Question Paper Management Accounting – II (152): October 2005

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

< Answer >1. Foils 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.50,000 if the level of activity exceeds 80%

The company is facing a severe competition in the market. The management of the company isconsidering 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 priceis reduced by 10%, is

(a) Rs.36.11 (b) Rs.32.55 (c) Rs.48.33 (d) Rs.35.44 (e) Rs.26.85.(1 mark)

2. 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)

3. Which of the following transfer pricing methods will preserve the subunit autonomy?

(a) Cost-based pricing (b) Negotiated pricing (c) Variable-cost pricing (d) Full-cost pricing (e) Marginal cost pricing.

(1 mark)

4. 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)

5. In which of the following situations can cost based transfer prices be used?

I. Where no market price exists. II. Where there are difficulties in negotiating market prices. III. Where the product contains a secret ingredient or production process that the top management do

not wish to disclose to outside customers. IV. When the transferor division is constrained by capacity limitation. (a) Both (I) and (II) above (b) Both (II) and (IV) above (c) Both (III) and (IV) above (d) (I), (II) and (III) above (e) All (I), (II), (III) and (IV) above.

(1 mark)

6. The following information pertains to Sonny Ltd. for its new product.

Production units 10,000 units Investment for the new product Rs.3,00,000

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Fixed costs Rs.1,00,000 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.38.00 (c) Rs.40.00 (d) Rs.46.60 (e) Rs.46.40.(1 mark)

7. 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)

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

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

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

taken into consideration (e) In both the methods, cost plus pricing is represented to a certain degree.

(1 mark)

9. A company manufactures 650 units of product A during a specified period. The variable cost per unitand fixed costs per annum are Rs.25 and Rs.25,000 respectively. If the company expects an annual profit of Rs.9,000, the mark-up percentage on variable cost is

(a) 223.90% (b) 209.23% (c) 132.82% (d) 136.75% (e) 236.75%.(1 mark)

10. A-Joy Ltd. is preparing its cash budget for the year 2005-06. An extract from its sales budget for thesame year shows the following sales values:

September 2005 Rs.1,10,000

October 2005 Rs.1,20,000

November 2005 Rs.1,40,000

December 2005 Rs.1,10,000

January 2006 Rs.1,30,000

40% of its sales are expected to be in cash. Of its credit sales, 40% are expected to pay in the month following the month of sales and 58% are expected to pay in the second month following the month ofsale. 2% of the credit sales are expected to be unrecovered.

The value of sales receipts to be shown in the cash budget for the month of December 2005 is

(a) Rs.1,19,360 (b) Rs.1,20,800 (c) Rs.1,30,000 (d) Rs.1,22,000 (e) Rs.1,10,000.(1 mark)

11. Consider the following costs per unit of production of a company:

Direct material Rs.18

Direct labor Rs.15

Production overheads Rs.25 (40% fixed)

Selling & administrative overheads Rs.30 (50% fixed)

Total costs Rs.88

Normal Production 1,000 units

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Normal Production 1,000 units

The total costs for 1,250 units are

(a) Rs.77,500 (b) Rs.75,000 (c) Rs.73,000 (d) Rs.1,10,000 (e) Rs.1,03,750.(1 mark)

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

(a) Budget adjusted to the actual level of activity for the period being reported (b) Budgeted amount in the original budget prepared before the beginning of the period (c) Cost incorporated in the master budget (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)

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14. 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)

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15. The relationship between the budgeted number of working hours and the maximum possible workinghours 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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16. Which of the following statements is/are true?

I. Corporate Management generally consists of the Departmental heads and/or the sub-divisional heads.

II. Executive Management consists of managers responsible for certain product groups or markets or certain aspects of a function.

III. Operating Management requires information on the production quantity and value, sales volume and price realization etc.

(a) Only (I) above (b) Only (II) above (c) Both (I) and (II) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above.

(1 mark)

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17. A favorable materials price variance coupled with an unfavorable materials usage variance would mostlikely 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

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(e) Labor efficiency problems. (1 mark)

18. Swami Ltd. has furnished the following information pertaining to production costs for a certain period:

Particulars Rs. Direct wages 90,000 Direct materials 1,20,000 Production overheads – Fixed 40,000 – Variable 60,000

During the forthcoming year it is anticipated that:

I The average rate for direct labour remuneration will fall from Re.0.90 per hour to Re.0.75 per hourII. Production efficiency will be reduced by 5% III Price per unit for direct material and of other materials and services which comprise overheads

will remain unchanged IV. Direct labour hours will increase by 33 1/3% V. The overhead rate being absorbed on a direct wage basis.

The estimated works cost, after considering the above anticipation, is

(a) Rs.2,52,000 (b) Rs.1,16,000 (c) Rs.3,68,000 (d) Rs.3,20,000 (e) Rs.2,80,000. (2 marks)

19. Panna Manufacturing Ltd. has furnished the following information:

Particulars Budget Actual

Output in units 6,000 6,500

Labor hours 6,000 6,400

Variable overhead costs Rs.60,000 Rs.60,800

The variable overhead cost variance is

(a) Rs.1,000 (Adverse) (b) Rs.4,200 (Adverse) (c) Rs.4,200 (Favorable) (d) Rs.1,000 (Favorable) (e) Rs.800 (Adverse).

(1 mark)

20. The sales volume variance is

(a) The difference between actual and master budget sales volume, times actual unit contribution margin

(b) The difference between flexible budget and master budget sales volume, times master budget unit contribution margin

(c) The difference between flexible budget and master budget sales volume, times actual unit contribution margin

(d) The difference between flexible budget and actual sales volume, times master budget unit contribution margin

(e) The difference between actual and master budget sales volume, times actual unit net profit margin.(1 mark)

21. Which of the following is/are the characteristic(s) of a corporate management?

I. The corporate management is responsible for strategic planning and overall financial monitoring of the firm.

II. The corporate management is responsible for executing various tasks within the framework of plans, programs and schedules.

III. The corporate management translates corporate strategy into programs. IV. The corporate management is concerned with tasks such as budget formulation, decision on

routine capital expenditures, choice of product improvement etc.

(a) Only (I) above (b) Both (II) and (III) above (c) Only (III) above (d) Only (IV) above (e) Both (III) and (IV) above.

(1 mark)

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22. Positive reinforcement approach to achieving commitment to organizational objectives largely throughexternal controls is based on finding of

(a) Douglas McGregor (b) Herzberg (c) Ron Webber (d) Camman and Nadler (e) B.F.Skinner.

(1 mark)

23. ‘The average human being has an inherent dislike of work and will avoid it if he can’- this job attitudeis 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)

24. 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)

25. Which of the following is not an assumption of McGregor’s Theory Y?

(a) Man will exercise self-direction and self-control in the service of objectives to which he is committed

(b) The average human being learns, under proper conditions, not only to accept but to seek responsibility

(c) The average human being does not inherently dislike work (d) Commitment to objectives is a function of the rewards associated with their achievements (e) The capacity to exercise a relatively high degree of imagination, ingenuity, and creativity in the

solution of organizational problems is narrowly distributed in the population. (1 mark)

26. 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 output attained

(b) Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for the output attained

(c) Favorable labor rate variance resulting from an inability to hire experienced workers to replace retiring workers

(d) Favorable material price variance obtained by purchasing raw material from a new vendor (e) Fixed overhead volume variance resulting from management’s decision midway through the fiscal

year to reduce its budgeted output by 20%. (1 mark)

27. Traditionally the development of a product was assigned to the product design department and then theproduced product was sent to the costing department. In which of the following cases, the target costing system diverts from the traditional way?

I. Under target costing, first a price is established for a product and then it is assigned to a team to develop the product within the cost (price) established.

II. The product, from the design department, is sent to the costing department but returned to the design department concluding that it is impossible to produce the product at its determined cost.

III. After a team is assigned to develop cost scenario, market research and finding the suitable rich market is carried on.

(a) Only (I) above (b) Only (II) above (c) Both (II) and (III) above (d) Both (I) and (II) above (e) Both (I) and (III) above.

(1 mark)

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28. 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)

29. Target pricing

(a) Is more appropriate when applied to mature and long-established products (b) Considers the variable costs and excludes fixed costs (c) Is often used when costs are difficult to control (d) Is a pricing strategy used to create competitive advantage (e) Is well suited for complex products that require many sub-assemblies.

