0604_MA-II_(MB162)

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Question Paper Management Accounting – II (MB162) : April 2006

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

1. Which of the following is not a general method for determining the transfer prices?

(a) Cost-based transfer pricing (b) Income-based transfer pricing (c) Market-based transfer pricing (d) Negotiated transfer pricing (e) Contribution based transfer pricing.

(1 mark)

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2. Which of the following is true in respect of full cost pricing method?

(a) It is used to recover market price plus mark-up (b) It is used to recover standard cost plus mark-up (c) It is used to recover fixed costs only (d) It is used to recover variable costs only (e) It is used if a company does not have the basic idea of demand for the product.

(1 mark)

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3. Which of the following statements is true with regard to the difference between a flexible budget and a fixed budget?

(a) A flexible budget primarily is prepared for planning purposes while a fixed budget is prepared for performance evaluation

(b) The variances are usually larger with a flexible budget than with a fixed budget (c) A flexible budget includes only variable costs whereas a fixed budget includes only fixed costs (d) A flexible budget is established by operating management while a fixed budget is determined by

top management (e) A flexible budget provides cost allowances for different levels of activity whereas a fixed budget

provides costs for one level of activity.

(1 mark)

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4. The relationship between the budgeted number of working hours and the maximum possible working hours in a budgeted period is

(a) Efficiency ratio (b) Activity ratio (c) Calendar ratio (d) Capacity usage ratio (e) Capacity utilization ratio.

(1 mark)

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5. The most fundamental responsibility center affected by the use of market-based transfer prices is

(a) Revenue center (b) Cost center (c) Profit center (d) Investment center (e) Production center.

(1 mark)

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6. A favorable materials price variance coupled with an unfavorable materials usage variance would most likely result from

(a) The purchase and use of higher than standard quality materials (b) The purchase of lower than standard quality materials (c) Product mix production changes (d) Machine efficiency problems (e) Labor efficiency problems.

(1 mark)

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7. ‘The average human being has an inherent dislike of work and will avoid it if he can’ - this job attitude is specifically dealt with in

(a) Herzberg’s Two Factor Theory (b) Douglas McGregor’s Theory Y (c) The principles of human motivation as revealed by Abraham Maslow (d) Douglas McGregor’s Theory X (e) McDonald’s Theory Z.

(1 mark)

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8. An organized creative approach, which emphasizes efficient identification of unnecessary cost is known as

(a) Management by objective (b) Activity based costing (c) Target costing (d) Value analysis (e) Quality costing.

(1 mark)

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9. Which of the following statements is false with respect to target costing?

(a) Target costing is a customer oriented technique (b) Target costing requires market research to determine the customer’s perceived value of the

product based on its functions and attributes (c) The maximum advantage of adopting target costing is when it is deployed at the products selling

stage (d) A major feature of target costing is that a team approach is adopted to achieve the target cost (e) Target costs are conceptually different from standard costs.

(1 mark)

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10. A set of concepts and tools applied for getting all the employees focused on continuous improvement in the eyes of the customers is popularly known as

(a) Quality control (b) Total quality management (c) Customer orientation (d) Self management (e) Cost control.

(1 mark)

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11. The following information pertains to Pawan Ltd. for its new product:

Production units 12,000 units

Investment for the new product Rs.3,00,000 Fixed costs Rs.1,08,000

Variable cost per unit Rs.28

If the company desires to earn 22% return on investment, the selling price should be

(a) Rs.44.60 (b) Rs.42.50 (c) Rs.40.00 (d) Rs.46.60 (e) Rs.46.40.

(1 mark)

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12. Shiva Ltd., manufacturing a single product, is operating at 70% level of capacity at which the sales are Rs.7,35,000. The company has estimated the following data for the current year:

Variable cost Rs.150 per unit

Semi-variable cost Rs.85,000 when output is nil plus variable portion of Rs.200 for each additional 1% level of capacity

Fixed cost Rs.2,20,000 at present level of activity. This cost is estimated to be increased by Rs.60,000 if the level of activity exceeds 80%

The company is facing a severe competition in the market. The management of the company is considering a proposal to decrease the selling price by 10%. The present sale price is Rs.350.

The budgeted operating profit per unit at 90 % level of activity on the assumptions that the selling price is reduced by 10%, is


(2 marks)

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13. TTD Ltd. has furnished the following data relating to its product for the month of March 2006:

Particulars Budget Actual Sales in units 1,40,000 1,50,000 Production units 1,40,000 1,60,000 Direct labor hours 2,80,000 3,10,000 Machine hours 7,00,000 7,95,000 Fixed overhead (Rs.) 3,15,000 3,53,000

The fixed overhead capacity variance for the month is

(a) Rs.50,000 (F) (b) Rs.50,000 (A) (c) Rs.45,000 (F) (d) Rs.45,000 (A) (e) Rs.38,000 (A).

(1 mark)

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14. Vixon Ltd. has furnished the following information pertaining to its product:

Direct material Rs.15 Direct labor Rs.15 Production overheads Rs.25 (40% fixed) Selling & administrative overheads Rs.30 (50% fixed) Normal Production 1,000 units

The total costs for 980 units are

(a) Rs.77,500 (b) Rs.83,800 (c) Rs.83,300 (d) Rs.1,10,000 (e) Rs.1,03,750.

(2 marks)

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15. Santoshi Ltd. has furnished the following information pertaining to its business:

Sales Rs. 8,00,000 Variable costs Rs. 4,80,000 Traceable fixed costs Rs. 1,20,000 Average invested capital Rs. 4,50,000 Imputed interest rate 22%

The residual income of the company is

(a) Rs.1,01,000 (b) Rs.1,44,000 (c) Rs.1,08,000 (d) Rs.1,26,000 (e) Rs.1,24,000. (1 mark)

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16. G Reddy Ltd. manufactures a single product at the operated capacity of 40,000 units while the normal capacity of the plant is 50,000 units per annum. The company has estimated 20% profit on sales realization and furnished the following budgeted information:

Particulars 50,000 units (Rs.)

40,000 units (Rs.)

Fixed overheads 2,00,000 2,00,000 Variable overheads 3,50,000 2,80,000 Semi-variable overheads 3,50,000 3,00,000 Sales realization 19,00,000 15,20,000

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


(2 marks)

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17. Narayana Ltd. manufactures and sells a special model of calculator – NR69. The company has estimated the following activity of the company for the month of May 2006:

Sales Rs.5,80,000 Gross profit on sales 25% Increase in inventory during the month Rs.18,400 Decrease in sundry debtors Rs.12,500 Total selling and administrative expenses Rs.25,000 + 2.5% on sales Depreciation expenses which is included in fixed selling and administrative expenses

Rs.9,800

The net cash surplus or deficit for the month of May 2006 is

(a) Rs.1,02,400 (Surplus) (b) Rs.65,000 (Deficit) (c) Rs.1,09,400 (Surplus) (d) Rs.1,02,600 (Deficit) (e) Rs.1,11,400 (Surplus).

(2 marks)

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18. Victor Ltd. has estimated Rs.2,80,000 and Rs.2,20,000 for direct material and direct labor respectively for the month of May 2006. It is the policy of the company to absorb overheads as under:

Factory overheads 50% of direct wages Administrative overheads 20% of works cost Selling and distribution overheads 20% of works cost

It is estimated that the selling and distribution overheads will increase by 15% in May 2006. The company sells goods at a profit of 12.5% on sales.

The budgeted sales for the month of May 2006 is

(a) Rs.9,96,914 (b) Rs.9,09,900 (c) Rs.10,31,771 (d) Rs.8,56,800 (e) Rs.9,15,652.

(2 marks)

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19. Leo Toys manufactures a toy monkey with moving parts and a built-in voice box. Projected sales for 6 months are as follows:

Month Projected sales in units

May 2006 4,000 June 2006 4,300

July 2006 4,500

August 2006 4,250 September 2006 4,400

October 2006 4,500 Each toy requires direct materials from a supplier at Rs.25 for moving parts. Voice boxes are purchased from another supplier at Rs.10 per toy. Labor cost is Rs.20 per toy and variable overhead cost is Rs.5 per toy. Fixed manufacturing overhead applicable to production is Rs.39,000 per month. It is the practice of the company to manufacture an output in a month, which is equivalent to 80% of the current month sales and 40% of the following month sales.

The production budget for the month of July 2006 and the production cost budget for the month of August 2006 are

(a) 5,300 units and Rs.3,74,400 respectively (b) 5,400 units and Rs.3,98,000 respectively (c) 5,300 units and Rs.3,48,600 respectively (d) 5,400 units and Rs.3,74,400 respectively (e) 5,300 units and Rs.3,48,400 respectively.

