Question Paper Management Accounting (MB161) : October 2004

Question Paper Management Accounting (MB161) : October 2004 Answer all questions. Marks are indicated against each question. 1. A Balance Sheet account, which has significant overlap between Managerial and Financial Accounting, involves the valuation of: (a) Equipment (c) Accounts Payable (d) Share Capital 2. Research and development costs for new products are (b) Inventory (e) Debentures. (a) Sunk costs (b) Conversion cost (c) Joint costs (d) Relevant costs (e) Avoidable costs. 3. When allocating service department costs to production departments, the method that does not consider different cost behavior patterns is the (a) Single-rate method (c) Direct method (e) Step method. (b) Dual-rate method (d) Reciprocal method 4. If a product is the result of a common process, which of the following costs are relevant for future decision-making? (a) Joint costs before allocation (c) Joint and separable costs in total (e) Prime cost. (b) Joint costs allocated to the products (d) Separable costs only 5. The contribution or income that is forgone by not using a limited resource for its next best alternative use is called (a) Discretionary cost (b) Potential cost (c) Opportunity cost (d) Marginal cost (e) Out of pocket cost. 6. When comparing managerial accounting information with financial accounting information, it is expected that managerial accounting information would (a) Be based upon GAAP (b) Emphasize information on the company as a whole (c) Present estimates of future financial operations (d) Include an analysis of historical cost (e) Be mandatory for business organizations. 7. When manufacturing expenses are recovered on a proper basis, the journal entry to be passed is (a) Debit Work-in-process account and credit General ledger adjustment account Answer Answer Answer Answer Answer Answer Answer

(b) Debit Manufacturing overhead control account and credit stores ledger control account, wages control account and general ledger adjustment account (c) Debit Manufacturing overhead control account and credit work-in-process account (d) Debit General ledger adjustment account and credit Work-in-process account (e) Debit Work-in-process account and credit Manufacturing overhead control account. 8. Generally, individual departmental rates rather than a plant wide rate for applying overhead would be used, if (a) A company wants to adopt a standard cost system (b) A company wants to adopt a direct costing system (c) The manufactured products differ in the resources consumed from the individual departments in the plant (d) The manufacturing overhead is the largest cost component of its product cost (e) The manufacturing operations of a company are highly automated. 9. The release of indirect materials to production requires a journal entry, which includes a credit to which of the following? (a) Work-in-Process Inventory (c) Finished-Goods Inventory (e) Manufacturing Supplies Inventory. 10. Opportunity costs are (b) Raw-Material Inventory (d) Indirect materials (a) Irrelevant for decision making (b) Equal to historical costs (c) Fixed cost (d) Relevant for decision making (e) Variable costs. 11. Which of the following is least likely to be an objective of cost accounting system? (a) Product costing (c) Maximization of profit (e) Sales commission determination. (b) Optimum sales mix determination (d) Inventory valuation 12. The transfer price which is usually based on the listed price of an identical or similar product or service, or the price of a competitor is called (a) Marginal cost transfer pricing (c) Negotiated transfer pricing (e) Market based transfer pricing. (b) Cost plus a mark up transfer pricing (d) Full cost transfer pricing 13. The rate, which is used to carry out adjustment for the difference between overheads absorbed and overheads incurred is known as (a) Blanket rate (b) Plant wide rate (c) Single rate (d) Supplementary rate (e) Moving average rate. Answer Answer Answer Answer Answer Answer 14. While making a decision to make or buy, the qualitative considerations that support the quantitative aspects include I. Value of facilities released II. Reliability of the external supplier Answer

III. Control over the quality of the external supplier (a) Only (I) above (c) Both (I) and (III) above (e) (I), (II) and (III) above. (b) Both (I) and (II) above (d) Both (II) and (III) above 15. Quality cost will not include: (a) Inspection costs (b) Rework costs (c) Lost sales (d) Redesign of the production process (e) Retention cost for non-execution of the project. Answer 16. Which of the following is an appropriate classification of the salary paid to a foreman incharge of the packing department? (a) Direct departmental cost (b) Indirect departmental cost (c) Service department cost (d) Direct product cost (e) Administrative cost. 17. If a sub-unit Which is operating at full capacity and can sell everything produced either internally or externally, then the transfer price of the product will be fixed up on the basis of (a) Negotiation between the divisions (b) Market price (c) Variable cost (d) Cost plus a mark-up (e) Full cost pricing. 18. Which of the following bases of apportionment is most suitable for allocating the rent of a factory building between cost centers? (a) Machine hours (b) Labor hours (c) Number of labourers (d) Floor area (e) Kilowatt hours. 19. In which of the following situations can cost based transfer prices be used? I. No market price exists 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 IV. 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. Answer Answer Answer Answer 20. Managers should focus their attention on the parts of performance reports that do not reflect smoothly running aspects of operations. This is called: (a) Exceptional management (c) Management by perception (e) Management by objectives. (b) Management by walking around (d) Management by exception Answer

21. 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. Answer 22. Which of the following statements is not 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) Cost based transfer pricing can be used when market price does not exist. 23. A debit balance of labor rate variance indicates that (a) Standard hours of labour exceed actual hours (b) Actual hours of labor exceed standard hours (c) Standard rate of labor exceeds actual rate (d) Actual rate of labor exceeds standard rate (e) Standard hours with actual rate exceed actual hours with actual rate. 24. Garmo, a clothing wholesaler, decides to charge higher prices to smaller, independent clothing retailers because of the nuisance involved in dealing with them. Garmo is engaging in (a) Predatory pricing (b) Penetration pricing (c) Discriminatory pricing (d) Contribution pricing (e) Skimming pricing. 25. Full-cost price is defined as (a) The price usually based on absorption-costing (b) The price usually based on marginal costing (c) The price in the open market (d) The price representing the cash outflows of the supplying division plus the contribution to the supplying division from an outside sale (e) The price based on variable cost plus a lump sum. 26. The data, equipment and computer programs that are used to develop information for managerial use is know as (a) Management by exception (b) Management by objective (c) Management control (d) Management information system (e) Value chain analysis. Answer Answer Answer Answer Answer 27. Tropicana Ltd. buys soft drinks for its employee cafeterias from Pepsi. Both companies are Pepsi Co s. business units. The amount that Pepsi charges Tropicana Ltd. for the soft drinks is called the (a) Transfer price (c) Raw materials cost (b) Cost of goods sold (d) Reciprocal price Answer

