152-0704

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Question Paper Management Accounting - II - (152) – July 2004 Answer all questions. Marks are indicated against each question. 1. Which of the following statements is/are true with respect to transfer pricing? (a) It motivates divisional managers to make good economic decisions (b) It is useful for evaluating performance of the divisional managers (c) It is a selling price established for goods or services sold by one division to other under the same organisation (d) It does not help in measuring divisional performances (e) All (a), (b) and (c) above. (1 mark) < Ans wer > 2. The most fundamental responsibility center affected by the use of market-based transfer prices is (a) Revenue center (b) Cost center (c) Profit center (d) Investment center (e) Production center. (1 mark) < Ans wer > 3. Which of the following pricing techniques ignores fixed cost? (a) Standard cost based pricing (b) Full cost pricing (c) Cost plus profit pricing (d) Return on investment based pricing (e) Differential cost pricing. (1 mark) < Ans wer > 4. Which of the following factors should be considered while fixing the price? (a) Product cost (b) Competitors’ price (c) Prices of substitutes (d) Unique features of the product (e) All of the above. (1 mark) < Ans wer > 5. Which of the following statements is false in respect of full cost pricing and contribution margin pricing? (a) They are not competing to each other (b) In both the methods, the selling prices proposed must be only tentative and they are always subject to adjustments (c) Fixed costs are important in both the pricing models (d) In both the methods, a normal mark-up on total costs is made and the volume of production is taken into consideration < Ans wer >

Transcript of 152-0704

Page 1: 152-0704

Question PaperManagement Accounting - II - (152) – July 2004

     

         Answer all questions.        Marks are indicated against each question.

 

 

1. Which of the following statements is/are true with respect to transfer pricing?

(a) It motivates divisional managers to make good economic decisions(b) It is useful for evaluating performance of the divisional managers(c) It is a selling price established for goods or services sold by one division to other under the same

organisation(d) It does not help in measuring divisional performances(e) All (a), (b) and (c) above.

(1 mark)

< Answer >

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

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

(1 mark)

< Answer >

3. Which of the following pricing techniques ignores fixed cost?

(a) Standard cost based pricing (b) Full cost pricing(c) Cost plus profit pricing (d) Return on investment based pricing(e) Differential cost pricing.

(1 mark)

< Answer >

4. Which of the following factors should be considered while fixing the price?

(a) Product cost (b) Competitors’ price(c) Prices of substitutes (d) Unique features of the product(e) All of the above.

(1 mark)

< Answer >

5. Which of the following statements is false in respect of full cost pricing and contribution margin pricing?

(a) They are not competing to each other(b) In both the methods, the selling prices proposed must be only tentative and they are always

subject to adjustments(c) Fixed costs are important in both the pricing models(d) In both the methods, a normal mark-up on total costs is made and the volume of production is

taken into consideration(e) They represent to a certain degree, cost plus pricing.

(1 mark)

< Answer >

6. Assuming that the mark-up-percentage and the quantity of production/sales remain constant, which of the following pricing method/ methods will give more profit as the fixed cost of production increases?

(a) Return on investment pricing (b) Full cost pricing(c) Contribution margin approach to pricing (d) Both (a) and (b) above(e) Both (b) and (c) above.

(1 mark)

< Answer >

7. The information contained in cost of goods manufactured budget most directly relates to

(a) Materials used, direct labor, overhead applied, and ending work-in-process budgets(b) Materials used, direct labor, overhead applied, and work-in-process inventories budgets(c) Materials used, direct labor, overhead applied, work-in-process inventories, and finished goods

< Answer >

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inventories budgets(d) Materials used, direct labor, overhead applied, and finished goods inventories budgets(e) Materials used, direct labor, overhead applied, unit production, and raw materials inventories

budgets.(1 mark)

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

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

(b) A flexible budget provides cost allowances for different levels of activity whereas a fixed budget provides costs for one level of activity

(c) A flexible budget includes only variable costs whereas a fixed budget includes only fixed costs(d) A flexible budget is established by operating management while a fixed budget is determined by

top management(e) The variances are usually larger with a flexible budget than with a fixed budget.

(1 mark)

< Answer >

9. While preparing a performance report for a cost center using flexible budgeting techniques, the planned cost column should be based on

(a) Cost incorporated in the master budget(b) Budgeted amount in the original budget prepared before the beginning of the period(c) Budget adjusted to the actual level of activity for the period being reported(d) Actual amount for the same period in the preceding year(e) Budget adjusted to the planned level of activity for the period being reported.

(1 mark)

< Answer >

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

(a) Production budget (b) Capital investment budget(c) Proforma income statement (d) Proforma statement of financial position(e) Overhead expenses budget.

(1 mark)

< Answer >

11. There are various budgets within the master budget. One of these budgets is the production budget. Which of the following best describes the production budget?

(a) It aggregates the monetary details of the operating budget(b) It is calculated from the desired ending inventory and the sales forecast(c) It includes required material purchases(d) It includes required direct labor hours(e) It summarizes all discretionary costs.

(1 mark)

< Answer >

12. Which of the following statements is false?

(a) Insufficient training is a reason for labor efficiency variance(b) When workers are not able to do the work due to some reason during the hours for which they are

paid, it results in idle time variance(c) High labor turnover is a reason for labor efficiency variance(d) Different rates being paid to workers employed to meet seasonal demands leads to labor rate

variance(e) Promotion of employees without proper authorization by personal favoritism or supervisors leads

to labor efficiency variance.(1 mark)

< Answer >

13. Which of the following factors is/are considered in determining the period of the short-range budget?

(a) The budget period should be long enough to allow for the financing of production well in advance of actual needs

(b) The budget period should be long enough to cover complete production of various products(c) For business of a seasonal nature, the budget period should cover at least one entire seasonal

< Answer >

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cycle(d) The budget period should coincide with the financial accounting period for comparison (e) All of the above.

(1 mark)

14. Which of the following statements most appropriately describe(s) the role of budgets?

(a) Budgets should be administered rigidly so that people believe in them(b) Attaining the budget is an end in itself(c) Managers should commit to the budget and keep it as adopted(d) Changing conditions call for changes in plans and long-term goal of the organization should be

the guide for changes to the budget itself(e) All of the above are true.

(1 mark)

< Answer >

15. If the budget of a company is reviewed and updated at regular intervals, it is known as

(a) Capital budget (b) Rolling budget (c) Flexible budget(d) Fixed budget (e) Zero-based budget.

(1 mark)

< Answer >

16. Which of the following budget challenges the existence of every budgetary unit at every budget period?

(a) Rolling budget (b) Participative budget (c) Zero based budget(d) Strategic budget (e) Short-range budget.

(1 mark)

< Answer >

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

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

(1 mark)

< Answer >

18. A company is currently using the budget as a tool for planning. The management has decided to use the budgets for control purposes also. To affect this change, the financial controller must

(a) Develop forecasting procedures(b) Organize a budget committee and appoint a budget director(c) Report daily to operating management all deviations from the plan(d) Report daily to top management all deviations from the plan(e) Synchronize the budgeting and accounting systems within the organizational structure.

(1 mark)

< Answer >

19. Material yield variance can be defined as

(a) Standard cost per unit ´ (Actual loss ~ Standard loss)(b) Standard cost per unit ´ (Actual loss ~ Standard loss on actual input)(c) Standard cost per unit ´ (Actual loss ~ Standard loss on standard input)(d) Actual cost per unit ´ (Actual loss ~ Standard loss)(e) Actual cost per unit ´ (Actual loss ~ Standard loss on actual input).

(1 mark)

< Answer >

20. If a company has unfavorable material price variance, which of the following departments is primarily held responsible?

(a) Stores department (b) Production department(c) Inspection department (d) Purchase department(e) Receiving department.

(1 mark)

< Answer >

21. Which of the following statements is true?

(a) Material price variance is caused on account of pilferage of materials

< Answer >

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(b) Material usage variance is caused on account of excessive shrinkage or loss of material in transit(c) Material price variance occurs if defective materials are purchased(d) Material price variance arises because of purchasing substitute materials at different prices(e) Material mix variance will result if materials are used into production in the same ratio as the

standard mix.(1 mark)

22. A debit balance of materials usage variance indicates that

(a) Standard quantities of materials exceed actual quantities (b) Actual quantities of materials exceed standard quantities(c) Standard rates of standard quantities exceed actual cost(d) Standard rates of actual quantities exceed actual rate of actual quantities(e) Standard rates of standard quantities exceed actual rate of actual quantities.