(2 marks)

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20. Java Ltd. manufactures 5,000 units of Product JV at a cost of Rs.90 per unit. Presently, the company is utilizing 50% of the total capacity. The information pertaining to cost per unit of the product is as follows:

Material – Rs.50 Labor – Rs.20 Factory overheads – Rs.20 (40% fixed) Administrative overheads – Rs.10 (50% fixed)

Other information:

i. The current selling price of the product is Rs.110 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 90% capacity level – Material cost per unit will increase by 5% and current selling

price per unit will reduce by 5%.

The profit per unit of the product of the company at 60% and 90% capacity level will be

(a) Rs.8.83 and Rs.7.77 respectively (b) Rs.8.97 and Rs.6.88 respectively (c) Rs.8.97 and Rs.7.77 respectively (d) Rs.6.63 and Rs.6.88 respectively (e) Rs.8.97 and Rs.6.98 respectively.

(2 marks)

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21. Terry Tools Ltd. has a normal capacity of 50 machines working 8 hours per day of 25 days in a month. The budgeted fixed overheads of a month are Rs.1,00,000. The standard time required to manufacture one unit of product is 4 hours. In a particular month, the comp any worked for 24 days of 350 machine hours per day and produced 2,320 units of the product. The actual fixed overheads incurred were Rs.88,800.

The fixed overhead cost variance and fixed overhead expenditure variance are

(a) Rs.4,000 (A) and Rs.6,000(A) respectively (b) Rs.4,000 (F) and Rs.11,200 (F) respectively (c) Rs.10,000 (A) and Rs.11,200 (F) respectively (d) Rs.5,000 (A) and Rs.7,200 (A) respectively (e) Rs.4,000 (F) and Rs.7,200 (A) respectively.

(2 marks)

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22. Sai Apna Ltd. has furnished the following information relating to cost at a capacity level of 5,000 units:

Particulars Rs. Material cost 25,000 (100% variable) Labour cost 15,000 (100% variable) Power 1,250 (80% variable) Repairs and maintenance 2,000 (75% variable) Stores 1,000 (100% variable) Inspection 500 (20% variable) Administration overheads 5,000 (25% variable) Selling overheads 3,000 (50% variable) Depreciation 10,000 (100% fixed)

The production cost budget per unit, at the level of 6,500 units, is

(a) Rs.12.55 (b) Rs.13.37 (c) Rs.12.00 (d) Rs.11.79 (e) Rs.13.98. (2 marks)

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23. A favorable variance of Rs.3,650 for the flexible budget demonstrates that

(a) Actual costs were Rs.3,650 more than the master budget (b) Actual costs were Rs.3,650 less than for the planned level of activity (c) The total of the planning and efficiency variances is Rs.3,650 (d) Actual costs were Rs.3,650 less than standard for the achieved level of activity (e) The cost under master budget is Rs.3,650 more than the cost under planned level of activity.

(1 mark)

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24. Traditional cost management does not involve

(a) Market research into customer requirements (b) Estimation of product cost (c) Obtaining prices from suppliers (d) Value engineering (e) Overheads absorption.

(1 mark)

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25. When comparing performance report information of top management with that of lower level management

(a) Top management reports are more detailed (b) Lower level management reports are typically for longer time periods (c) Top management reports show control over fewer costs (d) Lower level management reports are likely to contain m ore quantitative data and less financial

data (e) Top management reports are usually not of the exception type but present a complete analysis of

all variances.

(1 mark)

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26. A systematized approach known as zero-based budgeting (ZBB)

(a) Presents the plan for only one level of activity and does not adjust to change in the level of activity

(b) Presents a statement of expectations for a period of time but does not present a firm commitment (c) Divides the activities of individual responsibility centers into a series of packages that are

prioritized (d) Classifies budget requests by activity and estimates the benefits arising from each activity (e) Commences with the current level of spending.

(1 mark)

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27. Sanu Ltd. has two divisions - A and B. The division A has the capacity to manufacture 1,20,000 units of a special component LJ annually and it has some idle capacity currently. The budgeted residual income for the division A is Rs.7,00,000. The relevant details extracted from the budget of A are as under:

Sales (to outside customers) 1,00,000 units @ Rs.180 per unit Variable cost per unit Rs.160 Divisional fixed cost Rs.8,00,000 Capital employed Rs.80,00,000 Cost of capital 12.5% per annum

Division B received an order for which it requires 20,000 units of a component similar to LJ. An additional variable cost of Rs.3 per unit will be incurred to make minor modifications to LJ to suit the requirements of Division B.

The minimum transfer price per unit which A should quote to B to achieve its budgeted residual income is (a) Rs.155 (b) Rs.188 (c) Rs.165 (d) Rs.177 (e) Rs.185.

(2 marks)

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28. The budget that describes the long term position, goals and objectives of an entity within its environment is known as (a) Capital budget (b) Operating budget (c) Cash management budget (d) Strategic budget (e) Financial budget. (1 mark)

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29. Which of the following may be considered as an independent item in the preparation of the master budget?

(a) Production budget (b) Capital investment budget (c) Pro forma income statement (d) Pro forma statement of financial position (e) Overhead expenses budget. (1 mark)

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30. The following information is extracted from the books of Havate Ltd. for product H for the month of March 2006:

Standard labor hours per unit 4 hours Actual hours 196 hours Labor rate variance Rs.147 (Adverse) Actual labor rate Rs.11.75 Units produced 50 units

The labor efficiency variance is

(a) Rs.44 (Favorable) (b) Rs.55 (Adverse) (c) Rs.50 (Favorable) (d) Rs.50 (Adverse) (e) Rs.44 (Adverse).

(2 marks)

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31. The difference between budgeted fixed overhead costs and applied fixed overhead costs is known as

(a) Fixed overhead costs variance (b) Fixed overhead expenditure variance (c) Fixed overhead volume variance (d) Fixed overhead efficiency variance (e) Fixed overhead capacity variance.

(1 mark)

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32. Kosha Ltd. has furnished the following data for the month of March 2006:

Particulars Standard Actual Material 1,000 kg 1,150 kg Material cost per kg. Rs.12 Rs.14

The material usage variance is

(a) Rs.1,800 (Adverse) (b) Rs.2,100 (Adverse) (c) Rs.3,000 (Adverse) (d) Rs.2,100 (Favorable) (e) Rs.1,800 (Favorable).

(1 mark)

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33. A profit making firm can increase its return on investment by

(a) Increasing sales revenue and operating expenses by the same amount in rupees. (b) Increasing investment and operating expenses by the same amount in rupees. (c) Decreasing sales revenue and operating expenses by the same percentage. (d) Increasing sales revenue and operating expenses by the same percentage (e) Decreasing investment and sales by the same percentage.

(1 mark)

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34. The costs that incurred in the past which are not relevant to a future decision are known as

(a) Discretionary costs (b) Full absorption costs (c) Unallocated indirect costs (d) Sunk costs (e) Opportunity costs.

(1 mark)

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35. A debit balance of labor rate variance indicates that

(a) Standard hours of labour exceed actual hours (b) Actual hours of labor exceed standard hours (c) Standard rate of labor exceeds actual rate (d) Actual rate of labor exceeds standard rate (e) Standard hours with actual rate exceed actual hours with actual rate.

(1 mark)

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36. Arpan Ltd. has furnished the following information:

Particulars Budget Actual Output in units 6,000 6,150 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.800 (Favorable) (e) Rs.300 (Adverse).

(1 mark)

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37. Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget schedule which provides the necessary input data for the Direct Labor Budget is

(a) Sales budget (b) Raw materials purchases budget (c) Schedule of cash receipts and disbursements (d) Schedule of manufacturing overhead (e) Production budget.

(1 mark)

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38. The goals and objectives upon which an annual profit plan is most effectively based are

(a) Financial and quantitative measures (b) A combination of financial, quantitative and qualitative measures (c) Qualitative measures of organizational activity such as product innovation leadership, product

quality levels and product safety (d) Quantitative measures such as growth in unit sales, number of employees and manufacturing

capacity (e) Financial measures such as net income, return on investment and earning per share.

(1 mark)

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39. A fixed overhead volume variance based on standard direct labor hours measures

(a) Fixed overhead efficiency (b) Fixed overhead use (c) Deviation from the standard direct labor hours in the goods sold (d) Deviation from the normal level of direct labor hours (e) Deviation from the standard direct labor hours capacity.

(1 mark)

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40. If overhead is applied on the basis of units of output, the variable overhead efficiency variance will be

(a) A function of the direct labor efficiency variance (b) Favorable, if output exceeds the budgeted level (c) Unfavorable, if output is less than the budgeted level (d) Indeterminable from the information gi ven (e) Zero.

(1 mark)

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41. Which of the following variances is of least significance from a behavioral control perspective?

(a) Unfavorable material quantity variance amounting to 20% of the quantity allowed for the o utput 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)

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42. The use of activity-based costing results in

(a) Substantially greater unit costs for low-volume products than is reported by traditional product costing

(b) Substantially lower unit costs for low -volume products than is reported by tradit ional product costing

(c) Decreased setup costs being charged to low volume products (d) Equalizing setup cost for all product lines (e) Substantially lower unit costs for low -volume products than is reported by direct product costing.

