Management Accounting I 0105

Question Paper
Management Accounting I (151) – January 2005

• Answer all questions.
• Marks are indicated against each question.
1. A form of cost not measured by either Financial Accounting System or Management Accounting System is < Answer >
known as
(a) Product Cost (b) Period Cost (c) Opportunity Cost
(d) Indirect Cost (e) Direct cost.
(1 mark)
2. Which of the following statements is true? < Answer >
(a) Management accounting is mandatory for business organizations because it should be maintained as
per the various legal statutes
(b) The application of management accounting cannot be extended beyond the traditional accounting
system
(c) Management accounting focuses more on a company as a whole and less on the parts or segments of a
company
(d) Management accounting statements are prepared in accordance with the Generally Accepted
Accounting Principles
(e) Management accounting refers to the reports prepared to fulfill the needs of the management.
(1 mark)
3. Which of the following is least likely to be an objective of a cost accounting system? < Answer >
(a) Product pricing (b) Product mix determination

(c) Department efficiency (d) Inventory valuation
(e) Sales commission determination.
(1 mark)
4. The costs having clear relationship to output are known as < Answer >
(a) Opportunity costs (b) Engineered costs

(c) Manufacturing costs (d) Overhead costs (e) Budgeted costs.
(1 mark)
5. The cost of goods manufactured, under a periodic cost accumulation system, is equal to the < Answer >
(a) Cost of goods sold less beginning work-in-process

(b) Cost of goods put into production plus beginning work-in-process less ending work-in-process
(c) Cost of goods put into production plus ending work-in-process less beginning work-in-process
(d) Cost of goods available for sale plus beginning finished goods less ending finished goods
(e) Cost of goods available for sale plus ending finished goods less beginning finished goods.
(1 mark)
6. Which of the following is true? < Answer >
(a) Decremental cost means the cost of an additional unit

(b) Standard cost tells us what the actual cost is for the product
(c) Period costs are not assigned to products
(d) Cost center and cost unit are the same
(e) Cost of production is equal to prime cost plus works cost.
(1 mark)
7. Which of the following items is not considered in cost accounting? < Answer >
(a) Direct materials (b) Holiday with pay (c) Royalty

(d) Hire of cranes on job (e) Income tax.
(1 mark)
8. A manager of a company wants to control and reduce, if possible, the company's production costs. He must < Answer >
determine how the production costs are related to and affected by the various business activities. The
manager needs to understand the
(a) Cost behaviors (b) Relevant ranges (c) Fixed costs
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(d) Variable costs (e) Total costs.
(1 mark)
9. The average method of valuation of inventory in process costing is suitable, if < Answer >
(a) Prices are increasing

(b) Prices of inventory fluctuate from period to period
(c) Abnormal loss is incurred at the beginning of the process
(d) Material is continually introduced
(e) Material is introduced at the beginning of the process.
(1 mark)
10. The following statements are true except < Answer >
(a) Managers of all companies analyze costs to control material, labor and overhead
(b) Managers of all companies analyze cost to properly value inventory
(c) Managers of all companies need to improve quality
(d) Managers of all companies need to improve productivity
(e) Managers of all companies need to improve efficiency.
(1 mark)
11. ABC Company’s budgeted overhead amounts to Rs.3,00,000 based on an output of 200 units of A, 300 < Answer >
units of B, and 500 units of C. Direct labor costs of A, B, and C per unit amount to Rs.75, Rs.50, and Rs.40
respectively. Overhead is applied based on budgeted overhead rates using labor cost as cost driver. If actual
overhead amounts to Rs.3,19,000 for the production of 300, 350, and 400 units of A, B and C respectively,
the under or over applied overhead amounts to
(a) Rs.19,000 underapplied (b) Rs.19,000 overapplied (c) Rs.17,000 underapplied
(d) Rs.17,000 overapplied (e) Rs.14,000 under applied.
(1 mark)
12. Which of the following is an indirect labor? < Answer >
(a) A stores assistant in a factory store

(b) An audit clerk in a firm of auditors
(c) An assembly worker in a company manufacturing televisions
(d) A mason of a construction company
(e) A technician of a machine tool shop.
(1 mark)
13. Which of the following is/are true? < Answer >
I. A cost unit is a unit of output in the production of which costs are incurred
II. A cost center is the smallest segment of activity or area of responsibility for which costs are
accumulated
III. Typically departments are cost centers and there may be many departments in a cost center.
(a) Only (I) above (b) Only (II) above

(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
(1 mark)
14. The classification of cost as either direct or indirect depends upon < Answer >
(a) The cost object to which the cost is being related

(b) The timing of the cash outlay for the cost
(c) The behavior of the cost in response to volume changes
(d) The controllability of costs
(e) The avoidability of costs.
(1 mark)
15. Costs are allocated to cost objects in many ways and for many reasons. Which of the following is a purpose < Answer >
of cost allocation?
(a) Implementing activity-based costing
(b) Evaluating revenue center performance
(c) Budgeting cash and controlling expenditures
(d) Aiding in variable costing for internal reporting
(e) Measuring income and assets for external reporting.
(1 mark)
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16. In allocating factory service department costs to production departments, which of the following items < Answer >
would most likely be used as an activity base?
(a) Salary of service department employees
(b) Units of electric power consumed
(c) Direct materials usage
(d) Units of finished goods shipped to customers
(e) Units of product sold.
(1 mark)
17. At 60% capacity utilization, the overhead recovery rate is Rs.17.50 per unit. At 70% capacity level, the rate < Answer >
gets reduced to Rs.16 per unit. If the production attains 88% of the capacity utilization, the recovery rate
would be
(a) Rs.12.60 (b) Rs.12.46 (c) Rs.14.16 (d) Rs.12.24 (e) Rs.14.00.
(1 mark)
18. Ajex Ltd. had the following inventories at the beginning and end of the month of December 2004: < Answer >
Particulars December 1, 2004 (Rs.) December 31, 2004 (Rs.)

Finished goods 1,25,000 1,17,000
Work-in-process 2,35,000 2,51,000
Direct materials 1,34,000 1,24,000
The following additional manufacturing data were available for the month of December 2004:
Particulars (Rs.)
Direct materials purchased 1,89,000
Purchase returns and allowances 1,000
Transportation 3,000
Direct labor 3,00,000
Actual factory overhead 1,75,000
The company applies factory overhead at a rate of 60% of direct labor cost, and any overapplied or
underapplied factory overhead is deferred until the end of the year 2004-05.
The manufacturing cost of the company for the month of December 2004 was
(a) Rs.6,81,000 (b) Rs.6,65,000 (c) Rs.4,89,000 (d) Rs.2,01,000 (e) Rs.6,73,000.
(2 marks)
19. For a department, the standard overhead rate is Rs.2.50 per hour and overhead allowances are as follows: < Answer >
Activity level (hours) Budgeted overhead allowance (Rs.)

3,000 10,000
7,000 18,000
11,000 26,000
The normal capacity level, on the basis of which the standard overhead rate has been worked out, is
(a) 4,000 hours (b) 5,000 hours (c) 5,500 hours (d) 8,000 hours (e) 6,500 hours.
(2 marks)
20. Nivedita Ltd. has furnished the following information pertaining to its machine: < Answer >
i. Total cost of machine to be depreciated Rs.3,00,000

ii. Life of machine – 10 years
iii. Depreciation on straight line
iv. Departmental overheads (annual)
Rent – Rs.40,000; Heat and light – Rs.30,000; Supervision – Rs.1,50,000
v. Departmental area – 70,000 square metres; Machine area – 2,500 square metres
vi. Number of machines – 25
vii. Annual cost of reserve equipment for machines – Rs.2,000
viii. Hours run on production – 2,000
ix. Hours for setting and adjusting – 150
x. Power cost – Re.0.50 per hour of running time
xi. Labor :
3
* When setting and adjusting – full time attention
* When machine is producing – one worker can look after 2 machines
xii. Labor rate is Rs.8 per hour.
The comprehensive machine hour rate of the company is
(2 marks)
21. The allocation of costs to a particular cost object allows a firm to analyze all of the following except < Answer >
(a) Whether a production manager earns a bonus

(b) Whether a particular department should be expanded
(c) Whether a product line should be discontinued
(d) The causes of increase in the sales of a particular product
(e) The decision with regard to a particular product, which should be purchased or manufactured in-house.
(1 mark)
22. If predetermined overhead rate is not employed and the volume of production is increased over the level < Answer >
planned, the cost per unit would be expected to
(a) Decrease for fixed costs and remain unchanged for variable costs
(b) Remain unchanged for fixed costs and increase for variable costs
(c) Decrease for fixed costs and increase for variable costs
(d) Increase for fixed costs and increase for variable costs
(e) Increase for fixed costs and remain unchanged for variable costs.
(1 mark)
23. Priya Ltd. produces products P and Q. The direct cost of P is Rs.300 per unit (Rs.200 materials and Rs.100 < Answer >
labor) and Q is Rs.400 per unit (Rs.300 material and Rs.100 labor). 80 units of P and 150 units of Q were
produced. Overhead amounts to Rs.1,68,000 and is composed of material handling Rs.18,000, labor support
Rs.80,000, machine operation Rs.60,000 and general administration Rs.10,000. Material handling cost
driver is material cost, labor support cost driver is labor cost. Machine operation cost resulted from running
the machines for a total of 600 hours (3/4th of which was for product P). General administration effort
related equally to product P and Q. Machine operation cost chargeable per unit of Q amounts to
(a) Rs. 100 (b) Rs.250 (c) Rs.600 (d) Rs.680 (e) Rs.340.
(1 mark)
24. Raja Ltd. has furnished the following data pertaining to products: < Answer >
Number of Number of Square Number of Sales

