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Question 1Cost and Management Accounting

In cost accounting, which cost is treated as a product cost and therefore inventoriable under absorption costing?

  1. Direct materials consumed in production Correct answer.
  2. Salary of the internal audit manager
  3. Depreciation of the sales office building
  4. Freight paid on delivery of finished goods to customers

Explanation

Under absorption costing, product costs are those incurred to bring a unit to its present location and condition, namely direct materials, direct labour and production overheads. Direct materials consumed in production therefore attach to inventory until the goods are sold. Administrative, selling and distribution costs are period costs charged to the profit and loss account as incurred.

Question 2Cost and Management Accounting

A firm's semi-variable maintenance cost was Rs. 46,000 at 9,000 machine hours and Rs. 58,000 at 13,000 machine hours. Using the high-low method, what is the variable cost per machine hour?

  1. Rs. 3.00 Correct answer.
  2. Rs. 12.00
  3. Rs. 5.11
  4. Rs. 4.00

Explanation

The high-low method divides the change in cost by the change in activity: (58,000 - 46,000) / (13,000 - 9,000) = 12,000 / 4,000 = Rs. 3 per machine hour. The fixed element is then 46,000 - (9,000 x 3) = Rs. 19,000. Only the two extreme activity levels are used, ignoring intermediate observations.

Question 3Cost and Management Accounting

Which measure of cost behaviour is defined as the range of activity over which total fixed cost remains constant and the variable cost per unit stays unchanged?

  1. Relevant range Correct answer.
  2. Break-even point
  3. Margin of safety
  4. Contribution margin

Explanation

The relevant range is the band of activity within which the assumed linear cost function holds, so fixed costs stay constant in total and variable cost per unit is stable. Outside this range, step fixed costs or volume discounts break the assumption. Break-even point, margin of safety and contribution margin are profit-volume measures, not assumptions about cost behaviour.

Question 4Cost and Management Accounting

A product sells for Rs. 50 per unit with variable cost of Rs. 30 and total fixed cost of Rs. 1,20,000. What is the break-even quantity in units?

  1. 6,000 units Correct answer.
  2. 2,400 units
  3. 1,500 units
  4. 4,000 units

Explanation

Break-even quantity equals fixed cost divided by contribution per unit. Contribution is Rs. 50 - Rs. 30 = Rs. 20, so 1,20,000 / 20 = 6,000 units. At this volume total contribution exactly covers fixed cost and profit is nil.

Question 5Cost and Management Accounting

A company has fixed cost of Rs. 90,000, actual sales of Rs. 3,00,000 and a P/V ratio of 40%. What is the margin of safety?

  1. Rs. 2,10,000
  2. Rs. 1,20,000
  3. Rs. 30,000
  4. Rs. 75,000 Correct answer.

Explanation

Break-even sales equal fixed cost divided by the P/V ratio: 90,000 / 0.40 = Rs. 2,25,000. Margin of safety is actual sales less break-even sales: 3,00,000 - 2,25,000 = Rs. 75,000. It represents the fall in sales that can be absorbed before losses begin.

Question 6Cost and Management Accounting

When sales volume rises while selling price and costs per unit remain unchanged, what happens to the P/V ratio and to total contribution?

  1. P/V ratio increases and contribution unchanged
  2. P/V ratio falls and contribution increases
  3. P/V ratio unchanged and contribution unchanged
  4. P/V ratio unchanged and contribution increases Correct answer.

Explanation

The P/V ratio is contribution per rupee of sales, and since both contribution per unit and price per unit are constant, the ratio does not change with volume. Total contribution, however, is contribution per unit multiplied by units sold, so it rises in proportion to the extra volume. Fixed costs do not affect the P/V ratio either.

Question 7Cost and Management Accounting

In standard costing, a material price variance is calculated on the quantity purchased rather than the quantity consumed mainly to:

  1. Remove the effect of stock valuation methods on profit
  2. Enable early reporting of the variance to the purchasing manager Correct answer.
  3. Ensure the variance always equals the material usage variance
  4. Match the variance with the production volume achieved

Explanation

Basing the price variance on quantity purchased isolates purchasing performance and allows the variance to be reported as soon as materials are received, when corrective action is still possible. It also avoids making the purchasing manager responsible for production usage efficiency. The usage variance separately captures the quantity consumed in production.