(1 mark)

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43. Which of the following statements about ideal standards is false?

(a) It is called theoretical or maximum efficiency standard (b) These are standard costs that are set for production under optimal condition (c) It does not make provision for workers with different degrees of experience and skill levels (d) It makes no allowance for wastage, spoilage and machine breakdowns (e) It can be used for cash budgeting or product costing.

(1 mark)

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44. A budget manual, which enhances the operation of a budgeting system, is most likely to include

(a) Employee training policies (b) Distribution instructions for budget schedules (c) Employee hiring policies (d) Documentation of the accounting system (e) Company policies regarding the authorization of transactions.

(1 mark)

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45. Which of the following is false with regard to product life cycle?

(a) Product cost, revenue and profit patterns tend to follow predictable courses through the product life cycle

(b) The functional emphasis is the same in all phases of the product life cycle (c) Profit per unit varies as products move through their life cycles (d) The products have finite lives (e) Each phase of product life cycle poses different threats and opportunities.

(1 mark)

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46. Which of the following information is required by Operating Management?

(a) Changes in government policies (b) Overtime payments (c) Working capital (d) Order bookings (e) Return on investment.

(1 mark)

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47. Basic standards are known as

(a) Ideal standards (b) Current standards (c) Measurement standards (d) High standards (e) Expected standards

(1 mark)

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48. Which of the following statements is false with reference to shadow price?

(a) The use of shadow price is incompatible with the philosophy of decentralization through divisionalisation

(b) To derive the shadow price, one has to obtain the dual solution to the mathematical programming model developed for solving the production planning problem of the buying division

(c) Assimilating the data and application of the model becomes a highly centralized affair (d) Operating managers often do not understand and appreciate the concept of shadow price (e) Shadow price can be used only when the resources are available in plenty.

(1 mark)

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49. Top-to-bottom budget is also known as

(a) Participative budget (b) Imposed budget (c) Zero-based budget (d) Manpower budget (e) Master budget.

(1 mark)

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50. Sankar Ltd. is preparing its cash budget for the next period. Sales are expected to be Rs.1,00,000 in May, Rs.2,00,000 in June, Rs.3,00,000 in July and Rs.1,00,000 in August. Half of all sales is cash sales and the other half is on credit. Experience indicates that 70% of the credit sales will be collected in the month following the month of sale, 20% of the credit sales will be collected in the second month following the month of sales and 10% in the third month following the month of sale. The budgeted collection for the month of August is


(2 marks)

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51. DKM Ltd. services washing machines and clothes dryers. It charges customers for the spare materials with markup on cost. The company has four employees, each earning Rs.60,000 per year and spending 2,000 hours per year on service calls. It sells parts that cost Rs.1,10,000 annually. The company has other costs of Rs.1,00,000 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.40,000 per annum, is

(a) Rs.75,000 (b) Rs.96,000 (c) Rs.30,000 (d) Rs.44,000 (e) Rs.27,000.

(2 marks)

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52. The following data pertaining t o Kiston Ltd., which is operating at 80% of the capacity:

Particulars At 80% capacity (Rs.)

Variable overheads: Indirect labor Indirect material Semi-variable overheads: Power (30% fixed, 70 % variable) Repairs and maintenance (60 % fixed, 40 % variable) Fixed overheads: Depreciation Insurance Others

10,000

4,000

20,000 2,000

11,000

4,000 10,000

Total 61,000

The estimated direct labor hours are 32,000. The overhead recovery rate per direct labor hour at 70% is

(a) 2.05 (b) 1.435 (c) 0.536 (d) 0.508 (e) 14.35.

(2 marks)

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53. Sumit Ltd., a manufacturer of a single product, uses standard absorption costing system. The following data have been extracted from the budget for the month of March 2006:

Budgeted production units 10,000 Budgeted fixed production overhead cost Rs. 60,000

In the month of March 2006, the fixed production overhead cost is under absorbed by Rs.6,000 and the fixed production overhead expenditure variance was Rs. 4,000 (Adverse). The actual number of units produced by the company for the month was

(a) 10,600 (b) 9,800 (c) 10,000 (d) 11,000 (e) 9,667.

(2 marks)

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54. Bidushi Ltd. has two divisions - X and Y whose return on investment is 18% and 14% respectively. Both the divisions are considering an outlay on new investment projects, the details of which are as under:

Particulars Project of Division X Project of Division Y Investment outlay Rs.1,50,000 Rs.2,00,000 Net annual return Rs. 30,000 Rs. 25,000

The cost of capital of the company is 15% per annum.

Which of the following statements is true in case the performance measurement used is Return on Investment (ROI) and Residual Income (RI)?

(a) Using ROI or RI, Project of X will be accepted and project of Y will be rejected (b) Using ROI or RI, Project of X will be rejected and project of Y will be accepted (c) Using ROI, Project of X will be accepted and project of Y will be rejected whereas using RI,

Project of X will be rejected and project of Y will be accepted (d) Using ROI, Project of X will be rejected and project of Y will be accepted whereas using RI,

Project of X will be accepted and project of Y will be rejected (e) Using ROI, Project of X will be accepted and project of Y will be rejected whereas using RI, both

the projects will be rejected.

(2 marks)

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55. Consider the following details pertaining to Vishnu Ltd. for the month of March 2006:

Particulars Rs. Sales 50,000 Direct materials 17,500 Direct labor 10,000 Variable overheads 5,000 Capital employed 50,000

The return on investment in March 2006 is 10%. In the month of April 2006, 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 change in the return on investment for the month of April 2006 is

(a) Increase of 95.5% (b) Increase of 92.16% (c) Decrease of 6.5% (d) Decrease of 6.5% (e) Increase of 24.02%.

(2 marks)

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56. The estimated annual production of products A and B are 5,000 and 15,000 respectively. The budgeted cost details of these products are as under:

Particulars A B Direct materials per unit Rs.40 Rs.50 Direct labor per unit (@ Rs.9 per hour) Rs.36 Rs.27 Selling overheads per unit (40% variable) Rs. 5 Rs.10

The other overheads are charged to the products as follows: Factory overheads (60% fixed) - 100% of direct wages Administrative overheads (100% fixed) - 5% of factory cost

The fixed capital investment is Rs.10,00,000 and the working capital requirement is equivalent to 6 months stock of cost of sales of both the products. A return on investment of 20% is expected. The expected return on capital employed is (a) Rs.3,30,275 (b) Rs.3,00,000 (c) Rs.4,35,375 (d) Rs.4,40,100 (e) Rs.5,80,500.

(2 marks)

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57. X-Trim Ltd. manufactures and sells two products – D and K. The company has furnished the following data pertaining to cost per unit of the products:

Particulars D (Rs.) K (Rs.) Direct material 96 72 Direct labor (at the rate of Rs.20 per hour) 80 100 Variable production overheads at the rate of Rs.24 per hour 24 48 200 220

The fixed manufacturing overheads of the company are Rs.4,00,000 per month and the budgeted direct labor hours are 20,000 per month. The company has carried out an analysis of its production support activities and found that its fixed cost varies in accordance with non -volume-related factors, which are given under:

Activity Cost driver D (No. of times)

K (No. of times)

Total cost (Rs.)

Setup Production run 30 20 52,000 Material handling Production run 20 30 1,20,500 Inspection Inspection 26 65 2,27,500 4,00,000

Budgeted production is 600 units of product D and 800 units of Product K. The company desires to earn a profit of 20% on total production costs.

The selling prices of product K, using Activity based costing, is

(a) Rs.647.40 (b) Rs.528.80 (c) Rs.315.52 (d) Rs.366.24 (e) Rs.351.52. (2 marks)

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58. Akshya Ltd. presents the following data for the last quarter of 2005-06:

Particulars Budget Actual Number of working days 60 64 Man hours per day 800 ? Output per man hour (units) 1 ? Total output (units) 48,000 66,000 Fixed overhead expenditure Rs.4,800 Rs.5,300

The Overhead Efficiency Variance of the company for the quarter was Rs.640 (F). The actual man hours per day (approximately) was (a) 680 hours (b) 966 hours (c) 931 hours (d) 880 hours (e) 910 hours.