(1 mark)

< Answer >

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

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

(1 mark)

< Answer >

24. Fixed overhead efficiency variance is equal to

(a) Standard fixed overhead rate per hour ´ (Actual hours – Budgeted hours)(b) Actual fixed overhead rate per hour ´ (Actual hours – Budgeted hours)(c) Actual fixed overhead rate per hour ´ (Actual hours – Standard hours for actual production)(d) Standard fixed overhead rate per hour ´ (Actual hours – Standard hours for standard production)(e) Standard fixed overhead rate per hour ´ (Actual hours – Standard hours for actual production).

(1 mark)

< Answer >

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

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

(1 mark)

< Answer >

26. The difference between the budget amount and the best estimate is called

(a) Variance (b) Contingency provision (c) Slack(d) Standard error (e) Probability.

(1 mark)

< Answer >

27. A standard which can be attained under the most favorable conditions is called

(a) Current standard (b) Ideal standard (c) Basic standard (d) High standard (e) Expected standard.

(1 mark)

< Answer >

28. The data, equipment and computer programs that are used to develop information for managerial use is known as

(a) Management by exception (b) Management by objective(c) Management control (d) Management information system(e) Value chain analysis.

(1 mark)

< Answer >

29. Which of the following information is required by the Operating Management?< Answer >

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

(1 mark)

30. Which of the following activities is not useful in standard costing technique?

(a) Pricing decisions (b) Performance appraisal (c) Cost awareness(d) Cost control (e) Cost reduction.

(1 mark)

< Answer >

31. In responsibility accounting, a center’s performance is measured by controllable costs. Controllable costs are best described as including

(a) Direct material and direct labor only(b) Only those costs that the manager can influence in the current time period (c) Only discretionary costs(d) Those costs about which the manager is knowledgeable and informed(e) Incremental and fixed costs.

(1 mark)

< Answer >

32. Which of the following is/are not true in relation to Value Chain Analysis?

(a) Value chain is the linked set of value-creating activities from the basic raw material sources for suppliers to the ultimate end-use product delivered to the customer

(b) No individual firm is likely to span the entire value chain(c) Value chain requires an internal focus unlike conventional management accounting in which

focus is external to the firm(d) Each firm must be understood in the context of the overall value chain of value-creating activities(e) Both (b) and (d) above.

(1 mark)

< Answer >

33. In activity-based costing system the primary criteria for making cost allocation decisions is

(a) Cause and effect (b) Benefits received (c) Fairness(d) Ability to bear (e) Total costs before taking into overhead costs.

(1 mark)

< Answer >

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

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

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

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

(1 mark)

< Answer >

35. Under project–life cycle costing, which of the following costs is not an initial cost of a capital asset purchased from a supplier?

(a) Installation charges (b) Cost of spares(c) Research and Development Costs (d) Cost of acquisition(e) Commission paid.

(1 mark)

< Answer >

36. Which of the following statements is false with respect to Total Quality Control (TQC)?

(a) TQC is a management process based on the belief that quality costs are minimized with zero defects

(b) The proponents of TQC do not advocate that ‘quality is free’(c) TQC begins with the design and engineering of the product

< Answer >

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(d) TQC is often associated with JIT manufacturing(e) TQC is sometimes referred to as TQM (Total Quality Management).

(1 mark)

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

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

(1 mark)

< Answer >

38. Which of the following is false with respect to Return on Investment (ROI) and Residual Income (RI)?

(a) In case of RI, there is a problem of defining the minimum required rate of return associated with various investment opportunities

(b) ROI can be readily employed for inter-divisional comparisons(c) A project will be rejected under ROI method and accepted under RI method if the rate of return

from such project is more than the minimum required rate of return but less than the current ROI(d) RI is the rate of return which a division is able to earn above the minimum required rate of return

on operating assets(e) Under RI approach, the larger divisions will be expected to have more RI than the smaller

divisions.(1 mark)

< Answer >

39. In case the resources of an enterprise are not fully utilized, which of the following will be zero?

(a) Standard cost (b) Shadow price (c) Residual income(d) Margin of Safety (e) Marginal revenue.

(1 mark)

< Answer >

40. Scrap and costs of spoiled units that cannot be salvaged are the examples of

(a) Appraisal costs (b) Internal failure costs(c) External failure costs (d) Prevention costs(e) Committed costs.

(1 mark)

< Answer >

41. XY Ltd. fixes the inter-divisional transfer prices for its products on the basis of cost plus estimated return on investment in its divisions. The relevant position of the budget for the division A for the year 2004-05 is as follows:

Fixed assets (Rs.) 8,00,000Current assets other than Sundry debtors (Rs.) 3,20,000Sundry debtors (Rs.) 2,80,000Annual fixed cost of division A (Rs.) 8,00,000Variable cost per unit of product (Rs.) 20Budgeted units of production (units) 50,000

If the company desires to earn a return of 25% on investment, the transfer price for division A is

(a) Rs.28.00 (b) Rs.40.00 (c) Rs.43.00 (d) Rs.27.00 (e) Rs.41.60.(1 mark)

< Answer >

Satya Ltd. has two divisions - A and B. The division A has the capacity to manufacture 50,000 units of a special component L annually and it has some idle capacity currently. The budgeted residual income for the division A is Rs.4,00,000. The relevant details extracted from the budget of A are as under:

Sales (to outside customers) 40,000 units @ Rs.80 per unitVariable cost per unit Rs.50Divisional fixed cost Rs.5,00,000Capital employed Rs.60,00,000Cost of capital 10% per annum

Division B received an order for which it requires 10,000 units of a component similar to L. An

< Answer >

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additional variable cost of Rs.6 per unit will be incurred to make minor modifications to L to suit the requirements of Division B.The minimum transfer price per unit which A should quote to B to achieve its budgeted residual income is

(a) Rs.86 (b) Rs.50 (c) Rs.56 (d) Rs.80 (e) Rs.74.(2 marks)

43. The following is the statement showing operating income of Dyeing division of Kamal Garments Ltd.

Particulars Rs.Sales 2,50,000Variable manufacturing costs 2,00,000Administrative expenses 33,000Selling expenses 16,000Operating income 10,000

The sales include cloth transferred to Printing division at manufacturing cost of Rs.25,000.The common administrative expenses of Rs.8,000 and common selling expenses of Rs.6,000 are apportioned to the Dyeing division. If the internal transfer is at market price, the operating income of Dyeing division using contribution approach is

(a) Rs.22,143 (b) Rs. 8,143 (c) Rs.57,143 (d) Rs.43,143 (e) Rs.24,000.(2 marks)

< Answer >

44. Narayana Ltd. has furnished the following data relating to its product for the year 2003-04:

Annual production (units) 40,000Material cost (Rs.) 2,80,000Other variable cost (Rs.) 2,20,000Fixed cost (Rs.) 2,20,000Apportioned investment (Rs.) 6,00,000

Assuming income tax rate of 40%, if the company desires to earn a post tax profit of 15% on listed sale price when trade discount is 35%, the net sale price per unit would be

(a) Rs.25.00 (b) Rs.63.75 (c) Rs.41.44 (d) Rs.45.00 (e) Rs.29.25.(2 marks)

< Answer >

45. Santaram Ltd. manufactures a single product at the operated capacity of 20,000 units while the normal capacity of the plant is 25,000 units per annum. The company has estimated 20% profit on sales realization and furnished the following budgeted information:

Particulars 25,000 units (Rs.)

20,000 units (Rs.)

Fixed overheads 2,00,000 2,00,000Variable overheads 4,00,000 3,20,000Semi-variable overheads 2,50,000 2,20,000Sales realization 15,00,000 12,00,000

The company has received an order from a customer for a quantity equivalent to 10% of the normal capacity. It is noticed that prime cost per unit of product is constant. If the company desires to maintain the same percentage of profit on selling price, the minimum price per unit to be quoted for new order is

(a) Rs.33.75 (b) Rs.27.00 (c) Rs.25.25 (d) Rs.41.25 (e) Rs.36.50.(2 marks)

< Answer >

46. Jyothi Ltd. is attempting to compute costs for its three products for pricing purposes. The company has annual fixed manufacturing costs of Rs.5,32,000. The variable costs of the company’s products are as follows:

Product Variable costs of manufacture (per unit) (Rs.)