(e) Economy price. 28. Budgets that plan the organization s ending financial position are called (a) Financial budgets (b) Operating budgets (c) Master budgets (d) Capital budgets (e) Flexible budgets. 29. 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. 30. In Activity Based Costing system the primary criterian for making cost allocation decisions is (a) Cause and effect (b) Benefits received (c) Fairness Answer Answer Answer (d) Ability to bear (e) Total costs before considering the overhead costs. 31. When a normal costing system is used, budgeted rates would be used for applying costs by the absorption-costing method for (a) Direct labour and variable factory overhead (b) Variable factory overhead and fixed factory overhead (c) Fixed factory overhead and direct materials (d) Direct materials and direct labour (e) Fixed factory overhead and direct labour. 32. Responsibility accounting is a system where (a) The accounting department is responsible for all cost accounting and financial reporting activities (b) Critical processes and key success factors are the primary activities for which accounting data (c) are gathered Lower-level managers are responsible for meeting specific objectives and reporting on the results (d) Everyone in the organization is accountable for achieving corporate goals (e) An accounting system where activity based costing is implemented. 33. Under the standard cost system, the material price variances are usually the responsibility of the (a) Production Manager (b) Cost Accounting Manager (c) Sales Manager (d) Purchases Manager (e) Industrial Engineering Manager. 34. Which of the following variances is most controllable by the production control supervisor? (a) Material price variance (b) Material usage variance (c) Variable overhead spending variance (d) Fixed overhead budget variance Answer Answer Answer Answer

(e) Fixed overhead volume variance. 35. The flexible-budget variance is the difference between: (a) Static budget and actual results (b) Master budget and flexible budget (c) Actual results and master budget (d) Actual results and the budget at standard prices and standard inputs allowed for the outputs achieved (e) Rolling budget and flexible budget. Answer 36. Material price variance ratio can be defined as (a) (Actual quantity Actual rate) Standard rate (b) (Actual quantity Standard rate) Actual rate (c) (Actual quantity Actual rate) (Actual quantity Standard rate) (d) (Actual quantity Standard rate) (Standard quantity Actual rate) (e) (Standard quantity Standard rate) (Actual quantity Standard rate). Answer 37. A harmonized collection of techniques to gather and use information for planning, controlling, motivating and evaluating activities is called a (a) Management control system (b) Cost accounting system (c) Financial planning model (d) Accounting system (e) Unity of command. Answer 38. Managers at Paper Works Ltd. need to focus their effort in areas where performance is measured and where it affects the system of rewards. In order to promote this behavior, executives at Paper Works Ltd. should develop that encourage goal congruence. (a) Plans (b) Incentives (c) Controls (d) Strategies (e) Tactics. Answer 39. There is no conceptual difference between a budget amount and a standard amount if standards are: (a) Ideal standards (b) Perfection standards (c) Currently attainable standards (d) Flexible standards (e) Controllable standards. 40. Which of the following statements is/are true? (I) The use of budgets by management to monitor and control a company's operations is called budgetary control (II) The first financial budget prepared is the cash budget (III) In a fixed budgetary control system, the master budget is based on a single prediction for sales volume and other activity level. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (III) above (e) All of (I), (II) and (III) above. Answer Answer 41. Consider the following: Answer

Raw material used Rs. 1,40,000 Direct labour Rs. 5,00,000 Total manufacturing overhead Rs. 6,00,000 Beginning work-in-process Rs. 15,000 Cost of goods sold Rs.12,05,000 What is the value of the ending work-in-process? (a) Rs.65,000 (b) Rs.35,000 (c) Rs. 50,000 (d) Rs.70,000 (e) Rs.1,05,000. 42. Ajex Ltd. had the following inventories at the beginning and end of the month of September 2004. Answer Particulars September 1, 2004 (Rs.) September 30, 2004 (Rs.) Finished goods 1,25,000 1,17,000 Work-in-process 2,35,000 2,51,000 Direct materials 1,34,000 1,24,000 The following additional manufacturing data were available for the month of September 2004: Particulars (Rs.) Direct materials purchased 1,89,000 Purchase returns and allowances 1,000 Transportation 3,000 Direct labor 3,00,000 Actual factory overhead 1,75,000 The company applies factory overhead at a rate of 60% of direct labor cost and any over applied or under applied factory overhead is deferred until the end of the year 2004-2005. The manufacturing cost of the company for the month of September 2004 was (a) Rs.6,81,000 (b) Rs.6,65,000 (c) Rs.4,89,000 (d) Rs.2,01,000 (e) Rs.6,73,000. 43. Air Purifier Ltd. uses process cost system to manufacture Dust Density Sensors for the mining industry. The following pertains to the operations for the month of September 2004: Particulars Units Opening work-in-process (September 01, 2004) 450 Introduced in production during September 2004 4,100 Closing work-in-process (September 30, 2004) 520 There is no loss in the manufacturing process. The opening inventory was 80% complete for materials and 60% complete for conversion costs. The closing inventory was 75% complete for materials and 65% complete for conversion costs. Costs pertaining to the month of September 2004 are as follows: Opening work in process: Materials Rs. 6,850 Conversion Rs. 4,350 During the month: Materials Rs.71,050 Conversion Rs.57,372 The total cost of closing work-in-process on September 30, 2004, using FIFO method, is (a) Rs.10,708.62 (b) Rs.11,649.63 (c) Rs.12,573.78 (d) Rs.11,557.00 (e) Answer