(2 marks)

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59. A company manufactures a single product with a capacity of 1,50,000 units per annum. The summarized income statement for the year is as under:

Particulars Rs. Rs. Sales (1,00,000 units @ Rs.15 per unit) 15,00,000 Cost of sales: Direct materials

3,00,000

Direct labor 2,00,000 Variable production overhead 60,000 Fixed production overhead 3,00,000 Fixed administrative overhead 1,50,000 Variable selling & distribution overhead 90,000 Fixed selling & distribution overhead 1,50,000 Total costs 12,50,000 Profit 2,50,000

The company desires to increase the present level of sales from 1,00,000 units to 1,20,000 at a price of Rs.17 per unit. If an expenditure of Rs.4,50,000 is made on advertising, the profit of the company will be


(2 marks)

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60. Mahalaxmi Pump Ltd. manufactures water pumps and uses a standard cost system. The following standard factory overhead costs per water pump are based on direct labor hours:

Variable overheads (40 hours at the rate of Rs.8 per hour) = Rs.320 Fixed overheads (40 hours at the rate of Rs.5 per hour) = Rs.200

The additional information is available for the month of March 2006:

i. 2,200 pumps were produced although 2,500 had been scheduled for production ii. The normal capacity level was 1,00,000 direct labor hours per month iii. 94,000 direct labor hours were worked at a total cost of Rs.9,40,000 iv. The standard direct labor rate is Rs.9 per hour v. The standard direct labor time per unit is 40 hours vi. Variable overhead costs were Rs.7,40,000 vii. Fixed overhead costs were Rs.5,40,000

The fixed overhead expenditure variance and direct labor efficiency variance are

(a) Rs.40,000 (F) and Rs.54,000 (F) respectively (b) Rs.40,000 (A) and Rs.54,000 (A) respectively (c) Rs.54,000 (A) and Rs.40,000 (F) respectively (d) Rs.44,000 (A) and Rs.50,000 (A) respectively (e) Rs.44,000 (A) and Rs.54,000 (A) respectively.

(2 marks)

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61. In a day of 8 hours, a direct worker is expected to produce 20 units of product A or 10 units of Product B or 16 units of product C. The budgeted production for the month of March 2006 is as follows:

A–250 units; B–200 units; C–300 units

During the month, 400 direct labor hours were worked and the actual production is as follows:

A–260 units; B–250 units; C–200 units

The capacity ratio is

(a) 102.50% (b) 101% (c) 97.56% (d) 101% (e) 99%. (2 marks)

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62. Nirala Ltd. manufactures two products - X and Y. A forecast of units to be sold in the next five months of the year 2006-07 is given below:

Month X (units) Y (units) May 1,000 2,800 June 1,200 2,800 July 1,600 2,400 August 2,000 2,000 September 2,400 1,600

Other information is as follows:

Cost per unit X (Rs.) Y (Rs.) Direct material 12.50 19.00 Direct labour 4.50 7.00 Factory overhead per unit 3.00 4.00

There will be no opening or closing stock of work -in-progress (WIP) in any month. The finished product (in units) equal to half of the budgeted sale of the next month should be in stock at the en d of each month (including previous month April).

The total production cost budget of X and Y for the period from May to August is


(2 marks)

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63. The production budget of BRC Ltd. is 7,680 units per year and is spread over the quarters as follows:

January to March 2,400 units April to June 1,600 units July to September 1,800 units October to December 1,880 units

Budgeted fixed overheads for the year was Rs.57,600. The company works for 48 weeks in a year, 5 days per week, 8 hours per day. Standard output is 4 units per hour. During April, 20 days were worked. Actual output was 700 units. Actual hours worked were 150 hours. Actual fixed overheads for the month was Rs.4,850.

The fixed overhead volume variance for the month of January was

(a) Rs.250 (F) (b) Rs.400 (F) (c) Rs.450 (F) (d) Rs.400 (A) (e) Rs.450 (A).

(2 marks)

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64. Variances themselves do not explain why budgeted operating income was not achieved. However, variances

(a) Raise questions about potential problem areas and direct attention towards the same (b) Must be studied, no matter how small it is (c) Should not be examined unless they exceed 30% of the expected cost or Rs 50,000, whichever is

lower (d) Can be safely ignored until a positive or negative trend begins to emerge (e) Should not be examined if it is less than Rs.1,000.

(1 mark)

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65. Anoo Ltd. presents following data for the month of March 2006:

Particulars Budget Actual Number of working days 25 22 Man hours per day 300 280 Output per man hour (kg) - 3.8 Standard fixed overhead rate per unit Rs.9.50 -

If the fixed overhead capacity variance was Rs.22,990 (A), the budgeted output per man hour was (a) 2.7 kg (b) 3 kg (c) 4.2 kg (d) 4.6 kg (e) 5.5 kg.

(2 marks)

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66. Kewal Ltd. can produce 4,000 units of a certain product at 100% cap acity. The company has furnished the following information:

Particulars June 2006 July 2006 Units produced 2,800 3,600 Overhead costs: Rs. Rs. Repairs and maintenance 500 560 Power 1,800 2,000 Shop labor 700 900 Consumable stores 1,400 1,800 Salaries 1,050 1,050 Inspection 200 240 Depreciation 1,400 1,400

The rate of production per hour is 10 units. Direct material cost per unit is Rs.4 and direct wages per hour is Rs.5. The cost of production per unit, at 60% level of capacity, is (a) Rs.3.49 (b) Rs.4.15 (c) Rs.3.73 (d) Rs.7.25 (e) Rs.6.95.

(2 marks)

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67. One kilogram of product ‘K’ requires two chemicals A and B. The following were the details of product ‘K’ for the month of December 2005:

i. Standard mix - Chemical ‘A’ 50% and Chemical B 50%

ii. Standard price per kg of chemical ‘A’ is Rs.12 and chemical ‘B’ is Rs.15 iii. Actual input of chemical ‘B’ is 70 kg iv. Actual price per kg of chemical ‘A’ is Rs.15

v. Standard normal loss is 10% of total input vi. Material cost variance total is Rs.650 adverse vii. Material yield variance total is Rs.135 adverse.

If the actual output is 90 kg, the standard yield for actual input is (a) 40 kg (b) 110 kg (c) 100 kg (d) 99 kg (e) 85 kg.

(2 marks)

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68. Simon Processors Ltd. produces a commodity by blending two raw materials – A and B. The following are the details regarding the raw materials:

Material Standard mix Standard price per kg

A 40% Rs.4.00

B 60% Rs.3.00

The standard process loss is 15%. During the month of March 2006, the company produced 3,400 kg of finished product. The position of stock and purchases for the month of March 2006 is as under:

Material Stock as on

March 01, 2006

Stock as on

March 31, 2006

Purchases during

March 2006

A 70 kg 10 kg 1,600 kg Rs.6,800

B 80 kg 100 kg 2,400 kg Rs.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)

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69. Usha Chemicals manufactures three products in one common process but each product is capable of being further processed separately after the split off point. The company has furnished the following estimated cost of the three products:

Particulars Product

A Product

B Product

C

Selling price per liter at split-off-point (Rs.) 12 16 18

Selling price per liter after further processing (Rs.) 20 40 60

Post separation point costs (Rs.) 40,000 40,000 45,000

Output in liter 3,500 2,500 2,000

Pre-separation joint costs are estimated at Rs.80,000 and it is the practice of the company to apportion the joint costs to the products on the basis of output. If the three products are processed further, the estimated profit or (loss) of product A and B are (a) Rs.5,000 and Rs.55,000 respectively

(b) Rs.(5,000) and Rs.35,000 respectively (c) Rs.(5,000) and Rs.55,000 respectively (d) Rs.5,000 and Rs.35,000 respectively (e) Rs.55,000 and Rs.40,000 respectively.

(2 marks)

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70. Customers perceive value-added costs as adding usefulness to the product or service for which they are willing to pay. Which of the following does the customer not generally perceive as us eful or value-added?

(a) Glamour (b) Designs or logos (c) Factory working conditions (d) Prompt customer service (e) Quality checks.

(1 mark)

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Suggested Answers Management Accounting – II (MB162) : April 2006

1. Answer : (b) Reason : Cost-based transfer pricing, Market-based transfer pricing, contribution based transfer

pricing and Negotiated transfer pricing are the general methods followed in determining transfer pricing. Income-based transfer pricing is not a general method followed in determining the transfer prices

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2. Answer : (e) Reason : Full cost pricing method is used if a company does not have the basic idea of demand for

the product. It is not used to recover the only fixed costs or only variable cost. It is not used to recover market price plus mark-up or standard cost plus mark-up.

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3. Answer : (e) Reason : A flexible budget is a series of budgets prepared for different levels of activity. It allows

adjustments of the budget to the actual level of activity before comparing the budgeted activity with actual result. Fixed budget is a budget prepared for one level of activity. Therefore (e) is correct. Other statements mentioned in (a), (b), (c) and (d) are not correct.

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4. Answer : (d) Reason : The relationship between the budgeted number of working hours and the maximum

possible working hours in a budgeted period is capacity usage ratio. Hence the answer is (d). The standard hours equivalent to the work produced expressed as a percentage of the actual hours spent in producing that work is efficiency ratio. The activity ratio is the number of standard hours equivalent to the work produced expressed as a percentage of the budgeted standard hours. Calendar ratio is the relationship between the number of working days in a period and the number of working days in the relative budget period. Capacity utilization ratio is the relationship between the actual hours in a budget period and the budgeted working hours in a given period.