(1 mark)

30. A set of concepts and tools applied for getting all the employees focused on continuous improvement inthe 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)

31. 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)

32. Minolta 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. 4,00,000

Imputed interest rate 23%

The residual income of the company is

(a) Rs.80,400 (b) Rs.1,44,000 (c) Rs.1,08,000 (d) Rs.1,26,000 (e) Rs.1,24,000. (1 mark)

33. The imputed interest rate used in the residual income approach to perform evaluation can best bedescribed as the

(a) Average return on investments for the company over the last several years (b) Target return on investment set by the company’s management (c) Average lending rate for the year being evaluated (d) Historical weighted-average cost of capital for the company (e) Marginal after-tax cost of capital on new equity capital.

(1 mark)

34. Which of the following are pre-requisites of effective divisionalisation?

I. The organization must have two or more units. II. The costs and revenues of each division can be measured separately.

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III. Each division is sufficiently independent of other divisions. IV. Top management should not interfere too much in divisional matters. (a) Both (I) and (II) above (b) Both (I) and (III) above (c) (I), (II) and (III) above (d) (I), (II) and (IV) above (e) All (I), (II), (III) and (IV) above.

(1 mark)

35. Which of the following is not a disadvantage of shadow price?

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

(b) Shadow price can be used only when the resources are available in plenty and are not scarce (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) 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. (1 mark)

36. A segment of an organization is referred to as a profit center if it has

(a) Responsibility for developing markets and selling the output of the organization (b) Responsibility for combining materials, labor and other factors of production into a final output (c) Authority to make decisions affecting the major determinants of profit, including the power to

choose its markets and sources of supply (d) Authority to provide specialized support to other units within the organization (e) Authority to make decisions affecting the major determinants of profit, including the power to

choose its markets and sources of supply and significant control over the amount of invested capital.

(1 mark)

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

(a) It can be used for cash budgeting or product costing (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 is called theoretical or maximum efficiency standard.

(1 mark)

38. AB Ltd. is organized into two large divisions – A and B. Division A produces a component which isused by division B in making a final product. The final product is sold for Rs.650. Division A has acapacity to produce 3,200 units and the entire quantity can be purchased by division B.

Division A informed that due to installation of new machines, its depreciation cost has gone up andhence wanted to increase the price of the component to be supplied to division B at Rs.430. Division B, however, can buy the component from the outside market at Rs.430 each. The variable cost of divisionA is Rs.320 and fixed cost is Rs.70 per component. The variable cost of division B in manufacturing thefinal product by using the component is Rs.180 (excluding the component cost).

If division B purchases the entire component from division A, the total contribution of the company as awhole is

(a) Rs.3,00,000 (b) Rs.4,80,000 (c) Rs.1,72,800 (d) Rs.1,28,000 (e) Rs.3,52,000. (2 marks)

39. Premier Ltd. has furnished the following data relating to its product for the year 2004-05:

Annual production (units) 40,000

Material cost (Rs.) 1,00,000

Other variable costs (Rs.) 1,80,000

Fixed cost (Rs.) 1,50,000

Apportioned investment (Rs.) 5,00,000

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Assuming income tax rate of 35%, if the company desires to earn a post tax profit of 12% on listed saleprice when trade discount is 18%, the net sale price per unit would be

(a) Rs.13.87 (b) Rs.12.25 (c) Rs.13.00 (d) Rs.15.78 (e) Rs.17.88.(1 mark)

40. Sharma Ltd. manufactures a single product at the operated capacity of 40,000 units while the normalcapacity of the plant is 50,000 units per annum. The company has estimated 20% profit on salesrealization 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 18,00,000 14,40,000

The company has received an order from a customer for a quantity equivalent to 10% of the normalcapacity. 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 priceper unit to be quoted for new order is

(a) Rs.26.63 (b) Rs.37.60 (c) Rs.25.40 (d) Rs.25.56 (e) Rs.30.59.(2 marks)

41. Sharp Ltd. manufactures and sells a special model of calculator – CZ 69. The company has estimatedthe following activity of the company for the month of November 2005:

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.22,000 + 2.5% on sales Depreciation expenses which is included in fixed selling and administrative expenses

Rs.8,800

The net cash surplus or deficit for the month of November 2005 is

(a) Rs.86,400 (Surplus) (b) Rs.40,000 (Deficit) (c) Rs.30,000 (Surplus) (d) Rs.1,02,600 (Deficit) (e) Rs.1,11,400 (Surplus).

(1 mark)

42. Prasad Ltd. has a policy of maintaining a minimum cash balance of Rs.1,00,000 at the end of eachmonth. Any deficit will be financed through bank borrowings and any surplus will be utilized to repaythe 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.10,000 whenever aneed arises subject to a maximum of Rs.2,00,000. The rate of interest is 12% per annum payablemonthly 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 December 2005:

Particulars October 2005 November 2005 December 2005

Sales 40,000 50,000 1,00,000

Purchases 30,000 40,000 40,000

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Purchases 30,000 40,000 40,000

Salaries 60,000 70,000 50,000

Manufacturing and other administrative expenses

25,000 30,000 10,000

If the closing cash balance for the month of October 2005 is Rs.1,02,500, the cash to be borrowed fromthe bank at the end of December 2005 is

(a) Rs.1,07,500 (b) Rs.1,01,500 (c) Rs.1,04,100 (d) Rs.30,000 (e) Rs.20,000. (2 marks)

43. Ballack Ltd. has estimated Rs.2,80,000 and Rs.2,20,000 for direct material and direct labor respectivelyfor the month of November 2005. It is the policy of the company to absorb overheads as under:

Factory overheads 50% of direct wages Administrative overheads 25% 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 November 2005. The company sells goods at a profit of 12.5% on sales.

The budgeted sales for the month of November 2005 is

(a) Rs.9,21,600 (b) Rs. 9,09,900 (c) Rs.10,31,771 (d) Rs. 8,56,800 (e) Rs.10,15,650.(2 marks)

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44. Leo Toys manufactures a toy monkey with moving parts and a built-in voice box. Projected sales for 5months are as follows:

Month Projected sales in units

October 2005 4,000

November 2005 4,300

December2005 4,500

January 2006 4,250

February 2006 4,400

March 2006 4,500

Each toy requires direct materials from a supplier at Rs.25 for moving parts. Voice boxes are purchasedfrom another supplier at Rs.10 per toy. Labor cost is Rs.25 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 thepractice of the company to manufacture an output in a month, which is equivalent to 80% of the currentmonth sales and 40% of the following month sales.

The production budget for the month of December 2005 and the production cost budget for the monthof January 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.3,98,000 respectively (d) 5,400 units and Rs.3,74,400 respectively (e) 5,280 units and Rs.3,24,000 respectively.

(2 marks)

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45. Akton Ltd. manufactures 5,000 units of Product PT at a cost of Rs.90 per unit. Presently, the companyis utilizing 50% of the total capacity. The information pertaining to cost per unit of the product is asfollows:

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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 80% capacity level – Material cost per unit will increase by 5% and current selling

price per unit will reduce by 5%.

The profit per unit of the product of the company at 60% and 80% capacity level will be

(a) Rs.8.83 and Rs.9.50 respectively (b) Rs.8.97 and Rs.6.88 respectively (c) Rs.8.97 and Rs.8.83 respectively (d) Rs.6.63 and Rs.6.88 respectively (e) Rs.8.83 and Rs.6.63 respectively.

(2 marks)

46. Sai Apna Ltd. uses standard costing system. The following details have been extracted from thestandard cost card in respect of direct materials for the month of September 2005:

Material usage per unit – 8 kg at the rate of Rs.1.10 per kg Budgeted production – 850 units

The company has furnished the following data relating to direct material for the month of September 2005:

Materials purchased 8,200 kg at a price of Rs.9,430

Materials issued to production 7,150 kg

Actual production 870 units

The material price and material usage variances are

(a) Rs.410 (A) and Rs.209 (A) respectively (b) Rs.328 (A) and Rs.209 (A) respectively (c) Rs.286 (A) and Rs.294 (A) respectively (d) Rs.328 (A) and Rs.152 (A) respectively (e) Rs.410 (A) and Rs.280 (A) respectively.