Rs.12,443.00. 44. Consider the following data pertaining to the production of a company for the month of September 2004: Particulars Rs. Opening stock of raw material 8,780 Closing stock of raw material 9,270 Purchase of raw material during the month 67,890 Total manufacturing cost charged to product 2,92,840 Answer Factory overheads are applied at the rate of 75% of direct labor cost. The amount of factory overhead applied to production is (a) Rs.67,400 (b) Rs.96,617 (c) Rs.1,28,823 (d) Rs.1,28,543 (e) Rs.96,407. 45. A product, which uses 100 tons as input per month, passes through two processes Process 1 and Process 2. The details of cost of process 1 for the month of September 2004 are as follows: Process 1 Cost per ton (Rs.) Direct material cost 2,610 Direct labor cost 780 Overhead costs 1,350 The total loss in process 1 is 2% of input and the scrap is 8% of the input with a value of Rs.1,200 per ton. The material is transferred to process 2 at cost. The direct labor cost of Process 2 is Rs.900 per ton of input. The overhead is 60% of direct labor cost. The scrap at process 2 is 20% of input with a value of Rs.1,200 per ton. The cost per unit of finished goods in process 2 is (a) Rs.7,800 (b) Rs.5,400 (c) Rs.6,600 (d) Rs.5,160 (e) Rs.7,950. 46. An organization's break-even point is 4,000 units at a sales price of Rs.50 per unit, variable cost of Rs.30 per unit, and total fixed costs of Rs.80,000. If the company sells 500 additional units, by how much will its profit increase? (a) Rs.25,000 (b) Rs.15,000 (c) Rs.12,000 (d) Rs.37,000 (e) Rs.10,000. 47. Tismat Ltd. is a manufacturing company. In one of the production departments in its main factory, the machine hour rate is used for absorption of production overheads. The company has fixed up the predetermined rate of Rs.15 per machine hour on the basis of normal activity level. The company has estimated the following overhead expenditure at different activity levels: Activity level (Machine hour) Overhead expenditure (Rs.) 1,500 25,650 1,650 26,325 2,000 27,900 Answer Answer Answer

If the actual machine hours are 1,700, the under/over absorption of overhead is (a) Rs.1,050 (under) (b) Rs.1,050 (over) (c) Rs.1,575 (under) (d) Rs.1,575 (over) (e) Rs.3,675 (under). 48. Sales are Rs.3,20,000, fixed costs are Rs.80,000 and variable costs are Rs.1,20,000. What is the safety margin? (a) Rs.18,900 (b) Rs.20,000 (c) Rs.1,92,000 (d) Rs.128,000 (e) Rs.131000. 49. The profits and sales of a company for 2 consecutive years were as follows: Answer Answer Break-even sales of the company is Period Profits (Rs.) Sales (Rs.) Year 1 20,000 1,20,000 Year 2 25,000 1,40,000 (a) Rs.60,000 (b) Rs.50,000 (c) Rs.40,000 (d) Rs.30,000 (e) Rs.20,000. 50. Consider the following data pertaining to inventories of Calex Ltd. for the month of September 2004: Particulars Opening inventory (Rs.) Closing inventory (Rs.) Raw materials 7,120 8,635 Work-in-process 8,000 3,000 Finished goods 9,000 11,000 Other information: Rs. i. Raw materials used 32,665 ii. Total manufacturing costs charged to product (it includes raw materials, direct labor and factory overheads applied @ 60% of direct labor cost) 82,601 iii. Cost of goods available for sale 1,02,600 iv. Selling and general expenses 2,500 Answer The costs of raw materials purchased and the amount of factory overhead applied are (a) Rs.31,270 and Rs.49,936 respectively (b) Rs.31,150 and Rs.31,210 respectively (c) Rs.34,180 and Rs.31,210 respectively (d) Rs.34,180 and Rs.18,726 respectively (e) Rs.34,180 and Rs.12,484 respectively. 51. ABC Ltd. is preparing its cash budget for the 4 th quarter of 2004-05. An extract from its sales budget for the same year shows the following sales values: September 2004 October 2004 November 2004 December 2004 Rs.1,20,000 Rs.1,40,000 Rs.1,10,000 Rs.1,30,000 40% of its sales are expected to be for cash. Of its credit sales, 50% are expected to pay in the month after sales and 50% are expected to pay in the second month after the sale. Answer

The value of sales receipts to be shown in the cash budget for November 2004 is (a) Rs.1,85,000 (b) Rs.1,33,000 (c) Rs.1,30,000 (d) Rs.1,22,000 (e) Rs.1,10,000. 52. Consider the following information pertaining to Deys Ltd. for the month of September 2004: The sales price variance for the month is Particulars Actual Budget Sales (Units) 10,000 12,000 Sales Revenue (Rs.) 1,10,400 1,26,000 (a) Rs.5400 (adverse) (b) Rs.5400 (favorable) (c) Rs.6200 (favorable) (d) Rs.6480 (adverse) (e) Rs.6480 (favorable). 53. The following data pertains to Unique Telecommunications in its proposed revamping activity of its project at Bangalore. Cables & wires Instruments Rent of building (fixed) Cost of law suits pending Rs.500 lakhs per annum Rs.1250 lakhs per annum Rs.240 lakhs per annum Rs.5,40,000 The idea of revamping its project is perceived mainly to reduce certain costs.accordingly, the company predicts it can cut down costs on instruments if it takes the same on lease at Rs. 1,150 lakh per annum, cables & wires at Rs.480 lakh. The law suits are expected to be settled in this financial year which shall bring about a cash inflow of Rs.10,00,000 for the defamation suit the company filed against a journalist. The revamping of the project shall bring about a change in profit by (a) Rs.10 lakhs (b) Rs.20 lakhs (c) Rs.100 lakhs (d) Rs.110 lakhs (e) Rs.120 lakhs. 54. Consider the following costs per unit of production of a company: The total cost for 1,250 units is Direct material Direct labor Production overheads Selling & administrative overheads Total costs Normal Production Rs.10 Rs.12 Rs.20 (40% fixed) Rs.20 (50% fixed) Rs.62 1,000 units (a) Rs.77,500 (b) Rs.75,000 (c) Rs.73,000 (d) Rs.65,000 (e) Rs.55,000. 55. Grant Corporation has furnished the following information pertaining to product X : Budgeted variable overhead cost Rs.15,000 Budgeted fixed overhead cost Rs.30,000 Budgeted direct labor hours 15,000 Budgeted Production 7,500 units Actual variable overhead cost Rs.14,000 Actual fixed overhead cost Rs.29,000 Actual direct labor hours 13,000 Answer Answer Answer Answer