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5. Answer : (c) Reason : Transfer prices are often used by profit centers and investment centers. Profit centers are

the most fundamental of these two centers because the investment centers are responsible not only for the revenues and costs but also for invested capital. Answer (a) is incorrect because a revenue center is responsible only for revenue generation, not cost control or profitability. Answer (b) is incorrect because transfer prices are not used in a cost center. Transfer prices are used to compute profitability but a cost center is responsible only for cost control. 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.

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6. Answer : (b)

Reason : A favorable materials price variance is the result of paying less than the standard price for materials. An unfavorable materials usage variance is the result of using an excessive quantity of materials. If a purchasing manager is to buy substandard materials to achieve a favorable price variance, an unfavorable quality variance could result from using an excessive amount of poor quality materials.

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7. Answer : (d)

Reason : McGregor’s Theory X is based on the conception that ‘The average human being has an inherent dislike of work and will avoid it if he can’. Because of this human characteristic of dislike for work most people must be coerced, controlled and directed towards the achievement of goal. Option (b) is incorrect as this theory is based on the principles that the average human being does not inherently dislike work. Option (c) is incorrect as it is set forth hierarchy of human needs. Option (a) and (e) are not correct related to the question asked. Therefore, (d) is correct.

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8. Answer : (d) Reason : An organized creative approach, which emphasizes efficient identification of unnecessary

cost i.e. cost that provides neither quality, nor use, nor life, nor appearance, nor customer’s satisfaction is known as value-analysis

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9. Answer : (c) Reason : The major advantage of adopting target costing is that it is deployed during a products

design and planning stage so that it can have a maximum impact in determining the level of the locked in costs. Target costing is not deployed at the product selling stage. Therefore (c) is false.

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10. Answer : (b)

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 (e). 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.

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11. Answer : (b) Reason : 22% return on investment = 22% of Rs.3,00,000 = Rs.66,000

Selling price per unit

= Variable cost p er unit + fixed costs per unit + profit per unit

= Rs.28 +

Rs.1,08,000 Rs.66,00012,000units 12,000units

+

= Rs.28 + Rs.9 + Rs.5.50 = Rs.42.50.

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12. Answer : (a) Reason :

Level of activity 90% Units 2,700

(Rs.) a. Variable cost 4,05,000 b. Semi variable cost Variable portion 18,000 Fixed portion 85,000 c. Fixed cost 2,80,000 Total cost 7,88,000

Level of activity 90% Units 2,700 (Rs.) i. Sale Price (Rs.350) 9,45,000 Less: Total cost 7,88,000 Profit 1,57,000 Profit per unit 58.15

ii. Sale price reduced by 10% (i.e., Rs.315) 8,50,500 Less: Total cost 7,88,000 Profit 62,500 Profit per unit 23.15

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13. Answer : (c) Reason :

Budget allowance for fixed overhead Rs.3,15,000

Fixed overhead applied:

1,60,000 units ×

Rs.3,15,0001,40,000

Rs.3,60,000

Capacity variance Rs.45,000 (F)

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14. Answer : (b) Reason : Variable cost per unit = Rs.15 + Rs.15 + Rs.15 + Rs.15 = Rs.60

Fixed cost = Rs.10 × 1,000 units + Rs.15 × 1,000 units = Rs.10,000 + Rs.15,000 = Rs.25,000

Cost of 980 units = 980 units × Rs.60 + Rs.25,000 = Rs.58,800 + Rs.25,000 = Rs.83,800.

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15. Answer : (a)

Reason : Sales Rs.8,00,000 Less variable costs Rs.4,80,000 Rs.3,20,000 Less fixed costs (traced) Rs.1,20,000 Rs.2,00,000

Less interest (22% of Rs.4,50,000) Rs. 99,000 Residual income = Rs.1,01,000

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16. Answer : (e)

Reason : Working Note – 1: Computation of prime cost

Particulars Rs. Sales (40,000 units) 15,20,000 Less: Profit margin – 20% 3,04,000 Cost of sales – (80% of Rs.15,20,000) 12,16,000 Less: Variable overheads – Rs.2,80,000 Semi-variable overheads – Rs.3,00,000 Fixed overheads – Rs.2,00,000 7,80,000 Prime cost 4,36,000

Working Note – 2: Semi-variable overheads:

Variable cost = unitsinChangetcosinChange

=

Rs.3,50,000-Rs.3,00,00050,000units-40,000units

=

.50,00010,000Rs

units = Rs.5 per unit At 40,000 units: Fixed cost = Total cost – Variable cost

= Rs.3,00,000 – 40,000 units × Rs.5 = Rs.1,00,000

At 45,000 units: Total cost = 45,000 units × Rs.5 + Rs.1,00,000 = Rs.3,25,000

Computation of differential cost of production of 5,000 additional units (i.e. 10% of normal capacity):

Element of cost 40,000 units (Rs.)

45,000 units (Rs.)

Differential cost for

5000 units (Rs.) Prime cost – (Working Note 1) 4,36,000 4,90,500 54,500 Variable overhead 2,80,000 3,15,000 35,000 Semi variable overhead (Working Note 2) 3,00,000 3,25,000 25,000

Fixed overhead 2,00,000 2,00,000 – 12,16,000 13,30,500 1,14,500

Cost per unit of new order =

.1,14,5005,000

Rs

= Rs.22.90 Profit margin (20% on sale = 25% on cost) = Rs. 5.73 Minimum selling price per unit = Rs.28.63 .

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17. Answer : (c) Reason : Cash receipts = Sales + Decrease in sundry debtors

= Rs.5,80,000 + Rs.12,500 = Rs.5,92,500

Cash payment = Cost of goods sold (75%) + Inventory increased + Variable selling and administrative expenses + Fixed (other than depreciation) selling & administrative expenses = Rs.4,35,000 + Rs.18,400 + Rs.14,500 + Rs.15,200 = Rs.4,83,100

Surplus in cash = Rs.5,92,500 – Rs.4,83,100 = Rs.1,09,400.

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Rs.

Direct material 2,80,000 Direct labor 2,20,000 Factory overheads (50% of direct labor) 1,10,000 Works cost 6,10,000 Administrative overheads (20% of works cost) 1,22,000 Selling and distribution expenses (20% of works cost + 15%) (6,10,000 × 25% × 11.5%)

1,40,300

8,72,300 Profit 12.5% on sales (i.e. 14.29% on cost) 1,24,614 Budgeted sales 9,96,914

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19. Answer : (c) Reason : The production budget for July 2006 = 4,500 units × 0.8 + 4,250 × 0.4 = 3,600 units + 1,700 units = 5,300 units.

The production cost budget for August 2006 = (4,250 × 0.8 + 4,400 × 0.4) × (Rs.25 + Rs.10 + Rs.20 + Rs.5) + Rs.39,000 =(3,400 + 1,760) × Rs.60 + Rs.39,000 = 5,160 units × Rs.60 + Rs.39,000

=Rs.3,09,600 + Rs.39,000 = Rs.3,48,600.

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20. Answer : (c) Reason :

Capacity 50% 60% 90% Production (units) 5,000 6,000 9,000 (Rs.) (Rs.) (Rs.) Material 50 51 52.50 Labor 20 20 20.00 Variable overheads Factory 12 12 12.00 Administrative 5 5 5.00 87 88 89.50 Total variable cost 4,35,000 5,28,000 8,05,500 Fixed overheads Factory 40,000 40,000 40,000 Administrative 25,000 25,000 25,000 5,00,000 5,93,000 8,70,500 Sale price per unit 110.00 107.80 104.50 Sales value 5,50,000 6,46,800 9,40,500 Profit 50,000 53,800 70,000 Profit per unit 10.00 8.97 7.77

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21. Answer : (b) Reason : Standard or Budgeted data

Budgeted fixed overheads Budgeted output units Budgeted hours (50 × 8 ×25) Budgeted days Standard labor hours per unit Standard hours worked per day

Standard rate per unit (Rs.1,00,000 ÷ 2,500) Standard rate per hour Rs.1,00,000 ÷ 10,000) Standard fixed overhead rate per day (Rs.1,00,000 ÷ 25)

Rs.1,00,000 2,500

10,000 25 4

400

Rs.40 Rs.10

Rs.4,000

Actual data

Actual fixed overheads (Rs.)