AB

2030

< Answer >

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C 40

The company expects to produce and sell 5,000 units of A, 6,000 units of B, and 8,000 units of C annually. The policy of the company is to add a markup of 25% to each product’s total manufacturing costs to compute the tentative selling price. The selling prices of product A, B and C, if fixed costs are allocated on the basis of number of units produced, are

(a) Rs. 48.00, Rs. 58.00 and Rs. 85.00 respectively (b) Rs. 60.00, Rs. 72.50 and Rs. 85.00 respectively(c) Rs. 60.00, Rs. 58.00 and Rs. 85.00 respectively(d) Rs. 60.00, Rs. 72.50 and Rs. 68.00 respectively(e) Rs. 68.00, Rs. 85.00 and Rs. 60.00 respectively.

(2 marks)

47. Motilal Ltd. manufactures and sells a single product. The estimated activity of the company for the month of June 2004 is as follows:

Sales Rs.8,50,000Gross profit on sales 30%Increase in inventory during the month Rs.25,800Increase in sundry debtors Rs.19,500Total selling and administrative expenses Rs.50,000 + 2.5% on salesDepreciation expenses which is included in fixed selling and administrative expenses Rs.20,000

The net cash surplus or deficit for the month of June 2004 is

(a) Rs.1,58,450 (Surplus) (b) Rs.1,77,950 (Surplus)(c) Rs.1,38,950 (Surplus) (d) Rs.1,28,450 (Deficit)(e) Rs.1,07,200 (Deficit).

(2 marks)

< Answer >

48. Shira Ltd. pays commission to its salesmen in the month the company receives cash for sales, which is equal to 4% of the cash inflows. The company has budgeted sales of Rs.6,50,000 for July 2004, Rs.7,00,000 for August 2004 and Rs.7,50,000 for September 2004. 50% of the sales are on credit. Experience indicates that 70% of the budgeted credit sales will be collected in the month following the sales. 25% are expected to be realized in the second month following the month of sales and remaining 5% will be non-recoverable.

The total amount of sales commission for the month of September 2004 is

(a) Rs.30,500 (b) Rs.28,050 (c) Rs.24,800 (d) Rs.18,250 (e) Rs.13,050.(2 marks)

< Answer >

49. Tripty Ltd. has a policy of maintaining a minimum cash balance of Rs.50,000 at the end of each month. Any deficit below Rs.50,000 will be financed through bank borrowings and any surplus will be utlised to repay the outstanding bank borrowing and the balance will be invested in short-term securities. For this purpose, the company has an agreement with the bank to borrow in multiples of Rs.5,000 whenever a need arises subject to a maximum of Rs.60,000. The rate of interest is 12% per annum payable monthly on the amount borrowed.

50% of the sales are on credit and is expected to be collected in the month following the month of sales. 25% of the purchases are on credit and will be paid in the month following the month of purchases. The salaries and other expenses are to be paid in the month for which they relate. The following is the budgeted information for the quarter ending September 2004:

Particulars July 2004 Rs. August2004 Rs.

September2004 Rs.

Sales 20,000 30,000 40,000Purchases 20,000 30,000 30,000Salaries 10,000 10,000 10,000Manufacturing and other administrative expenses

 10,000

 10,000

 10,000

< Answer >

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If the closing cash balance as on July 31, 2004 is Rs.50,000, the cash balance as on October 01, 2004 before borrowing will be

(a) Rs.32,750 (b) Rs.52,500 (c) Rs. 27,500 (d) Rs.52,250 (e) Rs. 37,250.(3 marks)

50. XY Ltd. has prepared the following budget for the year 2004-05:

Particulars Percentage to total sales(Rs.)Direct materials 40Direct labor 20Factory overheads – Variable 10

Fixed 8Selling and administrative overheads –Variable 12

Fixed 06Profit 04Total 100

After evaluating the first quarter performance, it was observed that the company would be able to achieve only 80% of the original budgeted sales. The revised budgeted sales as envisaged above was estimated at Rs.2,400 lakh after taking into account a reduction in selling price by 20%.The original budgeted sales at original price is

(a) Rs.2,750 lakh (b) Rs.3,600 lakh (c) Rs.3,750 lakh (d) Rs.3,500 lakh (e) Rs.3,000 lakh.(2 marks)

< Answer >

51. Sreyi Ltd. has furnished the following data relating to a product for the year 2003–04:

Units produced 4,000 Direct materials

(Rs.) 5,20,000

Direct labor (Rs.) 3,40,000Manufacturing overheads (Rs.) 2,00,000 (25% fixed)Selling and administrative overheads (Rs.) 1,50,000 (40% fixed)

If the company manufactures 4,400 units in the next year, the total cost per unit would be

(a) Rs.275 (b) Rs.300 (c) Rs.325 (d) Rs.350 (e) Rs.400.(2 marks)

< Answer >

52. Leo Ltd. manufactures toy cats with moving parts and a built-in voice box. Projected sales for 5 months are as follows:

Month Projected sales in unitsJuly 2004 3,500August 2004 3,900September 2004 4,200October 2004 4,500November 2004 4,800

Each toy requires direct materials from a supplier at Rs.80 for moving parts. Voice boxes are purchased from another supplier at Rs.20 per toy. Labor cost is Rs.30 per toy and variable overhead cost is Rs.5 per toy. Fixed manufacturing overhead applicable to production is Rs.51,000 per month. It is the practice of the company to manufacture an output in a month which is equivalent to 1.2 times of the following month’s sales.

The production budget for the month of August 2004 and the production cost budget for the month of September 2004 are

(a) 5,040 units and Rs.7,80,000 respectively(b) 5,040 units and Rs.7,29,000 respectively(c) 5,040 units and Rs.7,50,000 respectively(d) 5,500 units and Rs.7,80,000 respectively

< Answer >

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(e) 5,555 units and Rs.7,50,000 respectively.(2 marks)

53. The flexible budget for the month of July 2004 was for 12,000 units with direct material cost at Rs.25 per unit. Direct labor was budgeted at 45 minutes per unit for a total cost of Rs.1,44,000. Actual output for the month was 10,800 units with Rs.2,70,000 in direct material and Rs.1,30,000 in direct labor expenses. The direct labor standard of 45 minutes was maintained throughout the month. The variance analysis of the performance for the month of July 2004 would show a(n)

(a) Favorable material usage variance of Rs.1,200(b) Unfavorable material price variance of Rs.1,000(c) Favorable direct labor efficiency variance of Rs.400(d) Unfavorable direct labor efficiency variance of Rs.400(e) Unfavorable direct labor rate variance of Rs.400.

(2 marks)

< Answer >

54. Avoy Ltd. manufactures two products – X and Y, using same facilities and similar process. The company has furnished the following information pertaining to two products for the year ending March 31, 2004.

Particulars Product X Product YDirect labor hours per unit 4 2.5Machine hours per unit 5 4Number of set ups during the period 22 18Number of orders handled during the period 16 19Production units 6,000 4,340

Total production overhead costs for the period are as follows:

Particulars Rs.Machine activity costs 2,40,000Set-ups costs 56,000Order handling costs 52,500  3,48,500

The absorption of total production overheads of both the products on the basis of a suitable cost driver, using Activity Based Costing method, is

Product X (Rs.) Product Y (Rs.)(a) 2,06,827 1,41,673(b) 2,14,462 1,34,038(c) 2,06,827 1,16,473(d) 1,93,611 1,54,889(e) 2,40,000 1,41,673.

(2 marks)

< Answer >

55. Acer Ltd. manufactures 6,000 units of Product PT at a cost of Rs.150 per unit. Presently, the company is utilizing 60% of the total capacity. The information pertaining to cost per unit of the product is as follows:

Material – Rs.80Labor – Rs.20Factory overheads – Rs.30 (40% fixed)Administrative overheads – Rs.20 (50% fixed)

Other information:i. The current selling price of the product is Rs.200 per unit.ii. At 70% capacity level – Material cost per unit will increase by 2% and

current selling price per unit will reduce by 2%.iii. At 90% capacity level – Material cost per unit will increase by 5% and

current selling price per unit will reduce by 5%.