If the company produces 6000 units, the fixed manufacturing overhead volume variance is (a) Rs.1,000 unfavorable (b) Rs.3,000 unfavorable (c) Rs.3,000 favorable (d) Rs.6,000 favorable (e) Rs.6,000 unfavorable. 56. A-1 Sports Ltd. manufactures tracksuits for athletes. Presently its output is 70% of its full capacity of 19,000 units per annum. One exporter has approved the sample and has offered to buy 10,000 tracksuits at a special price of Rs.750 per suit. At present the company sells tracksuits at the rate of Rs.1,050 per suit. The standard cost per suit is as follows: Particulars Rs. Cloth and other materials 410 Labor cost 125 Fixed cost 210 Other variable cost 55 Total 800 The net profit or loss of accepting the order of 10,000 tracksuits is (a) Rs.64,500 (profit) (b) Rs.64,500 (loss) (c) Rs.3,78,000 (loss) (d) Rs.5,00,000 (loss) (e) Rs.16,00,000 (profit). 57. AB Ltd. makes three components S, T and U. The following costs have been recorded : Component S Component T Component U Unit cost (Rs.) Unit cost (Rs.) Unit cost (Rs.) Variable cost 2.50 8.00 5.00 Fixed cost 2.00 8.30 3.75 Total cost 4.50 16.30 8.75 Another company has offered to supply the components to AB Ltd. at the following prices : Component S Component T Component U Price each Rs.4.00 Rs.7.00 Rs.5.50 Which of the component(s) should AB Ltd. consider buying? (a) Buy only T (b) Buy S and U (c) Buy T and U (d) All the three components (e) None of the components. 58. Ajax Ltd. produces oak desks. It has established standards for one oak desk at the following: Direct materials : 36 square feet of oak lumber at Rs.4.50 per square foot Direct labor : 10 hours of skilled labor at Rs.15 per hour Variable overhead : 10 hours at Rs.15 per hour Fixed overhead : Rs.40,000 at a normal operating level of 2,000 desks Ajax Ltd. produced 1,500 desks at a total materials price of Rs.2,50,700 for 54,500 square feet of oak lumber. The material price variance is (a) Rs.2,300 (unfavorable) (b) Rs.5,400 (favorable) (c) Rs.5,400 (unfavorable) (d) Rs.5,450 (favorable) (e) Rs.5,450 (unfavorable). Answer Answer Answer

59. With an opening inventory of 12,000 units as on October 1, 2004, how many units must be produced during the month of October, 2004 to provide an ending inventory of 8,000 units, if Accord Supply Ltd. expects October, 2004 sales to be 36,000 units at Re.1 per unit? (a) 20,000 units (b) 27,000 units (c) 32,000 units (d) 48,000 units (e) 56,000 units. 60. LRH Ltd. has budgeted for sales of 10,000 units of PCs at a price of Rs.15,000 per unit. The actual sales for the period were 9,000 units of PCs at Rs.16,000 per unit. What was the flexible-budget sales amount for LRH? (a) Rs.13.5 Crore (b) Rs.14.4Crore (c) Rs.15.0Crore (d) Rs.16.0 Crore (e) Rs.16.5 Crore. Answer Answer 61. The following information pertains to McArthur Ltd. for the year 2003-04 Sales Rs.30,00,000 Variable costs Rs.12,00,000 Fixed cost Rs.5,00,000 Average invested capital Rs.50,00,000 Applicable interest on capital Rs.10% Answer The residual income of McArthur Ltd. is (a) Rs.7,50,000 (b) Rs.8,00,000 (c) Rs.9,40,000 (d) Rs.10,70,000 (e) Rs.12,55,000. 62. BDH Ltd. has budgeted for sales of 10,000 units of LR at a price of Rs.15 per unit. The actual sales for the period was 9,000 units of LR at Rs.16 per unit. What was the sales-price variance for the current period? (a) Rs.9,000 Favorable (b) Rs.9,000 Unfavorable (c) Rs.10,000 Favorable (d) Rs.10,000 Unfavorable (e) Nil. 63. Consider the following projected sales forecast of a company: Time Period 1 2 3 4 Sales in units 12,000 13,000 15,000 10,000 The desired ending inventory is 10% of the sales units of the subsequent period. How many units will be produced in the second time period? (a) 13,100 (b) 13,300 (c) 13,200 (d) 14,100 (e) 14,700. 64. The Sundae Manufacturing Ltd. prepared a fixed budget of 80,000 direct labor hours, with a planned overhead costs of Rs.4,00,000 for variable overhead and Rs.1,20,000 for fixed overhead. In a flexible budget at 100% capacity there are 1,00,000 labor hours, what would be the variable and fixed costs at 100% capacity? (a) Rs.4,00,000 and Rs.1,20,000 (c) Rs.4,00,000 and Rs.1,50,000 (e) Rs.6,00,000 and Rs.1,50,000. (b) Rs.5,00,000 and Rs.1,20,000 (d) Rs.5,00,000 and Rs.1,50,000 Answer Answer Answer