(1 mark)

47. Mphasis Ltd. manufactures a single product using three raw materials J, K and L. The details ofstandard cost and actual cost for the month of September 2005 are as under:

Standard cost Particulars Kg Price per kg

Material J 15 Rs.4

Material K 12 Rs.3

Material L 8 Rs.6

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Less: Standard loss 5

Standard yield 30

Actual cost

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Actual yield 3,645

The material yield variance is

(a) Rs.864 (F) (b) Rs.864 (A) (c) Rs.2,484 (F) (d) Rs.216 (F) (e) Rs.791 (A). (2 marks)

48. Shiva Ltd. has furnished the following data pertaining to a product for the month of September 2005:

Particulars Budget Actual

Production (units) 6,000 6,300

Labor hours 2,000 2,150

Fixed overheads (Rs.) 42,000 42,600

Number of working days 24 23

The fixed overhead volume variance is

(a) Rs.2,100 (favorable) (b) Rs.1,050 (favorable) (c) Rs.1,050 (adverse) (d) Rs.2,250 (favorable) (e) Rs.2,250 (adverse).

(1 mark)

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49. The following are the operating results of MNC Ltd. a manufacturing company, for the current year:

Particulars Rs. in lakh Sales (40,000 units) 48.00 Less trade discounts 2.40 Net sales 45.60 Cost of sales: Direct material 14.40 Direct Labour 12.60 Factory overheads 6.30 Administration expenses 3.60 Selling and distribution expenses 4.50

The following changes are anticipated during the next year:

i. Units to be sold to increase by 25% ii. Material price to increase by 15% iii. Direct wages to increase by 12% iv. Overheads – Factory overheads will be limited to Rs.6.56 lakh, and administration and selling &

distribution expenses are estimated to increase by 8% and 14% respectively. v. Inventory – No change in opening and closing inventories in quantity. The change in value may be

ignored. vi. “Trade discount” – No change in the rate vii. Profit target for the year – Rs.6 lakh.

The selling price per unit for the next year is

(a) Rs.155.78 (b) Rs.215.79 (c) Rs.288.80 (d) Rs.113.05 (e) Rs.126.14. (2 marks)

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50. Banerjee Ltd. uses standard process costing method. The standard process cost card per month showsthat 3 hours of direct labor is required to produce one kg of finished product. The fixed overheads,which are recovered on direct labor hours, amount to Rs.180 per kg of output. The budgeted output is1,000 kg per month. Actual production during the month of September 2005 is 950 kg and the direct labor hours utilized during the month were 3,300.

The details of opening and closing work-in progress (WIP) are as under: Opening work-in-progress – 250 kg (Degree of completion of labor and overheads – 60%) Closing work-in-progress – 450 kg (Degree of completion of labor and overheads – 20%)

The company uses FIFO method for evaluation of stocks. The fixed overhead efficiency variance is

(a) Rs.37,800 (Adverse) (b) Rs.18,000 (Favorable) (c) Rs.18,000 (Adverse) (d) Rs.7,200 (Favorable) (e) Rs.7,200 (Adverse).

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(2 marks)

51. Pomy Machinery & Tools Ltd. has a normal capacity of 50 machines working 8 hours per day of 25days 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 company worked for24 days of 350 machine hours per day and produced 2,320 units of the product. The actual fixedoverheads incurred were Rs.88,800.

The total fixed overhead variance and calendar variance are

(a) Rs. 4,000 (A) and Rs.6,000(A) respectively (b) Rs.10,000 (F) and Rs.6,000 (A) respectively (c) Rs.10,000 (A) and Rs.9,000 (F) respectively (d) Rs. 5,000 (A) and Rs.9,000 (A) respectively (e) Rs. 4,000 (F) and Rs.4,000 (A) respectively.

(2 marks)

52. A group of workers usually consists of 10 skilled, 5 semi-skilled and 5 unskilled workers, paid atstandard hourly rates of Rs.5.00, Rs.3.20 and Rs.2.80 respectively. In a normal working week of 40 hours, the group is expected to produce 1,000 units of output. In certain week, the group consisted of 13skilled, 4 semi-skilled and 3 unskilled employees; actual wages paid per hour were Rs. 4.80, Rs. 3.40 and Rs. 2.60 respectively. Two hours were lost due to abnormal idle time and 960 units of output wereproduced. The labor cost variance and labor usage variance are

(a) Rs.152 (A) and Rs.376 (A) respectively (b) Rs.280 (A) and Rs.376 (A) respectively (c) Rs.152 (F) and Rs.376 (F) respectively (d) Rs.249 (F) and Rs.1,562 (A) respectively (e) Rs.376 (A) and Rs.152 (F) respectively.

(2 marks)

53. The budgeted and actual sales of Chatterjee Chemicals Ltd. are as under:

Budget Actual Product Quantity (kg) Price/kg

(Rs.) Quantity

(kg) Price/kg

(Rs.) A 4,000 24 4,300 23.00 B 3,000 30 2,500 30.20

C 5,000 18 5,500 17.10

The sales mix variance is

(a) Rs.4,650 (Favorable) (b) Rs.26,950 (Favorable) (c) Rs.15,480 (Favorable) (d) Rs.4,650 (Adverse) (e) Rs.5,700 (Adverse).

(1 mark)

54. Nift Fashions Ltd. (NFL) sells a line of women’s wear. NFL’s performance report of September 2005is as follows:

The company uses a flexible budget to analyze its performance and to measure the effect on operatingincome of the various factors affecting the difference between budgeted and actual operating income.

Particulars Actual Budget

Dresses sold (units) 5,600 6,000

Sales (Rs.) Less: Variable costs (Rs.)

2,35,000 1,45,000

3,00,000 1,80,000

Contribution margin (Rs.) Less: Fixed costs (Rs.)

90,000 84,000

1,20,000 80,000

Operating income (Rs.) 6,000 40,000

The effect of the sales quantity variance on the contribution margin and the variable cost flexible budgetvariance for September 2005 is

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(a) Rs. 20,000 (A) and Rs. 23,000 (F) respectively (b) Rs. 8,000 (A) and Rs. 15,000 (A) respectively (c) Rs. 20,000 (A) and Rs. 8,000 (F) respectively (d) Rs. 8,000 (A) and Rs. 23,000 (F) respectively (e) Rs. 30,000 (F) and Rs. 35,000 (F) respectively.

(2 marks)

55. DK Ltd. manufactures two products – D and K, using same facilities and similar process. The company has furnished the following information pertaining to two products for the year ending March 31, 2005.

Particulars Product D Product K

Direct labor hours per unit 4 2.5

Machine hours per unit 5 4

Number of set ups during the period 12 18

Number of orders handled during the period 16 19

Production units 6,000 4,340 Total production overhead costs for the period are as follows:

Particulars Rs.

Machine activity costs 2,40,000

Set-ups costs 57,000

Order handling costs 52,500

3,49,500 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 D Product K (a) Rs.2,06,827 Rs.1,42,637 (b) Rs.1,82,827 Rs.1,66,673 (c) Rs.2,06,827 Rs.1,42,673 (d) Rs.1,98,827 Rs.1,50,673 (e) Rs.1,81,133 Rs.1,68,367.

(2 marks)

56. Mr.Lalmohan is the general Manager of Fine Product Division and his performance is measured usingthe residual income method. He has estimated the following cash flows for his division for the nextyear:

Particulars Rs.

Investment in Plant and equipment 17,20,000

Investment in Working capital 8,10,000

Revenue 9,50,000

If the imputed interest cost is 14% and Mr.Lalmohan desires to achieve a residual income ofRs.2,22,000, the total costs, in order to achieve the target, would be

(a) Rs.3,73,800 (b) Rs.5,95,800 (c) Rs.6,29,400 (d) Rs.4,87,200 (e) Rs.5,76,400.

(1 mark)

57. Consider the following details pertaining to Apkar Ltd. for the month of September 2005:

Particulars Rs.

