25,000 25,000 25,000
4,50,00 5,35,00 7,07,000
0 0
Sale price per unit 100 98 95
Sales value 5,00,00 5,88,00 7,60,000
0 0
Profit 50,000 53,000 53,000
Profit per unit 10.00 8.83 6.63
19. Answer : (c) < TOP >

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).
20. Answer : (e) < TOP >

Reason :
Material usage variance = Standard rate (Actual quantity ~ Standard quantity)
Material A = Rs.10 (2,050 kg ~ 1,000 units × 2kg) = Rs.10 × 50 kg =
Rs.500 (Adverse)
Material B = Rs.20 (2,980 kg ~ 1,000 units × 3 kg) = Rs.20 × 20 kg
= Rs.400
(Favorable)
Material usage variance Rs.100 (Adverse)
21. Answer : (e) < TOP >

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.
< TOP >
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
= Rs.2,400 ~
= Rs.2,400 ~ Rs.2,600
 = Rs.200 (favorable)
Other options (b), (c), (d) and (e) are not correct.
< TOP >
23. Answer : (e)

Budgeted variable costs

Budgeted units
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) < TOP >

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

25. Answer : (b) < TOP >

Actual material consumption:

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

Standard cost:
 Quantity (kg.) Price (Rs.) Amount (Rs.)
A 1,600 4 6,400
B 2,400 3 7,200
4,000
Loss: 600
Output 3,400 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)
26. Answer : (b) < TOP >

Budgeted cost Rs.48, 000

  Rs.10
Budgeted output 4, 800
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) < TOP >

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.
28. Answer : (d) < TOP >

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.

29. Answer : (b) < TOP >

Reason :
 Material – Rs.2.00
Labor – Rs.3.00
* Variable overhead Rs.4.50
** Fixed overhead Rs.4.50
Cost per unit Rs.14.00
* 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) < TOP >

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

Reason : Actual hours = 40 (28 + 18 + 4) = 2,000 hrs

Standard hours= 40 (32 + 12 + 6) = 2,000 hrs

Standard time for actual output

1, 800
 40  32
2, 000
Skilled = = 1,152 hrs
 1, 800
 40 12
2, 000
Semi-skilled = = 432 hrs
1, 800
 40  6
2, 000
Unskilled = = 216 hrs
Efficiency variance:
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) < TOP >

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) < TOP >

Reason : Total labor cost 5 x Rs. 6,000 = Rs. 30,000

Cost of parts = Rs. 45,000
Total variable cost Rs.75,000
Target profit = Rs. 20,000
Fixed cost = Rs. 25,000
= Rs. 45,000
Mark up % = Rs. 45,000 ÷Rs. 75,000 = 60%
Mark up on parts = 60% of Rs. 45,000 = Rs. 27,000
34. Answer : (c) < TOP >

Reason : Profit = Rs.4,480 – Rs.3,660 – Rs.170 = Rs.650

Investment = Rs.1,815 + Rs.785 = Rs.2,600
Rs.650
 25%
Rs.2, 600
ROI =
< TOP >
35. Answer : (c)
Reason :
Particulars Rs.

Fixed cost (Rs. Rs.1,15,000 + Rs.1,10,000) 2,25,000

Add: expected return (Rs.7,60,000 + Rs.5,00,000) ×25% 3,15,000
Contribution (Expected) 5,40,000
Total labor hours:
Product A: (3× 4,000 units) 12,000
Product B: (4× 6,000 units) 24,000
Rs.5,40,000
Total labor hours 36,000 36,000 hours
Contribution per labor hour = = Rs.15 per labor hour.
 Calculation of selling price:
Particulars Rs.

Variable cost other than labor (Rs.1,60,000 / 4,000 units) 40

Direct labor (Rs.6×3 hours) 18
Contribution (Rs.15 ×3) 45
Selling price 103
36. Answer : (b) < TOP >

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.
37. Answer : (d) < TOP >

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.
38. Answer : (c) < TOP >

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.
39. Answer :(a) < TOP >

Reason : Value Chain analysis starts with customers as the ultimate aim. The fist stage of Value Chain is thus
research, development and engineering.
40. Answer :(c) < TOP >

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.
41. Answer : (d) < TOP >

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.
42. Answer : (e) < TOP >

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
 production, mentioned in (I), (II), (III) and (IV) are important to the operating management.