65. Consider the following production schedule for 2004-05: Quarter: 1 st 2 nd 3 rd 4 th Expected sales units 7,000 5,000 8,000 6,000 The previous year's 4th quarter ending inventory of 700 units meets the minimum requirement for the subsequent quarter's beginning inventory and the same policy is followed in the subsequent quarters. The expected production in the current 2nd Quarter will be which of the following? (a) 5,300 units (b) 5,800 units (c) 6,500 units (d) 6,600 units (e) 6,800 units. 66. Moti Ltd. pays commission to its salesmen in the month the company receives cash from sales, which is equal to 4% of the cash inflows. The company has budgeted sales of Rs.3,15,000 for July 2004, Rs,4,25,000 for August 2004 and Rs.4,85,000 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.24,750 (b) Rs.21,250 (c) Rs.18,750 (d) Rs.17,225 (e) Rs.15,650. 67. Consider the following data of a company: Amounts budgeted for 10,000 units of planned production: Direct materials Rs. 80,000 Direct labor Rs.1,20,000 Variable manufacturing overhead costs Rs.1,00,000 Fixed manufacturing overhead costs Rs. 50,000 What is the total budgeted manufacturing cost at a level of 11,000 units, which is below full capacity? (a) Rs.378,000 (b) Rs.380,000 (c) Rs.385,000 (d) Rs.387,000 (e) Rs.389,000. Answer Answer Answer 68. The overhead variances for Big Ltd. for the month of September, 2004,were: Variable overhead spending variance Rs.450 (unfavorable) Variable overhead efficiency variance Rs.750 (favorable) Fixed overhead spending variance Rs.1,250 (unfavorable) Fixed overhead volume variance Rs.3,000 (unfavorable) What was the overhead controllable variance? (a) Rs.950 unfavorable (b) Rs.1,700 unfavorable (c) Rs.2,950 unfavorable (d) Rs.3,000 unfavorable (e) Rs.3,950 unfavorable. Answer 69. Titri Ltd. produces a single product k. The following budgeted data are available for the month of September 2004: Production (units) 15,000 25,000 Flexible budget data: (Rs.) (Rs.) Material 30,000 50,000 Labor 45,000 75,000 Answer

Factory overhead: Indirect material 15,000 25,000 Indirect labor 30,000 50,000 Supervision 26,250 33,750 Heat, Light and Power 15,250 22,750 Depreciation 63,000 63,000 Insurance and Taxes 8,000 8,000 Total factory overhead 1,57,500 2,02,500 Total Manufacturing cost 2,32,500 3,27,500 Other information for the month of September 2004: i. Standard time : 0.5 direct labor hour per unit of product ii. Normal capacity : 10,000 direct labor hours iii. Units produced : 22,000 units iv. Actual labor hours : 10,700 hours. v. Factory overheads incurred : Rs.1,91,000. Standard factory overhead rates are based on direct labor hours. The overhead efficiency variance and overhead capacity variance are (a) Rs.2,700 (F) and Rs.4,700 (A) respectively (b) Rs.2,700 (F) and Rs.9,000 (F) respectively (c) Rs.2,700 (A) and Rs.4,700 (F) respectively (d) Rs.2,700 (A) and Rs.9,000 (A) respectively (e) Rs.4,700 (A) and Rs.2,700 (A) respectively. 70. Cellophone Ltd. s monthly flexible overhead budget and activity are shown below: Answer Activity (units) Budgeted monthly overhead cost 2,400 Rs.2,20,000 2,800 Rs.2,40,000 3,600 Rs.2,80,000 The budgeted fixed overhead cost per month is (a) Rs.70,000 (b) Rs.90,000 (c) Rs.1,00,000 (d) Rs.1,40,000 (e) Rs.1,80,000. 71. The following particulars are extracted from the books of Gas & Coal Ltd. for the half year ended September 30, 2004 : Particulars All fig. in Rs. Purchase of raw materials 1,30,000 Direct wages 1,00,000 Rent, rates, insurance and works on cost 45,000 Carriage inward 1,500 Stock on 01.04.2004 : Raw materials 20,000 Finished products (3, 200 tonnes) 37,600 Work-in-progress on 01.04.2004 4,500 Work-in-progress on 30.09.2004 16,000 Factory supervision 10,000 Answer

Sales Finished products 3,00,000 Advertising discount allowed and selling cost at Re. 0.50 per tonne sold. 25,000 tonnes of commodity was sold during the period. The closing stock of raw material is Rs.25,000. The prime cost for the period is (a) Rs. 2,26,500 (b) Rs. 2,21,000 (c) Rs. 1,26,500 (d) Rs. 1,50,000 (e) Rs. 1,25,000. 72. Consider the following events and balances of a company: Cash sales totaling Rs.3,80,000, Beginning cash balance Rs.30,000 Expenses of Rs.4,20,000, which include Rs.20,000 of depreciation and Rs.12,000 of interest End-of-period accrued liabilities of Rs.20,000 for unpaid expenses Borrowing Rs.50,000 cash by issuing a note payable The expected ending cash balance will be (a) Rs.35,000 (b) Rs.40,000 (c) Rs.52,000 (d) Rs.60,000 (e) Rs.80,000. 73. Cimko Ltd. has furnished the following data relating to its product for the year 2004-05: Answer Answer Annual production (units) 30,000 Material cost (Rs.) 90,000 Other variable costs (Rs.) 1,80,000 Fixed cost (Rs.) 60,000 Total cost (Rs.) 3,30,000 Apportioned investment (Rs.) 3,00,000 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.35.00 (b) Rs.30.00 (c) Rs.27.50 (d) Rs.25.00 (e) Rs.17.88.