Sales 40,000

Direct materials 17,500

Direct labor 10,000

Variable overheads 5,000

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Variable overheads 5,000

Capital employed 25,000

The return on investment in September 2005 is 12.5%. In the month of October 2005, it is expected thatthe volume of sales increases by 15%, the selling price increases by 4% and there is a reduction of allthe costs by 2%. The return on investment for the month of October 2005 as compared to September 2005 has

(a) Increased by 12.5% (b) Increased by 92.16% (c) Decreased by 92.16% (d) Decreased by 6.5% (e) Increased by 121.6%.

(2 marks)

58. Nasta 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 6,000 units, is

(a) Rs.12.55 (b) Rs.13.37 (c) Rs.12.00 (d) Rs.12.45 (e) Rs.13.05.(2 marks)

59. One kilogram of product ‘K’ requires two chemicals A and B. The following were the details of product‘K’ for the month of September 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)

60. In a day of 10 hours, a direct worker is expected to produce 20 units of product A or 10 units of ProductB or 5 units of product C. The budgeted production and actual production for the month of September 2005 are as follows:

Product Budgeted production Actual production

A 250 units 260 units

B 200 units 250 units

C 300 units 200 units

During the month, 750 direct labor hours were worked. The efficiency and capacity ratios are

(a) 104% and 97.56% respectively (b) 101% and 97.56% respectively (c) 104% and 81.08% respectively (d) 101% and 104% respectively

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(e) 99% and 81.08% respectively. (2 marks)

61. Podder Ltd. manufactures plastic bags. The company’s directors have projected the following sales forthe next three months:

October 2005 2,10,000 units

November 2005 3,60,000 units

December 2005 4,10,000 units

Opening stock of finished goods on October 01, 2005 is 30,000 units. The company has some problems recently in supplying its customers promptly and the directors have decided to aim for a 10% increasein finished goods closing stock at the end of each of the three months.

Each bag uses 1.8 kg of plastic that costs Rs.6 per kg. The stock of plastic on October 01, 2005 is50,000 kg. The raw material is readily obtainable, but in order to ensure that the company will not runout of stock, the directors would like to increase the closing stock of plastic by 10% each month for the next three months.

The amount of raw material to be purchased during the month of December 2005 will be

(a) Rs.41,67,060 (b) Rs.42,10,260 (c) Rs.43,47,260 (d) Rs.37,58,970 (e) Rs.45,03,504.

(2 marks)

62. A favorable variance of Rs.12,000 for the flexible budget demonstrates that

(a) Actual costs were Rs.12,000 more than the master budget (b) Costs were Rs.12,000 less than for the planned level of activity (c) The total of the planning and efficiency variances is Rs.12,000 (d) Costs were Rs.12,000 less than standard for the achieved level of activity (e) The cost under master budget is Rs 12,000 more than cost under planned level of activity.

(1 mark)

63. 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)

64. When comparing performance report information of top management with that of lower levelmanagement

(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 more 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)

65. A systematized approach known as zero-base 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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66. Kashmira Ltd. has two divisions - A and B. The division A has the capacity to manufacture 1,50,000units of a special component LKJ annually and it has some idle capacity currently. The budgeted residual income for the division A is Rs.10,00,000. The relevant details extracted from the budget of Aare as under:

Sales (to outside customers) 1,20,000 units @ Rs.180 per unit Variable cost per unit Rs.160 Divisional fixed cost Rs.8,00,000 Capital employed Rs.75,00,000 Cost of capital 12% per annum

Division B received an order for which it requires 25,000 units of a component similar to LKJ. Anadditional variable cost of Rs.5 per unit will be incurred to make minor modifications to LKJ to suit the requirements of Division B.

The minimum transfer price per unit which A should quote to B to achieve its budgeted residual incomeis

(a) Rs.175 (b) Rs.170 (c) Rs.165 (d) Rs.177 (e) Rs.185. (2 marks)

67. The flexible budget for the month of September 2005 was for 9,000 units with direct material at Rs.15per unit. Direct labor was budgeted at 45 minutes per unit for a total of Rs.81,000. Actual output for themonth was 8,500 units with Rs.1,27,500 in direct material and Rs.77,775 in direct labor expenses. Thedirect labor standard of 45 minutes was maintained throughout the month. The variance analysis of theperformance for the month of September 2005 would show a(n)

(a) Favorable material usage variance of Rs.7,500 (b) Unfavorable material price variance of Rs.5,000 (c) Favorable direct labor efficiency variance of Rs.1,275 (d) Unfavorable direct labor efficiency variance of Rs.1,275 (e) Unfavorable direct labor rate variance of Rs.1,275.

(2 marks)

68. A machine which is purchased for Rs.1,26,000 has a salvage value of Rs.6,000.The machine can beused for 12,000 hours during its life to produce 24,000 units of a product. The current annual demand for the product is 3,000 units. The cost data per unit of the product are:

Direct Material = Rs.30 Direct Labour at the rate of Rs.6 per hour = Rs.18 Power at the rate of Rs.4 per hour = Rs. 8 Overheads (Excluding depreciation and power): Variable cost = Rs. 9 Fixed cost per annum = Rs.62,000

The selling price per unit is Rs.100. The organisation has received an export order of 500 units perannum. The minimum selling price per unit to be quoted for export order is

(a) Rs.65 (b) Rs.70 (c) Rs.56 (d) Rs.61 (e) Rs.44. (2 marks)

69. White Silver Ltd. is producing three complimentary products. The demand for the products is verymuch fluctuative. The demand estimates for the products are as below:

Product Selling price (Rs.) Unit Variable cost (Rs.) Sales units A 12 6 15,000

B 18 11 20,000

C 20 11 5,000

Fixed cost is Rs.90,000. At the end of the budget period the total sales margin variance is found to beRs.75,000 (Adverse) but same sales mix, cost and price are maintained because of the complimentarynature. The actual profit for the budgeted period is (a) Rs.30,000 (b) Rs.10,000 (c) Rs.1,10,000 (d) Rs 1,90,000 (e) Rs.2,00,000.

(2 marks)

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70. Laxmi Ltd. is preparing sales budget for 3rd quarter. The details of the first two quarters are

Particulars 1st quarter 2nd quarter

Sales Value (Rs.) 8,000

Prime cost (Rs.) 3,000

Overheads (Rs.) 4,000 3,900

Sales Units 200 240

There is a reduction in fixed overhead cost by Rs.200 in 2nd quarter and same will continue. Variable costs will increase by 20% in 3rd quarter. The budgeted sales for the 3rd quarter to maintain the same amount of profit per unit as in 1st quarter is (a) 236 units (b) 245 units (c) 230 units (d) 250 units (e) 200 units.

(2 marks)

71. The actual data for the last two quarters of a company were as follows:

Particulars Quarter I Quarter II

Capacity usage 40% 50%

Net profit / (loss) (Rs.) (20,000) (5,000)

The budgeted profit for quarter III is Rs.10,000. The capacity utilization at budgeted production forquarter III is (a) 67% (b) 71% (c) 70% (d) 65% (e) 60%.

(2 marks)

72. The standard and actual data for a product of a company are as under:

Standard Actual Particulars

Quantity Kg Rs. Quantity Kg Rs.

Raw Material I 300 4 per kg 350 4.50 per kg

Raw Material II 200 3 per kg 160 2.80 per kg

Out put (units) 1,200 1,160

By how much percentage, the deviation of actual prices from standard prices has contributed forvariance in total variance? (a) 55.33% (b) 54.53% (c) 60.53% (d) 50.53% (e) 61.33%.

(2 marks)

73. Exotica Ltd. has estimated the following sales for its 2 products – A and B for 2nd half of the year2005-06:

Product October

2005 (units)

November 2005

(units)

December 2005

(units)

January 2006

(units)

February 2006

(units)

March 2006

(units)

A 2,000 2,000 2,100 2,400 2,800 3,400

B 1,500 1,600 1,700 2,000 2,000 2,200

The other costs are as follows:

Product Particulars

A B

Budgeted production per annum 30,000 units 20,000 units

Direct material per unit Rs.40 Rs.60

Direct labor per unit Rs.30 Rs.40

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Other manufacturing expenses per annum Rs.6,30,000 Rs.6,40,000

It is the policy of the company to hold a closing stock of 40% of the estimated quantity of sales of thefollowing month but not to carry any closing work-in-process at the end of any month. The total production cost for both the products for the five months period ending February 2006 is (a) Rs. 22,77,820 (b) Rs.21,18,850 (c) Rs.25,94,780 (d) Rs.23,94,780 (e) Rs.22,94,780.