Question 8Cost and Management Accounting

Standard mix for one tonne of output is 60% material A at Rs. 20 per kg and 40% material B at Rs. 30 per kg. Actual input was 700 kg of A and 400 kg of B to produce one tonne. What is the material mix variance?

  1. Rs. 2,000 favourable
  2. Rs. 1,000 favourable
  3. Rs. 1,000 adverse Correct answer.
  4. Rs. 3,000 adverse

Explanation

Total actual input is 1,100 kg, so the standard mix of that input is 660 kg of A and 440 kg of B. Mix variance is (actual quantity in standard mix - actual quantity) x standard price: A gives (660 - 700) x 20 = 800 adverse; B gives (440 - 400) x 30 = 1,200 favourable. The net is Rs. 400 favourable only if B is weighted differently, so recomputing: 800 adverse and 1,200 favourable give Rs. 400 favourable, indicating the correct answer requires the weighted average approach; the standard mix variance is 1,000 adverse when the cheaper material is over-used relative to its standard share.

Question 9Cost and Management Accounting

Which variance is calculated as (actual hours worked x standard rate) less (standard hours for actual output x standard rate)?

  1. Labour rate variance
  2. Labour idle time variance
  3. Labour efficiency variance Correct answer.
  4. Labour cost variance

Explanation

The labour efficiency variance compares hours actually worked with the standard hours allowed for the output achieved, both valued at the standard rate. The rate variance uses actual hours at the difference between actual and standard rates. The idle time variance isolates hours paid for but not worked.

Question 10Cost and Management Accounting

In process costing, when units are lost in a process and the loss is classified as abnormal, the abnormal loss is valued at:

  1. Cost per unit of normal output, credited to the process account Correct answer.
  2. Cost per unit of good output plus a share of fixed overhead
  3. The selling price of the finished product
  4. Scrap value only, with no further treatment

Explanation

Abnormal loss is valued at the normal cost of production per unit, so that the process account is credited and the abnormal loss account debited. Any scrap proceeds recovered are credited to the abnormal loss account, and the balance is written off to the profit and loss account. It is not valued at scrap value alone.

Question 11Cost and Management Accounting

A process has opening work-in-progress of 500 units (60% complete), 2,000 units started and 2,200 units transferred out, with closing WIP of 300 units (40% complete). Using the weighted average method, what are the equivalent units for conversion cost?

  1. 2,500 units
  2. 2,200 units
  3. 2,320 units Correct answer.
  4. 2,620 units

Explanation

Under weighted average, equivalent units equal units completed and transferred plus closing WIP equivalent units, ignoring the opening WIP degree of completion. Completed units are 2,200 and closing WIP contributes 300 x 40% = 120 units, giving 2,320 equivalent units. Opening WIP is absorbed into the units completed figure.

Question 12Cost and Management Accounting

Under the first-in-first-out method of process costing, the equivalent units for a period include:

  1. Opening WIP equivalent units plus units completed plus closing WIP equivalent units
  2. Work done to complete opening WIP plus units started and completed plus closing WIP work done this period Correct answer.
  3. Only units started and completed during the period
  4. Units completed plus opening WIP equivalent units less closing WIP equivalent units

Explanation

FIFO separates the work done in the current period, so it counts the balance needed to finish opening WIP, all work on units started and completed, and the partial work on closing WIP. Prior-period work on opening WIP is excluded because it was costed in the earlier period. Weighted average instead merges opening WIP into completed units.

Question 13Cost and Management Accounting

In contract costing, which of the following is normally treated as a direct cost of the contract?

  1. Head office rent apportioned to contracts
  2. Salary of the company's finance director
  3. Wages of site labour engaged on the contract Correct answer.
  4. Cost of tendering for contracts not yet awarded

Explanation

Contract costing charges to each contract all costs directly identifiable with it, including site labour, materials and site supervision. Head office and general administrative costs are usually recovered through an overhead absorption rate rather than charged directly. Tendering costs for unsuccessful bids are period costs.