Suggested Answers Management Accounting (MB161) : October 2004 1. Answer : (b) Reason : Processes related to Inventory are different and significant under both Managerial and Financial Accounting. Other items like equipment, accounts payable, share capital and debentures are not correct for both accounting methods. Therefore, (b) is correct. 2. Answer : (a) Reason : The research and development costs have already been incurred. Thus, they are costs resulting from a past irrevocable decision. These sunk costs are irrelevant to the new product because they are unavoidable. Therefore (a) is correct 3. Answer : (a) Reason : The single rate method combines fixed and variable costs. However, dual rates are preferable because they allow variable costs to be allocated on a different basis from fixed costs. Options (c), (d) and (e) are incorrect because the direct method, reciprocal method and step methods can be used on a single or dual rate basis. Option (b) is not true because a dual-rate method considers different cost behavior patterns. 4. Answer : (d) Reason : Joint costs by definition are common to the joint products produced and therefore, do not differ among alternative courses of action. Hence only separable costs are relevant for future decision making. Hence correct answer is (d). 5. Answer : (c) Reason : An opportunity cost in the maximum benefit sacrificed by employing a scarce productive resource in a specified manner. It is the value of resource in the next best alternative. Therefore (c) is correct. Discretionary cost is not relevant in decision making. Marginal cost is an incremental or differential cost. Incremental cost is the difference in total cost between two decision choices.. 6. Answer : (c) Reason : Management Accounting includes estimates. Financial Accounting looks at the company as a whole based upon GAAP including analysis of historical costs. Financial accounting is mandatory for business organizations. Therefore, (c) is correct. 7. Answer : (e) Reason : Relevant cost concept applies to all the the situations mentioned in (b), (c), (d) and (e) excepting (a). Relevant costs are those costs that are associated with a particular decision situation and will be incurred if that decision situation is undertaken. It can be differentiated from those costs which are incurred irrespective of whether the decision is taken or not. When the manufacturing expenses are recovered on a suitable basis, the Work-in-process account is debited and Manufacturing overhead control account is credited. 8. Answer : (c) Reason : Factory overhead is usually assigned to products based on a predetermined rate or rates. The activity base for overhead allocation should have a high correlation with the incurrence of overhead. Given only one cost driver, one overhead application rate is sufficient. If products differ in the resources consumed in individual departments, multiple rates are preferable. 9. Answer : (e) Reason : The release of indirect materials to production requires crediting to Manufacturing Supplies Inventory.

10. Answer : (d) Reason : Opportunity cost can be defined as the maximum benefit forgone by using a scarce resource for a given purpose. It is the benefit provided by the next best use of that resource. An opportunity cost is thus relevant for decision process. Other options stated in (a), (b), (c) and (e) are not correct. 11. Answer : (e) Reason : A cost accounting system has numerous objectives, including product costing, assessing departmental efficiency, inventory valuation, product mix determination, optimum sales mix, profit planning, evaluating and controlling operations. Determining sales commissions is not an objective of a cost accounting system because such commissions are based on sales, not costs 12. Answer : (e) Reason : The market based transfer pricing may reflect the price prevailing in an open competitive market. Hence, it is based on the listed price of an identical product in the market, may be even of a competitor. The other methods of transfer pricing stated in (a), (b), (c) and (d) are not based on the listed price or competitors price. Hence (e) is correct. 13. Answer : (d) Reason : Supplementary rates are used to carry out adjustment for the difference between overhead absorbed and overhead incurred. Therefore, (d) is correct. Other options are not correct. 14. Answer : (e) Reason : The qualitative considerations involved in decision making process are value of facilities released, reliability of the external supplier and control over the quality of the external supplier. 15. Answer : (e) Reason : Quality costs include all of these, and more. Inspection costs are classified as appraisal costs. Rework costs are internal failure costs. Lost sales are external failure costs. And redesign of the production process is a prevention cost. Option (e) retention cost for the non-execution of the project is not a part of quality cost. 16. Answer : (a) Reason : The salary paid to a foreman in packing department is to be classified as direct department cost. It is not the production cost, indirect department cost, service department cost or administrative cost. Therefore (a) is correct. 17. Answer : (b) Reason : Since the division can sell the full capacity production to the outside market, it has no incentive to take a lower price i.e. it will not opt for negotiation or variable costing or cost plus a mark-up and full cost pricing methods i.e. it will be willing to use a transfer price set by the market. 18. Answer : (d) Reason : In selecting suitable base for apportioning service department overhead cost, considerations should be given to practicability, simplicity, economy, theoretical soundness and assistance in accurate costing and cost control. Rent of a factory building should be apportioned on the basis of floor areas of cost centers. There is no link between rent expenses of a factory building with other options like machine hours, labor hours, number of labors and kilowatt hours. Therefore (d) is correct. 19. 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. 20. Answer : (d) Reason : Management by exception is facilitated by well-designed reports that direct attention to unusual outcomes. Managers should focus their attention on the parts of performance reports that do not reflect smoothly running aspects of operations. This is called Management by exception. 21. 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 only fixed costs or only variable cost. It is not used to recover market price plus mark-up or standard cost plus mark-up. 22. Answer : (d) 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. 23. Answer : (d) Reason : A debit balance of labor rate variance means that the labor rate variance is adverse. Adverse labor rate variance arises if the actual rate per hour or unit of labor exceeds standard rate per hour or unit. It does not arise due to the difference between actual hours and standard hours. Therefore (d) is correct. 24. Answer : (c) Reason : The pricing strategy under which a company reduces its prices drastically so that the competitor is forced to leave the market is known as predatory pricing. Discriminatory pricing is pricing strategy where different prices are offered in different markets. Contribution margin pricing is that pricing based on the contribution margin. Penetration pricing is that pricing used for the newly introduced products to penetrate into the markets. Initially, the price is low and is gradually increased once the product is accepted. Skimming pricing is where the price initially is high so that the initial set up costs are recovered and then the price is reduced. 25. Answer : (a) Reason : The correct answer is (a) (a) Full-cost price is the price usually set based on absorption costing calculation and includes materials, labor and a full allocation of production overhead. (b) is not correct because it is variable cost. (c) is not correct because the market price is the price in the open market. (d) is not correct because it is the outlay cost plus opportunity cost. (e) is not correct because it is the variable cost plus pricing. 26. 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. 27. Answer : (a) Reason : The price at which the goods are transferred from one business unit to other business unit of the same company is called transfer price. The amount in question is the transfer price, the amount Pepsi charges Tropicana, a related business unit, for soft drinks.