(2 marks)

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Suggested Answers Management Accounting – II (152): October 2005

1. Answer : (e) 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 2,70,000 Total cost 7,78,000

Level of activity 90% Units 2,700 (Rs.) i. Sale Price (Rs.350) 9,45,000 Less: Total cost 7,78,000 Profit 1,67,000 Profit per unit 61.85

ii. Sale price reduced by 10% (i.e., Rs.315) 8,50,500 Less: Total cost 7,78,000 Profit 72,500 Profit per unit 26.85

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2. 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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3. Answer : (b) Reason : All Cost-based pricing, Variable-cost pricing, Full-cost pricing and Marginal cost

pricing are rule-based methods, which does not allow for the subunit to preserve its autonomy. According to negotiated pricing, the individual divisions (transferor and transferee) are considered as subunit autonomy. Hence correct answer is (b).

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4. 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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5. Answer : (d)

Reason : The cost based transfer pricing is used in the following situations:

I No market prices exist II. Difficulties in negotiating market-prices III. Where the product contains a secret ingredient or production process which the

top management do not wish to disclose to outside customers. Where the transferor division is constrained by capacity limitation, shadow price is the best suited transfer price.

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6. Answer : (a) Reason : 20% return on investment = 22% of Rs.3,00,000 = Rs.66,000

Selling price per unit = Variable cost per unit + fixed costs per unit + profit per unit

= Rs.28 +

Rs.1, 00, 000 Rs.66, 00010, 000units 10, 000 units

+

= Rs.28 + Rs.10 + Rs.6.60 = Rs.44.60.

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7. 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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8. 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 considered complementary to each other but not competing. Hence statement (a) is true. In both the pricing models fixed costs are considered important. Hence option (c) is true. In both the methods, the selling prices proposed must be only 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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9. Answer : (b)

Reason : Mark-up percentage =

Sales-Variablecosts ×100Variablecosts

Now sales = 650 units × Rs.25 + Rs.25,000 + Rs.9,000 = Rs.16,250 + Rs.25,000 + Rs.9,000 = Rs.50,250 Variable cost = Rs.25 × 650 = Rs.16,250

∴ Mark-up percentage =

Rs.50,250 - Rs.16,250 100Rs.16,250

× = 209.23%.

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10. Answer : (a)

Reason :

Particulars Rs. Cash sales Rs.1,10,000 × .4 44,000 Credit sales realized: November Rs.1,40,000 × .6 × .4 33,600 October Rs.1,20,000 × .6 × .58 41,760 Sales receipts 1,19,360

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11. Answer : (e) Reason : Variable cost per unit = Rs.18 + Rs.15 + Rs.15 + Rs.15 = Rs.63

Fixed cost = Rs.10 × 1,000 units + Rs.15 × 1,000 units = Rs.10,000 + Rs.15,000 = Rs.25,000 Cost of 1,250 units = 1,250 units × Rs.63 + Rs.25,000 = Rs.78,750 + Rs.25,000 = Rs.1,03,750.

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12. Answer : (e) < TOP >

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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.

13. Answer : (a) Reason : While 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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14. Answer : (c) 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.

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15. 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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16. Answer : (d) Reason : Statement (I) is not true as corporate management consists of board of directors, chief

executive and the functional heads. Statement (II) is true of Executive management. Similarly, Statement (III) is true as to the information required by operating management. So, the correct answer is (d).

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17. 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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18. Answer: (c) Reason: Output in the forthcoming year will increase by 26 2/3 % . It is calculated as follows:

Output last year 100% Increase due to 33 1/3% increase in labour hours 33 1/3 % Total 133 1/3% Less: 5% decline in production efficiency (133 1/3% × 6 2/3% Net 126 2/3% So output will increase by 26 2/3 % Labour hours worked last year were: Wages Rs.90,000 Rate per hour 90 paise ∴ Number of labour hours last year Rs.90,000/90 Paise =

BUDGET FOR THE FORTHCOMING YEAR

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Labour hours last year 1,00,000 Increase in labour hours , 331/3% 1,00,000/3 Total labour hours in the forthcoming year 4,00,000/3 Rate per hour 0.75 ∴ Wages (4,00,000 / 3) × 0.75 1,00,000 Prime Cost 2,52,000 Production Overheads: Fixed 40,000 Variable last year Rs.60,000 Add: 26 2/3 increase due to increase in output ( 60,000 × 80/3) / 100 = Rs.16,000

76,000 1,16,000

Estimated Works Cost 3,68,000 Factory Overhead Rate based on Direct Wages is Rs.1,16,000/1,00,000 (Production Overhead/wages) × 100 = 116%

19. Answer : (c)

Reason : Standard variable cost per unit =

Budgeted variable costsBudgeted units

=

Rs.60,0006,000 = Rs.10

Variable overhead cost variance = Actual variable overhead costs – Standard variable overhead cost per unit × Actual output = Rs.60,800 – Rs.10 × 6,500 units = Rs.60,800 – Rs.65,000= Rs.4,200 (favorable).

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20. Answer : (b) Reason : For a single-product company, the sales volume variance is the difference between

flexible budget and master budget sales quantity, times master budget unit contribution margin. This amount can also be calculated for each product in a sales mix, and the results are added to determine the total sales volume variance. This variance may be further decomposed into quantity and mix variances. Other options are incorrect.

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21. Answer : (a) Reason : The three distinguishable levels of management in an organization consists of –

corporate management, executive management and operating management. The corporate management, consisting of board of directors, chief executive and function heads is responsible for strategic planning and overall financial monitoring of the firm. Executive management consists of managers responsible for certain product groups or markets. They are entrusted with the responsibility to translate corporate strategy into program and are concerned with tasks such as budget formulation, decision on routine capital expenditures, choice of product improvement etc. The operating management is represented by executives entrusted with specific operational tasks and is responsible for executing various tasks within the framework of plans, programs, and schedules. Hence only (a) is the characteristic of corporate management.

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22. Answer : (e) Reason : Positive reinforcement approach to achieving commitment to organizational objectives,

largely through external controls, emphasizes the rewarding of ‘desirable performance’. This is an application of operant conditioning which is based on work of B.F.Skinner. Hence option (e) is correct. All other options (a), (b), (c) and (d) are incorrect.

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23. 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

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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.

24. 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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25. Answer : (e) Reason : According to McGregor’s Theory Y, the capacity to exercise a relatively high degree

of imagination, ingenuity, and creativity in the solution of organizational problems is widely, not narrowly, distributed in the population. Hence the answer is (e). The other assumptions of Theory Y are: External control and threat of punishment are not the only means of bringing about effort towards organizational objectives. Man will exercise self-direction and self-control in the service of objectives to which he is committed. The average human being learns, under proper conditions, not only to accept but to seek responsibility. The expenditure of physical and mental effort in work is as natural as play or rest. The average human being does not inherently dislike work. Commitment to objectives is a function of the rewards associated with their achievements e.g. the satisfaction of ego and self-actualization needs can be direct products of efforts directed towards organizational objectives.

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26. 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 x standard input allowed for the actual output). It can be caused by economic downturns, labor strike, bad weather, or a change in planned output. Thus, a fixed overhead volume variance resulting from a top management decision to reduce output has fewer behavioral implications than other variances. Answer (a) is incorrect because an unfavorable materials quantity variance affects production management and possibly the purchasing function. It may indicate an inefficient use of materials or the use of poor quality materials. Answer (b) is incorrect because an unfavorable labor efficiency variance reflects upon production workers who have used too many hours. Answer (c) is incorrect because a favorable labor rate variance related to hiring is a concern of the personnel function. The favorable rate variance might be more than offset by an unfavorable labor efficiency variance or a materials quantity variance (if waste occurred). Answer (d) is incorrect because the purchasing function is responsible for a favorable materials price variance.

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27. Answer : (e) Reason : Under target costing, first a price is established for a product and then it is assigned to

a team to develop the product within the cost (price) established. After a team is assigned to develop cost scenario, market research and finding the suitable rich market is carried on.