Department
Employees* Hours feet Units sold (Rs.)
A 10 (10) 20,000 20,000 200 13,50,000
B 14 (8) 18,000 4,000 400 9,50,000
C 20 (6) 22,000 6,000 1,000 7,50,000
D 30 (4) 15,000 10,000 3,000 3,75,000
Total 74 75,000 40,000 4,600 34,25,000
* The number of full time employees is listed in the parenthesis. Full time employees work on an
average for 4 years with the company, part-time employees work on an average for 5 months with the
company.
The Personnel Department costs amount to Rs.81,400. The personnel department is responsible for
recruiting, hiring and managing the benefits.
What would be the amount of Personnel Department cost allocated to Department C assuming that the
allocation is based on the number of employees?
(a) Rs.4,400 (b) Rs.13,200 (c) Rs. 44,000 (d) Rs.1,62,800 (e) Rs.22,000.
(1 mark)
25. Replacement cost is the < Answer >
(a) Written-down value of the abondoned asset less its scrap value
(b) Cost which is not essential for the decision(s) under consideration
(c) Cost at which there could be purchase of an asset identical to that which is being replaced or revalued
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(d) Maximum possible alternative earning that might have been earned if the productive capacity or
services had been put to some alternative use
(e) Change in cost due to the change in the level of activity.
(1 mark)
26. If under or over applied overhead is considered to be relevant, which accounts should it be allocated to? < Answer >
(a) Cost of goods sold

(b) Work-in-process and cost of goods sold
(c) Work-in-process, finished goods and cost of goods sold
(d) Work-in-process and finished goods
(e) Cost of goods sold and finished goods.
(1 mark)
27. The upper limit of a company’s productive output capacity given its existing resources is called < Answer >
(a) Theoritical capacity (b) Practical capacity (c) Normal capacity

(d) Excess capacity (e) Cycle-time capacity.
(1 mark)
28. Consider the following information of a company for a period: < Answer >
i) Acquired Rs.50,000 of capital from owners

ii) Paid Rs.10,000 for all materials used in starting and completing 50 units of product A
iii) Paid Rs.5,000 for administrative salaries
iv) Paid Rs.8,000 for wages of production workers
v) Depreciation of office furniture Rs.3,000
vi) Depreciation of manufacturing equipment Rs.3,500
vii) Collected Rs.25,000 in cash for all sales made during the period.
If 50 units were completed and 5 units were in ending inventory, the gross margin for the period is
(a) Rs. 2,150 (b) Rs. 5,650 (c) Rs.28,000 (d) Rs.30,000 (e) Rs. 3,000.
(1 mark)
29. Shiva Ltd. had 8,000 units of work-in-procress inventory in department A on December 1, 2004. These < Answer >
units were 60% complete as to conversion costs. Direct materials are added at the beginning of the process.
During the month of December 2004, 34,000 units were started and 36,000 units were completed. The
company had 6,000 units of work-in-process inventory on December 31, 2004. These units were 80%
complete as to conversion costs.
The equivalent production units of conversion (under average method) exceeds the equivalent production of
conversion (under FIFO method) by
(a) 8,000 units (b) 6,000 units (c) 3,200 units (d) 4,800 units (e) 5,000 units..
(2 marks)
30. A factory has three production departments – P1, P2 and P3 and 2 service departments – S1 and S2. < Answer >
Budgeted overheads for the next year have been allocated or apportioned by the cost department among the
5 departments. The secondary distribution of service department overheads is pending and the following
details are given:
Overheads apportioned/allocated
Department Estimated level of activity
(Rs.)
P1 48,000 5,000 labor hours
P2 1,12,000 12,000 machine hours
P3 52,000 6,000 labor hours
Overheads apportioned / Apportionment of service

Department
allocated (Rs.) department costs
S1 16,000 P1(20%),P2(40%), P3(20%) & S2(20%)
S2 24,000 P1(10%), P2(60%), P3(20%) & S1(10%)
The overhead rates of P1 and P3 departments after completing the distribution of service department costs
are
(a) Rs.10.91 and Rs.10.22 respectively (b) Rs.10.91 and Rs.11.35 respectively
(c) Rs.11.35 and Rs.10.22 respectively (d) Rs.10.91 and Rs.11.00 respectively
(e) Rs.11.00 and Rs.11.35 respectively.
5
(2 marks)
31. The rate which is used to carry out adjustment for the difference between overheads absorbed and overheads < Answer >
incurred is known as
(a) Blanket rate (b) Plant wide rate (c) Single rate
(d) Supplementary rate (e) Moving average rate.
(1 mark)
32. Consider the following data pertaining to inventories of Calex Ltd. for the month of December 2004: < Answer >
Particulars Opening inventory (Rs.) Closing inventory (Rs.)

Raw materials 7,120 8,635
Work-in-process 8,000 3,000
Finished goods 9,000 11,000
Other information:
i. Raw materials used Rs. 32,665
ii. Total manufacturing costs charged to product
(it includes raw materials, direct labor and factory
overheads applied @ 60% of direct labor cost) Rs. 82,601
iii. Cost of goods available for sale Rs. 1,02,600
iv. Selling and general expenses Rs. 2,500
The costs of raw materials purchased and the amount of factory overhead applied are
(a) Rs.31,270 and Rs.49,936 respectively (b) Rs.31,150 and Rs.31,210 respectively
(c) Rs.34,180 and Rs.31,210 respectively (d) Rs.34,180 and Rs.18,726 respectively
(e) Rs.34,180 and Rs.12,484 respectively.
(1 mark)
33. An Operation Costing System is < Answer >
(a) Identical to a process costing system except that actual cost is used for manufacturing overhead
(b) The same as a job-order costing system except that no overhead allocations are made since actual costs
are used throughout
(c) The same as a job-order costing system except that materials are accounted for in the same way as they
are in a process costing system
(d) The same as a process costing system except that materials are allocated on the basis of batches of
production
(e) Identical to direct costing system except that no overhead allocations are made since actual costs are
used throughout.
(1 mark)
34. Sun Flower Ltd. has furnished the following data of its process account for the month of December 2004: < Answer >
Particulars Completion of materials Units