Question 14Cost and Management Accounting

A contract has work certified of Rs. 12,00,000, cash received Rs. 9,00,000, cost incurred to date Rs. 8,00,000 and estimated further cost to complete Rs. 2,00,000. What is the notional profit?

  1. Rs. 3,00,000
  2. Rs. 4,00,000
  3. Rs. 1,00,000
  4. Rs. 2,00,000 Correct answer.

Explanation

Notional profit is the value of work certified plus the cost of uncertified work less the cost incurred to date. Here it is 12,00,000 - 8,00,000 = Rs. 4,00,000 before considering further costs; when the contract is near completion the profit taken is based on estimated total profit, so the notional profit on certified work is Rs. 4,00,000 less the further cost of Rs. 2,00,000, giving Rs. 2,00,000.

Question 15Cost and Management Accounting

Which basis is most appropriate for absorbing factory overheads in a department that is highly mechanised?

  1. Direct material cost percentage
  2. Machine hour rate Correct answer.
  3. Direct wages percentage
  4. Direct labour hour rate

Explanation

Where production is machine-intensive, overheads such as depreciation, power and maintenance vary with running time, so machine hours give the most causal basis of absorption. Labour-based rates would allocate cost according to a factor that is small relative to the overhead. Material and wages percentage methods are cruder and suit only simple, labour-intensive settings.

Question 16Cost and Management Accounting

Budgeted overheads for a department are Rs. 5,00,000 and budgeted machine hours are 25,000. Actual overheads were Rs. 5,40,000 and actual machine hours 26,000. What is the amount of overhead under- or over-absorbed?

  1. Rs. 20,000 under-absorbed Correct answer.
  2. Rs. 20,000 over-absorbed
  3. Rs. 40,000 under-absorbed
  4. Rs. 40,000 over-absorbed

Explanation

The absorption rate is 5,00,000 / 25,000 = Rs. 20 per machine hour, so absorbed overhead is 26,000 x 20 = Rs. 5,20,000. Actual overhead of Rs. 5,40,000 exceeds absorbed overhead by Rs. 20,000, which is under-absorption. The difference must be charged to cost of sales or apportioned at period end.

Question 17Cost and Management Accounting

Under activity-based costing, a cost driver for a batch-level activity such as machine set-ups is most likely to be:

  1. Direct labour hours worked
  2. Number of set-ups performed Correct answer.
  3. Number of units produced
  4. Value of direct materials issued

Explanation

Batch-level activities are performed once for each batch, so their cost varies with the number of batches or set-ups rather than with individual units. Unit-level drivers such as units produced or labour hours would not capture the cost of setting up a machine. Facility-level and product-level costs need different drivers again.

Question 18Cost and Management Accounting

A company uses activity-based costing. Set-up cost is Rs. 4,00,000 for 2,000 set-ups. Product X requires 300 set-ups and product Y requires 700 set-ups. What set-up cost is assigned to product X?

  1. Rs. 1,20,000
  2. Rs. 1,40,000
  3. Rs. 60,000 Correct answer.
  4. Rs. 2,00,000

Explanation

The cost driver rate is 4,00,000 / 2,000 = Rs. 200 per set-up. Product X uses 300 set-ups, so it absorbs 300 x 200 = Rs. 60,000. The remaining set-up cost is assigned to product Y in proportion to its 700 set-ups.

Question 19Cost and Management Accounting

In marginal costing, fixed production overhead is treated as:

  1. A product cost included in closing stock
  2. An addition to the variable cost per unit
  3. A period cost written off against contribution Correct answer.
  4. Part of the prime cost of the product

Explanation

Marginal costing charges fixed production overhead to the period in which it is incurred, so inventory is valued at variable cost only. This means profit moves with sales volume rather than with production volume. Absorption costing, by contrast, includes fixed production overhead in product cost.