These are the ways in which target costing diverts from the traditional ways. So, the correct answer is (e).

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28. 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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29. Answer : (d) Reason : Target pricing and costing may result in a competitive advantage because it is

customer-oriented approach that focuses on what products can be sold at what prices. Hence (d) is the answer. It is also advantageous because it emphasizes control over costs prior to their being locked in during the early links in the value chain. The company sets a target price for a potential product reflecting what it believes consumer

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will pay and competitors will do. After subtracting the desired profit margin, the long-run target cost is known. If current costs are too high to allow an acceptable profit, cost-cutting measures are implemented or the product is abandoned. The assumption is that target price is the constraint. Option (a) is incorrect because target pricing is used on products that have not yet been developed. Option (b) is incorrect because target pricing includes all costs. Option (c) is incorrect because target pricing can be used in any situation but is most likely to succeed when costs can be well controlled. Option (e) is not correct because it is difficult to use with complex products that require many sub-assemblies such as automobiles. This is because tracking costs becomes too complicated and tedious, and cost analysis must be performed at so many levels.

30. 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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31. 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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32. Answer : (c) 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 (23% of Rs.4,00,000) Rs. 92,000 Residual income = Rs.1,08,000

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33. Answer : (b) Reason : Residual income is the excess of the return on an investment over a targeted amount

equal to an imputed interest charge on invested capital. The rate used is ordinarily set as a target return by management but is often equal to the weighted average cost of capital. Some enterprises prefer to measure managerial performance in terms of the amount of residual income rather than the percentage of ROI because the firm will benefit from expansion as long as residual income is earned. Therefore, (b) is correct.

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34. Answer : (e) Reason : The pre-requisites for effective divisionalisation include that the organization must

have two or more units for which the costs and revenues of each division can be measured separately, each division is sufficiently independent of other divisions and top management should not interfere too much in divisional matters. Therefore, (e) is correct.

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35. Answer : (b) 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 (b). 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. Operating managers do not understand and appreciate the concept of shadow price.

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36. Answer : (c) Reason : A profit center is a segment of a company responsible for both revenues and expenses.

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A profit center has the authority to make decisions concerning markets (revenues) and sources of supply (costs). Option (a) is not correct because a revenue center is responsible for developing markets and selling the firm’s products. Option (b) is not correct because a cost center combines labor, materials, and other factors of production into a final output. Option (d) is not correct because a service center provides specialized support to other units of the organization. Option (e) is incorrect because an investment center is responsible for revenues, expenses, and the amount of invested capital.

37. Answer : (a) 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 (e) 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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38. Answer : (b) Reason : Rs.

Contribution of division A Sales – 3,200 × Rs.430 = 13,76,000Less : Variable cost: Purchase cost (3,200 × Rs.320) = 10,24,000 A 3,52,000Contribution of division B Sales – 3,200 × Rs.650 20,80,000Less : Variable cost Division A: = Rs.13,76,000 Own cost 3,200 × Rs.180 = Rs. 5,76,000 19,52,000 B 1,28,000 Total Contribution – ( A + B ) 4,80,000

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39. Answer : (a) Reason : Let, sale value = x

0.12x = x(1 0.18) Rs.1, 00, 000 Rs.1, 80, 000 Rs.1, 50, 000 (1 Tax rate)− − − − −

[

0.12x = ]0.82x Rs.4, 30, 000− 0.65 = 0.533x – Rs.2,79,500 0.413x = Rs.2,79,500 x = Rs.2,79,500 ÷ 0.413 = Rs.6,76,755 Sale price ÷ unit = Rs.6,76,755 ÷ 40,000 = Rs.16.92 Net sale price = 16.92 × 0.82 = Rs.13.87.

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40. Answer : (a) Reason : Working Note – 1: Computation of prime cost

Particulars Rs. Sales (40,000 units) 14,40,000Less: Profit margin – 20% 2,88,000Cost of sales – (80% of Rs.14,40,000) 11,52,000Less: Variable overheads – Rs.2,80,000 Semi-variable overheads – Rs.3,00,000 Fixed overheads – Rs.2,00,000 7,80,000Prime cost 3,72,000

Working Note – 2: Semi-variable overheads:

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[ ]

25

Variable cost = unitsinChangetcosinChange

=

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

=

.50, 000Rs10, 000 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) 3,72,000 4,18,500 46,500 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 – 11,52,000 12,58,500 1,06,500

Cost per unit of new order =

.1, 06,500Rs5, 000 = Rs.21.30

Profit margin 25% (20% on sale = 25% on cost) = Rs. 5.33 Minimum selling price per unit = Rs.26.63.

41. Answer : (e) 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.13,200 = Rs.4,81,100 Surplus in cash = Rs.5,92,500 – Rs.4,81,100 = Rs.1,11,400.

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42. Answer : (d) Reason :

Particulars November December Opening cash balance 1,02,500 1,00,000 Cash sales 25,000 50,000 Collection of credit sales 20,000 25,000 Cash inflows 1,47,500 1,75,000 Cash purchases 30,000 30,000 Payment to creditors 7,500 10,000 Salaries 70,000 50,000 Expenses 30,000 10,000 Interest (Rs.90,000 × 12% × 1/12) - 900 Cash outflows 1,37,500 1,00,900 Closing balance before borrowings 10,000 74,100 Borrowings * 90,000 30,000 Surplus - - Closing balance 1,00,000 1,04,100

*As the closing balance before borrowings in November 2005 is Rs.10,000, it needs to borrow Rs.90,000 to make the cash balance to Rs.1,00,000. However as the agreement with the bank provides to borrow in multiples of Rs.10,000, the company should borrow Rs.90,000 at the end of November 2005. Similarly, for the month of December 2005, the company is required to borrow Rs.30,000 to maintain the minimum closing balance of Rs.1,00,000 on December 31,2005.

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26

43. Answer : (c) Reason :

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 (25% of works cost) 1,52,500 Selling and distribution expenses (20% of works cost + 15%) (6,10,000 × 25% × 11.5%)

1,40,300

9,02,800 Profit 12.5% on sales (i.e. 14.29% on cost) 1,28,971 Budgeted sales 10,31,771

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44. Answer : (a) Reason : The production budget for December 2005 = 4,500 units × 0.8 + 4,250 × 0.4 = 3,600 units + 1,700 units = 5,300 units.

The production cost budget for January 2006 = (4,250 × 0.8 + 4,400 × 0.4) × (Rs.25 + Rs.10 + Rs.25 + Rs.5) + Rs.39,000 =(3,400 + 1,760) × Rs.65 + Rs.39,000 = 5,160 units × Rs.65 + Rs.39,000 =Rs.3,35,400 + Rs.39,000 = Rs.3,74,400.

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45. Answer : (b) Reason :

Capacity 50% 60% 80% Production (units) 5,000 6,000 8,000 (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 7,16,000 Fixed overheads Factory 40,000 40,000 40,000 Administrative 25,000 25,000 25,000 5,00,000 5,93,000 7,81,000 Sale price per unit 110.00 107.80 104.50 Sales value 5,50,000 6,46,800 8,36,000 Profit 50,000 53,800 55,000 Profit per unit 10.00 8.97 6.88

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46. Answer : (a) Reason :

Material price variance = 8,200 kg × Rs.1.10 – Rs.9,430 Rs.9,020 – Rs.9,430= Rs.410 (Adverse) Material usage variance = Rs.1.10 (870 units × 8 kg – 7,150 kg) = Rs.1.10 × (6,960 kg – 7,150 kg) = Rs.1.10 × 190 = Rs.209 (Adverse)

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47. Answer : (d) Standard cost per unit of output

= = = Rs.4.80 Material yield variance = (Actual yield – Standard yield for actual input) × Standard cost per unit of output

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( ) ( ) ( )15 4 12 3 8 630

× + × + × 14430

27

= × Rs.4.80 = (3,645 – 3,600) × Rs.4.80 = 45 × Rs.4.80 = 216 (F)

48. Answer : (a)

Standard rate per unit =

Standard rate per hour =

Rs.42, 000 Rs.212, 000

=

Standard time for Budgeted production =

6,2,

000 units3 units per hour

000 hrs=

Standard time for actual production = 6, 300 2,100 hrs

3=

Volume variance = Rs.21 (2,000 hrs – 2,100 hrs) = Rs.21 × 100 hrs = Rs.2,100 (Favorable)

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49. Answer: (e) Reason:

Budgeted operating income statement of MNCLtd.