Materials introduced - 13,000
Opening WIP 60% 3,000
Closing WIP 50% 4,000
The equivalent completed units of material in the process, under average method, is
(a) 20,000 units (b) 16,000 units (c) 14,000 units (d) 12,200 units (e) 10,000 units.
(1 mark)
35. Air Purifier Ltd. uses process cost system to manufacture Dust Density Sensors for the mining industry. The < Answer >
following pertains to operations for the month of December 2004:
Particulars Units
Opening work-in-process (December 01, 2004) 450
Introduced in production during December 2004 4,100
Closing work-in-process (December 31, 2004) 520
There is no loss in the manufacturing process. The opening inventory was 80% complete for materials and
60% complete for conversion costs. The closing inventory was 75% complete for material and 65%
complete for conversion costs.
Costs pertaining to the month of December 2004 are as follows:
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Materials Rs. 6,850
Conversion Rs. 4,350
During the month:
Materials Rs.71,050
Conversion Rs.57,372
The total cost of closing work-in-process on December 31, 2004, using FIFO method, is
(a) Rs.10,708.62 (b) Rs.11,649.63 (c) Rs.12,573.78 (d) Rs.11,557.00 (e) Rs.12,443.00.
(2 marks)
36. The yield of a certain process is 80%, the by-product is 16% and normal loss is 4% of its main product. < Answer >
5,000 units of materials are put in process and its cost is Rs.24.80 per unit and other expenses amounted to
Rs.15,150, 40% of which was accounted for by power cost. It is the practice of the company that the power
cost is chargeable to the main-product and the by-product in the ratio of 3:2. The cost of the by-product is
(a) Rs.24,606 (b) Rs.55,660 (c) Rs.26,727 (d) Rs.22,264 (e) Rs.23,718.
(2 marks)
37. Six Chemicals Ltd. produces high-quality plastic sheets in a continuous manufacturing operation. All < Answer >
materials are introduced at the beginning of the process. Conversion costs are incurred evenly throughout
the process. A quality control inspection occurs when units are 75% through the manufacturing process,
when some units are separated out as inferior quality. The following data are available for the month of
December 2004:
Material costs Rs.90,000
Conversion costs Rs.70,200
Units introduced 40,000
Units completed 36,000
There is no opening or closing work-in-progress. Past experience indicates that approximately 7.5% of the
units introduced are found to be defective on inspection by quality control.
The cost of abnormal loss for the month of December 2004 is
(2 marks)
38. Brand Manufacturing Company makes one model of a product known as ‘Brand B’. The company has < Answer >
provided the following balances as on April 01, 2004:
Finished goods – 500 units
Work-in-process – Rs. 5,740
Raw materials – Rs. 11,620
The following data are available as on September 30, 2004
Indirect labor – Rs. 12,160
Freight in – Rs. 5,570
Direct labor – Rs. 32,640
Raw material – Rs. 9,640
Factory overhead expenses – Rs. 31,730
Work-in-process – Rs. 7,820
Sales (15,000 units) – Rs.3,60,000
Indirect material – Rs. 21,390
Total manufacturing costs incurred – Rs.1,94,080
There were 1,500 units of finished goods of ‘Brand B’ as on September 30, 2004.
The amount of raw materials purchased during the half-year ended September 30, 2004 is
(a) Rs. 92,570 (b) Rs. 88,610 (c) Rs. 94,180 (d) Rs. 86,530 (e) Rs.1,21,250.
(2 marks)
39. Mr. Subramaniyam owns a fleet of taxis and the following information is available from the records < Answer >
maintained by him:
Number of taxis 5
Cost of each taxi Rs.2,70,000
Salary of manager Rs.6,500 per month
Salary of accountant Rs.5,000 per month
Salary of cleaner Rs.800
7 per month
Salary of cleaner Rs.800 per month
Salary of mechanic Rs.2,200 per month
Garage rent Rs.2,000 per month
Insurance premium 5% per annum
Annual tax Rs.4,200 per taxi
Salary of driver Rs.5,000 per month per taxi
Annual repairs Rs.2,000 per taxi
Oil and other sundries Rs.10 per 100 kms
The total life of a taxi is about 3,00,000 km. A taxi runs in all 4,500 km in a month of which 20% it runs empty.
Petrol consumption is 5.62 km per litre. The cost of petrol is Rs.36 per litre.
The cost of running a taxi per km. is
(2 marks)
40. PH Ltd. operates several production processes involving the mixing of ingredients to produce bulk animal < Answer >
feedstuffs. One such product is mixed in two separate process operations. The company has furnished the
following information pertaining to process 2 for the quarter ending December 31, 2004:
Cost incurred: Rs.
Transferred from process 1 1,87,704
Raw materials 47,972
Conversion costs 63,176
Opening work-in-process 3,009
Production: Units
Opening work-in-process 1,200
(Material – 100% complete apart from process
Conversion cost – 50% complete)
Transferred from process 1 1,12,000
Completed output 1,05,400
Closing work-in-process 1,600
(Material – 100% complete apart from process 2 Conversion – 75% complete)
Normal wastage of materials (including product transferred from process 1), which occurs in the early stage
of process 2 (after all materials have been added), is expected to be 5% of input, process 2 conversion costs
are all apportioned to units of good output. Wastage materials have no saleable value.
The values of finished goods and closing WIP (using FIFO method) are
(a) Rs.2,96,237 and Rs.4,259 respectively
(b) Rs.2,96,021 and Rs.4,212 respectively
(c) Rs.2,96,273 and Rs.4,295 respectively
(d) Rs.2,96,021 and Rs.4,259 respectively
(e) Rs.2,96,273 and Rs.4,259 respectively.
(2 marks)
41. Sitpax Ltd. purchases raw materials worth Rs.16.56 lakhs and processes them into 4 products – A, B, C and < Answer >
D. The sale value per unit of products A, B, C and D is Rs.4.50, Rs.13.50, Rs.24 and Rs.90 respectively at
split-off point, as these could be sold as such to other processors. However, during a year, the company
decided to further process and sell products A, B and D while C was not to be processed further but sold at
split-off point to other processors. The processing of raw materials into 4 products cost Rs.42 lakhs to the
company. The company has furnished the following information pertaining to the 4 products:
Product Output Sales after further Additional processing cost
A 10,00,000 69.00 18.00
B 20,000 6.00 3.60
C 10,000 2.40 –
D 18,000 18.00 0.60
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D 18,000 18.00 0.60
The maximum profit of the company after adopting best sales strategy is
(a) Rs.16.24 lakhs (b) Rs.15.86 lakhs (c) Rs.14.64 lakhs
(d) Rs.14.94 lakhs (e) Rs. 7.74 lakhs.
(3 marks)
42. If the size of a batch increases < Answer >
(a) Setting-up cost per unit decreases (b) Setting-up cost per unit increases
(c) Setting-up cost per unit remains the same (d) Total cost of the batch decreases
(e) Total profit of the batch decreases.
(1 mark)
43. Consider the following data of a company: < Answer >
Material Purchased - Rs.170,000. There was no beginning inventory

Direct labor incurred - 400 hours at the rate of Rs.10 per hour
Budgeted overheads - 430 hours
Budgeted overhead cost - Rs.6,450
Units started - 20,000 units
Units completed - 15,000 units
Actual overheads - Rs.6,200
Ending Inventory - 60% complete.
The value of ending inventory is
(a) Rs.50,000 (b) Rs.30,000 (c) Rs.20,000 (d) Rs. 5,000 (e) Rs.25,000.
(2 marks)
44. Bhuban Ltd. has furnished the following cost structure of product M: < Answer >
Direct material 50%

Direct labor 20%
Overhead costs 30%
The sale price of the product is Rs.45,000. The company has estimated an increase of 15% in the cost of
matertials and an increase of 25% in the cost of the labor. These increased costs in relation to the present
selling price would cause a 25% decrease in the amount of present profit per unit.
The revised selling price to produce the same percentage of profit to sales as before, is
(2 marks)
45. The total production cost for making 20,000 units was Rs.21,000 and the total production cost for making < Answer >
50,000 units was Rs.34,000. Once production exceeds 25,000 units, additional fixed costs of Rs.4,000 are
incurred. The cost per unit for making 30,000 units is
(a) 80 paise (b) 50 paise (c) 68 paise (d) 84 paise (e) 93 paise.
(2 marks)
46. Ray Ltd. manufactures product R in a two-stage production cycle in departments A and B. Direct materials < Answer >
are added at the beginning of the process in department B. The company uses the weighted average method.
Conversion costs for department B were 50% complete as to the 6,000 units in the beginning work-in-
process inventory and 75% complete as to the 8,000 units in the ending work-in-process inventory. 12,000
units were completed and transferred out of department B during the month of December 2004. An analysis
of the costs relating to work-in-process inventory and production activity in department B for the month of
December 2004 is as follows:
Transferred in Materials costs Conversion costs
Particulars
(Rs.) (Rs.) (Rs.)
Opening WIP,cost attached 12,000 2,500 1,000
December activity, cost added 29,000 5,500 5,000
The total cost per equivalent unit transferred out for the month of December 2004, of product R, was
(2 marks)
47. The following data are available pertaining to a product after passing through 2 processes-A & B: < Answer >
9
Output transferred from process B to process C - 9,120 units for Rs.49,263
Expenses incurred in process C:
Materials – Rs.1,480; Labor cost – Rs.6,500; Direct expenses – Rs.1,605.
The wastage of process C is sold at Re.1 per unit.The overheads were 168% of direct labor. The final
product was sold at Rs.10 per unit after charging a profit of 20% on sales.
There is no closing stock.The percentage of wastage in process C is
(a) 10% (b) 5% (c) 15% (d) 8% (e) 12%.
(2 marks)
48. A certain chemical process yields 75% of material introduced as main product, 20% as by-product and 5% < Answer >
being lost. In the process one unit of main product requires double the material required for one unit of by-
product. Further one unit of main product needs 1.5 times the time needed for one unit of by-product.
Overheads are absorbed in the ratio of 3:1.
During a week, 1,000 units of raw material at a cost of Rs.17,000 were introduced. Total labor cost was
Rs.5,300. Total Overheads came to Rs.2,700. Wastages realised Rs.300.
The cost of by-product per unit is
(2 marks)
49. Which of the following activities uses process costing? < Answer >
(a) Foundry (b) Automobile repair

(c) Road building (d) Electrical contracting (e) Newspaper publishing.
(1 mark)
50. Jyothi Constructions undertook a contract for construction of a large complex. The construction work < Answer >
commenced on April 01, 2003 and the following data are available for the year ended March 31, 2004:
Particulars Rs.
Total contract price 80,00,000
Work certified 60,60,000
Progress payment received 50,00,000
Material issued to site 30,80,000
Planning and estimating costs 4,80,000
Direct wages paid 12,30,000
Materials returned from site 42,500
Site office cost 26,400
Plant hire charges 1,82,000
Wage related costs 92,600
Head office expenses apportioned 80,500
Direct expenses incurred 85,300
Work not certified 4,25,000
Materials at site 60,000
Accrued wages 55,500
The contractors own a plant which originally cost Rs.18,00,000 and has been continuously in use in this
contract throughout the year. The salvage value of the plant after 10 years is expected to be Rs.50,000. The
company uses the straight-line method of depreciation.
The total of work-in-process and plant at site to be shown in the balance sheet as on March 31, 2004 is
(a) Rs.26,14,970 (b) Rs.27,89,970 (c) Rs.31,10,000 (d) Rs.32,85,000 (e) Rs.27,96,970.
(2 marks)
51. A, B and C are the main products and M is the by-product of a company, where A is a liquid and B is a gas < Answer >
and C is a solid. If product A and product B are further processed before being in a saleable state and
product C is sold without further processing, then which of the following is the most appropriate basis for
apportionment of costs of M to joint products A, B and C?
(a) Physical units (b) Sales value at separation point
(c) Notional sales value at separation point (d) Standard sales value at separation point
(e) Sales value after further processing cost.
(1 mark)
(a) Job costing can be more suitably used in concerns producing uniform products on repetitive basis
10
(b) Job costing is applied only in small concerns
(c) Escalation clause in a contract provides that the contract price is fixed
(d) Final contract price to be paid is certain in cost plus contracts
(e) In contract costing credit is taken only for a part of the profit on incomplete contracts.
(1 mark)
53. If the amount of wastage in a manufacturing process is abnormal, it should be classified as < Answer >
(a) Deferred charge (b) Period cost (c) Product cost