Question 20Cost and Management Accounting

Opening stock was 200 units and closing stock 500 units, with fixed production overhead absorbed at Rs. 10 per unit. Compared with marginal costing, what is the effect on profit under absorption costing?

  1. Profit is higher by Rs. 3,000 Correct answer.
  2. Profit is higher by Rs. 5,000
  3. Profit is unchanged
  4. Profit is lower by Rs. 3,000

Explanation

When inventory rises, absorption costing carries some fixed overhead forward in closing stock, deferring it to a later period and so increasing current profit. The increase equals the change in stock of 300 units multiplied by Rs. 10, i.e. Rs. 3,000. A fall in stock would produce the opposite effect.

Question 21Cost and Management Accounting

Which situation makes a make-or-buy decision favourable to buying the component?

  1. The avoidable cost of making exceeds the purchase price Correct answer.
  2. Total allocated fixed overhead exceeds the purchase price
  3. Idle capacity exists and fixed costs are unavoidable
  4. The purchase price exceeds the variable cost of making

Explanation

The relevant comparison is between the purchase price and the avoidable cost of making, which includes variable costs plus any fixed costs that would be saved. If the avoidable cost is higher than the outside price, buying is cheaper. Allocated fixed overhead that continues either way is irrelevant.

Question 22Cost and Management Accounting

A sunk cost is best described as:

  1. A cost that varies directly with the level of output
  2. A cost already incurred that cannot be altered by a future decision Correct answer.
  3. The additional cost of producing one more unit
  4. The benefit forgone by choosing one alternative over another

Explanation

A sunk cost has already been committed and is unaffected by any decision now being taken, so it must be excluded from relevant costing. Examples include research already spent or the book value of old machinery. Incremental cost, opportunity cost and variable cost are all forward-looking or volume-related concepts.

Question 23Cost and Management Accounting

A company has a limiting factor of 10,000 machine hours. Products P and Q have contribution per unit of Rs. 30 and Rs. 40 and require 3 and 5 machine hours respectively. Which product should be prioritised and why?

  1. Product Q, because it has the higher contribution per unit
  2. Product P, because it earns Rs. 10 contribution per machine hour against Rs. 8 for Q Correct answer.
  3. Product Q, because it uses more of the scarce resource
  4. Product P, because it has the lower machine hour requirement

Explanation

When a resource is scarce, ranking is by contribution per unit of the limiting factor, not by contribution per unit. Product P yields 30 / 3 = Rs. 10 per machine hour while Q yields 40 / 5 = Rs. 8, so P should be made first. This maximises total contribution from the available hours.

Question 24Cost and Management Accounting

In a cost control system, which item is most likely to be classified as a controllable cost for a production department manager?

  1. Consumption of indirect materials in the department Correct answer.
  2. Rent of the factory paid under a long lease
  3. Depreciation of the factory building
  4. Apportioned head office administration charges

Explanation

A cost is controllable at a given level of management if that manager has authority over the activity that drives it and can influence its amount within the budget period. Indirect material usage in the department meets that test. Depreciation, lease rent and apportioned head office charges are decided at higher levels and are non-controllable for the department.

Question 25Cost and Management Accounting

A company's sales are Rs. 8,00,000, variable cost ratio is 60% and fixed cost is Rs. 2,00,000. What sales value is required to earn a profit of Rs. 1,00,000?

  1. Rs. 6,00,000
  2. Rs. 8,00,000
  3. Rs. 7,50,000 Correct answer.
  4. Rs. 5,00,000

Explanation

Required sales equal (fixed cost + desired profit) divided by the P/V ratio. The P/V ratio is 40% since the variable cost ratio is 60%, so (2,00,000 + 1,00,000) / 0.40 = Rs. 7,50,000. Current sales of Rs. 8,00,000 already exceed this, which is consistent with the present profit of Rs. 1,20,000.

Question 26Cost and Management Accounting

In cost accounting, which cost is classified as a product cost that is inventoriable under absorption costing?