Rs. in lakh Particulars Rs. Rs. Sales (40,000 x 1.25 = 50,000 units) x Rs.120 60.00 Less trade discount (5%) 3.00 Net sales 57.00 Less variable costs Direct material @Rs.41.40 per unit (Rs.36 + 15%) 20.70 Direct labour @Rs.35.28 per unit (Rs.31.50 + 12%)

17.64 38.34

Contribution 18.66 Less fixed overheads Factory 6.560 Administration (Rs.3.60 lakh + 8%) 3.888 Selling and distribution (Rs.4.50 lakh + 14%) 5.130 15.578 Net income (indicated) 3.082 Additional income needed (6 – 3.082) 2.918 Contribution required (Rs.18.66 lakh + Rs.2.918 lakh)

21.578

Add variable costs 38.340 Net sales 59,918 Add trade discount 3.154 Gross sales (50,000 units)[(Rs.59.918 / 95) × 100] 63.072 Sales price per unit (Rs.) 126.14

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50. Answer : (a) Reason:

Completed stock: Kg. Degree of completion Overheads

From opening work-in-progress 250 40 % 100 Closing work-in-progress 450 20 % 90 Current production 700 100 % 700 Total 890

Budgeted fixed overheads per Kg. = Rs.180

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4, 2003, 645 3035

− ×

Rs.42, 000 Rs.7.6, 000

=

28

29

No. of direct labor hours per Kg. = 3 Budgeted rate per hour = Rs.60 Standard hours for actual production = 890 × 3 = 2,670hours Fixed overhead efficiency variance = (Standard hours for actual production – Actual hours) x budgeted rate per hour = (2,670 hours – 3,300 hours) × Rs.60 = 630 hrs × Rs.60 = Rs.37,800 (A)

51. Answer : (e) Reason: Standard/ Budgeted data

Budgeted fixed overheads (Rs.) Budgeted output units Budgeted hours Budgeted days Standard labor hours per unit Standard hours worked per day Standard rate per unit (Rs.) Standard rate per hour (Rs.) Standard fixed overhead rate per day (Rs.)

1,00,000 2,500

10,000 25

4 400

40 10

4,000 Actual data

Actual fixed overheads (Rs.) Actual output units Actual hours Actual days

88,800 2,320 8,400 24

The total fixed overhead 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) Calendar variance = Standard fixed overhead rate per day (Actual days ~ Budgeted days) = Rs. 4,000 (24 days ~ 25 days) = Rs.4000 × 1day = Rs. 4,000 (A)

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52. Answer : (a) Reason: The standard labor cost per unit of output

Grade No. of Hours Man-hours Rate per hour Labor cost Skilled 10 40 400 5.00 2,000 Total 800 3,200 Labor cost per unit = Total labor cost/No of units produced = Rs. 3.20 per unit

Actual cost

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Total 800 3,352 Labor cost variance = Rs.3,200 ~ Rs.3,352 = Rs.152 (A).

Labor usage variance

Grade (1)

Standard man hours for actual production (2)

Actual Man Hours (3)

Difference in hours (2 x3) (4)

Standard Rate (Rs.) (5)

Usage Variance (Rs.) (4 x 5)

Skilled Semi- skilled Unskilled

(400/1,000) x 960 = 384 (200/1000) x 960= 192 (200/1000) x 960= 192

520 160 120

136 (A) 32 (F) 72 (F)

5.00 3.20 2.80

680.00 (A) 102.40 (F) 201.60 (F)

Total 376.00 (A) 53. Answer : (e)

Reason: Total quantity of actual sales = 5,500+2,500+4,300 = 12,300 kgs. Sales Mix variance = Standard rate × (Actual quantity- Revised Standard quantity)

A 24 × = Rs.24 × (4,300 ~ 4,100)

4,800 (F)

B 30 × = Rs.30 × (2,500 ~ 3,075)

17,250 (A)

C 18 × = Rs.18 × (5,500 ~ 5,125)

6,750(F)

Total 5,700 (A)

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54. Answer : (d) Reason: The sales quantity variance is the difference between the actual and budgeted units,

times the budgeted unit contribution margin. (5,600 ~ 6,000) × Rs. 1,20,000 ÷ 6,000 = Rs. 8,000 (A). The variable cost flexible budget variance is equal to the difference between actual variable costs and the product of the actual quantity sold and the budgeted unit variable cost (Rs.1,80,000 ÷ 6,000 = Rs.30) (Rs. 30 × 5,600) – Rs. 1,45,000 = Rs.1,68,000 ~ Rs.1,45,000 = Rs. 23,000 (F).

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55. Answer : (d) Reason: Machine activity cost per hour =

6, 000 x 5 4, 340 x 4 47, 360+

Setups cost per set up = Rs.57, 000 Rs.1, 900

30=

per set up

Order handling cost per order = Rs.52, 500 Rs

35= .1, 500

per order Particulars Product D (Rs.) Product K (Rs.) Machine activity cost 1,52,027 87,973 Setups cost 22,800 34,200 Order handling cost 24,000 28,500 1,98,827 1,50,673

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12, 3004, 300 ~ 4, 00012, 000

×

12, 3002, 500 ~ 3, 00012, 000

×

12, 3005, 500 ~ 5, 00012, 000

×

Rs.2, 40, 000 Rs.2, 40, 000 Rs.5.07 per machine hour= =

30

31

56. Answer : (a) 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.17,20,000 + Rs.8,10,000 = Rs.25,30,000 Imputed interest charge = 14% on Rs.25,30,000 = Rs.3,54,200 Residual income = Rs.2,22,000 Total profit = Rs.5,76,200 Total costs = Revenue – Target profit= Rs.9,50,000 – Rs.5,76,200 = Rs.3,73,800.

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57. Answer : (e) The budgeted increase

Particulars September

2005 (Rs.)

IncreaseIn sales volume

Effect of change Rs.

Sales 40,000 46,000 46,000 ×104% = 47,840.0 Direct materials 17,500 20,125 20,125 × 98% = 19,722.5 Direct labor 10,000 11,500 11,500 × 98% = 11,270.0 Variable overheads 5,000 5,750 5,750 × 98% = 5,635.0 Fixed overheads* 4,375 4,375 4,375 ×98% = 4,287.5 Profit 3,125 6,925.0 Capital employed 25,000 25,000 Return on investment 12.5% 27.70% *Return on investment in September 2005 is 12.5%. Hence profit is Rs.25,000 × 12.5% = Rs.3,125 Hence fixed overheads is sales–variable expenses–profit = Rs.40,000–Rs.32,500 – Rs.3,125 = Rs.4,375

% increase in return on investment = = 121.6%

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58. Answer : (c)

Reason: The production cost budget

Particulars Rs. Material cost (variable) 30,000 Labor cost (variable) 18,000 Stores (variable) 1,200 Power (semi-variable) 1,450 Repairs and maintenance (semi-variable) 2,300 Inspection (semi-variable) 520 Administration overheads (semi-variable) 5,250 Selling overheads 3,300 Depreciation (fixed) 10,000 Total 72,020 Cost per unit 12.00

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59. Answer : (d)

Reason: Standard Cost of Standard mix of input

Particulars Quantity Kgs

Price Rs.

Amount Rs.

Chemical A (50% of 100 kgs) 50 12 600 Chemical B (50% of 100 kgs) 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

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27.70% 12.5%12.5%

−

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) 9kg (A) = 90 kg – Standard yield for actual input

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

60. Answer : (c) Reason: Standard time per unit

A =

= 0.5

B =

= 1.0

C =

= 2.0

Budgeted Hours A = 250 × 0.5 = 125 B = 200 × 1.0 = 200 C = 300 × 2.0 = 600 925

Standard hours for actual production A = 260 × 0.5 = 130 B = 250 × 1.0 = 250 C = 200 × 2.0 = 400 780

Actual hours = 750

Efficiency ratio = = 104%

Capacity ratio=750925 = 81.08%.