(d) Joint cost (e) Discretionary cost.
(1 mark)
54. Overhead rate per unit of production is an appropriate overhead allocation base when < Answer >
(a) Several well differentiated products are manufactured

(b) Direct labor costs are low
(c) Direct material costs are large relative to direct labor costs
(d) Only one product is manufactured
(e) The manufacturing process is complex.
(1 mark)
55. Tifco Ltd. has furnished the following information pertaining to a new product: < Answer >
i. The fixed costs will be Rs.80,000 for production of 7,500 units or less. If the production is more than
7,500 units, the fixed costs will be Rs.1,20,000.
ii. The variable cost ratio is 60% of the sales for the first 7,500 units and it will be reduced to 50% of
sales for units in excess of 7,500 units.
iii. The sale price of the product per unit is Rs.25.
If the company manufactures more than 7,500 units, the break-even units of the new product is
(a) 12,000 (b) 11,100 (c) 12,500 (d) 9,600 (e) 8,500.
(2 marks)
56. X, Y and Z are three similar plants under the same management of AB Ltd. The details are as follows: < Answer >
Plant X Y Z
Capacity operated 90% 60% 50%
Particulars (Rs.in lakhs) (Rs.in lakhs) (Rs.in lakhs)
Turnover 270 240 150
Variable cost 180 180 75
Fixed cost 70 50 62
The Break-even percentage of the merged plant is
(a) 50% (b) 52% (c) 35% (d) 55% (e) 49%.
(2 marks)
57. Consider the following data of a company: < Answer >
Direct material - Rs.10 per unit

Direct labor - Rs. 6 per unit
Variable overhead - Rs. 3 per unit
Fixed overhead - Rs. 4 per unit
Budgeted production - 12,000 units
Actual production - 10,000 units
There is no overhead spending variance
Sales - 9,000 units
Sale price - Rs.28 per unit
If absorption costing is used, the net income will be
(a) Rs.4,800 more than the income under variable costing
(b) Rs.4,800 less than the income under variable costing
(c) Rs.5,000 more than the income under variable costing
(d) Rs.5,000 less than the income under variable costing
(e) Same as the net income under variable costing.
(2 marks)
11
58. Cost-volume-profit analysis is most important for the determination of < Answer >
(a) Volume of operations necessary to break-even

(b) Margin of safety necessary to equal fixed costs
(c) Sales revenue necessary to equal fixed costs
(d) Relationship between revenues and costs at various level of operations
(e) Sales revenue necessary to equal total costs.
(1 mark)
59. Which of the following statements is false with respect to absorption of factory overheads? < Answer >
(a) Machine hour rate is suitable where the machine is the major factor in production
(b) Labor hour rate should not be used where machines are used extensively for production
(c) Labor hour rate is very useful where labor is the main factor in production
(d) Prime cost percentage method considers both materials and labor in charging overhead to each job or
product
(e) Prime cost percentage method is suitable in capital intensive organisation.
(1 mark)
60. Which of the following statements is true for a firm that uses variable costing? < Answer >
(a) Product costs include variable selling costs

(b) An idle facility variation is calculated
(c) The cost of a unit of product changes because of changes in number of units manufactured
(d) Profits fluctuate with sales
(e) Product costs include variable administrative costs.
(1 mark)
61. The contribution to sales ratio depends upon < Answer >
(a) Fixed cost per unit (b) Total fixed cost

(c) Sales volume (d) Production volume (e) Direct expenses.
(1 mark)
62. Which of the following can be said about job-order system, process costing system and hybrid system? < Answer >
(a) The type of product manufactured by a company does not influence the type of accounting system
used
(b) The manufacturing process does not influence the type of accounting system used by a company
(c) That cost systems require the use of some form of cost averaging
(d) That managers rely upon the cost system to provide information based only upon actual costs
(e) That managers rely upon the cost system to provide information based only upon standard costs.
(1 mark)
63. ABC Company sells three products – A, B and C with the price of Rs.20 per unit. However, A’s variable < Answer >
cost is at 40%, B’s at 50% and C’s at 60%. Fixed costs amount to Rs.18,000. An additional Rs.9,000 need
to be spent on advertising to boost sales. Sales mix is 500, 1,500 and 3,000 units for A, B, and C
respectively. Sales in rupees for B at break-even amounts to
(1 mark)
64. Consider the following data pertaining to a manufacturing company: < Answer >
Present Forecast
Particulars
(2004-05) (2005-06)
Sales (units) 10,000 15,000
Loss (Rs.) 5,000 -
Fixed cost (Rs.) 25,000 25,000
Profit (Rs.) - 5,000
The variable cost of sales has been taken at Rs.7 per unit up to 15,000 units and it shall be Rs.8 per unit
beyond 15,000 units.
What percentage of increase in sales is required to cover additional 50 paisa per unit towards extra
packaging cost in the year 2005-06 for achieving the forecasted contribution level?
(a) 100% (b) 150% (c) 200% (d) 75% (e) 50%.
(2 marks)
12
65. Xenil Ltd. has furnished the following cost per unit to manufacture and market ‘XL’ product: < Answer >
i. Manufacturing costs:
Direct materials Rs.4.00
Direct labor Rs.4.80
Variable overheads Rs.3.20
Fixed overheads Rs.2.00
ii. Marketing costs:

Variable Rs.1.25
Fixed Rs.1.00
The company is planning whether to make the product or buy it from an outside supplier. If the company
buys it from the market, fixed marketing costs would be unaffected but variable marketing costs would be
reduced by 40%.
The maximum amount per unit of the product that the company can pay to the supplier without decreasing
the operating income, is
(1 mark)
66. Costs which can be reduced or removed from the company's cost structure without affecting product or < Answer >
service quality for the customer are referred to as
(a) Value-added costs (b) Indirect costs (c) Variable costs
(d) Non-value-added costs (e) Fixed costs.
(1 mark)
67. Praful Ltd. has furnished the following information pertaining to product – Z: < Answer >
Particulars Rs. per unit

Selling price 100
Direct material 60
Direct labour 10
Variable overheads 10
The company has sold 5,035 units during the year. The wages cost would be increased by 10%.The
percentage of selling price to be raised to maintain the same P/V ratio is
(a) 1.50 % (b) 1.35% (c) 1.25% (d) 1.20 % (e) 1.40 %.
(1 mark)
68. AB Ltd. produces and sells two products A and B for Rs.29 and Rs.19 a unit respectively. Variable costs < Answer >
amount to Rs.14 for A and Rs.12 for B per unit. It takes 1½ hours to make one unit of A and ½ hour to
make one unit of B. Total manpower available is 1,300 hours and maximum demand is 1,800 units of A
and 1,700 units of B. The optimum production units of A to maximize profit should be
(a) 300 (b) 450 (c) 600 (d) 900 (e) 750.
(2 marks)
69. The operating results of M/S. Krupa Ltd for the year 2003-04 were as under: < Answer >
Product Sales Mix (%) PV Ratio

A 40 20
B 10 6
C 30 12
D 20 10
Total of sales value of all the products was Rs.80 lakhs and fixed costs amount to Rs.10 lakhs. The
composite P/V ratio is
(a) 15.2% (b) 14.2% (c) 12.0% (d) 15.0%
(e) 16.0%
(2 marks)
70. ACD Ltd. has been approached by a foreign customer who wants to place an order for 1,500 units of < Answer >
Product C at Rs 22 50 a unit although the company currently sells this item for Rs 39 a unit and the item
13
Product C at Rs.22.50 a unit although the company currently sells this item for Rs.39 a unit, and the item
has a cost of Rs.29 a unit. Further analysis reveals that the company will not pay sales commission of
Rs.2.50 a unit on these sales and its packaging requirement will save an additional amount of Rs.1.50 per
unit. However, the additional graphics required on this job will cost Rs.3,000. The fixed costs amounting to
Rs.4,00,000 for the production of 50,000 units of such products by the company will not change. Accepting
this job by the company will
(a) Increase profit by Rs.1,950 (b) Increase profit by Rs.6,750
(c) Increase profit by Rs.5,250 (d) Decrease profit by Rs.5,250
(e) Decrease profit by Rs.1,950.
(2 marks)
71. Clamp fix Ltd. manufactures multipurpose woodworking clamps in a simple manufacturing process that < Answer >
uses special equipment. The company is planning to drop the product line. The variable cost of the product
is Rs.6 per unit. Fixed overhead costs, exclusive of depreciation, have been allocated to this product at a rate
of Rs.3.50 per unit and will continue irrespective of production. Depreciation on the special equipment
amounts to Rs.20,000 a year. If the production of the clamp is discontinued, the special equipment can be
sold for Rs.18,000. If production continues, the equipment will be useless for further production at the end
of year 1 and will have no salvage value. The selling price of the clamp is Rs.10 per unit. The minimum
number of units that would have to be sold in the current year to justify the continuation of the production is
(a) 9,500 units (b) 3,000 units (c) 5,000 units (d) 4,500 units (e) 12,500 units.
(2 marks)
(a) Differential cost technique does not prove useful in decision making
(b) Export orders should not be accepted at a price below the total cost, otherwise there will be a loss from
export sales
(c) A company with a higher break-even point is considered better than a company with a lower break-
even point
(d) In make or buy decision, supplier’s offer price per unit is compared with own total cost per unit
(e) Effect of price reduction is always to reduce contribution to sales ratio and increase the break-even
point.
(1 mark)
14
Suggested Answers
Management Accounting I (151) – January 2005
1. Answer : (c) < TOP >
Reason : Opportunity Cost is the cost of lost opportunities. Neither a Financial Accounting System
nor a Managerial Accounting System measure the opportunity cost. Therefore, (c) is
correct.
2. Answer : (e) < TOP >
Reason : Management accounting is not mandatory. The application of management accounting