The profit per unit of the product of the company at 70% and 90% capacity levels will be

< Answer >

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(a) Rs.50.00 and Rs.43.33 respectively(b) Rs.43.33 and Rs.47.54 respectively(c) Rs.47.54 and Rs.43.33 respectively(d) Rs.47.54 and Rs.46.22 respectively(e) Rs.43.33 and Rs.50.00 respectively.

(3 marks)

56. Sri Ram Ltd. uses a Standard costing system. The following details have been extracted from the standard cost card in respect of direct materials for the month of June 2004.

Material usage per unit – 5 kg at the rate of Rs.15 per kgBudgeted production – 1000 units

The company has furnished the following data relating to direct material for the month of June 2004:

Materials purchased 5,400 kg at a price of Rs.86,400Materials issued to production 4,670 kgsActual production 900 units

The material price and material usage variances are

(a) Rs.5,400 (A) and Rs.2,550 (A) respectively(b) Rs.5,400 (A) and Rs.2,550 (F) respectively(c) Rs.5,400 (A) and Rs.2,750 (A) respectively(d) Rs.2,750 (A) and Rs.2,550 (A) respectively(e) Rs.2,750 (F) and Rs.5,400 (F) respectively.

(2 marks)

< Answer >

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

Material Standard mix Standard price per kg.A 60% Rs. 8B 40% Rs.10

The standard process loss is 10%. During the month of June 2004, the company produced 5,000 kg. of finished product. The position of stock and purchases for the month of June 2004 is as under:

Material Stock as on June 01, 2004Kg.

Stock as on June 30, 2004 Kg.

Purchases during June 2004

Kg. Rs.

A 120 50 3,000 24,900B 80 30 2,500 24,000

The material yield variance of the company is(a) Rs.574 (A) (b) Rs.567 (A) (c) Rs.495 (F) (d) Rs.495 (A) (e) Rs.567 (F).

(2 marks)

< Answer >

58. SD Ltd. uses a standard absorption costing system. The following data have been extracted from its budget for the month of June 2004:

Fixed production overhead cost Rs.1,20,000Production 12,000 units

In June 2004, the fixed production overhead cost was under absorbed by Rs.10,500 and the fixed production overhead expenditure variance was Rs.2,800 (Adverse).The actual number of units produced was

(a) 1,050 units (b) 1,200 units (c) 10,670 units (d) 11,230 units (e) 12,770 units.(2 marks)

< Answer >

59. VK Ltd. has furnished the following data pertaining to a product for the month of June 2004:

Particulars Budget ActualProduction units 10,000 10,400Labor hours 5,000 4,800Fixed overheads (Rs.) 85,000 87,200

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Number of working days 25 24The fixed overhead volume variance is(a) Rs.2,000 (F) (b) Rs.2,200 (F) (c) Rs.2,200 (A) (d) Rs.3,400 (A) (e) Rs.3,400 (F).

(1 mark)

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

Variable overheads (40 hours at the rate of Rs.20 per hour) Rs.800Fixed overheads (40 hours at the rate of Rs.15 per hour) Rs.600

The additional information is available for the month of June 2004:

i. 4,000 pumps were produced although 4,200 had been scheduled for productionii. The normal capacity level was 1,68,000 direct labor hours per monthiii. 1,59,000 direct labor hours were worked at a total cost of Rs.38,16,000iv. The standard direct labor rate is Rs.25 per hourv. The standard direct labor time per unit is 40 hoursvi. Variable overhead costs were Rs.33,20,000vii. Fixed overhead costs were Rs.25,50,000

The fixed overhead expenditure variance and direct labor efficiency variance are

(a) Rs.25,000 (F) and Rs.30,000 (F) respectively(b) Rs.25,000 (A) and Rs.30,000 (A) respectively(c) Rs.30,000 (A) and Rs.25,000 (F) respectively(d) Rs.30,000 (A) and Rs.20,000 (A) respectively(e) Rs.30,000 (A) and Rs.28,000 (A) respectively.

(2 Marks)

< Answer >

61. Consider the following data pertaining to overhead cost for the month of June 2004:

i. Overhead cost variance – Rs.5,200 (A)ii. Overhead volume variance – Rs.3,800 (A)iii. Budgeted hours for the month – 2,500iv. Budgeted overheads for the month – Rs.20,000v. Rate of recovery of overheads – Rs.20 per hour

The actual overhead incurred by the company is(a) Rs.21,400 (b) Rs.18,600 (c) Rs.23,800 (d) Rs.16,200 (e) Rs.25,200.

(1 mark)

< Answer >

62. X Ltd. operates under a standard cost system. Factory overhead cost is applied to products on a direct labor hour basis. At normal operating level, the company utilizes 2,00,000 direct-labor hours per year. The budgeted overhead cost at normal capacity level is as follows:

Variable – Rs.6,50,000Fixed – Rs.4,20,000

During the year 2003-04, the actual labor hours were 2,20,000 to get production that should have required only 1,80,000 hours. The overhead efficiency variance is

(a) Rs.1,30,000 (F) (b) Rs.1,30,000 (A) (c) Rs.2,14,000 (A) (d) Rs.2,14,000 (F) (e) Nil.(2 marks)

< Answer >

63. MN Ltd. uses standard process costing method. The standard process cost card per month shows that 4 hours of direct labor is required to produce one kg. of finished product and the fixed overheads, which are recovered on direct labor hours, amount to Rs.180 per kg. of output. The budgeted output is 4,000 kgs. per month.

Actual production during the month of June 2004 is 3,800 kgs. and the direct labor hours utilized during the month were 14,800.

The details of opening and closing work-in progress (WIP) are as under:Opening work-in-progress – 300 kgs.(Degree of completion of labor and overheads – 60%) Closing work-in-progress – 480 kgs.(Degree of completion of labor and overheads – 20%)The company uses FIFO method for evaluation of stocks. The fixed overhead efficiency variance is

< Answer >

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 (a) Rs.2,880 (F) (b) Rs.2,880 (A) (c) Rs.2,480 (F) (d) Rs.2,500 (A) (e) Rs.2,500 (F).

(3 marks)

64. The standard labor component and the actual labor component for a job in a week are given below:

Particulars Skilled workers

Semi-skilled workers

Unskilled workers

i. Standard number of workers in the gang 40 30 20

ii. Standard wage rate per hour (Rs.) 20 16 10iii. Actual number of workers employed in

the gang during the week 36 20 34

iv. Actual wage rate per hour (Rs.) 32 23 8During the 40 hours working week, the gang produced 3,400 standard labor hours of work.The labor efficiency variance is(a) Rs.2,132 (F) (b) Rs.2,132 (A) (c) Rs.708 (F) (d) Rs.708(A) (e) Nil.

(2 marks)

< Answer >

65. The budgeted and actual sales of a concern are as under:

ProductBudget Actual

Quantity (kgs.)

Price (Rs.)

Quantity (kgs.) Price (Rs.)

A 2,500 30 2,700 32B 1,500 25 1,300 26C 2,000 20 2,200 18

The sales mix variance is(a) Rs. 3,933 (F) (b) Rs.5,417 (F) (c) Rs.3,933 (A) (d) Rs. 5,417 (A) (e) Rs.83 (A).

(1 mark)

< Answer >

66. The data relating to Sinha Ltd. for the month of June 2004 are as follows:

Output (units)Wages paid for 4,850 hoursMaterial purchased 2,500 kg

5,000 Rs. 87,300 Rs. 40,000

Variances:Variances Rs.Labor rateLabor efficiencyLabor idle timeMaterial priceMaterial usage

2,130 (A)2,250 (F)300 (A)2,560 (F)2,940 (F)

The standard prime cost per unit is

(a) Rs. 24.30 (b) Rs. 17.42 (c) Rs. 24.40 (d) Rs. 26.52 (e) Rs. 25.50.(2 marks)

< Answer >

67. Jaya Electronics Ltd., a camera manufacturer, is planning to produce a new model of cameras. The potential demand for the next year is estimated to be 50,000 units. The company has the capacity to produce 2,00,000 units and could sell 50,000 units at a price of Rs.900 per camera. The demand would double for every decrease of Rs.60 in the selling price. The company expects a minimum margin of 25%. At full capacity level, the target cost per unit will be

(a) Rs.585 (b) Rs.975 (c) Rs.936 (d) Rs.630 (e) Rs.1,008.(1 mark)

< Answer >

68. Mr.Kanai the General Manager of Main Product Division of Sai Ltd. has estimated the following cash flows for his division for the next year:

Particulars Rs.