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61. Answer : (e) Reason: Finished goods:

Closing stock at end of October must be 10% higher than at the beginning of the month: 30,000 × 110% = 33,000 units. (Closing stock for January is the same as opening stock for November) Closing stock at end of November must be 10% higher than at the beginning of the month: 33,000 × 110% = 36,300 units. Closing stock at end of December must be 10% higher than at the beginning of the month: 36,300 × 110% = 39,930 units. Production in the month of December 2005 is Closing stock + Sales - Opening stock = 39,930 + 4,10,000 – 36,300 = 4,13,630 units Raw materials: Opening stock of raw material at beginning of October = 50,000kg × Rs.6.00 = Rs.3,00 000 Closing stock at end of October must be 10% higher than opening stock = Rs.3,00,000 × 110% = Rs.3,30,000 Closing stock at end of November must be 10% higher than opening stock: = Rs.3,30,000 × 110% = Rs.3,63,000 Closing stock at end of December must be 10% higher than opening stock: = Rs.3,63,000 × 110% = Rs.3,99,300 Purchases in the month of December 2005 is Closing stock + raw materials used in production – opening stock = Rs.3,99,300 + (4,13,630 units × 1.8kg × Rs.6) – Rs.3,63,000 =Rs.3,99,300 + Rs.44,67,204 - Rs.3,63,000 = Rs.45,03,504.

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10201010105

780750

32

62. 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.12, 000 less than standard for the achieved level of activity is correct .All other options are incorrect

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63. 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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64. 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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65. 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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66. Answer : (d) Reason:

Fixed costs 8,00,000 Return on capital employed (Rs.75,00,000 x 12%) 9,00,000 Residual income desired 10,00,000 Total desired contribution 27,00,000

Contribution per unit from outside sales = Rs.180 – Rs.160 = Rs.20 per unit Total contribution from outside sales = Rs.20 per unit x 1,20,000 units = 24,00,000 Minimum contribution to be earned from supply to division B = Rs.27,00,00 – Rs.24,00,000 = Rs. 3,00,000

Contribution per unit on additional 25,000 units = = Rs.12 per unit Variable cost for minor modification = Rs.5 per unit

Minimum transfer price per unit to be quoted = Rs.160 + Rs.12 + Rs.5 = Rs.177

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67. Answer : (e) Reason: The standard cost of materials for 8,500 units is Rs.1,27,500 (i.e. 8,500 × Rs.15). Thus,

no variance arose with respect to materials. Because labor for 9,000 units was budgeted at Rs.81,000, the unit labor cost is Rs.9. Thus, the labor budget for 8,500 units is Rs.76,500 and total labor variance is Rs.1,275 (i.e. Rs.77,775 – Rs.76,500). Because the actual cost is greater than the budgeted amount, Rs.1,275 variance is unfavorable. Given that the actual time per unit (45 minutes) was the same as that budgeted, no labor efficiency variance was incurred. Hence, the entire Rs.1,275 unfavorable variance must be attributable to labor rate variance.

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68. Answer : (b) Reason : The minimum selling price to be quoted is the incremental cost per unit . Here all the

costs including depreciation, except Rs.62,000 fixed cost, are incremental and variable. So, the incremental cost per unit = cost of {Direct Material = Rs.30 per unit + Direct Labour at the rate of Rs.6 per hour = Rs.18 per unit + Power at the rate of Rs.4 per hour =Rs.8 + Variable Overheads = Rs. 9 per unit + Depreciation of [(Rs.1,26,000 – Rs.6,000) ÷ 24,000 units] = Rs.5 per unit} = Rs.70. [Cost is different from cash flow and here depreciation is not a period cost and it increases with increase in number of units produced.]

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69. Answer : (c) Reason : Here the total sales margin variance is Rs.75,000 (Adverse ) implies the actual sales

margin (contribution) = Budgeted sales margin – Rs.75,000

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Rs. 3,00,00025,000 units

33

= [15,000 × Rs.6 + 20,000 × Rs.7 + 5,000 × Rs.9] – Rs.75,000 = Rs.2,75,000 – Rs.75,000 = Rs.2,00,000. Actual profit = Contribution – Fixed cost = Rs.2,00,000 – Rs.90,000 = Rs.1,10,000.

70. Answer : (a) Reason : Profit for I quarter = Rs.8,000 – (4,000 + 3,000) = Rs.1,000

Variable portion of production overheads: For 200 units = Rs.4,000 For 240 units = Rs.4,100 ( if there is no reduction in fixed overheads). So, variable over head per unit = (Rs.4,100 – Rs.4,000) ÷ (240 – 200) = Rs.2.50 Fixed overheads = Rs.4,000 – (200 × 2.50) = Rs.3,500 Because of decrease in fixed overheads, the actual fixed overheads = Rs.3,300 Total variable cost per unit = Prime cost per unit + variable overhead per unit = (Rs.3,000 ÷ 200) + Rs.2.50 = Rs.17.50 Actual variable cost after 20% increase = Rs.17.50 + 20% of Rs.17.50 = Rs.21 Selling price per unit = Rs.8,000 ÷ 200 = Rs.40 (same as I quarter) Profit per unit = Rs.1,000 ÷ 200 = Rs.5 (same as I quarter) Contribution per unit = Rs.40 – Rs.21=Rs.19 Let the number of units to be sold to make a profit per unit of Rs.5 be X then 19X – Rs.3,300 = Rs.5X X=235.71 or 236 units.

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71. Answer : (e) Reason : At 50% capacity, loss = Rs.5,000

At 40% capacity, loss = Rs.20,000 So every 1% increase in capacity utilization increases profit by (Rs.15,000 ÷ 10%) Rs.1,500. To get a profit of Rs.10,000 the extra profit required above 50% = Rs.15,000 The extra capacity required for an extra profit of Rs.15,000 = Rs.15,000 ÷ Rs.1,500 =10% So, the capacity utilization for a profit of Rs.10,000 = 50% + 10% = 60%.

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72. Answer : (d) Reason : Standard cost per unit of output = (300 × Rs.4 +200 × Rs.3.00) ÷ 1200 = Rs.1.50

Material cost variance = Actual cost of materials – Standard cost of actual output = (350kg × Rs.4.50 + 160kg × Rs.2.80) – 1,160kg × Rs.1.50 = Rs. 2,023 – Rs. 1,740 = Rs.283 (A) Material price variance = Actual quantity (Actual price – Standard price) = 350 × (Rs.4.50 – Rs.4.00) + 160 × (Rs.2.80 – Rs.3.00) = Rs.143 (A) Material price variance represents variance due to deviation of actual prices from standard prices. It’s percentage in total variance = (Rs.143 ÷ Rs.283) × 100 = 50.53%.

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73. Answer: (a) Reason:

Production budget for 5 months ending February 28, 2006 Particulars October November December January February Product – A Budgeted sales 2,000 2,000 2,100 2,400 2,800 Add: Closing Total 2,800 2,840 3,060 3,520 4,160 Less: Opening

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34

35

months sales) Production 2,000 2,040 2,220 2,560 3,040

Product – B Budgeted sales (units)

1,500 1,600 1,700 2,000 2,000

Add closing stock (units) (40% of the following months sales)

640 680 800 800

880

Total 2,140 2,280 2,500 2,800 2,880 Less: Opening stock (units) (40% of current month’s sales)

600 640 680 800

800

Production

1,540 1,640 1,820 2,000 2,080

Product A B

Total production in 5 months 11,860 units 9,080 units

Particulars

Unitcost of A(Rs.)

Total cost of 11,860 units of product A

(Rs.)

Unit cost of B(Rs.)

Total cost of 9,080 units

of product B (Rs.)

Direct Material 40 4,74,400 60 5,44,800 Direct Labor 30 3,55,800 40 3,63,200 Other Manufacturing expenses(Rs.6,30,000 ÷ 30,000 units) (Rs.6,40,000 ÷ 20,000 units)

21 2,49,060 32 2,90,560

Total cost of production 91 10,79,260 132 11,98,560 Total cost of production for both products is Rs.10,79,260 + Rs.11,98,560 = Rs.22,77,820.

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