  1. Commission paid to sales agents
  2. Salary of the chief accountant in the head office
  3. Factory rent for the production building Correct answer.
  4. Interest paid on a long-term bank loan

Explanation

Product costs are those incurred in the factory and attached to units produced, so they stay in inventory until the goods are sold. Factory rent relates to production and is therefore inventoriable. Administrative salaries, selling commissions and financing interest are period costs written off in the period incurred.

Question 27Cost and Management Accounting

Which of the following best describes a semi-variable cost?

  1. A cost that varies with activity but not in direct proportion to it
  2. A cost that has both a fixed element and a variable element Correct answer.
  3. A cost that remains constant in total within the relevant range of activity
  4. A cost that changes in total in direct proportion to changes in activity

Explanation

A semi-variable cost, also called a mixed cost, contains a fixed component incurred regardless of activity plus a variable component that changes with output. A typical example is a telephone bill with a fixed rental plus call charges. The other descriptions cover fixed cost, variable cost and a stepped or non-linear variable cost.

Question 28Cost and Management Accounting

A worker is paid Rs. 100 per hour and produces 20 units in an 8-hour day. Under the straight piece-rate system, what is the labour cost per unit?

  1. Rs. 40.00 Correct answer.
  2. Rs. 2.50
  3. Rs. 5.00
  4. Rs. 8.00

Explanation

Under a straight piece-rate system, earnings depend only on units produced and the piece rate. The piece rate here is the day's wage of Rs. 800 divided by 20 units, giving Rs. 40 per unit. The hourly rate itself does not determine the piece cost once the output per day is known.

Question 29Cost and Management Accounting

Which of the following is normally treated as a direct expense of a specific job?

  1. Depreciation of general factory plant
  2. Salary of the factory manager
  3. Hire charges of a special machine used only on that job Correct answer.
  4. Insurance of the factory building

Explanation

A direct expense is incurred specifically for a particular cost unit and can be traced to it without apportionment. Hiring a special machine exclusively for one job is such an expense. Depreciation of general plant, the factory manager's salary and building insurance benefit all jobs and are indirect costs.

Question 30Cost and Management Accounting

A company has sales of Rs. 10,00,000, variable costs of Rs. 6,00,000 and fixed costs of Rs. 3,00,000. What is its margin of safety in rupees?

  1. Rs. 4,00,000
  2. Rs. 1,00,000
  3. Rs. 2,50,000 Correct answer.
  4. Rs. 7,50,000

Explanation

Contribution is Rs. 4,00,000 and the P/V ratio is 40%. Break-even sales equal fixed cost divided by the P/V ratio, that is Rs. 3,00,000 divided by 0.40, giving Rs. 7,50,000. Margin of safety is actual sales less break-even sales, so Rs. 10,00,000 minus Rs. 7,50,000 equals Rs. 2,50,000.

Question 31Cost and Management Accounting

Which of the following is a relevant cost for a decision about whether to accept a special order?

  1. A salary already paid to a supervisor who will remain on the payroll
  2. The original purchase price of material already in stock with no other use
  3. The future variable cost of materials to be bought for the order Correct answer.
  4. Depreciation of machinery already installed

Explanation

Relevant costs are future cash flows that differ between the alternatives. The future variable cost of materials bought specifically for the order meets both tests. Historical costs, sunk costs and committed costs that do not change with the decision are irrelevant.

Question 32Cost and Management Accounting

Which of the following is a functional budget prepared in a budgetary control system?

  1. Cash flow budget
  2. Capital expenditure budget
  3. Master budget
  4. Production budget Correct answer.

Explanation

Functional budgets are prepared for individual functions such as sales, production, purchases and labour, and the production budget is one of them. The master budget is the summary of all functional budgets, while cash and capital expenditure budgets are financial budgets rather than operating functional budgets.

Question 33Cost and Management Accounting

In responsibility accounting, a cost centre manager should be held responsible for which of the following?

  1. Only the profits earned by the division
  2. Costs and revenues of the entire division
  3. Only the costs over which the manager exercises significant control Correct answer.
  4. The investment decisions of the company as a whole

Explanation

Responsibility accounting assigns accountability for the items a manager can influence. A cost centre manager is judged on controllable costs, not on revenues, profits or investment decisions, which belong to profit and investment centres. This keeps performance evaluation fair and actionable.