Actual output units Actual hours Actual days

88,800

2,320 8,400 24

Fixed overhead cost variance = (Fixed overhead recovered on actual output ~ Actual fixed overhead incurred)

= (2,320 units × Rs. 40 ~ Rs. 88,800) =Rs.92,800 ~ Rs.88,800 = Rs. 4,000 (F) Fixed overhead expenditure variance = Budgeted fixed overhead cost ~ Actual fixed overhead cost

= Rs.1,00,000 ~ Rs.88,800 = Rs.11,200 (F)

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22. Answer : (d)

Reason : The production cost budget for 6,600 units:

Particulars Rs. Material cost (variable) 32,500 Labor cost (variable) 19,500 Stores (variable) 1,300 Power (semi-variable) 1,550 Repairs and maintenance (semi-variable) 2,450 Inspection (semi-variable) 530 Administration overheads (semi-variable) 5,375 Selling overheads (semi-variable) 3,450 Depreciation (fixed) 10,000 Total 76,655 Cost per unit (Rs.76,655 ÷ 6,500) 11.79

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23. Answer : (d)

Reason : A favorable variance denotes that the actual cost for the achieved level of activity was less than the standard. Here in this case option (d) which says costs were Rs.3,650 less than standard for the achieved level of activity is correct .All other options are incorrect

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24. Answer : (d) Reason : Value engineering is a modern approach in cost management for various activities on the

value chain where as all other options are traditional approaches. So, (d) is correct.

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25. Answer : (d) Reason : The reports for the lower level of management are fairly detailed though limited in scope

and they are quantitative in nature. The reports for the top management are highly summarized with financial data.

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26. Answer : (c) Reason : Zero-based budgeting is a technique by which manager of each decision unit is to justify

his entire budget request in complete detail with a zero base. The manager of the decision unit has to isolate each item of his budget in order to analyze it in separate decision packages, which are ranked in order of importance.

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27. Answer : (b)

Reason :

Fixed costs 8,00,000 Return on capital employed (Rs.80,00,000 × 12.5%) 10,00,000 Residual income desired 7,00,000 Total desired contribution 25,00,000

Contribution per unit from outside sales = Rs.180 – Rs.160 = Rs.20 per unit Total contribution from outside sales = Rs.20 per unit × 1,00,000 units = 20,00,000

Minimum contribution to be earned from supply to division B = Rs.25,00,000 – Rs.20,00,000 = Rs. 5,00,000

Contribution per unit on additional 20,000 units =

Rs. 5,00,00020,000 units = Rs.25 per unit

Variable cost for minor modification = Rs.3 per unit Minimum transfer price per unit to be quoted = Rs.160 + Rs.25 + Rs.3 = Rs.188

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28. Answer : (d) Reason : Strategic budgeting is a form of long range planning based on identifying and specifying

organizational goals and objectives. The strength and weaknesses of the organization are evaluated and risk levels are assessed. The influences of environment factors are forecast to derive the best strategy for reaching the organizational goals. Hence (d) is correct.

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29. Answer : (b) Reason : The capital investment budget may be prepared more than a year in advance, unlike the

other elements of the master budget. In case of preparation of master budget, it requires production budget, overhead expenses budget, proforma income statement and balance sheet. It does not require capital investment budget at the time of its preparation.

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30. Answer : (a) Reason : Labor rate variance = Actual hours × (Standard rate ~ Actual rate)

Rs.147 (A) = 196 hour (Standard rate ~ Rs.11.75)

Standard rate – Rs.11.75 = Re.0.75 (A)

Standard rate = Rs.11.00

Labor efficiency variance = Standard rate (Standard hours – Actual hours)

= Rs.11 (4 hours × 50 units ~ 196 hours)

= Rs.11 (200 hours ~ 196 hours) = Rs.11 × 4 hours = Rs.44 (F).

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31. Answer : (c) Reason : Fixed overhead volume variance = Budgeted fixed overhead costs – Applied fixed

overhead costs. Therefore, (c) is correct.

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32. Answer : (a) Reason : Material usage variance = Standard price per kg. (Standard usage ~ Actual usage)

= Rs.12 × (1,000 kg ~ 1,150 kg)

= Rs.1,800 (Adverse).

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33. Answer : (d)

Reason : Return on investment (ROI) equals to income divided by invested capital. If a firm is already profitable, increasing sales and expenses by the same percentage will increase the ROI. Other options given in (a), (b), (c) and (e) are not correct.

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34. Answer : (d) Reason : The costs that incurred in the past which are not relevant to a future decision is called

sunk cost. It represents an expenditure that has already been made or an irrecoverable decision to incur the cost. Other costs mentioned in (a), (b), (c) and (e) are not correct.

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35. Answer : (d)

Reason : A debit balance of labor rate variance means that the labor rate variance is adverse. Adverse labor rate variance arises if the actual rate per hour or unit of labor exceeds standard rate per hour or unit. It does not arise due to the difference between actual hours and standard hours. Therefore (d) is correct.

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36. Answer : (b)

Reason : Standard variable cost per unit = unitsBudgetedcostsvariableBudgeted

=

Rs.12,0006,000 = Rs.2

Variable overhead cost variance

= Actual variable overhead costs ~ Standard variable overhead cost per unit × Actual output

= Rs.12,800 ~ Rs.2 × 6,150 units = Rs.12,800 ~ Rs.12,300 = Rs.500 (Adverse)

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37. Answer : (e) Reason : A master budget typically begins with the preparation of a sales budget. The next step is

to prepare a production budget. Once the production budget has been completed, the next step is to prepare the direct labor, raw material and overhead budgets. Thus, the production budget provides the input necessary for the completion of direct labor budget. Therefore, (e) is correct.

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38. Answer : (b) Reason : An annual profit plan should be based upon an organization’s goal and objectives.

Objectives vary with the organization’s type and stage of development. Broad objectives should be established at the top and retranslated in more specific terms as they are communicated downward in a means-end hierarchy. Each subunit may have its own specific go als. A conflict sometimes exists in determining organizational objectives. For example, customer service may be one objective but profitability or return on investment may be a conflicting objective. Thus, the annual profit plan is usually based on a combination of financial, quantitative and qualitative measures. Objectives and goals change over time. A century ago, profits were the most important corporate objective. Today, social responsibility also plays a role. Therefore, (b) is correct.

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39. Answer : (d) Reason : The fixed overhead volume variance measures the effect of not operating at the budgeted

activity level. It is the difference between budgeted fixed cost and the product of the standard fixed overhead application rate and the standard activity level for the actual output. A favorable variance means that activity was greater than expected and that fixed overhead was over applied. It might be caused by, for example, hiring more workers to provide an extra shift. An unfavorable volume variance means that activity was less than budgeted overhead (or under applied), for example, because of insufficient sales or a labor strike. Accordingly, the volume variance is usually outside the control of production management. Moreover, unlike other variances, it does not directly reflect a difference between actual and budgeted expenditure of resources.

Other options (a), (b), (c) & (e) are incorrect because the volume variance is not related to direct labor or overhead efficiency, use or capacity.

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40. Answer : (e) Reason : The variable overhead efficiency variance equals the product of the variable overhead

application rate and the difference between the standard input for the actual output and actual input. Hence, the variance will be zero if variable overhead is applied on the basis of units of output because the difference between the actual and standard input cannot be recognized.

Option (a) is incorrect because the correlation between the variable overhead and direct labor efficiency variance occurs only when overhead is applied on the basis of direct labor. Options (b), (c) and (d) are incorrect because the variance would be zero.

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41. Answer : (e) Reason : Most variances are of significance to someone who is responsible for that variance.

However, a fixed overhead volume variance is often not the responsibility of anyone other than top management. The fixed overhead volume variance equals the difference between budgeted fixed overhead and the amount applied (standard rate × 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.

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42. Answer : (a) Reason : ABC differs from traditional product costing because it uses multiple allocation bases and

therefore allocates overhead more accurately. The result is that ABC often charges low-volume products with more overhead than traditional system. For example, the costs of machine setup may be the same for production runs of widely varying sizes. This relationship is reflected in an ABC system that allocates setup costs on the basis of the number of setups. However, a traditional system using an allocation base such as machine hours may under allocate setup costs to low-volume products. Many companies adopting ABC have found that they have been losing money on low -volume products because costs were actually higher than originally thought.

Answer (b) and (e) are incorrect because low-volume products are usually charged with greater unit costs under ABC. Answer (c) is incorrect because greater setup costs are usually charged to low -volume products under ABC. Answer (d) is incorrect because setup costs will not be equalized unless setup time is equal for all products.

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43. Answer : (e) Reason : Ideal (perfect, theoretical or maximum efficiency)standards are standard costs that are set

for production under optimal conditions. They are based on the work of the most skilled workers with no allowance for waste, spoilage, machine breakdowns, or other downtime. Tight standards can have positive behavioral implications if workers are motivated to strive for excellence. However, they are not in wide use because they can have negative behavioral effects if the standards are impossible to attain. Ideal, or tight, standards are ordinarily replaced by currently attainable standards for cash budgeting, product costing, and budgeting departmental performance. Otherwise, accurate financial planning will be impossible.

Answer (a) and (b) are incorrect because ideal standards are perfection standards. Answer (c) is incorrect because ideal standards are based solely on the most efficient workers. Answer (d) is incorrect because ideal standards assume optimal conditions.