can be extended beyond the traditional accounting system. It focuses more on the parts or
segments of a company and less on a company as a whole. It is not governed by GAAP.
It refers to reports prepared to fulfill the needs of management. Therefore, (e) is correct
Reason : A cost accounting system has numerous objectives, including product costing, assessing
departmental efficiency, inventory valuation, product mix determination and planning
evaluating and controlling operations. Determining sales commissions is not an objective
of a cost accounting system because such commissions are based on sales, not costs.
4. Answer : (b) < TOP >
Reason : The costs having clear relationship to output are known as engineered costs. Direct
material cost is an example of engineered costs.
Reason : Under periodic cost accumulation system, the cost of goods manufactured is equal to cost
of goods put into production plus beginning work-in-process less ending work-in-
process. Therefore (b) is correct. Other options are not correct.
Reason : Decremental cost is not the cost of an added unit. Standard cost never tells us the actual
cost of the product. Cost center and cost units are not the same thing. Cost of production
is not equal to prime cost plus works cost. The correct statement is that the period cost is
not assigned to products. It is a fixed cost and does not vary with the production.
Therefore, ( c) is correct.
Reason : The amount of income tax is not considered in cost accounting. Other items given in (a),
(b), (c) and (d) are considered in cost accounting.
8. Answer : (a) < TOP >
Reason : The manager wants to control, and reduces if possible, the company's production costs.
He must determine how production costs are related to and affected by various business
activities. The manager needs to understand cost behaviors. A knowledge of cost
behavior is useful because it helps managers forecast (plan) results under different
activity levels
Reason : The average method of valuation of inventory in process costing is useful when prices are
fluctuating from period to period. It is not useful in respect of other options (a),(c),(d)
and (e).
Reason : Service companies do not have Inventory. So Managers of service companies do not
analyze cost to properly value inventory. Therefore, option (b) is not correct.
11. Answer: (d) < TOP >
Reason: Overhead absorption rate per rupee labor cost =

Rs.3,00,000 / [(200 x Rs.75) + (300 x Rs.50) + (500 x Rs.40)
= Rs.3,00,000 ÷ Rs. 50,000 = Rs. 6.
Overhead applied:
[(300 x Rs.75) + (350 x 50) + (400 x 40)] x 6
15
= (Rs. 22,500 + Rs. 17,500 + 16,000) x 6
= Rs.56,000 x Rs.6 = Rs.3,36,000
Over applied overhead: Rs.3,36,000 – Rs.3,19,000 = Rs.17,000.
Reason : A stores assistant in a factory store is an indirect labor. Therefore (a) is correct. Other
options mentioned in (b), (c), (d) and (e) are examples of direct labor.
13. Answer : (d) < TOP >
Reason : Options (I) and (II) are true. But, option (III) is not, as cost centers because cost centers
are departments and there may be several cost centers in a department, but not many
departments in a cost center.
Reason : A direct cost can be specifically associated with a single cost object in an economically
feasible way. An indirect cost cannot be specifically associated with a single cost object.
Thus the specific cost object influences whether a cost is direct or indirect. For example,
a cost might be directly associated with a single plant. The same cost however might not
be directly associated with a particular department in the plant. Therefore (a) is correct.
Option (b) is not correct because the timing of the cash outlay has no effect on whether a
cost is direct or indirect. Option (c) is not correct because the behavior of cost in response
to volume changes is a factor only if the cost object is a product. Options (d) and (e) are
not correct because controllability and avoidability of costs have no effect on whether a
cost is direct or indirect.
Reason : The purpose of cost allocation is to measure income and assets for external reporting. The
other options given (a), (b), (c) and (d) are not the purposes of cost allocation.
Cost allocation is a process of assigning and reassigning costs to cost objects. It is used
for these costs that cannot be directly associated with a specific cost object. It is often
used for purposes of measuring income and assets for external reporting purposes. It is
less meaningful for internal purposes because responsibility accounting systems
emphasize controllability, a process often ignored in cost allocation.
Reason : Service department costs are considered part of factory overhead and should be allocated
to the production department that use the services. A basis reflecting causes and effect
should be used to allocate service department costs. Units of electric power consumed
i.e., the number of kilowatt hours used by each producing department is probably the best
allocation base for electricity base.
Option (a) is not correct because salary of service department employees is the cost
allocated ,not a basis Option (c) is incorrect because making allocation on the basis of
material usage may not meet the cause-and-effect criterion. Option (d) and (e) are
incorrect because making allocation on the basis of goods shipped and units sold may not
meet the cause-and-effect criterion.
Reason : Let, at 100% capacity level, units produced = 100

At 60% capacity, the overhead recovery rate = Rs.17.50 per unit
Therefore, total overhead at 60% = 60 × Rs.17.50 = Rs.1,050
At 70% capacity, the recovery rate = Rs.16 per unit
Therefore, total overhead at 70% = Rs.16 × 70 = Rs.1,120
Rs.1,120 − Rs.1, 050 Rs.70
Therefore, variable cost = 10 = 10 = Rs.7 per unit
Fixed cost = Total cost – Variable cost = Rs.1,050 – 60 × Rs.7 = Rs.630
At, 88% capacity = Rs.630 + 88 × Rs.7
= Rs.630 + Rs.616 = Rs.1,246
Rate = Rs. 1,246 ÷ 88 = Rs. 14.16.
16
Reason :
Beginning direct materials inventory 1,34,000
Add: Purchases 1,89,000
Less: Purchase returns (1,000)
Add: Transportation 3,000
Total direct materials available 3,25,000
Less: Ending direct materials inventory (1,24,000)
Direct material used 2,01,000
Direct labor 3,00,000
Total prime costs 5,01,000
Manufacturing cost = Rs.5,01,000 + 60% of Rs.3,00,000 (Direct labor)
= Rs.6,81,000.
Reason : Variable cost = Change of cost / change of activity

= (Rs.18,000 – Rs.10,000 ) / (7,000 – 3,000) = Rs.2.
Fixed cost = Rs.18,000 – 7,000 x Rs.2 = Rs.4,000.
Standard overhead = Rs.2.50.
Standard fixed cost = Rs.2.50 – Rs.2.00 = Re.0.50.
Normal capacity level = Rs.4,000 / Re.0.50 = 8,000 hours.
20. Answer: (e) < TOP >
Reason: Computation of comprehensive machine hour rate:

Expenses Workings Rs. Rs.
Standing charges:
Rent, heat and light (Rs.70,000 / 70,000) x 2,500 2,500
Supervision Rs.1,50,000 / 25 6,000
Depreciation 10% of Rs.3,00,000 30,000
Reserve equipment cost Rs.2,000 / 25 80
Labor cost during setting 150 hours x Rs.8 1,200
and adjustment
Hourly standing charges Rs.39,780 / 2,000 39,780 19.89
Machine expenses:
Power 0.50
Labor cost Rs.8 / 2 4.00
Comprehensive machine hour rate 24.39
Reason : Allocation of costs is a distribution of costs that cannot be directly assigned to the cost
objects that are assumed to have caused them. An allocation of costs does not enable a
company to determine why the sales of a particular product have increased. Many factors
affect consumer demand such as advertising, consumer confidence, availability of
substitutes and changes in tastes. Cost allocation is an internal matter that does not affect
demand except to the extent it results in a change in price.
< TOP >
22. Answer : (a)
Reason : If predetermined overhead rate is not employed and the volume of production is increased
over the level planned, the cost per unit will be reduced because fixed cost per unit will be
reduced and variable cost per unit will remain same. Therefore, (a) is correct.
< TOP >
23. Answer: (a)
Reason: Machine operation charge per hour = Rs.60,000 / 600 = Rs.100;
Machine operation charged to Q = Rs.100 x (600 hr. /4) = Rs.15,000;
Machine operation charged per unit of Q = Rs.15,000 / 150
= Rs.100 per unit.
17
24. Answer: (e) < TOP >
Reason: Cost to be Allocated / Cost Driver = Allocation Rate