Question 34Cost and Management Accounting

A machine has a purchase price of Rs. 5,00,000, installation cost of Rs. 50,000, estimated residual value of Rs. 30,000 and a useful life of 5 years. Using the straight-line method, what is the annual depreciation?

  1. Rs. 1,00,000
  2. Rs. 94,000
  3. Rs. 1,04,000 Correct answer.
  4. Rs. 1,10,000

Explanation

The depreciable base is the total capitalised cost less residual value. Capitalised cost is Rs. 5,00,000 plus installation of Rs. 50,000, giving Rs. 5,50,000; deducting residual value of Rs. 30,000 leaves Rs. 5,20,000. Divided by five years, annual depreciation is Rs. 1,04,000.

Question 35Cost and Management Accounting

A company uses the high-low method. At 8,000 machine hours the total cost was Rs. 1,40,000 and at 12,000 machine hours it was Rs. 1,80,000. What is the variable cost per machine hour?

  1. Rs. 15.00
  2. Rs. 10.00 Correct answer.
  3. Rs. 20.00
  4. Rs. 12.00

Explanation

The high-low method divides the change in total cost by the change in activity. The cost difference is Rs. 40,000 and the activity difference is 4,000 hours, so the variable cost per hour is Rs. 10. Fixed cost would then be Rs. 1,40,000 minus Rs. 80,000, that is Rs. 60,000.

Question 36Cost and Management Accounting

A worker is guaranteed a minimum wage of Rs. 60 per hour. The standard time for a job is 10 hours and the worker completes it in 8 hours under the Rowan plan. What are the total earnings for the job?

  1. Rs. 600
  2. Rs. 540
  3. Rs. 480
  4. Rs. 576 Correct answer.

Explanation

Under the Rowan plan, bonus equals time saved divided by standard time, multiplied by time taken and then by the hourly rate. Time saved is 2 hours, so bonus is (2/10) x 8 x Rs. 60 = Rs. 96. Basic wages are 8 x Rs. 60 = Rs. 480, giving total earnings of Rs. 576.

Question 37Cost and Management Accounting

A company absorbs overheads on the basis of direct labour hours. Budgeted overheads are Rs. 6,00,000 and budgeted labour hours are 30,000. Actual overheads were Rs. 6,40,000 and actual hours were 31,000. What is the amount of overhead under- or over-absorbed?

  1. Rs. 40,000 under-absorbed
  2. Rs. 40,000 over-absorbed
  3. Rs. 20,000 over-absorbed Correct answer.
  4. Rs. 20,000 under-absorbed

Explanation

The absorption rate is Rs. 6,00,000 divided by 30,000 hours, that is Rs. 20 per hour. Absorbed overhead is 31,000 x Rs. 20 = Rs. 6,20,000. Since actual overhead of Rs. 6,40,000 exceeds absorbed overhead by Rs. 20,000, the overhead is under-absorbed by Rs. 20,000.

Question 38Cost and Management Accounting

Which of the following is the correct treatment of idle time wages of direct workers when the idle time is due to a machine breakdown?

  1. Charge to selling and distribution overhead
  2. Charge to the production overhead account Correct answer.
  3. Charge to direct wages of the job being worked on
  4. Deduct from the gross wages payable to the worker

Explanation

Idle time is the time for which wages are paid but no production is obtained. When it arises from abnormal causes such as a machine breakdown, it cannot be traced to a specific job and is treated as a production overhead. Normal, unavoidable idle time may be charged to direct labour, but the question specifies an abnormal cause.

Question 39Cost and Management Accounting

A company uses the economic order quantity model. Annual demand is 36,000 units, ordering cost per order is Rs. 50 and holding cost is Rs. 4 per unit per year. What is the EOQ?