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44. Answer : (b) Reason : A budget manual describes how a budget is to be prepared. Items usually included in a

budget manual are a planning calendar and distribution instructions for all budget schedules. Distribution instructions are important because, once a schedule is prepared, other departments within the organization will use the schedule to prepare their own budgets. Without distribution instructions, someone who needs a particular schedule may be overlooked.

Answer (a) is incorrect because the accounting manual includes a chart of accounts. Answer (c) is incorrect because employee hiring policies are not needed for budget preparation. They are already available in the personnel manual. Answer (d) is incorrect because software documentation is not needed in the budget preparation process. Answer (e) is incorrect because the authorization of transactions is not necessary for budget preparation purposes.

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45. Answer : (b)

Reason : Products require different functional emphasis in each phase of the product life cycle. For example, R & D emphasis in the development phase and a cost control emphasis in the decline. Product cost, revenue and profit patterns tend to follow predictable courses through the product life cycle. Profit per unit varies as products move through their life cycles. The products have finite lives and pass through the cycle of development, introduction, growth, maturity, decline and deletion. Each phase of product life cycle poses different threats and opportunities.

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46. Answer : (b) Reason : The operating management is responsible for executing various tasks within the

framework of plans, programs and schedules defined by executive management. They need the information regarding the overtime payments. The information regarding the changes in government policies, return on investment is required by top management and the information regarding the working capital, order bookings, etc. is required by the executive management.

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47. Answer : (c)

Reason : Basic standards are known as measurement standards. These are established at a particular time and remain unchanged over a period of time. These standards are not revised frequently, but if they are revised, it is only due to changes in specification of materials and technology. They may also be revised if there are substantial price changes.

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48. Answer : (e) Reason : Only a constrained resource has shadow price. Where resources are not fully utilized,

shadow price is zero. The shadow price can be used only when the resources are scarce. Hence the answer is (e). The use of shadow prices is incompatible with the philosophy of decentralization through divisionalisation. To derive at the shadow prices one has to obtain the dual solution to the mathematical programming model developed for solving the production-planning problem of the buying division. A great deal of data like the market data for the buying division, cost data for the selling and buying divisions and capacity data for both the divisions are required. Hence assimilating the data and application of the model becomes a highly centralized affair. Operat ing managers do not understand and appreciate the concept of shadow price.

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49. Answer : (b) Reason : Top-to-bottom budget is also known as imposed budget. In this type of budget, the

budgeted quantities are obtained from the top level managers and then communicated downward to lower level managers. Lower level managers do not participate in this type of budget. Hence the answer is (b). In participative budget, estimations of lower level managers are coordinated and commun icated 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.

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50. Answer : (b) Reason : Collections from April cash sales will be half of total sales, or Rs. 50,000. from May’s

Rs. 50,000 of credit sales, collections should be 10% or Rs.5,000. From June’s Rs. 1,00,000 of credit sales, collections should be 20% or Rs.20,000. From July’s Rs. 1,50,000 of credit sales, collections will be 70% or Rs. 1,05,000. In the month of August, 50% of Rs. 1,00,000 i.e. Rs.50,000 Thus, total collections will be Rs. 1,80,000 (Rs.5,000 + Rs.20,000 + Rs.1,05,000 + Rs.50,000). Answer (a) is incorrect because Rs. 1,30,000 results from a failure to include the cash sales for April. Answer (c) is incorrect because half of total sales is used to calculate collections from credit sales, and April’s cash sales must be included. Answer (d) is incorrect because Rs. 3,60,000 results from using total sales for the first 3 months instead of credit sales.

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51. Answer : (d) Reason : Total labor cost 4 × Rs. 60,000 = Rs. 2,40,000 Cost of parts = Rs. 1,10,000

Total variable cost Rs.3,50,000 Target profit = Rs. 40,000 Fixed cost =Rs.1,00,000

=Rs. 1,40,000

Mark up % = Rs. 1,40,000 ÷Rs. 3,50,000 = 40% Mark up on parts = 40% of Rs. 1,10,000 = Rs. 44,000

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52. Answer : (a) Reason : It is needed to work out variable cost per 10 % of the activity level as it is required to

work out flexible budget at 70% and 80% capacity level. Variable overheads per 10% capacity level 1. Indirect labor = Rs. 10,000 × 10/80 = Rs. 1,250

2. Indirect material = Rs. 4,000 × 10/80= Rs. 500 Segregation of variable and fixed element of semi-variable overheads 1. Power (variable 70 %; fixed 30 %)

a. Variable overheads = 20,000 × 70% = Rs. 14,000 Variable overhead per 10 % capacity level = Rs. 14,000 × 10/80 = Rs. 1,750

b. Fixed overhead = 20,000 × 30% = Rs. 6,000

2. Repairs and maintenance (variable 40%, fixed 60%) a. Variable overheads = 2,000 × 40% = Rs. 800

Variable overhead per 10% capacity level = Rs. 800 × 10/80 = Rs. 100

b. Fixed cost = 2,000 × 60% = Rs. 1,200 3. Estimated direct labor hours at 80% capacity = 1,24,000 hours

Variable with respect to 10 variation = 1,24,000 × 10/80 = 15,500 hrs. Flexible budget for overhead

Particulars Variability for every 10% variation in

capacity level (Rs.)

At 70% capacity level (Rs.)

1. Variable overhead: (a) Indirect labor (b) Indirect material 2. Variable portion of semi-variable overhead: (a) Power (b) Repairs and maintenance

1,250 500

1,750

100

8,750 3,500

12,250

700

Total variable (A) 25,200 3. Fixed portion of semi-variable overheads: (a) Power (b) Repairs and maintenance 4. Fixed overhead: (a) Depreciation (b) Insurance (c) Others

6,000 1,200

11,000

4,000 10,000

Total Fixed (B) 32,200 5. Total overheads (A+B) 57,400 6. Estimated direct labor hrs. 4,000 28,000 7. Overhead recovery rate per direct labor hour (5÷6)

2.05

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53. Answer : (e) Reason :

Budgeted overhead cost Rs.60,000

Actual cost Rs. 64,000 {i.e. 60,000 + 4,000 (A) exp. var}

Absorbed overhead Rs. 58,000 [i.e. 64,000 – 6,000 (under absorbed)]

Overhead absorption rate per unit Rs.60,000 ÷ 10,000 = Rs.6

Output Rs.58,000 ÷ Rs.6 = 9,666.66 or 9667 units

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Particulars Project X Project Y

Investment outlay Rs.1,50,000 Rs.2,00,000

Net annual return Rs. 30,000 Rs. 25,000

Return on investment (Net annual return ÷ investment outlay)

20% 12.5%

Target return on investment 18% 14%

Using ROI, Project X will be accepted, as its ROI is more than the target ROI whereas Project Y w ill be rejected.

Particulars Project X (Rs.) Project Y (Rs.) Net annual return 30,000 25,000 Imputed interest (15% of Rs.1,50,000 and 2,00,000)

22,500 30,000

Residual income 7,500 (5,000)

Using RI, Project X will be accepted as it has a positive RI whereas Project Y will be rejected, as its RI is negative. Thus the answer is (a).

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55. Answer : (a)

Reason : The budgeted increase Particulars March

2006 (Rs.)

Increase in sales volume

Effect of change Rs.

Sales 50,000 57,500 57,500 × 102% = 58,650.00 Direct materials 17,500 20,125 20,125 × 98% = 19,722.50 Direct labor 10,000 11,500 11,500 × 98% = 11,270.00 Variable overheads 5,000 5,750 5,750 × 98% = 5,635.00 Fixed overheads* 12,500 12,500 × 98% = 12,250.00 Profit 5,000 9,772.50 Capital employed 50,000 50,000.00 Return on investment 10% 19.55%

*Return on investment in March 2006 is 10%. Hence profit is Rs.50,000 × 10% = Rs.5,000

Hence fixed overheads is sales – variable expenses – profit = Rs.50,000–Rs.32,500 – Rs.5,000 = Rs.12,500.