= Rs.81,400 / 74 = Rs.1,100
Allocation Rate x Cost Driver = Allocated Cost
= Rs.1,100 x 20 employees = Rs.22,000.
Reason : Replacement cost is the cost at which there could be purchase of an asset identical to the
one being replaced and hence it is equal to the current market price. Therefore (c) is
correct.
26. Answer: (c) < TOP >
Reason: The under or over applied overhead indicates that all of the inventory worked on during
the period have been absorbed and need to be adjusted. This under or over applied
overhead cost is to be allocated to work-in-process, finished goods and cost of goods sold.
Therefore, (c) is correct.
Reason: Practical capacity is the maximum level at which output is produced efficiently, with an
allowance for unavoidable interruptions. Because this level will be higher than expected
capacity, its use will ordinarily result in under-applied fixed factory overhead. Other
options are not correct.
28. Answer: (b) < TOP >
Reason: Product cost = Rs. 10,000 + Rs. 8,000 + Rs. 3,500 = Rs. 21,500
Cost of Goods Sold =
Product Cost Rs.21,500 - Ending Inventory Rs.2,150 = Rs.19,350 (430 × 45)
Sales Rs.25,000 - Cost of Goods Sold Rs.19,350
= Gross Margin Rs.5,650.
Product Cost / units completed = Rs.21,500 / 50 units = 430 per unit
The cost of 5 units inventory = Rs.430 x 5 = Rs.2,150.
Reason: Weighted Average Method:

Input = 8,000 units + 34,000 units = 42,000 units;
Out put = 36,000 units + 6,000 units = 42,000 units;
Equivalent production units of conversion =
100% of 36,000 + 80% of 6,000 = 36,000 + 4,800 = 40,800 units;
FIFO Method:
Input = 8,000 units + 34,000 units = 42,000 units;
Out put = 8,000 units + 28,000 units + 6,000 units = 42,000 units;
Equivalent production units of conversion =
40% of 8,000 units + 100% of 28,000 units +80% of 6,000 =
= 3,200 + 28,000 + 4,800 = 36,000 units.
Excess equivalent units of production of conversion =
40,800 units – 36,000 units = 4,800 units.
Reason : It is given in the question that the secondary distribution of service departrments’
overhead is pending. The same is thus attempted by use of simultaneous equation
method.
Let, total overheads of department S1 = x; and total overheads of S2 = y;
According to problem, we get x = 16,000 + 0.1y and y = 24,000 + 0.2x;
Therefore, x = 16,000 + 0.1(24,000 + 0.2x) = 16,000 + 2,400 + 0.02x
Or, x (1 – 0.02) = 18,400, or, x = 18,400 / 0.98 = 18,775, then y = 27,755
18
Statement of secondary distribution:
Particulars P1 (Rs.) P2 (Rs.) P3 (Rs.) Total (Rs.)
Direct allocation 48,000 1,12,000 52,000 2,12,000
S1 (80% of 18,775) 3,755 7,510 3,755 15,020
S2 (90% of Rs.27,755) 2,776 16,653 5,551 24,980
Total 54,531 1,36,163 61,306 2,52,000
Budgeted machine hours 5,000 12,000 6,000
Overhead rate per machine hour 10.91 11.35 10.22
Reason : Supplementary rates are used to carry out adjustment for the difference between
overhead absorbed and overhead incurred. Therefore, (d) is correct. Other options are
not correct.
Reason : Materials purchased = Rs.32,665 + Rs.8,635 – Rs.7,120 = Rs.34,180

Total manufacturing costs =Direct material + Direct labor + 60% of Direct labor
Rs.82,601 = Rs.32,665 + Direct labor + 0.6 Direct labor
1.6 direct labor = 49,936
Direct labor = Rs.31,210
Applied factory overhead = 60% of Rs.31,210 = Rs.18,726
Reason : Operation Costing is a hybrid of Job-order and Process costing systems wherein materials
are allocated on the basis of batches of production. It is used by companies that
manufacture goods that undergo some similar and dissimilar processes. Operation costing
accumulates total conversion cost for each operation. However direct material costs are
charged specifically to products or batches as in job-order system.
Reason :
Opening WIP 3,000 units
Materials introduced 13,000 units
16,000 units
Less: Closing WIP 4,000 units
Completed units 12,000 units
Equivalent completed units (under average method) of materials in the process
= 12,000 units + 50% of 4,000 units (closing stock)
= 12,000 units + 2000 units = 14,000 units.
< TOP >
35. Answer : (d)
Reason :
Statement of equivalent Production Unit (FIFO)
Input Output Material Conversion
Opening 450 Opening 450 20% 90 40% 180
Introduced 4,100 Introduced 3,580 100% 3,580 100% 3,580
Closing 520 75% 390 65% 338
4,550 4,550 4,060 4,098
Costs Rs.71,050 Rs.57,372
19
the month
Cost
per unit Rs. 17.50 Rs. 14.00
The total cost of closing work-in-process
Material – 390 × Rs.17.50 = Rs.6,825
Conversion – 338 × Rs.14.00 = Rs.4,732
Rs.11,557
Reason : Input = 5,000 units. Main product = 80% of 5,000 units = 4,000 units.
By-product = 16% of 5,000 units = 800 units
Process loss = 4% of 5,000 units = 200 units
Share of by-product:
Material cost = 5,000 units x Rs.24.80 = (Rs.1,24,000 x 800 ) / 4,800
= Rs.20,667
Other cost = 60% of Rs.15,150 = (Rs. 9,090 x 800) / 4,800 = Rs.1,515
Power cost = 40% of Rs.15,150 = (Rs.6,060 x 2) / 5 = Rs.2,424
Total costs of by-product = Rs.20,667 + Rs.1,515 + Rs.2,424 = Rs.24,606.
Reason :
Material Conversion
Input Output % units % units
Units Completed 36,000 100% 36,000 100% 36,000
started
– 40,000
Normal 3,000 100% 3,000 75% 2,250
loss 7.5%
Abnormal loss 1,000 100% 1,000 75% 750
40,000 39,000
Cost Rs.90,000 Rs.70,200
Cost per unit Rs.2.25 Rs.1.80
Cost of abnormal loss = 1,000 × Rs.2.25 + 750 × Rs.1.80
= Rs.2,250 + Rs.1,350 = Rs.3,600.
Reason :
Rs. Rs.
Total manufacturing Costs 1,94,080
Less: Overhead costs:
Indirect labor 12,160
Factory overhead 31,730
Indirect material 21,390
65,280
Freight in 5,570 70,850
1,23,230
Less: Direct labor 32,640
20
Less: Direct labor 32,640
Material consumed 90,590
Add: Closing material 9,640
1,00,230
Less: Opening material 11,620
Material purchased 88,610
Reason :
Particulars Per month Per km.
Fixed expenses:
Salary of Manager 6,500
Accountant 5,000
Cleaner 800
Mechanic 2,200
Garage rent 2,000
Insurance:
5% on 5 × 2, 70, 000
5,625
12
Drivers salary (Rs.5,000 × 5) 25,000
Rs.4, 200 × 5
1,750
Annual tax 12
48,875
Effective km = Rs.4,500 × .8 × 5 = 18,000 2.72
Depreciation Rs.2,70,000 ÷ (3,00,000 × .8) 1.13
Repairs Rs.2,000 ÷ (12 × 3,600) 0.05
Petrol (4,500 × Rs.36) ÷ (5.62 × 3600) 8.00
Oil and other sundries 0.13
(Rs.10 × 4,500)÷(100km × 3,600)
Cost of plying taxi per km. 12.03
Reason :
Input units Units Materials Conversion
Opening 1,200 Opening 1,200 – – 50% 600
From 1,12,000 Process 1 1,04,200 100% 1,04,200 100% 1,04,200
Normal 5,600 – – – –
Abnormal 600 100% 600 – –
Closing 1,600 100% 1,600 75% 1,200
1,13,200 1,13,200 1,06,400 1,06,000
21
1,13,200 1,13,200 1,06,400 1,06,000
Particulars Rs.
Materials – From Process 1 1,87,704
Process 2 47,972
2,35,676
Equivalent units 1,06,400
Cost per unit 2.215
Conversion cost 63,176
Equivalent units 1,06,000
Cost per unit 0.596
Finished goods: Rs.