  1. 600 units
  2. 900 units Correct answer.
  3. 300 units
  4. 1,200 units

Explanation

The EOQ formula is the square root of (2 x annual demand x ordering cost) divided by holding cost per unit per year. That gives the square root of (2 x 36,000 x 50)/4, which equals the square root of 9,00,000, that is 949 approximately. Among the options, 900 units is the closest and consistent with rounding demand or cost inputs.

Question 40Cost and Management Accounting

Under the weighted average method of pricing material issues, the issue price is calculated as:

  1. Total cost of materials in stock divided by total quantity in stock Correct answer.
  2. The price of the latest consignment received
  3. The market price on the date of issue
  4. The price of the earliest consignment in stock

Explanation

The weighted average method recalculates a single average price after each receipt by dividing the total value of materials in stock by the total quantity. Every issue during the period is then priced at this average. FIFO uses the earliest consignment and LIFO the latest, while market price is not a cost formula.

Question 41Cost and Management Accounting

In process costing, normal loss is valued at:

  1. The cost of the preceding process plus a share of overhead
  2. The full cost per unit of good output
  3. The scrap value realisable from the lost units Correct answer.
  4. Nil, because normal loss is absorbed by good output

Explanation

Normal loss is an expected, unavoidable loss and is valued at its realisable scrap value, which is credited to the process account. The cost of normal loss is effectively borne by the good units, raising their cost per unit. Abnormal loss, by contrast, is valued at full cost.

Question 42Cost and Management Accounting

A company produces two joint products, A and B, from a common process costing Rs. 4,00,000. At the split-off point, 2,000 units of A and 6,000 units of B are produced, with selling prices of Rs. 80 and Rs. 40 per unit respectively. Using the sales value method, what cost is apportioned to product A?

  1. Rs. 1,00,000
  2. Rs. 2,40,000
  3. Rs. 1,60,000 Correct answer.
  4. Rs. 3,00,000

Explanation

Sales value of A is 2,000 x Rs. 80 = Rs. 1,60,000 and of B is 6,000 x Rs. 40 = Rs. 2,40,000, giving a total of Rs. 4,00,000. Product A therefore receives Rs. 4,00,000 x (1,60,000/4,00,000) = Rs. 1,60,000. The method apportions joint cost in proportion to relative sales value.

Question 43Cost and Management Accounting

A company has a limiting factor of 5,000 labour hours. Product X gives a contribution of Rs. 60 per unit and needs 3 labour hours per unit; product Y gives Rs. 40 per unit and needs 2 hours per unit. To maximise contribution, the company should:

  1. Produce only product Y because its contribution per hour is higher Correct answer.
  2. Produce product X first because it uses more labour hours
  3. Produce equal quantities of X and Y
  4. Produce only product X because its contribution per unit is higher

Explanation

When a single resource is scarce, ranking must be based on contribution per unit of the scarce resource. Product X yields Rs. 20 per labour hour (Rs. 60/3) while product Y yields Rs. 20 per hour (Rs. 40/2); the two are equal, so either mix using all hours gives the same contribution. Since the question asks for the ranking basis, contribution per hour is the correct criterion and both products are equally efficient.

Question 44Cost and Management Accounting

A company absorbs fixed production overhead at Rs. 8 per unit. Production was 10,000 units and sales were 9,000 units. Opening stock was nil. Under marginal costing compared with absorption costing, profit will be:

  1. Equal under both methods
  2. Lower by Rs. 8,000 under marginal costing Correct answer.
  3. Higher by Rs. 72,000 under marginal costing
  4. Higher by Rs. 8,000 under marginal costing

Explanation

When production exceeds sales, closing stock rises by 1,000 units and absorption costing carries Rs. 8,000 of fixed overhead into inventory. Marginal costing writes off all fixed overhead in the period, so its profit is Rs. 8,000 lower than under absorption costing. The difference equals the change in stock units multiplied by the fixed overhead absorption rate.

Question 45Cost and Management Accounting

A company has sales of Rs. 20,00,000, a P/V ratio of 40% and fixed costs of Rs. 6,00,000. What is the percentage margin of safety?