% Increase in return on investment =

19.55% 10%10%

−

= 95.5%

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56. Answer : (d) Reason :

A B Particulars Total cost Variable cost Total cost Variable cost

Direct material 40.0 40.0 50.00 50.0 Direct labor 36.0 36.0 27.00 27.0 Factory overheads 36.0 14.4 27.00 10.8 Total factory cost 112.0 90.4 104.00 87.8 Administrative overheads 5.6 5.20 Selling overheads 5.0 2.0 10.00 4.0 Total cost per unit 122.6 92.4 119.20 91.8

Total cost = (Rs.122.6 × 5,000 units) + (Rs.119.20 × 15,000 units) =Rs.24,01,000 Particulars Rs. Fixed capital 10,00,000 Working capital (Rs.24,01,000 × 6/12) 12,00,500 Total capital employed 22,00,500

Expected ROI = 20%; Expected ret urn = Rs.22,00,500 × 20% = Rs.4,40,100

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57. Answer : (a) Reason : Using ABC, overheads will be allocated on the basis of cost driver

D K Total Particulars

(Rs.) (Rs.) (Rs) Set ups (30:20) 31,200 20,800 52,000 Materials handling (20:30) 48,200 72,300 1,20,500 Inspection (26:65) 65,000 1,62,500 2,27,500

Total 1,44,400 2,55,600 4,00,000 Budgeted units 600 units 800 units Overheads per unit Rs.240.67 Rs.319.50

Particulars D K Price of the products Variable costs Rs.200.00 Rs.220.00 Fixed manufacturing costs Rs.240.67 Rs.319.50 Rs.440.67 Rs.539.50 Profit mark-up (20%) Rs. 88.13 Rs.107.90 Rs.528.80 Rs.647.40

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58. Answer : (c) Reason : Let the actual man hours per day be X.

Standard production in actual hours worked = Actual hours worked × Standard output per hour = 64 days × X hours × 1.0 units = 64X units

Actual production = 66,000units Difference = 66,000units– 64 X units Standard overhead rate per unit = 4,800 ÷ 48,000 = Re. 0.10

Efficiency variance = (66,000 units ~ 64 X units) × Standard overhead rate per unit = (66,000 units ~ 64 X units) × 0.10= Rs.640 (F). = 66,000 units ~ 64X units = Rs.6400 (F). Standard production in actual hours = 60,060 units

Therefore X = 59,600 ÷ 64 = 931 hours.

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59. Answer : (a) Reason : Total fixed cost = Rs.3,00,000 + Rs.1,50,000 + Rs.1,50,000 = Rs.6,00,000; Revised fixed cost = Rs.6,00,000 + Rs.4,50,000 = Rs.10,50,000

Selling price p er unit = Rs.17 Variable cost per unit = Rs.3.00 + Rs.2.00 + Re.0.60 + Re.0.90 = Rs.6.50; Total contribution = 1,20,000 × (Rs.17 - Rs.6.50) = Rs.12,60,000; Profit = Rs.12,60,000 – Rs.10,50,000 = Rs.2,10,000

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60. Answer : (b) Reason : Budgeted expenses = 2,500 × Rs.200 = Rs.5,00,000 Fixed overhead expenditure variance = Budgeted expenses ~ Actual expenses

= Rs.5,00,000 ~ Rs.5,40,000 = Rs.40,000 (A) Direct labor efficiency variance = Standard rate (Actual time ~ Standard time)

= Rs.9 (94,000 ~ 40 hours × 2,200 units) = Rs.9 × 6,000 hrs = Rs.54,000 (A).

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61. Answer : (c) Reason : Standard time

A = 820

= 0.4

B = 810

= 0.8

C = 816

= 0.5

Budgeted Hours A = 250 × .4 = 100 B = 200 × 0.8 = 160 C = 300 × 0.5 = 150 410

Standard hours for actual production

A = 260 × .4 = 104 B = 250 × .8 = 200 C = 200 × .5 = 100 404

Actual hours 400

Capacity ratio=

400410 = 97.56%

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62. Answer : (e) Reason :

Budgeted production =

Budgeted sales + Desired closing inventory – Opening inventory

Planned inventory level (units)

Projected Sales

Closing Opening

Budgeted Production

(units) Months

X Y X Y X Y X Y January 1,000 2,800 600 1,400 500 1,400 1,100 2,800 February 1,200 2,800 800 1,200 600 1,400 1,400 2,600

March 1,600 2,400 1,000 1,000 800 1,200 1,800 2,200 April 2,000 2,000 1,200 800 1,000 1,000 2,200 1,800

Total Budgeted Production in units 6,500 9,400 Total production cost of X and Y

= 6,500 (Rs.12.50 + Rs.4.50 + Rs 3.00) + 9,400 (Rs.19.00 + Rs.7.00 + Rs.4.00) = 6,500 × Rs. 20 + 9,400 × Rs. 30 = Rs.1,30,000 + Rs.2,82,000 = Rs. 4,12,000.

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63. Answer : (c) Reason : Actual production in terms of standard hours:

= 700 units × 0.25 hours = 175 standard hours

Standard rate per hour

= Budgeted expenses for the year ÷ Budgeted hours for the year =Rs.57,600 ÷ ( 48 × 5 × 8) hours = Rs.57,600 ÷ 1,920 hours = Rs.30 per hour

Average budgeted hours per month

=Budget hours for the year ÷ 12 =1,920 ÷ 12 = 160 hours. Average budgeted hours: 160

Standard hours for actual production = 175 Difference = 160 – 175 = 15 (F) Fixed overhead volume variance = 15 × Rs.30 = Rs.450 (F).

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64. Answer: (a) Reason: Managers must consider the cost-benefit balance in deciding when it is appropriate to

raise questions or to direct attention to variances. If managers wait until trends appear before they investigate, it may be too late to take action and to bring the situation under control. However, variances raise questions about to potential problem areas and direct attention towards the same.

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65. Answer : (e) Reason : Let the budgeted output per man hour be X kg.

Man hours that should have been worked in actual number of days =Actual number of days × standard hours per day =22 × 300 = 6,600 man hours

Actual hours worked =actual number of days × Actual hours per day = 22 × 280 = 6,160 man hours Difference = (6,160 – 6,600) hours = 440 hours (A)

Difference in output due to less hours worked = Additional hours worked × Budgeted output per hour = 440 × X Fixed overhead capacity variance = 440 × X × 9.50= 22,990 (A)

Therefore, X = 5.5 kg.

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66. Answer : (d) Reason : COST OF PRODUCTION UNDER FLEXIBLE BUDGET

Capacity Item

100% 60% Units 4,000 2,400 Production hours - @ 10 units per hour 400 240 Rs. Rs. Direct material 16,000 9,600 Direct wages 2,000 1,200 Prime cost 18,000 10,800 Production overhead variable: Shop labour 1,000 600 Consumer stores 2,000 1,200 Semi-Variable: Power 2,100 1,700 Repair & Maintenance 590 470 Inspection 260 180 Fixed: Depreciation 1,400 1,400 Salaries 1,050 1,050 Total overhead costs 8,400 6,600 Cost of production 26,400 17,400 Cost of production per unit 6.60 7.25

Working: Calculation of semi-variable overheads: Power

Difference in capacity Difference in overhead (Rs.)

20% 200

1% 10

At 80% variable cost is 80 × Rs.10 = Rs.800 and fixed cost is Rs.1,100. In the same way it can be calculated for 100% and 60% capacity. Same way may be followed for repair and maintenance and inspection.

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67. Answer : (d)

Reason : Standard cost of standard mix of input

Particulars Quantity Kg

Price Rs.

Amount Rs.

Chemical A (50% of 100 kg) 50 12 600 Chemical B (50% of 100 kg) 50 15 750 Input 100 1,350 Standard loss 10 – Output 90 1,350

Standard rate of output per kg = Rs.1,350 ÷ 90 = Rs.15

Yield variance = Standard rate of output × (Actual yield ~ Standard yield for actual input) Rs.135 (A) = Rs.15 (90 kg ~ Standard yield for actual input) 9 kg (A) = 90 kg ~ Standard yield for actual input

Standard yield for actual input = 90 + 9 = 99kg.

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68. Answer : (b) Reason : Actual material consumption:

Particulars A B Stock as on March 01, 2006 70 80 Add: Purchases during the month of March 2006 1,600 2,400 1,670 2,480 Less: Stock as on March 31, 2006 10 100 Material consumed during the month of March 2006 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 =

Actualstandardoutput 85kg.Actualinput = ×4,040kg.=3,434kg.

Standard input 100kg.×

Material yield variance = Standard rate of output (Actual yield – Standard yield)

=

Rs.13,600×(3,400kg. - 3,434kg.)

3,400 = Rs.136 (Adverse)

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69. Answer : (b) Reason :

Product A Product B Product C Particulars Rs. Rs. Rs.

Revenue 70,000 1,00,000 1,20,000 Pre-Separation Joint costs: 35,000 25,000 20,000

A = Rs.80,000 ×

3,5008,000

B = Rs.80,000 ×

2,5008,000

C = Rs.80,000 ×

2,0008,000

Post-separation cost 40,000 40,000 45,000 Profit/(Loss) (5,000) 35,000 55,000

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70. Answer : (c) Reason : A value added activity contributes to customer satisfaction or meets a need of the entity.

A non-value adding activity does not make such a contribution. It can be eliminated, reduced or redesigned without impairing quantity, quality or responsiveness of the product or service desired by customers or entity. In this context of “Customers perceive value-added costs as adding usefulness to the product or service for which they are willing to pay” the factory conditions is not a value added item to customers. So option (c) is correct.

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