28. Answer : (a) Reason : Financial budgets determine the effects of operations and other financing activities on cash and financial position. 29. Answer : (b) Reason : The capital investment budget may be prepared more than a year in advance, unlike the other elements of the master budget. In case of preparation of master budget, it requires production budget, overhead expenses budget, proforma income statement and balance sheet. It does not require capital investment budget at the time of its preparation. 30. 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. 31. Answer : (b) Reason : Normal costing charges production for the actual prime costs, but budgeted costs for variable and fixed factory overhead. Any combination which includes direct costs like Direct Material and Direct Labour is wrong. 32. Answer : (c) Reason : Responsibility accounting systems assign responsibility for a group of organizational activities and objectives to lower-level managers, and then monitor and report on the results. Lower-level managers play a key role in responsibility accounting systems. 33. Answer : (d) Reason : The materials price variance is the difference between the standard price and actual price paid for the materials. This variance is usually the responsibility of the purchase department, the purchasing manager has an incentive to obtain the best possible. Therefore (d) is correct. 34. Answer : (b) Reason : The production control supervisor has the most control over the materials usage variance. The materials usage variance measures the amount of material used over the amount specified in the standard. Production control supervisor is not responsible for material price variance, variable overhead spending variance, fixed overhead budget variance, fixed overhead volume variance. Therefore, (b) is correct. 35. Answer : (d) Reason : The flexible-budget variance is the difference between the flexible budget and actual results, or between actual results and the budget at standard prices and standard inputs allowed for the outputs achieved, which is the flexible budget prepared based on the actual results if the flexible budged prepared does not contain the budget prepared at actual capacity utilities. 36. Answer : (c) Reason : Material price variance ratio = Actual quantity Actual rate Actualquantity Standard rate 37. Answer : (a) Reason : A management control system communicates goals, promotes an understanding of necessary actions, shares operating results, and performs a system of self-assessment. The purpose of this system is to communicate goals, to promote an understanding of necessary actions, to share operating results, and to perform a system self-assessment.

38. Answer : (b) Reason : If Paper Works Ltd. s executives want to encourage certain managerial efforts they should develop incentives that will alter managerial behavior. Incentives are formal and informal performance-based rewards that enhance managerial effort toward corporate goals. 39. Answer : (c) Reason : Currently attainable standards are expected to be achieved given certain levels of effort; thus, they may be used for budgeting. Ideal or perfection standards cannot be achieved and would not be useful for budgeting. Flexible standards are not standards at all, but are probably just actual results. 40. Answer : (d) Reason : Budgetary control is the use of budgets by management to monitor and control a company's operations. Budget reports contain relevant information that compares actual results to planned activities (budgets). The first financial budget prepared is the budgeted income statement. The amounts detailed in a budgeted income statement are used in the determination of projected cash flows. A fixed budget, also called a static budget, is based on a single predicted amount of sales or production volume. Statements (I) are (III) are true, while (II) is false, hence the correct answer is (d). 41. Answer : (c) Reason : Value of ending WIP = Cost of goods manufactured + Opening WIP Cost of goods sold = 140000 + 500000 + 6,00,000 + 15,000 12,05,000 = Rs. 50,000 42. Answer : (a) Reason : Beginning direct materials inventory 1,34,000 Add: Purchases 1,89,000 Less: Purchase returns (1,000) Add: Transportation 3,000 Total direct materials available 3,25,000 Less: Ending direct materials inventory (1,24,000) Direct material used 2,01,000 Direct labor 3,00,000 Total prime costs 5,01,000 Manufacturing cost = Rs.5,01,000 + 60% of Rs.3,00,000 (Direct labor) = Rs.6,81,000. 43. Answer : (d) Reason : Statement of equivalent Production Unit (FIFO) Input Output Completed: Material Conversion Opening 450 Opening 450 20% 90 40% 180 Introduced 4,100 Introduced 3,580 100% 3,580 100% 3,580 Closing 520 75% 390 65% 338 4,550 4,550 4,060 4,098

Costs during the month Rs.71,050 Rs.57,372 Cost per unit Rs. 17.50 Rs. 14.00 The total cost of closing work-in-process Material 390 Rs.17.50 = Rs.6,825 Conversion 338 Rs.14.00 = Rs.4,732 Rs.11,557 44. Answer : (b) Reason : Raw material used = Op. stock + Purchases Cl. stock = Rs.8,780 + Rs.67,890 Rs.9,270 = Rs.67,400 Manufacturing cost = Raw material used + Direct labor + Factory overhead Rs.2,92,840 = Rs.67,400 + Direct labor + 75% of Direct labor 1.75 Direct labor = Rs.2,25,440 Direct labor = Rs.1,28,823 The amount of factory overhead = 75% of Rs.1,28,823 = Rs.96,617. 45. Answer : (e) Reason : Total cost of process 1 = 100 tons (Rs.2,610 +Rs.780 + Rs.1,350) = Rs.4,74,000 Number of good units 100 tons 2% of 100tons 8% of 100s = 90 tons Realizable value of scrap 8 units = 8 x Rs.1,200 = Rs.9,600 Cost per unit = ( Rs.4,74,000 Rs.9,600 ) / 90 tons = Rs.5,160 Total cost of process 2 = Input from process 1 + Direct labor + Overhead (60% labor cost = 90 tons x Rs.5,160 + 90 tons x Rs.900 + 60% of Rs.81,000 = Rs.4,64,400 + Rs.81,000 + Rs.48,600 = Rs.5,94,000 Scrap 20% of input = 20% of 90 = 18units, Realizable value = 18 tons x Rs.1,200 = Rs.21,600 Therefore, cost per unit of finished goods = ( Rs.5,94,000 Rs.21,600 ) / (90 18) tons = Rs.5,72,400 / 72 tons = Rs.7,950 46. Answer : (e ) Reason : Unit contribution margin is Rs. 50 - Rs.30 = Rs.20. Additional profit will be Rs.10,000 (500 x Rs.20). After break even, profit is equal to the unit contribution margin multiplied by the number of units sold beyond break-even. 47. Answer : (a) Reason : Variable overheads = Rs.26, 325 Rs.25, 650 1650hrs 1500hrs = Fixed overhead rate = Rs.25,650 Rs.4.50 1500 hrs = Rs.25,650 Rs.6,750 = Rs.18,900 Normal activity Under absorption = Rs.18,900 Rs.10.50 = 1800 hours = (1800 hrs 1700 hrs) Rs.10.50 = Rs.1050 Rs.675 150hrs = Rs.4.50 48. Answer : (c) Reason : Break-even sales = Fixed costs/contribution margin ratio or Rs.80,000/(Rs.2,00,000 / Rs.3,20,000); or Rs.80,000 / 0.625 = Rs.1,28,000. Proof: Rs.1,28,000 - (Rs.1,28,000 x 0.375) = Rs.1,28,000 - Rs.48,000 = Rs.80,000, the fixed costs. The safety margin is