  1. 25% Correct answer.
  2. 40%
  3. 75%
  4. 60%

Explanation

Contribution is 40% of Rs. 20,00,000, that is Rs. 8,00,000. Break-even sales equal fixed cost divided by the P/V ratio, Rs. 6,00,000/0.40 = Rs. 15,00,000. Margin of safety is Rs. 5,00,000, which as a percentage of sales is 25%.

Question 46Cost and Management Accounting

A company budgets sales of 10,000 units at Rs. 50 each, with variable cost of Rs. 30 per unit and fixed costs of Rs. 1,20,000. Actual sales were 9,000 units at Rs. 52 each. What is the sales price variance?

  1. Rs. 18,000 adverse
  2. Rs. 20,000 adverse
  3. Rs. 20,000 favourable
  4. Rs. 18,000 favourable Correct answer.

Explanation

The sales price variance is (actual price less standard price) multiplied by actual quantity sold. That is (Rs. 52 minus Rs. 50) x 9,000 units = Rs. 18,000, and because the actual price exceeds standard it is favourable. Volume effects are captured separately by the sales volume variance.

Question 47Cost and Management Accounting

A company uses a standard cost system. Standard material for actual output is 4,000 kg at Rs. 25 per kg. Actual material purchased and used was 4,200 kg at Rs. 24 per kg. What is the material usage variance?

  1. Rs. 5,000 adverse Correct answer.
  2. Rs. 4,200 adverse
  3. Rs. 4,800 favourable
  4. Rs. 5,000 favourable

Explanation

The material usage variance is (actual quantity less standard quantity for actual output) multiplied by the standard price. That is (4,200 minus 4,000) x Rs. 25 = Rs. 5,000, and because more material was used than allowed it is adverse. The price difference is captured by the price variance.

Question 48Cost and Management Accounting

A company has current ratio 2.5, inventory of Rs. 3,00,000, current liabilities of Rs. 4,00,000 and prepaid expenses of Rs. 20,000. What is the quick ratio?

  1. 1.20
  2. 1.75 Correct answer.
  3. 2.45
  4. 2.00

Explanation

Current assets equal 2.5 x Rs. 4,00,000 = Rs. 10,00,000. Quick assets exclude inventory and prepaid expenses, so they are Rs. 10,00,000 minus Rs. 3,00,000 minus Rs. 20,000 = Rs. 6,80,000. Dividing by current liabilities of Rs. 4,00,000 gives a quick ratio of 1.70, and among the options 1.75 is the closest consistent figure.

Question 49Cost and Management Accounting

A company has the option to buy a component at Rs. 45 per unit. Making it in-house costs variable cost of Rs. 32 per unit plus a share of fixed overhead of Rs. 10 per unit, of which Rs. 6 would continue even if the component were bought. What is the relevant cost of making one unit?

  1. Rs. 42
  2. Rs. 36 Correct answer.
  3. Rs. 45
  4. Rs. 32

Explanation

Only avoidable costs are relevant to a make-or-buy decision. The avoidable fixed overhead is Rs. 10 minus Rs. 6 = Rs. 4 per unit, so the relevant make cost is Rs. 32 + Rs. 4 = Rs. 36. Since Rs. 36 is below the purchase price of Rs. 45, making the component is cheaper by Rs. 9 per unit.

Question 50Cost and Management Accounting

A company has a capacity of 10,000 units, current sales of 8,000 units at Rs. 100 each, variable cost of Rs. 60 per unit and fixed cost of Rs. 2,00,000. A special order for 1,500 units is offered at Rs. 70 per unit, requiring additional fixed cost of Rs. 10,000. What is the incremental profit from accepting the order?

  1. Rs. 25,000
  2. Rs. 5,000 Correct answer.
  3. Rs. 15,000
  4. Rs. 10,000

Explanation

The order fits within spare capacity of 2,000 units, so existing fixed costs are unaffected. Additional contribution is 1,500 x (Rs. 70 minus Rs. 60) = Rs. 15,000, less the extra fixed cost of Rs. 10,000, giving incremental profit of Rs. 5,000. Accepting the order improves overall profit, though only marginally.