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Investment in Plant and equipment 18,50,000

Investment in Working capital 7,50,000

Revenue 7,80,000

If the imputed interest cost is 12% and Mr. Kanai desires to achieve a residual income of Rs.1,80,000, the total costs, in order to achieve the target, would be(a) Rs.3,50,000 (b) Rs.2,88,000 (c) Rs.4,20,000 (d) Rs.2,65,000 (e) Rs.3,12,000.

(2 marks)

69. Consider the following details pertaining to Srikanth Ltd. for the month of June 2004:

Particulars Rs.

Sales 60,000

Direct materials 18,500

Direct labor 14,000

Variable overheads 8,000

Capital employed 1,20,000The return on investment in June 2004 is 12.5%. In the month of July 2004, it is expected that the volume of sales will be increased by 15%, the selling price will be increased by 2% and there will be a reduction of all other costs by 2%. The change in the return on investment for the month of July 2004 will be(a) An increase of 12.5% (b) An increase of 35.52%(c) A decrease of 35.52% (d) A decrease of 43.24%(e) An increase of 42.00%.

(2 marks)

< Answer >

70. Consider the following data of AB Ltd. for the quarter ending June 30, 2004:

Projected sales 5,000 units

Raw materials per unit of finished goods 4 kg

Opening stock of finished goods 675units

Closing stock of finished goods 850units

Opening stock of raw materials 4,500 kg

Closing stock of raw materials 6,200 kg

The total quantity of materials purchased during the quarter is(a) 19,000 kg (b) 21,400 kg (c) 22,400 kg (d) 21,000 kg (e) 17,600 kg.

(2 marks)

< Answer >

71. Siva Ltd. manufacturers cabinets and outsources handles of the cabinet. Each cabinet requires four handles. The direct labor time for assembly work is 30 minutes per cabinet. The closing stock of finished cabinets in a month is estimated to be 50% of projected unit sales for the next month. The closing stock of handles in a month is planned to be 60% of the requirement for the second following month.

The company has furnished the following projected unit sales:

July 2004 300 cabinets

August 2004 310 cabinets

September 2004 320 cabinets

October 2004 350 cabinets

The closing inventory of the company for the month of June 2004 are as follows:

Cabinets 150

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Handles 800

The number of handles to be purchased in the month of July 2004 is(a) 1,240 units (b) 1,387 units (c) 1,216 units (d) 1,164 units (e) 1,176 units.

(2 marks)

  END OF QUESTION PAPER 

 

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Suggested AnswersManagement Accounting II (152) – July 2004

1. Answer : (e)Reason : Transfer pricing motivates divisional managers to perform well. It is useful for evaluating

performance of the divisional managers. It also helps in measuring divisional performance. It is the selling price established for goods or services sold by one division to other under the same organization. Therefore, (d) is not correct, (e) is correct.

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

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

Answer (e) is not correct because a production center may be a cost center, a profit center or even an investment center. Transfer prices are not used in a cost center. Transfer prices are used to compute profitability but a cost center is responsible only for cost control.

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3. Answer : (e)Reason : Differential cost technique for pricing ignores fixed cost. Differential cost technique considers

the change of cost for different options. Therefore, fixed cost has no relevancy with these differential cost techniques. Other techniques mentioned in (a), (b), (c) and (d) consider the fixed cost in pricing the goods.

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4. Answer : (e)Reason : Pricing decisions are influenced by internal factors such as costs and profit objectives. The first

consideration is the product costs that forms the basis of price. Competitors prices and prices of substitutes are the middle level consideration that the company has to take into account while setting prices. They help the firm to establish where its prices might be set and the company can use them as orientation point for its own pricing. The last one, the unique product features in the company establish the ceiling on its price. Hence all (a), (b), (c) and (d) above are correct. Hence the right option is (e).

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5. Answer : (d)Reason : When we look into the relationship between full cost and contribution margin pricing we can

conclude that although the full cost pricing and contribution margin based approach for pricing are considered distinctively different approaches, by and large , they represent to a certain degree, cost plus pricing. Hence statement (e) is true. They are not competing to each other. Hence statement (a) is true. In both the pricing models fixed costs are considered important. Hence option (c ) is true. In both the methods, the selling prices proposed must be only be tentative and they are always subjective. Hence statement (b) is also true. However, Full cost pricing makes a normal mark up on total costs and it does not take volume of production into consideration. On the other hand contribution margin approach to pricing is concerned about cost. Hence statement (d) which states that Contribution margin method also makes a normal markup on total costs is false

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6. Answer : (b)Reason : Under ROI pricing method, mark up percentage is related to investment. The profit will change

in direct proportion to investment. The profit figure computed as a percentage of investment is added to the total cost to determine the selling price. As a result, when variable or fixed cost of production changes the profit per unit or total profit remains the same. Hence (a) is not correctUnder full cost pricing method, mark-up is added as a percentage of total cost of production to arrive at the price. Hence a change in variable or fixed cost of production will lead to a change in profit if the markup percentage remains the same. Hence (b) is correct

Contribution margin approach to pricing computes the profit using the mark up percentage on the variable cost. Therefore, if fixed cost increases the profit is not affected. Hence (c) is not correct. Therefore (b) is the answer.

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7. Answer : (b)Reason : Cost of goods manufactured is equal to all manufacturing costs incurred during the period, plus

beginning work-in-process, minus ending work-in-process. A cost of goods manufactured budget is therefore based on materials, direct labor, factory overhead, and work-in-process.

Answer (a) is incorrect because both beginning and ending work-in-process must be included. Answer (c) and (d) are incorrect because finished goods are excluded. They are the end product of the manufacturing process. Answer (e) is incorrect because work-in-process inventories must be included.

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

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

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9. Answer : (c)Reason : When preparing a performance report for a cost center using flexible budgeting techniques, the

planned cost column should be based on budget adjusted to the actual level of activity for the period being reported.

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

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

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11. Answer : (b)Reason : A production budget is based on sales forecasts, in units, with adjustments for beginning and

ending inventories. It is used to plan when items will be produced. After the production budget has been completed, it is used to prepare materials purchases, direct labor, and factory overhead budgets.

Answer (a) is incorrect because a production budget is usually prepared in terms of units of output rather than costs. Answers (c) and (d) are incorrect because the direct labor and materials purchases budgets are prepared after the production budget. Answer (e) is incorrect because the production budget is not summarization of discretionary costs.

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12. Answer : (e)Reason : Promotion of employees without proper authorization by personal favoritism or supervisors

leads to labor rate variance as they are paid rates fixed for higher job classification. Hence (e) is false. Insufficient training is a reason for labor efficiency variance. When workers are not able to do the work due to some reason during the hours for which they are paid, it results in idle time variance. High labor turnover is a reason for labor efficiency variance and different rates being paid to workers employed to meet seasonal demands leads to labor rate variance.

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13. Answer : (e)Reason : Short range budgets may cover periods of three, six and twelve months depending on the nature

of the business. In determination of the period of short range budget all the factors as stated in (a) financing of production well in advance; (b) cover complete production; (c) entire seasonal cycle; (d) coincide with the financial accounting period are all considered. Hence option (e) is the correct option.

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14. Answer : (d)Reason : Budgets must allow for changes because of changing conditions. Changing conditions call for

changes in plans and long-run benefit to the organization should be the guide for changes to the budget itself. Budgets cannot be administered rigidly. Attaining the budget is not an end itself. Managers cannot be forced upon to commit to the budget and keep it as adopted.

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15. Answer : (b)Reason : If the budget of a company is reviewed and updated at regular intervals, it is defined as rolling

budget. It is continuously updated by periodically adding a new incremental time period, such as a quarter, and dropping the period just completed, Therefore (b) is correct.

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16. Answer : (c) < TOP >

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Reason : In case of zero based budget, each manager is asked to prepare his own requirement of funds beginning from scratch, ignoring the past and he has to justify the requirements mentioned by him. Hence the main idea behind zero based budget is to challenge the existence of every budgetary unit and every budget period.