Rs.3,20,000 - Rs.1,28,000 = Rs.1,92,000. 49. Answer : (c) Reason : Profit (Rs.) Sales (Rs.) Costs (Rs.) Year I 20,000 1,20,000 1,00,000 Year II 25,000 1,40,000 1,15,000 Change of Profit Contribution to sales ratio = Change of Sales Fixed cost (Year I) Rs.25,000 Rs.20,000 = Rs.1,40,000 Rs.1,20, 000 Rs.5,000 = Rs.20, 000 = 25% on Rs.1,20,000 Profit = Rs.30,000 Rs.20,000 = Rs.10,000. = 25% Fixed Cost Break even point = C / S ratio Rs.10,000 = 25% = Rs.40,000 Other answers mentioned in (a), (b), (d) and (e) are not correct. 50. Answer : (d) Reason : Materials purchased = Rs.32,665 + Rs.8,635 Rs.7,120 = Rs.34,180 Total manufacturing costs = Direct material + Direct labor + 60% of Direct labor Rs.82,601 = Rs.32,665 + Direct labor + 0.6 Direct labor 1.6 direct labor = 49,936 Direct labor = Rs.31,210 Applied factory overhead = 60% of Rs.31,210 = Rs.18,726 51. Answer : (d) Reason : The correct answer is (d). Particulars Cash sales (November) Rs.1,10,000 0.4 44,000 Credit sales realized: October Rs.1,40,000 0.6 0.5 42,000 September Rs.1,20,000 0.6 0.5 36,000 Sales receipts 1,22,000 Rs. 52. Answer : (b) Reason : The correct answer is (b). The sales price variance is determined by multiplying the difference between actual price and budgeted price by actual units. Rs.1,10,400 Actual price = 10,000 units Rs.1,26,000 Budgeted = 12,000 units = Rs.11.04 = Rs.10.50 Sales price variance is 10,000 units (Rs.11.04 Rs.10.5) = Rs.5,400 (favorable).

53. Answer : (e) Reason : Savings in the cost of the instruments Savings in the cost of cables & wires Total savings in costs Hence, profits will also increase by Rs. 120 lakhs. = Rs. 100 lakhs = Rs. 20 lakhs = Rs. 120 lakhs 54. Answer : (c) Reason : Variance cost per unit = Rs.10 + Rs.12 + Rs.12 + Rs.10 = Rs.44 Fixed cost = Rs.8 1,000 units + Rs.10 1,000 units = Rs.8,000 + Rs.10,000 = Rs.18,000 Cost of 1,250 units = 1,250 units Rs.44 + Rs.18,000 = Rs.55,000 + Rs.18,000 = Rs.73,000 55. Answer : (e) Reason : Step 1: 7,500 budgeted units of production - 6,000 actual units produced = 1,500 units. Step 2: 1,500 units x 2 labor hour allowed per unit = 3,000 labor hour variance. Step 3: 3,000 labor hour variance x Rs.2 fixed overhead rate = Rs.6,000 unfavorable. (Budgeted FOH standard FOH cost of actual output). 56. Answer : (c) Reason : Full capacity = 19,000 units Present capacity (70%) = 13,300 units Unutilized capacity = 5,700 units Variable cost per suit = Rs.410 + Rs.125 + Rs.55 = Rs.590 Incremental revenue for export = 10,000 units ( Rs.750 Rs.590 ) = Rs.16,00,000 Opportunity cost of indigenous production = 4,300 units (i.e.10,000 5,700) x (Rs.1,050 Rs.590) = Rs.19,78,000 Net loss = Rs.19,78,000 Rs.16,00,000 = Rs.3,78,000 57. Answer : (a) Reason : Assuming fixed cost will remain unchanged whether or not the company makes or buys the components, the relevant costs of manufacture will be the variable costs. Under these circumstances, the company should only purchase components if the purchase price is less than variable cost. So, the company should only purchase Component T. 58. Answer : (e) Reason : Materials price variance: Actual quantity used x (Standard price - Actual price). The actual price is Rs.250,700/54,500 = Rs.4.60. The materials price variance is 54,500 x (Rs.4.50 - Rs.4.60) = -Rs.5,450, an unfavorable variance. 59. Answer : (c) Reason : Sales in units plus the desired ending inventory of finished goods less the expected beginning inventory of finished goods determines the number of units to be produced: 36,000 + 8,000-12,000 = 32,000. 60. Answer : (a) Reason : Actual sales times budgeted price, 9,000 x Rs.15,000 = Rs.13.5 Crore. 61. Answer : (b) Reason : Residual income = Sales variable cost Fixed cost Interest on invested capital = (3 000 000 1 200 000 500 000 5 000 000 0 10) R 8 00 000