Opening WIP 3,009
Process I (1,04,200 × Rs.2.215) 2,30,803
Conversion cost (1,04,800 × 0.596) 62,461
2,96,273
Closing WIP: Rs.
Materials – 1,600 × Rs.2.215 3,544
Conversion – 1,200 × 0.596 715
4,259
Reason :
Joint costs = Material cost + Processing cost
= Rs.16.56 + Rs.42 = Rs.58.56 lakhs
Net realizable value (NPV): Rs. (in lakhs)
Product A = Rs.69 – Rs.18 = Rs.51.00
B= Rs.6 – Rs.3.60 = Rs. 2.40
C= Rs.2.40 – 0 = Rs. 2.40
D= Rs.18.00 – Re.0.60 = Rs.17.40
Rs. 73.20
Rs.51.00
A = Rs.58.56 × Rs.73.20 = Rs.40.80
Rs.2.40
B = Rs.58.56 × Rs.73.20 = Rs.1.92
Rs.2.40
C = Rs.58.56 × Rs.73.20 = Rs.1.92
Rs.17.40
D = Rs.58.56 × Rs.73.20 = Rs.13.92
(Rs. in lakhs)
A (Rs) B (Rs) C (Rs) D (Rs)
Sales at split-off point 45.00 2.70 2.40 16.20
Sales after split-off point 69.00 6.00 2.40 18.00
Incremental sale 24.00 3.30 NIL 1.80
Incremental cost 18.00 3.60 – 0.60
Profit (loss) 6.00 (0.30) NIL 1.20
Profitability St:
Sale at split-off point – 2.70 2.40 –
Sale after processing 69.00 – – 18.00
Less cost:
Pre  40.80   1.92   1.92   13.92 
Post        
 18.00   −   −   0.60 
Profit 10.20 0.78 0.48 3.48
Total Profit 14.94
22
Reason : If the batch size increases, setting up cost per unit decreases. Similarly, if the batch size
decreases, setting up cost per unit increases. Therefore, (a) is correct.
43. Answer: (b) < TOP >
Reason: Cost per equivalent unit of ending inventory = Rs.10.00 x 3,000 equivalent units in
ending inventory = Rs.30,000.
Equivalent units 15,000 completed + 3,000 in ending inventory (60% x 5,000) = 18,000
equivalent units.
Total cost = Material Rs.170,000 + labor 4,000 + applied overhead Rs. 6,000 (400 hours
x Rs.15/hour). = Rs.1,80,000
(Overhead rate = Rs. 6,450 ÷ 430 = Rs. 15)
Cost per unit = Rs.180,000/18,000 = Rs.10.00 per equivalent unit.
Reason : Let x = total cost and y = profit per unit of product whose selling price is Rs.45,000
x + y = Rs.45,000.
Statement showing the present and anticipated cost
Present Increase Anticipated
Particulars %
cost (Rs.) (Rs.) cost (Rs.)
Direct material 0.5x 15 0.075 0.575x
Direct labor 0.2x 25 0.050 0.250x
Overhead costs 0.3x - 0.300x
x 0.125x 1.125x
The increase in the cost of direct material and wages has reduced the present profit by
25%.
∴1.125x + 0.75y = Rs.45,000
Solving above 2 equations, we get
x = Rs. 30,000
y = Rs.15,000
Statement showing profit per unit:
Direct Material 0.5x Rs.15,000
Direct Labour 0.2x Rs. 6,000
Overhead 0.3x Rs. 9,000
Total cost Rs. 30,000
Profit (50% of cost or 33-1/3% of S.P) Rs. 15,000
Selling price Rs.45,000
Statement of required selling price Rs.

Direct Material 0.575 of Rs.30,000 17,250
Direct Wages 0.250 of Rs.30,000 7,500
Overhead 0.300 of Rs.30,000 9,000
Total anticipated cost 33,750
Profit 33-1/3% of sales or 50% of cost 16,875
Selling price 50,625
Reason :
At 50,000 units the total cost is Rs.30,000 other than additional Rs.4,000.
At 20,000 units, total costs is Rs.21,000
Variable cost = Change of cost / change of activity =
(Rs.30,000 – Rs.21,000) / (50,000 – 20,000) = 0.30
Fixed cost = Rs.21,000 – 20,000 x 0.30 = Rs.15,000 ;
At 30,000 units = 30,000 x 0.30 + Rs.15,000 = Rs.24,000 ; Total cost = Rs.24,000 +
Rs.4,000 (additional cost) = Rs.28,000
Cost per unit = Rs.28,000 / 30,000 = Re. 0.93.
Reason : Input = 6,000 units + 14,000 units = 20,000 units;

Out put = 12,000 units + 8,000 units = 20,000 units;
23
Equivalent production of materials =
100% of 12,000 units + 100% of 8,000 units = 20,000 units;
Equivalent production of conversion =
100% of 12,000 units + 75% of 8,000 units = 18,000 units;
Material costs per unit =
(Rs.12,000 + Rs.29,000 + Rs.2,500 + Rs.5,500) / 20,000 units = Rs.2.45
Conversion cost per unit = (Rs.1,000 + Rs.5,000) / 18,000 units = Re.0.33
Total cost per unit of finished goods = Rs.2.45 + Re.0.33 = Rs.2.78.
Reason : Total process cost = Rs.49,263 + Rs.1,480 + Rs.6,500 + Rs.1,605 + 168% of Rs.6,500
= Rs.58,848 + Rs.10,920 = Rs.69,768.
Let, the unit of normal loss = x, No. of finished product units =9,120 –x; value of normal
loss = Rs.x
Cost of finished goods per unit = Rs.10 – 20% of Rs.10 = Rs.8
Cost of finished goods + value of normal loss = Total cost of process
Rs.8x (9,120 –x) + x = Rs.69,768
Rs.72,960 – Rs.7x = Rs.69,768
Rs.7x = Rs.3,192 ; x = 456 units.
Percentage of normal loss = 456 / 9,120 = 5%.
Reason : Break up of the total units is

Main product 75% of 1,000 = 750; By-product 20% of 1,000 = 200; Loss = 5% of 1,000
Statement showing the ascertainment of cost
STATEMENT SHOWING THE ASCERTAINMENT OF COST
Main Product By product
Total Total Cost Cost
Total cost
Cost cost per unit per unit
Particulars Ratio
Rs. Rs. Rs. Rs. Rs.
Materials 15:2 17,000 15,000 20.00 2,000 10.00
Labour 45:8 5,300 4,500 6.00 800 4.00
Overheads 3:1 2,400 1,800 2.40 600 3.00
24,700 21,300 28.40 3,400 17.00
Scrap realized (Rs.300) is deducted from overheads.
Material ratio between the main product and by-product
750 x 2 = 1,500 ; 200 x 1 = 200 ; Ratio is 15:2
Labor ratio between the main product and by-product
750 x 3 = 2,250 ; 200 x 2 = 400 ; Ratio is 45:8
Reason : The correct answer is (e). Process costing is used for continuous manufacturing of
relatively homogeneous units. Newspapers are published in long runs of identical items,
hence process costing is indicated.
(a), (b), (c) and (d) are not correct because they involve unique projects which require
job-order costing.
Reason : Work-in-Process = Work certified + Work uncertified – Profit in reserve – Progress

payment received
= Rs.60,60,000 + Rs.4,25,000 – *Rs.4,95,030 – Rs.50,00,000
= Rs.9,89,970
24
Plant= Rs.18,00,000 – Rs.1,75,000 = Rs.16,25,000
Total = Rs.9,89,970 + Rs.16,25,000 = Rs.26,14,970.
Working:
Particulars Rs. Particulars Rs.
To Material issued 30,80,000 By Work-in-Progress:
To Wages –Direct 12,30,000 Work certified 60,60,000
–Accrued 55,500 Work not certified 4,25,000
To Wages related cost 92,600 By Material
To Plant hire charges 1,82,000 Returned from site 42,500
To Site office cost 26,400 At site 60,000
To Planning & estimating cost 4,80,000
To Head office expenses appr. 80,500
To Direct expenses 85,300
To Depreciation 1,75,000
To Notional profit 11,00,200
65,87,500 65,87,500
To Profit & loss A/c:
2 50, 00, 000
× 11, 00, 200 ×
3 60, 60, 000 6,05,170 By Notional Profit 11,00,200
To Reserve *4,95,030
11,00,200 11,00,200
Reason : If the cost of the by-product is apportioned to joint products, it is made at notional sales
value at separation point. Other options are not appropriate for apportionment of by-
product to joint products.
Reason : In contract costing, parts of the profit of incomplete contracts are credited to general
profit and loss account. Rest part of the profit is kept as reserve for future loss. Therefore,
(e) is correct.
Reason : Abnormal loss should be classified as period cost. If the wastage is normal, it should be
product cost. Abnormal loss cannot be deferred charge, joint cost or discretionary cost.
Therefore, (b) is correct.
Reason : Allocating overheads on the basis of units of production is generally not appropriate.
However, if a firm manufactures only one product, this allocation method may be
acceptable because all costs are to be charged to the single product. Other points
mentioned in (a), (b), (c) and (e) are not true.
Fixed cos t
Reason : BEP = Contribution per unit
Upto the product of 7,500 units
Rs.80, 000 Rs.80, 000
BEP = Rs.25 − 60% of Rs.25 = Rs.10 = 8,000 units.
At any production level greater than 7,500 units, total fixed costs are Rs.1,20,000 but
there are two contribution margin. The first 7,500 units sold will produce a contribution
margin of Rs.75,000 (i.e. 7,500 × Rs.10). Hence, the other Rs.45,000 (i.e. Rs.1,20,000 –
Rs.75,000) must be contributed. The contribution per unit is Rs.12.50 (i.e. Rs.25 – 50%
of Rs.25)
Therefore, BEP = Rs.45,000 ÷ Rs.12.50 = 3,600 units.
25
Therefore, Total BEP = 7,500 units + 3,600 units = 11,100 units.
Reason :
Plant X Y Z Merged
Capacity
100% 100% 100% 100%
operated
(Rs. in (Rs. in (Rs. in (Rs. in
lakh) lakh) lakh) lakh)
Turnover 300 400 300 1,000
Variable cost 200 300 150 650
Contribution 100 100 150 350
Fixed cost 70 50 62 182
350
× 100 = 35%
P/V ratio of merged plant = 1000
Fixed cos t 182
= = Rs.520 lakhs
Break even point of merged plant = P / V ratio 35%
Break even capacity = (520/1,000) × 100 = 52%
Reason :
Sales (9,000 × Rs.28) 2,52,000
Variable Costs (9,000 × Rs.19) 1,71,000
Contribution Margin 81,000
Fixed costs 48,000
Net Income under variable costing 33,000
Using Absorption Costing:
Sales 2,52,000
Cost of goods sold (*23.80 × 9,000) 2,14,200
Net Income under absorption costing 37,800
Net income increased by Rs.37,800 – Rs.33,000 = Rs.4,800 under absorption costing.
* Total cost per unit = Variable cost + Fixed cost
= Rs. 19 + (12,000 x Rs.4) / 10,000 = Rs. 23.80.
Reason : Cost-volume-profit analysis is important for the determination of relationship between

revenues and costs at various level of operation. Other options (a), (b), (c) and (e) are not
correct in respect of cost-volume-profit analysis. Therefore, (d) is correct.
Reason: The prime cost basis combines the total of direct materials cost and direct labor cost and
uses this total as a basis for charging overheads. It considers both materials and labor in
charging overhead to each job or product. This method is not suitable in capital intensive
organisation. It is useful in cases where there are no wide fluctuations in processing. This
statement is false. Other statements given in (a), (b), (c) & (d) are correct.
26
Reason : In a variable costing system, only the variable manufacturing costs are recorded as
product costs. All fixed manufacturing costs are expensed in the period incurred. Because
changes in the relationship between production levels and sales level do not cause
changes in the amount of fixed manufacturing costs expensed, profits more directly
follow the trends in sales. Other options are not correct.
Contribution per unit