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

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

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18. Answer : (e)Reason : A budget is a means of control because it sets standard guidelines with which actual

performance can be compared. The feedback provided by comparison of actual and budgeted performance reveals whether a manager has used company assets efficiently. If a budget is to be used for control purposes, however, the accounting system must be designed to produce information required for the control process. Further, the budgeting and accounting system must be related to the organizational structure. So that variances will be assigned to the proper individuals.Option (a) is incorrect because the company should already be using forecasting procedures if the budget is being used as a planning tool.Option (b) is not correct because a budget director and committee are needed even if a budget is to be used only for planning.Options (c) and (d) are incorrect because daily reporting is usually not necessary.

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19. Answer : (b)Reason : Material yield variance can be defined as the difference between the actual loss and the standard

loss on actual output multiplied by standard cost per unit. It is not true in respect of other options mentioned in (a), (c), (d) and (e).

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20. Answer : (d)Reason : Purchase department is responsible for an unfavorable materials price variance. Other

departments like store, production, inspection, and receiving are not responsible for unfavorable materials price variance.

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21. Answer : (d)Reason : Material price variance arises due to purchase of substitutes at different prices. It does not arise

due to pilferage or defective material. Other statements mentioned in (a), (b), (c) and (e) are false.

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22. Answer : (b)Reason : A debit balance of materials usage variance indicates the unfavorable variance. It means the

actual quantities of materials exceed standard quantities. Other statements stated in (a), (c), (d) and (e) are not true.

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23. Answer : (a)Reason : A favorable materials price variance is the result of paying less than the standard price for

materials. An unfavorable materials usage variance is the result of using an excessive quantity of materials. If a purchasing manager is to buy substandard materials to achieve a favorable price variance, an unfavorable quality variance could result from using an excessive amount of poor quality materials.

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24. Answer : (e)Reason : Fixed overhead efficiency variance = Standard fixed overhead rate per hour ´ (Actual hours –

Standard hours for actual production)

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

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costs. Therefore, (c) is correct.

26. Answer : (c)Reason : Many budgetees tend to budget revenues somewhat lower, and expenses somewhat higher, than

their best estimates of these amounts. The difference between the budget amount and the best estimate is called Slack. In examining the budget, superiors attempt to discover and eliminate slack. Variance is the difference between the budget and actual. Standard error and Probability has no link with the difference between the budget amount and the best estimate.

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27. Answer : (b)Reason : A standard which can be attained under the most favorable conditions is called Ideal standard.

Ideal standards are not widely used in practice because they may influence employee’s motivation adversely. All the options defined here are incorrect. (a) The standards which are set for use over a limited period to reflect current conditions is called current standard. (c) Basic standard is the standard established for use over a long period from which a current standard can be developed. (d) High standards represent the best possible performance. (e) Expected standard is standard based on conditions which may be realized in actual practice.

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28. Answer : (d)Reason : The data, equipment and computer programs that are used to develop information for

managerial use is called Management Information System (MIS). Other options (a), (b), (c) and (e) are not correct.

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

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

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30. Answer : (e)Reason : Under standard costing technique, it is possible to take pricing decisions, to do performance

appraisal, to create cost awareness among the employees and to control the cost. Through this technique, it is not possible to reduce cost. So, cost reduction is not useful in standard costing technique.

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31. Answer : (b)Reason : Control is the process of making certain that plans are achieving the desired objectives. A

controllable cost is one that is directly regulated by a specific manager at a given level of production within a given time span. For example, fixed costs are often not controllable in the short run.

Answer (a) is incorrect because many overhead costs are also controllable. Answer (c) is incorrect because controllable costs need not be discretionary. Discretionary costs are characterized by uncertainty about the relationship between input and the value of the related output; they may or may not be controllable. Answer (d) is incorrect because controllable costs are those over which a manager has control; the manager may be knowledgeable and informed about costs that he cannot control. Answer (e) is incorrect because fixed costs are often not controllable in the current period.

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32. Answer : (c)Reason : Value chain requires an external focus, unlike conventional management accounting in which

the focus is internal to the firm i.e., option ‘c’ is the right option.Options (a), (b), and (d) are the correct statements in relation to value chain analysis. Hence they are not right options.

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33. Answer : (a)Reason : Applying overhead costs to each product or service based on the extent to which that product or

service causes overhead cost to be incurred is the primary objective of accounting for overhead costs. Thus, ABC uses cost hierarchy to determine the cost drivers that cause a cost incurred. Hence the options given in (b), (c), (d) and (e) are not correct. Therefore, option (a) is correct.

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

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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.

35. Answer : (c)Reason : The project life-cycle costs of a capital asset can be grouped into three broad categories i.e.,

Initial costs, Operating costs and Disposal costs. The capital cost of an asset purchased from a supplier does not include Research and Development Costs. These costs accrue or arise only when the asset is constructed ‘in-home’. The costs mentioned in alternatives (a) Installation charges, (b)Cost of spares, (d) Cost of acquisition and (e) Commission paid are the initial costs of an asset purchased from a supplier.

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36. Answer : (b)Reason : TQC is a management process based on the belief that quality costs are minimized with zero

defects. The phrase ‘Quality is free’ is commonly advocated by the proponents of TQC. Hence statement (b) is incorrect and all other statements (a), (c), (d) and (e) are correct.

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37. Answer : (d)Reason : Return on investment (ROI) equals to net income divided by invested capital. If a firm is already

profitable, increasing sales and expenses by the same percentage will increase the ROI. Other options given in (a), (b), (c) and (e) are not correct.

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38. Answer : (d)Reason : RI is the net operating income which a division is able to earn above the minimum rate of return

on operating assets. It is in absolute terms and not a ratio. Hence (d) is false. As RI is the income above the minimum rate of return, there is a problem of defining the minimum required rate of return associated with various investment opportunities. ROI can be readily employed for inter-divisional comparisons as it is a ratio. A project will be rejected under ROI method and accepted under RI method if the rate of return from such project is more than the minimum required rate of return but less than the current ROI. Under RI approach, the larger divisions will be expected to have more RI than the smaller divisions, not necessarily because they are better managed but because of the bigger numbers involved.

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39. Answer : (b)Reason : Shadow price represents the opportunity cost of a unit of constrained resource. It is the increase

in the value of objective function, which would be achieved, if one more units of the resource was available. Only constrained resource has a shadow price. In case the resources are not fully utilized, the shadow price will be zero.

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40. Answer : (b)Reason : Scrap and costs of spoiled units that cannot be salvaged are examples of internal failure costs.

These are the costs associated with materials and products that fail to meet quality standards and result in manufacturing losses. These defects are identified before the goods are shipped to customers. Hence the answer is (b). Appraisal costs are incurred to ensure that materials, products and services meet quality standards. They begin with the inspection of raw materials and parts from vendors. External failure costs are the costs incurred when inferior-quality products or services are sold to customers. Prevention costs are the costs incurred to reduce the number of defective units produced or the incidence of poor-quality service. Committed costs are fixed costs which result from the decision of the management in the prior period and is not subject to the management control in the present on a short-run basis.

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41. Answer : (c)Reason : Total investments = Rs.8,00,000 + Rs.3,20,000 + Rs.2,80,000 = Rs.14,00,000

Total Return = 25% of Rs.14,00,000 = Rs.3,50,000

Particulars Rs.

Variable cost (50,000 × 20) 10,00,000

Fixed cost 8,00,000

Return 3,50,000

Sales price 21,50,000

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Sales price / unit

21,50, 00050, 000

43

  

42. Answer : (a)Reason :

Fixed costs 5,00,000

Return on capital employed (Rs.60,00,000 x 10%) 6,00,000

Residual income desired 4,00,000

Total desired contribution 15,00,000

Contribution per unit from outside sales = Rs.80 – Rs.50 = Rs.30 per unitTotal contribution from outside sales = Rs.30 per unit x 40,000 units = 12,00,000Minimum contribution to be earned from supply to division B = Rs.15,00,000 – Rs.12,00,000 = Rs. 3,00,000

Contribution per unit on additional 10,000 units =

Rs. 3,00,00010,000 units = Rs.30 per unit

Variable cost for minor modification = Rs.6 per unitMinimum transfer price per unit to be quoted = Rs.50 + Rs.30 + Rs.6 = Rs.86

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43. Answer : (a)Reason :

  Rs.Sales to outsiders (Rs.2,50,000 – Rs.25,000) 2,25,000Less: manufacturing cost of goods sold to outsiders (Rs.2,00,000 – Rs.25,000) 1,75,000Contribution 50,000

Mark-up on outside sale =

Rs.50,000=28.57%

Rs.1,75,000

Particulars Rs.Transfer price to outside sales (25,000 × 1.2857%) 32,143Sales to outsiders 2,25,000Total sales 2,57,143Less: Manufacturing expenses 2,00,000Contribution 57,143Less: Traceable expenses  Administration expenses 25,000Selling expenses 10,000Operating income 22,143

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44. Answer : (e)Reason : Let, sale value = x (listed price)

0.15x = x(1 0.35) Rs.2,80,000 Rs.2,20,000 Rs.2,20,000 (1 Tax rate)

0.15x = 0.65x Rs.7,20,000 0.6 = 0.39x – Rs.4,32,0000.24x = Rs.4,32,000x = Rs.4,32,000 ¸ 0.24 = Rs.18,00,000Sale price / unit= Rs.18,00,000 ÷ 40,000 = Rs.45Net sale price = 45 ´ .65 = Rs.29.25

 

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

Rs.