43. Answer : (d) < TOP >

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) < TOP >

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.
45. Answer : (e) < TOP >

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.
46. Answer : (e) < TOP >

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.
47. Answer : (e) < TOP >

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.
48. Answer : (c) < TOP >

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.
49. Answer : (c) < TOP >
 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) < TOP >

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.
51. Answer : (c) < TOP >

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.
52. Answer : (d) < TOP >

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.
53. Answer : (c) < TOP >

Reason : A standard costing system allows for the costs to be computed at the beginning of the period.
54. Answer : (a) < TOP >

Reason :
Standard hours for actual production

Jaya - 1,600 units × 1 hour = 1,600 hours

Sasi - 250 units × 6 hours 1,500 hours
Total 3,100 hours
Efficiency ratio =
Standard hours for actual production
×100
Actual hours worked

3,100 hours
×100
3, 500 hours
= = 88.57%.
55. Answer : (a) < TOP >

Reason :
Activity Based costing (ABC)
Machine hours (MH)
Product N (20,000 units × 1.5 hours) 30,000 hours
Product K (7,500 units × 2 hour) 15,000 hours
45,000 hours
Using ABC, the overhead costs are absorbed
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
 Overhead costs:

Product N Product K
Particulars
Rs. Rs.
Machine-driven cost:
3,00,000 1,50,000
(30,000 hours × Rs.10) (15,000 hours × Rs.10)
Set-up costs:
8,000 32,000
(40 × Rs.200) (160 × Rs.200)
Order-handling costs:
18,000 72,000
(30 × Rs.600) (120 × Rs.600)
3,26,000 2,54,000
Units produced 20,000 7,500
Overhead cost per unit Rs.16.30 Rs.33.87

56. Answer : (d) < TOP >

Reason :
Budget for the year 2005-06
Production volume – 55,000 units
Variable cost Fixed Total
Particulars Per unit Total costs Costs
(Rs.) (Rs.) (Rs.) (Rs.)

Direct materials 12 6,60,000 – 6,60,000

Direct labor (Rs.8 × 1.5 hours) 12 6,60,000 – 6,60,000

Indirect materials 3 1,65,000 – 1,65,000

Indirect labor 5 2,75,000 – 2,75,000
Inspection 2 1,10,000 50,000 1,60,000
Maintenance 3 1,65,000 40,000 2,05,000
Supervision – – 1,44,000 1,44,000
Depreciation on plant & machinery – – 80,000 80,000
Administrative expenses – – 60,000 60,000
Selling & distribution expenses 3 1,65,000 50,000 2,15,000
Total cost 40 22,00,000 4,24,000 26,24,000
Per unit cost – 40 7.71 47.71

Workings:
Segregation of semi-variable cost into fixed and variable components.
 Inspection:
Rs.1,80,000 − Rs.1,30,000 Rs.50,000
65,000 units − 40,000 units 25,000 units
Variable cost = = = 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) < TOP >

Reason:
Let budgeted labor hours be X.
Standard rate per hour = Budgeted variable overhead cost / Budgeted labor hours = 4,000 / X ……………
…….(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) < TOP >

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)
 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.
59. Answer: (c) < TOP >
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)
60. < TOP >
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

61. Answer : (a) < TOP >

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) = Rs. 10,000
Std. hours allowed for expected output ( 3,840 x Rs. 2) = Rs. 7,680
Labour yield variance Rs. 2,320 (F)

62. Answer : (c) < TOP >

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.
63. Answer : (e) < TOP >

Reason : Total sales = Rs.20 x 25,000 units =Rs.5,00,000

 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) < TOP >

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.
65. Answer : (c) < TOP >

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
66. Answer : (a) < TOP >

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).

67. Answer : (a) < TOP >

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)

68. Answer : (e) < TOP >

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.
69. Answer : (c) < TOP >

Reason :
 Particulars Rs.
Variable cost:
Direct materials 60
Direct labor 40
Manufacturing overheads 20
Selling expenses 12
Distribution expenses 3
Total variable cost 135
Fixed cost:
Manufacturing overheads 1,50,000
Selling expenses 30,000
Administrative expenses 50,000
Distribution expenses 20,000
2,50,000
Total cost of 8,000 units = 8,000 units × Rs.135
+ Rs.2,50,000
= 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) < TOP >

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) < TOP >

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 Total Per unit
Standard material cost (34,000 + 1,850 + 1,200) 37,05 5.70
Standard wages (48,750+1,275 – 1,875 – 700) 0 7.30
47,45
0
Total 84,50 13.00
0
72. Answer : (c) < TOP >

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.
73. Answer : (e) < TOP >

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.
74. Answer : (b) < TOP >

Reason :
The budgeted increase
December Increase
Effect of
Particulars 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 in
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
24.02% −12.5%
12.5%
% increase in return on investment = = 92.16%
< TOP OF THE DOCUMENT >