Reason : Contribution to sales ratio = Sales per unit
Sale Pr ice per unit − Variable cos t per unit

= Sale price per unit
According to above relation, contribution to sales ratio does not depend upon the total
fixed cost, fixed cost per unit, volume of sales or production. It depends upon the direct
expenses which are the components of variable costs.
62. Answer: (c ) < TOP >
Reason: All cost systems utilize some form of cost averaging and estimation. Therefore, (c) is
correct.
63. Answer: (a) < TOP >
Reason: Sales mix of products A:B:C

= 1:3:6 or 10% of A, 30% of B and 60% of C
Total contribution of the sales mix
= Proportionate contribution of A + Proportionate contribution of B +
Proportionate contribution of C
= 10% of Rs.12 + 30% of Rs.10 + 60% of Rs.8 = Rs.9.
Break-even sales units = (Rs.18,000 + Rs.9,000) / Rs.9 = 3,000 units.
Break-even sales units of product B = 30% of 3,000 = 900units.
Break-even sales of product B = 900 x Rs.20 = Rs.18,000.
Reason : Sales for 2004-05 =

Variable cost + Fixed cost –Loss = Rs.7 x 10,000 units + Rs.25,000 – Rs.5,000
= Rs.90,000, Selling price per unit = Rs.90,000 / 10,000 = Rs.9.
Contribution required for 15,000 units = Rs.25,000 + Rs.5,000 = Rs.30,000
Contribution from 15,000 units = 15,000 units (Rs.9 – Rs.7.50) = Rs.22,500
Additional contribution required from additional units = Rs.30,000 – Rs.22,500
= Rs.7,500
Units required to earn contribution of Rs.7,500 = Rs.7,500 / (Rs.9 – Rs.8.50)
= 15,000 units
Proposed sales = 15,000 units + 15,000 units = 30,000 units
Required increase in sales = 30,000 units – 10,000 units = 20,000 units
Percentage increase required = (20,000 / 10,000) x 100 = 200%
Reason : If the company buys from the market, the avoidable unit cost
= Rs.4.00 + Rs.4.80 + Rs.3.20 + 40% of Rs.1.25
= Rs.12 + Re.0.50 = Rs.12.50.
Reason : Costs, which can be reduced or removed from the company’s cost structure without
affecting product or service quality for the customer, are referred to as non-value-added
costs. Non-value-added costs can be removed without changing the customer's perceived
value of the company's service or product. They are costs typically associated with
27
activities such as transporting materials, verifying data, or transferring papers from one
department to another. Therefore, (d) is correct.
Reason : Contribution = Rs.100–Rs.80 = Rs. 20

Existing P/V ratio = 20/100 × 100 = 20%
New variable cost = Rs.81
When variable cost is Rs. 80 selling price – Rs.100
81× 100
= Rs.101.25
When variable cost is Rs.81 selling price - 80
(Rs.101.25 – Rs.100) / Rs.100 = 1.25%.
Selling price to be raised by 1.25%.
68. Answer: (a) < TOP >
Reason: A contribution per hour: (Rs.29 – Rs.14) / 1.5 = Rs.10;

Contribution per hour of B = (Rs.19 – Rs.12) / 0.50 = Rs.14;
so it would be best to satisfy the demand for B before we produce any of A, given the
limited hours available.
The company must produce B first:
1700 x 0.50 = 850 hours;
1,300 - 850 = 450 hours left;
450 / 1.5 = 300 units of A.
Reason :
Product Sales Mix Sales Contribution
(Rs. Lakh) (Rs. Lakh)
A 40 32 6.40
B 10 8 0.48
C 30 24 2.88
D 20 16 1.60
Total 11.36
Contribution 11.36 × 100

× 100 = 14.2%
PV ratio = Sales = 80
70. Answer: (c) < TOP >
Reason: Total cost per unit = Rs.29;

Fixed cost per unit at 50,000 units = Rs.4,00,000 / 50,000 = Rs.8.
Variable cost per unit = Rs.29 – Rs.8 = Rs.21;
Additional graphics cost per unit = Rs.3,000 / 1,500 = Rs.2 per unit.
Cost savings = Commission + packing cost
= Rs.2.50 + Rs.1.50 = Rs.4.00.
Therefore, net cost = Rs.21 + Rs.2 – Rs.4 = Rs.19.
Net profit per unit = Rs.22.50 – Rs.19.00 = Rs.3.50
Total profit = 1,500 x Rs.3.50 = Rs.5,250.
Reason : The minimum number of units is equal to fixed costs divided by the difference between
unit selling price and unit variable cost i.e., unit contribution margin. Rs.18,000 salvage
value, the cash flow to be received if production is discontinued, is treated here as a fixed
cost. Hence, continuation of the product line will permit the firm to break even or make a
28
profit only if the total contribution margin is Rs.18,000 or more.
Minimum no of units = Rs.18,000 ÷ (Rs.10 – Rs.6) = 4,500 units
Fixed overhead allocation is not considered in this calculation because it is not a cash
flow and will continue regardless of the decision.
Reason : Effect of price reduction is always to reduce contribution to sales ratio and increase the
break-even point, because contribution is the result of difference between sales and
variable cost. Therefore, (e) is true. Other options (a), (b), (c) and (d) are not correct.
< TOP OF THE DOCUMENT >
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Management Accounting I 0105

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Management Accounting I 0105

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Question Paper

Management Accounting I (151) – January 2005

(a) Product pricing (b) Product mix determination

(a) Opportunity costs (b) Engineered costs

(a) Cost of goods sold less beginning work-in-process

(a) Decremental cost means the cost of an additional unit

(a) Direct materials (b) Holiday with pay (c) Royalty

(a) Prices are increasing

(a) A stores assistant in a factory store

(a) Only (I) above (b) Only (II) above

(a) The cost object to which the cost is being related

Particulars December 1, 2004 (Rs.) December 31, 2004 (Rs.)

Activity level (hours) Budgeted overhead allowance (Rs.)

i. Total cost of machine to be depreciated Rs.3,00,000

(a) Whether a production manager earns a bonus

Number of Number of Square Number of Sales

(a) Cost of goods sold

(a) Theoritical capacity (b) Practical capacity (c) Normal capacity

i) Acquired Rs.50,000 of capital from owners

Overheads apportioned / Apportionment of service

Particulars Opening inventory (Rs.) Closing inventory (Rs.)

Particulars Completion of materials Units

Material Purchased - Rs.170,000. There was no beginning inventory

Direct material 50%

(a) Foundry (b) Automobile repair

(a) Deferred charge (b) Period cost (c) Product cost

(a) Several well differentiated products are manufactured

Direct material - Rs.10 per unit

(a) Volume of operations necessary to break-even

(a) Product costs include variable selling costs

(a) Fixed cost per unit (b) Total fixed cost

ii. Marketing costs:

Particulars Rs. per unit

Product Sales Mix (%) PV Ratio

Reason : Management accounting is not mandatory. The application of management accounting

Reason: Overhead absorption rate per rupee labor cost =

Reason : Let, at 100% capacity level, units produced = 100

Reason : Variable cost = Change of cost / change of activity

Reason: Computation of comprehensive machine hour rate:

Reason: Cost to be Allocated / Cost Driver = Allocation Rate

Reason: Weighted Average Method:

30. Answer : (a) < TOP >

31. Answer : (d) < TOP >

Reason : Materials purchased = Rs.32,665 + Rs.8,635 – Rs.7,120 = Rs.34,180

38. Answer : (b) < TOP >

40. Answer : (e) < TOP >

Finished goods: Rs.

Statement of required selling price Rs.

Reason : Input = 6,000 units + 14,000 units = 20,000 units;

Reason : Break up of the total units is

Reason : Work-in-Process = Work certified + Work uncertified – Profit in reserve – Progress

55. Answer : (b) < TOP >

56. Answer : (b) < TOP >

Reason : Cost-volume-profit analysis is important for the determination of relationship between

59. Answer : (e) < TOP >

Contribution per unit

Sale Pr ice per unit − Variable cos t per unit

62. Answer: (c ) < TOP >

Reason: Sales mix of products A:B:C

Reason : Sales for 2004-05 =

67. Answer : (c) < TOP >

Reason : Contribution = Rs.100–Rs.80 = Rs. 20