Sales (20,000 units) 12,00,000Less: Profit margin – 20% 2,40,000Cost of sales – (80% of Rs.12,00,000) 9,60,000Less: Variable overheads – Rs.3,20,000  

Semi-variable overheads – Rs.2,20,000  Fixed overheads – Rs.2,00,000 7,40,000

Prime cost 2,20,000

Semi-variable overheads:

Variable cost = unitsinChangetcosinChange

=

Rs.2,50,000-Rs.2,20,00025,000units-20,000units =

.30, 0005, 000Rs

units = Rs.6per unit

 At 20,000 unitsFixed cost = Total cost – Variable cost

= Rs.2,20,000 – 20,000 units ´ Rs.6 = Rs.1,00,000At 22,500 unitsTotal cost = 22,500 units ´ Rs.6 + Rs.1,00,000 = Rs.1,35,000 + Rs.1,00,000 = Rs.2,35,000

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

Element of cost 20,000 units (Rs.)

22,500 units (Rs.)

Differential cost for 2,500 units

(Rs.)

Prime cost – 2,20,000 2,47,500 27,500

Variable overhead 3,20,000 3,60,000 40,000

Semi variable overhead 2,20,000 2,35,000 15,000

Fixed overhead 2,00,000 2,00,000 –

  9,60,000 10,42,500 82,500

Cost per unit of new order =

.82,5002,500

Rs

= Rs.33.00Profit margin (20% on sale = 25% on cost) = Rs. 8.25 Minimum selling price per unit = Rs.41.25

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46. Answer : (b)Reason :

Particulars A B C Total

A Total fixed costs (Rs.) Number of units

 5,000

 6,000

 8,000

5,32,00019,000

Fixed cost per unit (Rs.) 28.00 28.00 28.00 28.00

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Variable cost per unit 20.00

30.00 40.00

Total unit cost (Rs.)Markup – 25%

48.0012.00

58.0014.50

68.0017.00

 

Selling price (Rs.) 60.00 72.50 85.00  

47. Answer : (a)Reason : Cash receipts = Sales – Increase in sundry debtors

= Rs.8,50,000 – Rs.19,500 = Rs.8,30,500Cash payment = Cost of goods sold (70%) + Inventory increase + Variable selling and

administrative expenses + Fixed (other than depreciation) selling & administrative expenses

= Rs.5,95,000 + Rs.25,800 + Rs.21,250 + Rs.30,000 = Rs.6,72,050Surplus in cash = Rs.8,30,500 – Rs.6,72,050 = Rs.1,58,450.

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48. Answer : (b)Reason :

Cash sales for September2004 (Rs.7,50,000 x 0.5) Rs.3,75,000

Cash flows from the credit sales in the month of July 2004 (Rs.6,50,000 x 0.5 x 0.25) Rs.81,250

Cash flows from the credit sales in the month of August 2004 (Rs.7,00,000x 0.5 x 0.7) Rs.2,45,000

  Rs.7,01,250

Total commission payable to salesmen = Rs.7,01,250 x 4% = Rs.28,050

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49. Answer : (e)Reason :

Particulars August September

Opening cash balance 50,000 52,500

Cash sales 15,000 20,000

Collection of credit sales 10,000 15,000

Cash inflows 75,000 87,500

Cash purchases 22,500 22,500

Payment to creditors 5,000 7,500

Salaries 10,000 10,000

Expenses 10,000 10,000

Interest (Rs.25,000 × 12% × 1/12) - 250

Cash outflows 47,500 50,250

Closing balance before borrowings 27,500 37,250

Borrowings 25,000 15,000

Surplus - -

Closing balance 52,500 52,250

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50. Answer : (c)Reason : If revised sale price 80%, the original sale price is 100. Therefore, revised budgeted sales at

original sale price =

Rs.2,4000.8 = Rs.3,000 lakh

Revised budgeted sales at original sale price = Rs.3,000 lakh

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Since, revised budgeted sales at original sale price is Rs.80 then the original budgeted sales at original sale price is Rs.100.

Therefore, original sales at original sale price =

Rs.3,000lakh0.8 = Rs.3,750 lakh

       

51. Answer : (b)Reason :

Particulars Rs.

Direct materials 5,20,000

Direct labor 3,40,000

Manufacturing overheads 1,50,000

Selling and administrative overheads 90,000

Total variable cost 11,00,000

Per unit variable cost 275

Total cost of 4,400 units = Rs.275 x 4,400 units + Rs.50,000 + Rs.60,000= Rs.12,10,000 + Rs.1,10,000 = Rs.13,20,000

Cost per unit = Rs.300.

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52. Answer : (a)Reason : The production budget for August 2004 = 4,200 units x 1.2 = 5,040 units

The production cost budget for September 2004 = 1.2 x 4,500 units x (Rs.80 + Rs.20 + Rs.30 + Rs.5) + Rs.51,000 = Rs.7,29,000 + Rs.51,000 = Rs.7,80,000.

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53. Answer : (e)Reason : The standard cost of materials for 10,800 units is Rs.2,70,000 (i.e. 10,800 ´ Rs.25). Thus, no

variance arose with respect to materials. Because labor for 12,000 units was budgeted at Rs.1,44,000, the unit labor cost is Rs.12. Thus, the labor budget for 10,800 units is Rs.1,29,600 and total labor variance is Rs.400 (i.e. Rs.1,30,000 – Rs.1,29,600). Because the actual cost is greater than the budgeted amount, Rs.400 variance is unfavorable. Given that the actual time per unit (45 minutes) was the same as that budgeted, no labor efficiency variance was incurred. Hence, the entire Rs.400 unfavorable variance must be attributable to labor rate variance.

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54. Answer : (a) Reason : Machine activity cost per hour =

Rs.2, 40, 000 Rs.2, 40, 000 Rs.5.07 per machine hour6, 000 x 5 4, 340 x 4 47, 360

Setups cost per set up =

Rs.56, 000 Rs.1, 40040

per set up

Order handling cost per order =

Rs.52, 500 Rs.1, 50035

per order

Particulars Product X (Rs.) Product Y (Rs.)

Machine activity cost 1,52,027 87,973

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Setups cost 30,800 25,200

Order handling cost 24,000 28,500

  2,06,827 1,41,673

        

55. Answer : (c)Reason :

Capacity 60% 70% 90%

Production (units) 6,000 7,000 9,000

  (Rs.) (Rs.) (Rs.)

Material 80.00 81.60 84.00

Labor 20.00 20.00 20.00

Variable overheads      

Factory 18.00 18.00 18.00

Administrative 10.00 10.00 10.00

  128.00 129.60 132.00

Total variable cost 7,68,000 9,07,200 11,88,000

Fixed overheads      

Factory 72,000 72,000 72,000

Administrative 60,000 60,000 60,000

  9,00,000 10,39,200 13,20,000

Sale price per unit 200 196 190

Sales value 12,00,000 13,72,000 17,10,000

Profit 3,00,000 3,32,800 3,90,000

Profit per unit 50.00 47.54 43.33

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56. Answer : (a)Reason : Material price variance = 5,400 kgs x Rs15– Rs.86,400

= Rs.81,000 – Rs.86,400 = Rs5,400(Adverse)Material usage variance = Rs.15 (900 units x 5 kgs – 4,670 kgs)

= Rs.15 (4,500 kgs – 4,670 kgs) = Rs.2,550 (Adverse)

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

Particulars A B

Stock as on June 01, 2004 120 80

Add: Purchases during the month of June 2004 3,000 2,500

  3,120 2,580

Less: Stock as on June 30, 2004 50 30

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Material consumed during the month of June 2004 3,070 2,550

Total material consumption = 3,070 + 2,550 = 5,620 kg.Standard cost:

  Quantity (kg.) Price (Rs.) Amount (Rs.)

A 3,000 8 24,000

B 2,000 10 20,000

  5,000    

Loss: 500    

Output 4,500   44,000

Standard yield =

Actualstandardoutput 90kg.Actualinput = ×5,620kg.=5,058kg.Standard input 100kg.

´

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

=

Rs.44,000×(5,058kg.-5,000 kg.)4,500 = Rs.567 (Adverse)

58. Answer : (d)

Reason : Standard fixed overhead rate =

Budgeted cost Rs.1,20,000 Rs.10Budgeted output 12,000

Overheads incurred = Budgeted fixed production overhead cost + Expenditure variance= Rs.1,20,000 + Rs.2,800 = Rs.1,22,800

Overheads absorbed = Actual overhead – Under absorption of overheads= Rs.1,22,800 – Rs.10,500 = Rs.1,12,300

Actual number of units = Rs.1,12,300 ¸ Rs.10 = 11,230 units.

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59. Answer : (e)

Reason : Standard rate per unit =

Rs.85,000Rs.8.50

10,000

Standard rate per hour =

Rs.85,000 Rs.175,000

Standard time for Budgeted production =

10,000 units 2units per hr5,000hrs

Standard time for actual production =

10,400 5,200hrs2

Volume variance = Rs.17 (5,000 hrs – 5,200 hrs)= Rs.17 x 200 hrs = Rs.3,400 (Favorable)

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60. Answer : (c)Reason : Fixed overhead expenditure variance= Budget expenses ~ Actual expenses

= Rs.15 x 1,68,000 hr. ~ Rs.25,50,000= Rs.25,20,000 ~ Rs.25,50,000 = Rs.30,000 (A)

Direct labor efficiency variance = Standard rate (Actual time ~ Standard time)= Rs.25 (1,59,000 ~ 40 hours x 4,000 units)= Rs.25 (1,000 hrs) = Rs.25,000 (F).

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61. Answer : (a)Reason : Overhead expenditure variance = Rs.5,200 (A) ~ Rs.3,800 (A)

= Rs.1,400 (A)Actual overhead incurred = Budgeted Overhead ~ Overhead expenditure

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variance= Rs.20,000 ~ Rs.1,400 (A)= Rs.21,400

62. Answer : (c)Reason : Budgeted rate = (Rs.6,50,000+Rs.4,20,000)¸2,00,000

=Rs.10,70,000¸2,00,000 = Rs.5.35Overhead efficiency variance = Budgeted allowance at 2,20,000 hours ~ Budgeted

allowance at1,80,000 hours= Rs.5.35 (2,20,000-1,80,000)

= Rs.5.35 ´ 40,000 = 2,14,000 (A)   

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63. Answer : (a)Reason :

Completed stock: Units Degree of completion

Overheads

From opening work-in-progress 300 40 % 120

Closing work-in-progress 480 20 % 96

Current production 3,500 100 % 3,500

Total     3,716

Budgeted rate per unit = Rs.180No. of direct labor hours per unit = 4 Budgeted rate per hour = Rs.45Standard hours for actual production = 3,716x 4 = 14,864 hoursFixed overhead efficiency variance = (Standard hours for actual production – Actual hours) x budgeted rate per hour = (14,864 hours –14,800 hours ) x Rs.45 = Rs.2,880 (F)

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64. Answer : (c)Reason : Actual hours = 40 (36 + 20 + 34) = 3,600 hrs

Total standard = 40 (40 + 30 + 20) = 3,600 hrsStandard time for actual output

Skilled =

3,400 40 403,600

´ ´= 1,511 hrs

Semi-skilled =

3,40040 30

3,600´ ´

= 1,133 hrs

Unskilled =

3,400 40 203,600

´ ´= 756 hrs

Efficiency variance:Skilled = Rs.20 (40 ´36 ~ 1511) = Rs. 1.420 (F)Semi-skilled = Rs.16 (40 ´ 20 ~ 1133) = Rs.5,328 (F)Unskilled = Rs.10 (40 ´34 ~ 756) = Rs. 6,040 (A)

Rs708 (F)

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65. Answer : (e)Reason : Total quantity of actual sales = 2,700 + 1,300 + 2,200 = 6,200 kgs.

Sales Mix variance = Standard rate × (Actual quantity- Revised Standard quantity)

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A30 ×

2,5002,700 6,2006,000

´ =

3,500 (F)

B25 ×

1, 5001, 300 6, 2006, 000

´ =

6,250 (A)

C20 ×

2,0002,200 6,2006,000

´ =

2,667 (F)

Total 83 (A)

66. Answer : (d)Reason : Actual cost

Standard material cost = Actual material cost + Favorable material price variance +Favorable material usage varianceStandard wages = Actual wages paid + favorable labor efficiency variance – adverse labor rate variance – adverse labor idle time variance

Particulars Total Per unit

Standard material cost (40,000 + 2,560 + 2,940)Standard wages (87,300+2,250 – 2,130 – 300)

45,50087,120

9.1017.42

Total 1,32,6 26.52

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67. Answer : (a)Reason : Target cost = Selling price at capacity – 25% profit margin

Price (Rs.) Demand (Units)

900 50,000

840 1,00,000

780 2,00,000

Target cost = Rs.780 – 25% ´ Rs.780 = Rs.780 – (Rs.780 ´ 0.25) = Rs.585

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68. Answer : (b)Reason : Residual income is the excess of the amount of the ROI over a targeted amount equal to an

imputed interest charge on invested capital.Total investment = Rs.18,50,000 + Rs.7,50,000 = Rs.26,00,000Imputed interest charge = 12% on Rs.26,00,000 = Rs. 3,12,000 Residual income = Rs. 1,80,000

Total profit = Rs. 4,92,000Total costs = Revenue – Target profit = Rs.7,80,000 – Rs.4,92,000 = Rs.2,88,000.

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69. Answer : (b)Reason : The budgeted increase

Particulars June 2004 (Rs.)

Increase in sales volume Effect of change Rs.

Sales 60,000 69,000 69,000 ×102% = 70,380.00

Direct materials 18,500 21,275 21,275× 98% = 20,849.50

Direct labor 14,000 16,100 16,100× 98% = 15,778.00

Variable overheads 8,000 9,200 9,200× 98% = 9,016.00

Fixed overheads* 4,500 4,500 4,500×98% = 4,410.00

Profit 15,000     20,326.50

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Capital employed 1,20,000     1,20,000

Return on investment 12.5%     16.94%

*Return on investment in June 2004 is 12.5%. Hence profit is Rs.1,20,000 × 12.5% = Rs.15,000Hence fixed overheads is sales–variable expenses–profit = Rs.60,000–Rs.40,500 – Rs.15,000 = Rs.4,500

% increase in return on investment =

16.94% 12.5%12.5%

= 35.52%     

70. Answer : (c)Reason :

Closing finished goods 850 units

Add: Budgeted sales 5,000 units

Total requirement of sales 5,850 units

Less: Opening finished goods 675 units

Required production of finished goods 5,175 units

Raw material per unit x 4 kg

Material usage 20,700 kg

Add: Closing raw material 6,200 kg

  26,900 kg

Less: Opening raw material 4,500 kg

Required purchases 22,400 kg

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71. Answer : (e)Reason : To determine the correct number of handles purchased for July 2004, the projected output of

finished goods for July 2004 and August 2004must be calculatedProjected sales of cabinets in July 2004 300Add: Required closing finished cabinets (50% of 310) 155  455Less: Opening finished cabinets 150

Total cabinet production for July 2004 305Projected sales of cabinets in August 2004 310Add: Required closing finished cabinets (50% of 320) 160  470Less: Opening finished cabinets 155

Total cabinet production for August 2004 315Number of Handles:  Handles for July 2004 (305 x 4) 1,220Add: Opening stock for August 2004 (315 x 4 x 0.6) 756(Closing stock for July)    1,976Less: Opening inventory 800

Total handles to be purchased 1,176

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